<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1999
REGISTRATION NO. 333-76853
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
OPTICAL COATING LABORATORY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 68-0164244
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification
Organization) No.)
</TABLE>
2789 NORTHPOINT PARKWAY, SANTA ROSA, CALIFORNIA 95407
(707) 545-6440
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
CHARLES J. ABBE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OPTICAL COATING LABORATORY, INC.
2789 NORTHPOINT PARKWAY
SANTA ROSA, CALIFORNIA 95407
(707) 545-6440
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
COPIES TO:
JOHN V. ERICKSON, Esq. JAMIE E. CHUNG, Esq.
JOHN J. O'NEILL, Esq. PETER M. O. WONG, Esq.
ANDREW H. PONTIOUS, Esq. HEATHER L. McCORMICK, Esq.
Collette & Erickson LLP Cooley Godward LLP
555 California Street, Suite 4350 One Maritime Plaza, 20th Floor
San Francisco, California 94104 San Francisco, California 94111
(415) 788-4646 (415) 693-2000
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
AMOUNT MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share...... 1,851,500 $58.09 $107,553,635 $25,087
</TABLE>
(1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
registration fee based upon the average of the high and low prices of the
Registrant's Common Stock on the Nasdaq National Market on May 5, 1999.
(2) Of this amount, $23,972 was paid in connection with the initial filing of
the registration statement on April 22, 1999 with respect to 1,782,500
shares of Common Stock at a proposed maximum offering price of $48.375 per
share. The additional amount of the registration fee ($1,115) has been
calculated pursuant to Rule 457 with respect to the additional 69,000 shares
to be registered hereby at the increased proposed maximum offering price
indicated.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 6, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
UNDERWRITERS MAY NOT CONFIRM SALES OF THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
PROSPECTUS
1,610,000 SHARES
[LOGO]
OPTICAL COATING LABORATORY, INC.
COMMON STOCK
OCLI is selling 1,300,000 shares in this offering and the selling
stockholders identified in this prospectus are selling 310,000 shares. OCLI will
not receive any of the proceeds from the sale of shares by the selling
stockholders. OCLI's common stock is traded on the Nasdaq National Market under
the symbol "OCLI." On May 5, 1999, the last reported sale price for the common
stock on the Nasdaq National Market was $57.50 per share. See "Price Range of
Common Stock."
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------------- ----------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to OCLI, before expenses........................... $ $
Proceeds to selling stockholders............................ $ $
</TABLE>
OCLI has granted the underwriters an option for a period of 30 days to
purchase up to 241,500 additional shares of common stock. The underwriters are
severally underwriting the shares being offered. The underwriters expect to
deliver the shares against payment on , 1999.
--------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
SOUNDVIEW TECHNOLOGY GROUP
, 1999
<PAGE>
[Gatefold page]
[OCLI: MAKING LIGHT WORK]
[A diagram depicting light separation through a prism and a diagram showing
light reflection, absorption and transmission through an optically thin film
coated substrate]
<PAGE>
[Inside Front Cover]
[The graphic depicts a schematic of a wavelength division multiplexing
system containing an Erbium Doped Fiber Amplifier. The components manufactured
or packaged by OCLI are labeled.]
pictures of:
- MicroNode Wavelength Selective Switch
- Wavelength Division Multiplexer
- Gain Flattening Filter
CONNECT
pictures of:
- cell phone
- automobile
- U.S. $100 bill
SECURE]
[LOGO]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................................... 4
Risk Factors................................................. 7
Forward-Looking Statements................................... 19
Use of Proceeds.............................................. 20
Price Range of Common Stock.................................. 20
Dividend Policy.............................................. 21
Corporate Information........................................ 21
Capitalization............................................... 22
Selected Consolidated Financial Information.................. 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 25
Business..................................................... 38
Management................................................... 53
Certain Transactions......................................... 55
Principal and Selling Stockholders........................... 56
Underwriting................................................. 58
Legal Matters................................................ 60
Experts...................................................... 60
How to Get Information about OCLI............................ 60
Information Incorporated by Reference........................ 61
Index to Consolidated Financial Statements................... F-1
</TABLE>
--------------
OCLI-Registered Trademark-, Glare/Guard-Registered Trademark-,
MicroNode-TM-, OVP-TM-, ChromaFlair-Registered Trademark-, Color-By-Physics-TM-,
MetaMode-Registered Trademark- and the OCLI logo are our trademarks and service
marks. This prospectus also contains trademarks and service marks of other
companies.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS," AND THE FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT DECISION.
OPTICAL COATING LABORATORY, INC.
Optical Coating Laboratory, Inc. (OCLI) is a worldwide leader in optical
thin film coating technologies. We have leveraged our technical and
manufacturing expertise, gained from over 50 years of experience developing thin
film coating processes for government and industry, to build 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 and
spectral filtering. By integrating superior process capabilities with advanced
product design, we provide complete optical solutions that address a range of
end-market applications in growing markets.
The ability to control the behavior of light using thin film technology
plays a critical role in many industries and products. We currently apply our
expertise to the following markets and products:
TELECOMMUNICATIONS. We manufacture and sell optical components for
fiber optic communications systems including wavelength division multiplexing
(WDM) products. We also sell optical components used on satellites for solar
power generation, thermal control and other functions.
LIGHT INTERFERENCE PIGMENTS. Through our Flex subsidiary, 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, large-screen projection televisions
and projection systems for business applications. 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 copiers, scanners, printers and other
office products.
In the telecommunications market, we have a strategic alliance with JDS
FITEL Inc., a leading fiber optic component company, involving supply and
distribution contracts under which we contribute our expertise to provide
optical filters for specified WDM products and JDS contributes its expertise in
the design, manufacture and marketing of those WDM products.
We also have a strategic alliance with SICPA Holding S.A., a leading
supplier of inks used in the printing of high security documents, most notably
currency, that allows us to maintain a leading position in the security pigment
market. SICPA uses our pigments to make optically variable ink, which is used on
the currencies of over 50 countries around the world. Through SICPA's
relationships with government currency printing agencies and national central
banks, optically variable ink, which contains our proprietary light interference
pigments, has been introduced as one of the most effective means of preventing
counterfeiting.
Our target markets present significant growth opportunities,
particularly in telecommunications, light interference pigments and projection
display. Growth in the telecommunications market is being driven by increasing
amounts of data, voice and video traffic, creating capacity constraints which
require
4
<PAGE>
solutions that offer increased bandwidth. Increased demand for light
interference pigments is being driven by the heightened need to protect currency
and value documents from counterfeiting. Additionally, the demand for large
screen displays has fueled the development of new products and technologies for
the projection display market.
As a pioneer in light management, we are well positioned to take
advantage of the increasing need for optical products and solutions in growth
markets. The key to our success is superior thin film deposition and product
design technologies and the ability to apply these technologies to our
customers' needs. We focus on high-performance processes that rely on internally
designed machinery and process monitoring equipment. We devote significant
resources to research and development of new processes and new products that
incorporate our optical thin film capabilities. Our reputation and commitment to
superior optical technology allows us to attract and retain both a strong
customer base and the most qualified personnel in the industry.
Our goal is to be the leading supplier of high performance optical
products. Key elements of our strategy include:
- capitalizing on our optical expertise to design and develop products;
- focusing on selected large and growing commercial markets;
- leveraging strategic alliances;
- enhancing manufacturing efficiency;
- expanding international presence; and
- selectively pursuing strategic acquisitions.
Our corporate headquarters and principal manufacturing and research
facilities are located in Santa Rosa, California. We maintain additional
operations in Hillend, Scotland as well as sales and administrative offices in
Europe and Japan. As of January 31, 1999, we had 1,410 employees, including 127
in research and development, 1,082 in manufacturing, 74 in sales and marketing
and 127 in finance and administration.
THE OFFERING
Except as otherwise noted, all information in this prospectus assumes
that the underwriters do not exercise the option granted to them by OCLI to
purchase additional shares in the offering. See "Underwriting."
<TABLE>
<S> <C>
Common stock offered by OCLI....................... 1,300,000 shares
Common stock offered by the selling stockholders... 310,000 shares
Common stock to be outstanding after the
offering........................................... 13,914,346 shares(1)
Use of proceeds.................................... For working capital and other general
corporate purposes.
Nasdaq National Market symbol...................... OCLI
</TABLE>
- ------------------------
(1) This information is based on the number of shares outstanding at March 31,
1999. It includes 10,000 shares being offered by a selling stockholder
pursuant to the exercise of fully vested stock options. The information
excludes the remaining 3,034,723 shares of common stock reserved for
issuance under our stock option plans, of which 2,201,805 shares were
subject to outstanding options as of March 31, 1999 at a weighted average
exercise price of $14.78 per share, and excludes 400,000 shares reserved
under our stock purchase plan, which was approved by our stockholders on
April 1, 1999. See "Capitalization" and Note 9 of Notes to Consolidated
Financial Statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JANUARY 31,
---------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenues.................................... $ 131,780 $ 169,417 $ 189,195 $ 217,829 $ 255,624 $ 53,373 $ 69,851
Gross profit................................ 47,779 63,408 62,426 74,622 85,954 17,138 21,219
Income from operations...................... 10,561 16,570 12,402 15,947 14,872 3,629 6,219
Net income.................................. $ 4,604 $ 7,391 $ 5,196 $ 7,125 $ 7,339 $ 1,596 $ 2,033
Net income per common share, diluted........ $ 0.51 $ 0.73 $ 0.41 $ 0.60 $ 0.59 $ 0.13 $ 0.16
Weighted average common shares, diluted..... 9,023 9,510 10,301 10,673 11,999 11,396 12,868
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1999
-------------------------
AS
ACTUAL ADJUSTED(1)
---------- -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 14,324 $ 84,512
Working capital......................................................................... 53,009 123,197
Total assets............................................................................ 204,806 274,994
Long term debt.......................................................................... 51,870 51,870
Total stockholders' equity.............................................................. 105,531 175,719
</TABLE>
- ------------------------
(1) The pro forma "as adjusted" column reflects the application of the proceeds
from the sale of 1,300,000 shares of common stock offered by OCLI in this
prospectus at an assumed public offering price of $57.50 per share after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
WE PREPARE OUR FINANCIAL STATEMENTS ON THE BASIS OF A 52/53-WEEK FISCAL
YEAR ENDING ON THE SUNDAY NEAREST OCTOBER 31. HOWEVER, FOR PURPOSES OF
PRESENTATION, FISCAL PERIODS ARE INDICATED AS ENDING AT CALENDAR MONTH-ENDS.
FISCAL 1996 WAS A 53-WEEK YEAR AND FISCAL 1994, 1995, 1997 AND 1998 WERE 52-WEEK
YEARS.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW BEFORE MAKING AN INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE
MATERIALLY HARMED. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN
AND UNKNOWN RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THESE STATEMENTS. FACTORS THAT COULD
CONTRIBUTE TO THESE DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND ELSEWHERE IN
THIS PROSPECTUS.
WE RELY HEAVILY ON JDS FOR THE DESIGN, PACKAGING, ASSEMBLY, TESTING,
DISTRIBUTION, SALES AND MARKETING OF CERTAIN OF OUR TELECOMMUNICATIONS PRODUCTS.
- WE RELY ON JDS TO DESIGN, PACKAGE, ASSEMBLE, DISTRIBUTE, SELL AND
MARKET OUR PRODUCTS. Under the terms of our agreements, JDS has
primary responsibility for the design, packaging and assembly of WDM
products covered by these agreements. JDS also has exclusive sales,
marketing and distribution responsibilities for such products. If JDS
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
for significant financial and technical contributions to these
programs.
- WE LACK CONTROL OVER MANAGEMENT DECISIONS. We share with JDS 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
and ourselves. Our interests may not always be aligned. If we disagree
with JDS 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,
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 CAN TERMINATE OUR AGREEMENTS OR FAIL TO PERFORM. JDS can terminate
the agreements without cause beginning in 2015. If JDS terminates the
agreements or fails to 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 INTENDS TO MERGE WITH UNIPHASE. JDS recently announced an intended
merger with Uniphase Corporation. 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
7
<PAGE>
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.
SICPA was the previous owner of a 40.0% interest in Flex. In July 1996,
SICPA filed a lawsuit naming us as a defendant in order to prevent a proposed
initial public offering of Flex. This litigation was settled in November 1998
and we subsequently purchased SICPA's 40.0% interest in Flex. See
"Business--Legal Proceedings."
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 other technologies, are adopted by our customers, our telecommunications
business would suffer.
The light interference pigments market is also susceptible to changing
technology and customer requirements. Growth in the demand for our
ChromaFlair-Registered Trademark- 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.
8
<PAGE>
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 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. We increased our 60.0% ownership of Flex to
100% in December 1998 and we acquired OPKOR Inc. in February 1999. 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,
9
<PAGE>
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 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
ChromaFlair-Registered Trademark- 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 and Atsugi, Japan. We are currently
experiencing manufacturing capacity constraints and we are in the process of
expanding our manufacturing capacity at 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.
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.
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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;
- delays in planned manufacturing capacity upgrades;
- 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, where we
recognize revenue upon shipment by JDS 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
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<PAGE>
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.
Of our total revenues in fiscal 1998, JDS accounted for approximately
21.0% and SICPA accounted for approximately 13.9%. Of our total revenues in the
first quarter of fiscal 1999, JDS accounted for approximately 31.1% and SICPA
accounted for approximately 18.3%. 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 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.
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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 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 noncompetition 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 ChromaFlair-Registered Trademark-
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.
Sales to customers outside of the United States accounted for
approximately 58.8% of our revenues in fiscal 1998 and approximately 68.1% of
our revenues in the first quarter of our 1999 fiscal year. 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;
- 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.
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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 were 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 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, our strategic
partner for our WDM business. In the satellites market, we compete with
Pilkington Aerospace, a division of Pilkington plc.
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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/Guard-Registered Trademark- 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/Guard-Registered Trademark- 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.
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
uncompetitive, 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.
OUR STOCK PRICE IS AT OR NEAR ITS HISTORICAL HIGH AND MAY FLUCTUATE
SIGNIFICANTLY.
The trading price of our common stock has been and is likely to be
highly volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
- failure to meet securities analysts' estimates;
- changes in financial estimates by securities analysts;
- conditions, trends or announcements in the telecommunications, light
interference pigment products, display, office automation or aerospace
and instrumentation industry;
- announcements of technological innovations by us or our competitors;
- new products or services offered by us or our competitors;
- announcements of significant acquisitions, strategic alliances, joint
ventures or capital commitments by us or our competitors;
- additions or departures of key personnel;
- sales of common stock;
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- accounting pronouncements or changes in accounting rules that affect
our financial statements; and
- other events or factors that may be beyond our control.
In addition, the stock markets in general, and the Nasdaq National
Market in particular, have experienced extreme price and volume fluctuations
recently. These fluctuations often have been unrelated or disproportionate to
the operating performance of these companies. Our stock is particularly
susceptible to market fluctuations because of the small number of shares of our
stock available on the public market. Furthermore, the trading price of our
common stock is at or near historical highs and our price-to-earnings multiple
is substantially above historical levels. Our trading price and multiple may not
be sustained. Broad market and industry factors may materially adversely affect
the market price of our common stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation often has been
instituted against that company. Litigation like this, if instituted, could
result in substantial costs and a diversion of management's attention and
resources.
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 unforseen 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 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.
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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.
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.
MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS OF THE OFFERING.
We currently have no specific plans for a significant portion of our net
proceeds from this offering. Consequently, our management will have the
discretion to allocate the net proceeds to uses that stockholders may not deem
desirable. We may not be able to generate a significant return on any investment
of the proceeds.
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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 currenty 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 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 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.
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FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and elsewhere in this
prospectus, 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 prospectus that are not historical facts. When used in this prospectus, 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 under "Risk Factors" and in other 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.
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USE OF PROCEEDS
OCLI will receive an estimated $70.2 million in net proceeds from the
sale of 1,300,000 shares of common stock offered by us ($83.3 million if the
underwriters' over-allotment option is exercised in full) at an assumed public
offering price of $57.50 per share, after deducting underwriting commissions and
discounts and estimated expenses. We will not receive any proceeds from the sale
of common stock by the selling stockholders.
We intend to use the net proceeds from this offering for working capital
and other general corporate purposes. We also intend to use a portion of our net
proceeds to fund the growth of Flex and our to support our growth in the
telecommunications market. In addition, we may use a portion of the our proceeds
to acquire complementary businesses, products, services or technologies;
however, we currently have no commitments or agreements and are not involved in
any negotiations with respect to any such transactions. Pending such use of our
net proceeds, we intend to invest our net proceeds in short term
interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the
symbol "OCLI." The following table sets forth, for the periods indicated, the
high and low sale prices per share of our common stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FY 1996
- ---------------------------------------------------------------------------
First Quarter (commencing November 1, 1995).............................. $ 15.38 $ 9.25
Second Quarter........................................................... 14.50 9.63
Third Quarter............................................................ 19.75 12.00
Fourth Quarter........................................................... 15.25 9.88
FY 1997
- ---------------------------------------------------------------------------
First Quarter (commencing November 1, 1996).............................. $ 11.75 $ 9.50
Second Quarter........................................................... 11.75 9.13
Third Quarter............................................................ 14.25 9.31
Fourth Quarter........................................................... 13.38 12.00
FY 1998
- ---------------------------------------------------------------------------
First Quarter (commencing November 1, 1997).............................. $ 16.13 $ 12.38
Second Quarter........................................................... 15.69 12.00
Third Quarter............................................................ 19.75 14.38
Fourth Quarter........................................................... 18.75 14.38
FY 1999
- ---------------------------------------------------------------------------
First Quarter (commencing November 1, 1998).............................. $ 32.50 $ 16.69
Second Quarter........................................................... 65.25 23.75
Period from May 1, 1999 to May 5, 1999................................... 63.75 54.50
</TABLE>
On May 5, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $57.50 per share. As of March 31, 1999, there were
approximately 858 stockholders of record of the common stock.
20
<PAGE>
DIVIDEND POLICY
Since June 1991, we have paid a semi-annual dividend of $0.06 per share
on our common stock. While we currently intend to pay a dividend on our common
stock, we can provide no assurances for how long this policy will continue or
the amount of future dividends, if any. Our dividend policy is reviewed
regularly by our Board of Directors.
CORPORATE INFORMATION
Optical Coating Laboratory, Inc. was incorporated in Delaware in 1948.
We incorporated in California in 1963 and reincorporated in Delaware in 1987.
References in this prospectus to "OCLI," "we," "our," and "us" refer to Optical
Coating Laboratory, Inc. and our wholly owned subsidiaries, Flex Products, Inc.,
OCLI Optical Coating Laboratory, Ltd. and OCLI Asia K.K. Our principal executive
offices are located at 2789 Northpoint Parkway, Santa Rosa, California
95407-7397 and our telephone number is (707) 545-6440. Information contained on
our Web site, www.ocli.com, does not constitute part of this prospectus.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization as of January 31, 1999
on an actual basis and as adjusted to give effect to our receipt of the
estimated net proceeds from the sale of 1,300,000 shares of our common stock at
an assumed public offering price of $57.50 per share and the application of
these net proceeds as set forth in "Use of Proceeds." The capitalization
information set forth in the table below should be read in conjunction with our
consolidated financial statements and the notes thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
JANUARY 31, 1999
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long term debt........................................................................... $ 51,870 $ 51,870
---------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value per share:
100,000 shares authorized, 10,000 of which are designated Series A Preferred Stock,
6,650 of which are designated Series B Cumulative Convertible Preferred stock, no
shares issued and outstanding, actual and as adjusted................................ -- --
Common stock, $0.01 par value per share:
30,000,000 shares authorized, 12,215,000 shares issued and outstanding, actual;
13,525,000 shares issued and outstanding, as adjusted(1)............................. 122 135
Additional paid-in capital............................................................. 72,120 142,295
Retained earnings...................................................................... 33,258 33,258
Accumulated other comprehensive income................................................. 31 31
---------- -----------
Total stockholders' equity........................................................... 105,531 175,719
---------- -----------
Total capitalization............................................................. $ 157,401 $ 227,589
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) This "as adjusted" number includes 10,000 shares being offered by a selling
stockholder pursuant to the exercise of fully vested stock options, but
excludes the remaining 2,832,807 shares of common stock reserved for
issuance under our stock option plans, of which 1,996,219 shares were
subject to outstanding options as of January 31, 1999. See Notes 2 and 9 of
Notes to Consolidated Financial Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and the
Notes thereto included elsewhere in this prospectus. The consolidated statement
of income data set forth below for fiscal years 1996, 1997 and 1998 and the
balance sheet data as of October 31, 1997 and 1998 have been derived from our
audited consolidated financial statements included elsewhere in this prospectus.
The consolidated statement of income data set forth below for fiscal years 1994
and 1995 and the balance sheet data as of October 31, 1994, 1995 and 1996 have
been derived from audited consolidated financial statements not included in this
prospectus. The consolidated statement of income data for the three-month
periods ended January 31, 1999 and 1998 and the balance sheet data as of January
31, 1999 are derived from unaudited financial statements included in this
prospectus, which, in the opinion of our management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial data for such periods. The historical results are not necessarily
indicative of results to be expected for any future periods. We use a 52/53-week
fiscal year ending on the Sunday nearest October 31. However, for purposes of
presentation, fiscal periods are indicated as ending at calendar month-ends.
Fiscal year 1996 was a 53-week year and fiscal years 1994, 1995, 1997 and 1998
were 52-week years.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED OCTOBER 31, ENDED JANUARY 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues................................... $ 131,780 $ 169,417 $ 189,195 $ 217,829 $ 255,624 $ 53,373 $ 69,851
Cost of sales.............................. 84,001 106,009 126,769 143,207 169,670 36,235 48,632
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................. 47,779 63,408 62,426 74,622 85,954 17,138 21,219
Operating expenses:
Research and development................. 5,229 8,401 11,733 14,903 17,137 3,821 4,644
Selling and administrative............... 31,341 37,462 37,145 42,836 43,926 9,488 10,193
Impairment loss(1)....................... -- -- -- -- 8,628 -- --
Restructuring expenses(2)................ -- -- -- -- 586 -- --
Legal settlement, net(3)................. -- -- -- -- -- -- (2,960)
In process research and development
charges(4)............................. -- -- -- -- -- -- 2,906
Amortization of intangibles.............. 648 975 1,146 936 805 200 217
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses............... 37,218 46,838 50,024 58,675 71,082 13,509 15,000
--------- --------- --------- --------- --------- --------- ---------
Income from operations................. 10,561 16,570 12,402 15,947 14,872 3,629 6,219
Nonoperating income (expense):
Interest income.......................... 338 667 379 461 769 84 318
Interest expense, net.................... (3,215) (3,547) (3,524) (4,030) (3,615) (808) (959)
--------- --------- --------- --------- --------- --------- ---------
Income before provision for income
taxes and minority interest.......... 7,684 13,690 9,257 12,378 12,026 2,905 5,578
Provision for income taxes................. 3,080 5,483 3,425 4,622 3,336 1,162 3,054
Minority interest.......................... -- 816 636 631 1,351 147 491
--------- --------- --------- --------- --------- --------- ---------
Net income............................. 4,604 7,391 5,196 7,125 7,339 1,596 2,033
Dividend on convertible redeemable
preferred stock.......................... -- 462 960 693 250 125 --
--------- --------- --------- --------- --------- --------- ---------
Net income applicable to common
stock................................ $ 4,604 $ 6,929 $ 4,236 $ 6,432 $ 7,089 $ 1,471 $ 2,033
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share, basic................ $ 0.51 $ 0.76 $ 0.44 $ 0.63 $ 0.62 $ 0.14 $ 0.17
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share, diluted.............. $ 0.51 $ 0.73 $ 0.41 $ 0.60 $ 0.59 $ 0.13 $ 0.16
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Cash dividend paid on common stock......... $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.06 $ 0.06
Weighted average number of common shares
used to compute basic earnings per
share.................................... 8,975 9,144 9,629 10,191 11,388 10,625 12,142
Weighted average number of common shares
used to compute diluted earnings per
share.................................... 9,023 9,510 10,301 10,673 11,999 11,396 12,868
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------------------------- JANUARY 31,
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 19,663 $ 6,602 $ 16,027 $ 15,217 $ 40,880 $ 14,324
Working capital.................................. 28,692 28,015 38,087 42,618 75,130 53,009
Total assets..................................... 118,879 169,834 172,771 183,493 213,586 204,806
Long term debt................................... 35,441 47,267 45,788 40,975 52,373 51,870
Total stockholders' equity....................... 52,037 73,894 79,559 86,963 102,223 105,531
</TABLE>
- ------------------------------
(1) In the fourth quarter of fiscal 1998, we recorded an impairment loss of $8.6
million in connection with the sale of the operating assets of MMG. See Note
3 of Notes to Consolidated Financial Statements included in this prospectus.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 15 of Notes to Consolidated Financial Statements
included in this prospectus.
(2) In the fourth quarter of fiscal 1998, we recorded restructuring charges of
$586,000 pursuant to a plan of restructuring approved in the fourth quarter
of fiscal 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 4 of Notes to Consolidated
Financial Statements included in this prospectus.
(3) On January 15, 1999, we settled a lawsuit with Optical Corporation of
America and certain of its stockholders regarding a failed merger in fiscal
1996. In connection with the settlement, we received cash, net of related
legal expenses, $3.0 million of which was recorded as a benefit in the first
quarter of fiscal 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 15 of Notes to
Consolidated Financial Statements included in this prospectus.
(4) In December 1998, we acquired the 40.0% minority interest in Flex held by
SICPA for $30.0 million bringing our ownership in Flex to 100%. We recorded
the transaction as a purchase in the first quarter of fiscal 1999. As a
result of this transaction, we recorded a charge for in-process research and
development of $2.9 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 5 and Note 15 of
Notes to Consolidated Financial Statements included in this prospectus.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Optical Coating Laboratory, Inc. is a worldwide leader in optical thin
film coating technologies. We have leveraged our technical and manufacturing
expertise, gained from over 50 years of experience developing thin film coating
processes for government and industry to build 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 and spectral filtering.
Our products address a range of markets and 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. This market accounted for $73.6 million of our revenues in
fiscal 1998 and $25.1 million of our revenues in the first quarter of fiscal
1999.
LIGHT INTERFERENCE PIGMENTS. Through our Flex subsidiary, 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. This market accounted for $43.4 million
of our revenues in fiscal 1998 and $14.6 million of our revenues in the first
quarter of fiscal 1999.
DISPLAY. We manufacture and sell optical components used in 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. This market
accounted for $60.1 million of our revenues in fiscal 1998 and $14.3 million of
our revenues in the first quarter of fiscal 1999.
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. This market accounted for $44.7 million of our revenues
in fiscal 1998 and $11.2 million of our revenues in the first quarter of fiscal
1999.
OFFICE AUTOMATION. We manufacture and sell optical components,
including precision polymer optics, for copiers, scanners, printers and other
office products. This market accounted for $33.7 million of our revenues in
fiscal 1998 and $4.6 million of our revenues in the first quarter of fiscal
1999.
The following table indicates trends in revenues by market:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED OCTOBER 31,
JANUARY 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF REVENUES BY MARKET:
Telecommunications.............................. 5.3% 16.1% 28.8% 22.9% 36.0%
Light interference pigments..................... 16.2 18.3 17.0 17.1 20.9
Display......................................... 34.0 27.5 23.5 28.7 20.5
Aerospace and instrumentation................... 26.8 20.0 17.5 19.6 16.0
Office automation............................... 17.7 18.1 13.2 11.7 6.6
--------- --------- --------- --------- ---------
Total......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
25
<PAGE>
The sales approach to each market is based on a combination of direct
and indirect sales primarily to OEMs resulting in a high variance of gross
margins. Generally, our telecommunications products yield lower gross margins
and our light interference pigment products yield higher gross margins when
compared to our overall gross margin percentage. Therefore, the overall gross
margins will be affected by the relative contributions of our markets. In
general, all our markets are very competitive and subject to margin pressure.
Revenues generated by sales to Canada have increased from 8.9% in fiscal
1997 to 21.3% in fiscal 1998 and 32.5% in the first quarter of fiscal 1999
reflecting the growth in telecommunications sales from our alliance with JDS.
Revenues generated by sales within the United States represented 43.8% of our
total revenues in fiscal 1997, 41.3% in fiscal 1998 and 31.9% in the first
quarter of fiscal 1999, the decline again reflecting the faster growth in sales
of telecommunications products to Canada. Revenues from sales to other foreign
countries, primarily Europe and Asia, also declined as a percentage of our total
revenues from 47.3% in fiscal 1997 to 37.4% in fiscal 1998 and 35.6% in the
first quarter of fiscal 1999 due to increased sales of telecommunications
products to Canada.
SALE OF MMG. In the fourth quarter of fiscal 1998, we decided to
dispose of substantially all of the assets of our manufacturing subsidiary in
Germany, which was doing business under the name "MMG," in order to focus our
resources in other markets. In conjunction with the negotiation of the sale,
independent appraisals were made of the assets and liabilities of MMG, and we
recorded an impairment loss of $8.6 million in the fourth quarter of fiscal 1998
to reduce the carrying amount of the impaired assets to fair value, net of
disposal costs on a liquidation basis.
In the first quarter of fiscal 1999, Glas-Trosch GmbH, a privately held
company in Switzerland, purchased the business and the operating assets and
other related intangibles of MMG for $4.3 million. We retained ownership of an
office building with an appraised value of $600,000 and accounts receivable and
cash totaling $3.4 million. Third party liabilities of MMG were $4.5 million,
which 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.
INVESTMENT IN FLEX. Flex was founded as one of our divisions in the
early 1980's and was subsequently established as a joint venture in which ICI
Americas Inc., an affiliate of Imperial Chemical Industries plc, owned 60.0% and
we owned 40.0%. In 1995, we acquired controlling ownership of Flex with the
purchase of an additional 20.0% interest. In conjunction with our ownership
increase, the remaining 40.0% interest in Flex was acquired by SICPA Holding
S.A., a privately held corporation headquartered in Lausanne, Switzerland. SICPA
is one of the world's leading manufacturers of printing inks and the primary
customer of Flex.
In December 1998, we purchased SICPA's 40.0% interest in Flex for $30.0
million in cash, increasing our ownership to 100% and 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 will be
amortized over 15 years, and identifiable intangibles (included in other assets)
of $10.1 million that will be 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 commitment to put in place additional capacity to
manufacture light interference pigments.
SETTLEMENT OF LITIGATION. 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 was recorded
in the first quarter of fiscal 1999 for the cash proceeds from the settlement,
net of applicable legal expenses.
26
<PAGE>
PURCHASE OF OPKOR INC. In March 1999, we closed the acquisition of
OPKOR Inc., an optical design and manufacturing company specializing in
precision polymer optic components and assemblies, for $9.0 million plus annual
contingent payments based on profits of the acquired entity. Consideration
consisted of $1.8 million in cash and 267,285 shares of our common stock. The
acquisition will be recorded as a purchase in the second quarter of fiscal 1999.
Under the terms of the acquisition, we agreed to register 81,670 shares within
30 days of the closing of that transaction and the remaining 185,615 shares
within one year of the closing. Furthermore, the OPKOR shareholders can earn an
additional amount of shares of common stock based upon the earnings of OPKOR
during fiscal 1999, fiscal 2000 and fiscal 2001. The maximum amount of such
additional shares is the lesser of 267,285 shares or the number of shares equal
in value to $18.0 million. We have granted registration rights for these
additional shares, if any.
RESULTS OF OPERATIONS
The following table sets forth items, for the periods indicated, from
our Consolidated Statements of Income as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED OCTOBER 31, JANUARY 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 63.7 62.6 67.0 65.7 66.4 67.9 69.6
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 36.3 37.4 33.0 34.3 33.6 32.1 30.4
Operating expenses:
Research and development................ 4.0 5.0 6.2 6.8 6.7 7.2 6.6
Selling and administrative.............. 23.8 22.1 19.6 19.7 17.2 17.8 14.6
Impairment loss......................... -- -- -- -- 3.4 -- --
Restructuring expenses.................. -- -- -- -- 0.2 -- --
Legal settlement, net................... -- -- -- -- -- -- (4.2)
In process research and development
charges............................... -- -- -- -- -- -- 4.2
Amortization of intangibles............. 0.5 0.6 0.6 0.4 0.3 0.4 0.3
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.................. 28.3 27.7 26.4 26.9 27.8 25.4 21.5
--------- --------- --------- --------- --------- --------- ---------
Income from operations.................... 8.0 9.7 6.6 7.4 5.8 6.7 8.9
Nonoperating income (expense):
Interest income......................... 0.3 0.4 0.2 0.2 0.3 0.2 0.5
Interest expense, net................... (2.4) (2.1) (1.9) (1.9) (1.4) (1.5) (1.4)
--------- --------- --------- --------- --------- --------- ---------
Income before provision for income
taxes and minority interest........... 5.9 8.0 4.9 5.7 4.7 5.4 8.0
Provision for income taxes................ 2.3 3.2 1.8 2.1 1.3 2.2 4.4
Minority interest......................... -- 0.5 0.3 0.3 0.5 0.3 0.7
--------- --------- --------- --------- --------- --------- ---------
Net income.............................. 3.6 4.3 2.8 3.3 2.9 2.9 2.9
Dividend on convertible redeemable
preferred stock......................... -- 0.3 0.5 0.3 0.1 0.2 --
--------- --------- --------- --------- --------- --------- ---------
Net income applicable to common stock..... 3.6% 4.0% 2.3% 3.0% 2.8% 2.7% 2.9%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
27
<PAGE>
THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
REVENUES. Revenues for the first quarter of fiscal 1999 were $69.9
million, an increase of $16.5 million or 30.9% over revenues of $53.4 million in
the first quarter of fiscal 1998. Adjusted for the effect of the sale of MMG in
November 1998 revenues for the first quarter of fiscal 1999 would have increased
$19.4 million or 38.5% over revenues of $50.4 million in the first quarter of
fiscal 1998. The revenue increase resulted primarily from increased revenues in
our telecommunications, light interference pigments and office automation
markets, as adjusted for the effect of the sale of MMG. These increases were
partially offset by a decrease of $1.0 million in revenues in our display
markets. All of the revenue increases and decreases were primarily due to
changes in volume.
GROSS PROFIT. Gross profit for the first quarter of fiscal 1999 was
$21.2 million, or 30.4%, of revenues compared to $17.1 million, or 32.1%, of
revenues for the first quarter of fiscal 1998. Adjusted for the effect of the
sale of MMG, gross profit for the first quarter of fiscal 1998 would have been
$16.5 million, or 32.8% of revenues. The gross profit decrease as a percent of
revenues in the first quarter of fiscal 1999 was primarily due to the increase
in sales in our telecommunications business which have gross margins lower than
our average.
RESEARCH AND DEVELOPMENT. Research and development expenditures in the
first quarter of fiscal 1999 were $4.6 million compared to $3.8 million in the
first quarter of fiscal 1998. The increase was primarily due to new product
development and product improvement initiatives for telecommunications products.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses in the first quarter of fiscal 1999 were $10.2 million, an increase of
$705,000, or 7.4% from selling and administrative expenses of $9.5 million for
the first quarter of fiscal 1998. Adjusted for the effect of the sale of MMG,
selling and administrative expenses would have increased $1.5 million in the
first quarter of fiscal 1999 over selling and administrative expenses of $8.7
million for the first quarter of fiscal 1998. The increase in the first quarter
of fiscal 1999 was primarily due to a $600,000 increase in selling expenses
primarily for the promotion of ChromaFlair-Registered Trademark- light
interference pigment for consumer application, and profit-based incentive
accruals.
LEGAL SETTLEMENT. In the first quarter of fiscal 1999, we settled a
lawsuit with OCA and certain of its stockholders regarding a failed merger. A
benefit of $3.0 million was recorded in the first quarter 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 40.0% 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, we recorded a charge for in
process research and development of $2.9 million.
AMORTIZATION OF INTANGIBLES. We recorded amortization of intangibles of
$217,000 in the first quarter of fiscal 1999 compared to $200,000 in the first
quarter of fiscal 1998. Adjusted for the effect of the sale of MMG, amortization
of intangibles for the first quarter of fiscal 1998 would have been $104,000.
The increase in the first quarter of fiscal 1999, adjusted for the effect of the
sale of MMG, 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
revenues, gross profit and operating expenses, our income from operations was
$6.2 million for the first quarter of fiscal 1999 compared to $3.6 million for
the first quarter of fiscal 1998.
INTEREST INCOME AND EXPENSE. Interest income for the first quarter of
fiscal 1999 was $318,000 compared to interest income of $84,000 for the first
quarter of fiscal 1998. The increase in interest income
28
<PAGE>
was due to higher average cash balances in the first quarter of fiscal 1999.
Interest expense, net of capitalized interest, for the first quarter of fiscal
1999 was $959,000 compared to $808,000 for the first quarter of fiscal 1998.
Capitalized interest for the first quarter of fiscal 1998 was $160,000 compared
to $84,000 for the first quarter of fiscal 1998. The capitalized interest
increase in fiscal 1999 was primarily due to the construction of capital
equipment for telecommunications manufacturing. The increase in gross interest
expense was due to increased borrowings outstanding in the first quarter of
fiscal 1999.
PROVISION FOR INCOME TAXES AND MINORITY INTEREST. Our effective income
tax rate was 54.8% for the first quarter of fiscal 1999 compared to 40.0% for
the first quarter 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 quarter of fiscal 1999 is 36.0%. The
effective tax rate decrease in the first quarter of fiscal 1999 was primarily
due to the recognition of benefit from foreign sales corporations and business
tax credits. Minority interest was $491,000 in the first quarter of fiscal 1999
compared to $147,000 for the first quarter of fiscal 1998. In the first quarter
of fiscal 1999, minority interest was recorded up to the date of purchase of the
remaining interest in Flex. In the first quarter of fiscal 1998, minority
interest included the share of net income of Flex accruing to SICPA and the
portion of the operating results of OCLI Asia attributable to our Japanese
partner. We purchased the minority interest in OCLI Asia in the fourth quarter
of fiscal 1998. The minority interest increase in the first quarter of fiscal
1999 was primarily due to increased profits at Flex.
NET INCOME APPLICABLE TO COMMON STOCK. We had net income applicable to
common stock of $2.0 million, or $0.16 per share on a diluted basis, for the
first quarter of fiscal 1999 compared to $1.5 million, or $0.13 per share on a
diluted basis, for the first quarter of fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES. Revenues for fiscal 1998 were $255.6 million, an increase of
$37.8 million or 17.4% over revenues of $217.8 million for fiscal 1997. The
fiscal 1998 revenue increase was primarily due to increased revenues in our
telecommunications, light interference pigments and aerospace and
instrumentation markets. These revenue increases were partially offset by a $5.9
million decrease in revenues in our office automation markets. During fiscal
1998, office automation sales constituted 13.2% of our total sales. Much of the
decrease in our sales in office automation markets was due to our decision to
focus our investments in other markets.
The revenue increase in telecommunications markets was primarily due to
increased sales of WDM products to JDS. The increase in light interference
pigment products was primarily due to increased sales of security pigment to
SICPA.
GROSS PROFIT. Gross profit, as a percent of revenues, was 33.6% in
fiscal 1998 compared to 34.3% in fiscal 1997. The gross margin decrease in
fiscal 1998 was primarily due to the increase in sales in our telecommunications
business, which have gross margins lower than our average.
RESEARCH AND DEVELOPMENT. Research and development expenditures for
fiscal 1998 were $17.1 million, an increase of $2.2 million, or 15.0% over
research and development expenditures of $14.9 million for fiscal 1997. The
fiscal 1998 increase was primarily due to product and process development for
telecommunications products and for new products in the display market.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses for
fiscal 1998 were $43.9 million, an increase of $1.1 million or 2.5% over fiscal
1997 selling and administrative expenses of $42.8 million. This increase was due
to increases in legal expenses in fiscal 1998 primarily associated with a
lawsuit with OCA, which was settled in the first quarter of fiscal 1999 and a
patent infringement suit brought by Flex against BASF, which was settled in the
fourth quarter of fiscal 1998.
29
<PAGE>
IMPAIRMENT LOSS. In the fourth quarter of fiscal 1998, we made the
decision to dispose of MMG in order to focus more resources in other markets.
Independent appraisals were made of the assets and liabilities of MMG and an
impairment loss of $8.6 million was recorded to reduce the carrying amount of
MMG's assets to fair value, net of disposal costs on a liquidation basis. In the
first quarter of fiscal 1999, we sold the operating assets of MMG at our
recorded cost.
RESTRUCTURING EXPENSES. During fiscal 1998, we finalized and announced
to affected individuals, a plan of restructuring for our administrative and
sales offices in Europe. In fiscal 1998, we recorded $586,000 of severance and
exit costs associated with this plan of restructuring.
AMORTIZATION OF INTANGIBLES. We recorded amortization of intangibles of
$805,000 in fiscal 1998 and $936,000 in fiscal 1997, primarily resulting from
amortization of goodwill for MMG.
INCOME FROM OPERATIONS. As a result of the foregoing changes in
revenues, gross profit and operating expenses, our income from operations in
fiscal 1998 was $14.9 million compared to $15.9 million in fiscal 1997.
INTEREST INCOME AND EXPENSES. Interest income was $769,000 in fiscal
1998 compared to $461,000 in fiscal 1997. Net interest expense in fiscal 1998
was $3.6 million compared to $4.0 million in fiscal 1997. Fiscal 1998 net
interest expense was the result of interest incurred of $4.3 million net of
interest capitalized of $697,000, compared to fiscal 1997 interest incurred of
$4.2 million net of interest capitalized of $219,000. The higher amount of
interest capitalized in fiscal 1998 was due to higher capital expenditures in
fiscal 1998.
PROVISION FOR INCOME TAXES. Our effective income tax rate was 27.7% in
fiscal 1998 compared to 37.3% in fiscal 1997. The lower combined federal and
state statutory tax rate in fiscal 1998 was primarily due to the recognition of
for prior year losses in Germany that previously had not been recognized. In
both fiscal 1998 and 1997, we recognized the benefit of state tax credits
arising from the purchase of new manufacturing equipment and federal and state
research credits resulting in a lower tax rate.
MINORITY INTEREST. In fiscal 1998, we recorded minority interest of
$1.4 million compared to minority interest of $631,000 in fiscal 1997. Minority
interest represents the share of net income of Flex accruing to SICPA and the
portion of the operating results of OCLI Asia attributable to our Japanese
partner. During fiscal 1998, we purchased the share of the OCLI Asia owned by
our Japanese partner and in fiscal 1999, we purchased SICPA's 40.0% interest in
Flex.
NET INCOME. We had net income of $7.3 million in fiscal 1998 compared
to $7.1 million in fiscal 1997. Dividends of $250,000 in 1998 and $693,000 in
fiscal 1997 were accrued on outstanding convertible redeemable preferred stock.
The fiscal 1998 preferred dividend decrease was due to the conversion of the
remaining shares of convertible redeemable preferred stock into 599,000 shares
of our common stock during fiscal 1998.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Revenues for fiscal 1997 was $217.8 million, an increase of
$28.6 million or 15.1% over revenues of $189.2 million for fiscal 1996. The
fiscal 1997 revenue increase was primarily due to increased revenues in our
telecommunications, light interference pigments and office automation markets.
These revenue increases were partially offset by decreased revenues in our
display and aerospace and instrumentation markets. Much of the decrease in our
sales in display markets was due to our decision not to pursue a next generation
product in order to focus resources into other markets.
The revenue increase in our telecommunications business was primarily
due to sales of WDM products to JDS. The revenue increase in our office
automation markets was primarily due to better capacity utilization of our
continuous coating platforms resulting in yield improvements that allowed us to
30
<PAGE>
better compete in this market. The increase in revenues in our light
interference pigment market was due to increased sales of security pigment to
SICPA as additional countries adopted the security ink as an anti-counterfeiting
device.
GROSS PROFIT. Gross profit, as a percent of revenues, was 34.3% in
fiscal 1997 compared to 33.0% in fiscal 1996. The gross margin improvement in
fiscal 1997 was primarily due to yield improvements in our new continuous
coating machines offset by higher than average material cost in the manufacture
of WDM products.
RESEARCH AND DEVELOPMENT. Research and development expenditures for
fiscal 1997 were $14.9 million, an increase of $3.2 million, or 27.0% over
research and development expenditures of $11.7 million for fiscal 1996. The
fiscal 1997 increase was primarily due to increased spending of $2.2 million by
Flex for the development of new products. Approximately $800,000 of the
remaining increase was for product and process development for products in our
telecommunications markets.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses for
fiscal 1997 were $42.8 million, an increase of $5.7 million, or 15.3% over
fiscal 1996 selling and administrative expenses of $37.1 million. This increase
was primarily due to $1.4 million of increased selling and administrative
expenses resulting from the establishment of OCLI Asia, $1.5 million of
increased selling expenses for the introduction of new products by Flex, and a
$1.1 million increase in legal expenses. The legal expense increase was
primarily associated with a lawsuit with SICPA and a patent infringement suit in
which we were the plaintiff. Both lawsuits were settled in November 1997.
AMORTIZATION OF INTANGIBLES. We recorded amortization of intangibles of
$936,000 in fiscal 1997 and $1.1 million in fiscal 1996, primarily resulting
from amortization of goodwill relating to the acquisition of MMG.
INCOME FROM OPERATIONS. As a result of the foregoing changes in
revenues, gross profit and operating expenses, our income from operations in
fiscal 1997 was $15.9 million compared to $12.4 million in fiscal 1996.
INTEREST INCOME AND EXPENSE. Interest income was $461,000 in fiscal
1997 compared to $379,000 in fiscal 1996. Net interest expense in fiscal 1997
was $4.0 million compared to $3.5 million in fiscal 1996. Fiscal 1997 net
interest expense was the result of interest incurred of $4.2 million net of
interest capitalized of $219,000, compared to fiscal 1996 interest incurred of
$4.7 million net of interest capitalized of $1.2 million. The higher amount of
interest capitalized in fiscal 1996 was due to the construction of two new
buildings and the installation of two new continuous coating machines.
PROVISION FOR INCOME TAXES. Our effective income tax rate was 37.3% in
fiscal 1997 compared to 37.0% in fiscal 1996. In both years, the lower than
combined federal and state statutory effective rate was primarily due to the
recognition of state tax credits arising from the purchase of new manufacturing
equipment.
MINORITY INTEREST. In fiscal 1997, we recorded minority interest of
$631,000 compared to minority interest of $636,000 in fiscal 1996. Fiscal 1997
minority interest represents the share of net income of Flex accruing to SICPA
and the portion of the operating results of OCLI Asia attributable to our
Japanese partner. Fiscal 1996 minority interest represents the share of net
income of Flex accruing to SICPA.
NET INCOME. We had net income of $7.1 million in fiscal 1997 compared
to $5.2 million in fiscal 1996. Dividends of $693,000 in fiscal 1997 and
$960,000 in fiscal 1996 were accrued on outstanding convertible redeemable
preferred stock. The fiscal 1997 preferred dividend decrease was due to the
conversion of 5,750 shares of convertible redeemable preferred stock into
555,000 shares of our common stock during fiscal 1997.
31
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly financial information
for each of the nine quarters ended January 31, 1999 and such data expressed as
a percentage of revenues for the periods indicated. The information is presented
on a basis consistent with the Consolidated Financial Statements included
elsewhere in this prospectus and, in the opinion of management, include all
adjustments consisting of normal recurring accruals, necessary for a fair
presentation of the unaudited quarterly results when read in conjunction with
the Consolidated Financial Statements and Notes thereto. These operating results
are not necessarily indicative of results that may be expected for any
subsequent periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 45,720 $ 53,516 $ 59,997 $ 58,596 $ 53,373 $ 64,345 $ 67,393 $ 70,513
Cost of sales.............. 30,199 34,842 40,207 37,959 36,235 42,484 44,462 46,489
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............. 15,521 18,674 19,790 20,637 17,138 21,861 22,931 24,024
Operating expenses:
Research and
development............ 2,562 3,951 3,943 4,447 3,821 4,026 4,222 5,068
Selling and
administrative......... 10,266 10,782 10,774 11,014 9,488 11,171 12,131 11,136
Impairment loss.......... -- -- -- -- -- -- -- 8,628
Restructuring expenses... -- -- -- -- -- -- -- 586
Legal settlement, net.... -- -- -- -- -- -- -- --
In process research and
development charges.... -- -- -- -- -- -- -- --
Amortization of
intangibles............ 243 237 232 224 200 198 200 207
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses............... 13,071 14,970 14,949 15,685 13,509 15,395 16,553 25,625
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
Operations............. 2,450 3,704 4,841 4,952 3,629 6,466 6,378 (1,601)
Nonoperating income
(expense):
Interest income.......... 175 82 78 126 84 81 117 487
Interest expense, net.... (1,052) (1,027) (1,007) (944) (808) (927) (796) (1,084)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
provision for income
taxes and minority
interest............. 1,573 2,759 3,912 4,134 2,905 5,620 5,699 (2,198)
Provision for income
taxes.................... 630 1,103 1,568 1,321 1,162 2,163 2,246 (2,235)
Minority interest.......... 36 143 350 102 147 408 32 764
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ 907 1,513 1,994 2,711 1,596 3,049 3,421 (727)
Dividend on convertible
redeemable preferred
stock.................. 240 187 141 125 125 125 -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)
applicable to common
stock.................... $ 667 $ 1,326 $ 1,853 $ 2,586 $ 1,471 $ 2,924 $ 3,421 $ (727)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income per share,
basic.................... $ 0.07 $ 0.13 $ 0.18 $ 0.25 $ 0.14 $ 0.27 $ 0.28 $ (0.06)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income per share,
diluted.................. $ 0.07 $ 0.13 $ 0.17 $ 0.23 $ 0.13 $ 0.25 $ 0.27 $ (0.06)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average number of
common shares used to
compute basic earnings
per share................ 9,777 10,069 10,372 10,541 10,625 10,903 12,009 12,061
Weighted average number of
common shares used to
compute diluted earnings
per share................ 10,165 10,410 11,135 11,148 11,396 11,553 12,546 12,546
<CAPTION>
JANUARY 31,
1999
-----------
<S> <C>
Revenues................... $ 69,851
Cost of sales.............. 48,632
-----------
Gross profit............. 21,219
Operating expenses:
Research and
development............ 4,644
Selling and
administrative......... 10,193
Impairment loss.......... --
Restructuring expenses... --
Legal settlement, net.... (2,960)
In process research and
development charges.... 2,906
Amortization of
intangibles............ 217
-----------
Total operating
expenses............... 15,000
-----------
Income (loss) from
Operations............. 6,219
Nonoperating income
(expense):
Interest income.......... 318
Interest expense, net.... (959)
-----------
Income (loss) before
provision for income
taxes and minority
interest............. 5,578
Provision for income
taxes.................... 3,054
Minority interest.......... 491
-----------
Net income (loss)........ 2,033
Dividend on convertible
redeemable preferred
stock.................. --
-----------
Net income (loss)
applicable to common
stock.................... $ 2,033
-----------
-----------
Net income per share,
basic.................... $ 0.17
-----------
-----------
Net income per share,
diluted.................. $ 0.16
-----------
-----------
Weighted average number of
common shares used to
compute basic earnings
per share................ 12,142
Weighted average number of
common shares used to
compute diluted earnings
per share................ 12,868
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF
REVENUES:
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............. 66.1 65.1 67.0 64.8 67.9 66.0 66.0 65.9
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............. 33.9 34.9 33.0 35.2 32.1 34.0 34.0 34.1
Operating expenses:
Research and
development............ 5.6 7.4 6.6 7.6 7.2 6.3 6.3 7.2
Selling and
administrative......... 22.5 20.1 18.0 18.8 17.8 17.4 18.0 15.8
Impairment loss.......... -- -- -- -- -- -- -- 12.2
Restructuring expenses... -- -- -- -- -- -- -- 0.8
Legal settlement, net.... -- -- -- -- -- -- -- --
In process research and
development charges.... -- -- -- -- -- -- -- --
Amortization of
intangibles............ 0.5 0.4 0.4 0.4 0.4 0.3 0.3 0.3
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 28.6 27.9 25.0 26.8 25.4 24.0 24.6 36.3
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............... 5.3 7.0 8.0 8.4 6.7 10.0 9.4 (2.2)
Nonoperating income
(expense):
Interest income.......... 0.4 0.2 0.1 0.2 0.2 0.1 0.2 0.7
Interest expense, net.... (2.3) (1.9) (1.7) (1.6) (1.5) (1.4) (1.2) (1.5)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes and
minority interest...... 3.4 5.3 6.4 7.0 5.4 8.7 8.4 (3.0)
Provision for income
taxes.................... 1.4 2.1 2.6 2.3 2.2 3.4 3.3 (3.2)
Minority interest.......... 0.1 0.3 0.6 0.2 0.3 0.6 0.0 1.1
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ 1.9 2.9 3.2 4.5 2.9 4.7 5.1 (0.9)
Dividend on convertible
redeemable preferred
stock.................... 0.5 0.4 0.3 0.3 0.3 0.3 -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)
applicable to common
stock.................. 1.4% 2.5% 2.9% 4.2% 2.6% 4.4% 5.1% (0.9%)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
JANUARY 31,
1999
-----------
<S> <C>
AS A PERCENTAGE OF
REVENUES:
Revenues................... 100.0%
Cost of sales.............. 69.6
-----------
Gross profit............. 30.4
Operating expenses:
Research and
development............ 6.6
Selling and
administrative......... 14.6
Impairment loss.......... --
Restructuring expenses... --
Legal settlement, net.... (4.2)
In process research and
development charges.... 4.2
Amortization of
intangibles............ 0.3
-----------
Total operating
expenses............. 21.5
-----------
Income (loss) from
operations............... 8.9
Nonoperating income
(expense):
Interest income.......... 0.5
Interest expense, net.... (1.4)
-----------
Income before provision
for income taxes and
minority interest...... 8.0
Provision for income
taxes.................... 4.4
Minority interest.......... 0.7
-----------
Net income (loss)........ 2.9
Dividend on convertible
redeemable preferred
stock.................... --
-----------
Net income (loss)
applicable to common
stock.................. 2.9%
-----------
-----------
</TABLE>
FINANCIAL CONDITION AND LIQUIDITY
As of January 31, 1999 we had cash and cash equivalents totaling $14.3
million, a decrease of $26.6 million from $40.9 as of October 31, 1998. We used
$30.0 million to purchase the minority interest in Flex, invested $5.1 million
in plant and equipment, used $1.4 million to pay down debt, $700,000 to pay
dividends and $2.4 million to purchase a portion of Flex's working capital loan
from SICPA. These expenditures were offset by $12.2 million of cash generated by
operations and stockholder investments of $849,000.
In the first quarter of fiscal 1999, our working capital, excluding cash
and short term investments, increased $4.4 million from $34.3 million to $38.7
million. This increase was primarily due to decreases to accounts payable,
accrued expenses and accrued compensation expenses of $7.3 million, increases to
other current assets of $4.1 million and increases to accounts receivable of
$800,000 offset by increases to deferred revenue of $3.7 million and decreases
to inventories of $4.0 million. The decreases to accounts payable, accrued
expenses and accrued compensation expenses are primarily due to payment of year
end compensation accruals, funding of our 401(k)/ESOP plan and payment of
restructuring accruals. The increase in other current assets is primarily due to
amounts receivable for the sale of operating assets of MMG. The accounts
receivable increase is consistent with increased sales. The deferred revenue
increase is primarily due to invoicing provisions for light interference
pigment. Approximately half of the inventory decrease results from the sale of
the MMG assets while the remainder results from higher sales in the first
quarter of fiscal 1999.
33
<PAGE>
As of October 31, 1998 we had $52.4 million in long term debt in
addition to $6.0 million in current maturities of long term debt. This debt is
comprised of $44.4 million in unsecured senior notes at a weighted average rate
of 7.2%, $5.0 million in mortgage debt collateralized by two buildings in Santa
Rosa, $3.7 million of unsecured debt financed in Germany by ABN Amro, $3.1
million related to MMG partially collateralized by land and buildings and $2.3
million in long term capital leases.
Our primary banking arrangement is with a syndicate consisting of Bank
of America and ABN Amro. Through these banks as of October 31, 1998 we had
executed a $20.0 million line of credit that was not utilized.
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 March 1999, we replaced the credit facilities of our subsidiary in
Japan with two facilities totaling approximately $10.0 million with an average
interest rate of 1.5% per year.
In the first quarter of fiscal 1999, demand for light interference
pigment exceeded capacity, resulting in an inventory decrease of $1.0 million to
satisfy excess demand. Existing backlog and projected orders at Flex are
expected to fill available capacity for light interference products 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 approximately $14.0 million for which we have firm
purchase commitments outstanding of approximately $5.4 million. Including
commitments for the above expansion, as of January 31, 1999, our total capital
commitments are approximately $7.4 million.
We believe that the cash on hand at January 31, 1999, cash anticipated
to be generated from future operations, available funds from revolving credit
arrangements and our proceeds from this offering 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 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 January 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.
34
<PAGE>
INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. We have
taken an inventory of all of our non-financial software and equipment that may
be affected by the Year 2000, have identified the non-financial software and
equipment that is critical to our operations and are in the process of testing
the items that 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. 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. We are currently working on contingency plans
to address unforeseen issues that may arise with internal non-financial software
and imbedded chip technology. Full Year 2000 compliance for our internal
non-financial software and imbedded chip technology is scheduled for September
30, 1999.
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. Over 80.0% of
our key suppliers and third party service providers and over 50.0% of our key
customers have indicated that they are or are expecting to achieve Year 2000
compliance by December 31, 1999. 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 do
not achieve Year 2000 compliance successfully and in a timely manner, and we are
unable to replace them with new customers or alternate suppliers, our business
or operations could be adversely affected.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Our exposure to market risk for changes in interest
rates relates primarily to our cash equivalents and long term debt obligations.
Cash equivalents are readily convertible to cash and have maturity dates of
three months or less. Due to the short maturities of cash equivalents, carrying
amounts approximate fair value.
By policy, our cash investments are limited to obligations of the United
States, United Kingdom, German and Japanese governments, bank repurchase
agreements collateralized by direct obligations of those governments, prime
commercial paper and savings accounts with commercial banks. Amounts deposited
with commercial banks are also limited in amount by financial institutions. We
do not use derivatives or equity investments for cash investment purposes.
As our long term debt obligations are at fixed rates, we do not have
cash flow exposure due to rate changes on our long term debt. The fair value of
our long term debt is estimated based on current interest rates offered to us
for similar instruments.
From time to time, we enter into interest rate swaps primarily to reduce
our interest rate exposure from floating to fixed rate. In fiscal 1998, we
entered into an interest rate swap for anticipated debt refinancing in the
amount of $30.0 million. The purpose of the swap was to fix the reference rate
for the debt at 5.7% to eliminate our exposure to interest rate fluctuations
until the loan refinance was completed. The swap was designated as a hedge of an
anticipated transaction. After completion of the loan refinance, $310,000 was
paid under the swap that was recorded as an increase to interest expense over
the term of the notes. There were no interest rate swaps outstanding on either
October 31, 1998 or January 31, 1999.
35
<PAGE>
The table below presents principal (or notional) amounts and related
weighted-average interest rates by year of maturity for our cash equivalents and
debt obligations as of October 31, 1998.
<TABLE>
<CAPTION>
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
--------- --------- --------- --------- --------- ------------ --------- ---------
(IN THOUSANDS, EXCEPT RATES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents
Fixed rate........................ $ 38,300 -- -- -- -- -- $ 38,300 $ 38,300
Average rate...................... 4.8% -- -- -- -- -- 4.8%
Long term debt
Fixed rate........................ $ 6,026 $ 3,663 $ 3,533 $ 8,616 $ 6,126 $ 30,435 $ 58,399 $ 59,843
Average rate...................... 7.4% 8.0% 8.0% 7.2% 6.9% 7.0% 7.2%
</TABLE>
FOREIGN EXCHANGE RISK. We have significant investments in Scotland and
Japan. Changes in the value of those countries' currencies relative to the U.S.
dollar are recorded as direct charges or credits to equity. We also have
manufacturing operations in Scotland and Japan and sales presence in other
European and Asian countries. A significant weakening of the currencies in
Europe or Asia in relation to the U.S. dollar could reduce the reported results
of those operations. In addition, a significant amount of our sales are export
sales which could be subject to competitive price pressures if the U.S. dollar
were to strengthen compared to the currency of foreign competitors.
We do, from time to time, enter into purchase, sales or debt
arrangements denominated in currencies other than our functional currency which
exposes us to currency risk on open receivable and payable balances. We are also
exposed to exchange risk on open intercompany balances that some of the foreign
subsidiaries have with us and each other. We will, from time to time, enter into
contracts to hedge those risks that we consider material.
In addition to derivative contracts to hedge foreign currency risk on
existing commitments, open receivables, payables and debt instruments, we may
enter into interest rate swaps or similar instruments in order to reduce
interest rate risk on our debt instruments. We do not enter into derivatives for
trading purposes.
In fiscal 1998, we entered into foreign currency forward contracts for
the principal and interest payments under a $3.1 million loan that is
denominated in Deutsche marks. The transaction is designated as a hedge of a
foreign currency commitment. Gains and losses on the contract are recorded as a
net reduction or increase to interest expense over the life of the loan. We also
entered into foreign currency forward contracts for the principal and interest
payments under an intercompany note receivable denominated in Pounds sterling.
Gains and losses on those contracts are offset in consolidation.
The following table provides information about our foreign exchange
forward contracts by maturity date at October 31, 1998.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT CONTRACT RATES)
<S> <C> <C> <C> <C> <C> <C> <C>
Deutsche marks:
Notional amount.................................. $ 1,026 $ 995 $ 959 $ 921 $ 224 -- $ 4,124
Average contract rate (foreign currency/ USD).... 1.78 1.75 1.73 1.71 1.70 -- 1.74
Pounds sterling:
Notional amount.................................. $ 374 $ 370 $ 368 $ 366 $ 365 $ 1,106 $ 2,948
Average contract rate (foreign currency/ USD).... 0.63 0.64 0.64 0.65 0.65 0.64 0.64
<CAPTION>
FAIR
VALUE
---------
<S> <C>
Deutsche marks:
Notional amount.................................. $ 345
Average contract rate (foreign currency/ USD)....
Pounds sterling:
Notional amount.................................. $ 92
Average contract rate (foreign currency/ USD)....
</TABLE>
There have been no significant changes in market risk since October 31,
1998.
36
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In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. The statement requires balance sheet and income statement
recognition of derivative transactions and provides limitations and accounting
requirements for hedging instruments. The statement is effective for the first
quarter of our fiscal 2000 with earlier application encouraged. As our existing
derivative contracts and policies regarding the use of derivatives require that
cash flows under financial derivatives match cash flows under existing firm
commitments, we do not expect adoption of SFAS 133 to affect our results of
operations or cash flows but, as the statement requires separate presentation of
the fair value of derivative instruments, our Statement of Financial Position
will be affected by adoption of the statement.
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BUSINESS
OVERVIEW
Optical Coating Laboratory, Inc. is a worldwide leader in optical thin
film coating technologies. We have leveraged our technical and manufacturing
expertise, gained from over 50 years of experience developing thin film coating
processes for government and industry to build 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 and spectral filtering.
By integrating superior process capabilities with advanced product design we
provide complete optical solutions that address a range of end-market
applications in growing markets.
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. This market accounted for 28.8% of our revenues in fiscal 1998
and 36.0% of our revenues in the first quarter of fiscal 1999.
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. This market accounted for 17.0% of our revenues in
fiscal 1998 and 20.9% of our revenues in the first quarter of fiscal 1999.
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. This market
accounted for 23.5% of our revenues in fiscal 1998 and 20.5% of our revenues in
the first quarter of fiscal 1999.
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. This market accounted for 17.5% of our revenues in
fiscal 1998 and 16.0% of our revenues in the first quarter of fiscal 1999.
OFFICE AUTOMATION. We manufacture and sell optical components,
including precision polymer optics, for copiers, scanners, printers and other
office products. This market accounted for 13.2% of our revenues in fiscal 1998
and 6.6% of our revenues in the first quarter of fiscal 1999.
INDUSTRY BACKGROUND
Optical thin film coatings are microscopic layers of materials, such as
silicon and magnesium flouride, applied to the surface of a substrate, such as
glass or plastic, to alter its optical properties. Thin film coatings control
the reflection, refraction, transmission and absorption of light to achieve
specific optical effects. Thin film coatings can also create electrical
conductivity and enhance the durability of the surface of a substrate while
maintaining the desired optical effects. These effects are achieved as a result
of the optical properties, sequence, number and thickness of the thin film
layers in relation to the wavelengths of light.
The ability to control the behavior of light using thin films plays a
critical role in many industries and products. Such control allows one to:
- combine many communications signals on a single fiber optic cable;
- provide protection for solar cells on satellites;
- create color-shifting ink pigments for currency security;
- increase the brightness and contrast of computer displays;
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- create the color for projection displays; and
- control high energy laser beams.
[A diagram depicting light separation through a prism and a diagram
showing light reflection, absorption and transmission through an optical thin
film coated substrate]
TELECOMMUNICATIONS
The volume of data, voice and video traffic carried by telecommunication
service providers has dramatically grown over the last several years. Data
traffic has increased due to the escalating use of the Internet, the
proliferation of bandwidth intensive applications such as distributed computing,
email, electronic commerce and local and wide area networking, and the
development of high bandwidth access technologies such as digital subscriber
lines, known as "DSLs," and cable modems. Voice traffic has increased with the
proliferation of cellular telephones. These demands have created capacity
constraints on existing networks, forcing providers to seek alternatives in
order to increase bandwidth and decrease cost, including expanding and enhancing
both fiber optic and satellite communications systems in which optical products
and processes are critical.
Fiber Optics
One of the means for expanding the capacity, or bandwidth, of fiber
optic cable networks is WDM. WDM increases the number of information-carrying
channels an optical fiber can simultaneously transmit by combining light sources
of different wavelengths, or colors, onto the same fiber optic cable. Dense WDM
technology refers to the ability to transmit four or more channels on a single
fiber optic cable. ElectroniCast Corporation, a research firm specializing in
this market, has projected that the demand for dense WDM products will grow at a
compound annual rate of 28.7% from $1.6 billion in 1998 to $12.2 billion in
2006.
A dense WDM fiber optic system requires multiplexers that combine light
sources at the transmission end and separate light sources at the receiving end
of the system using some form of wavelength discrimination technology.
ElectroniCast projects that the market for all forms of wavelength
discrimination technologies used in dense WDM products will grow at a compound
annual rate of 26.7% from $146.6 million in 1998 to $971.9 million in 2006. A
dense WDM system also requires an erbium doped fiber amplifier (EDFA) every 60
to 100 kilometers to boost the light energy on the fiber without having to
convert the light energy to an electronic signal. ElectroniCast projects that
the market for EDFAs will grow at a compound annual rate of 21.3% from $714.3
million in 1998 to $3.3 billion in 2006.
To date, WDM technology has been used primarily in point-to-point
backbone systems by interexchange carriers. Emerging network architectures,
however, are developing around the capability to switch selected wavelengths of
light within and between networks in order to direct network traffic without
expensive opto-electronic equipment. Expansion of optical networks into
metropolitan networks is creating strong demand for a new class of products
known as selectable wavelength optical add/drop multiplexers. ElectroniCast
projects that this market will grow at a compound annual rate of 69.9% from
$15.5 million in 1998 to $1.1 billion in 2006.
Satellites
Satellite launches have increased in recent years and are expected to
continue to increase, particularly as low earth orbit satellite systems are
deployed to support the demand for increased communications. Satellites are
powered by solar cell systems and are usually protected from harmful radiation
by solar cell covers coated with optical thin films. According to Frost &
Sullivan, a market research firm, satellite launches are anticipated to decline
from 175 in 1999 to 157 in 2000 and are expected to increase to 283 in 2001 and
267 in 2002. In the subsequent years, satellite launches are expected to
decline.
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LIGHT INTERFERENCE PIGMENTS
Light interference pigments create unique effects such as a shift in
color based on viewing angle. Currently, two major markets utilize these
pigments.
Security
Counterfeiting constitutes a present and growing threat to the security
of the world's currencies. Recently, the proliferation of high resolution color
copiers, scanners and computer software has made it possible for the novice to
produce counterfeit bills that will pass as authentic in many environments.
Additionally, political and economic uncertainty has led to the loss of
confidence in local currencies in many areas and created an environment for
highly sophisticated counterfeiting of high denomination substitute currencies,
such as the U.S. $100 bill. In response to these threats, many governments,
including the United States, have been incorporating a number of
anti-counterfeiting mechanisms including color shifting ink utilizing light
interference pigments. Other security applications where light interference
pigments can be utilized include passports, credit cards, tax stamps, securities
and brand protection.
Decorative
Decorative applications in the automotive paint, cosmetics, electronics
and sports apparel markets all provide market opportunities for special effect
pigments, such as light interference pigments, as color becomes an important
distinguishing feature for brand identification. Light interference pigments can
be a supplement to other paint pigments to provide special effects or a
substitute for high performance organic pigments used to create color. According
to IAL Consultants, a market research firm specializing in the chemical,
plastics and allied process industries, the special effect or high performance
pigment market, which consists of pearlescent, iridescent and metallic effects,
was estimated to be approximately $544 million in 1998, and the market for high
performance organic pigments was estimated to be approximately $978 million in
1998.
DISPLAY
Today's mainstream technologies in the display market include CRT, flat
panel, and projection displays. CRT displays are currently used for most
televisions and computer monitors.
Factors driving demand for display technologies include:
- increased demand for portable products such as laptop computers, cell
phones and personal digital assistants, commonly known as "PDAs";
- the need to project and display digitally formatted data; and
- larger display dimensions coupled with smaller size and weight
requirements.
The performance of display products is highly dependent upon components
utilizing optical thin film technology.
CRT
CRT displays make up the largest segment of the display market. This
market is characterized by slow, but positive, unit growth and downward pricing
pressure. The advantages of CRT displays traditionally have been low cost and
reliability. The disadvantages of CRT display technology, which include large
size, weight and power consumption, have led to the introduction of competing
display technologies.
Flat Panel
Flat panel displays are used in laptop computers, global positioning
systems (GPS) displays, camcorders and touch panels. This market is expected to
grow with demand for these products. Growth is also expected as large flat panel
displays supplant computer CRT displays for use in many applications.
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Flat panel displays offer the advantage of reduced size and weight for the same
viewing area, but are more expensive than CRT displays.
Projection
Projection displays consist of two major market segments--large screen
consumer projection television sets and projection systems for business
applications. The demand for projection displays is increasing due to large
screen size capability with favorable overall size and weight characteristics as
compared to CRTs. The cost of these systems is quite high, however, relative to
the cost of CRT-based display systems. As projection display systems decrease in
cost, the market for these products is anticipated to grow more rapidly. The
total market for projection displays is estimated to grow at a compound annual
rate of 8.4% from $7.2 billion in 1998 to $11.7 billion in 2004 according to
Stanford Resources, Inc., a market research firm. Of this market, the segment
for rear projection displays utilizing reflective liquid crystal displays (LCDs)
is projected by Stanford Resources to have a compound annual growth rate of
46.0% from $90.4 million in 1998 to $876.2 million in 2004. We believe that
these figures do not include the potential application of large size monitors
for use as desktop displays.
AEROSPACE AND INSTRUMENTATION
The aerospace and instrumentation markets require sophisticated,
high-precision coated products and optical components that selectively absorb,
transmit or reflect light in order to meet the specific performance requirements
of advanced scientific systems. These high-precision coated products and optical
components are used in aerospace systems, and medical, scientific and analytical
instruments, manufacturing process control instruments, and bar code scanners.
OFFICE AUTOMATION
The office automation market includes photoreceptors and front surface
mirrors for photocopiers, document scanners, overhead projectors, facsimile
machines, printers, and precision molded plastic optical components used in
scanners and printers.
OUR ADVANTAGE
As a pioneer in light management, we are well positioned to take
advantage of the increasing need for optical products and solutions in growth
markets. The key to our success is superior thin film deposition and product
design technologies and the ability to apply these technologies to our
customers' needs. We have 50 years of experience in innovating and developing
thin film designs and process technologies used to create optical solutions. We
focus on high performance processes that rely on internally designed machinery
and process monitoring equipment. We devote significant resources to research
and development of new processes and new products that incorporate our optical
thin film capabilities. Our reputation and commitment to superior optical
technology allows us to attract and retain both a strong customer base and the
most qualified personnel in the industry.
OUR STRATEGY
Our goal is to be the leading supplier of high performance optical
products. Key elements of our strategy are:
CAPITALIZE ON OPTICAL EXPERTISE TO DESIGN AND DEVELOP PRODUCTS. We
capitalize on our expertise in thin film technology and process design in order
to develop high quality optical products. We accomplish this by continuing to
focus our research and development efforts on both product development as well
as our core thin film and process technology. In addition, we will continue to
integrate the optical design and thin film design of a product with a focus on
low cost manufacturing. This approach allows us to design and build products
that have the ability to gain wide market acceptance.
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FOCUS ON SELECTED LARGE AND GROWING COMMERCIAL MARKETS. Light
management technology is applicable across a wide range of potential market
applications. We currently focus on the telecommunications, light interference
pigments and projection display markets because they all require sophisticated
optical components and offer the opportunity for high growth. We will continue
to focus on selected commercial markets that represent our best opportunity for
growth.
LEVERAGE STRATEGIC ALLIANCES. One of our key success factors is the
capability to rapidly and efficiently develop, manufacture and distribute
products. We currently have developed strategic alliances with JDS in the fiber
optic telecommunications market and SICPA in the security ink market. We will
continue to evaluate potential strategic alliances to minimize time to market
for our products.
ENHANCE MANUFACTURING EFFICIENCY. We will continue to invest in the
development of high volume, low cost manufacturing capability. Because assembly
operations are subject to high labor costs, we will focus on the design and
development of products adaptable to manufacturing automation. Also, we will
continue to have a strong focus on operational excellence through our Factory
Overall Efficiency programs, which measure overall costs and target continuous
improvements.
EXPAND INTERNATIONAL PRESENCE. We will continue to expand our presence
in Asia and Europe by focusing more sales, product development resources and
manufacturing capabilities in these areas. By locating these resources closer to
our customers in Asia and Europe, we expect to improve our penetration in those
markets.
PURSUE STRATEGIC ACQUISITIONS. In February 1999, we acquired OPKOR, a
complementary precision polymer optics company that provides improved optical
design capability, capacity expansion and technology as well as products in new
markets such as biometrics and projection lenses. We intend to selectively
pursue acquisitions that enhance our position as a leading high performance
optical products company. We expect these acquisitions to provide enabling
technology or directly expand our product portfolio.
STRATEGIC ALLIANCES
JDS. In February 1997, we entered into an alliance with JDS, a leading
fiber optic component company, in order to capitalize on the rapidly growing
market for WDM products. The alliance involves long term supply and distribution
contracts under which we contribute our expertise to provide wavelength
discrimination technologies for specified WDM products and JDS contributes its
expertise in the design, packaging and marketing of those products. The JDS
alliance includes one agreement, where we contract with JDS for the design,
packaging and assembly of certain WDM products, and a second agreement, where we
sell the WDM products to JDS for marketing and distribution. Both agreements are
exclusive except under certain circumstances where wavelength discrimination
devices or assembly services are not available within our alliance at industry
competitive prices. We share in the profits and losses generated by the
alliance.
SICPA. In 1986, we began supplying light interference pigments to
SICPA, a leading supplier of inks used in the printing of value documents, most
notably currency, in order to capitalize on the use of our pigments as an
anti-counterfeiting measure. SICPA uses our pigments to make optically variable
ink. Through SICPA's relationships with government currency printing agencies
and central banks, optically variable ink, which contains our proprietary light
interference pigments, has been introduced as one of the most effective means of
preventing counterfeiting. We currently have a long term exclusive license and
product supply contract with SICPA extending through 2009 for specified
applications of our light interference pigment in the security market. The
contract has minimum and maximum "take or pay" purchase requirements as well as
firm pricing.
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TECHNOLOGY AND PRODUCTS
TELECOMMUNICATIONS
The representation below depicts the major components of a WDM network.
Products manufactured by us are indicated.
[The graphic depicts a schematic of a wavelength division multiplexing
system containing an Erbium Doped Fiber Amplifier. The components manufactured
or packaged by OCLI are labeled.]
Fiber Optics
- DENSE WAVELENGTH DIVISION MULTIPLEXING COMPONENTS. In our alliance
with JDS, we combine our resources to provide dense WDM components for
the fiber optic communications market. These products allow the
simultaneous transmission of multiple channels of information through
a single fiber. Our dense WDM components enable the integration and
segregation of discrete wavelengths of light, each of which carries
separate channels of information.
- ERBIUM DOPED FIBER AMPLIFIER (EDFA) WDM COMPONENTS. EDFAs are
typically located every 60 to 100 kilometers in a fiber optic network
and can contain a number of WDM components, including band splitters
that we provide as part of our JDS alliance.
- GAIN FLATTENING COMPONENTS. The amplification of signals in an EDFA is
not inherently uniform across the amplifier bandwidth. Fiber optic
components typically utilizing gain flattening thin film technology are
used to equalize WDM amplifier gain. Typically, EDFAs contain pairs of
gain flattening filters designed to provide this uniformity, which is
critical for optimum network performance. Utilizing our superior thin
film processes, we have recently introduced a single element gain
flattening filter which performs the same function as the paired
filters and simplifies EDFA assembly. We are now offering these
components as part of our JDS alliance.
- WAVELENGTH LOCKING FILTERS. Wavelength locking filters are utilized to
stabilize the transmitting laser at the desired wavelength. These
filters ensure that the wavelength desired for that particular channel
of information is distinct from other wavelengths. The accuracy of
such components ultimately determines how dense the spacing can be
between channels and therefore the total capacity of the WDM system.
- RECONFIGURABLE ADD/DROP MULTIPLEXER. As "point-to-point" dense WDM
systems develop into more complete fiber optic networks, it becomes
advantageous to enable the adding or dropping of certain wavelengths
onto other network nodes to selectively direct traffic without
expensive electronic equipment. Our recently introduced MicroNode-TM-
Wavelength Selective Switch, a three port optical switch utilizing
thin film technology and a proprietary micro-mechanical high speed
switch, will enable this capability when fully commercialized.
Satellites
- SOLAR CELL COVERS. We produce solar cell covers by coating ultra-thin
glass that protect and enhance photovoltaic cells used for satellite
power. The thin film coatings protect against undesirable effects of
the sun. The covers are durable enough to withstand the effects of
space debris.
- THERMAL CONTROL MIRRORS. We manufacture thermal control mirrors that
are mounted on satellites to minimize solar heating of the satellite
instrumentation.
LIGHT INTERFERENCE PIGMENTS
Security
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Our OVP-TM- product is a light interference pigment which allows ink to
exhibit different colors from different viewing angles. This pigment is produced
on machinery and processes designed by Flex. Flex is the only supplier of this
product and enjoys a long-term supply and distribution contract with SICPA. Our
OVP-TM- product is being used on the currencies of more than 50 countries, and
is on the U.S. $100, $50 and $20 denominations.
[The graphic depicts a cross-section of a light interference pigment
flake]
Decorative
Our Chromaflair-Registered Trademark- product utilizes the same
manufacturing processes as our OVP-TM- security product, but is designed to have
certain color characteristics that make it attractive for applications in
paints, cosmetics and plastics. Our pigments create a durable color shifting
finish when used in these applications. Our Chromaflair-Registered Trademark-
product has been most recently featured as a paint option on selected Nissan
automobiles in Europe. Chromaflair-Registered Trademark- product is also
available through most paint companies in the automobile refinish market. While
its primary design application currently is for the automotive paint market,
Chromaflair-Registered Trademark- product has also been used on consumer
products such as Nokia cell phones, Sony portable CD players, Motorola pagers
and Nike shoes.
DISPLAY
CRT
We produce a broad line of high performance optical glass filters for
display applications. These filters are sold under the brand name
Glare/Guard-Registered Trademark- and are delivered as custom manufactured
products on a private label basis to other brands such as Kensington and ACCO.
Flat Panel
We have developed a product line for LCD flat panel displays, which
manages the reflectance of the screen and enhances color contrast and
brightness. This product is utilized on high quality flat panel display products
for the desktop as well as products that are used outdoors and require an
anti-glare treatment such as GPS and video camcorders.
Projection
We manufacture the following components that can be used as part of the
optical engine for projection display systems:
- PHILIPS PRISMS manage the color creation in systems utilizing
multi-reflective LCD technology;
- POLARIZING BEAM SPLITTERS manage the light beam for reflective LCD
systems;
- DICHROICS AND COLOR WHEELS are used to create the color in systems
that utilize a single imager;
- PROJECTION LENSES combine precision polymer optics and traditional
glass elements to project a high quality image;
- OPTICAL WINDOWS, which we coat and assemble for Texas Instruments' DMD
chip, to enhance the projected image; and
- HIGHLY REFLECTIVE MIRROR PRODUCTS reflect the optical image in a
manner that optimizes brightness and image quality.
AEROSPACE AND INSTRUMENTATION
We make a broad array of products to support the aerospace and
instrumentation markets. These include wavelength infrared components, beam
splitters and optical sensors for aerospace applications,
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optical engine components for bar-code scanners, optical filters for medical
instruments and dichroic filters for stage lighting.
OFFICE AUTOMATION
We produce numerous products for the office automation market including
mirrors for copiers and multi-function devices, sensors for printers, biometric
fingerprint optics for device security, and camera lenses for video conferencing
applications.
CUSTOMERS
We provide a wide range of products to a broad range of customers. Our
top ten customers accounted for 54.8% of our revenues in fiscal 1998, with JDS
accounting for 21.1% of our revenues and SICPA accounting for 13.9%. Of our
total revenues in the first quarter of fiscal 1999, JDS accounted for
approximately 31.1% and SICPA accounted for approximately 18.3%. SICPA was our
largest customer in fiscal 1997 and 1996, accounting for 14.0% of our revenues
in fiscal 1997 and 12.7% of our revenues in fiscal 1996. No other customer
accounted for more than 10.0% of our revenues in fiscal 1996, 1997 or 1998, or
in the first quarter of fiscal 1999. Below is a list of our two largest
customers by revenue for each market in fiscal 1998.
<TABLE>
<S> <C>
FIBER OPTICS DISPLAY
JDS FITEL, Inc. Texas Instruments Incorporated
Uniphase Corporation Mitsubishi Digital Electronics
of America
SATELLITES AEROSPACE AND INSTRUMENTATION
Hughes Space and Communication Hewlett-Packard Company
Company PSC Inc.
Lockheed Martin Corporation
LIGHT INTERFERENCE PIGMENTS OFFICE AUTOMATION
SICPA Holding S.A. Hewlett-Packard Company
E. I. DuPont de Nemours and Xerox Corporation
Company, Inc.
</TABLE>
SALES AND MARKETING
We sell our products directly to OEMs, distributors and our strategic
partners. Our sales organizations communicate directly with customers'
engineering, manufacturing and purchasing personnel in determining the design,
performance and cost specifications for customer product requirements. Our sales
force is divided into three distinct groups. We utilize specialized, highly
technical sales forces to sell our fiber optics and light interference pigment
products. Our satellite, display, aerospace and instrumentation and office
automation products are sold through our corporate sales organization. We market
and sell these products directly to OEMs, with the exception of our
Glare/Guard-Registered Trademark- product line, which is marketed through
distributors and dealers directly to end-users. We have regional sales offices
in several major cities throughout the United States and in Germany, France and
the United Kingdom. In Japan and other Asian countries, we have established
sales representative offices to provide more integrated marketing and sales
support in these regions.
We sell specified WDM components to JDS as part of our strategic
alliance. We sell our other fiber optic products such as our MicroNode-TM-
switch through our specialized fiber optics sales force.
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Light interference pigments for the security market are sold exclusively
to SICPA pursuant to a long term supply agreement.
ChromaFlair-Registered Trademark- light interference pigments are sold through
our technical sales organization within Flex.
COMPETITION
We believe our ability to compete successfully in our markets depends on
a number of factors, both within and outside of our control, including:
- the price, quality and performance of our products;
- the emergence of new optical standards;
- the ability to maintain adequate coating capacity and sources of raw
materials;
- the efficiency of our manufacturing and production;
- the rate at which customers design our products into their products;
- the number and nature of our competitors in a given market;
- the assertion of intellectual property rights; and
- general market and economic conditions.
We attempt to position ourself as either the exclusive or principal
supplier to most of our key customers. To the extent competitors offer similar
products to our customers, pricing pressure may result. When we are unable to
differentiate our product offerings, competition and related pressure on profit
margins can be intense. In most of the markets in which we compete, many
competitors have significantly greater financial, technical, marketing and other
resources, greater name recognition and a larger installed base of customers.
In the fiber optic telecommunications market, we face competition from
E-Tek Dynamics and DiCon Fiberoptics, as well as other WDM component vendors. In
the optical switch market, we compete with these same companies and potentially
with JDS, our strategic partner for our WDM business. In the satellite products
market, we face competition from Pilkington Aerospace.
In the security market, we face competition from alternative
anti-counterfeiting devices such as holograms, embedded threads and watermarks.
In the decorative market, we face competition from providers of lower cost,
lower performance special effect pigments such as BASF and Merck KGaA. These
companies are also some of our most important customers for our
ChromaFlair-Registered Trademark- product.
We have a large number of domestic and foreign competitors for our
Glare/Guard-Registered Trademark- anti-glare optical filters. Companies that
purchase coated glass and assemble and sell filters in competition with us
include Fellowes, Polaroid, ACCO and 3M. Certain of these companies purchase
private label products from us for resale in competition with our
Glare/Guard-Registered Trademark- product line. In the flat panel display
market, we face competition from Japanese coating companies such as Nidek,
Toppan and Tore. In projection display components, our competition includes
Viratec, Balzers, Nitto Optical, Nikon and Fuji Photo-Optical.
MANUFACTURING
We have developed many proprietary thin film coating processes and have
designed, fabricated or significantly customized most of the coating equipment
we use in production. This includes our continuous coaters, batch coaters and
high speed roll-to-roll coaters. We believe our ability to design and build this
specialized equipment and our ability to develop proprietary process
technologies have been important factors in enabling us to compete successfully.
Consequently, we maintain an extensive array of thin film coating, glass
fabrication and metrology equipment to meet customer requirements for coated
products and fabricated glass components.
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We employ batch coating by evaporation and batch coating by reactive
metal mode sputtering as proprietary processes. We employ similar evaporation
and sputtering processes in our continuous, in-line coating systems. Flex also
employs proprietary evaporation and sputtering processes in our high-speed,
roll-to-roll coating systems. We have extensive auxiliary material preparation
and glass fabrication equipment in place which allow us to produce a broad array
of glass and plastic products for a wide variety of applications.
We currently face capacity constraints that have slowed our ability to
further penetrate the light interference pigment market. We are building another
production line which will increase our capacity to manufacture pigment by
approximately 50%. This production line is expected to begin operation in the
middle of 2000. Flex also has a roll-to-roll coating machine that is devoted to
the manufacture of window film exclusively for 3M under a long-term
"take-or-pay" contract.
We are continuing to increase capacity by focusing on manufacturing
improvement programs such as our Factory Overall Efficiency program and are
actively building capital equipment for WDM products and projection display
components.
We have developed and procured extensive state-of-the-art metrology and
test equipment to allow testing and verification of technological and
performance characteristics of our products. This capability, including the
expertise of our scientific and technical staff to develop and design specific
thin film coatings to meet a customer's application requirements, is frequently
a critical factor used by customers in selecting us as a supplier.
SUPPLIERS
The primary raw materials used in our coating and manufacturing
operations are various forms of glass, fused silica, inorganic coating materials
such as magnesium fluoride, silicon dioxide, aluminum or germanium, and several
types of polymers. Although we have more than one supplier for each of our raw
materials, we occasionally enter into single source supply arrangements in order
to obtain favorable pricing and service concessions. For example, we purchase
special grade flat glass under long-term arrangements from one major U.S. glass
supplier. We have not experienced any significant interruptions in production
due to a shortage of raw material. Substrate materials are purchased by us or
supplied by customers. Coating materials and their composition are generally
supplied by us as they are often considered a proprietary element of the
manufacturing process.
RESEARCH AND DEVELOPMENT
We devote substantial resources to research and development in order to
develop new, and improve existing, thin film products, processes and
manufacturing equipment. As a result, we have developed a technological
leadership position in the thin film coatings industry, and customers rely on
our thin film integration services expertise and our products. The majority of
our current research and development activities are devoted to
telecommunications products and light interference pigments.
We are developing new WDM products and processes to expand the
information carrying capability of fiber optic communication networks. We
continue to advance the standard in manufacturing extremely high precision
interference coating deposition technology. We also devote significant effort to
the continued development of our reconfigurable add/drop switch products as well
as other components targeted toward the telecommunications market.
Flex focuses much of its research and development efforts on developing
more economical and commercially suitable light interference pigments. We have
worked with several major pigment manufacturing companies in programs designed
to develop lower cost light interference pigments that would allow us to more
rapidly penetrate the large special effect pigment market. Currently, we are
focusing our development efforts with one such company where we are engaged in a
joint research and development program designed to create a new, lower cost
light interference pigment. This relationship could evolve into an alliance
designed to rapidly commercialize the resulting technology.
47
<PAGE>
Our research and development efforts also include:
- color separation filters and various components for optical systems;
- optical systems and thin film design capabilities for the
telecommunications, display and instrumentation markets;
- coating processes for optical components to meet high component volume
requirements;
- high yield processes for complex coatings and high volume assembly
capabilities; and
- reduction of coating and cleaning materials that may be hazardous to
the environment.
As of January 31, 1999, we had 173 technical employees, including 82
engineers with advanced degrees, 47 of whom have a Ph.D. These technical
employees have expertise in high performance optical products, especially for
those products and applications that rely on high precision thin-film optical
interference filters.
Our research and development expenditures totaled $11.7 million or 6.2%
of revenues in fiscal 1996, $14.9 million or 6.8% of revenues in fiscal 1997,
$17.1 million or 6.7% of revenues in fiscal 1998, $3.8 million or 7.2% of
revenues in the first quarter of fiscal 1998 and $4.6 million or 6.6% of
revenues in the first quarter of fiscal 1999.
PATENTS AND LICENSES
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. 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. We
believe our proprietary technology, our trade secrets and our patents are of
considerable value to our business. We believe that our patents demonstrate and
support our technological leadership position, safeguard our competitive
position and support existing and potential sales volume.
As of April 15, 1999, OCLI and Flex together had 105 patents and 48
patent applications pending in the United States that cover processes, products
and production equipment. We also have patents and patent applications pending
in various foreign countries covering the same technology. Expiration dates for
our various patents range from 1999 to 2017.
We believe that our patented MetaMode-Registered Trademark- reactive
sputtering technology provides us with an important competitive advantage in
manufacturing many of our products.
Patents expiring in fiscal years 1999 through 2001 do not encompass
technologies in which we enjoy a competitive advantage. We therefore do not
expect expiration of those patents to materially affect our results of
operations or financial condition.
We selectively license our coating technology to other companies,
primarily for integrated, mass production applications that we would not
otherwise be able to provide as a manufacturer in the ordinary course of our
business. During each of the past five years, these licenses, together with
sales of equipment built for licensees in support of the licenses, have not
constituted greater than 10.0% of our consolidated revenues.
BACKLOG
Backlog consists of new orders on which shipments have not yet started
or unfilled portions of orders that are only partly completed. Some of these
orders are completed within several days of receipt, while others are not
completed for a number of months. Substantially all orders included in backlog
are subject to cancellation without penalty; however, we generally have not
experienced significant order
48
<PAGE>
cancellations. Contractually specified delivery dates on orders sometimes are
adjusted at the request of either the customer or us.
Our backlog of orders was $78.7 million as of January 31, 1999 and $64.9
million as of January 31, 1998. Substantially all orders in backlog at January
31, 1999 are scheduled for shipment during fiscal 1999. The amount of backlog at
January 31, 1999 represents only a portion of anticipated sales in 1999, with
new orders historically comprising the major portion of sales in a fiscal year.
Flex has multi-year supply contracts with two customers that include
annual buy requirements with "take or pay" provisions. It is the practice of
Flex to only include specifically scheduled shipment releases under these
contracts in reported backlog.
INTERNATIONAL AND DOMESTIC SALES
Revenues generated by sales to Canada have increased from 8.9% in fiscal
1997 to 21.3% in fiscal 1998 and 32.5% in the first quarter of fiscal 1999
reflecting the growth in telecommunications sales from our alliance with JDS.
Revenues generated by sales within the United States represented 43.8% of our
total revenues in fiscal 1997, 41.3% in fiscal 1998 and 31.9% in the first
quarter of fiscal 1999, the decline again reflecting the faster growth in sales
of telecommunications products to Canada. Revenues from sales to other foreign
countries, primarily Europe and Asia, also declined as a percentage of our total
revenues from 47.3% in fiscal 1997 to 37.4% in fiscal 1998 and 35.6% in the
first quarter of fiscal 1999 due to growing sales of telecommunications products
to Canada. See Note 14 of Notes to Consolidated Financial Statements.
49
<PAGE>
PROPERTIES
Our corporate headquarters and principal manufacturing and research and
development facilities are located on a Company-owned campus in Santa Rosa,
California. The site consists of approximately 75 acres of land of which
approximately 53 acres are occupied by existing operations, with the remaining
22 acres currently held available for development or sale. The site is within an
industrial park area and is served by well-developed road access and utilities.
In addition, we lease offices for our sales personnel located in various cities
in the United States, Europe and Asia.
The following table sets forth certain information concerning our
principal facilities.
<TABLE>
<CAPTION>
NO. OF LEASED/ TOTAL SQ. SITE
LOCATION BUILDINGS OWNED FT. (ACRES) USE
- ---------------- ------------- --------- --------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
Santa Rosa, CA 13 Owned 490,000 75 Optical Coating Laboratory, Inc. and Flex
Products, Inc. corporate offices,
manufacturing, engineering and research and
development facilities
Santa Rosa, CA 1 Leased 23,000 -- Precision polymer optics administrative
offices and manufacturing facilities
Santa Rosa, CA 7 Leased 70,000 -- Warehousing, research and development, and
miscellaneous facilities
Hillend, 1 Owned 56,000 16 OCLI Optical Coating Laboratory, Ltd.
Scotland administrative offices, manufacturing and
research and development facilities
Hillend, 1 Leased 9,000 -- OCLI Optical Coating Laboratory, Ltd.
Scotland warehousing
Atsugi, Japan 1 Leased 18,000 -- OCLI Asia K.K. manufacturing facilities
Tokyo, Japan 1 Leased 3,000 -- OCLI Asia K.K. administrative offices
Rochester, NY 1 Leased 33,000 -- OPKOR Inc. administrative and manufacturing
facilities
</TABLE>
Until November 1998, MMG occupied two manufacturing buildings and two
office buildings in Goslar, Germany. In November 1998, the manufacturing
buildings and one of the office buildings were sold and the other office
building is being held for sale.
Management believes that our facilities are adequate for our current
level of business and our near-term growth requirements.
EMPLOYEES
As of January 31, 1999, we had 1,410 employees of whom 1,263 were
employed domestically; 114 were employed by our operations in Hillend, Scotland;
11 were employed in our sales and administrative offices in Europe and 22 were
employed by OCLI Asia in Japan. As of January 31, 1999, there were 127 employees
assigned to research and development projects, 1,082 assigned to manufacturing,
74 employees in sales and marketing and 127 employees in finance and
administration.
We have not experienced a work stoppage due to labor difficulties. We
believe our employee relations are good. None of our employees are subject to
collective bargaining agreements.
LEGAL PROCEEDINGS
Over the past several years, we have been engaged in litigation in the
United Kingdom involving infringement of our patent by Pilkington PE Limited and
Pilkington plc. We won our action at the Patents
51
<PAGE>
County Courts level but lost on appeal to the U.K. House of Lords. In October
1998, we settled the claim for approximately $850,000, most of which had been
accrued in previous periods.
In March 1997, OCA and certain of its directors and officers commenced
suit against us in the Superior Court of Middlesex County, Commonwealth of
Massachusetts. The complaint arose out of a letter of intent executed by us and
OCA in March 1996 and an ensuing merger agreement executed by us and OCA in June
1996. Under the merger agreement, we would have acquired OCA. The complaint
sought damages for costs and expenses incurred by OCA in pursuing the merger
transaction with us. OCA alleged that we made negligent misrepresentations to
OCA and certain of OCA's affiliates, and that we breached our letter of intent.
We filed counterclaims against OCA and certain of OCA's affiliates based on
OCA's breach of the merger agreement and sought damages based on the difference
between the value of OCA's business to us and the agreed upon purchase price
under the merger agreement. In January 1999, we, OCA and certain of its
affiliates settled the litigation. Settlement proceeds to OCLI, net of
applicable legal expenses, approximated $3.0 million, which was recorded as a
reduction to operating expenses in the first quarter of fiscal 1999. In addition
to the cash proceeds, the settlement allowed for us to receive $1.0 million in
business transaction value through product purchase discounts, purchase of our
products over a period not to exceed three years or some other mutually
determined method. Future business opportunities, not expected to affect our
results over the next twelve months, were also included in the agreement.
In July 1996, SICPA filed a lawsuit in Delaware Chancery Court in order
to block a proposed financing by Flex arguing that such a transaction without
SICPA's consent was prohibited by Flex's certificate of incorporation, as well
as by certain contractual provisions between us and SICPA. In fiscal 1998, we
announced that we had completed final negotiations for the settlement of the
litigation with SICPA. Under the terms of the settlement, we and SICPA agreed to
modify our co-ownership agreement to enable us to more effectively manage the
day-to-day operations of Flex, to allow for public financing of Flex's
operations and to modify the license and supply agreement between Flex and
SICPA. The modification to the license and supply agreement provided for more
attractive scheduled pricing discounts on higher volume purchases and changed
the scheduled order patterns to be consistent with our fiscal quarters. In
addition, we purchased $2.6 million of Flex's working capital loans from SICPA.
In December 1998 we purchased SICPA's 40.0% interest in Flex and remaining
working capital loans.
In 1997, Flex filed a suit in United States District Court for the
Eastern District of Michigan alleging that BASF Corporation and BASF AG
infringed Flex's patents covering optically variable thin film flakes which,
when mixed with paints and inks, produce color shifting visual properties. The
complaint requested that the court enjoin BASF from importing, making, using,
selling or offering to sell the infringing pigment in the United States. The
complaint also sought damages for the infringement, including treble damages if
the infringement was intentional. In October 1998, a settlement agreement was
reached between Flex and BASF under which Flex has agreed to allow BASF to make,
use and sell two specific forms of a special effects pigment for use within
limited application fields in exchange for a series of payments to be based upon
BASF's revenues on the sale of those pigments.
52
<PAGE>
MANAGEMENT
The following table sets forth certain information of the directors and
executive officers of OCLI as of April 15, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Charles J. Abbe................ 58 President, Chief Executive Officer and Director
Craig B. Collins............... 44 Vice President, Finance and Chief Financial Officer
Michael J. Cumbo............... 39 Vice President and Chief Technical Officer
Michael A. Kasper.............. 48 Vice President and General Manager, Aerospace &
Instrumentation Division
Stephen E. Myers............... 51 Vice President and General Manager, Information
Industries Division
Kenneth D. Pietrelli........... 50 Vice President, Corporate Services
James W. Seeser, Ph.D.......... 55 Vice President
Glenn K. Yamamoto.............. 47 Vice President and General Manager, Telecommunications
Division
Vice President, Legal Counsel and Corporate Secretary
Joseph Zils.................... 44 of
OCLI, and President and Chief Financial Officer
of Flex
Herbert M. Dwight, Jr.......... 68 Chairman of the Board of Directors
Douglas C. Chance(1)........... 57 Director
Shoei Kataoka, D.Sc., Dr.
Eng.......................... 69 Director
John McCullough................ 65 Director
Julian Schroeder(1)............ 51 Director
Renn Zaphiropoulos(1).......... 72 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee and Compensation and Stock Option Committee.
CHARLES J. ABBE has served as our Chief Executive Officer since April
1998 and as our President and Director since November 1997. From April 1996 to
October 1997, Mr. Abbe served as Vice President and General Manager of our Santa
Rosa division. From 1989 to 1996, Mr. Abbe was employed by Raychem Corporation,
a diversified electronics manufacturing company, in various senior management
positions.
CRAIG B. COLLINS has served as our Vice President, Finance and Chief
Financial Officer, since September 1997. Prior to joining us, Mr. Collins served
as Senior Vice President, Finance and Chief Financial Officer from 1993 to 1996
and in various senior management positions with Nestle Beverage Company, a
consumer products company, since 1984.
MICHAEL J. CUMBO, PH.D., has served as our Vice President and Chief
Technical Officer since April 1999. Dr. Cumbo joined us as a Senior Research
Engineer in March 1995 and managed our corporate research department from April
1996 to February 1997. Prior to joining us, Dr. Cumbo spent seven years as a
principal optical engineer at Bausch & Lomb Incorporated, an optical products
company.
MICHAEL A. KASPER has served as our Vice President and General Manager
of our aerospace and instrumentation division since December 1997. Prior to
that, he served as our Director of Operations from February 1996 to November
1997. Prior to joining us, Mr. Kasper served in various manufacturing
engineering and materials management positions with Proctor & Gamble, a consumer
products company, from 1972 to 1996.
STEPHEN E. MYERS has served as the Vice President and General Manager of
our information industries division since December 1997. From July 1996 to
December 1997, Mr. Myers was our Director
53
<PAGE>
of Information Industries business unit. Prior to joining us, Mr. Myers served
in various operations and finance management positions with Raychem Corporation
from 1978.
KENNETH D. PIETRELLI has served as our Vice President of Corporate
Services since June 1993. Prior to that, he served as our Corporate Materials
Manager from 1980.
JAMES W. SEESER, PH.D., joined us in 1983 and has served as our Vice
President since 1989. From November 1993 to March 1999, Dr. Seeser served as
Chief Technical Officer.
GLENN K. YAMAMOTO has served as our Vice President and General Manager
of our telecommunications division since December 1997. Mr. Yamamoto joined us
in 1973 and has held various product lines sales and manufacturing management
positions.
JOSEPH ZILS has served as the President and Chief Financial Officer of
Flex and our Legal Counsel since November 1997. Mr. Zils also served as Vice
President, General Counsel and Corporate Secretary for OCLI since 1993. Mr. Zils
joined OCLI in 1989 as Corporate Counsel and Director of Contracts.
HERBERT M. DWIGHT, JR. has served as Chairman of the Board of OCLI since
August 1991. He served as our President from August 1991 to November 1997 and as
Chief Executive Officer from August 1991 to April 1998. From December 1993 to
April 1995, Mr. Dwight also served as Chief Financial Officer. Mr. Dwight was
Chairman, President and Chief Executive Officer of Superconductor Technologies,
Inc., a telecommunications technology company, from 1988 through August 1991 and
continued to serve as Chairman from 1991 until May 1994. Mr. Dwight is also a
director of Applied Materials, Inc., Applied Magnetics Corporation and Advanced
Fiber Communications, Inc.
DOUGLAS C. CHANCE has served as a director of OCLI since April 1973. He
has served as President and Chief Executive Officer of Wyse Technology since
November 1994. Mr. Chance served as President, Chief Executive Officer and
director of Octel Communications Corporation, a telecommunications products
company, from October 1990 to November 1993 and as a consultant and director of
Octel from November 1993 until November 1994. Mr. Chance is also a director of
Centigram Communications Corporation.
SHOEI KATAOKA, D.SC., DR.ENG., has served as a director of OCLI since
December 1996. He has served as an outside consultant for Sharp Electronics
Corporation, a consumer electronics products company, in Japan since October
1998. Dr. Kataoka joined Sharp in 1985 and held various senior level management
and technical positions most recently as corporate consultant and Executive
Director and Division Manager of the Tokyo Branch. He is also Chairman of the
TC100 (multi-media) of the Electronics Industries Association of Japan.
JOHN MCCULLOUGH has served as a director of OCLI initially from 1959 to
1967 and subsequently since April 1985. He has been associated with OCLI in
various capacities since 1958. He retired in April 1998 as a Vice President of
OCLI, a position he held since February 1992.
JULIAN SCHROEDER has served as a director of OCLI since April 1989.
Since March 1997, he has served as a Managing Director of the high yield
department, international research, for Schroder & Co., Inc., an investment
banking company. Mr. Schroeder was President, Chief Executive Officer and
director of research of BDS Securities Corporation, a financial consulting
company, from 1995 to 1997. He served as Vice President, Corporate Finance of
BDS Securities from March 1989 to May 1995. Mr. Schroeder is also a director of
Versus Technology.
RENN ZAPHIROPOULOS has served as a director of OCLI since April 1988.
Mr. Zaphiropoulos is also a retired corporate vice president of Xerox
Corporation, an office products and services company, where he served from 1984
to 1988. Mr. Zaphiropoulos currently serves on the board of directors of Osicom
Technologies, Inc. and CalComp Technology, Inc. He also is a director of
numerous private companies.
54
<PAGE>
CERTAIN TRANSACTIONS
Our subsidiary in Germany, OCLI Optical Coating Laboratory GmbH, is
located in an office suite in Reinheim, Germany, that is leased by Mr. Klaus F.
Derge, our former Vice President, Europe, for Mr. Derge's personal business use.
We utilize the office space and pay Mr. Derge for its occupancy and for office
services. Under this arrangement, we paid Mr. Derge approximately $99,000 in
fiscal 1998. It is our opinion that the terms of this arrangement are as fair as
could have been obtained from unaffiliated persons.
During fiscal 1998, Herbert M. Dwight, Jr., our Chairman of the Board
and former Chief Executive Officer exercised options totaling 770,666 shares of
our common stock and turned in 117,296 shares for payment of withholding taxes.
The $5.8 million exercise price of the options was paid with a full recourse
promissory note to us that was repaid, with interest at 7.5%, in fiscal 1998.
We have entered into indemnification agreements with each of our
directors and officers. The agreements require us to indemnify the directors and
officers to the full extent permitted by Delaware law if certain claims are
brought against them in their capacities with us.
Effective November 20, 1997, we entered into change in control
agreements with our executive officers. Similar agreements have been in effect
since fiscal 1987. The agreements have a two-year term from November 20, 1997 to
November 20, 1999. All of our executive officers are currently covered by these
agreements. The agreements, among other things, provide that the executive
officer has the right to terminate his employment at any time during the period
beginning three months after the occurrence of a "Change in Control" or a
"Hostile Change in Control," as defined in the agreement, and ending 12 months
after the occurrence of a Change in Control and upon such termination shall be
paid an amount equal to 12 months of his maximum salary in effect within 12
months of the termination. Except in the case of a termination by us for cause
or a voluntary termination, if at any time within two years after the occurrence
of a Change in Control either (i) we terminate the employment of an executive
officer who is party to an agreement or (ii) such executive officer terminates
his employment following a "constructive dismissal" by us, then that executive
officer shall be paid an amount equal to 24 months of the executive officer's
maximum salary in effect within 12 months of termination. The agreements provide
that no amount shall be paid which would be classified as an "excess parachute
payment" within the meaning of Section 280G(b)(1) of the Internal Revenue Code.
The agreements also provide that in the event of a Change in Control, all
unvested options held by the executive officer will immediately vest.
Effective May 1, 1998 and through December 22, 1998, John McCullough,
retired Vice President of OCLI, entered into an arrangement with us under which
he agreed to continue to serve as a director of OCLI and of Flex, as a member of
the Flex Strategic Technical Advisory Committee ("STAC Committee") and was
retained as a consultant to work on special projects for OCLI and Flex. Under
the arrangement, Mr. McCullough received the standard retainer fees, annual
stock award and meeting fees that are paid to OCLI's outside directors. In
addition, he was paid a retainer fee of $1,000 per month from OCLI for his
services as a director of Flex and member of the STAC Committee. From this
amount, premiums for medical, dental and vision insurance were deducted. The
arrangement also provided for compensation at the rate of $160 hour, or $1,600
per day, whichever is less, for any variable tasks that we retained Mr.
McCullough to perform. From December 22, 1998 through the present, Mr.
McCullough has been paid a retainer fee of $1,000 per month from OCLI and is
available for consulting services on an as needed basis. He is also paid the
standard fee for his continuing service as an OCLI director.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the our
common stock as of March 31, 1999, and as adjusted to reflect the sale of our
common stock offered in this prospectus for (1) each person who is known by us
to own beneficially more than 5% of our common stock, (2) each of our directors,
(3) our Chief Executive Officer and our four next most highly compensated
executive officers for the fiscal year ended October 31, 1998, (4) all of our
directors and executive officers as a group and (5) each selling stockholder.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(1) NUMBER OF OFFERING(1)
---------------- SHARES ------------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
---- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
OCLI 401(k) Plan
c/o Optical Coating Laboratory,
Inc.
2789 Northpoint Parkway
Santa Rosa, California
95407-7397(2).................. 1,428,323 11.3% -- 1,428,323 10.3%
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202(3)... 809,100 6.4% -- 809,100 5.8%
Herbert M. Dwight, Jr.(4)........ 497,027 3.9% 152,960 344,067 2.5%
Charles J. Abbe(5)............... 217,784 1.7% -- 217,784 1.5%
Kenneth D. Pietrelli(6).......... 69,349 * -- 69,349 *
Joseph Zils(7)................... 50,203 * -- 50,203 *
Stephen E. Myers(8).............. 41,910 * -- 41,910 *
Julian Schroeder................. 29,000 * -- 29,000 *
John McCullough(9)............... 25,106 * 10,000 15,106 *
Douglas C. Chance................ 21,200 * -- 21,200 *
Klaus F. Derge(10)............... 19,028 * -- 19,028 *
Renn Zaphiropoulos............... 10,000 * -- 10,000 *
Shoei Kataoka.................... 2,000 * -- 2,000 *
All directors and executive
officers
as a group (15 persons)(11).... 1,153,795 8.8% 172,960 980,835 6.8%
Charles R. Gardner............... 57,459 * 17,459 40,000 *
Richard L. Mulcahy............... 53,867 * 16,456 37,411 *
Claude Tribastone................ 53,867 * 16,456 37,411 *
Glenn Yamamoto(12)............... 51,050 * 10,000 41,050 *
New York State Science and
Technology Foundation.......... 31,423 * 29,400 2,023 *
Rexford R. Fisher, Sr............ 24,240 * 19,982 4,258 *
Tech Ventures IV, L.P............ 13,467 * 13,467 -- --
Anthony J. LaPaglia.............. 8,978 * 8,978 -- --
Murray and Theresa Brandes....... 4,489 * 4,489 -- --
Taylor & Company................. 4,009 * 4,009 -- --
Richard S. and Molly R. Ives..... 1,795 * 795 1,000 *
Annie Fisher..................... 1,795 * 900 895 *
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(1) NUMBER OF OFFERING(1)
---------------- SHARES ------------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
---- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Fred J. Guyett................... 1,795 * 1,795 -- --
Lewis H. Mariotti................ 1,122 * 400 722 *
HLM Family Fund.................. 898 * 150 748 *
Michael H. Messina............... 898 * 210 688 *
Paul R. Messina.................. 898 * 148 750 *
Steven Messina................... 898 * 150 748 *
William G. Peck.................. 898 * 898 -- --
Ralph A. Whiteman................ 898 * 898 -- --
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options currently exercisable, or exercisable within 60 days of March 31,
1999, are deemed outstanding for computing the percentage of the person
holding such options but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote and subject
to community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
(2) Under the terms of the Trust Agreement between the OCLI 401(k) Plan and T.
Rowe Price, Trustee for the Plan, the Trustee votes the shares held in the
Plan upon instructions given by individual participants as to their vested
shares, and in the discretion of the Trustee otherwise.
(3) These securities are owned by various individual and institutional investors
which T. Rowe Price Associates, Inc. serves as investment adviser with power
to direct investments and/or sole power to vote the securities. For purposes
of the reporting requirements of the Securities Exchange Act of 1934, T.
Rowe Price is deemed to be a beneficial owner of such securities as of March
31, 1999; however, T. Rowe Price expressly disclaims that it is, in fact,
the beneficial owner of such securities.
(4) Includes 10,064 shares held for the benefit of Mr. Dwight by the OCLI 401(k)
Plan and 29,334 shares subject to options exercisable within 60 days of
March 31, 1999.
(5) Includes 207,784 shares subject to options exercisable within 60 days of
March 31, 1999.
(6) Includes 10,626 shares held for the benefit of Mr. Pietrelli by the OCLI
401(k) Plan and 41,778 shares subject to options exercisable within 60 days
of March 31, 1999.
(7) Includes 2,494 shares held for the benefit of Mr. Zils by the OCLI 401(k)
Plan and 45,209 shares subject to options exercisable within 60 days of
March 31, 1999.
(8) Includes 166 shares held for the benefit of Mr. Myers by the OCLI 401(k)
Plan and 41,774 shares subject to options exercisable within 60 days of
March 31, 1999.
(9) Includes 5,106 shares held for the benefit of Mr. McCullough by the OCLI
401(k) Plan.
(10) Includes 10,000 shares subject to options exercisable within 60 days of
March 31, 1999. Mr. Derge resigned his position as an officer of OCLI in
December 1998 following the sale of MMG and is included in this table
because he was one of our four most highly compensated executive officers in
fiscal 1998, not including our Chief Executive Officer.
(11) Includes 44,659 shares held for the benefit of all directors and executive
officers as a group by the OCLI 401(k) Plan and 533,862 shares subject to
options exercisable within 60 days of March 31, 1999. Does not include any
shares owned beneficially by Mr. Derge.
(12) Includes 9,331 shares held for the benefit of Mr. Yamamoto by the OCLI
401(k) Plan and 41,719 shares subject to options exercisable within 60 days
of March 31, 1999.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, Hambrecht & Quist LLC, NationsBanc Montgomery
Securities LLC and SoundView Technology Group, Inc., have severally agreed to
purchase from OCLI and the selling stockholders the following respective number
of shares of our common stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ------------------------------------------------------------------------------------------------------ ----------
<S> <C>
Hambrecht & Quist LLC.................................................................................
NationsBanc Montgomery Securities LLC.................................................................
SoundView Technology Group, Inc.......................................................................
----------
Total............................................................................................... 1,610,000
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and independent
auditors. The nature of the underwriters' obligation is such that they are
committed to purchase all shares of common stock offered in this offering if any
of such shares are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the public offering of the shares, the offering price and other
selling terms may be changed by the underwriters.
We have granted to the underwriters an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to 241,500 additional
shares of common stock at the public offering price, less the underwriting
discount, set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase approximately the same percentage of the additional shares that the
number of shares of common stock to be purchased by such underwriter shown in
the above table bears to the total number of shares of common stock offered in
this offering. We will be obligated, pursuant to the option, to sell shares to
the underwriters to the extent the option is exercised. The underwriters may
exercise the option only to cover over-allotments made in connection with the
sale of common stock offered in this prospectus.
The following table summarizes the compensation that the selling
stockholders and we will pay to the underwriters in connection with this
offering:
<TABLE>
<CAPTION>
TOTAL
----------------------------
WITHOUT OVER- WITH OVER-
PER SHARE ALLOTMENT ALLOTMENT
----- ------------- -------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us...................................
Underwriting discounts and commissions paid by selling stockholders.................
</TABLE>
58
<PAGE>
The offering of the shares is made for delivery when, as and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The selling stockholders and we have agreed to indemnify the
underwriters against certain liabilities; including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect thereof.
Certain of our stockholders, including all executive officers and
directors, who beneficially own in the aggregate 1,153,795 shares of common
stock have agreed that they will not, without the prior written consent of
Hambrecht & Quist offer, sell, or otherwise dispose of any shares of common
stock, options or warrants to acquire shares of common stock or securities
exchangeable for or convertible into shares of common stock owned by them until
91 days following the date of this prospectus. We have agreed that we will not,
without the prior written consent of Hambrecht & Quist, offer, sell or otherwise
dispose of any shares of common stock, options or warrants to acquire shares of
common stock or securities exchangeable for or convertible into shares of common
stock until the date 91 days following the date of this prospectus, except that
we may issue shares upon the exercise of options granted prior to the date
hereof, and may grant additional options under our stock option plans, provided
that, without the prior written consent of Hambrecht & Quist such additional
options shall not be exercisable during such period.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering. A penalty bid means an arrangement permitting the underwriters to
reclaim the selling concession otherwise accruing to an underwriter or syndicate
member if the stock originally sold by the underwriter or syndicate member is
purchased by the underwriters in a syndicate covering transaction. Such
transactions may be effected on the Nasdaq National Market, in the
over-the-counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act. During the business day prior to the pricing of the offering
before, the commencement of offers or sales of our common stock, passive market
makers must comply with applicable volume and price limitations and, must be
identified as such. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid of such security; if all
independent bids are lowered below the passive market maker's bid, however, such
bid must then be lowered when certain purchase limits are exceeded.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $450,000.
In June 1998, Hambrecht & Quist entered into a letter agreement to
provide various financial advisory services to OCLI, for which Hambrecht & Quist
was paid a fee of $75,000.
59
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
OCLI by Collette & Erickson LLP, San Francisco, California. A partner of
Collette & Erickson owns 18,883 shares of common stock. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by Cooley
Godward LLP, San Francisco, California.
EXPERTS
The financial statements of the Company and its consolidated
subsidiaries and related financial statement schedule as of October 31, 1998 and
1997 and for each of the three years in the period ended October 31, 1998,
except for Flex Products, Inc., a consolidated subsidiary, as of October 31,
1997 and for each of the two years in the period ended October 31, 1997,
included and incorporated by reference in this prospectus have been audited by
Deloitte & Touche LLP, as stated in their reports, which are included and
incorporated by reference herein.
The financial statements of Flex Products, Inc., not included herein, as
of November 2, 1997 and for each of the two years in the period ended November
2, 1997 have been audited by KPMG LLP, as stated in their report, such report
being included and incorporated by reference herein. The financial statements of
the Company and its consolidated subsidiaries have been included in reliance
upon the reports of Deloitte & Touche LLP and KPMG LLP given upon their
authority as experts in accounting and auditing. Both of the foregoing firms are
independent auditors.
With respect to the unaudited interim financial information for the
three-month periods ended January 31, 1999 and 1998 which is included and
incorporated by reference, Deloitte & Touche LLP have applied limited procedures
in accordance with professional standards for a review of such information.
However, as stated in their report included in the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1999 and incorporated by reference
herein, they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their reports on
such information should be restricted in light of the limited nature of the
review procedures applied. Deloitte & Touche LLP is not subject to the liability
provisions of Section 11 of the Securities Act for their report on the unaudited
interim financial information because such report is not a "report" or a "part"
of the registration statement prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Securities Act.
HOW TO GET INFORMATION ABOUT OCLI
OCLI is subject to the informational requirements of the Exchange Act
and therefore files reports, proxy and information statements and other
information with the SEC. You can inspect many of such reports, proxy and
information statements and other information on the SEC's internet website at
http://www.sec.gov.
You can also inspect and copy such reports, proxy and information
statements and other information at the SEC's Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549. You can obtain information on the
operation of the Public Reference Room by calling the SEC at Tel:
1-800-SEC-0330. You can also inspect and copy such reports, proxy and
information statements and other information may also be inspected and copied at
the following Regional Offices of the SEC: New York Regional Office, Seven World
Trade Center, Suite 1300, New York, New York 10048; and Chicago Regional Office,
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. OCLI's common stock is listed on the Nasdaq National Market System, and
you can inspect such reports, proxy and information statements and other
information at the offices of the NYSE, 20 Broad Street, New York, New York
10005.
60
<PAGE>
This prospectus constitutes part of a registration statement on Form S-3
filed by OCLI with the SEC under the Securities Act. This prospectus does not
contain all of the information set forth in the registration statement. For
further information with respect to OCLI and the shares, you should refer to the
registration statement either at the SEC's website or at the address set forth
in the preceding paragraph. Statements in this prospectus concerning any
document filed as an exhibit to this prospectus are not necessarily complete,
and, in each instance, you should refer to the copy of such document which has
been filed as an exhibit to the registration statement. Each such statement is
qualified in its entirety by such reference.
INFORMATION INCORPORATED BY REFERENCE
The following documents, which we have filed with the Commission, are
incorporated by reference into this prospectus:
- Our annual report on Form 10-K for the fiscal year ended October 31,
1998;
- Our quarterly report on Form 10-Q for the quarter ended January 31,
1999;
- Our current reports on Form 8-K dated November 18, 1998 and December
22, 1998; and
- The description of our capital stock contained in our registration
statement on Form 8-A, as amended by our amendment to the registration
statement on Form 8-A/A filed on May 5, 1999.
All documents that we file with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus
and before the termination of the offering of the common stock offered in this
prospectus shall be deemed incorporated by reference into this prospectus and to
be a part of this prospectus from the respective dates of filing such documents.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon such person's written or oral request, a copy of
any or all of the information incorporated by reference in this prospectus
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this prospectus
incorporates). Requests should be directed to Optical Coating Laboratory, Inc.,
2789 Northpoint Parkway, Santa Rosa, California 95407-7397, Attention: Agie
Navarro, telephone number (707) 525-7072.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed modified,
superseded or replaced for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any subsequently filed document
that also is or is deemed to be incorporated by reference in this prospectus
modifies, supersedes or replaces such statement. Any statement so modified,
superseded or replaced shall not be deemed, except as so modified, superseded or
replaced, to constitute a part of this prospectus.
61
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Report of Independent Auditors of Optical Coating Laboratory, Inc.................. F-2
Report of Independent Auditors of Flex Products, Inc............................... F-3
Consolidated Balance Sheets as of October 31, 1997 and 1998 and January 31, 1999
(unaudited)...................................................................... F-4
Consolidated Statements of Income for the years ended October 31, 1996, 1997 and
1998 and the three months ended January 31, 1998 (unaudited) and 1999
(unaudited)...................................................................... F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1996, 1997
and 1998 and the three months ended January 31, 1998 (unaudited) and 1999
(unaudited)...................................................................... F-6
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the
years ended October 31, 1996, 1997 and 1998 and the three months ended January
31, 1999 (unaudited)............................................................. F-8
Notes to Consolidated Financial Statements......................................... F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Optical Coating Laboratory, Inc.
Santa Rosa, California
We have audited the accompanying consolidated balance sheets of Optical
Coating Laboratory, Inc. and subsidiaries (the "Company") as of October 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity and comprehensive income and cash flows for each of the three years in
the period ended October 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Flex Products, Inc., a consolidated subsidiary for the
years ended October 31, 1997 and 1996, whose assets represent 12% of
consolidated total assets at October 31, 1997, and whose total revenues for the
years ended October 31, 1997 and 1996 represent 18% and 15% respectively, of
consolidated total revenues. The financial statements of Flex Products, Inc. for
the years ended October 31, 1997 and 1996, were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Flex Products, Inc., is based solely on the report of such
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, such consolidated financial statements present fairly, in all material
respects, the financial position of Optical Coating Laboratory, Inc. and its
subsidiaries at October 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended October 31,
1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
December 22, 1998
(January 8, 1999 as to paragraph 8 of Note 6 and February 22, 1999 as to Note
15)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Flex Products, Inc.
Santa Rosa, California
We have audited the balance sheets of Flex Products, Inc. (the
"Company"), a joint venture of Optical Coating Laboratory, Inc. and SICPA
Holding S.A., as of November 2, 1997 and November 3, 1996 and the related
statements of operations, stockholders' equity and cash flows for the years
ended November 2, 1997 and November 3, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
These financial statements have been prepared on a historical basis of
accounting and do not reflect any purchase accounting adjustments recorded by
Optical Coating Laboratory, Inc. as a result of their acquisition of a majority
interest in Flex Products, Inc. as of May 8, 1995.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Flex Products, Inc.
as of November 2, 1997 and November 3, 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
November 26, 1997
F-3
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1997 1998
--------- --------- JANUARY 31,
1999
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................................................. $ 15,217 $ 40,880 $ 14,324
Accounts receivable, net of allowance for doubtful accounts of $1,884, $1,831 and
$1,797.................................................................................. 34,923 38,585 39,392
Inventories............................................................................... 22,829 25,233 21,268
Income taxes receivable................................................................... 504 2,511
Deferred income tax assets................................................................ 6,853 9,311 5,186
Other current assets...................................................................... 1,707 1,822 6,015
--------- --------- ------------
Total Current Assets.................................................................... 82,033 115,831 88,696
Other Assets
Goodwill.................................................................................. 716 10,565
Deferred income taxes..................................................................... 8,243 4,151 536
Property, plant and equipment held for sale............................................... 3,183 531
Other assets.............................................................................. 13,236
Property, Plant and Equipment
Land and improvements..................................................................... 9,225 9,116 9,116
Buildings and improvements................................................................ 41,944 36,171 36,563
Machinery and equipment................................................................... 121,717 123,261 125,376
Construction-in-progress.................................................................. 9,525 12,722 14,269
--------- --------- ------------
182,411 181,270 185,324
Less accumulated depreciation............................................................. (89,194) (91,565) (94,082)
--------- --------- ------------
Property, plant and equipment--net........................................................ 93,217 89,705 91,242
--------- --------- ------------
Total Assets............................................................................ $ 183,493 $ 213,586 $ 204,806
--------- --------- ------------
--------- --------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................................................... $ 14,301 $ 8,423 $ 6,667
Accrued expenses.......................................................................... 6,854 9,935 7,883
Accrued compensation expenses............................................................. 8,752 10,365 6,866
Income taxes payable...................................................................... 339 708 252
Current maturities on long term debt...................................................... 7,888 6,026 5,903
Notes payable............................................................................. 381 4,483 3,612
Deferred revenue.......................................................................... 900 761 4,504
--------- --------- ------------
Total Current Liabilities............................................................... 39,415 40,701 35,687
Noncurrent Liabilities
Accrued postretirement health benefits and pension liabilities............................ 2,040 2,241 2,269
Deferred revenue.......................................................................... 1,050
Deferred income tax liabilities........................................................... 785 3,528 8,399
Long term debt............................................................................ 40,975 52,373 51,870
Minority interest......................................................................... 13,315 12,520
Commitments and contingencies (Note 13)
Stockholders' Equity
Preferred stock--Series C; 8% cumulative, convertible redeemable; issued and outstanding
6,250 shares at October 31, 1997........................................................ 5,559
Common stock, $0.01 par value; authorized 30,000,000 shares; issued and outstanding
10,599,000, 12,087,000 and 12,215,000 shares............................................ 106 121 122
Paid-in capital........................................................................... 55,723 69,993 72,120
Retained earnings......................................................................... 26,217 31,951 33,258
Accumulated other comprehensive income.................................................... (642) 158 31
--------- --------- ------------
Stockholders' Equity...................................................................... 86,963 102,223 105,531
--------- --------- ------------
Total Liabilities and Stockholders' Equity.............................................. $ 183,493 $ 213,586 $ 204,806
--------- --------- ------------
--------- --------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED OCTOBER 31, JANUARY 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Revenues.................................................. $ 189,195 $ 217,829 $ 255,624 $ 53,373 $ 69,851
Cost of Sales............................................. 126,769 143,207 169,670 36,235 48,632
--------- --------- --------- --------- ---------
Gross Profit.......................................... 62,426 74,622 85,954 17,138 21,219
Costs and Expenses
Operating Expenses:
Research and development................................ 11,733 14,903 17,137 3,821 4,644
Selling and administrative.............................. 37,145 42,836 43,926 9,488 10,193
Impairment loss......................................... 8,628
Restructuring expenses.................................. 586
Legal settlement, net................................... (2,960)
In process research and development charges............. 2,906
Amortization of intangibles............................. 1,146 936 805 200 217
--------- --------- --------- --------- ---------
Total Operating Expenses.............................. 50,024 58,675 71,082 13,509 15,000
--------- --------- --------- --------- ---------
Income from Operations.............................. 12,402 15,947 14,872 3,629 6,219
Nonoperating Income (Expense):
Interest income......................................... 379 461 769 84 318
Interest expense, net................................... (3,524) (4,030) (3,615) (808) (959)
--------- --------- --------- --------- ---------
Earnings
Income Before Provision for Income Taxes and Minority
Interest............................................ 9,257 12,378 12,026 2,905 5,578
Provision for income taxes.............................. 3,425 4,622 3,336 1,162 3,054
Minority interest....................................... 636 631 1,351 147 491
--------- --------- --------- --------- ---------
Net Income............................................ 5,196 7,125 7,339 1,596 2,033
Dividend on convertible redeemable preferred stock...... 960 693 250 125 --
--------- --------- --------- --------- ---------
Net Income Applicable to Common Stock................. $ 4,236 $ 6,432 $ 7,089 $ 1,471 $ 2,033
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Income Per Share, Basic............................... $ 0.44 $ 0.63 $ 0.62 $ 0.14 $ 0.17
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Income Per Share, Diluted............................. $ 0.41 $ 0.60 $ 0.59 $ 0.13 $ 0.16
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common shares used to compute
basic earnings per share................................ 9,629 10,191 11,388 10,625 12,142
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common shares used to compute
diluted earnings per share.............................. 10,301 10,673 11,999 11,396 12,868
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED OCTOBER 31, JANUARY 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATIONS
Cash Flows From Operations:
Cash received from customers............ $ 191,665 $ 194,375 $ 213,634 $ 42,062 $ 53,208
Interest received....................... 258 455 684 51 371
Cash paid to suppliers and employees.... (165,565) (165,033) (185,268) (46,876) (40,018)
Interest paid........................... (5,196) (5,345) (3,112) (808) (523)
Income taxes paid, net of refunds....... (954) (4,316) (572) (28) (836)
--------- --------- --------- --------- ---------
Net Cash Provided By (Used For)
Operations.......................... 20,208 20,136 25,366 (5,599) 12,202
INVESTMENTS
Cash Flows From Investments:
Purchase of plant and equipment......... (30,530) (17,231) (16,341) (4,261) (5,055)
Purchase of minority shareholder's
interest in OCLI-Asia................. (738)
Proceeds from sale-leaseback of new
equipment............................. 18,940
Purchase of remaining interest in
Flex.................................. (30,035)
--------- --------- --------- --------- ---------
Net Cash Used For Investments......... (11,590) (17,231) (17,079) (4,261) (35,090)
FINANCING
Cash Flows From Financing:
Proceeds from long term debt............ 8,596 5,416 42,276 6,774 47
Repayment of long term debt............. (7,019) (8,311) (32,913) (6,564) (1,401)
Proceeds from notes payable............. 8 6 3,978 183
Repayment of notes payable.............. (2,400)
Proceeds from exercise of stock
options............................... 1,713 2,247 7,321 335 849
Investment by minority interest
holder................................ 1,440
Proceeds from note to minority interest
holder................................ 800
Repayment of note to minority interest
holder................................ (413) (76) (1,801)
Purchase of note from minority interest
holder................................ (2,600) (2,400)
Payment of dividend on preferred
stock................................. (960) (693) (208) (125)
Payment of dividend on common stock..... (1,153) (1,199) (1,355) (636) (726)
--------- --------- --------- --------- ---------
Net Cash Provided By (Used For)
Financing........................... 772 (3,570) 17,298 (1,833) (3,631)
Effect of exchange rate changes on cash... 35 (145) 78 (105) (37)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents............................. 9,425 (810) 25,663 (11,798) (26,556)
Cash and cash equivalents at beginning of
period.................................. 6,602 16,027 15,217 15,217 40,880
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period.................................. $ 16,027 $ 15,217 $ 40,880 $ 3,419 $ 14,324
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-6
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED OCTOBER 31, JANUARY 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ADJUSTMENTS
Reconciliation of Net Income To Cash Flows From
Operations:
Net income............................................. $ 5,196 $ 7,125 $ 7,339 $ 1,596 $ 2,033
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization........................ 13,669 12,784 13,129 2,985 2,985
Impairment loss...................................... 8,628
Restructuring expenses............................... 586
Minority interest in earnings of subsidiaries........ 636 631 1,351 147 491
Loss on disposal of equipment........................ 1,356 1,412 1,467 210 557
Accrued postretirement health benefits............... 184 (226) 200 40 28
Net book value of coating machine sold............... 880
Other non-cash adjustments to net income............. (681) (97) (11) 471 765
Change in:
Accounts receivable................................ 1,378 (8,012) (3,363) (3,364) (905)
Inventories........................................ (3,030) (4,623) (2,299) (2,004) 2,207
Income taxes receivable and income taxes payable... 1,357 (328) 3,110 235 (2,454)
Deferred income taxes.............................. 1,177 1,701 (409) 601 9,158
Other current assets and other assets and
investments...................................... 716 136 (911) (1,074) (292)
Accounts payable, accrued expenses and accrued
compensation expenses............................ (3,094) 9,979 (3,312) (6,508) (7,164)
Deferred revenue................................... 464 (346) (139) 1,066 4,793
--------- --------- --------- --------- ---------
Total adjustments................................ 15,012 13,011 18,027 (7,195) 10,169
--------- --------- --------- --------- ---------
Net Cash Provided By (Used For) Operations......... $ 20,208 $ 20,136 $ 25,366 $ (5,599) $ 12,202
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company recorded capital leases of $2.0 million and $1.2 million in
fiscal 1997 and fiscal 1998 to finance the hardware, software and some of the
integration costs of an Enterprise Resource Planning System for which
implementation began in 1998. Lease terms run through 2004 with payments
totaling approximately $67,000 per month.
In fiscal 1996, 1997 and 1998, common stock, with an aggregate fair
market value of $52,000, $51,000 and $86,000 was awarded to the Company's
outside directors as remuneration.
In fiscal 1997, 5,750 shares of 8% Series C Convertible Redeemable
Preferred Stock, plus accrued dividends of $74,000 were converted into 555,000
shares of Company common stock.
In fiscal 1998, pursuant to a call for redemption by the Company, the
remaining 6,250 shares of 8% Series C Convertible Redeemable Preferred Stock
outstanding plus accrued dividends of $42,000 were converted into 599,000 shares
of Company common stock.
In the first quarter of fiscal 1999, the Company sold the operating
assets of the Company's manufacturing subsidiary in Germany (MMG) for $4.3
million. The cash proceeds from the sale were received in February 1999, after
the balance sheet date. The amount receivable from the sale is included in other
current assets at January 31, 1999.
During fiscal years 1996, 1997 and 1998 and during the three months
ended January 31, 1999, the Company issued 39,880, 14,601, 39,292 and 39,914
shares of common stock to the OCLI 401(k) Employee Stock Ownership Plan at fair
market value to satisfy a portion of its Company contribution.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998 AND THE THREE MONTHS ENDED JANUARY
31, 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON STOCK
------------------------ ------------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
----------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1995............. 12 $ 11,357 9,489 $ 95 $ 44,461 $ 17,901
Shares issued to Employee Stock
Ownership Plan........................ 39 1 439
Exercise of stock options, including tax
benefit and shares issued to
directors............................. 233 2 2,319
Series C preferred stock issuance
expenses.............................. (48)
Dividend on preferred stock............. (960)
Dividend on common stock................ (1,153)
Net income for the year................. 5,196
Other comprehensive income, net of
taxes:
Foreign currency translation
adjustment..........................
--
----------- ----------- --- --------- -----------
BALANCE AT OCTOBER 31, 1996............. 12 11,309 9,761 98 47,219 20,984
Shares issued to Employee Stock
Ownership Plan........................ 15 159
Exercise of stock options, including tax
benefit and shares issued to
directors............................. 268 3 2,524
Conversion of Series C preferred stock
to common stock....................... (6) (5,750) 555 5 5,821
Dividend on preferred stock............. (693)
Dividend on common stock................ (1,199)
Net income for the year................. 7,125
Other comprehensive income, net of
taxes:
Foreign currency translation
adjustment..........................
--
----------- ----------- --- --------- -----------
BALANCE AT OCTOBER 31, 1997............. 6 5,559 10,599 106 55,723 26,217
Shares issued to Employee Stock
Ownership Plan........................ 39 555
Exercise of stock options, including tax
benefit and shares issued to
directors............................. 967 10 9,659
Shares surrendered for payment of
withholding taxes..................... (117) (1) (1,539)
Conversion of Series C preferred stock
to common stock....................... (6) (5,559) 599 6 5,595
Dividend on preferred stock............. (250)
Dividend on common stock................ (1,355)
Net income for the year................. 7,339
Other comprehensive income, net of
taxes:
Foreign currency translation
adjustment..........................
--
----------- ----------- --- --------- -----------
BALANCE AT OCTOBER 31, 1998............. -- -- 12,087 121 69,993 31,951
Shares issued to Employee Stock
Ownership Plan*....................... 40 933
Exercise of stock options, including tax
benefit and shares issued to
directors*............................ 88 1 1,194
Dividend on common stock*............... (726)
Net income for the quarter*............. 2,033
Other comprehensive income, net of
taxes:
Foreign currency translation
adjustment*.........................
--
----------- ----------- --- --------- -----------
BALANCE AT JANUARY 31, 1999*............ -- -- 12,215 $ 122 $ 72,120 $ 33,258
--
--
----------- ----------- --- --------- -----------
----------- ----------- --- --------- -----------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME
----------------- ---------------
<S> <C> <C>
BALANCE AT OCTOBER 31, 1995............. $ 80
Shares issued to Employee Stock
Ownership Plan........................
Exercise of stock options, including tax
benefit and shares issued to
directors.............................
Series C preferred stock issuance
expenses..............................
Dividend on preferred stock.............
Dividend on common stock................
Net income for the year................. 5,196
Other comprehensive income, net of
taxes:
Foreign currency translation
adjustment.......................... (131) (131)
----- -------
BALANCE AT OCTOBER 31, 1996............. (51) $ 5,065
-------
-------
Shares issued to Employee Stock
Ownership Plan........................
Exercise of stock options, including tax
benefit and shares issued to
directors.............................
Conversion of Series C preferred stock
to common stock.......................
Dividend on preferred stock.............
Dividend on common stock................
Net income for the year................. 7,125
Other comprehensive income, net of
taxes:
Foreign currency translation
adjustment.......................... (591) (591)
----- -------
BALANCE AT OCTOBER 31, 1997............. (642) $ 6,534
-------
-------
Shares issued to Employee Stock
Ownership Plan........................
Exercise of stock options, including tax
benefit and shares issued to
directors.............................
Shares surrendered for payment of
withholding taxes.....................
Conversion of Series C preferred stock
to common stock.......................
Dividend on preferred stock.............
Dividend on common stock................
Net income for the year................. 7,339
Other comprehensive income, net of
taxes:
Foreign currency translation
adjustment.......................... 800 800
----- -------
BALANCE AT OCTOBER 31, 1998............. 158 $ 8,139
-------
-------
Shares issued to Employee Stock
Ownership Plan*.......................
Exercise of stock options, including tax
benefit and shares issued to
directors*............................
Dividend on common stock*...............
Net income for the quarter*............. 2,033
Other comprehensive income, net of
taxes:
Foreign currency translation
adjustment*......................... (127) (127)
----- -------
BALANCE AT JANUARY 31, 1999*............ $ 31 $ 1,906
----- -------
----- -------
</TABLE>
- ------------------------------
* Amounts are unaudited.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-8
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998 AND
THE THREE MONTHS ENDED JANUARY 31, 1998 (UNAUDITED) AND 1999 (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 abrasion resistance. OCLI markets and distributes
components to original equipment manufacturers (OEMs) of optical and
electro-optical systems and sells its Glare/Guard-Registered Trademark- brand
ergonomic computer display products through resellers and office retailers.
OCLI's products are found in many applications including computer monitors, flat
panel displays, telecommunication systems, photocopiers, fax machines,
medical/analytical equipment and instruments, projection imaging systems,
satellite power systems and aerospace and defense systems. The Company also
manufactures precision injection molded plastic optical components that are used
in a variety of applications such as inkjet printers, point-of-sale scanners and
sunglasses. Through its wholly owned subsidiary, Flex Products, Inc. (Flex), 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,
commercial and automotive applications and ChromaFlair-Registered Trademark-
light interference pigments for commercial paints.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
INTERIM FINANCIAL INFORMATION. The accompanying Consolidated Balance
Sheet as of January 31, 1999, the Consolidated Statements of Income for the
three month periods ended January 31, 1998 and 1999, the Consolidated Statement
of Stockholders' Equity and Comprehensive Income for the three month period
ended January 31, 1999 and the Consolidated Statements of Cash Flows for the
three month periods ended January 31, 1998 and 1999, have been prepared by the
Company without audit. In the opinion of management, all adjustments consisting
of normal recurring accruals, necessary to present fairly the financial
position, results of operations and cash flows at January 31, 1999 and for all
periods presented have been made. The data disclosed in the Notes to
Consolidated Financial Statements as of such dates and for such periods are
unaudited.
The results of operations for the period ended January 31, 1999 are not
necessarily indicative of the operating results anticipated for the full year.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its wholly and majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. The Company's fiscal year ends on the Sunday closest to the last day
in October. For convenience purposes, the Company has designated October 31 as
its fiscal year end. Fiscal year 1996 was a 53-week year and fiscal years 1997
and 1998 were 52-week years.
INVESTMENTS. Cash and cash equivalents are comprised of cash, bank
repurchase agreements and short-term commercial paper readily convertible to
cash. Cash equivalents are carried at cost which
F-9
<PAGE>
approximates market value. For purposes of the Statements of Cash Flows, all
highly liquid cash equivalents with an original maturity of three months or less
are considered cash equivalents.
REVENUE RECOGNITION. Revenue from sales of manufactured products (under
standard product sale and fixed price supply contracts) is recognized when the
products are shipped to the customer. Revenue for service contracts (whether
fixed price or cost reimbursement) is recognized as services are performed. The
Company occasionally enters into long-term contracts under which revenue is
recognized on a percentage of completion basis.
INVENTORIES. Inventories are stated at the lower of cost, on a
first-in, first-out basis, or market. Work-in-process inventories related to
fixed-price contracts are stated at the accumulated cost of material, labor and
manufacturing overhead, less the estimated cost of units delivered. To the
extent total costs under fixed-price contracts are estimated to exceed the total
sales price, charges are made to current operations to reduce inventoried costs
to net realizable value. In addition, if future costs are estimated to exceed
future revenues, an allowance for losses equal to the excess is provided by a
charge to current operations. The Company did not have any material estimated
loss contracts in the periods presented.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated
at cost. Estimated service lives range from 5 to 45 years for buildings and
improvements and from 3 to 10 years for all other property, plant and equipment.
Buildings and improvements and substantially all equipment are depreciated using
accelerated methods.
Assets under capital lease constitute computer equipment and enterprise
resource planning software for leases commencing in fiscal 1997 and 1998, which
are being amortized on a straight-line basis from the date of service.
Amortization lives are four years for the equipment and six years for the
software. The gross cost of assets under capital lease is included in machinery
and equipment and was $2,037,000 and $3,638,000 at October 31, 1997 and 1998.
Amortization began in fiscal 1998 when assets were placed in service.
Accumulated amortization for assets under capital lease is included in
accumulated depreciation and was $205,000 at October 31,1998.
RESEARCH AND DEVELOPMENT. Research and development costs are charged to
operations in the period incurred. The cost of equipment used in research and
development activities that has alternative uses is capitalized as equipment and
not treated as an expense of the period. Such equipment is depreciated over
estimated lives of 5 years.
FOREIGN OPERATIONS. The financial position and operating results of
foreign operations are consolidated using the local currency as the functional
currency. Local currency assets and liabilities are translated at the rate of
exchange to the U.S. dollar on the balance sheet date, and the local currency
revenues and expenses are translated at average rates of exchange to the U.S.
dollar during the period. Resulting translation gains or losses are included in
stockholders' equity as cumulative foreign currency translation adjustment.
Foreign currency transaction gains and losses, which have not been material, are
reflected in operating results.
INCOME TAXES. Income taxes include provisions for temporary differences
between earnings for financial reporting purposes and earnings for income tax
purposes under the guidelines of SFAS No. 109, "Accounting for Income Taxes".
Tax credits are taken as a reduction of current income tax provisions when
available.
EARNINGS PER SHARE. In 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," which required the
Company to replace its presentation of primary earnings per share with a
presentation of basic earnings per share and requires dual presentation of basic
and diluted earnings per share on the face of the income statement. Basic
earnings per share is computed by dividing net income applicable to common stock
by the weighted average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income
F-10
<PAGE>
applicable to common stock by the weighted average number of common shares and
the potential dilution of convertible securities, stock options and warrants.
The earnings per share presentation for fiscal years 1996 and 1997 were restated
to conform to the new statement.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the periods presented
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED OCTOBER 31, JANUARY 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
BASIC SHARES:
Average common shares outstanding....... 9,629 10,191 11,388 10,625 12,142
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income.............................. $ 5,196 $ 7,125 $ 7,339 $ 1,596 $ 2,033
Less dividend on convertible redeemable
preferred stock....................... 960 693 250 125 --
--------- --------- --------- --------- ---------
Net income applicable to common stock... $ 4,236 $ 6,432 $ 7,089 $ 1,471 $ 2,033
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per common share, basic...... $ 0.44 $ 0.63 $ 0.62 $ 0.14 $ 0.17
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DILUTED SHARES:
Average common shares outstanding....... 9,629 10,191 11,388 10,625 12,142
Dilutive effect of employee stock
options............................... 672 482 611 771 726
--------- --------- --------- --------- ---------
Average shares outstanding, diluted..... 10,301 10,673 11,999 11,396 12,868
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income applicable to common stock... $ 4,236 $ 6,432 $ 7,089 $ 1,471 $ 2,033
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share, diluted........... $ 0.41 $ 0.60 $ 0.59 $ 0.13 $ 0.16
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Preferred stock convertible into 1,143,000, 595,000, and 303,000 shares
of common stock in fiscal 1996, 1997 and 1998 and 595,000 shares of common stock
in the first three months of fiscal 1998 was not included in the calculation of
diluted earnings per share as the effect of increasing the denominator by those
amounts and adding back the preferred dividends would have increased diluted
earnings per share.
Options to purchase 12,000 shares of common stock at a weighted average
price of $17.38 that were outstanding in 1996, options to purchase 65,500 shares
of common stock at a weighted average price of $12.96 that were outstanding
during 1997, options to purchase 67,500 shares of common stock at a weighted
average price of $17.35 that were outstanding during 1998 and options to
purchase 45,000 shares of common stock at a weighted average price of $25.89
that were outstanding during the first quarter of fiscal 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.
RECLASSIFICATIONS. Certain reclassifications have been made to prior
period data to conform to the current period presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS. For certain of the Company's
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, accrued compensation expenses and notes
payable, the carrying amounts approximate fair value due to their short
maturities. The Company's long-term debt is carried at book value. If revalued
based on borrowing rates currently available to the Company for bank loans of
similar terms and maturities, the fair value of the Company's long-term debt
would exceed carrying value by approximately $1.4 million at October 31, 1998.
F-11
<PAGE>
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 Consolidated Statements of Stockholders'
Equity have been changed to 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.
Comparative presentations for fiscal years ended October 31, 1996, 1997 and 1998
have been reclassified to conform to the new statement.
NEW ACCOUNTING PRINCIPLES. In 1997, the Financial Accounting Standards
Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for a public company's operating segments and related disclosures about its
products, services, geographic areas and major customers. The statement is
effective for the Company's fiscal 1999 annual report and will require 1999
comparative disclosures for interim reports in the following fiscal year.
Adoption of the statement affects the Company's disclosures and will not impact
the Company's results of operations, cash flow or financial position.
In 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
revises employers' disclosures about pension and other postretirement benefit
plans to standardize disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
and eliminates certain disclosures. The statement is effective for the Company's
fiscal 1999 annual report with restatement of prior year disclosures required if
the information is readily available. Adoption of the statement affects the
Company's disclosures and will not impact the Company's results of operations,
cash flow or financial position.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. The statement requires balance sheet and income statement
recognition of derivative transactions and provides limitations and accounting
requirements for hedging instruments. The statement is effective for the first
quarter of the Company's fiscal year 2000 with earlier application encouraged.
As the Company's existing derivative contracts and policies regarding the use of
derivatives require that cash flows under financial derivatives match cash flows
under existing firm commitments, the Company does not expect adoption of SFAS
133 to affect its results of operations or cash flows but, as the statement
requires separate presentation of the fair value of derivative instruments, the
Company's Statement of Financial Position will be affected by adoption of the
statement.
3. IMPAIRMENT LOSS
In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The statement addresses the accounting for the impairment of long-lived assets
and long-lived assets to be disposed of, certain identifiable intangibles and
goodwill related to those assets and establishes guidance for recognizing and
measuring impairment losses and requires that the carrying amount of impaired
assets be reduced to fair value.
In the fourth quarter of fiscal 1998, the Company made the decision to
dispose of its manufacturing subsidiary in Germany (MMG). In conjunction with
negotiation of the sale, independent appraisals were made of the assets and
liabilities of MMG, and an impairment loss of $8.6 million was recorded in the
fourth quarter of 1998 to reduce the carrying amount of MMG's assets to fair
value, net of disposal costs on a liquidation basis. Assets written down include
Property, Plant and Equipment of $3.8 million and Goodwill (included in Other
Assets) of $4.4 million. Transaction and disposal costs of approximately
$400,000 were accrued. At October 31, 1998, the remaining carrying amount of
assets to be disposed of (inventory, equipment, furniture and three buildings in
Germany) was $4.9 million. MMG's net sales were $19.8 million, $18.1 million and
$16.5 million and MMG's net income (loss), excluding the
F-12
<PAGE>
impairment loss in 1998, was ($1.4) million, ($163,000) and $1.2 million in
fiscal years 1996, 1997 and 1998.
4. RESTRUCTURING CHARGES
During the fourth quarter of fiscal 1998, the Company finalized and
announced to affected individuals a plan of restructuring for its administrative
and sales offices in Europe. The Company recorded $328,000 of severance and
termination benefits and $258,000 of exit costs associated with this plan of
restructuring. The restructuring will eliminate five administrative and sales
positions in Europe. Exit costs include costs of closing down administrative and
sales offices in Europe and lease termination costs. The restructuring plan is
scheduled for completion by April 1, 1999.
In the first quarter of 1999, $306,000 of severance and termination
benefits and $250,000 of exit costs were paid under the restructuring plan.
Remaining accrued restructuring expenses under the plan at January 31, 1999 are
$30,000.
5. INVESTMENTS
FLEX PRODUCTS, INC. Flex was founded as a division of the Company in
the early 1980's and was subsequently established as a joint venture in which
ICI Americas Inc. (ICIA), an affiliate of Imperial Chemical Industries PLC owned
60% and the Company owned 40%. In 1995, the Company acquired controlling
ownership of Flex with the purchase of an additional 20% interest in Flex from
ICIA. In conjunction with the Company's increase in ownership, the remaining 40%
interest in Flex was acquired by SICPA Holding S.A. (SICPA), a privately held
Swiss Corporation headquartered in Lausanne, Switzerland. SICPA is one of the
world's leading manufacturers of printing inks and a major customer of Flex.
In 1996, SICPA filed a lawsuit in Delaware Chancery Court in order to
block an attempted initial public offering by Flex arguing that such an offering
without SICPA's consent was prohibited by Flex's articles of incorporation, as
well as by certain contractual provisions between the Company and SICPA. In
fiscal 1998, the Company announced that it had completed final negotiations for
the settlement of the litigation with SICPA. Under the terms of the settlement,
the Company and SICPA agreed to modify their co-ownership agreement to enable
OCLI to more effectively manage the day-to-day operations of Flex, to allow for
public financing of Flex's operations and to modify the License and Supply
Agreement between Flex and SICPA. The modification to the License and Supply
Agreement provided for more attractive scheduled pricing discounts on higher
volume purchases and changed the scheduled order patterns to be consistent with
the Company's fiscal quarters. In addition, the Company purchased $2.6 million
of Flex's working capital loans from SICPA.
OCLI ASIA. In the second quarter of 1997, the Company began operating a
joint venture with Hakuto Co., Ltd. (Hakuto) in Japan. The joint venture was
established to address the rapidly changing market for OCLI's multi-layer thin
film coatings that require an expanded presence and more integrated support
within Asia. Each partner contributed cash of $800,000 for working capital. OCLI
Asia was consolidated into the Company's results of operations and financial
position as the Company has operating control. During 1998, the Company
purchased Hakuto's interest in the joint venture for $740,000 in cash. The
wholly owned subsidiary, OCLI Asia K.K., continues to do business as OCLI Asia
and remains headquartered in Tokyo, with manufacturing facilities in Atsugi,
Japan. At October 31, 1998, other assets and investments include $600,000 of
goodwill for OCLI Asia that is being amortized over fifteen years.
F-13
<PAGE>
6. LONG TERM DEBT
Long term debt, including current maturities, at October 31, 1997 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Unsecured senior notes. Interest at 6.7% payable semiannually. Principal
payable in annual installments of $4.3 million commencing July 31, 2002
through 2008............................................................ $ 30,000
Unsecured senior notes. Interest at 7.8% payable semiannually. Principal
payable in annual installments of $1.1 million commencing July 31, 2002
through 2008............................................................ 8,000
Unsecured senior notes. Interest at 8.7% payable semiannually. Principal
payable in annual installments of $1.6 million commencing June 1, 1999
through 2002............................................................ 6,400
Mortgage payable. Interest at 8.0%. Collateralized by a 72,000 sq. ft.
building and related land. Principal and interest payments of $25,000
per month through 2011.................................................. $ 2,422 2,314
Mortgage payable. Interest at 7.5%. Collateralized by a 65,000 sq. ft.
building and related land leased to Flex. Principal and interest
payments of $28,000 per month through 2011.............................. 2,821 2,647
Unsecured bank note. Interest at 5.6%. Quarterly principal and interest
payments of approximately $300,000 through December 2002................ 4,568 3,661
Bank loans of OCLI/MMG Division with interest rates ranging from 4.5% to
7.5%. Payable in semiannual and annual installments through 2020. Partly
collateralized by mortgages on OCLI/MMG Division land and buildings and
liens on equipment. $2.7 million is payable from the proceeds of assets
sold in November 1998, and $371,000 is payable when the office building
is sold................................................................. 3,618 3,120
Unsecured senior notes. Interest at 8.7% payable semiannually. Principal
payable in annual installments of $3.6 million from 1998 through 2002.
Refinanced in July 1998................................................. 14,400
Unsecured bank term loan. Variable interest rates averaging 6.8% at
October 31, 1997, payable quarterly, with semiannual principal payments
of $2 million. Refinanced in July 1998.................................. 10,000
Unsecured borrowings under bank line of credit. Variable interest rate
averaging 6.7% at October 31, 1997, payable quarterly or specified
duration period. Principal due upon expiration on April 28, 2000........ 5,000
Scottish Development Agency building loan, with a conditional interest
moratorium from February 1, 1995 through January 31, 1998 with interest
at 9.5% thereafter. Semiannual principal payments of approximately
$100,000 are payable through January 1998 with subsequent payments of
$331,000, comprising principal and interest, through 2006.
Collateralized by the land and building of the Company's Scottish
subsidiary.............................................................. 3,877
Land improvement assessment. Interest at an average rate of 7.2%.
Principal and interest payable in semiannual installments of $77,000
through 1998............................................................ 150
Present value of obligations under capital leases at imputed interest
rates from 8.0% to 9.5% payable in monthly installments through 2004.... 2,007 2,257
--------- ---------
48,863 58,399
Less current maturities................................................... (7,888) (6,026)
--------- ---------
Total long term debt, net of current maturities..................... $ 40,975 $ 52,373
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
Annual debt maturities and capital lease payments for the ensuing five
years are as follows:
<TABLE>
<CAPTION>
YEAR PAYMENT
- --------------------------- -----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
1999....................... $ 6,026
2000....................... 3,663
2001....................... 3,533
2002....................... 8,616
2003....................... 6,126
Thereafter................. 30,435
-------
$ 58,399
-------
-------
</TABLE>
The Company has a $20 million revolving line of credit. The revolving
line of credit carries a commitment fee of .2% to .3% per year on the unused
portion of the facility depending on the Company's leverage ratio and expires on
July 31, 2003. The Company has a surety bond for $903,000 to satisfy the
Company's workers' compensation self-insurance requirements. The surety bond
carries a fee of 1% per year.
During fiscal 1997, the Company replaced its 8.0%, $5 million note
payable to private parties with a 5.6% bank note. Payments of principal and
interest under the new note are denominated in German marks and are
approximately $300,000 per quarter through December 2002.
During fiscal 1997 and 1998, the Company recorded capital leases
totaling $2,037,000 and $1,601,000 to finance the hardware, software and
integration costs of a new computer system that is to be fully implemented in
fiscal 1999. Lease terms run through February 2002 with payments totaling
approximately $67,000 per month.
The Company's subsidiary in Scotland has a credit arrangement of up to
approximately $490,000 at market interest rates and has outstanding letters of
credit of approximately $330,000 to guarantee import duties. There were no
borrowings under the credit arrangement in fiscal 1997 or 1998.
The Company's subsidiary in Japan has various credit facilities with a
local bank with interest at 1.24% to 1.63% per year. Borrowing under these
facilities totaled $4.5 million at October 31, 1998. These credit facilities are
used for working capital requirements in Asia and will expire in May 1999.
The Company has certain financial covenants and restrictions under its
bank credit arrangements and the unsecured senior notes. At October 31, 1998, as
a result of the impairment loss and restructuring charges recorded in fiscal
1998, the Company was in violation of one of the covenants under its bank credit
arrangement. On January 8, 1999, the Company and the bank executed a waiver and
amendment to the Company's credit agreement under which a waiver was obtained
for the period ended October 31, 1998. The amendment removes the effect of the
impairment loss and restructuring charges from the financial covenants so they
will not affect covenant compliance in future periods.
7. FINANCIAL DERIVATIVES AND HEDGING
The Company, from time to time, enters into derivative transactions in order
to hedge foreign currency risk on existing commitments, open receivables,
payables and debt instruments when the currency risk is considered significant
to the Company. In addition, the Company may enter into interest rate swaps or
similar instruments in order to reduce interest rate risk on its debt
instruments. The Company does not enter into derivatives for trading purposes.
In fiscal 1998, the Company entered into foreign currency forward
contracts for the principal and interest payments under a $3.1 million loan that
is denominated in German Marks. The transaction is designated as a hedge of a
foreign currency commitment. Gains and losses on the contract are recorded as
F-15
<PAGE>
a net reduction or increase to interest expense over the life of the loan. The
Company also entered into foreign currency forward contracts for the principal
and interest payments under an intercompany note receivable denominated in
British Pounds. Gains and losses on those contracts are offset in consolidation.
In fiscal 1998, the Company entered into an interest rate swap for
anticipated debt refinancing in the amount of $30 million. The purpose of the
swap was to fix the reference rate for the debt at 5.7% to eliminate the
Company's exposure to interest rate fluctuations until the loan refinance was
completed. The Company had designated the swap as a hedge of an anticipated
transaction. After completion of the loan refinance, $310,000 was paid under the
swap that is being recorded as an increase to interest expense over the term of
the notes.
The notional amounts, carrying amounts and fair values of the Company's
derivatives position at October 31, 1998 are included in the table below:
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
OF FOREIGN
NOTIONAL CARRYING EXCHANGE
AMOUNT AMOUNT CONTRACT
----------- ------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency forward exchange contracts:
Deutsche Marks.............................. $ 4,124 -- $ 345
British Pounds.............................. $ 2,948 -- $ 92
</TABLE>
The notional amounts, carrying amounts and fair values of the Company's
derivatives position at January 31, 1999 are included in the table below:
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
OF FOREIGN
NOTIONAL CARRYING EXCHANGE
AMOUNT AMOUNT CONTRACT
----------- ------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency forward exchange contracts:
Deutsche Marks.............................. $ 3,865 -- $ 196
British Pounds.............................. $ 2,948 -- $ 163
</TABLE>
8. STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN. On December 16, 1997, the Company's Board of
Directors approved a new Stockholder Rights Plan (the "Plan") to succeed the
Stockholder Rights Plan first adopted on November 25, 1987. Under the terms of
the Plan, which expires in November 1999, the Company declared a dividend of
preferred stock purchase rights which only become exercisable, if not redeemed,
ten days after a person or group has acquired 20% or more of the Company's
common stock or the announcement of a tender offer which would result in a
person or group acquiring 30% or more of the Company's common stock. Under
certain circumstances, the plan allows stockholders, other than the acquiring
person or group, to purchase the Company's common stock or the common stock of
the acquirer at an exercise price of half the market price. On December 15,
1998, the Board of Directors approved an amendment to the Plan which deletes or
modifies references to "Continuing Directors" in order to comply with recent
changes in Delaware law.
F-16
<PAGE>
PREFERRED STOCK. The Company has authorized 100,000 shares of preferred
stock at $.01 par value of which 10,000 shares were designated Series A
Preferred Stock in connection with the Company's Stockholder Rights Plan. None
of the Series A Preferred Stock is issued. Additionally, 15,000 shares were
designated Series B Preferred Stock, of which 8,350 shares were issued and
subsequently converted to common stock on call for redemption. None of the
Series B Preferred Stock is currently issued and outstanding.
In 1995, as part of the financing of the acquisition of a controlling
interest in Flex, the Company issued 12,000 shares of 8.0% Series C Convertible
Redeemable Preferred Stock (the "Series C Preferred Stock") in consideration for
$1,000 per share. The Series C Preferred Stock was convertible into common stock
at any time by the holders at a conversion price of $10.50 per common share
(subject to adjustment in certain circumstances). The Series C Preferred Stock
was redeemable at the option of the Company commencing two years from the date
of issuance (if the Company's common stock is trading at $17 per share or more
for any 20 consecutive day period) and, after three years, unconditionally, at
108% of the purchase price per share, declining to 100% over four years. The
holders of the Series C Preferred Stock were entitled to receive a cumulative
annual dividend of $80 per share, which was payable quarterly and had preference
to any other dividends paid by the Company.
In fiscal 1997, 5,750 shares of the Company's 8.0% Series C Convertible
Redeemable Preferred Stock, plus accrued dividends, were converted into
approximately 555,000 shares of common stock.
In fiscal 1998, the Company called for redemption the remaining shares
of 8.0% Series C Convertible Redeemable Preferred Stock. The remaining 6,250
shares plus accrued dividends, were subsequently converted by the holders into
approximately 599,000 shares of common stock.
9. EMPLOYEE STOCK OPTION PLANS
Pursuant to the terms of the Company's employee stock option plans, at
October 31, 1998, an aggregate of 2,330,441 shares of Company common stock has
been issued or reserved for issuance upon the exercise of options granted to
qualified employees. Options are granted with exercise prices equal to the
market price of the Company's common stock at the date of grant.
Information with respect to stock options outstanding and options
exercisable at October 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 10/31/98 LIFE PRICE AT 10/31/98 PRICE
- -------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$6.125-$8.375 127,250 1.15 $ 6.68 127,250 $ 6.68
$9.625-$10.75 773,311 2.98 $ 10.25 504,089 $ 10.34
$12.125-$14.325 504,820 4.05 $ 13.92 44,852 $ 12.60
$15.00-$19.00 100,500 4.66 $ 17.10 --
----------- -----------
1,505,881 676,191
----------- -----------
----------- -----------
</TABLE>
In May 1997, the Board of Directors approved a stock option repricing
program under which stock options with exercise prices above $14.00 per share
were repriced to the then current market value of the Company's common stock of
$9.63. A total of 162,000 shares, with exercise prices ranging from $14.13 per
share to $17.38 per share, were exchanged under this program. The exchange of
such options is presented in the following table as cancellations and subsequent
grants.
F-17
<PAGE>
In the second quarter of fiscal 1998, the Company's Chairman of the
Board and former Chief Executive Officer exercised options for 770,666 shares of
common stock of the Company and turned in 117,296 shares for payment of
withholding taxes. The $5.8 million exercise price of the options was paid with
a full recourse promissory note that was repaid with interest at 7.5% in the
third quarter of fiscal 1998.
Stock option activity for the three years ended October 31, 1998 and the
three months ended January 31, 1999 was:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
----------- ---------------
<S> <C> <C>
BALANCE AT NOVEMBER 1, 1995...................... 1,531,800 $ 7.47
Granted.......................................... 546,450 11.81
Exercised........................................ (229,800) 7.45
Canceled......................................... (13,200) 9.16
----------- ------
BALANCE AT OCTOBER 31, 1996...................... 1,835,250 8.75
Granted.......................................... 708,800 10.48
Exercised........................................ (268,849) 8.52
Canceled......................................... (272,792) 12.53
----------- ------
BALANCE AT OCTOBER 31, 1997...................... 2,002,409 8.88
Granted.......................................... 509,000 14.86
Exercised........................................ (964,424) 7.61
Canceled......................................... (41,104) 12.56
----------- ------
BALANCE AT OCTOBER 31, 1998...................... 1,505,881 11.64
Granted (unaudited).............................. 607,780 20.83
Exercised (unaudited)............................ (87,634) 9.73
Cancelled (unaudited)............................ (19,808) 13.41
----------- ------
BALANCE AT JANUARY 31, 1999 (UNAUDITED).......... 2,006,219 $ 14.48
----------- ------
----------- ------
EXERCISABLE AT OCTOBER 31, 1998.................. 676,191 $ 9.80
----------- ------
----------- ------
EXERCISABLE AT JANUARY 31, 1999 (UNAUDITED)...... 803,141 $ 10.66
----------- ------
----------- ------
</TABLE>
The Company's subsidiary, Flex, a non-public company, has a
non-qualified stock option plan. After taking into account a one hundred to one
stock split in fiscal 1998, at October 31, 1998 the plan had 1,000,000 shares of
common stock authorized for issuance against 10,000,000 shares outstanding of
Flex to key members of Flex's management. The options have vesting periods from
two to four years with five-year terms. At October 31, 1998, Flex's outstanding
options were exercisable at prices ranging from $4.39 to $4.89, with weighted
average remaining lives of 3.29 years.
F-18
<PAGE>
Flex's stock option activity for the three years ended October 31, was:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
BALANCE AT NOVEMBER 1, 1995......................
Granted.......................................... 1,027,100 $ 4.44
Exercised........................................
Canceled.........................................
----------- -----
BALANCE AT OCTOBER 31, 1996...................... 1,027,100 4.44
Granted.......................................... 20,000 4.89
Exercised........................................
Canceled......................................... (44,600) 4.43
----------- -----
BALANCE AT OCTOBER 31, 1997...................... 1,002,500 4.47
Granted.......................................... 370,000 4.67
Exercised........................................
Canceled......................................... (444,300) 4.48
----------- -----
BALANCE AT OCTOBER 31, 1998...................... 928,200 $ 4.55
----------- -----
----------- -----
EXERCISABLE AT OCTOBER 31, 1998.................. 341,710 $ 4.44
----------- -----
----------- -----
</TABLE>
In fiscal 1997, the Company adopted the disclosure requirements of SFAS
123 that provide for the disclosure of pro forma net earnings and net earnings
per share as if the fair value method of accounting had been adopted at the
beginning of fiscal 1996. If compensation expense had been determined for stock
options granted in fiscal 1996, 1997 and 1998 using the fair value method at the
date of grant, consistent with the provisions of SFAS 123, the Company's pro
forma net earnings and earnings per share would have been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income as reported........................... $ 5,196 $ 7,125 $ 7,339
Pro forma compensation adjustment................ (997) (1,597) (1,669)
--------- --------- ---------
Pro forma net income....................... $ 4,199 $ 5,528 $ 5,670
--------- --------- ---------
--------- --------- ---------
Basic earnings per share:
Net income per share, as reported.............. $ 0.44 $ 0.63 $ 0.62
Pro forma compensation adjustment.............. (0.10) (0.16) (0.15)
--------- --------- ---------
Pro forma net income per share............. $ 0.34 $ 0.47 $ 0.47
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share:
Net income per share, as reported.............. $ 0.41 $ 0.60 $ 0.59
Pro forma compensation adjustment.............. (0.10) (0.15) (0.14)
--------- --------- ---------
Pro forma net income per share............. $ 0.31 $ 0.45 $ 0.45
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
The weighted average fair value of options granted during fiscal 1996,
1997 and 1998 was $6.25, $5.60 and $5.75, respectively. The weighted average
fair value of Flex's options granted during fiscal 1996, 1997 and 1998 was,
$0.83, $1.39 and $1.06. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in fiscal 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--- --- ---
<S> <C> <C> <C>
COMPANY OPTIONS:
Expected dividend yield.................................. 0.7% 0.7% 0.8%
Expected volatility...................................... 59.0% 59.0% 43.0%
Risk-free interest rate.................................. 5.6% 5.5% 5.7%
Expected term (years).................................... 5 5 4
FLEX OPTIONS:
Expected dividend yield (not applicable).................
Expected volatility (not applicable).....................
Risk-free interest rate.................................. 6.1% 6.2% 5.5%
Expected term (years).................................... 4 6 5
</TABLE>
10. INCOME TAXES
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal........................................... $ 2,120 $ 2,537 $ 2,722
State............................................. 309 225 916
Foreign........................................... (149) 116 129
--------- --------- ---------
2,280 2,878 3,767
--------- --------- ---------
DEFERRED:
Federal........................................... 1,535 1,061 (258)
State............................................. (369) 598 (612)
Foreign........................................... (21) 85 439
--------- --------- ---------
1,145 1,744 (431)
--------- --------- ---------
$ 3,425 $ 4,622 $ 3,336
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reconciliation of the effective income tax rate to the federal
statutory rate was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --- ---
<S> <C> <C> <C>
Statutory federal income tax rate.................................. 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit............................ 7.1 5.7 4.0
Foreign losses not previously benefited............................ (8.8)
Foreign income taxes at rates different than U.S. statutory
rates............................................................ 4.8 (0.5) .8
Business tax credits (state tax credits net of federal tax
effect).......................................................... (10.3) (2.9) (2.3)
Tax benefit from foreign sales corporation......................... (1.7) (2.7) (3.8)
Non-deductible expenses, primarily foreign losses.................. 3.3 4.2 2.5
Other.............................................................. (0.2) (0.5) 1.3
--------- --- ---
Effective tax rate............................................... 37.0% 37.3% 27.7%
--------- --- ---
--------- --- ---
</TABLE>
F-20
<PAGE>
DEFERRED TAX ASSETS (LIABILITIES). The Company's deferred tax assets
and liabilities at October 31, 1997 and 1998 under SFAS 109 arise from the
following temporary differences in accounting for financial versus tax reporting
purposes:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
CURRENT:
Valuation reserves and accruals not deductible for tax purposes until paid
or utilized.............................................................. $ 5,527 $ 4,060
Intercompany profit eliminated for financial reporting purposes which is
taxable currently........................................................ 266 263
Domestic net operating losses available for carryforward................... 983 4,599
Asset valuation difference between financial and tax reporting basis due to
purchase accounting...................................................... 131 73
Other...................................................................... (54) 316
--------- ---------
Total deferred tax assets.............................................. 6,853 9,311
--------- ---------
NONCURRENT:
Domestic net operating losses available for carryforward................... 2,678 1,627
Foreign net operating losses available for carryforward.................... 2,686 751
Tax depreciation greater than financial reporting depreciation............. (3,920) (5,500)
Intangible assets, difference between financial and tax reporting basis and
periods.................................................................. (816) (459)
Burden and interest on self-constructed assets expensed for tax purposes
and depreciated for financial reporting purposes......................... (555) (816)
Costs required to be capitalized under the uniform capitalization tax rules
which are deducted for financial reporting purposes...................... 169 309
Liability for postretirement health benefits not deductible for tax
purposes until paid...................................................... 747 967
State tax credits eligible for carryforward................................ 614 1,353
Other...................................................................... 296 (293)
--------- ---------
1,899 (2,061)
Less valuation allowance................................................... (2,684) (751)
--------- ---------
(785) (2,812)
--------- ---------
Total deferred tax balances................................................ $ 6,068 $ 6,499
--------- ---------
--------- ---------
</TABLE>
As a result of the sale of the assets of its MMG division and the
resulting impairment loss in fiscal 1998, the Company recognized tax benefits
relating to certain foreign operating losses that had not been tax benefited in
prior periods. The Company has provided a valuation allowance related to the
deferred tax asset resulting from the remaining operating loss carryforwards of
certain of its other foreign subsidiaries until the realization of tax benefits
resulting from those losses is determined to be more likely than not. The fiscal
1998 valuation allowance decrease is attributable to the change in the deferred
tax asset resulting from foreign operating loss carryforwards.
At October 31, 1998, the Company has domestic net operating loss
carryforwards of $17.2 million. If not used, $4.0 million will expire in 2006,
$3.6 million will expire in 2007, and $9.6 million will expire in 2018. The
Company has California Manufacturers' Investment Credit carryforwards of
$867,000 and California Research Credit carryforwards of $485,000. If not used,
a portion of those credit carryforwards will expire between 2006 and 2008.
Income taxes have not been provided on approximately $6.8 million of
unremitted earnings of the Company's subsidiary in Scotland as of October 31,
1998. The Company intends to continue to reinvest
F-21
<PAGE>
these amounts in the subsidiary's operations. Should any of these amounts be
distributed to the Company, any taxes on these distributions would be
substantially offset by foreign tax credits.
11. EMPLOYEE BENEFIT PLANS
U.S. OPERATIONS. The Company has a 401(k)/Employee Stock Ownership Plan
(ESOP) defined contribution retirement plan for its non-Flex employees and a
401(k) plan with a Company match for the employees of Flex. Company
contributions for non-Flex employees are a combination of a 401(k) matching
contribution of 25% of the first 6% of employee contributions plus a
contribution to the ESOP plan based on the Company's proportional share of
pre-tax profits. Prior to fiscal 1997, all Company contributions to non-Flex
employees were to the ESOP and were determined under a profit sharing formula.
Company contributions for Flex employees are 75% of the first 6% of employee
contributions. Company matching contributions to the 401(k) plans are funded in
cash. Company contributions to the ESOP are contributed in cash for the purchase
of Company common stock or are contributed in the form of original issued shares
of Company common stock. In fiscal 1996, 1997 and 1998, the Company contributed
and charged to operations $787,000, $1,211,000 and $1,740,000 as contributions
to its U.S. retirement plans.
SCOTTISH OPERATIONS. The Company's Scottish subsidiary maintains a
contributory defined benefit pension program covering most of its employees.
Benefits are primarily based on years of service and compensation. The program
is funded in conformity with the requirements of applicable U.K. government
regulations. Plan assets are invested in fixed interest and balanced fund units
that are primarily comprised of corporate equity securities.
The funded status of the plan at October 31, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Plan assets at fair value................................................. $ 7,617 $ 8,504
Projected benefit obligation.............................................. (8,856) (10,387)
--------- ---------
Plan assets less than projected benefit obligation........................ (1,239) (1,883)
Unrecognized net loss..................................................... 1,842 2,204
Unrecognized transition asset being amortized over 19 years............... (423) (381)
--------- ---------
Prepaid (accrued) pension cost included in other assets (accrued
expenses)......................................................... $ 180 $ (60)
--------- ---------
--------- ---------
</TABLE>
At October 31, 1996, 1997 and 1998, the projected benefit obligations
include accumulated benefit obligations of $5,658,000, $8,043,000 and $9,236,000
of which $5,643,000, $8,006,000, and $9,232,000 are vested.
A discount rate of 7.0% was used in determining the present value of the
projected benefit obligation. The expected long-term rate of return on assets
was 9.0% and the assumed rate of increase in future compensation levels was
5.0%.
F-22
<PAGE>
The net pension expense for the Company's Scottish subsidiary recorded
in fiscal 1996, 1997 and 1998 included the following components:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Service-cost benefits earned during the period......................... $ 364 $ 415 $ 565
Interest cost on projected benefit obligation.......................... 474 506 636
Actual return on plan assets........................................... (674) (616) (766)
Net amortization and deferral.......................................... 163 (13) 46
--------- --------- ---------
Net pension expense.............................................. $ 327 $ 292 $ 481
--------- --------- ---------
--------- --------- ---------
</TABLE>
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors a contributory defined benefit postretirement plan for
its U.S. operations which provides medical, dental and life insurance benefits
to employees who meet age and years of service requirements prior to retirement
and who agree to contribute a portion of the cost. The Company has the right to
modify or terminate these benefits at any time.
The Company's contribution is a set amount per retiree depending on the
retiree's years of service and dependent status at the date of retirement and
the age of the retiree and dependents when benefits are provided. The retiree
pays cost increases.
The postretirement plan's benefit obligation was as follows for the
years ended October 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................... $ 1,017 $ 1,134
Fully eligible plan participants............................................ 341 170
Other active plan participants.............................................. 810 947
--------- ---------
Total accumulated postretirement benefit obligation unfunded.......... 2,168 2,251
Unrecognized loss........................................................... (168) (111)
--------- ---------
Accrued postretirement benefit obligation............................. $ 2,000 $ 2,140
--------- ---------
--------- ---------
</TABLE>
The following components were included in net periodic postretirement
benefit cost for the years ended October 31, 1996, 1997, and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--- --- ---
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Service-cost benefits earned during the period........................... $ 79 $ 71 $ 69
Interest cost on accumulated post retirement benefit obligation.......... 166 165 141
Net amortization and deferral............................................ (7) 10 55
--- --- ---
Net postretirement benefit cost.................................... $ 238 $ 246 $ 265
--- --- ---
--- --- ---
</TABLE>
Because the Company has established a maximum amount it will pay per
retiree under the plan, health care cost trends do not affect the calculation of
the accumulated benefit obligation or the net
F-23
<PAGE>
postretirement benefit cost. The weighted average discount rate used in
determining the accumulated benefit obligation was 8.0% in fiscal 1996 and 1997
and 6.8% in fiscal 1998.
13. CONTINGENCIES AND COMMITMENTS
LITIGATION. Over the past several years, the Company has been engaged
in litigation in the United Kingdom (U.K.) involving infringement of a Company
patent by the U.K. companies, Pilkington PE Limited and Pilkington PLC. The
Company won its action at the Patents County Courts level but lost on appeal to
the U.K. House of Lords. In October 1998, the Company settled the claim for
approximately $850,000, most of which had been accrued in previous periods.
On March 17, 1997, Optical Corporation of America (OCA) and certain of
its directors and officers (Affiliates) commenced suit against the Company in
the Superior Court, Middlesex County, Commonwealth of Massachusetts. The
complaint arose out of a letter of intent executed by the Company and OCA in
March 1996 and an ensuing merger agreement executed by the Company and OCA in
June 1996. Under the merger agreement, the Company would have acquired OCA. The
complaint sought damages for costs and expenses incurred by OCA in pursuing the
merger transaction with the Company due to the Company's alleged negligent
misrepresentations to OCA and Affiliates and the Company's alleged breach of its
letter of intent with OCA. The Company filed counterclaims against OCA and the
Affiliates based on OCA's breach of the merger agreement and sought damages
based on the difference between the value of OCA's business to the Company and
the agreed upon purchase price under the merger agreement. See Note 15 for
additional discussion of OCA suit.
In July 1996, SICPA filed a lawsuit in Delaware Chancery Court in order
to block an attempted initial public offering by Flex arguing that such an
offering without SICPA's consent was prohibited by Flex's articles of
incorporation, as well as by certain contractual provisions between the Company
and SICPA. In fiscal 1998, the Company announced that it had completed final
negotiations for the settlement of the litigation with SICPA. Under the terms of
the settlement, the Company and SICPA agreed to modify their co-ownership
agreement to enable OCLI to more effectively manage the day-to-day operations of
Flex, to allow for public financing of Flex's operations and to modify the
License and Supply Agreement between Flex and SICPA. The modification to the
License and Supply Agreement provided for more attractive scheduled pricing
discounts on higher volume purchases and changed the scheduled order patterns to
be consistent with the Company's fiscal quarters. In addition, the Company
purchased $2.6 million of Flex's working capital loans from SICPA. On December
22, 1998 the Company purchased SICPA's 40% interest in Flex.
In 1997, Flex filed a suit in United States District Court for the
Eastern District of Michigan alleging that BASF Corporation (BASF) and BASF AG
infringed Flex's patents covering optically variable thin film flakes which,
when mixed with paints and inks, produce color shifting visual properties. The
complaint requested that the Court enjoin BASF from importing, making, using,
selling or offering to sell the infringing pigment in the United States. The
complaint also sought damages for the infringement, including treble damages if
the infringement was intentional. In October 1998, a settlement agreement was
reached between Flex and both BASF companies under which Flex has agreed to
allow BASF to make, use and sell two specific forms of a special effects pigment
for use within limited application fields in exchange for a series of payments
to be based upon BASF's revenues on the sale of those pigments.
CONCENTRATIONS OF CREDIT RISK. The Company grants credit to customers,
subject to credit approval, for most of its sales. At October 31, 1998, accounts
receivable from customers in foreign countries was $21 million, or 53.7%, of
accounts receivable with approximately $8 million receivable from customers in
Asia and approximately $13 million receivable from customers in Europe and other
countries.
OPERATING LEASE AGREEMENTS. The Company and its subsidiaries lease
computer equipment, manufacturing space and warehouse space. The operating lease
payments are recorded as rental expense and totaled $4,881,000, $6,351,000 and
$7,104,000 for fiscal 1996, 1997 and 1998. Future minimum
F-24
<PAGE>
operating lease payments amount to $24.9 million, and for the years 1999 through
2003 are $6,665,000 $5,845,000, $5,178,000, $3,020,000 and $777,000 under
operating lease agreements in effect at October 31, 1998.
EMPLOYMENT AGREEMENTS. The Company has approved employment agreements
for officers and employment assurance agreements for certain management and
technical employees, as well as increases in severance benefits for full-time
employees, to be effective in the event of certain changes in control of the
Company. These agreements are currently effective through fiscal 1999.
14. INFORMATION ON OPERATIONS
INVENTORIES. Inventories as of October 31, 1997 and 1998 and January
31, 1999 consisted of:
<TABLE>
<CAPTION>
OCTOBER 31,
1997 1998
--------- ---------
JANUARY 31,
1999
-----------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Raw materials and supplies.................... $ 7,541 $ 7,138 $ 6,289
Work-in-process............................... 12,308 13,148 9,896
Finished goods................................ 2,980 4,947 5,083
--------- --------- -----------
Total inventories......................... $ 22,829 $ 25,233 $ 21,268
--------- --------- -----------
--------- --------- -----------
</TABLE>
INTEREST. Interest expense and amounts capitalized were as follows for
the years ended October 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Interest costs incurred............................. $ 4,696 $ 4,249 $ 4,312
Less amounts capitalized............................ 1,172 219 697
--------- --------- ---------
Net interest expense.......................... $ 3,524 $ 4,030 $ 3,615
--------- --------- ---------
--------- --------- ---------
</TABLE>
SALES INFORMATION. Significant customers and sales to the federal
government were as follows:
The Company's largest customer in fiscal 1996 and 1997 accounted for
12.7% and 14.0% of consolidated revenues. The Company's largest customer in
fiscal 1998 accounted for 21.1% of consolidated revenues.
Sales of products and services to the federal government, primarily
under subcontracts, were 8.8%, 5.9% and 4.0% of net revenues in fiscal 1996,
1997 and 1998. Certain of these contracts are subject to cost review by various
governmental agencies. Management believes that adjustments, if any, will not be
material to the operating results of the Company.
F-25
<PAGE>
FOREIGN OPERATIONS. Certain information regarding the Company's
domestic and foreign revenues is as follows:
<TABLE>
<CAPTION>
CANADA EUROPE ASIA
UNITED AND AND AND
STATES OTHER(1) OTHER(1) OTHER(1) ELIMINATIONS TOTAL
--------- ----------- ----------- --------- ----------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED OCTOBER 31,
1996:
Domestic revenues and revenues of
foreign operations............. $ 99,543 $ 38,795 $ (815) $ 137,523
Export sales from the U.S........ $ 1,640 34,106 $ 25,296 (9,370) 51,672
Transfers between regions........ (815) (9,370) 10,185
--------- ----------- ----------- --------- ----------- ---------
Revenues from customers........ $ 98,728 $ 1,640 $ 63,531 $ 25,296 $ -- $ 189,195
--------- ----------- ----------- --------- ----------- ---------
--------- ----------- ----------- --------- ----------- ---------
FISCAL YEAR ENDED OCTOBER 31,
1997:
Domestic revenues and revenues of
foreign operations............. $ 98,025 $ 31,411 $ 8,295 $ (2,709) $ 135,022
Export sales from the U.S........ $ 19,571 45,855 30,023 (12,642) 82,807
Transfers between regions........ (2,709) (6,669) (5,973) 15,351
--------- ----------- ----------- --------- ----------- ---------
Revenues from customers........ $ 95,316 $ 19,571 $ 70,597 $ 32,345 $ -- $ 217,829
--------- ----------- ----------- --------- ----------- ---------
--------- ----------- ----------- --------- ----------- ---------
FISCAL YEAR ENDED OCTOBER 31,
1998:
Domestic revenues and revenue of
foreign operations............. $ 106,019 $ 29,664 $ 14,924 $ (1,056) $ 149,551
Export sales from the U.S........ $ 54,528 40,224 27,890 (16,569) 106,073
Transfers between regions........ (598) (5,930) (11,097) 17,625
--------- ----------- ----------- --------- ----------- ---------
Revenues from customers........ $ 105,421 $ 54,528 $ 63,958 $ 31,717 $ -- $ 255,624
--------- ----------- ----------- --------- ----------- ---------
--------- ----------- ----------- --------- ----------- ---------
</TABLE>
- ------------------------
Transfers between regions represent intercompany sales of products and
intercompany compensation for services.
(1) Other sales, which constitute less than 10% of consolidated sales, are
aggregated by region based on geographic proximity.
Certain information regarding the Company's operations by region is as
follows:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE JAPAN ELIMINATIONS TOTAL
--------- --------- --------- ----------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED OCTOBER 31, 1996:
Income (Loss) from operations................. $ 12,812 $ (410) $ -- $ -- $ 12,402
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Identifiable assets........................... $ 146,869 $ 59,715 $ -- $ (33,813) $ 172,771
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
FISCAL YEAR ENDED OCTOBER 31, 1997:
Income (Loss) from operations................. $ 16,206 $ 385 $ (316) $ (328) $ 15,947
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Identifiable assets........................... $ 170,443 $ 32,646 $ 5,570 $ (25,166) $ 183,493
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
FISCAL YEAR ENDED OCTOBER 31, 1998:
Income (Loss) from operations................. $ 22,972 $ (7,083) $ (689) $ (328) $ 14,872
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Identifiable assets........................... $ 208,733 $ 21,773 $ 9,077 $ (25,997) $ 213,586
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
F-26
<PAGE>
COMPONENTS OF EARNINGS. Components of earnings (loss) before provision
for income taxes and minority interest were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Domestic......................................................... $ 10,796 $ 12,587 $ 20,436
Foreign.......................................................... (1,539) (209) (8,410)(1)
--------- --------- ---------
$ 9,257 $ 12,378 $ 12,026
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) In the fourth quarter of 1998, the Company recorded an impairment loss of
$8.6 million in connection with the sale of the operating assets of its MMG
division and recorded restructuring charges of $586,000 pursuant to a plan
of restructuring approved in the fourth quarter of 1998. See Notes 3 and 4
of Notes to Consolidated Financial Statements.
15. SIGNIFICANT TRANSACTIONS SUBSEQUENT TO OCTOBER 31, 1998
In the first quarter of fiscal 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 MMG for $4.3 million. As the Company had
previously recorded an impairment loss to reduce MMG's assets to fair value on a
liquidation basis, no gain or loss was recognized on the sale. The cash proceeds
from the sale were received in February 1999 and, as a result, the amount
receivable from the sale is included in other current assets at January 31,
1999. An office building in Germany, with a carrying value of $531,000 which was
not part of the sale, is being held for sale.
In connection with the sale of MMG, the Company also received $1.2
million for a three-year covenant not to compete and $600,000 for a three-year
license and supply agreement that incorporates the use of the OCLI name. The
$1.8 million received for those contracts is being recognized as revenue over
the three-year terms of the agreements.
In December 1998, the Company acquired the 40% minority interest in Flex
held by SICPA 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 addition, the Company
purchased SICPA's $2.4 million dollar working capital loan and 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 commitment to put in place additional capacity to manufacture optically
variable pigment.
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 first quarter
of 1999.
On January 31, 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.
F-27
<PAGE>
On February 16, 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 Company common stock on the date of the equity
restructuring. The per share exercise price for each converted Flex option was
based on the ratio of the Flex exercise price over the market value per share of
Flex multiplied by the market value per share of Company common stock on the
date of the equity restructuring.
Effective February 22, 1999, the Company acquired OPKOR, Inc., an
optical design and manufacturing company specializing in precision polymer optic
components and assemblies, for $9.0 million plus annual contingent payments
based on profits of the acquired entity. Consideration consisted of $1.8 million
cash and 267,285 shares of Company common stock. The acquisition will be
recorded as a purchase in the second quarter of 1999. The purchase price
allocation may include a component consisting of in-process research and
development which would result in a charge to expense in the second quarter of
1999.
F-28
<PAGE>
[artwork inside back cover]
[DISPLAY PRODUCTS
pictures of:
- business presentation projector
- videocam
- color wheel
- large screen television
- highly reflective mirror
- computer monitor with
Glare/Guard filter
DISPLAY]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,610,000 SHARES
COMMON STOCK
---------------
PROSPECTUS
---------------
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
SOUNDVIEW TECHNOLOGY GROUP
---------
, 1999
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES
TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of our common stock being registered hereby. All amounts shown are
estimates, except the Securities and Exchange Commission registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 23,972
NASD filing fee................................................... $ 9,123
Nasdaq National Market listing fee................................ $ 17,500
Blue Sky fees and expenses........................................ $ 5,000
Printing and engraving expenses................................... $ 90,000
Legal fees and expenses........................................... $ 150,000
Accounting fees and expenses...................................... $ 75,000
Transfer Agent and Registrar fees................................. $ 5,000
Miscellaneous expenses............................................ $ 74,405
---------
Total........................................................... $ 450,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The indemnification and liability of the Company's directors and
officers are governed by Delaware law.
Under Section 145 of the General Corporation Law of the State of
Delaware, corporations have broad powers to indemnify their directors and
officers against liabilities that may incur in such capacities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
Delaware law also permits corporations to eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach or alleged breach of directors' fiduciary "duty of care."
While Delaware law does not eliminate the directors' duty of care, it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. These provisions have no effect on director's liability for (1)
breach of the director's duty of loyalty, (2) acts or omissions not in good
faith or involving intentional misconduct or knowing violations of law, (3) a
corporation's illegal payment of dividends, (4) approval of any transaction from
which the director derives an improper personal benefit, or (5) on claims
arising under other laws, such as the federal securities laws.
In connection with the Company's reincorporation in Delaware in November
1987, it included in its Certificate of Incorporation a provision limiting
directors' liability to the greatest extent permitted by Delaware corporate law.
In addition, the Certificate of Incorporation and the Company's Bylaws provide
that it will indemnify its directors and officers to the fullest extent
permitted under Delaware law, including circumstances in which indemnification
is otherwise discretionary. The Company submitted these charter and Bylaw
provisions to its stockholders, who approved them in March 1987.
In addition, the Company has entered into separate Indemnification
Agreements with its directors and officers to the full extent permitted by
applicable law and our Certificate of Incorporation. The general effect of the
indemnification provisions of the Bylaws and the Indemnification Agreements is
to require the Company, among other things, to indemnify its directors and
officers against certain liabilities that may arise by reason of their status or
service as directors or officers (provided the officer or director acted in good
faith and in a manner he or she believed to be in or not opposed to the
Company's best interests and, with respect to a criminal proceeding, provided he
or she had no reasonable cause to
II-1
<PAGE>
believe that the conduct was unlawful), and to advance their expenses (including
attorneys' fees) incurred as a result of any proceeding against them as to which
they could be indemnified. The Company believes that its charter and Bylaw
provisions and the separate Indemnification Agreements are necessary to attract
and retain qualified persons as directors and officers.
At present, the Company is not aware of any threatened litigation or
proceeding which could result in a claim for indemnification by any director or
officer.
ITEM 16. EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- ----------------------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation. Incorporated by reference to Exhibit (4)(a)
of the Registrant's Form 10-Q for the quarter ended July 31, 1988.
3.2 By-Laws. Incorporated by reference to Exhibit (3)(b) of the Registrant's Form 8-K
under Item 5 dated November 20, 1987.
4.1 Stockholder Rights Agreement between the Registrant and ChaseMellon Shareholder
Services L.L.C. dated December 16, 1997. Incorporated by reference to Exhibit 4.1
of the Registrant's Form 10-K for the year ended October 31, 1997.
4.2* First Amendment to Stockholder Rights Agreement between the Registrant and
ChaseMellon Shareholder Services L.L.C. dated December 15, 1998.
4.3 Form of Note Purchase Agreement dated as of July 30, 1998 for the private
placement of $30 million of 6.69% Senior Notes due July 31, 2008 with Modern
Woodman of America, American Life and Casualty Insurance Company, Massachusetts
Mutual Life Insurance Company, Baystate Health Systems, Inc. and Principal Life
Insurance Company. Incorporated by reference to Exhibit 4.1 of the Registrant's
Form 10-Q for the quarter ended July 31, 1998.
4.4 Credit Agreement dated as of July 31, 1998 among the Registrant, Bank of America
National Trust and Savings Association, as Agent, Letter of Credit Issuing Bank
and the Other Financial Institutions Party Thereto. Incorporated by reference to
Exhibit 4.0 of the Registrant's Form 10-Q for the quarter ended July 31, 1998.
4.5 Waiver and First Amendment, dated as of January 8, 1999 and effective as of
October 31, 1998, to Credit Agreement dated as of July 31, 1998 among the
Registrant, Bank of America National Trust and Savings Association, as Agent,
Letter of Credit Issuing Bank and The Other Financial Institutions Party Thereto.
4.6 Secured Promissory Note between Optical Coating Laboratory, Inc. and Aid
Association for Lutherans dated November 8, 1995. Incorporated by reference to
Exhibit 4.8 of the Registrant's Form 10-K for the year ended October 31, 1995.
4.7 Capital Equipment Lease Agreement dated as of February 20, 1996 between Optical
Coating Laboratory, Inc. and Fleet Credit Corporation. Incorporated by reference
to Exhibit 4.10 of the Registrant's Form 10-K for the year ended October 31, 1996.
4.8 Capital Equipment Lease Agreement dated as of June 19, 1996 between Flex Products,
Inc. and Fleet Credit Corporation. Incorporated by reference to Exhibit 4.11 of
the registrant's Form 10-K for the year ended October 31,1996.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- ----------------------------------------------------------------------------------
<S> <C>
4.9 Credit Agreement dated as of May 20, 1997 between Optical Coating Laboratory, Inc.
as Borrower and ABN AMRO Bank N.V. as Bank. Incorporated by reference to Exhibit
4.2 of the Registrant's form 10-Q for the quarter ended April 30, 1997.
5.1+ Opinion and consent of Collette & Erickson LLP.
10.1* License and Supply Agreement between Flex Products, Inc. and SICPA Holding, S.A.
dated as of December 2, 1994.
10.2* Amended and Restated Agreement between JDS Fitel, Inc. and Optical Coating
Laboratory, Inc. dated as of April 15, 1999.
15.* Letter regarding Unaudited Interim Financial Information.
23.1* Consent of Deloitte & Touche LLP.
23.2* Consent of KPMG LLP.
23.3+ Consent of Counsel (See Exhibit 5.1, above).
24.1* Power of Attorney (See page II-5).
</TABLE>
- ------------------------
* Not previously filed.
+ To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant to
Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered
II-3
<PAGE>
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby further undertakes that, for
purposes of determining any liability under the Securities Act, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(i) The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance under Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Rosa, State of
California, on the 5th day of May 1999.
<TABLE>
<S> <C> <C>
OPTICAL COATING LABORATORY, INC.
By: /s/ CRAIG B. COLLINS
-----------------------------------------
Craig B. Collins
VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
President, Chief Executive
CHARLES J. ABBE* Officer
- ------------------------------ and Director May 5, 1999
Charles J. Abbe (Principal Executive
Officer)
Vice President, Finance
/s/ CRAIG B. COLLINS and Chief Financial
- ------------------------------ Officer May 5, 1999
Craig B. Collins (Principal Financial
Officer)
HOLLY D. NEAL* Corporate Controller
- ------------------------------ (Principal Accounting May 5, 1999
Holly D. Neal Officer)
HERBERT M. DWIGHT, JR.*
- ------------------------------ Chairman of the Board May 5, 1999
Herbert M. Dwight, Jr.
JOHN MCCULLOUGH*
- ------------------------------ Director May 5, 1999
John McCullough
DOUGLAS C. CHANCE*
- ------------------------------ Director May 5, 1999
Douglas C. Chance
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
- ------------------------------ Director May 5, 1999
Shoei Kataoka
JULIAN SCHROEDER*
- ------------------------------ Director May 5, 1999
Julian Schroeder
RENN ZAPHIROPOULOS*
- ------------------------------ Director May 5, 1999
Renn Zaphiropoulos
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ CRAIG B. COLLINS
-------------------------
(CRAIG B. COLLINS,
ATTORNEY-IN-FACT)
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- ----------------------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation. Incorporated by reference to Exhibit (4)(a)
of the Registrant's Form 10-Q for the quarter ended July 31, 1988.
3.2 By-Laws. Incorporated by reference to Exhibit (3)(b) of the Registrant's Form 8-K
under Item 5 dated November 20, 1987.
4.1 Stockholder Rights Agreement between the Registrant and ChaseMellon Shareholder
Services L.L.C. dated December 16, 1997. Incorporated by reference to Exhibit 4.1
of the Registrant's Form 10-K for the year ended October 31, 1997.
4.2* First Amendment to Stockholder Rights Agreement between the Registrant and
ChaseMellon Shareholder Services L.L.C. dated December 15, 1998.
4.3 Form of Note Purchase Agreement dated as of July 30, 1998 for the private
placement of $30 million of 6.69% Senior Notes due July 31, 2008 with Modern
Woodman of America, American Life and Casualty Insurance Company, Massachusetts
Mutual Life Insurance Company, Baystate Health Systems, Inc. and Principal Life
Insurance Company. Incorporated by reference to Exhibit 4.1 of the Registrant's
Form 10-Q for the quarter ended July 31, 1998.
4.4 Credit Agreement dated as of July 31, 1998 among the Registrant, Bank of America
National Trust and Savings Association, as Agent, Letter of Credit Issuing Bank
and the Other Financial Institutions Party Thereto. Incorporated by reference to
Exhibit 4.0 of the Registrant's Form 10-Q for the quarter ended July 31, 1998.
4.5 Waiver and First Amendment, dated as of January 8, 1999 and effective as of
October 31, 1998, to Credit Agreement dated as of July 31, 1998 among the
Registrant, Bank of America National Trust and Savings Association, as Agent,
Letter of Credit Issuing Bank and The Other Financial Institutions Party Thereto.
4.6 Secured Promissory Note between Optical Coating Laboratory, Inc. and Aid
Association for Lutherans dated November 8, 1995. Incorporated by reference to
Exhibit 4.8 of the Registrant's Form 10-K for the year ended October 31, 1995.
4.7 Capital Equipment Lease Agreement dated as of February 20, 1996 between Optical
Coating Laboratory, Inc. and Fleet Credit Corporation. Incorporated by reference
to Exhibit 4.10 of the Registrant's Form 10-K for the year ended October 31, 1996.
4.8 Capital Equipment Lease Agreement dated as of June 19, 1996 between Flex Products,
Inc. and Fleet Credit Corporation. Incorporated by reference to Exhibit 4.11 of
the registrant's Form 10-K for the year ended October 31, 1996.
4.9 Credit Agreement dated as of May 20, 1997 between Optical Coating Laboratory, Inc.
as Borrower and ABN AMRO Bank N.V. as Bank. Incorporated by reference to Exhibit
4.2 of the Registrant's form 10-Q for the quarter ended April 30, 1997.
5.1+ Opinion and consent of Collette & Erickson LLP.
10.1* License and Supply Agreement between Flex Products, Inc. and SICPA Holding, S.A.
dated as of December 2, 1994.
10.2* Amended and Restated Agreement between JDS Fitel, Inc. and Optical Coating
Laboratory, Inc. dated as of April 15, 1999.
15.* Letter regarding Unaudited Interim Financial Information.
23.1* Consent of Deloitte & Touche LLP.
23.2* Consent of KPMG LLP.
23.3+ Consent of Counsel (See Exhibit 5.1, above).
24.1* Power of Attorney (See page II-5).
</TABLE>
- ------------------------
* Not previously filed.
+ To be filed by amendment.
<PAGE>
EXHIBIT 15
LETTER REGARDING UNAUDITED INTERIM
FINANCIAL INFORMATION
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 period ended January 31, 1999, as indicated in our report dated February 18,
1999; because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which was included in
your Quarterly Report on Form 10-Q for the quarter ended January 31, 1999, is
being incorporated by reference in the Prospectus which is a part of this
Amendment No. 1 to Registration Statement 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.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
May 6, 1999
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-76853 of Optical Coating Laboratory, Inc. on Form
S-3 of our reports dated December 22, 1998 (January 8, 1999 as to Note 5),
included and incorporated by reference in the Annual Report on Form 10-K of
Optical Coating Laboratory, Inc. for the year ended October 31, 1998, and to the
use of our report dated December 22, 1998 (January 8, 1999 as to paragraph 8 of
Note 6 and February 22, 1999 as to Note 15), appearing in the Prospectus, which
is part of this Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
May 6, 1999
<PAGE>
EXHIBIT 23.2
To the Board of Directors and Stockholders
Optical Coating Laboratory, Inc.:
We consent to the incorporation by reference in the Registration
Statement on Form S-3 of Optical Coating Laboratory, Inc. of our report dated
November 26, 1997, relating to the balance sheets of Flex Products, Inc. as of
November 2, 1997, and November 3, 1996, and the related statements of
operations, stockholders' equity and cash flows for the years then ended, which
report appears in the October 31, 1998, annual report on Form 10-K of Optical
Coating Laboratory, Inc., and to the use of such report appearing herein. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ KPMG LLP
San Francisco, California
May 6, 1999
