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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to __________
Commission file number 1-8402
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IRVINE SENSORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-0280334
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3001 Redhill Avenue, Costa Mesa, California
(Address of principal executive offices)
92626
(Zip Code)
(714) 549-8211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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As of December 31, 1995 there were 16,028,300 shares of Common Stock
outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, October 1,
1995 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,173,100 $ 4,367,100
Accounts receivable, net of allowances of $10,000 2,978,800 2,388,000
Inventory 4,285,400 2,930,900
Prepaid expenses 216,600 241,500
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Total current assets 8,653,900 9,927,500
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Equipment, furniture and fixtures, net 5,984,700 5,649,600
Other assets 30,100 32,100
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$ 14,668,700 $ 15,609,200
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,069,800 $ 1,302,500
Accrued expenses 576,600 671,500
Deferred revenues 1,424,400 1,365,000
Notes payable and current portion of long-term debt 158,400 206,400
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Total current liabilities 3,229,200 3,545,400
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Commitment to employee retirement plan 149,800 -
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Long-term debt 59,000 78,000
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Deferred royalties payable - affiliated company 123,200 123,200
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Preferred stock of consolidated subsidiary 118,500 118,500
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Convertible subordinated debentures 150,000 2,250,000
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SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 500,000 shares authorized;
9,354 shares Series B Convertible Cumulative
Preferred issued and outstanding; aggregate liquidation
preference of $238,500 100 100
5,659 shares Series C Convertible Cumulative
Preferred issued and outstanding; aggregate liquidation
preference of $271,700 100 100
Common stock, $0.01 par value, 20,000,000 shares authorized;
16,028,300 and 15,566,800 shares issued and outstanding 160,300 155,700
Common stock warrants and unit warrants;
126,900 issued and outstanding - -
Paid-in capital 29,639,200 27,025,700
Accumulated deficit (18,960,700) (17,687,500)
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Total shareholders' equity 10,839,000 9,494,100
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$ 14,668,700 $ 15,609,200
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</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
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IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
13 Weeks Ended
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December 31, January 1,
1995 1995
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<S> <C> <C>
Revenues $ 2,506,500 $ 1,559,400
Other 72,000 -
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Total revenues 2,578,500 1,559,400
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Cost and expenses:
Cost of revenues 2,613,600 1,475,900
General and administrative 869,500 521,000
Research and development 372,400 281,700
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3,855,500 2,278,600
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Loss from operations (1,277,000) (719,200)
Interest expense (34,500) -
Interest income 39,200 41,900
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Loss before provision
for income taxes (1,272,300) (677,300)
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Provision for income taxes 900 900
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Net loss $(1,273,200) $ (678,200)
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Net loss per common and
common equivalent share $(0.08) $(0.05)
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Weighted average number
of shares outstanding 15,846,700 14,784,800
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</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
3
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IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
13 Weeks Ended
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December 31, 1995 January 1, 1995
---------------------------- --------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 1,987,700 $ 1,249,500
Cash paid to suppliers and employees (4,934,000) (2,284,500)
Interest received 39,200 41,900
Interest paid (7,300) -
Income taxes paid (900) (900)
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Net cash used in operating activities $(2,915,300) $ (994,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital facilities and equipment expenditures (729,800) (898,900)
Decrease in marketable securities - 1,959,400
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Net cash (used in) provided by investing activities (729,800) 1,060,500
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible
subordinate debentures 450,000 -
Proceeds from long-term debt - 152,600
Principal payments under notes payable
and capital lease obligations (67,000) (23,700)
Proceeds from common stock issued 68,100 12,500
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Net cash provided by financing activities 451,100 141,400
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Net (decrease) increase in cash and cash equivalents (3,194,000) 207,900
Cash and cash equivalents at beginning of period 4,367,100 437,300
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Cash and cash equivalents at end of period $ 1,173,100 $ 645,200
=========== ===========
RECONCILIATION OF NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Net loss $(1,273,200) $ (678,200)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization $ 394,700 $ 230,900
Commitment to employee retirement plan 149,800 116,200
Increase in accounts receivable (590,800) (309,900)
Increase in inventory (1,354,500) (339,900)
Decrease (increase) in prepaid expenses
and other assets 26,900 (1,000)
Decrease in accounts payable and accrued expenses (327,600) (71,300)
Increase in deferred revenues 59,400 59,200
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Total adjustments (1,642,100) (315,800)
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Net cash used in operating activities $(2,915,300) $ (994,000)
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Commitment to employee retirement plan $ 149,800 $ 116,200
=========== ===========
Capitalized lease obligations $ - $ 152,600
=========== ===========
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
4
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IRVINE SENSORS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The information contained in the following Condensed Notes to Consolidated
Financial Statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the
consolidated financial statements and related notes thereto contained in the
1995 Annual Report to Shareholders of Irvine Sensors Corporation (the
"Company"). It should be understood that accounting measurements at interim
dates inherently involve greater reliance on estimates than at year end. The
results of operations for the interim periods presented are not necessarily
indicative of the results expected for the entire year.
The consolidated financial information as of December 31, 1995 and January 1,
1995 included herein is unaudited but includes all normal recurring adjustments
which, in the opinion of management of the Company, are necessary to present
fairly the consolidated financial position of the Company at December 31, 1995
and the results of its operations and of its cash flows for the 13 week periods
ended December 31, 1995 and January 1, 1995, respectively.
The consolidated financial statements include the accounts of Irvine Sensors
Corporation (the "Company") and its wholly owned subsidiaries Carson Alexiou
Corporation ("CAC") and Novalog, Inc. ("Novalog"). All significant intercompany
transactions have been eliminated in consolidation.
NOTE 2 - INVENTORY
Title to all inventories remains with the Company. Inventoried materials and
costs relate to work-in-process on serial infrared communication chips,
customers' orders, generic module parts and memory stacks which the Company
anticipates it will sell to customers. Such inventoried costs are stated
generally at the total of the direct production costs including overhead.
Inventory valuations do not include general and administrative expenses and are
valued at the lower of cost or market.
NOTE 3 - CONVERTIBLE SUBORDINATED DEBENTURES
In conjunction with the fiscal 1995 private financing of $2.25 million of 8
percent convertible subordinated debentures (the "Debentures"), the Company
issued an additional $500,000 of Debentures in October 1995 to institutional
investors in Europe. The gross proceeds less expenses were added to the
Company's general funds. Subsequent to the issuance, the Company registered the
shares underlying the Debentures.
During the first quarter of fiscal 1996, the Company, at the request of
certain bond holders, converted $2,600,000 of outstanding Debentures at varying
rates into 407,500 shares of the Company's common stock.
NOTE 4 - ISSUANCE OF COMMON STOCK
During the first quarter of fiscal 1996, the Company issued 54,000 shares of
common stock to one employee and two non-employee directors upon exercise of
options granted under the Company's Stock Option Plans. The net proceeds of
$68,100 were added to the Company's general funds.
NOTE 5 - RELATED PARTY TRANSACTIONS
In April 1980, the Company entered into an agreement with R&D Leasing Ltd.,
(RDL), a limited partnership in which the Company's Chairman and a Senior Vice-
President are general partners with beneficial interests, to design an
electronic circuit, to develop certain fabrication processes and to build
equipment for testing electronic integrated circuits. In connection with the
development of the electronic test equipment under
5
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the RDL agreement, certain other proprietary fabrication processes were
developed to which RDL retained ownership. Upon the occurrence of certain
specified events, such as the use of patented fabrication processes in
connection with contracts, the agreement with RDL provides that the Company will
pay RDL a royalty fee based on a percentage of revenues from sales of the basic
devices using the processes created during the development of this equipment. As
of December 31, 1995, the Company owed RDL $123,200 in deferred royalty fees.
NOTE 6 - SUBSEQUENT EVENTS
In January 1996, the Company finalized negotiations of the terms under which
it may acquire and operate the equipment comprising IBM's cubing line located at
IBM's Essex Junction, Vermont Plant. The cubing line was established by IBM to
manufacture the stacked-chip assemblies required to commercialize the Company's
proprietary chip-stacking technology under the joint development alliance that
IBM and the Company entered into in 1992 and recently completed. Under the
terms of the agreement, an approximate $6.5 million purchase price for the
cubing line, valid until March 21, 1996, and the terms of a space lease under
which the line could be operated under the Company's management within the IBM
facility, have been established. The purchase price must be fully paid by the
Company by April 20, 1996 to consummate the transaction.
The new arrangements also included a Fabrication Services Agreement under
which the Company will build cubes for IBM should IBM have a demand for such
services during the lease period, which extends through 1998.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS.
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RESULTS OF OPERATIONS
REVENUES
The Company achieved another record quarter with revenues of $2,578,500 for
the first quarter of fiscal 1996, an increase of 65 percent or $1,019,100 from
the first quarter of fiscal 1995. The additional revenues were attributable to
a substantial increase in shipments of the Company's new serial infrared
communications chip ("SIRComm") and shipments of Memory Short Stacks/TM/ from
the Company's Vermont facility. The SIRComm chip has continued to gain market
acceptance since its introduction in late fiscal 1995. The increase in
shipments of Memory Short Stacks by the Company's Computer Products Operations
("CPO") is a result of substantial increases in bookings for this product that
began in the second half of fiscal 1995. The Company's research and development
operations, which is largely dependent on contracts from the U.S. Government's
military agencies and subcontracts from major Government contractors, has been
adversely affected by funding delays caused by the Federal Government's budget
crisis.
Other revenues were derived from a license agreement with Unitrode
Corporation which involves the transfer of technology required to produce
Novalog's SIRComm chip.
COSTS OF REVENUES
Costs of revenues as a percentage of revenue increased from 95 percent for
the first quarter of fiscal 1995 to 101 percent for fiscal 1996. This increase
is primarily due to the Company's inability to recover indirect costs in the
Company's research and development unit due to funding delays on existing
contracts and the inability to obtain new contracts during the Federal
Government's budget crisis.
RESEARCH AND DEVELOPMENT
The Company increased its expenditure in research and development by $90,700
or 32 percent during the first quarter of fiscal 1996 compared to the first
quarter of fiscal 1995. The increase was primarily attributable to efforts
directed at developing the next generation SIRComm products, and to a lessor
extent, research directed toward process improvements at the Company's other
operations.
GENERAL AND ADMINISTRATIVE
General and administrative expense ("G&A") increased $348,500 or 67% from the
first quarter of fiscal 1995. As a percentage of revenues, G&A increased from
33% for the first quarter of fiscal 1995 to 34% for the first quarter of fiscal
1996. The increase was due to additional labor and benefits associated with the
Company's marketing efforts plus general increases in fixed costs and operating
supplies related to the growth in the Company's infrastructure experienced
during the first quarter of fiscal 1996.
INTEREST INCOME AND INTEREST EXPENSE
Interest income decreased $2,700 from the first quarter of fiscal 1995.
Interest expense increased $34,500 from the first quarter of fiscal 1995. The
increase in interest expense was attributable to the issuance of subordinated
debenture bonds (See Note 3 of Notes to Consolidated Financial Statements) and
from capital lease obligations incurred during fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continued growth had an adverse impact on liquidity and capital
resources. At December 31, 1995, the Company had cash and cash equivalents of
$1,173,100 which reflects a $3,194,000 reduction in the balance from October 1,
1995. Working capital decreased $957,400 from October 1, 1995 to
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$5,424,700 primarily due to the acquisition of capital equipment and facilities
improvements. The current ratio at December 31, 1995 was 2.8:1 compared to 2.7:1
at the end of fiscal 1995. Cash and cash equivalents were primarily used to fund
increases in accounts receivable and inventory balances of $590,800 and
$1,354,500, respectively, and for capital additions.
The Company is continuing to invest in improvements to its facilities and
capital equipment both in California and Vermont. In the first quarter of
fiscal 1996, the Company invested $729,800 in these improvements. The Company
is anticipating the acquisition of certain equipment from IBM during fiscal 1996
related to its cubing line, contingent on the Company securing appropriate
financing (See Note 6 of Notes to Consolidated Financial Statements).
In conjunction with the acquisition of equipment from IBM and the anticipated
demand for additional working capital in the near future, the Company has began
discussions with both investment banking and lending institutions to secure
financing.
Purchase of the IBM cubing line would materially increase both the operating
and financing costs of the Company's Vermont operation. Although the Company
believes that the market exists to justify this pending investment, there can be
no assurances that the Company will be able to effectively penetrate this market
in a timely manner thereby generating the revenues necessary to absorb these
additional costs. Further, at the time of this filing, the Company had not
consummated the financing necessary to purchase the IBM cubing line, and there
can be no assurances that the Company will be successful in obtaining such
financing.
8
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
None.
(b) Reports on Form 8-K.
During the fiscal quarter ended December 31, 1995, the Registrant did not
file any report(s) on Form 8-K.
9
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRVINE SENSORS CORPORATION
----------------------------------------
(Registrant)
Date: February 12, 1996 By: /s/ John J. Stuart, Jr.
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John J. Stuart, Jr.
Chief Financial Officer
(Principal Accounting Officer)
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