UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11360
ILC TECHNOLOGY, INC
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1655721
(State of other jurisdiction (I.R.S. Employer Incorporation or
or organization) Identification No.)
399 JAVA DRIVE, SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices) (Zip Code)
408-745-7900
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12 , 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares: 4,800,953 Date: JANUARY 31, 1997
<PAGE>
ILC TECHNOLOGY, INC.
FORM 10-Q
For the Quarter Ended December 28, 1996
INDEX PAGE NO.
Part I FINANCIAL INFORMATION 2
Item 1 Condensed Consolidated Statements of
Operations - Quarters ended December 28, 1996
and December 30, 1995 3
Condensed Consolidated Balance Sheets -
December 28, 1996 and September 28, 1996 4
Condensed Consolidated Statements of Cash
Flows - Quarters ended December 28, 1996
and December 30, 1995 5-6
Notes to Condensed Consolidated Financial
Statements 7-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-11
Part II OTHER INFORMATION 12
SIGNATURES 13
1
<PAGE>
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures which are made are adequate to make the information presented not
misleading. It is suggested that the condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report/Form 10-K for the year ended
September 28, 1996.
These financial statements have been prepared in all material respects in
conformity with the standards of accounting measurements set forth in Accounting
Principles Board Opinion No. 28 and reflect, in the opinion of management, all
adjustments (that consisted only of normal recurring adjustments) necessary to
present fairly the financial information set forth therein. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
ILC TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
QUARTER ENDED
DEC. 28, 1996 DEC. 30, 1995
------------- -------------
(as restated)
<S> <C> <C>
Net Sales ......................................... $12,121 $12,211
Costs and expenses:
Cost of sales ................................... 8,741 8,012
Research and development ........................ 1,072 1,225
Marketing ....................................... 747 655
General and administrative ...................... 988 1,046
Amortization of intangibles ..................... 30 30
------- -------
11,578 10,968
------- -------
Income from continuing operations before
provision for income taxes and interest
expense .......................................... 543 1,243
------- -------
Interest expense, net ............................. 139 113
------- -------
Income from continuing operations before
provision for income taxes ....................... 404 1,130
Provision for income taxes on continuing
operations ....................................... 97 282
------- -------
Income from continuing operations ................. 307 848
Income from discontinued operations, net
of income tax provision of $10 in the first
quarter of fiscal 1996 ........................... - 30
------- -------
Net Income ....................................... $ 307 $ 878
======= =======
Earnings per share:
Earnings from continuing operations .............. $ 0.06 $ 0.17
Earnings from discontinued operations ............ - 0.01
------- -------
Net income ........................................ $ 0.06 $ 0.18
======= =======
Weighted average shares outstanding ............... 5,042 4,884
======= =======
See accompanying notes
3
<PAGE>
ILC TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
DEC. 28, 1996 SEP. 28, 1996
------------- -------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................... $ 957 $ 1,829
Accounts receivable, net ..................... 10,947 10,356
Inventories:
Raw materials ............................... 5,031 4,803
Work-in-process ............................. 3,267 2,550
Finished goods .............................. 1,433 1,549
------- -------
Total inventories ......................... 9,731 8,902
------- -------
Deferred tax asset ........................... 2,158 2,158
Prepaid expenses ............................. 258 208
Net assets from discontinued operations ...... 2,693 2,178
------- -------
Total current assets ...................... 26,744 25,631
------- -------
Property and equipment, net .................. 21,903 21,176
Covenant-not-to-compete, net ................. 327 357
Other assets ................................. 714 680
------- -------
$49,688 $47,844
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................. $ 4,406 $ 3,643
Accrued liabilities .......................... 5,169 5,346
Accrued income taxes payable ................. 1,547 1,487
------- -------
Total current liabilities ................. 11,122 10,476
------- -------
Long-term debt ............................... 6,788 6,188
Obligations under equipment line ............. 1,259 1,096
Other accruals ............................... 206 206
Capital lease obligation ..................... 79 87
Stockholders' equity:
Common stock ................................. 6,951 6,815
Retained earnings ............................ 23,283 22,976
------- -------
Total stockholders' equity ................ 30,234 29,791
------- -------
$49,688 $47,844
======= =======
See accompanying notes
4
<PAGE>
ILC TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
QUARTER ENDED
<CAPTION>
DEC 28, 1996 DEC 30, 1995
------------ ------------
(as restated)
<S> <C> <C>
Cash flows from operating activities -
Net income ........................................ $ 307 $ 878
Adjustment to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization .................. 503 390
Amortization of non-compete agreement .......... 30 30
Changes in assets and liabilities from
operations:
(Increase) decrease in accounts receivable ... (591) 755
Increase in inventories ...................... (829) (592)
(Increase) decrease in prepaid expenses ...... (50) (137)
(Increase) decrease in other assets .......... (34) 16
Increase (decrease) in accounts payable ...... 762 (150)
Decrease in accrued liabilities .............. (289) (336)
Net change in assets and liabilities from
discontinued operations ..................... (515) 76
------- -------
Total adjustments ........................... (1,013) 52
------- -------
Net cash provided by (used in) operating
activities .................................. (706) 930
------- -------
Cash flows from investing activities -
Capital expenditures ............................ (1,229) (665)
------- -------
Net cash used in investing activities ....... (1,229) (665)
------- -------
Cash flows from financing activities -
Principal borrowings under line of credit ....... 2,963 1,500
Principal repayments under line of credit ....... (2,100) (2,000)
Principal borrowings under equipment line ....... 667 443
Principal payments under equipment line ......... (340) (296)
Principal payments under term loan for
buildings ...................................... (263) (396)
Proceeds from issuance of common stock .......... 136 97
Payments under non-compete agreement ............ - (130)
------- -------
Net cash provided by (used in)
financing activities ....................... 1,063 (782)
------- -------
Net decrease in cash and cash equivalents ....... (872) (517)
Cash and cash equivalents at beginning of
period ......................................... 1,829 1,530
------- -------
Cash and cash equivalents at end of period ...... $ 957 $ 1,013
======= =======
See accompanying notes
5
<PAGE>
ILC TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
QUARTER ENDED
<CAPTION>
DEC 28, 1996 DEC 30, 1995
------------ ------------
<S> <C> <C>
Cash paid during the period for:
Interest expense ............................ $184 $151
Income taxes ................................ - -
</TABLE>
See accompanying notes
6
<PAGE>
ILC TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 28, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements include the accounts of ILC
Technology, Inc., and its subsidiaries, after elimination of intercompany
accounts and transactions. The company's quarter ends on the last Saturday of
the fiscal month.
The Condensed Consolidated Financial Statements for the quarter ended
December 30, 1995 were restated to reflect the Company's decision to discontinue
the operations of Precision Lamp, Inc. This restatement had no impact on net
income.
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.
2. EARNINGS PER SHARE
------------------
Earnings per share is computed using the weighted average number of common
shares and common equivalent shares (when such equivalents have a dilutive
effect) outstanding during the periods using the treasury stock method. Fully
diluted earnings per share is not significantly different from earnings per
share as reported.
3. COVENANT-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.
Subsequent to this acquisition, the Company quarterly evaluates whether later
events and circumstances have occurred that indicate the remaining estimated
useful life of this intangible may warrant revision or that the remaining
balance of the intangible 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.
7
<PAGE>
ILC TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 28, 1996 (continued)
-----------------------------
4. BANK BORROWINGS
Subsequent to December 28, 1996, the Company negotiated an additional
$3,000,000 line of credit available to June 30, 1997 at 2.5% above the LIBOR
rate. As of January 31, 1997, the Company had used approximately $900,000 of
this line of credit.
5. 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 (see 1996 Annual Report/10K). For the quarter ended December 28,
1996, the loss incurred by this operation of approximately $201,000 was netted
against the accrual for discontinued operations recorded in the fourth quarter
of fiscal 1996.
In January 1997, the Company signed an agreement to sell the Precision Lamp
subsidiary. The selling price is approximately $3.3 million but is subject to
due diligence and the ability of the purchaser to obtain adequate financing no
later than March 31, 1997.
8
<PAGE>
ITEM 2. 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 located in Cotati,
California. 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.
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", "future", "may have", "will take place", "will be
realized" 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
- ---------------------
QUARTER ENDED DECEMBER 28, 1996 COMPARED TO QUARTER ENDED DECEMBER 30, 1995
- ---------------------------------------------------------------------------
Net sales remained constant at $12,121,000 in the quarter ended December
28, 1996 compared to $12,211,000 in the quarter ended December 30, 1995.
Although net sales at ILC Sunnyvale increased 11.4% between the two quarters,
net sales at Converter Power decreased 46.0% between the two quarterly periods.
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. This order reduction continued into the first
quarter of fiscal 1997. 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. Net sales at Q-Arc increased 40.8% in the quarter ended
December 28, 1996 over net sales in the quarter ended December 30, 1995. The net
sales increases at both ILC Sunnyvale and at Q-Arc were the result of a higher
volume of products sold in all areas except Equipment products, which were lower
than the previous year due to the timing of the shipment of orders.
Cost of sales as a percentage of net sales was 72.1% in the first quarter
of fiscal 1997 compared to 65.6% in the same quarter last year. The percentage
increase was due primarily to the sales decline from Converter Power's major
customer discussed above despite cost reductions initiated in the fourth quarter
of fiscal 1996. Additionally, unfavorable yields in Cermax and infrared lamp
products, increases in the provision for inventory reserves and revenue
recognition on Aerospace contracts with low or minimal gross margin contributed
to the cost of sales percentage increase between the first quarter of fiscal
1997 and the first quarter of fiscal 1996.
Research and development expenses, 8.8% of net sales in the quarter ended
December 28, 1996 compared to 10.0% of net sales in the quarter ended December
30, 1995, decreased $153,000 between the two quarters. Spending declines
occurred in Flash and Quartz while spending increases took place in Cermax and
Equipment for the display and projection market.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTINUED)
------------------------
QUARTER ENDED DECEMBER 28, 1996 COMPARED TO QUARTER ENDED DECEMBER 30, 1995
(CONTINUED)
- -----------
Marketing expenses for the quarter ended December 28, 1996 were $747,000,
or 6.2% of net sales compared to $655,000, or 5.4% of net sales in the same
quarter of the prior fiscal year. The $92,000 increase between the two quarters
was the result of personnel additions and more travel and trade show attendance.
As a percentage of net sales, general and administrative expenses were 8.2%
in the first quarter of fiscal 1997 and 8.6% in the first quarter of 1996. In
absolute dollars, the general and administrative spending level has decreased
$58,000 between the two quarters primarily at Converter Power.
Amortization of intangibles of $30,000 in the first quarter of fiscal 1997
and 1996 represents the amortization of the covenant-not-to-compete arising from
the acquisition of Q-Arc in 1991.
Net interest expense, $139,000 in the quarter ended December 28, 1996
compared to $113,000 in the quarter ended December 30, 1995, increased $26,000
between the two quarters. Interest expense associated with continuing operations
for the first quarter of fiscal 1997 was $166,000 compared to $130,000 for the
first quarter of fiscal 1996. The increase in interest expense between the two
quarters is due to higher borrowings under 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 $404,000 in the first quarter of fiscal 1997 compared to income
from continuing operations before provision for income taxes of $1,130,000 in
the first quarter of fiscal 1996. The effective tax rate in the quarter ended
December 28, 1996 was 24% compared to an effective tax rate of 25% in the
quarter ended December 30, 1995.
As previously discussed, the Company's Board of Directors voted to proceed
with the divestiture of Precision Lamp based in Cotati, California. The
operating loss of Precision Lamp incurred in the first quarter of fiscal 1997
(approximately $201,000) have been offset against an accrual made in the fourth
quarter of fiscal 1996 for anticipated losses during the final disposition of
the subsidiary. In January 1997, the Company signed an agreement to sell the
Precision Lamp subsidiary. The selling price is approximately $3.3 million but
is subject to due diligence and the ability of the purchaser to obtain adequate
financing no later than March 31, 1997.
The Company believes that inflation and changing prices had no significant
impact on sales or costs during the first quarter of fiscal 1997 or 1996.
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Net cash used in operating activities for the quarter ended December 28,
1996 was $706,000, a $1,636,000 change from the $930,000 net cash provided by
operating activities for the quarter ended December 30, 1995. During the first
quarter of fiscal 1997, the Company made capital equipment acquisitions of
$1,229,000, increased its net borrowings under its line of credit by $863,000,
increased its net borrowings under an equipment line by $327,000 and paid down a
term loan by $263,000. During the first quarter of fiscal 1996, the Company made
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
---------------------------------
LIQUIDITY AND FINANCIAL CONDITION (CONTINUED)
- ---------------------------------------------
capital equipment acquisitions of $665,000, decreased its net borrowings under
its line of credit by $500,000, paid down a term loan by $396,000 and increased
its net borrowings under an equipment line by $147,000.
Raw material and work in process inventories have increased from the
preceding quarter by approximately $228,000 and $717,000, respectively. This
increase is in anticipation of product shipments in the second quarter of fiscal
1997 and to reduce cycle time for customer needs.
The Company has working capital of $15,622,000 and a current ratio of 2.40
to 1.0 at December 28, 1996. This compares with working capital of $15,155,000
and a current ratio of 2.45 to 1.0 at September 28, 1996. As of December 28,
1996, the Company has $137,000 unused on a $6,000,000 bank line of credit at 2%
above the LIBOR rate (London Interbank Offer Rate) (7.66% at December 28, 1996).
Subsequent to December 28, 1996, the Company negotiated an additional $3,000,000
line of credit available to June 30, 1997 at 2.5% above the LIBOR rate. The
Company also has available approximately $443,000 remaining on a $2,200,000
equipment credit facility at 2% above the LIBOR rate. This credit facility can
be increased to accommodate the capital equipment needs of the Company. At
December 28, 1996, the Company was in compliance with, or had obtained waivers
for, all covenants. 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.
11
<PAGE>
PART II OTHER INFORMATION
- ------- -----------------
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILC TECHNOLOGY, INC.
DATE: February 11, 1997 /S/RONALD E. FREDIANELLI
Ronald E. Fredianelli
Chief Financial Officer
DATE: February 11, 1997 /S/HENRY C. BAUMGARTNER
Henry C. Baumgartner
Chairman of the Board and
Chief Executive Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> DEC-28-1996
<CASH> 957
<SECURITIES> 0
<RECEIVABLES> 11,274
<ALLOWANCES> 327
<INVENTORY> 9,731
<CURRENT-ASSETS> 5,109
<PP&E> 33,395
<DEPRECIATION> 11,492
<TOTAL-ASSETS> 49,688
<CURRENT-LIABILITIES> 11,122
<BONDS> 0
0
0
<COMMON> 6,951
<OTHER-SE> 23,283
<TOTAL-LIABILITY-AND-EQUITY> 49,688
<SALES> 12,121
<TOTAL-REVENUES> 12,121
<CGS> 8,741
<TOTAL-COSTS> 8,741
<OTHER-EXPENSES> 2,837
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> 404
<INCOME-TAX> 97
<INCOME-CONTINUING> 307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 307
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
