-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UFH+XsHWPHnnK/7elJxgxdHbQLydLvRh0RcrPF1bGLHDkJAcP4Af/sTwVHGqBf/N p+WYzmCPsmXGOPj48ecCug== 0000719625-96-000017.txt : 19961227 0000719625-96-000017.hdr.sgml : 19961227 ACCESSION NUMBER: 0000719625-96-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960928 FILED AS OF DATE: 19961226 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILC TECHNOLOGY INC CENTRAL INDEX KEY: 0000719625 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 941655721 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11360 FILM NUMBER: 96686208 BUSINESS ADDRESS: STREET 1: 399 JAVA DR CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087457900 MAIL ADDRESS: STREET 1: 399 JAVA DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089 10-K 1 FINANCIAL REPORTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended SEPTEMBER 28, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 0-11360 ILC TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-1655721 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 399 JAVA DRIVE, SUNNYVALE, CALIFORNIA 94089 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 745-7900 -------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on December 16, 1996, was approximately $50,929,417. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant's Common Stock on December 16, 1996 was 4,782,508. Parts of the following documents are incorporated by reference into Part III of this Annual Report and Form 10-K: (1) Proxy Statement for registrant's 1996 Annual Meeting of Shareholders. TABLE OF CONTENTS ITEM DESCRIPTION PAGE PART I 1 Business 1 - 7 2 Properties 6 - 7 3 Legal Proceedings 7 4 Submission of Matters to a Vote of Security Holders 7 PART II 5 Market for the Registrant's Common Equity and Related Stockholder Matters 8 6 Selected Financial Data 9 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 13 8 Financial Statements and Supplementary Data 14 - 32 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 33 PART III 10 Directors and Executive Officers of the Registrant 33 11 Executive Compensation 33 12 Security Ownership of Certain Beneficial Owners and Management 33 13 Certain Relationships and Related Transactions 33 PART IV 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K 34 Signatures 35 PART I ITEM 1. BUSINESS - ------- -------- GENERAL - ------- ILC Technology, Inc. ("ILC" or the "Company") designs, develops, and manufactures high intensity lamps and lighting products for the medical, industrial, communication, aerospace, scientific, entertainment and military industries. ILC Technology, Inc. was incorporated under the laws of the State of California on September 15, 1967. Its principal manufacturing and executive facilities are located at 399 Java Drive, Sunnyvale, California 94089. The Company's telephone number is (408) 745-7900. In September 1996, the Board of ILC voted to proceed with the divestiture of the Company's Precision Lamp, Inc. (PLI) subsidiary and therefore PLI is reported as discontinued operations in the accompanying consolidated financial statements. PLI is a manufacturer of miniature incandescent surface-mount lamps as well as liquid crystal display (LCD) backlight panels that incorporate the technology of the surface mount lamps. BUSINESS STRATEGY - ----------------- The Company uses a market focused business strategy. ILC targets selected high growth markets which most closely match the Company's technological expertise and manufacturing strengths. With a strong emphasis on research and development, ILC achieves and maintains a leadership position in these market segments through advanced technology, engineering design capability and attentive customer support. PRODUCTS - FLASHLAMPS - --------------------- The flashlamp line of products was ILC's founding product line. In August 1991, ILC purchased Q-Arc, Ltd., an arc lamp manufacturing company based in Cambridge, England. The Company makes pulsed and direct current arc lamps that are designed to satisfy a wide variety of laser and industrial applications requiring rigorous, high-performance standards. The primary source of sales, of which approximately 80% are for the replacement market, derives from industrial uses such as materials aging (solar simulation) and laser cutting, drilling, scribing and marking. Ancillary sales are generated by the medical field where lasers are utilized in cataract surgery and other exacting procedures. Production is highly labor-intensive and requires a lengthy training period to achieve a quality product. ILC anticipates that the market for flashlamps in low-energy laser pumping applications will erode as alternative technologies such as laser diode pumps become increasingly cost-effective; however, in high-powered laser applications, flashlamps remain more efficient at less than 50% of the total life cycle cost of laser diodes. The Company believes that growth in the flashlamp business is highly dependent on its ability to develop new applications for flashlamp technology. ILC continues to develop high growth arc lamp markets outside of the laser industry. Some of these include material aging (solar simulation), UV sterilization and curing, machine vision and spectrofluoroscopy. During 1996, sales of flashlamps to non-laser markets were approximately 11% of total flashlamp sales. PRODUCTS - CERMAX(R) AND EQUIPMENT - ---------------------------------- The Company provides short arc xenon lamps that are optically pre-aligned, encased in a very safe ceramic body bonded to a metallized sapphire window, and are capable of transmitting the full 1 PRODUCTS - CERMAX(R) AND EQUIPMENT (CONTINUED) - ---------------------------------------------- spectrum from infrared to ultra-violet wavelengths. In addition, the Company also manufactures fully- encased and open frame power supplies, lamp holders and other accessories to support the Cermax(R) product line. Products also include complete fiber-optic lightsources that are private labelled for manufacturers of medical equipment. Currently, the primary market is in fiber optic illumination for medical procedures such as endoscopy. The market for Cermax(R) lightsources and related equipment used in endoscopy is composed of two segments - a high-intensity or critical segment and a low-intensity or non-critical segment. Critical endoscopy applications require high-intensity Cermax(R) lightsources with specialized power supplies due to the small size of the fiberoptic lightguide. Furthermore, as these applications often use video displays, high-intensity lightsources are required for good color rendition. The low-intensity market is dominated by manufacturers of halogen lightsources. Ancillary industrial uses for Cermax(R) lightsources include illuminating areas that are difficult to inspect such as nuclear reactors or jet engines. The Company has also targeted new non-medical lightsource markets which include analytical instruments, spot UV curing lightsources and Flash-Cermax(R) machine vision systems. During fiscal 1995, ILC announced the release of new high intensity lamps for video projection utilizing ILC's proprietary Daymax(R) and Cermax(R) technologies. During 1996, several of ILC's products were incorporated into high-end/professional and mid-range/business video projection systems of several original equipment manufacturers (OEMs), including Hughes-JVC, Ampro, Electrohome and Rank Brimar. Sony and Mitsubishi have also demonstrated preliminary versions of ILC's video projection lamps. ILC's video projection lamps are compatible with the key imaging devices including light valves, LCD's (Liquid Crystal Displays) or Texas Instrument's DMD's (Digital Micromirror Devices). ILC has also developed lamps for the low-end/commercial business segment which are now being evaluated by several OEMs. The Company's future growth will depend to a large extent on the successful introduction, marketing and commercial viability of video projection systems that will use the Company's products. The factors that may adversely affect the Company's Cermax(R) business include the expected entry of competitors into the market. The Company's primary patent on the Cermax(R) lightsource expired in 1991 and the Company expects competition from established and emerging companies. Increased competition could result in price reductions, which in turn could generate lower net sales on stable unit volume. Increased competition could also result in fewer customer orders, reduced gross margins and loss of market share. PRODUCTS - MERCURY XENON SHORT ARC LAMPS ("STEPPER LAMPS") - ---------------------------------------------------------- In fiscal 1995, the Company began commercial shipment of a new product, the mercury xenon short arc lamp ("stepper lamp"), which is used to expose patterns during the fabrication of semiconductor wafers. ILC is currently shipping a complete line of 1,000 and 2,000 watt stepper lamps. Each lamp, fully utilized, lasts for approximately 1-2 months. Accordingly, the Company expects that the product will generate a high repeat business. The market for stepper lamps is currently dominated by a Japanese competitor of the Company. ILC has invested heavily in ensuring the quality of its stepper lamps since end users perceive substantial risk in switching suppliers. In addition, ILC's stepper lamp does not require the end user to modify any of its maintenance procedures. The Company has worked extensively over the last four years with major U.S. end users of stepper equipment to qualify its stepper lamps at the major semi-conductor fabrication facilities. 2 PRODUCTS - MERCURY XENON SHORT ARC LAMPS ("STEPPER LAMPS") (CONTINUED) - ---------------------------------------------------------------------- During fiscal 1995, ILC established itself as the only qualified United States supplier of short arc stepper lamps used in semiconductor chip manufacturing equipment, a market that has been dominated by foreign manufacturers. In 1996, ILC's lamps were qualified by a number of key customers including IBM, Intel, Integrated Solutions, Inc. (ISI), and others. The failure of the Company's stepper lamp to achieve or sustain market acceptance would have a material adverse effect on the Company's results of operations. In October 1994, the Company purchased a 20,000 square foot office and manufacturing facility in Santa Clara, California for the Company's stepper lamp operations. The move to the new facility is expected to be completed in the second quarter of fiscal 1997. There can be no assurance that the move will not result in a short-term disruption in stepper lamp operations. In addition, the success of the Company's stepper lamp business depends in large part on the ability of the Company to manufacture stepper lamps efficiently and reliably over time. There can be no assurance that the Company will not experience manufacturng problems in the future that would result in product delivery delays or quality problems. PRODUCTS - MERCURY CAPILLARY LAMPS - ---------------------------------- Mercury capillary lamps are manufactured using technology and processes that are similar to those developed for stepper lamps. The applications for capillary lamps include the photolithography of grid patterns on color TV screens and printed circuit boards for computers. PRODUCTS - DAYMAX(R) METAL HALIDE - --------------------------------- Daymax(R) lamps simulate stable daylight conditions. Originally developed for use in the space program, these products are now widely used throughout the entertainment business. Applications include: indoor and outdoor lighting for motion picture and television productions, high speed and special effects lighting, concert, disco and stadium lighting and theatrical lighting. Daymax(R) lamps are also used for solar simulation in certain scientific applications. The Company has developed DTI, a series of integral low-power metal halide lamps (less than 500 watts) for commercial projection, stage and medical applications. DTI lamps, using a rugged ceramic reflector, have been qualified for use in video projection systems and architectural lighting. PRODUCTS - AEROSPACE - -------------------- ILC offers standard, modified, and customer systems covering the visible, infrared, and ultraviolet spectrum to meet each space lighting requirement. The Company's lighting systems are key elements of NASA's Space Transportation System. These systems are installed in the Space Shuttle interior and exterior, on the Manned Maneuvering Unit, on Spacelab and in several experiments carried aboard the shuttle orbiters. Other ILC systems are being designed for use on International Space Station Alpha, in future shuttle experiments and payload packages and space robotic vehicles. ILC is the only domestic manufacturer of space lighting qualified to serve NASA and other government agencies in Japan and Europe. ILC aerospace lighting systems feature efficiency, reliability, ruggedness, light weight and full space qualification. New systems aimed to meet unique requirements can often be developed from ILC's large selection of space-qualified designs and components, substantially reducing development costs and lead times. 3 PRODUCTS - MILITARY - ------------------- These products include infrared lamps used by the military on tanks and aircraft to deflect offensive heat seeking missiles. During fiscal 1996, the Company received a contract for approximately $1 million for a multi-faceted Cermax(R) high intensity discharge lamp which is used in the infrared guidance system of the TOW (Tube Launched Optically Guided Wire Controlled) missile for Hughes Aircraft. PRODUCTS - CONVERTER POWER - -------------------------- ILC acquired Converter Power, Inc. (CPI) in January 1993. CPI is a leading producer of high efficiency, small form factor lamp power sources built to fit compactly into a variety of systems. The Company designs and manufactures a full family of UL and TUV-approved power supplies which can be incorporated into OEM equipment. In addition, CPI has one OEM customer that purchases custom power supplies for equipment which services the ion implant sector of the semiconductor equipment manufacturing industry. In the fourth quarter of fiscal 1996, CPI experienced a significant reduction in orders from this customer. CPI must reduce its reliance on this major customer through additional sales of new products to other customers. CPI also provides power supplies which have been specifically engineered for ILC's Cermax(R) and metal halide lamps. This effort has enabled CPI to provide power sources which will be sold to OEMs. MARKETING AND SALES - ------------------- ILC sells its products through a direct sales force to OEMs and sells to end users through sales representatives and distributors. The sales organization includes Regional Sales Managers and a team of Market Development Managers with global responsibilities aligned along specific markets such as semicondcutor, video projection and medical. In addition, ILC maintains customer service groups at its facilities in California, Massachusetts and Cambridge, England to provide sales and customer service support to its customer base and network of foreign and domestic distributors. The European sales office located at the facilities of Q-Arc in Cambridge, England, sells and markets the complete line of lamp and equipment products and provides local support for European customers. For fiscal 1996, approximately 37.1% of the Company's net sales represented international sales, primarily in the Pacific Rim and Europe. Information regarding the Company's export sales and major customers is incorporated herein by reference to Note 3 of Notes to Consolidated Financial Statements. BACKLOG - ------- As of September 28, 1996, ILC's backlog of unfilled orders was approximately $28,091,000 ($26,839,000 relating to continuing operations) as compared to approximately $33,767,000 ($27,168,000 relating to continuing operations) at September 30, 1995. The Company includes in its backlog only orders which have been released by the customer for shipment within the next 12 months. Due to the possibility of customer changes in delivery schedules or cancellations of orders, backlog as of any particular date may not be representative of actual sales for any succeeding period. 4 MANUFACTURING - ------------- ILC's lamp groups have built substantial expertise in the fields of sealing technology (ceramic-to- metal, quartz-to-metal, vacuum sealing), materials research, plasma physics, electrical engineering, optoelectronics, and electrode technology. With CPI, ILC obtained the essential power supply expertise necessary for providing OEMs with integrated solutions. The manufacturing of most of the Company's lamp and power supply products is labor and capital intensive, and accordingly, the labor force is highly skilled and experienced. The combination of ILC's technical and manufacturing expertise enables ILC to dominate its selected market niches for specialty lighting. ILC designs, develops, and manufactures a majority of its products in two facilities totaling 97,000 square feet. These adjoining buildings include lamp development laboratories, separate manufacturing facilities for xenon and krypton arc lamps, Cermax(R) lamps, Daymax(R) metal halide lamps, mercury short arc ("stepper") lamps, mercury capillary lamps, Cermax(R) equipment and Aerospace products. The Company also purchased, in October 1994, a facility in Santa Clara, California totalling approximately 20,000 square feet to accommodate stepper lamp manufacturing. The need for more production capacity for the subsidiaries of ILC prompted expansion of existing manufacturing facilities. Q-Arc purchased a new facility of approximately 36,000 square feet in June 1994 and occupied the new facility in early fiscal 1995. Q-Arc currently occupies approximately 25,000 of the 36,000 square feet and has available 11,000 square feet for future expansion. Converter Power recently occupied a 32,000 square foot facility in Beverly, Massachusetts. Q-Arc received ISO9002 certification in fiscal 1995 and ILC Sunnyvale became certified in fiscal 1996. CPI excepts to be certified in fiscal 1997. ISO certification ensures customers that ILC has a quality system that will result in continuous product quality improvement. It is a recognition of a commitment to quality throughout all sections of the organization. PATENTS AND TRADEMARKS - ---------------------- The Company holds approximately 45 patents related to the key features of several of its products and several applications are pending. While these patents tend to enhance the Company's competitive position, management believes that the Company's success depends primarily upon its proprietary technological, engineering, production and marketing skills and the high quality of its products. The names of two of the Company's products, Cermax(R) and Daymax(R) are registered as trademarks in the United States Patent and Trademark Office and in many other countries in which the Company's products are sold. The Company's patents expire at various dates between 1997 and 2013. There can be no assurance that any patents held by the Company will not be challenged and invalidated, that patents will issue from any of the Company's pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in all countries where the Company's products can be sold to provide meaningful protection or any commercial advantage to the Company. Competitors of the Company also may be able to design around the Company's patents. COMPETITION - ----------- ILC competes on the basis of product performance, applications engineering, customer service, reputation and price. The Company competes in many markets in which technology develops and improves rapidly, stimulating ILC to enhance the capability of its products and technologies. Competitors consist of both large and small companies located in the United States, Japan and Europe. 5 COMPETITION (CONTINUED) - ----------------------- They include EG&G Inc., Osram, Philips, Ushio, Optical Radiation Corporation (ORC), Koto and Wolfram. In many market segments, the competition has established the bench mark for product acceptance at a very high level, causing ILC to continuously improve all phases of its processes for customer satisfaction. The Company believes that by exploiting segmented market areas in which ILC has technological, manufacturing and marketing strengths, ILC can compete effectively. At the same time, by focusing its product development and acquisition activities in these areas, the Company can defend its strengths and maintain its leadership in selected markets. ENGINEERING AND RESEARCH - ------------------------ ILC's engineering, research, and development efforts consist of three main activities. The first area of activity is extensive application engineering in response to customer requirements. These activities result in customer specific products and modifications to existing products to satisfy the needs of the customers. The second area is that of joint engineering and development work made in connection with customer production contracts. The third area includes those projects funded by the Company to develop new products and technologies. The Company spent $4,534,000, $4,497,000 and $3,998,000 in fiscal 1996, 1995 and 1994, respectively, for Company funded research and development ($4,320,000, $4,279,000 and $3,694,000 in fiscal 1996, 1995 and 1994, respectively, spent for research and development in continuing operations). The Company's engineering and research personnel are engineers and scientists, all of whom have technical degrees. EMPLOYEES - --------- As of September 28, 1996, the Company had 616 full-time employees, comprised of 64 in research and engineering, 24 in marketing and sales, 485 in manufacturing and 43 in general and administrative positions. Of these employees, 52 in research and development, 22 in marketing and sales, 389 in manufacturing and 33 in general and administrative positions are associated with the continuing operations of the Company. ILC believes that its future success depends upon its continued ability to recruit and maintain highly skilled employees in all disciplines. Although competition for qualified personnel is strong, ILC has been successful in attracting and retaining skilled employees. None of the Company's employees is represented by a labor union. The Company believes that its relations with its employees are good. ITEM 2. PROPERTIES - ------- ---------- The Company owns and leases an aggregate of approximately 153,000 and 56,000 square feet, respectively, of office and manufacturing space in six separate buildings in Sunnyvale, Santa Clara and Cotati, California; Beverly, Massachusetts; and Cambridge, England. In Sunnyvale, the Company owns 97,000 square feet in two adjacent buildings. These buildings were constructed by the Company in 1977 and 1979, sold in 1982 and leased back from the new owners, and re-purchased from the landlord in August 1993. The Company leases to one tenant approximately 9,000 square feet of its space in Sunnyvale under a lease which expires in March 1997. In early October 1994, the Company purchased 20,000 square feet of office and manufacturing space in Santa Clara, California. In June 1994, the Company purchased 36,000 square feet of office and manufacturing space in Cambridge, England. Q-Arc currently occupies approximately 25,000 square feet with approximately 11,000 square feet available for future expansion. Precision Lamp moved into a new facility in July 1993. The lease for the 24,000 square feet of office and manufacturing space, located in Cotati, California, expires in 2003. The operations of Precision Lamp have been reclassified as discontinued operations. See Note 12 of Notes to Consolidated Financial Statements appearing elsewhere herein. Finally, Converter Power, in late fiscal 1995, entered into a lease to occupy approximately 32,000 square feet of office and manufacturng space in Beverly, Massachusetts. This lease 6 ITEM 2. PROPERTIES (CONTINUED) - ------- ---------------------- expires in September 2000. Converter Power moved into this new facility in the first quarter of fiscal 1996. CPI previously occupied a 15,000 square foot facility in Ipswich, Massachusetts. For a discussion of the Company's lease commitments, see Note 8 of Notes to Consolidated Financial Statements appearing elsewhere herein. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- There were no matters submitted to a vote of the security holders during the fourth quarter of fiscal 1996. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------- --------------------------------------------------------------------- ILC's common stock is traded in the Nasdaq National Market (symbol ILCT). The high and low closing sales prices for the common stock on the Nasdaq National Market, are set forth below for the quarters as indicated: FISCAL 1996 HIGH LOW ----------- ---- --- 1st Quarter 111/2 83/4 2nd Quarter 117/8 87/8 3rd Quarter 14 1011/16 4th Quarter 131/2 107/8 FISCAL 1995 HIGH LOW 1st Quarter 103/8 71/2 2nd Quarter 103/4 8 3rd Quarter 111/8 83/4 4th Quarter 111/4 9 There were approximately 2,000 institutional and individual stockholders as of December 16, 1996. The closing sales price of the common stock on December 16, 1996 as reported by Nasdaq was $117/8. The Company intends to retain earnings for use in its business and does not expect to pay cash dividends in the foreseeable future. The Company's credit agreement with Union Bank provides that the Company shall not declare or pay any dividend or other distribution on its Common Stock (other than a stock dividend) or purchase or redeem any Common Stock, without the bank's prior written consent. 8 ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- The following selected consolidated financial data of the Company, which has been reclassified to reflect the continuing operations of ILC and the discontinuted operations of PLI, should be read in conjunction with the Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. FISCAL YEAR ENDED (in thousands except per share data) 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Net sales ................$ 54,206 $ 49,496 $ 44,331 $ 42,250 $ 38,727 Income from continuing operations .............. 4,546 4,637 3,727 4,509 4,757 Income (loss) from discontinued operations . (4,239) (99) (3,536) 250 193 Net income ............... 307 4,538 191 4,759 4,950 Earnings (loss) per share: Continuing operations ... .92 .97 .77 .91 .96 Discontinued operations (.86) (.02) (.73) .05 .04 ------- ------- ------ ------ ------- Net income per share $ .06 $ .95 $ .04 $ .96 $ 1.00 Weighted average shares outstanding ..... 4,923 4,765 4,825 4,980 4,956 Working capital ..........$ 15,155 $ 14,618 $ 11,366 $ 17,543 $ 16,399 Total assets ............. 48,594 46,726 41,312 39,703 28,645 Total long-term debt ..... 7,576 6,592 6,421 5,805 2,193 Total stockholders' equity .................$ 29,791 $ 28,802 $ 23,624 $ 24,565 $ 19,578 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- GENERAL In September 1996, the Company's Board of Directors voted to proceed with the divestiture of the Company's Precision Lamp subsidiary based in Cotati, California. The accompanying consolidated financial statements have been restated to reflect the discontinued operations of the Precision Lamp business. Refer to Note 12 of Notes to Consolidated Financial Statements for a further discussion of discontinued operations. Accordingly, the following discussion and analysis of financial condition and results of operations reflects the activities of ILC Technology, Inc., Converter Power, Inc. and Q-Arc, Ltd. 9 GENERAL (CONTINUED) - ------------------- During fiscal 1996, 1995 and 1994, the Company derived approximately 39%,40% and 52%, respectively, of its net sales from the medical market. During fiscal 1996, 1995 and 1994, the Company's sales in the industrial market accounted for 46%, 47% and 34%, respectively, of net sales. In each of the fiscal years 1996, 1995 and 1994, the Company's sales in the aerospace market accounted for 8% of net sales. Products sold in the medical market are incorporated into products sold into the health-care and health-care related industries. These industries have recently been subject to significant fluctuations in demand which in turn have affected the demand for components used in these products. The Company expects sales to the medical market to continue to decrease as a percentage of net sales for the foreseeable future. aerospace sales have remained relatively constant over the last two fiscal years. Due to the continuing slowdown in military and defense spending, the Company does not expect aerospace sales to grow significantly from fiscal 1996 and 1995 levels. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "believes", "expects", "future", "may have", "will take place", and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. CONTINUING OPERATIONS - --------------------- FISCAL 1996 COMPARED TO FISCAL 1995 - ----------------------------------- Net sales for fiscal 1996 were $54,206,000, an increase of 9.5% over fiscal 1995 net sales of $49,496,000. The $4,710,000 increase was primarily attributable to a $3.4 million sales increase in Cermax and related equipment sales, a $1.7 million sales increase in Quartz lamps and a $1 million sales increase in Flashlamps. These sales gains were offset by a $1.4 million sales decrease in Aerospace and at Converter Power. In the fourth quarter of fiscal 1996, Converter Power experienced a significant reduction in orders from a major customer that provides equipment to the semiconductor equipment industry. Converter Power must continue to reduce reliance on this major customer through additional sales of new products to other customers. This change in customer base and mix may have an unfavorable impact on gross margins in future quarters. Cost of sales as a percentage of net sales was 66.7% for fiscal 1996 compared to 64.2% for fiscal 1995. The percentage increase was due primarily to the sales decline from Converter Power's major customer discussed above coupled with cost revisions for a fixed price contract in Aerospace. In addition, although there was some improvement in the gross margin associated with Quartz lamp products in fiscal 1996 over fiscal 1995, the gross margin in both fiscal years remained negative. The ratio of inventory reserve to year end inventory in fiscal 1996, 1995 and 1994 was 18.6%, 20.0% and 26.3%, respectively. Research and development expense, 8.0% of net sales in fiscal 1996 compared to 8.6% of net sales in fiscal 1995, remained unchanged at approximately $4.3 million. In both fiscal years, the majority of the spending was concentrated in Quartz for the development of lamps used in the processing of semiconductor materials, in Cermax for lamps for video projection and at Converter Power for the design of new power supplies to compliment the lamps for video projection. 10 FISCAL 1996 COMPARED TO FISCAL 1995 (CONTINUED) - ----------------------------------------------- Marketing expenses, 4.9% of net sales in both fiscal 1996 and 1995, increased $241,000 between the two fiscal years. The increase was the result of personnel additions and more travel and trade show attendance. As a percentage of net sales, general and administrative expenses were 8.1% in fiscal 1996 and 9.0% in fiscal 1995. In absolute dollars, the general and administrative spending level has remained constant at approximately $4.4 million. Amortization of intangibles of $120,000 in fiscal 1996 and 1995 represents the amortization of the covenant-not-to-compete arising from the acquisition of Q-Arc in 1991. Interest income was $80,000 in fiscal 1996, compared to interest income of $265,000 in fiscal 1995 which amount included approximately $235,000 of interest income from an income tax refund in the third quarter of fiscal 1995. Interest expense associated with continuing operations, $542,000 in fiscal 1996 as compared to $589,000 in fiscal 1995, decreased approximately $47,000 between the two fiscal years due to a slightly lower interest rate. Interest expense is associated with a term loan obtained to purchase the Company's two operating facilities in Sunnyvale, a line of credit for working capital needs and an equipment line of credit for capital equipment acquisitions. The Company reported income from continuing operations before provision for income taxes of $6,061,000 in fiscal 1996 compared to income from continuing operations before provision for income taxes of $6,109,000 in fiscal 1995. The fiscal 1996 effective tax rate was 25% compared with a fiscal 1995 effective tax rate of 28%, exclusive of a $238,000 income tax refund received in the third quarter of fiscal 1995. As previously discussed, the Company's Board of Directors voted to proceed with the divestiture of Precision Lamp based in Cotati, California. The net operating results of this subsidiary have been reported as a $4,239,000 loss from discontinued operations in fiscal 1996. This amount includes the $840,000 operating loss of Precision Lamp for fiscal 1996 and an estimated loss for the disposal of discontinued operations of $3,399,000. The estimated loss for the disposal includes asset write downs of $3.3 million, a $500,000 charge for anticipated losses during the final disposition of the subsidiary and the write off of the unamortized balance of the Precision Lamp covenant-not-to- compete of approximately $470,000. The combined loss from discontinued operations is net of a $1,413,000 income tax benefit. Company management believes that the carrying value of the net assets from discontinued operations will be realized upon disposition through either a sale to a qualified buyer or an orderly liquidation of the business. The disposition of the business will take place in fiscal 1997. The Company believes that the disposition will improve cash flows, strengthen its financial position and provide the basis for improved financial performance in the future. (See Note 12 of Notes to Consolidated Financial Statements.) The Company believes that inflation and changing prices had no significant impact on sales or costs during fiscal 1996 and 1995. FISCAL 1995 COMPARED TO FISCAL 1994 - ----------------------------------- Net sales for fiscal 1995 were $49,496,000, an increase of 11.7% over fiscal 1994 net sales of $44,331,000. The $5,165,000 increase was primarily attributable to a $4 million sales increase at Converter Power and a $1 million sales increase at Q-Arc. Although total net sales at ILC Technology remained unchanged between the two fiscal years, Cermax and related equipment sales decreased $2.4 million due to a reduction in the medical market. Flash and quartz lamp sales increased $1 million and Aerospace sales increased $1.4 million. 11 FISCAL 1995 COMPARED TO FISCAL 1994 (CONTINUED) - ----------------------------------------------- As a percentage of net sales, cost of sales remained constant between fiscal 1995 and 1994 at 64.2% and 64.6%, respectively. The ratio of the inventory reserve to year end inventory in fiscal 1995, 1994 and 1993 was 20.0%, 26.3% and 16.5% respectively. Research and development expenses, 8.6% of net sales in fiscal 1995 compared to 8.3% of net sales in fiscal 1994, increased $584,000 between the two fiscal years. The majority of the increase was concentrated in the Quartz stepper lamp product. Marketing expenses, 4.9% of net sales in fiscal 1995 compared to 4.1% of net sales in fiscal 1994, increased $ 609,000. The increase between the two fiscal years was primarily due to the addition of personnel and more travel and trade show attendance. As a percentage of sales, general and administrative expenses were 9.0% in fiscal 1995 and 10.3% in fiscal 1994. The $87,000 decrease was due to the accrual in the second quarter of fiscal 1994 for early exit incentives for various long time ILC employees ($500,000) and the write off of a note receivable, doubtful of collection ($250,000). This decrease was partially offset by expenses incurred by Q-Arc in its move to a larger manufacturing facility and by personnel additions and other expenses at Converter Power, totalling approximately $650,000, in fiscal 1995. Amortization of intangibles of $120,000 in fiscal 1995 and 1994 represents the amortization of the covenant-not-to-compete arising from the acquisitions of Q-Arc in 1991. Interest income was $265,000 in fiscal 1995, which amount included approximately $235,000 of interest income from an income tax refund in the third quarter of fiscal 1995. Interest income in fiscal 1994 was $170,000. Interest expense associated with continuing operations was $589,000 in fiscal 1995 as compared to $289,000 in fiscal 1994. The $300,000 increase between the two fiscal years was due to additional borrowings on the Company's line of credit and equipment purchases. Due to the Company's decision in 1996 to divest of the Precision Lamp subsidiary, the Consolidated Statements of Operations for fiscal 1995 and 1994 were restated to reflect the discontinued operations of Precision Lamp. The Company reported income from continuing operations before provision for income taxes of $6,109,000 in fiscal 1995 compared to income from continuing operations before provision for income taxes of $5,402,000 in fiscal 1994. The fiscal 1995 provision for income taxes on continuing operations was 28% of income from continuing operations before provision for income taxes exclusive of a $238,000 income tax refund received in the third quarter of fiscal 1995. This compares with a fiscal 1994 provision for income taxes on continuing operations of 31% of income from continuing operations before provision for income taxes. The net loss from discontinued operations of $99,000 in fiscal 1995 represents the operating results of Precision Lamp and is net of an income tax benefit of $32,000. The net loss from discontinued operations of $3,536,000 in fiscal 1994 is net of a $523,000 income tax benefit and includes a $3.4 million write down of intangibles generated from the Precision Lamp acquisition. In assessing the recoverability of the unamortized goodwill and covenant-not-to-compete generated from the acquisition, management determined that an impairment occurred and recorded the $3.4 million charge. The Company believes that inflation and changing prices had no significant impact on sales or costs during fiscal 1995 and 1994. 12 LIQUIDITY AND FINANCIAL POSITION - -------------------------------- Cash and cash equivalents increased to $1,829,000 in fiscal 1996 from $1,530,000 in fiscal 1995. Cash provided from operations amounted to $1,597,000 in fiscal 1996, a decrease of $952,000 from $2,549,000 in fiscal 1995. During fiscal 1996, the Company made capital equipment purchases of $3,187,000. In fiscal 1996, the Company increased its net borrowings under its line of credit by $3,000,000, increased its net borrowings under an equipment line by $180,000 and paid down a term loan by $1,584,000. In fiscal 1995, the Company used cash of $1,745,000 to purchase land and a new manufacturing facility in Santa Clara, California and made capital equipment acquisitions of $2,518,000. During fiscal 1995, the Company increased its net borrowings under its line of credit by $2,000,000, increased its net borrowings under an equipment line by $670,000 and paid down a term loan by $1,578,000. In fiscal 1994, the Company used cash of $2,701,000 to purchase a new office and manufacturing facility in Cambridge, England, deposited $1,300,000 for the purchase of land and a manufacturing facility in Santa Clara, California and paid $312,000 for land in Cotati, California. Capital equipment acquisitions in fiscal 1994 amounted to $1,672,000. In fiscal 1994, the Company increased its net borrowings under a term loan for real estate acquisitions by $800,000 and increased the net borrowings under an equipment line by $591,000. In addition, in fiscal 1994, the Company also repurchased, on the open market, 204,000 shares of its common stock for $1,556,000. The Company has working capital of $15,155,000 and a current ratio of 2.45 to 1.0 at September 28, 1996. This compares with working capital of $14,618,000 and a current ratio of 2.29 to 1.0 at September 30, 1995. As of September 28, 1996, the Company had $1,000,000 unused on a $6,000,000 bank line of credit with interest at 2% above the LIBOR rate (London Interbank Offer Rate) (7.4% at September 28, 1996). The Company also has available approximately $1,100,000 remaining on a $2,200,000 equipment credit facility at the above interest rate. This credit facility can be increased to accommodate the capital equipment needs of the Company. In fiscal 1997, ILC anticipates making capital expenditures of approximately $2.5 million. These financial resources, together with anticipated additional resources to be provided from continuing operations, are expected to be adequate to meet the Company's working capital needs, capital equipment requirements and debt service obligations at least through fiscal 1997. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company is not required to adopt the provisions of this statement until its fiscal year 1997. The provisions of this statement must be made on a prospective basis. The Company plans to adopt the disclosure provisions of this statement in 1997, and therefore the effect on its financial position and results of operations, upon adoption, will not be significant. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- ------------------------------------------- TABLE OF CONTENTS PAGE ----------------- ---- Consolidated Balance Sheets - September 28, 1996 and September 30, 1995 15 - 16 Consolidated Statements of Operations for the Three Fiscal Years Ended September 28, 1996 17 Consolidated Statements of Stockholders' Equity for the Three Fiscal Years Ended September 28, 1996 18 Consolidated Statements of Cash Flows for the Three Fiscal Years Ended September 28, 1996 19 - 20 Notes to Consolidated Financial Statements 21 - 30 Form 10-K Schedule 31 Report of Independent Public Accountants 32 14 ILC TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 ASSETS ------ 1996 1995 ---- ---- Current assets: Cash and cash equivalents ..................... $ 1,828,807 $ 1,529,863 Accounts receivable, less allowance for doubtful accounts of $312,358 and $409,440, respectively ................... 9,494,246 8,450,977 Receivable from long-term contracts ........... 861,427 610,122 Inventories ................................... 8,901,528 7,533,090 Deferred tax asset ............................ 2,158,000 1,454,000 Prepaid expenses .............................. 208,320 122,244 Net assets from discontinued operations ....... 2,178,383 6,249,401 ----------- ----------- Total current assets ................... 25,630,711 25,949,697 ----------- ----------- Property and equipment, net .................... 21,176,431 19,560,683 Covenants-not-to-compete, net of accumulated amortization and writedown of $3,195,524 and $2,435,354, respectively ...................... 356,641 475,521 Other assets ................................... 680,013 739,836 ----------- ----------- $48,593,796 $46,725,737 =========== =========== The accompanying notes are an integral part of these financial statements. 15 ILC TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ 1996 1995 ---- ---- Current liabilities: Accounts payable ................................ $ 3,643,496 $ 3,763,998 Accrued payroll and related items ............... 1,263,741 1,601,111 Other accrued liabilities ....................... 1,146,822 1,121,321 Current portion of non-compete obligation ....... 390,000 520,000 Current portion of long-term debt ............... 2,545,600 2,455,500 Accrued income taxes payable .................... 1,486,518 1,869,494 ----------- ----------- Total current liabilities ................. 10,476,177 11,331,424 ----------- ----------- Long-term liabilities, net of current portion: Long-term debt .................................. 7,370,164 5,898,040 Non-compete obligation .......................... -- 390,000 Other accruals .................................. 206,235 304,074 ----------- ----------- Total long-term liabilities ............... 7,576,399 6,592,114 ----------- ----------- Commitments and contingencies (Note 7) Stockholders' equity: Common stock, no par value; 10,000,000 shares authorized; 4,782,508 shares and 4,683,174 shares outstanding, respectively .... 6,815,109 6,132,914 Retained earnings ............................... 22,976,111 22,669,285 ----------- ----------- Total stockholders' equity ................ 29,791,220 28,802,199 ----------- ----------- $48,593,796 $46,725,737 =========== =========== The accompanying notes are an integral part of these financial statements. 16 ILC TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996 1996 1995 1994 ---- ---- ---- Net sales .................................$54,206,424 $49,496,029 $44,331,237 Costs and expenses: Cost of sales ........................... 36,180,448 31,799,916 28,654,362 Research and development ................ 4,319,650 4,278,697 3,694,392 Sales and marketing ..................... 2,645,952 2,404,856 1,795,930 General and administrative .............. 4,417,446 4,459,726 4,546,290 Amortization of intangibles ............. 120,000 120,000 120,000 ----------- ---------- ----------- 47,683,496 43,063,195 38,810,974 Income from continuing operations before provision for income taxes and interest expense .................................. 6,522,928 6,432,834 5,520,263 Interest expense, net ..................... 461,898 323,757 118,597 ---------- ---------- ---------- Income from continuing operations before provision for income taxes ............... 6,061,030 6,109,077 5,401,666 Provision for income taxes on continuing operations ............................... 1,515,000 1,472,000 1,675,000 ---------- ----------- ---------- Income from continuing operations ......... 4,546,030 4,637,077 3,726,666 Discontinued operations: Operating loss net of tax benefit of $280,004, $32,000 and $523,000 in 1996, 1995 and 1994, respectively ...... (840,217) (99,143) (3,536,053) Estimated loss on disposal, including $500,000 for operating losses during the phase out, net of tax benefit of $1,132,996 (3,398,987) -- -- ----------- ---------- --------- Loss from discontinued operations ....... (4,239,204) (99,143) (3,536,053) ----------- ----------- ----------- Net income ............................... $ 306,826 $4,537,934 $ 190,613 =========== ========== =========== Earnings (loss) per share: Earnings from continuing operations ......$ 0.92 $ 0.97 $ 0.77 Loss from discontinued operations ........ (0.86) (0.02) (0.73) ----------- ---------- ----------- Net income per share $ 0.06 $ 0.95 $ 0.04 =========== ========= =========== Weighted average shares outstanding used to compute net income (loss) per share ... 4,923,132 4,764,989 4,825,009 =========== ========= ========= The accompanying notes are an integral part of these financial statements. 17 ILC TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996 Common Common Stock Retained Shares Amount Earnings Total Balance at October 2, 1993 .. 4,619,476 $ 6,623,828 $17,940,738 $24,564,566 Net income ................ - - 190,613 190,613 Issuance of common stock under stock purchase plan 25,475 196,590 - 196,590 Exercise of stock options . 82,000 227,420 - 227,420 Repurchase of common stock (204,000) (1,555,500) - (1,555,500) ---------- ----------- ---------- ----------- Balance at October 1, 1994 .. 4,522,951 5,492,338 18,131,351 23,623,689 Net income ................ - - 4,537,934 4,537,934 Issuance of common stock under stock purchase plan 37,973 266,575 - 266,575 Exercise of stock options . 132,250 450,751 - 450,751 Repurchase of common stock (10,000) (76,750) - (76,750) ---------- ----------- ---------- ------------ Balance at September 30, 1995 4,683,174 6,132,914 22,669,285 28,802,199 Net income ................ - - 306,826 306,826 Issuance of common stock under stock purchase plan 34,209 279,068 - 279,068 Exercise of stock options . 65,125 403,127 - 403,127 ---------- ---------- ---------- ---------- Balance at September 28, 1996 4,782,508 $6,815,109 $22,976,111 $29,791,220 ========== ========== =========== =========== The accompanying notes are an integral part of these financial statements. 18 ILC TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net Income ....................... $ 306,826 $4,537,934 $ 190,613 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................. 1,570,809 1,450,597 948,313 Provision for doubtful accounts and note ....................... 38,804 102,861 383,902 Provision for inventory obsolescence ................... 520,006 169,034 1,772,346 Net loss on property and equipment sold or retired ................. - 26,367 - Amortization of non-compete agreements ...................... 118,880 118,881 118,880 Changes in assets and liabilities: Decrease in marketable securities .................... - 998,129 438,078 (Increase) decrease in accounts receivable .................... (1,333,378) (2,467,329) 167,344 Increase in inventories ........ (1,888,444) (1,685,743) (1,846,314) (Increase) decrease in deferred tax asset ..................... (704,000) 951,000 (1,016,000) (Increase) decrease in prepaid expenses ...................... (86,076) 406,556 (229,338) (Increase) decrease in other assets ........................ 59,823 (98,397) 183,044 Increase (decrease) in accounts payable ....................... (120,502) 300,709 21,467 Increase (decrease) in accrued liabilities ................... (956,660) (637,731) 1,657,530 Net changes in assets and liabilities from discontinued operations ..................... 4,071,018 (1,623,516) 2,850,679 ----------- ----------- ---------- Total adjustments ........... 1,290,280 (1,988,582) 5,449,931 ----------- ----------- ---------- Net cash provided by operating activities ....... 1,597,106 2,549,352 5,640,544 ----------- ----------- ---------- Cash flows from investing activities: Purchase of land and real estate ............................ - (3,045,412) (3,012,844) (Increase) decrease in deposit on land and building purchase ........ - 1,300,000 (1,300,000) Investment in joint venture ........ - (450,000) - Capital expenditures ............... (3,186,557) (2,517,541) (1,671,942) ----------- ----------- ---------- Net cash used in investing activities ....... (3,186,557) (4,712,953) (5,984,786) ----------- ----------- ----------- The accompanying notes are an integral part of these financial statements. 19 ILC TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 28, 1996 (CONTINUED) 1996 1995 1994 ---- ---- ---- Cash flows from financing activities: Principal borrowings under line of credit ........................$ 9,500,000 $ 8,450,000 $ - Principal repayments under line of credit ........................ (6,500,000) (6,450,000) - New borrowings under equipment line ............................. 1,555,000 1,720,089 1,090,702 Principal repayments under equipment line ................... (1,374,800) (1,049,958) (499,225) Principal borrowings under term loan ........................ - - 1,333,333 Principal repayments under term loan ........................ (1,584,000) (1,578,000) (533,333) Payments under non-compete agreement ........................ (390,000) (520,000) (520,000) Proceeds from issuance of common stock ..................... 682,195 717,326 424,010 Repurchase of common stock ........ - (76,750) (1,555,500) ---------- ----------- ----------- Net cash provided by (used in) financing activities............ 1,888,395 1,212,707 (260,013) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents....... 298,944 (950,894) (604,255) Cash and cash equivalents at beginning of year .................. 1,529,863 2,480,757 3,085,012 ----------- ----------- ----------- Cash and cash equivalents at end of year ........................$ 1,828,807 $ 1,529,863 $ 2,480,757 =========== =========== =========== 1996 1995 1994 ---- ---- ---- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest - continuing operations . $ 542,061 $589,200 $ 288,669 Interest - discontinued operations 77,714 106,341 50,082 Income taxes ..................... 1,055,000 909,000 2,500,539 Supplemental disclosures of noncash investing and financing activities: A capital lease obligation of $174,268 was incurred in fiscal 1994 when the Company entered into a capital lease for new computer equipment. The accompanying notes are an integral part of these financial statements. 20 ILC TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 28, 1996 1. THE COMPANY ----------- ILC Technology, Inc. (the "Company") was incorporated on September 15, 1967. The Company designs, develops and manufactures high intensity lamps and lighting products the medical, industrial, communication, aerospace, scientific, entertainment and military industries. The Company develops and manufactures the majority of its products at its headquarter facilities in California and the remainder at its subsidiary facilities in Massachusetts and the United Kingdom. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ BASIS OF PRESENTATION - --------------------- The financial statements include the accounts of ILC Technology, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Fiscal years 1995 and 1994 were restated to reflect the Company's decision to discontinue the operations of Precision Lamp, Inc. (see Note 12). None of these restatements had any impact on net income in any of the prior years. The Company's fiscal year end is the Saturday closest to September 30. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS - ------------------------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - ------------------------- For the purpose of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less at the time of issue to be cash equivalents. INVENTORIES - ----------- Inventories are stated at the lower of cost (first-in, first-out) or market, and include material, labor and manufacturing overhead. Inventories at September 28, 1996 and September 30, 1995, net of inventory reserves of $2,034,258 and $1,881,026, respectively, consisted of: 21 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ INVENTORIES (CONTINUED) - ----------------------- 1996 1995 ---- ---- Raw materials ........................ $4,802,839 $4,398,553 Work-in-process ...................... 2,549,805 1,981,414 Finished goods ....................... 1,548,884 1,153,123 ---------- ---------- Total inventories..................... $8,901,528 $7,533,090 ========== ========== DEVELOPMENTAL AND MANUFACTURING CONTRACTS - ----------------------------------------- The Company contracts with the U.S. Government and other customers for the development and manufacturing of various products under both cost-plus-fixed-fee and fixed-price contracts. Revenues are recognized under these contracts using the percentage of completion method, whereby revenues are reported in the proportion that costs incurred bear to the total estimated costs for each contract. Periodic reviews of estimated total costs during the performance of such contracts may result in revisions of contract estimates in subsequent periods. Any loss contracts are reserved at the time such losses are determined. Revenues from these contracts were less than 10% of net revenues during 1996, 1995 and 1994. DEPRECIATION AND AMORTIZATION - ----------------------------- Depreciation and amortization on property and equipment are provided on a straight-line basis over estimated useful lives of 3 to 31.5 years, except for leasehold improvements which are amortized over the terms of the leases. NET INCOME (LOSS) PER SHARE - --------------------------- Net income (loss) per share is computed based on the weighted average number of common shares and common equivalent shares (using the treasury stock) outstanding during the period. Fully diluted net income (loss) per share is not significantly different from net income (loss) per share as reported. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company is not required to adopt the provisions of this statement until its fiscal year 1997. The provisions of this statement must be made on a prospective basis. The Company plans to adopt the disclosure provisions of this statement in 1997, and therefore the effect on its financial position and results of operations, upon adoption, will not be significant. COVENANTS-NOT-TO-COMPETE - ------------------------ The covenant-not-to-compete relates to the Q-Arc acquisition that took place in 1991. This is being amortized over the period of the covenant. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of." The Company adopted the provisions of this statement in fiscal 1996. The effect on its financial position and results of operations were not significant. The Company 22 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ COVENANTS-NOT-TO-COMPETE (CONTINUED) - ------------------------------------ quarterly evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful lives of these intangibles may warrant revision or that the remaining balances of intangibles may not be recoverable. When factors indicate that intangibles should be evaluated for possible impairment, the Company uses an estimate of the related subsidiary's undiscounted cash flow over the remaining life of the intangibles in measuring whether the intangibles are recoverable. As part of the Company's decision to discontinue the operations of its Precision Lamp subsidiary, the unamortized balance of the covenant-not-to-compete ($470,000) was written off in the fourth quarter of fiscal 1996. INVESTMENT IN JOINT VENTURE - --------------------------- In February 1995, the Company invested $450,000 in a lamp manufacturer located in Japan. The Company's investment represents a 49% ownership interest in the equity of the investee, consequently the Company accounts for its investment using the equity method of accounting. The Company's investment is included in Other Assets in the accompanying consolidated balance sheets and its proportionate interest in the income of the investee of $20,000 and $89,000 in fiscal 1996 and 1995, respectively, is included in the accompanying consolidated statements of operations. 3. REVENUES -------- The Company recognizes revenue on all product sales upon shipment of the product. The Company accrues for estimated warranty obligations at the time of the sale of the related product based upon its past history of claims experience and costs to discharge its obligations. The Company operates in a single industry segment, the designing, developing, manufacturing and marketing of high performance light source products. Revenues from continuing operations are geographically summarized as follows (in thousands): 1996 1995 1994 ---- ---- ---- United States .................... $34,088 32,533 $26,966 Europe ........................... 6,920 5,964 4,380 Asia ............................. 12,700 10,951 12,819 Other international............... 498 48 166 ------- ------- ------- $54,206 $49,496 $44,331 ======= ======= ======= Customers comprising more than 10% of net sales from continuing operations are as follows: 1996 1995 1994 ---- ---- ---- Customer A..................... 15.0% 12.2% 17.8% Customer B..................... 11.5% 12.0% * *less than 10% of net sales 23 3. REVENUES (CONTINUED) -------------------- The Company provides credit in the form of trade accounts receivable to its customers. The Company does not generally require collateral to support customer receivables. The Company performs ongoing credit evaluations of its customers and maintains allowances which management believes are adequate for potential credit losses. Approximately 39%, 40% and 52% of the Company's sales in fiscal 1996, 1995 and 1994, respectively, were to customers in the medical industry. This industry has experienced significant fluctuations in demand and the Company expects sales to the medical market to decrease as a percentage of net sales in the foreseeable future. Customer B, referred to above, is in the semiconductor equipment industry and is a major customer of Converter Power. In the fourth quarter of fiscal 1996, Converter Power experienced a significant reduction in orders from this customer. Management believes that inventory at Converter Power is stated at the lower of cost or net realizable value. 4. PROPERTY AND EQUIPMENT ---------------------- Property and equipment at September 28, 1996 and September 30, 1995 consisted of: 1996 1995 ---- ---- Property and equipment, at cost: Machinery and equipment ...... $ 15,047,138 $ 13,705,702 Land and buildings ........... 14,955,738 14,504,768 Furniture and fixtures ....... 601,822 617,800 Equipment under capital lease 174,268 174,268 Leasehold improvements ....... 598,814 95,536 Construction-in-progress ..... 1,011,601 172,951 ------------ ------------ 32,389,891 29,271,025 Less accumulated depreciation and amortization ................. (11,212,950) (9,710,342) ------------ ------------ Property and equipment, net ..... $ 21,176,431 $ 19,560,683 ============ ============ 5. BANK BORROWINGS --------------- As of September 28, 1996 and September 30, 1995, borrowings outstanding under the Company's credit facilities consisted of: 1996 1995 ---- ---- Line of credit ......... $ 5,000,000 $ 2,000,000 Term note .............. 2,638,000 4,222,000 Equipment line of credit 2,191,200 2,011,000 Other capital lease .... 86,564 120,540 ----------- ----------- 9,915,764 8,353,540 Less: current portion .. (2,545,600) (2,455,500) ----------- ----------- Long-term debt ......... $ 7,370,164 $ 5,898,040 =========== =========== 24 5. BANK BORROWINGS (CONTINUED) --------------------------- Aggregate maturities for long-term debt during the next five years are approximately: 1997 - $2,545,600, 1998 - $2,283,600, and none in 1999, 2000 and 2001. All of the above credit facilities are secured by all of the property of the Company. The Company has a $6 million line of credit available with a bank which expires in March 1998. Borrowings under this line are at 2% above the LIBOR rate (London Interbank Offer Rate) (7.4% at September 28, 1996) and are limited to 75% of eligible accounts receivable. Under the covenants of the loan agreement, unless written approval from the bank is obtained, the Company is restricted from entering into certain transactions and is required to maintain certain specified financial covenants and profitability. As of September 28, 1996, the Company was not in compliance with all covenants but has obtained a waiver from the bank. The average balance outstanding (based on month-end balances) under the line of credit in 1996 was $2,595,833. The maximum borrowings were $5,000,000 at an average interest rate of 7.4% for 1996. At September 30, 1995, $2 million was outstanding under the line of credit. As of September 28, 1996, $1 million was available for future borrowings under this line of credit. In addition, in connection with the purchase of its Sunnyvale manufacturing facilities, the Company entered into a term note with a bank for $5,000,000 in 1993, which was subsequently increased to $6,333,333 in 1994. The note matures in August 1998. The term loan requires monthly principal payments equal to one-forty-eighth of the principal amount plus interest at 2% above the LIBOR rate (London Interbank Offer Rate) (7.4% at September 28, 1996). The term loan is a reducing revolving credit facility which allows for principal pre-payments and the flexibility for re-borrowing up to the maximum amount that would be outstanding under the term loan given normal amortization to the date of re-borrowing. The Company also has available a $2.2 million equipment line of credit for 100% of the purchase cost of new equipment, which expires in March 1997. Borrowings under this line bear interest at 2% above the LIBOR rate (7.4% at September 28, 1996), with principal balances amortized over a 2 year period. At September 28, 1996, the Company had approximately $1,096,000 available for future borrowings under this line of credit. 6. INCOME TAXES ------------ The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires an asset and liability approach to accounting for income taxes. Income from continuing operations before provision for income taxes consists of the following for fiscal 1996, 1995 and 1994, respectively: 1996 1995 1994 ---- ---- ---- U.S. ...................... $4,897,389 $5,588,040 $5,030,336 Foreign.................... 1,163,641 521,037 371,330 ---------- ---------- ---------- $6,061,030 $6,109,077 $5,401,666 ========== ========== ========== 25 6. INCOME TAXES (CONTINUED) ------------------------ The components of the provision for income taxes on continuing operations are as follows: 1996 1995 1994 ---- ---- ---- Federal - Current ............... $ 1,559,000 $ 833,000 $ 2,373,000 Deferred .............. (600,000) 581,500 (902,000) ----------- ----------- ----------- 959,000 1,414,500 1,471,000 ----------- ----------- ----------- Foreign - Current ............... 384,000 -- -- State - Current ............... 276,000 199,000 493,000 Deferred .............. (104,000) 96,500 (289,000) ----------- ----------- ----------- 172,000 295,500 204,000 ----------- ----------- ----------- Federal refund received ........ -- (238,000) -- ----------- ----------- ----------- Total provision for income taxes on continuing operations ...... $ 1,515,000 $ 1,472,000 $ 1,675,000 =========== =========== =========== The major components of the deferred tax account, as computed under SFAS No. 109, are as follows: 1996 1995 ---- ---- Reserve for loss on disposal of discontinued operations, not currently deductible for tax purposes ................................... $ 1,133,000 $ - Inventory reserve ............................ 877,000 838,000 Bad debt reserve ............................. 92,000 271,000 Warranty reserve ............................. 128,000 105,000 Accruals not currently deductible for tax purposes ............................... 381,000 448,000 Amortization of covenant-not-to-compete ...... 202,000 278,000 Excess of tax over book depreciation ......... (988,000) (801,000) Other items, individually insignificant ...... 333,000 315,000 ----------- ----------- $ 2,158,000 $ 1,454,000 =========== =========== The provision for income taxes on continuing operations differs from the amounts which would result by applying the applicable statutory Federal income tax rate to income from continuing opertions before taxes as follows: 1996 1995 1994 ---- ---- ---- Computed expected provision $ 2,121,000 $ 2,138,000 $ 1,891,000 State tax ................. 364,000 367,000 324,000 FSC commission ............ (181,000) (216,000) (259,000) General business credits .. (218,000) (203,000) (72,000) Refund received ........... -- (238,000) -- Other items, indivdually insignificant ............ (571,000) (376,000) (209,000) ----------- ----------- ----------- $ 1,515,000 $ 1,472,000 $ 1,675,000 =========== =========== =========== 26 6. INCOME TAXES (CONTINUED) ------------------------ During the second quarter of fiscal 1995, the Company received a refund of $238,000 from the Internal Revenue Service (IRS) related to tax returns filed in previous years, which were examined by the IRS. This amount was recorded as a reduction of the fiscal 1995 tax provision upon receipt of the refund. An additional $235,000 of interest related to the refund amount was received and was included in interest income in fiscal 1995. 7. EMPLOYEE RETIREMENT PLAN ------------------------ On January 1, 1984, the Company adopted a thrift incentive savings plan (the "Plan"). The Plan is qualified under section 401(k) of the Internal Revenue Code and is available to all full-time employees with one or more years of employment with the Company. Under the terms of the Plan, participating employees must contribute at least 2% of their salary to the Plan, and the Company contributes (as a matching contribution) 100% of this amount. Employees may also contribute an additional amount up to 13% of their salary to the Plan, with no further contributions by the Company. The Company's contributions vest at a rate of 20% per year, commencing on the first anniversary of employment. Total employer matching contributions under the Plan were $226,000, $212,000, and $163,000 for the fiscal years 1996, 1995 and 1994, respectively. The expense to continuing operations was $188,000, $171,000 and $138,000 for fiscal years 1996, 1995 and 1994, respectively. 8. COMMITMENTS AND CONTINGENCIES ----------------------------- At September 28, 1996, the future minimum rental payments under all building leases for fiscal 1997 through 2001 are approximately $423,000, $424,000, $444,000, $444,000 and $226,000, respectively, and $434,000 thereafter. The amounts total $2,395,000. The future minimum rental payments for continuing operations, under all building leases for fiscal 1997 through 2001, are approximately $207,000, $207,000, $218,000, $218,000 and none in 2001. The amounts total $850,000. For fiscal years 1996, 1995 and 1994, rental expense was approximately $442,000, $277,000 and $318,000 respectively. Rental expense for continuing operations was $226,000, $61,000 and $102,000 for fiscal years 1996, 1995 and 1994, respectively. 9. STOCK OPTION AND PURCHASE PLANS ------------------------------- Under the 1992 Stock Option Plan ("Plan"), the Company may grant options to employees and directors. The Company has reserved 400,000 shares for issuance under the Plan. In November 1996, the Board of Directors authorized an additional 175,000 shares for issuance under the Plan, subject to shareholder approval. The exercise price per share for stock options cannot be less than the fair market value on the date of grant. Options granted are for a ten-year term and generally vest ratably over a period of four years commencing one year after the date of grant. The Plan provides for the automatic grant of a nonstatutory stock option to purchase shares of Common Stock to each outside Director annually during the Company's third fiscal quarter. During fiscal 1996, each outside Director was granted an automatic option to purchase a total of 5,000 shares of the Company's Common Stock. The Company's 1983 Stock Option Plan expired in 1993 and no further options have been granted under this Plan since then. A summary of the option transactions is as follows: 27 9. STOCK OPTION AND PURCHASE PLANS (CONTINUED) ------------------------------------------- OPTIONS OUTSTANDING ------------------- Options Number Available of Price per Fof Grant Shares Share Balance at October 2, 1993 .. 159,624 746,027 $ 1.09-11.50 Granted .................... (74,000) 74,000 $ 7.38-11.00 Canceled ................... 18,000 (18,000) $ 3.75-11.50 Exercised .................. - (82,000) $ 1.09 -8.75 -------- -------- ------------ Balance at October 1, 1994 .. 103,624 720,027 $ 1.09-11.50 Granted .................... (28,000) 28,000 $ 9.50 Canceled ................... 34,000 (34,000) $ 8.75-11.50 Exercised .................. - (132,250) $ 2.13 -8.75 -------- -------- ------------ Balance at September 30, 1995 109,624 581,777 $1.09 -11.50 Additional shares approved . 200,000 - - Granted .................... (205,000) 205,000 $ 9.00-11.25 Canceled ................... 92,125 (92,125) $ 8.75-11.50 Exercised .................. - (65,125) $ 1.09-11.50 -------- -------- ------------ Balance at September 28, 1996 196,749 629,527 $ 1.09-11.50 ======== ======== ============ Options exercisable at September 28, 1996 ......... 416,965 $ 1.09-11.50 ======== ============ If all options outstanding at September 28, 1996 were exercised, the total proceeds to the Company would be approximately $4.7 million (unaudited). Under the Company's Employee Stock Purchase Plan, the Company has reserved 300,000 shares of common stock for issuance to participating employees who have met certain eligibility requirements. In November 1996, the Board of Directors authorized an additional 50,000 shares for issuance under the Plan, subject to shareholder approval. The number of shares available for purchase by each participant is based upon annual base earnings and at a purchase price equal to 85% of the fair market value at the beginning or the end of the quarter of purchase, whichever is lower. As of September 28, 1996, 61,588 shares were available for future purchase. 10. OTHER INCOME/EXPENSE -------------------- Other (income) expense consists of the following: 1996 1995 1994 ---- ---- ---- Interest income ............... $ (80,163) $(265,443) $(170,072) Interest expense .............. 542,061 589,200 288,669 --------- --------- --------- Net interest expense related to continuing operations ........ $ 461,898 $ 323,757 $ 118,597 ========= ========= ========= 28 11. ACQUISITIONS ------------ In August 1991, the Company acquired all the outstanding stock of Q-Arc Ltd. of Cambridge, England for $1,400,000 in cash and the assumption of certain liabilities. Q-Arc is a manufacturer of specialty lamps for laser and non-laser applications. This transaction was accounted for as a purchase and accordingly, all assets were revalued to their respective fair values. The acquisition price was equal to the fair value of net assets acquired. Net assets included a covenant-not-to-compete of approximately $951,000. The covenant is being amortized over an eight year period. At September 28, 1996, the unamortized balance of the Q-Arc covenant-not-to-compete is approximately $357,000. 12. DISCONTINUED OPERATIONS ----------------------- In September 1996, the Company's Board of Directors voted to proceed with the divestiture of the Company's Precision Lamp subsidiary based in Cotati, California. The Company plans to dispose of Precision Lamp either through a sale to a qualified buyer or by an orderly liquidation of the business if no buyer is located within one year. As a result of the Company's plan, an estimated loss on disposal of $3,399,000, net of a tax benefit of $1,133,000, was recorded in the fourth quarter of fiscal 1996. This loss on disposal included $500,000 as the estimated operating losses through the final disposition of the subsidiary and the write off of the unamortized balance of the Precision Lamp covenant-not-to- compete of approximately $470,000. Continuing operations, as reclassified for fiscal years 1996, 1995 and 1994, consist of the activities of ILC Technology, Inc. based in Sunnyvale, California, Converter Power, Inc. based in Beverly, Massachusetts and Q-Arc based in Cambridge, England. The Consolidated Statements of Operations have been reclassified to report separately the activities of Precision Lamp as discontinued operations. Revenues from Precision Lamp were $7,772,000, $8,933,000 and $7,691,000 for fiscal 1996, 1995 and 1994, respectively. The net loss after tax from the discontinued operations of Precision Lamp was $840,000, $99,000 and $3,536,000 for fiscal 1996, 1995 and 1994, respectively. The net loss from discontinued operations of $3,536,000 in fiscal 1994 is net of a $523,000 income tax benefit and includes a $3.4 million write down of intangibles generated from the Precision Lamp acquisition. A portion of net interest expense of approximately $66,000, $58,000 and $21,000 for fiscal years 1996, 1995 and 1994, respectively, has been allocated to the discontinued operations. Net interest has been allocated to discontinued operations based on the ratio of the net assets to be discontinued to the consolidated net assets plus consolidated debt other than debt which is directly attributable to continuing operations. The net assets of Precision Lamp of $2,178,383 as of September 28, 1996 are shown in the accompanying balance sheet as net assets from discontinued operations. These assets were written down to a value that represents management's best estimate of the amount that could be realized upon disposition. 13. RIGHTS AGREEMENT AND OTHER MATTERS ---------------------------------- On September 19, 1989, the Company's Board of Directors declared a dividend of one common share purchase right for each outstanding share of common stock, no par value, of the Company. The dividend was payable on October 2, 1989 to the shareholders of record on that date. Each right entitles the registered holder to purchase from the Company one share of common stock of the Company at a price of $15.00 per common share. The rights will not be exercisable until a party either acquires beneficial ownership of 20% of the Company's common stock or makes a tender offer for at least 30% of its common stock. In the event the rights become exercisable and thereafter a person or group acquires 30% or more of the Company's stock, a 20% shareholder ("Acquiring Person") engages in any specified self-dealing transaction, or, as a result of a recapitalization or reorganization, 29 13. RIGHTS AGREEMENT AND OTHER MATTERS (CONTINUED) ---------------------------------------------- an Acquiring Person's shareholdings are increased by more than 3%, each right will entitle the holder to purchase from the Company, for the exercise price, common stock having a market value of twice the exercise price of the right. In the event the rights become exercisable and thereafter the Company is acquired in a merger or other business combination, each right will enable the holder to purchase from the surviving corporation, for the exercise price, common stock having a market value of twice the exercise price of the right. At the Company's option, the rights are redeemable in their entirety, prior to becoming exercisable, at $.01 per right. The rights are subject to adjustment to prevent dilution and expire September 29, 1999. In November 1996, the Board of Directors authorized severance agreements for certain key managers in the event that a change of control occurs at the Company. 14. REPURCHASE OF COMMON STOCK -------------------------- In November 1996, the Board of Directors authorized the Company to repurchase up to 1,000,000 shares of the Company's issued and outstanding common stock. Purchases can be made for up to two years from the date of authorization. 30 SCHEDULE VIII ILC TECHNOLOGY, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR FISCAL YEARS 1996, 1995 AND 1994 Balance Charged at (Credited) Deductions Balance Beginning to Cost and and at end of Of Period Expenses Write Offs Period --------- -------- ---------- ------ ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended October 1, 1994..............$ 208,787 $ 383,902 $260,017 $ 332,672 Year ended September 30, 1995....... $ 332,672 $ 102,861 $ 26,093 $ 409,440 Year ended September 28, 1996....... $ 409,440 $ 38,804 $135,886 $ 312,358 RESERVE FOR INVENTORY OBSOLESCENCE: Year ended October 1, 1994 .......... $1,177,080 $1,772,346 $807,434 $2,141,992 Year ended September 30, 1995........ $2,141,992 $ 169,034 $430,000 $1,881,026 Year ended September 28, 1996........ $1,881,026 $ 520,006 $366,774 $2,034,258 31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To ILC Technology, Inc. We have audited the accompanying consolidated balance sheets of ILC Technology, Inc. (a California Corporation) and subsidiaries as of September 28, 1996 and September 30, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 28, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ILC Technology, Inc. and subsidiaries as of September 28, 1996 and September 30, 1995 and the results of their operations and their cash flows for each of the three years in the period ended September 28, 1996 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule presented on page 31 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California November 22, 1996 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III Certain information required by Part III is omitted from this Report in that registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Shareholders to be held February 12, 1997, not later than 120 days after the end of the fiscal year covered by this Report, and the information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors required by this item appearing in the Company's 1996 Proxy Statement under the caption "Election of Directors-Nominees" is incorporated herein by reference. The information regarding executive officers of the Company required by this item appearing in the Company's 1996 Proxy Statement under the caption "Executive Officers" is incorporated herein by reference. The information required by this item appearing in the Company's 1996 Proxy Statement under the caption "Compliance Under Section 16(a) of the Securities Exchange Act of 1934" is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appearing in the Company's 1996 Proxy Statement under the captions "Election of Directors-Director Compensation", "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appearing in the Company's 1996 Proxy Statement under the captions "Election of Directors-Nominees" and "Security Ownership of Certain Beneficial Owners" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appearing in the Company's 1996 Proxy Statement under the captions "Election of Directors-Director Compensation", "Executive Compensation" and "Certain Transactions" is incorporated herein by reference. 33 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS The Consolidated Financial Statements, notes thereto, and Report of Independent Public Accountants thereon are included in Part II, Item 8 of this report. PAGE IN 2. FINANCIAL STATEMENT SCHEDULE FORM 10-K Schedule VIII Valuation and Qualifying Accounts and Reserves 31 All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or notes thereto. 3. EXHIBITS The exhibits listed in the Index to Exhibits following the signature page are filed as part of this Report. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the last quarter of fiscal 1996. . 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ILC TECHNOLOGY, INC. By: /S/ HENRY C. BAUMGARTNER Henry C. Baumgartner (Chairman of the Board and Chief Executive Officer) Dated: December 24, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE ---------- ----- ---- /S/ HENRY C. BAUMGARTENER Chairman of the Board and December 24, 1996 - ------------------------- Chief Executive Officer (Henry C. Baumgartner) (Principal Executive Officer and Director) /S/ RICHARD D. CAPRA President and Chief December 24, 1996 - ------------------------- Operating Officer (Richard D. Capra) /S/ RONALD E. FREDIANELLI Chief Financial Officer December 24, 1996 - ------------------------- and Secretary (Ronald E. Fredianelli) (Principal Financial and Accounting Officer) /S/ HARRISON H. AUGUR Director December 24, 1996 - ------------------------- (Harrison H. Augur) - -------------------- Director December , 1996 (Arthur L. Schawlow) - --------------------- Director December , 1996 (Wirt D. Walker, III) 35 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION 3.1 (A) Restated Articles of Incorporation of ILC Technology, Inc. as filed in the Office of the California Secretary of State on March 8, 1991. 3.2 Amended and Restated Bylaws as of November 21, 1996 4.1 (C) Certificate evidencing shares of Common Stock without par value, ILC Technology, Inc. 10.1 (E) ILC Technology, Inc. 1983 Employee Incentive and Nonstatutory Stock Option Plan, as amended, together with related form of Stock Option Agreement. 10.2 (B) Rights Agreement between ILC Technology, Inc. and Security Pacific National Bank dated as of September 29, 1989. 10.3 (D) Employment Agreement between ILC Technology, Inc. and Richard E. DuNah dated July 1, 1992. * 10.4 (E) ILC Technology, Inc. 1992 Stock Option Plan, as amended, and related form of Option Agreement. * 10.5 (D) Form of Officer and Director Indemnification Agreement * 10.6 (G) Credit Agreement dated March 2, 1995, by and between Union Bank and ILC Technology, Inc. 10.7 (E) Standard Industrial/Commercial Single-Tenant Lease between ILC Technology, Inc. (720 Portal Street, Cotati, California) and John Gary Taylor, dated December 29, 1992. 10.8 (F) Purchase and Sale Agreement dated June 24, 1994, by and between UCB Bank PLC and Q-Arc, Limited relating to property on the south side of Saxon Way, Bar Hill, Cambridge, England. 10.9 (F) Asset Purchase Agreement dated September 16, 1994, by and between ILC Technology, Inc. and UVP, Inc. 10.10 (G) Lease Agreement between Converter Power, Inc. (150 Sohier Road, Beverly, Massachusetts) and Communications & Power Industries, Inc., dated September 15, 1995 10.11 Credit agreement dated March 25, 1996 by and between Union Bank and ILC Technology, Inc. along with first amendment dated July 18, 1996. 10.12 Form of Management Compensation Agreement* 21.1 (F) Subsidiaries of Registrant 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule INDEX TO EXHIBITS (CONTINUED) 99.1 Proxy Statement for the Company's 1996 Annual Meeting of Shareholders (to be deemed filed only to the extent required by General Instruction H to Form 10-K) - -------------------------------------------------------------------------------- (A) Incorporated by reference from the Exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended September 28, 1991. (B) Incorporated by reference from the Exhibits to Registrant's Current Report on Form 8-K dated September 19, 1989. (C) Incorporated by reference from the Exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988. (D) Incorporated by reference from the Exhibits to Registrants' Annual Report on Form 10-K for the fiscal year ended October 3, 1992. (E) Incorporated by reference from the Exhibits to Registrants Annual Report on Form 10-K for the fiscal year ended October 2, 1993. (F) Incorporated by reference from the Exhibits to Registrants' Registration Statement on Form 10-K for the year ended October 1, 1994. (G) Incorporated by reference from the Exhibits to Registrants' Registration Statement on Form 10-K for the year ended Setpember 30, 1995. * Management contract or compensatory plan or arrangement. EX-3.(II) 2 BYLAWS BYLAWS OF ILC TECHNOLOGY, INC., a California corporation AMENDED AND RESTATED as of November 21, 1996 ARTICLE 1 OFFICES Section 1.1. Principal Office. The principal office for the transaction of the business of the corporation shall be located at 399 Java Drive, Sunnyvale, California 94089. The Board of Directors is hereby granted full power and authority to change said principal office to another location within or without the State of California. Section 1.2. Other Offices. One or more branch or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within or without the State of California as it deems appropriate. ARTICLE 2 DIRECTORS Section 2.1. Exercise of Corporate Powers. Except as otherwise provided by the Articles of Incorporation of the corporation or by the laws of the State of California now or hereafter in force, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-to-day operation of the business of the corporation as permitted by law provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Section 2.2. Number. (a) The number of the corporation's directors shall be not less than six (6) nor more than eleven (11). (b) The exact number of the corporation's directors shall be six (6) until changed, within the limits specified above, by a resolution duly approved by the Board or shareholders. Section 2.3. Need Not Be Shareholders. The directors of the corporation need not be shareholders of the corporation. 1 Section 2.4. Compensation. Directors shall receive such compensation for their services as directors and such reimbursement for their expenses of attendance at meetings as may be determined from time to time by resolution of the Board. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 2.5. Election and Term of Office. At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting, provided that if for any reason said annual meeting or an adjournment thereof is not held or the directors are not elected thereat, then the directors may be elected at any special meeting of the shareholders called and held for that purpose. The term of office of the directors shall begin immediately after their election and shall continue until the expiration of the term for which elected and until their respective successors have been elected and qualified. Section 2.6. Vacancies. A vacancy or vacancies in the Board of Directors shall exist when any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number of directors (by the Board or the shareholders) or otherwise. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. A vacancy created by the removal of a director may be filled only by the approval of the shareholders. Except for a vacancy created by the removal of a director, vacancies on the Board may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director. The shareholders may elect a director at any time to fill any vacancy not filled by the directors, but any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary, or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 2.7. Removal. 2.7.1. General Rule. Any and all of the directors may be removed without cause if such removal is approved by the affirmative vote of a majority of the outstanding shares entitled to vote at an election of directors, except as set forth in subsections 2.7.2 and 2.7.3. 2.7.2. Supermajority Vote Required. No director may be removed (unless the entire Board is removed) when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected; 2.7.3. Class Vote. When by the provisions of the Articles the holders of the shares of any class or series, voting as a class or series, are entitled to elect one or more directors, 2 any director so elected may be removed only by the applicable vote of the holders of the shares of that class or series. 2.7.4. Effect of Reduction of Size of Board. Any reduction of the authorized number of directors does not remove any director prior to the expiration of such director's term of office. Section 2.8. Meetings of Directors. 2.8.1. Place of Meetings. Unless otherwise specified in the notice thereof, meetings (whether regular, special or adjourned) of the Board of Directors of the corporation shall be held at the principal office of the corporation for the transaction of business, as specified in accordance with Section 1.1, which is hereby designated as an office for such purpose in accordance with the laws of the State of California, or at any other place within or without the State which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. 2.8.2. Regular Meetings. Regular meetings of the Board of Directors, of which no notice need be given except as required by the laws of the State of California, shall be held after the adjournment of each annual meeting of the shareholders (which meeting shall be designated the Regular Annual Meeting) and at such other times as may be designated from time to time by resolution of the Board of Directors. Such regular meetings shall be held at the principal office of the corporation for the transaction of business as specified in accordance with Section 1.1 or at any other place within or without the State of California which has been designated from time to time by resolution of the Board or by written consent of all members of the Board, unless notice of the place thereof be given in the same manner as for special meetings. 2.8.3. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary, or any two or more of the directors. 2.8.4. Notice of Meetings. Except in the case of regular meetings, notice of which has been dispensed with, all meetings of the Board of Directors shall be held upon four (4) days' notice by mail or forty-eight (48) hours' notice delivered personally or by telephone, telegraph, or other electronic or wireless means. If the address of a director is not shown on the records and is not readily ascertainable, notice shall be addressed to him at the city or place in which the meetings of the directors are regularly held. Except as set forth in subsection 2.8.6, notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. 2.8.5. Quorum. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors except as otherwise provided by law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the 3 withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. 2.8.6. Adjourned Meetings. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. 2.8.7. Waiver of Notice and Consent. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 2.8.8. Action Without a Meeting. Any action required or permitted to be taken by the Board may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. 2.8.9. Conference Telephone Meetings. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to this Section constitutes presence in person at such meeting. 2.8.10. Meetings of Committees. The provisions of this Section apply also to committees of the Board and action by such committees, with such changes in points of detail as may be necessary. ARTICLE 3 OFFICERS Section 3.1. Election and Qualifications. The officers of the corporation shall consist of a President, one or more Vice Presidents, a Secretary, and a Chief Financial Officer who shall be chosen by the Board of Directors and such other officers, including a Chairman of the Board, as the Board of Directors shall deem expedient, who shall be chosen in such manner and hold their offices for such terms as the Board of Directors may prescribe. Any two or more of such offices may be held by the same person. Any Vice President, Assistant Treasurer, or Assistant Secretary may exercise any of the powers of the President, the Chief Financial Officer, or the Secretary, respectively, as directed by the Board of Directors, and shall perform such other duties as are imposed upon such officer by the Bylaws or the Board of Directors. Section 3.2. Term of Office and Compensation. The term of office and salary of each of said officers and the manner and time of the payment of such salaries shall be fixed and 4 determined by the Board of Directors and may be altered by said Board from time to time at its pleasure, subject to the rights, if any, of said officers under any contract of employment. Section 3.3. Removal and Vacancies. Any officer of the corporation may be removed at the pleasure of the Board of Directors at any meeting or at the pleasure of any officer who may be granted such power by a resolution of the Board of Directors. Any officer may resign at any time upon written notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. If any vacancy occurs in any office of the corporation, the Board of Directors may elect a successor to fill such vacancy for the remainder of the unexpired term and until a successor is duly chosen and qualified. ARTICLE 4 CHAIRMAN OF THE BOARD The Chairman of the Board of Directors, if there be one, shall have the power to preside at all meetings of the Board of Directors, and to call meetings of the shareholders and of the Board of Directors to be held within the limitations prescribed by law or by these Bylaws, at such times and at such places as the Chairman of the Board shall deem proper. The Chairman of the Board shall have such other powers and shall be subject to such other duties as the Board of Directors may from time to time prescribe. ARTICLE 5 PRESIDENT Section 5.1. Powers and Duties. The powers and duties of the President are: (a) To act as the chief executive officer of the corporation and, subject to the control of the Board of Directors, to have general supervision, direction, and control of the business and affairs of the corporation. (b) To preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. (c) To call meetings of the shareholders and also of the Board of Directors to be held, subject to the limitations prescribed by law or by these Bylaws, at such times and at such places as the President shall deem proper. (d) Subject to the direction of the Board of Directors, to have general charge of the property of the corporation and to supervise and control all officers, agents, and employees of the corporation. Section 5.2. President Pro Tem. If neither the Chairman of the Board, the President, nor any Vice President is present at any meeting of the Board of Directors, a President pro tem may be chosen to preside and act at such meeting. If neither the President nor any Vice 5 President is present at any meeting of the shareholders, a President pro tem may be chosen to preside at such meeting. ARTICLE 6 VICE PRESIDENT In case of the absence, disability, or death of the President, the Vice President, or one of the Vice Presidents, shall exercise all the powers and perform all the duties of the President. If there is more than one Vice President, the order in which the Vice Presidents shall succeed to the powers and duties of the President shall be fixed by the Board of Directors. The Vice President or Vice Presidents shall have such other powers and perform such other duties as may be granted or prescribed by the Board of Directors. ARTICLE 7 SECRETARY The powers and duties of the Secretary are: (a) To keep a book of minutes at the principal office of the corporation, or such other place as the Board of Directors may order, of all meetings of its directors and shareholders with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. (b) To keep the seal of the corporation and to affix the same to all instruments which may require it. (c) To keep or cause to be kept at the principal office of the corporation, or at the office of the transfer agent or agents, a share register, or duplicate share registers, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for shares, and the number and date of cancellation of every certificate surrendered for cancellation. (d) To keep a supply of certificates for shares of the corporation, to fill in all certificates issued, and to make a proper record of each such issuance; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agent of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents. (e) To transfer upon the share books of the corporation any and all shares of the corporation; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agent of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents, and the method of transfer of each certificate shall be subject to the reasonable regulations of the transfer agent to which the certificate is presented for transfer, and also, if the corporation then has one or more duly appointed and 6 acting registrars, to the reasonable regulations of the registrar to which the new certificate is presented for registration; and provided, further, that no certificate for shares of stock shall be issued or delivered or, if issued or delivered, shall have any validity whatsoever until and unless it has been signed or authenticated in the manner provided in Section 12.2. (f) To make service and publication of all notices that may be necessary or proper, and without command or direction from anyone. In case of the absence, disability, refusal, or neglect of the Secretary to make service or publication of any notices, then such notices may be served and/or published by the President, a Vice President, any person thereunto authorized by either of them, the Board of Directors, or the holders of a majority of the outstanding shares of the corporation. (g) Generally to do and perform all such duties as pertain to the office of Secretary and as may be required by the Board of Directors. ARTICLE 8 CHIEF FINANCIAL OFFICER The powers and duties of the Chief Financial Officer are: (a) To supervise and control the keeping and maintaining of adequate and correct accounts of the corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. (b) To have the custody of all funds, securities, evidences of indebtedness, and other valuable documents of the corporation, and, at the Chief Financial Officer's discretion, to cause any or all thereof to be deposited for the account of the corporation with such depositary as may be designated from time to time by the Board of Directors. (c) To receive or cause to be received, and to give or cause to be given, receipts and acquittances for moneys paid in for the account of the corporation. (d) To disburse, or cause to be disbursed, all funds of the corporation as may be directed by the Board of Directors, taking proper vouchers for such disbursements. (e) To render to the President and the Board of Directors, whenever they may require, accounts of all transactions and of the financial condition of the corporation. (f) Generally to do and perform all such duties as pertain to the office of Chief Financial Officer and as may be required by the Board of Directors. 7 ARTICLE 9 COMMITTEES OF THE BOARD Section 9.1. Appointment and Procedure. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of at least two or more directors, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Section 9.2. Powers. Any committee appointed by the Board of Directors, to the extent provided in the resolution of the Board or in these Bylaws, shall have all the authority of the Board except with respect to: (a) the approval of any action which requires the approval or vote of the shareholders; (b) the filling of vacancies on the Board or on any committee; (c) the fixing of compensation of the directors for serving on the Board or on any committee; (d) the amendment or repeal of Bylaws or the adoption of new Bylaws; (e) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) a distribution as defined at Section 166 of the California Corporations Code, except at a rate or in a periodic amount or within a price range set forth in the Articles of Incorporation or determined by the Board; (g) the appointment of other committees of the Board or the members thereof. Section 9.3. Executive Committee. In the event that the Board of Directors appoints an Executive Committee, such Executive Committee, in all cases in which specific directions to the contrary shall not have been given by the Board of Directors, shall have and may exercise, during the intervals between the meetings of the Board of Directors, all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation (except as provided in Section 9.2) in such manner as the Executive Committee may deem best for the interests of the corporation. 8 ARTICLE 10 MEETINGS OF SHAREHOLDERS Section 10.1. Place of Meetings. Meetings (whether regular, special, or adjourned) of shareholders of the corporation shall be held at the principal office for the transaction of business as specified in accordance with Section 1.1, or any place within or without the State which may be designated by written consent of all the shareholders entitled to vote thereat, or which may be designated by the Board of Directors. Section 10.2. Time of Annual Meetings. The annual meeting of the shareholders shall be at the hour of 4:00 o'clock in the afternoon on the second Wednesday in February in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding business day not a legal holiday, or such other time or date within fifteen months of the date of incorporation or the date of the last annual meeting of shareholders (whichever is later) as may be set by the Board of Directors. Section 10.3. Special Meetings. Special meetings of the shareholders may be called by the Board of Directors, the Chairman of the Board, the President, or the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. Section 10.4. Notice of Meetings. Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 (or, if sent by third-class mail, 30) nor more than 60 days before the day of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date, and hour of the meeting and (a) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (b) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but subject to the provisions of Section 10.8 hereof any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board of Directors for election. Section 10.5. Delivery of Notice. Notice of a shareholders' meeting or the furnishing of any report shall be given either personally or by first-class mail, or, if the corporation has outstanding shares held of record by 500 or more persons on the record date for the shareholders' meeting, notice may be sent third-class mail, or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. A verified statement of mailing of any notice or report in accordance with the provisions of this Section, executed by the secretary, assistant secretary, or any transfer agent, shall be prima facie evidence of the giving of the notice or report. If any notice or 9 report addressed to the shareholders at the address of such shareholder appearing on the books of the corporation is returned to the corporation by United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice to all other shareholders. Section 10.6. Adjourned Meetings. When a shareholders' meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof is announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 10.7. Consent to Shareholders' Meeting. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote not present in person or by proxy signs a written waiver of notice or consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the California General Corporation Law to be included in the notice but not so included in the notice if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written notice, consent to the holding of the meeting or approval of the minutes thereof, unless otherwise provided in the Articles of Incorporation or Bylaws, except as provided in Section 10.8. Section 10.8. Notice of Business to be Transacted in Certain Cases. Any shareholder approval at a meeting, other than unanimous approval by those entitled to vote, on any of the matters listed below shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting or in any written waiver of notice: (a) a proposal to approve a contract or other transaction between a corporation and one or more of its directors, or between a corporation and any corporation, firm, or association in which one or more director has a material financial interest; (b) a proposal to amend the Articles of Incorporation; (c) a proposal regarding a reorganization, merger, or consolidation involving the corporation; 10 (d) a proposal to wind up and dissolve the corporation; (e) a proposal to adopt a plan of distribution of the shares, obligations, or securities of any other corporation, domestic or foreign, or assets other than money which is not in accordance with the liquidation rights of any preferred shares as specified in the Articles of Incorporation. Section 10.9. Quorum; Vote Required. 10.9.1. Quorum Required. The presence in person or by proxy of the persons entitled to vote a majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. If a quorum is present, the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law, the Articles of Incorporation, or these Bylaws, and except as provided in subsection 10.9.2. 10.9.2. Continuation of Business Despite Lack of Quorum. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of the number of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 10.9.3. No Votes Without Quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy, but no other business may be transacted, except as provided in subsection 10.9.2. Section 10.10. Actions Without Meeting. 10.10.1. Majority Consent. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided that, subject to the provisions of Section 2.6, directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. 10.10.2. Notice to Nonconsenting Shareholders. Unless the consents of all shareholders entitled to vote have been solicited in writing, (a) notice of any shareholder approval on matters described in subsections (a), (c), or (e) of Section 10.8 or respecting indemnification of agents of the corporation without a meeting by less than unanimous written consent shall be given at least ten (10) days before the consummation of the action authorized by such approval, and 11 (b) prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent, to those shareholders entitled to vote but who have not consented in writing; the provisions of Section 10.5 shall apply to such notice. 10.10.3. Setting of Record Date. In order that the corporation may determine the shareholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any shareholder of record seeking to have the shareholders authorize or take corporate action by written consent shall, by written notice to the secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date (unless a record date has previously been fixed by the Board of Directors pursuant to the first sentence of this Section). If no record date has been fixed by the Board of Directors pursuant to the first sentence of this Section or otherwise within ten (10) days of the date on which such a request is received, the record date for determining shareholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to the secretary at the principal executive offices of the corporation. Delivery shall be by hand or by certified mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining shareholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. 10.10.4. Inspection. In the event of the delivery, in the manner provided by Section 10.10.3, to the corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the corporation shall engage independent inspectors of elections for the purpose of performing promptly a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the corporation that the consents delivered to the corporation in accordance with Section 10.10.3 represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this Section 10.10.4 shall in any way be construed to suggest or imply that the Board of Directors or any shareholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution, or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). 12 10.10.5. Time Period for Consents. Every written consent shall bear the date of signature of each shareholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated written consent received in accordance with Section 10.10.3, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the Corporation in the manner prescribed in Section 10.10.3. Section 10.11. Revocation of Consent. Any shareholder giving a written consent, or the shareholder's proxy-holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy-holders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the secretary of the corporation. Section 10.12. Voting Rights. Except as provided in Section 10.14, in the Articles of Incorporation, or in any statute relating to the election of directors or to other particular matters, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. Section 10.13. Determination of Holders of Record. 10.13.1. Record Date. In order that the corporation may determine the shareholders entitled to notice of any meeting, to vote, to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. 10.13.2. Absence of Determination By Board. In the absence of any record date set by the Board of Directors pursuant to subsection 10.13.1, then: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given. 13 (c) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. 10.13.3. Adjournments. A determination of shareholders of record entitled to notice of or to a vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. 10.13.4. Effect of Post Record Date Transfers. Shareholders at the close of business on the record date are entitled to notice and to vote or to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles, these Bylaws, agreement, or applicable law. Section 10.14. Elections for Directors. 10.14.1. Right to Cumulate. Every shareholder complying with subsection 10.14.2 and normally entitled to vote at any election of directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. 10.14.2. Procedure for Cumulating Votes. No shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of the votes which such shareholder normally is entitled to cast) unless such candidate or candidates' names have been placed in nomination prior to the voting and the shareholder has given written notice to the chairman of the meeting at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. 10.14.3. Directors Elected. In any election of directors, the candidates receiving the highest number of affirmative votes of the shares entitled to be voted for them up to the number of directors to elected by such shares are elected; votes against directors and votes withheld shall have no effect. 10.14.4. Ballot Optional. Elections for directors need not be by ballot unless a shareholder demands election by ballot at the meeting and before the voting begins. Section 10.15. Proxies. 10.15.1. Proxies Authorized. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. Any proxy purporting to be executed in accordance with the provisions of the General Corporation Law of the State of California shall be presumptively valid. 14 10.15.2. Term of Proxy. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in this Section. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting by attendance at such meeting and voting in person by the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. 10.15.3. Death of Proxy Maker. A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by the corporation. Section 10.16. Inspectors of Election. 10.16.1. Appointment. In advance of any meeting of shareholders, the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. 10.16.2. Duties. The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity, and effect of proxies, receive votes, ballots, or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count, and tabulate all votes and consents, determine when the polls shall close, determine the result, and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. 10.16.3. Good Faith; Acts. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability, and as expeditiously as is practical. If there are three inspectors of election, the decision, act, or certificate of a majority is effective in all respects as the decision, act, or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. Section 10.17. Nominations and Proposals at Annual Meetings. 10.17.1. Nominations and Proposals. Nominations of persons for election to the Board of Directors and the proposal of business to be transacted by the shareholders may be made at an annual meeting of shareholders (a) pursuant to the corporation's notice with respect to such meeting, (b) by or at the direction of the Board of Directors or (c) by any shareholder of the corporation who was a shareholder of record at the time of giving of the notice provided for 15 in this section, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this section. 10.17.2. Prior Notice. For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to Section 10.17.1(c), the shareholder must have given timely notice thereof in writing to the secretary of the corporation and such business must be a proper matter for shareholder action under the California General Corporation Law. To be timely, a shareholder's notice shall be delivered to the secretary at the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting of shareholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 60 days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the shareholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the corporation's books, and of such beneficial owner and (ii) the class and number of shares of the corporation that are owned beneficially and of record by such shareholder and such beneficial owner. 10.17.3. Increase in Number of Directors to be Elected. Notwithstanding anything in the second sentence of Section 10.17.2 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. 10.17.4. No Other Business. Only persons nominated in accordance with the procedures set forth in this section shall be eligible to serve as directors and only such business shall be conducted at an annual meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this section. The chair of the meeting shall have the power and the duty to determine whether a nomination or any business proposed to be 16 brought before the meeting has been made in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws to declare that such defective proposed business or nomination shall not be presented for shareholder action at the meeting and shall be disregarded. 10.17.5. Definition. For purposes of this section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. 10.17.6. No Effect On Exchange Act Requirements. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in this Section. Nothing in this section shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 10.18. Special Meetings; Other Provisions. The Board of Directors may postpone, reschedule or cancel any previously scheduled special meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of Shareholders at which directors are to be selected pursuant to the Company's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the corporation who is a shareholder of record at the time of giving of notice provided for in these Bylaws, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. Nominations by shareholders of persons for election to the Board of Directors may be made at such a special meeting of shareholders if the shareholder's notice required by Section 10.17.2 of these Bylaws shall be delivered to the secretary at the principal executive offices of the corporation not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be selected at such meeting. ARTICLE 11 INDEMNIFICATION OF DIRECTORS, OFFICERS, AND AGENTS Section 11.1. Indemnification For Third Party Actions. The corporation shall indemnify any officer or director of the corporation, and may indemnify any other person, who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that such person is or was an agent of the corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendre or its equivalent shall not, of itself, create a presumption that the person did not 17 act in good faith and in a manner which the person reasonably believed to be in the best interests of the corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. Section 11.2. Indemnification For Claims By the Corporation. The corporation shall indemnify any officer or director of the corporation, and may indemnify any other person, who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of the corporation and its shareholders. Section 11.3. Indemnification For Successful Defense. To the extent that an agent of the corporation is successful on the merits in defense of any proceeding or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. Section 11.4. Advances of Expenses. Expenses incurred by an officer or director of the corporation in defending a proceeding shall be advanced by the corporation, and expenses incurred by a person other than an officer or director of the corporation in defending a proceeding may be advanced by the corporation, before final disposition of the proceeding. As a condition to any such advance, the corporation shall receive an undertaking by or on behalf of the officer, director, or agent to repay such amount if it is determined ultimately that the agent is not entitled to be indemnified. With respect to advances to persons other than officers or directors, the corporation may require such terms and collateral as it deems appropriate as a condition to any such advance. The corporation shall pay expenses of officers and directors required to be paid under this Section within 45 days after the corporation receives evidence of the expenses in form sufficient to document them for tax purposes. Section 11.5. Prohibitions on Indemnification. 11.5.1. Inconsistent With Controlling Documents or Court Orders, or Culpable Acts. No indemnification or advance shall be made under this Article, except as provided in Section 11.3 or Section 11.6(c), in any circumstance where it appears that: (a) it would be inconsistent with a provision of the Articles of Incorporation of the corporation, these Bylaws, a resolution of the shareholders, or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) it would be inconsistent with any condition expressly imposed by a court in approving a settlement. 18 11.5.2. Selfish or Reckless Actions. No indemnification or advance shall be made under this Article, except as provided in Section 11.3, in any circumstance where it appears that the agent may be liable: (a) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (b) for acts or omissions that the agent believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the agent; (c) for any transaction from which the agent derived an improper personal benefit; (d) for acts or omissions that show a reckless disregard for the agent's duty to the corporation or its shareholders in circumstances in which the agent was aware, or should have been aware, in the ordinary course of performing the agent's duties, of a risk of serious injury to the corporation or its shareholders; (e) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the agent's duty to the corporation or its shareholders; or (f) under Section 310 or Section 316 of the California Corporations Code. 11.5.3. Additional Prohibitions on Indemnification of Claims by the Corporation. No indemnification shall be made under Section 11.2, (a) in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to the corporation in the performance of such person's duty to the corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (b) of amounts paid in settling or otherwise disposing of a pending action without court approval; or (c) of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. Section 11.6. Authorization of Indemnification. Except as provided in Section 11.3, any indemnification under this Article shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Section 11.1 or 11.2, by any of the following: 19 (a) A majority vote of a quorum consisting of directors who are not parties to such proceeding; (b) If such quorum of directors is not obtainable, by independent legal counsel in a written opinion; (c) Approval of the shareholders, with the shares owned by the person to be indemnified not being entitled to vote thereon; or (d) The court in which such proceeding is or was pending upon application made by the corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by the corporation. Section 11.7. Bylaws Not Exclusive. The corporation may agree that it shall indemnify or advance expenses in situations where such indemnification or advance is not mandatory as the Board of Directors deems appropriate. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any law, other provisions of these Bylaws, the corporation's Articles of Incorporation, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, as authorized in the Articles of Incorporation of the corporation. The rights to indemnification under this Article shall continue as to a person who has ceased to be an agent and shall inure to the benefit of the heirs, executors, and administrators of such person. Nothing contained in this Article shall affect any right to indemnification to which persons other than such directors and officers may be entitled by contract or otherwise. Section 11.8. Insurance. The corporation may purchase and maintain insurance on behalf of any agent against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such, whether or not the corporation has the power to indemnify the agent against such liability under this subsection. Section 11.9. Optional Means of Assuring Payment. The corporation may, but is not required to, create a trust fund, grant a security interest, obtain a letter of credit, or use other means to ensure the payment of such sums as may be necessary to indemnify its agents as provided herein. Section 11.10. Savings Clause. If any portion of this Article is invalid, then the corporation shall nevertheless indemnify each officer and director, and each agent the corporation elects to indemnify, to the full extent permitted by any applicable portion of this Article that is not invalid, or by any applicable agreement or law. Without limiting the foregoing, if any portion of this Article is invalid because it is too broad, the corporation shall be required or entitled, as the case may be, to indemnify its agents to the full extent permitted as if all necessary limitations had been included herein. 20 Section 11.11. Application of Other Laws. Nothing in this Article shall restrict the power of the corporation to indemnify its agents under any provision of law from time to time applicable to the corporation, nor shall anything in this Article authorize the corporation to indemnify its agents in situations prohibited by law. Section 11.12. Definitions. For the purpose of this Article 11: (a) "agent" means any person who is or was a director, officer, employee, or other agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation; (b) "officer" means the chief executive officer, chief operating officer, chief financial officer, president, treasurer, secretary, and any vice president, assistant treasurer, and assistant secretary of the corporation; (c) "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and (d) "expenses" includes without limitation attorneys' fees and any expenses establishing a right to indemnification. ARTICLE 12 SUNDRY PROVISIONS Section 12.1. Shares Held by the Corporation. Shares in other corporations standing in the name of this corporation may be voted or represented and all rights incident thereto may be exercised on behalf of this corporation by the President or by any other officer of this corporation authorized so to do by resolution of the Board of Directors. Section 12.2. Certificates of Stock. There shall be issued to each holder of fully paid shares of the capital stock of the corporation a certificate or certificates for such shares. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board, the President, or a Vice President and by the Chief Financial Officer, an Assistant Treasurer, the Secretary, or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificates may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent, or registrar at the date of issue. Section 12.3. Lost Certificates. The corporation may issue a new share certificate or a new certificate for any other security in the place of any certificate theretofore issued by it, alleged to have been lost, stolen, or 21 destroyed, and the corporation may require the owner of the lost, stolen, or destroyed certificate or the owner's legal representative to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft, or destruction of any such certificate or the issuance of such new certificate. The Board of Directors may adopt such other provisions and restrictions with reference to lost certificates, not inconsistent with applicable law, as it shall in its discretion deem appropriate. Section 12.4. Certification and Inspection of Bylaws. The corporation shall keep at its principal executive office in this state, or if its principal executive office is not in this state at its principal business office in this state, the original or a copy of these Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside this state and the corporation has no principal business office in this state, it shall upon the written request of any shareholder furnish to such shareholder a copy of the Bylaws as amended to date. Section 12.5. Notices. Any reference in these Bylaws to the time a notice is given or sent means, unless otherwise expressly provided, the time a written notice by mail is deposited in the United States mails, postage prepaid; or the time any other written notice is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient; or the time any oral notice is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. Section 12.6. Reports to Shareholders. Except as may otherwise be required by law, the rendition of an annual report to the shareholders is waived so long as there are less than 100 holders of record of the shares of the corporation (determined as provided in Section 605 of the California General Corporation Law). At such time or times, if any, that the corporation has 100 or more holders of record of its shares, the Board of Directors shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year or within such shorter time period as may be required by applicable law, and such annual report shall contain such information and be accompanied by such other documents as may be required by applicable law. Section 12.7. Loans to Officers. The Board may approve loans of money or property to, and guaranties of the obligations of, officers of the corporation, and may adopt employee benefit plans authorizing such loans and guaranties to officers of the corporation, without the approval of the shareholders of the corporation, provided that: (a) the corporation has outstanding shares held of record by more than 100 persons; (b) the vote of any interested director or directors is not counted; and (c) the Board determines that such loan, guaranty, or plan may reasonably be expected to benefit the corporation. 22 ARTICLE 13 CONSTRUCTION OF BYLAWS WITH REFERENCE TO PROVISIONS OF LAW Section 13.1. Definitions. Unless defined otherwise in these Bylaws or unless the context otherwise requires, terms used herein shall have the same meaning, if any, ascribed thereto in the California General Corporation Law, as amended from time to time. Section 13.2. Bylaw Provisions Additional and Supplemental to Provisions of Law. All restrictions, limitations, requirements, and other provisions of these Bylaws shall be construed, insofar as possible, as supplemental and additional to all provisions of law applicable to the subject matter thereof and shall be fully complied with in addition to the said provisions of law unless such compliance shall be illegal. Section 13.3. Bylaw Provisions Contrary to or Inconsistent with Provisions of Law. Any portion of these Bylaws that, upon being construed in the manner provided in Section 13.2, is contrary to or inconsistent with any applicable law, shall not apply so long as said law remains in effect. Such result shall not, however, affect the validity or application of any other portion of these Bylaws. Each portion of these Bylaws would have been adopted even if any other portion were invalid or unenforceable. ARTICLE 14 ADOPTION, AMENDMENT, OR REPEAL OF BYLAWS Section 14.1. By Shareholders. Bylaws may be adopted, amended, or repealed by the approval of the affirmative vote of a majority of the outstanding shares of the corporation entitled to vote. Section 14.2. By the Board of Directors. Subject to the right of shareholders to adopt, amend, or repeal Bylaws, Bylaws other than a Bylaw or amendment thereof changing the authorized number of directors or any provision of this Article may be adopted, amended, or repealed by the Board of Directors. A Bylaw adopted by the shareholders may restrict or eliminate the power of the Board of Directors to adopt, amend, or repeal any or all Bylaws. 23 CERTIFICATE OF SECRETARY KNOW ALL MEN BY THESE PRESENTS: That the undersigned does hereby certify that the undersigned is the Secretary of ILC Technology, Inc., a corporation duly organized and existing under and by virtue of the laws of the State of California; that the above and foregoing Bylaws of said corporation were duly and regularly adopted as such by the Board of Directors of said corporation; and that the above and foregoing Bylaws are now in full force and effect. Dated: November 21, 1996 /s/ Ronald E. Fredianelli Ronald E. Fredianelli, Secretary 24 EX-10.11 3 LOAN AGREEMENT EXHIBIT 10.11 LOAN AGREEMENT THIS LOAN AGREEMENT ("Agreement") is made and entered into as of March 25, 1996 by and between ILC Technology, Inc., ("Borrower") and UNION BANK, a California banking corporation ("Bank"). SECTION 1. THE LOAN 1.1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount not to exceed Four Million Dollars ($4,000,000) outstanding in the aggregate at any one time (the "Revolving Loan"). Borrower may borrow, repay and reborrow all or part of the Revolving Loan in accordance with the terms of the Revolving Note. All borrowings of the Revolving Loan must be made before March 31, 1998 at which time all unpaid principal and interest of the Revolving Loan shall be due and payable. The Revolving Loan shall be evidenced by a promissory note (the "Revolving Note") on the standard form used by Bank for commercial loans. Bank shall enter each amount borrowed and repaid in Bank's records and such entries shall be deemed to be the amount of the Revolving Loan outstanding. Omission of Bank to make any such entries shall not discharge Borrower of its obligation to repay in full with interest all amounts borrowed. 1.1.2 NON-REVOLVING EQUIPMENT LOAN. Bank will loan to Borrower an amount not to exceed Two Million Two Hundred Thousand Dollars ($2,2000,000) outstanding in the aggregate at any one time (the "Non-Revolving Loan"). All borrowings of the Non-Revolving Loan must be made before March 31, 1997 at which time all unpaid principal under the Non-Revolving Loan shall be converted to a fully amortizing loan as set forth in subsection 1.1.3. In the event of a prepayment of principal after such conversion and payment of any resulting fees, any repaid amounts shall be applied to the scheduled principal payments in the reverse order of their maturity. The Non-Revolving Loan shall be evidenced by a promissory note (the "Non-Revolving Note") on the standard form used by Bank for commercial loans. Bank shall enter each amount borrowed and repaid in Bank's records and such entries shall be deemed to be the amount of the Non-Revolving Loan outstanding. Omission of Bank to make any such entries shall not discharge Borrower of its obligation to repay in full with interest all amounts borrowed. 1.1.3 THE TERM LOAN. Solely to repay the Non-Revolving Loan, Bank will loan to Borrower the sum outstanding at the maturity of the Non-Revolving Loan in one disbursement on or before March 31, 1997 (the "Term Loan"). In the event of a prepayment of principal and payment of any resulting fees, any prepaid amounts shall be applied to the scheduled principal payments in the reverse order of their maturity. The Term Loan shall be evidenced by a promissory note (the "Term Note") on the standard form used by Bank for commerical loans. 1 1.1.4 OTHER LOANS. Bank has extended and will continue to extend, subject to the terms of this Agreement and the terms of the respective Note, certain additional facilities each evidenced by a Note described as follows: A. Obligation #008000001 dated 2/2/96 in the orignal principal amount of $1,252,800 with a present unpaid principal balance of $1,200,600. B. Obligation #00270003 dated 8/23/93 in the original principal amount of $5,000,000 with a present unpaid principal balance of $3,562,000. C. Obligation #0000000003 dated 6/24/94 in the original principal amount of $360,000 with a present unpaid principal balance of $45,000. D. Obligation #0001000001 dated 1/6/95 in the original principal amount of $1,464,000 with a present unpaid principal balance of $610,000. 1.2 TERMINOLOGY. As used herein the word "Loan" shall mean, collectively, all the credit facilities described above. As used herein the word "Note" shall mean, collectively, all the promissory notes described above. As used herein, the words "Loan Documents" shall mean all documents executed in connection with this Agreement. 1.3 BORROWING BASE. Notwithstanding any other provisions of this Agreement, Bank shall not be obligated to advance funds under the Revolving Loan, if at any time the aggregate of Borrower's obligations to Bank thereunder shall exceed the sum of seventy-five percent (75%) of Borrower's Eligible Accounts. If at any time Borrower's obligations to Bank under the above facilities exceed the sum so permitted, Borrower shall immediately repay to Bank such excess. 1.3.1 ELIGIBLE ACCOUNTS. The term "Accounts" means all presently existing and hereafter arising accounts receivable, contract rights, chattel paper, and all other forms of obligations owing to Borrower, payable in United States Dollars, arising out of the sale or lease of goods, or the rendition of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's books and records relating to any of the foregoing. The term "Eligible Accounts" means those Accounts, net of finance charges, which are due and payable within Ninety (90) days, or less, from the date of the invoice, have been validly assigned to Bank and strictly comply with all of Borrower's warranties and representations to Bank, but Eligible Accounts shall not include the following: (a) Any Account with respect to which the account debtor is an officer, shareholder, director, employee or agent of Borrower; (b) Any Account with respect to which the account debtor is a subsidiary of, related to, or affiliated or has common officers or directors with Borrower; (c) Any Account relating to goods placed on consignment, guaranteed sale or other terms by reason of which the payment by the account debtor may be conditional; -2- (d) Any Account with respect to which the account debtor is not a resident of the United States or Canada; (e) Any Account with respect to which the account debtor is the United States or any department, agency or instrumentality of the United States; (f) Any Account with respect to which Borrower is or may become liable to the account debtor for goods sold or services rendered by the account debtor to Borrower; (g) Any Account with respect to which there is asserted a defense, counterclaim, discount or setoff, whether well-founded or otherwise, except for those discounts, allowances and returns arising in the ordinary course of Borrower's business; (h) Any Account with respect to which the account debtor becomes insolvent, fails to pay its debts as they mature or goes out of business or is owed by an account debtor which has become the subject of a proceeding under any provision of the Untied States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including, but not limited to, assignments for the benefit of creditors, formal or informal moratoriums, compositions or extensions with all or substantially all of its creditors; (i) Any Account owed by any account debtor with respect to which twenty-five percent (25%) or more of the aggregate dollar amount of its Accounts are not paid within ninety (90) days from the due date of the invoice; (j) That portion of the Accounts owed by any single account debtor which exceeds twenty percent (20%) of all of the Accounts; and 1.4 PURPOSE OF LOAN. The proceeds of the Revolving Loan shall be used for general working capital purposes and the proceeds of the Non-Revolving Loan shall be used only for Borrower's Capital Equipment Requirements, and the proceeds of the Term Loan shall be used only for the repayment of the Non-Revolving Loan. 1.5 INTEREST. (A) Interest on the usage of the Revolving Loan shall be payable monthly to March 31, 1998 at which time the principal shall be due and payable. Interest on this loan shall be payable at Bank's Reference Rate or at the Borrower's option a fixed rate of libor plus 200 basis points. Twenty four hour notice shall be given if the fixed rate option is taken. (B) Interest on the usage of the Revolving Equipment Loan shall be payable monthly to March 31, 1998 at which time the principal amount then outstanding will equally amortize over a 24 month period. Interest on this loan shall be payable at Bank's Reference Rate or at the Borrower's option a fixed rate of libor plus 200 basis points. Twenty four hour notice shall be given if the fixed rate option is taken. -3- 1.6 BALANCES. Borrower shall maintain its major depository accounts with Bank until the Note and all sums payable pursuant to this Agreement have been paid in full. 1.7 DISBURSEMENT. Upon execution hereof, Bank shall disburse the proceeds of the Loan as provided in Bank's standard form Authorization executed by Borrower. 1.8 SECURITY. Prior to any disbursement of the Loan, Borrower, ILC Technology, Inc. and Guarantors, Converter Power, Inc. and Precision Lamp, Inc., shall have executed a security agreement, on Bank's standard form, and a financing statement, suitable for filing in the office of the Secretary of State of the State of California and any other state designated by Bank, granting to Bank a first priority security interest in such of Borrower's property as is described in said security agreement. Exceptions to Bank's first priority, if any, are permitted only as otherwise provided in this Agreement. 1.9 CONTROLLING DOCUMENT. In the event of any inconsistency between the terms of this Agreement and any Note or any of the other Loan Documents, the terms of such Note or other Loan Documents will prevail over the terms of this Agreement. SECTION 2. CONDITIONS PRECEDENT Bank shall not be obligated to disburse all or any portion of the proceeds of the Loan unless at or prior to the time for the making of such disbursement, the following conditions have been fulfilled to Bank's satisfaction. 2.1 COMPLIANCE. Borrower shall have performed and complied with all terms and condition required by this Agreement to be performed or complied with by it prior to or at the date of the making of such disbursement and shall have executed and delivered to Bank the Note and other documents deemed necessary by Bank. 2.2 GUARANTIES. Converter Power, Inc., Precision Lamp, Inc. and Q-ARC Limited ("Guarantors") shall have executed and delivered to Bank their respective continuing guaranties in form and amount satisfactory to Bank. Borrower shall cause each Guarantor to submit to Bank not later than Ninety (90) days after the end of each fiscal year such Guarantor's financial statement in form satisfactory to Bank. 2.3 BORROWING RESOLUTION. Borrower shall have provided Bank with certified copies of resolutions duly adopted by the Board of Directors of Borrower, authorizing this Agreement and the Loan Documents. Such resolutions shall also designate the persons who are authorized to act on Borrower's behalf in connection with this Agreement and to do the things required of Borrower pursuant to this Agreement. 2.4 CONTINUING COMPLIANCE. At the time any disbursement is to be made, there shall not exist any event, condition or act which constitutes an event of default under Section 6 hereof or any event, condition or act which with notice, lapse of time or both would constitute such event of default; nor shall there be any such event, condition, or act immediately after the disbursement were it to be made. -4- SECTION 3. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants that: 3.1 BUSINESS ACTIVITY. The principal business of Borrower is Manufacturer of Light Source Products. 3.2 AFFILIATES AND SUBSIDIARIES. Borrower's affiliates and subsidiaries (those entities in which Borrower has either a controlling interest or at least 25% ownership interest) and their addresses, and the names of Borrower's principal shareholders, are as provided on a schedule delivered to Bank on or before the date of this Agreement. 3.3 AUTHORITY TO BORROW. The execution, delivery and performance of this Agreement, the Note and all other agreements and instruments required by Bank in connection with the Loan are not in contravention of any of the terms of any indenture, agreement or undertaking to which Borrower is a party or by which it or any of its property is bound or affected. 3.4 FINANCIAL STATEMENTS. The financial statements of Borrower, including both a balance sheet at September 30, 1995, together with supporting schedules, and an income statement for the Twelve (12) months ended September 30, 1995, have heretofore been furnished to Bank, and are true and complete and fairly represent the financial condition of Borrower during the period covered thereby. Since September 30, 1995, there has been no material adverse change in the financial condition or operations of Borrower. 3.5 TITLE. Except for assets which may have been disposed of in the ordinary course of business, Borrower has good and marketable title to all of the property reflected in its financial statements delivered to Bank and to all property acquired by Borrower since the date of said financial statements, free and clear of all liens, encumbrances, security interests and adverse claims except those specifically referred to in said financial statements. 3.6 LITIGATION. There is no litigation or proceeding pending or threatened against Borrower or any of its property which is reasonably likely to affect the financial condition, property or business of Borrower in a materially adverse manner or result in liability in excess of Borrower's insurance coverage. 3.7 DEFAULT. Borrower is not now in default in the payment of any of its material obligations, and there exists no event, condition or act which constitutes an event of default under Section 6 hereof and no condition, event or act which with notice or lapse of time, or both, would constitute an event of default. -5- 3.8 COMPLIANCE WITH LAWS. Borrower is not in violation with respect to any applicable laws, rules, ordinances or regulations which materially affect the operations or financial condition of Borrower. 3.9 CONTINUING REPRESENTATIONS. These representations shall be considered to have been made again at and as of the date of each disbursement of the Loan and shall be true and correct as of such date or dates. SECTION 4. AFFIRMATIVE COVENANTS Until the Note and all sums payable pursuant to this Agreement or any other of the Loan Documents have been paid in full, unless Bank waives compliance in writing, Borrower agrees that: 4.1 USE OF PROCEEDS. Borrower will use the proceeds of the Loan only as provided in subsection 1.4 above. 4.2 PAYMENT OF OBLIGATIONS. Borrower will pay and discharge promptly all taxes, assessments and other governmental charges and claims levied or imposed upon it or its property, or any part thereof, provided, however, that Borrower shall have the right in good faith to contest any such taxes, assessments, charges or claims and, pending the outcome of such contest, to delay or refuse payment thereof provided that adequately funded reserves are established by it to pay and discharge any such taxes, assessments, charges and claims. 4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain and preserve its existence and assets and all rights, franchises, licenses and other authority necessary for the conduct of its business and will maintain and preserve its property, equipment and facilities in good order, condition and repair. Bank may, at reasonable times, visit and inspect any of the properties of Borrower. 4.4 RECORDS. Borrower will keep and maintain full and accurate accounts and records of its operations according to generally accepted accounting principles and will permit Bank to have access thereto, to make examination and photocopies thereof, and to make audits during regular business hours. Costs for such audits shall be paid by Borrower. 4.5 INFORMATION FURNISHED. Borrower will furnish to Bank: (a) Within Forty-Five (45) days after the close of each fiscal quarter, except for the final quarter of each fiscal year, its unaudited balance sheet as of the close of such fiscal quarter, its unaudited income and expense statement with supportive schedules and statement of retained earnings for that fiscal quarter, prepared in accordance with generally accepted accounting principles: (b) Within Ninety (90) days after the close of each fiscal year, a copy of its statement of financial condition including at least its balance -6- sheet as of the close of such fiscal year, its income and expense statement and retained earnings statement for such fiscal year, examined and prepared on an audited basis by independent certified public accountants selected by Borrower and reasonably satisfactory to Bank, in accordance with generally accepted accounting principles applied on a basis consistent with that of the previous year; (c) As soon as available, but in any event within Ninety (90) days after the close of each fiscal year of Borrower, projections for the next succeeding fiscal year of corresponding cash flow statement by Borrower and acceptable to Bank; (d) Such other financialstatements and information as Bank may reasonably request from time to time; (e) In connection with each financial statement provided hereunder, a statement executed by Chief Financial Officer of Borrower, certifying that no default has occurred and no event exists which with notice or the lapse of time, or both, would result in a default hereunder; (f) In connection with each fiscal year-end statement required hereunder, any management letter of Borrower's certified public accountants; (g) Within Forty-Five (45) days after each fiscal quarter, a certification of compliance with all covenants under this Agreement, executed by Borrower's chief financial officer or other duly authorized officer of Borrower, in form acceptable to Bank; (h) Prompt written notice to Bank of all events of default under any of the terms or provisions of this Agreement or of any other agreement, contract, document or instrument entered, or to be entered into with Bank; and of any litigation which, if decided adversely to Borrower, would have a material adverse effect on Borrower's financial condition; and of any other matter which has resulted in, or is likely to result in, a material adverse change in its financial condition or operations; and (i) Prior written notice to Bank of any changes in Borrower's officers and other senior management; Borrower's name; and location of Borrower's assets, principal place of business or chief executive office; and (j) Within Forty-Five (45) days after each fiscal quarter, a copy of Borrower's accounts receivable aging. (k) Within Thirty (30) days after each calendar month end a copy of Borrower's certificate of compliance with borrowing base described above, executed by Borrower's Chief Financial Officer or other duly authorized officer of Borrower, in form acceptable to Bank, which certificate shall accurately report Borrower's account receivable and eligible accounts. 4.6 CURRENT RATIO. Borrower will at all times maintain a ratio of current assets to current liabilities of at least 1.50 : 1.0, as such terms are defined by generally accepted accounting principles. -7- 4.7 TANGIBLE NET WORTH. Maintain a Tangible Net Worth of not less than Twenty Seven Million Dollars ($27,000,000) plus 75% of quarterly net profits after taxes (calculated without giving effect to net losses and inclusive of extraordinary gains) beginning with the quarter to end March 31, 1996 plus the proceeds of all sales by Borrower of its stock. "Tangible Net Worth" means the difference between (a) the gross book value of the assets of Borrower, and (b) the sum of (i) the amount of all intangibles such as goodwill, patents, trademarks, organization expenses, treasury stock, unamortized debt discount and expense and deferred charges, (ii) the amount of reserves established by Borrower for anticipated losses and expenses, and (iii) the amount of all liabilities and indebtedness of Borrower, including accrued but deferred income taxes. 4.8 DEBT TO TANGIBLE NET WORTH. Borrower will at all times maintain a ratio of total liabilities to tangible net worth of not greater than 1:5 : 1.0. "Tangible Net Worth" shall mean net worth decreased by patents, licenses, trademarks, trade names, goodwill and other similar intangible assets, organizational expenses, security deposits, prepaid costs and expenses and monies due from affiliates (including officers, shareholders and directors). 4.9 PROFITABILITY. Borrower will maintain a net profit, after provision for income taxes, of any positive amount for any two consecutive fiscal quarters, as reported at the end of each such fiscal quarter, and maintain a net profit, after provision for income taxes for its fiscal year end. 4.10 CASH FLOW COVERAGE. Maintain for each Measurement Period, Cash Flow Coverage of not less than One Hundred Seventy Five Percent (175%), as measured at the end of each fiscal quarter (each such date being a "Measurement date"). "Measurement Period" means the immediately preceding twelve month period ending on a given Measurement Date. "Cash Flow Coverage" is a fraction stated as percentage and computed as the quotient of (i) Borrower's net profit after taxes for a given Measurement Period, exclusive of nonrecurring income and increased by depreciation and amortization and other non-cash expenditures (taken in accordance with GAAP) divided by (ii) the aggregate amount of all principal, interest (and also including amounts coming due in respect of leases) payable by Borrower in such Measurement Period. 4.11 INSURANCE. Borrower will keep all of its insurable property, real, personal or mixed, insured by companies and in amounts approved by Bank against fire and such other risks, and in such amounts, as is customarily obtained by companies conducting similar business with respect to like properties. Borrower will furnish to Bank statements of its insurance coverage, will promptly furnish other or additional insurance deemed necessary by and upon request of Bank to the extent that such insurance may be available and hereby assigns to Bank, as security for Borrower's obligations to Bank, the proceeds of any such insurance. Prior to any disbursement of the Loan, Bank will be named loss payee on all policies insuring collateral. Borrower will maintain adequate worker's -8- compensation insurance and adequate insurance against liability for damage to persons or property. All policies shall require at least ten (10 days' written notice to Bank before any policy may be altered or cancelled. 4.12 ADDITIONAL REQUIREMENTS. Borrower will promptly, upon demand by Bank, take such further action and execute all such additional documents and instruments in connection with this Agreement as Bank in its reasonable discretion deems necessary, and promptly supply Bank with such other information concerning its affairs as Bank may request from time to time. 4.13 LITIGATION AND ATTORNEYS' FEES. Borrower will pay promptly to Bank upon demand, reasonable attorneys' fees (including but not limited to the reasonable estimate of the allocated costs and expenses of in-house legal counsel and legal staff) and all costs and other expenses paid or incurred by Bank in collecting, modifying or compromising the Loan or in enforcing or exercising its rights or remedies created by, connected with or provided for in this Agreement or any of the Loan Documents, whether or not an arbitration, judicial action or other proceeding is commenced. If such proceeding is commenced, only the prevailing party shall be entitled to attorneys' fees and court costs. 4.14 BANK EXPENSES. Borrower will pay or reimburse Bank for all costs, expenses and fees incurred by Bank in preparing and documenting this Agreement and the Loan, and all amendment and modifications thereof, including but not limited to all filing and recording fees, costs of appraisals, insurance and attorneys' fees, including the reasonable estimate of the allocated costs and expenses of in-house legal counsel and legal staff. 4.15 REPORTS UNDER PENSION PLANS. Borrower will furnish to Bank, as soon as possible and in any event within 15 days after Borrower knows or has reason to know that any event or condition with respect to any defined benefit pension plans of Borrower described in Section 3 above has occurred, a statement of an authorized officer of Borrower describing such event or condition and the action, if any, which Borrower proposes to take with respect thereto. SECTION 5. NEGATIVE COVENANTS Until the Note and all other sums payable pursuant to this Agreement or any other of the Loan Documents have been paid in full, unless Bank waives compliance in writing, Borrower agrees that: 5.1 ENCUMBRANCES AND LIENS. Except for those already disclosed on its fiscal year end 10/1/94 financial statement, Borrower will not create, assume or suffer to exist any mortgage, pledge, security interest, encumbrance, or lien (other than for taxes not delinquent and for taxes and other items being contested in good faith) on property of any kind, whether real, personal or mixed, now owned or hereafter acquired, or upon the income or profits thereof, except to Bank and except for minor encumbrances and easements on real property which do not affect its market value, and except for existing liens on Borrower's personal property and future purchase money security interests encumbering only the personal property purchased. -9- 5.2 BORROWINGS. Borrower will not sell, discount or otherwise transfer any account receivable or any note, draft or other evidence of indebtedness, except to Bank or except to a financial institution at face value for deposit or collection purposes only and without any fee other than fees normally charged by the financial institution for deposit or collection services. Borrower will not borrow any money, become contingently liable to borrow money, nor enter any agreement to directly or indirectly obtain borrowed money, except pursuant to agreements made with Bank. 5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will neither liquidate nor dissolve nor enter into any consolidation, merger, partnership or other combinations, nor convey, nor sell, nor lease all or the greater part of its assets or business, nor purchase or lease all or the greater part of the assets or business of another, without prior written consent from Bank. 5.4 LOANS, ADVANCES AND GUARANTIES. Borrower will not, except in the ordinary course of business as currently conducted, make any loans or advances, become a guarantor or surety, pledge its credit or properties in any manner or extend credit. 5.5 INVESTMENTS. Borrower will not purchase the debt or equity of another person or entity except for savings accounts and certificates of deposit of Bank, direct U.S. Government obligations and commercial paper issued by corporations with the top ratings of Moody's or Standard & Poor's, provided all such permitted investments shall mature within one year of purchase. 5.6 PAYMENT OF DIVIDENDS. Borrower will not declare or pay any dividends, other than a dividend payable in its own common Stock, or authorize or make any other distribution with respect to any of its stock now or hereafter outstanding. 5.7 RETIREMENT OF STOCK. Borrower will not acquire or retire any share of its capital stock for value. SECTION 6. EVENTS OF DEFAULT The occurrence of any of the following events ("Events of Default") shall terminate any obligation on the part of Bank to make or continue the Loan and automatically, unless otherwise provided under the Note, shall make all sums of interest and principal and any other amounts owing under the Loan immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or any other notices or demands: 6.1 Borrower shall default in the due and punctual payment of the principal of or the interest on the Note or any of the other Loan Documents; or 6.2 Any default shall occur under the Note; or 6.2 Any default shall occur under the Note; or -10- 6.3 Borrower shall default in the due performance or observance of any covenant or condition of the Loan Documents; 6.4 Any guaranty or subordination agreementrequired hereunder is breached or becomes ineffective, or any Guarantor or subordinating creditor dies, disavows or attempts to revoke or terminate such guaranty or subordination agreement; or 6.5 There is a change in ownership or control of ten percent (10%) or more of the issued and outstanding stock of Borrower or any Guarantor. SECTION 7. MISCELLANEOUS PROVISIONS 7.1 ADDITIONAL REMEDIES. The rights, power and remedies given to Bank hereunder shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Bank by law against Borrower or any other person, including but not limited to Bank's rights of setoff or banker's lien. 7.2 NONWAIVER. Any forebearance or failure or delay by Bank in exercising any right, power or remedy hereunder shall not be deemed a waiver thereof and any single or partial exercise of any right, power or remedy shall not preclude the further exercise thereof. No waiver shall be effective unless it is in writing and signed by an officer of Bank. 7.3 INUREMENT. The benefits of this Agreement shall inure to the successor and assigns of Bank and the permitted successors and assignees of Borrower, and any assignment of Borrower without Bank's consent shall be null and void. 7.4 APPLICABLE LAW. This Agreement and all other agreements and instruments required by Bank in connection therewith shall be governed by and construed according to the laws of the State of California. 7.5 SEVERABILITY. Should any one or more provisions of this Agreement be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. 7.6 INTEGRATION CLAUSE. Except for documents and instruments specifically referenced herein, this Agreement constitutes the entire agreement between Bank and Borrower regarding the Loan and all prior communications verbal or written between Borrower and Bank shall be of no further effect or evidentiary value. 7.7 CONSTRUCTION. The section and subsection headings herein are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 7.8 AMENDMENTS. This Agreement may be amended only in writing signed by all parties hereto. -11- 7.9 COUNTERPARTS. Borrower and Bank may execute one or more counterparts to this Agreement, each of which shall be deemed an original. SECTION 8. SERVICE OF NOTICES 8.1 Any notices or other communications provided for or allowed hereunder shall be effective only when given by one of the following methods and addressed to the respective party at its address given with the signatures at the end of this Agreement and shall be considered to have been validly given: (a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first class postage prepaid, with the United States Postal Service; (c) on the next business day, if sent by overnight courier service of recognized standing; and (d) upon telephoned confirmation of receipt, if telecopied. 8.2 The addresses to which notices or demands are to be given may be changed from time to time by notice delivered as provided above. (THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK) -12- THIS AGREEMENT is executed on behalf of the parties by duly authorized officers as of the date first above written. UNION BANK By: Title: By: Title: Address: Attention: Telecopier: Telephone: BORROWER: ILC TECHNOLOGY, INC. GUARANTORS: Converter Power, Inc. By: By: Title: Title: Q-ARC Limited By: By: Title: Title Precision Lamp, Inc. Address: By: Title: Attention: Telecopier: Telephone: -13- EX-10.12 4 COMPENSATION COMPENSATION AGREEMENT ---------------------- THIS COMPENSATION AGREEMENT (this "Agreement"), made and entered into as of _____________, 1996, is by and between ILC Technology, Inc., a California corporation with its principal offices in Sunnyvale, California (the "Company"), and _______________, an individual residing in _______________, California ("Employee"). R E C I T A L S: ---------------- A. Employee serves as an officer or employee of the Company; and B. The Company desires to retain the services of Employee, whose experience, knowledge and abilities with respect to the business and affairs of the Company and its subsidiaries are extremely valuable to the Company; and C. The Board of Directors of the Company (the "Board") and the Compensation Committee (the "Committee") of the Board recognize that the continuing possibility of an acquisition proposal, including unsolicited tender offer or other takeover bid, for the Company may be unsettling to Employee and other senior executives of the Company, and that uncertainty as to the Employee's future position with the Company and future compensation could affect Employee's objectivity in assessing and advising the Board with respect to the proposal and could detract from Employee's continuing performance and willingness to remain with the Company; and D. The Board and the Committee believe it is in the best interests of the Company and its shareholders to adopt a compensation arrangement that, should the Company receives any acquisition proposals from third parties, will enable Employee, without being influenced by the uncertainties of Employees' own situation, to continue the faithful performance of Employee's duties to the Company, to assess and advise the Board objectively whether such proposals would be in the best interests of the Company and its shareholders and to take such other action regarding such proposals as the Board might determine to be appropriate. E. The Board and the Committee also wish to demonstrate to Employee and other senior employees of the Company that the Company is concerned with the welfare of its employees and intends to see that loyal employees are treated fairly in respect of their past service on behalf of the Company and their continuing value to the Company. F. In view of the foregoing and in further consideration of Employee's continued employment with the Company, the Board and the Committee have determined that it is in the best interests of the Company and its shareholders for the Company to agree to pay Employee the compensation set forth below in the event Employee should leave the employ of the Company under certain circumstances, as set forth below; 1 428044.2 NOW, THEREFORE, in consideration of the mutual agreements and promises of the parties, the parties hereby agree as follows: 1. Term. This Agreement shall terminate upon the earliest of (a) three years from the date hereof if a Change in Control of the Company (as defined herein) has not occurred within such three year period, (b) the termination of Employee's employment with the Company (i) prior to a Change in Control of the Company or (ii) after a Change in Control of the Company, if such termination is based upon Employee's death, Employee's Disability (as defined herein), Cause (as defined herein) or Employee's Retirement (as defined herein) or is the result of Employee's voluntary resignation for Good Reason (as defined herein) or (c) two years after the date of a Change in Control of the Company. 2. Change in Control. No compensation shall be payable under this Agreement unless and until (a) there shall have been a Change in Control of the Company while the Employee is still an employee of the Company, and (b) Employee's employment shall thereafter have terminated (i) involuntarily for reasons other than death, Disability, Retirement or Cause, or (ii) voluntarily for Good Reason. For purposes of this Agreement, a "Change in Control of the Company" shall mean any of the following: (a) A consolidation or merger of the Company in which the Company is not the continuing or surviving company, other than a transaction (1) the sole purpose of which is to change the state of incorporation of the Company, (2) in which the proportionate beneficial ownership (as determined immediately prior to such consolidation or merger) of the combined voting power of the outstanding shares of the Company and combined voting power of the outstanding shares (or other voting interests) of the surviving company remains substantially unchanged or (3) in which the Company is effectively the continuing or surviving corporation but changes its name to that of the other company (or to another name); (b) A consolidation merger or other acquisition of the Company in which the Company becomes a subsidiary of another person and resulting in less than 51% of the outstanding voting shares (or other voting interests) of such other person being held, immediately after such merger or consolidation, by the holders of voting shares of the Company immediately prior to such consolidation, merger or acquisition; (c) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% or more of the combined voting power of the Company's then outstanding shares, unless, within 30 days after notice to the Company of such event, the Board (as constituted immediately prior to such event) adopts a resolution that for purposes of this Agreement no Change in Control of the Company shall be deemed to have occurred (which resolution may be revoked by the Board at any time, in which case a Change in Control of the Company will be deemed to have occurred as of the date such revocation becomes effective); (d) During any period of two consecutive years, members who at the beginning of such period constitute the Board cease for any reason to constitute a majority thereof, unless the election, or nomination for election by the Company's shareholders, of each director is approved by the vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; or 3 (e) An acquisition of all or substantially all of the assets of the Company or the acquisition of the Company pursuant to a tender or exchange offer resulting in less than 51% of the outstanding voting shares of the surviving corporation being held, immediately after such acquisition or offer, by the holders of the voting shares of the Company outstanding immediately prior to such acquisition or offer. 3. Termination After Change in Control. If, within two years after a Change in Control of the Company, Employee's employment with the Company is terminated (i) by the Company for reasons other than Employee's death, Employee's Disability or Cause, or (ii) by Employee upon Retirement or for Good Reason, then Employee will be entitled to the benefits provided in Section 4 hereof. (a) "Disability," as used in this Agreement, means a physical or mental illness or injury which, as determined an independent physician, continuously prevents Employee from performing Employee's duties with the Company for a period of six months prior to termination. (b) "Cause," as used in this Agreement, means (i) gross negligence, (ii) material dishonesty, (iii) violation of any reasonable rule or regulation of the Board that results in significant damage to the Company, and with respect to which Employee fails to correct within a reasonable time, (iv) Employee's continued failure to perform Employee's duties with the Company (other than such failure resulting from incapacity due to physical or mental illness), after Employee shall have been given written demand for such performance setting forth the specific respects in which Employee is deemed not to have satisfactorily performed such duties, (v) Employee's willfully engaging in gross misconduct that is materially and demonstrably injurious to the Company, (vi) Employee's committing a felony or an act of fraud against the Company or its affiliates, or (vii) Employee's breaching materially the terms of Employee's employee confidentiality and proprietary information agreement with the Company. No act, or failure to act, by Employee shall be considered "willful" if done, or omitted to be done, by Employee in Employee's good faith and reasonable belief that such act or omission was in the best interest of the Company or required by applicable law. Cause shall be determined only by the affirmative vote of a majority of the authorized number of the Board of Directors at a meeting for which notice has been given that it is proposed to consider the issue or at a meeting occurring not less than seven days after a meeting at which one or more directors indicates an intention to present a motion to such effect. Notice of such meeting shall be provided promptly to Employee, and Employee, together with Employee's counsel, shall be given an opportunity to be heard before the Board. No termination of Employee for Cause shall be effective until the Board shall have delivered to Employee a Notice of Termination. (c) "Notice of Termination," as used in this Agreement, means a written notice that shall indicate those specific termination provisions in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provisions so indicated and shall state that, in the good faith opinion of the Board, the Company has Cause (as defined above) to terminate Employee. For 4 purposes of this Agreement, no purported termination by the Company shall be effective without Employee's being furnished a Notice of Termination. (d) "Date of Termination," as used in this Agreement, means the effective date of Employee's termination of employment. (e) "Retirement," as used in this Agreement, means the voluntary termination of Employee's employment with the Company in accordance with the Company's retirement policy as of the date of this Agreement, including (at Employee's election, set forth in writing) early retirement, generally applicable to its salaried employees or in accordance with any retirement arrangement established with Employee's written consent with respect to Employee. (f) "Good Reason," as used in this Agreement, means the occurrence of one of the following events within two years after a Change in Control of the Company and without Employee's express written consent: (i) The assignment by the Company to Employee of any duties that materially diminish the position held by Employee or the duties assigned to Employee immediately prior to the Change in Control of the Company, or a significant reduction in Employee's responsibilities, titles or positions as in effect immediately prior to a Change in Control or the Company; (ii) A reduction by the Company in Employee's base salary as in effect immediately prior to the Change in Control of the Company; provided that any reduction in base salary that occurs in connection with an across-the-board reduction in the level of base salaries payable to the Company's executive officers or senior management (or the executive officers or senior management of a successor to the Company) as part of a general cost-cutting program shall not constitute Good Reason unless it reduces Employee's annual compensation by more than 10%; (iii)Failure to include Employee in the executive incentive and benefit programs in which other executives of the Company at the same level participate; or a material reduction in the benefits made available to Employee by the Company under any employee benefit plan or any life, health, accident, disability or similar plan, or any material reduction in vacation benefits, as compared to such benefits made available to Employee immediately prior to the Change in Control of the Company, unless the benefits made available to Employee after such Change in Control of the Company are no less favorable to Employee than the benefits then made available by the Company to the other employees of the Company whose positions and seniority with the Company are similar to the position and seniority of Employee. (iv) The requirement by the Company that Employee be based anywhere other than within a 50-mile radius of Employee's location immediately prior to the Change in Control of the Company, except for required travel on the Company's business to an extent substantially consistent with Employee's duties; (v) The failure of any successor of the Company to assume the Company's obligations under this Agreement, as provided in Section 5. 5 Any occurrence described in (i), (ii), (iii) or (iv) of this Section 3(f) that is caused by the termination of Employee's employment by Employer voluntarily or by the Company for cause or as a result of Employee's death or disability shall not constitute Good Reason. 4. Certain Benefits upon Termination of Employment. (a) If Employee's employment with the Company terminates pursuant to the provisions of Section 3(a), then Employee shall be entitled to the benefits set forth below: (i) The Company shall pay to Employee the amount of Employee's full base salary (which, for the purposes of this Agreement, shall not include any bonuses or other forms of compensation) through the Date of Termination at the rate in effect at the time Notice of Termination is given plus credit for any vacation earned but not taken and the amount, if any, of any bonus or incentive compensation for a past fiscal year that has been awarded but not yet paid to Employee; (ii) The Company shall pay to Employee in a lump sum, in cash, on the fifth business day following the Date of Termination (the "Termination Payment") an amount equal to % of the amount of Employee's annual full base salary at Employee's salary rate at the time Notice of Termination is given; (iii)Employee's participation in, and terminating distributions and vested rights under, any applicable retirement plan, profit sharing plan and stock incentive plan of the Company shall be governed by the terms of those respective plans; (iv) Any benefits of indemnification provided by the Bylaws of the Company or under any agreement with Employee shall be continued for the benefit of Employee for such period of time after termination as may be necessary until any action for which indemnification would otherwise be available is barred by the applicable statute of limitation, and, to the extent required under the Bylaws or any such agreement, any directors' and officers' liability insurance that may be maintained by the Company and outstanding on the date of termination shall be continued for the benefit of Employee for such reasonable period of time as may be determined by the Board to afford protection to Employee; and (v) The Company shall pay all reasonable legal fees and expenses that Employee may incur as a result of the Company's contesting the validity, enforceability or Employee's interpretation of, or determinations under, this Agreement, provided such dispute is finally determined substantially in Employee's favor. (b) Notwithstanding any provision in this Agreement to the contrary, in the event that any payment or benefit received or to be received by Employee in connection with a Change in Control of the Company or the termination of Employee's employment, whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company (collectively, the "Total Payments"), would constitute a "parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the Total Payments shall be reduced to the largest amount that would result in no portion of such benefits being subject to the excise tax imposed by 6 Section 4999 of the Code. The determination of any reduction in the benefits available under this Section pursuant to the foregoing shall be made by the Company in good faith and any such reduction shall reduce first the cash payable under Section 4 of this Agreement. For purposes of this limitation: (i) no portion of the Total Payments, the receipt or enjoyment of which Employee shall have effectively waived in writing prior to the date of payment of the Termination Payment, shall be taken into account; (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel selected by the Company and reasonably acceptable to Employee, does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code; (iii) the Termination Payment shall be reduced only to the extent necessary so that the Total Payments (excluding payments referred to in clause (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280(G)(d)(3) and (4) of the Code and the regulations thereunder. (c) Employee's benefits hereunder shall be considered payment in consideration of Employee's past service and continued service from the date hereof, and Employee's entitlement thereto shall not be (i) governed by any duty of Employee to mitigate damages by seeking further employment or (ii) offset by any compensation that Employee may received from future employment. (d) In the event that Employee's employment with the Company is terminated in a manner so that the benefits under this Section 4 become payable to Employee, the arrangements provided for by this Section 4, by any stock option or other agreement between the Company and Employee in effect at the time and by any other applicable plan of the Company shall constitute the entire obligation of the Company to Employee and performance thereof shall constitute full settlement of any claim that Employee might otherwise assert against the Company on account of such termination. 5. Successor to the Company. (a) The Company shall require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, absolutely and unconditionally to assume (including an assumption by operation of law) all the Company's obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. Upon such assumption, such successor or assignee shall be bound by the provisions of this Agreement as if it were the Company and, thereupon, the term "Company", as used herein, shall be deemed to include such successor or assignee. Any failure of such successor or assignee to assume such obligations prior to the effectiveness of any such succession or assignment shall be deemed a material breach of this Agreement by the Company and shall entitle Employee to terminate Employee's employment voluntarily for Good Reason, as provided in Section 3(f). 7 (b) If during the term of this Agreement Employee is employed by a subsidiary of the Company (including any company a majority of the voting securities of which is then owned, directly or indirectly, by the Company), the term "Company" as used in Sections 3 and 4 will include such employer and the Company shall pay or cause such employer to pay any amounts owed to Employee pursuant to Section 4. (c) The rights of Employee under this Agreement are personal to Employee and may not be assigned by Employee. However, such rights shall inure to the benefit of, and this Agreement shall be enforceable by, Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts are still payable hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee, or, if there is no such designee, to Employee's estate. 6. Approval by Company. This Agreement has been approved by the Board in accordance with the authority granted and restrictions imposed by action of the Board. It shall be executed by the President or other duly qualified officer. Upon request, the Company shall furnish Employee with a certified copy of the portion of the minutes of the meeting of the Board approving this Agreement and authorizing such execution. 7. Modification. Any alteration or modification of any of the provisions of this Agreement or cancellation or replacement of this Agreement shall not be valid unless made in writing and signed by the parties hereto. 8. No Employment Rights. This Agreement does not extend to Employee any right to continued employment with the Company or any subsidiary of the Company, nor does it limit the Company's right to terminate Employee's employment at any time. This Agreement does not create a trust of any kind or any fiduciary relationship. 9. No Assignment of Rights. Employee's rights under this Agreement shall be nontransferable except by will or the laws of descent and distribution. 10. Unfunded Agreement. This Agreement is not intended to meet the qualification requirements of Section 401 of the Code. Neither the Company nor the Board shall be required to segregate any assets with respect to amounts payable under this Agreement. Neither the Company nor the Board shall be deemed to be a trustee of any amounts to be paid under this Agreement. All benefits under this Agreement shall be payable solely from the general assets of the Company or any appropriate subsidiary, and no obligation created by this Agreement shall be deemed to be secured by any pledge or any encumbrance on any property of the Company. 11. Severability. Any provision in this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8 12. Construction. This Agreement shall be governed by the laws of the State of California applicable to contracts made and to be performed in California. 13. Confidentiality. Employee shall retain in confidence any and all confidential information known to Employee concerning the Company, its business any subsidiary of the Company or the business of any such subsidiary, so long as such information is not otherwise publicly disclosed. This Section 13 shall not supersede any other nondisclosure or confidentiality agreement between Employee and the Company or any such subsidiary. 14. Sole Agreement. This Agreement represents the entire agreement between Employee and the Company and (except for Section 13) supersedes any and all prior concurrent (a) agreements, amendments, memoranda and understandings between the Company and Employee with respect to the subject matter hereof and (b) any representations by or on behalf of the Company or Employee with respect to the subject matter hereof. 15. Waiver. Waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 16. Counterparts. This Agreement may be executed in a number of identical counterparts, each of which shall be construed as an original for all purposes, but all of which taken together shall constitute one and the same agreement. 17. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered, deposited with a commercial courier, fees prepaid, or mailed by first class United States mail, postage prepaid, as follows: If to the Company: ILC Technology, Inc. 399 Java Drive Sunnyvale, California 94089 If to Employee: Either party may change its address for receipt of notices by written notice to the other party, which shall be effective upon receipt. 9 IN WITNESS WHEREOF, the parties hereto have executed this Compensation Agreement the day and year first above written. EMPLOYEE ILC TECHNOLOGY, INC. By: [Employee Signature] Title: 10 EX-99.1 5 PROXY STATEMENT ILC TECHNOLOGY, INC. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS February 12, 1997 ---------------------- The 1996 Annual Meeting of the Shareholders of ILC Technology, Inc., a California corporation (the "Company"), will be held on Wednesday, February 12, 1997, at 2:00 p.m. local time at the principal office of the Company at 399 Java Drive, Sunnyvale, California, for the following purposes: 1. To elect a Board of four Directors. 2. To approve an amendment to the 1992 Stock Option Plan to increase the number of shares of Common Stock reserved for issuance thereunder. 3. To approve an amendment to the 1985 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for insurance thereunder. 4. To ratify the appointment of Arthur Andersen LLP as independent public accountants of the Company for fiscal 1997. 5. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof. These items of business are more fully described in the Proxy Statement accompanying this Notice. Only shareholders of record at the close of business on December 16, 1996 are entitled to notice of and to vote at the meeting. A majority of the Company's outstanding shares must be represented at the meeting (in person or by proxy) to transact business. To assure proper representation at the meeting, please mark, sign and date the enclosed proxy and mail it promptly in the enclosed self-addressed envelope. Your proxy will not be used if you revoke it either before or at the meeting. Dated: January 2, 1997 Ronald E. Fredianelli Secretary IF YOU ARE UNABLE TO BE PERSONALLY PRESENT, PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOUR VOTE IS IMPORTANT. 1 ILC TECHNOLOGY, INC. PROXY STATEMENT INFORMATION CONCERNING SOLICITATION AND VOTING The enclosed proxy is solicited on behalf of the Board of Directors of ILC Technology, Inc. (the "Company") for use at the Annual Meeting of Shareholders (the "Meeting") to be held Wednesday, February 12, 1997 at 2:00 p.m. local time, or at any adjournment or postponement thereof. The Meeting will be held at the principal offices of the Company, which are located at 399 Java Drive, Sunnyvale, California 94089. The Company's telephone number is (408) 745- 7900. These proxy solicitation materials were mailed to shareholders on or about January 2, 1997. Shareholders of record at the close of business on December 16, 1996 are entitled to notice of, and to vote at, the Meeting. On December 16, 1996, 4,782,508 shares of the Company's Common Stock were issued and outstanding. A majority of the shares issued and outstanding as of December 16, 1996 must be present in person or represented by proxy at the Meeting for the transaction of business. Nominees for election of directors are elected by plurality vote of all votes cast at the Meeting. Approval of the amendments to the 1992 Stock Option Plan and the 1985 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance and ratification of Arthur Andersen LLP as the independent public accountants require the affirmative vote of a majority of the shares present at the Meeting in person or by proxy and entitled to vote. Abstentions have the effect of a negative vote, but broker non- votes do not affect the calculation. For the election of directors, shareholders may exercise cumulative voting rights which enable them to cast as many votes as there are directors to be elected, multiplied by the number of shares held by each shareholder. All such votes may be cast for one candidate or may be distributed as desired among two or more candidates. However, no shareholder shall be entitled to cumulate votes unless the candidate's name has been placed in nomination before the voting and the shareholder has given notice at the Meeting before the voting of the shareholder's intention to cumulate votes. If one shareholder gives such notice, all shareholders may cumulate their votes and the proxy holders may vote all proxies on a cumulative voting basis. On all other matters, each share has one vote. Any person may revoke a proxy at any time before its use by delivering to the Company a written revocation or a duly executed proxy bearing a later date or by attending the Meeting and voting in person. The cost of this solicitation will be borne by the Company. These costs represent amounts normally expended for a solicitation for an election of directors. The Company may reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in forwarding solicitation material to such beneficial owners. Proxies may also be solicited by certain of the Company's directors, officers and regular employees, without additional compensation, personally, by telephone or otherwise. 2 Deadline for Receipt of Shareholder Proposals for 1997 Annual Meeting Proposals of shareholders that are intended to be presented by such shareholders at the Company's 1997 meeting of shareholders must be received by the Company no later than September 4, 1997. ELECTION OF DIRECTORS Nominees A board of four directors is to be elected at the Meeting. There will be two vacancies on the Board. The Company is currently undertaking a search for an additional outside director, as Wirt D. Walker, III recently decided not to stand for re-election to the Board. Unless marked to the contrary, all properly signed and returned proxies will be voted for the election of management's four nominees named below, all of whom are directors of the Company. If any nominee is unable or declines to serve as a director at the time of the Meeting, the proxies will be voted for any nominee designated by the present Board of Directors to fill the vacancy. The Company is not aware of any nominee who will be unable or will decline to serve as a director. The proxy holders reserve the right to cumulate votes for the election of directors in such a manner as will assure the election of as many of the nominees listed below as possible, and, in such event, the specific nominees to be voted for will be determined by the proxy holders. The term of office of each person elected as a director will continue until the next meeting of shareholders or until a successor has been elected and qualified. The names of the nominees and executive officers of the Company and certain information about them are set forth below.
Shares of Common Stock Beneficially Owned as of December 16, 1996(1) ------------------------ Name, Principal Occupation Director and Directorship Age Since Number Percent ---------------- --- ----- ------ ------- Henry C. Baumgartner............. 64 1967 219,988(2) 4.5% Chairman of the Board of the Company since July 1996; Chief Executive Officer of the Company since April 1990; President of the Company from April 1990 to July 1996; Chief Executive Officer and Chairman of the Board of the Company from November 1986 to April 1990. Richard D. Capra................. 64 1995 1,250 * President and Chief Operating Officer of the Company since July 1996; President and Chief Executive Officer of Philips Lighting Company, U.S. from 1983 to 1991; Director of Advanced Lighting Technologies Arthur L. Schawlow............... 75 1984 22,000(4) * Retired in 1991; Professor of Physics at Stanford University from 1961 to 1991; Director of the Company from 1969 to 1971 and since 1984; Noble Prize in 1981 for contributions to the development of laser spectroscopy. Harrison H. Augur................ 55 1989 42,000(5) 1.0% General Partner of Capital Asset Management since June 1987; Executive Vice President and Director of Worms & Co., Inc. from April 1981 to August 1991.
3 - ----------------------------- * Less than 1% (1) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them, subject to applicable community property laws and the information contained in the footnotes to the table. (2) Includes 121,250 shares subject to outstanding options that are exercisable on or before February 14, 1997. (3) These shares are subject to outstanding options that are exercisable on or before February 14, 1997. (4) Includes 10,000 shares subject to outstanding options that are exercisable on or before February 14, 1997. (5) Includes 30,000 shares subject to outstanding options that are exercisable on or before February 14, 1997. Director Compensation Members of the Board who are not also officers or employees of the Company ("Outside Directors") are paid an annual fee of $10,000 for services as director. Such fees are paid quarterly and prorated when a director does not serve for a full year. Directors receive no additional compensation for committee participation or attendance at committee meetings. During fiscal 1996, each Outside Director was granted automatic options to purchase a total of 5,000 shares of the Company's Common Stock at an exercise price of $11.00 per share. Dr. Schawlow exercised options to purchase 5,000 shares during fiscal 1996 for a net value realized of $39,375. As of September 28, 1996, options to purchase 60,000 shares were outstanding to the following Outside Directors, at the weighted average exercise price per share indicated: Mr. Augur -- 40,000 shares at $6.91 per share; and Dr. Schawlow -- 20,000 shares at $10.06 per share. Board Meetings and Committees The Board of Directors held a total of eight meetings during the fiscal year ended September 28, 1996. The Board has two committees: the Audit Committee and the Compensation and Stock Option Committee. The Audit Committee is comprised of Directors Augur, Walker and Schawlow. After the Meeting, the Audit Committee will be comprised of Directors Augur and Schawlow. The Audit Committee recommends engagement of the Company's independent public accountants and is primarily responsible for approving the services performed by the Company's independent public accountants and for reviewing and evaluating the Company's accounting practices and its systems of internal accounting controls. The Audit Committee held one meeting during fiscal 1996. Each quarter the Chairman of the Audit Committee meets with the Company's independent public accountants. The Compensation and Stock Option Committee is comprised of Directors Augur, Walker and Schawlow. After the Meeting, the Compensation and Stock Option Committee will be comprised of Directors Augur and Schawlow. The Compensation and Stock Option Committee recommends the amount and nature of compensation to be paid to the Company's Chief Executive Officer and reviews and approves the compensation plan for other corporate officers. It also reviews the performance of the Company's key employees who are eligible for the Company's Stock Option Plan and determines the number of shares, if any, to be granted each employee under such plan and the terms of such grants. The Compensation and Stock Option Committee held three meetings during fiscal 1996. No director attended fewer than 75% of all meetings of the Board of Directors held during fiscal 1996 or of all meetings of any committee upon which such director served during fiscal 1996. 4 AMENDMENT OF THE 1992 STOCK OPTION PLAN In November 1996, the Board of Directors adopted a resolution, subject to shareholder approval, approving an amendment to the Company's 1992 Stock Option Plan (the "Option Plan") to increase the number of shares of Common Stock issuable thereunder by 175,000 shares to 575,000 shares. Before giving effect to the proposed amendment, 8,749 shares of Common Stock were available for issuance under the Option Plan. Approval of the amendment to the Option Plan requires the affirmative vote of a majority of the shares present at the Meeting in person or by proxy and entitled to vote. The Board of Directors recommends that shareholders vote for the amendment to the Option Plan. The essential features of the Option Plan are summarized below. The purpose of the Option Plan is to advance the interests of the Company by giving the Company's employees and Outside Directors incentive through ownership of the Company's Common Stock to continue in the service of the Company and thereby to help the Company compete effectively with other enterprises for the services of qualified individuals. Options granted under the Option Plan may be either "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock options. Administration The Option Plan is administered by the Compensation and Stock Option Committee of the Board of Directors (the "Committee"). In addition to having general supervisory and interpretive authority over the Option Plan, the Committee determines, upon the recommendation of management and subject to the terms and limits of the Option Plan, the employees, if any, to whom options will be granted, the time at which options are granted, the number of shares subject to each option and the terms and conditions of exercise of options. Eligibility All employees (including officers and directors who are also employees) of the Company and its subsidiaries are eligible to receive incentive stock options under the Option Plan. Nonstatutory stock options may be granted under the Option Plan to employees and directors of the Company. Participants are selected by the Committee upon the recommendation of management. Nonstatutory stock options are also granted under the Option Plan to all Outside Directors pursuant to the automatic grant program. As of September 28, 1996, 618 persons were eligible to receive options under the Option Plan, of which seven were executive officers of the Company, 608 were non-executive officer employees and three were Outside Directors. Under the terms of the Option Plan, the aggregate fair market value (determined at the date of the option grant) of the stock with respect to which incentive stock options are exercisable for the first time by any employee during any calendar year may not exceed $100,000 and no participant can receive options to purchase more than a total of 100,000 shares of Common Stock under the Option Plan in any calendar year. The Option Plan provides for an automatic grant program for Outside Directors, whereby each year, each Outside Director is automatically granted a new ten-year nonstatutory stock option to purchase 5,000 shares of Common Stock, which is exercisable in cumulative annual increments of 25% beginning on the first anniversary of the date of grant. See "Option Plan Benefits." 5 Terms of Options Each option granted under the Option Plan must be evidenced by an option agreement between the Company and the optionee and has a term of up to 10 years, unless sooner terminated in accordance with the Option Plan or the option agreement. Options granted pursuant to the Option Plan need not be identical, but each option is subject to the following terms and conditions: (a) Exercise of Option. Options are exercisable by the optionee in such periodic increments and/or at such milestones as the Committee, in its sole discretion, shall determine on an individual basis with respect to each optionee. Options are generally exercisable in cumulative increments of 25% per year beginning on the first anniversary of the date of grant. In no event shall an officer or director of the Company exercise any option during the six-month period immediately following the grant of such option. An option is exercised by giving written notice of exercise to the Company, specifying the number of full shares of Common Stock to be purchased, and tendering payment of the purchase price and any applicable taxes to the Company. Payment for shares issued upon exercise of an option may consist of cash, check or delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price. (b) Exercise Price. The exercise price is determined by the Committee, provided that in no instance shall such price be less than the fair market value of the Common Stock on the date the option is granted. The Option Plan defines "fair market value" as the closing sales price of the Common Stock of the Company as reported by the Nasdaq National Market on the last market trading day before the date of grant. The closing sales price of the Company's Common Stock on the Nasdaq National Market on December 16, 1996 was $11 7/8 per share. Incentive stock options granted to shareholders owning more than 10% of the combined voting power of all the stock of the Company are subject to the additional restrictions that the exercise price be no less than 110% of the fair market value on the date of grant and that options expire no later than 5 years from the date of grant. (c) Termination of Employment. Incentive stock options granted under the Option Plan terminate 30 days after the optionee ceases to be employed by the Company unless (i) the termination of employment is due to permanent and total disability, in which case the option may be exercised at any time within 12 months after termination to the extent the option was exercisable on the date of termination; (ii) the optionee dies while employed by the Company, in which case the option may be exercised at any time within 12 months after death to the extent the option was exercisable on the date of death; or (iii) the option by its terms specifically provides otherwise. Subject to special rules for incentive stock options, the Committee may, in its discretion, extend the period of exercisability of an option after an optionee's termination of employment, but in no event shall any option be exercisable after the expiration date set forth in the option agreement. (d) Expiration of Options. No option is exercisable by any person after the expiration of 10 years from the date the option was granted. (e) Nontransferability of Option. Options granted under the Option Plan are transferable only by will or the laws of descent and distribution and are exercisable during the optionee's lifetime only by the optionee or the optionee's guardian or legal representative. (f) Other Provisions. The option agreement may contain such other terms, provisions and conditions not inconsistent with the Option Plan as the Committee may deem necessary or appropriate. 6 Adjustments Upon Changes in Capitalization The Option Plan provides for adjustments to be made in the shares subject to option to give effect to changes in the capital structure of the Company resulting from recapitalizations, stock splits, stock dividends, combinations of shares, mergers or reorganizations. Depending upon the circumstances, the particular adjustments may require a change in the number, kind and class of securities covered by the option and a change in the exercise price or prices thereof to give effect to the purpose and intent of the Option Plan. The Option Plan and all options terminate in the event of the dissolution or liquidation of the Company. Corporate Transactions. A Corporate Transaction is defined in the Option Plan generally as a merger or asset sale in which the Company does not survive, or any reorganization that results in the transfer of beneficial ownership of 50% or more of the Company's voting stock outstanding. Immediately before the effective date of a Corporate Transaction, each option outstanding under the Option Plan will automatically become exercisable in full unless the option is either to be assumed by the successor corporation or a parent thereof or replaced by a reasonably comparable option to purchase shares of the successor corporation or parent thereof, in connection with the Corporate Transaction. Upon the consummation of any Corporate Transaction, all outstanding options will terminate, to the extent not previously exercised by the optionees or assumed by the successor corporation or its parent company. Change in Control. Change in control is defined in the Option Plan generally as a tender or exchange offer that is not recommended by the Company's Board of Directors for 25% or more of the Company's voting stock by a person or related group of persons other than the Company or an affiliate of the Company, or a contested election for the Board of Directors that results in a change in a majority of the Board. Effective 15 days following the effective date of a Change in Control, each option outstanding under the Option Plan automatically becomes exercisable in full and will remain fully exercisable until the expiration or sooner termination of the option term specified in the option agreement. Acceleration of the exercisability of options in the event of a Corporate Transaction or a Change in Control may have the effect of depressing the market price of the Company's Common Stock and denying shareholders a premium that might otherwise be paid for their shares in such a transaction and may have the effect of discouraging a proposal for merger, a takeover attempt or other efforts to gain control of the Company. Adjustment to Option Rights Subject to the general limitations of the Option Plan, the Committee may adjust the exercise price, term or any other provision of an option (other than automatic options granted to Outside Directors) by canceling and regranting the option or by amending or substituting the option. Options that have been so adjusted may have higher or lower exercise prices, have longer or shorter terms, or be subject to different rights and restrictions than prior options. The Committee may also adjust the number of options granted to an optionee by canceling outstanding options or granting additional options. Except for adjustments necessary to ensure compliance with any applicable state or federal law, no such adjustment may impair an optionee's rights under any option agreement without the consent of the optionee. Amendment and Termination of the Option Plan The Board may amend the Option Plan from time to time or may suspend or terminate the Option Plan. In addition, to the extent necessary to comply with applicable laws or regulations, the Company shall obtain shareholder approval of any amendment to the Option Plan in such a manner as required. However, no such action by the Board or shareholders may alter or impair any option previously granted under the Option Plan without the consent of the optionee. 7 The Option Plan terminates by its terms when all shares available for issuance under the Option Plan have been issued or in November 2002, whichever is earlier, subject to earlier termination by the Board of Directors. Notwithstanding such termination, options granted under the Option Plan will remain outstanding in accordance with their terms. Option Plan Benefits Automatic options are granted to the Outside Directors at the meeting of the Committee held during the Company's third fiscal quarter. Under the Option Plan, each Outside Director after the Meeting, specifically Messrs. Augur and Schawlow, will receive an automatic grant of options to purchase 5,000 shares of Common Stock each calendar year. Federal Income Tax Information The following summary is intended only as a general guide as to the federal income tax consequences under current law with respect to participation in the Option Plan and does not describe all possible federal and other tax consequences of such participation. Furthermore, the tax consequences of options are complex and subject to change, and a taxpayer's situation may be such that some variation of the described rules applies. The summary does not address other taxes that may affect an optionee such as state and local income taxes, federal and state estate, inheritance and gift taxes and foreign taxes. Optionees should consult with their own tax advisors before the exercise of any option and before the disposition of any shares acquired upon the exercise of an option. Incentive Stock Options. If an option is treated as an incentive stock option ("ISO"), the optionee does not recognize taxable income upon its grant or incur tax on its exercise (unless the optionee is subject to the alternative minimum tax described below). If the optionee holds the stock acquired upon exercise of an ISO ("ISO Shares") for more than one year after the date the option was exercised and for more than two years after the date the option was granted, the optionee generally will realize long-term capital gain or loss (rather than ordinary income or loss) upon disposition of the ISO Shares. This gain or loss will be equal to the difference between the amount realized upon such disposition and the amount paid for the ISO Shares. If the optionee disposes of ISO Shares before the expiration of either required holding period (a "disqualifying disposition"), then gain realized upon such disqualifying disposition, up to the difference between the fair market value of the ISO Shares on the date of exercise (or, if less, the amount realized on a sale of such ISO Shares) and the option exercise price, will be treated as ordinary income. Any additional gain will be long-term or short-term capital gain, depending upon the length of time the optionee held the ISO Shares. The Company will be entitled to a deduction in connection with the disposition of ISO Shares only to the extent that the optionee recognizes ordinary income on a disqualifying disposition of the ISO Shares. Alternative Minimum Tax. The difference between the exercise price and fair market value of the ISO Shares on the date of exercise of an ISO is an adjustment to income for purposes of the alternative minimum tax ("AMT"). The AMT (imposed to the extent it exceeds the taxpayer's regular tax) is 26% of an individual taxpayer's alternative minimum taxable income (28% in the case of alternative minimum taxable income in excess of $175,000). Alternative minimum taxable income is determined by adjusting regular taxable income for certain items, increasing that income by certain tax preference items and reducing this amount by the applicable exemption amount ($45,000 in the case of a joint return, subject to reduction in certain circumstances). If a disqualifying disposition of the ISO Shares occurs in the same calendar year as exercise of the ISO, there is no AMT adjustment with respect to those ISO Shares. Also, upon a sale of ISO Shares that is not a disqualifying disposition, alternative minimum taxable income is reduced in the year of sale by the excess of the fair market value of the ISO Shares at exercise over the amount paid for the ISO Shares. 8 Nonstatutory Stock Options. An optionee does not recognize any taxable income at the time a nonstatutory stock option ("NSO") is granted. However, upon exercise of an NSO, the optionee must include in income as compensation an amount equal to the difference between the fair market value of the shares on the date of exercise and the amount paid for that stock upon exercise of the NSO. The included amount must be treated as ordinary income by the optionee and will be subject to income tax withholding by the Company. Upon resale of the shares by the optionee, any subsequent appreciation or depreciation in the value of the shares will be treated as capital gain or loss. The Company will be entitled to a deduction in connection with the exercise of an NSO by a domestic optionee to the extent that the optionee recognizes ordinary income and the Company withholds tax. AMENDMENT OF THE 1985 EMPLOYEE STOCK PURCHASE PLAN In November 1996, the Board of Directors adopted a resolution, subject to shareholder approval, approving an amendment to the Company's 1985 Employee Stock Purchase Plan (the "Purchase Plan") to increase the number of shares of Common Stock issuable thereunder by 50,000 shares to 350,000 shares. Before giving effect to the proposed amendment, 61,588 shares of Common Stock remain available for issuance under the Purchase Plan. The Board of Directors recommends that shareholders vote for the amendment of the Purchase Plan. The Board of Directors believes that the Purchase Plan advances the interests of the Company by assisting the Company in attracting and retaining competent and motivated employees and by facilitating employee investment in the Company's Common Stock. The essential features of the Purchase Plan, as amended, are outlined below. Description of the Purchase Plan General. The Purchase Plan, which is intended to qualify under Section 423 of the Code, provides for the grant to employees of rights to purchase shares of the Company's Common Stock. Administration. The Purchase Plan is administered by the Committee, which has final authority for interpretation of any provisions of the Purchase Plan or of any right to purchase stock granted under the Purchase Plan. All costs and expenses associated with the administration of the Purchase Plan are borne by the Company. In addition, the Purchase Plan provides certain indemnification provisions. Eligibility. Employees of the Company (including officers) become eligible for participation in the Purchase Plan after completing three months of continuous employment that customarily entails more than twenty hours a week and more than five months per calendar year. However, no employee is eligible to participate in the Purchase Plan if, immediately after the election to participate, such employee would own stock of the Company (including stock such employee may purchase under outstanding options) representing 5% or more of the total combined voting power or value of all classes of stock of the Company. In addition, no employee is permitted to participate if under the Purchase Plan and all similar purchase plans of the Company or its subsidiaries, such rights would accrue at a rate that exceeds $25,000 of the fair market value of such stock (determined at the time the right is granted) for each calendar year. Participation. The Purchase Plan is implemented by one offering during each calendar quarter, beginning on the first trading day of the quarter and ending on the last trading day of the quarter ("Participation Period"). Eligible employees become participants in the Purchase Plan by executing a participation agreement and filing it with the Company no later than the deadline stated in the participation agreement, and if none is stated, then no later than the first day of the Participation Period. By enrolling in the Purchase Plan, a participant is deemed to have elected to purchase the maximum number of whole shares of Common Stock that can be purchased with the compensation withheld during the Participation Period. 9 Payroll Deductions. The payroll deductions made for each participant may be any whole percentage of a participant's base earnings, up to a maximum of 10%. Base earnings is defined in the Purchase Plan as all compensation, excluding overtime, shift differential and all incentive compensation, sales commissions and other bonuses. Payroll deductions commence with the first paycheck issued during the Participation Period and are deducted from subsequent paychecks throughout the Participation Period unless changed or terminated as provided in the Purchase Plan. The participant may increase or decrease the rate of payroll withholding for the next Participation Period by filing a new participation agreement on or before the date specified in the participation agreement and if none is stated, then no later than the first day of the Participation Period for which the change is to be effective. The Company maintains a plan account in the name of each participant and credits the amount deducted from compensation to such account. Purchase of Stock; Price. As of the last day of each Participation Period, each participant's accumulated payroll deductions are applied to the purchase of whole shares of Common Stock at a price which is the lower of (i) 85% of the fair market value per share of the Common Stock on the first trading day of the Participation Period or (ii) 85% of the fair market value per share of the Common Stock on the last trading day during the Participation Period. The fair market value of the Common Stock on a given date is defined as the closing bid price as reported by the Nasdaq National Market. The closing sales price of the Company's Common Stock on the Nasdaq National Market on December 16, 1996 was $11 7/8 per share. In the event that the aggregate number of shares which all participants elect to purchase during a Participation Period exceeds the number of shares remaining for issuance under the Purchase plan, the available shares will be divided ratably and any excess cash will be refunded to the participants. Participants are notified by statements of account as soon as practicable following the end of each Participation Period as to the amount of payroll deductions, the number of shares purchased, the purchase price and the remaining cash balance of their plan account. Certificates representing whole shares are delivered to participants. Withdrawal From the Purchase Plan. Participants may withdraw from participation in the Purchase Plan at any time up to the last day of a Participation Period by filing the prescribed form with the Company. As soon as practicable after withdrawal, payroll deductions cease and all amounts credited to the participant's plan account are refunded in cash, without interest. A participant who has withdrawn from the Purchase Plan will be a participant in future Participation Periods only if such participant re-enrolls pursuant to the Purchase Plan. Termination of Employment. Termination of a participant's status as a full-time or permanent part-time employee for any reason, including death, is treated as an automatic withdrawal from the Purchase Plan. In such event, the Company will distribute all funds held for the employee to the employee or, in the case of death, to the person or persons entitled thereto as provided in the Purchase Plan. Nontransferability. The rights of interests of any participant in the Purchase Plan or in any shares or cash to which such participant may be entitled, shall not be transferable by voluntary or involuntary assignment or by operation of law, or by any other manner than as permitted by the Code, by will or the laws of descent and distribution. Amendment and Termination of the Purchase Plan. The Board of Directors has the right to amend, modify or terminate the Purchase Plan at any time, except that the approval of the holders of a majority of the voting power of the Company's outstanding Common Stock is required for any amendment that (i) changes the number of shares reserved for issuance under the Purchase Plan; (ii) changes the percentage of fair market value used in the determination of the purchase price under the Purchase Plan; (iii) materially increases the benefits accruing to persons eligible to participate in the Purchase Plan; or (iv) 10 materially changes the standards of eligibility for participation in the Purchase Plan. Unless sooner terminated, the Purchase Plan will terminate on the last day of the fiscal year ending in 2010. Adjustments Upon Changes in Capitalization. In the event of any reorganization, recapitalization, stock split, reverse stock split, stock dividend, combination of shares, merger, consolidation or other similar change in the capital structure of the Company, the Board of Directors may make such adjustment, if any, as it deems appropriate in the number, kind and purchase price of the shares available for purchase under the Purchase Plan and the maximum number of shares a participant may elect to purchase under the Purchase Plan in any Participation Period, subject to the limitations of Section 423 of the Code. Federal Income Tax Information The following summary is intended only as a general guide as to the federal income tax consequences under current law with respect to participation in the Purchase Plan and does not describe all possible federal and other tax consequences of such participation. Furthermore, the tax consequences are complex and subject to change, and a taxpayer's situation may be such that some variation of the described rules applies. The summary does not address other taxes that may affect a participant in the Purchase Plan such as state and local income taxes, federal and state estate, inheritance and gift taxes and foreign taxes. Participants should consult with their own tax advisors regarding the tax consequences of participation in the Purchase Plan. The Purchase Plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Code. Participants will not recognize income for federal income tax purposes either upon enrollment in the Purchase Plan or upon the purchase of shares. All tax consequences are deferred until a participant sells the shares, disposes of the shares by gift or dies. If shares are held for more than one year after the date of purchase and more than two years from the beginning of the applicable Participation Period, or if the participant dies while owning the shares, the participant realizes ordinary income on a sale (or a disposition by way of gift or upon death) to the extent of the lesser of (i) 15% of the fair market value of the shares at the beginning of the Participation Period or (ii) the actual gain (the amount by which the market value of the shares on the date of sale, gift or death exceeds the purchase price). All additional gain upon the sale of shares is treated as long-term capital gain. If the shares are sold and the sale price is less than the purchase price, there is no ordinary income and the participant has a long-term capital loss for the difference between the sale price and the purchase price. If the shares are sold or are otherwise disposed of including by way of gift (but not death, bequest or inheritance) (in any case a "disqualifying disposition") within either the one-year or the two-year holding periods described above, the participant realizes ordinary income at the time of sale or other disposition, taxable to the extent that the fair market value of the shares at the date of purchase is greater than the purchase price. This excess will constitute ordinary income (not currently subject to withholding) in the year of the sale or other disposition even if no gain is realized on the sale or if a gratuitous transfer is made. The difference, if any, between the proceeds of sale and the fair market value of the shares at the date of purchase is a capital gain or loss. Capital gains may be offset by capital losses, and up to $3,000 of capital losses may be used annually against ordinary income. The Company will be entitled to a deduction in connection with the disposition of shares acquired under the Purchase Plan only to the extent that the participant recognizes ordinary income on a disqualifying disposition of the shares. The Company will treat any transfer of record ownership of shares as a disposition, unless it is notified to the contrary. 11 RATIFICATION OF APPOINTMENT OF AUDITORS The Board of Directors has selected Arthur Andersen LLP, independent public accountants, to serve as the auditors for the Company for fiscal 1997. At the Meeting, the shareholders will be asked to ratify such appointment. Representatives of Arthur Andersen LLP are expected to attend the Meeting and will be given the opportunity to make a statement and to answer appropriate questions. EXECUTIVE OFFICERS Ronald E. Fredianelli, age 47, has served as Chief Financial Officer of the Company since April 1990 and as Secretary since 1987. Except for the period from November 1985 to August 1986 and until he was elected Chief Financial Officer in 1990, Mr. Fredianelli was the Controller of the Company since August 1979. From November 1985 to August 1986, he was Controller of Synergy Computer Graphics. Felix J. Schuda, age 48, has served as Chief Technical Officer of the Company since September 1996 and as a Vice President of the Company since 1981. He has been employed by the Company in various engineering and engineering management positions since June 1976. Bert E. Smith, age 48, has served as Vice President of Operations of the Company since September 1996. In February 1996, he was named President of Converter Power, Inc., a wholly owned subsidiary of the Company. From 1984 until February 1996, he was an independent consultant and from November 1994 until his appointment as President of Converter Power, Inc., he served as a consultant to the Company. John A. Lucero, age 47, has served as Vice President of Marketing and Sales of the Company since September 1996. He joined the Company in August 1994 as Director of Sales. From June 1991 to August 1994, he was employed by Crystal Technology, Inc., an electro-optics company, in management positions in marketing and operations. Dennis M. Toohey, age 49, has served as Vice President of Logistics and Quality of the Company since October 1996. From May 1995 to September 1996, he was General Manager of Coils, Inc., an electronic parts manufacturer. From May 1993 to May 1995, he was employed by LeMans Corporation, an auto parts distributor, as Vice President of Operations. From February 1992 to April 1993, he was Vice President, Logistics at Harley-Davidson and from April 1990 to February 1992 he was Vice President, Logistics at General Tire/Continental A.G. 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth information with respect to each executive officer of the Company, each shareholder known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock and all officers and directors of the Company as a group. For information regarding the beneficial ownership of the Company's Common Stock by each nominee for director, see "Election of Directors--Nominees." ~
Shares of Common Stock Beneficially Owned as of December 16, 1996 ----------------------------- Name Number Percent - ---- ------ ------ Marvin Schwartz.......................... 302,000(1) 6.31% Neuberger & Berman 605 Third Avenue New York, New York 10158-3698 Felix J. Schuda.......................... 92,984(2) 1.9% Vice President-Chief Technical Officer Ronald E. Fredianelli.................... 71,543(3) 1.5% Chief Financial Officer and Secretary John A. Lucero........................... 6,950(4) * Vice President, Sales and Marketing Bert E. Smith............................ - - Vice President, Operations Dennis M. Toohey......................... - - Vice President, Logistics and Quality All Officers and Directors as a Group (9 persons) 456,715(5) 9.2%
- ----------------------------- * Less than 1% (1) The share ownership is as reported on Schedule 13D filed with the Securities & Exchange Commission in July 1996. (2) Includes 41,250 shares subject to outstanding options that are exercisable on or before February 14, 1997. (3) Includes 55,000 shares subject to outstanding options that are exercisable on or before February 14, 1997. (4) Includes 6,250 shares subject to outstanding options that are exercisable on or before February 14, 1997. (5) Includes 265,000 shares subject to outstanding options that are exercisable on or before February 14, 1997. 13 EXECUTIVE COMPENSATION Summary Compensation Table The following table shows certain information concerning the compensation of each of the Company's executive officers for services rendered in all capacities to the Company for the fiscal years ended 1996, 1995 and 1994.
Annual Compensation ------------------- All Other Name and Principal Position Fiscal Year Salary(1) Bonus(2) Compensation (3) - --------------------------- --------------------- ------------------------- Henry C. Baumgartner 1996 $175,000 $ - $2,558 Chief Executive Officer 1995 175,000 $26,392 3,021 1994 144,462 26,417 2,889 Richard D. Capra (4) 1996 25,385 -- -- President and Chief 1995 10,000 -- -- Operating Office Bert E. Smith (5) 1996 136,314 -- -- Vice President, Operations 1995 82,180 -- -- Ronald E. Fredianelli (6) 1996 120,000 -- 2,215 Chief Financial Officer 1995 113,423 19,074 2,262 and Secretary 1994 101,192 20,913 2,024 Felix J. Schuda 1996 115,000 -- 2,100 Vice President-Chief 1995 105,000 15,893 2,100 Technical Officer 1994 97,292 20,253 1,946 John A. Lucero (7) 1996 96,442 -- 1,919 Vice President, Sales and 1995 91,642 12,459 1,823 Marketing 1994 10,585 -- --
(1) No compensation is paid to officers of the Company for services rendered as directors. Dennis M. Toohey, who joined the Company in October 1996 as Vice President, Logistics and Quality, is compensated at an annual salary rate of $120,000. (2) Includes cash bonuses paid during the year and cash bonuses accrued for services rendered during the year. (3) Company matching contributions under the Company's Thrift Incentive Savings Plan. (4) Mr. Capra, who joined the Company in July 1996, is currently compensated at an annual salary rate of $200,000. Amounts for 1995 represent compensation for services as a director. (5) Mr. Smith, who joined the Company in February 1996, is compensated at an annual salary rate of $140,000. Amounts for prior periods represent consulting fees. (6) Mr. Fredianelli is currently compensated at an annual salary rate of $130,000. (7) Mr. Lucero joined the Company in August 1994. He is currently compensated at an annual salary rate of $120,000. 14 Option Grants in Fiscal 1996 The following table sets forth information regarding option grants to the executive officers in fiscal 1996. In accordance with the rules of the Securities and Exchange Commission, the table sets forth the hypothetical gains or "option spreads" that would exist for the options at the end of their ten-year term. These gains are based on assumed rates of annual compound stock price appreciation of 5% and 10% from the date the options were granted to the end of the option terms.
Option Grants in Fiscal 1996 Individual Grants ----------------- Name Percent of Number of Total Options Securities Granted to Underlying Employees in Exercise Price Expiration Options Fiscal 1996 Per Share Date Name Granted (1) - ---- ----------- ----------- --------- ---- Henry C. Baumgartner... 25,000 13% $ 9.00 11/6/05 Richard D. Capra....... 55,000 30% 11.25 7/16/06 Bert E. Smith.......... 25,000 13% 10.625 3/28/06 Ronald E. Fredianelli.. 20,000 11% 9.00 11/6/05 Felix J. Schuda........ 5,000 3% 9.00 11/6/05 John A. Lucero......... 5,000 3% 9.00 11/6/05
Potential Realizable Value at Assumed Annual Rates of Stock Appreciation for Option Terms(2) ------------------- 5% 10% -- --- Henry C. Baumgartner.......... $141,501 $358,592 Richard D. Capra.............. 389,129 986,128 Bert E. Smith................. 167,050 423,338 Ronald E. Fredianelli......... 113,201 286,874 Felix J. Schuda............... 28,300 71,718 John A. Lucero................ 28,300 71,718
- ----------- (1) The options shown in the table were granted at fair market value and become exercisable in cumulative increments of 25% of the shares per year, commencing on the first anniversary of the date of grant. The options shown in the table will expire ten years from the date of grant, subject to earlier termination upon termination of employment. (2) The assumed annual compound rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of future stock prices. 15 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table shows the number of shares of Common Stock acquired by the executive officers upon the exercise of stock options during fiscal 1996, the net value realized at exercise, the number of shares of Common Stock represented by outstanding stock options held by each executive officer as of September 28, 1996 and the value of such options based on the closing price of the Company's Common Stock on September 28, 1996, which was $11.13.
Value of Number of Unexercised Unexercised In-the-Money Options at Options at at FY-End (#)(1) FY-End ($)(2) ---------------- ------------- Shares Acquired Value Realized Excerisable/ Exercisable/ Name of Exercise (#) ($) (3) Unexercisable Unexercisable - ---- --------------- ------- ------------- ------------- Henry C. Baumgartner -- -- 115,000/25,000 $854,625/$53,125 Richard D. Capra -- -- 1,250/58,750 2,031/469 Bert E. Smith -- -- 0/25,000 0/12,500 Ronald E. Fredianelli -- -- 50,000/20,000 345,000/42,500 Felix J. Schuda 1,000 $9,750 40,000/5,000 252,000/10,625 John A. Lucero -- -- 5,000/10,000 18,750/29,375
- ------------------------------- (1) Represents the total number of shares subject to stock options held by each executive officer. These options were granted on various dates during fiscal years 1987 through 1996 and are exercisable on various dates beginning in 1988 and expiring in 2006. (2) Represents the difference between the exercise price and $11.13, which is the September 28, 1996 closing price. Stock option exercise prices range from $2.13 to $11.25. (3) Aggregate market value of the shares covered by the option at the date of exercise, less the aggregate exercise price. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The Compensation and Stock Option Committee of the Board of Directors (the "Committee") is composed of Harrison H. Augur, Chairman, Arthur L. Schawlow and Wirt D. Walker. All are independent outside directors. Richard D. Capra served on the Committee until July 1996, when he was elected President and Chief Operating Officer of the Company. BOARD COMPENSATION AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Committee is charged with the responsibility for reviewing the performance and approving the compensation of key executives and for establishing general compensation policies and standards for reviewing management performance. The Committee also reviews both corporate and key executive performance in light of established criteria and goals and approves individual key executive compensation. Compensation Philosophy The executive compensation philosophy of the Company is to provide competitive levels of compensation that advance the Company's annual and long-term performance objectives, reward corporate performance, and assist the Company in attracting, retaining and motivating highly qualified executives. 16 The framework for the Committee's executive compensation programs is to establish base salaries which are competitive and to incentivize excellent performance by providing executives with the opportunity to earn additional remuneration linked to the Company's profitability. The incentive plan goals are designed to improve the effectiveness and enhance the efficiency of Company operations, to provide savings for customers and to create value for shareholders. It is also the Company's policy to encourage share ownership by executive officers and Outside Directors through the grant of stock options. Components of Compensation The compensation package of the Company's executive officers consists of base annual salary, bonus opportunities and stock option grants. At executive levels, base salaries are reviewed but not necessarily increased annually. Base salaries are fixed at competitive amounts paid to individuals with comparable qualifications, experience and responsibilities engaged in similar businesses as the Company. The Company develops its executive compensation data from a nationally recognized survey for high technology companies of similar size, industry and location. Dr. Schuda's base salary of $105,000 was increased to $115,000 in October 1995. No other executive officer of the Company received a salary increase in fiscal 1996. However, the Company typically adjusts base salary levels in connection with promotions. Mr. Lucero's base salary of $95,000 was increased to $120,000 in August 1996, in connection with his appointment as an executive officer of the Company. Incentive compensation is closely tied to the Company's success in achieving financial performance goals. Each year the Committee approves a management bonus program based upon performance objectives for executive officers and other key employees. Under the program, a participant may receive in any year a portion of a management bonus pool, which pool is based on a percentage of yearly pre-tax profits with no ceiling. The participant's share is based on his or her base wage as a percent of the total salaries of all participants during the management bonus period. The participant's distribution is then calculated in accordance with a bonus point scaling system tied to financial performance goals. In addition, all employees share in another bonus program based solely on a percentage of pre-tax profits, again with no ceiling, and distributed based on a percentage of base salary. The Company uses stock options both to reward past performance and to motivate future performance, especially long-term performance. Stock options typically have been granted to executive officers when the executive first joins the Company, in connection with a significant change in responsibilities, to provide greater incentives to continue their employment with the Company and, occasionally, to achieve equity within a peer group. The Committee may, however, grant additional stock options to executives for other reasons. The number of shares subject to each stock option granted is within the discretion of the Committee and is based on anticipated future contribution and ability to impact corporate results, past performance or consistency within the executive's peer group. The Committee considered these factors, as well as the number of options held by such executive officers that would remain unvested at the end of fiscal 1995, in determining the number of options to grant to executive officers for fiscal 1996. The Committee believes that through the use of stock options, executive interests are directly tied to enhancing shareholder value. Stock options are granted at fair market value as of the date of grant, and have a term of ten years. The options vest 25% per year, beginning on the first anniversary date of the grant. The stock options provide value to the recipients only when the market price of the Company's Common Stock increases above the option grant price and only as the shares vest and become exercisable. In November 1996, the Board of Directors authorized severance agreements for certain key managers in the event of a change of control of the Company and subsequent actual or constructive termination of the covered manager without cause. The severance pay will be a multiple of current base salary (.5 to 3 times, depending on seniority). 17 The change of control severance agreements are intended to maintain management objectivity and continuation during any negotiation process. Mr. Baumgartner's 1996 Compensation The Committee makes decisions regarding the compensation of the Chief Executive Officer using the same philosophy set forth above. The Committee's approach in setting Mr. Baumgartner's base compensation, as with that of the Company's other executives, is to be competitive with other companies within the industry, taking into consideration company size, operating conditions and compensation philosophy and performance. Mr. Baumgartner's base salary in fiscal 1996 was the same as his base salary in fiscal 1995. Mr. Baumgartner's fiscal 1996 incentive compensation was earned under the same bonus plans and performance criteria that were described previously in this report. He received 25,000 stock option grants at $9.00 per share during fiscal 1996. Compliance with Section 162(m) of the Internal Revenue Code The Company intends to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986 for fiscal 1997. The Option Plan is in compliance with Section 162(m) by limiting the number of shares subject to options to be granted to any participant. The Company does not expect cash compensation for fiscal 1996 to be affected by the requirements of Section 162(m). COMPENSATION AND STOCK OPTION COMMITTEE Harrison H. Augur, Chairman Arthur L. Schawlow Wirt D. Walker, III 18 PERFORMANCE GRAPH The Securities and Exchange Commission requires that the Company include in this Proxy Statement a line- graph presentation comparing cumulative, five-year shareholder returns on an indexed basis with (i) a broad equity market index and (ii) either an industry index or peer group. The following graph compares the percentage change in the cumulative total shareholder return on the Company's Common Stock against the cumulative total return of the Standard & Poors 500 Index and the NASDAQ SIC Group 364 (Electric Lighting and Wiring Equipment) for a period of five years. "Total return," for the purpose of this graph, assumes reinvestment of all dividends, if any. The stock price performance shown on the graph is not necessarily indicative of future price performance. Comparison of Five Year Cumulative Total Return* Among ILC Technology, Inc., The S&P 500 INDEX and NASDAQ SIC Group 364 Edgar representation of data points used in printed graphic
ILC Technology, Inc. SDAQ SIC Group 364 S&P 500 9-91 100 100 100 9-92 84 111 118 9-93 84 125 145 9-94 64 130 170 9-95 80 169 212 9-96 79 203 216
*100 invested on 9/30/91 in stock or index, including reinvestment of dividends. Fiscal year ending September 28. 19 CERTAIN TRANSACTIONS In November 1996, the Company entered into Compensation Agreements with ten of its key employees, including six executive officers, that would provide severance benefits effective upon a change in control of the Company. Each agreement provides that if, during the two-year period following a change in control of the Company (as defined in the agreements), the Company terminates the employee's employment without cause (other than for death, retirement or disability) or the employee terminates the employee's employment for good reason (as defined in the agreements), the employee will receive from the Company a lump sum payment as a severance benefit. The amount of such payment will be equal to three times the employee's annual full base salary (excluding bonus) for Messrs. Baumgartner, Capra and Fredianelli, and two times the employee's annual full base salary (excluding bonus) for Messrs. Schuda, Smith and Lucero. All Compensation Agreements expire in November 1999 if a change in control of the Company has not occurred or upon the employee's earlier termination for cause or by reason of the employee's death, disability or retirement. COMPLIANCE UNDER SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Based solely on its review of the copies of forms furnished to the Company and written representations from its executive officers and directors, the Company believes that all Section 16(a) filing requirements were met during fiscal 1996, except that a Form 3 giving an initial statement of beneficial ownership of equity securities was filed late by Bert E. Smith, Vice President, Operations and John A. Lucero, Vice President, Sales and Marketing. OTHER MATTERS The Company knows of no other matters to be submitted to the Meeting. However, if any other matters properly come before the Meeting or any adjournment or postponement thereof, it is the intention of the proxy holders to vote the shares they represent as the Board of Directors may recommend. By Order of the Board of Directors Ronald E. Fredianelli, Secretary Dated: January 2, 1997 Sunnyvale, California 20 EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated November 22, 1996, included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statements, File Numbers 2-90841, 2-95899, 33-6917, 33-27001, 33-50404, 33-89470 and 333-1095. ARTHUR ANDERSEN LLP San Jose, California December 20, 1996 EX-27 7 FDS
5 ILC Technology, Inc., Financial Data Sheet 0000719625 ILC Technology, Inc. 1,000 12-MOS SEP-28-1996 SEP-28-1996 1,829 0 10,668 312 8,902 4,545 32,389 11,213 48,594 10,476 0 0 0 6,815 22,976 48,594 54,206 54,206 36,180 36,180 11,503 0 462 6,061 1,515 4,546 (4,239) 0 0 307 .06 .06
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