<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) December 16, 1998
-----------------
EG&G, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 1-5075 04-2052042
--------------- ------------------------ -------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
45 William Street, Wellesley, Massachusetts 02481
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(781) 237-5100
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
This Amendment No. 2 on Form 8-K/A amends and restates Item 7 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on December
30, 1998 by EG&G, Inc.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired
The financial statements required to be filed were previously reported
in the Lumen Technologies, Inc. (formerly BEC Group, Inc.) Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and in
the ILC Technology, Inc. Annual Report on Form 10-K for the fiscal year
ended September 27, 1997 and are included in the Exhibits to this Form
8-K/A.
(b) Unaudited Pro Forma Financial Information
On December 16, 1998, Lighthouse Weston Corp. ("Lighthouse"), a wholly
owned subsidiary of the Company, completed its tender offer for shares
of common stock of Lumen Technologies, Inc. ("Lumen"), which is engaged
in the business of developing, manufacturing and marketing specialty
light sources and related products for markets requiring advanced
optical technologies. Lighthouse acquired approximately 92.3% of
Lumen's common stock pursuant to the tender offer. On January 4, 1999,
Lumen became a wholly owned subsidiary of the Company, as a result of
the merger of Lighthouse with and into Lumen. The acquisition of Lumen
by the Company was accounted for as a purchase.
The following unaudited pro forma consolidated financial information
gives effect to the acquisition of Lumen and should be read in
conjunction with the historical financial statements and related notes
thereto for both the Company and Lumen (including the historical
financial statements and related notes thereto for ILC). The unaudited
pro forma consolidated income statements for the fiscal year ended
December 28, 1997 and the nine-month period ended September 27, 1998
give effect to the acquisition as if the acquisition was completed as
of January 1, 1997, and combines the Company's and Lumen's historical
income statements for each respective period. The unaudited pro forma
consolidated results for the fiscal year ended December 28, 1997 and
the nine-month period ended September 27, 1998 exclude
acquisition-related charges of $2.3 million for purchased in-process
technology related to Lumen.
The unaudited pro forma consolidated income statement for the fiscal
year ended December 28, 1997 includes columns representing the
Company's historical results as adjusted for the 1998 divestitures of
its Rotron and Sealol Industrial Seals businesses (previously reported
on Form 8-K dated April 16, 1998) for the fiscal twelve months then
ended, Lumen's historical results for the year ended December 31, 1997
and ILC Technology, Inc.'s (ILC) historical results for the fiscal
twelve months ended September 27, 1997 (which represented ILC's
previous fiscal year end). ILC was acquired by Lumen on March 12, 1998.
The unaudited pro forma consolidated income statement for the nine
months ended September 27, 1998 includes columns representing the
Company's historical results as adjusted for the divestiture of its
Rotron and Sealol Industrial Seals businesses for the nine-month period
then ended, Lumen's historical results for the nine months ended
September 30, 1998 and ILC's historical results for the period from
January 1 through March 12, 1998.
The unaudited pro forma consolidated financial information is provided
for informational purposes only and is not necessarily indicative of
the Company's financial position or operating results that would have
occurred had the acquisition been consummated on the dates, or at the
beginning of the period, for which the consummation of the acquisition
is being given effect, nor is it necessarily indicative of the
Company's future operating results or financial position. The unaudited
pro forma adjustments do not reflect any operating efficiencies and
cost savings that the Company believes are achievable.
<PAGE> 3
The unaudited pro forma consolidated financial information has been
prepared using the purchase method of accounting, whereby the total
cost of the acquisition has been allocated to the tangible and
intangible assets acquired and liabilities assumed based on their
respective fair values at the effective date of the acquisition. Such
allocations will be based on studies and independent valuations, which
are currently being finalized. Accordingly, the allocations reflected
in the unaudited pro forma consolidated financial information are
preliminary and subject to revision. It is not expected that the final
allocation of purchase price will produce materially different results
from those presented herein.
<PAGE> 4
EG&G, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 27, 1998
(In thousands)
<TABLE>
<CAPTION>
EG&G LUMEN
HISTORICAL HISTORICAL PRO FORMA
9/27/98 9/30/98 ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 178,649 $ 1,994 $ -- $ 180,643
Accounts receivable 210,449 26,701 -- 237,150
Inventories 107,446 29,878 3,204(B) 140,528
Other current assets 67,825 1,730 -- 69,555
----------- ----------- ----------- -----------
Total current assets 564,369 60,303 3,204 627,876
Property, plant and equipment, net 165,828 38,813 15,156(H) 219,797
Investments 14,717 -- -- 14,717
Intangible assets 114,974 45,249 141,997(C) 302,220
Other assets 64,529 7,436 -- 71,965
----------- ----------- ----------- -----------
Total assets $ 924,417 $ 151,801 $ 160,357 $ 1,236,575
=========== =========== =========== ===========
Current Liabilities:
Short-term debt and current
portion of long-term $ 22,962 $ 25,411 $ 162,050(I) $ 210,423
Accounts payable 73,233 11,028 -- 84,261
Accrued restructuring costs 38,571 -- 5,000(F) 43,571
Accrued expenses 195,730 24,044 20,984(E) 240,758
----------- ----------- ----------- -----------
Total current liabilities 330,496 60,483 188,034 579,013
Long-term debt 114,867 36,986 -- 151,853
Convertible subordinated notes -- 14,648(L) -- 14,648
Other long-term liabilities 101,677 7,570 -- 109,247
Minority interests -- 237 -- 237
Common stock 60,102 207 (207)(D) 60,102
Retained earnings 605,286 34,215 (30,015)(D) 609,486
Accumulated other comprehensive
income 1,178 (38) 38(D) 1,178
Cost of shares held in treasury (289,189) (2,507) 2,507(D) (289,189)
----------- ----------- ----------- -----------
Total stockholders' equity 377,377 31,877 (27,677) 381,577
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity $ 924,417 $ 151,801 $ 160,357 $ 1,236,575
=========== =========== =========== ===========
</TABLE>
The accompanying unaudited notes are an integral part of this pro forma
consolidated financial information.
<PAGE> 5
EG&G, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998
(In thousands)
<TABLE>
<CAPTION>
ROTRON &
EG&G SEALOL EG&G LUMEN ILC TECH.
HISTORICAL PRO FORMA EXCLUDING HISTORICAL HISTORICAL
9 MONTHS ADJUSTMENTS DIVESTITURES 9 MONTHS 1/1/98 THROUGH
ENDED 9/27/98 (A) 9/27/98 ENDED 9/30/98 3/12/98
------------- ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Sales $ 1,055,705 $ (22,666) $ 1,033,039 $ 105,885 $ 8,052
Cost of Sales 793,809 (14,064) $ 779,745 69,156 5,661
----------- ----------- ----------- ----------- -----------
Gross Margin 261,896 (8,602) 253,294 36,729 2,391
Research and development
expenses 32,383 (302) 32,081 3,341 565
Selling, general and
administrative expenses 172,519 (6,173) 166,346 20,275 989
Restructuring charges 54,500 -- 54,500 -- --
Merger, spinoff & nonrecurring
charges -- -- -- 16,704 --
Asset impairment charge 7,400 -- 7,400 -- --
Gains on dispositions (125,822) 125,822 -- -- --
----------- ----------- ----------- ----------- -----------
Operating income (loss) from
continuing operations 120,916 (127,949) (7,033) (3,591) 837
Other income (expense) 1,845 -- 1,845 (4,131) (55)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes 122,761 (127,949) (5,188) (7,722) 782
Provision (benefit) for income
taxes 41,227 (38,355) 2,872 1,702 238
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations $ 81,534 $ (89,594) $ (8,060) $ (9,424) $ 544
=========== =========== =========== =========== ===========
Basic earnings per share from
continuing operations $ 1.79 $ (1.97) $ (0.18)
Diluted earnings per share from
continuing operations $ 1.77 $ (1.94) $ (0.17)
Weighted average shares of
common stock outstanding:
Basic 45,552 45,552 45,552
Diluted 46,089 46,089 46,089
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
------------ -----------
<S> <C> <C>
Sales $ -- $ 1,146,976
Cost of Sales 487(H) 855,049
----------- -----------
Gross Margin (487) 291,927
Research and development
expenses -- 35,987
Selling, general and
administrative expenses 4,825(G)(H) 192,435
Restructuring charges (54,500)(K) --
Merger, spinoff & nonrecurring
charges (16,704)(K) --
Asset impairment charge (7,400)(K) --
Gains on dispositions -- --
----------- -----------
Operating income (loss) from
continuing operations 73,292 63,505
Other income (expense) (6,685)(I) (9,026)
----------- -----------
Income (loss) from continuing
operations before income taxes 66,607 54,479
Provision (benefit) for income
taxes 16,242(J) 21,054
----------- -----------
Income (loss) from continuing
operations $ 50,365 $ 33,425
=========== ===========
Basic earnings per share from
continuing operations $0.73
Diluted earnings per share from
continuing operations $0.73
Weighted average shares of
common stock outstanding:
Basic 45,552
Diluted 46,089
</TABLE>
The accompanying unaudited notes are an integral part of this pro forma
consolidated financial information.
<PAGE> 6
EG&G, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 28, 1997
(In thousands)
<TABLE>
<CAPTION>
ROTRON &
EG&G SEALOL EG&G BEC GROUP ILC TECH.
HISTORICAL PRO FORMA EXCLUDING HISTORICAL HISTORICAL
FISCAL ADJUSTMENTS DIVESTITURES FISCAL FISCAL
1997 (A) 1997 1997 1997
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 1,460,805 $ (158,237) $ 1,302,568 $ 48,128 $ 55,518
Cost of Sales 1,084,691 (95,755) 988,936 30,603 39,194
----------- ----------- ----------- ----------- -----------
Gross Margin 376,114 (62,482) 313,632 17,525 16,324
Research and development expenses 44,907 (2,659) 42,248 1,601 4,253
Selling, general and
administrative expenses 243,409 (36,539) 206,870 9,304 7,508
Merger, spinoff & nonrecurring
charges -- -- -- 9,571 --
Asset impairment charge 28,200 -- 28,200 -- --
Gains on dispositions -- -- -- -- (2,379)
----------- ----------- ----------- ----------- -----------
Operating income (loss) from
continuing operations 59,598 (23,284) 36,314 (2,951) 6,942
Other income (expense) (5,572) 85 (5,487) (2,356) (494)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes 54,026 (23,199) 30,827 (5,307) 6,448
Provision (benefit) for income
taxes 23,381 (6,491) 16,890 (1,656) 1,608
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations $ 30,645 $ (16,708) $ 13,937 $ (3,651) $ 4,840
=========== =========== =========== =========== ===========
Basic earnings per share from
continuing operations $ 0.67 $ (0.37) $ 0.30
Diluted earnings per share from
continuing operations $ 0.67 $ (0.37) $ 0.30
Weighted average shares of common
stock outstanding:
Basic 45,757 45,757 45,757
Diluted 45,898 45,898 45,898
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
----------- -----------
<S> <C> <C>
Sales $ -- $ 1,406,214
Cost of Sales 4,077(B)(H) 1,062,810
----------- -----------
Gross Margin (4,077) 343,404
Research and development expenses -- 48,102
Selling, general and
administrative expenses 6,902(G)(H) 230,584
Merger, spinoff & nonrecurring
charges (9,571)(K) --
Asset impairment charge (28,200)(K) --
Gains on dispositions 2,379(K) --
----------- -----------
Operating income (loss) from
continuing operations 24,413 64,718
Other income (expense) (8,913)(I) (17,250)
----------- -----------
Income (loss) from continuing
operations before income taxes 15,500 47,468
Provision (benefit) for income
taxes 2,610(J) 19,452
----------- -----------
Income (loss) from continuing
operations $ 12,890 $ 28,016
=========== ===========
Basic earnings per share from
continuing operations $ 0.61
Diluted earnings per share from
continuing operations $ 0.61
Weighted average shares of common
stock outstanding:
Basic 45,757
Diluted 45,898
</TABLE>
The accompanying unaudited notes are an integral part of this pro forma
consolidated financial information.
<PAGE> 7
EG&G, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
Note 1) The purchase price was allocated to the estimated fair value of assets
acquired and liabilities assumed. The preliminary purchase price allocation is
based on the Company's estimates of respective fair values. The pro forma
consolidated balance sheet adjustments presented are as of December 16, 1998.
Some allocations are based on studies and independent valuations which are
currently being finalized. Management does not believe that the final purchase
price allocation will produce materially different results than those reflected
in the pro forma consolidated financial statements. Additionally, management
expects the Lumen restructuring plans to be finalized by the end of the year.
The components of the purchase price and preliminary allocation are as follows:
<TABLE>
<S> <C>
Cash paid to Lumen for stock and options $ 162,050
Debt assumed 74,388
Value of option rollover 6,500
Deferred purchase price for subsidiary minority interest 6,000
Acquisition costs 3,925
---------
Total consideration & acquisition costs 252,863
Preliminary allocation of purchase price:
Current assets 66,829
Property, plant & equipment 52,525
Other assets 430
Identifiable intangible assets 11,800
In-process research and development 2,300
Goodwill 175,446
Current liabilities (50,097)
Other liabilities (6,370)
</TABLE>
(A) Represent adjustments to eliminate the results of operations of the Rotron
and Sealol Industrial Seals businesses that were sold by the Company on January
9, 1998 and April 1, 1998, respectively, as well as the related gains on
dispositions.
(B) Represents the write-up to fair value of Lumen work-in-process and finished
goods inventory as of the acquisition date. This amount will be charged to cost
of sales as the related inventory is sold and has been reflected as such in the
pro forma income statement for the year ended December 28, 1997.
(C) Includes approximately $11.8 million of acquired intangible assets
representing the fair value assigned to trademarks, trade names and patents by
an independent third party appraiser. Acquired intangible assets will be
amortized over their useful life of 10 years. Approximately $175,446 represents
the excess of consideration paid over the fair market value of Lumen's net
assets (goodwill) and will be amortized over 30 years. Such amount reflects an
incremental goodwill amount of $130,197 over the historical goodwill included in
Lumen's balance sheet as of September 30, 1998.
(D) Reflects the elimination of Lumen's historical equity accounts.
Additionally, the adjustment to retained earnings includes (a) the fair value of
Company's options issued in exchange for Lumen options totaling $6.5 million and
(b) $2.3 million that was allocated to in-process research and development for
projects that had not reached technological feasibility as of the acquisition
date and for which no alternative use existed. The estimated fair value was
based on a risk-adjusted cash flow and was determined by an independent third
party appraiser. This amount was expensed as a nonrecurring, non-tax deductible
charge upon consummation of the acquisition and has been reflected as a
reduction to retained earnings. The in-process research and development has not
been included in the pro forma combined income statements due to its
nonrecurring nature.
<PAGE> 8
(E) Includes adjustments to accrue transaction costs, record deferred taxes
resulting from purchase accounting and reflect the fair value of accrued
liabilities as of the acquisition date. Approximately $6 million represents
deferred purchase price related to minority ownership in a Lumen subsidiary.
(F) Represents the estimate of restructuring charges related to Lumen to be
incurred in connection with the acquisition. The restructuring plans include
initiatives to integrate the operations of the Company and Lumen, consolidate
duplicate facilities and reduce overhead. Management is in the process of
finalizing its restructuring plans related to Lumen, and accordingly, the
amounts recorded are based on management's current estimate of those costs.
Management expects that most of the restructuring actions related to the plan
will be completed within the next year.
(G) Includes additional amortization related to goodwill and acquired intangible
assets amortization as follows:
<TABLE>
<CAPTION>
12/97 9/98
<S> <C> <C>
Goodwill $5,848 $4,386
Acquired intangibles 1,180 885
------ ------
Total amortization 7,028 5,271
Historical amortization 500 655
------ ------
Pro forma adjustment $6,528 $4,616
------ ------
</TABLE>
(H) Represents the write-up to fair value of Lumen property, plant & equipment
as of the acquisition date. The pro forma consolidated income statements include
additional depreciation expense related to these write-ups of $873 and $487 for
cost of sales and $374 and $209 for selling, general and administrative expenses
for the fiscal year ended December 28, 1997 and nine months ended September 27,
1998, respectively.
(I) Reflects $162,050 of cash paid to Lumen for stock and options and
incremental interest expense. The Company has currently financed this amount
with available cash and short-term debt consisting of commercial paper
borrowings with a weighted-average interest rate of 5.5% at year end. A 1/8 of
one percent change in the base rate would change annual interest expense by
approximately $203. The Company intends to refinance the outstanding debt with
fixed rate debt during fiscal 1999.
(J) Income tax adjustments have been calculated using estimated statutory income
tax rates. The primary difference between the provision calculated at statutory
rates and the amount reflected in the pro forma adjustments column for the
periods presented is attributable to nondeductible goodwill related the
acquisition as well as certain nondeductible elements in the various historical
non-recurring charges described in Note K below. The pro forma consolidated
provision for income taxes may not represent amounts that would have resulted
had the Company and Lumen filed consolidated income tax returns during the
periods presented.
(K) Historical nonrecurring charges related to restructuring, asset impairments
and merger/spinoff costs have been eliminated for purposes of the pro forma
consolidated income statements.
(L) On February 16, 1999, the Company paid $15.5 million to retire the
convertible subordinated notes. These notes were retired at a premium, and the
payment was funded through additional commercial paper borrowings. Such
retirement has not been reflected in this pro forma financial information.
<PAGE> 9
(c) Exhibits
Exhibit 2 - Agreement and Plan of Merger dated as of October 21, 1998
by and among EG&G, Inc., Lighthouse Weston Corp. and Lumen
Technologies, Inc. (incorporated by reference from Exhibit (c)(1) to
Schedule 14D-1 filed by the Company with the Securities and Exchange
Commission on October 27, 1998).
Exhibit 22.1 - Consent of PriceWaterhouseCoopers LLP, Independent
Accountants.
Exhibit 22.2 - Consent of Arthur Andersen LLP, Independent Accountants.
Exhibit 99.1 - Lumen Technologies, Inc. (formerly BEC Group, Inc.)
Financial Statements as of December 31, 1997 and 1996 and for each of
the three years in the period ended December 31, 1997.
Exhibit 99.2 - ILC Technology, Inc. Financial Statements as of
September 27, 1997 and September 28, 1996 and for each of the three
years in the period ended September 27, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EG&G, Inc.
Date: March 9, 1999 By: /s/ Murray Gross
------------- ---------------------
Senior Vice President
<PAGE> 1
Exhibit 22.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 333-71069 and
33-59675) and in the Registration Statements on Form S-8 (Nos. 2-98168,
33-36082, 33-35379, 33-49898, 33-57606, 33-54785, 33-62805, 333-8811, 333-32059,
333-32463, 333-70977, 333-50953, 333-56921, 333-58517, 333-61615, 333-65367,
333-69115) of EG&G, Inc. of our report dated April 9, 1998, relating to the
consolidated financial statements of Lumen Technologies, Inc. (formerly BEC
Group, Inc.), which are included in the Current Report on Form 8-K/A of EG&G,
Inc. dated February 26, 1999.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 9, 1999
<PAGE> 1
Exhibit 22.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated December 1, 1997 covering the historical financial statements of ILC
Technology, Inc. included in this Form 8-K/A and to the incorporation by
reference of our report into Registration Statements previously filed by EG&G,
Inc. on Form S-8, File No. 2-98168; Form S-8, File No. 33-36082; Form S-8, File
No. 33-35379; Form S-8, File No. 33-49898; Form S-8, File No. 33-57606; Form
S-8, File No. 33-54785; Form S-8, File No. 33-62805; Form S-8, File No.
333-8811; Form S-8, File No. 333-32059; Form S-8, File No. 333-32463; Form S-8,
File No. 333-70977; Form S-8, File No. 333-50953; Form S-8, File No. 333-56921;
Form S-8, File No. 333-58517; Form S-8, File No. 333-61615; Form S-8, File No.
333-65367; Form S-8, File No. 333-69115; Form S-3, File No. 33-59675 and Form
S-3, File No. 333-71069.
/s/ ARTHUR ANDERSEN LLP
- ------------------------
ARTHUR ANDERSEN LLP
San Jose, California
March 9, 1999
<PAGE> 1
Exhibit 99.1
LUMEN TECHNOLOGIES, INC. (FORMERLY BEC GROUP, INC.) FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lumen Technologies, Inc. (formerly
BEC Group, Inc.)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of comprehensive income (loss), of
stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Lumen Technologies, Inc. (formerly BEC
Group, Inc.) and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1, on March 11, 1998, the Company distributed the stock
of its subsidiary, Bolle Inc., to the Company's stockholders and on March 12,
1998 merged with ILC Technology, Inc.
PRICE WATERHOUSE LLP
Dallas, Texas
April 9, 1998
<PAGE> 2
LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 762 $ 2,164
Trade receivables, less allowance for doubtful accounts of $586 and $503 10,214 7,280
Inventories 9,534 9,317
Investment in and net receivables from discontinued operations (Note 3) 51,567 11,167
Other current assets 6,094 3,651
--------- ---------
Total current assets 78,171 33,579
Property and equipment, net 13,763 13,114
Goodwill, net 12,138 11,372
Intangible assets, net 1,225 1,296
Equity in and notes receivable from affiliated companies 8,773 11,435
Other assets 5,619 4,275
--------- ---------
Total assets $ 119,689 $ 75,071
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long term debt $ 25,458 $ 17,645
Accounts payable 4,891 2,858
Accrued compensation 1,390 2,134
Other accrued expenses 12,095 8,557
--------- ---------
Total current liabilities 43,834 31,194
Long-term debt 31,349 3,597
Convertible subordinated notes 23,742 21,922
Other long-term liabilities 8,307 10,754
--------- ---------
Total liabilities 107,232 67,467
--------- ---------
Commitments and contingencies
Mandatorily redeemable preferred stock--par value $1; 500 shares authorized;
10 issued and outstanding 9,294
---------
Stockholders' equity:
Common stock--par value $.01; 50,000 shares authorized; 8,815 issued; 8,813
and 8,857 outstanding 88 88
Additional paid-in capital 28,743 28,791
Treasury stock - 2 and 58 shares at cost (17) (557)
Accumulated deficit (25,651) (20,718)
--------- ---------
Total stockholders' equity 3,163 7,604
--------- ---------
Total liabilities and stockholders' equity $ 119,689 $ 75,071
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Continuing operations:
Net sales $ 48,128 $ 42,574 $ 41,244
Costs and expenses:
Costs of sales 30,603 25,676 23,725
Selling, general and administrative expense 10,905 10,020 13,820
Special charges and spinoff expenses 9,571 5,237
Interest expense 3,458 2,942 4,087
Other income, net (1,102) (1,378) (3,337)
-------- -------- --------
Total costs and expenses 53,435 37,260 43,532
Income (loss) from continuing operations before income taxes (5,307) 5,314 (2,288)
Provision (benefit) for incomes taxes from continuing operations (1,656) 1,870 (1,339)
-------- -------- --------
Income (loss) from continuing operations $ (3,651) $ 3,444 $ (949)
-------- -------- --------
Discontinued operations (Note 3):
Income (loss) from operations of the Prescription Eyewear Business, Foster $ (1,282) $ 4,302 $ (5,811)
Grant Group and Bolle (less applicable taxes of $(2,020), $384 and $1,139 in
1997, 1996 and 1995, respectively)
Net gain on the sales of the Prescription Eyewear Business, and Foster Grant
Group net of phase out losses of $2,902
75,010
-------- -------- --------
Income (loss) from discontinued operations $ (1,282) $ 79,312 $ (5,811)
-------- -------- --------
Net income (loss) $ (4,933) $ 82,756 $ (6,760)
Basic earnings (loss) per share:
From continuing operations $ (0.44) $ 0.40 $ (0.12)
From discontinued operations (0.15) 9.29 (0.77)
-------- -------- --------
$ (0.59) $ 9.69 $ (0.89)
-------- -------- --------
Basic EPS weighted average shares outstanding 8,803 8,537 7,620
Diluted earnings (loss) per share:
From continuing operations $ (0.44) $ 0.40 $ (0.12)
From discontinued operations (0.15) 9.22 (0.77)
-------- -------- --------
$ (0.59) $ 9.62 $ (0.89)
-------- -------- --------
Diluted EPS weighted average shares outstanding 8,803 8,600 7,620
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC.
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
For the year ended December 31
--------------------------------------------------------
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Net income (loss) $ (4,933) $ 82,756 $ (6,760)
Foreign currency translation adjustments (462) 26
Reclassification adjustment - (before taxes) 77
--------- --------- ---------
Comprehensive income (loss) before tax (5,395) 82,833 (6,734)
Other comprehensive income tax effect 197 (2) (9)
--------- --------- ---------
Comprehensive income (loss) $ (5,198) $ 82,831 $ (6,743)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
ISSUED COMMON TREASURY COMMON PAID-IN EARNINGS TREASURY
SHARES SHARES STOCK CAPITAL (DEFICIT) STOCK
------------- -------- ------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1995:
Balance - December 31, 1994 7,268 49 $ 72 $105,001 $ 7,385 $ (1,365)
Shares issued for acquisitions 79 1 2,845
Shares issued through public offering,
net of expenses 589 6 22,030
Exercise of stock options 79 1 1,412
Other issuances of common stock 10 506
Net loss (6,760)
-------- -------- -------- -------- -------- --------
Balance - December 31, 1995 8,025 49 80 131,794 625 (1,365)
1996:
Exercise of stock options 126 1 2,326
Other issuances of common stock 66 1,567
Cancel treasury stock (49) (49) (1,365) 1,365
Repurchases of treasury stock 58 (557)
Dividend to stockholders (125,972) (104,099)
Conversion of 8% Convertible Notes
due 2001 647 7 20,441
Net income 82,756
-------- -------- -------- -------- --------- --------
Balance - December 31, 1996 8,815 58 88 28,791 (20,718) (557)
1997:
Exercise of stock options (84) (48) 789
Repurchase of treasury stock 28 (249)
Net loss (4,933)
-------- -------- -------- -------- -------- --------
Balance - December 31, 1997 8,815 2 $ 88 $ 28,743 $(25,651) $ (17)
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ (3,651) $ 3,444 $ (949)
Adjustments to reconcile income (loss) to net cash provided
(used) by operating activities:
Special charges and spinoff expenses, net of payments 9,571 4,120
Depreciation and amortization 1,477 1,105 1,234
Bad debt expense 163 26 280
Loss (gain) on sale of property and equipment 414 (316)
Other 15
Changes in current assets and liabilities (net of effect of companies
acquired):
Trade receivables (3,017) (89) (2,201)
Inventories (217) (1,371) 256
Other assets 723 (2,054) (3,529)
Accounts payable 2,033 356 2,383
Accrued expenses and other (1,972) 3 (4,663)
Cash provided (used) by discontinued operations 144 6,853 (9,122)
--------- --------- ---------
Net cash provided (used) by operating activities $ 5,254 $ 8,687 $ (12,492)
--------- --------- ---------
Cash flows from investing activities:
Cash expended in acquisitions, net of cash received (5,164) (3,865)
Capital expenditures (1,372) (618) (1,619)
Notes receivable from affiliates (815)
Proceeds from sale of fixed assets 155 3,648
Cash provided (used) by discontinued operations (33,848) 276,112 (36,887)
--------- --------- ---------
Net cash provided (used) by investing activities $ (41,199) $ 275,649 $ (38,723)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (payments for) issuance of long-term debt 27,350 (15,364) 3,010
Proceeds (payments) from revolving credit lines and short term debt 7,813 (45,000) (8,938)
Proceeds from issuance of common stock 492 1,944 23,569
Cash dividend to stockholders (230,071)
Cash provided (used) by discontinued operations (1,112) 2,264 26,198
--------- --------- ---------
Net cash provided (used) by financing activities $ 34,543 $(286,227) $ 43,839
--------- --------- ---------
Net decrease in cash $ (1,402) $ (1,891) $ (7,376)
Cash and cash equivalents at beginning of year 2,164 4,055 11,431
--------- --------- ---------
Cash and cash equivalents at end of year $ 762 $ 2,164 $ 4,055
========= ========= =========
</TABLE>
(Continued)
<PAGE> 7
LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
For the year ended December 31
--------------------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $2,167 $6,710 $9,100
Income taxes paid $ 484 $2,581 $ 910
</TABLE>
Noncash transactions:
1997
- Recorded $1,835 of interest on convertible subordinated
notes which is accrued until conversion, redemption or
maturity.
- The acquisition of Bolle France included in discontinued
operations was consummated during the year. The acquisition
was funded with cash, equity and debt. The fair values of
the assets and liabilities at the date of acquisition were
as follows:
<TABLE>
<S> <C>
Cash $ 1,294
Accounts receivable 9,441
Inventories 6,167
Other current assets 388
Property and equipment 3,949
Goodwill 22,642
Trademark 40,000
Other assets 181
Short-term debt (175)
Accounts payable and accrued liabilities (9,756)
Other long-term liabilities (15,896)
</TABLE>
1996
- $20,448 of Benson convertible notes were converted into
equity during 1996 in conjunction with the Essilor Merger.
- $500 of notes receivable from Superior Vision Services, Inc.
("SVS") was forgiven during 1996.
- Recorded $1 million of non-interest bearing convertible
preferred stock as partial consideration on the sale of FGG.
(Continued)
<PAGE> 8
LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(CONTINUED)
1995
- Recorded a $1.9 million non-interest bearing convertible
note receivable in exchange for notes and trade receivables.
- Certain business combinations and divestitures were
consummated during the year. The acquisitions were funded
through a combination of cash, equity and debt. The fair
values of the assets and liabilities at the dates of
acquisition were allocated as follows: Accounts receivable
$2,888, Property and equipment $622, Goodwill $13,841,
Intangible assets $1,350, Other assets $358, Accounts
payable and accrued liabilities $(1,840), and Other
long-term assets and liabilities $2,416.
See accompanying notes to consolidated financial statements.
<PAGE> 9
LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 1 -- SPINOFF AND MERGER SUBSEQUENT TO YEAR END
On March 11, 1998, the Company distributed its subsidiary, Bolle Inc.
("Bolle"), to its stockholders via a spinoff (the "Spinoff"). In the Spinoff,
Company stockholders received one share of Bolle for every three shares of
Company common stock. In conjunction with the Spinoff, the Company and Bolle
entered into a Management Services Agreement and a Bill of Sale and Assignment
Agreement (the "Contribution Agreement"). The Management Services Agreement
provides management services to Bolle for an agreed fee. In accordance with
the Contribution Agreement, (i) the Company assigned to Bolle all of the
Company's assets other than the assets related to the ORC Technologies, Inc.
("ORC") Business (as defined in the Contribution Agreement ) and certain other
specific assets retained by the Company; and (ii) Bolle will assume all of the
Company's liabilities prior to the Spinoff other than those related to the ORC
Business and certain specific liabilities.
On March 12, 1998, the Company (through its wholly-owned subsidiary,
BILC Acquisition Corp.) completed its merger with ILC Technology, Inc. (the
"ILC Merger"). Under the terms of the agreement, ILC shareholders received
4.4084 shares of the company's Common Stock (or 2.2042 shares, after giving
effect to a one-for-two reverse split of the Company's Common Stock) for each
share of ILC Common Stock outstanding. In conjunction with the ILC Merger, the
Company changed its name to Lumen Technologies, Inc. The effect of the
one-for-two reverse split has been retroactively presented in these financial
statements.
The accompanying consolidated financial statements (i) reflect the
continuing operations of ORC; (ii) reflect Bolle net assets as "Investment in
and net receivables from discontinued operations" and Bolle's results of
operations as discontinued for all periods presented; (iii) do not reflect the
ILC Merger and (iv) do not reflect the disposition of certain assets and
liabilities pursuant to the Contribution Agreement.
On a proforma basis, had the above transactions occurred at December
31, 1997, the Company's total assets and stockholders' equity would have been
approximately $130 million (unaudited) and $35 million (unaudited),
respectively.
NOTE 2 -- BUSINESS
Business
During the periods presented, Lumen Technologies, Inc. ("Lumen" or
the "Company") had one core business, ORC which manufactures and markets
specialty lighting, electronic and electroformed products to a diverse
customer base. The evolution of the Company was accomplished through a series
of acquisitions and divestitures which were consummated during the period from
October 1992 through December 1997 (Notes 3 and 6). The name was changed from
BEC Group, Inc. in conjunction with the Spinoff (Note 1) and the ILC Merger
(Note 1) in March 1998.
<PAGE> 10
NOTE 3 -- DISCONTINUED OPERATIONS
Bolle Inc.
On March 11, 1998, the Company completed the Spinoff of Bolle to the
Company's stockholders (Note 1). Accordingly, the accompanying financial
statements reflect the results of operations of Bolle as discontinued
operations for all periods presented but do not reflect the transfer of the
other assets and liabilities to Bolle Inc. at the time of the Spinoff in
conjunction with the Contribution Agreement. After the Spinoff, the
"Investment in and net receivables from discontinued operations" caption will
be reduced to zero and will be accompanied by a corresponding entry to reduce
paid in capital.
Foster Grant Group and Dallas Corporate Headquarters
On December 12, 1996, the Company sold to Foster Grant Holdings, Inc.
("Holdings") all of the issued and outstanding shares of capital stock of the
entities comprising the Foster Grant Group ("FGG"). At closing, the Company
received $29 million in cash and 100 shares of non-voting preferred stock with
a maximum redemption value of $6 million (the "Preferred Stock"). By agreement
with Accessories Associates, Inc. ("AAi"), the Company may, at its option,
exchange the Preferred Stock for shares of AAi common stock if AAi completes
an initial public offering ("IPO") at any time within three (3) years of
closing. Upon any such exchange, the Company will receive the number of shares
of AAi common stock equal to $6 million divided by 85% of the IPO offering
price, as set forth in the AAi final IPO prospectus. Any such shares of AAi
common stock will not be registered for resale under federal securities laws,
but will bear "piggyback" registration rights. If the Preferred Stock is not
converted, it will be redeemed by Foster Grant Holdings, Inc. ("Holdings") on
or before February 28, 2000 for up to $6 million, based on FGG's net sales
for the year ending December 31, 1999. The cash consideration was used to pay
down the company's credit facility and pay transaction expenses. The results
of operations for FGG and the Dallas Corporate Headquarters, which was closed
in connection with the sale of FGG, are presented as discontinued operations
of the Company. The assets of FGG, net of liabilities, are presented as
investment in discontinued operations at December 31, 1995. A loss of $26.1
million including transaction expenses and phase-out losses, net of taxes was
recorded on the sale. All rights, liabilities and obligations of the Company
with respect to the Preferred Stock and/or agreement by and between the
Company, AAi Holdings and/or FGG was assigned to, and assumed by, Bolle in
connection with the Spinoff.
Prescription Eyewear Business
On May 3, 1996, Benson Eyecare Corporation (the predecessor of the
Company) ("Benson"), the Company, Essilor International, S.A. ("Essilor"),
Essilor of America, Inc. ("Essilor of America"), a wholly owned subsidiary of
Essilor and Essilor Acquisition Corporation, Inc. ("Essilor Sub"), a wholly
owned subsidiary of Essilor of America, entered into an Agreement and Plan of
Merger, as amended pursuant to which Essilor purchased Benson and the Omega
Group, Benson's wholesale optical laboratory business (the "Essilor Merger").
Benson also entered into an Asset Purchase Agreement, pursuant to which
Benson's lens manufacturing business, Orcolite, was purchased by the Monsanto
Company (the "Asset Sale"). The Omega Group and Orcolite comprised the
Prescription Eyewear Business of Benson. In connection with the Spinoff, Bolle
will agree to indemnify the Company against any and all liabilities, damages,
costs or other expenses arising in connection with the Essilor transaction,
except to the extent arising as a result of the ORC Business.
Pursuant to the Essilor Merger, each outstanding share of Benson
common stock was exchanged for $6.60 in cash and one share of the Company's
Common Stock was received for every two shares of Benson Common Stock. Upon
consummation of the Essilor Merger, the equity interest in Benson of its
stockholders ceased and Benson became a wholly owned subsidiary of Essilor of
America. Also upon consummation of the Essilor Merger, the Company became a
registrant whose common shares are traded on the NYSE.
<PAGE> 11
For accounting purposes, the company was considered the continuing
entity. Accordingly, in substance, the Merger and Asset Sale were considered
to be a sale of Omega and Orcolite by the Company to Essilor and Monsanto
Company, respectively. Upon approval of the Essilor Merger, Benson's
historical consolidated financial statements, adjusted for the sale of the
Prescription Eyewear business, became the historical financial statements of
the Company. The gain on the sale of these businesses of $100.7 million and
the results of operations for these businesses are presented as discontinued
operations of the Company. The cash merger consideration is treated as a
dividend by the Company. The assets of the discontinued operations, net of
liabilities, are presented as investment in discontinued operations at
December 31, 1995. The accounting treatment of the Essilor Merger and Asset
Sale differed from the legal and federal income tax treatment.
During the third quarter of 1996, the final Closing Balance Sheet for
the sale of Omega was agreed upon by the Company and Essilor. According to the
terms of the Essilor Merger, a purchase price adjustment of $2.1 million was
paid to Essilor on October 3, 1996, decreasing the gain on the sale.
Additionally, Essilor and the Company agreed to settle the Contingent
Valuation Right (the "CVR") early for cash of $2.2 million payable by the
Company to Essilor in January 1997. Accordingly, the gain on the sale
increased by approximately $2.4 million. The net result of the described
adjustments, in addition to the adjustment of certain accruals relating to the
Merger, was a $791 incremental gain on the sale of the Prescription Eyewear
Business recorded in discontinued operations in the third quarter.
Summarized information on the combined discontinued operations,
excluding the net gain on the transactions follows. The amounts represent the
operating results of FGG, the Prescription Eyewear Business and Bolle Inc.
business through their respective measurement dates.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Net sales $ 32,160 $ 125,987 $ 260,591
Income (loss) before income taxes (3,369) 4,686 (4,672)
Income tax expense (benefit) (2,020) 384 1,139
Minority interests (67)
--------- --------- ---------
Net income (loss) $ (1,282) $ 4,302 $ (5,811)
========= ========= =========
</TABLE>
Pursuant to the Essilor Merger, all Benson stock options were
canceled. Continuing Company option holders received cash and new options in
exchange for their Benson options. Option holders from discontinued operations
received cash and the Company stock in exchange for their Benson options.
NOTE 4 -- SPECIAL CHARGES AND SPINOFF EXPENSES
The Company's special charges and spinoff expenses of $9.6 million
for the year ended December 31, 1997 include the following items:
(i) A $6.2 million charge to reflect the impairment of the
Company's long term investment in Eyecare Products plc
("Eyecare") (Note 10). This investment has historically been
accounted for under the equity method reflecting the
Company's percentage shareholding and the long term nature
of this investment. In connection with the Spinoff and the
transfer of the Eyecare shares to Bolle, the Company has
reassessed Eyecare's operating performance and market
performance and accordingly has written down its investment
in Eyecare to market value at December 31, 1997.
<PAGE> 12
(ii) A $2.2 million charge to reflect the impairment of the
Sterling Vision, Inc. Convertible Subordinated Note Due 2015
due to Sterling's recent operating performance and negative
operating cash flows.
(iii) Spinoff expenses of $1.2 million for expenses relating to
the distribution of Bolle Inc. See Note 1.
The Company's special charges of $5.2 million for the year 1995
included primarily: (i) a $4.3 million charge to reflect the impairment of
certain notes receivable and trade accounts receivable from OCA Acquisition,
Inc., d/b/a/ Optical Corporation of America ("OCA") prior to the exchange of
such assets for a non-interest bearing convertible note receivable from
Sterling Vision, Inc.; (ii) the write-off of $500 of deferred financing costs
in connection with a change in the Company's banking syndicate in September
1995. None of the above items relate to the operations of the ORC business.
NOTE 5 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries over which the Company asserts
control. Investments in less than 50% owned affiliates are accounted for by
the equity method, investments in less than 20% owned affiliates are accounted
for by the cost method (Note 10). All significant intercompany transactions,
profits and accounts have been eliminated in consolidation.
Cash Equivalents
Cash equivalents include all temporary cash investments with original
maturities of three months or less. The carrying value is equal to market
value.
Revenue Recognition
The Company recognizes revenue upon shipment or delivery of products.
Concentration of Credit Risk and Major Customers
The Company is not subject to significant concentrations of credit
risk. However, trade receivables arising from sales to customers are not
collateralized and as a result management continually monitors the financial
condition of these customers to reduce the risk of loss. Notes receivable
relate to the divestiture of certain businesses and related assets in 1995 and
1994. The carrying values of notes receivable approximate fair value.
Inventories
Inventories, which consist primarily of raw materials and finished
goods held for resale, are stated at the lower of cost or market value and
determined on a first-in-first-out basis.
Warranties
Certain sales are subject to warranty against defects in material and
workmanship for varying periods. The Company provides for such potential
future costs at the time the sales are recorded.
<PAGE> 13
Property and Equipment
Property and equipment are stated at cost. Additions and improvements
are capitalized. Maintenance and repairs are expensed as incurred.
Depreciation is computed on a straight line basis for financial reporting
purposes, and on an accelerated basis for tax purposes, over the estimated
useful lives of the assets. Useful lives range from 3 to 5 years for office
equipment to 30 years for buildings. Asset cost and accumulated depreciation
amounts are removed for dispositions and retirements, with resulting gains and
losses reflected in earnings.
Goodwill and Intangible Assets
Goodwill represents the excess cost over the fair value of net assets
acquired in business combinations accounted for under the purchase method.
Intangible assets consist principally of trademarks and other identifiable
intangible assets.
Goodwill and intangible assets are amortized on a straight line basis
over estimated useful lives which approximate 40 years for goodwill, 20 years
for trademarks, and from 3-10 years for other identifiable intangibles. At
each balance sheet date, the Company evaluates the realizability of goodwill
and intangible assets based upon expectations of undiscounted cash flows of
each subsidiary having a significant goodwill or intangible asset balance.
Should this review indicate that goodwill or intangible assets will not be
recoverable, the Company's carrying value of the goodwill or intangible assets
will be reduced by the estimated shortfall of discounted cash flows. Based
upon its most recent analysis, the Company believes that no material
impairment of goodwill or intangible assets exists.
Income Taxes
Deferred income taxes are provided on the difference in basis of
assets and liabilities between financial reporting and tax returns using
enacted tax rates. A valuation allowance is recorded when realization of
deferred tax assets is not assured.
Investments in Affiliates
Investments in affiliates owned less than 20% are carried on the
balance sheet according to the cost method. Investments in more than 20% owned
affiliates are carried on the balance sheet according to the equity method.
Earnings Per Share
Basic earnings per share is computed by dividing net earnings or loss
available to common stockholders by the weighted average number of outstanding
shares of common stock. Diluted earnings per share includes weighted average
common stock equivalents outstanding during each year in the denominators,
unless the effect is anti-dilutive. Common stock equivalents consist of the
dilutive effect of common shares which may be issued upon exercise of stock
options, warrants or conversion of debt.
In accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 98, the weighted average number of outstanding common
shares and common stock options is calculated based on the historical timing
of the common stock transactions. Also, the May 3, 1996 and March 12, 1998
reverse stock splits have been retroactively reflected in the Company's
financial statements.
<PAGE> 14
Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NOTE 6 -- BUSINESS COMBINATIONS AND DIVESTITURES
1997 BUSINESS COMBINATIONS
Bolle France
On July 9, 1997, the Company acquired, in a transaction accounted for
as a purchase, all of the shares of Bolle France which included Bolle France
and several consolidated and unconsolidated subsidiaries, for a total purchase
price of approximately $58,235, comprised of cash of $31,000, BEC Series A
mandatorily redeemable preferred stock of $9,294, Bolle mandatorily redeemable
preferred stock of $11,055 and Bolle common stock of $3,302, as well as direct
acquisition costs of $3,595. Where such consideration was denominated in
French Francs, the July 10, 1997 exchange rate of 5.9197 was used to translate
to US Dollars.
Voltarc Technologies
On October 1, 1997, the Company expanded its interests in
the specialty lighting business. Pursuant to the terms of a Stock Purchase and
Option Agreement (the "Voltarc Purchase Agreement") dated as of October 1,
1997 among the Company, ORC, Voltarc and certain stockholders of Voltarc (the
"Voltarc Stockholders"), the Company and ORC acquired (a) 30% of the common
stock of Voltarc, for $1,800,000, (b) 12,000 shares of preferred stock of
Voltarc, convertible at ORC's option into approximately 10% of the total
number of shares of Voltarc issued and outstanding for $1,200,000 and (c) a
call option to acquire the remaining shares of capital stock of Voltarc from
the remaining Voltarc Stockholders in March 1999 if certain earnings
benchmarks are met. Pursuant to the Voltarc Purchase Agreement, the Voltarc
stockholders also received the right to put the remaining shares of Voltarc
common stock to the Company or ORC upon the occurrence of certain events. In
addition, ORC made available to Voltarc a subordinated revolving credit
facility in the amount of $800,000. The Company accounts for its investment in
Voltarc under the equity method. Voltarc is a manufacturer and marketer of
specialty lighting products.
1997 AND 1996 DIVESTITURES
For a discussion of 1997 and 1996 divestitures see Note 3.
<PAGE> 15
1995 BUSINESS COMBINATION
Bolle America, Inc.
Effective November 2, 1995, the Company acquired all of the
outstanding common stock of Bolle America, Inc. ("Bolle America") in exchange
for 3,265 shares of the Benson Common Stock, valued at $31 million. The
business combination was accounted for as a pooling of interests and
accordingly, the financial statements of Bolle America were combined with
those of the Company. The Company entered into employment, consulting and
noncompete agreements with the former president of Bolle America providing for
annual payments of $255 from 1996 through 2000. Bolle America's results are
included in discontinued operations.
1995 DIVESTITURES
Effective September 15, 1995, the Company exchanged its interests in
notes receivable and trade accounts receivable from OCA for a non
interest-bearing convertible note receivable from Sterling Vision, Inc. (Note
4).
Effective June 30, 1995, the Company sold 100% of the issued and
outstanding capital stock of Superior Eye Care for aggregate consideration of
$5 million. There was no gain or loss recorded on the transaction.
NOTE 7 -- INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Raw materials $ 4,604 $ 4,534
Work in progress 2,859 2,655
Finished goods 2,739 2,504
Reserves (668) (376)
------- -------
$ 9,534 $ 9,317
======= =======
</TABLE>
NOTE 8 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Land $ 1,632 $ 1,631
Buildings 10,458 10,401
Machinery and equipment 3,775 3,224
Furniture and fixtures 291 203
Leasehold improvements 57 42
Construction in progress 603
-------- --------
16,816 15,501
Less accumulated depreciation (3,053) (2,387)
-------- --------
Net property and equipment $ 13,763 $ 13,114
======== ========
</TABLE>
<PAGE> 16
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 was $1,097, $748 and $742, respectively.
Land and buildings totaling $6.1 million net of accumulated
depreciation are subject to operating leases. The minimum future rental income
is as follows:
<TABLE>
<S> <C>
1998 $1,257
1999 762
2000 494
2001 494
Thereafter
----------
$3,007
==========
</TABLE>
NOTE 9 -- GOODWILL AND INTANGIBLE ASSETS
Intangible assets and accumulated amortization consist of the
following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Goodwill $ 13,011 $ 11,939
Trademarks 1,482 1,498
Other identifiable intangible assets __ (16)
-------- --------
14,493 13,421
Less accumulated amortization (1,130) (753)
-------- --------
$ 13,363 $ 12,668
======== ========
</TABLE>
Amortization expense for goodwill and intangible assets for the years
ended December 31, 1997, 1996 and 1995, was $380, $357 and $492, respectively.
NOTE 10 -- EQUITY IN AND NOTES RECEIVABLE FROM AFFILIATED COMPANIES
Eyecare Products plc
The Company first invested in Eyecare Products plc in December 1993.
For the years ended December 31, 1997, 1996 and 1995, the Company recognized
equity earnings of $595, $275 and $525, respectively, on its investment in
Eyecare. The Company entered into an agreement, dated November 14, 1996, as
amended, with Lantis Eyewear Corporation ("Lantis"), whereby the Company sold
3,500 shares of Eyecare to Lantis and granted Lantis an option to acquire the
Company's remaining interest in Eyecare. Lantis did not exercise its December
1997 option as the operating performance of Eyecare was below Lantis'
expectations and its market price was below the option floor price. The
Company currently maintains a 23% interest in Eyecare. Due to the value
impairment and the Company's intention to dividend this investment to Bolle
according to the Contribution Agreement, this investment was written down to
market value at December 31, 1997 resulting in a special charge of $6.2
million.
<PAGE> 17
Eyecare Products shares two common directors with the Company, and
the Company has a management agreement with Eyecare Products under which a
management fee is paid to the Company, not to exceed .5% of Eyecare Products
net sales. No management fee was charged in 1997. The Company recognized
management fee income of $100 and $300 during each of the years December 31,
1996 and 1995, respectively.
NOTE 11 -- CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Credit Agreement $23,282 $17,500
Current maturities of long-term debt 2,159 145
Other short term debt 17
------- -------
$25,458 $17,645
======= =======
</TABLE>
Credit Agreement
On April 3, 1996, the Company and certain of its subsidiaries entered
into a credit facility (the "Credit Agreement") with a syndicate of lenders
(the "Lenders"), led by NationsBank, N.A., ("NationsBank"). The Original
Credit Agreement, as amended effective December 12, 1996 and July 10, 1997,
provided for a $70 million revolving credit facility, which included a letter
of credit subfacility of $5 million, and two $15 million term facilities. The
interest rate applicable to the credit facilities will equal the Base Rate,
the Eurodollar Rate or the French Franc Libor Rate (each, as defined in the
Credit Agreement), as the Company may from time to time elect. The Base Rate
will generally be equal to the sum of (a) the greater of (i) the prime rate as
announced from time to time by NationsBank or (ii) the Federal Funds Rate plus
one-half percent (0.5%), and (b) a margin ranging from 0% to .375%, depending
upon the Company's satisfaction of certain financial criteria. The Eurodollar
Rate and the French Franc Libor Rate will generally be equal to the interbank
offered rate, as adjusted to give effect to reserve requirements, plus a
margin ranging from .625% to 1.625%, depending upon the Company's satisfaction
of certain financial criteria. A commitment fee of $175 was paid upon closing
the Credit Agreement in April 1996 and a commitment fee of $596 was paid upon
Closing of the July 10, 1997 amendment.
At December 31, 1996, the Company had aggregate borrowing capacity
under the Credit Agreement of $25 million. During 1996, the weighted average
interest rate on borrowings under the facility was 7.1%, the average
outstanding balance was $42.3 million, and the maximum balance outstanding was
$68 million.
At December 31, 1997, the Company had aggregate borrowing capacity
under the Credit Agreement of $70 million. During 1997, the weighted average
interest rate on borrowings under the facility was 6.7%, the average
outstanding balance was $35.4 million, and the maximum balance outstanding was
$53.4 million.
On March 11, 1998, in conjunction with the ILC Merger and the
Spinoff, the Company and its subsidiaries (excluding Bolle) entered into a
Second Amended and Restated Credit Agreement (the "New Credit Agreement"). The
New Credit Agreement provides for a $40 million revolving credit facility,
which includes a letter of credit subfacility of $5 million, and a $30 million
term facility. The interest rate applicable to the facilities will equal the
Base Rate or the Eurodollar Rate (each, as defined in the New Credit
Agreement), as the Company may from time to time elect. The Base Rate will
generally be equal to the sum of (a) the greater of (i) the prime rate as
announced
<PAGE> 18
from time to time by NationsBank or (ii) the Federal Funds Rate plus
one-half percent (0.5%), and (b) a margin ranging from 0% to 0.25%, depending
on the Company's satisfaction of certain financial criteria. The Eurodollar
Rate will generally be equal to the interbank offered rate, as adjusted, to
give effect to reserve requirements, plus a margin ranging from 0.875% to
1.75%, depending upon the Company's satisfaction of certain financial
criteria. Commitment and related fees of $420 were paid upon the closing of
the New Credit Agreement.
At December 31, 1997, the Company was in compliance with all debt
covenants.
Long-Term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Credit Agreement $ 29,987
Mortgage 3,521 $ 3,742
-------- --------
33,508 3,742
Less current maturities (2,159) (145)
-------- --------
$ 31,349 $ 3,597
======== ========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ 2,159
1999 5,175
2000 7,691
2001 10,210
2002 5,717
Thereafter 2,556
-------
$33,508
=======
</TABLE>
The fair value of long term debt is estimated using incremental
borrowing rates currently available to the Company. The carrying value of
long-term debt approximates fair value.
Convertible Subordinated Notes
On May 9, 1994, Benson completed a public offering of $40,950
Convertible Subordinated Notes, due 2001 with a coupon rate of 8% and a
conversion price of $9.056 per Benson share. In connection with the Essilor
Merger, holders of $40,896 Convertible Subordinated Notes due 2001 accepted a
Conversion and Exchange Agreement whereby they exchanged one-half of their
principal amount and a portion of accrued interest for new 8% Convertible
Notes due 2002 (the "New Notes"). The other half of their notes was converted
into Merger Consideration using a $7.90 conversion price. The New Notes accrue
interest semi-annually but do not pay interest until conversion, redeemption
or maturity. Accordingly, $2,723 of accrued interest is included in the
Convertible Subordinated Notes balance at December 31, 1997. Interest may be
paid in cash or in kind at the option of the Company. The conversion price for
the New Notes was $5.75. As of December 31, 1997, there were $21,019 New Notes
and $0 Benson Notes outstanding. The Company registered the New Notes with the
Securities and Exchange Commission effective January 28, 1997. Since December
31, 1997, $8,045 of New Notes have converted into BEC stock.
<PAGE> 19
Mortgage
The Company has a $3,521 mortgage bearing interest at LIBOR plus 1.85
basis points, secured by land and buildings in Dallas, Texas, with monthly
principal and interest payments of $41 due through April 2001. Such payments
are paid using rental income from FGG which occupies the building. The
building and related mortgage were transferred to Bolle Inc. under the
Contribution Agreement. A contract to sell the property at a value in excess
of the mortgage valuation has been entered into.
NOTE 12 -- 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 (loss) before provision for income taxes consists of the
following for the periods ended:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996 1995
--------------- ------------ ---------------
<S> <C> <C> <C>
U.S. $(9,766) $85,010 $(6,960)
Foreign 1,157
--------------- ------------ ---------------
$(8,609) $85,010 $(6,960)
=============== ============ ===============
</TABLE>
The provision (benefit) from income taxes consists of the following
for continuing and discontinued operations for the periods ended:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal $1,177 $2,365 $(138)
State and local 67 141 (27)
Deferred (2,900) (636) (1,174)
-------- -------- -------
$(1,656) $1,870 $(1,339)
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Discontinued operations: 1997 1996 1995
U.S.: -------- ------- ------
<S> <C> <C> <C>
Current $(1,713) $ 623 $ 719
Deferred (961) (239) 420
Foreign:
Current 1,803
Deferred (1,149)
------- ------- -------
$(2,020) $ 384 $ 1,139
------- ------- -------
Total provision (benefit) from income taxes $(3,676) $ 2,254 ($ 200)
======= ======= =======
</TABLE>
<PAGE> 20
The Company's effective tax rates for continuing and discontinued
operations differ from the Federal statutory rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Expected tax (benefit) at statutory rate (35.0%) 35.0% (35.0%)
State income taxes (2.0%) 2.0% (2.0%)
Provision to return adjustment (7.6%)
Effects of acquisitions and divestitures 4.7% (32.9%) 4.2%
Valuation allowance (1.6%) 16.9%
Goodwill amortization 3.0% 1.3% 10.9%
Other, net (5.8%) (1.1%) 2.1%
------ ------ ------
(42.7%) 2.7% (2.9%)
====== ===== ======
</TABLE>
Significant components of deferred income taxes for continuing and
discontinued operations are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Net operating loss carryforward $ 1,072
Capital loss carryforward 607 $ 2,263
Accounts receivable 283 173
Notes receivable 1,748 959
Office closing 848
Investments 3,927
Inventories 298 190
Assets of discontinued operations 2,329 452
Other, net 587 398
-------- --------
Gross deferred tax asset 10,851 5,283
Valuation allowance (607) (2,263)
-------- --------
Deferred tax asset 10,244 3,020
Fixed assets (666) (650)
Intangible assets (28) (128)
-------- --------
Deferred tax liability (694) (778)
-------- --------
Net deferred tax asset $ 9,550 $ 2,242
======== ========
</TABLE>
Discontinued Operations
The Company recorded gross deferred tax assets of $2,329 and $452 for
discontinued operations for the years ended December 31, 1997 and 1996,
respectively. In connection with the divestitures in 1996, substantially all
net operating loss carryforwards were utilized to reduce income taxes
currently payable. The balance of the valuation allowance at December 31, 1995
was released in 1996 as the utilization of the net operating loss
carryforwards was assured due to the gains recognized on the divestitures. Net
operating loss carryforwards related to discontinued operations amount to
approximately $5.6 million and $0 at December 31, 1997 and 1996 respectively.
<PAGE> 21
Continuing Operations
The Company recorded gross deferred tax assets of $8,522 and related
valuation allowance of $607 for continuing operations for the year ended
December 31, 1997. The capital loss generated on the sale of Foster Grant
Group and the related valuation allowance were revalued during 1997. Net
operating loss carryforwards related to continuing operations amount to
approximately $2.9 million and $0 at December 31, 1997 and 1996, respectively.
The net operating loss carryforwards begin to expire in the year 2008.
The Company recorded gross deferred tax assets of $4,831 and related
valuation allowance of $2,263 for continuing operations for the year ended
December 31, 1996. A capital loss carryforward was generated through the sale
of FGG. A valuation allowance of $2,263 was established for the entire net tax
benefit of the capital loss carryforward as the realization was not assured.
The effect on the income tax provision for continuing operations related to
the valuation allowance was a charge of $2,263. The capital loss carryforward
expires in the year 2001.
NOTE 13 - SHARE REPURCHASE PROGRAM
On September 9, 1996, the Company adopted a share repurchase program
whereby the Company may repurchase, pursuant to Rule 10(b)-18 under the
Securities and Exchange Act of 1934, shares of its common stock in the open
market. The repurchase program became active in December 1996 following
the FGG disposal. Repurchased shares may be issued from time to time upon (i)
exercise of options granted under the Company's 1996 Stock Incentive Plan
and/or (ii) under the Company's 1996 Employee Stock Purchase Plan. During
1996, the Company purchased 58 shares of its common stock at an average price
of $9.60 per share. During 1997, the Company purchased 28 shares of its common
stock at $8.96 per share. During 1997, the Company used 84 treasury shares to
satisfy options exercised. The Company discontinued its share repurchase
program in July 1997, as it was prohibited by the July 1997 amendment to the
Credit Agreement, as amended (See Note 11).
NOTE 14 - STOCK OPTION PLANS
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans, which are described below. Accordingly,
no compensation cost has been recognized for its stock option plans. Had
compensation cost been determined based on the fair market value at the grant
dates for awards under those plans consistent with the method provided by SFAS
No. 123, the Company's net income (loss) and net income (loss) per share would
have been as set forth in the tables below. All option information has been
restated to give effect to the May 3, 1996 and March 12, 1998 reverse stock
splits.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ (4,933) $ 82,756 $ (6,760)
Pro Forma $ (6,183) $ 78,592 $ (10,236)
Basic earnings (loss) per share As reported $ (0.59) $ 9.69 $ (0.89)
Pro Forma $ (0.73) $ 9.21 $ (1.34)
Diluted earnings (loss) per share As Reported $ (0.59) $ 9.62 $ (0.89)
Pro Forma $ (0.73) $ 9.14 $ (1.34)
</TABLE>
<PAGE> 22
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for all grants:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 50% 64% 64%
Risk free rate of return 6.5% 5% 5%
Expected turnover 7% 7% 7%
Expected term 5 years 5 years 5 years
</TABLE>
The weighted average fair values of Benson options granted during the
years ended December 31, 1996 and 1995 were $10.24 and $9.60, respectively.
The weighted average fair value of the Company options granted during 1997 was
$8.80 and 1996 was $9.26.
The Company may grant nonqualified stock options, incentive stock
options or stock appreciation rights to officers, directors, consultants and
key employees of the Company.
Options under the nonqualified stock option plan are granted to
officers, directors and key employees at prices determined by the Company
Board based upon market value on the date of grant. There were no shares
available under the plan for future grants at December 31, 1997. The plan was
amended on March 11, 1998 to increase the number of authorized options and to
ensure current grants were in compliance with the plans.
As a result of the Essilor Merger and Asset Sale, all Benson options
were canceled. Option holders received consideration (including new Company
options) for their Benson options. Accordingly, all options were issued under
the Company Stock Compensation Plan on or after May 3, 1996.
A summary of Benson option transactions is as follows:
<TABLE>
<CAPTION>
OPTION PRICE RANGE NUMBER OF EXPIRATION
PER SHARE OPTIONS DATE
------------------ --------- ----------
<S> <C> <C> <C>
Outstanding at 1/1/95 $3.00 - 16.90 1,144 1995 - 2001
Granted $12.26 - 19.74 284
Exercised $3.00 - 14.50 (159)
Cancelled $14.00 - 14.50 (62)
-------
Outstanding at 12/31/95 $3.00 - 19.74 1,207 1996 - 2002
Granted $15.74 - 19.00 134
Exercised $5.00 - 14.50 (163)
Cancelled $3.00 - 19.50 (8)
Cancelled in connection with Merger and Asset Sale (1,170)
-------
Outstanding at 12/31/96 -0-
</TABLE>
<PAGE> 23
A summary of the Company option transactions is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE PRICE NUMBER OF OPTIONS
---------------------- -----------------
<S> <C> <C>
Outstanding at 12/31/95 -0-
Granted $ 9.26 1,025
Exercised $ 5.42 (45)
Cancelled $ 9.88 (73)
Outstanding at 12/31/96 $ 9.40 907
Exercisable at 12/31/96 $ 7.80 195
Granted $ 8.80 883
Exercised $ 8.82 (83)
Forfeited $ 10.02 (57)
Outstanding at 12/31/97 $ 9.08 1,650
Exercisable at 12/31/97 $ 8.68 316
</TABLE>
Options generally vest evenly over a three-or four-year period
beginning one year from the date of grant and expire seven years from the date
of grant. The 316 exercisable options at 12/31/97 had an option price range of
$1.66 -- $10.25. The weighted average remaining contractual life of the 1,650
options outstanding as of December 31, 1997 was 5.5 years.
A summary of the price ranges of exercisable and outstanding options
as of December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------- ----------------------------------------------------
Price Range Per Share Number of Weighted Average Weighted Average Number of Weighted Average Weighted Average
- - --------------------- ----------- ----------------- ----------------- --------- ----------------- ----------------
Options Remaining Exercise Price options Remaining Exercise Price
------- ---------- -------------- ------- ---------- --------------
Contractual Life Contractual Life
---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding options:
$ 0.00 - $ 4.00 6 5.3 $ 2.32 6 6.3 $ 2.32
$ 4.01 - $ 6.00 28 5.3 $ 4.88 28 6.3 $ 4.88
$ 6.01 - $ 8.00 79 3.2 $ 7.72 88 4.1 $ 7.72
$ 8.01 - $10.00 996 6.2 $ 8.80 196 3.8 $ 8.92
$10.01 - $12.00 541 4.4 $10.10 589 5.1 $10.10
--- ---
1,650 5.5 $ 9.08 907 4.8 $ 9.40
Exercisable options:
$ 0.00 - $ 4.00 6 $ 2.32 6 $ 2.32
$ 4.01 - $ 6.00 28 $ 4.88 28 $ 4.88
$ 6.01 - $ 8.00 69 $ 7.72 63 $ 7.74
$ 8.01 - $10.00 76 $ 8.92 87 $ 8.86
$10.01 - $12.00 137 $10.10 11 $10.10
--- --
316 $ 8.68 195 $ 7.80
</TABLE>
<PAGE> 24
NOTE 15 - EARNINGS PER SHARE COMPUTATION
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Per Share Average Per Share Average Per Share
Loss Shares Amount Income Shares Amount Loss Shares Amount
------- ------- -------- -------- ------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) from
continuing operations $(3,651) $3,444 $(949)
Less: Preferred stock
Dividend 232
-------
BASIC EPS
Income (loss) from
continuing operations
available to common
stockholders $(3,883) 8,803 $(0.44) $3,444 8,537 $0.40 $(949) 7,620 $(0.12)
EFFECT OF DILUTIVE
SECURITIES
Stock options 63 __
DILUTED EPS
Income from continuing
operations available to
common stockholders
plus assumed conversions $(3,883) 8,803 $(0.44) $3,444 8,600 $0.40 $(949) 7,620 $(0.12)
</TABLE>
In 1997 and 1995, due to the net loss from continuing operations, although
there were stock options outstanding, they were not included in the
computation of diluted EPS as the effect would be antidilutive. At December
31, 1997 and 1996 the Company had convertible debt outstanding convertible
into 1,828 shares of common stock. At December 31, 1995 Benson had convertible
debt outstanding convertible into 2,261 shares of common stock. Such shares
were not included in the computation of diluted EPS because the conversion
price was greater than the average market price of the common shares. Warrants
outstanding at December 31, 1997 issued in conjunction with the acquisition of
Bolle France were not included in the calculation of diluted EPS because the
effect would be antidilutive. Such warrants were cancelled on March 11, 1998
in conjunction with Spinoff.
NOTE 16 -- RELATED PARTY TRANSACTIONS
Ms. Nora Bailey, a member of the Company's Board of Directors since
May 1996, is an attorney specializing in federal tax law. In her professional
capacity she has rendered legal advice and related services to both the
Company and its predecessor, Benson. Ms. Bailey has rendered such services
both prior to and subsequent to her appointment to the Company Board of
Directors, and it is anticipated that from time to time in the future she will
be engaged to provide similar legal services to the Company. All fees paid to
Ms. Bailey in connection with such services have been agreed in arms' length
negotiations and are in accordance with Ms. Bailey's usual and customary
billing practices. Fees paid to Ms. Bailey by the Company in connection with
such services are not paid in consideration of her services as a director.
Aggregate fees billed to Benson and the Company by Ms. Bailey during 1997 and
1996 were approximately $90 and $73, respectively.
<PAGE> 25
On December 12, 1996, in connection with the sale of FGG by the
Company, Marlin Capital, LP ("Marlin"), a Delaware limited partnership,
invested $2.5 million in convertible preferred stock of the buyer AAi; upon
conversion, AAi common stock received by Marlin would bear demand and
piggyback registration rights. Marlin Holdings, Inc. ("MH"), a Delaware
corporation, is the general partner of Marlin. Mr. Martin E. Franklin, the
Company's Chairman and Chief Executive Officer, is the Chief Executive Officer
and principal stockholder of MH. Mr. Ashken, the Company's Chief Financial
Officer and a Director, also is a stockholder and executive officer of MH. Mr.
Franklin also has been named a member of AAi's Board of Directors.
Mr. Franklin serves as non-executive chairman of Eyecare Products.
Mr. Ashken serves as a director of Eyecare Products.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to various litigation incidental to business.
Irrespective of any indemnification that may be received, the Company does not
believe that exposure on any matter will result in a significant impact on the
Company's financial condition, results of operations or cash flows.
NOTE 18 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
Q1 Q2 Q3 Q4
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $10,963 $12,200 $12,058 $12,907
Gross profit 4,457 4,520 4,459 4,089
Income (loss) from continuing operations 1,038 993 699 (6,381)
Basic and diluted earnings (loss) per share $ 0.12 $ 0.11 $ 0.07 $ (0.74)
from continuing operations
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
Q1 Q2 Q3 Q4
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $10,771 $11,206 $10,007 $10,590
Gross profit 4,281 4,328 4,025 4,264
Income from continuing operations 779 1,210 1,045 410
Basic and diluted earnings per share from continuing $ 0.09 $ 0.14 $ 0.12 $ 0.05
operations
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
Q1 Q2 Q3 Q4
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $9,547 $10,511 $9,875 $11,311
Gross profit 4,324 4,745 3,728 4,722
Income (loss) from continuing operations 145 629 (1,083) (640)
Basic and diluted earnings (loss) per share from continuing $ 0.02 $ 0.09 $(0.14) $ (0.09)
operations
</TABLE>
<PAGE> 1
Exhibit 99.2
ILC TECHNOLOGY, INC. FINANCIAL STATEMENTS
ILC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................... $ 1,113,992 $ 1,828,807
Accounts receivable, less allowance for
doubtful accounts of $337,958 and $312,358,
respectively ................................... 9,485,397 9,494,246
Receivable from long-term contracts ............. 1,049,122 861,427
Inventories, net ................................ 10,716,680 8,901,528
Deferred tax asset .............................. 835,803 2,158,000
Prepaid expenses ................................ 344,393 208,320
Current portion of note receivable from
sale of PLI .................................... 1,150,000 --
Net assets from discontinued operations ......... -- 2,178,383
----------- -----------
Total current assets ......................... 24,695,387 25,630,711
----------- -----------
Property and equipment, net ..................... 21,652,695 21,176,431
Note receivable from sale of PLI, net
of current portion ............................. 2,196,871 --
Covenants-not-to-compete, net of
accumulated amortization and writedown of
$3,314,404 and $3,195,524, respectively ........ 237,761 356,641
Other assets .................................... 765,309 680,013
----------- -----------
$49,548,023 $47,843,796
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 2
ILC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable ............................ $ 4,361,816 $ 3,643,496
Accrued payroll and related
items ...................................... 1,701,209 1,263,741
Other accrued liabilities ................... 1,517,606 1,146,822
Current portion of non-compete
obligation ................................. -- 390,000
Current portion of long-term
debt ....................................... 2,534,500 2,545,600
Accrued income taxes payable ................ 1,243,451 1,486,518
----------- -----------
Total current liabilities ............. 11,358,582 10,476,177
----------- -----------
Long-term liabilities, net of
current portion:
Long-term debt .............................. 3,117,396 7,370,164
Other accruals .............................. 78,328 206,235
----------- -----------
Total long-term liabilities .......... 3,195,724 7,576,399
----------- -----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, no par value;
10,000,000 shares authorized;
4,874,040 shares and 4,782,508
shares outstanding, respectively ........... 7,178,231 6,815,109
Retained earnings ........................... 7,815,486 22,976,111
----------- -----------
Total stockholders' equity ............ 34,993,717 29,791,220
----------- -----------
$49,548,023 $47,843,796
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales .................................. $ 55,517,905 $ 54,206,424 $ 49,496,029
Costs and expenses:
Cost of sales ............................ 39,194,377 36,180,448 31,799,916
Research and development ................. 4,252,694 4,319,650 4,278,697
Sales and marketing ...................... 3,059,158 2,645,952 2,404,856
General and administrative ............... 4,329,067 4,417,446 4,459,726
Amortization of intangibles .............. 120,000 120,000 120,000
------------ ------------ ------------
50,955,296 47,683,496 43,063,195
Income from continuing
operations before provision for
income taxes, interest expense
and gain on sale of CPI ................... 4,562,609 6,522,928 6,432,834
Interest expense, net ...................... 493,917 461,898 323,757
------------ ------------ ------------
Income from continuing
operations before provision for
income taxes and before gain
on sale of CPI ............................ 4,068,692 6,061,030 6,109,077
Gain on sale of CPI ........................ 2,378,683 -- --
------------ ------------ ------------
Income from continuing
operations before provision for
income taxes .............................. 6,447,375 6,061,030 6,109,077
Provision for income taxes on
continuing operations ..................... 1,608,000 1,515,000 1,472,000
------------ ------------ ------------
Income from continuing operations........... 4,839,375 4,546,030 4,637,077
Discontinued operations:
Operating loss, net of tax
benefit of $280,000 and
$32,000 in 1996 and
1995, respectively ...................... -- (840,217) (99,143)
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)
------------ ------------ ------------
Net income ................................. $ 4,839,375 $ 306,826 $ 4,537,934
============ ============ ============
Earnings (loss) per share:
Earnings from continuing
operations ............................... $ 0.96 0.92 $ 0.97
Loss from discontinued operations ......... -- (0.86) (0.02)
------------ ------------ ------------
Net income per share ....................... $ 0.96 $ 0.06 $ 0.95
============ ============ ============
Weighted average shares
outstanding used to compute
net income (loss) per share ............... 5,047,658 4,923,132 4,764,989
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
Common
Common Stock Retained
Shares Amount Earnings Total
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
Net income ................... -- -- 4,839,375 4,839,375
Issuance of common
stock under stock
purchase plan ............... 28,555 266,588 -- 266,588
Exercise of stock options .... 99,977 521,992 -- 521,992
Repurchase of common stock ... (37,000) (425,458) -- (425,458)
------------ ------------ ------------ ------------
Balance at September 27,
1997 .......................... 4,874,040 $ 7,178,231 $ 27,815,486 $ 34,993,717
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net Income ............................ $ 4,839,375 $ 306,826 $ 4,537,934
Adjustment to reconcile net
income to net cash provided by
continuing operations:
Discontinued operations ............... -- 4,239,204 99,143
Depreciation and amortization ......... 2,002,845 1,689,689 1,569,478
Provision for doubtful accounts ....... 68,694 38,804 102,861
Provision for inventory obsolescence .. 696,089 520,006 169,034
Net loss on property and equipment
sold or retired ...................... 14,144 -- 26,367
Equity in income of joint venture ..... (106,000) (20,000) (89,000)
Gain on sale of CPI ................... (2,378,683) -- --
Changes in assets and liabilities,
net of effects of businesses sold:
Decrease in marketable securities ..... -- -- 998,129
Increase in accounts receivable ....... (1,494,632) (1,333,378) (2,467,329)
Increase in inventories ............... (4,267,013) (1,888,444) (1,685,743)
(Increase) decrease in deferred
tax asset ............................ 1,322,197 (704,000) 951,000
(Increase) decrease in prepaid
expenses ............................. (136,073) (86,076) 406,556
(Increase) decrease in other
assets .............................. 20,704 79,823 (9,397)
Increase (decrease) in accounts
payable .............................. 718,320 (120,502) 300,709
Decrease in accrued liabilities ....... (230,124) (956,660) (637,731)
----------- ----------- -----------
Net cash provided by operating
activities from continuing
operations ......................... 1,069,843 1,765,292 4,272,011
Net cash used in discontinued
operations ......................... (1,518,488) (168,186) (1,722,659)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of CPI ............. 6,350,000 -- --
Payments received on note for
sale of PLI .......................... 350,000 -- --
Purchase of land and real estate ...... -- -- (3,045,412)
Decrease in deposit on land and
building purchase .................... -- -- 1,300,000
Investment in joint venture ........... -- -- (450,000)
Capital expenditures .................. (3,102,092) (3,186,557) (2,517,541)
----------- ----------- -----------
Net cash provided by (used in)
investing activities ............... 3,597,908 (3,186,557) (4,712,953)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
(continued)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Principal borrowings under line of
credit............................. $ 10,963,000 $ 9,500,000 $ 8,450,000
Principal repayments under line of
credit............................. (13,463,000) (6,500,000) (6,450,000
New borrowings under equipment line.. 1,045,000 1,555,000 1,720,059
Principal repayments under
equipment line..................... (1,321,200) (1,374,800) (1,049,958)
Principal repayments under term
loan............................... (1,451,000) (1,584,000) (1,578,000)
Payments under non-compete
agreement.......................... -- (390,000) (520,000)
Proceeds from issuance of common
stock.............................. 788,580 682,195 717,326
Repurchase of common stock........... (425,458) -- (76,750)
------------ ----------- -----------
Net cash provided by (used in)
financing activities........... (3,864,078) 1,888,395 1,212,707
------------ ----------- -----------
Net increase (decrease) in
cash and cash equivalents...... (714,815) 198,944 (950,894)
Cash and cash equivalents at
beginning of year.................... 1,828,807 1,529,863 2,480,757
------------ ----------- -----------
Cash and cash equivalents at end
of year.............................. $ 1,113,992 $ 1,828,807 $ 1,529,863
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest - continuing operations...... $ 641,127 $ 542,061 $ 589,200
Interest - discontinued operations.... -- 77,714 106,341
Income taxes.......................... 282,898 1,055,000 909,000
</TABLE>
Supplemental disclosure of non-cash activities:
ILC sold the stock of PLI for a note. The purchase price, net of expenses,
approximated the net assets of PLI (Note 12).
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
ILC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1997
1. The Company
ILC Technology, Inc. ("ILC") was incorporated on September 15, 1967.
ILC designs, develops, manufactures and markets high intensity lamps and
lighting products for the medical, industrial, aerospace, scientific,
entertainment and military industries. ILC develops and manufactures the
majority of its products at its headquarter facilities in California and the
remainder at its subsidiary facility in the United Kingdom. (See Notes 12, 13
and 16).
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of ILC and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Fiscal year 1995 was restated to reflect ILC's decision to discontinue
the operations of Precision Lamp, Inc. ("PLI") (see Note 12). This restatement
had no impact on net income.
ILC'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. Items which
require management to make estimates include the realization of accounts
receivable and inventory balances, warranty, and other reserves. Additionally,
ILC is currently in negotiation with PLI Acquisition Corp. to restructure the
terms of that note receivable, as discussed in Note 12.
Cash and Cash Equivalents
For the purpose of the statement of cash flows, ILC 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 27, 1997 and September 28, 1996, net of inventory reserves of
$2,043,420 and $2,034,258, respectively, consisted of:
<PAGE> 8
2. Summary of Significant Accounting Policies (continued)
Inventories (continued)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $5,459,159 $ 4,802,839
Work-in-process 3,974,496 2,549,805
Finished goods 1,283,025 1,548,884
---------- -----------
Total inventories $10,716,680 $ 8,901,528
=========== ===========
</TABLE>
Developmental and Manufacturing Contracts
ILC 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 1997,
1996 and 1995.
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 using the weighted average number
of common shares and common equivalent shares (when such equivalents have a
dilutive effect) outstanding during the period using the treasury stock method.
Fully diluted net income (loss) per share is not significantly different from
net income (loss) per share as reported.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, which requires disclosure of basic earnings per share and diluted earnings
per share and is effective for periods ending subsequent to December 15, 1997
and restatement will be required for all prior period EPS data presented. The
pro forma effect of adoption of SFAS No. 128 is included in the table below.
<PAGE> 9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income (Loss) Per Share (continued)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(shares in thousands)
<S> <C> <C> <C>
As reported:
Earnings (loss) per share:
Continuing operations ............ $ 0.96 $ 0.92 $ 0.97
Discontinued operations .......... -- (0.86) (0.02)
--------- --------- ---------
Net income per share ............ $ 0.96 $ 0.06 $ 0.95
Pro forma for SFAS No. 128:
Basic earnings (loss) per share:
Continuing operations ............ $ 1.00 $ 0.96 $ 1.01
Discontinued operations .......... -- (0.90) (0.02)
--------- --------- ---------
Basic net income per share ....... $ 1.00 $ 0.06 $ 0.99
Weighted average number of
common shares outstanding ....... 4,848 4,725 4,604
Diluted earnings (loss) per share:
Continuing operations ............ $ 0.96 $ 0.92 $ 0.97
Discontinued operations .......... -- (0.86) (0.02)
--------- --------- ---------
Diluted net income per share ..... $ 0.96 $ 0.06 $ 0.95
Weighted average number of
common shares outstanding ....... 5,048 4,923 4,765
</TABLE>
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."
ILC adopted the provisions of this statement in fiscal 1996. The effect on its
financial position and results of operations was not significant. ILC 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, ILC 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 ILC's decision to discontinue the operations of PLI, 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, ILC invested $450,000 in a lamp manufacturer located
in Japan. ILC's investment represents a 49% ownership interest in the equity of
the investee, consequently ILC accounts for its investment using the equity
method of accounting. ILC's investment is included in Other Assets in the
accompanying consolidated balance sheets and its proportionate interest in the
income of the
<PAGE> 10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Joint Venture (continued)
investee of $106,000, $20,000 and $89,000 in fiscal 1997, 1996 and 1995,
respectively, is included in the accompanying consolidated statements of
operations.
New Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income", establishes guidelines
for all items that are to be recognized under accounting standards as components
of comprehensive income to be reported in the financial statements. The
statement is effective for all periods ending after December 15, 1997 and
reclassification of financial statements for earlier periods presented will be
required for comparative purposes.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting of operating segment
information in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
statements issued to shareholders. The statement is effective for all periods
ending after December 15, 1997.
3. Revenues
ILC recognizes revenue on all product sales upon shipment of the
product. ILC 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.
ILC 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):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
United States ..... $36,639 $34,088 $32,533
Europe ............ 6,671 6,920 5,964
Asia .............. 11,986 12,700 10,951
Other international 222 498 48
------- ------- -------
$55,518 $54,206 $49,496
======= ======= =======
</TABLE>
Customers comprising more than 10% of net sales from continuing operations are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Customer A......................... 13.5% 15.0% 12.2%
Customer B......................... * 11.5% 12.0%
</TABLE>
*less than 10% of net sales
<PAGE> 11
3. Revenues (continued)
ILC provides credit in the form of trade accounts receivable to its
customers. ILC does not generally require collateral to support customer
receivables. ILC performs ongoing credit evaluations of its customers and
maintains allowances which management believes are adequate for potential credit
losses.
Approximately 31%, 39% and 40% of ILC's sales in fiscal 1997, 1996 and
1995, respectively, were to customers in the medical industry. This industry has
experienced significant fluctuations in demand and ILC 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 was a major customer of ILC's subsidiary, CPI. In the fourth
quarter of fiscal 1996, CPI experienced a significant reduction in orders from
this customer. In May 1997, CPI was sold (see Note 13).
4. Property and Equipment
Property and equipment at September 27, 1997 and September 28, 1996
consisted of:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Property and equipment, at cost:
Machinery and equipment ...... $ 17,130,338 $ 15,047,138
Land and buildings ........... 15,498,058 14,955,738
Furniture and fixtures ....... 518,283 601,822
Equipment under capital lease 174,268 174,268
Leasehold improvements ....... -- 598,814
Construction-in-progress ..... 577,449 1,011,601
------------ ------------
33,898,396 32,389,891
Less accumulated depreciation and
amortization ................. (12,245,701) (11,212,950)
------------ ------------
Property and equipment, net ..... $ 21,652,695 $ 21,176,431
============ ============
</TABLE>
5. Bank Borrowings
As of September 27, 1997 and September 28, 1996, borrowings outstanding
under ILC's credit facilities consisted of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Line of credit ......... $ 2,500,000 $ 5,000,000
Term loan .............. 1,187,000 2,638,000
Equipment line of credit 1,915,000 2,191,200
Other capital lease .... 49,896 86,564
----------- -----------
5,651,896 9,915,764
Less: current portion .. (2,534,500) (2,545,600)
----------- -----------
Long-term debt ......... $ 3,117,396 $ 7,370,164
=========== ===========
</TABLE>
Aggregate maturities for long-term debt during the next five years are
approximately: 1998 - $2,534,500, 1999 - $3,117,396, and none in 2000, 2001 and
2002.
<PAGE> 12
5. Bank Borrowings (continued)
All of the above credit facilities are secured by all of the property
of ILC.
ILC has a $6 million line of credit available with a bank which expires
in March 1999. Borrowings under this line are at 2% above the LIBOR rate (London
Interbank Offer Rate) (7.66% at September 27, 1997). Under the covenants of the
loan agreement, unless written approval from the bank is obtained, ILC is
restricted from entering into certain transactions and is required to maintain
certain specified financial covenants and profitability. As of September 27,
1997, ILC was in compliance with all financial covenants. The average balance
outstanding (based on month-end balances) under the line of credit in 1997 was
$4,021,000. The maximum borrowings were $6,000,000 and the average interest rate
during 1997 was 7.6%. As of September 27, 1997, $3.5 million was available for
future borrowings under this line of credit.
In addition, in connection with the purchase of its Sunnyvale
manufacturing facilities, ILC entered into a term loan 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) (7.66% at September 27, 1997). 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 average balance outstanding (based on month-end balances)
under the term loan in 1997 was $1,913,000, and the average interest rate during
1997 was 7.6%.
ILC has available equipment lines of credit for 100% of the purchase
cost of new equipment. At the end of fiscal 1997, ILC had borrowings under these
lines of $1,915,000, of which $1,348,000 is due in fiscal 1998 and $567,000 is
due in fiscal 1999. These borrowings bear interest at 2% above the LIBOR rate
(7.66% at September 27, 1997). ILC also has available an unused $2 million
equipment line of credit which expires in August 1998. Borrowings under this
line bear interest at the same rate as discussed above, with principal balances
amortized over a 2 year period.
6. Income Taxes
ILC 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 1997, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
U.S................................ $4,738,375 $4,897,389 $5,588,040
Foreign............................ 1,709,000 1,163,641 521,037
---------- ---------- ----------
$6,447,375 $6,061,030 $6,109,077
========== ========== ==========
</TABLE>
The components of the provision for income taxes on continuing
operations are as follows:
<PAGE> 13
6. Income Taxes (continued)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal -
Current .................. $ 671,000 $ 1,559,000 $ 833,000
Deferred ................. 80,000 (600,000) 581,500
----------- ----------- -----------
751,000 959,000 1,414,500
----------- ----------- -----------
Foreign -
Current .................. 540,000 384,000 --
State -
Current .................. 241,000 276,000 199,000
Deferred ................. 76,000 (104,000) 96,500
----------- ----------- -----------
317,000 172,000 295,500
----------- ----------- -----------
Federal refund received ........ -- -- (238,000)
----------- ----------- -----------
Total provision for income taxes
on continuing operations ...... $ 1,608,000 $ 1,515,000 $ 1,472,000
=========== =========== ===========
</TABLE>
The major components of the deferred tax asset account, as computed
under SFAS No. 109, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Reserve for loss on disposal of
discontinued operations, not
currently deductible for tax
purposes ....................... $ -- $ 1,133,000
Inventory reserve ............... 795,000 877,000
Bad debt reserve ................ 132,000 92,000
Warranty reserve ................ 103,000 128,000
Accruals not currently deductible
for tax purposes ............... 545,000 381,000
Amortization of covenant-not-
to-compete ..................... -- 202,000
Excess of tax over book
depreciation ................... (1,112,000) (988,000)
Other items, individually
insignificant .................. 372,803 333,000
----------- -----------
$ 835,803 $ 2,158,000
=========== ===========
</TABLE>
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 operations before taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected provision $ 2,192,000 $ 2,121,000 $ 2,138,000
State tax ................. 317,000 364,000 367,000
FSC commission ............ (43,000) (181,000) (216,000)
General business credits .. (277,000) (218,000) (203,000)
Refund received ........... -- -- (238,000)
Other items, individually
insignificant ............ (581,000) (571,000) (376,000)
----------- ----------- -----------
$ 1,608,000 $ 1,515,000 $ 1,472,000
=========== =========== ===========
</TABLE>
<PAGE> 14
6. Income Taxes (continued)
During the second quarter of fiscal 1995, ILC 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, ILC adopted a thrift incentive savings plan (the
"Retirement Plan"). The Retirement 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 ILC. Under the terms of the Retirement Plan,
participating employees must contribute at least 2% of their salary to the
Retirement Plan, and ILC contributes (as a matching contribution) 100% of this
amount. Employees may also contribute an additional amount up to 13% of their
salary to the Retirement Plan, with no further contributions by ILC. ILC's
contributions vest at a rate of 20% per year, commencing on the first
anniversary of employment. Total employer matching contributions under the
Retirement Plan were $187,000, $226,000, and $212,000 for fiscal years 1997,
1996 and 1995, respectively. The components of such expense relating to
continuing operations was $187,000, $188,000 and $171,000 for fiscal years 1997,
1996 and 1995, respectively.
8. Commitments and Contingencies
At September 27, 1997, all of ILC's facilities in Sunnyvale and Santa
Clara, California and Cambridge, England are owned. All lease obligations
associated with the facilities of PLI and CPI were assumed by the buyers at the
time of sale.
For fiscal years 1997, 1996 and 1995, rental expense was approximately
$178,000, $442,000 and $277,000, respectively. Rental expense for continuing
operations was $121,000, $226,000 and $61,000 for fiscal years 1997, 1996 and
1995, respectively.
As discussed in Note 13, the number of shares held in escrow relating
to the sale of CPI are subject to adjustment related to warranties and the
valuation of the acquiror's common stock.
9. Stock Option and Purchase Plans
Under the 1992 Stock Option Plan ("Plan"), ILC may grant options to
employees and directors. ILC has reserved 575,000 shares for issuance under the
Plan. 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 ILC's third fiscal quarter. During fiscal 1997, each outside
Director was granted an automatic option to purchase a total of 5,000 shares of
ILC's Common Stock. ILC's 1983 Stock Option Plan expired in 1993 and no further
options have been granted under such plan since then.
In accordance with the disclosure requirements of Statement of
Financial Accounting Standards No. 123 " Accounting for Stock-Based
Compensation," if ILC had elected to recognize compensation cost based on fair
value of the options granted at grant dates prescribed, income from continuing
operations and
<PAGE> 15
9. Stock Option and Purchase Plans (continued)
earnings per share would have been reduced to the pro forma amounts indicated in
the table below. The pro forma effect on net income for fiscal 1997 and 1996 is
not representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to fiscal 1996.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Income from continuing operations-
as reported ..................... $ 4,839,375 $ 4,546,030
Income from continuing operations-
pro forma ....................... $ 4,328,487 $ 4,344,547
Earnings per share from continuing
operations as reported .......... $ 0.96 $ 0.92
Earnings per share from continuing
operations-pro forma ............ $ 0.89 $ 0.89
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model utilizing expected volatility
calculations based on historical data (62.10%) and risk-free interest rates
based on U.S. government bonds on the date of grant with maturities equal to the
expected option term (5.82%-6.69%). No dividends are assumed, and the expected
option term is 5.93 years. The weighted-average fair values of options granted
in fiscal 1997 and 1996 are $6.49 and $6.27, respectively.
<PAGE> 16
9. Stock Option and Purchase Plans (continued)
A summary of ILC's stock option activity for the past three fiscal
years is as follows:
<TABLE>
<CAPTION>
Weighted
Options Exercise Average
Available Number Price Exercise
for Grant of Shares Per Share Price
-------- -------- -------------- --------------
Options Outstanding
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1994 ....... 103,624 720,027 $1.09-11.50 $ 6.27
Granted ......................... (28,000) 28,000 $ 9.50 $ 9.50
Canceled ........................ 34,000 (34,000) $8.75-11.50 $ 9.85
Exercised ....................... -- (132,250) $2.13-8.75 $ 3.48
-------- -------- -------------- --------------
Balance at September 30, 1995 .... 109,624 581,777 $1.09-11.50 $ 6.87
Additional shares approved ...... 200,000 -- -- --
Granted .........................(205,000) 205,000 $9.00-11.25 $ 9.94
Canceled ........................ 92,125 (92,125) $8.75-11.50 $ 10.27
Exercised ....................... -- (65,125) $1.09-11.50 $ 6.10
-------- -------- -------------- --------------
Balance at September 28, 1996 .... 196,749 629,527 $1.09 -11.50 $ 7.44
Additional shares approved ...... 175,000 -- -- --
Granted .........................(406,000) 406,000 $9.00-11.19 $ 10.29
Canceled ........................ 89,550 (89,550) $9.00-11.50 $ 10.57
Exercised ....................... -- (99,977) $1.09-11.50 $ 5.22
-------- -------- -------------- --------------
Balance at September 27, 1997 .... 55,299 846,000 $2.25-11.25 $ 8.74
======== ======== ============== ==============
</TABLE>
At the end of fiscal 1997, 1996 and 1995, options to purchase 351,063
shares, 416,965 shares and 439,715 shares, respectively, were exercisable at
weighted average prices of $6.70, $6.11 and $5.94.
The following table summarizes information about stock options
outstanding at September 27, 1997:
<TABLE>
<CAPTION>
Weighted Avg. Weighted Avg.
Number of Exercise Weighted Avg. Remaining Number of Exercise Price
Shares Price Exercise Contractual Shares of Options
Outstanding Range Price Life Exercisable Exercisable
- ----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
162,000 $ 2.25-3.75 $ 3.54 2.19 years 162,000 $ 3.54
390,000 7.38-9.50 9.13 7.93 years 136,563 8.70
294,000 10.63-11.50 11.08 8.64 years 52,500 11.30
</TABLE>
<PAGE> 17
9. Stock Option and Purchase Plans (continued)
Under ILC's Employee Stock Purchase Plan, ILC has 83,033 shares of
common stock available at September 27, 1997 for issuance to participating
employees who have met certain eligibility requirements. 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.
10. Interest Expense, Net
Interest expense, net consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest income................... $(147,210) $(80,163) $(265,443)
Interest expense.................. 641,127 542,061 589,200
-------- -------- --------
Net interest expense related to
continuing operations............ $493,917 $461,898 $323,757
======== ======== ========
</TABLE>
11. Acquisitions
In August 1991, ILC 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 27, 1997, the unamortized
balance of the Q-Arc covenant-not-to-compete is approximately $238,000.
12. Discontinued Operations
In September 1996, ILC's Board of Directors voted to proceed with the
divestiture of PLI which is a subsidiary based in Cotati, California. As a
result of ILC'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 estimated operating losses through the final
disposition of the subsidiary and the write off of the unamortized balance of
the PLI covenant-not-to-compete of approximately $470,000.
In January 1997, ILC signed an agreement to sell PLI. The original
selling price was approximately $3.3 million but was subject to due diligence
and the ability of PLI Acquisition Corp., the purchaser, to obtain adequate
financing no later than March 31, 1997. The purchaser was not able to obtain
adequate financing, but through further discussions with the purchaser, ILC
agreed to sell the stock of PLI to PLI Acquisition Corp. for a promissory note
with a face value of $4 million bearing 8% interest per year on any unpaid
principal amount. Payments on the promissory note began in May 1997 and will be
completed in April 2000. This transaction was recorded in the third quarter of
fiscal 1997. The purchase price, net of expenses and reserves, approximated the
book value and therefore, no gain or loss was recorded.
<PAGE> 18
12. Discontinued Operations (continued)
After conferring with ILC management, PLI Acquisition Corp. did not
make the scheduled October and November 1997 payments on the note payable to
ILC. ILC and PLI Acquisition Corp. are currently evaluating a restructuring of
the payment terms of the note payable to ILC. ILC's management believes that
there has been no impairment of the value of the note as recorded by ILC.
Continuing operations, as reclassified for fiscal years 1996 and 1995,
consist of the activities of ILC Technology, Inc. based in Sunnyvale,
California, CPI 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 PLI as discontinued operations. Revenues
from PLI were $7,772,000 and $8,933,000 for fiscal 1996 and 1995, respectively.
The net loss after tax from the discontinued operations of PLI was $840,000 and
$99,000 for fiscal 1996 and 1995, respectively. A portion of net interest
expense of approximately $66,000 and $58,000 for fiscal 1996 and 1995,
respectively, was allocated to the discontinued operations. Net interest expense
was 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. For the six months
ended March 29, 1997, revenues from PLI were $1,489,000. Net interest expense
allocated to the discontinued operations of PLI was approximately $18,000. As
discussed above, the resultant loss from discontinued operations was offset
against accruals made in the fourth quarter of fiscal 1996.
The net assets of PLI 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 represented management's best
estimate of the amount that could be realized upon disposition.
13. Converter Power, Inc.
In May 1997, ILC completed the sale of CPI to Applied Science and
Technology, Inc. (ASTeX) for $6.35 million in cash and 45,000 shares of ASTeX
common stock. The total sale price was $7.35 million, subject to adjustments
related to warranties. ILC has estimated that $500,000 of potential warranties
could be paid and has reduced the gain on sale accordingly. In August 1997,
ASTeX removed approximately 4,900 shares from escrow based on post-closing audit
adjustments. The remaining shares will be held in escrow subject to any further
post-closing adjustments, with a final settlement in May 1998. The sale, net of
expenses, resulted in a gain of $2,378,683 and was reported in the results of
operations for the third quarter ended June 28, 1997. The net amount due from
ASTeX of $500,000 (to be satisfied by the release to ILC of the ASTeX shares
held in escrow) is reflected in accounts receivable in the accompanying balance
sheet as of September 27, 1997.
14. Rights Agreement and Other Matters
On September 19, 1989, ILC's Board of Directors declared a dividend of
one common share purchase right for each outstanding share of common stock, no
par value, of ILC. 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 ILC one share of common stock of ILC 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 ILC'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 ILC's stock, a 20%
shareholder
<PAGE> 19
14. Rights Agreement and Other Matters (continued)
("Acquiring Person") engages in any specified self-dealing transaction, or, as a
result of a recapitalization or reorganization, an Acquiring Person's
shareholdings are increased by more than 3%, each right will entitle the holder
to purchase from ILC, 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 ILC 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 ILC'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. On
February 25, 1997, the Rights Agreement was amended. The amended terms generally
provide that the exercise of the various rights may occur whenever a party
acquires a beneficial ownership of 15% or more of ILC outstanding common shares
and that registered holders of ILC are entitled to purchase from ILC one share
of common stock at a price of $55.00 per common share. Additionally, the
expiration date of the Rights Agreement was extended to December 31, 2006.
In November 1996, the Board of Directors authorized eight severance
agreements for six executive officers and two managers, providing for severance
benefits upon termination during the two-year period following a change in
control in ILC, as defined therein.
15. Repurchase of Common Stock
In November 1996, the Board of Directors authorized ILC to repurchase
up to 1,000,000 shares of ILC's issued and outstanding common stock. During the
third quarter of fiscal 1997, and since inception of the repurchase program, ILC
repurchased 37,000 shares of common stock for an aggregate amount of $425,458.
Purchases were made on the open market and can be made for up to two years from
the date of authorization.
16. Subsequent Event
On October 30, 1997, ILC entered into a definitive Agreement and Plan
of Merger by and among ILC, BEC Group, Inc. ("BEC") and BILC Acquisition Corp.
("Acquisition Corp."), a wholly owned subsidiary of BEC, pursuant to which ILC
will merge (the "Merger") with and into Acquisition Corp. Upon consummation of
the Merger, each outstanding share of ILC will be converted into the right to
receive 2.18 shares (reflecting the completion of BEC's contemplated one-for-two
reverse stock split) of BEC's common stock. The Merger is subject to the
approval of both ILC's shareholders and BEC's stockholders, and to certain
regulatory approvals and other customary closing conditions. The respective
chairmen of ILC and BEC have executed voting agreements in favor of the Merger.
<PAGE> 20
SCHEDULE VIII
ILC TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR FISCAL YEARS 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Balance at Charged to Deductions Deductions Balance at
Beginning Cost and and from end of
of Period Expenses Write Offs Dispositions Period
---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts:
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
Year ended
September 27, 1997 $ 312,358 $ 68,694 $ 22,062 $ 21,032 $ 337,958
Reserve for Inventory
Obsolescence:
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
Year ended
September 27, 1997 $2,034,258 $ 696,089 $ 635,927 $ 51,000 $2,043,420
</TABLE>
<PAGE> 21
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 27,
1997 and September 28, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 27, 1997. These financial statements and the schedule
referred to below are the responsibility of ILC'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 27, 1997 and September 28,
1996 and the results of their operations and their cash flows for each of the
three years in the period ended September 27, 1997 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 36 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
December 1, 1997
