ITEM 1. BUSINESS
GENERAL
ILC Technology, Inc. ("ILC" or the "Company") designs, develops, and manufactures high intensity lamps and lighting products for medical, industrial, communication, aerospace, scientific, entertainment, and military industries. ILC Technology, Inc. was incorporated under the laws of the State of California on September 15, 1967. Its principal manufacturing and executive facilities are located at 399 Java Drive, Sunnyvale, California 94089. The Company's telephone number is (408) 745-7900.
BUSINESS STRATEGY
The Company uses a market focused business strategy. ILC targets selected high growth markets which most closely match the Company's technological expertise and manufacturing strengths. With a strong emphasis on research and development, ILC achieves and maintains a leadership position in these market segments through advanced technology, engineering design capability and attentive customer support.
PRODUCTS - FLASHLAMPS
The flashlamp line of products was ILC's founding product line. The Company makes pulsed and direct current arc lamps that are designed to satisfy a wide variety of laser and industrial applications requiring rigorous, high-performance standards. The primary source of sales, of which approximately 80% are for the replacement market, derives from industrial uses such as materials aging (solar simulation), and laser cutting, drilling, scribing and marking. Ancillary sales are generated by the medical field where lasers are utilized in cataract surgery and other exacting procedures. Production is highly labor-intensive and requires a lengthy training period to achieve a quality product. The laser market, while somewhat predictable and a steady source of revenue for the Company, is not expected to grow dramatically. ILC anticipates that the market for flashlamps in low-energy laser pumping applications will erode as alternative technologies such as laser diode pumps become increasingly cost-effective. However, in high-powered laser applications, flashlamps remain more efficient at less than 50% of the total life cycle cost of laser diodes. Therefore, ILC continues to investigate high growth arc lamp markets outside of the laser industry. Some of these include UV sterilization and curing, machine vision and spectrofluoroscopy.
In August 1991, ILC purchased Q-Arc Ltd., an arc lamp manufacturing company based in Cambridge, England. In the third quarter of fiscal 1994, ILC invested $2.7 million to expand Q-Arc's manufacturing capacity and using the new facility as a base, ILC has begun to broaden its sales effort for all product lines in key sales locations throughout Europe.
PRODUCTS - CERMAX(R) AND EQUIPMENT
The Company provides short arc xenon lamps that are optically pre-aligned, encased in a very safe ceramic body bonded to a metallized sapphire window, and are capable of transmitting the full spectrum from infrared to ultra-violet wavelengths. In addition, the Company also manufactures fully- encased and open frame power supplies, lamp holders and other accessories to support the Cermax(R) product line. Products also include complete fiber-optic lightsources that are private labelled for manufacturers of medical equipment. Currently, the primary market is in fiber optic illumination for medical procedures such as endoscopy.
PRODUCTS - CERMAX(R) AND EQUIPMENT (CONTINUED)
The market for Cermax(R) lightsources and related equipment used in endoscopy is composed of two segments - a high-intensity or critical segment and a low-intensity or non-critical segment. Critical endoscopy applications require high-intensity Cermax(R) lightsources with specialized power supplies due to the small size of the fiberoptic lightguide. Furthermore, as these applications often use video displays, high-intensity lightsources are required for good color rendition. The low-intensity market is dominated by manufacturers of halogen lightsources. Ancillary industrial uses for Cermax(R) lightsources include illuminating areas that are difficult to inspect such as nuclear reactors or jet engines. Emerging uses include lamps for analytical instruments and video projection. The Company has also targeted new non-medical lightsource markets which include spot UV curing lightsources and Flash-Cermax(R) machine vision systems.
For several years, ILC has conducted research and development activities focused on utilizing Cermax(R), with its brightness characteristics, as a light source for the projection of computer and television video images. Using the Cermax(R) light source and a new display technology which is based on Texas Instruments' Digital Micromirror Device ("DMD"), Rank Brimar Limited, a division of The Rank Organization Plc, demonstrated a bright, large screen, digital video projector which promises exceptional image quality.
The video projection market, for both computer and television applications, is expected to expand as new digital projection technology enables bright, large-screen display of video in a fully lit setting with exceptional image quality. Companies such as Texas Instruments and Rank Brimar have developed this technology for applications in leisure, entertainment and business. Digital projectors are expected to gain acceptance in entertainment venues, corporate environments, conference centers, concerts, advertising and promotional events, training and education and data display.
The factors that may adversely affect the Company's Cermax(R) business include the expected entry of competitors into the market. The Company's primary patent on the Cermax(R) lightsource expired in 1991 and the Company expects competition from established and emerging companies. Increased competition could result in price reductions, which in turn could generate lower net sales on stable unit volume. Increased competition could also result in fewer customer orders, reduced gross margins and loss of market share.
PRODUCTS - SHORT ARC LAMPS MERCURY XENON SHORT ARC LAMPS ("STEPPER LAMPS")
In fiscal 1995, the Company began commercial shipment of a new product, the mercury xenon short arc lamp ("stepper lamp"), which is used to expose patterns during the fabrication of semiconductor wafers. ILC is currently shipping a complete line of 1,000 watt stepper lamps, expects to begin shipping a 2,000 watt stepper lamp by the end of the first quarter of fiscal 1996 and plans to complete the full family of stepper lamps with power ratings from 1,000 to 2,500 watts. Each lamp, fully utilized, lasts for approximately 1-2 months. Accordingly, the Company expects that the product will generate a high repeat business.
The market for stepper lamps is currently dominated by a Japanese competitor of the Company. ILC has invested heavily in ensuring the quality of its stepper lamps since end users perceive substantial risk in switching suppliers. In addition, ILC's stepper lamp does not require the end user to modify any of its maintenance procedures. The Company has worked over the last three years with major U.S. end users of stepper equipment, including IBM, Intel, Texas Instruments, Motorola and Hewlett-Packard to ensure that ILC's stepper lamps become qualified at each of its customers' plants. ILC's 1,000 watt stepper lamp has also recently been qualified by Sony and Hitachi in Japan.
PRODUCTS - SHORT ARC LAMPS (CONTINUED) MERCURY XENON SHORT ARC LAMPS ("STEPPER LAMPS")
The Company's stepper lamps are engineered to be of equivalent quality and performance and completely interchangeable with lamps provided by other qualified suppliers. ILC has established relationships with sales representatives in Japan, Taiwan and Korea and plans to sell stepper lamps through distributors to reach a broader manufacturing market in Asia. To accommodate an increased volume of stepper lamps, ILC purchased a 20,000 square foot office and manufacturing facility in nearby Santa Clara, California in October 1994. The failure of the Company's stepper lamp to achieve market acceptance would have a material adverse effect on the Company's results of operations.
MERCURY CAPILLARY LAMPS
Mercury capillary lamps are manufactured using technology and processes that are similar to those developed for stepper lamps. The applications for capillary lamps range from the photolithography of grid patterns on color TV screens to printed circuit boards for computers. The total market for capillary lamps is about $20 million with about 15% annual growth rate.
PRODUCTS - ADVANCED LIGHTING
The Company develops metal halide technologies for a broad range of commercial and military applications. Advanced Lighting products include:
o DTI-The Company began new product development activities in fiscal 1994 to commercialize its aerospace and military metal halide technology. The Company has developed DTI, a series of integral low-power metal halide lamps (less than 500 watts) for commercial projection, stage and medical applications.
o DAYMAX(R) LAMPS-Daymax(R) lamps simulate stable daylight conditions. Originally developed for use in the space program, these products are now widely used throughout the entertainment business. Applications include: indoor and outdoor lighting for motion picture and television productions, high speed and special effects lighting, concert, disco and stadium lighting, theatrical lighting and lighting for projection systems. Daymax(R) lamps are also used for solar simulation in certain manufacturing processes.
o AEROSPACE PRODUCTS-ILC offers standard, modified, and customer systems covering the visible, infrared, and ultraviolet spectrum to meet each space lighting requirement. The Company's lighting systems are key elements of NASA's Space Transportation System. These systems are installed in the Space Shuttle interior and exterior, on the Manned Maneuvering Unit, on Spacelab and in several experiments carried aboard the shuttle orbiters. Other ILC systems are being designed for use on International Space Station Alpha, in future shuttle experiments and payload packages and space robotic vehicles. ILC is the only domestic manufacturer of space lighting qualified to serve NASA and other government agencies in Japan and Europe.
ILC aerospace lighting systems feature efficiency, reliability, ruggedness, light weight and full space qualification. New systems aimed to meet unique requirements can often be developed from ILC's large selection of space-qualified designs and components, substantially reducing development costs and lead times.
o MILITARY PRODUCTS-These products include infrared lamps used by the military on tanks and aircraft to deflect offensive heat seeking missiles.
PRODUCTS - CONVERTER POWER
ILC acquired Converter Power, Inc. (CPI) in January 1993. CPI is a leading producer of high efficiency, small form factor lamp power sources built to fit compactly into a variety of systems. The Company designs and manufactures a full family of UL and TUV-approved power supplies which can be incorporated into original equipment manufacturer (OEM) equipment. In addition, CPI maintains a business relationship with a particular OEM to design custom power supplies for equipment which services the ion implant sector of the semiconductor manufacturing industry as well as several medical markets.
CPI also provides power supplies which have been specifically engineered for ILC's Cermax(R) and metal halide lamps. This effort has enabled CPI to design power sources which will eventually be sold into the video projection market.
PRODUCTS - PRECISION LAMP
Precision Lamp, Inc. (PLI), purchased in June 1992, distributes over 1,500 types of miniature to microminiature industrial incandescent lamps, and manufactures the world's only surface-mount lamp small enough to be automatically inserted onto a printed circuit board. These lamps can be used in pagers, watches, camera lenses and many other customized miniature lighting circumstances. Production of the surface-mount lamp and backlight panel are semi-automated.
The Company has invested in a liquid crystal display (LCD) backlight panel incorporating the technology of the surface-mount lamp. It is an innovative product in that it distributes light uniformly across a panel whereas direct backlighting or light emitting diodes can result in burn spots or uneven scattering of light. Furthermore, management believes the newly introduced backlight panel is an easier and less expensive component to use than electro-luminescent panels which require drive circuitry. This panel is the first backlight available for small displays. The LCD backlight panel is used in pagers, phones, two-way radios, games, toys, calculators and cameras. ILC received its first order at the end of fiscal 1993 for the backlight panel from an OEM making TV remote controls. Due to the wide range of consumer-driven applications, this product should enable ILC to broaden its customer base. Currently, Precision Lamp is working with major LCD fabricators in Japan, Korea, Taiwan, Singapore and Europe, all of whom are extremely interested in utilizing this component in their products. The failure of the backlight panel to achieve market acceptance would have a material adverse effect on the Company's results of operations.
MARKETING AND SALES
ILC sells its products through a direct sales force to OEMs and sells to end users through sales representatives and distributors. In situations where the Company is entering an existing market, such as the stepper lamp market, ILC works directly with end users in qualifying the lamps utilizing indirect distribution channels. In addition, ILC maintains a team of ten people to provide sales and customer service support to its customer base and network of foreign and domestic distributors.
A European sales office located at the facilities of Q-Arc in Cambridge, England, sells and markets the complete line of lamp and equipment products and provides local support for European customers. With the formation of a joint venture in Japan, ILC has broadened its sales reach to Asia and established a local presence for its Asian customers. Sales activities of the Company' subsidiaries, Q-Arc, CPI and PLI, operate independently with overall coordination handled by ILC corporate in Sunnyvale.
MARKETING AND SALES (CONTINUED)
For fiscal 1995, approximately 34.8% of the Company's net sales represented international sales, primarily in the Pacific Rim and Europe. Information regarding the Company's export sales and major customers is incorporated herein by reference to Note 3 of Notes to Consolidated Financial Statements.
BACKLOG
As of September 30, 1995, ILC's backlog of unfilled orders was approximately $33,767,000 as compared to approximately $27,730,000 at October 1, 1994. The Company includes in its backlog only orders which have been released by the customer for shipment within the next 12 months. Due to the possibility of customer changes in delivery schedules or cancellations of orders, backlog as of any particular date may not be representative of actual sales for any succeeding period.
MANUFACTURING
ILC's lamp groups have built substantial expertise in the fields of sealing technology (ceramic-to- metal, quartz-to-metal, vacuum sealing), materials research, plasma physics, electrical engineering, optoelectronics, and electrode technology. With PLI, ILC obtained unique semi-automated manufacturing capabilities required for high-volume, low-cost manufacturing. With CPI, ILC obtained the essential power supply expertise necessary for providing OEMs with integrated solutions. The manufacturing of most of the Company's lamp and power supply products is labor and capital intensive, and accordingly, the labor force is highly skilled and experienced with specialty equipment. 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 totalling 97,000 square feet. These adjoining buildings include lamp development laboratories, separate manufacturing facilities for xenon and krypton arc lamps, Cermax(R) lamps, Daymax(R) metal halide lamps, mercury short arc ("stepper") lamps, mercury capillary lamps, Cermax(R) equipment and Aerospace products. The Company also purchased, in October 1994, a facility in Santa Clara, California totalling approximately 20,000 square feet to accommodate stepper lamp manufacturing.
The need for more production capacity for the subsidiaries of ILC prompted expansion of existing manufacturing facilities. Q-Arc 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 of the 36,000 square feet and is seeking a tenant to occupy the balance of the space. The 10,000 square foot facility which Q-Arc previously occupied was sublet to a third party. Converter Power, in late fiscal 1995, signed a lease for a 32,000 square foot facility to satisfy the growing production requirements of laser power supplies. CPI had previously occupied a 15,000 square foot facility and is currently seeking a tenant to sublet the property which has one year left on the lease. Precision Lamp occupies a 24,000 square foot facility in Cotati, California for the automated manufacture of surface mounted miniature incandescent lamps and LCD backlight panels. Precision Lamp moved into this facility in fiscal 1993.
PLI received ISO9001 certification in fiscal 1994 and Q-Arc received ISO9002 certification in fiscal 1995. ILC Sunnyvale has been recommended for ISO9001 certification and management excepts CPI to be certified by late 1996. ISO9001 certification ensures customers that ILC has a quality system that will result in continuous product quality improvement. It is a recognition of a commitment to quality throughout all sections of the organization.
PATENTS AND TRADEMARKS
The Company holds approximately 42 patents related to the key features of several of its products and several applications are pending. While these patents tend to enhance the Company's competitive position, management believes that the Company's success depends primarily upon its proprietary technological, engineering, production and marketing skills and the high quality of its products. The names of two of the Company's products, Cermax(R) and Daymax(R) are registered as trademarks in the United States Patent and Trademark Office and in many other countries in which the Company's products are sold.
The Company's patents expire at various dates between 1996 and 2012. There can be no assurance that any patents held by the Company will not be challenged and invalidated, that patents will issue from any of the Company's pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in all countries where the Company's products can be sold to provide meaningful protection or any commercial advantage to the Company. Competitors of the Company also may be able to design around the Company's patents.
COMPETITION
ILC competes on the basis of product performance, applications engineering, customer service, reputation and price. The Company competes in many markets in which technology develops and improves rapidly, stimulating ILC to enhance the capability of its products and technologies. Competitors consist of both large and small companies located in the United States, Japan and Europe. They include EG&G Inc., Osram, Philips, Ushio, ORC Japan, Koto, Wolfram and GE. In many market sequents, the competition has established the bench mark for product acceptance at a very high level, causing ILC to continuously improve all phases of its processes for customer satisfaction. The Company believes that by exploiting segmented market areas in which ILC has technological, manufacturing and marketing strengths, ILC can compete effectively. At the same time, by focusing its product development and acquisition activities in these areas, the Company can defend its strengths and maintain its leadership in selected markets.
ENGINEERING AND RESEARCH
ILC's engineering, research, and development efforts consist of three main activities. The first area of activity is extensive application engineering in response to customer requirements. These activities result in customer specific products and modifications to existing products to satisfy the needs of the customers. The second area is that of joint engineering and development work made in connection with customer production contracts. The third area includes those projects funded by the Company to develop new products and technologies. In 1995, the Company spent $4,497,000 for Company funded research and development efforts. This is compared to $3,998,000 and $2,767,000 spent in fiscal years 1994 and 1993, respectively. The Company's engineering and research personnel are engineers and scientists, all of whom have technical degrees.
In fiscal 1995, a Corporate Technology Business Unit was formed to provide ILC Sunnyvale with a focused research capability. This core competency will be directed and managed to service generic challenges. This newly formed group will also act as a focus of business opportunities that do not naturally fall within the strategic plans of an existing product line. Initially, this group will direct its efforts toward answering some basic questions regarding electrodes, envelopes and material related processes.
EMPLOYEES
As of September 30, 1995, the Company had 584 full-time employees, comprised of 53 in research and engineering, 21 in marketing and sales, 466 in manufacturing and 44 in general and administrative positions. ILC believes that its future success depends upon its continued ability to recruit and maintain highly skilled employees in all disciplines. Although competition for qualified personnel is strong, ILC has been successful in attracting and retaining skilled employees. None of the Company's employees is represented by a labor union. The Company believes that its relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns and leases an aggregate of approximately 153,000 and 56,000 square feet, respectively, of office and manufacturing space in six separate buildings in Sunnyvale, Santa Clara and Cotati, California; Beverly, Massachusetts; and Cambridge, England. In Sunnyvale, the Company owns 97,000 square feet in two adjacent buildings. These buildings were constructed by the Company in 1977 and 1979, sold in 1982 and leased back from the new owners, and re-purchased from the landlord in August 1993. The Company leases to one tenant approximately 5,000 square feet of its space in Sunnyvale under a lease which expires in March 1996. In early October 1994, the Company purchased 20,000 square feet of office and manufacturing space in Santa Clara, California. In June 1994, the Company purchased 36,000 square feet of office and manufacturing space in Cambridge, England. Q-Arc currently occupies approximately 25,000 square feet and is currently seeking a tenant to lease the balance of the space. Q-Arc previously leased a 10,000 square foot facility, which has been sublet to a third party. Precision Lamp moved into a new facility in July 1993. The lease for the 24,000 square feet of office and manufacturing space, located in Cotati, California, expires in 2003. Finally, Converter Power, in late fiscal 1995, entered into a lease to occupy approximately 32,000 square feet of office and manufacturing space in Beverly, Massachusetts. This lease expires in September 2000. Converter Power will begin to move into the new facility in the first quarter of fiscal 1996. CPI previously occupied a 15,000 square foot facility in Ipswich, Massachusetts, under a lease that expires in December 1996. The Company is currently seeking a tenant to sublet the property. For a discussion of the Company's lease commitments, see Note 8 of the Notes to Consolidated Financial Statements appearing elsewhere herein.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
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 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ILC's common stock is traded in the Nasdaq National Market (symbol ILCT). The high and low closing sales prices for the common stock on the Nasdaq National Market, are set forth below for the quarters as indicated:
FISCAL 1995 HIGH LOW
1st Quarter 10 3/8 7 1/2 2nd Quarter 10 3/4 8 3rd Quarter 11 1/8 8 3/4 4th Quarter 11 1/4 9
FISCAL 1994 HIGH LOW
1st Quarter 11 3/4 10 2nd Quarter 11 1/2 8 1/2 3rd Quarter 9 6 5/8 4th Quarter 9 5/8 7 1/4
There were approximately 2,000 institutional and individual stockholders as of December 18, 1995. The closing sales price of the common stock on December 18, 1995 as reported by Nasdaq was $9.38. The Company intends to retain earnings for use in its business and does not expect to pay cash dividends in the foreseeable future. The Company's credit agreement with Union Bank provides that the Company shall not declare or pay any dividend or other distribution on its Common Stock (other than a stock dividend) or purchase or redeem any Common Stock, without the bank's prior written consent.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
During fiscal 1995, 1994 and 1993, the Company derived approximately 34%, 44% and 45%, respectively, of its net sales from the medical market. During fiscal 1995, 1994 and 1993, the Company's sales in the industrial market accounted for 40%, 44% and 38%, respectively, of net sales. In each of the fiscal years 1995, 1994 and 1993, the Company's sales in the aerospace market accounted for 7% of net sales. Products sold in the medical market are incorporated into products sold into the health-care and health-care related industries. These industries have recently been subject to significant fluctuations in demand which in turn have affected the demand for components used in these products. The Company expects sales to the medical market to continue to decrease as a percentage of net sales for the foreseeable future. Aerospace sales have remained relatively constant over the last two fiscal years. Due to the continuing slowdown in military and defense spending, the Company does not expect aerospace sales to grow significantly from fiscal 1995 and 1994 levels. To compensate for this slowdown, the Company began new product development activities in fiscal 1995 and 1994 for commercial applications for metal halide lamps used for projection and information display.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales for fiscal 1995 were $58,429,000, an increase of 12.3% over fiscal 1994 net sales of $52,022,000. The $6,407,000 increase was primarily attributable to a $4 million sales increase at Converter Power and a $1 million
FISCAL 1995 COMPARED TO FISCAL 1994 (CONTINUED)
sales increase at both Precision Lamp and Q-Arc. Although total net sales at ILC Technology remained unchanged between the two fiscal years, Cermax and related equipment sales decreased approximately $2.4 million, due to a softness in the medical market as discussed above. Flash and Quartz lamp sales increased $1 million and Advanced Lighting sales increased $1.4 million. In the second quarter of fiscal 1994, Precision Lamp experienced a significant shortfall in orders from a major customer. Due to this slowdown, sales to this customer are expected to be significantly lower than previously anticipated. (See Note 11 of Notes to Consolidated Financial Statements). During fiscal 1995, sales to this major customer were slightly above the fiscal 1994 sales level. The $1 million Precision Lamp revenue increase discussed above was primarily the result of new product sales.
Cost of sales as a percentage of net sales was 67.1% for fiscal 1995 compared to 67.8% for fiscal 1994. The fiscal 1994 percentage was negatively impacted due to the write off of approximately $500,000 of excess Precision Lamp inventory relating to the slowdown in the release of shippable product from a major customer as discussed above. The ratio of the inventory reserve to year end inventory in fiscal years 1995, 1994 and 1993 was 18.0%, 20.9% and 17.5%, respectively. The fiscal year 1994 ratio excludes the above mentioned $500,000 reserve addition.
Research and development expenses, 7.7% of net sales in both fiscal 1995 and 1994, increased $499,000 between the two fiscal years. The majority of the increase was concentrated in the Quartz stepper lamp product.
Marketing expenses, 5.1% of net sales in fiscal 1995 compared to 4.4% of net sales in fiscal 1994, increased $705,000. The increase between the two fiscal years was primarily due to the addition of personnel, more travel and trade show attendance and additional commission expense on an increased sales volume.
As a percentage of sales, general and administrative expenses were 8.7% in fiscal 1995 and 10.0% in fiscal 1994. The $139,000 decrease was due to the accrual in the second quarter of fiscal 1994 for early exit incentives for various long time ILC employees ($500,000) and the write off of a note receivable, doubtful of collection ($250,000). This decrease was partially offset by expenses incurred by Q-Arc in its move to a larger manufacturing facility and by personnel additions and other expenses at Converter Power, totalling approximately $600,000, in fiscal 1995.
Amortization of intangibles of $290,000 in fiscal 1995 represents the amortization of covenants-not-to-compete arising from the acquisitions of Precision Lamp in 1992 and Q-Arc in 1991. The amortization of intangibles of $3,765,000 in fiscal 1994 includes a $3,400,000 write down of intangibles generated from the acquisition of Precision Lamp. As discussed below, Precision Lamp experienced a significant shortfall in orders from a major customer in the second quarter of fiscal 1994. In assessing the recoverability of the unamortized goodwill and covenant-not-to-compete generated from the acquisition, management determined that an impairment occurred and recorded a $3.4 million charge.
Interest income was $313,000 in fiscal 1995, which amount included approximately $235,000 of interest income from an income tax refund in the third quarter of fiscal 1995. Interest income in fiscal 1994 was $200,000. Interest expense, $696,000 in fiscal 1995 as compared to $339,000 in fiscal 1994, increased $357,000 between the two fiscal years. The increase was due to additional borrowings on the Company's line of credit and equipment purchases.
FISCAL 1995 COMPARED TO FISCAL 1994 (CONTINUED)
The Company reported income from operations before provision for income taxes of $5,978,000 in fiscal 1995 compared to $1,343,000 in fiscal 1994. The fiscal 1995 provision for income taxes, exclusive of an income tax refund of $238,000 in the third quarter of fiscal 1995, was 28% of pretax income before provision for income taxes. This compares with a fiscal 1994 provision for income taxes of approximately 31% of pretax income before provision for income taxes, which provision is exclusive of the effect related to the non-deductible portion of the write down of intangibles discussed above.
The Company believes that inflation and changing prices had no significant impact on sales or costs during fiscal 1995 and 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales remained relatively constant at $52,022,000 and $51,997,000 in fiscal 1994 and 1993, respectively. Although the total net sales were unchanged, Cermax(R) and related equipment sales decreased approximately $2 million, Flash and Quartz lamp sales increased approximately $1 million and Converter Power sales increased approximately $3 million between the two fiscal years. Additionally, in the second quarter of fiscal 1994, Precision Lamp experienced a significant shortfall in orders from a major customer. This slowdown resulted in lower sales of approximately $2 million in fiscal 1994 as compared to fiscal 1993. Sales to this customer are now expected to be significantly lower than previously anticipated. (See Note 11 of Notes to Consolidated Financial Statements.)
Cost of sales as a percentage of net sales was 67.8% for fiscal 1994 compared to 67.0% for fiscal 1993. The percentage increase was primarily due to the write off of approximately $500,000 related to excess Precision Lamp inventory caused by a slowdown in the release of shippable product from a major customer discussed above. The ratio of the inventory reserve to year end inventory in fiscal 1994, 1993 and 1992 was 20.9%, 17.5% and 22.8%, respectively. The fiscal 1994 ratio excludes the above mentioned $500,000 reserve addition.
Spending in the area of research and development, 7.7% of net sales in fiscal 1994, compared to 5.3% of net sales in fiscal 1993, increased $1,231,000 between the two fiscal years. The increase occurred in Cermax(R) for the development of lamps for video projection, in Quartz lamps for the development of the stepper lamp and in Advanced Lighting for the design and development of lamps used for entertainment applications. Also contributing to the increase was spending at Precision Lamp for the development of panels to light the entire rear of a liquid crystal display and spending at Converter Power for the design of new power supplies.
Marketing expenses were $2,271,000, or 4.4% of net sales in fiscal 1994 compared to $2,642,000, or 5.1% of net sales in fiscal 1993. The $371,000 decrease between the two fiscal years was due primarily to less travel and trade show attendance coupled with less commission expense associated with lower sales at Precision Lamp caused by the slowdown in the release of shippable product from a major Precision Lamp customer.
General and administrative expenses, as a percentage of net sales, were 10.0% in fiscal 1994 compared to 7.6% in fiscal 1993. The $1,282,000 increase between the two periods was due to a combination of the accrual for early exit incentives for various long-time ILC employees, the write off of a note receivable, doubtful of collection, which arose from the United Detector Technology divestiture in 1990 and increases to general and administrative expenses at Converter Power and Q- Arc. This increase was partially offset by the suspension of contributions to the ILC profit sharing plan for the first six months of fiscal 1994.
FISCAL 1994 COMPARED TO FISCAL 1993 (CONTINUED)
Amortization of intangibles of $3,765,000 in fiscal 1994 includes a $3,400,000 write down of intangibles generated from the acquisition of Precision Lamp in June 1992. As discussed above, Precision Lamp experienced a significant shortfall in orders from a major customer in the second quarter of fiscal 1994. In assessing the recoverability of the unamortized goodwill and covenant-not-to- compete generated from the acquisition, management determined that an impairment occurred in that quarter. Total sales and earnings of Precision Lamp for the period March 1994 to March 2002 as projected at the time of the intangible impairment calculation were approximately 50% and 70% lower than sales and earnings estimates, respectively, at the time of the Precision Lamp acquisition. These projections represent management's best estimate for future results for that subsidiary. Precision Lamp is actively seeking to solicit other customers and alter its products to meet their specifications for the surface mounted miniature incandescent lamp. However, because of the major customer's dominance of its market, and because other manufacturers are numerous and small volume, the Company believes that Precision Lamp will be unable to secure new customers to make up for the significant shortfall in orders. Accordingly, a $3.4 million charge was recorded to write down the intangibles to net realizable value. The writedown was determined based on the currently projected un-discounted cash flows of Precision Lamp from March 1994 to March 2002, which projected aggregate cash flows of approximately $900,000 over that period which was based on projected net income which averaged 9% higher than the net income projection for fiscal 1994 (with no loss years included in the projection), compared with the carrying value of the Company's investment in Precision Lamp, including goodwill, at the date of the writedown. At October 1, 1994, there were net assets associated with the Precision Lamp acquisition of approximately $2,270,000, or approximately 5% of total assets, for which recoverability is primarily dependent upon sales to the major customer discussed above. The amortization of intangibles of $757,000 in fiscal 1993 represents the amortization of covenants-not-to- compete plus the amortization of goodwill both arising from the acquisitions of Precision Lamp in 1992 and Q-Arc in 1991.
Although interest income remained constant between fiscal 1994 and fiscal 1993, interest expense increased by approximately $261,000 during the same period due to the term loan obtained to purchase the Company's two operating facilities in Sunnyvale, California in August 1993 and the manufacturing facility in Cambridge, England in June 1994.
The Company reported income before provision for income taxes of $1,343,000 in fiscal 1994 compared to $7,111,000 in fiscal 1993. The provision for income taxes, exclusive of the effect related to the non-deductible portion of the write down of intangibles discussed above, was approximately 31.0% of pretax income before provision for income taxes in fiscal 1994 compared to 33.1% in fiscal 1993.
The Company believes that inflation and changing prices had no significant impact on sales or costs during fiscal 1994 and 1993.
LIQUIDITY AND FINANCIAL POSITION
Cash and cash equivalents decreased to $1,509,000 in fiscal 1995 from $2,462,000 in fiscal 1994. Cash provided from operations amounted to $3,449,000 in fiscal 1995, a decrease of $3,226,000 from $6,675,000 in fiscal 1994. This decrease occurred primarily due to an increase in accounts receivable of $2,767,000 and an increase in inventories of $2,304,000. During fiscal 1995, the Company used cash of $1,745,000 to purchase land and a new manufacturing facility in Santa Clara, California and made capital equipment acquisitions of $3,419,000. In fiscal 1995, the Company increased its net borrowings under its line of credit by $2,000,000, increased its net borrowings under
LIQUIDITY AND FINANCIAL POSITION (CONTINUED)
an equipment line by $670,000 and paid down a term loan by $1,578,000. In fiscal 1994, the Company used cash of $2,701,000 to purchase a new office and manufacturing facility in Cambridge, England, deposited $1,300,000 for the purchase of land and a manufacturing facility in Santa Clara, California and paid $312,000 for land in Cotati, California. Capital equipment acquisitions in fiscal 1994 amounted to $2,634,000. In fiscal 1994, the Company increased its net borrowings under a term loan for real estate acquisitions by $800,000 and increased the net borrowings under an equipment line by $591,000. In addition, in fiscal 1994, the Company also repurchased, on the open market, 204,000 shares of its common stock for $1,556,000. In fiscal 1993, the Company used cash of $7,600,000 to purchase its manufacturing facilities and corporate offices in Sunnyvale, California. Also in fiscal 1993, the Company used cash of $1,467,000 for capital equipment acquisitions and borrowed $5,000,000 under a term loan to finance the purchase of the above mentioned facilities in Sunnyvale, California.
The Company has working capital of $11,066,000 and a current ratio of 1.94 to 1.0 at September 30, 1995. This compares with working capital of $9,428,000 and a current ratio of 1.79 to 1.0 at October 1, 1994. As of September 30, 1995, the Company has $2,000,000 unused on a $4,000,000 bank line of credit with interest at 2% above the LIBOR rate (London Interbank Offer Rate) (7.8% at September 30, 1995). The Company also has available approximately $690,000 remaining on a $1,500,000 equipment credit facility at the above interest rate. This credit facility can be increased to accomodate the capital equipment needs of the Company. In fiscal 1996, ILC anticipates making capital expenditures of approximately $3 million. These financial resources, together with anticipated additional resources to be provided from operations, are expected to be adequate to meet the Company's working capital needs, capital equipment requirements and debt service obligations at least through fiscal 1996.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company is not required to adopt the provisions of this statement until its fiscal year 1996. The provisions of this statement must be made on a prospective basis. The Company plans to adopt the disclosure provisions of this statement in 1996, and theefore the effect on its financial position and results of operations, upon adoption, will not be significant.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of." The Company will adopt the provision of this statement in fiscal 1996 and believes the effect on its financial position and result of operations, upon adoption, will not be significant.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS PAGE
Consolidated Balance Sheets - September 30, 1995 and October 1, 1994 15 - 16
Consolidated Statements of Operations for the Three Fiscal Years Ended September 30, 1995 17
Consolidated Statements of Stockholders' Equity for the Three Fiscal Years Ended September 30, 1995 18
Consolidated Statements of Cash Flows for the Three Fiscal Years Ended September 30, 1995 19 - 20
Notes to Consolidated Financial Statements 21 - 30
Form 10-K Schedule 31
Report of Independent Public Accountants 32
ILC TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1995
1. THE COMPANY
ILC Technology, Inc. (the "Company") was incorporated on September 15, 1967. The Company designs, develops and manufactures high intensity lamps and lighting products for medical, industrial, communication, aerospace, scientific, entertainment and military industries. The Company develops and manufactures the majority of its products at its headquarter facilities in California and the remainder at its subsidiary facilities in Massachusetts, the United Kingdom and another location in California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the accounts of ILC Technology, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The Company's fiscal year end is the Saturday closest to September 30.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less at the time of issue to be cash equivalents.
MARKETABLE SECURITIES
Effective October 3, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting For Certain Investments in Debt and Equity Securities". The adoption of this statement did not materially impact the Company's results from operations or financial position. Marketable securities at October 1, 1994 were being accounted for as trading securities and were therefore valued at fair market value in the accompanying balance sheet. The change in the net unrealized holding loss, which was included in fiscal 1994 income, was approximately $80,000 during fiscal 1994. During fiscal 1995, all marketable securities were liquidated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 30, 1995 and October 1, 1994, net of inventory reserves of $2,042,813 and $2,533,233, respectively, consisted of:
1995 1994 ---- ----
Raw materials .................... $4,846,508 $ 3,393,249 Work-in-process................... 2,609,006 2,556,006 Finished goods ................... 1,833,693 1,242,942 ---------- ----------- Total inventories................. $9,289,207 $ 7,192,197 ========== ===========
DEVELOPMENTAL AND MANUFACTURING CONTRACTS
The Company contracts with the U.S. Government and other customers for the development and manufacturing of various products under both cost-plus-fixed-fee and fixed-price contracts. Revenues are recognized under these contracts using the percentage of completion method, whereby revenues are reported in the proportion that costs incurred bear to the total estimated costs for each contract. Periodic reviews of estimated total costs during the performance of such contracts may result in revisions of contract estimates in subsequent periods. Any loss contracts are reserved at the time such losses are determined. Revenues from these contracts were less than 10% of net revenues during 1995, 1994 and 1993.
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 PER SHARE
Net income per share is computed based on the weighted average number of common shares and common equivalent shares (using the treasury stock method and when such equivalents have a dilutive effect) outstanding during the period. Fully diluted net income per share is not significantly different from net income per share as reported.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company is not required to adopt the provisions of this statement until its fiscal year 1996. The provisions of this statement must be made on a prospective basis. The Company plans to adopt the disclosure provisions of this statement in 1996, and theefore the effect on its financial position and results of operations, upon adoption, will not be significant.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
The Company has certain intangible assets as a result of its acquisition of two subsidiaries (see Note 10). Subsequent to these acquisitions, the Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful lives of these intangibles may warrant revision or that the remaining balances of intangibles may not be recoverable. When factors indicate that intangibles should be evaluated for possible impairment, the Company uses an estimate of the related subsidiary's undiscounted cash flow over the remaining life of the intangibles in measuring whether the intangibles are recoverable.
Covenants-not-to-compete are amortized over the period of the covenant.
INVESTMENT IN JOINT VENTURE
In February 1995, the Company invested $450,000 in a lamp manufacturer located in Japan. The Company's investment represents a 49% ownership interest in the equity of the investee, consequently the Company accounts for its investment using the equity method of accounting. The Company's investment is included in Other Assets in the accompanying consolidated balance sheets and its proportionate interest in the income of the investee of $89,000 in fiscal 1995 is included in the accompanying consolidated statements of operations.
FORWARD EXCHANGE CONTRACTS
The Company enters into forward exchange contracts to reduce its exposure to currency exchange risk for purchases from one Japanese vendor. The effect of this practice is to minimize the impact of foreign exchange rate movements on the Company's operating results. The Company's hedging activities do not subject the Company to exchange rate risk, as gains and losses on these contracts offset losses and gains on the liabilities being hedged.
At September 30, 1995, the Company had forward exchange contracts maturing from October 1995 to December 1995 to purchase 22,200,000 Japanese yen ($224,000).
3. REVENUES
The Company recognizes revenue on all product sales upon shipment of the product. The Company accrues for estimated warranty obligations at the time of the sale of the related product based upon its past history of claims experience and costs to discharge its obligations.
The Company operates in a single industry segment, the designing, developing, manufacturing and marketing of high performance light source products. Revenues are geographically summarized as follows (in thousands):
1995 1994 1993 ----------- ------------ ------------
United States ................... $ 38,080 $ 31,627 $ 29,994 Europe .......................... 6,062 4,435 5,188 Asia ............................ 14,239 15,794 16,447 Other international ............. 48 166 368 ----------- ------------ ------------ Total revenues ...... $ 58,429 $ 52,022 $ 51,997 =========== ============ ============
3. REVENUES (CONTINUED)
Customers comprising more than 10% of net sales are as follows:
1995 1994 1993 ----------- ------------ ------------
Customer A ............... 10.3% 17.6% 19% Customer B ............... 12.1% 12.8% 17% Customer C ............... 10.3% * *
*less than 10% of net sales
The Company provides credit in the form of trade accounts receivable to its customers. The Company does not generally require collateral to support customer receivables. The Company performs ongoing credit evaluations of its customers and maintains allowances which management believes are adequate for potential credit losses.
Approximately 34% of the Company's sales in fiscal 1995 were to customers in the health-care industry. This industry has experienced significant fluctuations in demand and the Company expects sales to the medical market to decrease as a percentage of net sales in the forseeable future. Customer C, referred to above, is in the semi-conducto industry. This industry also can be subject to significant fluctuations in demand.
4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1995 and October 1, 1994 consisted of:
Property and equipment, at cost: Machinery and equipment ................ $15,706,092 $11,856,023 Land and buildings ..................... 14,810,768 11,229,341 Furniture and fixtures ................. 670,145 463,910 Equipment under capital lease .......... 174,268 174,268 Leasehold improvements ................. 244,166 209,830 Construction-in-progress ............... 684,693 1,939,963 ----------- ----------- 32,290,132 25,873,335 Less accumulated depreciation and amortization ........................... (9,848,377) (8,185,058) ----------- -----------
Property and equipment, net ............... $22,441,755 $17,688,277 =========== ===========
5. BANK BORROWINGS
The Company has a $4 million line of credit available with a bank which expires in January 1997. Borrowings under this line are at 2% above the LIBOR rate (London Interbank Offer Rate) (7.8% at September 30, 1995) and are limited to 75% of eligible accounts receivable. Under the covenants of the loan agreement, unless written approval from the bank is obtained, the Company is restricted from entering into certain transactions and is required to maintain certain specified financial covenants and profitability. As of September 30, 1995, the Company was in compliance with all bank requirements.
The average balance outstanding (based on month-end balances) under the line of credit in 1995 was $1,550,000. The maximum borrowings were $2,450,000 at an average interest rate of 7.8% for 1995. There were no borrowings under the line of credit in fiscal 1994, nor were there any amounts outstanding as of October 1, 1994. As of September 30, 1995, $2 million was available for future borrowings under this line of credit.
5. BANK BORROWINGS (CONTINUED)
In addition, in connection with the purchase of its Sunnyvale manufacturing facilities, the Company entered into a term note with a bank for $5,000,000 in 1993, which was subsequently increased to $6,333,333 in 1994. The note matures in August, 1998. The term loan requires monthly principal payments equal to one-forty-eighth of the principal amount plus interest at 2% above the LIBOR rate (London Interbank Offer Rate) (7.8% at September 30, 1995). The term loan is a reducing revolving credit facility which allows for principal pre-payments and the flexibility for re-borrowing up to the maximum amount that would be outstanding under the term loan given normal amortization to the date of re-borrowing.
The Company also has available a $1.5 million equipment line of credit for 100% of the purchase cost of new equipment, which expires in January 1996. Borrowings under this line bear interest at 2% above the LIBOR rate (7.8% at September 30, 1995), with principal balances amortized over a 2 year period. At September 30, 1995, the Company had approximately $690,000 available for future borrowings under this line of credit.
As of September 30, 1995 and October 1, 1994, borrowings outstanding under its credit facilities consisted of:
1995 1994 ----------- -----------
Term note ............................. $ 4,222,000 $ 5,800,000 Line of credit ........................ 2,000,000 - Equipment line of credit .............. 2,011,000 1,340,869 Other capital lease ................... 120,540 152,119 ----------- ----------- 8,353,540 7,292,988
Less: current portion ................. (2,455,500) (2,196,494) ----------- -----------
Long-term debt ........................ $ 5,898,040 $ 5,096,494 =========== ===========
Aggregate maturities for long-term debt during the next five years are approximately: 1996 - $2,455,500, 1997 - $2,455,500, 1998 - $1,450,000, 1999 none and 2000 - none.
All of the above credit facilities are secured by all of the property of the Company.
6. INCOME TAXES
Effective October 3, 1993, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes", on a prospective basis. SFAS No. 109 requires an asset and liability approach to accounting for income taxes. The adoption of SFAS No. 109 did not have a material effect on the Company's consolidated financial statements.
Income before provision for income taxes consists of the following for fiscal 1995, 1994 and 1993:
1995 1994 1993 ---- ---- ----
U.S. $5,456,897 $ 971,283 $6,906,493 Foreign 521,037 371,330 204,178 ---------- ---------- ---------- $5,977,934 $1,342,613 $7,110,671 ========== ========== ==========
6. INCOME TAXES (CONTINUED)
The components of the provision for income taxes are as follows:
1995 1994 1993 ----------- ------------ ------------ Federal - Current $833,000 $2,373,000 $1,575,000 Deferred 554,000 (1,361,000) - -------- ---------- ----------
1,387,000 1,012,000 1,575,000 State - Current 199,000 493,000 777,000 Deferred 92,000 (353,000) - --------- --------- ---------
291,000 140,000 777,000 Federal refund received (238,000) - - --------- --------- --------- Total provision for income taxes $1,440,000 $1,152,000 $2,352,000 ========== ========== ==========
The major components of the deferred tax accounts as computed under SFAS No. 109, are as follows:
1995 1994 ---- ----
Inventory reserve $838,000 $754,000 Bad debt reserve 271,000 258,000 Warranty reserve 105,000 228,000 Accruals not currently deductible for tax purposes 448,000 1,078,000 Amortization of covenant-not-to-compete 278,000 538,000 Excess of tax over book depreciation (801,000) (710,000) Other 315,000 259,000 -------- ---------- $1,454,000 $2,405,000 ========== ==========
The provisions for income taxes differ from the amounts which would result by applying the applicable statutory Federal income tax rate to income before taxes as follows: 1995 1994 1993 ---- ---- ---- Computed expected provision $2,092,000 $470,000 $2,418,000 State tax 359,000 81,000 436,000 Amortization and writedown of goodwill - 812,000 90,000 FSC commission (211,000) (259,000) (254,000) General business credits (200,000) (72,000) (33,000) Refund received (238,000) - - Other (362,000) 120,000 (305,000)
-------- ------- ------- $1,440,000 $1,152,000 $2,352,000 ========== ========== ==========
7. EMPLOYEE RETIREMENT PLAN
On January 1, 1984, the Company adopted a thrift incentive savings plan (the "Plan"). The Plan is qualified under section 401(k) of the Internal Revenue Code and is available to all full-time employees with one or more years of employment with the Company. Under the terms of the Plan, participating employees must contribute at least 2% of their salary to the Plan, and the Company contributes (as a matching contribution) 100% of this amount. Employees may also contribute an additional amount up to 13% of their salary to the Plan, with no further contributions by the Company. The Company's contributions vest at a rate of 20% per year, commencing on the first anniversary of employment. Total employer matching contributions under the Plan were $212,000, $163,000, and $145,000 for the fiscal years 1995, 1994 and 1993, respectively.
8. COMMITMENTS AND CONTINGENCIES
In October 1994, Q-Arc Ltd. purchased a new office and manufacturing facility in Cambridge, England. Prior to this, Q-Arc had leased its manufacturing facility under an operating lease agreement, which lease agreement has been assumed by another company.
In August 1993, the Company purchased two buildings, which were its two principal operating facilities in Sunnyvale, California, from the landlord for $7,600,000. The Company has leased a small portion of the Sunnyvale facility under a lease which expires in 1996.
At September 30, 1995, the future minimum rental payments under all building leases for fiscal 1996 through 2000 are approximately $380,000, $423,000, $424,000, $444,000 and $444,000, respectively, and $660,000 thereafter. The amounts total $2,775,000.
For fiscal years 1995, 1994 and 1993, rental expense was approximately $277,000, $318,000 and $934,000 respectively.
9. STOCK OPTION AND PURCHASE PLANS
In 1993, the Company adopted the 1992 Stock Option Plan and reserved 200,000 shares for issuance. The 1992 Option Plan replaced the 1983 Option Plan which expired in June 1993. Although options granted under the 1983 Stock Option Plan before such expiration will remain outstanding in accordance with their terms, no further options will be granted under the 1983 Stock Option Plan after June 1993. 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. In November 1993, the Company's 1992 Stock Option Plan was amended to provide for the automatic grant of a nonstatutory stock option to purchase shares of Common Stock to each outside Director. Subsequent grants will occur annually during the Company's third fiscal quarter. During fiscal 1995, each outside Director was granted an automatic option to purchase a total of 5,000 shares of the Company's Common Stock. A summary of the option transactions is as follows:
9. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
Options Outstanding -------------------
Options Number Available of Price per for Grant Shares Share --------- ------ ---------
Balance at October 3, 1992 11,624 698,500 $2.13-11.50
1992 Option Plan new shares approved 200,000 - - Options assumed in Converter Power Acquisition - 26,027 $1.09 Granted (57,500) 57,500 $9.00-11.50 Canceled 5,500 (5,500) $8.75-11.50 Exercised - (30,500) $ 2.13 -3.75 ------- ------- ------------
Balance at October 2, 1993 159,624 746,027 $1.09-11.50
Granted (74,000) 74,000 $7.38-11.00 Canceled 18,000 (18,000) $3.75-11.50 Exercised - (82,000) $ 1.09 -8.75 ------- ------ ------------
Balance at October 1, 1994 103,624 720,027 $1.09-11.50
Granted (28,000) 28,000 $9.50 Canceled 34,000 (34,000) $8.75-11.50 Exercised - (132,250) $ 2.13 -8.75 ------ ------- ------------
Balance at September 30, 1995 109,624 581,777 $1.09 -11.50 ======= ======= ============ Options exercisable at September 30, 1995 439,715 $1.09 -11.50 ======= ============
In February 1985, the Company adopted an employee stock purchase plan. Under the plan, the Company has reserved 200,000 shares of common stock for issuance to participating employees who have met certain eligibility requirements. In 1994, the Board of Directors and shareholders approved an amendment to the employee stock purchase plan to increase the number of shares reserved for issuance from 200,000 to 300,000 shares. 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. During fiscal 1995, 1994 and 1993, a total of 37,973, 25,475 and 14,281 shares of common stock respectively, were purchased by the Company employees under the plan. As of September 30, 1995, 95,797 shares were available for future purchase.
If all options outstanding at September 30, 1995 were exercised, the total proceeds to the Company wuld be approximately $4 million (unaudited).
10. OTHER INCOME/EXPENSE
Other (income) expense consists of the following:
1995 1994 1993 ---- ---- ----
Interest income ................. $(313,351) $(199,578) $(191,941) Interest expense ................ 695,541 338,751 78,343 Rental and sublease income ...... - - (60,995) Net rental expense on sublet property ....................... - - 138,577 --------- --------- ------- $ 382,190 $ 139,173 $(36,016) ========= ========= =========
11. ACQUISITIONS
In August 1991, the Company acquired all the outstanding stock of Q-Arc Ltd. of Cambridge, England for $1,400,000 in cash and the assumption of certain liabilities. Q-Arc is a manufacturer of specialty lamps for laser and non- laser applications. This transaction was accounted for as a purchase and accordingly, all assets were revalued to their respective fair values. The acquisition price was equal to the fair value of net assets acquired. Net assets included a covenant-not-to-compete of approximately $951,000. The covenant is being amortized over an eight year period. At September 30, 1995, the unamortized balance of the Q-Arc covenant-not-to-compete is approximately $476,000.
On June 30, 1992, the Company acquired all of the outstanding stock of Precision Lamp, Inc. located in Cotati, California. Precision Lamp designs, manufactures and distributes miniature incandescent lamps for various applications. The Company paid approximately $2,000,000 in cash for all of the outstanding shares, agreed to pay off approximately $1,100,000 of bank debt and assumed all liabilities ($1,321,000) of Precision Lamp. The Company also agreed to pay at least $2,600,000 to the primary selling shareholder as consideration for a covenant-not-to-compete among the primary selling shareholder, Precision Lamp and ILC. These payments will be made in equal installments through 1997. This transaction was accounted for as a purchase and accordingly, all assets were revalued to their respective fair values. This purchase price allocation resulted in goodwill of approximately $2,650,000 which is being amortized over a ten year period. The $2,600,000 covenant- not-to-compete is being amortized over a seven year period.
In the second quarter of fiscal 1994, management determined that an impairment occurred in the recoverability of the unamortized goodwill and covenant-not-to-compete due to a significant shortfall in orders from a major Precision Lamp customer. Accordingly, a $3.4 million charge was recorded to write off the intangibles to net realizable value. The writedown was determined based on the currently projected undiscounted cash flows of Precision Lamp from March 1994 to March 2004, which projected aggregate cash flows of approximately $900,000 (unaudited) over that period and was based on projected net income which averaged 9% higher than the net income projection for fiscal 1994 (with no loss years included in the projection), compared with the carrying value of the Company's investment in Precision Lamp, including goodwill, at the date of the writedown. These projections represented management's best estimate for future results for that subsidiary. At September 30, 1995, the unamortized balance of the Precision Lamp covenant-not-to-compete is approximately $641,000.
12. RIGHTS AGREEMENT
On September 19, 1989, the Company's Board of Directors declared a dividend of one common share purchase right for each outstanding share of common stock, no par value, of the Company. The dividend was payable on October 2, 1989 to the shareholders of record on that date. Each Right entitles the registered holder to purchase from the Company one share of common stock of the Company at a price of $30.00 per common share. The rights will not be exercisable until a party either acquires beneficial ownership of 20% of the Company's common stock or makes a tender offer for at least 30% of its common stock. In the event the rights become exercisable and thereafter a person or group acquires 30% or more of the Company's stock, a 20% shareholder ("Acquiring Person") engages in any specified self-dealing transaction, or, as a result of a recapitalization or reorganization, an Acquiring Person's shareholdings are increased by more than 3%, each right will entitle the holder to purchase from the Company, for the exercise price, common stock having a market value of twice the exercise price of the right. In the event the rights become exercisable and thereafter the Company is acquired in a merger or other business combination, each right will enable the holder to purchase from the surviving corporation, for the exercise price, common stock having a market value of twice the exercise price of the right. At the Company's option, the rights are redeemable in their entirety, prior to becoming exercisable, at $.01 per right. The rights are subject to adjustment to prevent dilution and expire September 29, 1999.
13. REPURCHASE OF COMMON STOCK
In March 1994, the Board of Directors authorized the purchase of up to 1,000,000 shares of the Company's common shares outstanding through March 1995. During 1995 and 1994, the Company repurchased 10,000 and 204,000 shares of common stock for an aggregate amount of $76,750 and $1,555,500, respectively. Purchases were made on the open market.
SCHEDULE VIII
ILC TECHNOLOGY, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR FISCAL YEARS 1995, 1994 AND 1993
Balance Charged at (Credited) Addition Deductions Balance Beginning to Cost and from and at end of Of Period Expenses Acquisition Write Off Period --------- ----------- ----------- ---------- --------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended October 2, 1993 $341,355 $(98,769) $ 7,258 $ 30,716 $219,128
Year ended $219,128 $383,902 $ - $270,227 $332,803 October 1, 1994
Year ended September 30, 1995 $332,803 $103,251 $ - $ 26,104 $409,950
RESERVE FOR INVENTORY OBSOLESCENCE:
Year ended October 2, 1993 $1,990,256 $ (22,125) $ - $414,672 $1,553,459
Year ended October 1, 1994 $1,553,459 $1,772,346 $ - $792,572 $2,533,233
Year ended September 30, 1995 $2,533,233 $ 206,859 $ - $697,279 $2,042,813
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 30, 1995 and October 1, 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1995. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ILC Technology, Inc. and subsidiaries as of September 30, 1995 and October 1, 1994 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule presented on page 31 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California November 3, 1995
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Certain information required by Part III is omitted from this Report in that registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Shareholders to be held February 14, 1996, not later than 120 days after the end of the fiscal year covered by this Report, and the information included therein is incorporated herein by reference.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by this item appearing in the Company's 1995 Proxy Statement under the caption "Election of Directors-Nominees" is incorporated herein by reference.
The information regarding executive officers of the Company required by this item appearing in the Company's 1995 Proxy Statement under the caption "Election of Directors- Other Officers" is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appearing in the Company's 1995 Proxy Statement under the captions "Election of Directors-Director Compensation" and "Executive Compensation" is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appearing in the Company's 1995 Proxy Statement under the caption "Election of Directors-Nominees" is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appearing in the Company's 1995 Proxy Statement under the captions "Election of Directors-Director Compensation" and "Executive Compensation" is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The Consolidated Financial Statements, notes thereto, and Report of Independent Public Accountants thereon are included in Part II, Item 8 of this report.
Page in 2. FINANCIAL STATEMENT SCHEDULE Form 10-K
Schedule VIII Valuation and Qualifying Accounts and Reserves 31
All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or notes thereto.
3. EXHIBITS
The exhibits listed in the Index to Exhibits following the signature page are filed as part of this Report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1995. .
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 President and Chief Executive Officer
Dated: December 22, 1995
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
Chairman of the Board December , 1995 - ------------------------------- (Wirt D. Walker, III) (Director)
/S/ HENRY C. BAUMGARTNER President and Chief December 22, 1995 - ------------------------------- (Henry C. Baumgartner) Executive Officer (Principal Executive Officer and Director)
/S/ RONALD E. FREDIANELLI Chief Financial Officer December 22, 1995 - ------------------------------- Ronald E. Fredianelli) and Secretary (Principal Financial and Accounting Officer)
(Richard D. Capra) Director December , 1995
/S/ HARRISON H. AUGUR Director December 22, 1995 - ------------------------------- (Harrison H. Augur)
/S/ ARTHUR L. SCHAWLOW Director December 22, 1995 - ------------------------------- (Arthur L. Schawlow)
INDEX TO EXHIBITS
Exhibit NUMBER DESCRIPTION
3.1 (A) Restated Articles of Incorporation of ILC Technology, Inc. as filed in the Office of the California Secretary of State on March 8, 1991.
3.2 (A) Amended and restated Bylaws as of February 8, 1989.
4.1 (C) Certificate evidencing shares of Common Stock without par value, ILC Technology, Inc.
10.1 (F) ILC Technology, Inc. 1983 Employee Incentive and Nonstatutory Stock Option Plan, as amended, together with related form of Stock Option Agreement.
10.2 (B) Rights Agreement between ILC Technology, Inc. and Security Pacific National Bank dated as of September 29, 1989.
10.3 (D) Employment Agreement between ILC Technology, Inc. and Richard E. DuNah dated July 1, 1992.*
10.4 (F) ILC Technology, Inc. 1992 Stock Option Plan, as amended, and related form of Option Agreement.*
10.5 (D) Form of Officer and Director Indemnification Agreement*
10.6 Credit Agreement dated March 2, 1995, by and between Union Bank and ILC Technology, Inc.
10.7 (F) Purchase and Sale Agreement dated August 19, 1993, by and between Cambridge Investors I Limited Partnership and ILC Technology, Inc.
10.8 (F) Standard Industrial/Commercial Single-Tenant Lease between ILC Technology, Inc. (720 Portal Street, Cotati, California) and John Gary Taylor, dated December 29, 1992.
10.9 (E) Agreement and Plan of Reorganization among ILC Technology, Inc., ILC Acquisitions, Inc., Converter Power, Inc. and the shareholders of Converter Power, Inc., dated January 29, 1993.
10.10 (E) Employment Agreement between ILC Technology, Inc. and William F. O'Brien dated January 29, 1993.*
10.11 (E) Employment Agreement between ILC Technology, Inc. and Dean A. Mac Farland dated January 29, 1993.*
10.12 (G) Purchase and Sale Agreement dated June 24, 1994, by and between UCB Bank PLC and Q-Arc, Limited relating to property on the south side of Saxon Way, Bar Hill, Cambridge, England.
10.13 (G) Asset Purchase Agreement dated September 16, 1994, by and between ILC Technology, Inc. and UVP, Inc.
INDEX TO EXHIBITS (CONTINUED)
10.14 Lease Agreement between Converter Power, Inc. (150 Sohier Road, Beverly, Massachusetts) and Communications & Power Industries, Inc., dated September 15,
21.1 (G) Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
99.1 Proxy Statement for the Company's 1995 Annual Meeting of Shareholders (to be deemed filed only to the extent required by General Instructions H to Form 10-K)
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(A) Incorporated by reference from the Exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended September 28, 1991.
(B) Incorporated by reference from the Exhibits to Registrant's Current Report on Form 8-K dated September 19, 1989.
(C) Incorporated by reference from the Exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988.
(D) Incorporated by reference from the Exhibits to Registrants' Annual Report on Form 10-K for the fiscal year ended October 3, 1992.
(E) Incorporated by reference from the Exhibits to Registrants' Registration Statement on Form S-3, as amended (File No. 33-59904), effective May 19, 1993.
(F) Incorporated by reference from the Exhibits to Registrants Annual Report on Form 10-K for the fiscal year ended October 2, 1993.
(G) Incorporated by reference from the Exhibits to Registrants' Registration Statement on Form 10-K for the year ended October 1, 1994.
* Management Contract or Compenstory Plan or arrangement.