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
For the fiscal year ended September 27, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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Commission file number 0-11360
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ILC TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
California 94-1655721
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
399 Java Drive, Sunnyvale, California 94089
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 745-7900
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(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. [X]
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 November 3,
1997, was approximately $38,281,494. 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 November 3, 1997 was 4,879,890.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
Item Description Page
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<S> <C> <C>
PART I
------
1 Business................................................... 1 - 6
2 Properties ................................................ 6
3 Legal Proceedings.......................................... 6
4 Submission of Matters to a Vote of Security Holders........ 6
Executive Officers of the Registrant....................... 7 - 8
PART II
-------
5 Market for the Registrant's Common Equity and
Related Stockholder Matters............................... 9
6 Selected Financial Data..................................... 10
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................11 - 15
7A Quantitative and Qualitative Disclosures About Market Risk....15
8 Financial Statements and Supplementary Data.................16 - 38
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 39
PART III
--------
10 Directors and Executive Officers of the Registrant........... 39
11 Executive Compensation.......................................40 - 42
12 Security Ownership of Certain Beneficial Owners
and Management..............................................43 - 44
13 Certain Relationships and Related Transactions............... 45
PART IV
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14 Exhibits, Financial Statement Schedule, and Reports
on Form 8-K.................................................. 46
Signatures................................................... 47
</TABLE>
<PAGE>
PART I
Item 1. Business
General
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ILC Technology, Inc. ("ILC" or the "Company") designs, develops,
manufactures and markets high intensity lamps and lighting products for the
medical, industrial, aerospace, scientific, entertainment and military
industries. ILC was incorporated in California in 1967. Its principal
manufacturing and executive facilities are located at 399 Java Drive, Sunnyvale,
California 94089, and its telephone number is (408) 745-7900. ILC's wholly-owned
subsidiary, Q-Arc. Ltd., an arc lamp manufacturing company based in Cambridge,
England, was acquired by ILC in 1991.
In September 1996, the Board of Directors of ILC (the "ILC Board") voted to
proceed with the divestiture of ILC'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 backlight
panels that incorporate the technology of the surface mount lamps.
In May 1997, ILC completed the sale of its Converter Power, Inc. ("CPI")
subsidiary to Applied Science and Technology, Inc. ("ASTeX"). The gain on the
sale was reported in the results of operations for the third quarter of fiscal
1997. CPI is a producer of high efficiency, small form lamp power sources built
to fit compactly into a variety of systems.
On October 30, 1997, ILC entered into a definitive Agreement and Plan of
Merger by and among ILC, BEC Group, Inc. ("BEC") and BILC Acquisition Corp.
("Acquisition Corp."), a wholly owned subsidiary of BEC, pursuant to which ILC
will merge (the "Merger") with and into Acquisition Corp. Upon consummation of
the Merger, each outstanding share of ILC will be converted into the right to
receive 2.18 shares (reflecting the completion of BEC's contemplated one-for-
two reverse stock split) of BEC's common stock. The Merger is subject to the
approval of both ILC's shareholders and BEC's stockholders, and to certain
regulatory approvals and other customary closing conditions. The respective
chairmen of ILC and BEC have executed voting agreements in favor of the Merger.
Business Strategy
- -----------------
ILC uses a market focused business strategy. The key element of this
strategy is to select growth markets that most closely match ILC'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. ILC manufactures 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. In addition, ILC derives sales of flashlamps in the
medical market, where lasers are utilized in cataract surgery and other exacting
procedures. Production of flashlamps 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-
1
<PAGE>
Products (continued)
effective. In high-powered laser applications, however, ILC believes that
flashlamps will continue to be utilized.
ILC believes that growth in its flashlamp business is highly dependent upon
its ability to develop new, non-laser applications for flashlamp technology. ILC
continues to develop high growth arc lamp markets outside of the laser
applications. Some of these include material aging (solar simulation),
ultraviolet ("UV") sterilization and curing, machine vision and
spectrofluoroscopy. During fiscal 1997, sales of flashlamps to non-laser markets
were approximately 12% of ILC's total flashlamp sales.
Cermax(R) and Equipment. ILC manufactures Cermax lamps, which are short arc
xenon lamps that are optically pre-aligned, encased in a safe ceramic body
bonded to a metallized sapphire window, and are capable of transmitting the full
spectrum from infrared to UV wavelengths. In addition, ILC manufactures
fully-encased and open frame power supplies, lamp holders and other equipment to
support its Cermax product line. Products also include complete fiber optic
lightsources that are private labelled for manufacturers of medical equipment.
ILC sells Cermax lamps primarily to original equipment manufacturers ("OEMs").
The primary market for ILC's Cermax product line is fiber optic
illumination for medical procedures such as endoscopy. The market for Cermax
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 lightsources with specialized power supplies. High intensity lightsources
are required because physicians seek good color rendition on video displays and,
in some cases, also because of the small size of the fiber optic lightguide. The
low-intensity market is dominated by manufacturers of halogen lightsources.
Ancillary industrial uses for Cermax lightsources include illuminating areas
that are difficult to inspect, such as nuclear reactors or jet engines. ILC has
also targeted new non-medical Cermax lightsource markets that include analytical
instruments and spot UV curing lightsources.
During fiscal 1995, ILC announced the release of new high-intensity lamps
for video projection utilizing ILC's proprietary Daymax(R) and Cermax
technologies. During fiscal 1996 and 1997, several of ILC's products were
incorporated into high-end/professional and mid-range/business video projection
systems of several OEMs, including Hughes-JVC Technology Corporation, Ampro
Corporation, Electrohome Limited and Digital Projection Ltd. Sony Electronics,
Inc. and Mitsubishi Electric Corporation 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, liquid crystal
displays ("LCDs") or Texas Instruments Inc.'s DMD (Digital Micromirror Devices).
In conjunction with several OEMs, ILC is developing lamps for the
low-end/commercial business segment. ILC's future growth will depend to a large
extent on the successful introduction, marketing and commercial viability of
video projection systems that use ILC's products.
The factors that may adversely affect ILC's Cermax business include the
entry of competitors into the market. ILC's primary patent on the Cermax lamp
expired in 1991. ORC Technologies, Inc., Ushio and EG&G, Inc. are manufacturing
and marketing sealed beam xenon illuminators that compete with ILC's Cermax
lamps, and other established and emerging companies may compete in the future.
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.
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Products (continued)
Stepper Lamps. In fiscal 1995, ILC began commercial shipment of mercury
xenon short arc lamps, which are used to expose patterns during the fabrication
of semiconductor products. ILC is shipping a complete line of 1,000 and 2,000
watt stepper lamps. Each lamp, fully utilized, lasts for approximately 1-2
months. Accordingly, ILC expects that the product will generate a high repeat
business.
The market for stepper lamps is currently dominated by Ushio, a Japanese
competitor of ILC. ILC has invested heavily in ensuring the quality of its
stepper lamps since semiconductor manufacturers perceive substantial risk in
switching suppliers. In addition, ILC's stepper lamp does not require the
semiconductor manufacturer to modify any of its maintenance procedures. ILC has
worked extensively for more than four years with semiconductor manufacturers in
the United States to qualify its stepper lamps at major semiconductor
fabrication facilities. During fiscal 1995, ILC established itself as the only
qualified United States supplier of mercury xenon short arc lamps used in
semiconductor manufacturing equipment. In 1996 and 1997, ILC's stepper lamps
were qualified by a number of semiconductor manufacturers including IBM
Corporation, Intel Corporation and Integrated Solutions, Inc. The failure of
ILC's stepper lamp to sustain market acceptance would have a material adverse
effect on ILC's results of operations.
In October 1994, ILC purchased a 20,000 square foot office and
manufacturing facility in Santa Clara, California for ILC's stepper lamp
operations. The move to the new facility was completed in the second quarter of
fiscal 1997. The success of ILC's stepper lamp business depends in large part on
the ability of ILC to manufacture stepper lamps efficiently and reliably over
time. There can be no assurance that ILC will not experience manufacturing
problems in the future that would result in product delivery delays or quality
problems.
Other Products. ILC's other products include mercury capillary lamps,
Daymax metal halide lamps and products for the aerospace and military markets.
ILC manufacturers mercury capillary lamps using technology and processes
that are similar to those developed for stepper lamps. The primary applications
for mercury capillary lamps include the photolithography of grid patterns on
color television screens and printed circuit boards for computers.
Daymax lamps simulate stable daylight conditions. Originally developed for
use in the space program, these products are now used primarily in the
entertainment business. Applications include: indoor and outdoor lighting for
motion picture and television productions, high speed and special effects
lighting, concert and stadium lighting and theatrical lighting. Daymax lamps are
also used for solar simulation in certain scientific applications. ILC 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.
In the Aerospace market, ILC offers standard, modified, and customer
systems covering the visible, infrared, and UV spectrum to meet each space
lighting requirement. ILC's lighting 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 designed to meet unique requirements can often be developed from
ILC's large selection of space-qualified designs and components, substantially
3
<PAGE>
Products (continued)
reducing development costs and lead times.
ILC's products for the military market include infrared lamps used by the
military on tanks and aircraft to deflect offensive heat seeking missiles. In
addition, ILC developed for Hughes Aircraft Company a multi-faceted Cermax
high-intensity discharge lamp which is used in the infrared guidance system of
the TOW (Tube Launched Optically Guided Wire Controlled) missile, and shipped
approximately $1.6 million of this product in fiscal 1997.
Marketing and Sales
ILC markets and sells its products to OEMs through a direct sales force and
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 the
semiconductor, video projection and medical markets. In addition, ILC maintains
customer service groups at its facilities in California and Cambridge, England
to provide sales and customer service support to its customer base and network
of domestic and foreign sales representatives and distributors.
ILC's European sales office, which is located at the facilities of Q-Arc,
Ltd. in Cambridge, England, markets and sells the complete line of lamp and
equipment products and provides local customer support for European customers.
In the fiscal year ended September 27, 1997, international sales represented
approximately 34.0% of ILC's net sales. Information regarding ILC's export sales
and major customers is incorporated herein by reference to Note 3 of Notes to
Consolidated Financial Statements.
Backlog
As of September 27, 1997, ILC's backlog of unfilled orders was
approximately $23.4 million, compared to approximately $28.0 million at
September 28, 1996. Subsequent to fiscal 1997, ILC received an order of
approximately $6.5 million. A comparable order from the same customer was
received prior to the end of fiscal 1996 and is included in backlog as of
September 28, 1996. Had this order been received prior to the end of fiscal
1997, ILC's backlog at September 27, 1997 would have been approximately $29.9
million. ILC includes in its backlog orders that 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 is not necessarily representative of actual sales for any
succeeding period.
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. The manufacturing of most of ILC'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 in Sunnyvale, California. These adjoining
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<PAGE>
Manufacturing (continued)
buildings include lamp development laboratories, separate manufacturing
facilities for xenon and krypton arc lamps, Cermax lamps, Daymax metal halide
lamps, mercury capillary lamps, Cermax equipment and aerospace products. In
October 1994, ILC purchased a facility in Santa Clara, California totalling
approximately 20,000 square feet to accommodate stepper lamp manufacturing.
Q-Arc, Ltd. 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 square feet of this facility and has available
11,000 square feet for future expansion.
Q-Arc received ISO9002 certification in fiscal 1995 and ILC Sunnyvale
became certified in fiscal 1996. 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 through all sections of the
organization.
Patents and Trademarks
ILC holds approximately 25 United States and foreign patents related to the
key features of several of its products and has several patent applications
pending in the United States. While these patents tend to enhance ILC's
competitive position, ILC believes that ILC'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 ILC's products, Cermax and
Daymax, are registered as trademarks in the United States Patent and Trademark
Office and in many other countries in which ILC's products are sold.
ILC's patents expire at various dates between 1998 and 2013. There can be
no assurance that any patents held by ILC will not be challenged and
invalidated, that patents will issue from any of ILC's pending patent
applications or that any claim allowed from existing or pending patents will be
of sufficient scope or strength to provide meaningful protection or any
commercial advantage to ILC.
Competitors of ILC also may be able to design around ILC's patents.
Competition
ILC competes on the basis of product performance, applications engineering,
customer service, reputation and price. ILC 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. They include
EG&G, Inc., Osram GmbH, Philips Electronics N.V., Ushio, ORC Technologies, Inc.,
Koto and Wolfram Electric Inc. In many market segments, the competition has
established the benchmark for product acceptance at a very high level, which
requires ILC to improve continuously all phases of its processes for customer
satisfaction. ILC 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, ILC believes that it can defend its
strengths and maintain its leadership in selected markets.
Engineering and Research
ILC's engineering and 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
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Engineering and Research (continued)
of ILC's customers. The second area is joint engineering and development work
made in connection with customer production contracts. The third area includes
those projects funded by ILC to develop new products and technologies. ILC spent
$4,253,000, $4,320,000 and $4,279,000 in fiscal 1997, 1996 and 1995,
respectively, for ILC funded research and development.
Employees
As of September 27, 1997, ILC had 439 full-time employees, comprised of 31
in research and engineering, 24 in marketing and sales, 361 in manufacturing and
23 in general and administrative positions. ILC believes that its future success
depends upon its continued ability to recruit and retain highly skilled
employees in all disciplines. Although competition for qualified personnel is
intense, ILC has been successful in attracting and retaining skilled employees.
None of ILC's employees is represented by a labor union. ILC believes that its
relations with its employees are good.
Item 2. Properties
ILC owns facilities with an aggregate of approximately 153,000 square feet
of office and manufacturing space in four separate buildings in Sunnyvale and
Santa Clara, California and Cambridge, England. In Sunnyvale, ILC owns two
adjacent buildings with an aggregate of 97,000 square feet of office and
manufacturing space. These buildings were constructed by ILC in 1977 and 1979,
sold and leased back from the new owners in 1982, and re-purchased from the
landlord in August 1993. ILC leases to one tenant approximately 9,000 square
feet of its space in Sunnyvale under a lease that expires in March 1998. In
October 1994, ILC purchased 20,000 square feet of office and manufacturing space
in Santa Clara, California. In June 1994, ILC 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.
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 1997.
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Executive Officers of the Registrant
ILC's executive officers and their ages as of December 26, 1997, are as
follows:
<TABLE>
NAME AGE POSITION
<S> <C> <C>
Henry C. Baumgartner .......65 .................Chairman of the Board and Chief
Executive Officer
Richard D. Capra .......... 65 .................President and Chief Operating
Officer
John A. Lucero ............ 48 .................Senior Vice President, Marketing
and Sales
Ronald E. Fredianelli ..... 48 .................Chief Financial Officer and
Secretary
Felix J. Schuda ........... 49 .................Vice President - Chief Technical
Officer
Dennis M. Toohey .......... 50 .................Vice President, Logistics and
Quality
Arthur O. Whipple ......... 49 .................Vice President, Engineering
</TABLE>
Henry C. Baumgartner is a co-founder of ILC. He has served ILC in various
management positions since 1967 and has been a member of the ILC Board of
Directors since 1967. Mr. Baumgartner was appointed Chairman of the ILC Board of
Directors in July 1996 and Chief Executive Officer of ILC in April 1990. From
April 1990 to July 1996, he served as the President of ILC. Prior to 1990, he
served as Chief Executive Officer and Chairman of the Board of ILC from November
1986.
Richard D. Capra has served as a member of the Board of Directors of ILC
since 1995. Since July 1996, he has also served as President and Chief Operating
Officer of ILC. From January 1991 to July 1996, Mr. Capra served as a management
consultant and as director of several companies in the electric and lighting
business. He was President and Chief Financial Officer of Philips Lighting Inc.,
U.S., from 1983 to 1991.
John A. Lucero has served as Senior Vice President of Marketing and Sales
of ILC since February 1997. From September 1996 to February 1997 he was Vice
President of Marketing and Sales. He joined ILC 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.
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Executive Officers of the Registrant (continued)
Ronald E. Fredianelli has served as Chief Financial Officer of ILC 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 ILC since August 1979. From November 1985 to
August 1986, he was Controller of Synergy Computer Graphics.
Felix J. Schuda has served as Chief Technical Officer of ILC since
September 1996 and as Vice President of ILC since 1981. He has been employed by
ILC in various engineering and engineering management positions since June 1976.
Dennis M. Toohey has served as Vice President of Logistics and Quality of
ILC 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.
Arthur O. Whipple has served as Vice President of Engineering of ILC since
March 1997. From April 1994 to February 1997, he was employed by ILC's Precision
Lamp, Inc. subsidiary, initially as Vice President and as President after May
1996. From January 1990 to March 1994, Mr. Whipple was President of Aqua Design,
Inc., a privately held manufacturer and operator of water treatment systems.
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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:
<TABLE>
FISCAL 1997 HIGH LOW
<S> <C> <C>
1st Quarter....................14 3/16......... 10 3/8
2nd Quarter....................14 3/4 ......... 10
3rd Quarter....................12 1/8 ......... 9 1/8
4th Quarter....................12 3/16......... 10 1/2
FISCAL 1996 HIGH LOW
1st Quarter....................11 1/2 ......... 8 3/4
2nd Quarter....................11 7/8 ......... 8 7/8
3rd Quarter....................14 ......... 10 11/16
4th Quarter....................13 1/2 ......... 10 7/8
</TABLE>
There were approximately 2,000 institutional and individual stockholders as
of September 27, 1997. The closing sales price of the common stock on September
27, 1997 as reported by Nasdaq was $11.75. ILC has not declared or paid cash
dividends. ILC intends to retain earnings for use in its business and does not
expect to pay cash dividends in the foreseeable future. ILC's credit agreement
with Union Bank of California provides that ILC 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.
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Item 6. Selected Financial Data
The following selected consolidated financial data of ILC, which has been
reclassified to reflect the continuing operations of ILC and the discontinued
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)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net sales.....................$55,518 $54,206 $49,496 $44,331 $42,250
Income from continuing
operations................... 4,839 4,546 4,637 3,727 4,509
Income (loss) from
discontinued operations...... -- (4,239) (99) (3,536) 250
Net income.................... 4,839 307 4,538 191 4,759
Earnings (loss) per share (a):
Continuing operations........ .96 .92 .97 .77 .91
Discontinued operations...... -- (.86) (.02) (.73) .05
---- ----- ----- ----- ----
Net income per share..... $ .96 $ .06 $ .95 $ .04 $ .96
Weighted average shares
outstanding.................. 5,048 4,923 4,765 4,825 4,980
Working capital...............$13,337 $15,155 $14,618 $11,366 $17,543
Total assets.................. 49,548 47,844 46,726 41,312 39,703
Total long-term debt.......... 3,196 7,576 6,592 6,421 5,805
Total stockholders' equity....$34,994 $29,791 $28,802 $23,624 $24,565
(a) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing net income
per share. In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS No. 128"), which requires disclosure of basic earnings per
share and diluted earnings per share and is effective for periods ending
subsequent to December 15, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Recent Accounting
Pronouncement."
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect ILC's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or those anticipated. In addition to the factors discussed
below, among the factors that could cause actual results to differ materially
are the following: ILC's ability to manufacture products efficiently and
reliably; the ability of ILC to deliver new products on time; market acceptance
of ILC's products; the introduction, marketing and commercial viability of
products and systems that use ILC's products; competition; changes in pricing;
the timing of, or delay in, large customer orders; quality control of products
sold; and the factors contained from time to time in the reports that ILC files
with the Securities and Exchange Commission. In this report, the words
"anticipates", "believes", "future", "may have", "will take place", "are
expected" 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.
General
In September 1996, ILC's Board of Directors voted to proceed with the
divestiture of ILC's Precision Lamp Inc., subsidiary ("PLI") based in Cotati,
California. The accompanying consolidated financial statements for fiscal 1996
and 1995 have been restated to reflect the discontinued operations of the PLI
business. In May 1997, ILC completed the sale of Converter Power, Inc. ("CPI")
and the results of operations for this subsidiary through the date of sale have
been included in continuing operations. Refer to Notes 12 and 13 of Notes to
Consolidated Financial Statements for a further discussion of discontinued
operations and the sale of CPI. Accordingly, the following discussion and
analysis of financial condition and results of operations reflects the
activities of ILC Technology, Inc., CPI and Q-Arc, Ltd. ("Q-Arc").
During fiscal 1997, 1996 and 1995, ILC derived approximately 31%, 39% and
40%, respectively, of its net sales from the medical market. During fiscal 1997,
1996 and 1995, ILC's sales in the industrial market accounted for 43%, 46% and
47%, respectively, of net sales. In fiscal years 1997, 1996 and 1995, ILC's
sales in the aerospace market accounted for 14%, 8% and 8%, respectively, 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. ILC expects sales to
the medical market to continue to decrease as a percentage of net sales for the
foreseeable future. Aerospace sales have increased in fiscal 1997 over fiscal
1996 and 1995 due to shipments of multi-faceted Cermax high-intensity discharge
lamps used in the infrared guidance system of the TOW (Tube Launched Optically
Guided Wire Controlled) missile and due to additional contracts for space
lighting requirements. Because of the on-going uncertainty in military and
defense spending, ILC does not expect aerospace sales to grow from fiscal 1997
levels.
Continuing Operations
Fiscal 1997 Compared to Fiscal 1996
Net sales for fiscal 1997 were $55,518,000 compared to $54,206,000 in
fiscal 1996. Although net sales at ILC's California operations ("ILC Sunnyvale")
and Q-Arc increased by 16.1% between the two fiscal years, net sales at CPI
decreased 55.1% between the two fiscal years. In the fourth quarter of fiscal
11
<PAGE>
Fiscal 1997 Compared to Fiscal 1996 (continued)
1996, CPI 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 and second quarters of fiscal 1997. In May
1997, CPI was sold and therefore net sales for fiscal 1997 reflect only seven
months of CPI sales activity as opposed to a full year in fiscal 1996. 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 70.6% for fiscal 1997
compared to 66.7% for fiscal 1996. The percentage increase was due in part to
the sales decline from CPI's major customer discussed above. In addition,
unfavorable yields in Cermax and infrared lamp products, coupled with increases
in the provision for inventory reserves and revenue recognition on Aerospace
contracts with low or minimal gross margins, contributed to the cost of sales
percentage increase between the two fiscal years. The ratio of inventory reserve
to year end inventory in fiscal 1997, 1996 and 1995 was 16.0%, 18.6% and 20.0%,
respectively.
Research and development expenses, 7.7% of net sales in fiscal 1997
compared to 8.0% of net sales in fiscal 1996, remained constant at approximately
$4.3 million. Spending declines occurred in Flashlamp and Quartz lamp products
while spending increases took place in Cermax and Equipment products for the
display and projection markets. Additionally, research and development spending
declined at CPI due to the sale of the subsidiary in May 1997.
Sales and marketing expenses for fiscal 1997 were $3,059,000, or 5.5% of
net sales compared to $2,646,000, or 4.9% of net sales in fiscal 1996. The
$413,000 increase between the two fiscal years was the result of personnel
additions, increased travel and trade show participation and additional
commission expense.
General and administrative expenses, 7.8% of net sales in fiscal 1997
compared to 8.1% of net sales in fiscal 1996, decreased $88,000 between the two
fiscal years. The primary reason for the decrease was due to the inclusion of
only seven months of expense for CPI in fiscal 1997 versus a full year of
expense in fiscal 1996. If the general and administrative expenses related to
CPI were excluded from both fiscal years, the increase between the two periods
was approximately $555,000. Profit sharing accruals at ILC Sunnyvale in fiscal
1997 and personnel additions at Q-Arc during fiscal 1997 caused general and
administrative expenses to increase in fiscal 1997 over fiscal 1996.
Amortization of intangibles of $120,000 in fiscal 1997 and 1996 represents
the amortization of the covenant-not-to-compete arising from the acquisition of
Q-Arc in 1991.
Interest income was $147,000 in fiscal 1997 compared to $80,000 in fiscal
1996. Interest expense associated with continuing operations, $641,000 in fiscal
1997 compared to $542,000 in fiscal 1996, increased $99,000 between the two
fiscal years. The increase in interest expense is due to higher borrowings under
a line of credit for working capital needs and an equipment line of credit for
capital equipment acquisitions.
ILC reported income from continuing operations before provision for income
taxes and before gain on sale of CPI of $4,069,000 in fiscal 1997 compared to
income from continuing operations before provision for income taxes of
$6,061,000 in fiscal 1996. As discussed in Note 13 of Notes to Consolidated
Financial statements, the CPI subsidiary was sold in May 1997. The transaction
12
<PAGE>
Fiscal 1997 Compared to Fiscal 1996 (continued)
resulted in a pre-tax gain, net of expenses, of $2,379,000. The results of
operations for CPI through April 1997 are included in ILC's Consolidated
Statement of Operations. Including the gain on the sale of CPI in the results of
operations for fiscal 1997 increases the income from continuing operations
before provision for income taxes to $6,447,000. The effective tax rate for
fiscal 1997 and 1996 was 25%.
As previously discussed, the ILC Board voted to proceed with the
divestiture of PLI located in Cotati, California. The operating losses of PLI
for the six months ended March 29, 1997 were offset against accruals made in the
fourth quarter of fiscal 1996 for anticipated losses during the final
disposition of the subsidiary. In January 1997, ILC signed an agreement to sell
PLI to PLI Acquisition Corp. for approximately $3.3 million subject to due
diligence and the purchaser's ability to obtain adequate financing. The closing
was set to occur no later than March 31, 1997. The purchaser was not able to
obtain the required financing, but ILC agreed to sell the stock of PLI to PLI
Acquisition Corp., as discussed in Note 12 of Notes to Consolidated Financial
Statements. ILC received a $4 million promissory note that bears interest at the
rate of 8% per year on any unpaid principal amount. Payments began in May 1997
and will be completed in April 2000. The activities of PLI for fiscal 1996 have
been restated to reflect a loss from discontinued 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 CPI. In the fourth quarter of fiscal 1996, CPI
experienced a significant reduction in orders from a major customer that
provides equipment to the semiconductor equipment industry.
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 CPI'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 for the
development of Quartz Stepper lamps used in the processing of semiconductor
materials, in Cermax for lamps for video projection and at CPI for the design of
new power supplies to compliment the lamps for video projection.
Sales and 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 remained constant at approximately $4.4 million.
13
<PAGE>
Fiscal 1996 Compared to Fiscal 1995 (continued)
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 ILC's two operating facilities
in Sunnyvale, California, a line of credit for working capital needs and an
equipment line of credit for capital equipment acquisitions.
ILC 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 ILC Board voted to proceed with the
divestiture of PLI. The net operating results of PLI were reported as a
$4,239,000 loss from discontinued operations in fiscal 1996. This amount
included the $840,000 operating loss of PLI for fiscal 1996 and an estimated
loss for the disposal of discontinued operations of $3,399,000. The estimated
loss for the disposal included asset write downs of $3.3 million, a $500,000
charge for anticipated losses during the final disposition of PLI and the write
off of the unamortized balance of the PLI covenant-not-to-compete of
approximately $470,000. The combined loss from discontinued operations is net of
a $1,413,000 income tax benefit. See Note 12 of Notes to Consolidated Financial
Statements.
ILC believes that inflation and changing prices had no significant impact
on sales or costs during fiscal 1997, 1996 and 1995.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $1,114,000 at the end of fiscal 1997
from $1,829,000 at the end of fiscal 1996. Cash provided by operating activities
from continuing operations amounted to $1,070,000 in fiscal 1997, a decrease of
$695,000 from $1,765,000 in fiscal 1996. Cash used in discontinued operations
amounted to $1,518,000 in fiscal 1997, an increase of $1,350,000 from $168,000
in fiscal 1996. During fiscal 1997, ILC made capital equipment purchases of
$3,102,000. In fiscal 1997, ILC decreased its net borrowings under its line of
credit by $2,500,000, decreased its net borrowings under an equipment line by
$276,000 and paid down a term loan by $1,451,000. In addition, in fiscal 1997,
ILC also repurchased, on the open market, 37,000 shares of its common stock for
$425,000. In fiscal 1996, ILC made capital equipment acquisitions of $3,187,000.
During fiscal 1996, ILC 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, ILC 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, ILC
increased its net borrowing 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.
ILC had working capital of $13,337,000 and a current ratio of 2.17 to 1.0
at September 27, 1997. 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 September 27, 1997,
ILC had $3,500,000 unused on a $6,000,000 bank line of credit with interest at
14
<PAGE>
Liquidity and Capital Resources (continued)
2% above the LIBOR rate (London Interbank Offer Rate) (7.66% at September 27,
1997). ILC also has available an unused $2,000,000 equipment credit facility at
the above interest rate. This credit facility can be increased to accommodate
the capital equipment needs of ILC. In fiscal 1998, ILC anticipates making
capital expenditures of approximately $2.5 million. As of September 27, 1997,
ILC did not have any outstanding material commitments for capital expenditures.
ILC's current financial resources, together with anticipated additional
resources to be provided from continuing operations, are expected to be adequate
to meet ILC's working capital needs, capital equipment requirements and debt
service obligations at least through fiscal 1998.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, which requires disclosure of basic earnings per share and diluted earnings
per share and is effective for periods ending subsequent to December 15, 1997
and restatement will be required for all prior period EPS data presented. The
pro forma effect of adoption of SFAS No. 128 is included in the table below.
1997 1996 1995
---- ---- ----
(shares in thousands)
As reported:
Earnings (loss) per share:
Continuing operations.............$ 0.96 $0.92 $0.97
Discontinued operations........... -- (0.86) (0.02)
----- ------ ------
Net income per share.............$ 0.96 $0.06 $0.95
Pro forma for SFAS No. 128:
Basic earnings (loss) per share:
Continuing operations............. $1.00 $0.96 $1.01
Discontinued operations........... -- (0.90) (0.02)
----- ------ ------
Basic net income per share....... $1.00 $0.06 $0.99
Weighted average number of
common shares outstanding........ 4,848 4,725 4,604
Diluted earnings (loss) per share:
Continuing operations............. $0.96 $0.92 $0.97
Discontinued operations........... -- (0.86) (0.02)
----- ------ ------
Diluted net income per share $0.96 $0.06 $0.95
Weighted average number of
common shares outstanding........ 5,048 4,923 4,765
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
15
<PAGE>
Item 8. Financial Statements and Supplementary Data
Table of Contents Page
- ----------------- ----
Consolidated Balance Sheets - September 27,
1997 and September 28, 1996.......................................17 - 18
Consolidated Statements of Operations for the Three
Fiscal Years Ended September 27, 1997............................. 19
Consolidated Statements of Stockholders' Equity
for the Three Fiscal Years Ended September 27, 1997............... 20
Consolidated Statements of Cash Flows for the Three
Fiscal Years Ended September 27, 1997.............................21 - 22
Notes to Consolidated Financial Statements..........................23 - 35
Form 10-K Schedule.................................................. 36
Report of Independent Public Accountants............................ 37
Quarterly Results of Operations (Unaudited)......................... 38
16
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
ASSETS
1997 1996
---- ----
Current assets:
Cash and cash equivalents...................$1,113,992 $ 1,828,807
Accounts receivable, less allowance for
doubtful accounts of $337,958 and $312,358,
respectively............................... 9,485,397 9,494,246
Receivable from long-term contracts........ 1,049,122 861,427
Inventories, net........................... 10,716,680 8,901,528
Deferred tax asset......................... 835,803 2,158,000
Prepaid expenses........................... 344,393 208,320
Current portion of note receivable from
sale of PLI .............................. 1,150,000 --
Net assets from discontinued operations.... -- 2,178,383
----------- ---------
Total current assets.................... 24,695,387 25,630,711
---------- ----------
Property and equipment, net................ 21,652,695 21,176,431
Note receivable from sale of PLI, net
of current portion........................ 2,196,871 --
Covenants-not-to-compete, net of
accumulated amortization and writedown of
$3,314,404 and $3,195,524, respectively... 237,761 356,641
Other assets............................... 765,309 680,013
------- -------
$49,548,023 $47,843,796
=========== ===========
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---- ----
Current liabilities:
Accounts payable................ $4,361,816 $3,643,496
Accrued payroll and related
items........................... 1,701,209 1,263,741
Other accrued liabilities........ 1,517,606 1,146,822
Current portion of non-compete
obligation...................... -- 390,000
Current portion of long-term
debt............................ 2,534,500 2,545,600
Accrued income taxes payable..... 1,243,451 1,486,518
---------- -----------
Total current liabilities.. 11,358,582 10,476,177
---------- ----------
Long-term liabilities, net of
current portion:
Long-term debt................... 3,117,396 7,370,164
Other accruals................... 78,328 206,235
----------- -----------
Total long-term liabilities..3,195,724 7,576,399
----------- -----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, no par value;
10,000,000 shares authorized;
4,874,040 shares and 4,782,508
shares outstanding, respectively...7,178,231 6,815,109
Retained earnings...................7,815,486 22,976,111
--------- ------------
Total stockholders' equity...34,993,717 29,791,220
---------- ------------
$49,548,023 $47,843,796
=========== ===========
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
1997 1996 1995
---- ---- ----
Net sales........................$55,517,905 $54,206,424 $49,496,029
Costs and expenses:
Cost of sales.................. 39,194,377 36,180,448 31,799,916
Research and development....... 4,252,694 4,319,650 4,278,697
Sales and marketing............ 3,059,158 2,645,952 2,404,856
General and administrative..... 4,329,067 4,417,446 4,459,726
Amortization of intangibles.... 120,000 120,000 120,000
----------- ----------- -----------
50,955,296 47,683,496 43,063,195
Income from continuing
operations before provision for
income taxes, interest expense
and gain on sale of CPI......... 4,562,609 6,522,928 6,432,834
Interest expense, net............ 493,917 461,898 323,757
----------- ---------- ----------
Income from continuing
operations before provision for
income taxes and before gain
on sale of CPI.................. 4,068,692 6,061,030 6,109,077
Gain on sale of CPI.............. 2,378,683 -- --
--------- ----------- ----------
Income from continuing
operations before provision for
income taxes.................... 6,447,375 6,061,030 6,109,077
Provision for income taxes on
continuing operations........... 1,608,000 1,515,000 1,472,000
--------- ---------- ----------
Income from continuing operations..4,839,375 4,546,030 4,637,077
Discontinued operations:
Operating loss, net of tax
benefit of $280,000 and
$32,000 in 1996 and
1995, respectively.............. -- (840,217) (99,143)
Estimated loss on disposal,
including $500,000 for operating
losses during the phase out,
net of tax benefit of
$1,132,996...................... -- (3,398,987) --
---------- ---------- ----------
Loss from discontinued operations -- (4,239,204) (99,143)
---------- ---------- ----------
Net income........................$4,839,375 $ 306,826 $4,537,934
========== ========== ==========
Earnings (loss) per share:
Earnings from continuing
operations...................... $ 0.96 0.92 $ 0.97
Loss from discontinued operations -- (0.86) (0.02)
------ ------ ------
Net income per share.............. $ 0.96 $ 0.06 $ 0.95
====== ====== ======
Weighted average shares
outstanding used to compute
net income (loss) per share...... 5,047,658 4,923,132 4,764,989
========= ========= =========
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
Common
Common Stock Retained
Shares Amount Earnings Total
------ ------ -------- -----
Balance at October 1, 1994...4,522,951 $5,492,338 $18,131,351 $23,623,689
Net income................. -- -- 4,537,934 4,537,934
Issuance of common
stock under stock
purchase plan.............. 37,973 266,575 -- 266,575
Exercise of stock options... 132,250 450,751 -- 450,751
Repurchase of common stock.. (10,000) (76,750) -- (76,750)
Balance at September 30,
1995........................4,683,174 6,132,914 22,669,285 28,802,199
Net income.................. -- -- 306,826 306,826
Issuance of common
stock under stock
purchase plan............... 34,209 279,068 -- 279,068
Exercise of stock options.... 65,125 403,127 -- 403,127
--------- -------- --------- ----------
Balance at September 28,
1996.........................4,782,508 6,815,109 22,976,111 29,791,220
Net income.................. -- -- 4,839,375 4,839,375
Issuance of common
stock under stock
purchase plan.............. 28,555 266,588 -- 266,588
Exercise of stock options... 99,977 521,992 -- 521,992
Repurchase of common stock.. (37,000) (425,458) -- (425,458)
---------- ---------- -------- ----------
Balance at September 27,
1997......................... 4,874,040 $7,178,231 $27,815,486 $34,993,717
========= ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
1997 1996 1995
---- ---- ----
Cash flows from operating
activities:
Net Income.........................$4,839,375 $306,826 $4,537,934
Adjustment to reconcile net
income to net cash provided by
continuing operations:
Discontinued operations............ -- 4,239,204 99,143
Depreciation and amortization...... 2,002,845 1,689,689 1,569,478
Provision for doubtful accounts.... 68,694 38,804 102,861
Provision for inventory obsolescence..696,089 520,006 169,034
Net loss on property and equipment
sold or retired...................... 14,144 -- 26,367
Equity in income of joint venture....(106,000) (20,000) (89,000)
Gain on sale of CPI................(2,378,683) -- --
Changes in assets and liabilities,
net of effects of businesses sold:
Decrease in marketable securities.. -- -- 998,129
Increase in accounts receivable....(1,494,632) (1,333,378) (2,467,329)
Increase in inventories............(4,267,013) (1,888,444) (1,685,743)
(Increase) decrease in deferred
tax asset......................... 1,322,197 (704,000) 951,000
(Increase) decrease in prepaid
expenses.......................... (136,073) (86,076) 406,556
(Increase) decrease in other
assets........................... 20,704 79,823 (9,397)
Increase (decrease) in accounts
payable........................... 718,320 (120,502) 300,709
Decrease in accrued liabilities.... (230,124) (956,660) (637,731)
-------- -------- --------
Net cash provided by operating
activities from continuing
operations...................... 1,069,843 1,765,292 4,272,011
Net cash used in discontinued
operations......................(1,518,488) (168,186) (1,722,659)
---------- -------- ----------
Cash flows from investing activities:
Proceeds from sale of CPI.......... 6,350,000 -- --
Payments received on note for
sale of PLI....................... 350,000 -- --
Purchase of land and real estate -- -- (3,045,412)
Decrease in deposit on land and
building purchase................. -- -- 1,300,000
Investment in joint venture........ -- -- (450,000)
Capital expenditures...............(3,102,092) (3,186,557) (2,517,541)
----------- ---------- -----------
Net cash provided by (used in)
investing activities............ 3,597,908 (3,186,557) (4,712,953)
--------- ---------- -----------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
ILC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
(continued)
1997 1996 1995
---- ---- ----
Cash flows from financing activities:
Principal borrowings under line
of credit............................. $10,963,000 $9,500,000 $8,450,000
Principal repayments under line
of credit............................. (13,463,000) (6,500,000) (6,450,000)
New borrowings under equipment line.... 1,045,000 1,555,000 1,720,089
Principal repayments under
equipment line........................ (1,321,200) (1,374,800) (1,049,958)
Principal repayments under term loan... (1,451,000) (1,584,000) (1,578,000)
Payments under non-compete agreement... -- (390,000) (520,000)
Proceeds from issuance of common stock. 788,580 682,195 717,326
Repurchase of common stock............. (425,458) -- (76,750)
------------ --------- ----------
Net cash provided by (used in)
financing activities............... (3,864,078) 1,888,395 1,212,707
----------- --------- ---------
Net increase (decrease) in cash
and cash equivalents............... (714,815) 298,944 (950,894)
Cash and cash equivalents at beginning
of year................................ 1,828,807 1,529,863 2,480,757
--------- --------- ----------
Cash and cash equivalents at end
of year................................ $1,113,992 $1,828,807 $1,529,863
========== ========== ==========
1997 1996 1995
---- ---- ----
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest - continuing operations...... $ 641,127 $542,061 $ 589,200
Interest - discontinued operations.... -- 77,714 106,341
Income taxes.......................... 282,898 1,055,000 909,000
Supplemental disclosure of non-cash activities:
ILC sold the stock of PLI for a note. The purchase price, net of expenses,
approximated the net assets of PLI (Note 12).
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
ILC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1997
1. The Company
- --------------
ILC Technology, Inc. ("ILC") was incorporated on September 15, 1967.
ILC designs, develops, manufactures and markets high intensity lamps and
lighting products for the medical, industrial, aerospace, scientific,
entertainment and military industries. ILC develops and manufactures the
majority of its products at its headquarter facilities in California and the
remainder at its subsidiary facility in the United Kingdom. (See Notes 12, 13
and 16).
2. Summary of Significant Accounting Policies
- ----------------------------------------------
Basis of Presentation
The consolidated financial statements include the accounts of ILC and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Fiscal year 1995 was restated to reflect ILC's decision to discontinue
the operations of Precision Lamp, Inc. ("PLI") (see Note 12). This restatement
had no impact on net income.
ILC's fiscal year end is the Saturday closest to September 30.
Use of Estimates in Preparation of Financial Statements
- -------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Items which
require management to make estimates include the realization of accounts
receivable and inventory balances, warranty, and other reserves. Additionally,
ILC is currently in negotiation with PLI Acquistion Corp. to restructure the
terms of that note receivable, as discussed in Note 12.
Cash and Cash Equivalents
- -------------------------
For the purpose of the statement of cash flows, ILC considers all
highly liquid investments with an original maturity of three months or less at
the time of issue to be cash equivalents.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market, and include material, labor and manufacturing overhead. Inventories at
September 27, 1997 and September 28, 1996, net of inventory reserves of
$2,043,420 and $2,034,258, respectively, consisted of:
23
<PAGE>
2. Summary of Significant Accounting Policies (continued)
- -- ------------------------------------------------------
Inventories (continued)
- -----------------------
1997 1996
---- ----
Raw materials $5,459,159 $ 4,802,839
Work-in-process 3,974,496 2,549,805
Finished goods 1,283,025 1,548,884
---------- -----------
Total inventories $10,716,680 $ 8,901,528
=========== ===========
Developmental and Manufacturing Contracts
- -----------------------------------------
ILC contracts with the U.S. Government and other customers for the
development and manufacturing of various products under both cost-plus-fixed-fee
and fixed-price contracts. Revenues are recognized under these contracts using
the percentage of completion method, whereby revenues are reported in the
proportion that costs incurred bear to the total estimated costs for each
contract. Periodic reviews of estimated total costs during the performance of
such contracts may result in revisions of contract estimates in subsequent
periods. Any loss contracts are reserved at the time such losses are determined.
Revenues from these contracts were less than 10% of net revenues during 1997,
1996 and 1995.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization on property and equipment are provided on a
straight-line basis over estimated useful lives of 3 to 31.5 years, except for
leasehold improvements which are amortized over the terms of the leases.
Net Income (Loss) Per Share
- ---------------------------
Net income (loss) per share is computed using the weighted average number
of common shares and common equivalent shares (when such equivalents have a
dilutive effect) outstanding during the period using the treasury stock method.
Fully diluted net income (loss) per share is not significantly different from
net income (loss) per share as reported.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, which requires disclosure of basic earnings per share and diluted earnings
per share and is effective for periods ending subsequent to December 15, 1997
and restatement will be required for all prior period EPS data presented. The
pro forma effect of adoption of SFAS No. 128 is included in the table below.
24
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Net Income (Loss) Per Share (continued)
- ---------------------------------------
1997 1996 1995
---- ---- ----
(shares in thousands)
As reported:
Earnings (loss) per share:
Continuing operations.................$ 0.96 $0.92 $0.97
Discontinued operations............... -- (0.86) (0.02)
----- ------ ------
Net income per share.................$ 0.96 $0.06 $0.95
Pro forma for SFAS No. 128:
Basic earnings (loss) per share:
Continuing operations.................$1.00 $0.96 $1.01
Discontinued operations............... -- (0.90) (0.02)
----- ------ ------
Basic net income per share............$1.00 $0.06 $0.99
Weighted average number of
common shares outstanding............4,848 4,725 4,604
Diluted earnings (loss) per share:
Continuing operations.................$0.96 $0.92 $0.97
Discontinued operations............... -- (0.86) (0.02)
----- ------ ------
Diluted net income per share..........$0.96 $0.06 $0.95
Weighted average number of
common shares outstanding............5,048 4,923 4,765
Covenants-Not-To-Compete
- ------------------------
The covenant-not-to-compete relates to the Q-Arc acquisition that took
place in 1991. This is being amortized over the period of the covenant.
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long- Lived Assets to be Disposed Of." ILC adopted the
provisions of this statement in fiscal 1996. The effect on its financial
position and results of operations was not significant. ILC quarterly evaluates
whether later events and circumstances have occurred that indicate the remaining
estimated useful lives of these intangibles may warrant revision or that the
remaining balances of intangibles may not be recoverable. When factors indicate
that intangibles should be evaluated for possible impairment, ILC uses an
estimate of the related subsidiary's undiscounted cash flow over the remaining
life of the intangibles in measuring whether the intangibles are recoverable. As
part of ILC's decision to discontinue the operations of PLI, the unamortized
balance of the covenant-not-to-compete ($470,000) was written off in the fourth
quarter of fiscal 1996.
Investment in Joint Venture
- ---------------------------
In February 1995, ILC invested $450,000 in a lamp manufacturer located in
Japan. ILC's investment represents a 49% ownership interest in the equity of the
investee, consequently ILC accounts for its investment using the equity method
of accounting. ILC's investment is included in Other Assets in the accompanying
consolidated balance sheets and its proportionate interest in the income of the
25
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Investment in Joint Venture (continued)
- ---------------------------------------
investee of $106,000, $20,000 and $89,000 in fiscal 1997, 1996 and 1995,
respectively, is included in the accompanying consolidated statements of
operations.
New Accounting Pronouncements
- -----------------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes guidelines for
all items that are to be recognized under accounting standards as components of
comprehensive income to be reported in the financial statements. The statement
is effective for all periods ending after December 15, 1997 and reclassification
of financial statements for earlier periods presented will be required for
comparative purposes.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting of operating segment
information in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
statements issued to shareholders. The statement is effective for all periods
ending after December 15, 1997.
3. Revenues
- -- --------
ILC recognizes revenue on all product sales upon shipment of the product.
ILC accrues for estimated warranty obligations at the time of the sale of the
related product based upon its past history of claims experience and costs to
discharge its obligations.
ILC operates in a single industry segment, the designing, developing,
manufacturing and marketing of high performance light source products. Revenues
from continuing operations are geographically summarized as follows (in
thousands):
1997 1996 1995
---- ---- ----
United States....................$36,639 $34,088 $32,533
Europe........................... 6,671 6,920 5,964
Asia............................. 11,986 12,700 10,951
Other international.............. 222 498 48
------- ------- -------
$55,518 $54,206 $49,496
======= ======= =======
Customers comprising more than 10% of net sales from continuing operations are
as follows:
1997 1996 1995
---- ---- ----
Customer A.........................13.5% 15.0% 12.2%
Customer B......................... * 11.5% 12.0%
*less than 10% of net sales
26
<PAGE>
3. Revenues (continued)
- -- --------------------
ILC provides credit in the form of trade accounts receivable to its
customers. ILC does not generally require collateral to support customer
receivables. ILC performs ongoing credit evaluations of its customers and
maintains allowances which management believes are adequate for potential credit
losses.
Approximately 31%, 39% and 40% of ILC's sales in fiscal 1997, 1996 and
1995, respectively, were to customers in the medical industry. This industry has
experienced significant fluctuations in demand and ILC expects sales to the
medical market to decrease as a percentage of net sales in the foreseeable
future. Customer B, referred to above, is in the semiconductor equipment
industry and was a major customer of ILC's subsidiary, CPI. In the fourth
quarter of fiscal 1996, CPI experienced a significant reduction in orders from
this customer. In May 1997, CPI was sold (see Note 13).
4. Property and Equipment
- -- ----------------------
Property and equipment at September 27, 1997 and September 28, 1996
consisted of:
1997 1996
---- ----
Property and equipment, at cost:
Machinery and equipment............ $17,130,338 $15,047,138
Land and buildings................. 15,498,058 14,955,738
Furniture and fixtures............. 518,283 601,822
Equipment under capital lease...... 174,268 174,268
Leasehold improvements............. -- 598,814
Construction-in-progress........... 577,449 1,011,601
------------ -------------
33,898,396 32,389,891
Less accumulated depreciation and
amortization ...................... (12,245,701) (11,212,950)
----------- -----------
Property and equipment, net........... $21,652,695 $21,176,431
=========== ===========
5. Bank Borrowings
As of September 27, 1997 and September 28, 1996, borrowings outstanding
under ILC's credit facilities consisted of:
1997 1996
---- ----
Line of credit.........................$2,500,000 $5,000,000
Term loan.............................. 1,187,000 2,638,000
Equipment line of credit............... 1,915,000 2,191,200
Other capital lease.................... 49,896 86,564
---------- ----------
5,651,896 9,915,764
Less: current portion..................(2,534,500) (2,545,600)
----------- -----------
Long-term debt.........................$3,117,396 $ 7,370,164
========== ===========
Aggregate maturities for long-term debt during the next five years are
approximately: 1998 - $2,534,500, 1999 - $3,117,396, and none in 2000, 2001 and
2002.
27
<PAGE>
5. Bank Borrowings (continued)
---------------------------
All of the above credit facilities are secured by all of the property
of ILC.
ILC has a $6 million line of credit available with a bank which expires
in March 1999. Borrowings under this line are at 2% above the LIBOR rate (London
Interbank Offer Rate) (7.66% at September 27, 1997). Under the covenants of the
loan agreement, unless written approval from the bank is obtained, ILC is
restricted from entering into certain transactions and is required to maintain
certain specified financial covenants and profitability. As of September 27,
1997, ILC was in compliance with all financial covenants. The average balance
outstanding (based on month-end balances) under the line of credit in 1997 was
$4,021,000. The maximum borrowings were $6,000,000 and the average interest rate
during 1997 was 7.6%. As of September 27, 1997, $3.5 million was available for
future borrowings under this line of credit.
In addition, in connection with the purchase of its Sunnyvale
manufacturing facilities, ILC entered into a term loan with a bank for
$5,000,000 in 1993, which was subsequently increased to $6,333,333 in 1994. The
note matures in August 1998. The term loan requires monthly principal payments
equal to one-forty-eighth of the principal amount plus interest at 2% above the
LIBOR rate (London Interbank Offer Rate) (7.66% at September 27, 1997). The term
loan is a reducing revolving credit facility which allows for principal
pre-payments and the flexibility for re-borrowing up to the maximum amount that
would be outstanding under the term loan given normal amortization to the date
of re-borrowing. The average balance outstanding (based on month-end balances)
under the term loan in 1997 was $1,913,000, and the average interest rate during
1997 was 7.6%.
ILC has available equipment lines of credit for 100% of the purchase
cost of new equipment. At the end of fiscal 1997, ILC had borrowings under these
lines of $1,915,000, of which $1,348,000 is due in fiscal 1998 and $567,000 is
due in fiscal 1999. These borrowings bear interest at 2% above the LIBOR rate
(7.66% at September 27, 1997). ILC also has available an unused $2 million
equipment line of credit which expires in August 1998. Borrowings under this
line bear interest at the same rate as discussed above, with principal balances
amortized over a 2 year period.
6. Income Taxes
------------
ILC accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires an asset and liability approach to accounting for
income taxes.
Income from continuing operations before provision for income taxes
consists of the following for fiscal 1997, 1996 and 1995, respectively:
1997 1996 1995
---- ---- ----
U.S................................$4,738,375 $4,897,389 $5,588,040
Foreign............................ 1,709,000 1,163,641 521,037
---------- ---------- ----------
$6,447,375 $6,061,030 $6,109,077
========== ========== ==========
The components of the provision for income taxes on continuing operations
are as follows:
28
<PAGE>
6. Income Taxes (continued)
------------------------
1997 1996 1995
---- ---- ----
Federal -
Current...................... $671,000 $1,559,000 $833,000
Deferred .................... 80,000 (600,000) 581,500
-------- ---------- --------
751,000 959,000 1,414,500
-------- ---------- ---------
Foreign -
Current...................... 540,000 384,000 --
State -
Current...................... 241,000 276,000 199,000
Deferred..................... 76,000 (104,000) 96,500
-------- --------- ---------
317,000 172,000 295,500
-------- --------- ---------
Federal refund received............ -- -- (238,000)
-------- --------- --------
Total provision for income taxes
on continuing operations.........$1,608,000 $1,515,000 $1,472,000
========== ========== ==========
The major components of the deferred tax asset account, as computed under
SFAS No. 109, are as follows:
1997 1996
---- ----
Reserve for loss on disposal of
discontinued operations, not
currently deductible for tax
purposes...........................$ -- $1,133,000
Inventory reserve................... 795,000 877,000
Bad debt reserve.................... 132,000 92,000
Warranty reserve.................... 103,000 128,000
Accruals not currently deductible
for tax purposes................... 545,000 381,000
Amortization of covenant-not-
to-compete......................... -- 202,000
Excess of tax over book
depreciation......................(1,112,000) (988,000)
Other items, individually
insignificant..................... 372,803 333,000
----------- -----------
$ 835,803 $2,158,000
=========== ==========
The provision for income taxes on continuing operations differs from the
amounts which would result by applying the applicable statutory Federal income
tax rate to income from continuing operations before taxes as follows:
1997 1996 1995
---- ---- ----
Computed expected provision......... $2,192,000 $2,121,000 $2,138,000
State tax........................... 317,000 364,000 367,000
FSC commission...................... (43,000) (181,000) (216,000)
General business credits............ (277,000) (218,000) (203,000)
Refund received..................... -- -- (238,000)
Other items, individually
insignificant...................... (581,000) (571,000) (376,000)
--------- --------- ---------
$1,608,000 $1,515,000 $1,472,000
========== ========== ==========
29
<PAGE>
6. Income Taxes (continued)
------------------------
During the second quarter of fiscal 1995, ILC received a refund of $238,000
from the Internal Revenue Service (IRS) related to tax returns filed in previous
years, which were examined by the IRS. This amount was recorded as a reduction
of the fiscal 1995 tax provision upon receipt of the refund. An additional
$235,000 of interest related to the refund amount was received and was included
in interest income in fiscal 1995.
7. Employee Retirement Plan
------------------------
On January 1, 1984, ILC adopted a thrift incentive savings plan (the
"Retirement Plan"). The Retirement Plan is qualified under section 401(k) of the
Internal Revenue Code and is available to all full-time employees with one or
more years of employment with ILC. Under the terms of the Retirement Plan,
participating employees must contribute at least 2% of their salary to the
Retirement Plan, and ILC contributes (as a matching contribution) 100% of this
amount. Employees may also contribute an additional amount up to 13% of their
salary to the Retirement Plan, with no further contributions by ILC. ILC's
contributions vest at a rate of 20% per year, commencing on the first
anniversary of employment. Total employer matching contributions under the
Retirement Plan were $187,000, $226,000, and $212,000 for fiscal years 1997,
1996 and 1995, respectively. The components of such expense relating to
continuing operations was $187,000, $188,000 and $171,000 for fiscal years 1997,
1996 and 1995, respectively.
8. Commitments and Contingencies
-----------------------------
At September 27, 1997, all of ILC's facilities in Sunnyvale and Santa
Clara, California and Cambridge, England are owned. All lease obligations
associated with the facilities of PLI and CPI were assumed by the buyers at the
time of sale.
For fiscal years 1997, 1996 and 1995, rental expense was approximately
$178,000, $442,000 and $277,000, respectively. Rental expense for continuing
operations was $121,000, $226,000 and $61,000 for fiscal years 1997, 1996 and
1995, respectively.
As discussed in Note 13, the number of shares held in escrow relating to
the sale of CPI are subject to adjustment related to warranties and the
valuation of the acquiror's common stock.
9. Stock Option and Purchase Plans
-------------------------------
Under the 1992 Stock Option Plan ("Plan"), ILC may grant options to
employees and directors. ILC has reserved 575,000 shares for issuance under the
Plan. The exercise price per share for stock options cannot be less than the
fair market value on the date of grant. Options granted are for a ten-year term
and generally vest ratably over a period of four years commencing one year after
the date of grant. The Plan provides for the automatic grant of a nonstatutory
stock option to purchase shares of Common Stock to each outside Director
annually during ILC's third fiscal quarter. During fiscal 1997, each outside
Director was granted an automatic option to purchase a total of 5,000 shares of
ILC's Common Stock. ILC's 1983 Stock Option Plan expired in 1993 and no further
options have been granted under such plan since then.
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards No. 123 " Accounting for Stock-Based Compensation," if ILC
had elected to recognize compensation cost based on fair value of the options
granted at grant dates prescribed, income from continuing operations and
30
<PAGE>
9. Stock Option and Purchase Plans (continued)
-------------------------------------------
earnings per share would have been reduced to the pro forma amounts indicated in
the table below. The pro forma effect on net income for fiscal 1997 and 1996 is
not representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to fiscal 1996.
1997 1996
---- ----
Income from continuing operations-
as reported..........................$4,839,375 $4,546,030
Income from continuing operations-
pro forma............................$4,328,487 $4,344,547
Earnings per share from continuing
operations as reported............... $0.96 $0.92
Earnings per share from continuing
operations-pro forma................. $0.89 $0.89
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model utilizing expected volatility
calculations based on historical data (62.10%) and risk-free interest rates
based on U.S. government bonds on the date of grant with maturities equal to the
expected option term (5.82%-6.69%). No dividends are assumed, and the expected
option term is 5.93 years. The weighted-average fair values of options granted
in fiscal 1997 and 1996 are $6.49 and $6.27, respectively.
31
<PAGE>
9. Stock Option and Purchase Plans (continued)
-------------------------------------------
A summary of ILC's stock option activity for the past three fiscal years is
as follows:
Weighted
Options Exercise Average
Available Number Price Exercise
for Grant of Shares Per Share Price
--------- --------- --------- ----------
Options Outstanding
---------------------------------
Balance at October 1, 1994..... 103,624 720,027 $1.09-11.50 $6.27
Granted....................... (28,000) 28,000 $9.50 $9.50
Canceled...................... 34,000 (34,000) $8.75-11.50 $9.85
Exercised..................... -- (132,250) $2.13 -8.75 $3.48
------- -------- ----------- -----
Balance at September 30, 1995.. 109,624 581,777 $1.09-11.50 $6.87
Additional shares approved.... 200,000 -- -- --
Granted.......................(205,000) 205,000 $9.00-11.25 $9.94
Canceled...................... 92,125 (92,125) $8.75-11.50 $10.27
Exercised..................... -- (65,125) $1.09 -11.50 $ 6.10
------- -------- ------------ ------
Balance at September 28, 1996.. 196,749 629,527 $1.09 -11.50 $7.44
Additional shares approved.... 175,000 -- -- --
Granted.......................(406,000) 406,000 $9.00-11.19 $10.29
Canceled...................... 89,550 (89,550) $9.00-11.50 $10.57
Exercised..................... -- (99,977) $1.09-11.50 $ 5.22
------- ------- ----------- -------
Balance at September 27, 1997.. 55,299 846,000 $2.25-11.25 $ 8.74
======= ======= =========== ======
At the end of fiscal 1997, 1996 and 1995, options to purchase 351,063
shares, 416,965 shares and 439,715 shares, respectively, were exercisable at
weighted average prices of $6.70, $6.11 and $5.94.
The following table summarizes information about stock options outstanding
at September 27, 1997:
Weighted Avg. Weighted Avg.
Number of Exercise Weighted Avg. Remaining Number of Exercise Price
Shares Price Exercise Contractual Shares of Options
Outstanding Range Price Life Exercisable Exercisable
- ----------- -------- ------------- ----------- ----------- -------------
162,000 $ 2.25-3.75 $ 3.54 2.19 years 162,000 $ 3.54
390,000 7.38-9.50 9.13 7.93 years 136,563 8.70
294,000 10.63-11.50 11.08 8.64 years 52,500 11.30
32
<PAGE>
9. Stock Option and Purchase Plans (continued)
-------------------------------------------
Under ILC's Employee Stock Purchase Plan, ILC has 83,033 shares of common
stock available at September 27, 1997 for issuance to participating employees
who have met certain eligibility requirements. The number of shares available
for purchase by each participant is based upon annual base earnings and at a
purchase price equal to 85% of the fair market value at the beginning or the end
of the quarter of purchase, whichever is lower.
10. Interest Expense, Net
---------------------
Interest expense, net consists of the following:
1997 1996 1995
---- ---- ----
Interest income................... $(147,210) $(80,163) $(265,443)
Interest expense.................. 641,127 542,061 589,200
-------- -------- --------
Net interest expense related to
continuing operations............ $493,917 $461,898 $323,757
======== ======== ========
11. Acquisitions
------------
In August 1991, ILC acquired all the outstanding stock of Q-Arc Ltd. of
Cambridge, England for $1,400,000 in cash and the assumption of certain
liabilities. Q-Arc is a manufacturer of specialty lamps for laser and non-laser
applications. This transaction was accounted for as a purchase and accordingly,
all assets were revalued to their respective fair values. The acquisition price
was equal to the fair value of net assets acquired. Net assets included a
covenant-not-to-compete of approximately $951,000. The covenant is being
amortized over an eight year period. At September 27, 1997, the unamortized
balance of the Q-Arc covenant-not-to-compete is approximately $238,000.
12. Discontinued Operations
-----------------------
In September 1996, ILC's Board of Directors voted to proceed with the
divestiture of PLI which is a subsidiary based in Cotati, California. As a
result of ILC's plan, an estimated loss on disposal of $3,399,000, net of a tax
benefit of $1,133,000, was recorded in the fourth quarter of fiscal 1996. This
loss on disposal included estimated operating losses through the final
disposition of the subsidiary and the write off of the unamortized balance of
the PLI covenant-not-to-compete of approximately $470,000.
In January 1997, ILC signed an agreement to sell PLI. The original selling
price was approximately $3.3 million but was subject to due diligence and the
ability of PLI Acquisition Corp., the purchaser, to obtain adequate financing no
later than March 31, 1997. The purchaser was not able to obtain adequate
financing, but through further discussions with the purchaser, ILC agreed to
sell the stock of PLI to PLI Acquisition Corp. for a promissory note with a face
value of $4 million bearing 8% interest per year on any unpaid principal amount.
Payments on the promissory note began in May 1997 and will be completed in April
2000. This transaction was recorded in the third quarter of fiscal 1997. The
purchase price, net of expenses and reserves, approximated the book value and
therefore, no gain or loss was recorded.
33
<PAGE>
12. Discontinued Operations (continued)
-----------------------------------
After conferring with ILC management, PLI Acquisition Corp. did not make
the scheduled October and November 1997 payments on the note payable to ILC. ILC
and PLI Acquisition Corp. are currently evaluating a restructuring of the
payment terms of the note payable to ILC. ILC's management believes that there
has been no impairment of the value of the note as recorded by ILC.
Continuing operations, as reclassified for fiscal years 1996 and 1995,
consist of the activities of ILC Technology, Inc. based in Sunnyvale,
California, CPI based in Beverly, Massachusetts and Q-Arc based in Cambridge,
England. The Consolidated Statements of Operations have been reclassified to
report separately the activities of PLI as discontinued operations. Revenues
from PLI were $7,772,000 and $8,933,000 for fiscal 1996 and 1995, respectively.
The net loss after tax from the discontinued operations of PLI was $840,000 and
$99,000 for fiscal 1996 and 1995, respectively. A portion of net interest
expense of approximately $66,000 and $58,000 for fiscal 1996 and 1995,
respectively, was allocated to the discontinued operations. Net interest expense
was allocated to discontinued operations based on the ratio of the net assets to
be discontinued to the consolidated net assets plus consolidated debt other than
debt which is directly attributable to continuing operations. For the six months
ended March 29, 1997, revenues from PLI were $1,489,000. Net interest expense
allocated to the discontinued operations of PLI was approximately $18,000. As
discussed above, the resultant loss from discontinued operations was offset
against accruals made in the fourth quarter of fiscal 1996.
The net assets of PLI of $2,178,383 as of September 28, 1996 are shown in
the accompanying balance sheet as net assets from discontinued operations. These
assets were written down to a value that represented management's best estimate
of the amount that could be realized upon disposition.
13. Converter Power, Inc.
---------------------
In May 1997, ILC completed the sale of CPI to Applied Science and
Technology, Inc. (ASTeX) for $6.35 million in cash and 45,000 shares of ASTeX
common stock. The total sale price was $7.35 million, subject to adjustments
related to warranties. ILC has estimated that $500,000 of potential warranties
could be paid and has reduced the gain on sale accordingly. In August 1997,
ASTeX removed approximately 4,900 shares from escrow based on post-closing audit
adjustments. The remaining shares will be held in escrow subject to any further
post-closing adjustments, with a final settlement in May 1998. The sale, net of
expenses, resulted in a gain of $2,378,683 and was reported in the results of
operations for the third quarter ended June 28, 1997. The net amount due from
ASTeX of $500,000 (to be satisfied by the release to ILC of the ASTeX shares
held in escrow) is reflected in accounts receivable in the accompanying balance
sheet as of September 27, 1997.
14. Rights Agreement and Other Matters
----------------------------------
On September 19, 1989, ILC's Board of Directors declared a dividend of one
common share purchase right for each outstanding share of common stock, no par
value, of ILC. The dividend was payable on October 2, 1989 to the shareholders
of record on that date. Each right entitles the registered holder to purchase
from ILC one share of common stock of ILC at a price of $15.00 per common share.
The rights will not be exercisable until a party either acquires beneficial
ownership of 20% of ILC's common stock or makes a tender offer for at least 30%
of its common stock. In the event the rights become exercisable and thereafter a
person or group acquires 30% or more of ILC's stock, a 20% shareholder
34
<PAGE>
14. Rights Agreement and Other Matters (continued)
----------------------------------------------
("Acquiring Person") engages in any specified self-dealing transaction, or, as a
result of a recapitalization or reorganization, an Acquiring Person's
shareholdings are increased by more than 3%, each right will entitle the holder
to purchase from ILC, for the exercise price, common stock having a market value
of twice the exercise price of the right. In the event the rights become
exercisable and thereafter ILC is acquired in a merger or other business
combination, each right will enable the holder to purchase from the surviving
corporation, for the exercise price, common stock having a market value of twice
the exercise price of the right. At ILC's option, the rights are redeemable in
their entirety, prior to becoming exercisable, at $.01 per right. The rights are
subject to adjustment to prevent dilution and expire September 29, 1999. On
February 25, 1997, the Rights Agreement was amended. The amended terms generally
provide that the exercise of the various rights may occur whenever a party
acquires a beneficial ownership of 15% or more of ILC outstanding common shares
and that registered holders of ILC are entitled to purchase from ILC one share
of common stock at a price of $55.00 per common share. Additionally, the
expiration date of the Rights Agreement was extended to December 31, 2006.
In November 1996, the Board of Directors authorized eight severance
agreements for six executive officers and two managers, providing for severance
benefits upon termination during the two-year period following a change in
control in ILC, as defined therein.
15. Repurchase of Common Stock
--------------------------
In November 1996, the Board of Directors authorized ILC to repurchase up to
1,000,000 shares of ILC's issued and outstanding common stock. During the third
quarter of fiscal 1997, and since inception of the repurchase program, ILC
repurchased 37,000 shares of common stock for an aggregate amount of $425,458.
Purchases were made on the open market and can be made for up to two years from
the date of authorization.
16. Subsequent Event
----------------
On October 30, 1997, ILC entered into a definitive Agreement and Plan of
Merger by and among ILC, BEC Group, Inc. ("BEC") and BILC Acquisition Corp.
("Acquisition Corp."), a wholly owned subsidiary of BEC, pursuant to which ILC
will merge (the "Merger") with and into Acquisition Corp. Upon consummation of
the Merger, each outstanding share of ILC will be converted into the right to
receive 2.18 shares (reflecting the completion of BEC's contemplated one-for-two
reverse stock split) of BEC's common stock. The Merger is subject to the
approval of both ILC's shareholders and BEC's stockholders, and to certain
regulatory approvals and other customary closing conditions. The respective
chairmen of ILC and BEC have executed voting agreements in favor of the Merger.
35
<PAGE>
SCHEDULE VIII
ILC TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR FISCAL YEARS 1997, 1996 AND 1995
Balance at Charged to Deductions Deductions Balance at
Beginning Cost and and from end of
of Period Expenses Write Offs Dispositions Period
--------- -------- ---------- ------------ -------
Allowance for
Doubtful Accounts:
Year ended
September 30, 1995..... $332,672 $102,861 $ 26,093 $------- $409,440
Year ended
September 28, 1996..... $409,440 $ 38,804 $135,886 ------- $312,358
Year ended
September 27, 1997..... $312,358 $68,694 $22,062 $ 21,032 $337,958
Reserve for Inventory
Obsolescence:
Year ended
September 30, 1995....$2,141,992 $169,034 $430,000 $------- $1,881,026
Year ended
September 28, 1996....$1,881,026 $520,006 $366,774 ------- $2,034,258
Year ended
September 27, 1997....$2,034,258 $696,089 $635,927 $51,000 $2,043,420
36
<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 27,
1997 and September 28, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 27, 1997. These financial statements and the schedule
referred to below are the responsibility of ILC's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ILC Technology,
Inc. and subsidiaries as of September 27, 1997 and September 28, 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended September 27, 1997 in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule presented on page 36 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
December 1, 1997
37
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
Year Ended September 27, 1997
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues................. $12,121 $14,775 $13,911 $14,711
Gross profit............. 3,380 4,211 4,105 4,627
Net income from
continuing operations... 307 689 2,671 1,172
Net income per share
from continuing
operations.............. $ 0.06 $ 0.14 $ 0.53 $ 0.23
Year Ended September 28, 1996
(First, second and third quarters restated
for discontinued operations)
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- --------
Revenues................. $12,211 $13,943 $14,860 $13,192
Gross profit............. 4,199 4,869 4,995 3,963
Net income from
continuing operations... 848 1,124 1,626 948
Net income (loss)
from discontinued
operations.............. 30 (13) (122) (4,134)
Net income per share
from continuing
operations.............. $ 0.17 $ 0.23 $ 0.33 $ 0.19
Net income (loss) per
share from discontinued
operations.............. $ 0.01 $ (0.01) $ (0.03) $ (0.83)
38
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The names of the directors and certain information about them are set forth
below.
Henry C. Baumgartner, age 65, is a co-founder of ILC. He has served ILC in
various management positions since 1967 and has been a member of the ILC Board
of Directors since 1967. Mr. Baumgartner was appointed Chairman of the ILC Board
of Directors in July 1996 and Chief Executive Officer of ILC in April 1990. From
April 1990 to July 1996, he served as the President of ILC. Prior to 1990, he
served as Chief Executive Officer and Chairman of the Board of ILC from November
1986.
Richard D. Capra, age 65, has served as a member of the Board of Directors
of ILC since 1995. Since July 1996, he has also served as President and Chief
Operating Officer of ILC. From January 1991 to July 1996, Mr. Capra served as a
management consultant and as director of several companies in the electric and
lighting business. He was President and Chief Financial Officer of Philips
Lighting, Inc., U.S., from 1983 to 1991.
Arthur L. Schawlow, age 76, has served as a director of ILC from 1969 to
1971 and since 1984. He was a Professor of Physics at Stanford University from
1961 until his retirement in 1991. Dr. Schawlow won the Noble Prize in 1981 for
contributions toward the development of laser spectroscopy.
Harrison H. Augur, age 56, has served as a member of the Board of Directors
of ILC since 1989. He has been General Partner of Capital Asset Management since
June 1987. From April 1981 to August 1991, he served as Executive Vice President
and Director of Worms & Co., Inc.
George B. Clairmont, age 48, has served as a member of the Board of
Directors of ILC since July 1997. He has been President of Clairvest
Corporation, a New York-based registered investment adviser, since 1983. Mr.
Clairmont also serves as a director of Thomson-Leeds Corporation, a designer and
manufacturer of point of sales displays.
The information regarding executive officers required by this item
appearing in Part I hereof under the heading "Executive Officers" is
incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on its review of the copies of forms furnished to ILC and
written representations from its executive officers and directors, ILC believes
that all Section 16(a) filing requirements were met during fiscal 1997.
39
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table shows certain information concerning the compensation
of each of ILC's executive officers for services rendered in all capacities to
ILC for the fiscal years ended 1997, 1996 and 1995.
Annual Compensation
-------------------------------------
Other Annual All Other
Name and Principal Fiscal Salary Bonus Compensation Compensation
- ------------------ ---- ------- ----- ------------ -------------
Henry C. Baumgartner.... 1997 $183,654 $45,000 $6,000 $3,000
Chief Executive 1996 175,000 15,000 -- 2,558
Officer 1995 175,000 26,392 -- 3,021
Richard D. Capra (5).... 1997 197,115 45,000 6,000 615
President and 1996 25,385 -- -- --
Chief Operation 1995 10,000 -- -- --
Operator
Ronald E. Fredianelli... 1997 132,885 25,000 3,000 2,338
Chief Financial 1996 120,000 10,000 -- 2,215
Officer and 1995 113,423 19,074 -- 2,262
Secretary
John A. Lucero.......... 1997 126,923 30,000 3,000 2,435
Senior Vice 1996 96,442 10,000 -- 1,919
President, Sales 1995 91,642 12,459 -- 1,823
and Marketing
Felix J. Schuda..........1997 115,000 20,000 3,000 2,212
Vice President- 1996 115,000 8,000 -- 2,100
Chief Technical 1995 105,000 15,893 -- 2,100
Officer
Dennis M. Toohey (6).....1997 115,385 25,000 3,000 --
Vice President, Logistics
and Quality
Arthur O. Whipple (7)....1997 115,000 20,000 3,000 2,096
Vice President, 1996 110,000 -- -- 2,200
Engineering 1995 110,000 -- -- 1,100
___________________________
(1) No compensation is paid to officers of ILC for services rendered as
directors.
(2) Includes cash bonuses paid during the year and cash bonuses accrued for
services rendered during the year.
(3) Represents car allowance.
(4) Represents ILC matching contributions under ILC's Thrift Incentive Savings
Plan.
(5) Mr. Capra joined ILC in July 1996. Amounts for 1995 represent compensation
for services as a director.
(6) Mr. Toohey joined ILC in October 1996.
(7) Mr. Whipple joined ILC in March 1997. Amounts for 1996 and 1995 represent
compensation for services as an officer of Precision Lamp, Inc.
40
<PAGE>
Item 11. Executive Compensation (continued)
Option Grants in Fiscal 1997
The following table sets forth information regarding option grants to the
executive officers in fiscal 1997. 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 appreciated of 5% and 10% from the date the options were granted to the
end of the option terms.
Option Grants in Fiscal 1997
Individual Grants
---------------------------------------------------------
Number of Percent of
Underlying Granted to Exercise
Options Employees in Price Per Expiration
Name Granted (1) Fiscal 1997 Share Date
- ---- ----------- ----------- ----- ----
Henry C. Baumgartner... 20,000 5% $11.00 11/21/06
Henry C. Baumgartner... 50,000 12% 9.50 05/13/07
Richard D. Capra....... 40,000 10% 11.00 11/21/06
Richard D. Capra....... 40,000 10% 9.50 05/13/07
Ronald E. Fredianelli.. 10,000 2% 11.00 11/21/06
Ronald E. Fredianelli.. 20,000 5% 9.50 05/13/07
Felix J. Schuda........ 10,000 2% 9.50 05/13/07
John A. Lucero......... 20,000 5% 11.00 11/21/06
John A. Lucero......... 20,000 5% 9.50 05/13/07
Dennis M. Toohey....... 25,000 6% 11.00 11/21/06
Arthur O. Whipple...... 25,000 6% 9.50 05/13/07
Option Grants in Fiscal 1997
Individual Grants
-----------------------------
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term (2)
-----------------------------
Name 5% 10%
- ---- -----------------------------
Henry C. Baumgartner.............. $138,357 $350,623
Henry C. Baumgartner.............. 298,725 757,028
Richard D. Capra.................. 276,714 701,247
Richard D. Capra.................. 238,980 605,622
Ronald E. Fredianelli............. 69,178 175,312
Ronald E. Fredianelli............. 119,490 302,811
Felix J. Schuda................... 59,745 151,406
John A. Lucero.................... 138,357 350,623
John A. Lucero.................... 119,490 302,811
Dennis M. Toohey.................. 172,946 438,279
Arthur O. Whipple................. 149,362 378,514
(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 ILC's estimate or projection of future stock prices.
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 1997,
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 27, 1997 and the value of such options based on the closing price of
ILC's Common Stock on September 27, 1997, which was $11.75.
41
<PAGE>
Item 11. Executive Compensation (continued)
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values (continued)
Number of
Unexercised
Options at
FY-End (#) (1)
---------------
Shares Acquired Value Realized Exercisable/
Name on Exercise (#) ($) (3) Unexercisable
- ---- --------------- -------------- -------------
Henry C. Baumgartner........ 40,000 $375,000 81,250/88/750
Richard D. Capra............ -- -- 16,250/123,750
Ronald E. Fredianelli....... 10,000 93,750 45,000/45,000
Felix J. Schuda............. -- __ 41,250/13,750
John A. Lucero.............. -- __ 8,750/46,250
Dennis M. Toohey............ -- __ 0/25,000
Arthur O. Whipple........... -- __ 3,750/28,750
Value of Unexercised
In-the-Money Options
at FY-End ($) (2)
--------------------
Exercisable/
Name Unexercisable
- ---- --------------------
Henry C. Baumgartner.......... $558,688/179,063
Richard D. Capra.............. 12,813/147,188
Ronald E. Fredianelli......... 293,750/93,750
Felix J. Schuda............... 280,438/32,813
John A. Lucero................ 36,250/81,250
Dennis M. Toohey.............. 0/18,750
Arthur O. Whipple............. 16,406/72,656
__________________
(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 1988 through 1997 and are exercisable on various dates
beginning in 1989 and expiring in 2007.
(2) Represents the difference between the exercise price and $11.75, which is
the September 27, 1997 closing price. Stock option exercise prices range
from $2.25 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 George B. Clairmont, Chairman, Harrison H. Augur and
Arthur L. Schawlow. All are independent outside directors.
Director Compensation
Members of the Board who are not also officers or employees of ILC
("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 the third quarter of 1997, each Outside Director was granted an
automatic option to purchase a total of 5,000 shares of ILC's Common Stock at an
exercise price of $9.50 per share. In addition, in February 1997, Mr. Augur and
Dr. Schawlow each was granted an option to purchase 5,000 shares of ILC's Common
Stock at an exercise price $11.19 per share. As of September 27, 1997, options
to purchase shares were outstanding to the following Outside Directors, at the
weighted average exercise price per share indicated: Mr. Augur-50,000 shares at
$7.59 per share; and Dr. Schawlow-30,000 shares at $10.16 per share.
42
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the beneficial
ownership of ILC Common Stock as of September 27, 1997 by (i) each shareholder
known by ILC to be the beneficial owner of more than 5% of ILC Common Stock;
(ii) each director of ILC; (iii) each executive office of ILC; and (iv) all
directors and executive officers of ILC as a group.
Beneficial Ownership
as of September 27, 1997 (1)
----------------------------
Name Number Percent
- ---- ------ -------
Westport Asset Management, Inc. (2)...... 700,550 14.4%
Royce & Associates, Inc. (3)............. 519,920 10.7%
Investment Counselors of Maryland, Inc.(4) 326,000 6.7%
Marvin C. Schwartz (5)................... 302,700 6.2%
Henry C. Baumgartner (6)................. 191,238 3.9%
Felix J. Schuda (7)...................... 96,184 2.0%
Ronald E. Fredianelli (8)................ 79,751 1.6%
Richard D. Capra (9)..................... 27,338 *
John A. Lucero (10)...................... 16,906 *
Dennis M. Toohey (11).................... 6,250 *
Arthur O. Whipple (12)................... 3,950 *
Arthur L. Schawlow (13).................. 25,750 *
Harrison H. Augur (14)................... 45,750 1.0%
George B. Clairmont (15)................. 177,900 3.6%
All Executive Officers and Directors
as a Group.............................. 671,017 13.0%
(10 persons) (16)
______________________
*Less than 1%
(1) Based upon a total of 4,874,040 shares of ILC Common Stock outstanding as
of September 27, 1997. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable. Shares of ILC Common Stock subject to options that
are currently exercisable or exercisable within 60 days of September 27,
1997 are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.
(2) The share ownership is as reported on Schedule 13G dated February 13, 1997.
Of these shares, 691,650 shares are held in discretionary managed accounts
and 8,900 shares are beneficially owned by officers and stockholders of
Westport Asset Management, Inc. The address of Westport Asset Management,
Inc. is 253 Riverside Avenue, Westport, Connecticut 06880.
(3) The share ownership is as reported on Amendment Number 3 to Schedule 13G
dated June 6, 1997, on behalf of a group consisting of Charles M. Royce,
Royce & Associates, Inc. ("Royce") and Royce Management Company ("RMC"). Of
these shares, 461,620 shares are beneficially owned by Royce and 58,300
shares are beneficially owned by RMC. Mr. Royce disclaims beneficial
ownership of all of such shares. The address of Mr. Royce, Royce and RMC is
1414 Avenue of the Americas, New York, New York 10019.
43
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management (continued)
(4) The share ownership is as reported on Schedule 13G dated February 14, 1997.
All of such shares are owned by various investment advisory clients of
Investment Counselors of Maryland, Inc., which reported sole voting power
as to 286,000 shares and sole dispositive power as to 326,000 shares. The
address of Investment Counselors of Maryland, Inc. is 803 Cathedral Street,
Baltimore, Maryland 21201-5297.
(5) The share ownership is as reported on Schedule 13D dated August 13, 1996.
Mr. Schwartz reported ownership of 55,500 shares, sole dispositive power
and voting power with respect to 20,000 shares and discretionary and shared
dispositive power with respect to 227,200 shares. The address of Mr.
Schwartz is 605 Third Avenue, New York, New York 10158-3698.
(6) Includes 92,500 shares subject to outstanding options that are exercisable
within 60 days after September 27, 1997. Mr. Baumgartner is the Chairman of
the Board, Chief Executive Officer and a Director of ILC.
(7) Includes 42,500 shares subject to outstanding options that are exercisable
within 60 days after September 27, 1997. Mr. Schuda is the Vice President
and Chief Technical Officer of ILC.
(8) Includes 52,500 shares subject to outstanding options that are exercisable
within 60 days after September 27, 1997. Mr. Fredianelli is the Chief
Financial Officer and Secretary of ILC.
(9) Includes 26,250 shares subject to outstanding options that are exercisable
within 60 days after September 27, 1997. Mr. Capra is the President, Chief
Operating Officer and a Director of ILC.
(10) Includes 15,000 shares subject to outstanding options that are exercisable
within 60 days after September 27, 1997. Mr. Lucero is the Senior Vice
President, Sales and Marketing of ILC.
(11) Represents shares subject to outstanding options that are exercisable
within 60 days after September 27, 1997. Mr. Toohey is the Vice President,
Logistics and Quality of ILC.
(12) Includes 3,750 shares subject to outstanding options that are exercisable
within 60 days after September 27, 1997. Mr. Whipple is the Vice President,
Engineering of ILC.
(13) Includes 13,750 shares subject to outstanding options that are exercisable
within 60 days after ----- September 27, 1997. Dr. Schawlow is a Director
of ILC.
(14) Includes 33,750 shares subject to outstanding options that are exercisable
within 60 days after ----- September 27, 1997. Mr. Augur is a Director of
ILC.
(15) Includes 68,900 shares owned by persons whose accounts are managed by Mr.
Clairmont, as to which Mr. Clairmont disclaims beneficial ownership. Mr.
Clairmont is a Director of ILC.
(16) Includes 286,250 shares subject to outstanding options exercisable within
60 days after September 27, 1997, as described in Notes (6) through (14).
44
<PAGE>
Item 13. Certain Relationships and Related Transactions
In November 1996, ILC entered into Compensation Agreements with eleven of
its key employees, eight of whom are currently employed by ILC, that provide for
severance benefits upon termination following a change in control of ILC. Six of
the executive officers of ILC, plus two additional key employees of ILC, are
currently covered by the Compensation Agreements. Each agreement provides that
if, during the two-year period following a change in control of ILC (as defined
in the Compensation Agreements), ILC 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
Compensation Agreements) the employee will receive from ILC 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 Henry C.
Baumgartner, Chairman of the Board and Chief Executive Officer of ILC, Richard
D. Capra, President and Chief Operating Officer of ILC, and Ronald E.
Fredianelli, ILC's Chief Financial Officer, and two times the employee's annual
full base salary (excluding bonus) for Felix J. Schuda, Vice President and Chief
Technical Officer of ILC, John A. Lucero, Senior Vice President of Sales and
Marketing of ILC and Arthur O. Whipple, Vice President of Engineering of ILC.
45
<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 36
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.
A copy of any exhibits filed with ILC Technology's Annual Report on Form
10-K or incorporated by reference herein will be furnished without charge to
shareholders of record upon written request to Ronald E. Fredianelli, Secretary,
ILC Technology, Inc., 399 Java Drive, Sunnyvale, California 94089.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1997.
46
<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 8, 1997
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. Baumgartner Chairman of the Board and December 8, 1997
- ------------------------ Chief Executive Officer
(Henry C. Baumgartner) (Principal Executive
Officer and Director)
/s/ Richard D. Capra President, Chief December 8, 1997
- ------------------------- Operating Officer and
(Richard D. Capra) Director
/s/ Ronald E. Fredianelli Chief Financial Officer December 8, 1997
- ------------------------- and Secretary
(Ronald E. Fredianelli) (Principal Financial and
Accounting Officer)
/s/ Harrison H. Augur Director December 8, 1997
- -------------------------
(Harrison H. Augur)
/s/ //Arthur L. Schawlow Director December 8, 1997
- -------------------------
(Arthur L. Schawlow)
George B. Clairmont Director December 8, 1997
- --------------------------
(George B. Clairmont)
47
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
2.1 (A) Agreement and Plan of Merger, dated as of October 30, 1997, by
and among BEC Group, Inc., BILC Acquisition Corp.
and ILC Technology, Inc.
2.2 (B) Asset Purchase Agreement dated May 8, 1997, by and among
Applied Science and Technology, Inc., ASTeX/CPI Acquisition
Corp., Converter Power, Inc. and ILC Technology, Inc.
3.1 (C) 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 (D) Amended and Restated Bylaws as of November 21, 1996
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 (F) Rights Agreement between ILC Technology, Inc. and Security
Pacific National Bank dated as of September 19, 1989.
10.3 (G) Amendment to Rights Agreement dated as of February 25, 1997
between ILC Technology, Inc. and ChaseMellon Shareholder
Services L.L.C. as Rights Agent.
10.4 ILC Technology, Inc. 1992 Stock Option Plan, as amended, and
related form of Option Agreement. *
10.5 (H) Form of Officer and Director Indemnification Agreement *
10.6 (D) Form of Management Compensation Agreement*
10.7 Amended and restated loan agreement by and between ILC
Technology, Inc. and Union Bank of California dated
September 4, 1997.
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
(A) Incorporated by reference from Annex A to the Joint Proxy
Statement/Prospectus filed as part of the BEC Group, Inc.
Registration Statement on Form S-4 filed November 19,
1997 (File No. 333-40519).
(B) Incorporated by reference from the Exhibit to Registrant's
Current Report on Form 8-K dated May 8, 1997.
<PAGE>
INDEX TO EXHIBITS (continued)
(C) Incorporated by reference from the Exhibits to Registrant's
Annual Report on Form 10-K for the fiscal year ended September
28, 1991.
(D) Incorporated by reference from the Exhibits to Registrant's
Annual Report on Form 10-K for the fiscal year ended September
28, 1996.
(E) Incorporated by reference from the Exhibits to Registrant's
Annual Report on Form 10-K for the fiscal year ended October
2, 1993.
(F) Incorporated by reference from the Exhibits to Registrant's
Current Report on Form 8-K dated September 19, 1989.
(G) Incorporated by reference from the Exhibits to Registrant's
Current Report on Form 8-K dated February 25, 1997.
(H) Incorporated by reference from the Exhibits to Registrants'
Annual Report on Form 10-K for the fiscal year ended October
3, 1992.
* Management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 10.4
ILC TECHNOLOGY, INC.
1992 STOCK OPTION PLAN
As Amended November 21, 1996
ARTICLE 1
DEFINITIONS
As used herein, the following definitions shall apply:
1.1 "Administrator" means the Board or its Committee appointed pursuant to
Article 10 of the Plan. -------------
1.2 "Affiliate" means a parent or subsidiary corporation of the Company,
whether now or hereafter existing, as defined in Sections 424(e) and (f) of
the Code, respectively.
1.3 "Board" means the Board of Directors of the Company.
1.4 A "Change in Control" shall be deemed to occur (a) should a person or
related group of persons, other than the Company or a person that directly
or indirectly controls, is controlled by or is under common control with
the Company, becomes the beneficial owner (within the meaning of Rule 13d-3
of the General Rules and Regulations under the Exchange Act) of 25% or more
of the Company's outstanding voting stock pursuant to a tender or exchange
offer that the Board does not recommend that the shareholders of the
Company accept; or (b) on the first date within any period of 24
consecutive months or less on which there is effected a change in the
composition of the Board by reason of a contested election such that a
majority of the Board members (rounded up to the next whole number) cease
to be comprised of individuals who either (i) have been members of the
Board continuously since the beginning of such period or (ii) have been
elected or nominated for election as Board members during such period by at
least a majority of the Board members described in clause (i) who were
still in office at the time such election or nomination was approved by the
Board.
1.5 "Code" means the Internal Revenue Code of 1986, as amended.
1.6 "Committee" means the Committee appointed by the Board under Article 10 of
the Plan. ---------
1.7 "Common Stock" means the Common Stock, no par value, of the Company.
1.8 "Company" means ILC Technology, Inc., a California corporation.
1.9 "Corporate Transaction" means (a) a merger or acquisition in which the
Company is not the surviving entity (except for a transaction the principal
purpose of which is to change the State in which the Company is
incorporated), (b) the sale, transfer or other disposition of all or
substantially all of the assets of the Company or (c) any other corporate
reorganization or business combination in which the beneficial ownership of
50% or more of the Company's outstanding voting stock is transferred.
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1.10 "Employee" means any person, including officers and directors, employed by
the Company or any Affiliate. The term "Employee" shall also include
directors of the Company; however, payment of a director's fee by the
Company shall not be sufficient to constitute "employment" by the Company.
1.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
1.12 "Fair Market Value" means, as of any date, the value of the Common Stock
determined as ----------------- follows:
(a) If the Common Stock is listed on a stock exchange or national market
system including without limitation the National Market System of the
National Association of Securities Dealers, Inc. Automated Quotation
("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported),
as quoted on such system or exchange for the last market trading day
prior to the time of determination as reported in the Wall Street
Journal or such other source as the Administrator deems reliable;
(b) If the Common Stock is quoted on the Nasdaq System (but not on its
National Market System) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high and low asked prices for the Common
Stock or;
(c) In the absence of an established market for the Common Stock, its Fair
Market Value shall be determined in good faith by the Administrator.
1.13 "Incentive Option" means an Option intended to qualify as an incentive
stock option within the meaning of Section 422 of the Code.
1.14 "Nonstatutory Option" means an Option not intended to qualify as an
Incentive Option.
1.15 "Option" means a stock option granted pursuant to the Plan.
1.16 "Option Agreement" means a written agreement, signed by the Optionee and a
duly authorized representative of the Company, evidencing the grant of an
Option.
1.17 "Optionee" means an Employee or Outside Director who receives an Option.
1.18 "Outside Director" means each member of the Board who is not an Employee or
an officer of ---------------- the Company or any Affiliate.
1.19 "Plan" means this 1992 Stock Option Plan.
1.20 "Rule 16b-3" means Rule 16b-3 promulgated under Section 16 of the
Securities Exchange Act ---------- of 1934, as amended.
1.21 "Share" means a share of the Common Stock, as adjusted in accordance with
Article 9 of the ----- Plan.
1.22 "Termination of Employment" means the interruption or termination of the
employment relationship by the Company or any Affiliate for any reason
including resignation, discharge, death or retirement, but excluding
terminations where there is a simultaneous reemployment by the Company or
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an Affiliate. The Committee, in its absolute discretion, shall determine
the effect of all matters and questions relating to Termination of
Employment. Employment shall not be considered interrupted in the case of:
(a) sick leave; (b) military leave; (c) any other leave of absence approved
by the Board, provided that such leave is for a period of not more than 90
days, unless reemployment upon the expiration of such leave is guaranteed
by contract or statute; or (d) transfers between locations of the Company
or between the Company, its Affiliates or its successor. For Outside
Directors, Termination of Employment means ceasing to be a member of the
Board.
ARTICLE 2
PURPOSE
The purpose of the 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 stock to continue in the service of the Company and thereby to
help the Company compete effectively the other enterprises for the services of
qualified individuals. Options granted under the Plan may be Incentive Options
or Nonstatutory Options, as determined by the Administrator at the time of grant
of an option and subject to the applicable provisions of Section 422 of the
Code, the regulations promulgated thereunder and other relevant provisions of
the Code and regulations.
ARTICLE 3
STOCK SUBJECT TO THE PLAN
Subject to the adjustment as provided in Article 9 of the Plan, the Company
is authorized to issue Options to purchase up to 575,000 Shares. Any unpurchased
Shares that are subject to an Option that terminates for any reason other than
exercise shall, unless the Plan has been terminated, become available for future
grant under the Plan. The Company shall at all times reserve for issuance
pursuant to the Plan a number of its authorized but unissued Shares equal to the
number of Shares issuable pursuant to the Plan. Exercise of an Option shall
decrease the number of Shares available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
ARTICLE 4
TERM OF PLAN
The Plan shall become effective upon its adoption by the Board. Within 12
months after the date of such adoption, the Plan shall be approved by the
shareholders of the Company in the degree and manner required under applicable
state and federal law. No Option shall become exercisable unless and until such
shareholder approval has been obtained. Unless sooner terminated under Article 9
and 10, the Plan shall terminate upon the earlier of (i) the tenth anniversary
of its adoption by the Board or (ii) the date on which all shares available for
issuance under the Plan have been issued. Any Option outstanding under the Plan
at the time of its termination shall remain in effect in accordance with its
terms and conditions and those of the Plan.
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ARTICLE 5
ELIGIBILITY
Nonstatutory Options may be granted to Employees and Outside Directors,
except that Outside Directors who serve as Administrator under Section 10.1 of
the Plan are eligible to receive Option grants only in accordance with Article
8. Incentive Options may be granted only to Employees. An Optionee who is
otherwise eligible may be granted an additional Option or Options. The maximum
number of Shares underlying options granted to any Employee or Outside Director
in any fiscal year of the Company is 100,000 Shares.
ARTICLE 6
TERMS OF OPTIONS
6.1 Written Agreements. Grants of Options shall be evidenced by an Option
Agreement, which shall contain the provisions that the Plan requires and
may contain additional provisions that do not conflict with the Plan as the
Administrator deems appropriate. Option Agreements need not have identical
terms, but each Option Agreement shall be subject to the Plan.
6.2 Term of Option. The term of each Option shall be no more than 10 years from
the date of grant. However, in the case of an Incentive Option granted to
an Optionee who, at the time the Option is granted, owns, as that term is
defined in Section 424(d) of the Code, stock representing more than 10% of
the voting power of all classes of stock of the Company or any Affiliate,
the term of the Option shall be no more than 5 years from the date of
grant.
6.3 Exercise Price. The per Share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be determined by the Administrator,
but in no event shall the per Share exercise price of an Option be less
than the Fair Market Value per Share on the date of grant. In the case of
an Incentive Option granted to an Employee who, at the time of the grant of
such Incentive Option, owns, as that term is defined in Section 424(d) of
the Code, stock representing more than 10% of the voting power of all
classes of stock of the Company or any Affiliate, the per Share exercise
price shall be no less than 110% of the Fair Market Value per Share on the
date of grant.
6.4 Termination of Employment. Unless determined otherwise by the Administrator
pursuant to Section 6.5, to the extent not already expired or exercised,
every Option shall terminate at the earlier of (i) the expiration date as
set forth in the Option Agreement or (ii) 30 days after Termination of
Employment for reasons other than death or disability. If Termination of
Employment is due to the Optionee's death or disability (as defined in
Section 22(e) (3) of the Code), unless determined otherwise by the
Administrator pursuant to Section 6.5, the Option, to the extent not
already expired or exercised, shall terminate at the earlier of (i) the
expiration date as set forth in the Option Agreement or (ii) 12 months
after the date of the Optionee's disability or death. In the event of the
death of the Optionee, the Option shall be exercisable by the Optionee's
estate or any person who acquired the right to exercise the Option by
bequest or inheritance. Except as provided in an Option Agreement, an
Option shall be exercisable after Termination of Employment only to the
extent exercisable on the date of Termination of Employment. For purposes
of this Section, the limited period of exercisability of Incentive Options
following Termination of Employment shall be measured from the date the
Optionee ceases to be an Employee. Upon the expiration of the period of
exercisability after Termination of Employment or (if earlier) upon the
expiration of the Option term, the Option shall terminate.
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6.5 Extension of Exercise Period. The Administrator shall have full power and
authority to extend the expiration date of an Option following the
Optionee's Termination of Employment from the periods specified in Section
6.4 to such greater period of time as the Administrator shall deem
appropriate; provided, however, that in no event shall any Option be
exercisable after the expiration date set forth in the Option Agreement. In
the case of an Incentive Option, however, such determination shall be made
at the time of grant of the Option and such period of time shall not exceed
12 months after Termination of Employment by reason of death or disability
of the Optionee or 3 months after Termination of Employment for other
reasons.
6.6 Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than
by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.
6.7 Type of Option. Each Option Agreement shall clearly state whether or not
the Option is intended to qualify as an Incentive Option. If only a portion
of an Option is intended to so qualify, (i) the Option Agreement shall so
state, and (ii) the Option Agreement shall not require that the number of
Incentive Options exercised reduces the size of the Nonstatutory Option
portion, or vice-versa.
6.8 Limitation on Incentive Options. The aggregate Fair Market Value of the
Shares for which one or more Incentive Options granted to an Optionee under
the Plan (or any other incentive stock option plan of the Company or any
Affiliate) may for the first time become exercisable as Incentive Options
under the Code during any one calendar year shall not exceed $100,000 or
such other amount as may be permitted under subsequent amendments to
Section 422 of the Code. To the extent that any two or more Incentive
Options (including any Incentive Options accelerated in connection with any
Corporate Transaction or Change in Control under Section 9.3 or 9.4 of the
Plan), violate this limitation, such excess Options shall be treated as
Nonstatutory Options. For purposes of this Section 6.8, Incentive Options
shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares shall be determined as of the time the
Option with respect to such Shares was granted.
6.9 Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the
Administrator. Notice of the determination shall be given to each Employee
to whom an Option is so granted within a reasonable time after the date of
such grant.
6.10 No Employment Agreement. No Option Agreement, nor anything contained in the
Plan, shall confer upon any Optionee any right with respect to continuation
of employment with the Company or interfere in any way with the right of
the Optionee or the Company to terminate such employment at any time, with
or without cause.
6.11 Notice of Disqualifying Disposition of Incentive Options. Optionees shall
give the Company written notice of any disposition of any Share acquired
pursuant to exercise of an Incentive Option if such disposition occurs
before the second anniversary of the date the Option was granted or the
first anniversary of the date of purchase of the Share disposed of,
whichever occurs later. A disposition includes any sale, exchange, gift, or
other transfer or attempted transfer of legal title. The notice shall
include the Optionee's name, the number of Shares disposed of and the dates
and prices the Shares were acquired and disposed of.
6.12 Adjustments to Option Rights. Subject to the general limitations of the
Plan, the Administrator may adjust the exercise price, term or any other
provision of an Option (other than Options granted pursuant to Article 8 of
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the Plan) by cancelling 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 Administrator may
also adjust the number of Options granted to an Optionee by cancelling
outstanding Options or granting additional Options. Except for adjustments
necessary to ensure compliance with any applicable state or federal law, no
such adjustment shall impair an Optionee's rights under any Option
Agreement without the consent of the Optionee.
ARTICLE 7
EXERCISE OF OPTIONS
7.1 When Options Become Exercisable. Options shall be exercisable at such times
and under such conditions as determined by the Administrator, which may
include performance criteria with respect to the Company and/or the
Optionee. Options granted to officers and directors of the Company shall
not be exercisable in whole or in part until the expiration of six months
after the date of grant. No Option shall be exercisable until the Company
and the Optionee sign an Option Agreement acceptable to the Company.
7.2 No Fractional Shares. An Option may not be exercised for a fraction of a
Share.
7.3 Exercise Procedure. An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with
the terms of the Option by the person entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised
has been received by the Company. Full payment may, as authorized by the
Administrator, consist of any consideration and method of payment allowable
under Section 7.4 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing Shares
acquired upon exercise of an Option, no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to such
Shares, notwithstanding the exercise of the Option. The Company shall issue
(or cause to be issued) such stock certificate promptly upon exercise of
the Option.
7.4 Payment for Shares. The consideration to be paid for the Shares to be
issued upon exercise of an Option, including the method of payment, shall
be determined by the Administrator (and, in the case of an Incentive
Option, shall be determined at the time of grant) and may consist of (i)
cash, (ii) check, (iii) 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 or (iv) any combination of the foregoing.
7.5 Withholding Tax Obligations. At the time of exercise of an Option, the
Optionee shall remit to the Company by bank cashier's check or other form
of payment acceptable to the Company, all applicable (as determined by the
Company in its sole discretion) federal and state withholding and
employment taxes.
ARTICLE 8
AUTOMATIC GRANTS TO OUTSIDE DIRECTORS
8.1 Option Grant. Each calendar year, each Outside Director in office at the
date of grant (including any Outside Director who may have already received
one or more automatic option grants) shall automatically be granted a Non-
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statutory Option to purchase 5,000 Shares upon the terms and conditions
specified below. The initial automatic grant shall occur on November 13,
1993. Beginning in 1994, such automatic grants shall occur each year on the
date of the meeting of the Administrator held in the Company's third fiscal
quarter.
8.2 Terms of Options. The terms and conditions that apply to each such
automatic grant shall be as follows: (i) the per Share exercise price shall
be equal to the Fair Market Value per Share on the date of grant; (ii) the
term of the Option shall be 10 years; (iii) the Options shall be
exercisable in cumulative increments of 25% per year commencing on the
first anniversary of the date of grant; and (iv) all other terms and
conditions of the Option shall be as set forth in the Company's then
current form of Option Agreement.
8.3 No Other Grants. Except for the automatic grants under this Article 8,
those members of the Board who serve as Administrator under Section 10.1 of
the Plan shall not be eligible to receive any additional Options under the
Plan or any other stock plan of the Company or any Affiliate, except as
permitted by Rule 16b-3.
ARTICLE 9
ADJUSTMENTS OF AND CHANGES IN STOCK
9.1 Adjustments. Subject to any required action by the shareholders of the
Company, in the event of any change to the Common Stock issuable under the
Plan by reason of any (i) Corporate Transaction or (ii) stock split,
reverse stock split, stock dividend, recapitalization, combination or
reclassification of Shares or other change affecting the outstanding Common
Stock as a class without receipt of consideration, then unless such change
results in the termination of all outstanding Options as a result of the
Corporate Transaction, the number of Shares covered by each outstanding
Option and the number of Shares authorized for issuance under the Plan but
as to which no Options have yet been granted or that have been returned to
the Plan upon cancellation or expiration of an Option, as well as the per
Share exercise price, shall be proportionately adjusted. Such adjustments
shall be made by the Administrator, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number
or price of Shares subject to an outstanding Option.
9.2 Dissolution. In the event of the proposed dissolution or liquidation of the
Company, the Board shall notify the Optionee at least fifteen (15) days
prior to such proposed action. To the extent it has not been previously
exercised, the Option will terminate immediately prior to the consummation
of such proposed action.
9.3 Corporate Transactions. In the event of a Corporate Transaction, the
exercisability of each Option shall be automatically accelerated so that
each Option shall, immediately before the specified effective date for the
Corporate Transaction, become fully exercisable with respect to the total
number of Shares and may be exercised for all or any portion of such
Shares. However, an Option shall not be so accelerated if and to the extent
that such Option is, in connection with the Corporate Transaction, either
to be assumed by the successor corporation or parent thereof or be replaced
with a comparable option to purchase shares of the capital stock of the
successor corporation or parent thereof. The determination of comparability
shall be made by the Administrator, and its determination shall be final,
binding and conclusive.
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Upon the consummation of a Corporate Transaction, all outstanding Options
shall, to the extent not previously exercised or assumed by the successor
corporation or its parent, terminate and cease to be exercisable.
9.4 Change in Control. In the event of a Change in Control, the exercisability
of each Option shall be automatically accelerated effective 15 days
following the effective date of the Change in Control, so that each Option
shall become fully exercisable with respect to the total number of Shares
and may be exercised for all or any portion of such Shares. Upon a Change
in Control, all outstanding Options accelerated shall remain fully
exercisable until the expiration or sooner termination of the Option term
specified in the option agreement.
9.5 Other Changes. Upon any other relevant change in the capitalization of the
Company, the Administrator may, as it deems appropriate, provide for an
equitable adjustment in the number of Shares then subject to the Plan and
to any outstanding Options, as well as the exercise price of outstanding
Options.
9.6 No Fractional Shares. No right to purchase fractional Shares shall result
from any adjustment to outstanding Options pursuant to this Article. Upon
any such adjustment, the number of Shares subject to outstanding Options of
each Optionee shall be rounded down to the nearest whole Share. The Company
shall give notice of any adjustment to each holder of Options that have
been so adjusted. Such adjustment (whether or not such notice is given)
shall be effective and binding for all purposes of the Plan.
ARTICLE 10
ADMINISTRATION OF PLAN
10.1 Administrator. The Plan shall be administered by (A) the Board if the Board
may administer the Plan in compliance with Rule 16b-3, or (B) a Committee
of the Board, which shall be constituted in such a manner as to permit the
Plan to comply with Rule 16b-3. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by
the Board. From time to time the Board may increase the size of such
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill
vacancies, however caused, and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Rule 16b-3.
10.2 Powers of the Administrator. Subject to the provisions of the Plan and in
the case of a Committee, the specific duties delegated by the Board to such
Committee, the Administrator shall have the authority, in its discretion:
(a) to determine the Fair Market Value of the Common Stock, in accordance
with Section 1.12 of the Plan;
(b) to select the Employees and Outside Directors to whom Options may from
time to time be granted hereunder;
(c) to determine whether and to what extent Options are granted hereunder;
(d) to determine the number of Shares to be covered by each such Option
granted hereunder;
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(e) to approve forms of Option Agreement;
(f) to determine the terms and conditions, not inconsistent with the terms
of the Plan, of any Option granted hereunder (including, but not
limited to, the Share price and any restriction or limitation on any
Option and/or the Shares relating thereto, based in each case on such
factors as the Administrator shall determine, in its sole discretion);
(g) to adopt rules and regulations for implementing the Plan;
(h) to interpret the Plan; and
(i) to take such other action as is appropriate to the administration of
the Plan.
10.3 Rule 16b-3. Unless the Board determines otherwise in a specific case,
Options granted to persons subject to Section 16(b) of the Exchange Act
must comply with Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to Plan
transactions. In no event shall the Board take any action that would
violate Section 10.1 of the Plan.
10.4 Effect of Administrator's Decision. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all
Optionees and any other persons having an interest in any Options.
ARTICLE 11
AMENDMENT AND TERMINATION OF THE PLAN
11.1 Amendment and Termination. The Board may at any time amend, suspend or
terminate the Plan. In addition, to the extent necessary and desirable to
comply with Rule 16b-3 or with Section 422 of the Code (or any other
applicable law or regulation, including the requirements of the NASD or an
established stock exchange), the Company shall obtain shareholder approval
of any Plan amendment in such a manner and to such a degree as required.
11.2 Effect of Amendment or Termination. Except as provided in the Plan or in an
Option Agreement, no amendment, suspension or termination of the Plan shall
alter or impair the rights of any Optionee under any Option outstanding at
the time, without the written consent of the Optionee.
11.3 Amendments Required by Code. Notwithstanding the provisions of Section
11.2, the Board hereby reserves the right to amend or modify the Plan and
any Options outstanding to the extent necessary to qualify any or all
Options for such favorable federal income tax treatment as may be afforded
employee stock options under Section 422 of the Code and regulations
subsequently promulgated thereunder.
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ARTICLE 12
CONDITIONS UPON ISSUANCE OF SHARES
Implementation of the Plan, the grant of Options and the issuance of Shares
hereunder shall be subject to the Company obtaining all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
Options or the Shares, including, without limitation, any stock exchange or
market upon which the Shares may then be listed or traded. The inability of the
Company to obtain any such approvals or permits shall relieve the Company of any
liability in respect of the failure to grant such Options or issue or sell such
Shares as to which such approval or permit shall not have been obtained. As a
condition to the exercise of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of any such exercise
that the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required by applicable law.
ARTICLE 13
INFORMATION TO OPTIONEES
The Company shall provide to each Optionee, during the period for which
such Optionee has one or more Options outstanding, copies of all annual reports
and other information which are provided to all shareholders of the Company.
This Article 13 shall not be construed to require the Company to provide such
information to key employees whose duties in connection with the Company assure
their access to equivalent information.
ARTICLE 14
TAX STATUS
The Company does not hereby, nor by way of any plan, document, Option
Agreement or otherwise, represent or warrant to any person, including the
Optionees, that the grant or exercise of an Option or the subsequent disposition
of Shares obtained by the exercise of an Option pursuant to the Plan, or any
other aspect of the Plan, will have any particular tax effect.
ARTICLE 15
PLAN GOVERNS
If there is any inconsistency between the Plan and any documents related to
the Plan, including any Option Agreement, the Plan shall govern. Nothing
contained in the Plan shall be construed to constitute, or be evidence of, any
right in favor of any person to receive Options hereunder or any obligation on
the part of the Company to issue Options with respect to its Common Stock.
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ARTICLE 16
APPLICABLE LAW; SEVERABILITY
The Plan shall be governed and construed in all respects in accordance with
the laws of the State of California excluding its conflict of laws rules to the
extent such rules would apply the law of another jurisdiction. Incentive Options
granted under the Plan shall be interpreted and administered in accordance with
Section 422 of the Code. If any provision is susceptible of more than one
interpretation, it shall be interpreted in a manner consistent with the Plan
being an incentive stock option plan. If any provision of the Plan is found by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions shall continue to be fully effective.
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ILC TECHNOLOGY, INC.
STOCK OPTION AGREEMENT
PURSUANT TO THE 1992 STOCK OPTION PLAN
Optionee
This Stock Option Agreement, dated as of the Date of Grant set forth below,
is entered into between ILC Technology, Inc., a California corporation and the
Optionee named above pursuant to the ILC Technology, Inc. 1992 Stock Option Plan
(the "Plan"). Capitalized terms not defined in this Agreement are defined in the
Plan.
Pursuant to the Plan, the Company grants an option to the Optionee to
purchase shares of the Common Stock of the Company as follows:
Date of Grant ___________, 19__
Exercise Price Per Share $__________
Total Number of Shares Granted __________ Shares
Total Exercise Price $_____________
Type of Option Incentive Stock Option
Nonstatutory Stock Option
Term __ years
Expiration Date ___________, 20__
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Vesting Schedule: Subject to the provisions of this Agreement and the Plan,
the Options become exercisable in cumulative installments as set forth below.
Exercisable Options may be exercised from time to time until the Expiration Date
set forth above or termination of the Options as set forth below.
________Shares exercisable beginning on ______________, 19__
________Shares exercisable beginning on ______________, 19__
________Shares exercisable beginning on ______________, 20__
________Shares exercisable beginning on ______________, 20__
Termination: Exercisable Options expire 30 days after Termination of
Employment for reasons other than death or disability of Optionee or 12 months
after Termination of Employment because of death or disability. Options that are
not exercisable at the time of Termination of Employment expire on the date of
Termination of Employment. In no case, however, shall the Options be exercisable
after the Expiration Date.
Nontransferability: During the lifetime of the Optionee, the Option is
exercisable only by the Optionee. The Option or this Agreement shall not be
sold, pledged, assigned, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution. Any attempted sale, pledge,
assignment, transfer or other disposition of the Option shall be void and of no
effect.
Optionee and the Company agree that this Option is granted under and
governed by the terms and conditions of the Plan and the Additional Terms and
Conditions, all of which are attached to and made a part of this Agreement. By
signing this Agreement, Optionee acknowledges that Optionee has read and
understood the Plan and agrees to be bound by it and this Agreement, including
the Additional Terms and Conditions attached to this Agreement.
OPTIONEE:__________________________ ILC TECHNOLOGY, INC._______________________
BY:________________________________________
Title:_____________________________________
Print Name_________________________________
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EXHIBIT 10.7
LOAN AGREEMENT
This Amended And Restated Loan Agreement ("Agreement") is made and entered
into as of September 4, 1997 by and between ILC Technology, Inc., a California
corporation ("Borrower") and Union Bank of California, N.A., ("Bank"). This
Agreement amends and restates in its entirety that certain loan agreement dated
March 25, 1996 between Bank and Borrower.
Section 1. The Loan
Section 1.1.1 The Revolving Loan
Bank will loan to Borrower an amount not to exceed Six Million Dollars
($6,000,000) 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, 1999 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 The Non-Revolving-To-Term Loan
Bank will loan to Borrower an amount not to exceed Two Million Dollars
($2,000,000) outstanding in the aggregate at any one time (the
"Non-Revolving-To-Term Loan"). Borrower may borrow all or part of the
Non-Revolving-To-Term Loan in accordance with the terms of the
Non-Revolving-To-Term Note. All borrowings of the Non-Revolving-To-Term Loan
must be made before August 31, 1998, at which time all unpaid principal under
the Non-Revolving-To-Term 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 prepaid amounts shall be
applied to the scheduled principal payments in the reverse order of their
maturity. The Non-Revolving-To-Term Loan shall be evidenced by a promissory note
(the "Non-Revolving-To-Term 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-To-Term 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-To-Term Loan, Bank will loan to Borrower
the sum outstanding at the maturity of the Non-Revolving-To-Term Loan in one
disbursement on or before August 31, 1998 (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 commercial 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 # 0027000003 which matures on August 28, 1998. The current
outstanding principal amount of the Term Loan is One Million Three
Hundred Nineteen Thousand Dollars ($1,319,000). This Term Loan is
evidenced by a promissory note ("Term Note") on the standard form used
by Bank for commercial loans. In the event of a prepayment of principal
and any resulting fees, any prepaid amounts shall be applied to the
scheduled principal payments in the reverse order of their maturity.
B. Obligation # 0080000002 which matures on January 30, 1998. The current
outstanding principal amount of the Term Loan is Two Hundred Sixty One
Thousand Dollars ($261,000). This Term Loan is evidenced by a
promissory note ("Term Note") on the standard form used by Bank for
commercial loans. In the event of a prepayment of principal and any
resulting fees, any prepaid amounts shall be applied to the scheduled
principal payments in the reverse order of their maturity.
C. Obligation #0081000002 which matures on March 31, 1999. The current
outstanding principal amount of the Term Loan is One Million Seven
Hundred Ninety Six Thousand Dollars ($1,796,000). This Term Loan is
evidenced by a promissory note ("Term Note") on the standard form used
by Bank for commercial loans. In the event of a prepayment of principal
and any resulting fees, any prepaid amounts shall be applied to the
scheduled principal payments in the reverse order of their maturity.
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 Purpose of Loan
The proceeds of the Revolving Loan shall be used for general working
capital purposes and the proceeds of the Non-Revolving-To-Term Loan shall be
used for only for Borrower's capital equipment requirements.
1.4 Interest
The unpaid principal balance of the Revolving Loan and the
Non-Revolving-To-Term Loan shall bear interest at the rate or rates provided in
the Revolving Note and the Non-Revolving-To-Term Note and selected by Borrower.
The Revolving Loan and the Non-Revolving-To-Term Loan may be prepaid in full or
in part only in accordance with the terms of the Revolving Note and the
Non-Revolving-To-Term Note and any such prepayment shall be subject to the
prepayment fee provided for therein.
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1.5 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.
1.6 Disbursement
Upon execution hereof, Bank shall disburse the proceeds of the Loan as
provided in Bank's standard form Authorization executed by Borrower.
1.7 Security
Prior to any disbursement of the Loan, Borrower 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. At Bank's request, Borrower will
also obtain executed landlord's and mortgagee's waivers on Bank's form covering
all of Borrower's property located on leased or encumbered real property.
1.8 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 conditions
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
Q-ARC Limited ("Guarantor") shall have executed and delivered to Bank a
continuing guaranty 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.
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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.
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 a 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
June 28, 1997, together with supporting schedules, and an income statement for
the nine (9) months ended June 28, 1997, 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 June 28, 1997, there has been
no material adverse change in the financial condition or operations of Borrower.
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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.
3.8 Organization
Borrower is duly organized and existing under the laws of the state of its
organization, and has the power and authority to carry on the business in which
it is engaged and/or proposes to engage.
3.9 Power
Borrower has the power and authority to enter into this Agreement and to
execute and deliver the Note and all of the other Loan Documents.
3.10 Authorization
This Agreement and all things required by this Agreement have been duly
authorized by all requisite action of Borrower.
3.11 Qualification
Borrower is duly qualified and in good standing in any jurisdiction where
such qualification is required.
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3.12 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.
3.13 ERISA
Any defined benefit pension plans as defined in the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), of Borrower meet, as of the
date hereof, the minimum funding standards of Section 302 of ERISA, and no
Reportable Event or Prohibited Transaction as defined in ERISA has occurred with
respect to any such plan.
3.14 Regulation U
No action has been taken or is currently planned by Borrower, or any agent
acting on its behalf, which would cause this Agreement or the Note to violate
Regulation U or any other regulation of the Board of Governors of the Federal
Reserve System or to violate the Securities and Exchange Act of 1934, in each
case as in effect now or as the same may hereafter be in effect. Borrower is not
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock as one of its important activities and none of the
proceeds of the Loan will be used directly or indirectly for such purpose.
3.15 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
1.3 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.
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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 one hundred twenty (120) days after the close of each fiscal
year, a copy of its statement of financial condition including at
least its balance 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 financial statements and information as Bank may reasonably
request from time to time;
(e) In connection with each fiscal year-end statement required hereunder,
any management letter of Borrower's certified public accountants;
(f) 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;
7
<PAGE>
(h) 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.
4.6 Current Ratio
Borrower will at all times maintain a ratio of current assets to current
liabilities of at least 1.5:1.0, as such terms are defined by generally accepted
accounting principles.
4.7 Tangible Net Worth
Borrower will at all times 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 September 30, 1997 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.
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
Borrower will maintain a ratio of Cash Flow to Debt Service of not less
than 1.75:1.0. Compliance with this subsection shall be measured as of the end
of Borrower's fiscal year. "Cash Flow" shall mean net profit after taxes,
exclusive of nonrecurring income, to which depreciation, amortization and other
noncash expenses and interest (and also including amounts coming due in respect
of leases) are added for the fiscal year just ended. "Debt Service" shall mean
that portion of long-term liabilities and capital leases coming due within
twelve (12) months after the date of calculation plus interest.
8
<PAGE>
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 and such policies shall require at least ten (10) days' written
notice to Bank before any policy may be altered or canceled. Borrower will
maintain adequate worker's compensation insurance and adequate insurance against
liability for damage to persons or property.
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 amendments 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.
9
<PAGE>
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
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.
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 combination, 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.
10
<PAGE>
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 may repurchase its capital stock up to Three Million Dollars
($3,000,000) in any 12 month period. Purchases are not to exceed Seven Hundred
Fifty Thousand Dollars ($750,000) in any single fiscal quarter.
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
6.3
Borrower shall default in the due performance or observance of any covenant
or condition of the Loan Documents; or
6.4
Any guaranty or subordination agreement required 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, or (if Borrower
is a partnership) there is a change in ownership or control of any general
partner's interest.
SECTION 7. MISCELLANEOUS PROVISIONS
11
<PAGE>
7.1 Additional Remedies
The rights, powers 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 forbearance 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 successors and assigns of
Bank and the permitted successors and assignees of Borrower, and any assignment
by 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.
In the event of any conflict between the provisions of this Agreement and the
provisions of any note or reimbursement agreement evidencing any indebtedness
hereunder, the provisions of such note or reimbursement agreement shall prevail.
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.
12
<PAGE>
7.9 Counterparts
Borrower and Bank may execute one or more counterparts to this Agreement,
each of which shall be deemed an original, but when together shall be one and
the same instrument.
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.
THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A.
______________________________
s/s Patricia Lee
Patricia Lee
Vice President
Address: 350 California Street-10th Floor
San Francisco, CA 94104-1402
Attention: Patricia Lee, VP
Telecopier: (415) 705-7111
Telephone: (415) 705-7385
ILC TECHNOLOGY, INC.
_______________________________
By: s/s/ Richard D. Capra
Title President and Chief Operating Officer
________________________________
By: s/s Ronald E. Fredianelli
Title: Chief Financial Officer
Address: 399 Java Drive
Sunnyvale, CA 94089
Attention: Ron Fredianelli, CFO
Telecopier: (408) 745-7829
Telephone: (408) 745-7900
13
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- ------------------------------
ILC Light Source Foreign Sales Corporation Barbados
Q-Arc Ltd England and Wales
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated December 1, 1997, included in this Form 10-K, into ILC Technology,
Inc.'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 8, 1997
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