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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
[OCLI LOGO]
OPTICAL COATING LABORATORY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMISSION FILE NUMBER 0-2537
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DELAWARE 68-0164244
(STATE OR OTHER JURISDICTION OF (IRS IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2789 NORTHPOINT PARKWAY, SANTA ROSA, 95407-7397
CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (707) 545-6440
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF EACH CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At December 31, 1999, the aggregate market value of the registrant's common
stock (based upon the closing price of these shares on the NASDAQ National
Market System) held by non-affiliates, which excludes shares held by officers
and directors and the Employee Stock Ownership Plan of the registrant (not all
of whom claim to be affiliates), was approximately $3.7 billion.
At December 31, 1999, there were 14,487,581 shares of the registrant's
common stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Company's next Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.
The Exhibit index appears on Pages 66-67.
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OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 22
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders and
Executive Officers of the Company........................... 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 26
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 32
Item 8. Consolidated Financial Statements and Supplemental Financial
Information................................................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 64
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 65
Item 11. Executive Compensation...................................... 65
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 65
Item 13. Certain Relationships and Related Transactions.............. 65
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 65
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CERTAIN STATEMENTS UNDER THE CAPTIONS "BUSINESS," "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK," AND
OTHER SECTIONS OF THIS ANNUAL REPORT ON FORM 10-K, 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 ANNUAL REPORT ON FORM 10-K
THAT ARE NOT HISTORICAL FACTS. WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE
WORDS "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE"
AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY 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.
PART I
ITEM 1. 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. We operate in three reportable segments:
Telecommunications Products, Light Interference Pigments and Applied Photonics.
See Note 17 of Notes to Consolidated Financial Statements.
TELECOMMUNICATIONS PRODUCTS
Our Telecommunications Products segment manufactures and sells optical
components for fiber optic communications systems. The main application for
these products is to control the reflection, transmission and absorption of
lightwave signals that are transmitted through fiber optic cables. Current
products include Wavelength Division Multiplexing (WDM) components, Optical
Add-Drop Modules and Gain Flattening Components. This market accounted for 39.6%
of our revenues in fiscal 1999, 21.1% of our revenues in fiscal 1998 and 8.8% of
our revenues in fiscal 1997.
LIGHT INTERFERENCE PIGMENTS
Our Light Interference Pigments segment manufactures and sells color
shifting light interference 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 18.7% of our
revenues in fiscal 1999, 17.0% of our revenues in fiscal 1998 and 18.3% of our
revenues in fiscal 1997.
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APPLIED PHOTONICS
Our Applied Photonics segment manufactures and sells products into three
key markets:
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. This market
accounted for 19.8% of our revenues in fiscal 1999, 23.5% of our revenues in
fiscal 1998 and 27.5% of our revenues in fiscal 1997.
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 14.8% of our revenues in fiscal 1999, 25.2% of our revenues in
fiscal 1998 and 27.3% of our revenues in fiscal 1997.
OFFICE AUTOMATION.
We manufacture and sell optical components, including precision polymer
optics, for copiers, scanners, printers and other office products. This market
accounted for 7.1% of our revenues in fiscal 1999, 13.2% of our revenues in
fiscal 1998 and 18.1% of our revenues in fiscal 1997.
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, and 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. This technology may provide such
wide ranging applications as:
- 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;
- create the color for projection displays; and
- control high energy laser beams.
TELECOMMUNICATIONS PRODUCTS
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.
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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.
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.
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.
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 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.
APPLIED PHOTONICS
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.
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.
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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.
ACQUISITIONS, INVESTMENTS, DIVESTITURES AND STRATEGIC ALLIANCES
ALLIANCE WITH JDS UNIPHASE CORPORATION. In the second quarter of fiscal
1997, we entered into an alliance with JDS FITEL, a leading fiber optic
component company, in order to capitalize on the rapidly growing market for WDM
products. In July 1998, JDS FITEL merged with Uniphase Corporation to form JDS
Uniphase Corporation who continues the alliance with us. 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 Uniphase contributes its expertise in the design, packaging and
marketing of those products. The JDS Uniphase alliance includes an agreement,
where we sell the WDM products to JDS Uniphase 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. On November 3, 1999, subsequent to
our fiscal year end, we and JDS Uniphase entered into an agreement to merge
contingent on our stockholders' approval at a meeting to be concluded on
February 4, 2000. See Note 18 of Notes to Consolidated Financial Statements.
FLEX. Flex was founded as a division of OCLI 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 we owned 40%. In
1995, we acquired controlling ownership of Flex with the purchase of an
additional 20% interest in Flex from ICIA. In conjunction with our increased
ownership, the remaining 40% interest in Flex Products was acquired by SICPA
Holding S.A., a privately held Swiss Corporation headquartered in Lausanne,
Switzerland. SICPA is the world's largest manufacturer of printing inks and a
major customer of Flex.
In December 1998, we purchased the 40% minority interest held by SICPA for
$30.0 million in cash, bringing our ownership in Flex to 100%. We recorded the
transaction as a purchase in the first quarter of fiscal year 1999 based on data
provided in an independent valuation. The purchase price was allocated as
follows (dollars in thousands):
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Minority interest........................................... $10,611
Fair value adjustment to property and equipment............. 1,124
Deferred tax effect of adjustments to property and equipment
and identifiable intangibles.............................. (4,508)
Acquired in-process research and development................ 2,906
Identifiable intangibles.................................... 10,145
Goodwill.................................................... 9,757
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Total purchase price.............................. $30,035
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Acquired in-process research and development was expensed in the first
quarter of 1999. Identifiable intangibles are being amortized over useful lives
ranging from 11 to 15 years and goodwill is being amortized over 15 years.
Identifiable intangibles and goodwill are included in other assets.
In connection with the purchase, we purchased SICPA's $2.4 million 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.
OPKOR INC. In February, 1999, we purchased OPKOR Inc., an optical design
and manufacturing company specializing in precision polymer optic components and
assemblies, for $8.7 million plus annual
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contingent payments in our common stock based on profits of the acquired entity.
The initial $8.7 million was paid in the form of $1.6 million in cash and
267,285 shares of OCLI common stock. The transaction was accounted for using the
purchase method of accounting, and accordingly, the results of operations for
OPKOR have been included in our financial statements since the date of the
acquisition. Pro forma comparative results of operations are not presented
because they are not materially different from our reported results of
operations. The purchase price was allocated first to the $2.0 million fair
value of net assets acquired with the remaining $6.7 million allocated to
goodwill and identifiable intangibles that are being amortized over 8 years.
After the end of fiscal 1999, the contingent payment was eliminated.
OCLI ASIA. In the second quarter of 1997, we began operating a joint
venture (Hakuto-OCLI Co., Ltd. doing business as OCLI Asia) with Hakuto Co.,
Ltd. (Hakuto) in Japan. The joint venture was established to address the rapidly
changing market for our 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 our results of
operations and financial position because we had operating control. During 1998,
we purchased Hakuto's interest in the joint venture for $740,000. The wholly
owned subsidiary, OCLI Asia K.K., continues to do business as OCLI Asia and
remains headquartered in Tokyo, Japan with manufacturing facilities in Atsugi,
Japan.
SALE OF MMG. In the fourth quarter of 1998, we made the decision to dispose
of our 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 the impaired assets to
fair value, net of disposal costs on a liquidation basis.
In fiscal 1999, Glas Trosch, a privately held glass company in Switzerland
purchased the business and the operating assets (inventory, equipment,
furniture, two buildings, workforce, customer lists and other related
intangibles) of MMG for $4.3 million. We retained ownership of an office
building with an estimated value of $360,000 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. As the assets were sold for the recorded value, adjusted for the
impairment recorded in 1998, no gain or loss will be recognized in the fiscal
1999 in connection with the sale.
In connection with the sale of MMG, we also received $1.2 million for a
three-year covenant not to compete and $600,000 for a three-year license and
supply agreement that incorporates the use of the OCLI name. The $1.8 million
received for those contracts was deferred and is being recognized as revenue
over the three-year terms of the agreements.
TECHNOLOGY AND PRODUCTS
TELECOMMUNICATIONS PRODUCTS
DENSE WAVELENGTH DIVISION MULTIPLEXING COMPONENTS
In our alliance with JDS Uniphase, 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 Uniphase 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
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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 Uniphase
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
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.
LIGHT INTERFERENCE PIGMENTS
SECURITY
Our OVP(TM) product is a light interference pigment which allows ink to
exhibit different colors from different viewing angles. 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.
DECORATIVE
Our ChromaFlair(R) 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(R) product has been most recently featured as a paint option on
selected Nissan automobiles in Europe. ChromaFlair(R) 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(R) product has also been used on consumer products such as Nokia
cell phones, Sony portable CD players, Motorola pagers and Nike shoes.
APPLIED PHOTONICS
DISPLAY
CRT
We produce a broad line of high performance optical glass filters for
display applications. These filters are sold under the brand name GlareGuard(R)
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.
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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, optical engine
components for bar-code scanners, optical filters for medical instruments, solar
cell covers for satellites 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, and sensors for printers.
CUSTOMERS
We provide a wide range of products to a broad range of customers. Our top
ten customers accounted for 68.0%, 54.8% and 41.9% of our revenues in fiscal
years 1999, 1998 and 1997, with JDS Uniphase accounting for 39.4% of our
revenues in fiscal 1999 and 21.1% of our revenues in fiscal 1998. SICPA
accounted for 14.7% of our revenues in 1999, 13.9% of our revenues in fiscal
1998 and 12.7% of our revenues in fiscal 1997. No other customer accounted for
more than 10.0% of our revenues in fiscal 1999, 1998 or 1997. Because relatively
few customers account for a substantial portion of our sales, the loss of their
business could have a material adverse effect on our operating results. However,
we believe that we have the resources and capabilities to replace any lost
business over time through the development of new products and new applications
for its products.
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
GlareGuard(R) 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, the United Kingdom and
Japan. We have also established sales representative offices in other Asian
countries to provide more integrated marketing and sales support in these
regions.
We sell specified WDM components to JDS Uniphase 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(R) 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 Uniphase, our strategic partner for our WDM business and our merger
partner, in the event the merger is not consummated.
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(R)
product.
We have a large number of domestic and foreign competitors for our
GlareGuard(R) 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 GlareGuard(R) 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.
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
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coating systems and 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 calendar year 2000.
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.
Our research and development efforts also include developing:
- more economical and commercially suitable light interference pigments.
- 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.
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Our research and development expenditures totaled $26.3 million, or 7.6% of
revenues, in fiscal 1999, $17.1 million, or 6.7% of revenues in fiscal 1998, and
$14.9 million, or 6.8% of revenues, in fiscal 1997.
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
in order 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 October 31, 1999, we had 104 patents and 39 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 patents
range from 2000 to 2017.
Patents expiring in fiscal years 2000 through 2002 do not encompass
technologies in which we enjoy a significant 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 with scheduled shipment dates within 15
months 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
cancellations. Contractually specified delivery dates on orders sometimes are
adjusted at the request of either the customer or us.
Our backlog of orders was $94.1 million at the end of fiscal 1999, $80.6
million at the end of fiscal 1998 and $62.2 million at the end of fiscal 1997.
Substantially all orders in backlog at October 31, 1999 are scheduled for
shipment during fiscal 2000. The amount of backlog at October 31, 1999
represents only a portion of anticipated sales in 2000, with new orders
historically comprising the major portion of sales in a fiscal year.
We have multi-year supply contracts with two customers that include annual
buy requirements with "take or pay" provisions. In accordance with the
aforementioned policy, it is our practice of include only specifically scheduled
shipment releases under these contracts in reported backlog.
INTERNATIONAL AND DOMESTIC SALES
Revenues generated by sales to Canada have increased from 8.6% of our total
revenues in fiscal 1997 to 21.3% in fiscal 1998 and 39.1% in fiscal 1999
reflecting the growth in telecommunications sales from our alliance with JDS
Uniphase. Revenues generated by sales within the United States represented 43.8%
of our total revenues in fiscal 1997, 41.2% in fiscal 1998 and 31.1% in 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 47.7% in fiscal 1997 to 37.4% in fiscal 1998 and 29.8% in fiscal
1999 due to growing sales of telecommunications products to Canada. See Note 17
of Notes to Consolidated Financial Statements.
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EMPLOYEES
As of October 31, 1999, we had 1,459 employees of whom 1,320 were employed
domestically; 108 were employed by our operations in Hillend, Scotland; 6 were
employed in our sales and administrative offices in Europe and 25 were employed
by OCLI Asia in Japan.
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.
ENVIRONMENTAL
In 1988, we discovered ground water contamination at our facilities in
Santa Rosa, California. With the assistance of our environmental consultants and
under the regulatory guidance of the California Regional Water Quality Control
Board, we established a program for reducing contaminant concentration levels to
acceptable federal and state levels. In prior years, we recorded accruals to
cover the future estimated cost of drilling additional extraction and monitoring
wells and considers those accruals to be adequate. We have not charged
expenditures against those accruals in 1999, 1998 and 1997. Ongoing ground water
remediation expenses, and the cost of compliance with environmental standards
for years 1997 through 1999, have not been material to our operations and we do
not expect them to be material in the future.
RISK FACTORS
OUR PROPOSED MERGER WITH JDS UNIPHASE CORPORATION IS DEPENDENT UPON APPROVAL BY
OUR STOCKHOLDERS AND OTHER CONDITIONS.
If this proposed merger does not happen, our stock price may be adversely
affected. Furthermore, under the terms of the merger agreement, and under
certain circumstances, if the merger is not completed, we may be required to pay
to JDS Uniphase $85.0 million plus their out-of-pocket expenses associated with
the proposed merger. We have also granted to JDS Uniphase, an option to purchase
up to 19.9% of our stock at a purchase price of $177.65 per share which would
become exercisable if we were to enter into an alternative transaction instead
of completing the merger.
WE RELY HEAVILY ON JDS UNIPHASE FOR THE DESIGN, PACKAGING, ASSEMBLY, TESTING,
DISTRIBUTION, SALES AND MARKETING OF CERTAIN OF OUR TELECOMMUNICATIONS PRODUCTS.
- We rely on JDS Uniphase to design, package, assemble, distribute, sell
and market our products. Under the terms of our agreements, JDS Uniphase
has primary responsibility for the design, packaging and assembly of WDM
products covered by these agreements. JDS Uniphase also has exclusive
sales, marketing and distribution responsibilities for such products. If
JDS Uniphase is unable to successfully distribute, market and sell our
products, we may be unable to find a substitute distribution, marketing
or sales partner or develop these capabilities ourselves. We also rely on
JDS Uniphase for significant financial and technical contributions to
these programs.
- We lack control over management decisions. We share with JDS Uniphase the
responsibility for making certain management decisions as they relate to
the WDM products covered by the agreements. Certain decisions are made by
a management committee that has equal representation from JDS Uniphase
and ourselves. Our interests may not always be aligned. If we disagree
with JDS Uniphase on specific matters or general program direction, a
neutral party will make the decision. Such a decision may not be in our
best interests.
- Our share of profits could be reduced. Under our agreements with JDS
Uniphase, if the majority of the WDM products covered by the agreements
incorporate wavelength discrimination components not originating from us,
our share of the profits under the agreements will be significantly
reduced. In addition, we share any losses incurred under the agreements.
- JDS Uniphase can terminate our agreements or fail to perform. JDS
Uniphase can terminate the agreements without cause beginning in 2015. If
JDS Uniphase terminates the agreements or fails to
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provide adequate resources to the program, we cannot be certain that we
could obtain substitute resources or a substitute partner to
commercialize our products.
WE RELY EXCLUSIVELY ON SICPA'S USE OF OUR LIGHT INTERFERENCE PIGMENTS TO PRODUCE
OPTICALLY VARIABLE INK FOR THE SECURITY MARKET.
We have a strategic alliance with SICPA for the marketing and sale of our
light interference pigments used in connection with currency, stamps, credit
cards, passports and other specified value documents. Under a license and supply
agreement, we rely exclusively on SICPA to market and sell these products
worldwide. We currently do not plan to develop our own marketing and sales
organization for our light interference pigments for use in connection with such
value documents. SICPA has the right to terminate the agreement if we breach it.
If SICPA terminates our agreement or if it is unable to successfully market and
sell our light interference pigments for the applications covered by the
agreement, our business may be harmed and we may be unable to find a substitute
marketing and sales partner or develop these capabilities ourselves. Also, if
SICPA fails to meet its minimum purchase requirements under the agreement for
any reason, our operating results would be adversely affected.
WE MUST KEEP PACE WITH CHANGING TECHNOLOGICAL AND CUSTOMER REQUIREMENTS TO
REMAIN COMPETITIVE.
The market for our products, particularly in the telecommunications and
display markets, is characterized by the existence of many competing
technologies, rapid technological change, frequent new product introductions and
enhancements, changes in customer demands and evolving industry standards. Our
existing products could be rendered obsolete if we fail to remain competitive in
any of these ways. We have also found that the life cycles of our products are
difficult to estimate, primarily because they may vary according to the
particular application or vertical market segment. We believe that our future
success will depend upon our ability to continue to enhance our current product
line while we develop and introduce new products that keep pace with competitive
and technological developments. We also must introduce these products in a
timely manner to meet our customers' changing needs. These developments require
us to continue to make substantial product development investments. Because of
these and other market conditions, we can not be certain that we will be able to
make the technological improvements or the research investments necessary to
offer our products in a timely or effective manner.
We expect that new technologies will emerge as competition in the
telecommunications equipment industry increases and the need for higher and more
cost-effective bandwidth transmission expands. If alternatives to our thin film
filter-based products, such as products based on planar waveguide, fiber grating
or any other technologies, are adopted by our customers, our telecommunications
business would suffer.
The light interference pigments market is also susceptible to changing
technology and customer requirements. Growth in the demand for our
ChromaFlair(R) 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
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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.
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. These acquisitions and any future acquisitions
will expose us to increased risks and costs, including the following:
- failure to retain customers;
- integrating new operations and technologies;
- assimilating and retaining new personnel; and
- diverting financial and management resources from existing operations.
We may not be able to generate sufficient profits from any of these
acquisitions to offset the associated acquisition costs. We will also be
required to maintain uniform standards of quality and service, controls,
procedures and policies. Our failure to maintain any of these standards may hurt
relationships with customers,
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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(R) products may not achieve satisfactory market penetration.
OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT US.
The recent accelerated growth of our business has placed, and is expected
to continue to place, a strain on our limited personnel, management and other
resources. In particular, the growth of our telecommunications business related
to fiber optic networks and our light interference pigments business related to
security and value documents has required us to allocate significantly increased
amounts of manufacturing capabilities, personnel and other resources to those
markets. In addition, our ability to manage and allocate resources is
complicated by the number, diversity and complexity of our product lines. Our
management, personnel, systems, procedures and controls may be inadequate to
support our existing and future operations. If required to manage future growth,
the implementation of management systems can be time consuming and costly. In
order to manage future growth effectively, we will need to attract, train,
integrate, motivate, manage and retain employees successfully to continue to
improve our operational, financial and management systems.
WE MUST MANAGE OUR MANUFACTURING OPERATIONS AND FACILITIES EFFECTIVELY TO MEET
CHANGING CAPACITY REQUIREMENTS.
We currently manufacture all of our products at our facilities in Santa
Rosa, California, Hillend, Scotland, Atsugi, Japan and Rochester, New York. We
are currently experiencing manufacturing capacity constraints and we are in the
process of expanding our manufacturing capacity at some of these facilities. In
addition, many of our customers have requested that we build manufacturing
capabilities that are near or on their facilities to provide just-in-time
production capabilities.
If our plans to expand our manufacturing capacity are not implemented on a
timely basis, we could face production shortfalls. In addition, we may be
required to make additional capital investments in new or existing manufacturing
facilities. Rapid increases in production levels to meet unanticipated demand
could result in higher costs for components and subassemblies and higher
overtime costs and other expenses. These higher expenditures could lower our
profit margins. Further, if production is increased rapidly, there may be
decreased manufacturing yields, which may also lower our margins.
In order to meet forecasted demand, we will need to increase our
manufacturing capability for light interference pigments. We currently intend to
begin operating our third light interference pigment production machine in the
middle of 2000. In the past, we have experienced significant problems during the
initial phases of operating a new machine, which required us to take substantial
write-offs of inventory and incur substantial expenses to solve these problems.
If we encounter similar problems with this new machine, our production
capability and our operating results will suffer.
Many of our machines are the only manufacturing sources for particular
products and are running at or near capacity. We do not have plans to develop
redundancy for much of our production capability. Therefore, a breakdown or
catastrophic damage to certain machines would severely and adversely affect our
business. In addition, it can take up to two years to replace certain production
machines.
We are expanding our manufacturing capabilities and expending capital in
anticipation of a level of customer orders that may not be achieved. If demand
falls below our forecast, we could have excess
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production or excess capacity. Excess production could result in higher
inventories of our products. If we were unable to sell these inventories, we
would be forced to write off such inventories as obsolete products. Excess
manufacturing capacity could lead to higher production costs and lower margins.
We have in the past and may in the future experience difficulties in the
management of our manufacturing facilities located overseas because of the
distance from our headquarters and difference in time zone. To the extent that
we expand our overseas manufacturing capabilities, these issues will be
increased.
OUR OPERATING RESULTS MAY FLUCTUATE.
Our quarterly revenues and bookings are likely to fluctuate significantly
in the future due to a number of factors, many of which are outside our control.
Factors that could affect our revenues and bookings include the following:
- variations in the size or timing of orders and shipments of our products;
- new product introductions by competitors;
- delays in introducing new products or components;
- delays of orders forecasted by our customers;
- just in time manufacturing processes and consignment inventory for key
customers that may delay the scheduling of orders;
- delays in planned manufacturing capacity upgrades;
- delays by our customers in the completion of upgrades of
telecommunications infrastructure;
- variations in capital spending budgets of telecommunications service
providers; and
- delays in obtaining regulatory approval for commercial deployment of
certain telecommunications and other products.
A significant portion of our operating expenses are relatively fixed in
nature. Changes in revenue may cause significant fluctuations in our operating
results from quarter to quarter.
To achieve our revenue objectives, we depend on obtaining orders for
shipment in the same quarter. Furthermore, our agreements with our customers
generally do not contain binding purchase commitments and provide that our
customers may change delivery schedules and cancel orders within specified
timeframes without significant penalty. We generally recognize revenue upon
shipment of products to the customer except in the case of JDS Uniphase, where
we recognize revenue upon shipment by JDS Uniphase to their customers. Refusal
of customers or end users to accept shipped products, returns of shipped
products or delays or difficulties in collecting accounts receivable could
result in significant charges against income. We may be unable to obtain
sufficient orders in any quarter, or anticipate the cancellation or deferral of
such orders in a quarter.
We have experienced and expect to continue to experience seasonality in our
business. Our sales have been affected by a seasonal decrease in demand in the
last quarter of each calendar year, which coincides with the first quarter of
our fiscal year, due to year-end fluctuations in orders and operations of our
customers, a fewer number of workdays during the winter holiday season, and the
significant seasonality of consumer electronics products for which we provide
components. We expect this trend to continue, although other trends may emerge.
These trends, or other fluctuations in the timing of customer orders, may cause
quarterly or annual fluctuations.
WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS IN CERTAIN INDUSTRIES.
We believe that a substantial majority of our revenues will continue to be
derived from sales to a relatively small number of customers for the foreseeable
future. In addition, we believe that sales to these customers will be focused on
a small number of applications. The loss of a significant customer for any
reason
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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.
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
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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. Our officers and directors have non-compete
agreements that are effective in the case of a change of control and three
former employees of OPKOR also have non-compete agreements. Other than that,
none of our employees are bound by any non-competition agreements with us.
OUR PRODUCTS ARE SUBJECT TO GOVERNMENTAL AND INDUSTRY REGULATIONS,
CERTIFICATIONS AND APPROVALS.
The commercialization of our products may be delayed or made more costly
due to required government and industry approval processes. In the past, the
United States federal government has attempted to restrict the export of our
satellite-related products to certain foreign countries for reasons of national
security. Development of applications for our ChromaFlair(R) products may
require significant testing that could delay our sales. For example, certain
uses in cosmetics may be regulated by the Food and Drug Administration, which
has extensive and lengthy approval processes. Durability testing by the
automobile industry of our pigments used with automotive paints can take up to
three years. If we change a product for any reason including technological
changes or changes in the manufacturing process, prior approvals or
certifications may be invalid and we may need to go through the approval process
again. Additionally, some of our telecommunications products may need to obtain
Bellcore certification. This certification process can last six months or
longer. If we are unable to obtain these or other government or industry
certifications in a timely manner, or at all, our results could be adversely
affected.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We expect sales to customers outside of the United States to continue to
represent a significant percentage of our revenues for the foreseeable future.
International sales are subject to a number of risks, including the following:
- changes in foreign government regulations and standards;
- export license requirements, tariffs, taxes and other trade barriers;
- requirements or preferences of foreign nations for domestic products;
- fluctuations in currency exchange rates relative to the U.S. dollar;
- difficulty in collecting accounts receivable;
- difficulty in managing foreign operations; and
- political and economic instability.
If our customers or end users of our products are impacted by currency
devaluations or general economic crisis, 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
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reduce the reported results of those operations. In addition, our export sales
could be subject to competitive price pressures if the U.S. dollar was to
strengthen compared to the currency of foreign competitors.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS.
Our success and ability to compete are significantly dependent on our
proprietary technology. We rely on a combination of patent, trade secret,
copyright and trademark laws and contractual restrictions to establish and
protect proprietary rights in our products. Our pending patent applications may
not be granted. Even if they are granted, the claims covered by the patents may
be reduced from those included in our applications. Any patent might be subject
to challenge in court and, whether or not challenged, might not be broad enough
to prevent third parties from developing equivalent technologies or products. We
have entered into confidentiality and invention assignment agreements with our
employees, and we enter into non-disclosure agreements with some of our
suppliers, distributors and customers so as to limit access to and disclosure of
our proprietary information. These statutory and contractual arrangements may
not prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies. In addition, the
laws of some foreign countries might not protect our products or intellectual
property rights to the same extent as do the laws of the United States.
Protection of our intellectual property might not be available in every country
in which our products might be manufactured, marketed or sold.
WE MAY BE SUBJECT TO FUTURE CLAIMS OF INFRINGEMENT OF INTELLECTUAL PROPERTY
RIGHTS OF THIRD PARTIES.
We may in the future receive notices of claims of infringement of other
parties' patent, trademark, copyright and other intellectual property rights.
Any such claims, even those without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources or
cause us to enter into unfavorable royalty or licensing agreements. The
assertion of such claims could have a material adverse effect on our business.
OUR INDUSTRIES ARE HIGHLY COMPETITIVE WITH MANY ESTABLISHED COMPETITORS, WHO MAY
INCLUDE OUR CUSTOMERS, STRATEGIC ALLIANCE PARTNERS AND SUPPLIERS.
The markets for our products are intensely competitive and characterized by
rapidly changing technology. We currently experience competition from numerous
companies in each of the markets in which we participate.
In the fiber optic communications market, we face competition from E-Tek
Dynamics, Inc. and DiCon Fiberoptics, Inc., as well as other WDM component
vendors for the sale of WDM products. In the optical switch markets, we will
compete with these same companies, and potentially with JDS Uniphase, our
strategic partner for our WDM business and our merger partner, in the event the
merger is not consummated.
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(R) 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(R) 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.
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<PAGE> 21
These companies may develop or acquire additional competitive products or
technologies in the future and thereby reduce or cease their purchases from us.
Additionally, we compete with large, diversified companies such as BASF and
Merck KGaA that are also our suppliers. We may also face competition in the
future from these and other parties that develop fiber optic components based
upon the technologies similar to or different from the technologies employed by
us.
We expect competition in general to intensify substantially, particularly
in the expanding telecommunications and special effects pigments markets. We
further expect competition to be broadly based on varying combinations of
manufacturing capacity, ability to deliver products on time, and technical
features, each of which may render our existing products non-competitive,
obsolete or unmarketable. The development of new high-precision products is a
complex and uncertain process requiring high levels of innovation and highly
skilled assembly and manufacturing processes, as well as the accurate
anticipation of technological and market trends. Many of our competitors have
substantially greater financial, technical, manufacturing, marketing and other
resources with which to develop new technologies and to promote their products.
We may be unable to identify, develop, manufacture, market or support new or
enhanced products successfully or on a timely basis. We also may be unable to
respond effectively to product announcements by competitors, technological
changes or emerging industry standards. We also face competition from numerous
smaller companies.
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
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<PAGE> 22
to spend substantial amounts of money to contain and monitor the contamination.
Although we believe that our current manufacturing operations comply in all
material respects with applicable environmental laws and regulations,
environmental legislation has been enacted and may in the future be enacted or
interpreted to create environmental liability with respect to our facilities or
operations. We cannot be certain that environmental claims will not be asserted
against us in the future.
SOME ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON STOCK.
The Board of Directors has the authority to issue up to 100,000 shares of
preferred stock and to determine the rights, preferences and privileges of those
shares without any further vote or action by the stockholders. Of these 100,000
shares, 10,000 shares are currently designated "Series A Preferred Stock" in
connection with our stockholders' rights plan described below, and 15,000 shares
were designated "Series B Cumulative Convertible Preferred Stock," of which
6,650 shares remain available for future issuance. The rights of the holders of
common stock may be adversely affected by the rights of the holders of any
preferred stock that may be issued in the future. Some provisions of our
certificate of incorporation and bylaws could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
common stock. These include provisions that limit the ability of stockholders to
take action by written consent, call special meetings, remove a director for
cause, amend the by-laws or approve a merger with another company.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15.0% or more of the
corporation's voting stock.
We have a stockholders' rights plan, commonly referred to as a "poison
pill," that makes it difficult, if not impossible, for a person to acquire
control of us without the consent of our Board of Directors.
ITEM 2. PROPERTIES
Our corporate headquarters and principal manufacturing and research and
development facilities are located on a campus in Santa Rosa, California that we
own. 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 future development. 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.
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<PAGE> 23
THE FOLLOWING TABLE SETS FORTH CERTAIN INFORMATION CONCERNING
OUR PRINCIPAL FACILITIES.
<TABLE>
<CAPTION>
NO. OF LEASED/ TOTAL SITE
LOCATION BUILDINGS OWNED SQ. FT. (ACRES) USE
-------- --------- ------- ------- ------- ---
<S> <C> <C> <C> <C> <C>
Santa Rosa, CA...... 13 Owned(1) 490,000 75 Corporate offices,
manufacturing, engineering and
research and development
facilities
Santa Rosa, CA...... 1 Leased 23,000 -- Polymer optical products
administrative offices and
manufacturing facilities
Santa Rosa, CA...... 3 Leased 70,000 -- Warehousing, research and
development, and miscellaneous
facilities
Fremont, CA......... 1 Leased 5,000 -- Telecommunications product
development laboratory
Hillend, Scotland... 1 Owned 56,000 16 OCLI Optical Coating
Laboratory, Ltd.
administrative offices,
manufacturing and research and
development facilities
Hillend, Scotland... 1 Leased 9,000 -- OCLI Optical Coating
Laboratory, Ltd. 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>
- ---------------
(1) Two of the owned buildings are collateralized under two mortgage loan
agreements in the amount of $2.2 million and $2.5 million with interest
rates of 8.0% and 7.5% and monthly payments of $25,000 and $28,000
respectively through fiscal year 2011.
Management believes that our facilities are adequate for our current level
of business and our near-term growth requirements.
Our Telecommunications Products segment utilizes 35,000 square feet of our
owned property in Santa Rosa, California and the leased property in Fremont,
California. Our Light Interference Pigments segment utilizes 93,000 square feet
of our owned property in Santa Rosa, California. The remainder of our properties
are utilized by our Applied Photonics segment and by our corporate
administrative functions.
ITEM 3. LEGAL PROCEEDINGS
In March 1997, Optical Corporation of America (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
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<PAGE> 24
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.
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 loan.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the three months ended October 31, 1999.
EXECUTIVE OFFICERS
The following table sets forth certain information of the executive
officers of OCLI as of October 31, 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
Joseph Zils............... 44 Vice President, Legal Counsel and Corporate Secretary of
OCLI, and President and Chief Financial Officer of Flex
</TABLE>
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
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<PAGE> 25
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. From March 1997 to March 1999, Dr. Cumbo was an
operations manager in our telecommunications division and from April 1996 to
February 1997, Dr. Cumbo managed our corporate research department. Prior to
joining us, Dr. Cumbo spent seven ears 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 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.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 can be found in the definitive Proxy Statement relating to
the Company's 2000 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
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<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market under the
symbol OCLI. The table below sets forth the high and low prices of the Company's
common stock during the two most recent fiscal years ended October 31, 1999 and
1998.
<TABLE>
<CAPTION>
1Q 2Q 3Q 4Q FY
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
1999
High.......................................... 30 64 1/8 88 106 7/8 106 7/8
Low......................................... 16 7/8 25 55 3/8 59 1/2 16 7/8
1998
High........................................ 15 7/8 15 3/8 19 3/4 17 15/16 19 3/4
Low......................................... 12 1/2 12 1/2 14 5/8 15 3/16 12 1/2
</TABLE>
DIVIDEND INFORMATION
Since June 1991, the Company has paid a semiannual cash dividend of $.06
per share on its common stock.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
There were 669 holders of record of the Company's common stock as of
December 15, 1999.
ITEM 6. SELECTED FINANCIAL DATA
Years ended October 31, 1999, 1998, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1999 1998(1) 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................................ $347,145 $255,624 $217,829 $189,195 $169,417
Net income.............................. $ 23,223 $ 7,339 $ 7,125 $ 5,196 $ 7,391
Net income applicable to common stock... $ 23,223 $ 7,089 $ 6,432 $ 4,236 $ 6,929
Net income per share, basic............. $ 1.77 $ .62 $ .63 $ .44 $ .76
Net income per share, diluted........... $ 1.61 $ .59 $ .60 $ .41 $ .73
Weighted average number of shares used
to compute basic earnings per share... 13,101 11,388 10,191 9,629 9,144
Weighted average number of shares used
to compute diluted earnings per
share................................. 14,460 11,999 10,673 10,301 9,510
Cash dividend paid on common stock...... $ 1,564 $ 1,355 $ 1,199 $ 1,153 $ 1,083
Cash dividend paid per share of common
stock................................. $ .12 $ .12 $ .12 $ .12 $ .12
Working capital......................... $163,070 $ 75,130 $ 42,618 $ 38,087 $ 28,015
Total assets............................ $334,633 $213,586 $183,493 $172,771 $169,834
Long-term debt.......................... $ 52,411 52,373 $ 40,975 $ 45,788 $ 47,267
Stockholders' equity.................... $234,689 $102,223 $ 86,963 $ 79,559 $ 73,894
Common stockholders' equity per share... $ 16.45 $ 8.46 $ 7.68 $ 6.99 $ 6.59
Number of employees..................... 1,459 1,554 1,515 1,362 1,407
</TABLE>
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<PAGE> 27
- ---------------
(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 its MMG
division and recorded restructuring charges of $586,000 pursuant to a plan
of restructuring approved in the fourth quarter of 1998.
Our fiscal year ends on the Sunday closest to the last day in October. See
Note 2 of the Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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. We operate in three reportable segments:
Telecommunications Products, Light Interference Pigments and Applied Photonics.
See Note 18 of Notes to Consolidated Financial Statements.
TELECOMMUNICATIONS PRODUCTS
The Telecommunications Products segment manufactures and sells optical
components for fiber optic communications systems. The main application for
these products is to control the reflection, transmission and absorption of
lightwave signals that are transmitted through fiber optic cables. Current
products include Wavelength Division Multiplexing (WDM) components, Optical
Add-Drop Modules and Gain Flattening Components.
LIGHT INTERFERENCE PIGMENTS
Our Light Interference Pigments segment manufactures and sells color
shifting light interference 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.
APPLIED PHOTONICS
Our Applied Photonics segment manufactures and sells optical components
into three key markets:
DISPLAY. Includes 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.
AEROSPACE AND INSTRUMENTATION. Includes optical components, including
precision polymer optics, used in defense and aerospace products, automated data
collection products, and medical, scientific and analytical instruments.
OFFICE AUTOMATION. Includes optical components, including precision polymer
optics, for copiers, scanners, printers and other office products.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Revenues for fiscal 1999 were $347.1 million, an increase of
$91.5 million or 36% over revenues of $255.6 million in fiscal 1998. In the
first quarter of fiscal 1999, we sold the assets of our
27
<PAGE> 28
manufacturing subsidiary in Germany (MMG) and, in the second quarter of fiscal
1999, we purchased an optical design and manufacturing company, OPKOR Inc.
Adjusted for OPKOR in fiscal 1999 and MMG in fiscal 1998, pro forma revenues for
fiscal 1999 would have increased $102.5 million or 42% over pro forma revenues
of $243.4 million in fiscal 1998. The pro forma revenue increase in fiscal 1999
over fiscal 1998 is due to increased volumes in both of our business segments.
GROSS PROFIT. Gross profit, as a percent of revenue, was 31.0% in fiscal
1999 compared to 33.6% in fiscal 1998. Adjusted for OPKOR in fiscal 1999 and MMG
in fiscal 1998, pro forma gross profit would have been $107.6 million or 31.1%
of revenue in fiscal 1999 compared to $83.0 million or 34.1% of revenue in
fiscal 1998. The gross margin decrease in 1999 was primarily due to increased
sales of WDM products which have lower than Company average gross margins.
RESEARCH AND DEVELOPMENT. Research and development expenditures for fiscal
1999 were $26.3 million or 7.6% of revenues compared to research and development
expenditures of $17.1 million or 6.7% of revenues for fiscal 1998. The fiscal
1999 research and development increase is primarily due to telecommunications
product development.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses for fiscal
1999 were $41.6 million compared to $43.9 million in fiscal 1998. Adjusted for
OPKOR in fiscal 1999 and MMG in fiscal 1998, selling and administrative expenses
would have been $41.0 million, an increase of $3.4 million or 9.0%, over pro
forma fiscal 1998 selling and administrative expenses of $37.6 million. The pro
forma increase is primarily due to increased sales and marketing expenses in
fiscal 1999, primarily in connection with our light interference products.
PROGRAM SETTLEMENT. In the fourth quarter of fiscal 1999, a development
program in the display market was terminated by a customer. We recorded a $2.7
million credit to operating expenses which constitutes the settlement amount,
net of program specific assets that were written off as a result of the program
termination.
LOSS ON ASSET DISPOSAL. In the second quarter of fiscal 1999, we sold one
of our continuous coating machines that had previously been taken out of service
due to excess capacity. A loss of $934,000 is reflected in fiscal 1999 in
connection with this sale.
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, which constitutes the settlement amount net of related legal
expenses, is reflected in fiscal 1999 operating expenses.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES. In the first quarter of fiscal
1999, we purchased the 40% interest in Flex held by SICPA for $30.0 million in a
purchase transaction. In connection with the purchase, a $2.9 million charge for
in-process research and development is reflected in our operating results for
fiscal 1999.
AMORTIZATION OF INTANGIBLES. We recorded amortization of intangibles of
$2.2 million in fiscal 1999 compared to $805,000 in 1998. Adjusted for OPKOR in
fiscal 1999 and MMG in fiscal 1998, our intangible amortization would have been
$1.7 million in fiscal 1999 and $421,000 in fiscal 1998. The pro forma increase
in fiscal 1999 amortization results from amortization of goodwill and
identifiable intangibles in connection with the purchase of SICPA's interest in
Flex.
INCOME FROM OPERATIONS. As a result of the foregoing changes in revenue,
gross profit and operating expenses, our income from operations in fiscal 1999
was $39.3 million compared to $14.9 million in 1998.
INTEREST INCOME AND EXPENSE. Interest income was $3.3 million in fiscal
1999 compared to $769,000 in fiscal 1998. Net interest expense in fiscal 1999
was $3.8 million compared to $3.6 million in fiscal 1998. Fiscal 1998 net
interest expense is the net result of interest incurred of $4.4 million net of
interest capitalized of $631,000, compared to fiscal 1998 interest incurred of
$4.3 million net of interest capitalized of $697,000.
PROVISION FOR INCOME TAXES. Our effective tax rate was 39.0% in fiscal 1999
compared to 27.7% in fiscal 1998. The fiscal 1999 effective tax rate reflects
the benefit of state tax credits arising from the purchase of new manufacturing
equipment and federal and state research credits offset by the provision impact
of the
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<PAGE> 29
in-process research and development which was treated as a permanent difference
for tax purposes. Without the tax effect of the in-process research and
development charge, our 1999 effective tax rate would have been 36.3%. The
significantly lower than combined federal and state statutory tax rate in 1998
is primarily due to the recognition of tax benefits for prior year losses in
Germany that previously had not been tax benefited and were realized upon the
sale of MMG.
MINORITY INTEREST. In fiscal 1999, we recorded minority interest of
$491,000 compared to minority interest of $1.4 million in fiscal 1998. The
fiscal 1999 decrease is primarily due to the purchase of the remaining interest
in Flex in the first quarter of fiscal 1999.
NET INCOME. The Company had net income of $23.2 million in fiscal 1999
compared to $7.3 million in fiscal 1998. In fiscal 1998, dividends of $250,000
were accrued on outstanding Convertible Redeemable Preferred Stock. As the
Convertible Redeemable Preferred Stock was converted to common stock in fiscal
1998, we did not incur preferred dividends in fiscal 1999.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES. Revenues for fiscal 1998 were $255.6 million, an increase of
$37.8 million or 17% over revenues of $217.8 million for fiscal 1997. The fiscal
1998 revenue increase is primarily due to increased sales volumes in our
telecommunications segment.
GROSS PROFIT. Gross profit, as a percent of revenue, was 33.6% in fiscal
1998 compared to 34.3% in fiscal 1997. The gross margin decrease in fiscal 1998
was primarily due to increased sales of WDM products which have lower than
Company average gross margins.
RESEARCH AND DEVELOPMENT. Research and development expenditures for fiscal
1998 were $17.1 million or 6.7% of revenues compared research and development
expenditures of $14.9 million or 6.8% of revenues for fiscal 1997. The fiscal
1998 dollar increase is primarily due to product and process development for
telecommunications products and for product development in the display market.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses for 1998
were $43.9 million, an increase of $1.1 million, or 2.5%, over 1997 selling and
administrative expenses of $42.8 million. This increase is primarily due to
increases in legal expenses in 1998 primarily associated with a lawsuit with OCA
(settled in fiscal 1999) and a patent infringement suit with BASF (settled in
fiscal 1998). We were the plaintiff in both lawsuits. See ITEM 2, LEGAL
PROCEEDINGS.
IMPAIRMENT LOSS. In the fourth quarter of 1998, we made the decision to
dispose of our manufacturing subsidiary in Germany (MMG) in order to focus more
resources in other markets. In connection with negotiation of the sale,
independent appraisals were made of the assets and liabilities of MMG and an
impairment loss of $8.6 million was recorded to reduce the carrying amount of
MMG's assets to fair value net of disposal costs on a liquidation basis. In
early fiscal 1999, Glas Trosch, a privately held glass company in Switzerland
purchased the business and the operating assets (inventory, equipment,
furniture, two buildings, workforce, customer lists and other related
intangibles) of MMG. See ITEM 1, BUSINESS -- ACQUISITIONS, INVESTMENTS,
DIVESTITURES AND STRATEGIC ALLIANCES.
RESTRUCTURING EXPENSES. During fiscal 1998, we finalized and announced to
affected individuals, a restructuring plan for our administrative and sales
offices in Europe. Pursuant to this plan, we recorded $586,000 of severance and
exit costs.
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 (prior to disposition) and our precision
polymer optics operation.
INCOME FROM OPERATIONS. As a result of the foregoing changes in revenue,
gross profit and operating expenses, our income from operations in fiscal 1998
was $14.9 million compared to $15.9 million in fiscal 1997.
29
<PAGE> 30
INTEREST INCOME AND EXPENSE. 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 is 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 primarily due to new equipment in process for the
manufacture of telecommunications products.
PROVISION FOR INCOME TAXES. Our effective tax rate was 27.7% in fiscal 1998
compared to 37.3% in fiscal 1997. The significantly lower than combined federal
and state statutory tax rate in fiscal 1998 is primarily due to the recognition
of tax benefits for prior year losses in Germany that previously had not been
tax benefited and were realized upon the sale of MMG. In both 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 than combined federal and state statutory 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 Products accruing to its 40%
shareholder and the portion of the operating results of OCLI Asia attributable
to its Japanese partner. During fiscal 1998, we purchased the share of OCLI Asia
owned by our Japanese partner. See ITEM 1, BUSINESS -- ACQUISITIONS,
INVESTMENTS, DIVESTITURES AND STRATEGIC ALLIANCES.
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 fiscal 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.
PRICING. Our revenues were not materially affected by price increases or
decreases in fiscal 1999, 1998 or 1997.
BUSINESS SEGMENT RESULTS
TELECOMMUNICATIONS PRODUCTS
Revenues for our Telecommunications Products segment increased 156% or
$83.8 million to $137.6 million in fiscal 1999 from $53.8 million in fiscal 1998
and increased 181% or $34.4 million in fiscal 1998 from $19.4 million in fiscal
1997. The revenue increases result primarily from increased demand for WDM
products.
Income from operations for this segment increased $7.2 million or 102% to
$14.3 million in fiscal 1999 from $7.1 million in fiscal 1998 and increased 281%
or $4.3 million from $2.2 million in 1997. The increase in income from
operations results from increased revenues in fiscal 1999 and 1998 and volume
efficiencies realized in fiscal 1999.
LIGHT INTERFERENCE PIGMENTS
Revenues for our Light Interference Pigments segment increased 49% or $21.3
million to $64.8 million in fiscal 1999 from $43.4 million in fiscal 1998 and
increased 9% or $3.6 million in fiscal 1998 from 39.8 million in fiscal 1997.
Income from operations for this segment increased $1.6 million or 27.5% to
$7.5 million in fiscal 1999 from $5.9 million in fiscal 1998 and increased $4.4
million or 281% in fiscal 1998 from $1.5 million in fiscal 1997. 1999 income
from operations for this segment includes a $2.9 million charge for in-process
research and development in connection with the purchase of the minority
interest in our Flex subsidiary. Without this charge, fiscal 1999 pro forma
income from operations would have increased 77% or $4.5 million in fiscal 1999.
The increase in income from operations results from increased revenues and
volume efficiencies.
30
<PAGE> 31
APPLIED PHOTONICS
Revenues for our Applied Photonics segment were $144.8 million in fiscal
1999, $158.3 million in fiscal 1998 and $158.9 million in fiscal 1997. Adjusted
for OPKOR in fiscal 1999 and MMG in fiscal 1998, fiscal 1999 revenues would have
decreased $2.6 million or 1.8% from fiscal 1998 revenues of $146.1 million. The
pro forma decrease in fiscal 1999 is primarily due to decreased sales of
aerospace and instrumentation products. Revenues in fiscal 1998 of $158.3
million decreased $537,000 from fiscal 1997 revenues of $158.9 million. The 1998
decrease results from increased sales of aerospace and instrumentation products
of $5.1 million and increased sales of display products of $299,000 offset by
decreased office automation revenues of $5.9 million.
Income from operations for the Applied Photonics segment was $12.3 million
in fiscal 1999, $12.9 million in fiscal 1998 and $9.8 million in fiscal 1997.
Adjusted for the effect of OPKOR, the program settlement and the loss on asset
disposal in fiscal 1999 and for the effect of MMG in fiscal 1998, fiscal 1999
pro forma income from operations for this segment would have increased $2.4
million or 18% over fiscal 1998 pro forma income from operations of $13.8
million. Fiscal 1998 income from operations for this segment increased $3.0
million or 31% over fiscal 1997 income from operations of $9.8 million. The
improvements in income from operations result primarily from improved yields and
manufacturing efficiencies.
CORPORATE AND ELIMINATIONS
Income from operations included in corporate and eliminations is comprised
primarily of the $3.0 million legal settlement in fiscal 1999; the $8.6 million
impairment loss, the $586,000 impairment loss and unallocated legal expenses in
fiscal 1998; and royalties for licensing of patents paid to the parent
corporation in fiscal 1999, 1998 and 1997.
FINANCIAL CONDITION AND LIQUIDITY
On May 26, 1999, we completed a public offering for the sale of 1,350,000
shares of OCLI common stock. The proceeds of the offering, net of underwriting
discounts and expenses, were $88.9 million.
In 1999, our cash and cash equivalents and short-term investments increased
by $86.7 million to $127.6 million. Net cash provided by operations during
fiscal 1999 was $62.8 million, proceeds from exercise of stock options of $5.4
million and proceeds from the aforementioned public offering were $88.9 million.
These increases were offset by cash used for capital expenditures, net of
proceeds from assets sold, of $24.0 million, cash used for the purchase of
SICPA's interest in Flex of $30.0 million, cash used for the purchase of OPKOR
of $355,000, debt repayments, net of borrowings, of $13.8 million, payment of
dividends of $1.6 million and exchange rate variances of $627,000. At fiscal
year end 1999, we had cash and cash equivalents totaling $15.7 million and
short-term investments of $111.8 million. Short-term investments are comprised
of commercial paper with original maturities of greater than three months and
less than twelve months. In addition, we have available domestically a $25.0
million revolving line of credit and separate credit arrangements in place for
the operating requirements of our subsidiaries in Scotland and Japan.
During 1999, our working capital, excluding cash and cash equivalents and
short-term investments, increased $1.3 million, primarily due to repayment of
current maturities on long-term debt and notes payable offset by decreased
accounts receivable and an increase in other current liabilities. The accounts
receivable decrease is primarily due to the collection of MMG accounts
receivable.
At October 31, 1999, we had outstanding capital commitments of
approximately $9.5 million. We expect to fund these commitments from operations.
We believe that cash and cash equivalents and short-term investments on
hand at October 31, 1999, cash anticipated to be generated from future
operations and available funds from revolving credit arrangements will be
sufficient for us to meet our working capital needs, capital expenditures, debt
service requirements and payment of dividends as declared for at least the next
twelve months.
31
<PAGE> 32
OTHER MATTERS
IMPACT OF YEAR 2000. The "Year 2000 Issue" is the result of computer
programs that were written using two digits rather than four digits to define
the applicable year. If our computer programs with date-sensitive functions were
not Year 2000 compliant, they may recognize a date using "00" as the Year 1900
rather than the Year 2000. This could result in system failures or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities. We have not experienced any business
difficulties resulting from the Year 2000 Issue and no customers or suppliers
have notified us of any Year 2000 related issues that may affect our business,
however, we cannot provide assurance that we will not encounter business
difficulties resulting from the Year 2000 Issue in the future.
We completed our Year 2000 remediation in three components which dealt
with: internal business software; internal non-financial software and imbedded
chip technology and external noncompliance by customers and suppliers. The
following is a summary of the remediation steps that were completed in order to
avoid business disruptions due to the Year 2000 Issue.
INTERNAL BUSINESS SOFTWARE. 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 had
indicated was Year 2000 compliant. Total hardware, software and installation
cost of the ERP System was $4.0 million which had all been spent prior to the
end of fiscal 1999. The ERP System was fully implemented before the end of the
fiscal year. In addition, some of our ancillary financial systems were upgraded
prior to the end of the fiscal year.
INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. We took an
inventory of our non-financial software and equipment that we felt may be
affected by the Year 2000 and identified the items that were critical to our
operations. We tested those items that we felt were critical to our operations
and performed remediation steps such as module replacement, calibration
adjustment and reprogramming as necessary. We spent approximately $350,000 for
testing and remediation of our non-financial software and imbedded chip
technology, all of which was expensed in fiscal 1999.
EXTERNAL NON-COMPLIANCE BY CUSTOMERS AND SUPPLIERS. We identified and
contacted our critical suppliers, service suppliers and contractors to determine
if our interface systems were vulnerable to those third parties' failure to
remediate their own Year 2000 issues. By the end of fiscal 1999, all of our
significant suppliers, service suppliers and contractors had indicated that they
had completed their Year 2000 remediation plans.
ACQUISITIONS, INVESTMENTS, DIVESTITURES AND STRATEGIC ALLIANCES
See ITEM 1, BUSINESS -- ACQUISITIONS, INVESTMENTS, DIVESTITURES AND
STRATEGIC ALLIANCES.
ITEM 7A. 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, short-term investments and
long-term debt obligations. Cash equivalents are readily convertible to cash and
have maturity dates of three months or less. Short-term investments are also
readily convertible to cash with original maturity dates of greater than three
months and less than twelve months. Due to the short maturities of cash
equivalents and short-term investments, carrying amounts approximate fair value.
By policy, cash equivalents and short-term investments are limited to
obligations of the U.S., U.K., German and Japanese governments, Prime Commercial
Paper, Bank Repurchase Agreements collateralized by direct obligations of the
U.S., U.K., German or Japanese governments and Savings Accounts with commercial
banks. Amounts deposited with commercial banks are also limited in amount by
financial institutions. We do not use derivatives or equity investments for cash
investment purposes.
32
<PAGE> 33
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.
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 at October 31, 1999.
<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
-------- ------ ------ ------ ------ ---------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents
Fixed rate......... $ 12,293 $ 12,293 $ 12,293
Average rate....... 4.89% 4.89%
Short-term
investments
Fixed rate......... $111,833 $111,833 $111,833
Average rate....... 5.30% 5.30%
Long-term debt
Fixed rate......... $ 2,517 $8,573 $7,675 $5,842 $5,875 $24,446 $ 54,928 $ 55,264
Average rate....... 8.78% 3.84% 7.43% 6.98% 6.98% 7.02% 6.65%
</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 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 its 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 the us and each other. With the exception of the yen
contracts in the table below, we have not entered into contracts to hedge any of
these risks and we do not consider its net exposure on these items to be
material. We will, from time to time, enter into currency contracts (such as
forwards or options) in order to manage the currency risk on open balances or
commitments.
We do, from time to time, enter 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. In
addition, we may enter into interest rate swaps or similar instruments in order
to reduce interest rate risk on its debt instruments. We do not enter into
derivatives for trading purposes.
At October 31, 1999, we had outstanding foreign currency forward contracts
for the principal and interest payments under an intercompany note receivable
denominated in British Pounds and for intercompany purchases in U.S. dollars
identified with customer delivery commitments in Japanese yen.
33
<PAGE> 34
The following table provides information about our foreign exchange forward
contracts at October 31, 1999.
<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
------- ----- ----- ----- ----- ---------- ------- -----
(IN THOUSANDS EXCEPT CONTRACT RATES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Japanese yen:
Notional amount........... $ 1,537 $ 1,537 $ 33
Average contract rate
(foreign
currency/USD)........ 105.61 105.61
Pound sterling:
Notional amount......... $ 370 $ 368 $ 366 $ 365 $ 367 $ 740 $ 2,576 $(115)
Average contract rate
(foreign
currency/USD)........ 0.64 0.64 0.65 0.65 .64 0.64 0.64
</TABLE>
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 fiscal year 2001 with earlier application encouraged. We are
currently evaluating FAS 133 to determine what effect it would have on our
consolidated financial statements.
34
<PAGE> 35
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL INFORMATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors of Optical Coating
Laboratory, Inc............................................. 36
Report of Independent Auditors of Flex Products, Inc........ 37
Consolidated Balance Sheets as of October 31, 1999 and
1998...................................................... 38
Consolidated Statements of Income for the years ended
October 31, 1999, 1998 and 1997........................... 39
Consolidated Statements of Cash Flows for the years ended
October 31, 1999, 1998 and 1997........................... 40
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended October 31, 1999,
1998 and 1997............................................. 42
Notes to Consolidated Financial Statements.................. 43
</TABLE>
35
<PAGE> 36
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, 1999
and 1998, 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, 1999. 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
year ended October 31, 1997, whose total revenues represent 18% of consolidated
revenues for the year ended October 31, 1997. The financial statements of Flex
Products, Inc. for the year ended October 31, 1997, 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1999 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
December 15, 1999
36
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Flex Products, Inc.
Santa Rosa, California
We have audited the statements of operations, stockholders' equity and cash
flows of Flex Products, Inc. (the "Company"), a joint venture of Optical Coating
Laboratory, Inc. and SICPA Holding S.A., for the year ended November 2, 1997.
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 results of the operations and the cash flows of
Flex Products, Inc. for the year ended November 2, 1997 in conformity with
generally accepted accounting principles.
KPMG LLP
San Francisco, California
November 26, 1997
37
<PAGE> 38
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 15,734 $ 40,880
Short-term investments.................................... 111,833
Accounts receivable, net of allowance for doubtful
accounts of $2,116 and $1,831........................... 35,248 38,585
Inventories............................................... 25,899 25,233
Income taxes receivable................................... 1,250
Deferred income tax assets................................ 6,543 9,311
Other current assets...................................... 2,868 1,822
-------- --------
Total Current Assets...................................... 199,375 115,831
OTHER ASSETS
Goodwill.................................................. 16,525 910
Deferred income tax assets................................ 384 716
Property, plant and equipment held for sale............... 361 3,183
Other assets.............................................. 12,287 3,241
PROPERTY, PLANT AND EQUIPMENT
Land and improvements..................................... 9,093 9,116
Buildings and improvements................................ 38,054 36,171
Machinery and equipment................................... 135,698 123,261
Construction-in-progress.................................. 17,337 12,722
-------- --------
200,182 181,270
Less accumulated depreciation............................. (94,481) (91,565)
-------- --------
Property, plant and equipment-net....................... 105,701 89,705
-------- --------
Total Assets....................................... $334,633 $213,586
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 10,527 $ 8,423
Accrued expenses.......................................... 8,655 9,935
Accrued compensation expenses............................. 12,887 10,365
Income taxes payable...................................... 671 708
Current maturities on long-term debt...................... 2,517 6,026
Notes payable............................................. 4,483
Deferred revenue.......................................... 1,048 761
-------- --------
Total Current Liabilities.......................... 36,305 40,701
NONCURRENT LIABILITIES
Accrued postretirement health benefits and pension
liabilities............................................. 2,315 2,241
Deferred revenue.......................................... 815
Deferred income tax liabilities........................... 8,098 3,528
Long-term debt............................................ 52,411 52,373
Minority interest......................................... 12,520
Commitments and contingencies (Notes 15 and 18)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 30,000,000
shares; issued and outstanding 14,262,000 and 12,087,000
shares.................................................. 143 121
Paid-in capital........................................... 181,309 69,993
Retained earnings......................................... 53,610 31,951
Accumulated other comprehensive income.................... (373) 158
-------- --------
Stockholders' Equity.................................... 234,689 102,223
-------- --------
Total Liabilities and Stockholders' Equity......... $334,633 $213,586
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 39
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Revenues................................................... $347,145 $255,624 $217,829
Cost of sales............................................ 239,582 169,670 143,207
-------- -------- --------
Gross Profit..................................... 107,563 85,954 74,622
COSTS AND EXPENSES
Operating Expenses:
Research and development.............................. 26,258 17,137 14,903
Selling and administrative............................ 41,572 43,926 42,836
Impairment loss....................................... 8,628
Restructuring expenses................................ 586
Program settlement, net............................... (2,696)
Loss on asset disposal................................ 934
Legal settlement, net................................. (2,960)
In-process research and development charges........... 2,906
Amortization of intangibles........................... 2,236 805 936
-------- -------- --------
Total Operating Expenses......................... 68,250 71,082 58,675
-------- -------- --------
Income from Operations........................... 39,313 14,872 15,947
Nonoperating Income (Expense):
Interest income....................................... 3,344 769 461
Interest expense, net................................. (3,768) (3,615) (4,030)
-------- -------- --------
EARNINGS
Income before Provision for Income Taxes and Minority
Interest.............................................. 38,889 12,026 12,378
Provision for income taxes............................... 15,175 3,336 4,622
Minority interest........................................ 491 1,351 631
-------- -------- --------
Net Income....................................... 23,223 7,339 7,125
Dividend on convertible redeemable preferred stock....... 250 693
-------- -------- --------
Net Income Applicable to Common Stock............ $ 23,223 $ 7,089 $ 6,432
======== ======== ========
Net Income Per Share, Basic.............................. $ 1.77 $ 0.62 $ 0.63
======== ======== ========
Net Income Per Share, Diluted............................ $ 1.61 $ 0.59 $ 0.60
======== ======== ========
Weighted average number of common shares used to compute
basic earnings per share.............................. 13,101 11,388 10,191
======== ======== ========
Weighted average number of common shares used to compute
diluted earnings per share............................ 14,460 11,999 10,673
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE> 40
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATIONS
Cash Flows From Operations:
Cash received from customers.............................. $ 251,153 $ 213,634 $ 194,375
Interest received......................................... 1,380 684 455
Cash paid to suppliers and employees...................... (185,506) (185,268) (165,033)
Interest paid............................................. (4,067) (3,112) (5,345)
Income taxes paid, net of refunds......................... (198) (572) (4,316)
--------- --------- ---------
Net Cash Provided By Operations.................... 62,762 25,366 20,136
INVESTMENTS
Cash Flows From Investments:
Purchase of plant and equipment........................... (29,913) (16,341) (17,231)
Purchase of minority shareholder's interest in
OCLI-Asia............................................... (738)
Purchase of minority shareholder's interest in Flex
Products, Inc........................................... (30,035)
Purchase of Opkor, Inc.................................... (355)
Proceeds from sale of equipment........................... 5,916
--------- --------- ---------
Net Cash Used For Investments...................... (54,387) (17,079) (17,231)
FINANCING
Cash Flows From Financing:
Increase in short term investments........................ (111,833)
Proceeds from stock offering.............................. 88,920
Proceeds from long-term debt and notes payable............ 2,525 46,254 5,422
Proceeds from exercise of stock options................... 5,386 7,321 2,247
Investment by minority interest holder.................... 1,440
Repayment of long-term debt and notes payable............. (13,928) (32,913) (10,711)
Repayment of note to minority interest holder, net of
amounts borrowed........................................ (2,400) (1,801) (76)
Payment of dividend on preferred stock.................... (208) (693)
Payment of dividend on common stock....................... (1,564) (1,355) (1,199)
--------- --------- ---------
Net Cash Provided By (Used For) Financing.......... (32,894) 17,298 (3,570)
--------- --------- ---------
Effect of exchange rate changes on cash................... (627) 78 (145)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.......... (25,146) 25,663 (810)
Cash and cash equivalents at beginning of year............ 40,880 15,217 16,027
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 15,734 $ 40,880 $ 15,217
========= ========= =========
ADJUSTMENTS
Reconciliation of Net Income to Cash Flows From Operations:
Net income................................................ $ 23,223 $ 7,339 $ 7,125
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization........................... 14,419 13,129 12,784
Impairment loss......................................... 8,628
Restructuring expenses.................................. 586
Minority interest in earnings of subsidiaries........... 491 1,351 631
Net book value of equipment sold........................ 7,422 1,467 1,412
Accrued postretirement health benefits.................. 69 200 (226)
Deferred income taxes................................... 2,768 (431) 1,744
Other non-cash adjustments to net income................ 302 (11) (97)
Changes in:
Accounts receivable.................................. 4,315 (3,363) (8,012)
Inventories.......................................... (2,095) (2,299) (4,623)
Income taxes receivable and income taxes payable..... 7,795 3,110 (328)
Deferred income tax assets and liabilities........... 78 22 (43)
Other current assets and other assets and
investments.......................................... 2,437 (911) 136
Accounts payable, accrued expenses and accrued
compensation expenses................................ 436 (3,312) 9,979
Deferred revenue..................................... 1,102 (139) (346)
--------- --------- ---------
Total adjustments.................................. 39,539 18,027 13,011
--------- --------- ---------
Net Cash Provided By Operations......................... $ 62,762 $ 25,366 $ 20,136
========= ========= =========
</TABLE>
40
<PAGE> 41
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In February 1999, the Company purchased OPKOR Inc. for $9.0 million plus
annual contingent payments in OCLI common stock based on profits of the acquired
entity. The initial $9.0 million was paid in the form of $1.8 million in cash
and 267,285 shares of OCLI common stock. Cash and non-cash components of the
acquisition were as follows (dollars in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, including intangibles........ $13,615
Liabilities assumed......................................... (4,930)
-------
Initial consideration plus acquisition expenses............. 8,685
Fair value of OCLI common stock issued to sellers........... (7,200)
Cash acquired............................................... (1,130)
-------
Net cash paid............................................... $ 355
=======
</TABLE>
During fiscal 1999, 1998 and 1997, the Company issued 39,914, 39,292 and
14,601 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 Company recorded capital leases of $1.6 million and $2.0 million in
fiscal 1998 and 1997 to finance the hardware, software and some of the
integration costs of an Enterprise Resource Planning System for which
implementation was completed in fiscal 1999. Lease terms run through 2004 with
payments totaling approximately $67,000 per month.
In fiscal 1998 and 1997, common stock, with an aggregate fair market value
of $86,000 and $51,000 was awarded to the Company's outside directors as
remuneration.
In fiscal 1998, pursuant to a call for redemption by the Company, the 6,250
shares of 8% Series C Convertible Redeemable Preferred Stock outstanding plus
accrued dividends of $42,000 were converted into 599,000 shares of Company
common stock.
In fiscal 1997, 5,750 shares of 8% Series C Convertible Redeemable
Preferred Stock, plus accrued dividends of $74,000 were converted into 555,000
shares of Company common stock.
The accompanying notes are an integral part of these financial statements.
41
<PAGE> 42
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER
---------------------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME
------ ------- ------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 1, 1996............ 12 $11,309 9,761 $ 98 $ 47,219 $20,984 $ (51)
-- ------- ------ ---- -------- ------- -------
Shares issued to Employee Stock
Ownership Plan......................... 15 159
Exercise of stock options, including
tax benefit and shares issued to
directors............................ 268 3 2,524
Conversion of Series C preferred stock
to common stock...................... (6) (5,750) 555 5 5,821
Foreign currency translation adjustment
for the year......................... (591)
Dividend on preferred stock............ (693)
Dividend on common stock............... (1,199)
Net income for the year................ 7,125 7,125
-------
COMPREHENSIVE INCOME................... 6,534
-- ------- ------ ---- -------- ------- -------
BALANCE AT OCTOBER 31, 1997............ 6 5,559 10,599 106 55,723 26,217 (642)
-- ------- ------ ---- -------- ------- -------
Shares issued to Employee Stock
Ownership Plan....................... 39 555
Exercise of stock options, including
tax benefit and shares issued to
directors............................ 967 10 9,659
Shares surrendered for payment of
withholding taxes.................... (117) (1) (1,539)
Conversion of Series C preferred stock
to common stock...................... (6) (5,559) 599 6 5,595
Foreign currency translation adjustment
for the year......................... 800
Dividend on preferred stock............ (250)
Dividend on common stock............... (1,355)
Net income for the year................ 7,339 7,339
-------
COMPREHENSIVE INCOME................... 8,139
-- ------- ------ ---- -------- ------- -------
BALANCE AT OCTOBER 31, 1998............ -- -- 12,087 121 69,993 31,951 158
-- ------- ------ ---- -------- ------- -------
Shares issued to Employee Stock
Ownership Plan....................... 40 933
Exercise of stock options, including
tax benefit and shares issued to
directors............................ 518 5 14,280
Issuance of shares for OPKOR
acquisition.......................... 267 3 7,197
Issuance of shares for public
offering............................. 1,350 14 88,906
Foreign currency translation adjustment
for the year......................... (531)
Dividend on common stock............... (1,564)
Net income for the year................ 23,223 23,223
-------
COMPREHENSIVE INCOME................... 22,692
-- ------- ------ ---- -------- ------- -------
BALANCE AT OCTOBER 31, 1999............ -- -- 14,262 $143 $181,309 $53,610 $ (373)
-- ------- ------ ---- -------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
42
<PAGE> 43
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. GENERAL
NATURE OF OPERATIONS. OCLI designs, develops and manufactures multi-layer
thin film coatings which control and enhance light by altering the transmission,
reflection and absorption of its various wavelengths to achieve a desired effect
such as anti-reflection, anti-glare, electromagnetic shielding, electrical
conductivity and abrasion resistance. OCLI markets and distributes components
primarily to original equipment manufacturers (OEMs) of color shifting, optical
and electro-optical systems. OCLI's products are found in many applications
including telecommunications systems, security inks, commercial paints, computer
monitors, flat panel displays, telecommunication systems, office equipment,
medical/analytical equipment and instruments, projection imaging systems,
satellite power systems and aerospace and defense systems.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. The
Company's fiscal year ends on the Sunday closest to the last day in October. For
convenience purposes, the Company has designated October 31 as its fiscal year
end. Fiscal years 1999, 1998 and 1997 were 52-week years.
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.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents are comprised of cash,
bank repurchase agreements and short-term commercial paper readily convertible
to cash. Cash equivalents are carried at cost that approximates market value.
All highly liquid cash equivalents with an original maturity of three months or
less are considered cash equivalents.
SHORT-TERM INVESTMENTS. Short-term investments represent commercial paper
with original maturities of greater than three months and less than twelve
months.
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
straight line depreciation.
Assets under capital lease constitute computer equipment and enterprise
resource planning software which are being amortized on a straight-line basis
from the date of service. Amortization lives are four years for the equipment
and six years for the software. The gross cost of assets under capital lease is
included in machinery and equipment and was $3,725,000 and $3,638,000 at October
31, 1999 and 1998. Accumulated
43
<PAGE> 44
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
amortization for assets under capital lease is included in accumulated
depreciation and was $810,000 and $205,000 at October 31, 1999 and 1998.
GOODWILL. At October 31, 1999, the goodwill balance is due to the
acquisitions of the minority interest in Flex, the acquisition of OPKOR and the
purchase of minority interest in OCLI Asia. Goodwill is being amortized over
periods between eight and fifteen years.
OTHER ASSETS. Included in other assets is identifiable purchased
intangibles of $11.3 million in fiscal 1999 and $2.1 million in fiscal 1998
relating to Flex which are being amortized over useful lives ranging from 11 to
15 years.
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.
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. The Company records income taxes using the asset and
liability method which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, generally all expected future events other than
enactments or changes in the tax law or rates are considered. Tax credits are
taken as a reduction of current income tax provisions when available.
STOCK BASED COMPENSATION. The Company accounts for stock-based compensation
plans for employees using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees". Accordingly, no compensation expense has been recognized in the
financial statements for employee stock option arrangements. See Note 11 for
additional pro forma disclosures required under Statement of Financial
Accounting Standards (SFAS) No. 123.
EARNINGS PER SHARE. In 1998, the Company adopted SFAS No. 128, "Earnings
Per Share," which required the Company to replace its presentation of primary
earnings per share with a presentation of basic earnings per share and requires
dual presentation of basic and diluted earnings per share on the face of the
income statement. Basic earnings per share is computed by dividing net income
applicable to common stock by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing net income
applicable to common stock by the weighted average number of common shares and
the potential dilution of convertible securities, stock options and warrants.
The earnings per share presentation for all periods presented conform to the new
statement.
44
<PAGE> 45
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding.................. 13,101 11,388 10,191
======= ======= =======
Net income.................................................. $23,223 $ 7,339 $ 7,125
Less dividend on convertible redeemable preferred stock..... 250 693
------- ------- -------
Net income applicable to common stock....................... $23,223 $ 7,089 $ 6,432
======= ======= =======
Net income per common share, basic.......................... $ 1.77 $ 0.62 $ 0.63
======= ======= =======
DILUTED EARNINGS PER SHARE:
Average common shares outstanding, basic.................... 13,101 11,388 10,191
Dilutive effect of employee stock options................... 1,359 611 482
------- ------- -------
Average shares outstanding, diluted......................... 14,460 11,999 10,673
======= ======= =======
Net income applicable to common stock....................... $23,223 $ 7,089 $ 6,432
======= ======= =======
Net income per share, diluted............................... $ 1.61 $ 0.59 $ 0.60
======= ======= =======
</TABLE>
Preferred stock convertible into 303,000 and 595,000 shares of common stock
in 1998 and 1997 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.
During fiscal 1999 all outstanding options were included in the computation
of diluted earnings per share as there were no options with an exercise price
greater than the average market price. Options to purchase 67,500 shares of
common stock at a weighted average price of $17.35 that were outstanding during
fiscal 1998 and options to purchase 65,500 shares of common stock at a weighted
average price of $12.96 that were outstanding in fiscal 1997 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS. For certain of the Company's financial
instruments, including cash and cash equivalents, short-term investments,
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 would exceed carrying value
by approximately $336,000.
COMPREHENSIVE INCOME. In the first quarter of fiscal 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 Statement of
Stockholders' Equity has been changed to Consolidated Statement of Stockholders'
Equity and Comprehensive Income. Other comprehensive income consists of foreign
currency translation adjustments which are reported as a separate component of
equity.
RECLASSIFICATIONS. Certain reclassifications have been made to prior year
data to conform to the current year presentation.
NEW ACCOUNTING PRINCIPLE. In 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting
45
<PAGE> 46
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 2001 with earlier application encouraged. The Company is currently
evaluating SFAS 133 to determine what effect it would have on the Company's
consolidated financial statements.
3. PROGRAM SETTLEMENT
In the fourth quarter of fiscal 1999, a development program in the display
market was terminated by a customer. The Company recorded a $2.7 million credit
to operating expenses in the fourth quarter of fiscal 1999 which constitutes the
settlement amount, net of program specific assets that were written off as a
result of the program termination.
4. LOSS ON ASSET DISPOSAL
In the fourth quarter of fiscal 1998, due to excess capacity, the Company
removed from service and began negotiations for the sale of a large continuous
coating machine. As sales price estimates at that time and for subsequent
quarters exceeded the carrying amount of the equipment, losses were previously
not recorded. In the second quarter of 1999, due to the need for manufacturing
space, the Company made the decision to accelerate the sale of the machine and
to sell the machine for less than book value, if necessary. Consequently, the
machine, with a carrying value of $1.4 million was sold for $460,000 net of
removal and shipping costs and the Company recognized a loss of $934,000 in the
second quarter of fiscal 1999 on the sale of the machine.
5. LEGAL SETTLEMENT
In March 1997, Optical Corporation of America (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, 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.
OCA alleged that the Company made negligent misrepresentations to OCA and
certain of OCA's affiliates, and that the Company breached its letter of intent.
The Company 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 OCLI and the agreed upon
purchase price under the merger agreement. In January 1999, the Company, 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 the Company 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.
6. 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 in fiscal 1998 associated with
this plan of restructuring. The restructuring eliminated five administrative and
sales positions in Europe. Exit costs included costs of closing down
administrative and sales offices in Europe and lease termination costs. All of
the restructuring expenses were paid prior to the end of fiscal year 1999.
46
<PAGE> 47
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. LONG-TERM DEBT
Long-term debt, including current maturities, at October 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Unsecured senior notes. Interest at 6.69% payable
semiannually. Principal payable in annual installments of
$4.3 million commencing July 31, 2002 through 2008.......... $30,000 $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 8,000
Unsecured senior notes. Interest at 8.71% payable
semiannually. Principal payable in annual installments of
$1.6 million commencing June 1, 1999 through 2002......... 4,800 6,400
Mortgage payable. Interest at 8%. Collateralized by a 72,000
sq. ft. building and related land. Principal and interest
payments of $25,000 per month through 2011................ 2,197 2,314
Mortgage payable. Interest at 7.5%. Collateralized by a
65,000 sq. ft. building and related land. Principal and
interest payments of $28,000 per month through 2011....... 2,460 2,647
Unsecured bank note. Interest at 5.6%. Quarterly principal
and interest payments of approximately $300,000 through
December 2002............................................. 3,661
Bank loans of OCLI/MMG Division............................. 3,120
Revolving line of credit of the Company's subsidiary in
Japan. Interest from 1.45% to 1.62% payable monthly.
Facility expires in May 2001.............................. 5,862
Present value of obligations under capital leases at imputed
interest rates from 7.0% to 9.5% payable in monthly
installments through 2003................................. 1,609 2,257
------- -------
54,928 58,399
Less current maturities..................................... (2,517) (6,026)
------- -------
Total long-term debt, net of current maturities... $52,411 $52,373
======= =======
</TABLE>
Annual debt maturities and capital lease payments for the ensuing five
years are as follows:
<TABLE>
<CAPTION>
PAYMENT
-----------
(AMOUNTS IN
THOUSANDS)
-----------
<S> <C>
Year
2000..................................................... $ 2,517
2001..................................................... 8,573
2002..................................................... 7,675
2003..................................................... 5,842
2004..................................................... 5,875
Thereafter............................................... 24,446
-------
$54,928
=======
</TABLE>
At October 31, 1999, the Company had an unused $25 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
$1,405,000 to satisfy the Company's workers' compensation self-insurance
requirements. The surety bond carries a fee of 1% per year.
During fiscal 1998, the Company recorded capital leases totaling $1,601,000
and $2,037,000 to finance the hardware, software and integration costs of a new
computer system that was fully implemented in 1999. Lease terms run through 2004
with payments totaling approximately $67,000 per month.
47
<PAGE> 48
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company's subsidiary in Scotland has a credit arrangement of up to
approximately $490,000 at market interest rates and has outstanding letters of
credit of approximately $330,000 to guarantee import duties. There were no
borrowings under the credit arrangement in fiscal years 1999 or 1998.
The Company's subsidiary in Japan has various credit facilities totaling
approximately $9.6 million with interest rates ranging from 1.45% to 1.62% per
year. Borrowing under these facilities totaled $5.9 million at October 31, 1999.
These credit facilities are used for working capital requirements in Asia and
will expire in May 2001.
The Company has certain financial covenants and restrictions under its bank
credit arrangements and the unsecured senior notes. At October 31, 1998, as a
result of the impairment loss and restructuring charges recorded in 1998, the
Company was in violation of one of the covenants under its bank credit
arrangement. In January 1999, the Company and the bank executed a waiver and
amendment to the Company's credit agreement under which a waiver was obtained
for the period ended October 31, 1998. The amendment removes the effect of the
impairment loss and restructuring charges from the financial covenants so they
will not affect covenant compliance in future periods.
8. FINANCIAL DERIVATIVES AND HEDGING
The Company, from time to time, enters into derivative transactions in
order to hedge foreign currency risk on existing commitments, open receivables,
payables and debt instruments when the currency risk is considered 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.
At October 31, 1999, the Company had outstanding foreign currency forward
contracts for the principal and interest payments under an intercompany note
receivable denominated in British Pounds and for intercompany purchases in U.S.
dollars identified with customer delivery commitments in Japanese yen.
The notional amounts, carrying amounts and fair values of the Company's
derivatives position at October 31, 1999 are included in the table below:
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
OF FOREIGN
NOTIONAL CARRYING EXCHANGE
AMOUNT AMOUNT CONTRACT
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency forward exchange contracts:
Japanese Yen.................................. $1,537 $ -- $ 33
British Pounds................................ $2,574 $ -- $(115)
</TABLE>
9. DISPOSALS AND ACQUISITIONS
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., a privately held Swiss Corporation
headquartered in Lausanne, Switzerland. SICPA is the world's largest
manufacturer of printing inks and a major customer of Flex.
48
<PAGE> 49
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In December 1998, the Company purchased the 40% minority interest held by
SICPA for $30.0 million in cash, 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. The purchase price
was allocated as follows, in thousands of dollars:
<TABLE>
<S> <C>
Minority interest........................................... $10,611
Fair value adjustment to property and equipment............. 1,124
Deferred tax effect of adjustments to property and equipment
and identifiable intangibles.............................. (4,508)
Acquired in-process research and development................ 2,906
Identifiable intangibles.................................... 10,145
Goodwill.................................................... 9,757
-------
Total purchase price.............................. $30,035
=======
</TABLE>
Acquired in-process research and development was expensed in the first
quarter of 1999. Identifiable intangibles are being amortized over useful lives
ranging from 11 to 15 years and goodwill is being amortized over 15 years.
Identifiable intangibles and goodwill are included in other assets.
In connection with the purchase, the Company purchased SICPA's $2.4 million
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.
OPKOR INC. In February, 1999, the Company purchased OPKOR Inc., an optical
design and manufacturing company specializing in precision polymer optic
components and assemblies, for $8.7 million plus annual contingent payments in
OCLI common stock based on profits of the acquired entity. The initial $8.7
million was paid in the form of $1.6 million in cash and 267,285 shares of OCLI
common stock. The transaction was accounted for by the purchase method of
accounting, and accordingly, the results of operations for OPKOR have been
included in the Company's financial statements since the date of the
acquisition. Pro forma comparative results of operations are not presented
because they are not materially different from the Company's reported results of
operations. The purchase price was allocated first to the fair value of net
assets acquired ($2.0 million) with the remaining $6.7 million allocated to
goodwill and identifiable intangibles that are being amortized over 8 years.
After the end of fiscal 1999, the purchase agreement between the Company and
OPKOR was amended to eliminate the contingent payment portion of the agreement.
OCLI ASIA. In the second quarter of 1997, the Company began operating a
joint venture (Hakuto-OCLI Co., Ltd. doing business as OCLI Asia) with Hakuto
Co., Ltd. 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,
Japan with manufacturing facilities in Atsugi, Japan.
MMG. In the fourth quarter of 1998, the Company made the decision to
dispose of its manufacturing subsidiary in Germany (MMG). In conjunction with
negotiation of the sale, independent appraisals were made of the assets and
liabilities of MMG, and an impairment loss of $8.6 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.
49
<PAGE> 50
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In fiscal 1999, Glas Trosch, a privately held glass company in Switzerland
purchased the business and the operating assets (inventory, equipment,
furniture, two buildings, workforce, customer lists and other related
intangibles) of MMG for $4.3 million. The Company retained ownership of an
office building with a current value of $360,000 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. As the assets were sold for the recorded value, adjusted
for the impairment recorded in 1998, no gain or loss was recognized in fiscal
1999 in connection with the sale.
In connection with the sale of MMG, the Company also received $1.2 million
for a three-year covenant not to compete and $600,000 for a three-year license
and supply agreement that incorporates the use of the OCLI name. The $1.8
million received for those contracts was deferred and is being recognized as
revenue over the three-year terms of the agreements.
10. STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN. Effective December 17, 1999, the Company's Board
of Directors approved a new Stockholder Rights Plan (the "1999 Rights
Agreement") to succeed the Stockholder Rights Plan adopted on December 16, 1997,
as amended. Under the terms of the Plan, which expires in December 20, 2001, 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.
PREFERRED STOCK. The Company has authorized 100,000 shares of preferred
stock at $.01 par value of which 10,000 shares were designated Series A
Preferred Stock in connection with the Company's Stockholder Rights Plan. None
of the Series A Preferred Stock is issued. Additionally, 15,000 shares were
designated Series B Preferred Stock, of which 8,350 shares were issued and
subsequently converted to common stock on call for redemption. None of the
Series B Preferred Stock is currently issued and outstanding.
In 1995, as part of the financing of the acquisition of a controlling
interest in Flex Products, the Company issued 12,000 shares of 8% Series C
Convertible Redeemable Preferred Stock (the "Series C Preferred Stock") in
consideration for $1,000 per share. The Series C Preferred Stock was convertible
into common stock at any time by the holders at a conversion price of $10.50 per
common share (subject to adjustment in certain circumstances). The Series C
Preferred Stock was redeemable at the option of the Company commencing two years
from the date of issuance (if the Company's common stock is trading at $17 per
share or more for any 20 consecutive day period) and, after three years,
unconditionally, at 108% of the purchase price per share, declining to 100% over
four years. The holders of the Series C Preferred Stock were entitled to receive
a cumulative annual dividend of $80 per share, which was payable quarterly and
had preference to any other dividends paid by the Company.
In fiscal 1997, 5,750 shares of the Company's 8% Series C Convertible
Redeemable Preferred Stock, plus accrued dividends, were converted into
approximately 555,000 shares of common stock.
In fiscal 1998, the Company called for redemption the remaining shares of
8% Series C Convertible Redeemable Preferred Stock. The remaining 6,250 shares
plus accrued dividends, were subsequently converted by the holders into
approximately 599,000 shares of common stock.
50
<PAGE> 51
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PUBLIC OFFERING. On May 26, 1999, the Company completed a public offering
for the sale of 1,350,000 shares of OCLI common stock. The proceeds of the
offering, net of underwriting discounts and expenses, were $88.9 million.
11. EMPLOYEE STOCK OPTION PLANS
Under the Company's employee stock option plans, an aggregate of 2,437,080
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 on the
date of grant.
Information with respect to stock options outstanding and options
exercisable at October 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -----------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES OCTOBER 31, 1999 LIFE PRICE OCTOBER 31, 1999 PRICE
- --------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 6.25 - $ 8.38 5,000 0.2 $ 7.74 5,000 $ 7.74
$ 9.63 - $14.33 1,165,664 2.7 $12.08 837,569 $11.71
$15.00 - $20.50 641,449 5.8 $20.02 34,057 $17.11
$23.41 - $32.13 51,500 6.0 $26.29 -- --
$41.88 - $62.13 43,000 6.5 $52.26 -- --
$63.00 - $91.00 54,500 6.7 $76.33 18,000 $67.38
$99.66 - $99.66 1,000 7.0 $99.66 -- --
--------- ------ ------- ------
1,962,113 $17.75 894,626 $13.02
========= ====== ======= ======
</TABLE>
In addition, the Company has established a qualified Employee Stock
Purchase Plan, the terms of which allow employees to contribute up to 10% of
their salaries in order to purchase shares of the Company's common stock at a
price equal to the lower of 85% of the closing price at the beginning or end of
a one year offering period. 400,000 shares of Company common stock have been
reserved for issuance under the Plan. Purchases under the plan take place
semi-annually with the first purchase date on December 31, 1999. On December 31,
1999, after the end of the fiscal year, 12,914 shares were issued at a price per
share of $58.25 and, based on the participation and contribution rate of
employees at October 31, 1999, it is estimated that another 23,000 shares at a
purchase price of $58.25 per share will be purchased on June 30, 1999 pursuant
to this plan.
The Company's subsidiary, Flex Products, a non-public company, had a
non-qualified stock option plan. In the second quarter of fiscal 1999, the
Company restructured the equity of Flex. As a result of this restructuring, in
order to make the option holders whole under the provisions of Flex's option
plan, the Company exchanged options for the exercise of 928,200 shares of Flex
at a weighted average exercise price of $4.54 per share for options to exercise
324,157 shares of Company common stock at a weighted average exercise price of
$12.99 per share. The exchange was based on the ratio of the market value per
share of Flex (based on an independent valuation) to the market value of Company
common stock on the date of the equity restructuring. The per share exercise
price for each converted Flex option was the ratio of the total number of Flex
options exchanged over the number of Company options issued multiplied by the
original per share exercise price of each Flex option. The exchange of the Flex
options is presented in the following tables as cancellations of Flex options
and grants of Company options.
51
<PAGE> 52
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Flex Products' stock option activity for the three years ended October 31,
was:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
BALANCE AT NOVEMBER 1, 1996.............................. 1,027,100 $4.44
Granted.................................................. 20,000 4.89
Exercised................................................
Canceled................................................. (44,600) 4.43
--------- -----
BALANCE AT NOVEMBER 1, 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
Granted..................................................
Exercised................................................
Canceled................................................. (928,200) 4.55
--------- -----
BALANCE AT OCTOBER 31, 1999.............................. --
--------- -----
EXERCISABLE AT OCTOBER 31, 1999.......................... --
========= =====
</TABLE>
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 1998.
In May 1997, the Board of Directors approved a stock option repricing
program under which stock options with exercise prices above $14.00 per share
were repriced to the then current market value of the Company's common stock of
$9.63. A total of 162,000 shares, with exercise prices ranging from $14.13 per
52
<PAGE> 53
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
Stock option activity under the Company's stock option plan for the three
years ended October 31, was:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
BALANCE AT NOVEMBER 1, 1996.............................. 1,835,250 $ 8.75
Granted.................................................. 708,800 10.48
Exercised................................................ (268,849) 8.52
Canceled................................................. (272,792) 12.53
--------- ------
BALANCE AT NOVEMBER 1, 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.................................................. 1,038,438 22.78
Exercised................................................ (517,361) 10.42
Canceled................................................. (64,845) 14.94
--------- ------
BALANCE AT OCTOBER 31, 1999.............................. 1,962,113 $17.75
--------- ------
EXERCISABLE AT OCTOBER 31, 1999.......................... 894,626 $13.02
========= ======
</TABLE>
In 1997, the Company adopted the disclosure requirements of SFAS 123 that
provide for the disclosure of pro forma net earnings and net earnings per share
as if the fair value method of accounting had been adopted at the beginning of
fiscal 1996. If compensation expense had been determined for stock options
granted in 1999, 1998 and 1997 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>
1999 1998 1997
-------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income as reported.................................. $23,223 $7,339 $7,125
Pro forma compensation adjustment....................... (3,194) (1,669) (1,597)
------- ------ ------
Pro forma net income.......................... $20,029 $5,670 $5,528
======= ====== ======
Basic earnings per share:
Net income per share, as reported..................... $ 1.77 $ 0.62 $ 0.63
Pro forma compensation adjustment..................... (0.24) (0.15) (0.16)
------- ------ ------
Pro forma net income per share................ $ 1.53 $ 0.47 $ 0.47
======= ====== ======
Diluted earnings per share:
Net income per share, as reported..................... $ 1.61 $ 0.59 $ 0.60
Pro forma compensation adjustment..................... (0.22) (0.14) (0.15)
------- ------ ------
Pro forma net income per share................ $ 1.39 $ 0.45 $ 0.45
======= ====== ======
</TABLE>
The weighted average fair value of options granted during fiscal 1999, 1998
and 1997 was $11.24, $5.75 and $5.60, respectively. The weighted average fair
value of options granted in fiscal 1999 under the Employee Stock Purchase Plan
was $17.12. The weighted average fair value of Flex Products' options granted
during 1998 and 1997 was $1.06 and $1.39. The fair value of each option grant is
estimated on the date of grant using
53
<PAGE> 54
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants issued by the Company in 1999, 1998 and 1997 and by
Flex Products in 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
COMPANY OPTIONS:
Expected dividend yield..................................... 0.0% 0.8% 0.7%
Expected volatility......................................... 45.0% 43.0% 59.0%
Risk-free interest rate..................................... 4.6% 5.7% 5.5%
Expected term (years)....................................... 4 4 5
FLEX PRODUCTS OPTIONS:
Expected dividend yield (not applicable)....................
Expected volatility (not applicable)........................
Risk-free interest rate..................................... 5.5% 6.2%
Expected term (years)....................................... 5 6
</TABLE>
12. INCOME TAXES
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal............................................... $11,398 $2,722 $2,537
State................................................. 676 916 225
Foreign............................................... 333 129 116
------- ------ ------
12,407 3,767 2,878
------- ------ ------
DEFERRED:
Federal............................................... 2,310 (258) 1,061
State................................................. 472 (612) 598
Foreign............................................... (14) 439 85
------- ------ ------
2,768 (431) 1,744
------- ------ ------
$15,175 $3,336 $4,622
======= ====== ======
</TABLE>
The reconciliation of the effective income tax rate to the federal
statutory rate was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 34.0% 34.0%
State taxes, net of federal tax benefit..................... 4.3 4.0 5.7
Foreign losses not previously benefited..................... (8.8)
Foreign income taxes at rates different than U.S. statutory
rates..................................................... (0.2) 0.8 (0.5)
Business tax credits (state tax credits net of federal tax
effect)................................................... (1.8) (2.3) (2.9)
In-process research and development acquired during the
year...................................................... 2.6
Tax benefit from foreign sales corporation.................. (1.7) (3.8) (2.7)
Non-deductible expenses, including foreign losses........... 1.5 2.5 4.2
Effect of federal rate change............................... (0.2)
Other....................................................... (0.5) 1.3 (0.5)
---- ---- ----
Effective tax rate.......................................... 39.0% 27.7% 37.3%
==== ==== ====
</TABLE>
54
<PAGE> 55
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DEFERRED TAX ASSETS (LIABILITIES). The Company's deferred tax assets and
liabilities at October 31, 1999 and 1998 under SFAS 109 arise from the following
temporary differences in accounting for financial versus tax reporting purposes:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT:
Valuation reserves and accruals not deductible for tax
purposes until paid or utilized............................. $ 5,338 $ 4,060
Intercompany profit eliminated for financial reporting
purposes which is taxable currently....................... (9) 263
Domestic net operating losses available for carryforward.... 1,103 4,599
Asset valuation difference between financial and tax
reporting basis due to purchase accounting................ (311) 73
Other....................................................... 422 316
------- -------
Total current deferred tax balances, net.......... 6,543 9,311
------- -------
NONCURRENT:
Domestic net operating losses available for carryforward.... 445 1,627
Foreign net operating losses available for carryforward..... 582 751
Tax depreciation greater than financial reporting
depreciation.............................................. (6,199) (5,500)
Intangible assets, difference between financial and tax
reporting basis and periods............................... (511) (459)
Burden and interest on self-constructed assets expensed for
tax purposes and depreciated for financial reporting
purposes.................................................. (947) (816)
Costs required to be capitalized under the uniform
capitalization tax rules which are deducted for financial
reporting purposes........................................ 1,119 309
Liability for postretirement health benefits not deductible
for tax purposes until paid............................... 1,001 967
State tax credits eligible for carryforward................. 1,051 1,353
Asset valuation difference between financial and tax
reporting basis due to purchase accounting................ (3,841)
Other....................................................... 358 (293)
------- -------
(6,942) (2,061)
Less valuation allowance.................................... (772) (751)
------- -------
Total long term deferred tax balances, net........ (7,714) (2,812)
------- -------
Total deferred tax balances....................... $(1,171) $ 6,499
======= =======
</TABLE>
As a result of the sale of the assets of its MMG division and the resulting
impairment loss in 1998, the Company recognized tax benefits relating to certain
foreign operating losses that had not been tax benefited in prior periods. The
Company has provided a valuation allowance related to the deferred tax asset
resulting from the remaining operating loss 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. For fiscal 1999, the
Company has also provided a valuation allowance related to certain New York
state tax losses and credits, the realization of which is not considered to be
more likely than not.
At October 31, 1999, the Company has domestic federal and state net
operating loss carryforwards of $4.7 million. If not used, $2.8 million will
expire in fiscal 2006, $1.5 million will expire in fiscal 2007, and $0.4 million
will expire in fiscal 2012. The Company has California Manufacturers' Investment
Credit
55
<PAGE> 56
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
carryforwards of $89,000; California Research Credit carryforwards of $572,000;
and New York State Investment Credit carryforwards of $210,000. If not used, a
portion of the California credit carryforwards will expire beginning in 2006.
The New York credit carryforward will expire beginning in 2012. The Company also
has alternative minimum tax credits of $105,000 for federal income tax purposes
and $181,000 for California income tax purposes.
Income taxes have not been provided on approximately $7.6 million of
unremitted earnings of the Company's subsidiary in Scotland. The Company intends
to continue to reinvest these amounts in the subsidiary's operations. Should any
of these amounts be distributed to the Company, any taxes on these distributions
would be substantially offset by foreign tax credits.
13. EMPLOYEE BENEFIT PLANS
U.S. OPERATIONS. The Company has a 401(k) pre-tax voluntary retirement
savings plan for its U.S. employees. The Company matches 100% of the first 3% of
deferred salary and 50% for the next 3% of deferred salary. Eligible employees
can defer up to 15% of their salary or a maximum of $10,000 a year.
Contributions to the 401(k) plan are immediately vested. Company matching
contributions to the 401(k) plan are funded in cash. Prior to fiscal 1999, the
Company had an ESOP plan under which Company contributions were made in the form
of originally issued or purchased Company common stock. In fiscal 1999, the ESOP
plan was terminated and replaced by a Company 401(k) match. Assets of the ESOP
were merged into the 401(k) plan. Flex also had a separate 401(k) plan which was
merged into the Company's plan in fiscal 1999. In fiscal 1999, 1998 and 1997,
the Company contributed and charged to operations $2,069,000, $1,740,000 and
$1,211,000 as contributions to its 401(k) and ESOP 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.
In fiscal 1998, the Company adopted SFAS No. 132 "Employers' Disclosures
about Pensions and Other Porstretirement Benefits." FAS 132 standardizes the
disclosure requirements for pensions and other postretirement benefits. Prior
years' information has been restated to conform with the new requirements.
56
<PAGE> 57
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The reconciliation of the beginning and ending balances of the benefit
obligation, fair value of plan assets and funded status of the plan at October
31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $10,387 $ 8,856
Service cost................................................ 588 565
Interest cost............................................... 624 636
Actuarial loss.............................................. 558 469
Participants' contributions................................. 165 119
Benefits paid............................................... (82) (122)
Exchange rate changes....................................... 158 (136)
------- -------
Benefit obligation at end of year........................... $12,398 $10,387
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $ 8,504 $ 7,617
Actual return on plan assets................................ 1,003 748
Employer contributions...................................... 310 238
Participants' contributions................................. 165 119
Exchange rate changes....................................... 165 (96)
Benefit payments............................................ (82) (122)
------- -------
Fair value of plan assets at end of year.................... $10,065 $ 8,504
======= =======
FUNDED STATUS:
Funded status............................................... $(2,333) $(1,883)
Unrecognized net actuarial loss............................. 2,495 2,204
Unrecognized transition asset being amortized over 19
years..................................................... (343) (381)
------- -------
Prepaid (accrued) pension cost included in accrued
expenses........................................ $ (181) $ (60)
======= =======
</TABLE>
At October 31, 1999, 1998 and 1997, the projected benefit obligations
include accumulated benefit obligations of $11,148,000, $9,236,000 and
$8,043,000 of which $11,148,000, $9,232,000, and $8,006,000 are vested.
The net pension expense for the Company's Scottish subsidiary recorded in
1999, 1998 and 1997 included the following components:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service-cost benefits earned during the period............. $ 588 $ 565 $ 415
Interest cost on projected benefit obligation.............. 624 636 506
Expected return on plan assets............................. (613) (704) (610)
Amortization of transition asset........................... (38) (38) (37)
Recognized net actuarial loss.............................. 39 22 18
----- ----- -----
Net pension expense.............................. $ 600 $ 481 $ 292
===== ===== =====
</TABLE>
57
<PAGE> 58
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Actuarial assumptions used to determine costs and benefit obligations are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 6.0% 6.0% 8.0%
Expected return on plan assets.............................. 7.0% 8.0% 9.0%
Rate of compensation increase............................... 4.0% 4.0% 5.0%
</TABLE>
14. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors an unfunded, 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.
In fiscal 1998, the Company adopted SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." FAS 132 standardizes the
disclosure requirements for pensions and other postretirement benefits. Prior
years' information has been restated to conform with the new requirements.
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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $2,241 $1,871
Service cost................................................ 89 79
Interest cost............................................... 167 166
Actuarial (gain) loss....................................... (85) 222
Benefits paid............................................... (97) (97)
------ ------
Postretirement Benefit obligation at end of year............ $2,315 $2,241
====== ======
</TABLE>
The net postretirement benefit cost for the Company recorded in 1999, 1998
and 1997 included the following components:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service-cost benefits earned during the period.............. $ 89 $ 79 $ 71
Interest cost on projected benefit obligation............... 167 166 165
Amortization of transition asset............................ 17 (7) 10
---- ---- ----
Net postretirement benefit cost................... $273 $238 $246
==== ==== ====
</TABLE>
Discount rates of 7.75%, 6.75% and 8.0% were used in the determination of
the accumulated benefit obligations in fiscal 1999, 1998 and 1997.
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
accumulated benefit obligation or the net postretirement benefit cost.
58
<PAGE> 59
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. CONTINGENCIES AND COMMITMENTS
PROPOSED MERGER WITH JDS UNIPHASE CORPORATION. See Note 18.
CONCENTRATIONS OF CREDIT RISK. The Company grants credit to customers,
subject to credit approval, for most of its sales. At October 31, 1999, accounts
receivable from customers in foreign countries, was $24 million, or 69%, of
accounts receivable with approximately $8 million receivable from customers in
Asia and approximately $16 million receivable from customers in Europe and other
countries.
OPERATING LEASE AGREEMENTS. The Company and its subsidiaries lease computer
equipment, manufacturing space and warehouse space. The operating lease payments
are recorded as rental expense and totaled $7,763,000, $7,104,000, and
$6,351,000 for 1999, 1998, and 1997. Future minimum operating lease payments
amount to $16.5 million, and for the years 2000 through 2004 are $6,963,000,
$6,044,000, $3,268,000, $229,000 and $34,000 under operating lease agreements in
effect at October 31, 1999.
EMPLOYMENT AGREEMENTS. The Company has approved employment agreements for
officers and certain other employees 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 to
November 20, 2001.
16. INFORMATION ON OPERATIONS
INVENTORIES. Inventories as of October 31, 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies............................. $ 6,679 $ 7,138
Work-in-process........................................ 14,688 13,148
Finished goods......................................... 4,532 4,947
------- -------
Total inventories............................ $25,899 $25,233
======= =======
</TABLE>
INTEREST. Interest expense and amounts capitalized were as follows for the
years ended October 31, 1999, 1998 and 19976:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest costs incurred.......................... $4,399 $4,312 $4,249
Less amounts capitalized......................... 631 697 219
------ ------ ------
Net interest expense................... $3,768 $3,615 $4,030
====== ====== ======
</TABLE>
SALES INFORMATION. Significant customers and sales to the federal
government were as follows:
JDS Uniphase, the Company's largest customer in fiscal 1999 and 1998
accounted for 39.4% and 21.1% of consolidated revenues in fiscal 1999 and 1998.
SICPA, the Company's largest customer in fiscal 1997, accounted for 14.7%, 13.9%
and 12.7% of consolidated revenues in fiscal 1999, 1998 and 1997. No other
customer accounted for more than 10% of consolidated revenues in fiscal 1999,
1998 and 1997.
Sales of products and services to the federal government, primarily under
subcontracts, were 2%, 4% and 6% of net revenues in 1999, 1998 and 1997. 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.
59
<PAGE> 60
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. SEGMENT INFORMATION
In the fourth quarter of 1999, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments. The Company has divided its operations into three reportable segments:
Telecommunications Products, Light Interference Pigments and Applied Photonics.
Segment determination is based on market similarity and management of the
Company's business.
The Telecommunications Products segment manufactures and sells optical
components for fiber optic communications systems. The main application for
these products is to control the reflection, transmission and absorption of
lightwave signals that are transmitted through fiber optic cables. Current
products include Wavelength Division Multiplexing (WDM) products and switches.
The Light Interference Pigments segment manufactures and sells color
shifting light interference 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.
The Applied Photonics segment manufactures and sells optical components
used in display systems such as cathode ray tube displays, flat panel displays
and business projections systems; optical components used in defense and
aerospace products; automated data collection products and medical, scientific
and analytical instruments; and optical components used in office automation
products such as copiers, scanners and printers.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements and described in the summary of
significant accounting policies. Corporate costs are allocated to the segments
based on factors intended to approximate actual usage. Management evaluates a
segment's performance based on operating profit and return on net assets. Return
on net assets is net income before minority interest and tax effected interest
expense divided by average net assets. Net assets is total assets less current
liabilities plus notes payable and current maturities on long term debt.
Intersegment sales and transfers are recorded based on prevailing market prices.
Corporate operations include miscellaneous income, elimination of intersegment
revenues and profit, unallocated administrative expenses, legal settlements and
impairment and restructuring expenses. Corporate net assets include cash and
short-term investments, property plant and equipment used in administrative
functions and other unallocated corporate assets and liabilities.
60
<PAGE> 61
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents business segment information for fiscal years
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Telecommunications Products........................ $137,589 $ 53,849 $ 19,140
Light Intereference Pigments....................... 64,772 43,429 39,806
Applied Photonics.................................. 144,784 158,346 158,883
-------- -------- --------
Total revenues........................... $347,145 $255,624 $217,829
======== ======== ========
INCOME FROM OPERATIONS
Telecommunications Products........................ $ 14,342 $ 7,095 $ 2,195
Light Interference Pigments........................ 7,509 5,889 1,547
Applied Photonics.................................. 12,298 12,851 9,822
Corporate and eliminations......................... 5,164 (10,963) 2,383
-------- -------- --------
Total income from operations............. $ 39,313 $ 14,872 $ 15,947
======== ======== ========
RETURN ON NET ASSETS
Telecommunications Products........................ 80.3% 54.3% 51.2%
Light Interference Pigments........................ 8.5% 11.2% 5.1%
Applied Photonics.................................. 4.5% 7.2% 11.0%
ASSETS
Telecommunications Products........................ $ 20,752 $ 11,052
Light Interference Pigments........................ 57,097 35,629
Applied Photonics.................................. 101,249 107,255
Corporate and eliminations......................... 155,535 59,650
-------- --------
Total assets............................. $334,633 $213,586
======== ========
CAPITAL EXPENDITURES
Telecommunications Products........................ $ 7,127 $ 2,948 $ 1,978
Light Interference Pigments........................ 10,459 1,822 2,600
Applied Photonics.................................. 8,517 7,337 11,044
Corporate and eliminations......................... 4,441 4,931 1,828
-------- -------- --------
Total capital expenditures............... $ 30,544 $ 17,038 $ 17,450
======== ======== ========
</TABLE>
61
<PAGE> 62
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GEOGRAPHIC SALES. Certain information regarding the Company's domestic and
foreign revenues is as follows:
<TABLE>
<CAPTION>
UNITED OTHER ELIMI-
STATES CANADA EUROPE ASIA COUNTRIES NATIONS TOTAL
-------- -------- ------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED OCTOBER 31, 1999:
Domestic revenues and revenues of foreign
operations....................................... $108,042 $12,506 $ 11,810 $ (96) $132,262
Export sales from the U.S. ...................... $135,678 55,577 28,283 $2,365 (7,020) 214,883
Transfers between regions........................ (96) (397) (6,623) 7,116
-------- -------- ------- -------- ------ -------- --------
Revenues from customers.................. $107,946 $135,678 $67,686 $ 33,470 $2,365 $ -- $347,145
======== ======== ======= ======== ====== ======== ========
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. ...................... $ 54,476 37,981 27,882 $2,303 (16,569) 106,073
Transfers between regions........................ (598) (5,930) (11,097) 17,625
-------- -------- ------- -------- ------ -------- --------
Revenues from customers.................. $105,421 $ 54,476 $61,715 $ 31,709 $2,303 $ -- $255,624
======== ======== ======= ======== ====== ======== ========
FISCAL YEAR ENDED OCTOBER 31, 1997:
Domestic revenues and revenues of foreign
operations..................................... $ 98,025 $31,411 $ 8,295 $ (2,709) $135,022
Export sales from the U.S. ...................... $ 18,695 44,373 29,718 $2,663 (12,642) 82,807
Transfers between regions........................ (2,709) (6,669) (5,973) 15,351
-------- -------- ------- -------- ------ -------- --------
Revenues from customers.................. $ 95,316 $ 18,695 $69,115 $ 32,040 $2,663 $ -- $217,829
======== ======== ======= ======== ====== ======== ========
</TABLE>
Transfers between regions represent intercompany sales of products and
intercompany compensation for services.
Certain information regarding the Company's operations by region is as
follows:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE JAPAN ELIMINATIONS TOTAL
-------- ------- ------ ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED OCTOBER 31, 1999:
Income (Loss) from operations................. $ 38,271 $ 1,817 $ 3 $ (778) $ 39,313
======== ======= ====== ======= ========
Identifiable assets........................... $319,889 $14,350 $9,911 $(9,517) $334,633
======== ======= ====== ======= ========
FISCAL YEAR ENDED OCTOBER 31, 1998:
Income (Loss) from operations................. $ 22,972 $(7,083) $ (689) $ (328) $ 14,872
======== ======= ====== ======= ========
Identifiable assets........................... $192,360 $21,773 $9,077 $(9,624) $213,586
======== ======= ====== ======= ========
FISCAL YEAR ENDED OCTOBER 31, 1997:
Income (Loss) from operations................. $ 16,206 $ 385 $ (316) $ (328) $ 15,947
======== ======= ====== ======= ========
Identifiable assets........................... $154,104 $32,646 $5,570 $(8,827) $183,493
======== ======= ====== ======= ========
</TABLE>
COMPONENTS OF EARNINGS. Components of earnings (loss) before provision for
income taxes and minority interest were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Domestic.............................................. $38,188 $20,436 $12,587
Foreign............................................... 701 (8,410) (209)
------- ------- -------
$38,889 $12,026 $12,378
======= ======= =======
</TABLE>
62
<PAGE> 63
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. SUBSEQUENT EVENT
On November 3, 1999, the Company entered into a definitive agreement to be
acquired by JDS Uniphase Corporation for common stock valued at approximately
$2.7 billion as of November 3, 1999. The acquisition is expected to close on
February 4, 2000 subject to approval by the Company's stockholders. Upon closing
of the acquisition, each share of the Company's common stock will be exchanged
for 1.856 shares of common stock of JDS Uniphase. In addition, JDS Uniphase will
issue options in exchange for outstanding options of the Company with the number
of shares and the exercise prices appropriately adjusted by the exchange ratio.
If the acquisition is completed as expected, transaction costs estimated at
approximately $9.0 million will be expensed prior to the closing.
Under the terms of the merger agreement, and under certain circumstances,
if the merger is not completed, the Company may be required to pay to JDS
Uniphase $85.0 million plus its out-of-pocket expenses associated with the
proposed merger. The Company has also granted to JDS Uniphase an option to
purchase up to 19.9% of its common stock at a purchase price of $177.65 per
share which would become exercisable if the Company was to enter into an
alternative transaction instead of completing the merger.
63
<PAGE> 64
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(UNAUDITED)
Results of operations for each quarter of fiscal 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, FISCAL
1999 1999 1999 1999(1) 1999
----------- --------- -------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $69,851 $83,994 $89,864 $103,436 $347,145
Gross profit................................. 21,219 26,344 26,673 33,327 107,563
Income before provision for income taxes and
minority interest.......................... 5,578 7,451 9,717 16,143 38,889
Net income................................... 2,033 4,768 6,219 10,203 23,223
Net income applicable to common stock........ $ 2,033 $ 4,768 $ 6,219 $ 10,203 $ 23,223
======= ======= ======= ======== ========
Net income per share, basic.................. $ .17 $ .38 $ .46 $ .72 $ 1.77
======= ======= ======= ======== ========
Net income per share, diluted................ $ .16 $ .34 $ .41 $ .65 $ 1.61
======= ======= ======= ======== ========
Weighted average number of common shares used
to compute basic earnings per share........ 12,142 12,400 13,643 14,192 13,101
======= ======= ======= ======== ========
Weighted average number of common shares used
to compute diluted earnings per share...... 12,868 13,827 15,319 15,799 14,460
======= ======= ======= ======== ========
</TABLE>
Results of operations for each quarter of fiscal 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, FISCAL
1998 1998 1998 1998(2) 1998
----------- --------- -------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $53,373 $64,345 $67,393 $70,513 $255,624
Gross profit................................. 17,138 21,861 22,931 24,024 85,954
Income (loss) before provision for income
taxes and minority interest................ 2,905 5,620 5,699 (2,198) 12,026
Net income (loss)............................ 1,596 3,049 3,421 (727) 7,339
Net income (loss) applicable to common
stock...................................... $ 1,471 $ 2,924 $ 3,421 $ (727) $ 7,089
======= ======= ======= ======= ========
Net income (loss) per share, basic........... $ .14 $ .27 $ .28 $ (.06) $ .62
======= ======= ======= ======= ========
Net income (loss) per share, diluted......... $ .13 $ .25 $ .27 $ (.06) $ .59
======= ======= ======= ======= ========
Weighted average number of common shares used
to compute basic earnings per share........ 10,625 10,903 12,009 12,061 11,388
======= ======= ======= ======= ========
Weighted average number of common shares used
to compute diluted earnings per share...... 11,396 11,553 12,546 12,061 11,999
======= ======= ======= ======= ========
</TABLE>
- ---------------
(1) In the fourth quarter of 1999, a development program in the display market
was terminated by a customer. Pursuant to this program termination, the
company recorded a $2.7 million credit to operating expenses which
constitute the settlement amount, net of program specific assets that were
written off as a result of the program termination.
(2) 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
64
<PAGE> 65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in Part III, Items 10, 11, 12 and 13 of Form 10-K is
omitted since the Company will file with the Securities and Exchange Commission,
not later than 120 days after the close of the fiscal year ended October 31,
1999, a definitive proxy statement pursuant to Regulation 14A in connection with
its 2000 Annual Meeting of Stockholders. The information contained under the
caption "Executive Officers" in Part I of this Form 10-K is incorporated by
reference into Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS:
The following consolidated financial statements of Optical Coating
Laboratory, Inc. are included in Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports................. 36
Consolidated Balance Sheets................... 38
Consolidated Statements of Income............. 39
Consolidated Statements of Cash Flows......... 40
Consolidated Statements of Stockholders'
Equity and Comprehensive Income............... 42
Notes to Consolidated Financial Statements.... 43
Supplemental Financial Information............ 65
</TABLE>
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are
included in Item 14(d):
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying
Accounts.................................................... 68
</TABLE>
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the accompanying notes.
65
<PAGE> 66
(A) 3. LISTING OF EXHIBITS
The following are filed as Exhibits to this Annual Report on Form 10-K. The
numbers refer to the Exhibit Table of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.0 Agreement and Plan of Reorganization and Merger among JDS
Uniphase Corporation, Vintage Acquisition, Inc. and Optical
Coating Laboratory, Inc. dated as of November 3, 1999.
Incorporated by reference to Annex A of Amendment No. 1 to
Form S-4 filed by JDS Uniphase Corporation on December 22,
1999.
3.1 Restated Certificate of Incorporation. Incorporated by
reference to Exhibit (4)(a) of the Registrant's Form 10-Q
for the quarter ended July 31, 1988.
3.2 By-Laws. Incorporated by reference to Exhibit (3)(b) of the
Registrant's Form 8-K under Item 5 dated November 20, 1987.
4.0 Stockholder Rights Agreement between the Registrant and
ChaseMellon Shareholder Services L.L.C. dated December 16,
1999.*
4.1 Form of Note Purchase Agreement dated as of July 30, 1998
for the private placement of $30 million of 6.69% Senior
Notes due July 31, 2008 with Modern Woodman of America,
American Life and Casualty Insurance Company, Massachusetts
Mutual Life Insurance Company, Baystate Health Systems, Inc.
and Principal Life Insurance Company. Incorporated by
reference to Exhibit 4.1 of the Registrant's Form 10-Q for
the quarter ended July 31, 1998.
4.2 Credit Agreement dated as of July 31, 1998 among the
Registrant, Bank of America National Trust and Savings
Association, as Agent, Letter of Credit Issuing Bank and the
Other Financial Institutions Party Thereto. Incorporated by
reference to Exhibit 4.0 of the Registrant's Form 10-Q for
the quarter ended July 31, 1998.
4.3 Waiver and First Amendment, dated as of January 8, 1999 and
effective as of October 31, 1998, to Credit Agreement dated
as of July 31, 1998 among the Registrant, Bank of America
National Trust and Savings Association, as Agent, Letter of
Credit Issuing Bank and The Other Financial Institutions
Party Thereto. Incorporated by reference to Exhibit 4.3 of
the Registrant's Form 10-K for the year ended October 31,
1998.
4.4 Secured Promissory Note between Optical Coating Laboratory,
Inc. and Aid Association for Lutherans dated November 8,
1995. Incorporated by reference to Exhibit 4.8 of the
Registrant's Form 10-K for the year ended October 31, 1995.
4.5 Capital Equipment Lease Agreement dated as of February 20,
1996 between Optical Coating Laboratory, Inc. and Fleet
Credit Corporation. Incorporated by reference to Exhibit
4.10 of the Registrant's Form 10-K for the year ended
October 31, 1996.
4.6 Capital Equipment Lease Agreement dated as of June 19, 1996
between Flex Products, Inc. and Fleet Credit Corporation.
Incorporated by reference to Exhibit 4.11 of the
Registrant's Form 10-K for the year ended October 31,1996.
9.0 Not applicable.
10.0 Registrant's 1999 Incentive Compensation Plan. Incorporated
by reference to Exhibit 99 of the Registrant's Form S-8
dated September 3, 1999.(1)
10.1 Registrant's 1999 Employee Stock Purchase Plan. Incorporated
by reference to Exhibit 99 of the Registrant's Form S-8
dated September 3, 1999.(1)
10.2 Registrant's 1999 Director Stock Plan. Incorporated by
reference to Exhibit 99 of the Registrant's Form S-8 dated
September 3, 1999.(1)
10.3 Registrant's 1998 Incentive Compensation Plan. Incorporated
by reference to Exhibit 99 of the Registrant's Form S-8
dated December 14, 1998.(1)
10.4 Registrant's 1996 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated March 8, 1996.(1)
10.5 Registrant's 1995 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated March 10, 1995.(1)
10.6 Registrant's 1993 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated March 8, 1993.(1)
10.7 Registrant's 1992 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated March 8, 1992.(1)
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.8 Registrant's 1991 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated February 25, 1991.(1)
10.9 Form of Directors' and Officers' Indemnification Agreement.
Incorporated by reference to Exhibit (10)(j) of the
Registrant's Form 10-K for the year ended October 31,
1987.(1)
10.10 Form of Change in Control Employment Agreements between the
Registrant and its Executive Officers dated November 20,
1999.(1)*
10.11 Form of Change in Control Employment Agreements between the
Registrant and certain of its employees dated November 20,
1999.(1)*
10.12 Form of Employment Assurance Agreements between the
Registrant and its key technical and professional employees
dated as of November 20, 1999.(1)*
10.13 License and Supply Agreement between Flex Products, Inc. and
SICPA Holding, S.A. dated as of December 2, 1994.
Incorporated by reference to Exhibit 10.1 of Registrant's
Form S-3 dated April 22, 1999.
10.14 Second Amendment to the License and Supply Agreement by and
between Flex Products, Inc. and SICPA Holding S.A. dated as
of December 22, 1998. Incorporated by reference to Exhibit
10.11 of Registrant's Form 10-K for the year ended October
31, 1998. (Confidential treatment has been granted on
portions of this document.)
10.15 Amended and Restated Agreement by and between JDS FITEL Inc.
and Optical Coating Laboratory, Inc. dated as of April 15,
1999. Incorporated by reference to Exhibit 10.2 of
Registrant's Form S-3 dated April 22, 1999.
10.16 2000 Management Incentive Plan(1).*
11 Not applicable.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 Subsidiaries of the Registrant.*
22 Not applicable.
23.1 Independent Auditors' Consent and Report on
Schedules -- Deloitte & Touche LLP.*
23.2 Independent Auditors' Consent -- KPMG LLP.*
24 Not applicable.
27 Financial Data Schedule for the year ended October 31,
1999.*
28 Not applicable.
99 Not applicable.
</TABLE>
- ---------------
* An asterisk designates items not previously filed.
(1) Designates management contracts or compensatory plan arrangements required
to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K
None
67
<PAGE> 68
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (S-X, RULE 12-09)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED DEDUCTIONS BALANCE
BEGINNING COSTS AND TO OTHER AMOUNTS AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS CHARGED OFF OF PERIOD
----------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended October 31, 1999.......... $1,831 $720 $(13)(a) $422 $2,116
====== ==== ==== ==== ======
Year ended October 31, 1998.......... $1,884 $568 $(36)(a) $585 $1,831
====== ==== ==== ==== ======
Year ended October 31, 1997.......... $1,775 $642 $(31)(a) $502 $1,884
====== ==== ==== ==== ======
</TABLE>
- ---------------
(a) The 1999, 1998 and 1997 balances consist of recoveries and foreign currency
translation effects.
68
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: January 28, 2000 OPTICAL COATING LABORATORY, INC.
By: /s/ CRAIG B. COLLINS
------------------------------------
Craig B. Collins
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CHARLES J. ABBE President, Chief Executive January 28, 2000
- ------------------------------------- Officer and Director
Charles J. Abbe (Principal Executive Officer)
/s/ CRAIG B. COLLINS Vice President, Finance and January 28, 2000
- ------------------------------------- Chief Financial Officer
Craig B. Collins (Principal Financial Officer)
/s/ HOLLY D. NEAL Corporate Controller January 28, 2000
- ------------------------------------- (Principal Accounting Officer)
Holly D. Neal
/s/ HERBERT M. DWIGHT, JR. Chairman of the Board January 28, 2000
- -------------------------------------
Herbert M. Dwight, Jr.
/s/ JOHN MCCULLOUGH Director January 28, 2000
- -------------------------------------
John McCullough
/s/ DOUGLAS C. CHANCE Director January 28, 2000
- -------------------------------------
Douglas C. Chance
/s/ SHOEI KATAOKA Director January 28, 2000
- -------------------------------------
Shoei Kataoka
/s/ JULIAN SCHROEDER Director January 28, 2000
- -------------------------------------
Julian Schroeder
/s/ RENN ZAPHIROPOULOS Director January 28, 2000
- -------------------------------------
Renn Zaphiropoulos
</TABLE>
69
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
2.0 Agreement and Plan of Reorganization and Merger among JDS
Uniphase Corporation, Vintage Acquisition, Inc. and Optical
Coating Laboratory, Inc. dated as of November 3, 1999.
Incorporated by reference to Annex A of Amendment No. 1 to
Form S-4 filed by JDS Uniphase Corporation on December 22,
1999........................................................
3.1 Restated Certificate of Incorporation. Incorporated by
reference to Exhibit (4)(a) of the Registrant's Form 10-Q
for the quarter ended July 31, 1988.........................
3.2 By-Laws. Incorporated by reference to Exhibit (3)(b) of the
Registrant's Form 8-K under Item 5 dated November 20,
1987........................................................
4.0 Stockholder Rights Agreement between the Registrant and
ChaseMellon Shareholder Services L.L.C. dated December 16,
1999*.......................................................
4.1 Form of Note Purchase Agreement dated as of July 30, 1998
for the private placement of $30 million of 6.69% Senior
Notes due July 31, 2008 with Modern Woodman of America,
American Life and Casualty Insurance Company, Massachusetts
Mutual Life Insurance Company, Baystate Health Systems, Inc.
and Principal Life Insurance Company. Incorporated by
reference to Exhibit 4.1 of the Registrant's Form 10-Q for
the quarter ended July 31, 1998.............................
4.2 Credit Agreement dated as of July 31, 1998 among the
Registrant, Bank of America National Trust and Savings
Association, as Agent, Letter of Credit Issuing Bank and the
Other Financial Institutions Party Thereto. Incorporated by
reference to Exhibit 4.0 of the Registrant's Form 10-Q for
the quarter ended July 31, 1998.............................
4.3 Waiver and First Amendment, dated as of January 8, 1999 and
effective as of October 31, 1998, to Credit Agreement dated
as of July 31, 1998 among the Registrant, Bank of America
National Trust and Savings Association, as Agent, Letter of
Credit Issuing Bank and The Other Financial Institutions
Party Thereto. Incorporated by reference to Exhibit 4.3 of
the Registrant's Form 10-K for the year ended October 31,
1998........................................................
4.4 Secured Promissory Note between Optical Coating Laboratory,
Inc. and Aid Association for Lutherans dated November 8,
1995. Incorporated by reference to Exhibit 4.8 of the
Registrant's Form 10-K for the year ended October 31,
1995........................................................
4.5 Capital Equipment Lease Agreement dated as of February 20,
1996 between Optical Coating Laboratory, Inc. and Fleet
Credit Corporation. Incorporated by reference to Exhibit
4.10 of the Registrant's Form 10-K for the year ended
October 31, 1996............................................
4.6 Capital Equipment Lease Agreement dated as of June 19, 1996
between Flex Products, Inc. and Fleet Credit Corporation.
Incorporated by reference to Exhibit 4.11 of the
Registrant's Form 10-K for the year ended October 31,1996...
9.0 Not applicable..............................................
10.0 Registrant's 1999 Incentive Compensation Plan. Incorporated
by reference to Exhibit 99 of the Registrant's Form S-8
dated September 3, 1999(1)..................................
10.1 Registrant's 1999 Employee Stock Purchase Plan. Incorporated
by reference to Exhibit 99 of the Registrant's Form S-8
dated September 3, 1999(1)..................................
10.2 Registrant's 1999 Director Stock Plan. Incorporated by
reference to Exhibit 99 of the Registrant's Form S-8 dated
September 3, 1999(1)........................................
10.3 Registrant's 1998 Incentive Compensation Plan. Incorporated
by reference to Exhibit 99 of the Registrant's Form S-8
dated December 14, 1998(1)..................................
10.4 Registrant's 1996 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated March 8, 1996(1)............................
10.5 Registrant's 1995 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated March 10, 1995(1)...........................
10.6 Registrant's 1993 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated March 8, 1993(1)............................
10.7 Registrant's 1992 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated March 8, 1992(1)............................
10.8 Registrant's 1991 Incentive Compensation Plan. Incorporated
by reference to Exhibit A of the Registrant's Proxy
Statement dated February 25, 1991(1)........................
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
10.9 Form of Directors' and Officers' Indemnification Agreement.
Incorporated by reference to Exhibit (10)(j) of the
Registrant's Form 10-K for the year ended October 31,
1987(1).....................................................
10.10 Form of Change in Control Employment Agreements between the
Registrant and its Executive Officers dated November 20,
1999(1)*....................................................
10.11 Form of Change in Control Employment Agreements between the
Registrant and certain of its employees dated November 20,
1999(1)*....................................................
10.12 Form of Employment Assurance Agreements between the
Registrant and its key technical and professional employees
dated as of November 20, 1999(1)*...........................
10.13 License and Supply Agreement between Flex Products, Inc. and
SICPA Holding, S.A. dated as of December 2, 1994.
Incorporated by reference to Exhibit 10.1 of Registrant's
Form S-3 dated April 22, 1999...............................
10.14 Second Amendment to the License and Supply Agreement by and
between Flex Products, Inc. and SICPA Holding S.A. dated as
of December 22, 1998. Incorporated by reference to Exhibit
10.11 of Registrant's Form 10-K for the year ended October
31, 1998. (Confidential treatment has been granted on
portions of this document.).................................
10.15 Amended and Restated Agreement by and between JDS FITEL Inc.
and Optical Coating Laboratory, Inc. dated as of April 15,
1999. Incorporated by reference to Exhibit 10.2 of
Registrant's Form S-3 dated April 22, 1999..................
10.16 2000 Management Incentive Plan(1)*..........................
11 Not applicable..............................................
12 Not applicable..............................................
13 Not applicable..............................................
16 Not applicable..............................................
18 Not applicable..............................................
21 Subsidiaries of the Registrant*.............................
22 Not applicable..............................................
23.1 Independent Auditors' Consent and Report on
Schedules -- Deloitte & Touche LLP*.........................
23.2 Independent Auditors' Consent -- KPMG LLP*..................
24 Not applicable..............................................
27 Financial Data Schedule for the year ended October 31, 1999*
28 Not applicable..............................................
99 Not applicable..............................................
</TABLE>
- ---------------
* An asterisk designates items not previously filed.
(1) Designates management contracts or compensatory plan arrangements required
to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
<PAGE> 1
EXHIBIT 4.0
OPTICAL COATING LABORATORY, INC.
and
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
as RIGHTS AGENT
Rights Agreement
Dated as of December 17, 1999
1
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. Certain Definitions..................................................... 4
2. Appointment of Rights Agent............................................. 7
3. Issue of Rights Certificates............................................ 8
4. Form of Rights Certificates............................................. 10
5. Countersignature and Registration....................................... 11
6. Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificate................. 12
7 . Exercise of Rights; Purchase Price; Expiration Date of Rights........... 13
8. Cancellation and Destruction of Rights Certificates..................... 16
9. Reservation and Availability of Capital Stock........................... 16
10. Preferred Stock Record Date............................................. 18
11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights........................................................ 19
12. Certificate of Adjusted Purchase Price or Number of Shares.............. 31
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.... 32
14. Fractional Rights and Fractional Shares................................. 35
15. Rights of Action........................................................ 37
16. Agreement of Rights Holders............................................. 37
17. Rights Certificate Holder Not Deemed a Stockholder...................... 38
18. Concerning the Rights Agent............................................. 38
19. Merger or Consolidation or Change of Name of Rights Agent............... 39
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
20. Duties of Rights Agent.................................................. 40
21. Change of Rights Agent.................................................. 43
22. Issuance of New Rights Certificates..................................... 44
23. Redemption and Termination.............................................. 45
24. Notice of Certain Events................................................ 46
25. Notices................................................................. 47
26. Supplements and Amendments.............................................. 48
27. Successors.............................................................. 49
28. Determinations and Actions by the Board of Directors, etc............... 49
29. Benefits of this Agreement.............................................. 50
30. Severability............................................................ 50
31. Governing Law........................................................... 50
32. Counterparts............................................................ 51
33. Descriptive Headings.................................................... 51
</TABLE>
Exhibit A -- Certificate of Designation, Preferences and Rights
Exhibit B -- Form of Rights Certificate
Exhibit C -- Form of Summary of Rights
3
<PAGE> 4
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of December 17, 1999 (the "Agreement"),
between Optical Coating Laboratory, Inc., a Delaware corporation (the
"Company"), and ChaseMellon Shareholder Services L.L.C. (the "Rights Agent").
W I T N E S S
WHEREAS, on December 14, 1999 (the "Rights Dividend Declaration Date"),
the Board of Director's of the Company authorized and declared a dividend
distribution of one Right for each share of common stock, par value $.01 per
share, of the Company (the "Common Stock") outstanding at the close of business
on December 16, 1999 (the "Record Date"), and has authorized the issuance of one
Right (as such number may hereinafter be adjusted pursuant to the provisions of
Section 11(p) hereof) for each share of Common Stock of the Company issued
between the Record Date (whether originally issued or delivered from the
Company's treasury) and the Distribution Date, each Right initially representing
the right to purchase one one-thousandth of a share of Series A Preferred Stock
of the Company having the rights, powers and preferences set forth in the form
of Certificate of Designation, Preferences and Rights attached hereto as Exhibit
A, upon the terms and subject to the conditions hereinafter set forth (the
"Rights");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
20% or more of the shares of Common Stock then outstanding, but shall not
include the Company, any Subsidiary of the Company, any employee benefit plan of
the Company or of any Subsidiary of the Company, or any Person or entity
organized, appointed or established by the Company for or pursuant to the terms
of any such plan.
4
<PAGE> 5
(b) Affiliate and Associate shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended and in effect on the date of this
Agreement (the "Exchange Act").
(c) A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to beneficially own any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such right
is exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon the
exercise of conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however, that a person shall not be deemed the "Beneficial
Owner" of, or to "beneficially own," (A) securities tendered pursuant to a
tender or exchange offer made by such Person or any of such Person's Affiliates
or Associates until such tendered securities are accepted for purchase or
exchange, or (B) securities issuable upon exercise of Rights at any time prior
to the occurrence of a Triggering Event, or (C) securities issuable upon
exercise of Rights from and after the occurrence of a Triggering Event which
Rights were acquired by such Person or any of such Person's Affiliates or
Associates prior to the Distribution Date or pursuant to Section 3(a) or Section
22 hereof (the "Original Rights") or pursuant to Section 11(i) hereof in
connection with an adjustment made with respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in writing; provided,
however, that a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this subparagraph (ii) as a result of an
agreement, arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (A) arises solely from a revocable proxy given in
response to a public proxy or consent solicitation made pursuant to, and in
5
<PAGE> 6
accordance with, the applicable provisions of the General Rules and Regulations
under the Exchange Act, and (B) is not also then reportable by such Person on
Schedule 13D under the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such Person
(or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing), for the purpose of
acquiring, holding, voting (except pursuant to a revocable proxy as described in
the proviso to subparagraph (ii) of this paragraph (c) or disposing of any
voting securities of the Company
(d) "Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the State of California are authorized or
obligated by law or executive order to close
(e) "Close of Business" on any given date shall mean 5:00 P.M., Pacific
time, on such date; provided, however, that if such date is not a Business Day
it shall mean 5:00 P.M., Pacific time, on the next succeeding Business Day;
(f) "Common Stock" shall mean the common stock, par value $.01 per
share, of the Company, except that "Common Stock" when used with reference to
any Person other than the Company, shall mean the capital stock of such Person
with the greatest voting power, or the equity securities or other equity
interest having power to control or direct the management, of such Person;
(g) [This section intentionally left blank];
(h) "Person" shall mean any individual, firm, corporation, partnership
or other entity;
(i) "Preferred Stock" shall mean shares of Series A Preferred Stock, par
value $.01 per share, of the Company and, to the extent that there are not a
sufficient number of shares of Series A Preferred Stock authorized to permit the
full exercise of the Rights, any other series of Preferred Stock, par value $.01
per share, of the Company designated for such purpose containing terms
substantially similar to the terms of the Series A Preferred Stock;
6
<PAGE> 7
(j) "Section 11(a)(ii) Event" shall mean any event described in Section
11(a)(ii)(A) or (B) hereof;
(k) "Section 13 Event" shall mean any event described in clauses (x),
(y) or (z) of Section 13(a) hereof;
(l) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such;
(m) "Subsidiary" shall mean, with reference to any Person, any
corporation of which an amount of voting securities sufficient to elect at least
a majority of the directors of such corporation is beneficially owned, directly
or indirectly, by such Person, or otherwise controlled by such Person;
(n) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights in
accordance with the terms and conditions hereof, and the Rights Agent hereby
accepts such appointment. The Company may from time to time appoint such
Co-Rights Agents as it may deem necessary or desirable.
Section 3. Issue of Rights Certificates.
(a) Until the earlier of (i) the close of business on the tenth day
after the Stock Acquisition Date or (ii) the close of business on the tenth day
after the date that a tender or exchange offer by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of any such
plan) is first published, sent or given, within the meaning of Rule 14d-2 (a) of
the General Rules and Regulations under the Exchange Act, if upon consummation
thereof, such Person would be the Beneficial Owner of 30% or more of the shares
of Common Stock then outstanding (the earlier of (i) and (ii) being herein
referred to as the "Distribution Date"); (x) the Rights will be evidenced
(subject to
7
<PAGE> 8
the provisions of paragraph (b) of this Section 3) by the certificates for the
Common Stock registered in the name of the holders of the Common Stock (which
certificates for Common Stock shall be deemed also to be certificates for
Rights) and not by separate certificates, and (y) the Rights will be
transferable only in connection with the transfer of the underlying shares of
Common Stock (including a transfer to the Company). As soon as practicable after
the Distribution Date, the Rights Agent will send, by first-class, insured,
postage prepaid mail, to each record holder of the Common Stock as of the close
of business on the Distribution Date, at the address of such holder shown on the
records of the Company, one or more rights certificates, in substantially the
form of Exhibit B hereto (the "Rights Certificates") evidencing one Right for
each share of Common Stock so held, subject to adjustment as provided herein. In
the event that an adjustment in the number of Rights per share of Common Stock
has been made pursuant to Section 11(p) hereof, at the time of distribution of
the Rights Certificates, the Company shall make the necessary and appropriate
rounding adjustments (in accordance with Section 14(a) hereof) so that Rights
Certificates representing only whole numbers of Rights are distributed and cash
is paid in lieu of any fractional Rights. As of and after the Distribution Date,
the Rights will be evidenced solely by such Rights Certificates as promptly as
practicable following the Record Date and the Company will send a copy of a
Summary of Rights, in substantially the form attached hereto as Exhibit B (the
"Summary of Rights"), by first-class, postage prepaid mail, to each record
holder of the Common Stock as of the close of business on the Record Date, at
the address of such holder shown on the records of the Company. With respect to
certificates for the Common Stock outstanding as of the Record Date, until the
Distribution Date, the Rights will be evidenced by such certificates for the
Common Stock and the registered holders of the Common Stock shall also be the
registered holders of the associated Rights. Until the earlier of the
Distribution Date or the Expiration Date (as such term is defined in Section 7
hereof), the transfer of any certificates representing shares of Common Stock in
respect of which Rights have been issued shall also constitute the transfer of
the Rights associated with such shares of Common Stock; (c) Rights shall be
issued in respect of all shares of Common Stock which are issued after the
Record Date but prior to the earlier of
8
<PAGE> 9
the Distribution Date or the Expiration Date. Certificates representing such
shares of Common Stock shall also be deemed to be certificates for Rights, and
shall bear the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Rights Agreement between Optical
Coating Laboratory, Inc. (the "Company") and ChaseMellon Shareholder
Services L.L.C. (the "Rights Agent") dated as of December 17, 1999 (the
"Rights Agreement"), the terms of which are hereby incorporated herein
by reference and a copy of which is on file at the principal offices of
the Rights Agent. Under certain circumstances, as set forth in the
Rights Agreement, such Rights will be evidenced by separate certificates
and will no longer be evidenced by this certificate. The Rights Agent
will mail to the holder of this certificate a copy of the Rights
Agreement, in effect on the date of mailing, without charge promptly
after receipt of a written request therefor. Under certain circumstances
set forth in the Rights Agreement, Rights issued to, or held by, any
Person who is, was or becomes an Acquiring Person or any Affiliate or
Associates thereof (as such terms are defined in the Rights Agreement),
whether currently held by or on behalf of such Person or by any
subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until
the earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any of such certificates shall also constitute the transfer of the Rights
associated with the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase and
of assignment to be printed on the reverse thereof) shall each be substantially
in the form set forth in Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange or inter-dealer
9
<PAGE> 10
quotation system of a registered national securities association on which the
Rights may from time to time be listed, traded or quoted or to conform to usage.
Subject to the provisions of Section 11 and Section 22 hereof, the Rights
Certificates, whenever distributed, shall be dated as of the Record Date and on
their face shall entitle the holders thereof to purchase such number of one
one-thousandths of a share of Preferred Stock as shall be set forth therein at
the price set forth therein (such exercise price per one one-thousandth of a
share, the Purchase Price), but the amount and type of securities purchasable
upon the exercise of each Right and the Purchase Price thereof shall be subject
to adjustment as provided herein;
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22
hereof that represents Rights beneficially owned by: (i) an Acquiring Person or
any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect of avoidance of Section 7(e) hereof, and any Rights
Certificate issued pursuant to Section 6, Section 11, or Section 22 hereof upon
transfer, exchange, replacement or adjustment of any other Rights Certificate
referred to in this sentence, shall contain (to the extent feasible) the
following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights Certificate
and the Rights represented hereby may become null and void in the
circumstances specified in Section 7(e) of such Agreement.
10
<PAGE> 11
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the Company
by its Chairman of the Board, its President or any Vice President, either
manually or by facsimile signature, and shall have affixed thereto the Company's
seal or a facsimile thereof which shall be attested by the Secretary or an
Assistant Secretary of the Company, either manually or by facsimile signature.
The Rights Certificates shall be manually countersigned by the Rights Agent and
shall not be valid for any purpose unless so countersigned. In case any officer
of the Company who shall have signed any of the Rights Certificates shall cease
to be such officer of the Company before countersignature by the Rights Agent
and issuance and delivery by the Company, such Rights Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and delivered
by the Company with the same force and effect as though the person who signed
such Rights Certificates had not ceased to be such officer of the Company; and
any Rights Certificate may be signed on behalf of the Company by any person who,
at the actual date of the execution of such Rights Certificate, shall be a
proper officer of the Company to sign such Rights Certificate, although at the
date of the execution of this Rights Agreement any such person was not such an
officer; (b) following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the date of each of the Rights
Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e) and Section
14 hereof, at any time after the close of business on the Distribution Date, and
at or prior to the close of business on the Expiration Date, any Rights
Certificate or Certificates may be transferred, split up, combined or exchanged
for another Rights Certificate or Certificates,
11
<PAGE> 12
entitling the registered holder to purchase a like number of one one-thousandths
of a share of Preferred Stock (or, following a Triggering Event, Common Stock,
other securities, cash or other assets, as the case may be) as the Rights
Certificate or Certificates surrendered then entitled such holder (or former
holder in the case of a transfer) to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Rights Certificate or Certificates
shall make such request in writing delivered to the Rights Agent, and shall
surrender the Rights Certificate or Certificates to be transferred, split up,
combined or exchanged at the principal office or offices of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the Company shall be
obligated to take any action whatsoever with respect to the transfer of any such
surrendered Rights Certificate until the registered holder shall have completed
and signed the certificate contained in the form of assignment on the reverse
side of such Rights Certificate and shall have provided such additional evidence
of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e) and
Section 14 hereof, countersign and deliver to the Person entitled thereto a
Rights Certificate or Rights Certificates, as the case may be, as so requested.
The Company may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer, split
up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificate if
mutilated, the Company will execute and deliver a new Rights Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
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(a) Subject to Section 7(e) hereof, the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restriction on exercisability
set forth in Section 9(c), Section 11.(a)(iii) and Section 23(a) hereof) in
whole or in part at any time after the Distribution Date upon surrender of the
Rights Certificate, with the form of election to purchase and the certificate on
the reverse side thereof duly executed, to the Rights Agent at the principal
office or offices of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the total number of one
one-thousandths of a share (or other securities, cash or other assets, as the
case may be) as to which such surrendered Rights are then exercisable, at or
prior to the earlier of (i) the close of business on December 20, 2001, (the
"Final Expiration Date"), or (ii) the time at which the Rights are redeemed as
provided in Section 23 hereof (the earlier of (i) and (ii) being herein referred
to as the "Expiration Date").
(b) The Purchase Price for each one one-thousandth of a share of
Preferred Stock pursuant to the exercise of a Right shall initially be $600, and
shall be subject to adjustment from time to time as provided in Sections 11 and
13(a) hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Right. Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly executed,
accompanied by payment, with respect to each Right so exercised, of the Purchase
Price per one one-thousandth of a share of Preferred Stock (or other shares,
securities, cash or other assets, as the case may be) to be purchased as set
forth below and an amount equal to any applicable transfer tax, the Rights Agent
shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition
from any transfer agent of the shares of Preferred Stock (or make available, if
the Rights Agent is the transfer agent for such shares) certificates for the
total number of one one-thousandths of a share of Preferred Stock to be
purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) if the Company shall have elected to
deposit the total number of shares of Preferred Stock issuable upon exercise of
the Rights hereunder with a depository agent, requisition from the depository
agent depository receipts representing such number of one
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one-thousandths of a share of Preferred Stock as are to be purchased (in which
case certificates for the shares of Preferred Stock represented by such receipts
shall be deposited by the transfer agent with the depository agent) and the
Company will direct the depository agent to comply with such request, (ii)
requisition from the Company the amount of cash, if any, to be paid in lieu of
fractional shares in accordance with Section 14 hereof, (iii) after receipt of
such certificates or depository receipts, cause the same to be delivered to or
upon the order of the registered holder of such Rights Certificate, registered
in such name or names as may be designated by such holder, and iv) after receipt
thereof, deliver such cash, if any, to or upon the order of the registered
holder of such Rights Certificate. The payment of the Purchase Price (as such
amount may be reduced pursuant to Section 11(a)(iii) hereof) may be made in cash
or by certified bank check or bank draft payable to the order of the Company. In
the event that the Company is obligated to issue other securities (including
Common Stock) of the Company, pay cash and/or distribute other property pursuant
to Section 11(a) hereof, the Company will make all arrangements necessary so
that such other securities, cash and/or other property are available for
distribution by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to, or upon the order of, the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of a Section 11.(a)(ii) Event, any Rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
become such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receive such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
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holders of equity interests in such Acquiring Person or to any Person with whom
the Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has a primary purpose or effect the avoidance of this Section 7(e), shall
become null and void without any further action and no holder of such Rights
shall have any rights whatsoever with respect to such Rights, whether under any
provision of this Agreement or otherwise. The Company shall use all reasonable
efforts to insure that the provisions of this Section 7(e) and Section 4(b)
hereof are complied with, but shall have no liability to any holder of Rights
Certificates or other Person as a result of its failure to make any
determinations with respect to an Acquiring Person or its Affiliates, Associates
or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights; Certificates. All
Rights Certificates Surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Rights Certificates to the Company, or shall, at the written request of
the Company, destroy such canceled Rights Certificates, and in either such case
shall deliver a
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certificate of destruction or a certificate of cancellation, as may be
appropriate, thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued shares of Preferred Stock
(and, following the occurrence of a Triggering Event, out of its authorized and
unissued shares of Common Stock and/or other securities or out of its authorized
and issued shares held in its treasury), the number of shares of Preferred Stock
(and, following the occurrence of a Triggering Event, Common Stock and/or other
securities) that, as provided in this Agreement including Section 11(a)(iii)
hereof, will be sufficient to permit the exercise in full of all outstanding
Rights.
(b) So long as the shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or securities) issuable and
deliverable upon the exercise of the Rights may be listed on any national
securities exchange or inter-dealer quotation system of a registered national
securities association on which the Preferred Stock may from time to time be
listed, traded or quoted, the Company shall use its best efforts to cause, from
and after such time as the Rights become exercisable, all shares reserved for
such issuance to be listed on such exchange or quotation system upon official
notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, a registration statement under the Securities Act of 1933 (the "Act"),
with respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Act) until the earlier of (A) the date as of which the
Rights are no longer exercisable for such securities, and (B) the date of the
expiration-of the Rights. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the
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securities or blue sky laws of the various states in connection with the
exercisability of the Rights. The Company may temporarily suspend, for a period
of time not to exceed ninety (90) days after the date set forth in clause (i) of
the first sentence of this Section 9(c), the exercisability of the Rights in
order to prepare and file such registration statement and permit it to become
effective. Upon any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, as well an a public announcement at such time as the suspension is no
longer in effect that the Rights are presently exercisable. In addition, if the
Company shall determine that a registration statement is required following the
Distribution Date, the Company may temporarily suspend the exercisability of the
Rights until such time as a registration statement has been declared effective.
Notwithstanding any provision of this Agreement to the contrary, the
Rights shall not be exercisable in any jurisdiction if the requisite
qualification in such jurisdiction shall not have been obtained or the exercise
thereof shall not be permitted under applicable law.
(d) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all one one-thousandths of a share of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such shares (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Rights Certificates and
of any certificates for a number of one one-thousandths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) upon the
exercise of Rights. The Company shall not, however, be required to pay any
transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a Person other than, or the issuance or delivery of a
number of one one-thousandths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in respect of a name other than
that of,
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the registered holder of the Rights Certificates evidencing Rights surrendered
for exercise or to issue or deliver any certificates for a number of one
one-thousandths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no much tax is due.
Section 10. Preferred Stock Record Date. Each person in whose name any
certificate for a number of one one-thousandths of a share of Preferred Stock
(or Common Stock and/or other securities, as the case may be) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of such fractional shares of Preferred Stock (or Common Stock and/or
other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Preferred Stock (or
Common Stock and/or other securities, as the case may be) transfer books of the
Company are closed, such Person shall be deemed to have become the record holder
of such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Stock (or Common
Stock and/or other securities, as the case may be) transfer books of the Company
are open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Rights Certificate shall not be entitled to any rights of a stockholder of the
Company with respect to shares for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares covered by
each Right and
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the number of Rights outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a)(i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Stock payable in shares of
Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine the
outstanding Preferred Stock into a smaller number of shares, or (D) issue any
shares of its capital stock in a reclassification of the Preferred Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation), except
as otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification, and the
number and kind of shares of Preferred Stock or capital stock, as the case may
be, issuable on such date, shall be proportionately adjusted so that the holder
of any Right exercised after such time shall be entitled to receive, upon
payment of the Purchase price then in effect, the aggregate number and kind of
shares of Preferred Stock (or Common Stock and/or other securities as the case
may be), which, if such Right had been exercised immediately prior to such date
and at a time when the Preferred Stock transfer books of the Company were open,
he would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination or reclassification. If an event occurs
which would require an adjustment under both this Section 11 (a)(i) and Section
11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be
in addition to, and shall be made prior to, any adjustment required pursuant to
Section 11(a)(ii) hereof
(ii) In the event:
(A) any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company, or any Person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan), alone or together with
its Affiliates and Associates, shall, at any time after the Rights Dividend
Declaration Date, become the Beneficial Owner of 30% or more of the shares of
Common Stock then outstanding, unless the event causing the 30% threshold to be
crossed is (x) a transaction set forth in Section 13(a) hereof, or
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(y) an all cash tender offer or an exchange offer for all outstanding shares of
Common Stock of the Company, or any other transaction which, in either such
instance, a majority of the Directors then in office, after receiving advice
from one or more investment banking firms, has determined to be (a) at a price
which is fair to stockholders (taking into account all factors which such
members of the Board deem relevant including, without limitation, prices which
could reasonably be achieved if the Company or its assets were "sold on an
orderly basis designed to realize maximum value) and (b) otherwise in the best
interests of the Company and its stockholders (any transaction described in this
clause (y) being hereafter referred to as an "Approved Transaction"), or
(B) during such time as there is an Acquiring Person, there shall
be a reclassification of securities (including any reverse stock split), or
recapitalization of the Company, or any merger or consolidation of the Company
with any of its Subsidiaries or any other transaction or series of transactions
involving the Company or any of its Subsidiaries, other than a transaction or
transactions to which the provisions of Section 13(a) apply (whether or not with
or into or otherwise involving an Acquiring Person) which has the effect,
directly or indirectly, of increasing by more than 1% the proportionate share of
the outstanding shares of any class of equity securities of the Company or any
of its Subsidiaries which is directly or indirectly beneficially owned by any
Acquiring Person or any Associate or Affiliate of any Acquiring Person, or
(C) any Acquiring Person or any Associate or Affiliate of any
Acquiring Person, at any time after the date of this Agreement, directly or
indirectly, (1) shall sell, purchase, lease, exchange, mortgage, pledge transfer
or otherwise dispose of assets (in one or more transactions), to, from, with or
of, as the case may be, the Company or any of its Subsidiaries (including, in
the case of Subsidiaries, by way of a merger or consolidation of any
Subsidiary), on terms and conditions less favorable to the Company than the
Company would be able to obtain in arms-length negotiation with an unaffiliated
third party, other than pursuant to a transaction set forth in Section 13(a)
hereof, (2) shall receive any compensation from the Company or any of its
Subsidiaries other than compensation for full time employment as a regular
"employee at rate" in accordance with the Company's (or its "Subsidiaries") past
practices, or (3) shall receive
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the benefit, directly or indirectly (except proportionately as a shareholder and
except if resulting from a requirement of law or governmental regulation), of
any loans, assumptions of loans, advances, guarantees, pledges or other
financial assistance, or any tax credits or other tax advantage, provided by the
Company or any of its Subsidiaries, then, promptly following five (5) days after
the date of the occurrence of the event described in Section 11(a)(ii)(A) hereof
and promptly following the occurrence of any event described in Section
11(a)(ii)(B) hereof, proper provision shall be made so that each holder of a
Right (except as provided below and in Section 7(e) hereof) shall thereafter
have the right to receive, upon exercise thereof at the then current Purchase
Price in accordance with the terms of this Agreement, in lieu of the number of
one one-thousandths of a share of Preferred Stock, such number of shares of
Common Stock of the Company as shall equal the result obtained by (x)
multiplying the then current Purchase Price by the then number of one
one-thousandths of a share of Preferred Stock for which a Right was exercisable
immediately prior to the first occurrence of a Section 11(a)(ii) Event, and (y)
dividing that product (which, following such first occurrence, shall thereafter
be referred to as the "Purchase Price" for each Right and for all purposes of
this Agreement) by 50% of the current market price (determined pursuant to
Section ll(d) hereof) per share of Common Stock on the date of such first
occurrence (such number of shares, the "Adjustment Shares").
(iii) In the event that the number of shares of Common Stock
which are authorized by the Company's certificate of incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights are not sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this Section 11(a), the
Company shall: (A) determine the excess of (1) the value of the Adjustment
Shares issuable upon the exercise of a Right (the "Current Value") over (2) the
Purchase Price (such excess, "the Spread"), and (B) with respect to each Right,
make adequate provision to substitute for the Adjustment Shares, upon payment of
the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price,
(3) Common Stock or other equity securities of the Company (including, without
limitation, shares, or units of shares, of preferred stock which the Board of
Directors of the Company has
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deemed to have the same value as shares of Common Stock (such shares of
preferred stock, Common stock equivalents), (4) debt securities of the Company,
(5) other assets, or (6) any combination of the foregoing, having an aggregate
value equal to the Current Value, where such aggregate value has been determined
by the Board of Directors of the Company based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors of the
Company; provided, however, if the Company shall not have made adequate
provision to deliver value pursuant to clause (B) above within thirty (30) days
following the later of (x) the first occurrence of a Section 11(a)(ii) Event and
(y) the date on which the Company's right of redemption pursuant to Section
23(a) expires (the later of (x) and (y) being referred to herein as the Section
11(a)(ii) "Trigger Date"), then the Company shall be obligated to deliver, upon
the surrender for exercise of a Right and without requiring payment of the
Purchase Price, shares of Common Stock (to the extent available) and then, if
necessary, cash, which shares and/or cash have an aggregate value equal to the
Spread. If the Board of Directors of the Company shall determine in good faith
that it is likely that sufficient additional shares of Common Stock could be
authorized for issuance upon exercise in full of the Rights, the thirty (30) day
period set forth above may be extended to the extent necessary, but not more
than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that
the Company may seek shareholder approval for the authorization of such
additional shares (such period, as it may be extended, the "Substitution
Period"). To the extent that the Company determines that some action need be
taken pursuant to the first and/or second sentences of this Section 11(a)(iii),
the Company (x) shall provide, subject to Section 7(e) hereof, that such action
shall apply uniformly to all outstanding Rights, and (y) may suspend the
exercisability of the Rights until the expiration of the Substitution Period in
order to seek any authorization of additional shares and/or to decide the
appropriate form of distribution to be made pursuant to such first sentence and
to determine the value thereof. In the event of any such suspension, the Company
shall issue a public announcement stating that the exercisability of the Rights
has been temporarily suspended, as well as a public announcement at such time as
the suspension is no longer in effect. For purposes of this Section 11(a)(iii),
the value of the Common Stock shall be
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the current market price (as determined pursuant to Section 11(d) hereof) per
share of the Common Stock on the Section 11(a)(ii) Trigger Date and the value of
any "Common Stock" equivalent shall be deemed to have the same value as the
Common Stock on such date.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within forty-five (45) calendar
days after such record date) Preferred Stock (or shares having the same rights,
privileges and preferences as the shares of Preferred Stock ("equivalent
preferred stock") or securities convertible into Preferred Stock or equivalent
preferred stock at a price per share of Preferred Stock or per share of
equivalent preferred stock (or having a conversion price per share, if a
security convertible into Preferred Stock or equivalent preferred stock) less
than the current market price (as determined pursuant to Section 11(d) hereof)
per share of Preferred Stock on such record date, the Purchase Price to be in
effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date, plus the number of shares of Preferred Stock which the
aggregate offering price of the total number of shares of Preferred Stock and/or
equivalent preferred stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price, and the denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date, plus the number of
additional shares of Preferred Stock and/or equivalent preferred stock to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price may
be paid by delivery of consideration part or all of which may be in a form other
than cash, the value of such consideration shall be as determined in good faith
by the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be binding on the rights
Agent and the holders of the Rights. Shares of Preferred Stock owned by or held
for the account of the Company shall not be deemed outstanding for the purpose
of any such computation.
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Such adjustment shall be made successively whenever such a record date
is fixed, and in the event that such rights or warrants are not so issued, the
Purchase Price shall be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to
all holders of Preferred Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a regular quarterly
cash dividend out of the earnings or retained earnings of the Company), assets
(other than a dividend payable in Preferred Stock, but including any dividend
payable to stock other than Preferred Stock) or Subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price to be
in effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the current market price (as determined pursuant to
Section 11(d) hereof) per share of Preferred Stock on such record date, less the
fair market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent) of the portion of the cash, assets or evidences of indebtedness so
to be distributed or of such subscription rights or warrants applicable to a
share of Preferred Stock and the denominator of which shall be such current
market price (as determined pursuant to Section 11(d) hereof) per share of
Preferred Stock. Such adjustments shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so made,
the Purchase Price shall be adjusted to be the Purchase Price which would have
been in effect if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the current market
price per share of Common Stock on any date shall be deemed to be the average of
the daily closing prices per share of such Common Stock for the thirty (30)
consecutive; Trading Days (as such term is hereinafter defined) immediately
prior to such date, and for purposes of computations made pursuant to Section
11(a)(iii) hereof, the Current market price per share of Common
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Stock on, any date shall be deemed to be the average of the daily closing prices
per share of such Common Stock for the ten (10) consecutive Trading Days
immediately following such date; provided, however, that in the event that the
current market price per share of the Common Stock is determined during a period
following the announcement by the issuer of such Common Stock of (A) a dividend
or distribution on such Common Stock payable in shares of such Common Stock or
securities convertible into shares of such Common Stock (other than the Rights),
or (B) any subdivision, combination or reclassification of such Common Stock,
and prior to the expiration of the requisite thirty (30) Trading Day or ten (10)
Trading Day period, as set forth above, after the tax-dividend date for such
dividend or distribution, or the record date for such subdivision, combination
or reclassification, then, and in each such case, the current market price shall
be properly adjusted to take into account tax-dividend trading. The closing
price for each day shall be the last cafe price, regular way, or, in case no
such sale takes place on each day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Common Stock are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading or, if the shares of Common Stock
are not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, and reported by the National
Association of Securities Dealers, Inc. Automated Quotation System ('NASDAQ)
or such other system then in use, or, if on any such date the shares of Common
Stock are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker, making a market in
the Common Stock selected by the Board of Directors of the Company. If on any
such date no market maker is making a market in the Common Stock, the fair value
of such shares on such date as determined in good faith by the Board of
Directors of the Company shall be used. The term Trading Day shall mean a day on
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which the principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading is open for the transaction of business
or, if the shares of Common Stock are not listed or admitted to trading on any
national securities exchange, a Business Day. If the Common Stock is not
publicly held or not so listed or traded, current market price per share shall
mean the fair value per share as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the current
market price per share of Preferred Stock shall be determined in the same manner
as set forth above for the Common Stock in clause (i) of this Section 11(d)
(other than the last sentence thereof). If the current market price per share of
Preferred Stock cannot be determined in the manner provided above or if the
Preferred Stock does not publicly held or listed or traded in a manner described
in clause (i) of this Section 11(d), the current market price per share of
Preferred Stock shall be conclusively deemed to be an amount equal to 100 (such
number may be appropriately adjusted for such events as stock splits, such
dividends and recapitalizations with respect to the Common Stock occurring after
the date of this Agreement) multiplied by the current market price per share of
the Common Stock. If neither the Common Stock nor the Preferred Stock is
publicly held or so listed or traded, current market price per share of the
Preferred Stock shall mean the fair value per share as determined in good faith
by the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be conclusive for all
purposes. For all purposes of this Agreement, the Current market price. of one
one-thousandth of a share of Preferred Stock shall be equal to the Current
market price. of one share of Preferred Stock divided by 100 required unless
such adjustment would require an increase or decrease of at least one percent
(1%) in the Purchase Price; provided, however, that any adjustments which by
reason of this Section 11(e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 11 shall be made to the nearest cent or to the nearest
ten-thousandth of a share of Common Stock or other share or one-millionth of a
share of Preferred Stock, as the case may be. Notwithstanding the
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first sentence of this Section 11(e), any adjustment required by this Section 11
shall be made no later than the earlier of (i) three (3) years from the date of
the transaction which mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii)
or Section 13(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock other than Preferred
Stock, thereafter the number of such other shares so receivable upon exercise of
any Right and the Purchase Price thereof shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Stock contained in Section 11(a), (b),
(c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Section 7,
9,10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like
terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
share of Preferred Stock purchasable from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-thousandths of
a share of Preferred Stock (calculated to the nearest one-millionth) obtained by
(i) multiplying (x) the number of one one-thousandths of a share covered by a
Right immediately prior to this adjustment, by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price, and (ii) dividing
the product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in lieu of any adjustment in the
number of one one-thousandths of a share of Preferred Stock purchasable upon the
exercise of a Right. Each
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of the Rights outstanding after the adjustment in the number of Rights shall be
exercisable for the number of one one-thousandth of a share of Preferred Stock
for which a Right was exercisable immediately prior to such adjustment. Each
Right held of record prior to such adjustment of the number of Rights shall
become that number of Rights (calculated to the nearest one-ten-thousandth)
obtained by dividing the Purchase Price in effect immediately prior to
adjustment of the Purchase Price by the Purchase Price in effect immediately
after adjustment of the Purchase Price. The Company shall; make a public
announcement of its election to adjust the number of Rights, indicating the
record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least ten (10) days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Rights Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates to be so distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-thousandths of a share of Preferred Stock issuable upon
the exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per one one-thousandth of a
share and the number of one one-thousandth of a share which were expressed in
the initial Rights Certificates issued hereunder.
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<PAGE> 29
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then stated value, if any, of the number of one
one-thousandths of a share of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable such number of one one-thousandths of a share
of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-thousandths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
over the above the number of one one-thousandths of a share of Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional shares (fractional or otherwise) or securities upon the occurrence of
the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any
(i) consolidation or subdivision of the Preferred Stock,
(ii) issuance wholly for cash of any shares of Preferred Stock at
less than the current market price,
(iii) issuance wholly for cash of shares of Preferred Stock or
securities which by their terms are convertible into or exchangeable for shares
of Preferred Stock,
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(iv) stock dividends or (v) issuance of rights, options or
warrants referred to in this Section 11, hereafter made by the Company to
holders of its Preferred Stock shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time
after the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o) hereof), or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transaction each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the shareholders of the Person who
constitutes, or would constitute, the Principal Party for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution Date,
it will not, except as permitted by Section 23 or Section 26 hereof, take (or
permit any Subsidiary to take) any action if at the time such action is taken it
is reasonably foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the Rights Dividend Declaration
Date and prior to the Distribution Date;
(i) declare a dividend on the outstanding shares of Common Stock
payable in shares of Common Stock,
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(ii) subdivide the outstanding shares of Common Stock, or
(iii) combine the outstanding shares of Common Stock into a
smaller number of shares, the number of Rights associated with each share of
Common Stock then outstanding, or issued or delivered thereafter but prior to
the Distribution Date, shall be proportionately adjusted so that the number of
Rights thereafter associated with each share of Common Stock following any such
event shall equal the result obtained by multiplying the number of Rights
associated with each share of Common Stock immediately prior to such event by a
fraction the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 and Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Common Stock, a copy of such certificate, and (c) mail a
brief summary thereof to each holder of a Rights Certificate (or, if prior to
the Distribution Date, to each holder of a certificate representing shares of
Common Stock) in accordance with Section 25 hereof. The Rights Agent shall be
fully protected in relying on any such certificate and on any adjustment therein
contained.
Section 13. Consolidation Merger or Sale or Transfer of Assets or
Earnings Power.
(a) In the event that, following the Stock Acquisition Date, directly or
indirectly, (x) the Company shall consolidate with, or merge with and into, any
other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), and the Company shall not be the continuing
or surviving corporation of such consolidation or merger, (y) any Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof) shall consolidate with, or merge with or into, the Company, and
the Company shall be the
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continuing or surviving corporation of such consolidation or merger and, in
connection with such consolidation or merger, all or part of the outstanding
shares of Common Stock shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property, or (z) the Company
shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell
or otherwise transfer), in one transaction or a series of related transactions,
assets or earning power aggregating more than 50% of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any Person or Persons
(other than the Company or any Subsidiary of the Company in one or more
transactions each of which complies with Section 11(o) hereof), then, and in
each such case (except as may be contemplated by Section 13(d) hereof), proper
provision shall be made so that: (i) each holder of a Right, except as provided
in Section 7(e) hereof, shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price in accordance with the terms
of this Agreement, such number of validly authorized and issued, fully paid,
non-assessable and freely traceable shares of Common Stock of the Principal
Party (as such term is hereinafter defined), not subject to any liens,
encumbrances, rights of first refusal or other adverse claims, as shall be equal
to the result obtained by (1) multiplying the then current Purchase Price by the
number of one one-thousandth of a share of Preferred Stock for which a Right is
exercisable immediately prior to the first occurrence of a Section 13 Event (or,
if a Section 11(a)(ii) Event has occurred prior to the first occurrence of a
Section 13 Event, multiplying the number of such one one-thousandths of a share
for which a Right was exercisable immediately prior to the first occurrence of a
Section ll(a)(ii) Event by the Purchase Price in effect immediately prior to
such first occurrence), and dividing the product (which, following the first
occurrence of a Section 13 Event, shall be referred to as the Purchase Price for
each Right and for all purposes of this Agreement) by (2) 50% of the current
market price (determined pursuant to Section ll(d)(i) hereof) per share of the
Common Stock of such Principal Party on the date of consummation of such Section
13 Event; (ii) such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such Section 13 Event, all the obligations and duties of
the Company pursuant to this Agreement: (iii) the term Company shall thereafter
be deemed to refer to such Principal Party, it being specifically
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<PAGE> 33
intended that the provisions of Section 11 hereof shall apply only to such
Principal Party following the first occurrence of a Section 13 Event; (iv) much
Principal Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common Stock) in connection
with the consummation of any such transaction as may be necessary to assure that
the provisions hereof shall thereafter be applicable, as nearly as reasonably
may be, in relation to its shares of Common Stock thereafter deliverable upon
the exercise of the Rights; and (v) the provisions of Section 11(a)(ii) hereof
shall be of no effect following the first occurrence of any Section 13 Event.
(b) Principal Party shall mean (i) in the case of any transaction
described in clause (x) or (y) of the first sentence of Section 13(a), the
Person that is the issuer of any securities into which shares of Common Stock of
the Company are converted in such merger or consolidation, and if no securities
are so issued, the Person that is the other party to such merger or
consolidation; and (ii) in the case of any transaction described in clause (z)
of the first sentence of Section 13(a), the Person that is the party receiving
the greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions; provided, however, that in any such case, (1) if
the Common Stock of such Person is not at much time and has not been
continuously over the preceding twelve (12) month period registered under
Section 12 of the Exchange Act, and such Person is a direct or indirect
Subsidiary of another Person the Common Stock of which is and has been so
registered, Principal Party shall refer to such other Person; and (2) in case
such Person is a Subsidiary, directly or indirectly, of more than one Person,
the Common Stocks of two or more of which are and have been so registered,
Principal Party shall refer to whichever of such Persons is the issuer of the
Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
authorized shares of its Common Stock which have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13 and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in paragraphs (a) and
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(b) of this Section 13 and further providing that, as soon as practicable after
the date of any consolidation, merger or sale of assets mentioned in paragraph
(a) of this Section 13, the Principal Party will (i) prepare and file a
registration statement under the Act, with respect to the Rights and the
securities purchasable upon exercise of the Rights on an appropriate form, and
will use its best effort to cause such registration statement to (A) become
effective as soon as practicable after such filing and (B) remain effective
(with a prospectus at all times meeting the requirements of the Act) until the
Expiration Date; and (ii) will deliver to holders of the Rights historical
financial statements for the Principal Parties and each of its Affiliates which
comply in all respects with the requirements for registration on Form 10 under
the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. In the event that a
Section 13 Event shall occur at any time after the occurrence of a Section
11(a)(ii) Event, the Rights which have not theretofore been exercised shall
thereafter become exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary, Section
13 shall not be applicable to a transaction described in subparagraphs (x) and
(y) of Section 13(a) if (i) such transaction is consummated with a Person or
Persons who acquired shares of Common Stock pursuant to an Approved Transaction
(or a wholly-owned subsidiary of any such Person or Persons), (ii) the price per
share of Common Stock offered in such transaction is not less than the price per
share of Common Stock paid to all holders of shares of Common Stock whose shares
were purchased pursuant to such Approved Transaction, and (iii) the form of
consideration being offered to the remaining holders of shares of Common Stock
pursuant to such transaction is the same as the form of consideration paid
pursuant to such Approved Transaction. Upon consummation of any such transaction
contemplated by this Section 13(d), all Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights,
except prior to the Distribution Date as provided in Section 11(p) hereof, or to
distribute Rights
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Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Rights Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right.
For purposes of this Section 14(a), the current market value of a whole
Right shall be the closing price of the Rights for the Trading Day immediately
prior to the date on which such fractional Rights would have been otherwise
issuable. The closing price of the Rights for any day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading, or if the Rights are not
listed or admitted to trading on any national securities, exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company. If on any such date no such market maker is making a
market in the Rights the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions which are integral multiples of one
one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-thousandth of a
share of Preferred Stock). In lieu of fractional shares of Preferred Stock that
are not integral multiples of one one-thousandth of a share of Preferred Stock,
the Company may pay to the registered holders of Rights Certificates at
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<PAGE> 36
the time such Rights are exercised as herein provided an amount in cash equal to
the same fraction of the current market value of one one-thousandth of a share
of Preferred Stock. For purposes of this Section 14(b), the current market value
of one one-thousandth of a share of Preferred Stock shall be one one-thousandth
of the closing price of a share of Preferred Stock (as determined pursuant to
Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date of
such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall
not be required to issue fractions of shares of Common Stock upon exercise of
the Rights or to distribute certificates which evidence fractional shares of
Common Stock. In lieu of fractional shares of Common Stock, the Company may pay
to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the name fraction of the
current market value of one (1) share of Common Stock. For purposes of this
Section 14(c), the current market value of one share of Common Stock shall be
the closing price of one share of Common Stock (as determined pursuant to
Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
such exercise.
(d) The holder of a Right by the acceptance of the Rights expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of
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<PAGE> 37
Rights would not have an adequate remedy at law for any breach of this Agreement
and shall be entitled to specific performance of the obligations hereunder and
injunctive relief against actual or threatened violations of the obligations
hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that: (a) prior to the Distribution Date, the
Rights will be transferable only in connection with the transfer of Common
Stock; (b) after the Distribution Date, the Rights Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office or offices of the Rights Agent designated for such purposes, duly
endorsed or accompanied by a proper instrument of transfer and with the
appropriate forms and certificates fully executed; (c) subject to Section 6(a)
and Section 7(f) hereof, the Company and the Rights Agent may deem and treat the
person in whose name a Rights Certificate (or, prior to the Distribution Date,
the associated Common Stock certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Rights Certificates or the associated Common Stock
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent, subject to
the last sentence of Section 7(e) hereof, shall be required to be affected by
any notice to the contrary; and (d) notwithstanding anything in this Agreement
to the contrary, neither the Company nor the Rights Agent shall have any
liability to any holder of a Right or other Person as a result of its inability
to perform any of its obligations under this Agreement by reason of any
preliminary or permanent injunction or other order, decree or ruling issued by a
court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission, or any statute, rule, regulation or
executive order promulgated or enacted by any governmental authority,
prohibiting or otherwise restraining performance of such obligation; provided,
however, the Company must use its best efforts to have any such order, decree or
ruling lifted or otherwise overturned as soon as possible.
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Section 17. Rights Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of one
one-thousandths of a share of Preferred Stock or any other securities of the
Company which may at any time be issuable on the exercise of the Rights
represented thereby, nor shall anything contained herein or in any Rights
Certificate be construed to confer upon the holder of any Rights Certificate, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in Section 24 hereof), or to receive dividends or subscription rights,
or otherwise, until the Right or Rights evidenced by such Rights Certificate
shall have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises. Anything to the
contrary notwithstanding, in no event shall the Rights Agent be liable for
special, punitive, indirect, consequential or incidental loss or damage of any
kind whatsoever (including but not limited to lost profits), even if the Rights
Agent has been advised of the likelihood of such loss of damage.
(b) The Rights Agent shall be protected and shall incur no liability for
or in respect of any action taken, suffered or omitted by it in connection with
its administration
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of this Agreement in reliance upon any Rights Certificate or certificate for
Common Stock or for other securities of the Company, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice, direction,
consent, certificate, statement, or other paper or document believed by it to be
genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto:
Provided, however, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates, either in the name of the predecessor or
in the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall
not have been countersigned, the Right. Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and in all such
cases such Rights
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Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement, upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of current market price) be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate signed by the
Chairman of the Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution
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hereof by the Rights Agent) or in respect of the validity or execution of any
Rights Certificate (except its countersignature thereof); nor shall it be
responsible for any breach by the Company of any covenant or condition contained
in this Agreement or in any Rights Certificate; nor shall it be responsible for
any adjustment required under the provisions of Section 11 or Section 13 hereof
or responsible for the manner, method or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such adjustment
(except with respect to the exercise of Rights evidenced by Rights Certificates
after actual notice of any such adjustment); nor shall it by any act hereunder
be deemed to make any representation or warranty as to the authorization or
reservation of any shares of Common Stock or Preferred Stock to be issued
pursuant to this Agreement or any Rights Certificate or as to whether any shares
of Common Stock or Preferred Stock will, when so issued, be validly authorized
and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall
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<PAGE> 42
preclude the Rights Agent from acting in any other capacity for the Company or
for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct; provided, however, reasonable care was exercised in the
selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise of transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days notice in writing mailed to the Company, and to each
transfer agent of the Common Stock and Preferred Stock, by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30) days notice in writing, mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Common Stock
and Preferred Stock, by registered or certified mail, and to the holders of the
Rights Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of
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<PAGE> 43
thirty (30) days after giving notice of such removal or after it has been
notified in writing of such resignation or in capacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who shall,
with such notice, submit his Rights Certificate for inspection by the Company),
then any registered holder of any Rights Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of the State of New York (or of any other state of the United States so long as
such corporation is authorized to do business as a banking institution in the
State of New York), in good standing, having a principal office in the State of
New York, which is authorized under such laws to exercise corporate trust powers
and is subject to supervision or examination by federal or state authority and
which has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $100,000,000. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Stock and the Preferred Stock, and mail a notice thereof in writing
to the registered holders of the Rights Certificates. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the
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<PAGE> 44
Rights Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of Common Stock
following the Distribution Date and prior to the redemption or expiration of the
Rights, the Company (a) shall, with respect to shares of Common Stock so issued
or sold pursuant to the exercise of stock options or under any employee plan or
arrangement, or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company, and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Directors of the Company, issue Rights
Certificates representing the appropriate number of Rights in connection with
such issuance or all: provided, however, that (i) no such Rights Certificate
shall be issued if, and to the extent that, the Company shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Company or the Person to whom such Rights Certificate
would be issued, and (ii) no such Rights Certificate shall be issued if, and to
the extent that, appropriate adjustment shall otherwise have been made in lieu
of the issuance thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at its option, at any
time prior to the earlier of (i) the close of business on the tenth day
following the Stock Acquisition Date (or, if the Stock Acquisition Date shall
have occurred prior to the Record Date, the close of business on the tenth day
following the Record Date), or (ii) the Final Expiration Date, redeem all but
not less than all the then outstanding Rights at a redemption price of $.01 per
Right, as such amount may be appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (such
redemption price being hereinafter referred to as the "Redemption Price"), and
the Company may, at its option, pay the Redemption Price either in shares of
Common Stock (based on the "current market value", as defined in Section
11(d)(i) hereof, of the shares of Common Stock at the time of redemption) or
cash; provided, however, that if, following the occurrence of a Stock
Acquisition Date and following the expiration of the right of redemption
hereunder but prior to any Triggering Event, (i) a Person who is an Acquiring
Person shall have transferred or otherwise disposed of a number of shares of
Common Stock in one transaction or series of transactions, not directly or
indirectly
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<PAGE> 45
involving the Company or any of its Subsidiaries, which did not result in the
occurrence of a Triggering Event such that such Person is thereafter a
Beneficial Owner of 10% or less of the outstanding shares of Common Stock, and
(ii) there are no other Persons, immediately following the occurrence of the
event described in clause (i), who are Acquiring Persons, then the right of
redemption shall be reinstated and thereafter be subject to the provisions of
this Section 23. Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable after the first occurrence of a
Section 11(a)(ii) Event until such time as the Company's right of redemption
hereunder has expired.
(b) Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights, evidence of which shall have been filed
with the Rights Agent and without any further action and without any notice, the
right to exercise the Rights will terminate and the only right thereafter of the
holders of Rights shall be to receive the Redemption Price for each Right so
held. Promptly after the action of the Board of Directors ordering the
redemption of the Rights, the Company shall give notice of such redemption to
the Rights Agent and the holders of the then outstanding Rights by mailing such
notice to all such holders at each holder's last address as it appears upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the Transfer Agent for the Common Stock. Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of redemption will state the method
by which the payment of the Redemption Price will be made.
Section 24. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular quarterly cash dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, or, (iii) to effect any reclassification of its Preferred
Stock
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<PAGE> 46
(other than a reclassification involving only the subdivision of outstanding
shares of Preferred Stock), or (iv) to effect any consolidation or merger into
or with any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof), or to effect any sale or
other transfer (or to permit one or more of its Subsidiaries to effect any sale
or other transfer), in one transaction or a series of related transactions, of
more than 50% of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person or Persons (other than the Company and/or
any of its Subsidiaries in one or more transactions each of which complies with
Section 11(o) hereof), or (v) to effect the liquidation, dissolution or winding
up of the Company, then, in each such case, the Company shall give to each
holder of a Rights Certificate, to the extent feasible and in accordance with
Section 25 hereof, a notice of such proposed action, which shall specify the
record date for the purposes of such stock dividend, distribution of rights or
warrants, or the date on which such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution, or winding up is to take place and the
date of participation therein by the holders of the shares of Preferred Stock,
if any such date is to be fixed, and such notice shall be so given in the case
of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least twenty (20) days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of the shares of Preferred
Stock whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof
shall occur, then, in any such case, (I) the Company shall as soon as
practicable thereafter give to each holder of a Rights Certificate, to the
extent feasible and in accordance with Section 25 hereof, a notice of the
occurrence of such event, which shall specify the event and the consequences of
the event to holders of Rights under Section 11(a)(ii) hereof, and (ii) all
references in the preceding paragraph to Preferred Stock shall be deemed
thereafter to refer to Common Stock and/or, if appropriate, other securities.
Section 25. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the
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<PAGE> 47
Company shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing with the Rights
Agent) as follows:
Optical Coating Laboratory, Inc.
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
Attention: Joseph Zils, Secretary
Subject to the provisions of Section 21, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company as follows:
ChaseMellon Shareholder Services L.L.C.
235 Montgomery Street, 23rd Floor
San Francisco, CA 94104
Attention: Patricia Dedrick
Notices or demands authorized by this Agreement to be given or made by
the Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution date, to the holder of certificates representing
Shares of Common Stock) shall be sufficiently given if sent by first-class mail,
postage prepaid, addressed to such holder at the address of such holder as shown
on the registry books of the Company.
Section 26. Supplements and Amendments. Prior to the Distribution Date
and subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date and
subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company directs, supplement or amend this Agreement
without the approval of any holders of Rights Certificates in order (i) to cure
any ambiguity, (ii) to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, (iii)
to shorten or lengthen any time period hereunder or (iv) to change or supplement
the provisions hereunder in any manner which the Company may deem necessary or
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<PAGE> 48
desirable and which shall not adversely affect the interests of the holders of
Rights Certificates (other than an Acquiring Person or an Affiliate or Associate
of an Acquiring Person); provided, this Agreement may not be supplemented or
amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time
period relating to when the Rights may be redeemed at such time as the Rights
are not then redeemable, or (B) any other time period unless such lengthening is
for the purpose of protecting, enhancing or clarifying the rights of, and/or the
benefits to, the holders of Rights. Upon the delivery of a certificate from an
appropriate officer of the Company which states that the proposed supplement or
amendment is in compliance with the terms of this Section 26, the Rights Agent
shall execute such supplement or amendment. Prior to the Distribution Date, the
interests of the holders of Rights shall be deemed coincident with the interests
of the Holders of Common Stock.
Section 27. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 28. Determinations and Actions by the Board of Directors. etc.
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3 (d)(1)(i) of the General Rules and Regulations
under the Exchange Act. The Board of Directors of the Company shall have the
exclusive power and authority to administer this Agreement and to exercise all
rights and powers specifically granted to the Board or to the Company, or as may
be necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
in good faith, shall (x) be final,
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<PAGE> 49
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights and all other parties, and (y) not subject the Board to any liability to
the holders of the Rights.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
Section 30. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated; provided,
however, that notwithstanding anything in this Agreement to the contrary, if any
such term, provision, covenant or restriction is held by such court or
authority to be invalid, void or unenforceable and the Board of Directors of the
Company determines in its good faith judgment that severing the invalid language
from this Agreement would adversely affect the purpose or effect of this
Agreement, the right of redemption set forth in Section 23 hereof shall be
reinstated and shall not expire until the close of business on the tenth day
following the date of such determination by the Board of Directors.
Section 31. Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely with such State.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
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Section 33. Descriptive Headings. Descriptive headings of the several
sections of his Agreement are inserted the convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all
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as of the day and year first above written.
Attest: OPTICAL COATING LABORATORY, INC.
By
----------------------------------------------
Name
Title:
------------------------------------------
Attest: CHASEMELLON SHAREHOLDER SERVICES L.L.C.
By
----------------------------------------------
Name
Title:
------------------------------------------
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Exhibit A
FORM OF CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES A PREFERRED STOCK
of
Optical Coating Laboratory, Inc.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, Charles J. Abbe, President and Chief Executive Officer, and Joseph
C. Zils, Secretary, of Optical Coating Laboratory, Inc., a corporation organized
and existing under the General Corporation Law of the State of Delaware, in
accordance with the provisions of Section 103 thereof,
DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the said Corporation, the said Board of
Directors on November 25, 1987, adopted the following resolution creating a
series of 10,000 shares of Preferred Stock designated as Series A Preferred
Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock of the Corporation be
and it hereby is created, and that the designation and amount thereof and the
voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
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Section 1. Designation and Amount.
The shares of such series shall be designated as "Series A Preferred
Stock", shall have a par value of $.01 per share, and the number of shares
constituting such series shall be 10,000.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Preferred Stock with respect to dividends, if any, the holders of
shares of Series A Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the last day of January, April,
July and October in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to 1,000 times the aggregate per share amount of all cash dividends, and
1,000 times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, par value $.01 per
share, of the Corporation (the "Common Stock") subject to the provision for
adjustment hereinafter set forth, since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any time after November
25, 1987 (the Rights Declaration Date), (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of
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<PAGE> 54
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on the Common Stock (other than a dividend
payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 30 days prior to the date fixed
for the payment thereof.
Section 3. Voting Rights.
The holders of shares of Series A Preferred Stock shall have the
following voting rights:
(A) Subject to the provisions for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters
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<PAGE> 55
submitted to a vote of the stockholders of the Corporation. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the number of votes per share
to which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares
of Series A Preferred Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C) (i) If at any time dividends on any Series A Preferred Stock shall
be in arrears in an amount equal to six (6) quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a period (herein
called a "default period") which shall extend until such time when all accrued
and unpaid dividends for all previous quarterly dividend periods and for the
current quarterly dividend period on all shares of Series A Preferred Stock then
outstanding shall have been declared and paid or set apart for payment. During
each default period, all holders of Preferred Stock (including holders of the
Series A Preferred Stock) with dividends in arrears in an amount equal to six
(6) quarterly dividends thereon, voting as a class, irrespective of series,
shall have the right to elect two (2) Directors.
(ii) During any default period, such voting right of the holders
of Series A Preferred Stock may be exercised initially at a special meeting
called pursuant to subparagraph (iii) of this Section 3(C) or at any annual
meeting of stockholders, and thereafter at annual meetings of stockholders
provided that neither such voting right nor the right of the holders of any
other series of Preferred Stock, if any, to increase, in certain cases, the
authorized number of Directors shall be exercised unless the holders of ten
percent (10%) in number of shares of Preferred Stock outstanding shall be
present in
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<PAGE> 56
person or by proxy. The absence of a quorum of the holders of Common Stock shall
not affect the exercise by the holders of Preferred Stock of such voting right.
At any meeting at which the holders of Preferred Stock shall exercise such
voting right initially during an existing default period, they shall have the
right, voting as a class, to elect Directors to fill such vacancies, if any, in
the Board of Directors as may then exist up to two (2) Directors or, if such
right is exercised at an annual meeting, to elect two (2) Directors. If the
number which may be so elected at any special meeting does not amount to the
required number, the holders of the Preferred Stock shall have the right to make
such increase in the number of Directors as shall be necessary to permit the
election by them of the required number. After the holders of the Preferred
Stock shall have exercised their right to elect Directors in any default period
and during the continuance of such period, the number of Directors shall not be
increased or decreased except by vote of the holders of Preferred Stock as
herein provided or pursuant to the rights of any equity securities ranking
senior to or pari passu with the Series A Preferred Stock.
(iii) Notwithstanding anything to the contrary contained in the
Corporation's Certificate of Incorporation or By-Laws, unless the holders of
Preferred Stock shall, during an existing default period, have previously
exercised their right to elect Directors, the Board of Directors may order, or
any stockholder or stockholders owning in the aggregate not less than ten
percent (10%) of the total number of shares of Preferred Stock outstanding,
irrespective of series, may request, the calling of a special meeting of the
holders of Preferred Stock, which meeting shall thereupon be called by the
President, a Vice-President or the Secretary of the Corporation. Notice of such
meeting and of any annual meeting at which holders of Preferred Stock are
entitled to vote pursuant to this paragraph (C)(iii) shall be given to each
holder of record of Preferred Stock by mailing a copy of such notice to him at
his last address as the same appears on the books of the Corporation. Such
meeting shall be called for a time not earlier than 10 days and not later than
60 days after such order or request or in default of the calling of such meeting
within 60 days after such order or request, such meeting may be called on
similar notice by any stockholder or stockholders owning in the aggregate not
less than ten percent (10%) of the total number of shares of Preferred Stock
outstanding.
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<PAGE> 57
Notwithstanding the provisions of this paragraph (C)(iii), no such special
meeting shall be called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and
other classes of stock of the Corporation, if applicable, shall continue to be
entitled to elect the whole number of Directors until the holders of Preferred
Stock shall have exercised their right to elect two (2) Directors voting as a
class, after the exercise of which right (x) the Directors so elected by the
holders of Preferred Stock shall continue in office until their successors shall
have been elected by such holders or until the expiration of the default period,
and (y) any vacancy in the Board of Directors may (except as provided in
paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the
remaining Directors theretofore elected by the holders of the class of stock
which elected the Director whose office shall have become vacant. References in
this paragraph (C) to Directors elected by the holders of a particular class of
stock shall include Directors elected by such Directors to fill vacancies as
provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect Directors shall
cease, (y) the term of any Directors elected by the holders of Preferred Stock
as a class shall terminate, and (z) the number of Directors shall be such number
as may be provided for in the Certificate of Incorporation or By-Laws
irrespective of any increase made pursuant to the provisions of paragraph
(C)(ii) of this Section 3 (such number being subject, however, to change
thereafter in any manner provided by law or in the Certificate of Incorporation
or By-Laws). Any vacancies in the Board of Directors effected by the provisions
of clauses (y) and (z) in the preceding sentence may be filled by a majority of
the remaining Directors.
(D) Except as set forth herein, holders of Series A Preferred Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Stock as
set forth herein) for taking any corporate action.
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<PAGE> 58
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock, as provided in Section 2 hereof, are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable, or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Preferred Stock, or any shares of stock ranking on a parity with the
Series A Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
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<PAGE> 59
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares.
Any shares of Series A Preferred Stock purchased or otherwise acquired
by the Corporation in any manner whatsoever shall be retired and cancelled
promptly after the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock and may be
reissued as part of a new series of Preferred Stock to be created by resolution
or resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock unless, prior
thereto, the holders of shares of Series A Preferred Stock shall have received
$1,000 per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment (the
"Series A Liquidation Preference"). Following the payment of the full amount of
the Series A Liquidation Preference, no additional distributions shall be made
to the holders of shares of Series A Preferred Stock unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per share (the
Common Adjustment) equal to the quotient obtained by dividing (i) the absolute
value of the Series A Liquidation Preference by (ii) 1,000 (as appropriately
adjusted as set forth in subparagraph C below to reflect such events as stock
splits, stock dividends and recapitalizations with respect to the Common Stock)
(such number in clause (ii), the Adjustment Number.). Following the payment of
the full amount of the Series A Liquidation Preference and the Common Adjustment
in respect of all outstanding shares of Series A Preferred Stock and Common
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<PAGE> 60
Stock, respectively, holders of Series A Preferred Stock and holders of shares
of Common Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Adjustment Number to one
(1) with respect to such Preferred Stock and Common Stock, on a per share basis,
respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences it, of all other series of preferred stock, if any,
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the event, however,
that there are not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc.
In case the Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case the shares of Series A Preferred Stock shall at
the same time be similarly exchanged or changed in an amount per share (subject
to the provision for adjustment hereinafter set forth) equal to 1,000 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common Stock
is changed or exchanged. In the event the Corporation shall at any
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<PAGE> 61
time after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Series A Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption.
The shares of Series A Preferred Stock shall not be redeemable.
Section 9. Ranking.
The Series A Preferred Stock shall rank junior to all other series of
the Corporation's Preferred Stock as to the payment of dividends and the
distribution of assets, unless the terms of any such series shall provide
otherwise.
Section 10. Amendment.
The Certificate of Incorporation of the Corporation shall not be further
amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series A Preferred Stock so as to affect
them adversely without the affirmative vote of the holders of a majority or more
of the outstanding shares of Series A Preferred Stock, voting separately as a
class.
Section 11. Fractional Shares.
Series A Preferred Stock may be issued in fractions of a share which
shall entitle the holder thereof, in proportion to such holder's fractional
shares, to exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all of the rights of holders of shares
of Series A Preferred Stock.
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<PAGE> 62
DO HEREBY FURTHER CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the said Corporation, the said Board of
Directors on November 3, 1989, adopted the following resolution increasing the
number of authorized shares of Preferred Stock designated as Series A Preferred
Stock from 10,000 to 20,000:
RESOLVED, that the number of authorized shares of OCLI Preferred Stock
designated as Series A Preferred Stock be, and hereby is, increased to 20,000.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and
do affirm the foregoing as true under the penalties of perjury this 17th day of
December 1999.
- ------------------------------------
Charles J. Abbe, President
and Chief Executive Officer
Attest:
- ------------------------------------
Secretary
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<PAGE> 63
Exhibit B
[Form of Rights Certificate]
Certificate No. R-_________ ____________ Rights
NOT EXERCISABLE AFTER DECEMBER 20, 2001 OR EARLIER IF REDEEMED BY THE COMPANY.
THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER
RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS
DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR
WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7(e) OF SUCH AGREEMENT.
Rights Certificate
OPTICAL COATING LABORATORY, INC.
This certifies that , or
, registered assigns, is the registered owner of the
number of Rights set forth above, each of which entitles the owner thereof,
subject to the terms, provisions and conditions of the Rights Agreement, dated
as of December 17, 1999 (the "Rights Agreement"), between Optical Coating
Laboratory, Inc., a Delaware Corporation
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<PAGE> 64
(the "Company") and ChaseMellon Shareholder Services, L.L.C. (the "Rights
Agent"), to purchase from the Company at any time prior to 5:00 P.M.
(Pacific-time) on at the office or offices of the Rights Agent, designated for
such purpose, or its successors as Rights Agent, one one-thousandth of a fully
paid, non-assessable share of Series A Preferred Stock (the "Preferred Stock")
of the Company, at a purchase price of $600 per one one- thousandth of a share
(the "Purchase Price"), upon presentation and surrender of this Rights
Certificate with the Form of Election to Purchase and related Certificate duly
executed. The Purchase Price shall be paid in cash. The number of Rights
evidenced by this Rights Certificate (and the number of shares which may be
purchased upon exercise thereof) set forth above, and the Purchase Price per
share set forth above, are the number and Purchase Price as of December 17,
1999, based on the Preferred Stock as constituted at such date.
Upon the occurrence of a Section (11a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by
(i) an Acquiring Person or an Affiliate or Associate of any such
Acquiring Person (as such terms are defined in the Rights Agreement),
(ii) a transferee of any such Acquiring Person, Associate or Affiliate,
or
(iii) under certain circumstances specified in the Rights Agreement, a
transferee of a person who, after such transfer, became an Acquiring Person, or
an Affiliate or Associate of an Acquiring Person, such Rights shall become null
and void and no holder hereof shall have any right with respect to such Rights
from and after the occurrence of such Section 11(a)(ii) Event.
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<PAGE> 65
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities, which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office
of the Rights Agent and are also available upon written request to the Rights
Agent.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the principal office or offices of the Rights Agent designated for
such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of one one-thousandths of a share of Preferred
Stock as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
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<PAGE> 66
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Company at its option at a redemption
price of $.01 per Right in cash or in shares of Common Stock at any time prior
to the earlier of the close of business on (i) the tenth day following the Stock
Acquisition Date (as such time period may be extended pursuant to the Rights
Agreement), and (ii) the Final Expiration Date. After the expiration of the
redemption period, the Company's right of redemption may be reinstated if an
Acquiring Person reduces his beneficial ownership to 10% or less of the
outstanding shares of Common Stock in a transaction or series of transactions
not involving the Company.
No fractional shares of Preferred Stock will be issued upon the exercise
of any Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a share of Preferred Stock, which may, at the
election of the Company, be evidenced by depository receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the
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<PAGE> 67
Right or Rights evidenced by this Rights Certificate shall have been exercised
as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the signature of the proper officers of the Company and its
corporate seal.
ATTEST: OPTICAL COATING LABORATORY, INC.
By:
------------------------------------
Secretary
Countersigned:
CHASEMELLON SHAREHOLDER SERVICES L.L.C.
By:
------------------------------------
Authorized Signature
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<PAGE> 68
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Rights Certificate.)
FOR VALUE RECEIVED _________________________________________________
hereby sells, assigns and transfers unto (Please print name and address of
transferee) this Rights Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint Attorney, to
transfer the within Rights Certificate on the books of the within-named Company,
with full power of substitution.
Dated: _______________, 19__
Signature
-------------------------------
Signature Guaranteed:
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<PAGE> 69
Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [
] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated:______________, 19______ Signature
-----------------------------
Signature Guaranteed:
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<PAGE> 70
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
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<PAGE> 71
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights
represented by the Rights Certificate.)
To: OPTICAL COATING LABORATORY, INC.:
The undersigned hereby irrevocably elects to exercise Rights represented
by this Rights Certificate to purchase the shares of Preferred Stock issuable
upon the exercise of the Rights (or such other securities of the Company or of
any other person which may be issuable upon the exercise of the Rights) and
requests that certificates for such shares be issued in the name of and
delivered to:
Please insert social security or other identifying number:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
Dated: 19 Signature:
--------------- ---- ----------------------------------
Signature Guaranteed:
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<PAGE> 72
Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [
] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated: 19 Signature:
--------------- ---- ----------------------------------
Signature Guaranteed:
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<PAGE> 73
NOTICE
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
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<PAGE> 74
Exhibit C
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK
On December 14, 1999, the Board of Directors of Optical Coating
Laboratory, Inc. (the "Company") declared a dividend distribution of one Right
for each outstanding shares of the Company's Common Stock to stockholders of
record at the close of business on December 16, 1999. Each Right entitles the
registered holder to purchase from the Company a unit consisting of one
one-thousandth of a share (a "Unit") of Series A Preferred Stock, par value $.01
per share (the "Preferred Stock"), at a Purchase Price of $600 per Unit, subject
to adjustment. The Purchase Price shall be paid in cash. The description and
terms of the Rights are set forth in a Rights Agreement (the Rights Agreement*)
between the Company and ChaseMellon Shareholder Services L.L.C., as Rights
Agent.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. The Rights will separate from the Common Stock and a
distribution date (the "Distribution Date") will occur upon the earlier of (i)
10 days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding shares of
Common Stock (the "Stock Acquisition Date") or (ii) 10 days following the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning 30% or more of such outstanding shares of Common
Stock. Until the Distribution Date (i) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with such Common
Stock certificates, (ii) new Common Stock certificates issued after December 17,
1999 will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate.
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<PAGE> 75
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on December 20, 2001, unless earlier redeemed by
the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined by
the Board of Directors, only shares of Common Stock issued prior to the
Distribution Date will be issued with Rights. In the event that, at any time
following the Distribution Date, (i) a Person becomes the beneficial owner of
30% or more of the then outstanding shares of Common Stock (except pursuant to
an all cash offer for all outstanding shares of Common Stock, or any other
transaction which, in either such; instance, the independent Directors have
determined to be fair to and otherwise in the best interests of the Company and
its shareholders (an "Approved Transaction"), (ii) during such time as there is
an Acquiring Person, an event occurs which results in such Acquiring Person's
ownership interest being increased by more than 1% (e.g., a reverse stock
split), or (iii) an Acquiring Person engages in one or more "self-dealing"
transactions as set forth in the Rights Agreement, each holder of a Right will
thereafter have the right to receive, upon exercise, Common Stock (or, in
certain circumstances, cash, property or other securities of the Company) having
a value equal to two times the exercise price of the Right. Notwithstanding the
foregoing, following the occurrence of the events set forth in this paragraph,
all Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person will be null and
void.
However, Rights are not exercisable following the occurrence of an event
set forth above until such time as the Rights are no longer redeemable by the
Company as set forth below.
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<PAGE> 76
For example, at an exercise price of $600 per Right, each Right not
owned by an Acquiring Person (or by certain related parties) following an event
set forth in the preceding paragraph would entitle its holder to purchase $1200
worth of Common Stock (or other consideration, as noted above) for $600.
Assuming that the Common Stock had a per share value of $200 at such time, the
holder of each valid Right would be entitled to purchase 6 shares of Common
Stock for $600.
In the event that, at any time following the Stock Acquisition Date (i)
the Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation (other than in connection
with an Approved Transaction), or (ii) 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the Right. The events set forth
in this paragraph and in the second preceding paragraph are referred to as the
"Triggering Events."
The Purchase Price payable, and the number of Units of Preferred Stock
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) if holders of the Preferred Stock are granted certain
rights or warrants to subscribe for Preferred Stock or convertible Securities at
less than the current market price of the Preferred Stock, or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment in
cash will be made based on the
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<PAGE> 77
market price of the Preferred Stock on the last trading date prior to the date
of exercise. At any time until 10 days following the Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.01 per
Right in cash or in shares of Common Stock. After the redemption period has
expired, the Company's right of redemption may be reinstated if an Acquiring
Person reduces his beneficial ownership to 10% or less of the outstanding shares
of Common Stock in a transaction or series of transactions not involving the
Company. Immediately upon the action of the Board of Directors ordering
redemption of the Rights, the Rights will terminate and the only right of the
holders of Rights will be to receive the $.01 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
While the distribution of the Rights will not be taxable to stockholders
or to the Company, stockholders may, depending upon the circumstances, recognize
taxable income in the event that the Rights become exercisable for Common Stock
(or other consideration) of the Company or for Common Stock of the acquiring
company as set forth above.
Other than those provisions relating to the principal economic terms of
the Rights, any of the provisions of the Rights Agreement may be amended by the
Board of Directors of the Company prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board in order to cure any ambiguity, to make changes which do not adversely
affect the interests of holders of Rights (excluding the interest of any
Acquiring Person) or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable.
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<PAGE> 78
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit its Form 10-K for the fiscal year ended
October 31, 1999 and filed effective January 31, 2000. A copy of the Rights
Agreement is available free of charge from the Rights Agent. This summary
description of the Rights does not purport to be complete and is qualified in
its entirety by reference to the Rights Agreement, which is incorporated herein
by reference.
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<PAGE> 1
EXHIBIT 10.10
[LOGO] OPTICAL COATING LABORATORY, INC.
OFFICER: (Label)
OFFICER
EMPLOYMENT ASSURANCE AGREEMENT
AGREEMENT made this 30th day of October 1999, between Optical Coating
Laboratory, Inc. ("OCLI"), having its principal place of business at 2789
Northpoint Parkway, Santa Rosa, California, and the Officer referenced on the
label affixed above (hereinafter "Officer").
The purpose of this Agreement is to afford Officer additional security
concerning his or her employment with OCLI by providing for certain termination
payments to Officer in the event that there is a "Change in Control" or "Hostile
Change in Control" as described in the definitions set forth below. The
provisions of this Agreement shall only be effective in the event that there is
a Change in Control or Hostile Change in Control, and nothing in this Agreement
extends or expands Officer's present rights concerning employment with OCLI in
the absence of a Change in Control or Hostile Change in Control.
Based upon the foregoing, and in consideration of Officer's continued
employment with OCLI, OCLI agrees as follows:
1. Term. This Agreement shall be effective as of the date first written
above through November 20, 2001; provided, however, that if a Change in Control
or Hostile Change in Control occurs on or before November 20, 2001, this
Agreement shall remain in effect for two (2) years from the date of occurrence
of a Change in Control or Hostile Change in Control.
2. Termination
(a) Termination by Officer after Occurrence of a Hostile Change
in Control. Officer shall have the right to terminate his or her employment any
time during the period beginning three (3)
OFFICER
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
1
<PAGE> 2
months after the occurrence of a Hostile Change in Control and ending twelve
(12) months after the occurrence of such Hostile Change in Control. If Officer
terminates his or her employment during such time period, Officer shall be paid
an amount equal to the lesser of (i) eighteen (18) months of Officer's maximum
salary in effect within twelve (12) months of termination, or (ii) the maximum
amount payable under Section 280G of the Internal Revenue Code of 1986, as the
same may be amended from time to time (the "Code"), without any portion of such
amount being classified as an "excess parachute payment" within the meaning of
Section 280G(b)(1) of the Code, after taking into account all other "parachute
payments" within the meaning of Section 280G(b)(2) of the Code.
(b) Termination or Constructive Dismissal of Officer after
Occurrence of Change in Control. Except in the case of a Termination for Cause,
if any time within two (2) years after the occurrence of a Change in Control
either (i) OCLI terminates Officer's employment or (ii) Officer terminates his
or her employment following a Constructive Dismissal by OCLI, then Officer shall
be paid an amount equal to the lesser of (A) twenty-four (24) months of
Officer's maximum salary in effect within twelve (12) months of termination, or
(B) the maximum amount payable under Section 280G of the Code, without any
portion of such amount being classified as an "excess parachute payment" within
the meaning of Section 280G(b)(1) of the Code, after taking into account all
other "parachute payments" within the meaning of Section 280G(b)(2) of the Code.
If Officer is entitled to payment under this subparagraph b, Officer shall not
be entitled to payment under subparagraph a.
(c) Time of Payment. OCLI shall pay any amounts due to Officer
upon termination of Officer's employment.
(d) No Other Severance Payments. If Officer receives a payment
under subparagraph 2(a), Officer shall not be entitled to any severance payments
that might otherwise be payable to Officer.
3. Acceleration of Unvested Stock Options. Upon a Change in Control or
Hostile Change of Control as defined herein, the amount of unvested outstanding
stock options held by Officer that shall
OFFICER
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
2
<PAGE> 3
be immediately exercisable shall be the lesser of (i) all unvested outstanding
options or (ii) the maximum number of options that can become immediately
exercisable under Section 280G of the Code, without any of such options giving
rise to an "excess parachute payment" within the meaning of Section 280G(b)(1)
of the Code, after taking into account all other "parachute payments" within the
meaning of Section 280G(b)(2) of the Code. Except in the case of a Termination
for Cause, if any time within two (2) years after the occurrence of a Change in
Control or Hostile Change in Control either (i) OCLI terminates Officer's
employment or (ii) Officer terminates his or her employment following a
Constructive Dismissal by OCLI, then all remaining unvested outstanding options
held by Officer shall be immediately exercisable.
4. Certain Definitions. For purposes of this agreement, the following
terms have the meanings indicated:
(a) "Acquiring Person" shall mean any person who or which,
together with all Affiliates and Associates of such person, shall be the owner,
beneficial or otherwise, of more than twenty percent (20%) of the shares of
Common Stock of OCLI then outstanding, but shall not include OCLI, any
subsidiary of OCLI or, any employee benefit plan of OCLI or of any subsidiary of
OCLI, or any person or entity organized, appointed or established by OCLI for or
pursuant to the terms of any such plan.
(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended, and in effect
on the date of this Agreement.
(c) "Continuing Director" shall mean (i) any member of the Board
of Directors of OCLI, while such person is a member of the Board prior to the
date of this Agreement, or (ii) any person who subsequently becomes a member of
the Board, while such person is a member of the Board, if such person's
nomination for election or re-election to the Board is recommended or approved
by a majority of the Continuing Directors.
OFFICER
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
3
<PAGE> 4
(d) "Constructive Dismissal by OCLI" shall occur if OCLI demotes
Officer, reduces Officer's duties, decreases Officer's benefits or compensation,
or relocates Officer to a location outside of the community where Officer is
employed as of the date of the Change in Control or Hostile Change in Control.
(e) "Change in Control" shall mean the acquisition of more than
fifty percent (50%) of the shares of Common Stock of OCLI then outstanding by an
Acquiring Person, alone or together with such person's Affiliates or Associates,
including any such acquisitions pursuant to a "reorganization" within the
meaning of Section 181 of the California Corporations Code.
(f) "Hostile Change in Control" shall mean the occurrence of any
of the events described in subparagraph (i) or (ii) below:
(i) acquisition of more than twenty percent (20%) of the
shares of Common Stock of OCLI then outstanding by an Acquiring Person, alone or
together with such person's Affiliates or Associates, including any such
acquisitions pursuant to a "reorganization" within the meaning of Section 181 of
the California Corporations Code, and (B) the adoption by OCLI's Board of
Directors of a resolution (i) disapproving the acquisition in subparagraph
10(f), or (ii) declaring operative the provisions of this Agreement pertaining
to a Change in Control; or
(ii) The failure of a majority of the members of the Board
of Directors of Employer to be Continuing Directors.
(g) "Termination for Cause" shall mean a termination by OCLI
because of a willful breach by Officer in the course of his or her employment,
or in the case of his or her habitual neglect of his or her duties or continuing
incapacity to perform his or her duties.
5. Noncompetition.
(a) In consideration for the covenants of OCLI contained in Section 2
(including, without limitation, OCLI's payment obligations thereunder) and
Section 3, Officer agrees that, in the event that, following a Change in
Control, Officer ceases to be employed by OCLI (or any parent, subsidiary or
OFFICER
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
4
<PAGE> 5
affiliate of OCLI), then for a period of two (2) years after Officer's
employment ceases, Officer shall not do any of the following, either directly or
indirectly:
(i) Carry on or engage in any business that is similar to the
business being conducted by OCLI as of the date on which Officer's employment
ceases (a "Competitive Business"), whether as an employee, officer, contractor,
consultant, investor, shareholder, director, partner, principal, or in any other
individual or representative capacity; provided, however, that the aggregate
ownership by Officer of less than five percent (5%) of the outstanding equity of
any entity which may fit within the foregoing description shall not be deemed to
constitute a violation of this agreement not to compete; or
(ii) Solicit for employment in a Competitive Business (or cause
any person or entity controlled by Officer to so solicit for employment) any
employee, officer, director or consultant of OCLI (or its parent, subsidiaries
or affiliates) or take any action, directly or indirectly, to cause any such
person to terminate his or her business relationship with any of the foregoing;
or
(iii) For or on behalf of a Competitive Business, enter into any
transaction or business relationship with or solicit for any business purpose
any of OCLI's (or its parent's, subsidiaries' or affiliates') customers without
OCLI's prior written consent.
(b) The parties to this Agreement hereby stipulate that:
(i) The non-competition agreement contained herein is intended as
an agreement authorized by Section 16601 of the California Business and
Professions Code as it now exists ("Section 16601");
(ii) The provisions of Section 16601 are incorporated by
reference into this Section;
(iii) All terms used in this Section, including the terms "carry
on" and "business," shall have the same meaning as has been given, up to the
date of this Agreement, to such terms (as they are
OFFICER
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
5
<PAGE> 6
used in Section 16601) by the California Supreme Court and the Courts of Appeal
of the State of California; and
(iv) The remedy at law for any breach of this Section being
inadequate, OCLI shall be entitled, in addition to such other remedies as it may
have, to temporary and injunctive relief for any breach or threatened breach of
any provision of this Section, without proof of any actual damages that have
been or may be caused to it by such breach.
(c) The parties to this Agreement state and agree that this agreement
not to compete is reasonable and necessary to protect OCLI's business interests,
and this agreement not to compete imposes no undue hardship or burden on
Employee. Should any court or tribunal declare the foregoing agreement not to
compete to be unreasonable or void for any reason, the duration and/or
geographic scope of the agreement shall be modified to such shorter duration and
smaller geographic scope as to be upheld by said court or tribunal.
6. Effect of OCLI's Merger, Transfer of Assets or Dissolution. This
Agreement shall not be terminated by any merger or consolidation where OCLI is
not the consolidated or surviving corporation, transfer of substantially all of
the assets of OCLI, or voluntary or involuntary dissolution of OCLI. In the
event of any such merger, consolidation or transfer of assets, the surviving
corporation or the transferee of OCLI's assets shall be bound by the provisions
of this Agreement, and OCLI shall take all actions necessary to insure that such
corporation or transferee is bound by the provisions of this Agreement.
7. Agreement Supersedes Any Inconsistent Prior Agreements or
Understandings. The terms of this Agreement supersede any inconsistent prior
promises, policies, representations, understandings, arrangements or agreements
between the parties.
OFFICER
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
6
<PAGE> 7
8. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
OPTICAL COATING LABORATORY, INC.
By
-------------------------------------
Joseph C. Zils, Corporate Secretary
OFFICER:
- ------------------------------- ----------
Signature Date
Address:
- -------------------------------
- -------------------------------
OFFICER
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
7
<PAGE> 1
EXHIBIT 10.11
[LOGO] OPTICAL COATING LABORATORY, INC.
(Label)
EMPLOYMENT ASSURANCE AGREEMENT
AGREEMENT made this 30th day of October 1999, between Optical Coating
Laboratory, Inc. ("OCLI"), having its principal place of business at 2789
Northpoint Parkway, Santa Rosa, California, and the Employee referenced on the
label affixed above (hereinafter "Employee").
The purpose of this Agreement is to afford Employee additional security
concerning his or her employment with OCLI by providing for certain termination
payments to Employee in the event that there is a "Change in Control" or
"Hostile Change in Control" as described in the definitions set forth below. The
provisions of this Agreement shall only be effective in the event that there is
a Change in Control or Hostile Change in Control, and nothing in this Agreement
extends or expands Employee's present rights concerning employment with OCLI in
the absence of a Change in Control or Hostile Change in Control.
Based upon the foregoing, and in consideration of Employee's continued
employment with OCLI, OCLI agrees as follows:
1. Term. This Agreement shall be effective as of the date first written
above through November 20 , 2001; provided, however, that if a Change in Control
or Hostile Change in Control occurs on or before November 20, 2001, this
Agreement shall remain in effect for two (2) years from the date of occurrence
of a Change in Control or Hostile Change in Control.
2. Termination
(a) Termination by Employee after Occurrence of a Hostile Change
in Control. Employee shall have the right to terminate his or her employment any
time during the period beginning three (3) months after the occurrence of a
Hostile Change in Control and ending twelve (12) months after
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
1
<PAGE> 2
the occurrence of such Hostile Change in Control. If Employee terminates his or
her employment during such time period, Employee shall be paid an amount equal
to the lesser of (i) eighteen (18) months of Employee's maximum salary in effect
within twelve (12) months of termination, or (ii) the maximum amount payable
under Section 280G of the Internal Revenue Code of 1986, as the same may be
amended from time to time (the "Code"), without any portion of such amount being
classified as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code, after taking into account all other "parachute payments"
within the meaning of Section 280G(b)(2) of the Code.
(b) Termination or Constructive Dismissal of Employee after
Occurrence of Change in Control. Except in the case of a Termination for Cause,
if any time within two (2) years after the occurrence of a Change in Control
either (i) OCLI terminates Employee's employment or (ii) Employee terminates his
or her employment following a Constructive Dismissal by OCLI, then Employee
shall be paid an amount equal to the lesser of (A) twenty-four (24) months of
Employee's maximum salary in effect within twelve (12) months of termination, or
(B) the maximum amount payable under Section 280G of the Code, without any
portion of such amount being classified as an "excess parachute payment" within
the meaning of Section 280G(b)(1) of the Code, after taking into account all
other "parachute payments" within the meaning of Section 280G(b)(2) of the Code.
If Employee is entitled to payment under this subparagraph b, Employee shall not
be entitled to payment under subparagraph a.
(c) Time of Payment. OCLI shall pay any amounts due to Employee
upon termination of Employee's employment.
(d) No Other Severance Payments. If Employee receives a payment
under subparagraph 2(a), Employee shall not be entitled to any severance
payments that might otherwise be payable to Employee.
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
2
<PAGE> 3
3. Acceleration of Unvested Stock Options. Except in the case of a
Termination for Cause, if any time within two (2) years after the occurrence of
a Change in Control or Hostile Change in Control either (i) OCLI terminates
Employee's employment or (ii) Employee terminates his or her employment
following a Constructive Dismissal by OCLI, then all unvested outstanding
options held by Employee shall be immediately exercisable.
4. Certain Definitions. For purposes of this agreement, the following
terms have the meanings indicated:
(a) "Acquiring Person" shall mean any person who or which,
together with all Affiliates and Associates of such person, shall be the owner,
beneficial or otherwise, of more than twenty percent (20%) of the shares of
Common Stock of OCLI then outstanding, but shall not include OCLI, any
subsidiary of OCLI or, any employee benefit plan of OCLI or of any subsidiary of
OCLI, or any person or entity organized, appointed or established by OCLI for or
pursuant to the terms of any such plan.
(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended, and in effect
on the date of this Agreement.
(c) "Continuing Director" shall mean (i) any member of the Board
of Directors of OCLI, while such person is a member of the Board prior to the
date of this Agreement, or (ii) any person who subsequently becomes a member of
the Board, while such person is a member of the Board, if such person's
nomination for election or re-election to the Board is recommended or approved
by a majority of the Continuing Directors.
(d) "Constructive Dismissal by OCLI" shall occur if OCLI demotes
Employee, reduces Employee's duties, decreases Employee's benefits or
compensation, or relocates Employee to a location outside of the community where
Employee is employed as of the date of the Change in Control or Hostile Change
in Control.
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
3
<PAGE> 4
(e) "Change in Control" shall mean the acquisition of more than
fifty percent (50%) of the shares of Common Stock of OCLI then outstanding by an
Acquiring Person, alone or together with such person's Affiliates or Associates,
including any such acquisitions pursuant to a "reorganization" within the
meaning of Section 181 of the California Corporations Code.
(f) "Hostile Change in Control" shall mean the occurrence of any
of the events described in subparagraph (i) or (ii) below:
(i) acquisition of more than twenty percent (20%) of the
shares of Common Stock of OCLI then outstanding by an Acquiring Person, alone or
together with such person's Affiliates or Associates, including any such
acquisitions pursuant to a "reorganization" within the meaning of Section 181 of
the California Corporations Code, and (B) the adoption by OCLI's Board of
Directors of a resolution (i) disapproving the acquisition in subparagraph
10(f), or (ii) declaring operative the provisions of this Agreement pertaining
to a Change in Control; or
(ii) The failure of a majority of the members of the Board
of Directors of Employer to be Continuing Directors.
(g) "Termination for Cause" shall mean a termination by OCLI
because of a willful breach by Employee in the course of his or her employment,
or in the case of his or her habitual neglect of his or her duties or continuing
incapacity to perform his or her duties.
5. Noncompetition.
(a) In consideration for the covenants of OCLI contained in Section 2
(including, without limitation, OCLI's payment obligations thereunder) and
Section 3, Employee agrees that, in the event that, following a Change in
Control, Employee ceases to be employed by OCLI (or any parent, subsidiary or
affiliate of OCLI), then for a period of two (2) years after Employee's
employment ceases, Employee shall not do any of the following, either directly
or indirectly:
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
4
<PAGE> 5
(i) Carry on or engage in any business that is similar to the
business being conducted by OCLI as of the date on which Employee's employment
ceases (a "Competitve Business"), whether as an employee, officer, contractor,
consultant, investor, shareholder, director, partner, principal, or in any other
individual or representative capacity; provided, however, that the aggregate
ownership by Employee of less than five percent (5%) of the outstanding equity
of any entity which may fit within the foregoing description shall not be deemed
to constitute a violation of this agreement not to compete; or
(ii) Solicit for employment in a Competitive Business (or cause
any person or entity controlled by Employee to so solicit for employment) any
employee, officer, director or consultant of OCLI (or its parent, subsidiaries
or affiliates) or take any action, directly or indirectly, to cause any such
person to terminate his or her business relationship with any of the foregoing;
or
(iii) For or on behalf of a Competitive Business, enter into any
transaction or business relationship with or solicit for any business purpose
any of OCLI's (or its parent's, subsidiaries' or affiliates') customers without
OCLI's prior written consent.
(b) The parties to this Agreement hereby stipulate that:
(i) The non-competition agreement contained herein is intended as
an agreement authorized by Section 16601 of the California Business and
Professions Code as it now exists ("Section 16601");
(ii) The provisions of Section 16601 are incorporated by
reference into this Section;
(iii) All terms used in this Section, including the terms "carry
on" and "business," shall have the same meaning as has been given, up to the
date of this Agreement, to such terms (as they are used in Section 16601) by the
California Supreme Court and the Courts of Appeal of the State of California;
and
(iv) The remedy at law for any breach of this Section being
inadequate, OCLI shall be entitled, in addition to such other remedies as it may
have, to temporary and injunctive relief for any
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
5
<PAGE> 6
breach or threatened breach of any provision of this Section, without proof of
any actual damages that have been or may be caused to it by such breach.
(c) The parties to this Agreement state and agree that this agreement
not to compete is reasonable and necessary to protect OCLI's business interests,
and this agreement not to compete imposes no undue hardship or burden on
Employee. Should any court or tribunal declare the foregoing agreement not to
compete to be unreasonable or void for any reason, the duration and/or
geographic scope of the agreement shall be modified to such shorter duration and
smaller geographic scope as to be upheld by said court or tribunal.
6. Effect of OCLI's Merger, Transfer of Assets or Dissolution. This
Agreement shall not be terminated by any merger or consolidation where OCLI is
not the consolidated or surviving corporation, transfer of substantially all of
the assets of OCLI, or voluntary or involuntary dissolution of OCLI. In the
event of any such merger, consolidation or transfer of assets, the surviving
corporation or the transferee of OCLI's assets shall be bound by the provisions
of this Agreement, and OCLI shall take all actions necessary to insure that such
corporation or transferee is bound by the provisions of this Agreement.
7. Agreement Supersedes Any Inconsistent Prior Agreements or
Understandings. The terms of this Agreement supersede any inconsistent prior
promises, policies, representations, understandings, arrangements or agreements
between the parties.
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
6
<PAGE> 7
8. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
OPTICAL COATING LABORATORY, INC.
By
--------------------------------------
Joseph C. Zils, Corporate Secretary
EMPLOYEE:
- ------------------------------------ -----------
Signature Date
Address:
- ------------------------------------
- ------------------------------------
EMPLOYMENT ASSURANCE AGREEMENT
OCTOBER 30, 1999
7
<PAGE> 1
EXHIBIT 10.12
[LOGO] OPTICAL COATING LABORATORY, INC.
KEY EMPLOYEE: (Label)
KEY EMPLOYEE
EMPLOYMENT ASSURANCE AGREEMENT
AGREEMENT made this 20th day of November 1999, between Optical Coating
Laboratory, Inc. ("OCLI"), having its principal place of business at 2789
Northpoint Parkway, Santa Rosa, California, and the employee referenced on the
label affixed above (hereinafter "Employee").
The purpose of this Agreement is to afford Employee additional security
concerning his or her employment with OCLI by providing for certain termination
payments to Employee in the event that there is a Change in Control of OCLI as
described in the definitions of "Change in Control" below. The provisions of
this Agreement shall only be effective in the event that there is a Change in
Control, and nothing in this Agreement extends or expands Employee's present
rights concerning employment with OCLI in the absence of a Change in Control.
Based upon the foregoing, and in consideration of Employee's continued
employment OCLI agrees as follows:
1. Term. This Agreement shall be effective as of the date first written
above through November 20, 1999; provided, however, that if a Change in Control
occurs on or before November 20, 1999, this Agreement shall remain in effect for
two (2) years from the date of occurrence of the Change in Control.
2. Termination.
(a) Termination by OCLI or Constructive Dismissal by OCLI after a
Change in Control. Except in the case of a termination for cause by Employer, if
at any time within two (2) years after the occurrence of a Change in Control,
either (i) OCLI terminates Employee's employment, or (ii) Employee terminates
his or her employment following a Constructive Dismissal by OCLI, then
KEY EMPLOYEE
EMPLOYMENT ASSURANCE AGREEMENT
NOVEMBER 20, 1999
1
<PAGE> 2
Employee shall be paid an amount equal to twelve (12) months of Employee's
maximum salary in effect within twelve (12) months of termination.
(b) Time of Payment. OCLI shall pay any amounts due to Employee
upon termination of Employee's employment.
(c) No Other Severance Payments. If Employee receives a payment
under subparagraph 2(a), Employee shall not be entitled to any severance
payments that might otherwise be payable to Employee.
3. Acceleration of Unvested Stock Options. Upon a Change in Control as
defined herein, all unvested outstanding stock options held by Employee shall be
immediately exercisable.
4. Certain Definitions. For purposes of this agreement, the following
terms have the meanings indicated:
(a) "Acquiring Person" shall mean any person who or which,
together with all Affiliates and Associates of such person, shall be the owner,
beneficial or otherwise, of more than twenty percent (20%) of the shares of
Common Stock of OCLI then outstanding, but shall not include OCLI, any
subsidiary of OCLI or, any employee benefit plan of OCLI or of any subsidiary of
OCLI, or any person or entity organized, appointed or established by OCLI for or
pursuant to the terms of any such plan.
(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended, and in effect
on the date of this Agreement.
(c) "Continuing Director" shall mean (i) any member of the Board
of Directors of OCLI, while such person is a member of the Board prior to the
date of this Agreement, or (ii) any person who subsequently becomes a member of
the Board, while such person is a member of the Board, if such person's
nomination for election or re-election to the Board is recommended or approved
by a majority of the Continuing Directors.
CHANGE IN CONTROL
EMPLOYMENT ASSURANCE AGREEMENT
NOVEMBER 20, 1999
2
<PAGE> 3
(d) "Constructive Dismissal by OCLI" shall occur if OCLI demotes
Employee, reduces Employee's duties, decreases Employee's benefits or
compensation, or relocates Employee to a location outside of the community where
Employee is employed as of the date of the Change in Control.
(e) "Change in Control" shall mean the occurrence of any of the
events described in subparagraph (i) or (ii) below:
(i) acquisition of more than twenty percent (20%) of the
shares of Common Stock of OCLI then outstanding by an Acquiring Person, alone or
together with such person's Affiliates or Associates, including any such
acquisitions pursuant to a "reorganization" within the meaning of Section 181 of
the California Corporations Code, and (B) the adoption by OCLI's Board of
Directors of a resolution (i) disapproving the acquisition in subparagraph
10(f), or (ii) declaring operative the provisions of this Agreement pertaining
to a Change in Control; or
(ii) The failure of a majority of the members of the Board
of Directors of Employer to be Continuing Directors.
(f) "Termination for Cause" shall mean a termination by OCLI
because of a willful breach by Employee in the course of his or her employment,
or in the case of his or her habitual neglect of his or her duties or continuing
incapacity to perform his or her duties.
5. Effect of OCLI's Merger, Transfer of Assets or Dissolution. This
Agreement shall not be terminated by any merger or consolidation where OCLI is
not the consolidated or surviving corporation, transfer of substantially all of
the assets of OCLI, or voluntary or involuntary dissolution of OCLI. In the
event of any such merger, consolidation or transfer of assets, the surviving
corporation or the transferee of OCLI's assets shall be bound by the provisions
of this Agreement, and OCLI shall take all actions necessary to insure that such
corporation or transferee is bound by the provisions of this Agreement.
6. Agreement Supersedes Any Inconsistent Prior Agreements or
Understandings. The terms of this Agreement supersede any inconsistent prior
promises, policies, representations, understandings, arrangements or agreements
between the parties.
CHANGE IN CONTROL
EMPLOYMENT ASSURANCE AGREEMENT
NOVEMBER 20, 1999
3
<PAGE> 4
7. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
OPTICAL COATING LABORATORY, INC.
By
----------------------------------------
EMPLOYEE:
- -------------------------------- -----------
Signature Date
Address:
- --------------------------------
- --------------------------------
CHANGE IN CONTROL
EMPLOYMENT ASSURANCE AGREEMENT
NOVEMBER 20, 1999
4
<PAGE> 1
EXHIBIT 10.16
- --------------------------------------------------------------------------------
[OCLI LOGO]
2000 MANAGEMENT INCENTIVE PLAN Page 1
- --------------------------------------------------------------------------------
OBJECTIVES
The objectives of the Optical Coating Laboratory, Inc. (OCLI) Fiscal Year 2000
Management Incentive Plan (MIP) are:
- To motivate key managers and employees of OCLI and its
subsidiaries to achieve Fiscal Year (FY) 2000 financial
objectives; and
- To reward key managers and employees of OCLI and its subsidiaries
who contribute significantly towards the achievement of OCLI's
financial and operational objectives.
PLAN PRINCIPLES AND DESIGN
The MIP is designed so that achievement of Plan goals offers participants
competitive compensation for the at-risk portion of their total compensation.
Surpassing Plan goals and delivering outstanding results offers participants the
opportunity to earn a substantially higher bonus. The Plan is written to support
the company's financial goals. There are quarterly and annual financial goals,
matching those in the 2000 Annual Operating Plan (AOP), which total 100% of the
target bonus opportunity. 50% of the target bonus opportunity will be based on
Company Operating Profits (COP). This is an annual target with a possible
prepayment of up to 10% of the overall target bonus opportunity prepaid each of
the first 3 quarters for 100% plan attainment. The fourth quarter 10%
opportunity will be paid at the time the annual payment is made. 50% of the
target bonus opportunity will be eligible to be paid annually based on Return on
Net Assets (RONA).
The bonus awards are calculated quarterly and annually based on OCLI's and the
Divisions' financial results. The plan year is defined as the fiscal year
beginning November 1, 1999 and ending October 29, 2000.
ELIGIBILITY
Employees in Salary Grades 65 and above, or equivalent, are eligible to
participate in the MIP. MIP participants are eligible for "Superior Merit"
bonuses. Concurrent participation in any other type of bonus program requires
the approval of the Plan Administrator.
<PAGE> 2
- --------------------------------------------------------------------------------
[OCLI LOGO]
2000 MANAGEMENT INCENTIVE PLAN Page 2
- --------------------------------------------------------------------------------
BONUS OPPORTUNITY
The bonus opportunity for each participant is determined by salary grade (or
equivalent for some subsidiaries) as a percentage of base salary.
BONUS PAYMENTS
Quarterly bonus award payments will be approved by the CFO and the Director of
Human Resources following a review of the quarterly results by the Finance and
Accounting Department. Quarterly bonus payments will be paid within 10 working
days of the quarterly financial announcements.
Annual bonus award payments will be approved by the Plan Administrator following
the certification of OCLI's Consolidated Financial Statements by an independent
auditor. Payments will be distributed to eligible participants by the 15th of
January, 2001.
ADMINISTRATION
The Human Resources Department, in coordination with and after receiving the
results from the Finance & Accounting Department, will administer the MIP under
the direction of the CEO of OCLI (Plan Administrator).
Employees who are newly hired into eligible positions will receive pro rata
bonus awards based on the number of weeks of the plan year or quarter the
employee is in the eligible position. Employees who are promoted or transferred
into or out of eligible positions and those who move from one eligibility level
to another will receive bonus awards based on their eligibility status, rate,
and division as of the last day of the quarter. The annual payment will be
prorated based on the eligibility status, rate and division as of the end of
each of the year's quarters. Retroactive salary adjustments will not result in
retroactive MIP payment adjustments. Bonuses for any employees of acquisitions
made during the plan year will be determined separately.
<PAGE> 3
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[OCLI LOGO]
2000 MANAGEMENT INCENTIVE PLAN Page 3
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In addition, participants who leave OCLI during the plan year under any of the
following conditions may be eligible for pro rata bonus awards:
~ participants who retire under the provisions of one of the Company's
retirement plans or the Social Security Act; or
~ a disabled participant or the spouse or legal representative of a
deceased participant.
Participants leaving the Company under any conditions other than those outlined
above are not eligible for bonus awards for the plan quarter or year in which
they leave.
AMENDMENTS
The Board of Directors of OCLI reviews the Company's incentive compensation
plans annually to ensure equity both within the Company and in relation to
current economic conditions. The Board of Directors reserves the right to amend,
suspend, terminate or make exceptions to this plan at any time. The effects of
any unusual and material accounting or non-recurring transactions may be
excluded from the bonus calculations by the Plan Administrator with the approval
of the Board of Directors.
The objective of the MIP is to motivate key managers and employees of OCLI and
its subsidiaries to achieve the performance objectives stated in the AOP. The
AOP is constructed to implement a strategy approved by the Senior Management
Team. Therefore, a major change to any strategic assumption will result in the
restatement of the AOP and MIP performance objectives. Actual results and
planned results will be prepared using fully consistent accounting principles.
<PAGE> 1
EXHIBIT 21
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
Optical Coating Laboratory, Inc. was incorporated in Delaware in 1948. The
Company was reincorporated in California in 1963 and again reincorporated in
Delaware in 1987.
As of October 31, 1999, Optical Coating Laboratory, Inc. had the following
subsidiaries:
<TABLE>
<CAPTION>
PERCENT OF PLACE OF
SUBSIDIARY NAME OWNERSHIP INCORPORATION
- --------------- ---------- -------------
<S> <C> <C>
OCLI International Service Corporation........................... 100% California
OCLI Foreign Sales Corporation................................... 100% Guam
OCLI Optical Coating Laboratory, Ltd............................. 100% Scotland
OCLI Optical Coating Laboratory GmbH............................. 100% Germany
OCLI Optical Coatings Espana S.A. ............................... 100% Spain
Optical Coating Laboratory B.V. ................................. 100% Netherlands
Optical Coating Laboratory EURL.................................. 100% France
Flex Products, Inc............................................... 100% Delaware
OCLI Asia K.K.................................................... 100% Japan
OPKOR, Inc....................................................... 100% New York
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the incorporation by reference in Registration Statement No.
33-41050, No. 33-48808, No. 33-65132, No. 33-60891, No. 33-13013, No. 333-69157
and No. 333-86527 on Form S-8 and No. 333-87603 and No. 333-76853 on Form S-3
of our report dated December 15, 1999, appearing in this Annual Report on Form
10-K of Optical Coating Laboratory, Inc. for the year ended October 31, 1999.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of Optical
Coating Laboratory, Inc., listed in Item 14 (A) (2). The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, the financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
Deloitte & Touche LLP
San Jose, California
January 28, 2000
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders
Optical Coating Laboratory, Inc.:
Re: Registration Statements No. 33-41050, No. 33-48808, No. 33-65132,
No. 33-60891, No. 33-13013, No. 333-69157, and No. 333-86527 on
Form S-8 and No. 333-87603 and No. 333-76853 on Form S-3
We consent to the incorporation by reference in the registration statements
referred to above of Optical Coating Laboratory, Inc. of our report dated
November 26, 1997 relating to the statements of operations, stockholders' equity
and cash flows of Flex Products, Inc. for the year ended November 2, 1997, which
report appears in the October 31, 1999 annual report on Form 10-K of Optical
Coating Laboratory, Inc.
KPMG LLP
San Francisco, California
January 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 15,734
<SECURITIES> 111,833
<RECEIVABLES> 37,364
<ALLOWANCES> 2,116
<INVENTORY> 25,899
<CURRENT-ASSETS> 199,375
<PP&E> 200,182
<DEPRECIATION> 94,481
<TOTAL-ASSETS> 334,633
<CURRENT-LIABILITIES> 36,305
<BONDS> 0
0
0
<COMMON> 234,689
<OTHER-SE> 53,237
<TOTAL-LIABILITY-AND-EQUITY> 334,633
<SALES> 347,145
<TOTAL-REVENUES> 347,145
<CGS> 239,582
<TOTAL-COSTS> 239,582
<OTHER-EXPENSES> 68,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,768
<INCOME-PRETAX> 38,889
<INCOME-TAX> 15,175
<INCOME-CONTINUING> 23,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,223
<EPS-BASIC> 1.77
<EPS-DILUTED> 1.61
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