UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended SEPTEMBER 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from
to
Commission file number 0-11360
ILC TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1655721
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
399 JAVA DRIVE, SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 745-7900
--------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on December 16,
1996, was approximately $50,929,417. Shares of Common Stock held by each officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. The number of outstanding shares of the
registrant's Common Stock on December 16, 1996 was 4,782,508.
Parts of the following documents are incorporated by reference into Part
III of this Annual Report and Form 10-K: (1) Proxy Statement for registrant's
1996 Annual Meeting of Shareholders.
<PAGE>
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
PART I
1 Business 1 - 7
2 Properties 6 - 7
3 Legal Proceedings 7
4 Submission of Matters to a Vote of Security Holders 7
PART II
5 Market for the Registrant's Common Equity and
Related Stockholder Matters 8
6 Selected Financial Data 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
8 Financial Statements and Supplementary Data 14 - 32
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III
10 Directors and Executive Officers of the Registrant 33
11 Executive Compensation 33
12 Security Ownership of Certain Beneficial Owners
and Management 33
13 Certain Relationships and Related Transactions 33
PART IV
14 Exhibits, Financial Statement Schedule, and Reports
on Form 8-K 34
Signatures 35
<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
- -------
ILC Technology, Inc. ("ILC" or the "Company") designs, develops, and
manufactures high intensity lamps and lighting products for the medical,
industrial, communication, aerospace, scientific, entertainment and military
industries. ILC Technology, Inc. was incorporated under the laws of the State of
California on September 15, 1967. Its principal manufacturing and executive
facilities are located at 399 Java Drive, Sunnyvale, California 94089. The
Company's telephone number is (408) 745-7900.
In September 1996, the Board of ILC voted to proceed with the divestiture
of the Company's Precision Lamp, Inc. (PLI) subsidiary and therefore PLI is
reported as discontinued operations in the accompanying consolidated financial
statements. PLI is a manufacturer of miniature incandescent surface-mount lamps
as well as liquid crystal display (LCD) backlight panels that incorporate the
technology of the surface mount lamps.
BUSINESS STRATEGY
- -----------------
The Company uses a market focused business strategy. ILC targets selected
high growth markets which most closely match the Company's technological
expertise and manufacturing strengths. With a strong emphasis on research and
development, ILC achieves and maintains a leadership position in these market
segments through advanced technology, engineering design capability and
attentive customer support.
PRODUCTS - FLASHLAMPS
- ---------------------
The flashlamp line of products was ILC's founding product line. In August
1991, ILC purchased Q-Arc, Ltd., an arc lamp manufacturing company based in
Cambridge, England.
The Company makes pulsed and direct current arc lamps that are designed to
satisfy a wide variety of laser and industrial applications requiring rigorous,
high-performance standards. The primary source of sales, of which approximately
80% are for the replacement market, derives from industrial uses such as
materials aging (solar simulation) and laser cutting, drilling, scribing and
marking. Ancillary sales are generated by the medical field where lasers are
utilized in cataract surgery and other exacting procedures. Production is highly
labor-intensive and requires a lengthy training period to achieve a quality
product. ILC anticipates that the market for flashlamps in low-energy laser
pumping applications will erode as alternative technologies such as laser diode
pumps become increasingly cost-effective; however, in high-powered laser
applications, flashlamps remain more efficient at less than 50% of the total
life cycle cost of laser diodes.
The Company believes that growth in the flashlamp business is highly
dependent on its ability to develop new applications for flashlamp technology.
ILC continues to develop high growth arc lamp markets outside of the laser
industry. Some of these include material aging (solar simulation), UV
sterilization and curing, machine vision and spectrofluoroscopy. During 1996,
sales of flashlamps to non-laser markets were approximately 11% of total
flashlamp sales.
PRODUCTS - CERMAX(R) AND EQUIPMENT
- ----------------------------------
The Company provides short arc xenon lamps that are optically pre-aligned,
encased in a very safe ceramic body bonded to a metallized sapphire window, and
are capable of transmitting the full
1
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PRODUCTS - CERMAX(R) AND EQUIPMENT (CONTINUED)
- ----------------------------------------------
spectrum from infrared to ultra-violet wavelengths. In addition, the Company
also manufactures fully- encased and open frame power supplies, lamp holders and
other accessories to support the Cermax(R) product line. Products also include
complete fiber-optic lightsources that are private labelled for manufacturers of
medical equipment. Currently, the primary market is in fiber optic illumination
for medical procedures such as endoscopy.
The market for Cermax(R) lightsources and related equipment used in
endoscopy is composed of two segments - a high-intensity or critical segment and
a low-intensity or non-critical segment. Critical endoscopy applications require
high-intensity Cermax(R) lightsources with specialized power supplies due to the
small size of the fiberoptic lightguide. Furthermore, as these applications
often use video displays, high-intensity lightsources are required for good
color rendition. The low-intensity market is dominated by manufacturers of
halogen lightsources. Ancillary industrial uses for Cermax(R) lightsources
include illuminating areas that are difficult to inspect such as nuclear
reactors or jet engines. The Company has also targeted new non-medical
lightsource markets which include analytical instruments, spot UV curing
lightsources and Flash-Cermax(R) machine vision systems.
During fiscal 1995, ILC announced the release of new high intensity lamps
for video projection utilizing ILC's proprietary Daymax(R) and Cermax(R)
technologies. During 1996, several of ILC's products were incorporated into
high-end/professional and mid-range/business video projection systems of several
original equipment manufacturers (OEMs), including Hughes-JVC, Ampro,
Electrohome and Rank Brimar. Sony and Mitsubishi have also demonstrated
preliminary versions of ILC's video projection lamps. ILC's video projection
lamps are compatible with the key imaging devices including light valves, LCD's
(Liquid Crystal Displays) or Texas Instrument's DMD's (Digital Micromirror
Devices). ILC has also developed lamps for the low-end/commercial business
segment which are now being evaluated by several OEMs. The Company's future
growth will depend to a large extent on the successful introduction, marketing
and commercial viability of video projection systems that will use the Company's
products.
The factors that may adversely affect the Company's Cermax(R) business
include the expected entry of competitors into the market. The Company's primary
patent on the Cermax(R) lightsource expired in 1991 and the Company expects
competition from established and emerging companies. Increased competition could
result in price reductions, which in turn could generate lower net sales on
stable unit volume. Increased competition could also result in fewer customer
orders, reduced gross margins and loss of market share.
PRODUCTS - MERCURY XENON SHORT ARC LAMPS ("STEPPER LAMPS")
- ----------------------------------------------------------
In fiscal 1995, the Company began commercial shipment of a new product, the
mercury xenon short arc lamp ("stepper lamp"), which is used to expose patterns
during the fabrication of semiconductor wafers. ILC is currently shipping a
complete line of 1,000 and 2,000 watt stepper lamps. Each lamp, fully utilized,
lasts for approximately 1-2 months. Accordingly, the Company expects that the
product will generate a high repeat business.
The market for stepper lamps is currently dominated by a Japanese
competitor of the Company. ILC has invested heavily in ensuring the quality of
its stepper lamps since end users perceive substantial risk in switching
suppliers. In addition, ILC's stepper lamp does not require the end user to
modify any of its maintenance procedures. The Company has worked extensively
over the last four years with major U.S. end users of stepper equipment to
qualify its stepper lamps at the major semi-conductor fabrication facilities.
2
<PAGE>
PRODUCTS - MERCURY XENON SHORT ARC LAMPS ("STEPPER LAMPS") (CONTINUED)
- ----------------------------------------------------------------------
During fiscal 1995, ILC established itself as the only qualified United
States supplier of short arc stepper lamps used in semiconductor chip
manufacturing equipment, a market that has been dominated by foreign
manufacturers. In 1996, ILC's lamps were qualified by a number of key customers
including IBM, Intel, Integrated Solutions, Inc. (ISI), and others. The failure
of the Company's stepper lamp to achieve or sustain market acceptance would have
a material adverse effect on the Company's results of operations.
In October 1994, the Company purchased a 20,000 square foot office and
manufacturing facility in Santa Clara, California for the Company's stepper lamp
operations. The move to the new facility is expected to be completed in the
second quarter of fiscal 1997. There can be no assurance that the move will not
result in a short-term disruption in stepper lamp operations. In addition, the
success of the Company's stepper lamp business depends in large part on the
ability of the Company to manufacture stepper lamps efficiently and reliably
over time. There can be no assurance that the Company will not experience
manufacturng problems in the future that would result in product delivery delays
or quality problems.
PRODUCTS - MERCURY CAPILLARY LAMPS
- ----------------------------------
Mercury capillary lamps are manufactured using technology and processes
that are similar to those developed for stepper lamps. The applications for
capillary lamps include the photolithography of grid patterns on color TV
screens and printed circuit boards for computers.
PRODUCTS - DAYMAX(R) METAL HALIDE
- ---------------------------------
Daymax(R) lamps simulate stable daylight conditions. Originally developed
for use in the space program, these products are now widely used throughout the
entertainment business. Applications include: indoor and outdoor lighting for
motion picture and television productions, high speed and special effects
lighting, concert, disco and stadium lighting and theatrical lighting. Daymax(R)
lamps are also used for solar simulation in certain scientific applications.
The Company has developed DTI, a series of integral low-power metal halide
lamps (less than 500 watts) for commercial projection, stage and medical
applications. DTI lamps, using a rugged ceramic reflector, have been qualified
for use in video projection systems and architectural lighting.
PRODUCTS - AEROSPACE
- --------------------
ILC offers standard, modified, and customer systems covering the visible,
infrared, and ultraviolet spectrum to meet each space lighting requirement. The
Company's lighting systems are key elements of NASA's Space Transportation
System. These systems are installed in the Space Shuttle interior and exterior,
on the Manned Maneuvering Unit, on Spacelab and in several experiments carried
aboard the shuttle orbiters. Other ILC systems are being designed for use on
International Space Station Alpha, in future shuttle experiments and payload
packages and space robotic vehicles. ILC is the only domestic manufacturer of
space lighting qualified to serve NASA and other government agencies in Japan
and Europe.
ILC aerospace lighting systems feature efficiency, reliability, ruggedness,
light weight and full space qualification. New systems aimed to meet unique
requirements can often be developed from ILC's large selection of
space-qualified designs and components, substantially reducing development costs
and lead times.
3
<PAGE>
PRODUCTS - MILITARY
- -------------------
These products include infrared lamps used by the military on tanks and
aircraft to deflect offensive heat seeking missiles. During fiscal 1996, the
Company received a contract for approximately $1 million for a multi-faceted
Cermax(R) high intensity discharge lamp which is used in the infrared guidance
system of the TOW (Tube Launched Optically Guided Wire Controlled) missile for
Hughes Aircraft.
PRODUCTS - CONVERTER POWER
- --------------------------
ILC acquired Converter Power, Inc. (CPI) in January 1993. CPI is a leading
producer of high efficiency, small form factor lamp power sources built to fit
compactly into a variety of systems. The Company designs and manufactures a full
family of UL and TUV-approved power supplies which can be incorporated into OEM
equipment. In addition, CPI has one OEM customer that purchases custom power
supplies for equipment which services the ion implant sector of the
semiconductor equipment manufacturing industry. In the fourth quarter of fiscal
1996, CPI experienced a significant reduction in orders from this customer. CPI
must reduce its reliance on this major customer through additional sales of new
products to other customers.
CPI also provides power supplies which have been specifically engineered
for ILC's Cermax(R) and metal halide lamps. This effort has enabled CPI to
provide power sources which will be sold to OEMs.
MARKETING AND SALES
- -------------------
ILC sells its products through a direct sales force to OEMs and sells to
end users through sales representatives and distributors. The sales organization
includes Regional Sales Managers and a team of Market Development Managers with
global responsibilities aligned along specific markets such as semicondcutor,
video projection and medical. In addition, ILC maintains customer service groups
at its facilities in California, Massachusetts and Cambridge, England to provide
sales and customer service support to its customer base and network of foreign
and domestic distributors.
The European sales office located at the facilities of Q-Arc in Cambridge,
England, sells and markets the complete line of lamp and equipment products and
provides local support for European customers.
For fiscal 1996, approximately 37.1% of the Company's net sales represented
international sales, primarily in the Pacific Rim and Europe. Information
regarding the Company's export sales and major customers is incorporated herein
by reference to Note 3 of Notes to Consolidated Financial Statements.
BACKLOG
- -------
As of September 28, 1996, ILC's backlog of unfilled orders was
approximately $28,091,000 ($26,839,000 relating to continuing operations) as
compared to approximately $33,767,000 ($27,168,000 relating to continuing
operations) at September 30, 1995. The Company includes in its backlog only
orders which have been released by the customer for shipment within the next 12
months. Due to the possibility of customer changes in delivery schedules or
cancellations of orders, backlog as of any particular date may not be
representative of actual sales for any succeeding period.
4
<PAGE>
MANUFACTURING
- -------------
ILC's lamp groups have built substantial expertise in the fields of sealing
technology (ceramic-to- metal, quartz-to-metal, vacuum sealing), materials
research, plasma physics, electrical engineering, optoelectronics, and electrode
technology. With CPI, ILC obtained the essential power supply expertise
necessary for providing OEMs with integrated solutions. The manufacturing of
most of the Company's lamp and power supply products is labor and capital
intensive, and accordingly, the labor force is highly skilled and experienced.
The combination of ILC's technical and manufacturing expertise enables ILC to
dominate its selected market niches for specialty lighting.
ILC designs, develops, and manufactures a majority of its products in two
facilities totaling 97,000 square feet. These adjoining buildings include lamp
development laboratories, separate manufacturing facilities for xenon and
krypton arc lamps, Cermax(R) lamps, Daymax(R) metal halide lamps, mercury short
arc ("stepper") lamps, mercury capillary lamps, Cermax(R) equipment and
Aerospace products. The Company also purchased, in October 1994, a facility in
Santa Clara, California totalling approximately 20,000 square feet to
accommodate stepper lamp manufacturing.
The need for more production capacity for the subsidiaries of ILC prompted
expansion of existing manufacturing facilities. Q-Arc purchased a new facility
of approximately 36,000 square feet in June 1994 and occupied the new facility
in early fiscal 1995. Q-Arc currently occupies approximately 25,000 of the
36,000 square feet and has available 11,000 square feet for future expansion.
Converter Power recently occupied a 32,000 square foot facility in Beverly,
Massachusetts.
Q-Arc received ISO9002 certification in fiscal 1995 and ILC Sunnyvale
became certified in fiscal 1996. CPI excepts to be certified in fiscal 1997. ISO
certification ensures customers that ILC has a quality system that will result
in continuous product quality improvement. It is a recognition of a commitment
to quality throughout all sections of the organization.
PATENTS AND TRADEMARKS
- ----------------------
The Company holds approximately 45 patents related to the key features of
several of its products and several applications are pending. While these
patents tend to enhance the Company's competitive position, management believes
that the Company's success depends primarily upon its proprietary technological,
engineering, production and marketing skills and the high quality of its
products. The names of two of the Company's products, Cermax(R) and Daymax(R)
are registered as trademarks in the United States Patent and Trademark Office
and in many other countries in which the Company's products are sold.
The Company's patents expire at various dates between 1997 and 2013. There
can be no assurance that any patents held by the Company will not be challenged
and invalidated, that patents will issue from any of the Company's pending
applications or that any claims allowed from existing or pending patents will be
of sufficient scope or strength or be issued in all countries where the
Company's products can be sold to provide meaningful protection or any
commercial advantage to the Company. Competitors of the Company also may be able
to design around the Company's patents.
COMPETITION
- -----------
ILC competes on the basis of product performance, applications engineering,
customer service, reputation and price. The Company competes in many markets in
which technology develops and improves rapidly, stimulating ILC to enhance the
capability of its products and technologies. Competitors consist of both large
and small companies located in the United States, Japan and Europe.
5
<PAGE>
COMPETITION (CONTINUED)
- -----------------------
They include EG&G Inc., Osram, Philips, Ushio, Optical Radiation Corporation
(ORC), Koto and Wolfram. In many market segments, the competition has
established the bench mark for product acceptance at a very high level, causing
ILC to continuously improve all phases of its processes for customer
satisfaction. The Company believes that by exploiting segmented market areas in
which ILC has technological, manufacturing and marketing strengths, ILC can
compete effectively. At the same time, by focusing its product development and
acquisition activities in these areas, the Company can defend its strengths and
maintain its leadership in selected markets.
ENGINEERING AND RESEARCH
- ------------------------
ILC's engineering, research, and development efforts consist of three main
activities. The first area of activity is extensive application engineering in
response to customer requirements. These activities result in customer specific
products and modifications to existing products to satisfy the needs of the
customers. The second area is that of joint engineering and development work
made in connection with customer production contracts. The third area includes
those projects funded by the Company to develop new products and technologies.
The Company spent $4,534,000, $4,497,000 and $3,998,000 in fiscal 1996, 1995 and
1994, respectively, for Company funded research and development ($4,320,000,
$4,279,000 and $3,694,000 in fiscal 1996, 1995 and 1994, respectively, spent for
research and development in continuing operations). The Company's engineering
and research personnel are engineers and scientists, all of whom have technical
degrees.
EMPLOYEES
- ---------
As of September 28, 1996, the Company had 616 full-time employees,
comprised of 64 in research and engineering, 24 in marketing and sales, 485 in
manufacturing and 43 in general and administrative positions. Of these
employees, 52 in research and development, 22 in marketing and sales, 389 in
manufacturing and 33 in general and administrative positions are associated with
the continuing operations of the Company. ILC believes that its future success
depends upon its continued ability to recruit and maintain highly skilled
employees in all disciplines. Although competition for qualified personnel is
strong, ILC has been successful in attracting and retaining skilled employees.
None of the Company's employees is represented by a labor union. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
- ------- ----------
The Company owns and leases an aggregate of approximately 153,000 and
56,000 square feet, respectively, of office and manufacturing space in six
separate buildings in Sunnyvale, Santa Clara and Cotati, California; Beverly,
Massachusetts; and Cambridge, England. In Sunnyvale, the Company owns 97,000
square feet in two adjacent buildings. These buildings were constructed by the
Company in 1977 and 1979, sold in 1982 and leased back from the new owners, and
re-purchased from the landlord in August 1993. The Company leases to one tenant
approximately 9,000 square feet of its space in Sunnyvale under a lease which
expires in March 1997. In early October 1994, the Company purchased 20,000
square feet of office and manufacturing space in Santa Clara, California. In
June 1994, the Company purchased 36,000 square feet of office and manufacturing
space in Cambridge, England. Q-Arc currently occupies approximately 25,000
square feet with approximately 11,000 square feet available for future
expansion. Precision Lamp moved into a new facility in July 1993. The lease for
the 24,000 square feet of office and manufacturing space, located in Cotati,
California, expires in 2003. The operations of Precision Lamp have been
reclassified as discontinued operations. See Note 12 of Notes to Consolidated
Financial Statements appearing elsewhere herein. Finally, Converter Power, in
late fiscal 1995, entered into a lease to occupy approximately 32,000 square
feet of office and manufacturng space in Beverly, Massachusetts. This lease
6
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ITEM 2. PROPERTIES (CONTINUED)
- ------- ----------------------
expires in September 2000. Converter Power moved into this new facility in
the first quarter of fiscal 1996. CPI previously occupied a 15,000 square foot
facility in Ipswich, Massachusetts. For a discussion of the Company's lease
commitments, see Note 8 of Notes to Consolidated Financial Statements appearing
elsewhere herein.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
There were no matters submitted to a vote of the security holders during
the fourth quarter of fiscal 1996.
7
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
ILC's common stock is traded in the Nasdaq National Market (symbol ILCT).
The high and low closing sales prices for the common stock on the Nasdaq
National Market, are set forth below for the quarters as indicated:
FISCAL 1996 HIGH LOW
----------- ---- ---
1st Quarter 111/2 83/4
2nd Quarter 117/8 87/8
3rd Quarter 14 1011/16
4th Quarter 131/2 107/8
FISCAL 1995 HIGH LOW
1st Quarter 103/8 71/2
2nd Quarter 103/4 8
3rd Quarter 111/8 83/4
4th Quarter 111/4 9
There were approximately 2,000 institutional and individual stockholders as
of December 16, 1996. The closing sales price of the common stock on December
16, 1996 as reported by Nasdaq was $117/8. The Company intends to retain
earnings for use in its business and does not expect to pay cash dividends in
the foreseeable future. The Company's credit agreement with Union Bank provides
that the Company shall not declare or pay any dividend or other distribution on
its Common Stock (other than a stock dividend) or purchase or redeem any Common
Stock, without the bank's prior written consent.
8
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ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following selected consolidated financial data of the Company, which
has been reclassified to reflect the continuing operations of ILC and the
discontinuted operations of PLI, should be read in conjunction with the
Consolidated Financial Statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein.
FISCAL YEAR ENDED
(in thousands except per share data)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Net sales ................$ 54,206 $ 49,496 $ 44,331 $ 42,250 $ 38,727
Income from continuing
operations .............. 4,546 4,637 3,727 4,509 4,757
Income (loss) from
discontinued operations . (4,239) (99) (3,536) 250 193
Net income ............... 307 4,538 191 4,759 4,950
Earnings (loss) per share:
Continuing operations ... .92 .97 .77 .91 .96
Discontinued operations (.86) (.02) (.73) .05 .04
------- ------- ------ ------ -------
Net income per share $ .06 $ .95 $ .04 $ .96 $ 1.00
Weighted average
shares outstanding ..... 4,923 4,765 4,825 4,980 4,956
Working capital ..........$ 15,155 $ 14,618 $ 11,366 $ 17,543 $ 16,399
Total assets ............. 48,594 46,726 41,312 39,703 28,645
Total long-term debt ..... 7,576 6,592 6,421 5,805 2,193
Total stockholders'
equity .................$ 29,791 $ 28,802 $ 23,624 $ 24,565 $ 19,578
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
In September 1996, the Company's Board of Directors voted to proceed
with the divestiture of the Company's Precision Lamp subsidiary based in Cotati,
California. The accompanying consolidated financial statements have been
restated to reflect the discontinued operations of the Precision Lamp business.
Refer to Note 12 of Notes to Consolidated Financial Statements for a further
discussion of discontinued operations. Accordingly, the following discussion and
analysis of financial condition and results of operations reflects the
activities of ILC Technology, Inc., Converter Power, Inc.
and Q-Arc, Ltd.
9
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GENERAL (CONTINUED)
- -------------------
During fiscal 1996, 1995 and 1994, the Company derived approximately
39%,40% and 52%, respectively, of its net sales from the medical market. During
fiscal 1996, 1995 and 1994, the Company's sales in the industrial market
accounted for 46%, 47% and 34%, respectively, of net sales. In each of the
fiscal years 1996, 1995 and 1994, the Company's sales in the aerospace market
accounted for 8% of net sales. Products sold in the medical market are
incorporated into products sold into the health-care and health-care related
industries. These industries have recently been subject to significant
fluctuations in demand which in turn have affected the demand for components
used in these products. The Company expects sales to the medical market to
continue to decrease as a percentage of net sales for the foreseeable future.
aerospace sales have remained relatively constant over the last two fiscal
years. Due to the continuing slowdown in military and defense spending, the
Company does not expect aerospace sales to grow significantly from fiscal 1996
and 1995 levels.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below that could cause actual results
to differ materially from historical results or those anticipated. In this
report, the words "believes", "expects", "future", "may have", "will take
place", and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
CONTINUING OPERATIONS
- ---------------------
FISCAL 1996 COMPARED TO FISCAL 1995
- -----------------------------------
Net sales for fiscal 1996 were $54,206,000, an increase of 9.5% over fiscal
1995 net sales of $49,496,000. The $4,710,000 increase was primarily
attributable to a $3.4 million sales increase in Cermax and related equipment
sales, a $1.7 million sales increase in Quartz lamps and a $1 million sales
increase in Flashlamps. These sales gains were offset by a $1.4 million sales
decrease in Aerospace and at Converter Power. In the fourth quarter of fiscal
1996, Converter Power experienced a significant reduction in orders from a major
customer that provides equipment to the semiconductor equipment industry.
Converter Power must continue to reduce reliance on this major customer through
additional sales of new products to other customers. This change in customer
base and mix may have an unfavorable impact on gross margins in future quarters.
Cost of sales as a percentage of net sales was 66.7% for fiscal 1996
compared to 64.2% for fiscal 1995. The percentage increase was due primarily to
the sales decline from Converter Power's major customer discussed above coupled
with cost revisions for a fixed price contract in Aerospace. In addition,
although there was some improvement in the gross margin associated with Quartz
lamp products in fiscal 1996 over fiscal 1995, the gross margin in both fiscal
years remained negative. The ratio of inventory reserve to year end inventory in
fiscal 1996, 1995 and 1994 was 18.6%, 20.0% and 26.3%, respectively.
Research and development expense, 8.0% of net sales in fiscal 1996 compared
to 8.6% of net sales in fiscal 1995, remained unchanged at approximately $4.3
million. In both fiscal years, the majority of the spending was concentrated in
Quartz for the development of lamps used in the processing of semiconductor
materials, in Cermax for lamps for video projection and at Converter Power for
the design of new power supplies to compliment the lamps for video projection.
10
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FISCAL 1996 COMPARED TO FISCAL 1995 (CONTINUED)
- -----------------------------------------------
Marketing expenses, 4.9% of net sales in both fiscal 1996 and 1995,
increased $241,000 between the two fiscal years. The increase was the result of
personnel additions and more travel and trade show attendance.
As a percentage of net sales, general and administrative expenses were 8.1%
in fiscal 1996 and 9.0% in fiscal 1995. In absolute dollars, the general and
administrative spending level has remained constant at approximately $4.4
million.
Amortization of intangibles of $120,000 in fiscal 1996 and 1995 represents
the amortization of the covenant-not-to-compete arising from the acquisition of
Q-Arc in 1991.
Interest income was $80,000 in fiscal 1996, compared to interest income of
$265,000 in fiscal 1995 which amount included approximately $235,000 of interest
income from an income tax refund in the third quarter of fiscal 1995. Interest
expense associated with continuing operations, $542,000 in fiscal 1996 as
compared to $589,000 in fiscal 1995, decreased approximately $47,000 between the
two fiscal years due to a slightly lower interest rate. Interest expense is
associated with a term loan obtained to purchase the Company's two operating
facilities in Sunnyvale, a line of credit for working capital needs and an
equipment line of credit for capital equipment acquisitions.
The Company reported income from continuing operations before provision for
income taxes of $6,061,000 in fiscal 1996 compared to income from continuing
operations before provision for income taxes of $6,109,000 in fiscal 1995. The
fiscal 1996 effective tax rate was 25% compared with a fiscal 1995 effective tax
rate of 28%, exclusive of a $238,000 income tax refund received in the third
quarter of fiscal 1995.
As previously discussed, the Company's Board of Directors voted to proceed
with the divestiture of Precision Lamp based in Cotati, California. The net
operating results of this subsidiary have been reported as a $4,239,000 loss
from discontinued operations in fiscal 1996. This amount includes the $840,000
operating loss of Precision Lamp for fiscal 1996 and an estimated loss for the
disposal of discontinued operations of $3,399,000. The estimated loss for the
disposal includes asset write downs of $3.3 million, a $500,000 charge for
anticipated losses during the final disposition of the subsidiary and the write
off of the unamortized balance of the Precision Lamp covenant-not-to- compete of
approximately $470,000. The combined loss from discontinued operations is net of
a $1,413,000 income tax benefit. Company management believes that the carrying
value of the net assets from discontinued operations will be realized upon
disposition through either a sale to a qualified buyer or an orderly liquidation
of the business. The disposition of the business will take place in fiscal 1997.
The Company believes that the disposition will improve cash flows, strengthen
its financial position and provide the basis for improved financial performance
in the future. (See Note 12 of Notes to Consolidated Financial Statements.)
The Company believes that inflation and changing prices had no significant
impact on sales or costs during fiscal 1996 and 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
- -----------------------------------
Net sales for fiscal 1995 were $49,496,000, an increase of 11.7% over
fiscal 1994 net sales of $44,331,000. The $5,165,000 increase was primarily
attributable to a $4 million sales increase at Converter Power and a $1 million
sales increase at Q-Arc. Although total net sales at ILC Technology remained
unchanged between the two fiscal years, Cermax and related equipment sales
decreased $2.4 million due to a reduction in the medical market. Flash and
quartz lamp sales increased $1 million and Aerospace sales increased $1.4
million.
11
<PAGE>
FISCAL 1995 COMPARED TO FISCAL 1994 (CONTINUED)
- -----------------------------------------------
As a percentage of net sales, cost of sales remained constant between
fiscal 1995 and 1994 at 64.2% and 64.6%, respectively. The ratio of the
inventory reserve to year end inventory in fiscal 1995, 1994 and 1993 was 20.0%,
26.3% and 16.5% respectively.
Research and development expenses, 8.6% of net sales in fiscal 1995
compared to 8.3% of net sales in fiscal 1994, increased $584,000 between the two
fiscal years. The majority of the increase was concentrated in the Quartz
stepper lamp product.
Marketing expenses, 4.9% of net sales in fiscal 1995 compared to 4.1% of
net sales in fiscal 1994, increased $ 609,000. The increase between the two
fiscal years was primarily due to the addition of personnel and more travel and
trade show attendance.
As a percentage of sales, general and administrative expenses were 9.0% in
fiscal 1995 and 10.3% in fiscal 1994. The $87,000 decrease was due to the
accrual in the second quarter of fiscal 1994 for early exit incentives for
various long time ILC employees ($500,000) and the write off of a note
receivable, doubtful of collection ($250,000). This decrease was partially
offset by expenses incurred by Q-Arc in its move to a larger manufacturing
facility and by personnel additions and other expenses at Converter Power,
totalling approximately $650,000, in fiscal 1995.
Amortization of intangibles of $120,000 in fiscal 1995 and 1994 represents
the amortization of the covenant-not-to-compete arising from the acquisitions of
Q-Arc in 1991.
Interest income was $265,000 in fiscal 1995, which amount included
approximately $235,000 of interest income from an income tax refund in the third
quarter of fiscal 1995. Interest income in fiscal 1994 was $170,000. Interest
expense associated with continuing operations was $589,000 in fiscal 1995 as
compared to $289,000 in fiscal 1994. The $300,000 increase between the two
fiscal years was due to additional borrowings on the Company's line of credit
and equipment purchases.
Due to the Company's decision in 1996 to divest of the Precision Lamp
subsidiary, the Consolidated Statements of Operations for fiscal 1995 and 1994
were restated to reflect the discontinued operations of Precision Lamp. The
Company reported income from continuing operations before provision for income
taxes of $6,109,000 in fiscal 1995 compared to income from continuing operations
before provision for income taxes of $5,402,000 in fiscal 1994. The fiscal 1995
provision for income taxes on continuing operations was 28% of income from
continuing operations before provision for income taxes exclusive of a $238,000
income tax refund received in the third quarter of fiscal 1995. This compares
with a fiscal 1994 provision for income taxes on continuing operations of 31% of
income from continuing operations before provision for income taxes. The net
loss from discontinued operations of $99,000 in fiscal 1995 represents the
operating results of Precision Lamp and is net of an income tax benefit of
$32,000. The net loss from discontinued operations of $3,536,000 in fiscal 1994
is net of a $523,000 income tax benefit and includes a $3.4 million write down
of intangibles generated from the Precision Lamp acquisition. In assessing the
recoverability of the unamortized goodwill and covenant-not-to-compete generated
from the acquisition, management determined that an impairment occurred and
recorded the $3.4 million charge.
The Company believes that inflation and changing prices had no significant
impact on sales or costs during fiscal 1995 and 1994.
12
<PAGE>
LIQUIDITY AND FINANCIAL POSITION
- --------------------------------
Cash and cash equivalents increased to $1,829,000 in fiscal 1996 from
$1,530,000 in fiscal 1995. Cash provided from operations amounted to $1,597,000
in fiscal 1996, a decrease of $952,000 from $2,549,000 in fiscal 1995. During
fiscal 1996, the Company made capital equipment purchases of $3,187,000. In
fiscal 1996, the Company increased its net borrowings under its line of credit
by $3,000,000, increased its net borrowings under an equipment line by $180,000
and paid down a term loan by $1,584,000. In fiscal 1995, the Company used cash
of $1,745,000 to purchase land and a new manufacturing facility in Santa Clara,
California and made capital equipment acquisitions of $2,518,000. During fiscal
1995, the Company increased its net borrowings under its line of credit by
$2,000,000, increased its net borrowings under an equipment line by $670,000 and
paid down a term loan by $1,578,000. In fiscal 1994, the Company used cash of
$2,701,000 to purchase a new office and manufacturing facility in Cambridge,
England, deposited $1,300,000 for the purchase of land and a manufacturing
facility in Santa Clara, California and paid $312,000 for land in Cotati,
California. Capital equipment acquisitions in fiscal 1994 amounted to
$1,672,000. In fiscal 1994, the Company increased its net borrowings under a
term loan for real estate acquisitions by $800,000 and increased the net
borrowings under an equipment line by $591,000. In addition, in fiscal 1994, the
Company also repurchased, on the open market, 204,000 shares of its common stock
for $1,556,000.
The Company has working capital of $15,155,000 and a current ratio of 2.45
to 1.0 at September 28, 1996. This compares with working capital of $14,618,000
and a current ratio of 2.29 to 1.0 at September 30, 1995. As of September 28,
1996, the Company had $1,000,000 unused on a $6,000,000 bank line of credit with
interest at 2% above the LIBOR rate (London Interbank Offer Rate) (7.4% at
September 28, 1996). The Company also has available approximately $1,100,000
remaining on a $2,200,000 equipment credit facility at the above interest rate.
This credit facility can be increased to accommodate the capital equipment needs
of the Company. In fiscal 1997, ILC anticipates making capital expenditures of
approximately $2.5 million. These financial resources, together with anticipated
additional resources to be provided from continuing operations, are expected to
be adequate to meet the Company's working capital needs, capital equipment
requirements and debt service obligations at least through fiscal 1997.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company is not required to adopt the provisions of this
statement until its fiscal year 1997. The provisions of this statement must be
made on a prospective basis. The Company plans to adopt the disclosure
provisions of this statement in 1997, and therefore the effect on its financial
position and results of operations, upon adoption, will not be significant.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
TABLE OF CONTENTS PAGE
----------------- ----
Consolidated Balance Sheets - September 28,
1996 and September 30, 1995 15 - 16
Consolidated Statements of Operations for the Three
Fiscal Years Ended September 28, 1996 17
Consolidated Statements of Stockholders' Equity
for the Three Fiscal Years Ended September 28, 1996 18
Consolidated Statements of Cash Flows for the Three
Fiscal Years Ended September 28, 1996 19 - 20
Notes to Consolidated Financial Statements 21 - 30
Form 10-K Schedule 31
Report of Independent Public Accountants 32
14
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
ASSETS
------
1996 1995
---- ----
Current assets:
Cash and cash equivalents ..................... $ 1,828,807 $ 1,529,863
Accounts receivable, less allowance
for doubtful accounts of $312,358
and $409,440, respectively ................... 9,494,246 8,450,977
Receivable from long-term contracts ........... 861,427 610,122
Inventories ................................... 8,901,528 7,533,090
Deferred tax asset ............................ 2,158,000 1,454,000
Prepaid expenses .............................. 208,320 122,244
Net assets from discontinued operations ....... 2,178,383 6,249,401
----------- -----------
Total current assets ................... 25,630,711 25,949,697
----------- -----------
Property and equipment, net .................... 21,176,431 19,560,683
Covenants-not-to-compete, net of
accumulated amortization and
writedown of $3,195,524 and
$2,435,354, respectively ...................... 356,641 475,521
Other assets ................................... 680,013 739,836
----------- -----------
$48,593,796 $46,725,737
=========== ===========
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1996 1995
---- ----
Current liabilities:
Accounts payable ................................ $ 3,643,496 $ 3,763,998
Accrued payroll and related items ............... 1,263,741 1,601,111
Other accrued liabilities ....................... 1,146,822 1,121,321
Current portion of non-compete obligation ....... 390,000 520,000
Current portion of long-term debt ............... 2,545,600 2,455,500
Accrued income taxes payable .................... 1,486,518 1,869,494
----------- -----------
Total current liabilities ................. 10,476,177 11,331,424
----------- -----------
Long-term liabilities, net of current portion:
Long-term debt .................................. 7,370,164 5,898,040
Non-compete obligation .......................... -- 390,000
Other accruals .................................. 206,235 304,074
----------- -----------
Total long-term liabilities ............... 7,576,399 6,592,114
----------- -----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, no par value; 10,000,000
shares authorized; 4,782,508 shares and
4,683,174 shares outstanding, respectively .... 6,815,109 6,132,914
Retained earnings ............................... 22,976,111 22,669,285
----------- -----------
Total stockholders' equity ................ 29,791,220 28,802,199
----------- -----------
$48,593,796 $46,725,737
=========== ===========
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996
1996 1995 1994
---- ---- ----
Net sales .................................$54,206,424 $49,496,029 $44,331,237
Costs and expenses:
Cost of sales ........................... 36,180,448 31,799,916 28,654,362
Research and development ................ 4,319,650 4,278,697 3,694,392
Sales and marketing ..................... 2,645,952 2,404,856 1,795,930
General and administrative .............. 4,417,446 4,459,726 4,546,290
Amortization of intangibles ............. 120,000 120,000 120,000
----------- ---------- -----------
47,683,496 43,063,195 38,810,974
Income from continuing operations before
provision for income taxes and interest
expense .................................. 6,522,928 6,432,834 5,520,263
Interest expense, net ..................... 461,898 323,757 118,597
---------- ---------- ----------
Income from continuing operations before
provision for income taxes ............... 6,061,030 6,109,077 5,401,666
Provision for income taxes on continuing
operations ............................... 1,515,000 1,472,000 1,675,000
---------- ----------- ----------
Income from continuing operations ......... 4,546,030 4,637,077 3,726,666
Discontinued operations:
Operating loss net of tax benefit of
$280,004, $32,000 and $523,000 in
1996, 1995 and 1994, respectively ...... (840,217) (99,143) (3,536,053)
Estimated loss on disposal, including
$500,000 for operating losses during the
phase out, net of tax benefit of
$1,132,996 (3,398,987) -- --
----------- ---------- ---------
Loss from discontinued operations ....... (4,239,204) (99,143) (3,536,053)
----------- ----------- -----------
Net income ............................... $ 306,826 $4,537,934 $ 190,613
=========== ========== ===========
Earnings (loss) per share:
Earnings from continuing operations ......$ 0.92 $ 0.97 $ 0.77
Loss from discontinued operations ........ (0.86) (0.02) (0.73)
----------- ---------- -----------
Net income per share
$ 0.06 $ 0.95 $ 0.04
=========== ========= ===========
Weighted average shares outstanding used
to compute net income (loss) per share ... 4,923,132 4,764,989 4,825,009
=========== ========= =========
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996
Common
Common Stock Retained
Shares Amount Earnings Total
Balance at October 2, 1993 .. 4,619,476 $ 6,623,828 $17,940,738 $24,564,566
Net income ................ - - 190,613 190,613
Issuance of common stock
under stock purchase plan 25,475 196,590 - 196,590
Exercise of stock options . 82,000 227,420 - 227,420
Repurchase of common stock (204,000) (1,555,500) - (1,555,500)
---------- ----------- ---------- -----------
Balance at October 1, 1994 .. 4,522,951 5,492,338 18,131,351 23,623,689
Net income ................ - - 4,537,934 4,537,934
Issuance of common stock
under stock purchase plan 37,973 266,575 - 266,575
Exercise of stock options . 132,250 450,751 - 450,751
Repurchase of common stock (10,000) (76,750) - (76,750)
---------- ----------- ---------- ------------
Balance at September 30, 1995 4,683,174 6,132,914 22,669,285 28,802,199
Net income ................ - - 306,826 306,826
Issuance of common stock
under stock purchase plan 34,209 279,068 - 279,068
Exercise of stock options . 65,125 403,127 - 403,127
---------- ---------- ---------- ----------
Balance at September 28, 1996 4,782,508 $6,815,109 $22,976,111 $29,791,220
========== ========== =========== ===========
The accompanying notes are an integral part of these
financial statements.
18
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net Income ....................... $ 306,826 $4,537,934 $ 190,613
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and
amortization .................. 1,570,809 1,450,597 948,313
Provision for doubtful accounts
and note ....................... 38,804 102,861 383,902
Provision for inventory
obsolescence ................... 520,006 169,034 1,772,346
Net loss on property and equipment
sold or retired ................. - 26,367 -
Amortization of non-compete
agreements ...................... 118,880 118,881 118,880
Changes in assets and liabilities:
Decrease in marketable
securities .................... - 998,129 438,078
(Increase) decrease in accounts
receivable .................... (1,333,378) (2,467,329) 167,344
Increase in inventories ........ (1,888,444) (1,685,743) (1,846,314)
(Increase) decrease in deferred
tax asset ..................... (704,000) 951,000 (1,016,000)
(Increase) decrease in prepaid
expenses ...................... (86,076) 406,556 (229,338)
(Increase) decrease in other
assets ........................ 59,823 (98,397) 183,044
Increase (decrease) in accounts
payable ....................... (120,502) 300,709 21,467
Increase (decrease) in accrued
liabilities ................... (956,660) (637,731) 1,657,530
Net changes in assets and
liabilities from discontinued
operations ..................... 4,071,018 (1,623,516) 2,850,679
----------- ----------- ----------
Total adjustments ........... 1,290,280 (1,988,582) 5,449,931
----------- ----------- ----------
Net cash provided by
operating activities ....... 1,597,106 2,549,352 5,640,544
----------- ----------- ----------
Cash flows from investing activities:
Purchase of land and real
estate ............................ - (3,045,412) (3,012,844)
(Increase) decrease in deposit on
land and building purchase ........ - 1,300,000 (1,300,000)
Investment in joint venture ........ - (450,000) -
Capital expenditures ............... (3,186,557) (2,517,541) (1,671,942)
----------- ----------- ----------
Net cash used in
investing activities ....... (3,186,557) (4,712,953) (5,984,786)
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996
(CONTINUED)
1996 1995 1994
---- ---- ----
Cash flows from financing activities:
Principal borrowings under line
of credit ........................$ 9,500,000 $ 8,450,000 $ -
Principal repayments under line
of credit ........................ (6,500,000) (6,450,000) -
New borrowings under equipment
line ............................. 1,555,000 1,720,089 1,090,702
Principal repayments under
equipment line ................... (1,374,800) (1,049,958) (499,225)
Principal borrowings under
term loan ........................ - - 1,333,333
Principal repayments under
term loan ........................ (1,584,000) (1,578,000) (533,333)
Payments under non-compete
agreement ........................ (390,000) (520,000) (520,000)
Proceeds from issuance of
common stock ..................... 682,195 717,326 424,010
Repurchase of common stock ........ - (76,750) (1,555,500)
---------- ----------- -----------
Net cash provided by (used in)
financing activities............ 1,888,395 1,212,707 (260,013)
----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents....... 298,944 (950,894) (604,255)
Cash and cash equivalents at
beginning of year .................. 1,529,863 2,480,757 3,085,012
----------- ----------- -----------
Cash and cash equivalents at
end of year ........................$ 1,828,807 $ 1,529,863 $ 2,480,757
=========== =========== ===========
1996 1995 1994
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest - continuing operations . $ 542,061 $589,200 $ 288,669
Interest - discontinued operations 77,714 106,341 50,082
Income taxes ..................... 1,055,000 909,000 2,500,539
Supplemental disclosures of noncash investing and financing activities:
A capital lease obligation of $174,268 was incurred in fiscal 1994 when the
Company entered into a capital lease for new computer equipment.
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
ILC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
1. THE COMPANY
-----------
ILC Technology, Inc. (the "Company") was incorporated on September 15,
1967. The Company designs, develops and manufactures high intensity lamps and
lighting products the medical, industrial, communication, aerospace, scientific,
entertainment and military industries. The Company develops and manufactures the
majority of its products at its headquarter facilities in California and the
remainder at its subsidiary facilities in Massachusetts and the United Kingdom.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF PRESENTATION
- ---------------------
The financial statements include the accounts of ILC Technology, Inc. and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Fiscal years 1995 and 1994 were restated to reflect the Company's decision
to discontinue the operations of Precision Lamp, Inc. (see Note 12). None of
these restatements had any impact on net income in any of the prior years.
The Company's fiscal year end is the Saturday closest to September 30.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
- -------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
- -------------------------
For the purpose of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less at
the time of issue to be cash equivalents.
INVENTORIES
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market, and include material, labor and manufacturing overhead. Inventories at
September 28, 1996 and September 30, 1995, net of inventory reserves of
$2,034,258 and $1,881,026, respectively, consisted of:
21
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
INVENTORIES (CONTINUED)
- -----------------------
1996 1995
---- ----
Raw materials ........................ $4,802,839 $4,398,553
Work-in-process ...................... 2,549,805 1,981,414
Finished goods ....................... 1,548,884 1,153,123
---------- ----------
Total inventories..................... $8,901,528 $7,533,090
========== ==========
DEVELOPMENTAL AND MANUFACTURING CONTRACTS
- -----------------------------------------
The Company contracts with the U.S. Government and other customers for the
development and manufacturing of various products under both cost-plus-fixed-fee
and fixed-price contracts. Revenues are recognized under these contracts using
the percentage of completion method, whereby revenues are reported in the
proportion that costs incurred bear to the total estimated costs for each
contract. Periodic reviews of estimated total costs during the performance of
such contracts may result in revisions of contract estimates in subsequent
periods. Any loss contracts are reserved at the time such losses are determined.
Revenues from these contracts were less than 10% of net revenues during 1996,
1995 and 1994.
DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation and amortization on property and equipment are provided on a
straight-line basis over estimated useful lives of 3 to 31.5 years, except for
leasehold improvements which are amortized over the terms of the leases.
NET INCOME (LOSS) PER SHARE
- ---------------------------
Net income (loss) per share is computed based on the weighted average
number of common shares and common equivalent shares (using the treasury stock)
outstanding during the period. Fully diluted net income (loss) per share is not
significantly different from net income (loss) per share as reported.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company is not required to adopt the provisions of this
statement until its fiscal year 1997. The provisions of this statement must be
made on a prospective basis. The Company plans to adopt the disclosure
provisions of this statement in 1997, and therefore the effect on its financial
position and results of operations, upon adoption, will not be significant.
COVENANTS-NOT-TO-COMPETE
- ------------------------
The covenant-not-to-compete relates to the Q-Arc acquisition that took
place in 1991. This is being amortized over the period of the covenant.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long- Lived Assets to be Disposed Of." The Company
adopted the provisions of this statement in fiscal 1996. The effect on its
financial position and results of operations were not significant. The Company
22
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
COVENANTS-NOT-TO-COMPETE (CONTINUED)
- ------------------------------------
quarterly evaluates whether later events and circumstances have occurred that
indicate the remaining estimated useful lives of these intangibles may warrant
revision or that the remaining balances of intangibles may not be recoverable.
When factors indicate that intangibles should be evaluated for possible
impairment, the Company uses an estimate of the related subsidiary's
undiscounted cash flow over the remaining life of the intangibles in measuring
whether the intangibles are recoverable. As part of the Company's decision to
discontinue the operations of its Precision Lamp subsidiary, the unamortized
balance of the covenant-not-to-compete ($470,000) was written off in the fourth
quarter of fiscal 1996.
INVESTMENT IN JOINT VENTURE
- ---------------------------
In February 1995, the Company invested $450,000 in a lamp manufacturer
located in Japan. The Company's investment represents a 49% ownership interest
in the equity of the investee, consequently the Company accounts for its
investment using the equity method of accounting. The Company's investment is
included in Other Assets in the accompanying consolidated balance sheets and its
proportionate interest in the income of the investee of $20,000 and $89,000 in
fiscal 1996 and 1995, respectively, is included in the accompanying consolidated
statements of operations.
3. REVENUES
--------
The Company recognizes revenue on all product sales upon shipment of the
product. The Company accrues for estimated warranty obligations at the time of
the sale of the related product based upon its past history of claims experience
and costs to discharge its obligations.
The Company operates in a single industry segment, the designing,
developing, manufacturing and marketing of high performance light source
products. Revenues from continuing operations are geographically summarized as
follows (in thousands):
1996 1995 1994
---- ---- ----
United States .................... $34,088 32,533 $26,966
Europe ........................... 6,920 5,964 4,380
Asia ............................. 12,700 10,951 12,819
Other international............... 498 48 166
------- ------- -------
$54,206 $49,496 $44,331
======= ======= =======
Customers comprising more than 10% of net sales from continuing operations are
as follows:
1996 1995 1994
---- ---- ----
Customer A..................... 15.0% 12.2% 17.8%
Customer B..................... 11.5% 12.0% *
*less than 10% of net sales
23
<PAGE>
3. REVENUES (CONTINUED)
--------------------
The Company provides credit in the form of trade accounts receivable to its
customers. The Company does not generally require collateral to support customer
receivables. The Company performs ongoing credit evaluations of its customers
and maintains allowances which management believes are adequate for potential
credit losses.
Approximately 39%, 40% and 52% of the Company's sales in fiscal 1996, 1995
and 1994, respectively, were to customers in the medical industry. This industry
has experienced significant fluctuations in demand and the Company expects sales
to the medical market to decrease as a percentage of net sales in the
foreseeable future. Customer B, referred to above, is in the semiconductor
equipment industry and is a major customer of Converter Power. In the fourth
quarter of fiscal 1996, Converter Power experienced a significant reduction in
orders from this customer. Management believes that inventory at Converter Power
is stated at the lower of cost or net realizable value.
4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment at September 28, 1996 and September 30, 1995
consisted of:
1996 1995
---- ----
Property and equipment, at cost:
Machinery and equipment ...... $ 15,047,138 $ 13,705,702
Land and buildings ........... 14,955,738 14,504,768
Furniture and fixtures ....... 601,822 617,800
Equipment under capital lease 174,268 174,268
Leasehold improvements ....... 598,814 95,536
Construction-in-progress ..... 1,011,601 172,951
------------ ------------
32,389,891 29,271,025
Less accumulated depreciation and
amortization ................. (11,212,950) (9,710,342)
------------ ------------
Property and equipment, net ..... $ 21,176,431 $ 19,560,683
============ ============
5. BANK BORROWINGS
---------------
As of September 28, 1996 and September 30, 1995, borrowings outstanding
under the Company's credit facilities consisted of:
1996 1995
---- ----
Line of credit ......... $ 5,000,000 $ 2,000,000
Term note .............. 2,638,000 4,222,000
Equipment line of credit 2,191,200 2,011,000
Other capital lease .... 86,564 120,540
----------- -----------
9,915,764 8,353,540
Less: current portion .. (2,545,600) (2,455,500)
----------- -----------
Long-term debt ......... $ 7,370,164 $ 5,898,040
=========== ===========
24
<PAGE>
5. BANK BORROWINGS (CONTINUED)
---------------------------
Aggregate maturities for long-term debt during the next five years are
approximately: 1997 - $2,545,600, 1998 - $2,283,600, and none in 1999, 2000 and
2001.
All of the above credit facilities are secured by all of the property of
the Company.
The Company has a $6 million line of credit available with a bank which
expires in March 1998. Borrowings under this line are at 2% above the LIBOR rate
(London Interbank Offer Rate) (7.4% at September 28, 1996) and are limited to
75% of eligible accounts receivable. Under the covenants of the loan agreement,
unless written approval from the bank is obtained, the Company is restricted
from entering into certain transactions and is required to maintain certain
specified financial covenants and profitability. As of September 28, 1996, the
Company was not in compliance with all covenants but has obtained a waiver from
the bank.
The average balance outstanding (based on month-end balances) under the
line of credit in 1996 was $2,595,833. The maximum borrowings were $5,000,000 at
an average interest rate of 7.4% for 1996. At September 30, 1995, $2 million was
outstanding under the line of credit. As of September 28, 1996, $1 million was
available for future borrowings under this line of credit.
In addition, in connection with the purchase of its Sunnyvale manufacturing
facilities, the Company entered into a term note with a bank for $5,000,000 in
1993, which was subsequently increased to $6,333,333 in 1994. The note matures
in August 1998. The term loan requires monthly principal payments equal to
one-forty-eighth of the principal amount plus interest at 2% above the LIBOR
rate (London Interbank Offer Rate) (7.4% at September 28, 1996). The term loan
is a reducing revolving credit facility which allows for principal pre-payments
and the flexibility for re-borrowing up to the maximum amount that would be
outstanding under the term loan given normal amortization to the date of
re-borrowing.
The Company also has available a $2.2 million equipment line of credit for
100% of the purchase cost of new equipment, which expires in March 1997.
Borrowings under this line bear interest at 2% above the LIBOR rate (7.4% at
September 28, 1996), with principal balances amortized over a 2 year period. At
September 28, 1996, the Company had approximately $1,096,000 available for
future borrowings under this line of credit.
6. INCOME TAXES
------------
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". SFAS No. 109 requires an asset and liability approach to
accounting for income taxes.
Income from continuing operations before provision for income taxes
consists of the following for fiscal 1996, 1995 and 1994, respectively:
1996 1995 1994
---- ---- ----
U.S. ...................... $4,897,389 $5,588,040 $5,030,336
Foreign.................... 1,163,641 521,037 371,330
---------- ---------- ----------
$6,061,030 $6,109,077 $5,401,666
========== ========== ==========
25
<PAGE>
6. INCOME TAXES (CONTINUED)
------------------------
The components of the provision for income taxes on continuing operations are as
follows:
1996 1995 1994
---- ---- ----
Federal -
Current ............... $ 1,559,000 $ 833,000 $ 2,373,000
Deferred .............. (600,000) 581,500 (902,000)
----------- ----------- -----------
959,000 1,414,500 1,471,000
----------- ----------- -----------
Foreign -
Current ............... 384,000 -- --
State -
Current ............... 276,000 199,000 493,000
Deferred .............. (104,000) 96,500 (289,000)
----------- ----------- -----------
172,000 295,500 204,000
----------- ----------- -----------
Federal refund received ........ -- (238,000) --
----------- ----------- -----------
Total provision for income taxes
on continuing operations ...... $ 1,515,000 $ 1,472,000 $ 1,675,000
=========== =========== ===========
The major components of the deferred tax account, as computed under SFAS No.
109, are as follows:
1996 1995
---- ----
Reserve for loss on disposal of discontinued
operations, not currently deductible for tax
purposes ................................... $ 1,133,000 $ -
Inventory reserve ............................ 877,000 838,000
Bad debt reserve ............................. 92,000 271,000
Warranty reserve ............................. 128,000 105,000
Accruals not currently deductible for
tax purposes ............................... 381,000 448,000
Amortization of covenant-not-to-compete ...... 202,000 278,000
Excess of tax over book depreciation ......... (988,000) (801,000)
Other items, individually insignificant ...... 333,000 315,000
----------- -----------
$ 2,158,000 $ 1,454,000
=========== ===========
The provision for income taxes on continuing operations differs from the amounts
which would result by applying the applicable statutory Federal income tax rate
to income from continuing opertions before taxes as follows:
1996 1995 1994
---- ---- ----
Computed expected provision $ 2,121,000 $ 2,138,000 $ 1,891,000
State tax ................. 364,000 367,000 324,000
FSC commission ............ (181,000) (216,000) (259,000)
General business credits .. (218,000) (203,000) (72,000)
Refund received ........... -- (238,000) --
Other items, indivdually
insignificant ............ (571,000) (376,000) (209,000)
----------- ----------- -----------
$ 1,515,000 $ 1,472,000 $ 1,675,000
=========== =========== ===========
26
<PAGE>
6. INCOME TAXES (CONTINUED)
------------------------
During the second quarter of fiscal 1995, the Company received a refund of
$238,000 from the Internal Revenue Service (IRS) related to tax returns filed in
previous years, which were examined by the IRS. This amount was recorded as a
reduction of the fiscal 1995 tax provision upon receipt of the refund. An
additional $235,000 of interest related to the refund amount was received and
was included in interest income in fiscal 1995.
7. EMPLOYEE RETIREMENT PLAN
------------------------
On January 1, 1984, the Company adopted a thrift incentive savings plan
(the "Plan"). The Plan is qualified under section 401(k) of the Internal Revenue
Code and is available to all full-time employees with one or more years of
employment with the Company. Under the terms of the Plan, participating
employees must contribute at least 2% of their salary to the Plan, and the
Company contributes (as a matching contribution) 100% of this amount. Employees
may also contribute an additional amount up to 13% of their salary to the Plan,
with no further contributions by the Company. The Company's contributions vest
at a rate of 20% per year, commencing on the first anniversary of employment.
Total employer matching contributions under the Plan were $226,000, $212,000,
and $163,000 for the fiscal years 1996, 1995 and 1994, respectively. The expense
to continuing operations was $188,000, $171,000 and $138,000 for fiscal years
1996, 1995 and 1994, respectively.
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
At September 28, 1996, the future minimum rental payments under all
building leases for fiscal 1997 through 2001 are approximately $423,000,
$424,000, $444,000, $444,000 and $226,000, respectively, and $434,000
thereafter. The amounts total $2,395,000. The future minimum rental payments for
continuing operations, under all building leases for fiscal 1997 through 2001,
are approximately $207,000, $207,000, $218,000, $218,000 and none in 2001. The
amounts total $850,000.
For fiscal years 1996, 1995 and 1994, rental expense was approximately
$442,000, $277,000 and $318,000 respectively. Rental expense for continuing
operations was $226,000, $61,000 and $102,000 for fiscal years 1996, 1995 and
1994, respectively.
9. STOCK OPTION AND PURCHASE PLANS
-------------------------------
Under the 1992 Stock Option Plan ("Plan"), the Company may grant options to
employees and directors. The Company has reserved 400,000 shares for issuance
under the Plan. In November 1996, the Board of Directors authorized an
additional 175,000 shares for issuance under the Plan, subject to shareholder
approval. The exercise price per share for stock options cannot be less than the
fair market value on the date of grant. Options granted are for a ten-year term
and generally vest ratably over a period of four years commencing one year after
the date of grant. The Plan provides for the automatic grant of a nonstatutory
stock option to purchase shares of Common Stock to each outside Director
annually during the Company's third fiscal quarter. During fiscal 1996, each
outside Director was granted an automatic option to purchase a total of 5,000
shares of the Company's Common Stock. The Company's 1983 Stock Option Plan
expired in 1993 and no further options have been granted under this Plan since
then. A summary of the option transactions is as follows:
27
<PAGE>
9. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
-------------------------------------------
OPTIONS OUTSTANDING
-------------------
Options Number
Available of Price per
Fof Grant Shares Share
Balance at October 2, 1993 .. 159,624 746,027 $ 1.09-11.50
Granted .................... (74,000) 74,000 $ 7.38-11.00
Canceled ................... 18,000 (18,000) $ 3.75-11.50
Exercised .................. - (82,000) $ 1.09 -8.75
-------- -------- ------------
Balance at October 1, 1994 .. 103,624 720,027 $ 1.09-11.50
Granted .................... (28,000) 28,000 $ 9.50
Canceled ................... 34,000 (34,000) $ 8.75-11.50
Exercised .................. - (132,250) $ 2.13 -8.75
-------- -------- ------------
Balance at September 30, 1995 109,624 581,777 $1.09 -11.50
Additional shares approved . 200,000 - -
Granted .................... (205,000) 205,000 $ 9.00-11.25
Canceled ................... 92,125 (92,125) $ 8.75-11.50
Exercised .................. - (65,125) $ 1.09-11.50
-------- -------- ------------
Balance at September 28, 1996 196,749 629,527 $ 1.09-11.50
======== ======== ============
Options exercisable at
September 28, 1996 ......... 416,965 $ 1.09-11.50
======== ============
If all options outstanding at September 28, 1996 were exercised, the total
proceeds to the Company would be approximately $4.7 million (unaudited).
Under the Company's Employee Stock Purchase Plan, the Company has reserved
300,000 shares of common stock for issuance to participating employees who have
met certain eligibility requirements. In November 1996, the Board of Directors
authorized an additional 50,000 shares for issuance under the Plan, subject to
shareholder approval. The number of shares available for purchase by each
participant is based upon annual base earnings and at a purchase price equal to
85% of the fair market value at the beginning or the end of the quarter of
purchase, whichever is lower. As of September 28, 1996, 61,588 shares were
available for future purchase.
10. OTHER INCOME/EXPENSE
--------------------
Other (income) expense consists of the following:
1996 1995 1994
---- ---- ----
Interest income ............... $ (80,163) $(265,443) $(170,072)
Interest expense .............. 542,061 589,200 288,669
--------- --------- ---------
Net interest expense related to
continuing operations ........ $ 461,898 $ 323,757 $ 118,597
========= ========= =========
28
<PAGE>
11. ACQUISITIONS
------------
In August 1991, the Company acquired all the outstanding stock of Q-Arc
Ltd. of Cambridge, England for $1,400,000 in cash and the assumption of certain
liabilities. Q-Arc is a manufacturer of specialty lamps for laser and non-laser
applications. This transaction was accounted for as a purchase and accordingly,
all assets were revalued to their respective fair values. The acquisition price
was equal to the fair value of net assets acquired. Net assets included a
covenant-not-to-compete of approximately $951,000. The covenant is being
amortized over an eight year period. At September 28, 1996, the unamortized
balance of the Q-Arc covenant-not-to-compete is approximately $357,000.
12. DISCONTINUED OPERATIONS
-----------------------
In September 1996, the Company's Board of Directors voted to proceed with
the divestiture of the Company's Precision Lamp subsidiary based in Cotati,
California. The Company plans to dispose of Precision Lamp either through a sale
to a qualified buyer or by an orderly liquidation of the business if no buyer is
located within one year. As a result of the Company's plan, an estimated loss on
disposal of $3,399,000, net of a tax benefit of $1,133,000, was recorded in the
fourth quarter of fiscal 1996. This loss on disposal included $500,000 as the
estimated operating losses through the final disposition of the subsidiary and
the write off of the unamortized balance of the Precision Lamp covenant-not-to-
compete of approximately $470,000.
Continuing operations, as reclassified for fiscal years 1996, 1995 and
1994, consist of the activities of ILC Technology, Inc. based in Sunnyvale,
California, Converter Power, Inc. based in Beverly, Massachusetts and Q-Arc
based in Cambridge, England. The Consolidated Statements of Operations have been
reclassified to report separately the activities of Precision Lamp as
discontinued operations. Revenues from Precision Lamp were $7,772,000,
$8,933,000 and $7,691,000 for fiscal 1996, 1995 and 1994, respectively. The net
loss after tax from the discontinued operations of Precision Lamp was $840,000,
$99,000 and $3,536,000 for fiscal 1996, 1995 and 1994, respectively. The net
loss from discontinued operations of $3,536,000 in fiscal 1994 is net of a
$523,000 income tax benefit and includes a $3.4 million write down of
intangibles generated from the Precision Lamp acquisition. A portion of net
interest expense of approximately $66,000, $58,000 and $21,000 for fiscal years
1996, 1995 and 1994, respectively, has been allocated to the discontinued
operations. Net interest has been allocated to discontinued operations based on
the ratio of the net assets to be discontinued to the consolidated net assets
plus consolidated debt other than debt which is directly attributable to
continuing operations.
The net assets of Precision Lamp of $2,178,383 as of September 28, 1996 are
shown in the accompanying balance sheet as net assets from discontinued
operations. These assets were written down to a value that represents
management's best estimate of the amount that could be realized upon
disposition.
13. RIGHTS AGREEMENT AND OTHER MATTERS
----------------------------------
On September 19, 1989, the Company's Board of Directors declared a dividend
of one common share purchase right for each outstanding share of common stock,
no par value, of the Company. The dividend was payable on October 2, 1989 to the
shareholders of record on that date. Each right entitles the registered holder
to purchase from the Company one share of common stock of the Company at a price
of $15.00 per common share. The rights will not be exercisable until a party
either acquires beneficial ownership of 20% of the Company's common stock or
makes a tender offer for at least 30% of its common stock. In the event the
rights become exercisable and thereafter a person or group acquires 30% or more
of the Company's stock, a 20% shareholder ("Acquiring Person") engages in any
specified self-dealing transaction, or, as a result of a recapitalization or
reorganization,
29
<PAGE>
13. RIGHTS AGREEMENT AND OTHER MATTERS (CONTINUED)
----------------------------------------------
an Acquiring Person's shareholdings are increased by more than 3%, each right
will entitle the holder to purchase from the Company, for the exercise price,
common stock having a market value of twice the exercise price of the right. In
the event the rights become exercisable and thereafter the Company is acquired
in a merger or other business combination, each right will enable the holder to
purchase from the surviving corporation, for the exercise price, common stock
having a market value of twice the exercise price of the right. At the Company's
option, the rights are redeemable in their entirety, prior to becoming
exercisable, at $.01 per right. The rights are subject to adjustment to prevent
dilution and expire September 29, 1999.
In November 1996, the Board of Directors authorized severance agreements
for certain key managers in the event that a change of control occurs at the
Company.
14. REPURCHASE OF COMMON STOCK
--------------------------
In November 1996, the Board of Directors authorized the Company to
repurchase up to 1,000,000 shares of the Company's issued and outstanding common
stock. Purchases can be made for up to two years from the date of authorization.
30
<PAGE>
SCHEDULE VIII
ILC TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR FISCAL YEARS 1996, 1995 AND 1994
Balance Charged
at (Credited) Deductions Balance
Beginning to Cost and and at end of
Of Period Expenses Write Offs Period
--------- -------- ---------- ------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
Year ended
October 1, 1994..............$ 208,787 $ 383,902 $260,017 $ 332,672
Year ended
September 30, 1995....... $ 332,672 $ 102,861 $ 26,093 $ 409,440
Year ended
September 28, 1996....... $ 409,440 $ 38,804 $135,886 $ 312,358
RESERVE FOR INVENTORY
OBSOLESCENCE:
Year ended
October 1, 1994 .......... $1,177,080 $1,772,346 $807,434 $2,141,992
Year ended
September 30, 1995........ $2,141,992 $ 169,034 $430,000 $1,881,026
Year ended
September 28, 1996........ $1,881,026 $ 520,006 $366,774 $2,034,258
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ILC Technology, Inc.
We have audited the accompanying consolidated balance sheets of ILC
Technology, Inc. (a California Corporation) and subsidiaries as of September 28,
1996 and September 30, 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 28, 1996. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ILC
Technology, Inc. and subsidiaries as of September 28, 1996 and September 30,
1995 and the results of their operations and their cash flows for each of the
three years in the period ended September 28, 1996 in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule presented on page 31 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
November 22, 1996
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Certain information required by Part III is omitted from this Report in
that registrant will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") for its Annual Meeting of Shareholders to be held
February 12, 1997, not later than 120 days after the end of the fiscal year
covered by this Report, and the information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by this item appearing in the
Company's 1996 Proxy Statement under the caption "Election of
Directors-Nominees" is incorporated herein by reference.
The information regarding executive officers of the Company required by
this item appearing in the Company's 1996 Proxy Statement under the caption
"Executive Officers" is incorporated herein by reference.
The information required by this item appearing in the Company's 1996 Proxy
Statement under the caption "Compliance Under Section 16(a) of the Securities
Exchange Act of 1934" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appearing in the Company's 1996 Proxy
Statement under the captions "Election of Directors-Director Compensation",
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation in Compensation Decisions" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appearing in the Company's 1996 Proxy
Statement under the captions "Election of Directors-Nominees" and "Security
Ownership of Certain Beneficial Owners" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appearing in the Company's 1996 Proxy
Statement under the captions "Election of Directors-Director Compensation",
"Executive Compensation" and "Certain Transactions" is incorporated herein by
reference.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The Consolidated Financial Statements, notes thereto, and Report of
Independent Public Accountants thereon are included in Part II, Item 8 of this
report.
PAGE IN
2. FINANCIAL STATEMENT SCHEDULE FORM 10-K
Schedule VIII Valuation and Qualifying
Accounts and Reserves 31
All other schedules have been omitted since the required information is
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements or notes thereto.
3. EXHIBITS
The exhibits listed in the Index to Exhibits following the signature
page are filed as part of this Report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1996. .
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ILC TECHNOLOGY, INC.
By: /S/ HENRY C. BAUMGARTNER
Henry C. Baumgartner
(Chairman of the Board and
Chief Executive Officer)
Dated: December 24, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/S/ HENRY C. BAUMGARTENER Chairman of the Board and December 24, 1996
- ------------------------- Chief Executive Officer
(Henry C. Baumgartner) (Principal Executive
Officer and Director)
/S/ RICHARD D. CAPRA President and Chief December 24, 1996
- ------------------------- Operating Officer
(Richard D. Capra)
/S/ RONALD E. FREDIANELLI Chief Financial Officer December 24, 1996
- ------------------------- and Secretary
(Ronald E. Fredianelli) (Principal Financial and
Accounting Officer)
/S/ HARRISON H. AUGUR Director December 24, 1996
- -------------------------
(Harrison H. Augur)
- -------------------- Director December , 1996
(Arthur L. Schawlow)
- --------------------- Director December , 1996
(Wirt D. Walker, III)
35
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 (A) Restated Articles of Incorporation of ILC Technology, Inc. as
filed in the Office of the California Secretary of State on
March 8, 1991.
3.2 Amended and Restated Bylaws as of November 21, 1996
4.1 (C) Certificate evidencing shares of Common Stock without par
value, ILC Technology, Inc.
10.1 (E) ILC Technology, Inc. 1983 Employee Incentive and Nonstatutory
Stock Option Plan, as amended, together with related form of
Stock Option Agreement.
10.2 (B) Rights Agreement between ILC Technology, Inc. and Security
Pacific National Bank dated as of September 29, 1989.
10.3 (D) Employment Agreement between ILC Technology, Inc. and Richard
E. DuNah dated July 1, 1992. *
10.4 (E) ILC Technology, Inc. 1992 Stock Option Plan, as amended, and
related form of Option Agreement. *
10.5 (D) Form of Officer and Director Indemnification Agreement *
10.6 (G) Credit Agreement dated March 2, 1995, by and between Union
Bank and ILC Technology, Inc.
10.7 (E) Standard Industrial/Commercial Single-Tenant Lease between
ILC Technology, Inc. (720 Portal Street, Cotati, California)
and John Gary Taylor, dated December 29, 1992.
10.8 (F) Purchase and Sale Agreement dated June 24, 1994, by and
between UCB Bank PLC and Q-Arc, Limited relating to
property on the south side of Saxon Way, Bar Hill, Cambridge,
England.
10.9 (F) Asset Purchase Agreement dated September 16, 1994, by and
between ILC Technology, Inc. and UVP, Inc.
10.10 (G) Lease Agreement between Converter Power, Inc. (150 Sohier
Road, Beverly, Massachusetts) and Communications & Power
Industries, Inc., dated September 15, 1995
10.11 Credit agreement dated March 25, 1996 by and between Union
Bank and ILC Technology, Inc. along with first amendment
dated July 18, 1996.
10.12 Form of Management Compensation Agreement*
21.1 (F) Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
99.1 Proxy Statement for the Company's 1996 Annual Meeting of
Shareholders (to be deemed filed only to the extent required
by General Instruction H to Form 10-K)
- --------------------------------------------------------------------------------
(A) Incorporated by reference from the Exhibits to Registrant's
Annual Report on Form 10-K for the fiscal year ended September
28, 1991.
(B) Incorporated by reference from the Exhibits to Registrant's
Current Report on Form 8-K dated September 19, 1989.
(C) Incorporated by reference from the Exhibits to Registrant's
Annual Report on Form 10-K for the fiscal year ended September
30, 1988.
(D) Incorporated by reference from the Exhibits to Registrants'
Annual Report on Form 10-K for the fiscal year ended October
3, 1992.
(E) Incorporated by reference from the Exhibits to Registrants
Annual Report on Form 10-K for the fiscal year ended October
2, 1993.
(F) Incorporated by reference from the Exhibits to Registrants'
Registration Statement on Form 10-K for the year ended October
1, 1994.
(G) Incorporated by reference from the Exhibits to Registrants'
Registration Statement on Form 10-K for the year ended
Setpember 30, 1995.
* Management contract or compensatory plan or arrangement.
BYLAWS
OF
ILC TECHNOLOGY, INC.,
a California corporation
AMENDED AND RESTATED
as of November 21, 1996
ARTICLE 1
OFFICES
Section 1.1. Principal Office. The principal office for the transaction of the
business of the corporation shall be located at 399 Java Drive, Sunnyvale,
California 94089. The Board of Directors is hereby granted full power and
authority to change said principal office to another location within or without
the State of California.
Section 1.2. Other Offices. One or more branch or other subordinate offices may
at any time be fixed and located by the Board of Directors at such place or
places within or without the State of California as it deems appropriate.
ARTICLE 2
DIRECTORS
Section 2.1. Exercise of Corporate Powers. Except as otherwise provided by the
Articles of Incorporation of the corporation or by the laws of the State of
California now or hereafter in force, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board of Directors. The Board may delegate the
management of the day-to-day operation of the business of the corporation as
permitted by law provided that the business and affairs of the corporation shall
be managed and all corporate powers shall be exercised under the ultimate
direction of the Board.
Section 2.2. Number.
(a) The number of the corporation's directors shall be not less than six
(6) nor more than eleven (11).
(b) The exact number of the corporation's directors shall be six (6) until
changed, within the limits specified above, by a resolution duly
approved by the Board or shareholders.
Section 2.3. Need Not Be Shareholders. The directors of the corporation need not
be shareholders of the corporation.
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Section 2.4. Compensation. Directors shall receive such compensation for their
services as directors and such reimbursement for their expenses of attendance at
meetings as may be determined from time to time by resolution of the Board.
Nothing herein contained shall be construed to preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
Section 2.5. Election and Term of Office. At each annual meeting of
shareholders, directors shall be elected to hold office until the next annual
meeting, provided that if for any reason said annual meeting or an adjournment
thereof is not held or the directors are not elected thereat, then the directors
may be elected at any special meeting of the shareholders called and held for
that purpose. The term of office of the directors shall begin immediately after
their election and shall continue until the expiration of the term for which
elected and until their respective successors have been elected and qualified.
Section 2.6. Vacancies. A vacancy or vacancies in the Board of Directors shall
exist when any authorized position of director is not then filled by a duly
elected director, whether caused by death, resignation, removal, change in the
authorized number of directors (by the Board or the shareholders) or otherwise.
The Board of Directors may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony. A
vacancy created by the removal of a director may be filled only by the approval
of the shareholders. Except for a vacancy created by the removal of a director,
vacancies on the Board may be filled by a majority of the directors then in
office, whether or not less than a quorum, or by a sole remaining director. The
shareholders may elect a director at any time to fill any vacancy not filled by
the directors, but any such election by written consent other than to fill a
vacancy created by removal requires the consent of a majority of the outstanding
shares entitled to vote. Any director may resign effective upon giving written
notice to the Chairman of the Board, the President, the Secretary, or the Board
of Directors of the corporation, unless the notice specifies a later time for
the effectiveness of such resignation. If the resignation is effective at a
future time, a successor may be elected to take office when the resignation
becomes effective.
Section 2.7. Removal.
2.7.1. General Rule. Any and all of the directors may be removed without cause
if such removal is approved by the affirmative vote of a majority of the
outstanding shares entitled to vote at an election of directors, except as set
forth in subsections 2.7.2 and 2.7.3.
2.7.2. Supermajority Vote Required. No director may be removed (unless the
entire Board is removed) when the votes cast against removal, or not consenting
in writing to such removal, would be sufficient to elect such director if voted
cumulatively at an election at which the same total number of votes were cast
(or, if such action is taken by written consent, all shares entitled to vote
were voted) and the entire number of directors authorized at the time of the
director's most recent election were then being elected;
2.7.3. Class Vote. When by the provisions of the Articles the holders of the
shares of any class or series, voting as a class or series, are entitled to
elect one or more directors,
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any director so elected may be removed only by the applicable vote of the
holders of the shares of that class or series.
2.7.4. Effect of Reduction of Size of Board. Any reduction of the authorized
number of directors does not remove any director prior to the expiration of such
director's term of office.
Section 2.8. Meetings of Directors.
2.8.1. Place of Meetings. Unless otherwise specified in the notice thereof,
meetings (whether regular, special or adjourned) of the Board of Directors of
the corporation shall be held at the principal office of the corporation for the
transaction of business, as specified in accordance with Section 1.1, which is
hereby designated as an office for such purpose in accordance with the laws of
the State of California, or at any other place within or without the State which
has been designated from time to time by resolution of the Board or by written
consent of all members of the Board.
2.8.2. Regular Meetings. Regular meetings of the Board of Directors, of which no
notice need be given except as required by the laws of the State of California,
shall be held after the adjournment of each annual meeting of the shareholders
(which meeting shall be designated the Regular Annual Meeting) and at such other
times as may be designated from time to time by resolution of the Board of
Directors. Such regular meetings shall be held at the principal office of the
corporation for the transaction of business as specified in accordance with
Section 1.1 or at any other place within or without the State of California
which has been designated from time to time by resolution of the Board or by
written consent of all members of the Board, unless notice of the place thereof
be given in the same manner as for special meetings.
2.8.3. Special Meetings. Special meetings of the Board of Directors may be
called at any time by the Chairman of the Board, the President, any Vice
President, the Secretary, or any two or more of the directors.
2.8.4. Notice of Meetings. Except in the case of regular meetings, notice of
which has been dispensed with, all meetings of the Board of Directors shall be
held upon four (4) days' notice by mail or forty-eight (48) hours' notice
delivered personally or by telephone, telegraph, or other electronic or wireless
means. If the address of a director is not shown on the records and is not
readily ascertainable, notice shall be addressed to him at the city or place in
which the meetings of the directors are regularly held. Except as set forth in
subsection 2.8.6, notice of the time and place of holding an adjourned meeting
need not be given to absent directors if the time and place be fixed at the
meeting adjourned.
2.8.5. Quorum. A majority of the authorized number of directors constitutes a
quorum of the Board for the transaction of business. Every act or decision done
or made by a majority of the directors present at a meeting duly held at which a
quorum is present shall be regarded as the act of the Board of Directors except
as otherwise provided by law. A meeting at which a quorum is initially present
may continue to transact business notwithstanding the
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withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.
2.8.6. Adjourned Meetings. A majority of the directors present, whether or not a
quorum is present, may adjourn any meeting to another time and place. If the
meeting is adjourned for more than 24 hours, notice of any adjournment to
another time or place shall be given prior to the time of the adjourned meeting
to the directors who were not present at the time of the adjournment.
2.8.7. Waiver of Notice and Consent. Notice of a meeting need not be given to
any director who signs a waiver of notice or a consent to holding the meeting or
an approval of the minutes thereof, whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to such director. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
2.8.8. Action Without a Meeting. Any action required or permitted to be taken by
the Board may be taken without a meeting, if all members of the Board shall
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board. Such action by written consent shall have the same force and effect as a
unanimous vote of such directors.
2.8.9. Conference Telephone Meetings. Members of the Board may participate in a
meeting through use of conference telephone or similar communications equipment,
so long as all members participating in such meeting can hear one another.
Participation in a meeting pursuant to this Section constitutes presence in
person at such meeting.
2.8.10. Meetings of Committees. The provisions of this Section apply also to
committees of the Board and action by such committees, with such changes in
points of detail as may be necessary.
ARTICLE 3
OFFICERS
Section 3.1. Election and Qualifications. The officers of the corporation shall
consist of a President, one or more Vice Presidents, a Secretary, and a Chief
Financial Officer who shall be chosen by the Board of Directors and such other
officers, including a Chairman of the Board, as the Board of Directors shall
deem expedient, who shall be chosen in such manner and hold their offices for
such terms as the Board of Directors may prescribe. Any two or more of such
offices may be held by the same person. Any Vice President, Assistant Treasurer,
or Assistant Secretary may exercise any of the powers of the President, the
Chief Financial Officer, or the Secretary, respectively, as directed by the
Board of Directors, and shall perform such other duties as are imposed upon such
officer by the Bylaws or the Board of Directors.
Section 3.2. Term of Office and Compensation. The term of office and salary of
each of said officers and the manner and time of the payment of such salaries
shall be fixed and
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determined by the Board of Directors and may be altered by said Board from time
to time at its pleasure, subject to the rights, if any, of said officers under
any contract of employment.
Section 3.3. Removal and Vacancies. Any officer of the corporation may be
removed at the pleasure of the Board of Directors at any meeting or at the
pleasure of any officer who may be granted such power by a resolution of the
Board of Directors. Any officer may resign at any time upon written notice to
the corporation without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. If any vacancy occurs in any
office of the corporation, the Board of Directors may elect a successor to fill
such vacancy for the remainder of the unexpired term and until a successor is
duly chosen and qualified.
ARTICLE 4
CHAIRMAN OF THE BOARD
The Chairman of the Board of Directors, if there be one, shall have the power to
preside at all meetings of the Board of Directors, and to call meetings of the
shareholders and of the Board of Directors to be held within the limitations
prescribed by law or by these Bylaws, at such times and at such places as the
Chairman of the Board shall deem proper. The Chairman of the Board shall have
such other powers and shall be subject to such other duties as the Board of
Directors may from time to time prescribe.
ARTICLE 5
PRESIDENT
Section 5.1. Powers and Duties. The powers and duties of the President are:
(a) To act as the chief executive officer of the corporation and, subject
to the control of the Board of Directors, to have general supervision,
direction, and control of the business and affairs of the corporation.
(b) To preside at all meetings of the shareholders and, in the absence of
the Chairman of the Board, or if there be none, at all meetings of the
Board of Directors.
(c) To call meetings of the shareholders and also of the Board of
Directors to be held, subject to the limitations prescribed by law or
by these Bylaws, at such times and at such places as the President
shall deem proper.
(d) Subject to the direction of the Board of Directors, to have general
charge of the property of the corporation and to supervise and control
all officers, agents, and employees of the corporation.
Section 5.2. President Pro Tem. If neither the Chairman of the Board, the
President, nor any Vice President is present at any meeting of the Board of
Directors, a President pro tem may be chosen to preside and act at such meeting.
If neither the President nor any Vice
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President is present at any meeting of the shareholders, a President pro tem may
be chosen to preside at such meeting.
ARTICLE 6
VICE PRESIDENT
In case of the absence, disability, or death of the President, the Vice
President, or one of the Vice Presidents, shall exercise all the powers and
perform all the duties of the President. If there is more than one Vice
President, the order in which the Vice Presidents shall succeed to the powers
and duties of the President shall be fixed by the Board of Directors. The Vice
President or Vice Presidents shall have such other powers and perform such other
duties as may be granted or prescribed by the Board of Directors.
ARTICLE 7
SECRETARY
The powers and duties of the Secretary are:
(a) To keep a book of minutes at the principal office of the corporation,
or such other place as the Board of Directors may order, of all
meetings of its directors and shareholders with the time and place of
holding, whether regular or special, and, if special, how authorized,
the notice thereof given, the names of those present at directors'
meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
(b) To keep the seal of the corporation and to affix the same to all
instruments which may require it.
(c) To keep or cause to be kept at the principal office of the
corporation, or at the office of the transfer agent or agents, a share
register, or duplicate share registers, showing the names of the
shareholders and their addresses, the number and classes of shares
held by each, the number and date of certificates issued for shares,
and the number and date of cancellation of every certificate
surrendered for cancellation.
(d) To keep a supply of certificates for shares of the corporation, to
fill in all certificates issued, and to make a proper record of each
such issuance; provided, that so long as the corporation shall have
one or more duly appointed and acting transfer agent of the shares, or
any class or series of shares, of the corporation, such duties with
respect to such shares shall be performed by such transfer agent or
transfer agents.
(e) To transfer upon the share books of the corporation any and all shares
of the corporation; provided, that so long as the corporation shall
have one or more duly appointed and acting transfer agent of the
shares, or any class or series of shares, of the corporation, such
duties with respect to such shares shall be performed by such transfer
agent or transfer agents, and the method of transfer of each
certificate shall be subject to the reasonable regulations of the
transfer agent to which the certificate is presented for transfer, and
also, if the corporation then has one or more duly appointed and
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acting registrars, to the reasonable regulations of the registrar to
which the new certificate is presented for registration; and provided,
further, that no certificate for shares of stock shall be issued or
delivered or, if issued or delivered, shall have any validity
whatsoever until and unless it has been signed or authenticated in the
manner provided in Section 12.2.
(f) To make service and publication of all notices that may be necessary
or proper, and without command or direction from anyone. In case of
the absence, disability, refusal, or neglect of the Secretary to make
service or publication of any notices, then such notices may be served
and/or published by the President, a Vice President, any person
thereunto authorized by either of them, the Board of Directors, or the
holders of a majority of the outstanding shares of the corporation.
(g) Generally to do and perform all such duties as pertain to the office
of Secretary and as may be required by the Board of Directors.
ARTICLE 8
CHIEF FINANCIAL OFFICER
The powers and duties of the Chief Financial Officer are:
(a) To supervise and control the keeping and maintaining of adequate and
correct accounts of the corporation's properties and business
transactions, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings, and shares.
The books of account shall at all reasonable times be open to
inspection by any director.
(b) To have the custody of all funds, securities, evidences of
indebtedness, and other valuable documents of the corporation, and, at
the Chief Financial Officer's discretion, to cause any or all thereof
to be deposited for the account of the corporation with such
depositary as may be designated from time to time by the Board of
Directors.
(c) To receive or cause to be received, and to give or cause to be given,
receipts and acquittances for moneys paid in for the account of the
corporation.
(d) To disburse, or cause to be disbursed, all funds of the corporation as
may be directed by the Board of Directors, taking proper vouchers for
such disbursements.
(e) To render to the President and the Board of Directors, whenever they
may require, accounts of all transactions and of the financial
condition of the corporation.
(f) Generally to do and perform all such duties as pertain to the office
of Chief Financial Officer and as may be required by the Board of
Directors.
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ARTICLE 9
COMMITTEES OF THE BOARD
Section 9.1. Appointment and Procedure. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of at least two or more
directors, to serve at the pleasure of the Board. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors.
Section 9.2. Powers. Any committee appointed by the Board of Directors, to the
extent provided in the resolution of the Board or in these Bylaws, shall have
all the authority of the Board except with respect to:
(a) the approval of any action which requires the approval or vote of the
shareholders;
(b) the filling of vacancies on the Board or on any committee;
(c) the fixing of compensation of the directors for serving on the Board
or on any committee;
(d) the amendment or repeal of Bylaws or the adoption of new Bylaws;
(e) the amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable;
(f) a distribution as defined at Section 166 of the California
Corporations Code, except at a rate or in a periodic amount or within
a price range set forth in the Articles of Incorporation or determined
by the Board;
(g) the appointment of other committees of the Board or the members
thereof.
Section 9.3. Executive Committee. In the event that the Board of Directors
appoints an Executive Committee, such Executive Committee, in all cases in which
specific directions to the contrary shall not have been given by the Board of
Directors, shall have and may exercise, during the intervals between the
meetings of the Board of Directors, all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation
(except as provided in Section 9.2) in such manner as the Executive Committee
may deem best for the interests of the corporation.
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ARTICLE 10
MEETINGS OF SHAREHOLDERS
Section 10.1. Place of Meetings. Meetings (whether regular, special, or
adjourned) of shareholders of the corporation shall be held at the principal
office for the transaction of business as specified in accordance with Section
1.1, or any place within or without the State which may be designated by written
consent of all the shareholders entitled to vote thereat, or which may be
designated by the Board of Directors.
Section 10.2. Time of Annual Meetings. The annual meeting of the shareholders
shall be at the hour of 4:00 o'clock in the afternoon on the second Wednesday in
February in each year, if not a legal holiday, and if a legal holiday, then on
the next succeeding business day not a legal holiday, or such other time or date
within fifteen months of the date of incorporation or the date of the last
annual meeting of shareholders (whichever is later) as may be set by the Board
of Directors.
Section 10.3. Special Meetings. Special meetings of the shareholders may be
called by the Board of Directors, the Chairman of the Board, the President, or
the holders of shares entitled to cast not less than ten percent (10%) of the
votes at the meeting.
Section 10.4. Notice of Meetings. Whenever shareholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given not less than 10 (or, if sent by third-class mail, 30) nor more than 60
days before the day of the meeting to each shareholder entitled to vote thereat.
Such notice shall state the place, date, and hour of the meeting and (a) in the
case of a special meeting, the general nature of the business to be transacted,
and no other business may be transacted, or (b) in the case of the annual
meeting, those matters which the Board, at the time of the mailing of the
notice, intends to present for action by the shareholders, but subject to the
provisions of Section 10.8 hereof any proper matter may be presented at the
meeting for such action. The notice of any meeting at which directors are to be
elected shall include the names of nominees intended at the time of the notice
to be presented by the Board of Directors for election.
Section 10.5. Delivery of Notice. Notice of a shareholders' meeting or the
furnishing of any report shall be given either personally or by first-class
mail, or, if the corporation has outstanding shares held of record by 500 or
more persons on the record date for the shareholders' meeting, notice may be
sent third-class mail, or other means of written communication, addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice; or if no such address appears or is given, at the place where the
principal executive office of the corporation is located or by publication at
least once in a newspaper of general circulation in the county in which the
principal executive office is located. The notice or report shall be deemed to
have been given at the time when delivered personally or deposited in the mail
or sent by other means of written communication. A verified statement of mailing
of any notice or report in accordance with the provisions of this Section,
executed by the secretary, assistant secretary, or any transfer agent, shall be
prima facie evidence of the giving of the notice or report. If any notice or
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report addressed to the shareholders at the address of such shareholder
appearing on the books of the corporation is returned to the corporation by
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice or report to the shareholder at such
address, all future notices or reports shall be deemed to have been duly given
without further mailing if the same shall be available for the shareholder upon
written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice
to all other shareholders.
Section 10.6. Adjourned Meetings. When a shareholders' meeting is adjourned to
another time or place, unless these Bylaws otherwise require, notice need not be
given of the adjourned meeting if the time and place thereof is announced at the
meeting at which the adjournment is taken. At the adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than 45 days or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote at the meeting.
Section 10.7. Consent to Shareholders' Meeting. The transactions of any meeting
of shareholders, however called and noticed, and wherever held, are as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote not present in person or by proxy
signs a written waiver of notice or consent to the holding of the meeting or an
approval of the minutes thereof. All such waivers, consents, and approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the California
General Corporation Law to be included in the notice but not so included in the
notice if such objection is expressly made at the meeting. Neither the business
to be transacted at nor the purpose of any regular or special meeting of
shareholders need be specified in any written notice, consent to the holding of
the meeting or approval of the minutes thereof, unless otherwise provided in the
Articles of Incorporation or Bylaws, except as provided in Section 10.8.
Section 10.8. Notice of Business to be Transacted in Certain Cases. Any
shareholder approval at a meeting, other than unanimous approval by those
entitled to vote, on any of the matters listed below shall be valid only if the
general nature of the proposal so approved was stated in the notice of meeting
or in any written waiver of notice:
(a) a proposal to approve a contract or other transaction between a
corporation and one or more of its directors, or between a corporation
and any corporation, firm, or association in which one or more
director has a material financial interest;
(b) a proposal to amend the Articles of Incorporation;
(c) a proposal regarding a reorganization, merger, or consolidation
involving the corporation;
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(d) a proposal to wind up and dissolve the corporation;
(e) a proposal to adopt a plan of distribution of the shares, obligations,
or securities of any other corporation, domestic or foreign, or assets
other than money which is not in accordance with the liquidation
rights of any preferred shares as specified in the Articles of
Incorporation.
Section 10.9. Quorum; Vote Required.
10.9.1. Quorum Required. The presence in person or by proxy of the persons
entitled to vote a majority of the voting shares at any meeting shall constitute
a quorum for the transaction of business. If a quorum is present, the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or voting by classes is
required by law, the Articles of Incorporation, or these Bylaws, and except as
provided in subsection 10.9.2.
10.9.2. Continuation of Business Despite Lack of Quorum. The shareholders
present at a duly called or held meeting at which a quorum is present may
continue to transact business until adjournment notwithstanding the withdrawal
of the number of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
10.9.3. No Votes Without Quorum. In the absence of a quorum, any meeting of
shareholders may be adjourned from time to time by the vote of a majority of the
shares represented either in person or by proxy, but no other business may be
transacted, except as provided in subsection 10.9.2.
Section 10.10. Actions Without Meeting.
10.10.1. Majority Consent. Any action which may be taken at any annual or
special meeting of shareholders may be taken without a meeting and without prior
notice, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted;
provided that, subject to the provisions of Section 2.6, directors may not be
elected by written consent except by unanimous written consent of all shares
entitled to vote for the election of directors.
10.10.2. Notice to Nonconsenting Shareholders. Unless the consents of all
shareholders entitled to vote have been solicited in writing,
(a) notice of any shareholder approval on matters described in subsections
(a), (c), or (e) of Section 10.8 or respecting indemnification of
agents of the corporation without a meeting by less than unanimous
written consent shall be given at least ten (10) days before the
consummation of the action authorized by such approval, and
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(b) prompt notice shall be given of the taking of any other corporate
action approved by shareholders without a meeting by less than
unanimous written consent, to those shareholders entitled to vote but
who have not consented in writing; the provisions of Section 10.5
shall apply to such notice.
10.10.3. Setting of Record Date. In order that the corporation may determine the
shareholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which date shall not be more than ten (10) days
after the date upon which the resolution fixing the record date is adopted by
the Board of Directors. Any shareholder of record seeking to have the
shareholders authorize or take corporate action by written consent shall, by
written notice to the secretary, request the Board of Directors to fix a record
date. The Board of Directors shall promptly, but in all events within ten (10)
days after the date on which such a request is received, adopt a resolution
fixing the record date (unless a record date has previously been fixed by the
Board of Directors pursuant to the first sentence of this Section). If no record
date has been fixed by the Board of Directors pursuant to the first sentence of
this Section or otherwise within ten (10) days of the date on which such a
request is received, the record date for determining shareholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the corporation by delivery to the secretary at the
principal executive offices of the corporation. Delivery shall be by hand or by
certified mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
applicable law, the record date for determining shareholders entitled to consent
to corporate action in writing without a meeting shall be at the close of
business on the date on which the Board of Directors adopts the resolution
taking such prior action.
10.10.4. Inspection. In the event of the delivery, in the manner provided by
Section 10.10.3, to the corporation of the requisite written consent or consents
to take corporate action and/or any related revocation or revocations, the
corporation shall engage independent inspectors of elections for the purpose of
performing promptly a ministerial review of the validity of the consents and
revocations. For the purpose of permitting the inspectors to perform such
review, no action by written consent without a meeting shall be effective until
such date as the independent inspectors certify to the corporation that the
consents delivered to the corporation in accordance with Section 10.10.3
represent at least the minimum number of votes that would be necessary to take
the corporate action. Nothing contained in this Section 10.10.4 shall in any way
be construed to suggest or imply that the Board of Directors or any shareholder
shall not be entitled to contest the validity of any consent or revocation
thereof, whether before or after such certification by the independent
inspectors, or to take any other action (including, without limitation, the
commencement, prosecution, or defense of any litigation with respect thereto,
and the seeking of injunctive relief in such litigation).
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10.10.5. Time Period for Consents. Every written consent shall bear the date of
signature of each shareholder who signs the consent and no written consent shall
be effective to take the corporate action referred to therein unless, within
sixty (60) days of the earliest dated written consent received in accordance
with Section 10.10.3, a written consent or consents signed by a sufficient
number of holders to take such action are delivered to the Corporation in the
manner prescribed in Section 10.10.3.
Section 10.11. Revocation of Consent. Any shareholder giving a written consent,
or the shareholder's proxy-holders, or a transferee of the shares or a personal
representative of the shareholder or their respective proxy-holders, may revoke
the consent by a writing received by the corporation prior to the time that
written consents of the number of shares required to authorize the proposed
action have been filed with the secretary of the corporation, but may not do so
thereafter. Such revocation is effective upon its receipt by the secretary of
the corporation.
Section 10.12. Voting Rights. Except as provided in Section 10.14, in the
Articles of Incorporation, or in any statute relating to the election of
directors or to other particular matters, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote of
shareholders. Any holder of shares entitled to vote on any matter may vote part
of the shares in favor of the proposal and refrain from voting the remaining
shares or vote them against the proposal, other than elections to office, but,
if the shareholder fails to specify the number of shares such shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares such shareholder is entitled to
vote.
Section 10.13. Determination of Holders of Record.
10.13.1. Record Date. In order that the corporation may determine the
shareholders entitled to notice of any meeting, to vote, to receive payment of
any dividend or other distribution or allotment of any rights, or to exercise
any rights in respect of any other lawful action, the Board of Directors may
fix, in advance, a record date, which shall not be more than 60 nor less than 10
days prior to the date of such meeting nor more than 60 days prior to any other
action.
10.13.2. Absence of Determination By Board. In the absence of any record date
set by the Board of Directors pursuant to subsection 10.13.1, then:
(a) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business
on the business day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the business day
next preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, when no prior action
by the Board has been taken, shall be the day on which the first
written consent is given.
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(c) The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the Board adopts
the resolution relating thereto, or the 60th day prior to the date of
such other action, whichever is later.
10.13.3. Adjournments. A determination of shareholders of record entitled to
notice of or to a vote at a meeting of shareholders shall apply to any
adjournment of the meeting unless the Board fixes a new record date for the
adjourned meeting, but the Board shall fix a new record date if the meeting is
adjourned for more than 45 days from the date set for the original meeting.
10.13.4. Effect of Post Record Date Transfers. Shareholders at the close of
business on the record date are entitled to notice and to vote or to receive the
dividend, distribution, or allotment of rights or to exercise the rights, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the Articles,
these Bylaws, agreement, or applicable law.
Section 10.14. Elections for Directors.
10.14.1. Right to Cumulate. Every shareholder complying with subsection 10.14.2
and normally entitled to vote at any election of directors may cumulate such
shareholder's votes and give one candidate a number of votes equal to the number
of directors to be elected multiplied by the number of votes to which the
shareholder's shares are entitled, or distribute the shareholder's votes on the
same principle among as many candidates as the shareholder thinks fit.
10.14.2. Procedure for Cumulating Votes. No shareholder shall be entitled to
cumulate votes (i.e., cast for any candidate a number of votes greater than the
number of the votes which such shareholder normally is entitled to cast) unless
such candidate or candidates' names have been placed in nomination prior to the
voting and the shareholder has given written notice to the chairman of the
meeting at the meeting prior to the voting of the shareholder's intention to
cumulate the shareholder's votes. If any one shareholder has given such notice,
all shareholders may cumulate their votes for candidates in nomination.
10.14.3. Directors Elected. In any election of directors, the candidates
receiving the highest number of affirmative votes of the shares entitled to be
voted for them up to the number of directors to elected by such shares are
elected; votes against directors and votes withheld shall have no effect.
10.14.4. Ballot Optional. Elections for directors need not be by ballot unless a
shareholder demands election by ballot at the meeting and before the voting
begins.
Section 10.15. Proxies.
10.15.1. Proxies Authorized. Every person entitled to vote shares may authorize
another person or persons to act by proxy with respect to such shares. Any proxy
purporting to be executed in accordance with the provisions of the General
Corporation Law of the State of California shall be presumptively valid.
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10.15.2. Term of Proxy. No proxy shall be valid after the expiration of 11
months from the date thereof unless otherwise provided in the proxy. Every proxy
continues in full force and effect until revoked by the person executing it
prior to the vote pursuant thereto, except as otherwise provided in this
Section. Such revocation may be effected by a writing delivered to the
corporation stating that the proxy is revoked or by a subsequent proxy executed
by the person executing the prior proxy and presented to the meeting, or as to
any meeting by attendance at such meeting and voting in person by the person
executing the proxy. The dates contained on the forms of proxy presumptively
determine the order of execution, regardless of the postmark dates on the
envelopes in which they are mailed.
10.15.3. Death of Proxy Maker. A proxy is not revoked by the death or incapacity
of the maker unless, before the vote is counted, written notice of such death or
incapacity is received by the corporation.
Section 10.16. Inspectors of Election.
10.16.1. Appointment. In advance of any meeting of shareholders, the Board may
appoint inspectors of election to act at the meeting and any adjournment
thereof. If inspectors of election are not so appointed, or if any persons so
appointed fail to appear or refuse to act, the chairman of any meeting of
shareholders may, and on the request of any shareholder or a shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail
or refuse) at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more shareholders or
proxies, the majority of shares represented in person or by proxy shall
determine whether one or three inspectors are to be appointed.
10.16.2. Duties. The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity, and effect of proxies,
receive votes, ballots, or consents, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count, and
tabulate all votes and consents, determine when the polls shall close, determine
the result, and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.
10.16.3. Good Faith; Acts. The inspectors of election shall perform their duties
impartially, in good faith, to the best of their ability, and as expeditiously
as is practical. If there are three inspectors of election, the decision, act,
or certificate of a majority is effective in all respects as the decision, act,
or certificate of all. Any report or certificate made by the inspectors of
election is prima facie evidence of the facts stated therein.
Section 10.17. Nominations and Proposals at Annual Meetings.
10.17.1. Nominations and Proposals. Nominations of persons for election to the
Board of Directors and the proposal of business to be transacted by the
shareholders may be made at an annual meeting of shareholders (a) pursuant to
the corporation's notice with respect to such meeting, (b) by or at the
direction of the Board of Directors or (c) by any shareholder of the corporation
who was a shareholder of record at the time of giving of the notice provided for
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in this section, who is entitled to vote at the meeting and who has complied
with the notice procedures set forth in this section.
10.17.2. Prior Notice. For nominations or other business to be properly brought
before an annual meeting by a shareholder pursuant to Section 10.17.1(c), the
shareholder must have given timely notice thereof in writing to the secretary of
the corporation and such business must be a proper matter for shareholder action
under the California General Corporation Law. To be timely, a shareholder's
notice shall be delivered to the secretary at the principal executive offices of
the corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting of shareholders; provided,
however, that if the date of the annual meeting is advanced more than 30 days
prior to or delayed by more than 60 days after such anniversary date, notice by
the shareholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made. Such
shareholder's notice shall set forth (a) as to each person whom the shareholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (b)
as to any other business that the shareholder proposes to bring before the
meeting, a brief description of such business, the reasons for conducting such
business at the meeting and any material interest in such business of such
shareholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the shareholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such shareholder, as they appear on the corporation's books, and of
such beneficial owner and (ii) the class and number of shares of the corporation
that are owned beneficially and of record by such shareholder and such
beneficial owner.
10.17.3. Increase in Number of Directors to be Elected. Notwithstanding anything
in the second sentence of Section 10.17.2 to the contrary, in the event that the
number of directors to be elected to the Board of Directors is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the corporation
at least 70 days prior to the first anniversary of the preceding year's annual
meeting, a shareholder's notice required by this Section shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the secretary at the
principal executive offices of the corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the corporation.
10.17.4. No Other Business. Only persons nominated in accordance with the
procedures set forth in this section shall be eligible to serve as directors and
only such business shall be conducted at an annual meeting of shareholders as
shall have been brought before the meeting in accordance with the procedures set
forth in this section. The chair of the meeting shall have the power and the
duty to determine whether a nomination or any business proposed to be
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brought before the meeting has been made in accordance with the procedures set
forth in these Bylaws and, if any proposed nomination or business is not in
compliance with these Bylaws to declare that such defective proposed business or
nomination shall not be presented for shareholder action at the meeting and
shall be disregarded.
10.17.5. Definition. For purposes of this section, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service or in a document publicly
filed by the Company with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
10.17.6. No Effect On Exchange Act Requirements. Notwithstanding the foregoing
provisions of this Section, a shareholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations thereunder with
respect to matters set forth in this Section. Nothing in this section shall be
deemed to affect any rights of shareholders to request inclusion of proposals in
the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 10.18. Special Meetings; Other Provisions. The Board of Directors may
postpone, reschedule or cancel any previously scheduled special meeting.
Nominations of persons for election to the Board of Directors may be made at a
special meeting of Shareholders at which directors are to be selected pursuant
to the Company's notice of meeting (a) by or at the direction of the Board of
Directors or (b) by any shareholder of the corporation who is a shareholder of
record at the time of giving of notice provided for in these Bylaws, who shall
be entitled to vote at the meeting and who complies with the notice procedures
set forth in this Section. Nominations by shareholders of persons for election
to the Board of Directors may be made at such a special meeting of shareholders
if the shareholder's notice required by Section 10.17.2 of these Bylaws shall be
delivered to the secretary at the principal executive offices of the corporation
not earlier than the 90th day prior to such special meeting and not later than
the close of business on the later of the 60th day prior to such special meeting
or the 10th day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be selected at such meeting.
ARTICLE 11
INDEMNIFICATION OF DIRECTORS, OFFICERS, AND AGENTS
Section 11.1. Indemnification For Third Party Actions. The corporation shall
indemnify any officer or director of the corporation, and may indemnify any
other person, who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that such person is or
was an agent of the corporation, against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with such proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of such person was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendre or its
equivalent shall not, of itself, create a presumption that the person did not
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act in good faith and in a manner which the person reasonably believed to be in
the best interests of the corporation or that the person had reasonable cause to
believe that the person's conduct was unlawful.
Section 11.2. Indemnification For Claims By the Corporation. The corporation
shall indemnify any officer or director of the corporation, and may indemnify
any other person, who was or is a party or is threatened to be made a party to
any threatened, pending, or completed action by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was an agent of the corporation, against expenses actually and
reasonably incurred by such person in connection with the defense or settlement
of such action if such person acted in good faith, in a manner such person
believed to be in the best interests of the corporation and its shareholders.
Section 11.3. Indemnification For Successful Defense. To the extent that an
agent of the corporation is successful on the merits in defense of any
proceeding or in defense of any claim, issue, or matter therein, the agent shall
be indemnified against expenses actually and reasonably incurred by the agent in
connection therewith.
Section 11.4. Advances of Expenses. Expenses incurred by an officer or director
of the corporation in defending a proceeding shall be advanced by the
corporation, and expenses incurred by a person other than an officer or director
of the corporation in defending a proceeding may be advanced by the corporation,
before final disposition of the proceeding. As a condition to any such advance,
the corporation shall receive an undertaking by or on behalf of the officer,
director, or agent to repay such amount if it is determined ultimately that the
agent is not entitled to be indemnified. With respect to advances to persons
other than officers or directors, the corporation may require such terms and
collateral as it deems appropriate as a condition to any such advance. The
corporation shall pay expenses of officers and directors required to be paid
under this Section within 45 days after the corporation receives evidence of the
expenses in form sufficient to document them for tax purposes.
Section 11.5. Prohibitions on Indemnification.
11.5.1. Inconsistent With Controlling Documents or Court Orders, or Culpable
Acts. No indemnification or advance shall be made under this Article, except as
provided in Section 11.3 or Section 11.6(c), in any circumstance where it
appears that:
(a) it would be inconsistent with a provision of the Articles of
Incorporation of the corporation, these Bylaws, a resolution of the
shareholders, or an agreement in effect at the time of the accrual of
the alleged cause of action asserted in the proceeding in which the
expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
(b) it would be inconsistent with any condition expressly imposed by a
court in approving a settlement.
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11.5.2. Selfish or Reckless Actions. No indemnification or advance shall be made
under this Article, except as provided in Section 11.3, in any circumstance
where it appears that the agent may be liable:
(a) for acts or omissions that involve intentional misconduct or a knowing
and culpable violation of law;
(b) for acts or omissions that the agent believes to be contrary to the
best interests of the corporation or its shareholders or that involve
the absence of good faith on the part of the agent;
(c) for any transaction from which the agent derived an improper personal
benefit;
(d) for acts or omissions that show a reckless disregard for the agent's
duty to the corporation or its shareholders in circumstances in which
the agent was aware, or should have been aware, in the ordinary course
of performing the agent's duties, of a risk of serious injury to the
corporation or its shareholders;
(e) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the agent's duty to the
corporation or its shareholders; or
(f) under Section 310 or Section 316 of the California Corporations Code.
11.5.3. Additional Prohibitions on Indemnification of Claims by the Corporation.
No indemnification shall be made under Section 11.2,
(a) in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable to the corporation in the
performance of such person's duty to the corporation and its
shareholders, unless and only to the extent that the court in which
such proceeding is or was pending shall determine upon application
that, in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for expenses and then only
to the extent that the court shall determine;
(b) of amounts paid in settling or otherwise disposing of a pending action
without court approval; or
(c) of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
Section 11.6. Authorization of Indemnification. Except as provided in Section
11.3, any indemnification under this Article shall be made by the corporation
only if authorized in the specific case, upon a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in Section 11.1 or 11.2, by
any of the following:
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(a) A majority vote of a quorum consisting of directors who are not
parties to such proceeding;
(b) If such quorum of directors is not obtainable, by independent legal
counsel in a written opinion;
(c) Approval of the shareholders, with the shares owned by the person to
be indemnified not being entitled to vote thereon; or
(d) The court in which such proceeding is or was pending upon application
made by the corporation or the agent or the attorney or other person
rendering services in connection with the defense, whether or not such
application by the agent, attorney or other person is opposed by the
corporation.
Section 11.7. Bylaws Not Exclusive. The corporation may agree that it shall
indemnify or advance expenses in situations where such indemnification or
advance is not mandatory as the Board of Directors deems appropriate. The
indemnification provided by this Article shall not be deemed exclusive of any
other rights to which those seeking indemnification may be entitled under any
law, other provisions of these Bylaws, the corporation's Articles of
Incorporation, agreement, vote of shareholders or disinterested directors, or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office, as authorized in the Articles of
Incorporation of the corporation. The rights to indemnification under this
Article shall continue as to a person who has ceased to be an agent and shall
inure to the benefit of the heirs, executors, and administrators of such person.
Nothing contained in this Article shall affect any right to indemnification to
which persons other than such directors and officers may be entitled by contract
or otherwise.
Section 11.8. Insurance. The corporation may purchase and maintain insurance on
behalf of any agent against any liability asserted against or incurred by the
agent in such capacity or arising out of the agent's status as such, whether or
not the corporation has the power to indemnify the agent against such liability
under this subsection.
Section 11.9. Optional Means of Assuring Payment. The corporation may, but is
not required to, create a trust fund, grant a security interest, obtain a letter
of credit, or use other means to ensure the payment of such sums as may be
necessary to indemnify its agents as provided herein.
Section 11.10. Savings Clause. If any portion of this Article is invalid, then
the corporation shall nevertheless indemnify each officer and director, and each
agent the corporation elects to indemnify, to the full extent permitted by any
applicable portion of this Article that is not invalid, or by any applicable
agreement or law. Without limiting the foregoing, if any portion of this Article
is invalid because it is too broad, the corporation shall be required or
entitled, as the case may be, to indemnify its agents to the full extent
permitted as if all necessary limitations had been included herein.
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Section 11.11. Application of Other Laws. Nothing in this Article shall restrict
the power of the corporation to indemnify its agents under any provision of law
from time to time applicable to the corporation, nor shall anything in this
Article authorize the corporation to indemnify its agents in situations
prohibited by law.
Section 11.12. Definitions. For the purpose of this Article 11:
(a) "agent" means any person who is or was a director, officer, employee,
or other agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee, or agent of
another foreign or domestic corporation, partnership, joint venture,
trust, or other enterprise, or was a director, officer, employee, or
agent of a foreign or domestic corporation which was a predecessor
corporation of the corporation or of another enterprise at the request
of such predecessor corporation;
(b) "officer" means the chief executive officer, chief operating officer,
chief financial officer, president, treasurer, secretary, and any vice
president, assistant treasurer, and assistant secretary of the
corporation;
(c) "proceeding" means any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative;
and
(d) "expenses" includes without limitation attorneys' fees and any
expenses establishing a right to indemnification.
ARTICLE 12
SUNDRY PROVISIONS
Section 12.1. Shares Held by the Corporation. Shares in other corporations
standing in the name of this corporation may be voted or represented and all
rights incident thereto may be exercised on behalf of this corporation by the
President or by any other officer of this corporation authorized so to do by
resolution of the Board of Directors.
Section 12.2. Certificates of Stock. There shall be issued to each holder of
fully paid shares of the capital stock of the corporation a certificate or
certificates for such shares. Every holder of shares in the corporation shall be
entitled to have a certificate signed in the name of the corporation by the
Chairman or Vice Chairman of the Board, the President, or a Vice President and
by the Chief Financial Officer, an Assistant Treasurer, the Secretary, or any
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the
certificates may be facsimile. In case any officer, transfer agent, or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent, or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if such person were an officer, transfer agent, or registrar at the date of
issue.
Section 12.3. Lost Certificates. The corporation may issue a new share
certificate or a new certificate for any other security in the place of any
certificate theretofore issued by it, alleged to have been lost, stolen, or
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destroyed, and the corporation may require the owner of the lost, stolen, or
destroyed certificate or the owner's legal representative to give the
corporation a bond (or other adequate security) sufficient to indemnify it
against any claim that may be made against it (including any expense or
liability) on account of the alleged loss, theft, or destruction of any such
certificate or the issuance of such new certificate. The Board of Directors may
adopt such other provisions and restrictions with reference to lost
certificates, not inconsistent with applicable law, as it shall in its
discretion deem appropriate.
Section 12.4. Certification and Inspection of Bylaws. The corporation shall keep
at its principal executive office in this state, or if its principal executive
office is not in this state at its principal business office in this state, the
original or a copy of these Bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside this state and the
corporation has no principal business office in this state, it shall upon the
written request of any shareholder furnish to such shareholder a copy of the
Bylaws as amended to date.
Section 12.5. Notices. Any reference in these Bylaws to the time a notice is
given or sent means, unless otherwise expressly provided, the time a written
notice by mail is deposited in the United States mails, postage prepaid; or the
time any other written notice is personally delivered to the recipient or is
delivered to a common carrier for transmission, or actually transmitted by the
person giving the notice by electronic means, to the recipient; or the time any
oral notice is communicated, in person or by telephone or wireless, to the
recipient or to a person at the office of the recipient who the person giving
the notice has reason to believe will promptly communicate it to the recipient.
Section 12.6. Reports to Shareholders. Except as may otherwise be required by
law, the rendition of an annual report to the shareholders is waived so long as
there are less than 100 holders of record of the shares of the corporation
(determined as provided in Section 605 of the California General Corporation
Law). At such time or times, if any, that the corporation has 100 or more
holders of record of its shares, the Board of Directors shall cause an annual
report to be sent to the shareholders not later than 120 days after the close of
the fiscal year or within such shorter time period as may be required by
applicable law, and such annual report shall contain such information and be
accompanied by such other documents as may be required by applicable law.
Section 12.7. Loans to Officers. The Board may approve loans of money or
property to, and guaranties of the obligations of, officers of the corporation,
and may adopt employee benefit plans authorizing such loans and guaranties to
officers of the corporation, without the approval of the shareholders of the
corporation, provided that:
(a) the corporation has outstanding shares held of record by more than 100
persons;
(b) the vote of any interested director or directors is not counted; and
(c) the Board determines that such loan, guaranty, or plan may reasonably
be expected to benefit the corporation.
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ARTICLE 13
CONSTRUCTION OF BYLAWS WITH
REFERENCE TO PROVISIONS OF LAW
Section 13.1. Definitions. Unless defined otherwise in these Bylaws or unless
the context otherwise requires, terms used herein shall have the same meaning,
if any, ascribed thereto in the California General Corporation Law, as amended
from time to time.
Section 13.2. Bylaw Provisions Additional and Supplemental to Provisions of Law.
All restrictions, limitations, requirements, and other provisions of these
Bylaws shall be construed, insofar as possible, as supplemental and additional
to all provisions of law applicable to the subject matter thereof and shall be
fully complied with in addition to the said provisions of law unless such
compliance shall be illegal.
Section 13.3. Bylaw Provisions Contrary to or Inconsistent with Provisions of
Law. Any portion of these Bylaws that, upon being construed in the manner
provided in Section 13.2, is contrary to or inconsistent with any applicable
law, shall not apply so long as said law remains in effect. Such result shall
not, however, affect the validity or application of any other portion of these
Bylaws. Each portion of these Bylaws would have been adopted even if any other
portion were invalid or unenforceable.
ARTICLE 14
ADOPTION, AMENDMENT, OR REPEAL OF BYLAWS
Section 14.1. By Shareholders. Bylaws may be adopted, amended, or repealed by
the approval of the affirmative vote of a majority of the outstanding shares of
the corporation entitled to vote.
Section 14.2. By the Board of Directors. Subject to the right of shareholders to
adopt, amend, or repeal Bylaws, Bylaws other than a Bylaw or amendment thereof
changing the authorized number of directors or any provision of this Article may
be adopted, amended, or repealed by the Board of Directors. A Bylaw adopted by
the shareholders may restrict or eliminate the power of the Board of Directors
to adopt, amend, or repeal any or all Bylaws.
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CERTIFICATE OF SECRETARY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned does hereby certify that the undersigned is the Secretary
of ILC Technology, Inc., a corporation duly organized and existing under and by
virtue of the laws of the State of California; that the above and foregoing
Bylaws of said corporation were duly and regularly adopted as such by the Board
of Directors of said corporation; and that the above and foregoing Bylaws are
now in full force and effect.
Dated: November 21, 1996
/s/ Ronald E. Fredianelli
Ronald E. Fredianelli, Secretary
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EXHIBIT 10.11
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made and entered into as of March 25,
1996 by and between ILC Technology, Inc., ("Borrower") and UNION BANK, a
California banking corporation ("Bank").
SECTION 1. THE LOAN
1.1.1 THE REVOLVING LOAN.
Bank will loan to Borrower an amount not to exceed Four Million Dollars
($4,000,000) outstanding in the aggregate at any one time (the "Revolving
Loan"). Borrower may borrow, repay and reborrow all or part of the Revolving
Loan in accordance with the terms of the Revolving Note. All borrowings of the
Revolving Loan must be made before March 31, 1998 at which time all unpaid
principal and interest of the Revolving Loan shall be due and payable. The
Revolving Loan shall be evidenced by a promissory note (the "Revolving Note") on
the standard form used by Bank for commercial loans. Bank shall enter each
amount borrowed and repaid in Bank's records and such entries shall be deemed to
be the amount of the Revolving Loan outstanding. Omission of Bank to make any
such entries shall not discharge Borrower of its obligation to repay in full
with interest all amounts borrowed.
1.1.2 NON-REVOLVING EQUIPMENT LOAN.
Bank will loan to Borrower an amount not to exceed Two Million Two Hundred
Thousand Dollars ($2,2000,000) outstanding in the aggregate at any one time (the
"Non-Revolving Loan"). All borrowings of the Non-Revolving Loan must be made
before March 31, 1997 at which time all unpaid principal under the Non-Revolving
Loan shall be converted to a fully amortizing loan as set forth in subsection
1.1.3. In the event of a prepayment of principal after such conversion and
payment of any resulting fees, any repaid amounts shall be applied to the
scheduled principal payments in the reverse order of their maturity. The
Non-Revolving Loan shall be evidenced by a promissory note (the "Non-Revolving
Note") on the standard form used by Bank for commercial loans. Bank shall enter
each amount borrowed and repaid in Bank's records and such entries shall be
deemed to be the amount of the Non-Revolving Loan outstanding. Omission of Bank
to make any such entries shall not discharge Borrower of its obligation to repay
in full with interest all amounts borrowed.
1.1.3 THE TERM LOAN.
Solely to repay the Non-Revolving Loan, Bank will loan to Borrower the sum
outstanding at the maturity of the Non-Revolving Loan in one disbursement on or
before March 31, 1997 (the "Term Loan"). In the event of a prepayment of
principal and payment of any resulting fees, any prepaid amounts shall be
applied to the scheduled principal payments in the reverse order of their
maturity. The Term Loan shall be evidenced by a promissory note (the "Term
Note") on the standard form used by Bank for commerical loans.
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1.1.4 OTHER LOANS.
Bank has extended and will continue to extend, subject to the terms of this
Agreement and the terms of the respective Note, certain additional facilities
each evidenced by a Note described as follows:
A. Obligation #008000001 dated 2/2/96 in the orignal principal amount of
$1,252,800 with a present unpaid principal balance of $1,200,600.
B. Obligation #00270003 dated 8/23/93 in the original principal amount of
$5,000,000 with a present unpaid principal balance of $3,562,000.
C. Obligation #0000000003 dated 6/24/94 in the original principal amount
of $360,000 with a present unpaid principal balance of $45,000.
D. Obligation #0001000001 dated 1/6/95 in the original principal amount
of $1,464,000 with a present unpaid principal balance of $610,000.
1.2 TERMINOLOGY.
As used herein the word "Loan" shall mean, collectively, all the credit
facilities described above.
As used herein the word "Note" shall mean, collectively, all the promissory
notes described above.
As used herein, the words "Loan Documents" shall mean all documents
executed in connection with this Agreement.
1.3 BORROWING BASE.
Notwithstanding any other provisions of this Agreement, Bank shall not be
obligated to advance funds under the Revolving Loan, if at any time the
aggregate of Borrower's obligations to Bank thereunder shall exceed the sum of
seventy-five percent (75%) of Borrower's Eligible Accounts. If at any time
Borrower's obligations to Bank under the above facilities exceed the sum so
permitted, Borrower shall immediately repay to Bank such excess.
1.3.1 ELIGIBLE ACCOUNTS.
The term "Accounts" means all presently existing and hereafter arising
accounts receivable, contract rights, chattel paper, and all other forms of
obligations owing to Borrower, payable in United States Dollars, arising out of
the sale or lease of goods, or the rendition of services by Borrower, whether or
not earned by performance, and any and all credit insurance, guaranties and
other security therefor, as well as all merchandise returned to or reclaimed by
Borrower and Borrower's books and records relating to any of the foregoing. The
term "Eligible Accounts" means those Accounts, net of finance charges, which are
due and payable within Ninety (90) days, or less, from the date of the invoice,
have been validly assigned to Bank and strictly comply with all of Borrower's
warranties and representations to Bank, but Eligible Accounts shall not include
the following:
(a) Any Account with respect to which the account debtor is an officer,
shareholder, director, employee or agent of Borrower;
(b) Any Account with respect to which the account debtor is a subsidiary
of, related to, or affiliated or has common officers or directors with
Borrower;
(c) Any Account relating to goods placed on consignment, guaranteed sale
or other terms by reason of which the payment by the account debtor
may be conditional;
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(d) Any Account with respect to which the account debtor is not a resident
of the United States or Canada;
(e) Any Account with respect to which the account debtor is the United
States or any department, agency or instrumentality of the United
States;
(f) Any Account with respect to which Borrower is or may become liable to
the account debtor for goods sold or services rendered by the account
debtor to Borrower;
(g) Any Account with respect to which there is asserted a defense,
counterclaim, discount or setoff, whether well-founded or otherwise,
except for those discounts, allowances and returns arising in the
ordinary course of Borrower's business;
(h) Any Account with respect to which the account debtor becomes
insolvent, fails to pay its debts as they mature or goes out of
business or is owed by an account debtor which has become the subject
of a proceeding under any provision of the Untied States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law,
including, but not limited to, assignments for the benefit of
creditors, formal or informal moratoriums, compositions or extensions
with all or substantially all of its creditors;
(i) Any Account owed by any account debtor with respect to which
twenty-five percent (25%) or more of the aggregate dollar amount of
its Accounts are not paid within ninety (90) days from the due date of
the invoice;
(j) That portion of the Accounts owed by any single account debtor which
exceeds twenty percent (20%) of all of the Accounts; and
1.4 PURPOSE OF LOAN.
The proceeds of the Revolving Loan shall be used for general working
capital purposes and the proceeds of the Non-Revolving Loan shall be used only
for Borrower's Capital Equipment Requirements, and the proceeds of the Term Loan
shall be used only for the repayment of the Non-Revolving Loan.
1.5 INTEREST.
(A) Interest on the usage of the Revolving Loan shall be payable monthly
to March 31, 1998 at which time the principal shall be due and
payable. Interest on this loan shall be payable at Bank's Reference
Rate or at the Borrower's option a fixed rate of libor plus 200 basis
points. Twenty four hour notice shall be given if the fixed rate
option is taken.
(B) Interest on the usage of the Revolving Equipment Loan shall be payable
monthly to March 31, 1998 at which time the principal amount then
outstanding will equally amortize over a 24 month period. Interest on
this loan shall be payable at Bank's Reference Rate or at the
Borrower's option a fixed rate of libor plus 200 basis points. Twenty
four hour notice shall be given if the fixed rate option is taken.
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1.6 BALANCES.
Borrower shall maintain its major depository accounts with Bank until the
Note and all sums payable pursuant to this Agreement have been paid in full.
1.7 DISBURSEMENT.
Upon execution hereof, Bank shall disburse the proceeds of the Loan as
provided in Bank's standard form Authorization executed by Borrower.
1.8 SECURITY.
Prior to any disbursement of the Loan, Borrower, ILC
Technology, Inc. and Guarantors, Converter Power, Inc. and Precision Lamp, Inc.,
shall have executed a security agreement, on Bank's standard form, and a
financing statement, suitable for filing in the office of the Secretary of State
of the State of California and any other state designated by Bank, granting to
Bank a first priority security interest in such of Borrower's property as is
described in said security agreement. Exceptions to Bank's first priority, if
any, are permitted only as otherwise provided in this Agreement.
1.9 CONTROLLING DOCUMENT.
In the event of any inconsistency between the terms of this Agreement and
any Note or any of the other Loan Documents, the terms of such Note or other
Loan Documents will prevail over the terms of this Agreement.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the proceeds
of the Loan unless at or prior to the time for the making of such disbursement,
the following conditions have been fulfilled to Bank's satisfaction.
2.1 COMPLIANCE.
Borrower shall have performed and complied with all terms and condition
required by this Agreement to be performed or complied with by it prior to or at
the date of the making of such disbursement and shall have executed and
delivered to Bank the Note and other documents deemed necessary by Bank.
2.2 GUARANTIES.
Converter Power, Inc., Precision Lamp, Inc. and Q-ARC Limited
("Guarantors") shall have executed and delivered to Bank their respective
continuing guaranties in form and amount satisfactory to Bank. Borrower shall
cause each Guarantor to submit to Bank not later than Ninety (90) days after the
end of each fiscal year such Guarantor's financial statement in form
satisfactory to Bank.
2.3 BORROWING RESOLUTION.
Borrower shall have provided Bank with certified copies of resolutions duly
adopted by the Board of Directors of Borrower, authorizing this Agreement and
the Loan Documents. Such resolutions shall also designate the persons who are
authorized to act on Borrower's behalf in connection with this Agreement and to
do the things required of Borrower pursuant to this Agreement.
2.4 CONTINUING COMPLIANCE.
At the time any disbursement is to be made, there shall not exist any
event, condition or act which constitutes an event of default under Section 6
hereof or any event, condition or act which with notice, lapse of time or both
would constitute such event of default; nor shall there be any such event,
condition, or act immediately after the disbursement were it to be made.
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SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY.
The principal business of Borrower is Manufacturer of Light Source
Products.
3.2 AFFILIATES AND SUBSIDIARIES.
Borrower's affiliates and subsidiaries (those entities in which Borrower
has either a controlling interest or at least 25% ownership interest) and their
addresses, and the names of Borrower's principal shareholders, are as provided
on a schedule delivered to Bank on or before the date of this Agreement.
3.3 AUTHORITY TO BORROW.
The execution, delivery and performance of this Agreement, the Note and all
other agreements and instruments required by Bank in connection with the Loan
are not in contravention of any of the terms of any indenture, agreement or
undertaking to which Borrower is a party or by which it or any of its property
is bound or affected.
3.4 FINANCIAL STATEMENTS.
The financial statements of Borrower, including both a balance sheet at
September 30, 1995, together with supporting schedules, and an income statement
for the Twelve (12) months ended September 30, 1995, have heretofore been
furnished to Bank, and are true and complete and fairly represent the financial
condition of Borrower during the period covered thereby. Since September 30,
1995, there has been no material adverse change in the financial condition or
operations of Borrower.
3.5 TITLE.
Except for assets which may have been disposed of in the ordinary course of
business, Borrower has good and marketable title to all of the property
reflected in its financial statements delivered to Bank and to all property
acquired by Borrower since the date of said financial statements, free and clear
of all liens, encumbrances, security interests and adverse claims except those
specifically referred to in said financial statements.
3.6 LITIGATION.
There is no litigation or proceeding pending or threatened against Borrower
or any of its property which is reasonably likely to affect the financial
condition, property or business of Borrower in a materially adverse manner or
result in liability in excess of Borrower's insurance coverage.
3.7 DEFAULT.
Borrower is not now in default in the payment of any of its material
obligations, and there exists no event, condition or act which constitutes an
event of default under Section 6 hereof and no condition, event or act which
with notice or lapse of time, or both, would constitute an event of default.
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3.8 COMPLIANCE WITH LAWS.
Borrower is not in violation with respect to any applicable laws, rules,
ordinances or regulations which materially affect the operations or financial
condition of Borrower.
3.9 CONTINUING REPRESENTATIONS.
These representations shall be considered to have been made again at and as
of the date of each disbursement of the Loan and shall be true and correct as of
such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any other
of the Loan Documents have been paid in full, unless Bank waives compliance in
writing, Borrower agrees that:
4.1 USE OF PROCEEDS.
Borrower will use the proceeds of the Loan only as provided in subsection
1.4 above.
4.2 PAYMENT OF OBLIGATIONS.
Borrower will pay and discharge promptly all taxes, assessments and other
governmental charges and claims levied or imposed upon it or its property, or
any part thereof, provided, however, that Borrower shall have the right in good
faith to contest any such taxes, assessments, charges or claims and, pending the
outcome of such contest, to delay or refuse payment thereof provided that
adequately funded reserves are established by it to pay and discharge any such
taxes, assessments, charges and claims.
4.3 MAINTENANCE OF EXISTENCE.
Borrower will maintain and preserve its existence and assets and all
rights, franchises, licenses and other authority necessary for the conduct of
its business and will maintain and preserve its property, equipment and
facilities in good order, condition and repair. Bank may, at reasonable times,
visit and inspect any of the properties of Borrower.
4.4 RECORDS.
Borrower will keep and maintain full and accurate accounts and records of
its operations according to generally accepted accounting principles and will
permit Bank to have access thereto, to make examination and photocopies thereof,
and to make audits during regular business hours. Costs for such audits shall be
paid by Borrower.
4.5 INFORMATION FURNISHED.
Borrower will furnish to Bank:
(a) Within Forty-Five (45) days after the close of each fiscal quarter,
except for the final quarter of each fiscal year, its unaudited
balance sheet as of the close of such fiscal quarter, its unaudited
income and expense statement with supportive schedules and statement
of retained earnings for that fiscal quarter, prepared in accordance
with generally accepted accounting principles:
(b) Within Ninety (90) days after the close of each fiscal year, a copy of
its statement of financial condition including at least its balance
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sheet as of the close of such fiscal year, its income and expense
statement and retained earnings statement for such fiscal year,
examined and prepared on an audited basis by independent certified
public accountants selected by Borrower and reasonably satisfactory to
Bank, in accordance with generally accepted accounting principles
applied on a basis consistent with that of the previous year;
(c) As soon as available, but in any event within Ninety (90) days after
the close of each fiscal year of Borrower, projections for the next
succeeding fiscal year of corresponding cash flow statement by
Borrower and acceptable to Bank;
(d) Such other financialstatements and information as Bank may reasonably
request from time to time;
(e) In connection with each financial statement provided hereunder, a
statement executed by Chief Financial Officer of Borrower, certifying
that no default has occurred and no event exists which with notice or
the lapse of time, or both, would result in a default hereunder;
(f) In connection with each fiscal year-end statement required hereunder,
any management letter of Borrower's certified public accountants;
(g) Within Forty-Five (45) days after each fiscal quarter, a certification
of compliance with all covenants under this Agreement, executed by
Borrower's chief financial officer or other duly authorized officer of
Borrower, in form acceptable to Bank;
(h) Prompt written notice to Bank of all events of default under any of
the terms or provisions of this Agreement or of any other agreement,
contract, document or instrument entered, or to be entered into with
Bank; and of any litigation which, if decided adversely to Borrower,
would have a material adverse effect on Borrower's financial
condition; and of any other matter which has resulted in, or is likely
to result in, a material adverse change in its financial condition or
operations; and
(i) Prior written notice to Bank of any changes in Borrower's officers and
other senior management; Borrower's name; and location of Borrower's
assets, principal place of business or chief executive office; and
(j) Within Forty-Five (45) days after each fiscal quarter, a copy of
Borrower's accounts receivable aging.
(k) Within Thirty (30) days after each calendar month end a copy of
Borrower's certificate of compliance with borrowing base described
above, executed by Borrower's Chief Financial Officer or other duly
authorized officer of Borrower, in form acceptable to Bank, which
certificate shall accurately report Borrower's account receivable and
eligible accounts.
4.6 CURRENT RATIO.
Borrower will at all times maintain a ratio of current assets to current
liabilities of at least 1.50 : 1.0, as such terms are defined by generally
accepted accounting principles.
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4.7 TANGIBLE NET WORTH.
Maintain a Tangible Net Worth of not less than Twenty Seven Million Dollars
($27,000,000) plus 75% of quarterly net profits after taxes (calculated without
giving effect to net losses and inclusive of extraordinary gains) beginning with
the quarter to end March 31, 1996 plus the proceeds of all sales by Borrower of
its stock. "Tangible Net Worth" means the difference between (a) the gross book
value of the assets of Borrower, and (b) the sum of (i) the amount of all
intangibles such as goodwill, patents, trademarks, organization expenses,
treasury stock, unamortized debt discount and expense and deferred charges, (ii)
the amount of reserves established by Borrower for anticipated losses and
expenses, and (iii) the amount of all liabilities and indebtedness of Borrower,
including accrued but deferred income taxes.
4.8 DEBT TO TANGIBLE NET WORTH.
Borrower will at all times maintain a ratio of total liabilities to
tangible net worth of not greater than 1:5 : 1.0. "Tangible Net Worth" shall
mean net worth decreased by patents, licenses, trademarks, trade names, goodwill
and other similar intangible assets, organizational expenses, security deposits,
prepaid costs and expenses and monies due from affiliates (including officers,
shareholders and directors).
4.9 PROFITABILITY.
Borrower will maintain a net profit, after provision for income taxes, of
any positive amount for any two consecutive fiscal quarters, as reported at the
end of each such fiscal quarter, and maintain a net profit, after provision for
income taxes for its fiscal year end.
4.10 CASH FLOW COVERAGE.
Maintain for each Measurement Period, Cash Flow Coverage of not less than
One Hundred Seventy Five Percent (175%), as measured at the end of each fiscal
quarter (each such date being a "Measurement date"). "Measurement Period" means
the immediately preceding twelve month period ending on a given Measurement
Date. "Cash Flow Coverage" is a fraction stated as percentage and computed as
the quotient of (i) Borrower's net profit after taxes for a given Measurement
Period, exclusive of nonrecurring income and increased by depreciation and
amortization and other non-cash expenditures (taken in accordance with GAAP)
divided by (ii) the aggregate amount of all principal, interest (and also
including amounts coming due in respect of leases) payable by Borrower in such
Measurement Period.
4.11 INSURANCE.
Borrower will keep all of its insurable property, real, personal or mixed,
insured by companies and in amounts approved by Bank against fire and such other
risks, and in such amounts, as is customarily obtained by companies conducting
similar business with respect to like properties. Borrower will furnish to Bank
statements of its insurance coverage, will promptly furnish other or additional
insurance deemed necessary by and upon request of Bank to the extent that such
insurance may be available and hereby assigns to Bank, as security for
Borrower's obligations to Bank, the proceeds of any such insurance. Prior to any
disbursement of the Loan, Bank will be named loss payee on all policies insuring
collateral. Borrower will maintain adequate worker's
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compensation insurance and adequate insurance against liability for damage to
persons or property. All policies shall require at least ten (10 days' written
notice to Bank before any policy may be altered or cancelled.
4.12 ADDITIONAL REQUIREMENTS.
Borrower will promptly, upon demand by Bank, take such further action and
execute all such additional documents and instruments in connection with this
Agreement as Bank in its reasonable discretion deems necessary, and promptly
supply Bank with such other information concerning its affairs as Bank may
request from time to time.
4.13 LITIGATION AND ATTORNEYS' FEES.
Borrower will pay promptly to Bank upon demand, reasonable attorneys' fees
(including but not limited to the reasonable estimate of the allocated costs and
expenses of in-house legal counsel and legal staff) and all costs and other
expenses paid or incurred by Bank in collecting, modifying or compromising the
Loan or in enforcing or exercising its rights or remedies created by, connected
with or provided for in this Agreement or any of the Loan Documents, whether or
not an arbitration, judicial action or other proceeding is commenced. If such
proceeding is commenced, only the prevailing party shall be entitled to
attorneys' fees and court costs.
4.14 BANK EXPENSES.
Borrower will pay or reimburse Bank for all costs, expenses and fees
incurred by Bank in preparing and documenting this Agreement and the Loan, and
all amendment and modifications thereof, including but not limited to all filing
and recording fees, costs of appraisals, insurance and attorneys' fees,
including the reasonable estimate of the allocated costs and expenses of
in-house legal counsel and legal staff.
4.15 REPORTS UNDER PENSION PLANS.
Borrower will furnish to Bank, as soon as possible and in any event within
15 days after Borrower knows or has reason to know that any event or condition
with respect to any defined benefit pension plans of Borrower described in
Section 3 above has occurred, a statement of an authorized officer of Borrower
describing such event or condition and the action, if any, which Borrower
proposes to take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 ENCUMBRANCES AND LIENS.
Except for those already disclosed on its fiscal year end 10/1/94 financial
statement, Borrower will not create, assume or suffer to exist any mortgage,
pledge, security interest, encumbrance, or lien (other than for taxes not
delinquent and for taxes and other items being contested in good faith) on
property of any kind, whether real, personal or mixed, now owned or hereafter
acquired, or upon the income or profits thereof, except to Bank and except for
minor encumbrances and easements on real property which do not affect its market
value, and except for existing liens on Borrower's personal property and future
purchase money security interests encumbering only the personal property
purchased.
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5.2 BORROWINGS.
Borrower will not sell, discount or otherwise transfer any account
receivable or any note, draft or other evidence of indebtedness, except to Bank
or except to a financial institution at face value for deposit or collection
purposes only and without any fee other than fees normally charged by the
financial institution for deposit or collection services. Borrower will not
borrow any money, become contingently liable to borrow money, nor enter any
agreement to directly or indirectly obtain borrowed money, except pursuant to
agreements made with Bank.
5.3 SALE OF ASSETS, LIQUIDATION OR MERGER.
Borrower will neither liquidate nor dissolve nor enter into any
consolidation, merger, partnership or other combinations, nor convey, nor sell,
nor lease all or the greater part of its assets or business, nor purchase or
lease all or the greater part of the assets or business of another, without
prior written consent from Bank.
5.4 LOANS, ADVANCES AND GUARANTIES.
Borrower will not, except in the ordinary course of business as currently
conducted, make any loans or advances, become a guarantor or surety, pledge its
credit or properties in any manner or extend credit.
5.5 INVESTMENTS.
Borrower will not purchase the debt or equity of another person or entity
except for savings accounts and certificates of deposit of Bank, direct U.S.
Government obligations and commercial paper issued by corporations with the top
ratings of Moody's or Standard & Poor's, provided all such permitted investments
shall mature within one year of purchase.
5.6 PAYMENT OF DIVIDENDS.
Borrower will not declare or pay any dividends, other than a dividend
payable in its own common Stock, or authorize or make any other distribution
with respect to any of its stock now or hereafter outstanding.
5.7 RETIREMENT OF STOCK.
Borrower will not acquire or retire any share of its capital stock for
value.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default") shall
terminate any obligation on the part of Bank to make or continue the Loan and
automatically, unless otherwise provided under the Note, shall make all sums of
interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
6.1 Borrower shall default in the due and punctual payment of the principal of
or the interest on the Note or any of the other Loan Documents; or 6.2 Any
default shall occur under the Note; or
6.2 Any default shall occur under the Note; or
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6.3 Borrower shall default in the due performance or observance of any covenant
or condition of the Loan Documents;
6.4 Any guaranty or subordination agreementrequired hereunder is breached or
becomes ineffective, or any Guarantor or subordinating creditor dies,
disavows or attempts to revoke or terminate such guaranty or subordination
agreement; or
6.5 There is a change in ownership or control of ten percent (10%) or more of
the issued and outstanding stock of Borrower or any Guarantor.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES.
The rights, power and remedies given to Bank hereunder shall be cumulative
and not alternative and shall be in addition to all rights, powers and remedies
given to Bank by law against Borrower or any other person, including but not
limited to Bank's rights of setoff or banker's lien.
7.2 NONWAIVER.
Any forebearance or failure or delay by Bank in exercising any right, power
or remedy hereunder shall not be deemed a waiver thereof and any single or
partial exercise of any right, power or remedy shall not preclude the further
exercise thereof. No waiver shall be effective unless it is in writing and
signed by an officer of Bank.
7.3 INUREMENT.
The benefits of this Agreement shall inure to the successor and assigns of
Bank and the permitted successors and assignees of Borrower, and any assignment
of Borrower without Bank's consent shall be null and void.
7.4 APPLICABLE LAW.
This Agreement and all other agreements and instruments required by Bank in
connection therewith shall be governed by and construed according to the laws of
the State of California.
7.5 SEVERABILITY.
Should any one or more provisions of this Agreement be determined to be
illegal or unenforceable, all other provisions nevertheless shall be effective.
7.6 INTEGRATION CLAUSE.
Except for documents and instruments specifically referenced herein, this
Agreement constitutes the entire agreement between Bank and Borrower regarding
the Loan and all prior communications verbal or written between Borrower and
Bank shall be of no further effect or evidentiary value.
7.7 CONSTRUCTION.
The section and subsection headings herein are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
7.8 AMENDMENTS.
This Agreement may be amended only in writing signed by all parties hereto.
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7.9 COUNTERPARTS.
Borrower and Bank may execute one or more counterparts to this Agreement,
each of which shall be deemed an original.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed hereunder shall
be effective only when given by one of the following methods and addressed
to the respective party at its address given with the signatures at the end
of this Agreement and shall be considered to have been validly given: (a)
upon delivery, if delivered personally; (b) upon receipt, if mailed, first
class postage prepaid, with the United States Postal Service; (c) on the
next business day, if sent by overnight courier service of recognized
standing; and (d) upon telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may be changed
from time to time by notice delivered as provided above.
(THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK)
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THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
UNION BANK
By:
Title:
By:
Title:
Address:
Attention:
Telecopier:
Telephone:
BORROWER: ILC TECHNOLOGY, INC. GUARANTORS:
Converter Power, Inc.
By: By:
Title: Title:
Q-ARC Limited
By: By:
Title: Title
Precision Lamp, Inc.
Address:
By:
Title:
Attention:
Telecopier:
Telephone:
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COMPENSATION AGREEMENT
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THIS COMPENSATION AGREEMENT (this "Agreement"), made and entered into
as of _____________, 1996, is by and between ILC Technology, Inc., a California
corporation with its principal offices in Sunnyvale, California (the "Company"),
and _______________, an individual residing in _______________, California
("Employee").
R E C I T A L S:
----------------
A. Employee serves as an officer or employee of the Company; and
B. The Company desires to retain the services of Employee, whose experience,
knowledge and abilities with respect to the business and affairs of the Company
and its subsidiaries are extremely valuable to the Company; and
C. The Board of Directors of the Company (the "Board") and the Compensation
Committee (the "Committee") of the Board recognize that the continuing
possibility of an acquisition proposal, including unsolicited tender offer or
other takeover bid, for the Company may be unsettling to Employee and other
senior executives of the Company, and that uncertainty as to the Employee's
future position with the Company and future compensation could affect Employee's
objectivity in assessing and advising the Board with respect to the proposal and
could detract from Employee's continuing performance and willingness to remain
with the Company; and
D. The Board and the Committee believe it is in the best interests of the
Company and its shareholders to adopt a compensation arrangement that, should
the Company receives any acquisition proposals from third parties, will enable
Employee, without being influenced by the uncertainties of Employees' own
situation, to continue the faithful performance of Employee's duties to the
Company, to assess and advise the Board objectively whether such proposals would
be in the best interests of the Company and its shareholders and to take such
other action regarding such proposals as the Board might determine to be
appropriate.
E. The Board and the Committee also wish to demonstrate to Employee and other
senior employees of the Company that the Company is concerned with the welfare
of its employees and intends to see that loyal employees are treated fairly in
respect of their past service on behalf of the Company and their continuing
value to the Company.
F. In view of the foregoing and in further consideration of Employee's continued
employment with the Company, the Board and the Committee have determined that it
is in the best interests of the Company and its shareholders for the Company to
agree to pay Employee the compensation set forth below in the event Employee
should leave the employ of the Company under certain circumstances, as set forth
below;
1
<PAGE>
428044.2
NOW, THEREFORE, in consideration of the mutual agreements and promises of
the parties, the parties hereby agree as follows:
1. Term. This Agreement shall terminate upon the earliest of (a) three years
from the date hereof if a Change in Control of the Company (as defined herein)
has not occurred within such three year period, (b) the termination of
Employee's employment with the Company (i) prior to a Change in Control of the
Company or (ii) after a Change in Control of the Company, if such termination is
based upon Employee's death, Employee's Disability (as defined herein), Cause
(as defined herein) or Employee's Retirement (as defined herein) or is the
result of Employee's voluntary resignation for Good Reason (as defined herein)
or (c) two years after the date of a Change in Control of the Company.
2. Change in Control. No compensation shall be payable under this Agreement
unless and until (a) there shall have been a Change in Control of the Company
while the Employee is still an employee of the Company, and (b) Employee's
employment shall thereafter have terminated (i) involuntarily for reasons other
than death, Disability, Retirement or Cause, or (ii) voluntarily for Good
Reason. For purposes of this Agreement, a "Change in Control of the Company"
shall mean any of the following:
(a) A consolidation or merger of the Company in which the Company is not
the continuing or surviving company, other than a transaction (1) the
sole purpose of which is to change the state of incorporation of the
Company, (2) in which the proportionate beneficial ownership (as
determined immediately prior to such consolidation or merger) of the
combined voting power of the outstanding shares of the Company and
combined voting power of the outstanding shares (or other voting
interests) of the surviving company remains substantially unchanged or
(3) in which the Company is effectively the continuing or surviving
corporation but changes its name to that of the other company (or to
another name);
(b) A consolidation merger or other acquisition of the Company in which
the Company becomes a subsidiary of another person and resulting in
less than 51% of the outstanding voting shares (or other voting
interests) of such other person being held, immediately after such
merger or consolidation, by the holders of voting shares of the
Company immediately prior to such consolidation, merger or
acquisition;
(c) Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 50% or more of the combined
voting power of the Company's then outstanding shares, unless, within
30 days after notice to the Company of such event, the Board (as
constituted immediately prior to such event) adopts a resolution that
for purposes of this Agreement no Change in Control of the Company
shall be deemed to have occurred (which resolution may be revoked by
the Board at any time, in which case a Change in Control of the
Company will be deemed to have occurred as of the date such revocation
becomes effective);
(d) During any period of two consecutive years, members who at the
beginning of such period constitute the Board cease for any reason to
constitute a majority thereof, unless the election, or nomination for
election by the Company's shareholders, of each director is approved
by the vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period; or
3
<PAGE>
(e) An acquisition of all or substantially all of the assets of the
Company or the acquisition of the Company pursuant to a tender or
exchange offer resulting in less than 51% of the outstanding voting
shares of the surviving corporation being held, immediately after such
acquisition or offer, by the holders of the voting shares of the
Company outstanding immediately prior to such acquisition or offer.
3. Termination After Change in Control. If, within two years after a Change
in Control of the Company, Employee's employment with the Company is terminated
(i) by the Company for reasons other than Employee's death, Employee's
Disability or Cause, or (ii) by Employee upon Retirement or for Good Reason,
then Employee will be entitled to the benefits provided in Section 4 hereof.
(a) "Disability," as used in this Agreement, means a physical or mental
illness or injury which, as determined an independent physician,
continuously prevents Employee from performing Employee's duties with
the Company for a period of six months prior to termination.
(b) "Cause," as used in this Agreement, means (i) gross negligence, (ii)
material dishonesty, (iii) violation of any reasonable rule or
regulation of the Board that results in significant damage to the
Company, and with respect to which Employee fails to correct within a
reasonable time, (iv) Employee's continued failure to perform
Employee's duties with the Company (other than such failure resulting
from incapacity due to physical or mental illness), after Employee
shall have been given written demand for such performance setting
forth the specific respects in which Employee is deemed not to have
satisfactorily performed such duties, (v) Employee's willfully
engaging in gross misconduct that is materially and demonstrably
injurious to the Company, (vi) Employee's committing a felony or an
act of fraud against the Company or its affiliates, or (vii)
Employee's breaching materially the terms of Employee's employee
confidentiality and proprietary information agreement with the
Company. No act, or failure to act, by Employee shall be considered
"willful" if done, or omitted to be done, by Employee in Employee's
good faith and reasonable belief that such act or omission was in the
best interest of the Company or required by applicable law. Cause
shall be determined only by the affirmative vote of a majority of the
authorized number of the Board of Directors at a meeting for which
notice has been given that it is proposed to consider the issue or at
a meeting occurring not less than seven days after a meeting at which
one or more directors indicates an intention to present a motion to
such effect. Notice of such meeting shall be provided promptly to
Employee, and Employee, together with Employee's counsel, shall be
given an opportunity to be heard before the Board. No termination of
Employee for Cause shall be effective until the Board shall have
delivered to Employee a Notice of Termination.
(c) "Notice of Termination," as used in this Agreement, means a written
notice that shall indicate those specific termination provisions in
this Agreement relied upon, shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of
Employee's employment under the provisions so indicated and shall
state that, in the good faith opinion of the Board, the Company has
Cause (as defined above) to terminate Employee. For
4
<PAGE>
purposes of this Agreement, no purported termination by the Company
shall be effective without Employee's being furnished a Notice of
Termination.
(d) "Date of Termination," as used in this Agreement, means the effective
date of Employee's termination of employment.
(e) "Retirement," as used in this Agreement, means the voluntary
termination of Employee's employment with the Company in accordance
with the Company's retirement policy as of the date of this Agreement,
including (at Employee's election, set forth in writing) early
retirement, generally applicable to its salaried employees or in
accordance with any retirement arrangement established with Employee's
written consent with respect to Employee. (f) "Good Reason," as used
in this Agreement, means the occurrence of one of the following events
within two years after a Change in Control of the Company and without
Employee's express written consent:
(i) The assignment by the Company to Employee of any duties that
materially diminish the position held by Employee or the duties
assigned to Employee immediately prior to the Change in Control
of the Company, or a significant reduction in Employee's
responsibilities, titles or positions as in effect immediately
prior to a Change in Control or the Company;
(ii) A reduction by the Company in Employee's base salary as in effect
immediately prior to the Change in Control of the Company;
provided that any reduction in base salary that occurs in
connection with an across-the-board reduction in the level of
base salaries payable to the Company's executive officers or
senior management (or the executive officers or senior management
of a successor to the Company) as part of a general cost-cutting
program shall not constitute Good Reason unless it reduces
Employee's annual compensation by more than 10%;
(iii)Failure to include Employee in the executive incentive and
benefit programs in which other executives of the Company at the
same level participate; or a material reduction in the benefits
made available to Employee by the Company under any employee
benefit plan or any life, health, accident, disability or similar
plan, or any material reduction in vacation benefits, as compared
to such benefits made available to Employee immediately prior to
the Change in Control of the Company, unless the benefits made
available to Employee after such Change in Control of the Company
are no less favorable to Employee than the benefits then made
available by the Company to the other employees of the Company
whose positions and seniority with the Company are similar to the
position and seniority of Employee.
(iv) The requirement by the Company that Employee be based anywhere
other than within a 50-mile radius of Employee's location
immediately prior to the Change in Control of the Company, except
for required travel on the Company's business to an extent
substantially consistent with Employee's duties;
(v) The failure of any successor of the Company to assume the
Company's obligations under this Agreement, as provided in
Section 5.
5
<PAGE>
Any occurrence described in (i), (ii), (iii) or (iv) of this Section 3(f) that
is caused by the termination of Employee's employment by Employer voluntarily or
by the Company for cause or as a result of Employee's death or disability shall
not constitute Good Reason.
4. Certain Benefits upon Termination of Employment.
(a) If Employee's employment with the Company terminates pursuant to the
provisions of Section 3(a), then Employee shall be entitled to the
benefits set forth below:
(i) The Company shall pay to Employee the amount of Employee's full
base salary (which, for the purposes of this Agreement, shall not
include any bonuses or other forms of compensation) through the
Date of Termination at the rate in effect at the time Notice of
Termination is given plus credit for any vacation earned but not
taken and the amount, if any, of any bonus or incentive
compensation for a past fiscal year that has been awarded but not
yet paid to Employee;
(ii) The Company shall pay to Employee in a lump sum, in cash, on the
fifth business day following the Date of Termination (the
"Termination Payment") an amount equal to % of the amount of
Employee's annual full base salary at Employee's salary rate at
the time Notice of Termination is given;
(iii)Employee's participation in, and terminating distributions and
vested rights under, any applicable retirement plan, profit
sharing plan and stock incentive plan of the Company shall be
governed by the terms of those respective plans;
(iv) Any benefits of indemnification provided by the Bylaws of the
Company or under any agreement with Employee shall be continued
for the benefit of Employee for such period of time after
termination as may be necessary until any action for which
indemnification would otherwise be available is barred by the
applicable statute of limitation, and, to the extent required
under the Bylaws or any such agreement, any directors' and
officers' liability insurance that may be maintained by the
Company and outstanding on the date of termination shall be
continued for the benefit of Employee for such reasonable period
of time as may be determined by the Board to afford protection to
Employee; and
(v) The Company shall pay all reasonable legal fees and expenses that
Employee may incur as a result of the Company's contesting the
validity, enforceability or Employee's interpretation of, or
determinations under, this Agreement, provided such dispute is
finally determined substantially in Employee's favor.
(b) Notwithstanding any provision in this Agreement to the contrary, in
the event that any payment or benefit received or to be received by
Employee in connection with a Change in Control of the Company or the
termination of Employee's employment, whether payable pursuant to the
terms of this Agreement or any other plan, arrangement or agreement
with the Company (collectively, the "Total Payments"), would
constitute a "parachute payment" as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), the Total
Payments shall be reduced to the largest amount that would result in
no portion of such benefits being subject to the excise tax imposed by
6
<PAGE>
Section 4999 of the Code. The determination of any reduction in the
benefits available under this Section pursuant to the foregoing shall
be made by the Company in good faith and any such reduction shall
reduce first the cash payable under Section 4 of this Agreement. For
purposes of this limitation: (i) no portion of the Total Payments, the
receipt or enjoyment of which Employee shall have effectively waived
in writing prior to the date of payment of the Termination Payment,
shall be taken into account; (ii) no portion of the Total Payments
shall be taken into account which, in the opinion of tax counsel
selected by the Company and reasonably acceptable to Employee, does
not constitute a "parachute payment" within the meaning of Section
280G(b)(2) of the Code; (iii) the Termination Payment shall be reduced
only to the extent necessary so that the Total Payments (excluding
payments referred to in clause (i) or (ii)) in their entirety
constitute reasonable compensation for services actually rendered
within the meaning of Section 280G(b)(4) of the Code, in the opinion
of the tax counsel referred to in clause (ii); and (iv) the value of
any non-cash benefit or any deferred payment or benefit included in
the Total Payments shall be determined by the Company's independent
auditors in accordance with the principles of Sections 280(G)(d)(3)
and (4) of the Code and the regulations thereunder.
(c) Employee's benefits hereunder shall be considered payment in
consideration of Employee's past service and continued service from
the date hereof, and Employee's entitlement thereto shall not be (i)
governed by any duty of Employee to mitigate damages by seeking
further employment or (ii) offset by any compensation that Employee
may received from future employment.
(d) In the event that Employee's employment with the Company is terminated
in a manner so that the benefits under this Section 4 become payable
to Employee, the arrangements provided for by this Section 4, by any
stock option or other agreement between the Company and Employee in
effect at the time and by any other applicable plan of the Company
shall constitute the entire obligation of the Company to Employee and
performance thereof shall constitute full settlement of any claim that
Employee might otherwise assert against the Company on account of such
termination.
5. Successor to the Company.
(a) The Company shall require any successor or assignee (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company,
absolutely and unconditionally to assume (including an assumption by
operation of law) all the Company's obligations under this Agreement
in the same manner and to the same extent that the Company would be
required to perform if no such succession or assignment had taken
place. Upon such assumption, such successor or assignee shall be bound
by the provisions of this Agreement as if it were the Company and,
thereupon, the term "Company", as used herein, shall be deemed to
include such successor or assignee. Any failure of such successor or
assignee to assume such obligations prior to the effectiveness of any
such succession or assignment shall be deemed a material breach of
this Agreement by the Company and shall entitle Employee to terminate
Employee's employment voluntarily for Good Reason, as provided in
Section 3(f).
7
<PAGE>
(b) If during the term of this Agreement Employee is employed by a
subsidiary of the Company (including any company a majority of the
voting securities of which is then owned, directly or indirectly, by
the Company), the term "Company" as used in Sections 3 and 4 will
include such employer and the Company shall pay or cause such employer
to pay any amounts owed to Employee pursuant to Section 4.
(c) The rights of Employee under this Agreement are personal to Employee
and may not be assigned by Employee. However, such rights shall inure
to the benefit of, and this Agreement shall be enforceable by,
Employee's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If Employee should die while any amounts are still payable
hereunder, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to Employee's
devisee, legatee, or other designee, or, if there is no such designee,
to Employee's estate.
6. Approval by Company. This Agreement has been approved by the Board in
accordance with the authority granted and restrictions imposed by action of
the Board. It shall be executed by the President or other duly qualified
officer. Upon request, the Company shall furnish Employee with a certified
copy of the portion of the minutes of the meeting of the Board approving
this Agreement and authorizing such execution.
7. Modification. Any alteration or modification of any of the provisions of
this Agreement or cancellation or replacement of this Agreement shall not
be valid unless made in writing and signed by the parties hereto.
8. No Employment Rights. This Agreement does not extend to Employee any right
to continued employment with the Company or any subsidiary of the Company,
nor does it limit the Company's right to terminate Employee's employment at
any time. This Agreement does not create a trust of any kind or any
fiduciary relationship.
9. No Assignment of Rights. Employee's rights under this Agreement shall be
nontransferable except by will or the laws of descent and distribution.
10. Unfunded Agreement. This Agreement is not intended to meet the
qualification requirements of Section 401 of the Code. Neither the Company
nor the Board shall be required to segregate any assets with respect to
amounts payable under this Agreement. Neither the Company nor the Board
shall be deemed to be a trustee of any amounts to be paid under this
Agreement. All benefits under this Agreement shall be payable solely from
the general assets of the Company or any appropriate subsidiary, and no
obligation created by this Agreement shall be deemed to be secured by any
pledge or any encumbrance on any property of the Company.
11. Severability. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability,
without invalidating or affecting the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction.
8
<PAGE>
12. Construction. This Agreement shall be governed by the laws of the State of
California applicable to contracts made and to be performed in California.
13. Confidentiality. Employee shall retain in confidence any and all
confidential information known to Employee concerning the Company, its
business any subsidiary of the Company or the business of any such
subsidiary, so long as such information is not otherwise publicly
disclosed. This Section 13 shall not supersede any other nondisclosure or
confidentiality agreement between Employee and the Company or any such
subsidiary.
14. Sole Agreement. This Agreement represents the entire agreement between
Employee and the Company and (except for Section 13) supersedes any and all
prior concurrent (a) agreements, amendments, memoranda and understandings
between the Company and Employee with respect to the subject matter hereof
and (b) any representations by or on behalf of the Company or Employee with
respect to the subject matter hereof.
15. Waiver. Waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach.
16. Counterparts. This Agreement may be executed in a number of identical
counterparts, each of which shall be construed as an original for all
purposes, but all of which taken together shall constitute one and the same
agreement.
17. Notices. Any notice required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given when
delivered, deposited with a commercial courier, fees prepaid, or mailed by
first class United States mail, postage prepaid, as follows:
If to the Company: ILC Technology, Inc.
399 Java Drive
Sunnyvale, California 94089
If to Employee:
Either party may change its address for receipt of notices by written notice to
the other party, which shall be effective upon receipt.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Compensation
Agreement the day and year first above written.
EMPLOYEE ILC TECHNOLOGY, INC.
By:
[Employee Signature]
Title:
10
ILC TECHNOLOGY, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
February 12, 1997
----------------------
The 1996 Annual Meeting of the Shareholders of ILC Technology, Inc., a
California corporation (the "Company"), will be held on Wednesday, February 12,
1997, at 2:00 p.m. local time at the principal office of the Company at 399 Java
Drive, Sunnyvale, California, for the following purposes:
1. To elect a Board of four Directors.
2. To approve an amendment to the 1992 Stock Option Plan to increase the
number of shares of Common Stock reserved for issuance thereunder.
3. To approve an amendment to the 1985 Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for insurance
thereunder.
4. To ratify the appointment of Arthur Andersen LLP as independent public
accountants of the Company for fiscal 1997.
5. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
These items of business are more fully described in the Proxy Statement
accompanying this Notice.
Only shareholders of record at the close of business on December 16, 1996
are entitled to notice of and to vote at the meeting.
A majority of the Company's outstanding shares must be represented at the
meeting (in person or by proxy) to transact business. To assure proper
representation at the meeting, please mark, sign and date the enclosed proxy and
mail it promptly in the enclosed self-addressed envelope. Your proxy will not be
used if you revoke it either before or at the meeting.
Dated: January 2, 1997
Ronald E. Fredianelli
Secretary
IF YOU ARE UNABLE TO BE PERSONALLY PRESENT, PLEASE SIGN AND DATE THE ENCLOSED
PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOUR VOTE IS IMPORTANT.
1
<PAGE>
ILC TECHNOLOGY, INC.
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
The enclosed proxy is solicited on behalf of the Board of Directors of ILC
Technology, Inc. (the "Company") for use at the Annual Meeting of Shareholders
(the "Meeting") to be held Wednesday, February 12, 1997 at 2:00 p.m. local time,
or at any adjournment or postponement thereof. The Meeting will be held at the
principal offices of the Company, which are located at 399 Java Drive,
Sunnyvale, California 94089. The Company's telephone number is (408) 745- 7900.
These proxy solicitation materials were mailed to shareholders on or about
January 2, 1997.
Shareholders of record at the close of business on December 16, 1996 are
entitled to notice of, and to vote at, the Meeting. On December 16, 1996,
4,782,508 shares of the Company's Common Stock were issued and outstanding. A
majority of the shares issued and outstanding as of December 16, 1996 must be
present in person or represented by proxy at the Meeting for the transaction of
business. Nominees for election of directors are elected by plurality vote of
all votes cast at the Meeting. Approval of the amendments to the 1992 Stock
Option Plan and the 1985 Employee Stock Purchase Plan to increase the number of
shares of Common Stock reserved for issuance and ratification of Arthur Andersen
LLP as the independent public accountants require the affirmative vote of a
majority of the shares present at the Meeting in person or by proxy and entitled
to vote. Abstentions have the effect of a negative vote, but broker non- votes
do not affect the calculation.
For the election of directors, shareholders may exercise cumulative voting
rights which enable them to cast as many votes as there are directors to be
elected, multiplied by the number of shares held by each shareholder. All such
votes may be cast for one candidate or may be distributed as desired among two
or more candidates. However, no shareholder shall be entitled to cumulate votes
unless the candidate's name has been placed in nomination before the voting and
the shareholder has given notice at the Meeting before the voting of the
shareholder's intention to cumulate votes. If one shareholder gives such notice,
all shareholders may cumulate their votes and the proxy holders may vote all
proxies on a cumulative voting basis. On all other matters, each share has one
vote.
Any person may revoke a proxy at any time before its use by delivering to
the Company a written revocation or a duly executed proxy bearing a later date
or by attending the Meeting and voting in person.
The cost of this solicitation will be borne by the Company. These costs
represent amounts normally expended for a solicitation for an election of
directors. The Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation material to such beneficial owners. Proxies may also be solicited
by certain of the Company's directors, officers and regular employees, without
additional compensation, personally, by telephone or otherwise.
2
<PAGE>
Deadline for Receipt of Shareholder
Proposals for 1997 Annual Meeting
Proposals of shareholders that are intended to be presented by such
shareholders at the Company's 1997 meeting of shareholders must be received by
the Company no later than September 4, 1997.
ELECTION OF DIRECTORS
Nominees
A board of four directors is to be elected at the Meeting. There will be
two vacancies on the Board. The Company is currently undertaking a search for an
additional outside director, as Wirt D. Walker, III recently decided not to
stand for re-election to the Board. Unless marked to the contrary, all properly
signed and returned proxies will be voted for the election of management's four
nominees named below, all of whom are directors of the Company. If any nominee
is unable or declines to serve as a director at the time of the Meeting, the
proxies will be voted for any nominee designated by the present Board of
Directors to fill the vacancy. The Company is not aware of any nominee who will
be unable or will decline to serve as a director. The proxy holders reserve the
right to cumulate votes for the election of directors in such a manner as will
assure the election of as many of the nominees listed below as possible, and, in
such event, the specific nominees to be voted for will be determined by the
proxy holders. The term of office of each person elected as a director will
continue until the next meeting of shareholders or until a successor has been
elected and qualified.
The names of the nominees and executive officers of the Company and certain
information about them are set forth below.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned as of
December 16, 1996(1)
------------------------
<S> <C> <C> <C> <C>
Name, Principal Occupation Director
and Directorship Age Since Number Percent
---------------- --- ----- ------ -------
Henry C. Baumgartner............. 64 1967 219,988(2) 4.5%
Chairman of the Board of the
Company since July 1996; Chief
Executive Officer of the Company
since April 1990; President of the
Company from April 1990 to July
1996; Chief Executive Officer and
Chairman of the Board of the Company
from November 1986 to April 1990.
Richard D. Capra................. 64 1995 1,250 *
President and Chief Operating
Officer of the Company since July
1996; President and Chief Executive
Officer of Philips Lighting Company,
U.S. from 1983 to 1991; Director of
Advanced Lighting Technologies
Arthur L. Schawlow............... 75 1984 22,000(4) *
Retired in 1991; Professor of
Physics at Stanford University
from 1961 to 1991; Director of the
Company from 1969 to 1971 and since
1984; Noble Prize in 1981 for
contributions to the development of
laser spectroscopy.
Harrison H. Augur................ 55 1989 42,000(5) 1.0%
General Partner of Capital Asset
Management since June 1987; Executive
Vice President and Director of Worms
& Co., Inc. from April 1981 to
August 1991.
</TABLE>
3
<PAGE>
- -----------------------------
* Less than 1%
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them, subject
to applicable community property laws and the information contained in the
footnotes to the table.
(2) Includes 121,250 shares subject to outstanding options that are exercisable
on or before February 14, 1997.
(3) These shares are subject to outstanding options that are exercisable on or
before February 14, 1997.
(4) Includes 10,000 shares subject to outstanding options that are exercisable
on or before February 14, 1997.
(5) Includes 30,000 shares subject to outstanding options that are exercisable
on or before February 14, 1997.
Director Compensation
Members of the Board who are not also officers or employees of the Company
("Outside Directors") are paid an annual fee of $10,000 for services as
director. Such fees are paid quarterly and prorated when a director does not
serve for a full year. Directors receive no additional compensation for
committee participation or attendance at committee meetings.
During fiscal 1996, each Outside Director was granted automatic options to
purchase a total of 5,000 shares of the Company's Common Stock at an exercise
price of $11.00 per share. Dr. Schawlow exercised options to purchase 5,000
shares during fiscal 1996 for a net value realized of $39,375. As of September
28, 1996, options to purchase 60,000 shares were outstanding to the following
Outside Directors, at the weighted average exercise price per share indicated:
Mr. Augur -- 40,000 shares at $6.91 per share; and Dr. Schawlow -- 20,000 shares
at $10.06 per share.
Board Meetings and Committees
The Board of Directors held a total of eight meetings during the fiscal
year ended September 28, 1996. The Board has two committees: the Audit Committee
and the Compensation and Stock Option Committee.
The Audit Committee is comprised of Directors Augur, Walker and Schawlow.
After the Meeting, the Audit Committee will be comprised of Directors Augur and
Schawlow. The Audit Committee recommends engagement of the Company's independent
public accountants and is primarily responsible for approving the services
performed by the Company's independent public accountants and for reviewing and
evaluating the Company's accounting practices and its systems of internal
accounting controls. The Audit Committee held one meeting during fiscal 1996.
Each quarter the Chairman of the Audit Committee meets with the Company's
independent public accountants.
The Compensation and Stock Option Committee is comprised of Directors
Augur, Walker and Schawlow. After the Meeting, the Compensation and Stock Option
Committee will be comprised of Directors Augur and Schawlow. The Compensation
and Stock Option Committee recommends the amount and nature of compensation to
be paid to the Company's Chief Executive Officer and reviews and approves the
compensation plan for other corporate officers. It also reviews the performance
of the Company's key employees who are eligible for the Company's Stock Option
Plan and determines the number of shares, if any, to be granted each employee
under such plan and the terms of such grants. The Compensation and Stock Option
Committee held three meetings during fiscal 1996. No director attended fewer
than 75% of all meetings of the Board of Directors held during fiscal 1996 or of
all meetings of any committee upon which such director served during fiscal
1996.
4
<PAGE>
AMENDMENT OF THE 1992 STOCK OPTION PLAN
In November 1996, the Board of Directors adopted a resolution, subject to
shareholder approval, approving an amendment to the Company's 1992 Stock Option
Plan (the "Option Plan") to increase the number of shares of Common Stock
issuable thereunder by 175,000 shares to 575,000 shares. Before giving effect to
the proposed amendment, 8,749 shares of Common Stock were available for issuance
under the Option Plan.
Approval of the amendment to the Option Plan requires the affirmative vote
of a majority of the shares present at the Meeting in person or by proxy and
entitled to vote. The Board of Directors recommends that shareholders vote for
the amendment to the Option Plan. The essential features of the Option Plan are
summarized below.
The purpose of the Option Plan is to advance the interests of the Company
by giving the Company's employees and Outside Directors incentive through
ownership of the Company's Common Stock to continue in the service of the
Company and thereby to help the Company compete effectively with other
enterprises for the services of qualified individuals. Options granted under the
Option Plan may be either "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
nonstatutory stock options.
Administration
The Option Plan is administered by the Compensation and Stock Option
Committee of the Board of Directors (the "Committee"). In addition to having
general supervisory and interpretive authority over the Option Plan, the
Committee determines, upon the recommendation of management and subject to the
terms and limits of the Option Plan, the employees, if any, to whom options will
be granted, the time at which options are granted, the number of shares subject
to each option and the terms and conditions of exercise of options.
Eligibility
All employees (including officers and directors who are also employees) of
the Company and its subsidiaries are eligible to receive incentive stock options
under the Option Plan. Nonstatutory stock options may be granted under the
Option Plan to employees and directors of the Company. Participants are selected
by the Committee upon the recommendation of management. Nonstatutory stock
options are also granted under the Option Plan to all Outside Directors pursuant
to the automatic grant program. As of September 28, 1996, 618 persons were
eligible to receive options under the Option Plan, of which seven were executive
officers of the Company, 608 were non-executive officer employees and three were
Outside Directors.
Under the terms of the Option Plan, the aggregate fair market value
(determined at the date of the option grant) of the stock with respect to which
incentive stock options are exercisable for the first time by any employee
during any calendar year may not exceed $100,000 and no participant can receive
options to purchase more than a total of 100,000 shares of Common Stock under
the Option Plan in any calendar year.
The Option Plan provides for an automatic grant program for Outside
Directors, whereby each year, each Outside Director is automatically granted a
new ten-year nonstatutory stock option to purchase 5,000 shares of Common Stock,
which is exercisable in cumulative annual increments of 25% beginning on the
first anniversary of the date of grant. See "Option Plan Benefits."
5
<PAGE>
Terms of Options
Each option granted under the Option Plan must be evidenced by an option
agreement between the Company and the optionee and has a term of up to 10 years,
unless sooner terminated in accordance with the Option Plan or the option
agreement. Options granted pursuant to the Option Plan need not be identical,
but each option is subject to the following terms and conditions:
(a) Exercise of Option. Options are exercisable by the optionee in such
periodic increments and/or at such milestones as the Committee, in its
sole discretion, shall determine on an individual basis with respect
to each optionee. Options are generally exercisable in cumulative
increments of 25% per year beginning on the first anniversary of the
date of grant. In no event shall an officer or director of the Company
exercise any option during the six-month period immediately following
the grant of such option. An option is exercised by giving written
notice of exercise to the Company, specifying the number of full
shares of Common Stock to be purchased, and tendering payment of the
purchase price and any applicable taxes to the Company. Payment for
shares issued upon exercise of an option may consist of cash, check or
delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale or loan proceeds required to pay the
exercise price.
(b) Exercise Price. The exercise price is determined by the Committee,
provided that in no instance shall such price be less than the fair
market value of the Common Stock on the date the option is granted.
The Option Plan defines "fair market value" as the closing sales price
of the Common Stock of the Company as reported by the Nasdaq National
Market on the last market trading day before the date of grant. The
closing sales price of the Company's Common Stock on the Nasdaq
National Market on December 16, 1996 was $11 7/8 per share. Incentive
stock options granted to shareholders owning more than 10% of the
combined voting power of all the stock of the Company are subject to
the additional restrictions that the exercise price be no less than
110% of the fair market value on the date of grant and that options
expire no later than 5 years from the date of grant.
(c) Termination of Employment. Incentive stock options granted under the
Option Plan terminate 30 days after the optionee ceases to be employed
by the Company unless (i) the termination of employment is due to
permanent and total disability, in which case the option may be
exercised at any time within 12 months after termination to the extent
the option was exercisable on the date of termination; (ii) the
optionee dies while employed by the Company, in which case the option
may be exercised at any time within 12 months after death to the
extent the option was exercisable on the date of death; or (iii) the
option by its terms specifically provides otherwise. Subject to
special rules for incentive stock options, the Committee may, in its
discretion, extend the period of exercisability of an option after an
optionee's termination of employment, but in no event shall any option
be exercisable after the expiration date set forth in the option
agreement.
(d) Expiration of Options. No option is exercisable by any person after
the expiration of 10 years from the date the option was granted.
(e) Nontransferability of Option. Options granted under the Option Plan
are transferable only by will or the laws of descent and distribution
and are exercisable during the optionee's lifetime only by the
optionee or the optionee's guardian or legal representative.
(f) Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Option Plan as the
Committee may deem necessary or appropriate.
6
<PAGE>
Adjustments Upon Changes in Capitalization
The Option Plan provides for adjustments to be made in the shares subject
to option to give effect to changes in the capital structure of the Company
resulting from recapitalizations, stock splits, stock dividends, combinations of
shares, mergers or reorganizations. Depending upon the circumstances, the
particular adjustments may require a change in the number, kind and class of
securities covered by the option and a change in the exercise price or prices
thereof to give effect to the purpose and intent of the Option Plan. The Option
Plan and all options terminate in the event of the dissolution or liquidation of
the Company.
Corporate Transactions. A Corporate Transaction is defined in the Option
Plan generally as a merger or asset sale in which the Company does not survive,
or any reorganization that results in the transfer of beneficial ownership of
50% or more of the Company's voting stock outstanding. Immediately before the
effective date of a Corporate Transaction, each option outstanding under the
Option Plan will automatically become exercisable in full unless the option is
either to be assumed by the successor corporation or a parent thereof or
replaced by a reasonably comparable option to purchase shares of the successor
corporation or parent thereof, in connection with the Corporate Transaction.
Upon the consummation of any Corporate Transaction, all outstanding options will
terminate, to the extent not previously exercised by the optionees or assumed by
the successor corporation or its parent company.
Change in Control. Change in control is defined in the Option Plan
generally as a tender or exchange offer that is not recommended by the Company's
Board of Directors for 25% or more of the Company's voting stock by a person or
related group of persons other than the Company or an affiliate of the Company,
or a contested election for the Board of Directors that results in a change in a
majority of the Board. Effective 15 days following the effective date of a
Change in Control, each option outstanding under the Option Plan automatically
becomes exercisable in full and will remain fully exercisable until the
expiration or sooner termination of the option term specified in the option
agreement.
Acceleration of the exercisability of options in the event of a Corporate
Transaction or a Change in Control may have the effect of depressing the market
price of the Company's Common Stock and denying shareholders a premium that
might otherwise be paid for their shares in such a transaction and may have the
effect of discouraging a proposal for merger, a takeover attempt or other
efforts to gain control of the Company.
Adjustment to Option Rights
Subject to the general limitations of the Option Plan, the Committee may
adjust the exercise price, term or any other provision of an option (other than
automatic options granted to Outside Directors) by canceling and regranting the
option or by amending or substituting the option. Options that have been so
adjusted may have higher or lower exercise prices, have longer or shorter terms,
or be subject to different rights and restrictions than prior options. The
Committee may also adjust the number of options granted to an optionee by
canceling outstanding options or granting additional options. Except for
adjustments necessary to ensure compliance with any applicable state or federal
law, no such adjustment may impair an optionee's rights under any option
agreement without the consent of the optionee.
Amendment and Termination of the Option Plan
The Board may amend the Option Plan from time to time or may suspend or
terminate the Option Plan. In addition, to the extent necessary to comply with
applicable laws or regulations, the Company shall obtain shareholder approval of
any amendment to the Option Plan in such a manner as required. However, no such
action by the Board or shareholders may alter or impair any option previously
granted under the Option Plan without the consent of the optionee.
7
<PAGE>
The Option Plan terminates by its terms when all shares available for
issuance under the Option Plan have been issued or in November 2002, whichever
is earlier, subject to earlier termination by the Board of Directors.
Notwithstanding such termination, options granted under the Option Plan will
remain outstanding in accordance with their terms.
Option Plan Benefits
Automatic options are granted to the Outside Directors at the meeting of
the Committee held during the Company's third fiscal quarter. Under the Option
Plan, each Outside Director after the Meeting, specifically Messrs. Augur and
Schawlow, will receive an automatic grant of options to purchase 5,000 shares of
Common Stock each calendar year.
Federal Income Tax Information
The following summary is intended only as a general guide as to the federal
income tax consequences under current law with respect to participation in the
Option Plan and does not describe all possible federal and other tax
consequences of such participation. Furthermore, the tax consequences of options
are complex and subject to change, and a taxpayer's situation may be such that
some variation of the described rules applies. The summary does not address
other taxes that may affect an optionee such as state and local income taxes,
federal and state estate, inheritance and gift taxes and foreign taxes.
Optionees should consult with their own tax advisors before the exercise of any
option and before the disposition of any shares acquired upon the exercise of an
option.
Incentive Stock Options. If an option is treated as an incentive stock
option ("ISO"), the optionee does not recognize taxable income upon its grant or
incur tax on its exercise (unless the optionee is subject to the alternative
minimum tax described below). If the optionee holds the stock acquired upon
exercise of an ISO ("ISO Shares") for more than one year after the date the
option was exercised and for more than two years after the date the option was
granted, the optionee generally will realize long-term capital gain or loss
(rather than ordinary income or loss) upon disposition of the ISO Shares. This
gain or loss will be equal to the difference between the amount realized upon
such disposition and the amount paid for the ISO Shares. If the optionee
disposes of ISO Shares before the expiration of either required holding period
(a "disqualifying disposition"), then gain realized upon such disqualifying
disposition, up to the difference between the fair market value of the ISO
Shares on the date of exercise (or, if less, the amount realized on a sale of
such ISO Shares) and the option exercise price, will be treated as ordinary
income. Any additional gain will be long-term or short-term capital gain,
depending upon the length of time the optionee held the ISO Shares. The Company
will be entitled to a deduction in connection with the disposition of ISO Shares
only to the extent that the optionee recognizes ordinary income on a
disqualifying disposition of the ISO Shares.
Alternative Minimum Tax. The difference between the exercise price and fair
market value of the ISO Shares on the date of exercise of an ISO is an
adjustment to income for purposes of the alternative minimum tax ("AMT"). The
AMT (imposed to the extent it exceeds the taxpayer's regular tax) is 26% of an
individual taxpayer's alternative minimum taxable income (28% in the case of
alternative minimum taxable income in excess of $175,000). Alternative minimum
taxable income is determined by adjusting regular taxable income for certain
items, increasing that income by certain tax preference items and reducing this
amount by the applicable exemption amount ($45,000 in the case of a joint
return, subject to reduction in certain circumstances). If a disqualifying
disposition of the ISO Shares occurs in the same calendar year as exercise of
the ISO, there is no AMT adjustment with respect to those ISO Shares. Also, upon
a sale of ISO Shares that is not a disqualifying disposition, alternative
minimum taxable income is reduced in the year of sale by the excess of the fair
market value of the ISO Shares at exercise over the amount paid for the ISO
Shares.
8
<PAGE>
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time a nonstatutory stock option ("NSO") is granted. However, upon
exercise of an NSO, the optionee must include in income as compensation an
amount equal to the difference between the fair market value of the shares on
the date of exercise and the amount paid for that stock upon exercise of the
NSO. The included amount must be treated as ordinary income by the optionee and
will be subject to income tax withholding by the Company. Upon resale of the
shares by the optionee, any subsequent appreciation or depreciation in the value
of the shares will be treated as capital gain or loss. The Company will be
entitled to a deduction in connection with the exercise of an NSO by a domestic
optionee to the extent that the optionee recognizes ordinary income and the
Company withholds tax.
AMENDMENT OF THE 1985 EMPLOYEE STOCK PURCHASE PLAN
In November 1996, the Board of Directors adopted a resolution, subject to
shareholder approval, approving an amendment to the Company's 1985 Employee
Stock Purchase Plan (the "Purchase Plan") to increase the number of shares of
Common Stock issuable thereunder by 50,000 shares to 350,000 shares. Before
giving effect to the proposed amendment, 61,588 shares of Common Stock remain
available for issuance under the Purchase Plan.
The Board of Directors recommends that shareholders vote for the amendment
of the Purchase Plan. The Board of Directors believes that the Purchase Plan
advances the interests of the Company by assisting the Company in attracting and
retaining competent and motivated employees and by facilitating employee
investment in the Company's Common Stock. The essential features of the Purchase
Plan, as amended, are outlined below.
Description of the Purchase Plan
General. The Purchase Plan, which is intended to qualify under Section 423
of the Code, provides for the grant to employees of rights to purchase shares of
the Company's Common Stock.
Administration. The Purchase Plan is administered by the Committee, which
has final authority for interpretation of any provisions of the Purchase Plan or
of any right to purchase stock granted under the Purchase Plan. All costs and
expenses associated with the administration of the Purchase Plan are borne by
the Company. In addition, the Purchase Plan provides certain indemnification
provisions.
Eligibility. Employees of the Company (including officers) become eligible
for participation in the Purchase Plan after completing three months of
continuous employment that customarily entails more than twenty hours a week and
more than five months per calendar year. However, no employee is eligible to
participate in the Purchase Plan if, immediately after the election to
participate, such employee would own stock of the Company (including stock such
employee may purchase under outstanding options) representing 5% or more of the
total combined voting power or value of all classes of stock of the Company. In
addition, no employee is permitted to participate if under the Purchase Plan and
all similar purchase plans of the Company or its subsidiaries, such rights would
accrue at a rate that exceeds $25,000 of the fair market value of such stock
(determined at the time the right is granted) for each calendar year.
Participation. The Purchase Plan is implemented by one offering during each
calendar quarter, beginning on the first trading day of the quarter and ending
on the last trading day of the quarter ("Participation Period"). Eligible
employees become participants in the Purchase Plan by executing a participation
agreement and filing it with the Company no later than the deadline stated in
the participation agreement, and if none is stated, then no later than the first
day of the Participation Period. By enrolling in the Purchase Plan, a
participant is deemed to have elected to purchase the maximum number of whole
shares of Common Stock that can be purchased with the compensation withheld
during the Participation Period.
9
<PAGE>
Payroll Deductions. The payroll deductions made for each participant may be
any whole percentage of a participant's base earnings, up to a maximum of 10%.
Base earnings is defined in the Purchase Plan as all compensation, excluding
overtime, shift differential and all incentive compensation, sales commissions
and other bonuses. Payroll deductions commence with the first paycheck issued
during the Participation Period and are deducted from subsequent paychecks
throughout the Participation Period unless changed or terminated as provided in
the Purchase Plan. The participant may increase or decrease the rate of payroll
withholding for the next Participation Period by filing a new participation
agreement on or before the date specified in the participation agreement and if
none is stated, then no later than the first day of the Participation Period for
which the change is to be effective. The Company maintains a plan account in the
name of each participant and credits the amount deducted from compensation to
such account.
Purchase of Stock; Price. As of the last day of each Participation Period,
each participant's accumulated payroll deductions are applied to the purchase of
whole shares of Common Stock at a price which is the lower of (i) 85% of the
fair market value per share of the Common Stock on the first trading day of the
Participation Period or (ii) 85% of the fair market value per share of the
Common Stock on the last trading day during the Participation Period. The fair
market value of the Common Stock on a given date is defined as the closing bid
price as reported by the Nasdaq National Market. The closing sales price of the
Company's Common Stock on the Nasdaq National Market on December 16, 1996 was
$11 7/8 per share. In the event that the aggregate number of shares which all
participants elect to purchase during a Participation Period exceeds the number
of shares remaining for issuance under the Purchase plan, the available shares
will be divided ratably and any excess cash will be refunded to the
participants. Participants are notified by statements of account as soon as
practicable following the end of each Participation Period as to the amount of
payroll deductions, the number of shares purchased, the purchase price and the
remaining cash balance of their plan account. Certificates representing whole
shares are delivered to participants.
Withdrawal From the Purchase Plan. Participants may withdraw from
participation in the Purchase Plan at any time up to the last day of a
Participation Period by filing the prescribed form with the Company. As soon as
practicable after withdrawal, payroll deductions cease and all amounts credited
to the participant's plan account are refunded in cash, without interest. A
participant who has withdrawn from the Purchase Plan will be a participant in
future Participation Periods only if such participant re-enrolls pursuant to the
Purchase Plan.
Termination of Employment. Termination of a participant's status as a
full-time or permanent part-time employee for any reason, including death, is
treated as an automatic withdrawal from the Purchase Plan. In such event, the
Company will distribute all funds held for the employee to the employee or, in
the case of death, to the person or persons entitled thereto as provided in the
Purchase Plan.
Nontransferability. The rights of interests of any participant in the
Purchase Plan or in any shares or cash to which such participant may be
entitled, shall not be transferable by voluntary or involuntary assignment or by
operation of law, or by any other manner than as permitted by the Code, by will
or the laws of descent and distribution.
Amendment and Termination of the Purchase Plan. The Board of Directors has
the right to amend, modify or terminate the Purchase Plan at any time, except
that the approval of the holders of a majority of the voting power of the
Company's outstanding Common Stock is required for any amendment that (i)
changes the number of shares reserved for issuance under the Purchase Plan; (ii)
changes the percentage of fair market value used in the determination of the
purchase price under the Purchase Plan; (iii) materially increases the benefits
accruing to persons eligible to participate in the Purchase Plan; or (iv)
10
<PAGE>
materially changes the standards of eligibility for participation in the
Purchase Plan. Unless sooner terminated, the Purchase Plan will terminate on the
last day of the fiscal year ending in 2010.
Adjustments Upon Changes in Capitalization. In the event of any
reorganization, recapitalization, stock split, reverse stock split, stock
dividend, combination of shares, merger, consolidation or other similar change
in the capital structure of the Company, the Board of Directors may make such
adjustment, if any, as it deems appropriate in the number, kind and purchase
price of the shares available for purchase under the Purchase Plan and the
maximum number of shares a participant may elect to purchase under the Purchase
Plan in any Participation Period, subject to the limitations of Section 423 of
the Code.
Federal Income Tax Information
The following summary is intended only as a general guide as to the federal
income tax consequences under current law with respect to participation in the
Purchase Plan and does not describe all possible federal and other tax
consequences of such participation. Furthermore, the tax consequences are
complex and subject to change, and a taxpayer's situation may be such that some
variation of the described rules applies. The summary does not address other
taxes that may affect a participant in the Purchase Plan such as state and local
income taxes, federal and state estate, inheritance and gift taxes and foreign
taxes. Participants should consult with their own tax advisors regarding the tax
consequences of participation in the Purchase Plan.
The Purchase Plan is intended to qualify as an "employee stock purchase
plan" within the meaning of Section 423 of the Code. Participants will not
recognize income for federal income tax purposes either upon enrollment in the
Purchase Plan or upon the purchase of shares. All tax consequences are deferred
until a participant sells the shares, disposes of the shares by gift or dies.
If shares are held for more than one year after the date of purchase and
more than two years from the beginning of the applicable Participation Period,
or if the participant dies while owning the shares, the participant realizes
ordinary income on a sale (or a disposition by way of gift or upon death) to the
extent of the lesser of (i) 15% of the fair market value of the shares at the
beginning of the Participation Period or (ii) the actual gain (the amount by
which the market value of the shares on the date of sale, gift or death exceeds
the purchase price). All additional gain upon the sale of shares is treated as
long-term capital gain. If the shares are sold and the sale price is less than
the purchase price, there is no ordinary income and the participant has a
long-term capital loss for the difference between the sale price and the
purchase price.
If the shares are sold or are otherwise disposed of including by way of
gift (but not death, bequest or inheritance) (in any case a "disqualifying
disposition") within either the one-year or the two-year holding periods
described above, the participant realizes ordinary income at the time of sale or
other disposition, taxable to the extent that the fair market value of the
shares at the date of purchase is greater than the purchase price. This excess
will constitute ordinary income (not currently subject to withholding) in the
year of the sale or other disposition even if no gain is realized on the sale or
if a gratuitous transfer is made. The difference, if any, between the proceeds
of sale and the fair market value of the shares at the date of purchase is a
capital gain or loss. Capital gains may be offset by capital losses, and up to
$3,000 of capital losses may be used annually against ordinary income.
The Company will be entitled to a deduction in connection with the
disposition of shares acquired under the Purchase Plan only to the extent that
the participant recognizes ordinary income on a disqualifying disposition of the
shares. The Company will treat any transfer of record ownership of shares as a
disposition, unless it is notified to the contrary.
11
<PAGE>
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has selected Arthur Andersen LLP, independent public
accountants, to serve as the auditors for the Company for fiscal 1997. At the
Meeting, the shareholders will be asked to ratify such appointment.
Representatives of Arthur Andersen LLP are expected to attend the Meeting and
will be given the opportunity to make a statement and to answer appropriate
questions.
EXECUTIVE OFFICERS
Ronald E. Fredianelli, age 47, has served as Chief Financial Officer of the
Company since April 1990 and as Secretary since 1987. Except for the period from
November 1985 to August 1986 and until he was elected Chief Financial Officer in
1990, Mr. Fredianelli was the Controller of the Company since August 1979. From
November 1985 to August 1986, he was Controller of Synergy Computer Graphics.
Felix J. Schuda, age 48, has served as Chief Technical Officer of the
Company since September 1996 and as a Vice President of the Company since 1981.
He has been employed by the Company in various engineering and engineering
management positions since June 1976.
Bert E. Smith, age 48, has served as Vice President of Operations of the
Company since September 1996. In February 1996, he was named President of
Converter Power, Inc., a wholly owned subsidiary of the Company. From 1984 until
February 1996, he was an independent consultant and from November 1994 until his
appointment as President of Converter Power, Inc., he served as a consultant to
the Company.
John A. Lucero, age 47, has served as Vice President of Marketing and Sales
of the Company since September 1996. He joined the Company in August 1994 as
Director of Sales. From June 1991 to August 1994, he was employed by Crystal
Technology, Inc., an electro-optics company, in management positions in
marketing and operations.
Dennis M. Toohey, age 49, has served as Vice President of Logistics and
Quality of the Company since October 1996. From May 1995 to September 1996, he
was General Manager of Coils, Inc., an electronic parts manufacturer. From May
1993 to May 1995, he was employed by LeMans Corporation, an auto parts
distributor, as Vice President of Operations. From February 1992 to April 1993,
he was Vice President, Logistics at Harley-Davidson and from April 1990 to
February 1992 he was Vice President, Logistics at General Tire/Continental A.G.
12
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to each executive
officer of the Company, each shareholder known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock and all officers
and directors of the Company as a group. For information regarding the
beneficial ownership of the Company's Common Stock by each nominee for director,
see "Election of Directors--Nominees." ~
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially
Owned as of December 16, 1996
-----------------------------
<S> <C> <C>
Name Number Percent
- ---- ------ ------
Marvin Schwartz.......................... 302,000(1) 6.31%
Neuberger & Berman
605 Third Avenue
New York, New York 10158-3698
Felix J. Schuda.......................... 92,984(2) 1.9%
Vice President-Chief Technical Officer
Ronald E. Fredianelli.................... 71,543(3) 1.5%
Chief Financial Officer and Secretary
John A. Lucero........................... 6,950(4) *
Vice President, Sales and Marketing
Bert E. Smith............................ - -
Vice President, Operations
Dennis M. Toohey......................... - -
Vice President, Logistics and Quality
All Officers and Directors as a Group
(9 persons) 456,715(5) 9.2%
</TABLE>
- -----------------------------
* Less than 1%
(1) The share ownership is as reported on Schedule 13D filed with the
Securities & Exchange Commission in July 1996.
(2) Includes 41,250 shares subject to outstanding options that are exercisable
on or before February 14, 1997.
(3) Includes 55,000 shares subject to outstanding options that are exercisable
on or before February 14, 1997.
(4) Includes 6,250 shares subject to outstanding options that are exercisable
on or before February 14, 1997.
(5) Includes 265,000 shares subject to outstanding options that are exercisable
on or before February 14, 1997.
13
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table The following table shows certain information
concerning the compensation of each of the Company's executive officers for
services rendered in all capacities to the Company for the fiscal years ended
1996, 1995 and 1994.
<TABLE>
<CAPTION>
Annual Compensation
-------------------
All Other
Name and Principal Position Fiscal Year Salary(1) Bonus(2) Compensation (3)
- --------------------------- --------------------- -------------------------
<S> <C> <C> <C> <C>
Henry C. Baumgartner 1996 $175,000 $ - $2,558
Chief Executive Officer 1995 175,000 $26,392 3,021
1994 144,462 26,417 2,889
Richard D. Capra (4) 1996 25,385 -- --
President and Chief 1995 10,000 -- --
Operating Office
Bert E. Smith (5) 1996 136,314 -- --
Vice President, Operations 1995 82,180 -- --
Ronald E. Fredianelli (6) 1996 120,000 -- 2,215
Chief Financial Officer 1995 113,423 19,074 2,262
and Secretary 1994 101,192 20,913 2,024
Felix J. Schuda 1996 115,000 -- 2,100
Vice President-Chief 1995 105,000 15,893 2,100
Technical Officer 1994 97,292 20,253 1,946
John A. Lucero (7) 1996 96,442 -- 1,919
Vice President, Sales and 1995 91,642 12,459 1,823
Marketing 1994 10,585 -- --
</TABLE>
(1) No compensation is paid to officers of the Company for services rendered as
directors. Dennis M. Toohey, who joined the Company in October 1996 as Vice
President, Logistics and Quality, is compensated at an annual salary rate
of $120,000.
(2) Includes cash bonuses paid during the year and cash bonuses accrued for
services rendered during the year.
(3) Company matching contributions under the Company's Thrift Incentive Savings
Plan.
(4) Mr. Capra, who joined the Company in July 1996, is currently compensated at
an annual salary rate of $200,000. Amounts for 1995 represent compensation
for services as a director.
(5) Mr. Smith, who joined the Company in February 1996, is compensated at an
annual salary rate of $140,000. Amounts for prior periods represent
consulting fees.
(6) Mr. Fredianelli is currently compensated at an annual salary rate of
$130,000.
(7) Mr. Lucero joined the Company in August 1994. He is currently compensated
at an annual salary rate of $120,000.
14
<PAGE>
Option Grants in Fiscal 1996
The following table sets forth information regarding option grants to the
executive officers in fiscal 1996. In accordance with the rules of the
Securities and Exchange Commission, the table sets forth the hypothetical gains
or "option spreads" that would exist for the options at the end of their
ten-year term. These gains are based on assumed rates of annual compound stock
price appreciation of 5% and 10% from the date the options were granted to the
end of the option terms.
<TABLE>
<CAPTION>
Option Grants in Fiscal 1996
Individual Grants
-----------------
Name Percent of
Number of Total Options
Securities Granted to
Underlying Employees in Exercise Price Expiration
Options Fiscal 1996 Per Share Date
Name Granted (1)
- ---- ----------- ----------- --------- ----
<S> <C> <C> <C> <C>
Henry C. Baumgartner... 25,000 13% $ 9.00 11/6/05
Richard D. Capra....... 55,000 30% 11.25 7/16/06
Bert E. Smith.......... 25,000 13% 10.625 3/28/06
Ronald E. Fredianelli.. 20,000 11% 9.00 11/6/05
Felix J. Schuda........ 5,000 3% 9.00 11/6/05
John A. Lucero......... 5,000 3% 9.00 11/6/05
</TABLE>
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Stock Appreciation
for Option Terms(2)
-------------------
5% 10%
-- ---
<S> <C> <C>
Henry C. Baumgartner.......... $141,501 $358,592
Richard D. Capra.............. 389,129 986,128
Bert E. Smith................. 167,050 423,338
Ronald E. Fredianelli......... 113,201 286,874
Felix J. Schuda............... 28,300 71,718
John A. Lucero................ 28,300 71,718
</TABLE>
- -----------
(1) The options shown in the table were granted at fair market value and become
exercisable in cumulative increments of 25% of the shares per year,
commencing on the first anniversary of the date of grant. The options shown
in the table will expire ten years from the date of grant, subject to
earlier termination upon termination of employment.
(2) The assumed annual compound rates of stock price appreciation are mandated
by the rules of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of future stock prices.
15
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
The following table shows the number of shares of Common Stock acquired by
the executive officers upon the exercise of stock options during fiscal 1996,
the net value realized at exercise, the number of shares of Common Stock
represented by outstanding stock options held by each executive officer as of
September 28, 1996 and the value of such options based on the closing price of
the Company's Common Stock on September 28, 1996, which was $11.13.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
at FY-End (#)(1) FY-End ($)(2)
---------------- -------------
Shares Acquired Value Realized Excerisable/ Exercisable/
Name of Exercise (#) ($) (3) Unexercisable Unexercisable
- ---- --------------- ------- ------------- -------------
<S> <C> <C> <C> <C>
Henry C. Baumgartner -- -- 115,000/25,000 $854,625/$53,125
Richard D. Capra -- -- 1,250/58,750 2,031/469
Bert E. Smith -- -- 0/25,000 0/12,500
Ronald E. Fredianelli -- -- 50,000/20,000 345,000/42,500
Felix J. Schuda 1,000 $9,750 40,000/5,000 252,000/10,625
John A. Lucero -- -- 5,000/10,000 18,750/29,375
</TABLE>
- -------------------------------
(1) Represents the total number of shares subject to stock options held by each
executive officer. These options were granted on various dates during
fiscal years 1987 through 1996 and are exercisable on various dates
beginning in 1988 and expiring in 2006.
(2) Represents the difference between the exercise price and $11.13, which is
the September 28, 1996 closing price. Stock option exercise prices range
from $2.13 to $11.25.
(3) Aggregate market value of the shares covered by the option at the date of
exercise, less the aggregate exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
The Compensation and Stock Option Committee of the Board of Directors (the
"Committee") is composed of Harrison H. Augur, Chairman, Arthur L. Schawlow and
Wirt D. Walker. All are independent outside directors. Richard D. Capra served
on the Committee until July 1996, when he was elected President and Chief
Operating Officer of the Company.
BOARD COMPENSATION AND STOCK OPTION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Committee is charged with the responsibility for reviewing the
performance and approving the compensation of key executives and for
establishing general compensation policies and standards for reviewing
management performance. The Committee also reviews both corporate and key
executive performance in light of established criteria and goals and approves
individual key executive compensation.
Compensation Philosophy
The executive compensation philosophy of the Company is to provide
competitive levels of compensation that advance the Company's annual and
long-term performance objectives, reward corporate performance, and assist the
Company in attracting, retaining and motivating highly qualified executives.
16
<PAGE>
The framework for the Committee's executive compensation programs is to
establish base salaries which are competitive and to incentivize excellent
performance by providing executives with the opportunity to earn additional
remuneration linked to the Company's profitability. The incentive plan goals are
designed to improve the effectiveness and enhance the efficiency of Company
operations, to provide savings for customers and to create value for
shareholders. It is also the Company's policy to encourage share ownership by
executive officers and Outside Directors through the grant of stock options.
Components of Compensation
The compensation package of the Company's executive officers consists of
base annual salary, bonus opportunities and stock option grants.
At executive levels, base salaries are reviewed but not necessarily
increased annually. Base salaries are fixed at competitive amounts paid to
individuals with comparable qualifications, experience and responsibilities
engaged in similar businesses as the Company. The Company develops its executive
compensation data from a nationally recognized survey for high technology
companies of similar size, industry and location. Dr. Schuda's base salary of
$105,000 was increased to $115,000 in October 1995. No other executive officer
of the Company received a salary increase in fiscal 1996. However, the Company
typically adjusts base salary levels in connection with promotions. Mr. Lucero's
base salary of $95,000 was increased to $120,000 in August 1996, in connection
with his appointment as an executive officer of the Company.
Incentive compensation is closely tied to the Company's success in
achieving financial performance goals. Each year the Committee approves a
management bonus program based upon performance objectives for executive
officers and other key employees. Under the program, a participant may receive
in any year a portion of a management bonus pool, which pool is based on a
percentage of yearly pre-tax profits with no ceiling. The participant's share is
based on his or her base wage as a percent of the total salaries of all
participants during the management bonus period. The participant's distribution
is then calculated in accordance with a bonus point scaling system tied to
financial performance goals. In addition, all employees share in another bonus
program based solely on a percentage of pre-tax profits, again with no ceiling,
and distributed based on a percentage of base salary.
The Company uses stock options both to reward past performance and to
motivate future performance, especially long-term performance. Stock options
typically have been granted to executive officers when the executive first joins
the Company, in connection with a significant change in responsibilities, to
provide greater incentives to continue their employment with the Company and,
occasionally, to achieve equity within a peer group. The Committee may, however,
grant additional stock options to executives for other reasons. The number of
shares subject to each stock option granted is within the discretion of the
Committee and is based on anticipated future contribution and ability to impact
corporate results, past performance or consistency within the executive's peer
group. The Committee considered these factors, as well as the number of options
held by such executive officers that would remain unvested at the end of fiscal
1995, in determining the number of options to grant to executive officers for
fiscal 1996. The Committee believes that through the use of stock options,
executive interests are directly tied to enhancing shareholder value. Stock
options are granted at fair market value as of the date of grant, and have a
term of ten years. The options vest 25% per year, beginning on the first
anniversary date of the grant. The stock options provide value to the recipients
only when the market price of the Company's Common Stock increases above the
option grant price and only as the shares vest and become exercisable.
In November 1996, the Board of Directors authorized severance agreements
for certain key managers in the event of a change of control of the Company and
subsequent actual or constructive termination of the covered manager without
cause. The severance pay will be a multiple of current base salary (.5 to 3
times, depending on seniority).
17
<PAGE>
The change of control severance agreements are intended to maintain
management objectivity and continuation during any negotiation process.
Mr. Baumgartner's 1996 Compensation
The Committee makes decisions regarding the compensation of the Chief
Executive Officer using the same philosophy set forth above. The Committee's
approach in setting Mr. Baumgartner's base compensation, as with that of the
Company's other executives, is to be competitive with other companies within the
industry, taking into consideration company size, operating conditions and
compensation philosophy and performance. Mr. Baumgartner's base salary in fiscal
1996 was the same as his base salary in fiscal 1995. Mr. Baumgartner's fiscal
1996 incentive compensation was earned under the same bonus plans and
performance criteria that were described previously in this report. He received
25,000 stock option grants at $9.00 per share during fiscal 1996.
Compliance with Section 162(m) of the Internal Revenue Code
The Company intends to comply with the requirements of Section 162(m) of
the Internal Revenue Code of 1986 for fiscal 1997. The Option Plan is in
compliance with Section 162(m) by limiting the number of shares subject to
options to be granted to any participant. The Company does not expect cash
compensation for fiscal 1996 to be affected by the requirements of Section
162(m).
COMPENSATION AND STOCK OPTION COMMITTEE
Harrison H. Augur, Chairman
Arthur L. Schawlow
Wirt D. Walker, III
18
<PAGE>
PERFORMANCE GRAPH
The Securities and Exchange Commission requires that the Company include in
this Proxy Statement a line- graph presentation comparing cumulative, five-year
shareholder returns on an indexed basis with (i) a broad equity market index and
(ii) either an industry index or peer group. The following graph compares the
percentage change in the cumulative total shareholder return on the Company's
Common Stock against the cumulative total return of the Standard & Poors 500
Index and the NASDAQ SIC Group 364 (Electric Lighting and Wiring Equipment) for
a period of five years. "Total return," for the purpose of this graph, assumes
reinvestment of all dividends, if any. The stock price performance shown on the
graph is not necessarily indicative of future price performance.
Comparison of Five Year Cumulative Total Return*
Among ILC Technology, Inc., The S&P 500 INDEX
and NASDAQ SIC Group 364
Edgar representation of data points used in printed graphic
<TABLE>
<CAPTION>
ILC Technology, Inc. SDAQ SIC Group 364 S&P 500
<S> <C> <C> <C>
9-91 100 100 100
9-92 84 111 118
9-93 84 125 145
9-94 64 130 170
9-95 80 169 212
9-96 79 203 216
</TABLE>
*100 invested on 9/30/91 in stock or index, including reinvestment of
dividends. Fiscal year ending September 28.
19
<PAGE>
CERTAIN TRANSACTIONS
In November 1996, the Company entered into Compensation Agreements with ten
of its key employees, including six executive officers, that would provide
severance benefits effective upon a change in control of the Company. Each
agreement provides that if, during the two-year period following a change in
control of the Company (as defined in the agreements), the Company terminates
the employee's employment without cause (other than for death, retirement or
disability) or the employee terminates the employee's employment for good reason
(as defined in the agreements), the employee will receive from the Company a
lump sum payment as a severance benefit. The amount of such payment will be
equal to three times the employee's annual full base salary (excluding bonus)
for Messrs. Baumgartner, Capra and Fredianelli, and two times the employee's
annual full base salary (excluding bonus) for Messrs. Schuda, Smith and Lucero.
All Compensation Agreements expire in November 1999 if a change in control of
the Company has not occurred or upon the employee's earlier termination for
cause or by reason of the employee's death, disability or retirement.
COMPLIANCE UNDER SECTION 16(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely on its review of the copies of forms furnished to the Company
and written representations from its executive officers and directors, the
Company believes that all Section 16(a) filing requirements were met during
fiscal 1996, except that a Form 3 giving an initial statement of beneficial
ownership of equity securities was filed late by Bert E. Smith, Vice President,
Operations and John A. Lucero, Vice President, Sales and Marketing.
OTHER MATTERS
The Company knows of no other matters to be submitted to the Meeting.
However, if any other matters properly come before the Meeting or any
adjournment or postponement thereof, it is the intention of the proxy holders to
vote the shares they represent as the Board of Directors may recommend.
By Order of the Board of Directors
Ronald E. Fredianelli,
Secretary
Dated: January 2, 1997
Sunnyvale, California
20
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated November 22, 1996, included in this Form 10-K, into the Company's
previously filed Form S-8 Registration Statements, File Numbers 2-90841,
2-95899, 33-6917, 33-27001, 33-50404, 33-89470 and 333-1095.
ARTHUR ANDERSEN LLP
San Jose, California
December 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ILC Technology, Inc., Financial Data Sheet
</LEGEND>
<CIK> 0000719625
<NAME> ILC Technology, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-END> SEP-28-1996
<CASH> 1,829
<SECURITIES> 0
<RECEIVABLES> 10,668
<ALLOWANCES> 312
<INVENTORY> 8,902
<CURRENT-ASSETS> 4,545
<PP&E> 32,389
<DEPRECIATION> 11,213
<TOTAL-ASSETS> 48,594
<CURRENT-LIABILITIES> 10,476
<BONDS> 0
0
0
<COMMON> 6,815
<OTHER-SE> 22,976
<TOTAL-LIABILITY-AND-EQUITY> 48,594
<SALES> 54,206
<TOTAL-REVENUES> 54,206
<CGS> 36,180
<TOTAL-COSTS> 36,180
<OTHER-EXPENSES> 11,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 462
<INCOME-PRETAX> 6,061
<INCOME-TAX> 1,515
<INCOME-CONTINUING> 4,546
<DISCONTINUED> (4,239)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 307
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
