-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BISkGW/rbNsBpOswHZfaurl7iznZc6xu0KM0jOJYLQW0aPx92C3zVwFsl8h9ZJ5q sX/Ar3MhVTHEejxfFBXpkg== 0000074697-98-000011.txt : 19980624 0000074697-98-000011.hdr.sgml : 19980624 ACCESSION NUMBER: 0000074697-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980615 DATE AS OF CHANGE: 19980623 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTICAL COATING LABORATORY INC CENTRAL INDEX KEY: 0000074697 STANDARD INDUSTRIAL CLASSIFICATION: 3827 IRS NUMBER: 680164244 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02537 FILM NUMBER: 98649606 BUSINESS ADDRESS: STREET 1: 2789 NORTHPOINT PKWY CITY: SANTA ROSA STATE: CA ZIP: 95407 BUSINESS PHONE: 7075456440 MAIL ADDRESS: STREET 1: 2789 NORTHPOINT PARKWAY CITY: SANTA ROSA STATE: CA ZIP: 95407-7397 - - -----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M64z6BugQ7ui9aen26GQKby7pgs0T7qHgy8+iYF8Uzly/WsrpAUGFJyMeS5s6M0d mPbkwd5BiXvIKYqUsHKRpA== 0000074697-98-000011.txt : 19980618 0000074697-98-000011.hdr.sgml : 19980618 ACCESSION NUMBER: 0000074697-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980617 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTICAL COATING LABORATORY INC CENTRAL INDEX KEY: 0000074697 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 680164244 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02537 FILM NUMBER: 98649606 BUSINESS ADDRESS: STREET 1: 2789 NORTHPOINT PKWY CITY: SANTA ROSA STATE: CA ZIP: 95407 BUSINESS PHONE: 7075456440 MAIL ADDRESS: STREET 1: 2789 NORTHPOINT PARKWAY CITY: SANTA ROSA STATE: CA ZIP: 95407-7397 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-2537 OPTICAL COATING LABORATORY, INC. (Exact name of Registrant as specified in its charter) Delaware 68-0164244 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2789 Northpoint Parkway Santa Rosa, California 95407-7397 (Address of principal executive offices) (Zip code) 707-545-6440 (Registrant's telephone number including area code) Not applicable (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. TITLE OUTSTANDING Common Stock, $.01 par value 11,979,280 at May 31, 1998 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS APRIL 30, OCTOBER 31, ASSETS 1998 1997 - - - ----------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) (Unaudited) CURRENT Cash and cash equivalents $ 5,850 $ 15,217 ASSETS Accounts receivable, net of allowance for doubtful accounts of $2,063 and $1,884 37,040 34,923 Inventories 26,883 22,829 Income taxes receivable 636 504 Deferred income tax assets 6,710 6,853 Other current assets 2,339 1,707 -------- -------- Total Current Assets 79,458 82,033 OTHER Other assets and investments 7,972 8,243 ASSETS PROPERTY, Land and improvements 9,221 9,225 PLANT AND Buildings and improvements 41,847 41,944 EQUIPMENT Machinery and equipment 128,719 121,717 Construction-in-progress 10,223 9,525 -------- -------- 190,010 182,411 Less accumulated depreciation (94,649) (89,194) -------- -------- Property, plant and equipment-net 95,361 93,217 -------- -------- Total Assets $182,791 $183,493 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT Accounts payable $ 9,292 $ 14,301 LIABIL- Accrued expenses 8,283 6,854 ITIES Accrued compensation expenses 9,149 8,752 Income taxes payable 554 339 Current maturities on long-term debt 9,594 7,888 Notes payable 362 381 Deferred revenue 2,251 900 -------- -------- Total Current Liabilities 39,485 39,415 NONCURRENT Accrued postretirement health benefits LIABIL- and pension liabilities 2,120 2,040 ITIES Deferred income tax liabilities 1,863 785 Long-term debt 35,682 40,975 Minority interest 12,006 13,315 STOCK- Preferred stock-Series C; HOLDERS' 8% cumulative, convertible, redeemable; EQUITY issued and outstanding 6,250 shares at 10/31/97 5,559 Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 12,078,000 and 10,599,000 shares 121 106 Paid-in capital 68,560 55,723 Retained earnings 29,976 26,217 Cumulative foreign currency translation adjustment (1,234) (642) -------- -------- 97,423 86,963 Note receivable from related party (5,788) -------- -------- Common Stockholders' Equity 91,635 86,963 -------- -------- Total Liabilities $182,791 $183,493 and Stockholders' Equity ======== ======== The accompanying notes are an integral part of these financial statements. OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the three and six months ended April 30, 1998 and 1997 (Amounts in thousands, except per share amounts) THREE MONTHS SIX MONTHS 1998 1997 1998 1997 REVENUES Revenues $64,345 $53,516 $117,718 $99,236 Cost of Sales 42,484 34,842 78,719 65,041 ------- ------- -------- ------- Gross Profit 21,861 18,674 38,999 34,195 COSTS AND Operating Expenses: EXPENSES Research and development 4,026 3,951 7,847 6,513 Selling and administrative 11,171 10,782 20,659 21,048 Amortization of intangibles 198 237 398 480 ------- ------- ------- ------- Total Operating Expenses 15,395 14,970 28,904 28,041 ------- ------- ------- ------- Income from Operations 6,466 3,704 10,095 6,154 Nonoperating Income (Expense): Interest income 81 82 165 257 Interest expense (927) (1,027) (1,735) (2,079) ------- ------- ------- ------- EARNINGS Income Before Provision for Income Taxes and Minority Interest 5,620 2,759 8,525 4,332 Provision for income taxes 2,163 1,103 3,325 1,733 Minority interest 408 143 555 179 ------ ------ ------ ------ Net Income 3,049 1,513 4,645 2,420 Dividend on convertiblee redeemable preferred stock 125 187 250 427 ------ ------ ------ ------ Net Income Applicable to Common Stock $2,924 $1,326 $4,395 $1,993 ====== ====== ====== ====== Net Income Per Share, Basic $0.27 $0.13 $0.41 $0.20 ====== ====== ====== ====== Net Income Per Share, Diluted $0.25 $0.13 $0.38 $0.19 ====== ====== ====== ====== Weighted average number of common shares used to compute basic earnings per share 10,903 10,069 10,767 9,927 ====== ====== ====== ====== Weighted average number ofn common shares used to computed diluted earnings per share 11,553 10,410 11,478 10,292 ====== ====== ====== ====== The accompanying notes are an integral part of these financial statements. OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the three and six months ended April 30, 1998 and 1997 (Amounts in thousands) THREE MONTHS SIX MONTHS 1998 1997 1998 1997 OPERA- Cash Flows From Operations: TIONS Cash received from customers $54,208 $46,911 $96,270 $88,552 Interest received 67 71 118 235 Cash paid to suppliers and employees (43,644) (39,236) (90,391) (81,047) Cash paid to OCLI 401(k)/ESOP Plan (112) (116) (241) (147) Interest paid (613) (1,024) (1,421) (2,450) Income taxes paid, net of refunds 174 (856) 146 (907) ------ ------ ------ ------ Net Cash Provided By Operations 10,080 5,750 4,481 4,236 ------ ------ ------ ------ INVEST- Cash Flows From Investments: MENTS Purchase of plant and equipment (4,065) (3,547) (8,326) (6,625) ------ ------ ------ ------ Net Cash Used For Investments (4,065) (3,547) (8,326) (6,625) FINANCING Cash Flows From Financing: Proceeds from long-term debt 3,044 9,818 Repayment of long-term debt (6,686) (1,437) (13,250) (1,918) Proceeds from notes payable Repayment of notes payable (192) (1,234) (9) (1,644) Proceeds from exercise of 304 71 638 167 stock options Proceeds from note to minority stockholder 800 484 Purchase of note from minority stockholder (2,600) Investment by minority stockholder 1,017 1,017 Payment of dividend on preferred stock (83) (187) (208) (427) Payment of dividend on common stock (636) (586) ------ ------ ------ ------ Net Cash Used For Financing (3,613) (1,770) (5,447) (2,907) ------ ------ ------ ------ Effect of exchange rate changes on cash 29 (27) (75) (269) ------ ------ ------ ------ Increase (decrease) in cash and short-term investments 2,431 406 (9,367) (5,565) ------ ------ ------ ------ Cash and cash equivalents at beginning of period 3,419 10,056 15,217 16,027 ------ ------ ------ ------ Cash and cash equivalents at end of period $5,850 $10,462 $5,850 $10,462 ====== ====== ====== ====== OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) For the three and six months ended April 30, 1998 and 1997 (Amounts in thousands) THREE MONTHS SIX MONTHS 1998 1997 1998 1997 ADJUST- Reconciliation of MENTS Net Income To Cash Flows From Operations: Net income $3,049 $1,513 $4,645 $2,420 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 3,130 3,066 6,115 6,312 Minority interest in earnings of subsidiaries 408 143 557 179 Loss on disposal of equipment 321 168 529 210 Accrued postretire- ment health benefits 40 70 80 86 Deferred income tax liabilities 34 Other non-cash adjustments to net income (264) (68) 207 41 Change in: Accounts receivable 787 (1,078) (2,577) (5,089) Inventories (2,276) (3,465) (4,280) (4,064) Income tax receivable 1,600 (742) 1,693 110 Deferred income tax assets 473 194 1,040 (104) Other current assets and other assets and investments 124 41 (950) (505) Accounts payable, accrued expenses and accrued compensation expenses 2,315 5,455 (4,193) 4,003 Deferred revenue 285 (700) 1,351 (531) Income taxes payable 88 1,153 230 1,168 ------ ------ ------ ------ Total adjustments 7,031 4,237 (164) 1,816 ------ ------ ------ ------ Net Cash Provided By Operations $10,080 $5,750 $4,481 $4,236 ====== ====== ====== ====== The accompanying notes are an integral part of these financial statements. OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) For the six months ended April 30, 1998 (Amounts in thousands)
NOTE RECEIVABLE FOREIGN FROM PREFERRED STOCK COMMON STOCK PAID-IN RETAINED CURRENCY RELATED SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TRANSLATION PARTY BALANCE AT 6 $5,559 10,599 $106 $55,723 $26,217 $(642) NOVEMBER 1, 1997 Shares issued to Employee Stock Ownership Plan 39 1 555 Exercise of stock options,including tax benefit and interest accrued on note receivable from related party 841 8 6,687 ($5,788) Conversion of preferred stock to common stock (6) (5,559) 599 6 5,595 Foreign currency translation adjustment (592) Net Income 4,645 Dividend on preferred (250) stock Dividend on common (636) stock - - - ----------------------------------------------------------------------------------------------- BALANCE AT APRIL 30, 1998 0 $0 12,078 $121 $68,560 $29,976 ($1,234) ($5,788) ===============================================================================================
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended April 30, 1998 and 1997 (Unaudited) 1. GENERAL OCLI designs, develops and manufactures multi-layer thin film coatings which control and enhance light by altering the transmission, reflection and absorption of its various wavelengths to achieve a desired effect such as anti-reflection, anti-glare, electromagnetic shielding, electrical conductivity and abrasion resistance. OCLI markets and distributes components to original equipment manufacturers ("OEMs") of optical and electro-optical systems and sells its GlareGuard(R) brand ergonomic computer display products through resellers and office retailers. OCLI's products are found in many applications including computer monitors, flat panel displays, telecommuni- cation systems, photocopiers, fax machines, medical/analytical equipment and instruments, projection imaging systems, satellite power systems and aerospace and defense systems. Through its 60% owned subsidiary, Flex Products, Inc. ("Flex Products"), the Company designs and manufactures thin film coatings on flexible substrates using high vacuum roll-to-roll processes. Flex Products supplies critical pigments for use in anti- counterfeiting applications, energy conserving window film for residential, commercial, and automotive applications, photoreceptor components for copiers and ChromaFlair(R) light interference pigments for commercial paints. The Condensed Consolidated Balance Sheet as of April 30, 1998, the Condensed Consolidated Statements of Income for the three and six month periods ended April 30, 1998 and 1997, the Condensed Consolidated Statement of Stockholders' Equity for the six month period ended April 30, 1998 and the Condensed Consolidated Statements of Cash Flows for the three and six month periods ended April 30, 1998 and 1997, have been prepared by the Company without audit. In the opinion of management, all adjustments consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows at April 30, 1998 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended October 31, 1997. The results of operations for the period ended April 30, 1998 are not necessarily indicative of the operating results anticipated for the full year. In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which required the Company to replace its presentation of primary earnings per share with a presentation of basic earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share under the new statement includes the potential dilution of convertible securities, stock options and warrants. The difference between basic earnings per share and diluted earnings per share reported by the Company is the dilutive effect of stock options outstanding. The earnings per share presentation for 1997 was restated to conform to the new statement. 2. FINANCIAL DERIVATIVES AND HEDGING The Company, from time to time, enters into derivative transactions in order to hedge foreign currency risk on existing commitments, open receivables, payables and debt instruments when the currency risk is considered material to the Company. In addition, the Company may enter into interest rate swaps or similar instruments in order to reduce interest rate risk on its debt instruments. The Company does not enter into derivatives for trading purposes. In the second quarter of 1998, the Company entered into foreign currency forward contracts for the principal and interest payments under a $4.1 million loan that is denominated in German Marks. The transaction is designated as a hedge of a foreign currency commitment. Gains and losses on the contract are recorded as an adjustment to interest expense over the life of the loan. In the second quarter of 1998, the Company entered into an interest rate swap for anticipated debt refinancing in the amount of $30 million. The purpose of the swap is to fix the reference rate for the debt at 5.71% to eliminate the Company's exposure to interest rate fluctuations until the loan refinance is completed. The Company has designated the swap as a hedge of an anticipated transaction and will record the gain or loss on the transaction as an adjustment to interest expense over the term of the loan. The notional amounts, carrying amounts and fair values of the Company's derivatives position at April 30, 1998 are included in the table below: NOTIONAL CARRYING ESTIMATED (Amounts in thousands) AMOUNT AMOUNT FAIR VALUE - - - ---------------------------------------------------------------------------- Foreign currency forward exchange contracts: Deutsche marks $4,648 $4,648 $47 Interest rate swap $30,000 ($96,000) 3. NOTE RECEIVABLE FROM RELATED PARTY In the second quarter of 1998, the Company's Chairman of the Board and former Chief Executive Officer exercised options for 770,666 shares of common stock of the Company and surrenderred 117,296 shares for payment of withholding taxes. The $5.8 million exercise price of the options was paid with a three year, full recourse promissory note with principal and interest, at 5.39%, payable in April, 2001. The note is secured by a security agreement covering the 770,666 shares of the Company's common stock. 4. INVENTORIES Inventories consisted of the following: APRIL 30, OCTOBER 31, (Amounts in thousands) 1998 1997 (Unaudited) Raw materials and supplies $8,741 $ 7,541 Work-in-process 13,753 12,308 Finished goods 4,389 2,980 ------- ------- Total inventories $26,883 $22,829 ======= ======= 5. ACCRUED EXPENSES Accrued expenses consisted of the following APRIL 30, OCTOBER 31, (Amounts in thousands) 1998 1997 (Unaudited) Workers' compensation reserve $ 772 $ 555 Ground water remediation reserve 759 759 Other accrued liabilities 6,752 5,540 ------ ------ $8,283 $6,854 ====== ====== PART I. FINANCIAL INFORMATION ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF MATERIAL CHANGES IN RESULTS OF OPERATIONS AND FINANCIAL CONDITION THE INFORMATION CONTAINED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION INCLUDES FORWARD LOOKING STATEMENTS WHICH ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FORECASTS," "PLANS," "FUTURE," "STRATEGY," OR WORDS OF SIMILAR IMPORT. VARIOUS IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD LOOKING STATEMENTS ARE IDENTIFIED BELOW. ACTUAL RESULTS MAY VARY SIGNIFI- CANTLY BASED ON A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED TO, PRODUCT DEVELOPMENT, COMMERCIALIZATION AND TECHNOLOGICAL DIFFICULTIES; MANUFACTURING COSTS AND YIELD ISSUES ASSOCIATED WITH INITIATING PRODUCTION AT NEW FACILITIES; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; CHANGING CUSTOMER REQUIREMENTS; AND THE CHANGE IN ECONOMIC CONDITIONS OF THE VARIOUS MARKETS THE COMPANY SERVES. RESULTS OF OPERATIONS REVENUE. Revenue for the second quarter of fiscal 1998 was $64.3 million, an increase of $10.8 million, or 20%, over revenues of $53.5 million in the second quarter of fiscal 1997. Revenue for the first six months of fiscal 1998 was $117.7 million, an increase of $18.5 million, or 19%, over revenues of $99.2 million in the first six months of 1997. The quarter and year-to-date revenue increases were primarily due to increased sales in the Company's telecommunications markets ($11.0 million increase in the second quarter of 1998, $19.5 million increase for the first six months of 1998), increased sales in the Company's display markets ($1.7 million increase in the second quarter of 1998, $1.2 million increase for the first six months of 1998) offset by decreased sales in the Company's office automation and other markets of $1.7 million in the second quarter of 1998 and $3.0 million for the first six months of 1998. Sales by the Company's 60% owned subsidiary, Flex Products, Inc. (Flex Products), decreased $147,000 in the second quarter of 1998 but increased $818,000 for the first six months of 1998. The Company's sales changes over the same periods of last year were primarily due to volume changes. The increase in telecommunications sales is primarily due to the Company's participation with its partner, JDS FITEL Inc. (JDS), in the growing market for wavelength division multiplexing (WDM) products and to the expanding market for space satellites. GROSS PROFIT. Gross profit for the second quarter of fiscal 1998 was $21.9 million, or 34.0% of revenue, compared to $18.7 million, or 34.9% of revenue, for the second quarter of fiscal 1997. Gross profit for the first six months of fiscal 1998 was $39.0 million, or 33.1% of revenue, compared to $34.2 million, or 34.5% of revenue, for the first six months of fiscal 1997. The 1998 gross margin decreases for the second quarter and year-to-date 1998 periods is due to higher than Company average material cost content in the Company's new WDM business. RESEARCH AND DEVELOPMENT. Research and development expenditures in the second quarter of 1998 and the second quarter of 1997 were $4.0 million. Research and development expenditures for the first six months of 1998 were $7.8 million compared to $6.5 million for the first six months of 1997. In the second quarter of 1998, Flex Products spent approximately $400,000 less on research and development than in the same period of 1997 due to customer acceptance of new products in the second quarter of 1998. The remaining second quarter and year-to-date increase is primarily due to new product development of products in the telecommunications and display markets. SELLING AND ADMINISTRATIVE. Selling and administrative expenses in the second quarter of fiscal 1998 were $11.2 million, an increase of $388,000, or 4%, compared to selling and administrative expenses of $10.8 million for the second quarter of fiscal 1997. Selling and administrative expenses for the first six months of fiscal 1998 were $20.7 million, a decrease of $389,000 compared to selling and administrative expenses of $21.0 million for the first six months of fiscal 1997. The increase in selling and administrative expenses for the second quarter of 1998 compared to the second quarter of 1997 was primarily due to increased legal expenses. The decrease in selling and administrative expenses for the first six months of 1998 compared to the first six months of 1997 was primarily due to decreased selling expenses in the U.S. and Europe of approximately $1.4 million and decreased administrative expenses at Flex Products of approximately $400,000, offset by increased selling and administrative expenses in Asia of approximately $700,000 and increased legal expenses of approximately $700,000. AMORTIZATION OF INTANGIBLES. The Company recorded amortization of intangibles of $198,000 in the second quarter of 1998, $237,000 in the second quarter of 1997, $398,000 for the first six months of 1998 and $480,000 for the first six onths of 1997, primarily resulting from amortization of goodwill. Most of the 1998 decrease was due to exchange rate changes. INCOME FROM OPERATIONS. As a result of the foregoing changes in revenue, gross profit and operating expenses, the Company's income from operations was $6.5 million for the second quarter of fiscal 1998 compared to $3.7 million for the second quarter of fiscal 1997 and $10.1 million for the first six months of 1998 compared to $6.2 million for the first six months of 1997. INTEREST INCOME AND EXPENSE. Interest income for the second quarter of fiscal 1998 was $81,000 compared to interest income of $82,000 for the second quarter of fiscal 1997. Interest income for the first six months of fiscal 1998 was $165,000 compared to $257,000 for the first six months of 1997. Interest expense, net of capitalized interest, for the second quarter of 1998 was $927,000 compared to $1.0 million for the second quarter of fiscal 1997. Interest expense, net of capitalized interest, for the first six months of 1998 was $1.7 million compared to $2.1 million for the first six months of 1997. Capitalized interest for the second quarter of 1998 was $262,000 compared to $68,000 for the second quarter of fiscal 1997. Capitalized interest for the first six months of 1998 was $348,000 compared to $118,000 for the first six months of 1997. PROVISION FOR INCOME TAXES AND MINORITY INTEREST. The effective income tax rate was 38.5% for the second quarter of 1998 and 39.0% for the first six months of 1998 compared to 40.0% for the comparative periods of 1997. The change in the effective tax rate is primarily due to the recognition of benefit from foreign sales corporations. Minority interest was $408,000 in the second quarter of 1998 and $555,000 for the first six months of 1998 compared to $143,000 for the second quarter of 1997 and $179,000 for the first six months of 1997. Minority interest represents the share of net income of Flex Products accruing to its 40% stockholder and the portion of operating results of OCLI Asia attributable to its Japanese partner. NET INCOME APPLICABLE TO COMMON STOCK. The Company had net income applicable to common stock of $2.9 million, or $.25 per share, on a diluted basis, for the second quarter of fiscal 1998 compared to $1.3 million, or $.13 per share on a diluted basis, for the second quarter of fiscal 1997. The Company had net income applicable to common stock of $4.4 million, or $.38 per share on a diluted basis, for the first six months of 1998 compared to $2.0 million, or $.19 per share on a diluted basis, for the first six months of 1997. In 1998, the Company implemented Statement of Financial Accounting Standards No. 128 which requires dual presentation of basic and diluted earnings per share. Basic earnings per share does not reflect the dilution of common stock equivalents such as stock options and warrants. Diluted earnings per share includes potential dilution of convertible securities, stock options and warrants. The earnings per share presentation for 1997 was restated to reflect this change. LITIGATION In July of 1996, SICPA filed a lawsuit in Delaware Chancery Court in order to block an attempted initial public offering by Flex Products, arguing that such an offering without SICPA's consent was prohibited by Flex Products' articles of incorporation as well as by certain contractual provisions between the Company and SICPA. In 1998, the Company announced that it had completed final negotiations for the settlement of the litigation with SICPA. Under the terms of the settlement, the Company and SICPA have agreed to modify their co-ownership agreement to enable OCLI to more effectively manage the day-to-day operations of Flex Products, to allow for public financing of Flex Products'operations and to modify the License and Supply Agreement between Flex Products and SICPA to provide for more attractive scheduled pricing discounts on higher volume purchases and to change the scheduled order patterns to be consistent with the Company's fiscal quarters. In addition, the Company purchased $2.6 million of Flex Products' working capital loan from SICPA. IMPACT OF FOREIGN OPERATIONS, EXPORT SALES, FOREIGN CURRENCY AND HEDGING The Company has significant investments in Germany, Scotland and Japan. Changes in the value of those countries' currencies relative to the U.S. dollar are recorded as direct charges or credits to equity. The Company also has manufacturing operations in Germany, Scotland and Japan and sales presence in other European and Asian countries. A significant weakening of the currencies in Europe or Asia in relation to the U.S. dollar could reduce the reported results of those operations. In addition, a significant amount of the Company's sales are export sales which could be subject to competitive price pressures if the U.S. dollar was to strengthen compared to the currency of foreign competitors. The Company does, from time to time, enter into purchase, sales or debt arrangements denominated in currencies other than its functional currency which exposes the Company to currency risk on open receivable and payable balances. The Company is also exposed to exchange risk on open intercompany balances that some of the foreign subsidiaries have with the Company and its subsidiaries. The Company has not entered into contracts to hedge any of these risks, and the Company does not consider its net exposure on these items to be material. The Company 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. In the second quarter of 1998, the Company entered into foreign currency forward contracts for the principal and interest payments under a $4.1 million loan that is denominated in German Marks. See FINANCIAL DERIVATIVES AND HEDGING TRANSACTIONS below. For the first six months of 1998, 27% of the Company's consolidated sales constituted sales to customers in Europe and 13% of the Company's consolidated sales constituted sales to customers in Asia. During 1998, the Company has experienced an overall decline in sales mix from sales to customers in Asia (from 14% of consolidated sales for the first six months of 1997 to 13% for the first six months of 1998) and a decline in sales mix from sales to customers in Europe (from 37% of consolidated sales for the first six months of 1997 to 27% for the first six months of 1998). The Company attributes the decline in the Asian sales mix to growth in other geographic markets and attributes the decline in the European sales mix to shifts in the Company's markets. Due to the Company's investments in Europe and Asia and the geographic mix of the Company's sales, changes in economic conditions in Europe and Asia could materially affect the Company's future operations. FINANCIAL DERIVATIVES AND HEDGING TRANSACTIONS The Company, from time to time, enters into derivative transactions in order to hedge foreign currency risk on existing commitments, open receivables, payables and debt instruments when the currency risk is considered material to the Company. In addition, the Company may enter into interest rate swaps or similar instruments in order to reduce interest rate risk on its debt instruments. The Company does not enter into derivatives for trading purposes. In the second quarter of 1998, the Company entered into foreign currency forward contracts for the principal and interest payments under a $4.1 million loan that is denominated in German Marks. The transaction is designated as a hedge of a foreign currency commitment. Gains and losses on the contract are recorded as a net reduction or increase to interest expense over the life of the loan. In the second quarter of 1998, the Company entered into an interest rate swap for anticipated debt refinancing in the amount of $30 million. The purpose of the swap is to fix the reference rate for the debt at 5.71% to eliminate the Company's exposure to interest rate fluctuations until the loan refinance is completed. The Company has designated the swap as a hedge of an anticipated transaction and will record the gain or loss on the transaction as a net reduction or increase to interest expense over the life of the loan. FINANCIAL CONDITION In 1998, the Company's cash and short-term investment position decreased by $9.4 million. $8.3 million was invested in plant and equipment, $3.4 million was used to pay down debt, $844,000 was used to pay dividends and $2.6 million was used to purchase a portion of Flex Products' working capital loan from SICPA. These expenditures were offset by $4.5 million of cash generated by operations, stockholder investments of $639,000 and working capital loans from SICPA to Flex Products of $800,000. In 1998, the Company's working capital, excluding cash and short-term investments, increased $6.7 million, primarily due to increased accounts receivable ($2.1 million) and increased inventories ($4.1 million). Approximately half of the increase in inventories results from inventory increases in anticipation of new product demand. The remaining inventory increase and the accounts receivable increase is due to increased sales and bookings in 1998. During 1998, the remaining shares of the 8% Series C Convertible Redeemable Preferred Stock were converted into 599,000 shares of common stock of the Company. Management believes that the cash on hand at April 30, 1998, cash anticipated to be generated from future operations and the available funds from revolving credit arrangements will be sufficient for the Company to meet its near-term working capital needs, capital expenditures, debt service requirements and payment of dividends, as declared, for at least the next twelve months. IMPACT OF YEAR 2000 The "Year 2000 Issue" is the result of computer programs that were written using two digits rather than four to define the applicable year. If the Company's computer programs with date-sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. During 1997, as part of a business modernization program intended to reduce cycle time and improve profitability, the Company purchased an Enterprise Resource Planning System. The software vendor has indicated that the new system is Year 2000 compliant, and the Company's implementation schedule provides for full implementation on a worldwide basis for all of its financial and business systems before the Year 2000. However, if the implementation is not completed on a timely basis, the Year 2000 could have a material impact on the operations of the Company. The Company has a plan to formally communicate with its significant suppliers and contractors to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remedy their own Year 2000 issues. The Company does not currently have any information concerning the Year 2000 compliance status of its customers. In the event that any of the Company's significant customers and suppliers do not successfully and timely achieve Year 2000 compliance, the Company's business or operations could be adversely affected. The Company is gathering data to assess the impact of the Year 2000 on its non-financial systems such as manufacturing equipment, security equipment, etc. The Company does not, at this time, have sufficient data to estimate the cost of achieving Year 2000 compliance for its non-financial systems but does not expect those costs to have a material impact on its results of operations and cash flows. If the Company is unable to achieve Year 2000 compliance for its major non-financial systems, the Year 2000 could have a material impact on the operations of the Company. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 Except for historical information contained in this report, matters discussed in this report are forward-looking statements that involve risks and uncertainties. Actual results may vary significantly based on a number of factors including, but not limited to, product development, commercialization and technological difficulties, manufacturing costs and yield issues associated with initiating production at new facilities, the impact of competitive products and pricing, changing customer requirements and the change in economic conditions of the various markets the Company serves. INDEPENDENT ACCOUNTANTS' REVIEW The April 30, 1998 condensed consolidated financial statements included in this filing on Form 10-Q have been reviewed by Deloitte & Touche LLP, independent accountants, in accordance with established professional standards and procedures for such a review. The report of Deloitte & Touche LLP commenting on their review follows. INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of Optical Coating Laboratory, Inc. Santa Rosa, California We have reviewed the accompanying condensed consolidated balance sheet of Optical Coating Laboratory, Inc. and subsidiaries as of April 30, 1998, and the related condensed consolidated statements of income and cash flows for the three-month and six-month periods ended April 30, 1998 and April 30, 1997 and the related condensed consolidated statement of stockholders' equity for the six-month period ended April 30, 1998. These financial statements are the responsibility of the Company's management. We were furnished with the report of other accountants on their review of the interim financial information of Flex Products, Inc. (a consolidated subsidiary) for the three and six month periods ended April 30, 1997, whose total revenues constituted 17% of consolidated total revenues for the six-month period ended April 30, 1997. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review and the report of other accountants, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Optical Coating Laboratory, Inc. and subsidiaries as of October 31, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated December 19, 1997, we expressed an unqualified opinion on those consolidated financial statements based on our audit and the report of other auditors on their audit of Flex Products, Inc. (a consolidated subsidiary). In our opinion, based on our audit, and the report of other auditors, the information set forth in the accompanying condensed consolidated balance sheet as of October 31, 1997 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Deloitte & Touche LLP San Jose, California May 20, 1998 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of Flex Products, Inc. Santa Rosa, California We have reviewed the balance sheet of Flex Products, Inc. as of May 3, 1997 and the related statements of operations and cash flows for the three-month and six month periods ended May 3, 1997 and April 30, 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. These financial statements have been prepared on a historical basis of accounting and do not reflect any purchase accounting adjustments recorded by Optical Coting Laboratory, Inc. as a result of their acquisition of a majority interest in Flex Products, Inc. as of May 8, 1995. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. The balance sheet as of November 2, 1997 was audited by us, and we expressed an unqualified opinion on it in our report dated November 26, 1997, but we have not performed any auditing procedures since that date. KPMG Peat Marwick LLP San Francisco, California May 14, 1998 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes in legal proceedings since those reported in Registrant's Form 10-K for the year ended October 31, 1997. ITEM 2. CHANGES IN SECURITIES No disclosure required. ITEM 3. DEFAULTS UPON SENIOR SECURITIES No disclosure required. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Stockholders was held on March 31, 1998. (b) The management nominees for director listed in the proxy statement were elected as follows: NOMINEES FOR DIRECTOR VOTES FOR VOTES WITHHELD Herbert M. Dwight, Jr. 9,208,536 167,021 Charles J. Abbe 9,239,211 136,346 Douglas C. Chance 9,237,506 138,051 Shoei Kataoka 9,223,741 151,816 John McCullough 9,194,197 181,360 Julian Schroeder 9,238,171 137,386 Renn Zaphiropoulos 9,234,433 141,124 (c) The ratification of the appointment of Deloitte & Touche LLP as the independent auditors of the Company for the year ending October 31, 1998. For 9,280,773 Against 43,435 Abstain 51,349 Broker Non-Vote 1,292,311 ITEM 5. OTHER INFORMATION No disclosure required. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 1. (11)* Computation of earnings per share for the three and six month periods ended April 30, 1998 and 1997. 2. (15)* Letter of Deloitte & Touche LLP regarding unaudited interim financial information. 3. (27)* Financial Data Schedule for the three months ended April 30, 1998. Reports on Form 8-K filed for the three months ended April 30, 1998 None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Optical Coating Laboratory, Inc. June 12, 1998 By: /S/CRAIG B. COLLINS Date Craig B. Collins, Vice President, Finance and Chief Financial Officer EX-11 2 OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE For the three and six months ended April 30, 1998 and 1997 (Amounts in thousands, except per share amounts) THREE MONTHS SIX MONTHS 1998 1997 1998 1997 BASIC SHARES: Average common shares outstanding 10,903 10,069 10,767 9,927 ====== ====== ====== ===== Net income $3,049 $1,513 $4,645 $2,420 Less dividend on preferred stock (125) (187) (250) (427) ------ ------ ------ ------ Net income applicable to common stock $2,924 $1,326 $4,395 $1,993 ====== ====== ====== ====== Net income per common share, basic $0.27 $0.13 $0.41 $0.20 ====== ====== ====== ====== DILUTED SHARES: Average common shares outstanding 10,903 10,069 10,767 9,927 Dilutive effect of employee stock options 650 341 711 365 Potential dilution of preferred stock * * * * ------ ------ ------ ------ 11,553 10,410 11,478 10,292 ====== ====== ====== ===== Net income applicable to common stock $2,924 $1,326 $4,395 $1,993 Add back dividend on ====== ====== ====== ====== preferred stock * * * * ------ ------ ------ ------ Net income for calculating diluted earnings per share $2,924 $1,326 $4,395 $1,993 ====== ====== ====== ====== Net income per share, diluted $0.25 $0.13 $0.38 $0.19 ====== ====== ====== ====== *ANTI-DILUTIVE EX-15 3 EXHIBIT 15. LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION To the Board of Directors and Stockholders of Optical Coating Laboratory, Inc. Santa Rosa, California We have reviewed, in accordance with standards established by the American Institute of Certified Public Accountants, the unaudited interim financial information of Optical Coating Laboratory, Inc. and subsidiaries for the periods ended April 30, 1998 and 1997 as indicated in our report dated May 20, 1998. Because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended April 30, 1998, is incorporated by reference in Registration Statements No. 33-41050, No. 33-26271, No. 33-12276, No. 33-48808, No. 33-65132, No. 33-60891 and No. 333-13013 on Forms S-8, Registration Statement No. 33-61177 and No. 33-65319 on Form S-3. We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. Deloitte & Touche LLP San Jose, California June 15, 1998 EX-27 4
5 3-MOS OCT-31-1997 APR-30-1998 5,850 0 37,040 2,063 26,883 79,458 190,010 94,649 182,791 39,485 0 91,635 0 0 28,742 182,791 64,345 64,345 42,484 42,484 15,395 0 927 5,620 2,163 3,049 0 0 0 3,049 .27 .25
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