UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended SEPTEMBER 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from
to
Commission file number 0-11360
ILC TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1655721
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
399 JAVA DRIVE, SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 745-7900
--------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of 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. Yes X 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 amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on December 16,
1996, was approximately $50,929,417. Shares of Common Stock held by each officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. The number of outstanding shares of the
registrant's Common Stock on December 16, 1996 was 4,782,508.
Parts of the following documents are incorporated by reference into Part
III of this Annual Report and Form 10-K: (1) Proxy Statement for registrant's
1996 Annual Meeting of Shareholders.
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
PART I
1 Business 1 - 7
2 Properties 6 - 7
3 Legal Proceedings 7
4 Submission of Matters to a Vote of Security Holders 7
PART II
5 Market for the Registrant's Common Equity and
Related Stockholder Matters 8
6 Selected Financial Data 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
8 Financial Statements and Supplementary Data 14 - 32
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III
10 Directors and Executive Officers of the Registrant 33
11 Executive Compensation 33
12 Security Ownership of Certain Beneficial Owners
and Management 33
13 Certain Relationships and Related Transactions 33
PART IV
14 Exhibits, Financial Statement Schedule, and Reports
on Form 8-K 34
Signatures 35
PART I
ITEM 1. BUSINESS
- ------- --------
GENERAL
- -------
ILC Technology, Inc. ("ILC" or the "Company") designs, develops, and
manufactures high intensity lamps and lighting products for the medical,
industrial, communication, aerospace, scientific, entertainment and military
industries. ILC Technology, Inc. was incorporated under the laws of the State of
California on September 15, 1967. Its principal manufacturing and executive
facilities are located at 399 Java Drive, Sunnyvale, California 94089. The
Company's telephone number is (408) 745-7900.
In September 1996, the Board of ILC voted to proceed with the divestiture
of the Company's Precision Lamp, Inc. (PLI) subsidiary and therefore PLI is
reported as discontinued operations in the accompanying consolidated financial
statements. PLI is a manufacturer of miniature incandescent surface-mount lamps
as well as liquid crystal display (LCD) backlight panels that incorporate the
technology of the surface mount lamps.
BUSINESS STRATEGY
- -----------------
The Company uses a market focused business strategy. ILC targets selected
high growth markets which most closely match the Company's technological
expertise and manufacturing strengths. With a strong emphasis on research and
development, ILC achieves and maintains a leadership position in these market
segments through advanced technology, engineering design capability and
attentive customer support.
PRODUCTS - FLASHLAMPS
- ---------------------
The flashlamp line of products was ILC's founding product line. In August
1991, ILC purchased Q-Arc, Ltd., an arc lamp manufacturing company based in
Cambridge, England.
The Company makes pulsed and direct current arc lamps that are designed to
satisfy a wide variety of laser and industrial applications requiring rigorous,
high-performance standards. The primary source of sales, of which approximately
80% are for the replacement market, derives from industrial uses such as
materials aging (solar simulation) and laser cutting, drilling, scribing and
marking. Ancillary sales are generated by the medical field where lasers are
utilized in cataract surgery and other exacting procedures. Production is highly
labor-intensive and requires a lengthy training period to achieve a quality
product. ILC anticipates that the market for flashlamps in low-energy laser
pumping applications will erode as alternative technologies such as laser diode
pumps become increasingly cost-effective; however, in high-powered laser
applications, flashlamps remain more efficient at less than 50% of the total
life cycle cost of laser diodes.
The Company believes that growth in the flashlamp business is highly
dependent on its ability to develop new applications for flashlamp technology.
ILC continues to develop high growth arc lamp markets outside of the laser
industry. Some of these include material aging (solar simulation), UV
sterilization and curing, machine vision and spectrofluoroscopy. During 1996,
sales of flashlamps to non-laser markets were approximately 11% of total
flashlamp sales.
PRODUCTS - CERMAX(R) AND EQUIPMENT
- ----------------------------------
The Company provides short arc xenon lamps that are optically pre-aligned,
encased in a very safe ceramic body bonded to a metallized sapphire window, and
are capable of transmitting the full
1
PRODUCTS - CERMAX(R) AND EQUIPMENT (CONTINUED)
- ----------------------------------------------
spectrum from infrared to ultra-violet wavelengths. In addition, the Company
also manufactures fully- encased and open frame power supplies, lamp holders and
other accessories to support the Cermax(R) product line. Products also include
complete fiber-optic lightsources that are private labelled for manufacturers of
medical equipment. Currently, the primary market is in fiber optic illumination
for medical procedures such as endoscopy.
The market for Cermax(R) lightsources and related equipment used in
endoscopy is composed of two segments - a high-intensity or critical segment and
a low-intensity or non-critical segment. Critical endoscopy applications require
high-intensity Cermax(R) lightsources with specialized power supplies due to the
small size of the fiberoptic lightguide. Furthermore, as these applications
often use video displays, high-intensity lightsources are required for good
color rendition. The low-intensity market is dominated by manufacturers of
halogen lightsources. Ancillary industrial uses for Cermax(R) lightsources
include illuminating areas that are difficult to inspect such as nuclear
reactors or jet engines. The Company has also targeted new non-medical
lightsource markets which include analytical instruments, spot UV curing
lightsources and Flash-Cermax(R) machine vision systems.
During fiscal 1995, ILC announced the release of new high intensity lamps
for video projection utilizing ILC's proprietary Daymax(R) and Cermax(R)
technologies. During 1996, several of ILC's products were incorporated into
high-end/professional and mid-range/business video projection systems of several
original equipment manufacturers (OEMs), including Hughes-JVC, Ampro,
Electrohome and Rank Brimar. Sony and Mitsubishi have also demonstrated
preliminary versions of ILC's video projection lamps. ILC's video projection
lamps are compatible with the key imaging devices including light valves, LCD's
(Liquid Crystal Displays) or Texas Instrument's DMD's (Digital Micromirror
Devices). ILC has also developed lamps for the low-end/commercial business
segment which are now being evaluated by several OEMs. The Company's future
growth will depend to a large extent on the successful introduction, marketing
and commercial viability of video projection systems that will use the Company's
products.
The factors that may adversely affect the Company's Cermax(R) business
include the expected entry of competitors into the market. The Company's primary
patent on the Cermax(R) lightsource expired in 1991 and the Company expects
competition from established and emerging companies. Increased competition could
result in price reductions, which in turn could generate lower net sales on
stable unit volume. Increased competition could also result in fewer customer
orders, reduced gross margins and loss of market share.
PRODUCTS - MERCURY XENON SHORT ARC LAMPS ("STEPPER LAMPS")
- ----------------------------------------------------------
In fiscal 1995, the Company began commercial shipment of a new product, the
mercury xenon short arc lamp ("stepper lamp"), which is used to expose patterns
during the fabrication of semiconductor wafers. ILC is currently shipping a
complete line of 1,000 and 2,000 watt stepper lamps. Each lamp, fully utilized,
lasts for approximately 1-2 months. Accordingly, the Company expects that the
product will generate a high repeat business.
The market for stepper lamps is currently dominated by a Japanese
competitor of the Company. ILC has invested heavily in ensuring the quality of
its stepper lamps since end users perceive substantial risk in switching
suppliers. In addition, ILC's stepper lamp does not require the end user to
modify any of its maintenance procedures. The Company has worked extensively
over the last four years with major U.S. end users of stepper equipment to
qualify its stepper lamps at the major semi-conductor fabrication facilities.
2
PRODUCTS - MERCURY XENON SHORT ARC LAMPS ("STEPPER LAMPS") (CONTINUED)
- ----------------------------------------------------------------------
During fiscal 1995, ILC established itself as the only qualified United
States supplier of short arc stepper lamps used in semiconductor chip
manufacturing equipment, a market that has been dominated by foreign
manufacturers. In 1996, ILC's lamps were qualified by a number of key customers
including IBM, Intel, Integrated Solutions, Inc. (ISI), and others. The failure
of the Company's stepper lamp to achieve or sustain market acceptance would have
a material adverse effect on the Company's results of operations.
In October 1994, the Company purchased a 20,000 square foot office and
manufacturing facility in Santa Clara, California for the Company's stepper lamp
operations. The move to the new facility is expected to be completed in the
second quarter of fiscal 1997. There can be no assurance that the move will not
result in a short-term disruption in stepper lamp operations. In addition, the
success of the Company's stepper lamp business depends in large part on the
ability of the Company to manufacture stepper lamps efficiently and reliably
over time. There can be no assurance that the Company will not experience
manufacturng problems in the future that would result in product delivery delays
or quality problems.
PRODUCTS - MERCURY CAPILLARY LAMPS
- ----------------------------------
Mercury capillary lamps are manufactured using technology and processes
that are similar to those developed for stepper lamps. The applications for
capillary lamps include the photolithography of grid patterns on color TV
screens and printed circuit boards for computers.
PRODUCTS - DAYMAX(R) METAL HALIDE
- ---------------------------------
Daymax(R) lamps simulate stable daylight conditions. Originally developed
for use in the space program, these products are now widely used throughout the
entertainment business. Applications include: indoor and outdoor lighting for
motion picture and television productions, high speed and special effects
lighting, concert, disco and stadium lighting and theatrical lighting. Daymax(R)
lamps are also used for solar simulation in certain scientific applications.
The Company has developed DTI, a series of integral low-power metal halide
lamps (less than 500 watts) for commercial projection, stage and medical
applications. DTI lamps, using a rugged ceramic reflector, have been qualified
for use in video projection systems and architectural lighting.
PRODUCTS - AEROSPACE
- --------------------
ILC offers standard, modified, and customer systems covering the visible,
infrared, and ultraviolet spectrum to meet each space lighting requirement. The
Company's lighting systems are key elements of NASA's Space Transportation
System. These systems are installed in the Space Shuttle interior and exterior,
on the Manned Maneuvering Unit, on Spacelab and in several experiments carried
aboard the shuttle orbiters. Other ILC systems are being designed for use on
International Space Station Alpha, in future shuttle experiments and payload
packages and space robotic vehicles. ILC is the only domestic manufacturer of
space lighting qualified to serve NASA and other government agencies in Japan
and Europe.
ILC aerospace lighting systems feature efficiency, reliability, ruggedness,
light weight and full space qualification. New systems aimed to meet unique
requirements can often be developed from ILC's large selection of
space-qualified designs and components, substantially reducing development costs
and lead times.
3
PRODUCTS - MILITARY
- -------------------
These products include infrared lamps used by the military on tanks and
aircraft to deflect offensive heat seeking missiles. During fiscal 1996, the
Company received a contract for approximately $1 million for a multi-faceted
Cermax(R) high intensity discharge lamp which is used in the infrared guidance
system of the TOW (Tube Launched Optically Guided Wire Controlled) missile for
Hughes Aircraft.
PRODUCTS - CONVERTER POWER
- --------------------------
ILC acquired Converter Power, Inc. (CPI) in January 1993. CPI is a leading
producer of high efficiency, small form factor lamp power sources built to fit
compactly into a variety of systems. The Company designs and manufactures a full
family of UL and TUV-approved power supplies which can be incorporated into OEM
equipment. In addition, CPI has one OEM customer that purchases custom power
supplies for equipment which services the ion implant sector of the
semiconductor equipment manufacturing industry. In the fourth quarter of fiscal
1996, CPI experienced a significant reduction in orders from this customer. CPI
must reduce its reliance on this major customer through additional sales of new
products to other customers.
CPI also provides power supplies which have been specifically engineered
for ILC's Cermax(R) and metal halide lamps. This effort has enabled CPI to
provide power sources which will be sold to OEMs.
MARKETING AND SALES
- -------------------
ILC sells its products through a direct sales force to OEMs and sells to
end users through sales representatives and distributors. The sales organization
includes Regional Sales Managers and a team of Market Development Managers with
global responsibilities aligned along specific markets such as semicondcutor,
video projection and medical. In addition, ILC maintains customer service groups
at its facilities in California, Massachusetts and Cambridge, England to provide
sales and customer service support to its customer base and network of foreign
and domestic distributors.
The European sales office located at the facilities of Q-Arc in Cambridge,
England, sells and markets the complete line of lamp and equipment products and
provides local support for European customers.
For fiscal 1996, approximately 37.1% of the Company's net sales represented
international sales, primarily in the Pacific Rim and Europe. Information
regarding the Company's export sales and major customers is incorporated herein
by reference to Note 3 of Notes to Consolidated Financial Statements.
BACKLOG
- -------
As of September 28, 1996, ILC's backlog of unfilled orders was
approximately $28,091,000 ($26,839,000 relating to continuing operations) as
compared to approximately $33,767,000 ($27,168,000 relating to continuing
operations) at September 30, 1995. The Company includes in its backlog only
orders which have been released by the customer for shipment within the next 12
months. Due to the possibility of customer changes in delivery schedules or
cancellations of orders, backlog as of any particular date may not be
representative of actual sales for any succeeding period.
4
MANUFACTURING
- -------------
ILC's lamp groups have built substantial expertise in the fields of sealing
technology (ceramic-to- metal, quartz-to-metal, vacuum sealing), materials
research, plasma physics, electrical engineering, optoelectronics, and electrode
technology. With CPI, ILC obtained the essential power supply expertise
necessary for providing OEMs with integrated solutions. The manufacturing of
most of the Company's lamp and power supply products is labor and capital
intensive, and accordingly, the labor force is highly skilled and experienced.
The combination of ILC's technical and manufacturing expertise enables ILC to
dominate its selected market niches for specialty lighting.
ILC designs, develops, and manufactures a majority of its products in two
facilities totaling 97,000 square feet. These adjoining buildings include lamp
development laboratories, separate manufacturing facilities for xenon and
krypton arc lamps, Cermax(R) lamps, Daymax(R) metal halide lamps, mercury short
arc ("stepper") lamps, mercury capillary lamps, Cermax(R) equipment and
Aerospace products. The Company also purchased, in October 1994, a facility in
Santa Clara, California totalling approximately 20,000 square feet to
accommodate stepper lamp manufacturing.
The need for more production capacity for the subsidiaries of ILC prompted
expansion of existing manufacturing facilities. Q-Arc purchased a new facility
of approximately 36,000 square feet in June 1994 and occupied the new facility
in early fiscal 1995. Q-Arc currently occupies approximately 25,000 of the
36,000 square feet and has available 11,000 square feet for future expansion.
Converter Power recently occupied a 32,000 square foot facility in Beverly,
Massachusetts.
Q-Arc received ISO9002 certification in fiscal 1995 and ILC Sunnyvale
became certified in fiscal 1996. CPI excepts to be certified in fiscal 1997. ISO
certification ensures customers that ILC has a quality system that will result
in continuous product quality improvement. It is a recognition of a commitment
to quality throughout all sections of the organization.
PATENTS AND TRADEMARKS
- ----------------------
The Company holds approximately 45 patents related to the key features of
several of its products and several applications are pending. While these
patents tend to enhance the Company's competitive position, management believes
that the Company's success depends primarily upon its proprietary technological,
engineering, production and marketing skills and the high quality of its
products. The names of two of the Company's products, Cermax(R) and Daymax(R)
are registered as trademarks in the United States Patent and Trademark Office
and in many other countries in which the Company's products are sold.
The Company's patents expire at various dates between 1997 and 2013. There
can be no assurance that any patents held by the Company will not be challenged
and invalidated, that patents will issue from any of the Company's pending
applications or that any claims allowed from existing or pending patents will be
of sufficient scope or strength or be issued in all countries where the
Company's products can be sold to provide meaningful protection or any
commercial advantage to the Company. Competitors of the Company also may be able
to design around the Company's patents.
COMPETITION
- -----------
ILC competes on the basis of product performance, applications engineering,
customer service, reputation and price. The Company competes in many markets in
which technology develops and improves rapidly, stimulating ILC to enhance the
capability of its products and technologies. Competitors consist of both large
and small companies located in the United States, Japan and Europe.
5
COMPETITION (CONTINUED)
- -----------------------
They include EG&G Inc., Osram, Philips, Ushio, Optical Radiation Corporation
(ORC), Koto and Wolfram. In many market segments, the competition has
established the bench mark for product acceptance at a very high level, causing
ILC to continuously improve all phases of its processes for customer
satisfaction. The Company believes that by exploiting segmented market areas in
which ILC has technological, manufacturing and marketing strengths, ILC can
compete effectively. At the same time, by focusing its product development and
acquisition activities in these areas, the Company can defend its strengths and
maintain its leadership in selected markets.
ENGINEERING AND RESEARCH
- ------------------------
ILC's engineering, research, and development efforts consist of three main
activities. The first area of activity is extensive application engineering in
response to customer requirements. These activities result in customer specific
products and modifications to existing products to satisfy the needs of the
customers. The second area is that of joint engineering and development work
made in connection with customer production contracts. The third area includes
those projects funded by the Company to develop new products and technologies.
The Company spent $4,534,000, $4,497,000 and $3,998,000 in fiscal 1996, 1995 and
1994, respectively, for Company funded research and development ($4,320,000,
$4,279,000 and $3,694,000 in fiscal 1996, 1995 and 1994, respectively, spent for
research and development in continuing operations). The Company's engineering
and research personnel are engineers and scientists, all of whom have technical
degrees.
EMPLOYEES
- ---------
As of September 28, 1996, the Company had 616 full-time employees,
comprised of 64 in research and engineering, 24 in marketing and sales, 485 in
manufacturing and 43 in general and administrative positions. Of these
employees, 52 in research and development, 22 in marketing and sales, 389 in
manufacturing and 33 in general and administrative positions are associated with
the continuing operations of the Company. ILC believes that its future success
depends upon its continued ability to recruit and maintain highly skilled
employees in all disciplines. Although competition for qualified personnel is
strong, ILC has been successful in attracting and retaining skilled employees.
None of the Company's employees is represented by a labor union. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
- ------- ----------
The Company owns and leases an aggregate of approximately 153,000 and
56,000 square feet, respectively, of office and manufacturing space in six
separate buildings in Sunnyvale, Santa Clara and Cotati, California; Beverly,
Massachusetts; and Cambridge, England. In Sunnyvale, the Company owns 97,000
square feet in two adjacent buildings. These buildings were constructed by the
Company in 1977 and 1979, sold in 1982 and leased back from the new owners, and
re-purchased from the landlord in August 1993. The Company leases to one tenant
approximately 9,000 square feet of its space in Sunnyvale under a lease which
expires in March 1997. In early October 1994, the Company purchased 20,000
square feet of office and manufacturing space in Santa Clara, California. In
June 1994, the Company purchased 36,000 square feet of office and manufacturing
space in Cambridge, England. Q-Arc currently occupies approximately 25,000
square feet with approximately 11,000 square feet available for future
expansion. Precision Lamp moved into a new facility in July 1993. The lease for
the 24,000 square feet of office and manufacturing space, located in Cotati,
California, expires in 2003. The operations of Precision Lamp have been
reclassified as discontinued operations. See Note 12 of Notes to Consolidated
Financial Statements appearing elsewhere herein. Finally, Converter Power, in
late fiscal 1995, entered into a lease to occupy approximately 32,000 square
feet of office and manufacturng space in Beverly, Massachusetts. This lease
6
ITEM 2. PROPERTIES (CONTINUED)
- ------- ----------------------
expires in September 2000. Converter Power moved into this new facility in
the first quarter of fiscal 1996. CPI previously occupied a 15,000 square foot
facility in Ipswich, Massachusetts. For a discussion of the Company's lease
commitments, see Note 8 of Notes to Consolidated Financial Statements appearing
elsewhere herein.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
There were no matters submitted to a vote of the security holders during
the fourth quarter of fiscal 1996.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
ILC's common stock is traded in the Nasdaq National Market (symbol ILCT).
The high and low closing sales prices for the common stock on the Nasdaq
National Market, are set forth below for the quarters as indicated:
FISCAL 1996 HIGH LOW
----------- ---- ---
1st Quarter 111/2 83/4
2nd Quarter 117/8 87/8
3rd Quarter 14 1011/16
4th Quarter 131/2 107/8
FISCAL 1995 HIGH LOW
1st Quarter 103/8 71/2
2nd Quarter 103/4 8
3rd Quarter 111/8 83/4
4th Quarter 111/4 9
There were approximately 2,000 institutional and individual stockholders as
of December 16, 1996. The closing sales price of the common stock on December
16, 1996 as reported by Nasdaq was $117/8. The Company intends to retain
earnings for use in its business and does not expect to pay cash dividends in
the foreseeable future. The Company's credit agreement with Union Bank provides
that the Company shall not declare or pay any dividend or other distribution on
its Common Stock (other than a stock dividend) or purchase or redeem any Common
Stock, without the bank's prior written consent.
8
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following selected consolidated financial data of the Company, which
has been reclassified to reflect the continuing operations of ILC and the
discontinuted operations of PLI, should be read in conjunction with the
Consolidated Financial Statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein.
FISCAL YEAR ENDED
(in thousands except per share data)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Net sales ................$ 54,206 $ 49,496 $ 44,331 $ 42,250 $ 38,727
Income from continuing
operations .............. 4,546 4,637 3,727 4,509 4,757
Income (loss) from
discontinued operations . (4,239) (99) (3,536) 250 193
Net income ............... 307 4,538 191 4,759 4,950
Earnings (loss) per share:
Continuing operations ... .92 .97 .77 .91 .96
Discontinued operations (.86) (.02) (.73) .05 .04
------- ------- ------ ------ -------
Net income per share $ .06 $ .95 $ .04 $ .96 $ 1.00
Weighted average
shares outstanding ..... 4,923 4,765 4,825 4,980 4,956
Working capital ..........$ 15,155 $ 14,618 $ 11,366 $ 17,543 $ 16,399
Total assets ............. 48,594 46,726 41,312 39,703 28,645
Total long-term debt ..... 7,576 6,592 6,421 5,805 2,193
Total stockholders'
equity .................$ 29,791 $ 28,802 $ 23,624 $ 24,565 $ 19,578
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
In September 1996, the Company's Board of Directors voted to proceed
with the divestiture of the Company's Precision Lamp subsidiary based in Cotati,
California. The accompanying consolidated financial statements have been
restated to reflect the discontinued operations of the Precision Lamp business.
Refer to Note 12 of Notes to Consolidated Financial Statements for a further
discussion of discontinued operations. Accordingly, the following discussion and
analysis of financial condition and results of operations reflects the
activities of ILC Technology, Inc., Converter Power, Inc.
and Q-Arc, Ltd.
9
GENERAL (CONTINUED)
- -------------------
During fiscal 1996, 1995 and 1994, the Company derived approximately
39%,40% and 52%, respectively, of its net sales from the medical market. During
fiscal 1996, 1995 and 1994, the Company's sales in the industrial market
accounted for 46%, 47% and 34%, respectively, of net sales. In each of the
fiscal years 1996, 1995 and 1994, the Company's sales in the aerospace market
accounted for 8% of net sales. Products sold in the medical market are
incorporated into products sold into the health-care and health-care related
industries. These industries have recently been subject to significant
fluctuations in demand which in turn have affected the demand for components
used in these products. The Company expects sales to the medical market to
continue to decrease as a percentage of net sales for the foreseeable future.
aerospace sales have remained relatively constant over the last two fiscal
years. Due to the continuing slowdown in military and defense spending, the
Company does not expect aerospace sales to grow significantly from fiscal 1996
and 1995 levels.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below that could cause actual results
to differ materially from historical results or those anticipated. In this
report, the words "believes", "expects", "future", "may have", "will take
place", and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
CONTINUING OPERATIONS
- ---------------------
FISCAL 1996 COMPARED TO FISCAL 1995
- -----------------------------------
Net sales for fiscal 1996 were $54,206,000, an increase of 9.5% over fiscal
1995 net sales of $49,496,000. The $4,710,000 increase was primarily
attributable to a $3.4 million sales increase in Cermax and related equipment
sales, a $1.7 million sales increase in Quartz lamps and a $1 million sales
increase in Flashlamps. These sales gains were offset by a $1.4 million sales
decrease in Aerospace and at Converter Power. In the fourth quarter of fiscal
1996, Converter Power experienced a significant reduction in orders from a major
customer that provides equipment to the semiconductor equipment industry.
Converter Power must continue to reduce reliance on this major customer through
additional sales of new products to other customers. This change in customer
base and mix may have an unfavorable impact on gross margins in future quarters.
Cost of sales as a percentage of net sales was 66.7% for fiscal 1996
compared to 64.2% for fiscal 1995. The percentage increase was due primarily to
the sales decline from Converter Power's major customer discussed above coupled
with cost revisions for a fixed price contract in Aerospace. In addition,
although there was some improvement in the gross margin associated with Quartz
lamp products in fiscal 1996 over fiscal 1995, the gross margin in both fiscal
years remained negative. The ratio of inventory reserve to year end inventory in
fiscal 1996, 1995 and 1994 was 18.6%, 20.0% and 26.3%, respectively.
Research and development expense, 8.0% of net sales in fiscal 1996 compared
to 8.6% of net sales in fiscal 1995, remained unchanged at approximately $4.3
million. In both fiscal years, the majority of the spending was concentrated in
Quartz for the development of lamps used in the processing of semiconductor
materials, in Cermax for lamps for video projection and at Converter Power for
the design of new power supplies to compliment the lamps for video projection.
10
FISCAL 1996 COMPARED TO FISCAL 1995 (CONTINUED)
- -----------------------------------------------
Marketing expenses, 4.9% of net sales in both fiscal 1996 and 1995,
increased $241,000 between the two fiscal years. The increase was the result of
personnel additions and more travel and trade show attendance.
As a percentage of net sales, general and administrative expenses were 8.1%
in fiscal 1996 and 9.0% in fiscal 1995. In absolute dollars, the general and
administrative spending level has remained constant at approximately $4.4
million.
Amortization of intangibles of $120,000 in fiscal 1996 and 1995 represents
the amortization of the covenant-not-to-compete arising from the acquisition of
Q-Arc in 1991.
Interest income was $80,000 in fiscal 1996, compared to interest income of
$265,000 in fiscal 1995 which amount included approximately $235,000 of interest
income from an income tax refund in the third quarter of fiscal 1995. Interest
expense associated with continuing operations, $542,000 in fiscal 1996 as
compared to $589,000 in fiscal 1995, decreased approximately $47,000 between the
two fiscal years due to a slightly lower interest rate. Interest expense is
associated with a term loan obtained to purchase the Company's two operating
facilities in Sunnyvale, a line of credit for working capital needs and an
equipment line of credit for capital equipment acquisitions.
The Company reported income from continuing operations before provision for
income taxes of $6,061,000 in fiscal 1996 compared to income from continuing
operations before provision for income taxes of $6,109,000 in fiscal 1995. The
fiscal 1996 effective tax rate was 25% compared with a fiscal 1995 effective tax
rate of 28%, exclusive of a $238,000 income tax refund received in the third
quarter of fiscal 1995.
As previously discussed, the Company's Board of Directors voted to proceed
with the divestiture of Precision Lamp based in Cotati, California. The net
operating results of this subsidiary have been reported as a $4,239,000 loss
from discontinued operations in fiscal 1996. This amount includes the $840,000
operating loss of Precision Lamp for fiscal 1996 and an estimated loss for the
disposal of discontinued operations of $3,399,000. The estimated loss for the
disposal includes asset write downs of $3.3 million, a $500,000 charge for
anticipated losses during the final disposition of the subsidiary and the write
off of the unamortized balance of the Precision Lamp covenant-not-to- compete of
approximately $470,000. The combined loss from discontinued operations is net of
a $1,413,000 income tax benefit. Company management believes that the carrying
value of the net assets from discontinued operations will be realized upon
disposition through either a sale to a qualified buyer or an orderly liquidation
of the business. The disposition of the business will take place in fiscal 1997.
The Company believes that the disposition will improve cash flows, strengthen
its financial position and provide the basis for improved financial performance
in the future. (See Note 12 of Notes to Consolidated Financial Statements.)
The Company believes that inflation and changing prices had no significant
impact on sales or costs during fiscal 1996 and 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
- -----------------------------------
Net sales for fiscal 1995 were $49,496,000, an increase of 11.7% over
fiscal 1994 net sales of $44,331,000. The $5,165,000 increase was primarily
attributable to a $4 million sales increase at Converter Power and a $1 million
sales increase at Q-Arc. Although total net sales at ILC Technology remained
unchanged between the two fiscal years, Cermax and related equipment sales
decreased $2.4 million due to a reduction in the medical market. Flash and
quartz lamp sales increased $1 million and Aerospace sales increased $1.4
million.
11
FISCAL 1995 COMPARED TO FISCAL 1994 (CONTINUED)
- -----------------------------------------------
As a percentage of net sales, cost of sales remained constant between
fiscal 1995 and 1994 at 64.2% and 64.6%, respectively. The ratio of the
inventory reserve to year end inventory in fiscal 1995, 1994 and 1993 was 20.0%,
26.3% and 16.5% respectively.
Research and development expenses, 8.6% of net sales in fiscal 1995
compared to 8.3% of net sales in fiscal 1994, increased $584,000 between the two
fiscal years. The majority of the increase was concentrated in the Quartz
stepper lamp product.
Marketing expenses, 4.9% of net sales in fiscal 1995 compared to 4.1% of
net sales in fiscal 1994, increased $ 609,000. The increase between the two
fiscal years was primarily due to the addition of personnel and more travel and
trade show attendance.
As a percentage of sales, general and administrative expenses were 9.0% in
fiscal 1995 and 10.3% in fiscal 1994. The $87,000 decrease was due to the
accrual in the second quarter of fiscal 1994 for early exit incentives for
various long time ILC employees ($500,000) and the write off of a note
receivable, doubtful of collection ($250,000). This decrease was partially
offset by expenses incurred by Q-Arc in its move to a larger manufacturing
facility and by personnel additions and other expenses at Converter Power,
totalling approximately $650,000, in fiscal 1995.
Amortization of intangibles of $120,000 in fiscal 1995 and 1994 represents
the amortization of the covenant-not-to-compete arising from the acquisitions of
Q-Arc in 1991.
Interest income was $265,000 in fiscal 1995, which amount included
approximately $235,000 of interest income from an income tax refund in the third
quarter of fiscal 1995. Interest income in fiscal 1994 was $170,000. Interest
expense associated with continuing operations was $589,000 in fiscal 1995 as
compared to $289,000 in fiscal 1994. The $300,000 increase between the two
fiscal years was due to additional borrowings on the Company's line of credit
and equipment purchases.
Due to the Company's decision in 1996 to divest of the Precision Lamp
subsidiary, the Consolidated Statements of Operations for fiscal 1995 and 1994
were restated to reflect the discontinued operations of Precision Lamp. The
Company reported income from continuing operations before provision for income
taxes of $6,109,000 in fiscal 1995 compared to income from continuing operations
before provision for income taxes of $5,402,000 in fiscal 1994. The fiscal 1995
provision for income taxes on continuing operations was 28% of income from
continuing operations before provision for income taxes exclusive of a $238,000
income tax refund received in the third quarter of fiscal 1995. This compares
with a fiscal 1994 provision for income taxes on continuing operations of 31% of
income from continuing operations before provision for income taxes. The net
loss from discontinued operations of $99,000 in fiscal 1995 represents the
operating results of Precision Lamp and is net of an income tax benefit of
$32,000. The net loss from discontinued operations of $3,536,000 in fiscal 1994
is net of a $523,000 income tax benefit and includes a $3.4 million write down
of intangibles generated from the Precision Lamp acquisition. In assessing the
recoverability of the unamortized goodwill and covenant-not-to-compete generated
from the acquisition, management determined that an impairment occurred and
recorded the $3.4 million charge.
The Company believes that inflation and changing prices had no significant
impact on sales or costs during fiscal 1995 and 1994.
12
LIQUIDITY AND FINANCIAL POSITION
- --------------------------------
Cash and cash equivalents increased to $1,829,000 in fiscal 1996 from
$1,530,000 in fiscal 1995. Cash provided from operations amounted to $1,597,000
in fiscal 1996, a decrease of $952,000 from $2,549,000 in fiscal 1995. During
fiscal 1996, the Company made capital equipment purchases of $3,187,000. In
fiscal 1996, the Company increased its net borrowings under its line of credit
by $3,000,000, increased its net borrowings under an equipment line by $180,000
and paid down a term loan by $1,584,000. In fiscal 1995, the Company used cash
of $1,745,000 to purchase land and a new manufacturing facility in Santa Clara,
California and made capital equipment acquisitions of $2,518,000. During fiscal
1995, the Company increased its net borrowings under its line of credit by
$2,000,000, increased its net borrowings under an equipment line by $670,000 and
paid down a term loan by $1,578,000. In fiscal 1994, the Company used cash of
$2,701,000 to purchase a new office and manufacturing facility in Cambridge,
England, deposited $1,300,000 for the purchase of land and a manufacturing
facility in Santa Clara, California and paid $312,000 for land in Cotati,
California. Capital equipment acquisitions in fiscal 1994 amounted to
$1,672,000. In fiscal 1994, the Company increased its net borrowings under a
term loan for real estate acquisitions by $800,000 and increased the net
borrowings under an equipment line by $591,000. In addition, in fiscal 1994, the
Company also repurchased, on the open market, 204,000 shares of its common stock
for $1,556,000.
The Company has working capital of $15,155,000 and a current ratio of 2.45
to 1.0 at September 28, 1996. This compares with working capital of $14,618,000
and a current ratio of 2.29 to 1.0 at September 30, 1995. As of September 28,
1996, the Company had $1,000,000 unused on a $6,000,000 bank line of credit with
interest at 2% above the LIBOR rate (London Interbank Offer Rate) (7.4% at
September 28, 1996). The Company also has available approximately $1,100,000
remaining on a $2,200,000 equipment credit facility at the above interest rate.
This credit facility can be increased to accommodate the capital equipment needs
of the Company. In fiscal 1997, ILC anticipates making capital expenditures of
approximately $2.5 million. These financial resources, together with anticipated
additional resources to be provided from continuing operations, are expected to
be adequate to meet the Company's working capital needs, capital equipment
requirements and debt service obligations at least through fiscal 1997.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company is not required to adopt the provisions of this
statement until its fiscal year 1997. The provisions of this statement must be
made on a prospective basis. The Company plans to adopt the disclosure
provisions of this statement in 1997, and therefore the effect on its financial
position and results of operations, upon adoption, will not be significant.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
TABLE OF CONTENTS PAGE
----------------- ----
Consolidated Balance Sheets - September 28,
1996 and September 30, 1995 15 - 16
Consolidated Statements of Operations for the Three
Fiscal Years Ended September 28, 1996 17
Consolidated Statements of Stockholders' Equity
for the Three Fiscal Years Ended September 28, 1996 18
Consolidated Statements of Cash Flows for the Three
Fiscal Years Ended September 28, 1996 19 - 20
Notes to Consolidated Financial Statements 21 - 30
Form 10-K Schedule 31
Report of Independent Public Accountants 32
14
ILC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
ASSETS
------
1996 1995
---- ----
Current assets:
Cash and cash equivalents ..................... $ 1,828,807 $ 1,529,863
Accounts receivable, less allowance
for doubtful accounts of $312,358
and $409,440, respectively ................... 9,494,246 8,450,977
Receivable from long-term contracts ........... 861,427 610,122
Inventories ................................... 8,901,528 7,533,090
Deferred tax asset ............................ 2,158,000 1,454,000
Prepaid expenses .............................. 208,320 122,244
Net assets from discontinued operations ....... 2,178,383 6,249,401
----------- -----------
Total current assets ................... 25,630,711 25,949,697
----------- -----------
Property and equipment, net .................... 21,176,431 19,560,683
Covenants-not-to-compete, net of
accumulated amortization and
writedown of $3,195,524 and
$2,435,354, respectively ...................... 356,641 475,521
Other assets ................................... 680,013 739,836
----------- -----------
$48,593,796 $46,725,737
=========== ===========
The accompanying notes are an integral part of these financial statements.
15
ILC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1996 1995
---- ----
Current liabilities:
Accounts payable ................................ $ 3,643,496 $ 3,763,998
Accrued payroll and related items ............... 1,263,741 1,601,111
Other accrued liabilities ....................... 1,146,822 1,121,321
Current portion of non-compete obligation ....... 390,000 520,000
Current portion of long-term debt ............... 2,545,600 2,455,500
Accrued income taxes payable .................... 1,486,518 1,869,494
----------- -----------
Total current liabilities ................. 10,476,177 11,331,424
----------- -----------
Long-term liabilities, net of current portion:
Long-term debt .................................. 7,370,164 5,898,040
Non-compete obligation .......................... -- 390,000
Other accruals .................................. 206,235 304,074
----------- -----------
Total long-term liabilities ............... 7,576,399 6,592,114
----------- -----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, no par value; 10,000,000
shares authorized; 4,782,508 shares and
4,683,174 shares outstanding, respectively .... 6,815,109 6,132,914
Retained earnings ............................... 22,976,111 22,669,285
----------- -----------
Total stockholders' equity ................ 29,791,220 28,802,199
----------- -----------
$48,593,796 $46,725,737
=========== ===========
The accompanying notes are an integral part of these financial statements.
16
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996
1996 1995 1994
---- ---- ----
Net sales .................................$54,206,424 $49,496,029 $44,331,237
Costs and expenses:
Cost of sales ........................... 36,180,448 31,799,916 28,654,362
Research and development ................ 4,319,650 4,278,697 3,694,392
Sales and marketing ..................... 2,645,952 2,404,856 1,795,930
General and administrative .............. 4,417,446 4,459,726 4,546,290
Amortization of intangibles ............. 120,000 120,000 120,000
----------- ---------- -----------
47,683,496 43,063,195 38,810,974
Income from continuing operations before
provision for income taxes and interest
expense .................................. 6,522,928 6,432,834 5,520,263
Interest expense, net ..................... 461,898 323,757 118,597
---------- ---------- ----------
Income from continuing operations before
provision for income taxes ............... 6,061,030 6,109,077 5,401,666
Provision for income taxes on continuing
operations ............................... 1,515,000 1,472,000 1,675,000
---------- ----------- ----------
Income from continuing operations ......... 4,546,030 4,637,077 3,726,666
Discontinued operations:
Operating loss net of tax benefit of
$280,004, $32,000 and $523,000 in
1996, 1995 and 1994, respectively ...... (840,217) (99,143) (3,536,053)
Estimated loss on disposal, including
$500,000 for operating losses during the
phase out, net of tax benefit of
$1,132,996 (3,398,987) -- --
----------- ---------- ---------
Loss from discontinued operations ....... (4,239,204) (99,143) (3,536,053)
----------- ----------- -----------
Net income ............................... $ 306,826 $4,537,934 $ 190,613
=========== ========== ===========
Earnings (loss) per share:
Earnings from continuing operations ......$ 0.92 $ 0.97 $ 0.77
Loss from discontinued operations ........ (0.86) (0.02) (0.73)
----------- ---------- -----------
Net income per share
$ 0.06 $ 0.95 $ 0.04
=========== ========= ===========
Weighted average shares outstanding used
to compute net income (loss) per share ... 4,923,132 4,764,989 4,825,009
=========== ========= =========
The accompanying notes are an integral part of these financial statements.
17
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996
Common
Common Stock Retained
Shares Amount Earnings Total
Balance at October 2, 1993 .. 4,619,476 $ 6,623,828 $17,940,738 $24,564,566
Net income ................ - - 190,613 190,613
Issuance of common stock
under stock purchase plan 25,475 196,590 - 196,590
Exercise of stock options . 82,000 227,420 - 227,420
Repurchase of common stock (204,000) (1,555,500) - (1,555,500)
---------- ----------- ---------- -----------
Balance at October 1, 1994 .. 4,522,951 5,492,338 18,131,351 23,623,689
Net income ................ - - 4,537,934 4,537,934
Issuance of common stock
under stock purchase plan 37,973 266,575 - 266,575
Exercise of stock options . 132,250 450,751 - 450,751
Repurchase of common stock (10,000) (76,750) - (76,750)
---------- ----------- ---------- ------------
Balance at September 30, 1995 4,683,174 6,132,914 22,669,285 28,802,199
Net income ................ - - 306,826 306,826
Issuance of common stock
under stock purchase plan 34,209 279,068 - 279,068
Exercise of stock options . 65,125 403,127 - 403,127
---------- ---------- ---------- ----------
Balance at September 28, 1996 4,782,508 $6,815,109 $22,976,111 $29,791,220
========== ========== =========== ===========
The accompanying notes are an integral part of these
financial statements.
18
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net Income ....................... $ 306,826 $4,537,934 $ 190,613
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and
amortization .................. 1,570,809 1,450,597 948,313
Provision for doubtful accounts
and note ....................... 38,804 102,861 383,902
Provision for inventory
obsolescence ................... 520,006 169,034 1,772,346
Net loss on property and equipment
sold or retired ................. - 26,367 -
Amortization of non-compete
agreements ...................... 118,880 118,881 118,880
Changes in assets and liabilities:
Decrease in marketable
securities .................... - 998,129 438,078
(Increase) decrease in accounts
receivable .................... (1,333,378) (2,467,329) 167,344
Increase in inventories ........ (1,888,444) (1,685,743) (1,846,314)
(Increase) decrease in deferred
tax asset ..................... (704,000) 951,000 (1,016,000)
(Increase) decrease in prepaid
expenses ...................... (86,076) 406,556 (229,338)
(Increase) decrease in other
assets ........................ 59,823 (98,397) 183,044
Increase (decrease) in accounts
payable ....................... (120,502) 300,709 21,467
Increase (decrease) in accrued
liabilities ................... (956,660) (637,731) 1,657,530
Net changes in assets and
liabilities from discontinued
operations ..................... 4,071,018 (1,623,516) 2,850,679
----------- ----------- ----------
Total adjustments ........... 1,290,280 (1,988,582) 5,449,931
----------- ----------- ----------
Net cash provided by
operating activities ....... 1,597,106 2,549,352 5,640,544
----------- ----------- ----------
Cash flows from investing activities:
Purchase of land and real
estate ............................ - (3,045,412) (3,012,844)
(Increase) decrease in deposit on
land and building purchase ........ - 1,300,000 (1,300,000)
Investment in joint venture ........ - (450,000) -
Capital expenditures ............... (3,186,557) (2,517,541) (1,671,942)
----------- ----------- ----------
Net cash used in
investing activities ....... (3,186,557) (4,712,953) (5,984,786)
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
19
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996
(CONTINUED)
1996 1995 1994
---- ---- ----
Cash flows from financing activities:
Principal borrowings under line
of credit ........................$ 9,500,000 $ 8,450,000 $ -
Principal repayments under line
of credit ........................ (6,500,000) (6,450,000) -
New borrowings under equipment
line ............................. 1,555,000 1,720,089 1,090,702
Principal repayments under
equipment line ................... (1,374,800) (1,049,958) (499,225)
Principal borrowings under
term loan ........................ - - 1,333,333
Principal repayments under
term loan ........................ (1,584,000) (1,578,000) (533,333)
Payments under non-compete
agreement ........................ (390,000) (520,000) (520,000)
Proceeds from issuance of
common stock ..................... 682,195 717,326 424,010
Repurchase of common stock ........ - (76,750) (1,555,500)
---------- ----------- -----------
Net cash provided by (used in)
financing activities............ 1,888,395 1,212,707 (260,013)
----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents....... 298,944 (950,894) (604,255)
Cash and cash equivalents at
beginning of year .................. 1,529,863 2,480,757 3,085,012
----------- ----------- -----------
Cash and cash equivalents at
end of year ........................$ 1,828,807 $ 1,529,863 $ 2,480,757
=========== =========== ===========
1996 1995 1994
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest - continuing operations . $ 542,061 $589,200 $ 288,669
Interest - discontinued operations 77,714 106,341 50,082
Income taxes ..................... 1,055,000 909,000 2,500,539
Supplemental disclosures of noncash investing and financing activities:
A capital lease obligation of $174,268 was incurred in fiscal 1994 when the
Company entered into a capital lease for new computer equipment.
The accompanying notes are an integral part of these financial statements.
20
ILC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
1. THE COMPANY
-----------
ILC Technology, Inc. (the "Company") was incorporated on September 15,
1967. The Company designs, develops and manufactures high intensity lamps and
lighting products the medical, industrial, communication, aerospace, scientific,
entertainment and military industries. The Company develops and manufactures the
majority of its products at its headquarter facilities in California and the
remainder at its subsidiary facilities in Massachusetts and the United Kingdom.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF PRESENTATION
- ---------------------
The financial statements include the accounts of ILC Technology, Inc. and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Fiscal years 1995 and 1994 were restated to reflect the Company's decision
to discontinue the operations of Precision Lamp, Inc. (see Note 12). None of
these restatements had any impact on net income in any of the prior years.
The Company's fiscal year end is the Saturday closest to September 30.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
- -------------------------------------------------------
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 could differ from those estimates.
CASH AND CASH EQUIVALENTS
- -------------------------
For the purpose of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less at
the time of issue to be cash equivalents.
INVENTORIES
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market, and include material, labor and manufacturing overhead. Inventories at
September 28, 1996 and September 30, 1995, net of inventory reserves of
$2,034,258 and $1,881,026, respectively, consisted of:
21
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
INVENTORIES (CONTINUED)
- -----------------------
1996 1995
---- ----
Raw materials ........................ $4,802,839 $4,398,553
Work-in-process ...................... 2,549,805 1,981,414
Finished goods ....................... 1,548,884 1,153,123
---------- ----------
Total inventories..................... $8,901,528 $7,533,090
========== ==========
DEVELOPMENTAL AND MANUFACTURING CONTRACTS
- -----------------------------------------
The Company contracts with the U.S. Government and other customers for the
development and manufacturing of various products under both cost-plus-fixed-fee
and fixed-price contracts. Revenues are recognized under these contracts using
the percentage of completion method, whereby revenues are reported in the
proportion that costs incurred bear to the total estimated costs for each
contract. Periodic reviews of estimated total costs during the performance of
such contracts may result in revisions of contract estimates in subsequent
periods. Any loss contracts are reserved at the time such losses are determined.
Revenues from these contracts were less than 10% of net revenues during 1996,
1995 and 1994.
DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation and amortization on property and equipment are provided on a
straight-line basis over estimated useful lives of 3 to 31.5 years, except for
leasehold improvements which are amortized over the terms of the leases.
NET INCOME (LOSS) PER SHARE
- ---------------------------
Net income (loss) per share is computed based on the weighted average
number of common shares and common equivalent shares (using the treasury stock)
outstanding during the period. Fully diluted net income (loss) per share is not
significantly different from net income (loss) per share as reported.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company is not required to adopt the provisions of this
statement until its fiscal year 1997. The provisions of this statement must be
made on a prospective basis. The Company plans to adopt the disclosure
provisions of this statement in 1997, and therefore the effect on its financial
position and results of operations, upon adoption, will not be significant.
COVENANTS-NOT-TO-COMPETE
- ------------------------
The covenant-not-to-compete relates to the Q-Arc acquisition that took
place in 1991. This is being amortized over the period of the covenant.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long- Lived Assets to be Disposed Of." The Company
adopted the provisions of this statement in fiscal 1996. The effect on its
financial position and results of operations were not significant. The Company
22
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
COVENANTS-NOT-TO-COMPETE (CONTINUED)
- ------------------------------------
quarterly evaluates whether later events and circumstances have occurred that
indicate the remaining estimated useful lives of these intangibles may warrant
revision or that the remaining balances of intangibles may not be recoverable.
When factors indicate that intangibles should be evaluated for possible
impairment, the Company uses an estimate of the related subsidiary's
undiscounted cash flow over the remaining life of the intangibles in measuring
whether the intangibles are recoverable. As part of the Company's decision to
discontinue the operations of its Precision Lamp subsidiary, the unamortized
balance of the covenant-not-to-compete ($470,000) was written off in the fourth
quarter of fiscal 1996.
INVESTMENT IN JOINT VENTURE
- ---------------------------
In February 1995, the Company invested $450,000 in a lamp manufacturer
located in Japan. The Company's investment represents a 49% ownership interest
in the equity of the investee, consequently the Company accounts for its
investment using the equity method of accounting. The Company's investment is
included in Other Assets in the accompanying consolidated balance sheets and its
proportionate interest in the income of the investee of $20,000 and $89,000 in
fiscal 1996 and 1995, respectively, is included in the accompanying consolidated
statements of operations.
3. REVENUES
--------
The Company recognizes revenue on all product sales upon shipment of the
product. The Company accrues for estimated warranty obligations at the time of
the sale of the related product based upon its past history of claims experience
and costs to discharge its obligations.
The Company operates in a single industry segment, the designing,
developing, manufacturing and marketing of high performance light source
products. Revenues from continuing operations are geographically summarized as
follows (in thousands):
1996 1995 1994
---- ---- ----
United States .................... $34,088 32,533 $26,966
Europe ........................... 6,920 5,964 4,380
Asia ............................. 12,700 10,951 12,819
Other international............... 498 48 166
------- ------- -------
$54,206 $49,496 $44,331
======= ======= =======
Customers comprising more than 10% of net sales from continuing operations are
as follows:
1996 1995 1994
---- ---- ----
Customer A..................... 15.0% 12.2% 17.8%
Customer B..................... 11.5% 12.0% *
*less than 10% of net sales
23
3. REVENUES (CONTINUED)
--------------------
The Company provides credit in the form of trade accounts receivable to its
customers. The Company does not generally require collateral to support customer
receivables. The Company performs ongoing credit evaluations of its customers
and maintains allowances which management believes are adequate for potential
credit losses.
Approximately 39%, 40% and 52% of the Company's sales in fiscal 1996, 1995
and 1994, respectively, were to customers in the medical industry. This industry
has experienced significant fluctuations in demand and the Company expects sales
to the medical market to decrease as a percentage of net sales in the
foreseeable future. Customer B, referred to above, is in the semiconductor
equipment industry and is a major customer of Converter Power. In the fourth
quarter of fiscal 1996, Converter Power experienced a significant reduction in
orders from this customer. Management believes that inventory at Converter Power
is stated at the lower of cost or net realizable value.
4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment at September 28, 1996 and September 30, 1995
consisted of:
1996 1995
---- ----
Property and equipment, at cost:
Machinery and equipment ...... $ 15,047,138 $ 13,705,702
Land and buildings ........... 14,955,738 14,504,768
Furniture and fixtures ....... 601,822 617,800
Equipment under capital lease 174,268 174,268
Leasehold improvements ....... 598,814 95,536
Construction-in-progress ..... 1,011,601 172,951
------------ ------------
32,389,891 29,271,025
Less accumulated depreciation and
amortization ................. (11,212,950) (9,710,342)
------------ ------------
Property and equipment, net ..... $ 21,176,431 $ 19,560,683
============ ============
5. BANK BORROWINGS
---------------
As of September 28, 1996 and September 30, 1995, borrowings outstanding
under the Company's credit facilities consisted of:
1996 1995
---- ----
Line of credit ......... $ 5,000,000 $ 2,000,000
Term note .............. 2,638,000 4,222,000
Equipment line of credit 2,191,200 2,011,000
Other capital lease .... 86,564 120,540
----------- -----------
9,915,764 8,353,540
Less: current portion .. (2,545,600) (2,455,500)
----------- -----------
Long-term debt ......... $ 7,370,164 $ 5,898,040
=========== ===========
24
5. BANK BORROWINGS (CONTINUED)
---------------------------
Aggregate maturities for long-term debt during the next five years are
approximately: 1997 - $2,545,600, 1998 - $2,283,600, and none in 1999, 2000 and
2001.
All of the above credit facilities are secured by all of the property of
the Company.
The Company has a $6 million line of credit available with a bank which
expires in March 1998. Borrowings under this line are at 2% above the LIBOR rate
(London Interbank Offer Rate) (7.4% at September 28, 1996) and are limited to
75% of eligible accounts receivable. Under the covenants of the loan agreement,
unless written approval from the bank is obtained, the Company is restricted
from entering into certain transactions and is required to maintain certain
specified financial covenants and profitability. As of September 28, 1996, the
Company was not in compliance with all covenants but has obtained a waiver from
the bank.
The average balance outstanding (based on month-end balances) under the
line of credit in 1996 was $2,595,833. The maximum borrowings were $5,000,000 at
an average interest rate of 7.4% for 1996. At September 30, 1995, $2 million was
outstanding under the line of credit. As of September 28, 1996, $1 million was
available for future borrowings under this line of credit.
In addition, in connection with the purchase of its Sunnyvale manufacturing
facilities, the Company entered into a term note with a bank for $5,000,000 in
1993, which was subsequently increased to $6,333,333 in 1994. The note matures
in August 1998. The term loan requires monthly principal payments equal to
one-forty-eighth of the principal amount plus interest at 2% above the LIBOR
rate (London Interbank Offer Rate) (7.4% at September 28, 1996). The term loan
is a reducing revolving credit facility which allows for principal pre-payments
and the flexibility for re-borrowing up to the maximum amount that would be
outstanding under the term loan given normal amortization to the date of
re-borrowing.
The Company also has available a $2.2 million equipment line of credit for
100% of the purchase cost of new equipment, which expires in March 1997.
Borrowings under this line bear interest at 2% above the LIBOR rate (7.4% at
September 28, 1996), with principal balances amortized over a 2 year period. At
September 28, 1996, the Company had approximately $1,096,000 available for
future borrowings under this line of credit.
6. INCOME TAXES
------------
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". SFAS No. 109 requires an asset and liability approach to
accounting for income taxes.
Income from continuing operations before provision for income taxes
consists of the following for fiscal 1996, 1995 and 1994, respectively:
1996 1995 1994
---- ---- ----
U.S. ...................... $4,897,389 $5,588,040 $5,030,336
Foreign.................... 1,163,641 521,037 371,330
---------- ---------- ----------
$6,061,030 $6,109,077 $5,401,666
========== ========== ==========
25
6. INCOME TAXES (CONTINUED)
------------------------
The components of the provision for income taxes on continuing operations are as
follows:
1996 1995 1994
---- ---- ----
Federal -
Current ............... $ 1,559,000 $ 833,000 $ 2,373,000
Deferred .............. (600,000) 581,500 (902,000)
----------- ----------- -----------
959,000 1,414,500 1,471,000
----------- ----------- -----------
Foreign -
Current ............... 384,000 -- --
State -
Current ............... 276,000 199,000 493,000
Deferred .............. (104,000) 96,500 (289,000)
----------- ----------- -----------
172,000 295,500 204,000
----------- ----------- -----------
Federal refund received ........ -- (238,000) --
----------- ----------- -----------
Total provision for income taxes
on continuing operations ...... $ 1,515,000 $ 1,472,000 $ 1,675,000
=========== =========== ===========
The major components of the deferred tax account, as computed under SFAS No.
109, are as follows:
1996 1995
---- ----
Reserve for loss on disposal of discontinued
operations, not currently deductible for tax
purposes ................................... $ 1,133,000 $ -
Inventory reserve ............................ 877,000 838,000
Bad debt reserve ............................. 92,000 271,000
Warranty reserve ............................. 128,000 105,000
Accruals not currently deductible for
tax purposes ............................... 381,000 448,000
Amortization of covenant-not-to-compete ...... 202,000 278,000
Excess of tax over book depreciation ......... (988,000) (801,000)
Other items, individually insignificant ...... 333,000 315,000
----------- -----------
$ 2,158,000 $ 1,454,000
=========== ===========
The provision for income taxes on continuing operations differs from the amounts
which would result by applying the applicable statutory Federal income tax rate
to income from continuing opertions before taxes as follows:
1996 1995 1994
---- ---- ----
Computed expected provision $ 2,121,000 $ 2,138,000 $ 1,891,000
State tax ................. 364,000 367,000 324,000
FSC commission ............ (181,000) (216,000) (259,000)
General business credits .. (218,000) (203,000) (72,000)
Refund received ........... -- (238,000) --
Other items, indivdually
insignificant ............ (571,000) (376,000) (209,000)
----------- ----------- -----------
$ 1,515,000 $ 1,472,000 $ 1,675,000
=========== =========== ===========
26
6. INCOME TAXES (CONTINUED)
------------------------
During the second quarter of fiscal 1995, the Company received a refund of
$238,000 from the Internal Revenue Service (IRS) related to tax returns filed in
previous years, which were examined by the IRS. This amount was recorded as a
reduction of the fiscal 1995 tax provision upon receipt of the refund. An
additional $235,000 of interest related to the refund amount was received and
was included in interest income in fiscal 1995.
7. EMPLOYEE RETIREMENT PLAN
------------------------
On January 1, 1984, the Company adopted a thrift incentive savings plan
(the "Plan"). The Plan is qualified under section 401(k) of the Internal Revenue
Code and is available to all full-time employees with one or more years of
employment with the Company. Under the terms of the Plan, participating
employees must contribute at least 2% of their salary to the Plan, and the
Company contributes (as a matching contribution) 100% of this amount. Employees
may also contribute an additional amount up to 13% of their salary to the Plan,
with no further contributions by the Company. The Company's contributions vest
at a rate of 20% per year, commencing on the first anniversary of employment.
Total employer matching contributions under the Plan were $226,000, $212,000,
and $163,000 for the fiscal years 1996, 1995 and 1994, respectively. The expense
to continuing operations was $188,000, $171,000 and $138,000 for fiscal years
1996, 1995 and 1994, respectively.
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
At September 28, 1996, the future minimum rental payments under all
building leases for fiscal 1997 through 2001 are approximately $423,000,
$424,000, $444,000, $444,000 and $226,000, respectively, and $434,000
thereafter. The amounts total $2,395,000. The future minimum rental payments for
continuing operations, under all building leases for fiscal 1997 through 2001,
are approximately $207,000, $207,000, $218,000, $218,000 and none in 2001. The
amounts total $850,000.
For fiscal years 1996, 1995 and 1994, rental expense was approximately
$442,000, $277,000 and $318,000 respectively. Rental expense for continuing
operations was $226,000, $61,000 and $102,000 for fiscal years 1996, 1995 and
1994, respectively.
9. STOCK OPTION AND PURCHASE PLANS
-------------------------------
Under the 1992 Stock Option Plan ("Plan"), the Company may grant options to
employees and directors. The Company has reserved 400,000 shares for issuance
under the Plan. In November 1996, the Board of Directors authorized an
additional 175,000 shares for issuance under the Plan, subject to shareholder
approval. The exercise price per share for stock options cannot be less than the
fair market value on the date of grant. Options granted are for a ten-year term
and generally vest ratably over a period of four years commencing one year after
the date of grant. The Plan provides for the automatic grant of a nonstatutory
stock option to purchase shares of Common Stock to each outside Director
annually during the Company's third fiscal quarter. During fiscal 1996, each
outside Director was granted an automatic option to purchase a total of 5,000
shares of the Company's Common Stock. The Company's 1983 Stock Option Plan
expired in 1993 and no further options have been granted under this Plan since
then. A summary of the option transactions is as follows:
27
9. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
-------------------------------------------
OPTIONS OUTSTANDING
-------------------
Options Number
Available of Price per
Fof Grant Shares Share
Balance at October 2, 1993 .. 159,624 746,027 $ 1.09-11.50
Granted .................... (74,000) 74,000 $ 7.38-11.00
Canceled ................... 18,000 (18,000) $ 3.75-11.50
Exercised .................. - (82,000) $ 1.09 -8.75
-------- -------- ------------
Balance at October 1, 1994 .. 103,624 720,027 $ 1.09-11.50
Granted .................... (28,000) 28,000 $ 9.50
Canceled ................... 34,000 (34,000) $ 8.75-11.50
Exercised .................. - (132,250) $ 2.13 -8.75
-------- -------- ------------
Balance at September 30, 1995 109,624 581,777 $1.09 -11.50
Additional shares approved . 200,000 - -
Granted .................... (205,000) 205,000 $ 9.00-11.25
Canceled ................... 92,125 (92,125) $ 8.75-11.50
Exercised .................. - (65,125) $ 1.09-11.50
-------- -------- ------------
Balance at September 28, 1996 196,749 629,527 $ 1.09-11.50
======== ======== ============
Options exercisable at
September 28, 1996 ......... 416,965 $ 1.09-11.50
======== ============
If all options outstanding at September 28, 1996 were exercised, the total
proceeds to the Company would be approximately $4.7 million (unaudited).
Under the Company's Employee Stock Purchase Plan, the Company has reserved
300,000 shares of common stock for issuance to participating employees who have
met certain eligibility requirements. In November 1996, the Board of Directors
authorized an additional 50,000 shares for issuance under the Plan, subject to
shareholder approval. The number of shares available for purchase by each
participant is based upon annual base earnings and at a purchase price equal to
85% of the fair market value at the beginning or the end of the quarter of
purchase, whichever is lower. As of September 28, 1996, 61,588 shares were
available for future purchase.
10. OTHER INCOME/EXPENSE
--------------------
Other (income) expense consists of the following:
1996 1995 1994
---- ---- ----
Interest income ............... $ (80,163) $(265,443) $(170,072)
Interest expense .............. 542,061 589,200 288,669
--------- --------- ---------
Net interest expense related to
continuing operations ........ $ 461,898 $ 323,757 $ 118,597
========= ========= =========
28
11. ACQUISITIONS
------------
In August 1991, the Company acquired all the outstanding stock of Q-Arc
Ltd. of Cambridge, England for $1,400,000 in cash and the assumption of certain
liabilities. Q-Arc is a manufacturer of specialty lamps for laser and non-laser
applications. This transaction was accounted for as a purchase and accordingly,
all assets were revalued to their respective fair values. The acquisition price
was equal to the fair value of net assets acquired. Net assets included a
covenant-not-to-compete of approximately $951,000. The covenant is being
amortized over an eight year period. At September 28, 1996, the unamortized
balance of the Q-Arc covenant-not-to-compete is approximately $357,000.
12. DISCONTINUED OPERATIONS
-----------------------
In September 1996, the Company's Board of Directors voted to proceed with
the divestiture of the Company's Precision Lamp subsidiary based in Cotati,
California. The Company plans to dispose of Precision Lamp either through a sale
to a qualified buyer or by an orderly liquidation of the business if no buyer is
located within one year. As a result of the Company's plan, an estimated loss on
disposal of $3,399,000, net of a tax benefit of $1,133,000, was recorded in the
fourth quarter of fiscal 1996. This loss on disposal included $500,000 as the
estimated operating losses through the final disposition of the subsidiary and
the write off of the unamortized balance of the Precision Lamp covenant-not-to-
compete of approximately $470,000.
Continuing operations, as reclassified for fiscal years 1996, 1995 and
1994, consist of the activities of ILC Technology, Inc. based in Sunnyvale,
California, Converter Power, Inc. based in Beverly, Massachusetts and Q-Arc
based in Cambridge, England. The Consolidated Statements of Operations have been
reclassified to report separately the activities of Precision Lamp as
discontinued operations. Revenues from Precision Lamp were $7,772,000,
$8,933,000 and $7,691,000 for fiscal 1996, 1995 and 1994, respectively. The net
loss after tax from the discontinued operations of Precision Lamp was $840,000,
$99,000 and $3,536,000 for fiscal 1996, 1995 and 1994, respectively. The net
loss from discontinued operations of $3,536,000 in fiscal 1994 is net of a
$523,000 income tax benefit and includes a $3.4 million write down of
intangibles generated from the Precision Lamp acquisition. A portion of net
interest expense of approximately $66,000, $58,000 and $21,000 for fiscal years
1996, 1995 and 1994, respectively, has been allocated to the discontinued
operations. Net interest has been allocated to discontinued operations based on
the ratio of the net assets to be discontinued to the consolidated net assets
plus consolidated debt other than debt which is directly attributable to
continuing operations.
The net assets of Precision Lamp of $2,178,383 as of September 28, 1996 are
shown in the accompanying balance sheet as net assets from discontinued
operations. These assets were written down to a value that represents
management's best estimate of the amount that could be realized upon
disposition.
13. RIGHTS AGREEMENT AND OTHER MATTERS
----------------------------------
On September 19, 1989, the Company's Board of Directors declared a dividend
of one common share purchase right for each outstanding share of common stock,
no par value, of the Company. The dividend was payable on October 2, 1989 to the
shareholders of record on that date. Each right entitles the registered holder
to purchase from the Company one share of common stock of the Company at a price
of $15.00 per common share. The rights will not be exercisable until a party
either acquires beneficial ownership of 20% of the Company's common stock or
makes a tender offer for at least 30% of its common stock. In the event the
rights become exercisable and thereafter a person or group acquires 30% or more
of the Company's stock, a 20% shareholder ("Acquiring Person") engages in any
specified self-dealing transaction, or, as a result of a recapitalization or
reorganization,
29
13. RIGHTS AGREEMENT AND OTHER MATTERS (CONTINUED)
----------------------------------------------
an Acquiring Person's shareholdings are increased by more than 3%, each right
will entitle the holder to purchase from the Company, for the exercise price,
common stock having a market value of twice the exercise price of the right. In
the event the rights become exercisable and thereafter the Company is acquired
in a merger or other business combination, each right will enable the holder to
purchase from the surviving corporation, for the exercise price, common stock
having a market value of twice the exercise price of the right. At the Company's
option, the rights are redeemable in their entirety, prior to becoming
exercisable, at $.01 per right. The rights are subject to adjustment to prevent
dilution and expire September 29, 1999.
In November 1996, the Board of Directors authorized severance agreements
for certain key managers in the event that a change of control occurs at the
Company.
14. REPURCHASE OF COMMON STOCK
--------------------------
In November 1996, the Board of Directors authorized the Company to
repurchase up to 1,000,000 shares of the Company's issued and outstanding common
stock. Purchases can be made for up to two years from the date of authorization.
30
SCHEDULE VIII
ILC TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR FISCAL YEARS 1996, 1995 AND 1994
Balance Charged
at (Credited) Deductions Balance
Beginning to Cost and and at end of
Of Period Expenses Write Offs Period
--------- -------- ---------- ------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
Year ended
October 1, 1994..............$ 208,787 $ 383,902 $260,017 $ 332,672
Year ended
September 30, 1995....... $ 332,672 $ 102,861 $ 26,093 $ 409,440
Year ended
September 28, 1996....... $ 409,440 $ 38,804 $135,886 $ 312,358
RESERVE FOR INVENTORY
OBSOLESCENCE:
Year ended
October 1, 1994 .......... $1,177,080 $1,772,346 $807,434 $2,141,992
Year ended
September 30, 1995........ $2,141,992 $ 169,034 $430,000 $1,881,026
Year ended
September 28, 1996........ $1,881,026 $ 520,006 $366,774 $2,034,258
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ILC Technology, Inc.
We have audited the accompanying consolidated balance sheets of ILC
Technology, Inc. (a California Corporation) and subsidiaries as of September 28,
1996 and September 30, 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 28, 1996. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ILC
Technology, Inc. and subsidiaries as of September 28, 1996 and September 30,
1995 and the results of their operations and their cash flows for each of the
three years in the period ended September 28, 1996 in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule presented on page 31 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
November 22, 1996
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Certain information required by Part III is omitted from this Report in
that registrant will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") for its Annual Meeting of Shareholders to be held
February 12, 1997, not later than 120 days after the end of the fiscal year
covered by this Report, and the information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by this item appearing in the
Company's 1996 Proxy Statement under the caption "Election of
Directors-Nominees" is incorporated herein by reference.
The information regarding executive officers of the Company required by
this item appearing in the Company's 1996 Proxy Statement under the caption
"Executive Officers" is incorporated herein by reference.
The information required by this item appearing in the Company's 1996 Proxy
Statement under the caption "Compliance Under Section 16(a) of the Securities
Exchange Act of 1934" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appearing in the Company's 1996 Proxy
Statement under the captions "Election of Directors-Director Compensation",
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation in Compensation Decisions" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appearing in the Company's 1996 Proxy
Statement under the captions "Election of Directors-Nominees" and "Security
Ownership of Certain Beneficial Owners" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appearing in the Company's 1996 Proxy
Statement under the captions "Election of Directors-Director Compensation",
"Executive Compensation" and "Certain Transactions" is incorporated herein by
reference.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The Consolidated Financial Statements, notes thereto, and Report of
Independent Public Accountants thereon are included in Part II, Item 8 of this
report.
PAGE IN
2. FINANCIAL STATEMENT SCHEDULE FORM 10-K
Schedule VIII Valuation and Qualifying
Accounts and Reserves 31
All other schedules have been omitted since the required information is
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements or notes thereto.
3. EXHIBITS
The exhibits listed in the Index to Exhibits following the signature
page are filed as part of this Report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1996. .
34
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.
ILC TECHNOLOGY, INC.
By: /S/ HENRY C. BAUMGARTNER
Henry C. Baumgartner
(Chairman of the Board and
Chief Executive Officer)
Dated: December 24, 1996
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.
SIGNATURES TITLE DATE
---------- ----- ----
/S/ HENRY C. BAUMGARTENER Chairman of the Board and December 24, 1996
- ------------------------- Chief Executive Officer
(Henry C. Baumgartner) (Principal Executive
Officer and Director)
/S/ RICHARD D. CAPRA President and Chief December 24, 1996
- ------------------------- Operating Officer
(Richard D. Capra)
/S/ RONALD E. FREDIANELLI Chief Financial Officer December 24, 1996
- ------------------------- and Secretary
(Ronald E. Fredianelli) (Principal Financial and
Accounting Officer)
/S/ HARRISON H. AUGUR Director December 24, 1996
- -------------------------
(Harrison H. Augur)
- -------------------- Director December , 1996
(Arthur L. Schawlow)
- --------------------- Director December , 1996
(Wirt D. Walker, III)
35
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 (A) Restated Articles of Incorporation of ILC Technology, Inc. as
filed in the Office of the California Secretary of State on
March 8, 1991.
3.2 Amended and Restated Bylaws as of November 21, 1996
4.1 (C) Certificate evidencing shares of Common Stock without par
value, ILC Technology, Inc.
10.1 (E) ILC Technology, Inc. 1983 Employee Incentive and Nonstatutory
Stock Option Plan, as amended, together with related form of
Stock Option Agreement.
10.2 (B) Rights Agreement between ILC Technology, Inc. and Security
Pacific National Bank dated as of September 29, 1989.
10.3 (D) Employment Agreement between ILC Technology, Inc. and Richard
E. DuNah dated July 1, 1992. *
10.4 (E) ILC Technology, Inc. 1992 Stock Option Plan, as amended, and
related form of Option Agreement. *
10.5 (D) Form of Officer and Director Indemnification Agreement *
10.6 (G) Credit Agreement dated March 2, 1995, by and between Union
Bank and ILC Technology, Inc.
10.7 (E) Standard Industrial/Commercial Single-Tenant Lease between
ILC Technology, Inc. (720 Portal Street, Cotati, California)
and John Gary Taylor, dated December 29, 1992.
10.8 (F) Purchase and Sale Agreement dated June 24, 1994, by and
between UCB Bank PLC and Q-Arc, Limited relating to
property on the south side of Saxon Way, Bar Hill, Cambridge,
England.
10.9 (F) Asset Purchase Agreement dated September 16, 1994, by and
between ILC Technology, Inc. and UVP, Inc.
10.10 (G) Lease Agreement between Converter Power, Inc. (150 Sohier
Road, Beverly, Massachusetts) and Communications & Power
Industries, Inc., dated September 15, 1995
10.11 Credit agreement dated March 25, 1996 by and between Union
Bank and ILC Technology, Inc. along with first amendment
dated July 18, 1996.
10.12 Form of Management Compensation Agreement*
21.1 (F) Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
INDEX TO EXHIBITS (CONTINUED)
99.1 Proxy Statement for the Company's 1996 Annual Meeting of
Shareholders (to be deemed filed only to the extent required
by General Instruction H to Form 10-K)
- --------------------------------------------------------------------------------
(A) Incorporated by reference from the Exhibits to Registrant's
Annual Report on Form 10-K for the fiscal year ended September
28, 1991.
(B) Incorporated by reference from the Exhibits to Registrant's
Current Report on Form 8-K dated September 19, 1989.
(C) Incorporated by reference from the Exhibits to Registrant's
Annual Report on Form 10-K for the fiscal year ended September
30, 1988.
(D) Incorporated by reference from the Exhibits to Registrants'
Annual Report on Form 10-K for the fiscal year ended October
3, 1992.
(E) Incorporated by reference from the Exhibits to Registrants
Annual Report on Form 10-K for the fiscal year ended October
2, 1993.
(F) Incorporated by reference from the Exhibits to Registrants'
Registration Statement on Form 10-K for the year ended October
1, 1994.
(G) Incorporated by reference from the Exhibits to Registrants'
Registration Statement on Form 10-K for the year ended
Setpember 30, 1995.
* Management contract or compensatory plan or arrangement.