-----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, UX3PHwbu9yRDWyO915Acj0BUXSxlEpfupT1904sg4brf0us+weTZUkt/l4SI5jzp oF46IDpvts4XIbDRwVhRFw== 0000950135-99-001298.txt : 19990311 0000950135-99-001298.hdr.sgml : 19990311 ACCESSION NUMBER: 0000950135-99-001298 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981216 ITEM INFORMATION: FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EG&G INC CENTRAL INDEX KEY: 0000031791 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 042052042 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-05075 FILM NUMBER: 99561920 BUSINESS ADDRESS: STREET 1: 45 WILLIAM ST CITY: WELLESLEY STATE: MA ZIP: 02481 BUSINESS PHONE: 7812375100 MAIL ADDRESS: STREET 1: 45 WILLIAM ST CITY: WELLESLEY STATE: MA ZIP: 02481 FORMER COMPANY: FORMER CONFORMED NAME: EDGERTON GERMESHAUSEN & GRIER INC DATE OF NAME CHANGE: 19670626 8-K/A 1 EG&G, INC. AMENDED FORM 8-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT NO. 2 TO CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported) December 16, 1998 ----------------- EG&G, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 1-5075 04-2052042 --------------- ------------------------ ------------------- (State or other (Commission File Number) (IRS Employer jurisdiction of Identification No.) incorporation) 45 William Street, Wellesley, Massachusetts 02481 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (781) 237-5100 ---------------------------------------------------- (Registrant's telephone number, including area code) Not applicable ------------------------------------------------------------- (Former name or former address, if changed since last report) 2 This Amendment No. 2 on Form 8-K/A amends and restates Item 7 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 1998 by EG&G, Inc. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Financial Statements of Businesses Acquired The financial statements required to be filed were previously reported in the Lumen Technologies, Inc. (formerly BEC Group, Inc.) Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and in the ILC Technology, Inc. Annual Report on Form 10-K for the fiscal year ended September 27, 1997 and are included in the Exhibits to this Form 8-K/A. (b) Unaudited Pro Forma Financial Information On December 16, 1998, Lighthouse Weston Corp. ("Lighthouse"), a wholly owned subsidiary of the Company, completed its tender offer for shares of common stock of Lumen Technologies, Inc. ("Lumen"), which is engaged in the business of developing, manufacturing and marketing specialty light sources and related products for markets requiring advanced optical technologies. Lighthouse acquired approximately 92.3% of Lumen's common stock pursuant to the tender offer. On January 4, 1999, Lumen became a wholly owned subsidiary of the Company, as a result of the merger of Lighthouse with and into Lumen. The acquisition of Lumen by the Company was accounted for as a purchase. The following unaudited pro forma consolidated financial information gives effect to the acquisition of Lumen and should be read in conjunction with the historical financial statements and related notes thereto for both the Company and Lumen (including the historical financial statements and related notes thereto for ILC). The unaudited pro forma consolidated income statements for the fiscal year ended December 28, 1997 and the nine-month period ended September 27, 1998 give effect to the acquisition as if the acquisition was completed as of January 1, 1997, and combines the Company's and Lumen's historical income statements for each respective period. The unaudited pro forma consolidated results for the fiscal year ended December 28, 1997 and the nine-month period ended September 27, 1998 exclude acquisition-related charges of $2.3 million for purchased in-process technology related to Lumen. The unaudited pro forma consolidated income statement for the fiscal year ended December 28, 1997 includes columns representing the Company's historical results as adjusted for the 1998 divestitures of its Rotron and Sealol Industrial Seals businesses (previously reported on Form 8-K dated April 16, 1998) for the fiscal twelve months then ended, Lumen's historical results for the year ended December 31, 1997 and ILC Technology, Inc.'s (ILC) historical results for the fiscal twelve months ended September 27, 1997 (which represented ILC's previous fiscal year end). ILC was acquired by Lumen on March 12, 1998. The unaudited pro forma consolidated income statement for the nine months ended September 27, 1998 includes columns representing the Company's historical results as adjusted for the divestiture of its Rotron and Sealol Industrial Seals businesses for the nine-month period then ended, Lumen's historical results for the nine months ended September 30, 1998 and ILC's historical results for the period from January 1 through March 12, 1998. The unaudited pro forma consolidated financial information is provided for informational purposes only and is not necessarily indicative of the Company's financial position or operating results that would have occurred had the acquisition been consummated on the dates, or at the beginning of the period, for which the consummation of the acquisition is being given effect, nor is it necessarily indicative of the Company's future operating results or financial position. The unaudited pro forma adjustments do not reflect any operating efficiencies and cost savings that the Company believes are achievable. 3 The unaudited pro forma consolidated financial information has been prepared using the purchase method of accounting, whereby the total cost of the acquisition has been allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the effective date of the acquisition. Such allocations will be based on studies and independent valuations, which are currently being finalized. Accordingly, the allocations reflected in the unaudited pro forma consolidated financial information are preliminary and subject to revision. It is not expected that the final allocation of purchase price will produce materially different results from those presented herein. 4 EG&G, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 27, 1998 (In thousands)
EG&G LUMEN HISTORICAL HISTORICAL PRO FORMA 9/27/98 9/30/98 ADJUSTMENTS PRO FORMA ----------- ----------- ----------- ----------- Current Assets: Cash and cash equivalents $ 178,649 $ 1,994 $ -- $ 180,643 Accounts receivable 210,449 26,701 -- 237,150 Inventories 107,446 29,878 3,204(B) 140,528 Other current assets 67,825 1,730 -- 69,555 ----------- ----------- ----------- ----------- Total current assets 564,369 60,303 3,204 627,876 Property, plant and equipment, net 165,828 38,813 15,156(H) 219,797 Investments 14,717 -- -- 14,717 Intangible assets 114,974 45,249 141,997(C) 302,220 Other assets 64,529 7,436 -- 71,965 ----------- ----------- ----------- ----------- Total assets $ 924,417 $ 151,801 $ 160,357 $ 1,236,575 =========== =========== =========== =========== Current Liabilities: Short-term debt and current portion of long-term $ 22,962 $ 25,411 $ 162,050(I) $ 210,423 Accounts payable 73,233 11,028 -- 84,261 Accrued restructuring costs 38,571 -- 5,000(F) 43,571 Accrued expenses 195,730 24,044 20,984(E) 240,758 ----------- ----------- ----------- ----------- Total current liabilities 330,496 60,483 188,034 579,013 Long-term debt 114,867 36,986 -- 151,853 Convertible subordinated notes -- 14,648(L) -- 14,648 Other long-term liabilities 101,677 7,570 -- 109,247 Minority interests -- 237 -- 237 Common stock 60,102 207 (207)(D) 60,102 Retained earnings 605,286 34,215 (30,015)(D) 609,486 Accumulated other comprehensive income 1,178 (38) 38(D) 1,178 Cost of shares held in treasury (289,189) (2,507) 2,507(D) (289,189) ----------- ----------- ----------- ----------- Total stockholders' equity 377,377 31,877 (27,677) 381,577 ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity $ 924,417 $ 151,801 $ 160,357 $ 1,236,575 =========== =========== =========== ===========
The accompanying unaudited notes are an integral part of this pro forma consolidated financial information. 5 EG&G, INC. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998 (In thousands)
ROTRON & EG&G SEALOL EG&G LUMEN ILC TECH. HISTORICAL PRO FORMA EXCLUDING HISTORICAL HISTORICAL 9 MONTHS ADJUSTMENTS DIVESTITURES 9 MONTHS 1/1/98 THROUGH ENDED 9/27/98 (A) 9/27/98 ENDED 9/30/98 3/12/98 ------------- ------------ ------------ ------------- -------------- Sales $ 1,055,705 $ (22,666) $ 1,033,039 $ 105,885 $ 8,052 Cost of Sales 793,809 (14,064) $ 779,745 69,156 5,661 ----------- ----------- ----------- ----------- ----------- Gross Margin 261,896 (8,602) 253,294 36,729 2,391 Research and development expenses 32,383 (302) 32,081 3,341 565 Selling, general and administrative expenses 172,519 (6,173) 166,346 20,275 989 Restructuring charges 54,500 -- 54,500 -- -- Merger, spinoff & nonrecurring charges -- -- -- 16,704 -- Asset impairment charge 7,400 -- 7,400 -- -- Gains on dispositions (125,822) 125,822 -- -- -- ----------- ----------- ----------- ----------- ----------- Operating income (loss) from continuing operations 120,916 (127,949) (7,033) (3,591) 837 Other income (expense) 1,845 -- 1,845 (4,131) (55) ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes 122,761 (127,949) (5,188) (7,722) 782 Provision (benefit) for income taxes 41,227 (38,355) 2,872 1,702 238 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations $ 81,534 $ (89,594) $ (8,060) $ (9,424) $ 544 =========== =========== =========== =========== =========== Basic earnings per share from continuing operations $ 1.79 $ (1.97) $ (0.18) Diluted earnings per share from continuing operations $ 1.77 $ (1.94) $ (0.17) Weighted average shares of common stock outstanding: Basic 45,552 45,552 45,552 Diluted 46,089 46,089 46,089
PRO FORMA ADJUSTMENTS PRO FORMA ------------ ----------- Sales $ -- $ 1,146,976 Cost of Sales 487(H) 855,049 ----------- ----------- Gross Margin (487) 291,927 Research and development expenses -- 35,987 Selling, general and administrative expenses 4,825(G)(H) 192,435 Restructuring charges (54,500)(K) -- Merger, spinoff & nonrecurring charges (16,704)(K) -- Asset impairment charge (7,400)(K) -- Gains on dispositions -- -- ----------- ----------- Operating income (loss) from continuing operations 73,292 63,505 Other income (expense) (6,685)(I) (9,026) ----------- ----------- Income (loss) from continuing operations before income taxes 66,607 54,479 Provision (benefit) for income taxes 16,242(J) 21,054 ----------- ----------- Income (loss) from continuing operations $ 50,365 $ 33,425 =========== =========== Basic earnings per share from continuing operations $0.73 Diluted earnings per share from continuing operations $0.73 Weighted average shares of common stock outstanding: Basic 45,552 Diluted 46,089
The accompanying unaudited notes are an integral part of this pro forma consolidated financial information. 6 EG&G, INC. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 28, 1997 (In thousands)
ROTRON & EG&G SEALOL EG&G BEC GROUP ILC TECH. HISTORICAL PRO FORMA EXCLUDING HISTORICAL HISTORICAL FISCAL ADJUSTMENTS DIVESTITURES FISCAL FISCAL 1997 (A) 1997 1997 1997 ----------- ----------- ------------ ----------- ----------- Sales $ 1,460,805 $ (158,237) $ 1,302,568 $ 48,128 $ 55,518 Cost of Sales 1,084,691 (95,755) 988,936 30,603 39,194 ----------- ----------- ----------- ----------- ----------- Gross Margin 376,114 (62,482) 313,632 17,525 16,324 Research and development expenses 44,907 (2,659) 42,248 1,601 4,253 Selling, general and administrative expenses 243,409 (36,539) 206,870 9,304 7,508 Merger, spinoff & nonrecurring charges -- -- -- 9,571 -- Asset impairment charge 28,200 -- 28,200 -- -- Gains on dispositions -- -- -- -- (2,379) ----------- ----------- ----------- ----------- ----------- Operating income (loss) from continuing operations 59,598 (23,284) 36,314 (2,951) 6,942 Other income (expense) (5,572) 85 (5,487) (2,356) (494) ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes 54,026 (23,199) 30,827 (5,307) 6,448 Provision (benefit) for income taxes 23,381 (6,491) 16,890 (1,656) 1,608 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations $ 30,645 $ (16,708) $ 13,937 $ (3,651) $ 4,840 =========== =========== =========== =========== =========== Basic earnings per share from continuing operations $ 0.67 $ (0.37) $ 0.30 Diluted earnings per share from continuing operations $ 0.67 $ (0.37) $ 0.30 Weighted average shares of common stock outstanding: Basic 45,757 45,757 45,757 Diluted 45,898 45,898 45,898
PRO FORMA ADJUSTMENTS PRO FORMA ----------- ----------- Sales $ -- $ 1,406,214 Cost of Sales 4,077(B)(H) 1,062,810 ----------- ----------- Gross Margin (4,077) 343,404 Research and development expenses -- 48,102 Selling, general and administrative expenses 6,902(G)(H) 230,584 Merger, spinoff & nonrecurring charges (9,571)(K) -- Asset impairment charge (28,200)(K) -- Gains on dispositions 2,379(K) -- ----------- ----------- Operating income (loss) from continuing operations 24,413 64,718 Other income (expense) (8,913)(I) (17,250) ----------- ----------- Income (loss) from continuing operations before income taxes 15,500 47,468 Provision (benefit) for income taxes 2,610(J) 19,452 ----------- ----------- Income (loss) from continuing operations $ 12,890 $ 28,016 =========== =========== Basic earnings per share from continuing operations $ 0.61 Diluted earnings per share from continuing operations $ 0.61 Weighted average shares of common stock outstanding: Basic 45,757 Diluted 45,898
The accompanying unaudited notes are an integral part of this pro forma consolidated financial information. 7 EG&G, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) Note 1) The purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The preliminary purchase price allocation is based on the Company's estimates of respective fair values. The pro forma consolidated balance sheet adjustments presented are as of December 16, 1998. Some allocations are based on studies and independent valuations which are currently being finalized. Management does not believe that the final purchase price allocation will produce materially different results than those reflected in the pro forma consolidated financial statements. Additionally, management expects the Lumen restructuring plans to be finalized by the end of the year. The components of the purchase price and preliminary allocation are as follows: Cash paid to Lumen for stock and options $ 162,050 Debt assumed 74,388 Value of option rollover 6,500 Deferred purchase price for subsidiary minority interest 6,000 Acquisition costs 3,925 --------- Total consideration & acquisition costs 252,863 Preliminary allocation of purchase price: Current assets 66,829 Property, plant & equipment 52,525 Other assets 430 Identifiable intangible assets 11,800 In-process research and development 2,300 Goodwill 175,446 Current liabilities (50,097) Other liabilities (6,370)
(A) Represent adjustments to eliminate the results of operations of the Rotron and Sealol Industrial Seals businesses that were sold by the Company on January 9, 1998 and April 1, 1998, respectively, as well as the related gains on dispositions. (B) Represents the write-up to fair value of Lumen work-in-process and finished goods inventory as of the acquisition date. This amount will be charged to cost of sales as the related inventory is sold and has been reflected as such in the pro forma income statement for the year ended December 28, 1997. (C) Includes approximately $11.8 million of acquired intangible assets representing the fair value assigned to trademarks, trade names and patents by an independent third party appraiser. Acquired intangible assets will be amortized over their useful life of 10 years. Approximately $175,446 represents the excess of consideration paid over the fair market value of Lumen's net assets (goodwill) and will be amortized over 30 years. Such amount reflects an incremental goodwill amount of $130,197 over the historical goodwill included in Lumen's balance sheet as of September 30, 1998. (D) Reflects the elimination of Lumen's historical equity accounts. Additionally, the adjustment to retained earnings includes (a) the fair value of Company's options issued in exchange for Lumen options totaling $6.5 million and (b) $2.3 million that was allocated to in-process research and development for projects that had not reached technological feasibility as of the acquisition date and for which no alternative use existed. The estimated fair value was based on a risk-adjusted cash flow and was determined by an independent third party appraiser. This amount was expensed as a nonrecurring, non-tax deductible charge upon consummation of the acquisition and has been reflected as a reduction to retained earnings. The in-process research and development has not been included in the pro forma combined income statements due to its nonrecurring nature. 8 (E) Includes adjustments to accrue transaction costs, record deferred taxes resulting from purchase accounting and reflect the fair value of accrued liabilities as of the acquisition date. Approximately $6 million represents deferred purchase price related to minority ownership in a Lumen subsidiary. (F) Represents the estimate of restructuring charges related to Lumen to be incurred in connection with the acquisition. The restructuring plans include initiatives to integrate the operations of the Company and Lumen, consolidate duplicate facilities and reduce overhead. Management is in the process of finalizing its restructuring plans related to Lumen, and accordingly, the amounts recorded are based on management's current estimate of those costs. Management expects that most of the restructuring actions related to the plan will be completed within the next year. (G) Includes additional amortization related to goodwill and acquired intangible assets amortization as follows:
12/97 9/98 Goodwill $5,848 $4,386 Acquired intangibles 1,180 885 ------ ------ Total amortization 7,028 5,271 Historical amortization 500 655 ------ ------ Pro forma adjustment $6,528 $4,616 ------ ------
(H) Represents the write-up to fair value of Lumen property, plant & equipment as of the acquisition date. The pro forma consolidated income statements include additional depreciation expense related to these write-ups of $873 and $487 for cost of sales and $374 and $209 for selling, general and administrative expenses for the fiscal year ended December 28, 1997 and nine months ended September 27, 1998, respectively. (I) Reflects $162,050 of cash paid to Lumen for stock and options and incremental interest expense. The Company has currently financed this amount with available cash and short-term debt consisting of commercial paper borrowings with a weighted-average interest rate of 5.5% at year end. A 1/8 of one percent change in the base rate would change annual interest expense by approximately $203. The Company intends to refinance the outstanding debt with fixed rate debt during fiscal 1999. (J) Income tax adjustments have been calculated using estimated statutory income tax rates. The primary difference between the provision calculated at statutory rates and the amount reflected in the pro forma adjustments column for the periods presented is attributable to nondeductible goodwill related the acquisition as well as certain nondeductible elements in the various historical non-recurring charges described in Note K below. The pro forma consolidated provision for income taxes may not represent amounts that would have resulted had the Company and Lumen filed consolidated income tax returns during the periods presented. (K) Historical nonrecurring charges related to restructuring, asset impairments and merger/spinoff costs have been eliminated for purposes of the pro forma consolidated income statements. (L) On February 16, 1999, the Company paid $15.5 million to retire the convertible subordinated notes. These notes were retired at a premium, and the payment was funded through additional commercial paper borrowings. Such retirement has not been reflected in this pro forma financial information. 9 (c) Exhibits Exhibit 2 - Agreement and Plan of Merger dated as of October 21, 1998 by and among EG&G, Inc., Lighthouse Weston Corp. and Lumen Technologies, Inc. (incorporated by reference from Exhibit (c)(1) to Schedule 14D-1 filed by the Company with the Securities and Exchange Commission on October 27, 1998). Exhibit 22.1 - Consent of PriceWaterhouseCoopers LLP, Independent Accountants. Exhibit 22.2 - Consent of Arthur Andersen LLP, Independent Accountants. Exhibit 99.1 - Lumen Technologies, Inc. (formerly BEC Group, Inc.) Financial Statements as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997. Exhibit 99.2 - ILC Technology, Inc. Financial Statements as of September 27, 1997 and September 28, 1996 and for each of the three years in the period ended September 27, 1997. SIGNATURE 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 hereunto duly authorized. EG&G, Inc. Date: March 9, 1999 By: /s/ Murray Gross ------------- --------------------- Senior Vice President EX-22.1 2 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 22.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 333-71069 and 33-59675) and in the Registration Statements on Form S-8 (Nos. 2-98168, 33-36082, 33-35379, 33-49898, 33-57606, 33-54785, 33-62805, 333-8811, 333-32059, 333-32463, 333-70977, 333-50953, 333-56921, 333-58517, 333-61615, 333-65367, 333-69115) of EG&G, Inc. of our report dated April 9, 1998, relating to the consolidated financial statements of Lumen Technologies, Inc. (formerly BEC Group, Inc.), which are included in the Current Report on Form 8-K/A of EG&G, Inc. dated February 26, 1999. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------ PRICEWATERHOUSECOOPERS LLP Dallas, Texas March 9, 1999 EX-22.2 3 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 22.2 CONSENT OF INDEPENDENT ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated December 1, 1997 covering the historical financial statements of ILC Technology, Inc. included in this Form 8-K/A and to the incorporation by reference of our report into Registration Statements previously filed by EG&G, Inc. on Form S-8, File No. 2-98168; Form S-8, File No. 33-36082; Form S-8, File No. 33-35379; Form S-8, File No. 33-49898; Form S-8, File No. 33-57606; Form S-8, File No. 33-54785; Form S-8, File No. 33-62805; Form S-8, File No. 333-8811; Form S-8, File No. 333-32059; Form S-8, File No. 333-32463; Form S-8, File No. 333-70977; Form S-8, File No. 333-50953; Form S-8, File No. 333-56921; Form S-8, File No. 333-58517; Form S-8, File No. 333-61615; Form S-8, File No. 333-65367; Form S-8, File No. 333-69115; Form S-3, File No. 33-59675 and Form S-3, File No. 333-71069. /s/ ARTHUR ANDERSEN LLP - ------------------------ ARTHUR ANDERSEN LLP San Jose, California March 9, 1999 EX-99.1 4 LUMEN TECHNOLOGIES, INC. FINANCIAL STATEMENTS 1 Exhibit 99.1 LUMEN TECHNOLOGIES, INC. (FORMERLY BEC GROUP, INC.) FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Lumen Technologies, Inc. (formerly BEC Group, Inc.) In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income (loss), of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Lumen Technologies, Inc. (formerly BEC Group, Inc.) and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1, on March 11, 1998, the Company distributed the stock of its subsidiary, Bolle Inc., to the Company's stockholders and on March 12, 1998 merged with ILC Technology, Inc. PRICE WATERHOUSE LLP Dallas, Texas April 9, 1998 2 LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
December 31, -------------------------- 1997 1996 -------- --------- ASSETS Current assets: Cash and cash equivalents $ 762 $ 2,164 Trade receivables, less allowance for doubtful accounts of $586 and $503 10,214 7,280 Inventories 9,534 9,317 Investment in and net receivables from discontinued operations (Note 3) 51,567 11,167 Other current assets 6,094 3,651 --------- --------- Total current assets 78,171 33,579 Property and equipment, net 13,763 13,114 Goodwill, net 12,138 11,372 Intangible assets, net 1,225 1,296 Equity in and notes receivable from affiliated companies 8,773 11,435 Other assets 5,619 4,275 --------- --------- Total assets $ 119,689 $ 75,071 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt and current maturities of long term debt $ 25,458 $ 17,645 Accounts payable 4,891 2,858 Accrued compensation 1,390 2,134 Other accrued expenses 12,095 8,557 --------- --------- Total current liabilities 43,834 31,194 Long-term debt 31,349 3,597 Convertible subordinated notes 23,742 21,922 Other long-term liabilities 8,307 10,754 --------- --------- Total liabilities 107,232 67,467 --------- --------- Commitments and contingencies Mandatorily redeemable preferred stock--par value $1; 500 shares authorized; 10 issued and outstanding 9,294 --------- Stockholders' equity: Common stock--par value $.01; 50,000 shares authorized; 8,815 issued; 8,813 and 8,857 outstanding 88 88 Additional paid-in capital 28,743 28,791 Treasury stock - 2 and 58 shares at cost (17) (557) Accumulated deficit (25,651) (20,718) --------- --------- Total stockholders' equity 3,163 7,604 --------- --------- Total liabilities and stockholders' equity $ 119,689 $ 75,071 ========= =========
See accompanying notes to consolidated financial statements. 3 LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the year ended December 31, --------------------------------------------- 1997 1996 1995 -------- -------- ------- Continuing operations: Net sales $ 48,128 $ 42,574 $ 41,244 Costs and expenses: Costs of sales 30,603 25,676 23,725 Selling, general and administrative expense 10,905 10,020 13,820 Special charges and spinoff expenses 9,571 5,237 Interest expense 3,458 2,942 4,087 Other income, net (1,102) (1,378) (3,337) -------- -------- -------- Total costs and expenses 53,435 37,260 43,532 Income (loss) from continuing operations before income taxes (5,307) 5,314 (2,288) Provision (benefit) for incomes taxes from continuing operations (1,656) 1,870 (1,339) -------- -------- -------- Income (loss) from continuing operations $ (3,651) $ 3,444 $ (949) -------- -------- -------- Discontinued operations (Note 3): Income (loss) from operations of the Prescription Eyewear Business, Foster $ (1,282) $ 4,302 $ (5,811) Grant Group and Bolle (less applicable taxes of $(2,020), $384 and $1,139 in 1997, 1996 and 1995, respectively) Net gain on the sales of the Prescription Eyewear Business, and Foster Grant Group net of phase out losses of $2,902 75,010 -------- -------- -------- Income (loss) from discontinued operations $ (1,282) $ 79,312 $ (5,811) -------- -------- -------- Net income (loss) $ (4,933) $ 82,756 $ (6,760) Basic earnings (loss) per share: From continuing operations $ (0.44) $ 0.40 $ (0.12) From discontinued operations (0.15) 9.29 (0.77) -------- -------- -------- $ (0.59) $ 9.69 $ (0.89) -------- -------- -------- Basic EPS weighted average shares outstanding 8,803 8,537 7,620 Diluted earnings (loss) per share: From continuing operations $ (0.44) $ 0.40 $ (0.12) From discontinued operations (0.15) 9.22 (0.77) -------- -------- -------- $ (0.59) $ 9.62 $ (0.89) -------- -------- -------- Diluted EPS weighted average shares outstanding 8,803 8,600 7,620
See accompanying notes to consolidated financial statements. 4 LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC. STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (AMOUNTS IN THOUSANDS)
For the year ended December 31 -------------------------------------------------------- 1997 1996 1995 -------------- -------------- --------------- Net income (loss) $ (4,933) $ 82,756 $ (6,760) Foreign currency translation adjustments (462) 26 Reclassification adjustment - (before taxes) 77 --------- --------- --------- Comprehensive income (loss) before tax (5,395) 82,833 (6,734) Other comprehensive income tax effect 197 (2) (9) --------- --------- --------- Comprehensive income (loss) $ (5,198) $ 82,831 $ (6,743) ========= ========= =========
See accompanying notes to consolidated financial statements 5 LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
ADDITIONAL RETAINED ISSUED COMMON TREASURY COMMON PAID-IN EARNINGS TREASURY SHARES SHARES STOCK CAPITAL (DEFICIT) STOCK ------------- -------- ------ ----------- --------- -------- 1995: Balance - December 31, 1994 7,268 49 $ 72 $105,001 $ 7,385 $ (1,365) Shares issued for acquisitions 79 1 2,845 Shares issued through public offering, net of expenses 589 6 22,030 Exercise of stock options 79 1 1,412 Other issuances of common stock 10 506 Net loss (6,760) -------- -------- -------- -------- -------- -------- Balance - December 31, 1995 8,025 49 80 131,794 625 (1,365) 1996: Exercise of stock options 126 1 2,326 Other issuances of common stock 66 1,567 Cancel treasury stock (49) (49) (1,365) 1,365 Repurchases of treasury stock 58 (557) Dividend to stockholders (125,972) (104,099) Conversion of 8% Convertible Notes due 2001 647 7 20,441 Net income 82,756 -------- -------- -------- -------- --------- -------- Balance - December 31, 1996 8,815 58 88 28,791 (20,718) (557) 1997: Exercise of stock options (84) (48) 789 Repurchase of treasury stock 28 (249) Net loss (4,933) -------- -------- -------- -------- -------- -------- Balance - December 31, 1997 8,815 2 $ 88 $ 28,743 $(25,651) $ (17) ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 6 LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Income (loss) from continuing operations $ (3,651) $ 3,444 $ (949) Adjustments to reconcile income (loss) to net cash provided (used) by operating activities: Special charges and spinoff expenses, net of payments 9,571 4,120 Depreciation and amortization 1,477 1,105 1,234 Bad debt expense 163 26 280 Loss (gain) on sale of property and equipment 414 (316) Other 15 Changes in current assets and liabilities (net of effect of companies acquired): Trade receivables (3,017) (89) (2,201) Inventories (217) (1,371) 256 Other assets 723 (2,054) (3,529) Accounts payable 2,033 356 2,383 Accrued expenses and other (1,972) 3 (4,663) Cash provided (used) by discontinued operations 144 6,853 (9,122) --------- --------- --------- Net cash provided (used) by operating activities $ 5,254 $ 8,687 $ (12,492) --------- --------- --------- Cash flows from investing activities: Cash expended in acquisitions, net of cash received (5,164) (3,865) Capital expenditures (1,372) (618) (1,619) Notes receivable from affiliates (815) Proceeds from sale of fixed assets 155 3,648 Cash provided (used) by discontinued operations (33,848) 276,112 (36,887) --------- --------- --------- Net cash provided (used) by investing activities $ (41,199) $ 275,649 $ (38,723) --------- --------- --------- Cash flows from financing activities: Net proceeds from (payments for) issuance of long-term debt 27,350 (15,364) 3,010 Proceeds (payments) from revolving credit lines and short term debt 7,813 (45,000) (8,938) Proceeds from issuance of common stock 492 1,944 23,569 Cash dividend to stockholders (230,071) Cash provided (used) by discontinued operations (1,112) 2,264 26,198 --------- --------- --------- Net cash provided (used) by financing activities $ 34,543 $(286,227) $ 43,839 --------- --------- --------- Net decrease in cash $ (1,402) $ (1,891) $ (7,376) Cash and cash equivalents at beginning of year 2,164 4,055 11,431 --------- --------- --------- Cash and cash equivalents at end of year $ 762 $ 2,164 $ 4,055 ========= ========= =========
(Continued) 7 LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (CONTINUED)
For the year ended December 31 -------------------------------------------- 1997 1996 1995 -------- -------- --------- Supplemental disclosures of cash flow information: Interest paid $2,167 $6,710 $9,100 Income taxes paid $ 484 $2,581 $ 910
Noncash transactions: 1997 - Recorded $1,835 of interest on convertible subordinated notes which is accrued until conversion, redemption or maturity. - The acquisition of Bolle France included in discontinued operations was consummated during the year. The acquisition was funded with cash, equity and debt. The fair values of the assets and liabilities at the date of acquisition were as follows: Cash $ 1,294 Accounts receivable 9,441 Inventories 6,167 Other current assets 388 Property and equipment 3,949 Goodwill 22,642 Trademark 40,000 Other assets 181 Short-term debt (175) Accounts payable and accrued liabilities (9,756) Other long-term liabilities (15,896)
1996 - $20,448 of Benson convertible notes were converted into equity during 1996 in conjunction with the Essilor Merger. - $500 of notes receivable from Superior Vision Services, Inc. ("SVS") was forgiven during 1996. - Recorded $1 million of non-interest bearing convertible preferred stock as partial consideration on the sale of FGG. (Continued) 8 LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (CONTINUED) 1995 - Recorded a $1.9 million non-interest bearing convertible note receivable in exchange for notes and trade receivables. - Certain business combinations and divestitures were consummated during the year. The acquisitions were funded through a combination of cash, equity and debt. The fair values of the assets and liabilities at the dates of acquisition were allocated as follows: Accounts receivable $2,888, Property and equipment $622, Goodwill $13,841, Intangible assets $1,350, Other assets $358, Accounts payable and accrued liabilities $(1,840), and Other long-term assets and liabilities $2,416. See accompanying notes to consolidated financial statements. 9 LUMEN TECHNOLOGIES, INC. F/K/A BEC GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED) NOTE 1 -- SPINOFF AND MERGER SUBSEQUENT TO YEAR END On March 11, 1998, the Company distributed its subsidiary, Bolle Inc. ("Bolle"), to its stockholders via a spinoff (the "Spinoff"). In the Spinoff, Company stockholders received one share of Bolle for every three shares of Company common stock. In conjunction with the Spinoff, the Company and Bolle entered into a Management Services Agreement and a Bill of Sale and Assignment Agreement (the "Contribution Agreement"). The Management Services Agreement provides management services to Bolle for an agreed fee. In accordance with the Contribution Agreement, (i) the Company assigned to Bolle all of the Company's assets other than the assets related to the ORC Technologies, Inc. ("ORC") Business (as defined in the Contribution Agreement ) and certain other specific assets retained by the Company; and (ii) Bolle will assume all of the Company's liabilities prior to the Spinoff other than those related to the ORC Business and certain specific liabilities. On March 12, 1998, the Company (through its wholly-owned subsidiary, BILC Acquisition Corp.) completed its merger with ILC Technology, Inc. (the "ILC Merger"). Under the terms of the agreement, ILC shareholders received 4.4084 shares of the company's Common Stock (or 2.2042 shares, after giving effect to a one-for-two reverse split of the Company's Common Stock) for each share of ILC Common Stock outstanding. In conjunction with the ILC Merger, the Company changed its name to Lumen Technologies, Inc. The effect of the one-for-two reverse split has been retroactively presented in these financial statements. The accompanying consolidated financial statements (i) reflect the continuing operations of ORC; (ii) reflect Bolle net assets as "Investment in and net receivables from discontinued operations" and Bolle's results of operations as discontinued for all periods presented; (iii) do not reflect the ILC Merger and (iv) do not reflect the disposition of certain assets and liabilities pursuant to the Contribution Agreement. On a proforma basis, had the above transactions occurred at December 31, 1997, the Company's total assets and stockholders' equity would have been approximately $130 million (unaudited) and $35 million (unaudited), respectively. NOTE 2 -- BUSINESS Business During the periods presented, Lumen Technologies, Inc. ("Lumen" or the "Company") had one core business, ORC which manufactures and markets specialty lighting, electronic and electroformed products to a diverse customer base. The evolution of the Company was accomplished through a series of acquisitions and divestitures which were consummated during the period from October 1992 through December 1997 (Notes 3 and 6). The name was changed from BEC Group, Inc. in conjunction with the Spinoff (Note 1) and the ILC Merger (Note 1) in March 1998. 10 NOTE 3 -- DISCONTINUED OPERATIONS Bolle Inc. On March 11, 1998, the Company completed the Spinoff of Bolle to the Company's stockholders (Note 1). Accordingly, the accompanying financial statements reflect the results of operations of Bolle as discontinued operations for all periods presented but do not reflect the transfer of the other assets and liabilities to Bolle Inc. at the time of the Spinoff in conjunction with the Contribution Agreement. After the Spinoff, the "Investment in and net receivables from discontinued operations" caption will be reduced to zero and will be accompanied by a corresponding entry to reduce paid in capital. Foster Grant Group and Dallas Corporate Headquarters On December 12, 1996, the Company sold to Foster Grant Holdings, Inc. ("Holdings") all of the issued and outstanding shares of capital stock of the entities comprising the Foster Grant Group ("FGG"). At closing, the Company received $29 million in cash and 100 shares of non-voting preferred stock with a maximum redemption value of $6 million (the "Preferred Stock"). By agreement with Accessories Associates, Inc. ("AAi"), the Company may, at its option, exchange the Preferred Stock for shares of AAi common stock if AAi completes an initial public offering ("IPO") at any time within three (3) years of closing. Upon any such exchange, the Company will receive the number of shares of AAi common stock equal to $6 million divided by 85% of the IPO offering price, as set forth in the AAi final IPO prospectus. Any such shares of AAi common stock will not be registered for resale under federal securities laws, but will bear "piggyback" registration rights. If the Preferred Stock is not converted, it will be redeemed by Foster Grant Holdings, Inc. ("Holdings") on or before February 28, 2000 for up to $6 million, based on FGG's net sales for the year ending December 31, 1999. The cash consideration was used to pay down the company's credit facility and pay transaction expenses. The results of operations for FGG and the Dallas Corporate Headquarters, which was closed in connection with the sale of FGG, are presented as discontinued operations of the Company. The assets of FGG, net of liabilities, are presented as investment in discontinued operations at December 31, 1995. A loss of $26.1 million including transaction expenses and phase-out losses, net of taxes was recorded on the sale. All rights, liabilities and obligations of the Company with respect to the Preferred Stock and/or agreement by and between the Company, AAi Holdings and/or FGG was assigned to, and assumed by, Bolle in connection with the Spinoff. Prescription Eyewear Business On May 3, 1996, Benson Eyecare Corporation (the predecessor of the Company) ("Benson"), the Company, Essilor International, S.A. ("Essilor"), Essilor of America, Inc. ("Essilor of America"), a wholly owned subsidiary of Essilor and Essilor Acquisition Corporation, Inc. ("Essilor Sub"), a wholly owned subsidiary of Essilor of America, entered into an Agreement and Plan of Merger, as amended pursuant to which Essilor purchased Benson and the Omega Group, Benson's wholesale optical laboratory business (the "Essilor Merger"). Benson also entered into an Asset Purchase Agreement, pursuant to which Benson's lens manufacturing business, Orcolite, was purchased by the Monsanto Company (the "Asset Sale"). The Omega Group and Orcolite comprised the Prescription Eyewear Business of Benson. In connection with the Spinoff, Bolle will agree to indemnify the Company against any and all liabilities, damages, costs or other expenses arising in connection with the Essilor transaction, except to the extent arising as a result of the ORC Business. Pursuant to the Essilor Merger, each outstanding share of Benson common stock was exchanged for $6.60 in cash and one share of the Company's Common Stock was received for every two shares of Benson Common Stock. Upon consummation of the Essilor Merger, the equity interest in Benson of its stockholders ceased and Benson became a wholly owned subsidiary of Essilor of America. Also upon consummation of the Essilor Merger, the Company became a registrant whose common shares are traded on the NYSE. 11 For accounting purposes, the company was considered the continuing entity. Accordingly, in substance, the Merger and Asset Sale were considered to be a sale of Omega and Orcolite by the Company to Essilor and Monsanto Company, respectively. Upon approval of the Essilor Merger, Benson's historical consolidated financial statements, adjusted for the sale of the Prescription Eyewear business, became the historical financial statements of the Company. The gain on the sale of these businesses of $100.7 million and the results of operations for these businesses are presented as discontinued operations of the Company. The cash merger consideration is treated as a dividend by the Company. The assets of the discontinued operations, net of liabilities, are presented as investment in discontinued operations at December 31, 1995. The accounting treatment of the Essilor Merger and Asset Sale differed from the legal and federal income tax treatment. During the third quarter of 1996, the final Closing Balance Sheet for the sale of Omega was agreed upon by the Company and Essilor. According to the terms of the Essilor Merger, a purchase price adjustment of $2.1 million was paid to Essilor on October 3, 1996, decreasing the gain on the sale. Additionally, Essilor and the Company agreed to settle the Contingent Valuation Right (the "CVR") early for cash of $2.2 million payable by the Company to Essilor in January 1997. Accordingly, the gain on the sale increased by approximately $2.4 million. The net result of the described adjustments, in addition to the adjustment of certain accruals relating to the Merger, was a $791 incremental gain on the sale of the Prescription Eyewear Business recorded in discontinued operations in the third quarter. Summarized information on the combined discontinued operations, excluding the net gain on the transactions follows. The amounts represent the operating results of FGG, the Prescription Eyewear Business and Bolle Inc. business through their respective measurement dates.
FOR THE YEAR ENDED ------------------------------------------ 1997 1996 1995 --------- ---------- --------- Net sales $ 32,160 $ 125,987 $ 260,591 Income (loss) before income taxes (3,369) 4,686 (4,672) Income tax expense (benefit) (2,020) 384 1,139 Minority interests (67) --------- --------- --------- Net income (loss) $ (1,282) $ 4,302 $ (5,811) ========= ========= =========
Pursuant to the Essilor Merger, all Benson stock options were canceled. Continuing Company option holders received cash and new options in exchange for their Benson options. Option holders from discontinued operations received cash and the Company stock in exchange for their Benson options. NOTE 4 -- SPECIAL CHARGES AND SPINOFF EXPENSES The Company's special charges and spinoff expenses of $9.6 million for the year ended December 31, 1997 include the following items: (i) A $6.2 million charge to reflect the impairment of the Company's long term investment in Eyecare Products plc ("Eyecare") (Note 10). This investment has historically been accounted for under the equity method reflecting the Company's percentage shareholding and the long term nature of this investment. In connection with the Spinoff and the transfer of the Eyecare shares to Bolle, the Company has reassessed Eyecare's operating performance and market performance and accordingly has written down its investment in Eyecare to market value at December 31, 1997. 12 (ii) A $2.2 million charge to reflect the impairment of the Sterling Vision, Inc. Convertible Subordinated Note Due 2015 due to Sterling's recent operating performance and negative operating cash flows. (iii) Spinoff expenses of $1.2 million for expenses relating to the distribution of Bolle Inc. See Note 1. The Company's special charges of $5.2 million for the year 1995 included primarily: (i) a $4.3 million charge to reflect the impairment of certain notes receivable and trade accounts receivable from OCA Acquisition, Inc., d/b/a/ Optical Corporation of America ("OCA") prior to the exchange of such assets for a non-interest bearing convertible note receivable from Sterling Vision, Inc.; (ii) the write-off of $500 of deferred financing costs in connection with a change in the Company's banking syndicate in September 1995. None of the above items relate to the operations of the ORC business. NOTE 5 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries over which the Company asserts control. Investments in less than 50% owned affiliates are accounted for by the equity method, investments in less than 20% owned affiliates are accounted for by the cost method (Note 10). All significant intercompany transactions, profits and accounts have been eliminated in consolidation. Cash Equivalents Cash equivalents include all temporary cash investments with original maturities of three months or less. The carrying value is equal to market value. Revenue Recognition The Company recognizes revenue upon shipment or delivery of products. Concentration of Credit Risk and Major Customers The Company is not subject to significant concentrations of credit risk. However, trade receivables arising from sales to customers are not collateralized and as a result management continually monitors the financial condition of these customers to reduce the risk of loss. Notes receivable relate to the divestiture of certain businesses and related assets in 1995 and 1994. The carrying values of notes receivable approximate fair value. Inventories Inventories, which consist primarily of raw materials and finished goods held for resale, are stated at the lower of cost or market value and determined on a first-in-first-out basis. Warranties Certain sales are subject to warranty against defects in material and workmanship for varying periods. The Company provides for such potential future costs at the time the sales are recorded. 13 Property and Equipment Property and equipment are stated at cost. Additions and improvements are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed on a straight line basis for financial reporting purposes, and on an accelerated basis for tax purposes, over the estimated useful lives of the assets. Useful lives range from 3 to 5 years for office equipment to 30 years for buildings. Asset cost and accumulated depreciation amounts are removed for dispositions and retirements, with resulting gains and losses reflected in earnings. Goodwill and Intangible Assets Goodwill represents the excess cost over the fair value of net assets acquired in business combinations accounted for under the purchase method. Intangible assets consist principally of trademarks and other identifiable intangible assets. Goodwill and intangible assets are amortized on a straight line basis over estimated useful lives which approximate 40 years for goodwill, 20 years for trademarks, and from 3-10 years for other identifiable intangibles. At each balance sheet date, the Company evaluates the realizability of goodwill and intangible assets based upon expectations of undiscounted cash flows of each subsidiary having a significant goodwill or intangible asset balance. Should this review indicate that goodwill or intangible assets will not be recoverable, the Company's carrying value of the goodwill or intangible assets will be reduced by the estimated shortfall of discounted cash flows. Based upon its most recent analysis, the Company believes that no material impairment of goodwill or intangible assets exists. Income Taxes Deferred income taxes are provided on the difference in basis of assets and liabilities between financial reporting and tax returns using enacted tax rates. A valuation allowance is recorded when realization of deferred tax assets is not assured. Investments in Affiliates Investments in affiliates owned less than 20% are carried on the balance sheet according to the cost method. Investments in more than 20% owned affiliates are carried on the balance sheet according to the equity method. Earnings Per Share Basic earnings per share is computed by dividing net earnings or loss available to common stockholders by the weighted average number of outstanding shares of common stock. Diluted earnings per share includes weighted average common stock equivalents outstanding during each year in the denominators, unless the effect is anti-dilutive. Common stock equivalents consist of the dilutive effect of common shares which may be issued upon exercise of stock options, warrants or conversion of debt. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 98, the weighted average number of outstanding common shares and common stock options is calculated based on the historical timing of the common stock transactions. Also, the May 3, 1996 and March 12, 1998 reverse stock splits have been retroactively reflected in the Company's financial statements. 14 Reclassifications Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform with the 1997 presentation. Estimates 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 these estimates. NOTE 6 -- BUSINESS COMBINATIONS AND DIVESTITURES 1997 BUSINESS COMBINATIONS Bolle France On July 9, 1997, the Company acquired, in a transaction accounted for as a purchase, all of the shares of Bolle France which included Bolle France and several consolidated and unconsolidated subsidiaries, for a total purchase price of approximately $58,235, comprised of cash of $31,000, BEC Series A mandatorily redeemable preferred stock of $9,294, Bolle mandatorily redeemable preferred stock of $11,055 and Bolle common stock of $3,302, as well as direct acquisition costs of $3,595. Where such consideration was denominated in French Francs, the July 10, 1997 exchange rate of 5.9197 was used to translate to US Dollars. Voltarc Technologies On October 1, 1997, the Company expanded its interests in the specialty lighting business. Pursuant to the terms of a Stock Purchase and Option Agreement (the "Voltarc Purchase Agreement") dated as of October 1, 1997 among the Company, ORC, Voltarc and certain stockholders of Voltarc (the "Voltarc Stockholders"), the Company and ORC acquired (a) 30% of the common stock of Voltarc, for $1,800,000, (b) 12,000 shares of preferred stock of Voltarc, convertible at ORC's option into approximately 10% of the total number of shares of Voltarc issued and outstanding for $1,200,000 and (c) a call option to acquire the remaining shares of capital stock of Voltarc from the remaining Voltarc Stockholders in March 1999 if certain earnings benchmarks are met. Pursuant to the Voltarc Purchase Agreement, the Voltarc stockholders also received the right to put the remaining shares of Voltarc common stock to the Company or ORC upon the occurrence of certain events. In addition, ORC made available to Voltarc a subordinated revolving credit facility in the amount of $800,000. The Company accounts for its investment in Voltarc under the equity method. Voltarc is a manufacturer and marketer of specialty lighting products. 1997 AND 1996 DIVESTITURES For a discussion of 1997 and 1996 divestitures see Note 3. 15 1995 BUSINESS COMBINATION Bolle America, Inc. Effective November 2, 1995, the Company acquired all of the outstanding common stock of Bolle America, Inc. ("Bolle America") in exchange for 3,265 shares of the Benson Common Stock, valued at $31 million. The business combination was accounted for as a pooling of interests and accordingly, the financial statements of Bolle America were combined with those of the Company. The Company entered into employment, consulting and noncompete agreements with the former president of Bolle America providing for annual payments of $255 from 1996 through 2000. Bolle America's results are included in discontinued operations. 1995 DIVESTITURES Effective September 15, 1995, the Company exchanged its interests in notes receivable and trade accounts receivable from OCA for a non interest-bearing convertible note receivable from Sterling Vision, Inc. (Note 4). Effective June 30, 1995, the Company sold 100% of the issued and outstanding capital stock of Superior Eye Care for aggregate consideration of $5 million. There was no gain or loss recorded on the transaction. NOTE 7 -- INVENTORIES Inventories consist of the following at December 31:
1997 1996 ------- -------- Raw materials $ 4,604 $ 4,534 Work in progress 2,859 2,655 Finished goods 2,739 2,504 Reserves (668) (376) ------- ------- $ 9,534 $ 9,317 ======= =======
NOTE 8 -- PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
1997 1996 --------- -------- Land $ 1,632 $ 1,631 Buildings 10,458 10,401 Machinery and equipment 3,775 3,224 Furniture and fixtures 291 203 Leasehold improvements 57 42 Construction in progress 603 -------- -------- 16,816 15,501 Less accumulated depreciation (3,053) (2,387) -------- -------- Net property and equipment $ 13,763 $ 13,114 ======== ========
16 Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was $1,097, $748 and $742, respectively. Land and buildings totaling $6.1 million net of accumulated depreciation are subject to operating leases. The minimum future rental income is as follows: 1998 $1,257 1999 762 2000 494 2001 494 Thereafter ---------- $3,007 ==========
NOTE 9 -- GOODWILL AND INTANGIBLE ASSETS Intangible assets and accumulated amortization consist of the following at December 31:
1997 1996 -------- -------- Goodwill $ 13,011 $ 11,939 Trademarks 1,482 1,498 Other identifiable intangible assets __ (16) -------- -------- 14,493 13,421 Less accumulated amortization (1,130) (753) -------- -------- $ 13,363 $ 12,668 ======== ========
Amortization expense for goodwill and intangible assets for the years ended December 31, 1997, 1996 and 1995, was $380, $357 and $492, respectively. NOTE 10 -- EQUITY IN AND NOTES RECEIVABLE FROM AFFILIATED COMPANIES Eyecare Products plc The Company first invested in Eyecare Products plc in December 1993. For the years ended December 31, 1997, 1996 and 1995, the Company recognized equity earnings of $595, $275 and $525, respectively, on its investment in Eyecare. The Company entered into an agreement, dated November 14, 1996, as amended, with Lantis Eyewear Corporation ("Lantis"), whereby the Company sold 3,500 shares of Eyecare to Lantis and granted Lantis an option to acquire the Company's remaining interest in Eyecare. Lantis did not exercise its December 1997 option as the operating performance of Eyecare was below Lantis' expectations and its market price was below the option floor price. The Company currently maintains a 23% interest in Eyecare. Due to the value impairment and the Company's intention to dividend this investment to Bolle according to the Contribution Agreement, this investment was written down to market value at December 31, 1997 resulting in a special charge of $6.2 million. 17 Eyecare Products shares two common directors with the Company, and the Company has a management agreement with Eyecare Products under which a management fee is paid to the Company, not to exceed .5% of Eyecare Products net sales. No management fee was charged in 1997. The Company recognized management fee income of $100 and $300 during each of the years December 31, 1996 and 1995, respectively. NOTE 11 -- CREDIT FACILITIES Short-Term Debt Short-term debt consists of the following at December 31:
1997 1996 ------- ------- Credit Agreement $23,282 $17,500 Current maturities of long-term debt 2,159 145 Other short term debt 17 ------- ------- $25,458 $17,645 ======= =======
Credit Agreement On April 3, 1996, the Company and certain of its subsidiaries entered into a credit facility (the "Credit Agreement") with a syndicate of lenders (the "Lenders"), led by NationsBank, N.A., ("NationsBank"). The Original Credit Agreement, as amended effective December 12, 1996 and July 10, 1997, provided for a $70 million revolving credit facility, which included a letter of credit subfacility of $5 million, and two $15 million term facilities. The interest rate applicable to the credit facilities will equal the Base Rate, the Eurodollar Rate or the French Franc Libor Rate (each, as defined in the Credit Agreement), as the Company may from time to time elect. The Base Rate will generally be equal to the sum of (a) the greater of (i) the prime rate as announced from time to time by NationsBank or (ii) the Federal Funds Rate plus one-half percent (0.5%), and (b) a margin ranging from 0% to .375%, depending upon the Company's satisfaction of certain financial criteria. The Eurodollar Rate and the French Franc Libor Rate will generally be equal to the interbank offered rate, as adjusted to give effect to reserve requirements, plus a margin ranging from .625% to 1.625%, depending upon the Company's satisfaction of certain financial criteria. A commitment fee of $175 was paid upon closing the Credit Agreement in April 1996 and a commitment fee of $596 was paid upon Closing of the July 10, 1997 amendment. At December 31, 1996, the Company had aggregate borrowing capacity under the Credit Agreement of $25 million. During 1996, the weighted average interest rate on borrowings under the facility was 7.1%, the average outstanding balance was $42.3 million, and the maximum balance outstanding was $68 million. At December 31, 1997, the Company had aggregate borrowing capacity under the Credit Agreement of $70 million. During 1997, the weighted average interest rate on borrowings under the facility was 6.7%, the average outstanding balance was $35.4 million, and the maximum balance outstanding was $53.4 million. On March 11, 1998, in conjunction with the ILC Merger and the Spinoff, the Company and its subsidiaries (excluding Bolle) entered into a Second Amended and Restated Credit Agreement (the "New Credit Agreement"). The New Credit Agreement provides for a $40 million revolving credit facility, which includes a letter of credit subfacility of $5 million, and a $30 million term facility. The interest rate applicable to the facilities will equal the Base Rate or the Eurodollar Rate (each, as defined in the New Credit Agreement), as the Company may from time to time elect. The Base Rate will generally be equal to the sum of (a) the greater of (i) the prime rate as announced 18 from time to time by NationsBank or (ii) the Federal Funds Rate plus one-half percent (0.5%), and (b) a margin ranging from 0% to 0.25%, depending on the Company's satisfaction of certain financial criteria. The Eurodollar Rate will generally be equal to the interbank offered rate, as adjusted, to give effect to reserve requirements, plus a margin ranging from 0.875% to 1.75%, depending upon the Company's satisfaction of certain financial criteria. Commitment and related fees of $420 were paid upon the closing of the New Credit Agreement. At December 31, 1997, the Company was in compliance with all debt covenants. Long-Term Debt Long-term debt consists of the following at December 31:
1997 1996 -------- ------- Credit Agreement $ 29,987 Mortgage 3,521 $ 3,742 -------- -------- 33,508 3,742 Less current maturities (2,159) (145) -------- -------- $ 31,349 $ 3,597 ======== ========
Aggregate maturities of long-term debt are as follows: 1998 $ 2,159 1999 5,175 2000 7,691 2001 10,210 2002 5,717 Thereafter 2,556 ------- $33,508 =======
The fair value of long term debt is estimated using incremental borrowing rates currently available to the Company. The carrying value of long-term debt approximates fair value. Convertible Subordinated Notes On May 9, 1994, Benson completed a public offering of $40,950 Convertible Subordinated Notes, due 2001 with a coupon rate of 8% and a conversion price of $9.056 per Benson share. In connection with the Essilor Merger, holders of $40,896 Convertible Subordinated Notes due 2001 accepted a Conversion and Exchange Agreement whereby they exchanged one-half of their principal amount and a portion of accrued interest for new 8% Convertible Notes due 2002 (the "New Notes"). The other half of their notes was converted into Merger Consideration using a $7.90 conversion price. The New Notes accrue interest semi-annually but do not pay interest until conversion, redeemption or maturity. Accordingly, $2,723 of accrued interest is included in the Convertible Subordinated Notes balance at December 31, 1997. Interest may be paid in cash or in kind at the option of the Company. The conversion price for the New Notes was $5.75. As of December 31, 1997, there were $21,019 New Notes and $0 Benson Notes outstanding. The Company registered the New Notes with the Securities and Exchange Commission effective January 28, 1997. Since December 31, 1997, $8,045 of New Notes have converted into BEC stock. 19 Mortgage The Company has a $3,521 mortgage bearing interest at LIBOR plus 1.85 basis points, secured by land and buildings in Dallas, Texas, with monthly principal and interest payments of $41 due through April 2001. Such payments are paid using rental income from FGG which occupies the building. The building and related mortgage were transferred to Bolle Inc. under the Contribution Agreement. A contract to sell the property at a value in excess of the mortgage valuation has been entered into. NOTE 12 -- 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 (loss) before provision for income taxes consists of the following for the periods ended:
DECEMBER 31, --------------------------------------------------- 1997 1996 1995 --------------- ------------ --------------- U.S. $(9,766) $85,010 $(6,960) Foreign 1,157 --------------- ------------ --------------- $(8,609) $85,010 $(6,960) =============== ============ ===============
The provision (benefit) from income taxes consists of the following for continuing and discontinued operations for the periods ended:
1997 1996 1995 ---------- ---------- ---------- Continuing operations: Current: Federal $1,177 $2,365 $(138) State and local 67 141 (27) Deferred (2,900) (636) (1,174) -------- -------- ------- $(1,656) $1,870 $(1,339) ======== ======== =======
Discontinued operations: 1997 1996 1995 U.S.: -------- ------- ------ Current $(1,713) $ 623 $ 719 Deferred (961) (239) 420 Foreign: Current 1,803 Deferred (1,149) ------- ------- ------- $(2,020) $ 384 $ 1,139 ------- ------- ------- Total provision (benefit) from income taxes $(3,676) $ 2,254 ($ 200) ======= ======= =======
20 The Company's effective tax rates for continuing and discontinued operations differ from the Federal statutory rate as follows:
1997 1996 1995 ------ ------ ------ Expected tax (benefit) at statutory rate (35.0%) 35.0% (35.0%) State income taxes (2.0%) 2.0% (2.0%) Provision to return adjustment (7.6%) Effects of acquisitions and divestitures 4.7% (32.9%) 4.2% Valuation allowance (1.6%) 16.9% Goodwill amortization 3.0% 1.3% 10.9% Other, net (5.8%) (1.1%) 2.1% ------ ------ ------ (42.7%) 2.7% (2.9%) ====== ===== ======
Significant components of deferred income taxes for continuing and discontinued operations are as follows at December 31:
1997 1996 ------- -------- Net operating loss carryforward $ 1,072 Capital loss carryforward 607 $ 2,263 Accounts receivable 283 173 Notes receivable 1,748 959 Office closing 848 Investments 3,927 Inventories 298 190 Assets of discontinued operations 2,329 452 Other, net 587 398 -------- -------- Gross deferred tax asset 10,851 5,283 Valuation allowance (607) (2,263) -------- -------- Deferred tax asset 10,244 3,020 Fixed assets (666) (650) Intangible assets (28) (128) -------- -------- Deferred tax liability (694) (778) -------- -------- Net deferred tax asset $ 9,550 $ 2,242 ======== ========
Discontinued Operations The Company recorded gross deferred tax assets of $2,329 and $452 for discontinued operations for the years ended December 31, 1997 and 1996, respectively. In connection with the divestitures in 1996, substantially all net operating loss carryforwards were utilized to reduce income taxes currently payable. The balance of the valuation allowance at December 31, 1995 was released in 1996 as the utilization of the net operating loss carryforwards was assured due to the gains recognized on the divestitures. Net operating loss carryforwards related to discontinued operations amount to approximately $5.6 million and $0 at December 31, 1997 and 1996 respectively. 21 Continuing Operations The Company recorded gross deferred tax assets of $8,522 and related valuation allowance of $607 for continuing operations for the year ended December 31, 1997. The capital loss generated on the sale of Foster Grant Group and the related valuation allowance were revalued during 1997. Net operating loss carryforwards related to continuing operations amount to approximately $2.9 million and $0 at December 31, 1997 and 1996, respectively. The net operating loss carryforwards begin to expire in the year 2008. The Company recorded gross deferred tax assets of $4,831 and related valuation allowance of $2,263 for continuing operations for the year ended December 31, 1996. A capital loss carryforward was generated through the sale of FGG. A valuation allowance of $2,263 was established for the entire net tax benefit of the capital loss carryforward as the realization was not assured. The effect on the income tax provision for continuing operations related to the valuation allowance was a charge of $2,263. The capital loss carryforward expires in the year 2001. NOTE 13 - SHARE REPURCHASE PROGRAM On September 9, 1996, the Company adopted a share repurchase program whereby the Company may repurchase, pursuant to Rule 10(b)-18 under the Securities and Exchange Act of 1934, shares of its common stock in the open market. The repurchase program became active in December 1996 following the FGG disposal. Repurchased shares may be issued from time to time upon (i) exercise of options granted under the Company's 1996 Stock Incentive Plan and/or (ii) under the Company's 1996 Employee Stock Purchase Plan. During 1996, the Company purchased 58 shares of its common stock at an average price of $9.60 per share. During 1997, the Company purchased 28 shares of its common stock at $8.96 per share. During 1997, the Company used 84 treasury shares to satisfy options exercised. The Company discontinued its share repurchase program in July 1997, as it was prohibited by the July 1997 amendment to the Credit Agreement, as amended (See Note 11). NOTE 14 - STOCK OPTION PLANS The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock option plans, which are described below. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined based on the fair market value at the grant dates for awards under those plans consistent with the method provided by SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been as set forth in the tables below. All option information has been restated to give effect to the May 3, 1996 and March 12, 1998 reverse stock splits.
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1996 1995 -------- -------- -------- Net income (loss) As reported $ (4,933) $ 82,756 $ (6,760) Pro Forma $ (6,183) $ 78,592 $ (10,236) Basic earnings (loss) per share As reported $ (0.59) $ 9.69 $ (0.89) Pro Forma $ (0.73) $ 9.21 $ (1.34) Diluted earnings (loss) per share As Reported $ (0.59) $ 9.62 $ (0.89) Pro Forma $ (0.73) $ 9.14 $ (1.34)
22 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for all grants:
1997 1996 1995 ------- ------- ------- Dividend yield 0% 0% 0% Expected volatility 50% 64% 64% Risk free rate of return 6.5% 5% 5% Expected turnover 7% 7% 7% Expected term 5 years 5 years 5 years
The weighted average fair values of Benson options granted during the years ended December 31, 1996 and 1995 were $10.24 and $9.60, respectively. The weighted average fair value of the Company options granted during 1997 was $8.80 and 1996 was $9.26. The Company may grant nonqualified stock options, incentive stock options or stock appreciation rights to officers, directors, consultants and key employees of the Company. Options under the nonqualified stock option plan are granted to officers, directors and key employees at prices determined by the Company Board based upon market value on the date of grant. There were no shares available under the plan for future grants at December 31, 1997. The plan was amended on March 11, 1998 to increase the number of authorized options and to ensure current grants were in compliance with the plans. As a result of the Essilor Merger and Asset Sale, all Benson options were canceled. Option holders received consideration (including new Company options) for their Benson options. Accordingly, all options were issued under the Company Stock Compensation Plan on or after May 3, 1996. A summary of Benson option transactions is as follows:
OPTION PRICE RANGE NUMBER OF EXPIRATION PER SHARE OPTIONS DATE ------------------ --------- ---------- Outstanding at 1/1/95 $3.00 - 16.90 1,144 1995 - 2001 Granted $12.26 - 19.74 284 Exercised $3.00 - 14.50 (159) Cancelled $14.00 - 14.50 (62) ------- Outstanding at 12/31/95 $3.00 - 19.74 1,207 1996 - 2002 Granted $15.74 - 19.00 134 Exercised $5.00 - 14.50 (163) Cancelled $3.00 - 19.50 (8) Cancelled in connection with Merger and Asset Sale (1,170) ------- Outstanding at 12/31/96 -0-
23 A summary of the Company option transactions is as follows:
WEIGHTED AVERAGE EXERCISE PRICE NUMBER OF OPTIONS ---------------------- ----------------- Outstanding at 12/31/95 -0- Granted $ 9.26 1,025 Exercised $ 5.42 (45) Cancelled $ 9.88 (73) Outstanding at 12/31/96 $ 9.40 907 Exercisable at 12/31/96 $ 7.80 195 Granted $ 8.80 883 Exercised $ 8.82 (83) Forfeited $ 10.02 (57) Outstanding at 12/31/97 $ 9.08 1,650 Exercisable at 12/31/97 $ 8.68 316
Options generally vest evenly over a three-or four-year period beginning one year from the date of grant and expire seven years from the date of grant. The 316 exercisable options at 12/31/97 had an option price range of $1.66 -- $10.25. The weighted average remaining contractual life of the 1,650 options outstanding as of December 31, 1997 was 5.5 years. A summary of the price ranges of exercisable and outstanding options as of December 31, 1997 and 1996 is as follows:
1997 1996 ----------------------------------------------------- ---------------------------------------------------- Price Range Per Share Number of Weighted Average Weighted Average Number of Weighted Average Weighted Average - - --------------------- ----------- ----------------- ----------------- --------- ----------------- ---------------- Options Remaining Exercise Price options Remaining Exercise Price ------- ---------- -------------- ------- ---------- -------------- Contractual Life Contractual Life ---------------- ---------------- Outstanding options: $ 0.00 - $ 4.00 6 5.3 $ 2.32 6 6.3 $ 2.32 $ 4.01 - $ 6.00 28 5.3 $ 4.88 28 6.3 $ 4.88 $ 6.01 - $ 8.00 79 3.2 $ 7.72 88 4.1 $ 7.72 $ 8.01 - $10.00 996 6.2 $ 8.80 196 3.8 $ 8.92 $10.01 - $12.00 541 4.4 $10.10 589 5.1 $10.10 --- --- 1,650 5.5 $ 9.08 907 4.8 $ 9.40 Exercisable options: $ 0.00 - $ 4.00 6 $ 2.32 6 $ 2.32 $ 4.01 - $ 6.00 28 $ 4.88 28 $ 4.88 $ 6.01 - $ 8.00 69 $ 7.72 63 $ 7.74 $ 8.01 - $10.00 76 $ 8.92 87 $ 8.86 $10.01 - $12.00 137 $10.10 11 $10.10 --- -- 316 $ 8.68 195 $ 7.80
24 NOTE 15 - EARNINGS PER SHARE COMPUTATION
1997 1996 1995 ------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Per Share Average Per Share Average Per Share Loss Shares Amount Income Shares Amount Loss Shares Amount ------- ------- -------- -------- ------- -------- ------ ------- -------- Net income (loss) from continuing operations $(3,651) $3,444 $(949) Less: Preferred stock Dividend 232 ------- BASIC EPS Income (loss) from continuing operations available to common stockholders $(3,883) 8,803 $(0.44) $3,444 8,537 $0.40 $(949) 7,620 $(0.12) EFFECT OF DILUTIVE SECURITIES Stock options 63 __ DILUTED EPS Income from continuing operations available to common stockholders plus assumed conversions $(3,883) 8,803 $(0.44) $3,444 8,600 $0.40 $(949) 7,620 $(0.12)
In 1997 and 1995, due to the net loss from continuing operations, although there were stock options outstanding, they were not included in the computation of diluted EPS as the effect would be antidilutive. At December 31, 1997 and 1996 the Company had convertible debt outstanding convertible into 1,828 shares of common stock. At December 31, 1995 Benson had convertible debt outstanding convertible into 2,261 shares of common stock. Such shares were not included in the computation of diluted EPS because the conversion price was greater than the average market price of the common shares. Warrants outstanding at December 31, 1997 issued in conjunction with the acquisition of Bolle France were not included in the calculation of diluted EPS because the effect would be antidilutive. Such warrants were cancelled on March 11, 1998 in conjunction with Spinoff. NOTE 16 -- RELATED PARTY TRANSACTIONS Ms. Nora Bailey, a member of the Company's Board of Directors since May 1996, is an attorney specializing in federal tax law. In her professional capacity she has rendered legal advice and related services to both the Company and its predecessor, Benson. Ms. Bailey has rendered such services both prior to and subsequent to her appointment to the Company Board of Directors, and it is anticipated that from time to time in the future she will be engaged to provide similar legal services to the Company. All fees paid to Ms. Bailey in connection with such services have been agreed in arms' length negotiations and are in accordance with Ms. Bailey's usual and customary billing practices. Fees paid to Ms. Bailey by the Company in connection with such services are not paid in consideration of her services as a director. Aggregate fees billed to Benson and the Company by Ms. Bailey during 1997 and 1996 were approximately $90 and $73, respectively. 25 On December 12, 1996, in connection with the sale of FGG by the Company, Marlin Capital, LP ("Marlin"), a Delaware limited partnership, invested $2.5 million in convertible preferred stock of the buyer AAi; upon conversion, AAi common stock received by Marlin would bear demand and piggyback registration rights. Marlin Holdings, Inc. ("MH"), a Delaware corporation, is the general partner of Marlin. Mr. Martin E. Franklin, the Company's Chairman and Chief Executive Officer, is the Chief Executive Officer and principal stockholder of MH. Mr. Ashken, the Company's Chief Financial Officer and a Director, also is a stockholder and executive officer of MH. Mr. Franklin also has been named a member of AAi's Board of Directors. Mr. Franklin serves as non-executive chairman of Eyecare Products. Mr. Ashken serves as a director of Eyecare Products. NOTE 17 -- COMMITMENTS AND CONTINGENCIES The Company is subject to various litigation incidental to business. Irrespective of any indemnification that may be received, the Company does not believe that exposure on any matter will result in a significant impact on the Company's financial condition, results of operations or cash flows. NOTE 18 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997 Q1 Q2 Q3 Q4 - - ---------------------------------------------------------------------------------------------------------------- Net sales $10,963 $12,200 $12,058 $12,907 Gross profit 4,457 4,520 4,459 4,089 Income (loss) from continuing operations 1,038 993 699 (6,381) Basic and diluted earnings (loss) per share $ 0.12 $ 0.11 $ 0.07 $ (0.74) from continuing operations
FOR THE YEAR ENDED DECEMBER 31, 1996 Q1 Q2 Q3 Q4 - - ---------------------------------------------------------------------------------------------------------------- Net sales $10,771 $11,206 $10,007 $10,590 Gross profit 4,281 4,328 4,025 4,264 Income from continuing operations 779 1,210 1,045 410 Basic and diluted earnings per share from continuing $ 0.09 $ 0.14 $ 0.12 $ 0.05 operations
FOR THE YEAR ENDED DECEMBER 31, 1995 Q1 Q2 Q3 Q4 - - ---------------------------------------------------------------------------------------------------------------- Net sales $9,547 $10,511 $9,875 $11,311 Gross profit 4,324 4,745 3,728 4,722 Income (loss) from continuing operations 145 629 (1,083) (640) Basic and diluted earnings (loss) per share from continuing $ 0.02 $ 0.09 $(0.14) $ (0.09) operations
EX-99.2 5 ILC TECHNOLOGY, INC. FINANCIAL STATEMENTS 1 Exhibit 99.2 ILC TECHNOLOGY, INC. FINANCIAL STATEMENTS ILC TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996 ASSETS
1997 1996 ---- ---- Current assets: Cash and cash equivalents ....................... $ 1,113,992 $ 1,828,807 Accounts receivable, less allowance for doubtful accounts of $337,958 and $312,358, respectively ................................... 9,485,397 9,494,246 Receivable from long-term contracts ............. 1,049,122 861,427 Inventories, net ................................ 10,716,680 8,901,528 Deferred tax asset .............................. 835,803 2,158,000 Prepaid expenses ................................ 344,393 208,320 Current portion of note receivable from sale of PLI .................................... 1,150,000 -- Net assets from discontinued operations ......... -- 2,178,383 ----------- ----------- Total current assets ......................... 24,695,387 25,630,711 ----------- ----------- Property and equipment, net ..................... 21,652,695 21,176,431 Note receivable from sale of PLI, net of current portion ............................. 2,196,871 -- Covenants-not-to-compete, net of accumulated amortization and writedown of $3,314,404 and $3,195,524, respectively ........ 237,761 356,641 Other assets .................................... 765,309 680,013 ----------- ----------- $49,548,023 $47,843,796 =========== ===========
The accompanying notes are an integral part of these financial statements. 2 ILC TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996 LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996 ----------- ----------- Current liabilities: Accounts payable ............................ $ 4,361,816 $ 3,643,496 Accrued payroll and related items ...................................... 1,701,209 1,263,741 Other accrued liabilities ................... 1,517,606 1,146,822 Current portion of non-compete obligation ................................. -- 390,000 Current portion of long-term debt ....................................... 2,534,500 2,545,600 Accrued income taxes payable ................ 1,243,451 1,486,518 ----------- ----------- Total current liabilities ............. 11,358,582 10,476,177 ----------- ----------- Long-term liabilities, net of current portion: Long-term debt .............................. 3,117,396 7,370,164 Other accruals .............................. 78,328 206,235 ----------- ----------- Total long-term liabilities .......... 3,195,724 7,576,399 ----------- ----------- Commitments and contingencies (Note 8) Stockholders' equity: Common stock, no par value; 10,000,000 shares authorized; 4,874,040 shares and 4,782,508 shares outstanding, respectively ........... 7,178,231 6,815,109 Retained earnings ........................... 7,815,486 22,976,111 ----------- ----------- Total stockholders' equity ............ 34,993,717 29,791,220 ----------- ----------- $49,548,023 $47,843,796 =========== ===========
The accompanying notes are an integral part of these financial statements. 3 ILC TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
1997 1996 1995 ------------ ------------ ------------ Net sales .................................. $ 55,517,905 $ 54,206,424 $ 49,496,029 Costs and expenses: Cost of sales ............................ 39,194,377 36,180,448 31,799,916 Research and development ................. 4,252,694 4,319,650 4,278,697 Sales and marketing ...................... 3,059,158 2,645,952 2,404,856 General and administrative ............... 4,329,067 4,417,446 4,459,726 Amortization of intangibles .............. 120,000 120,000 120,000 ------------ ------------ ------------ 50,955,296 47,683,496 43,063,195 Income from continuing operations before provision for income taxes, interest expense and gain on sale of CPI ................... 4,562,609 6,522,928 6,432,834 Interest expense, net ...................... 493,917 461,898 323,757 ------------ ------------ ------------ Income from continuing operations before provision for income taxes and before gain on sale of CPI ............................ 4,068,692 6,061,030 6,109,077 Gain on sale of CPI ........................ 2,378,683 -- -- ------------ ------------ ------------ Income from continuing operations before provision for income taxes .............................. 6,447,375 6,061,030 6,109,077 Provision for income taxes on continuing operations ..................... 1,608,000 1,515,000 1,472,000 ------------ ------------ ------------ Income from continuing operations........... 4,839,375 4,546,030 4,637,077 Discontinued operations: Operating loss, net of tax benefit of $280,000 and $32,000 in 1996 and 1995, respectively ...................... -- (840,217) (99,143) Estimated loss on disposal, including $500,000 for operating losses during the phase out, net of tax benefit of $1,132,996 .............................. -- (3,398,987) -- ------------ ------------ ------------ Loss from discontinued operations ........ -- (4,239,204) (99,143) ------------ ------------ ------------ Net income ................................. $ 4,839,375 $ 306,826 $ 4,537,934 ============ ============ ============ Earnings (loss) per share: Earnings from continuing operations ............................... $ 0.96 0.92 $ 0.97 Loss from discontinued operations ......... -- (0.86) (0.02) ------------ ------------ ------------ Net income per share ....................... $ 0.96 $ 0.06 $ 0.95 ============ ============ ============ Weighted average shares outstanding used to compute net income (loss) per share ............... 5,047,658 4,923,132 4,764,989 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 4 ILC TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
Common Common Stock Retained Shares Amount Earnings Total --------- ------------ ------------ ------------ Balance at October 1, 1994 ..... 4,522,951 $ 5,492,338 $ 18,131,351 $ 23,623,689 Net income ................... -- -- 4,537,934 4,537,934 Issuance of common stock under stock purchase plan ............... 37,973 266,575 -- 266,575 Exercise of stock options .... 132,250 450,751 -- 450,751 Repurchase of common stock ... (10,000) (76,750) -- (76,750) Balance at September 30, 1995 .......................... 4,683,174 6,132,914 22,669,285 28,802,199 Net income ................... -- -- 306,826 306,826 Issuance of common stock under stock purchase plan ............... 34,209 279,068 -- 279,068 Exercise of stock options .... 65,125 403,127 -- 403,127 ------------ ------------ ------------ ------------ Balance at September 28, 1996 .......................... 4,782,508 6,815,109 22,976,111 29,791,220 Net income ................... -- -- 4,839,375 4,839,375 Issuance of common stock under stock purchase plan ............... 28,555 266,588 -- 266,588 Exercise of stock options .... 99,977 521,992 -- 521,992 Repurchase of common stock ... (37,000) (425,458) -- (425,458) ------------ ------------ ------------ ------------ Balance at September 27, 1997 .......................... 4,874,040 $ 7,178,231 $ 27,815,486 $ 34,993,717 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 5 ILC TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997
1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Net Income ............................ $ 4,839,375 $ 306,826 $ 4,537,934 Adjustment to reconcile net income to net cash provided by continuing operations: Discontinued operations ............... -- 4,239,204 99,143 Depreciation and amortization ......... 2,002,845 1,689,689 1,569,478 Provision for doubtful accounts ....... 68,694 38,804 102,861 Provision for inventory obsolescence .. 696,089 520,006 169,034 Net loss on property and equipment sold or retired ...................... 14,144 -- 26,367 Equity in income of joint venture ..... (106,000) (20,000) (89,000) Gain on sale of CPI ................... (2,378,683) -- -- Changes in assets and liabilities, net of effects of businesses sold: Decrease in marketable securities ..... -- -- 998,129 Increase in accounts receivable ....... (1,494,632) (1,333,378) (2,467,329) Increase in inventories ............... (4,267,013) (1,888,444) (1,685,743) (Increase) decrease in deferred tax asset ............................ 1,322,197 (704,000) 951,000 (Increase) decrease in prepaid expenses ............................. (136,073) (86,076) 406,556 (Increase) decrease in other assets .............................. 20,704 79,823 (9,397) Increase (decrease) in accounts payable .............................. 718,320 (120,502) 300,709 Decrease in accrued liabilities ....... (230,124) (956,660) (637,731) ----------- ----------- ----------- Net cash provided by operating activities from continuing operations ......................... 1,069,843 1,765,292 4,272,011 Net cash used in discontinued operations ......................... (1,518,488) (168,186) (1,722,659) ----------- ----------- ----------- Cash flows from investing activities: Proceeds from sale of CPI ............. 6,350,000 -- -- Payments received on note for sale of PLI .......................... 350,000 -- -- Purchase of land and real estate ...... -- -- (3,045,412) Decrease in deposit on land and building purchase .................... -- -- 1,300,000 Investment in joint venture ........... -- -- (450,000) Capital expenditures .................. (3,102,092) (3,186,557) (2,517,541) ----------- ----------- ----------- Net cash provided by (used in) investing activities ............... 3,597,908 (3,186,557) (4,712,953) ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. 6 ILC TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997 (continued)
1997 1996 1995 ---- ---- ---- Cash flows from financing activities: Principal borrowings under line of credit............................. $ 10,963,000 $ 9,500,000 $ 8,450,000 Principal repayments under line of credit............................. (13,463,000) (6,500,000) (6,450,000 New borrowings under equipment line.. 1,045,000 1,555,000 1,720,059 Principal repayments under equipment line..................... (1,321,200) (1,374,800) (1,049,958) Principal repayments under term loan............................... (1,451,000) (1,584,000) (1,578,000) Payments under non-compete agreement.......................... -- (390,000) (520,000) Proceeds from issuance of common stock.............................. 788,580 682,195 717,326 Repurchase of common stock........... (425,458) -- (76,750) ------------ ----------- ----------- Net cash provided by (used in) financing activities........... (3,864,078) 1,888,395 1,212,707 ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents...... (714,815) 198,944 (950,894) Cash and cash equivalents at beginning of year.................... 1,828,807 1,529,863 2,480,757 ------------ ----------- ----------- Cash and cash equivalents at end of year.............................. $ 1,113,992 $ 1,828,807 $ 1,529,863 ============ =========== ===========
1997 1996 1995 ---- ---- ---- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest - continuing operations...... $ 641,127 $ 542,061 $ 589,200 Interest - discontinued operations.... -- 77,714 106,341 Income taxes.......................... 282,898 1,055,000 909,000
Supplemental disclosure of non-cash activities: ILC sold the stock of PLI for a note. The purchase price, net of expenses, approximated the net assets of PLI (Note 12). The accompanying notes are an integral part of these financial statements. 7 ILC TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 27, 1997 1. The Company ILC Technology, Inc. ("ILC") was incorporated on September 15, 1967. ILC designs, develops, manufactures and markets high intensity lamps and lighting products for the medical, industrial, aerospace, scientific, entertainment and military industries. ILC develops and manufactures the majority of its products at its headquarter facilities in California and the remainder at its subsidiary facility in the United Kingdom. (See Notes 12, 13 and 16). 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of ILC and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Fiscal year 1995 was restated to reflect ILC's decision to discontinue the operations of Precision Lamp, Inc. ("PLI") (see Note 12). This restatement had no impact on net income. ILC's fiscal year end is the Saturday closest to September 30. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Items which require management to make estimates include the realization of accounts receivable and inventory balances, warranty, and other reserves. Additionally, ILC is currently in negotiation with PLI Acquisition Corp. to restructure the terms of that note receivable, as discussed in Note 12. Cash and Cash Equivalents For the purpose of the statement of cash flows, ILC considers all highly liquid investments with an original maturity of three months or less at the time of issue to be cash equivalents. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market, and include material, labor and manufacturing overhead. Inventories at September 27, 1997 and September 28, 1996, net of inventory reserves of $2,043,420 and $2,034,258, respectively, consisted of: 8 2. Summary of Significant Accounting Policies (continued) Inventories (continued)
1997 1996 ---- ---- Raw materials $5,459,159 $ 4,802,839 Work-in-process 3,974,496 2,549,805 Finished goods 1,283,025 1,548,884 ---------- ----------- Total inventories $10,716,680 $ 8,901,528 =========== ===========
Developmental and Manufacturing Contracts ILC contracts with the U.S. Government and other customers for the development and manufacturing of various products under both cost-plus-fixed-fee and fixed-price contracts. Revenues are recognized under these contracts using the percentage of completion method, whereby revenues are reported in the proportion that costs incurred bear to the total estimated costs for each contract. Periodic reviews of estimated total costs during the performance of such contracts may result in revisions of contract estimates in subsequent periods. Any loss contracts are reserved at the time such losses are determined. Revenues from these contracts were less than 10% of net revenues during 1997, 1996 and 1995. Depreciation and Amortization Depreciation and amortization on property and equipment are provided on a straight-line basis over estimated useful lives of 3 to 31.5 years, except for leasehold improvements which are amortized over the terms of the leases. Net Income (Loss) Per Share Net income (loss) per share is computed using the weighted average number of common shares and common equivalent shares (when such equivalents have a dilutive effect) outstanding during the period using the treasury stock method. Fully diluted net income (loss) per share is not significantly different from net income (loss) per share as reported. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, which requires disclosure of basic earnings per share and diluted earnings per share and is effective for periods ending subsequent to December 15, 1997 and restatement will be required for all prior period EPS data presented. The pro forma effect of adoption of SFAS No. 128 is included in the table below. 9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Income (Loss) Per Share (continued)
1997 1996 1995 --------- --------- --------- (shares in thousands) As reported: Earnings (loss) per share: Continuing operations ............ $ 0.96 $ 0.92 $ 0.97 Discontinued operations .......... -- (0.86) (0.02) --------- --------- --------- Net income per share ............ $ 0.96 $ 0.06 $ 0.95 Pro forma for SFAS No. 128: Basic earnings (loss) per share: Continuing operations ............ $ 1.00 $ 0.96 $ 1.01 Discontinued operations .......... -- (0.90) (0.02) --------- --------- --------- Basic net income per share ....... $ 1.00 $ 0.06 $ 0.99 Weighted average number of common shares outstanding ....... 4,848 4,725 4,604 Diluted earnings (loss) per share: Continuing operations ............ $ 0.96 $ 0.92 $ 0.97 Discontinued operations .......... -- (0.86) (0.02) --------- --------- --------- Diluted net income per share ..... $ 0.96 $ 0.06 $ 0.95 Weighted average number of common shares outstanding ....... 5,048 4,923 4,765
Covenants-Not-To-Compete The covenant-not-to-compete relates to the Q-Arc acquisition that took place in 1991. This is being amortized over the period of the covenant. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of." ILC adopted the provisions of this statement in fiscal 1996. The effect on its financial position and results of operations was not significant. ILC quarterly evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful lives of these intangibles may warrant revision or that the remaining balances of intangibles may not be recoverable. When factors indicate that intangibles should be evaluated for possible impairment, ILC uses an estimate of the related subsidiary's undiscounted cash flow over the remaining life of the intangibles in measuring whether the intangibles are recoverable. As part of ILC's decision to discontinue the operations of PLI, the unamortized balance of the covenant-not-to-compete ($470,000) was written off in the fourth quarter of fiscal 1996. Investment in Joint Venture In February 1995, ILC invested $450,000 in a lamp manufacturer located in Japan. ILC's investment represents a 49% ownership interest in the equity of the investee, consequently ILC accounts for its investment using the equity method of accounting. ILC's investment is included in Other Assets in the accompanying consolidated balance sheets and its proportionate interest in the income of the 10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investment in Joint Venture (continued) investee of $106,000, $20,000 and $89,000 in fiscal 1997, 1996 and 1995, respectively, is included in the accompanying consolidated statements of operations. New Accounting Pronouncements SFAS No. 130, "Reporting Comprehensive Income", establishes guidelines for all items that are to be recognized under accounting standards as components of comprehensive income to be reported in the financial statements. The statement is effective for all periods ending after December 15, 1997 and reclassification of financial statements for earlier periods presented will be required for comparative purposes. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for reporting of operating segment information in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial statements issued to shareholders. The statement is effective for all periods ending after December 15, 1997. 3. Revenues ILC recognizes revenue on all product sales upon shipment of the product. ILC accrues for estimated warranty obligations at the time of the sale of the related product based upon its past history of claims experience and costs to discharge its obligations. ILC operates in a single industry segment, the designing, developing, manufacturing and marketing of high performance light source products. Revenues from continuing operations are geographically summarized as follows (in thousands):
1997 1996 1995 ------- ------- ------- United States ..... $36,639 $34,088 $32,533 Europe ............ 6,671 6,920 5,964 Asia .............. 11,986 12,700 10,951 Other international 222 498 48 ------- ------- ------- $55,518 $54,206 $49,496 ======= ======= =======
Customers comprising more than 10% of net sales from continuing operations are as follows:
1997 1996 1995 ---- ---- ---- Customer A......................... 13.5% 15.0% 12.2% Customer B......................... * 11.5% 12.0%
*less than 10% of net sales 11 3. Revenues (continued) ILC provides credit in the form of trade accounts receivable to its customers. ILC does not generally require collateral to support customer receivables. ILC performs ongoing credit evaluations of its customers and maintains allowances which management believes are adequate for potential credit losses. Approximately 31%, 39% and 40% of ILC's sales in fiscal 1997, 1996 and 1995, respectively, were to customers in the medical industry. This industry has experienced significant fluctuations in demand and ILC expects sales to the medical market to decrease as a percentage of net sales in the foreseeable future. Customer B, referred to above, is in the semiconductor equipment industry and was a major customer of ILC's subsidiary, CPI. In the fourth quarter of fiscal 1996, CPI experienced a significant reduction in orders from this customer. In May 1997, CPI was sold (see Note 13). 4. Property and Equipment Property and equipment at September 27, 1997 and September 28, 1996 consisted of:
1997 1996 ------------ ------------ Property and equipment, at cost: Machinery and equipment ...... $ 17,130,338 $ 15,047,138 Land and buildings ........... 15,498,058 14,955,738 Furniture and fixtures ....... 518,283 601,822 Equipment under capital lease 174,268 174,268 Leasehold improvements ....... -- 598,814 Construction-in-progress ..... 577,449 1,011,601 ------------ ------------ 33,898,396 32,389,891 Less accumulated depreciation and amortization ................. (12,245,701) (11,212,950) ------------ ------------ Property and equipment, net ..... $ 21,652,695 $ 21,176,431 ============ ============
5. Bank Borrowings As of September 27, 1997 and September 28, 1996, borrowings outstanding under ILC's credit facilities consisted of:
1997 1996 ----------- ----------- Line of credit ......... $ 2,500,000 $ 5,000,000 Term loan .............. 1,187,000 2,638,000 Equipment line of credit 1,915,000 2,191,200 Other capital lease .... 49,896 86,564 ----------- ----------- 5,651,896 9,915,764 Less: current portion .. (2,534,500) (2,545,600) ----------- ----------- Long-term debt ......... $ 3,117,396 $ 7,370,164 =========== ===========
Aggregate maturities for long-term debt during the next five years are approximately: 1998 - $2,534,500, 1999 - $3,117,396, and none in 2000, 2001 and 2002. 12 5. Bank Borrowings (continued) All of the above credit facilities are secured by all of the property of ILC. ILC has a $6 million line of credit available with a bank which expires in March 1999. Borrowings under this line are at 2% above the LIBOR rate (London Interbank Offer Rate) (7.66% at September 27, 1997). Under the covenants of the loan agreement, unless written approval from the bank is obtained, ILC is restricted from entering into certain transactions and is required to maintain certain specified financial covenants and profitability. As of September 27, 1997, ILC was in compliance with all financial covenants. The average balance outstanding (based on month-end balances) under the line of credit in 1997 was $4,021,000. The maximum borrowings were $6,000,000 and the average interest rate during 1997 was 7.6%. As of September 27, 1997, $3.5 million was available for future borrowings under this line of credit. In addition, in connection with the purchase of its Sunnyvale manufacturing facilities, ILC entered into a term loan with a bank for $5,000,000 in 1993, which was subsequently increased to $6,333,333 in 1994. The note matures in August 1998. The term loan requires monthly principal payments equal to one-forty-eighth of the principal amount plus interest at 2% above the LIBOR rate (London Interbank Offer Rate) (7.66% at September 27, 1997). The term loan is a reducing revolving credit facility which allows for principal pre-payments and the flexibility for re-borrowing up to the maximum amount that would be outstanding under the term loan given normal amortization to the date of re-borrowing. The average balance outstanding (based on month-end balances) under the term loan in 1997 was $1,913,000, and the average interest rate during 1997 was 7.6%. ILC has available equipment lines of credit for 100% of the purchase cost of new equipment. At the end of fiscal 1997, ILC had borrowings under these lines of $1,915,000, of which $1,348,000 is due in fiscal 1998 and $567,000 is due in fiscal 1999. These borrowings bear interest at 2% above the LIBOR rate (7.66% at September 27, 1997). ILC also has available an unused $2 million equipment line of credit which expires in August 1998. Borrowings under this line bear interest at the same rate as discussed above, with principal balances amortized over a 2 year period. 6. Income Taxes ILC accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach to accounting for income taxes. Income from continuing operations before provision for income taxes consists of the following for fiscal 1997, 1996 and 1995, respectively:
1997 1996 1995 ---------- ---------- ---------- U.S................................ $4,738,375 $4,897,389 $5,588,040 Foreign............................ 1,709,000 1,163,641 521,037 ---------- ---------- ---------- $6,447,375 $6,061,030 $6,109,077 ========== ========== ==========
The components of the provision for income taxes on continuing operations are as follows: 13 6. Income Taxes (continued)
1997 1996 1995 ----------- ----------- ----------- Federal - Current .................. $ 671,000 $ 1,559,000 $ 833,000 Deferred ................. 80,000 (600,000) 581,500 ----------- ----------- ----------- 751,000 959,000 1,414,500 ----------- ----------- ----------- Foreign - Current .................. 540,000 384,000 -- State - Current .................. 241,000 276,000 199,000 Deferred ................. 76,000 (104,000) 96,500 ----------- ----------- ----------- 317,000 172,000 295,500 ----------- ----------- ----------- Federal refund received ........ -- -- (238,000) ----------- ----------- ----------- Total provision for income taxes on continuing operations ...... $ 1,608,000 $ 1,515,000 $ 1,472,000 =========== =========== ===========
The major components of the deferred tax asset account, as computed under SFAS No. 109, are as follows:
1997 1996 ----------- ----------- Reserve for loss on disposal of discontinued operations, not currently deductible for tax purposes ....................... $ -- $ 1,133,000 Inventory reserve ............... 795,000 877,000 Bad debt reserve ................ 132,000 92,000 Warranty reserve ................ 103,000 128,000 Accruals not currently deductible for tax purposes ............... 545,000 381,000 Amortization of covenant-not- to-compete ..................... -- 202,000 Excess of tax over book depreciation ................... (1,112,000) (988,000) Other items, individually insignificant .................. 372,803 333,000 ----------- ----------- $ 835,803 $ 2,158,000 =========== ===========
The provision for income taxes on continuing operations differs from the amounts which would result by applying the applicable statutory Federal income tax rate to income from continuing operations before taxes as follows:
1997 1996 1995 ----------- ----------- ----------- Computed expected provision $ 2,192,000 $ 2,121,000 $ 2,138,000 State tax ................. 317,000 364,000 367,000 FSC commission ............ (43,000) (181,000) (216,000) General business credits .. (277,000) (218,000) (203,000) Refund received ........... -- -- (238,000) Other items, individually insignificant ............ (581,000) (571,000) (376,000) ----------- ----------- ----------- $ 1,608,000 $ 1,515,000 $ 1,472,000 =========== =========== ===========
14 6. Income Taxes (continued) During the second quarter of fiscal 1995, ILC received a refund of $238,000 from the Internal Revenue Service (IRS) related to tax returns filed in previous years, which were examined by the IRS. This amount was recorded as a reduction of the fiscal 1995 tax provision upon receipt of the refund. An additional $235,000 of interest related to the refund amount was received and was included in interest income in fiscal 1995. 7. Employee Retirement Plan On January 1, 1984, ILC adopted a thrift incentive savings plan (the "Retirement Plan"). The Retirement Plan is qualified under section 401(k) of the Internal Revenue Code and is available to all full-time employees with one or more years of employment with ILC. Under the terms of the Retirement Plan, participating employees must contribute at least 2% of their salary to the Retirement Plan, and ILC contributes (as a matching contribution) 100% of this amount. Employees may also contribute an additional amount up to 13% of their salary to the Retirement Plan, with no further contributions by ILC. ILC's contributions vest at a rate of 20% per year, commencing on the first anniversary of employment. Total employer matching contributions under the Retirement Plan were $187,000, $226,000, and $212,000 for fiscal years 1997, 1996 and 1995, respectively. The components of such expense relating to continuing operations was $187,000, $188,000 and $171,000 for fiscal years 1997, 1996 and 1995, respectively. 8. Commitments and Contingencies At September 27, 1997, all of ILC's facilities in Sunnyvale and Santa Clara, California and Cambridge, England are owned. All lease obligations associated with the facilities of PLI and CPI were assumed by the buyers at the time of sale. For fiscal years 1997, 1996 and 1995, rental expense was approximately $178,000, $442,000 and $277,000, respectively. Rental expense for continuing operations was $121,000, $226,000 and $61,000 for fiscal years 1997, 1996 and 1995, respectively. As discussed in Note 13, the number of shares held in escrow relating to the sale of CPI are subject to adjustment related to warranties and the valuation of the acquiror's common stock. 9. Stock Option and Purchase Plans Under the 1992 Stock Option Plan ("Plan"), ILC may grant options to employees and directors. ILC has reserved 575,000 shares for issuance under the Plan. The exercise price per share for stock options cannot be less than the fair market value on the date of grant. Options granted are for a ten-year term and generally vest ratably over a period of four years commencing one year after the date of grant. The Plan provides for the automatic grant of a nonstatutory stock option to purchase shares of Common Stock to each outside Director annually during ILC's third fiscal quarter. During fiscal 1997, each outside Director was granted an automatic option to purchase a total of 5,000 shares of ILC's Common Stock. ILC's 1983 Stock Option Plan expired in 1993 and no further options have been granted under such plan since then. In accordance with the disclosure requirements of Statement of Financial Accounting Standards No. 123 " Accounting for Stock-Based Compensation," if ILC had elected to recognize compensation cost based on fair value of the options granted at grant dates prescribed, income from continuing operations and 15 9. Stock Option and Purchase Plans (continued) earnings per share would have been reduced to the pro forma amounts indicated in the table below. The pro forma effect on net income for fiscal 1997 and 1996 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to fiscal 1996.
1997 1996 ------------- ------------- Income from continuing operations- as reported ..................... $ 4,839,375 $ 4,546,030 Income from continuing operations- pro forma ....................... $ 4,328,487 $ 4,344,547 Earnings per share from continuing operations as reported .......... $ 0.96 $ 0.92 Earnings per share from continuing operations-pro forma ............ $ 0.89 $ 0.89
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model utilizing expected volatility calculations based on historical data (62.10%) and risk-free interest rates based on U.S. government bonds on the date of grant with maturities equal to the expected option term (5.82%-6.69%). No dividends are assumed, and the expected option term is 5.93 years. The weighted-average fair values of options granted in fiscal 1997 and 1996 are $6.49 and $6.27, respectively. 16 9. Stock Option and Purchase Plans (continued) A summary of ILC's stock option activity for the past three fiscal years is as follows:
Weighted Options Exercise Average Available Number Price Exercise for Grant of Shares Per Share Price -------- -------- -------------- -------------- Options Outstanding ------------------------------------------- Balance at October 1, 1994 ....... 103,624 720,027 $1.09-11.50 $ 6.27 Granted ......................... (28,000) 28,000 $ 9.50 $ 9.50 Canceled ........................ 34,000 (34,000) $8.75-11.50 $ 9.85 Exercised ....................... -- (132,250) $2.13-8.75 $ 3.48 -------- -------- -------------- -------------- Balance at September 30, 1995 .... 109,624 581,777 $1.09-11.50 $ 6.87 Additional shares approved ...... 200,000 -- -- -- Granted .........................(205,000) 205,000 $9.00-11.25 $ 9.94 Canceled ........................ 92,125 (92,125) $8.75-11.50 $ 10.27 Exercised ....................... -- (65,125) $1.09-11.50 $ 6.10 -------- -------- -------------- -------------- Balance at September 28, 1996 .... 196,749 629,527 $1.09 -11.50 $ 7.44 Additional shares approved ...... 175,000 -- -- -- Granted .........................(406,000) 406,000 $9.00-11.19 $ 10.29 Canceled ........................ 89,550 (89,550) $9.00-11.50 $ 10.57 Exercised ....................... -- (99,977) $1.09-11.50 $ 5.22 -------- -------- -------------- -------------- Balance at September 27, 1997 .... 55,299 846,000 $2.25-11.25 $ 8.74 ======== ======== ============== ==============
At the end of fiscal 1997, 1996 and 1995, options to purchase 351,063 shares, 416,965 shares and 439,715 shares, respectively, were exercisable at weighted average prices of $6.70, $6.11 and $5.94. The following table summarizes information about stock options outstanding at September 27, 1997:
Weighted Avg. Weighted Avg. Number of Exercise Weighted Avg. Remaining Number of Exercise Price Shares Price Exercise Contractual Shares of Options Outstanding Range Price Life Exercisable Exercisable - ----------- ----------- ------------- ----------- ----------- ------------- 162,000 $ 2.25-3.75 $ 3.54 2.19 years 162,000 $ 3.54 390,000 7.38-9.50 9.13 7.93 years 136,563 8.70 294,000 10.63-11.50 11.08 8.64 years 52,500 11.30
17 9. Stock Option and Purchase Plans (continued) Under ILC's Employee Stock Purchase Plan, ILC has 83,033 shares of common stock available at September 27, 1997 for issuance to participating employees who have met certain eligibility requirements. The number of shares available for purchase by each participant is based upon annual base earnings and at a purchase price equal to 85% of the fair market value at the beginning or the end of the quarter of purchase, whichever is lower. 10. Interest Expense, Net Interest expense, net consists of the following:
1997 1996 1995 -------- -------- -------- Interest income................... $(147,210) $(80,163) $(265,443) Interest expense.................. 641,127 542,061 589,200 -------- -------- -------- Net interest expense related to continuing operations............ $493,917 $461,898 $323,757 ======== ======== ========
11. Acquisitions In August 1991, ILC acquired all the outstanding stock of Q-Arc Ltd. of Cambridge, England for $1,400,000 in cash and the assumption of certain liabilities. Q-Arc is a manufacturer of specialty lamps for laser and non-laser applications. This transaction was accounted for as a purchase and accordingly, all assets were revalued to their respective fair values. The acquisition price was equal to the fair value of net assets acquired. Net assets included a covenant-not-to-compete of approximately $951,000. The covenant is being amortized over an eight year period. At September 27, 1997, the unamortized balance of the Q-Arc covenant-not-to-compete is approximately $238,000. 12. Discontinued Operations In September 1996, ILC's Board of Directors voted to proceed with the divestiture of PLI which is a subsidiary based in Cotati, California. As a result of ILC's plan, an estimated loss on disposal of $3,399,000, net of a tax benefit of $1,133,000, was recorded in the fourth quarter of fiscal 1996. This loss on disposal included estimated operating losses through the final disposition of the subsidiary and the write off of the unamortized balance of the PLI covenant-not-to-compete of approximately $470,000. In January 1997, ILC signed an agreement to sell PLI. The original selling price was approximately $3.3 million but was subject to due diligence and the ability of PLI Acquisition Corp., the purchaser, to obtain adequate financing no later than March 31, 1997. The purchaser was not able to obtain adequate financing, but through further discussions with the purchaser, ILC agreed to sell the stock of PLI to PLI Acquisition Corp. for a promissory note with a face value of $4 million bearing 8% interest per year on any unpaid principal amount. Payments on the promissory note began in May 1997 and will be completed in April 2000. This transaction was recorded in the third quarter of fiscal 1997. The purchase price, net of expenses and reserves, approximated the book value and therefore, no gain or loss was recorded. 18 12. Discontinued Operations (continued) After conferring with ILC management, PLI Acquisition Corp. did not make the scheduled October and November 1997 payments on the note payable to ILC. ILC and PLI Acquisition Corp. are currently evaluating a restructuring of the payment terms of the note payable to ILC. ILC's management believes that there has been no impairment of the value of the note as recorded by ILC. Continuing operations, as reclassified for fiscal years 1996 and 1995, consist of the activities of ILC Technology, Inc. based in Sunnyvale, California, CPI based in Beverly, Massachusetts and Q-Arc based in Cambridge, England. The Consolidated Statements of Operations have been reclassified to report separately the activities of PLI as discontinued operations. Revenues from PLI were $7,772,000 and $8,933,000 for fiscal 1996 and 1995, respectively. The net loss after tax from the discontinued operations of PLI was $840,000 and $99,000 for fiscal 1996 and 1995, respectively. A portion of net interest expense of approximately $66,000 and $58,000 for fiscal 1996 and 1995, respectively, was allocated to the discontinued operations. Net interest expense was allocated to discontinued operations based on the ratio of the net assets to be discontinued to the consolidated net assets plus consolidated debt other than debt which is directly attributable to continuing operations. For the six months ended March 29, 1997, revenues from PLI were $1,489,000. Net interest expense allocated to the discontinued operations of PLI was approximately $18,000. As discussed above, the resultant loss from discontinued operations was offset against accruals made in the fourth quarter of fiscal 1996. The net assets of PLI of $2,178,383 as of September 28, 1996 are shown in the accompanying balance sheet as net assets from discontinued operations. These assets were written down to a value that represented management's best estimate of the amount that could be realized upon disposition. 13. Converter Power, Inc. In May 1997, ILC completed the sale of CPI to Applied Science and Technology, Inc. (ASTeX) for $6.35 million in cash and 45,000 shares of ASTeX common stock. The total sale price was $7.35 million, subject to adjustments related to warranties. ILC has estimated that $500,000 of potential warranties could be paid and has reduced the gain on sale accordingly. In August 1997, ASTeX removed approximately 4,900 shares from escrow based on post-closing audit adjustments. The remaining shares will be held in escrow subject to any further post-closing adjustments, with a final settlement in May 1998. The sale, net of expenses, resulted in a gain of $2,378,683 and was reported in the results of operations for the third quarter ended June 28, 1997. The net amount due from ASTeX of $500,000 (to be satisfied by the release to ILC of the ASTeX shares held in escrow) is reflected in accounts receivable in the accompanying balance sheet as of September 27, 1997. 14. Rights Agreement and Other Matters On September 19, 1989, ILC's Board of Directors declared a dividend of one common share purchase right for each outstanding share of common stock, no par value, of ILC. The dividend was payable on October 2, 1989 to the shareholders of record on that date. Each right entitles the registered holder to purchase from ILC one share of common stock of ILC at a price of $15.00 per common share. The rights will not be exercisable until a party either acquires beneficial ownership of 20% of ILC's common stock or makes a tender offer for at least 30% of its common stock. In the event the rights become exercisable and thereafter a person or group acquires 30% or more of ILC's stock, a 20% shareholder 19 14. Rights Agreement and Other Matters (continued) ("Acquiring Person") engages in any specified self-dealing transaction, or, as a result of a recapitalization or reorganization, an Acquiring Person's shareholdings are increased by more than 3%, each right will entitle the holder to purchase from ILC, for the exercise price, common stock having a market value of twice the exercise price of the right. In the event the rights become exercisable and thereafter ILC is acquired in a merger or other business combination, each right will enable the holder to purchase from the surviving corporation, for the exercise price, common stock having a market value of twice the exercise price of the right. At ILC's option, the rights are redeemable in their entirety, prior to becoming exercisable, at $.01 per right. The rights are subject to adjustment to prevent dilution and expire September 29, 1999. On February 25, 1997, the Rights Agreement was amended. The amended terms generally provide that the exercise of the various rights may occur whenever a party acquires a beneficial ownership of 15% or more of ILC outstanding common shares and that registered holders of ILC are entitled to purchase from ILC one share of common stock at a price of $55.00 per common share. Additionally, the expiration date of the Rights Agreement was extended to December 31, 2006. In November 1996, the Board of Directors authorized eight severance agreements for six executive officers and two managers, providing for severance benefits upon termination during the two-year period following a change in control in ILC, as defined therein. 15. Repurchase of Common Stock In November 1996, the Board of Directors authorized ILC to repurchase up to 1,000,000 shares of ILC's issued and outstanding common stock. During the third quarter of fiscal 1997, and since inception of the repurchase program, ILC repurchased 37,000 shares of common stock for an aggregate amount of $425,458. Purchases were made on the open market and can be made for up to two years from the date of authorization. 16. Subsequent Event On October 30, 1997, ILC entered into a definitive Agreement and Plan of Merger by and among ILC, BEC Group, Inc. ("BEC") and BILC Acquisition Corp. ("Acquisition Corp."), a wholly owned subsidiary of BEC, pursuant to which ILC will merge (the "Merger") with and into Acquisition Corp. Upon consummation of the Merger, each outstanding share of ILC will be converted into the right to receive 2.18 shares (reflecting the completion of BEC's contemplated one-for-two reverse stock split) of BEC's common stock. The Merger is subject to the approval of both ILC's shareholders and BEC's stockholders, and to certain regulatory approvals and other customary closing conditions. The respective chairmen of ILC and BEC have executed voting agreements in favor of the Merger. 20 SCHEDULE VIII ILC TECHNOLOGY, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR FISCAL YEARS 1997, 1996 AND 1995
Balance at Charged to Deductions Deductions Balance at Beginning Cost and and from end of of Period Expenses Write Offs Dispositions Period ---------- ---------- ---------- ------------ ---------- Allowance for Doubtful Accounts: Year ended September 30, 1995 $ 332,672 $ 102,861 $ 26,093 $------- $ 409,440 Year ended September 28, 1996 $ 409,440 $ 38,804 $ 135,886 -- $ 312,358 Year ended September 27, 1997 $ 312,358 $ 68,694 $ 22,062 $ 21,032 $ 337,958 Reserve for Inventory Obsolescence: Year ended September 30, 1995 $2,141,992 $ 169,034 $ 430,000 $------- $1,881,026 Year ended September 28, 1996 $1,881,026 $ 520,006 $ 366,774 -- $2,034,258 Year ended September 27, 1997 $2,034,258 $ 696,089 $ 635,927 $ 51,000 $2,043,420
21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To ILC Technology, Inc. We have audited the accompanying consolidated balance sheets of ILC Technology, Inc. (a California Corporation) and subsidiaries as of September 27, 1997 and September 28, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 27, 1997. These financial statements and the schedule referred to below are the responsibility of ILC's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ILC Technology, Inc. and subsidiaries as of September 27, 1997 and September 28, 1996 and the results of their operations and their cash flows for each of the three years in the period ended September 27, 1997 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule presented on page 36 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California December 1, 1997 -----END PRIVACY-ENHANCED MESSAGE-----