-----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, HwQg0VurnLc2H5dwBXCuebUK+20dX/F78MT1+uXoZsr6hvVKYFapkJzPva+vyLw+ Tp8qcdzgjVptvKs9596rFQ== 0000719625-97-000008.txt : 19970813 0000719625-97-000008.hdr.sgml : 19970813 ACCESSION NUMBER: 0000719625-97-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970812 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11360 FILM NUMBER: 97656591 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 28, 1997 -------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- ---------------------------- Commission file number 0-11360 ---------------------------------------------------------- ILC TECHNOLOGY, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 94-1655721 - -------------------------------------------------------------------------------- (State of other jurisdiction (I.R.S. Employer Incorporation or or organization) Identification No.) 399 JAVA DRIVE, SUNNYVALE, CALIFORNIA 94089 - -------------------------------------------------------------------------------- (Address of principal executive offices) Zip Code) 408-745-7900 - -------------------------------------------------------------------------------- Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___ No___ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares: 4,866,402 Date: JULY 31, 1997 ------------ ------------------ ILC TECHNOLOGY, INC. FORM 10-Q For the Quarter Ended June 28, 1997 INDEX PAGE NO. Part I. FINANCIAL INFORMATION 2 Item 1 Condensed Consolidated Statements of Operations - Quarters ended June 28, 1997 and June 29, 1996 and nine months ended June 28, 1997 and June 29, 1996 3 Condensed Consolidated Balance Sheets - June 28, 1997 and September 28, 1996 4 Condensed Consolidated Statements of Cash Flows - Nine months ended June 28, 1997 and June 29, 1996 5-6 Notes to Condensed Consolidated Financial Statements 7-9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Item 3 Quantitative and Qualitative Disclosure about Market Risk 14 Part II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 15 SIGNATURES 16 1 PART I. FINANCIAL INFORMATION --------------------- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures which are made are adequate to make the information presented not misleading. It is suggested that the condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report/Form 10-K for the year ended September 28, 1996. These financial statements have been prepared in all material respects in conformity with the standards of accounting measurements set forth in Accounting Principles Board Opinion No. 28 and reflect, in the opinion of management, all adjustments (that consisted only of normal recurring adjustments) necessary to present fairly the financial information set forth therein. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. 2 ITEM 1. FINANCIAL STATEMENTS -------------------- ILC TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share data) QUARTER ENDED NINE MONTHS ENDED June 28, June 29, June 28, June 29, 1997 1996 1997 1996 (as restated) (as restated) Net sales .................. $ 13,911 $ 14,860 $ 40,808 $ 41,014 Costs and expenses: Cost of sales ............ 9,806 9,865 29,112 26,951 Research and development . 1,047 950 3,324 3,451 Marketing ................ 837 593 2,363 1,990 General and administrative 910 1,140 2,991 3,398 Amortization of intangibles 30 30 90 90 -------- -------- -------- -------- 12,630 12,578 37,880 35,880 -------- -------- -------- -------- Income from operations ...... 1,281 2,282 2,928 5,134 Interest expense, net ....... (99) (113) (423) (337) Gain on sale of Converter Power 2,379 -- 2,379 -- -------- -------- -------- -------- Income before provision for income taxes and discontinued operations ................... 3,561 2,169 4,884 4,797 Provision for income taxes .... 890 543 1,217 1,200 -------- -------- -------- -------- Income before discontinued operations ................... 2,671 1,626 3,667 3,597 Loss from discontinued operations, net of income tax benefit of $41 and $36 in the quarter and nine months ended June 29, 1996, respectively ................. -- (122) -- (105) -------- -------- -------- -------- Net income .................... $ 2,671 $ 1,504 $ 3,667 $ 3,492 ======== ======== ======== ======== Earnings per share: Earnings from continuing operations ................... $ 0.53 $ 0.33 $ 0.73 $ 0.73 Earnings from discontinued operations .................... -- (0.03) -- (0.02) -------- -------- -------- -------- Net income per share ...........$ 0.53 $ 0.30 $ 0.73 $ 0.71 ======== ======== ======== ======== Weighted average shares used in computation ......... 5,049 4,984 5,043 4,917 ======== ======== ======== ======== See accompanying notes 3 ILC TECHNOLOGY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) JUNE 28, 1997 SEPTEMBER 28, 1996 ------------- ------------------ (unaudited) ASSETS Current assets: Cash and cash equivalents ............... $ 1,220 $ 1,829 Accounts receivable, net ................ 10,391 10,356 Inventories: Raw materials ......................... 4,959 4,803 Work-in-process ....................... 3,262 2,550 Finished goods ........................ 1,505 1,549 ------- ------- Total inventories ................... 9,726 8,902 ------- ------- Deferred tax asset ........................ 1,484 2,158 Prepaid expenses .......................... 261 208 Net assets from discontinued operations ... -- 2,178 Note receivable from sale of Precision Lamp 1,400 -- ------- ------- Total current assets .................. 24,482 25,631 ------- ------- Property and equipment, net ............... 21,347 21,176 Note receivable from sale of Precision Lamp 2,197 -- Covenant-not-to-compete, net .............. 268 357 Other assets .............................. 768 680 ------- ------- $49,062 $47,844 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................ $ 4,030 $ 3,643 Accrued liabilities ..................... 2,696 2,853 Current portion of long-term debt ....... 2,620 2,493 Accrued income taxes payable ............ 2,013 1,487 ------- ------- Total current liabilities ............. 11,359 10,476 ------- ------- Long-term debt ............................ 2,633 6,188 Obligations under equipment line .......... 1,171 1,096 Other accruals ............................ 89 206 Capital lease obligation .................. 59 87 ------- ------- Total liabilities ..................... 15,311 18,053 ------- ------- Stockholders' equity: Common stock .............................. 7,108 6,815 Retained earnings ......................... 26,643 22,976 ------- ------- Total stockholders' equity ............ 33,751 29,791 ------- ------- $49,062 $47,844 ======= ======= See accompanying notes 4 ILC TECHNOLOGY, INC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) NINE MONTHS ENDED JUNE 28, JUNE 29, 1997 1996 -------- -------- (as restated) Cash flows from operating activities - Net income .................................. $ 3,667 $ 3,492 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ............. 860 1,143 Amortization of non-compete agreements .... 90 90 Gain on sale of Converter Power ........... (2,379) -- Changes in assets and liabilities from operations: Increase in accounts receivable ........... (763) (1,600) Increase in inventories ................. (2,520) (988) Increase in prepaid expenses ............ (53) (2) Decrease in deferred tax asset .......... 674 -- (Increase) decrease in other assets ..... (88) 20 Increase in accounts payable ............ 386 262 Increase (decrease) in accrued liabilities .. (638) (134) Net change in assets and liabilities from discontinued operations ................. 2,178 (1,039) -------- -------- Total adjustments ..................... (2,253) (2,248) -------- -------- Net cash provided by operating activities ........................... 1,414 1,244 -------- -------- Cash flows from investing activities - Capital expenditures ......................... (1,665) (2,187) Net change in note receivable from sale of Precision Lamp .............................. (3,596) -- Proceeds from the sale of Converter Power .... 6,350 -- -------- -------- Net cash provided by (used in) investing activities................... 1,089 (2,187) -------- -------- Cash flows from financing activities - Borrowings under line of credit .............. 9,713 7,100 Repayments under line of credit .............. (12,213) (5,600) Principal borrowings under equipment line .... 1,045 1,111 Principal payments under equipment line ...... (895) (1,035) Principal payments under term loan for buildings ................................... (1,055) (1,188) Proceeds from issuance of common stock ....... 718 394 Repurchase of common stock ................... (425) -- Payments under non-compete agreement ......... -- (390) -------- -------- Net cash provided by (used in) financing activities.................. (3,112) 392 -------- -------- Net decrease in cash ......................... (609) (551) Cash at beginning of period .................. 1,829 1,530 -------- -------- Cash at end of period ........................ $ 1,220 $ 979 ======== ======== See accompanying notes 5 ILC TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued) (In thousands) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: NINE MONTHS ENDED JUNE 28, 1997 JUNE 29, 1996 ------------- ------------- Cash paid during the period for: Interest expense $ 542 $ 451 Income taxes 29 425 See accompanying notes 6 ILC TECHNOLOGY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 28, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ BASIS OF PRESENTATION --------------------- The condensed consolidated financial statements include the accounts of ILC Technology, Inc., and its subsidiaries, after elimination of intercompany accounts and transactions. The Company's quarter ends on the last Saturday of the fiscal month. The Condensed Consolidated Financial Statements for the quarter and nine months ended June 29, 1996 were restated to reflect the Company's decision to discontinue the operations of Precision Lamp, Inc. This restatement had no impact on net income. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's 1996 Form 10-K and quarterly report on Form 10-Q for the nine months ended June 29, 1996. 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, the 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 a maturity of less than three months at the time of issue to be cash equivalents. INVENTORIES - ----------- Inventories are stated at the lower of cost (first in, first out) or market, and include material, labor and manufacturing overhead. 2. EARNINGS PER SHARE ------------------ Earnings per share is computed using the weighted average number of common shares and common equivalent shares (when such equivalents have a dilutive effect) outstanding during the periods using the treasury stock method. Fully diluted earnings per share is not significantly different from earnings per share as reported. In February 1997, the Financial Accounting Standards Board issued Statement on Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share", which is required to be adopted by the Company in its first quarter of fiscal 1998. The effective date of SFAS No. 128 is December 15, 1997 and early adoption is not permitted. The Company intends to adopt SFAS No. 128 during the quarter ended December 27, 1997. Had the provisions of SFAS No. 128 been applied to the Company's results of operations for the nine months ended June 28, 1997 and June 29, 1996, the Company's basic earnings per share from continuing operations would have been $0.76 per share for both periods, and its diluted earnings per share would have been $0.73 per share for both periods. 7 ILC TECHNOLOGY, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) --------------------------------------------------------------------------- JUNE 28, 1997 ------------- 3. COVENANT-NOT-TO-COMPETE ----------------------- The covenant-not-to-compete relates to the Q-Arc acquisition that took place in 1991. This is being amortized over the period of the covenant. Subsequent to this acquisition, the Company quarterly evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of this intangible may warrant revision or that the remaining balance of the intangible may not be recoverable. When factors indicate that intangibles should be evaluated for possible impairment, the Company uses an estimate of the related subsidiary's undiscounted cash flow over the remaining life of the intangibles in measuring whether the intangibles are recoverable. 4. BANK BORROWINGS --------------- In January 1997, the Company negotiated an additional $3,000,000 line of credit available to June 30, 1997 at 2.5% above the LIBOR rate. As of June 28, 1997, this facility expired and all amounts outstanding were repaid with proceeds from the sale of Converter Power. 5. DISCONTINUED OPERATIONS ----------------------- In September 1996, the Company's Board of Directors voted to proceed with the divestiture of the Company's Precision Lamp subsidiary based in Cotati, California. For the six months ended March 29, 1997, the loss incurred by this operation of approximately $765,000 was offset against an accrual for anticipated losses during the disposition of discontinued operations that was established in the fourth quarter of fiscal 1996. In January 1997, the Company signed an agreement to sell the Precision Lamp subsidiary. The original selling price was approximately $3.3 million but was subject to due diligence and the ability of PLI Acquisition Corp., the purchaser, to obtain adequate financing no later than March 31, 1997. The purchaser was not able to obtain adequate financing, but through further discussions with the purchaser, the Company agreed to sell the stock of Precision Lamp to PLI Acquisition Corp. for a $4 million promissory note bearing 8% interest per year on any unpaid principal amount. Payments on the promissory note began in May 1997 and will be completed in April 2000. This transaction was recorded in the third quarter ended June 28, 1997. The purchase price, net of expenses, approximated book value and therefore, no gain or loss was recorded. 6. CONVERTER POWER, INC. --------------------- In May 1997, the Company announced the sale of Converter Power, Inc. to Applied Science and Technology, Inc. (ASTeX) for a purchase price of $6.35 million in cash and 45,000 shares of ASTeX stock. The total purchase price is guaranteed to be $7.35 million, subject to adjustments related to warranties provided by the Company at the time of sale. The Company has made an estimate of the expected warranties that could be paid of approximately $500,000 and has reduced the gain on sale accordingly. The 45,000 shares received will be held in escrow subject to any post-closing adjustments. The sale, net of expenses, resulted in a gain of $2,379,000 and is reported in the results of operations for the quarter ended June 28, 1997. The net amount due from ASTeX of $500,000 is reflected in accounts receivable on the accompanying condensed consolidated balance sheet. 8 ILC TECHNOLOGY, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) --------------------------------------------------------------------------- JUNE 28, 1997 ------------- 7. 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. During the third quarter of fiscal 1997, and since inception of the repurchase program, the Company repurchased 37,000 shares of common stock for an aggregate amount of $425,000. Purchases were made on the open market and can be made for up to two years from the date of authorization. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- GENERAL - ------- In September 1996, the Company's Board of Directors voted to proceed with the divestiture of the Company's Precision Lamp subsidiary located in Cotati, California. Accordingly, the following discussion and analysis of financial condition and results of operations reflects the activities of ILC Sunnyvale, Converter Power, Inc. and Q-Arc Ltd. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. In addition to the factors discussed below, among the factors that could cause actual results to differ materially are the following: the Company's ability to manufacture products efficiently and reliably; the ability of the Company to deliver new products on time; market acceptance of the Company's products; the introduction, marketing and commercial viability of products and systems that use the Company's products; competition; changes in pricing; the timing of, or delay in, large customer orders; quality control of products sold; and the factors contained from time to time in the reports that the Company files with the Securities and Exchange Commission. In this report, the words "anticipates", "believes", "future", "may have", "will take place", "are expected" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. CONTINUING OPERATIONS - --------------------- QUARTER ENDED JUNE 28, 1997 COMPARED TO QUARTER ENDED JUNE 29, 1996 - ------------------------------------------------------------------- Net sales in the quarter ended June 28, 1997 were $13,911,000 compared to $14,860,000 in the quarter ended June 29, 1996. Although net sales at ILC Sunnyvale and Q-Arc increased by 11.1% between the two quarters, net sales at Converter Power decreased 79.4% between the two quarterly periods. In May 1997, Converter Power was sold and, accordingly, the quarter ended June 28, 1997 includes only one month of sales as compared to a full quarter of sales in the quarter ended June 29, 1996. The net sales increase at ILC and at Q-Arc was the result of a higher volume of products sold primarily in Flashlamp, Quartz and Aerospace products. Cost of sales as a percentage of net sales was 70.5% in the third quarter of fiscal 1997 compared to 66.4% in the same quarter last year. The percentage increase was due to unfavorable yields in Cermax products due to production equipment moves to allow for increased production capabilities. In addition, revenue recognition on Aerospace contracts with low or minimal gross margins contributed to the cost of sales percentage increase between the third quarter of fiscal 1997 and the third quarter of fiscal 1996. The cost of sales percentage associated with Quartz products decreased between the two quarters resulting in a positive gross margin contribution in the quarter ended June 28, 1997. Research and development expenses, 7.5% of net sales in the quarter ended June 28, 1997 compared to 6.4% of net sales in the quarter ended June 29, 1996, increased $97,000 between the two quarters. Spending declines occurred in Quartz products for the development of lamps used in the processing of semiconductor materials, but increased in the development of Cermax and Equipment products for the display and projection markets. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS CONTINUED) -------------------------------- QUARTER ENDED JUNE 28, 1997 COMPARED TO QUARTER ENDED JUNE 29, 1996 (CONTINUED) - ------------------------------------------------------------------------------- Marketing expenses for the quarter ended June 28, 1997 were $837,000, or 6.0% of net sales compared to $593,000, or 4.0% of net sales in the same quarter of the prior fiscal year. The $244,000 increase between the two quarters was the result of personnel additions, more travel and trade show attendance, more advertising and a higher commission expense. As a percentage of net sales, general and administrative expenses were 6.5% in the third quarter of fiscal 1997 and 7.7% in the third quarter of fiscal 1996. In absolute dollars, the general and administrative spending level decrease of $230,000 between the two quarters is attributable to the inclusion of a full quarter of expenses for Converter Power in the quarter ended June 29, 1996 as compared to only one month of expenses in the quarter ended June 28, 1997. Amortization of intangibles of $30,000 in the third quarter of fiscal 1997 and 1996 represents the amortization of the covenant-not-to-compete arising from the acquisition of Q-Arc in 1991. Net interest expense, $99,000 in the quarter ended June 28, 1997 compared to $113,000 in the quarter ended June 29, 1996, decreased $14,000 between the two quarters. Interest expense associated with continuing operations for the third quarter of fiscal 1997 was $143,000 compared to $155,000 for the third quarter of fiscal 1996. The decrease in interest expense between the two quarters is due to lower outstanding balances under the Company's line of credit as cash proceeds from the sale of Converter Power were used to reduce bank borrowings. As discussed in Note 6 of Notes to Condensed Consolidated Financial Statements, the Converter Power subsidiary was sold in May 1997. This transaction resulted in a pre-tax gain, net of expenses, of $2,379,000. The Company reported income before provision for income taxes and discontinued operations of $3,561,000 in the third quarter of fiscal 1997 compared to income before provision for income taxes and discontinued operations of $2,169,000 in the third quarter of fiscal 1996. The effective tax rate in the quarter ended June 28, 1997 and in the quarter ended June 29, 1996 was 25%. As previously discussed, the Company's Board of Directors voted to proceed with the divestiture of Precision Lamp located in Cotati, California. In January 1997, the Company signed an agreement to sell the Precision Lamp subsidiary for approximately $3.3 million subject to due diligence and the purchaser's ability to obtain adequate financing. The closing was set to occur no later than March 31, 1997. The purchaser, PLI Acquisition Corp., was not able to secure the required financing, but an agreement was reached in May 1997, between PLI Acquisition Corp. and the Company, to sell the stock of Precision Lamp. The Company received a $4 million promissory note together with 8% interest per year on any unpaid principal amount. Payments began in May 1997 and will be completed in April 2000. NINE MONTHS ENDED JUNE 28, 1997 COMPARED TO NINE MONTHS ENDED JUNE 29, 1996 - --------------------------------------------------------------------------- Net sales for the nine months ended June 28, 1997 were $40,808,000 compared to $41,014,000 for the nine months ended June 29, 1996. Net sales at ILC Sunnyvale and at Q-Arc increased 10.8% and 24.8%, respectively, between the two nine month periods while net sales at Converter Power decreased 46.9% between the same time periods. In the fourth quarter of fiscal 1996, Converter Power experienced a significant reduction in orders from a major customer that provides equipment to 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (CONTINUED) --------------------------------- NINE MONTHS ENDED JUNE 28, 1997 COMPARED TO NINE MONTHS ENDED JUNE 29, 1996 - --------------------------------------------------------------------------- (CONTINUED) ----------- the semiconductor equipment industry. This order reduction continued into the first and second quarters of fiscal 1997. In May 1997, the Converter Power subsidiary was sold and therefore net sales for the nine months ended June 28, 1997 reflect only seven months of Converter Power sales activity as opposed to nine months of sales activity in the nine months ended June 29, 1996. The net sales increases at both ILC Sunnyvale and at Q-Arc were the result of a higher volume of products sold in all areas except Equipment products, which were lower than the previous year due to the timing of the shipment of orders. Cost of sales as a percentage of net sales was 71.3% for the nine months ended June 28, 1997 compared to 65.7% for the nine months ended June 29, 1996. The percentage increase was due primarily to the sales decline from Converter Power's major customer discussed above. In addition, unfavorable yields in Cermax, Flashlamp and Infrared lamp products coupled with increases in the provision for inventory reserves and revenue recognition on Aerospace contracts with low or minimal gross margins, contributed to the cost of sales percentage increase between the nine months ended June 28, 1997 and the nine months ended June 29, 1996. Research and development expenses, $3,324,000 or 8.1% of net sales for the nine months ended June 28, 1997, decreased $127,000 from $3,451,000, or 8.4% of net sales for the nine months ended June 29, 1996. Spending declines occurred in Flashlamp and Quartz lamp products while spending increases took place in Cermax and Equipment for the display and projection markets. Marketing expenses in the nine months ended June 28, 1997 were $2,363,000, or 5.8% of net sales compared to $1,990,000, or 4.9% of net sales in the same nine month period a year ago. The $373,000 increase between the two nine month periods was the result of personnel additions, more travel and trade show attendance and additional commission expense. General and administrative expenses, 7.3% of net sales in the nine months ended June 28, 1997 compared to 8.3% of net sales in the nine months ended June 29, 1996, decreased $407,000. The majority of the decrease occurred at Converter Power although personnel additions at Q-Arc caused general and administrative expenses to increase at that location. Amortization of intangibles of $90,000 in the nine months ended June 28, 1997 and June 29, 1996 represents the amortization of the covenant-not-to-compete arising from the acquisition of Q-Arc in 1991. Net interest expense, $423,000 in the nine months ended June 28, 1997 compared to $337,000 in the nine months ended June 29, 1996, increased $86,000 between the two nine month periods. Interest expense associated with continuing operations for the first nine months of fiscal 1997 was $525,000 compared to $451,000 for the first nine months of fiscal 1996. The increase in interest expense between the two nine month periods is due to higher borrowings prior to the May 1997 sale of Converter Power under a line of credit for working capital needs and an equipment line of credit for capital equipment acquisitions. As discussed in Note 6 of Notes to Condensed Consolidated Financial Statements, the Converter Power subsidiary was sold in May 1997. The transaction resulted in a pre-tax gain, net of expenses, of $2,379,000. The results of operations for Converter Power for the nine months ended June 28, 1997 include sales activity through April 1997. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (CONTINUED) --------------------------------- NINE MONTHS ENDED JUNE 28, 1997 COMPARED TO NINE MONTHS ENDED JUNE 29, 1996 - --------------------------------------------------------------------------- (CONTINUED) ----------- The Company reported income before provision for income taxes and discontinued operations of $4,884,000 for the nine months ended June 28, 1997 compared to income before provision for income taxes and discontinued operations of $4,797,000 for the nine months ended June 29, 1996. The effective tax rate in the nine months ended June 28, 1997 and June 29, 1996 was 25%. As previously discussed, the Company's Board of Directors voted to proceed with the divestiture of Precision Lamp located in Cotati, California. The operating losses of Precision Lamp for the six months ended March 29, 1997 (approximately $765,000) have been offset against an accrual made in the fourth quarter of fiscal 1996 for anticipated losses during the final disposition of the subsidiary. In January 1997, the Company signed an agreement to sell the Precision Lamp subsidiary for approximately $3.3 million subject to due diligence and the purchaser's ability to obtain adequate financing. The closing was set to occur no later than March 31, 1997. The purchaser, PLI Acquisition Corp. was not able to secure the required financing, but an agreement was reached in May 1997, between PLI Acquisition Corp. and the Company, to sell the stock of Precision Lamp. The Company received a $4 million promissory note together with 8% interest per year on any unpaid principal amount. Payments began in May 1997 and will be completed in April 2000. The activities of Precision Lamp for the nine months ended June 29, 1996 have been restated to reflect a loss from discontinued operations. LIQUIDITY AND FINANCIAL CONDITION - --------------------------------- Net cash provided by operating activities for the nine months ended June 28, 1997 was $1,414,000, an increase of $170,000 from the $1,244,000 net cash provided by operating activities for the nine months ended June 29, 1996. During the first nine months of fiscal 1997, the Company made capital equipment acquisitions of $1,665,000, decreased its net borrowings under its line of credit by $2,500,000, increased its net borrowings under an equipment line by $150,000, paid down a term loan by $1,055,000 and repurchased common stock for $425,000. During the first nine months of fiscal 1996, the Company made capital equipment acquisitions of $2,187,000, increased its net borrowings under its line of credit by $1,500,000, increased its net borrowings under an equipment line by $76,000 and paid down a term loan by $1,188,000. The Company has working capital of $13,123,000 and a current ratio of 2.16 to 1.0 at June 28, 1997. This compares with working capital of $15,155,000 and a current ratio of 2.45 to 1.0 at September 28, 1996. As of June 28, 1997, the Company's credit facilities are as follows: AMOUNT OUTSTANDING AT JUNE 28, 1997 Bank line of credit ....................... $ 2,500,000 Equipment line of credit................... 2,341,000 Term loan ................................. 1,583,000 ----------- 6,424,000 Less current portion ..................... (2,620,000) ---------- Long-term debt ........................... $ 3,804,000 The Company has available an additional $3,500,000 under the bank line of credit ($6 million total). All of the above credit facilities bear interest at 2% above the LIBOR rate (London Interbank Offer Rate) (7.69% at June 28, 1997). In January 1997, the Company negotiated an additional $3,000,000 line of credit available through June 30, 1997 at 2.5% above the LIBOR rate. During the quarter ended June 28, 1997, this facility expired and all outstanding balances under this additional line of credit were repaid with proceeds from the sale of Converter Power. The Company is currently negotiating an 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (CONTINUED) --------------------------------- LIQUIDITY AND FINANCIAL CONDITION (CONTINUED) - --------------------------------------------- equipment credit facility to accommodate the capital equipment needs of the Company. At June 28, 1997, the Company was in compliance with all bank covenants. In fiscal 1997, the Company anticipates working capital equipment expenditures of approximately $2 million (including equipment expenditures made at Converter Power prior to the sale). In the fourth quarter of fiscal 1997, capital equipment expenditures are expected to be approximately $350,000. 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 acquisitions and debt service obligations at least through fiscal 1997. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Not applicable. 14 PART II OTHER INFORMATION - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibit is filed as part of this report: Exhibit 27.1 Financial Data Schedule (b) Reports on Form 8-K Form 8-K filed on May 22, 1997 to report the disposition of Converter Power, Inc. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ILC TECHNOLOGY, INC. DATE: August 12, 1997 /S/RONALD E. FREDIANELLI ------------------------ Ronald E.Fredianelli Chief Financial Officer DATE: August 12, 1997 /S/HENRY C. BAUMGARTNER ----------------------- Henry C. Baumgartner Chairman of the Board and Chief Executive Officer 16 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS SEP-27-1997 JUN-28-1997 1,220 0 10,716 325 9,726 3,145 33,197 11,850 49,062 11,359 0 0 0 7,108 26,643 49,062 40,808 40,808 29,112 29,112 8,768 0 423 2,505 1,217 1,288 0 2,379 0 3,667 .73 .73
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