<PAGE>
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 March 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to __________
Commission file number 1-8402
------
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
----- -------
As of March 30, 1997 there were 20,836,100 shares of Common Stock
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 30, September 29,
1997 1996
------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,566,500 $ 1,954,000
Accounts receivable, net of allowances of $10,000 2,462,700 3,023,900
Inventory 4,771,000 4,386,700
Prepaid expenses 150,700 283,600
------------ ------------
Total current assets 8,950,900 9,648,200
------------ ------------
Equipment, furniture and fixtures, net 11,109,700 11,906,700
Other assets 192,900 187,300
------------ ------------
$ 20,253,500 $ 21,742,200
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,003,600 $ 2,197,800
Accrued expenses 1,139,600 936,100
Deferred revenues 2,660,700 2,382,600
Notes payable and current portion of long-term debt 486,600 270,600
------------ ------------
Total current liabilities 7,290,500 5,787,100
------------ ------------
Long-term debt 2,553,200 2,809,900
Deferred royalties payable - affiliated company 479,000 355,700
Long-term accrued expenses 275,000 458,300
Commitment to employee retirement plan 219,000 -
Convertible subordinated debentures 550,000 3,400,000
------------ ------------
Minority interest in subsidiary 1,859,200 500,000
------------ ------------
Preferred stock of consolidated subsidiary 118,500 118,500
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 500,000 shares authorized;
8,832 shares Series B Convertible Cumulative
Preferred issued and outstanding; aggregate liquidation
preference of $238,500 50 50
5,179 shares Series C Convertible Cumulative
Preferred issued and outstanding; aggregate liquidation
preference of $264,100 50 50
Common stock, $0.01 par value, 40,000,000 shares authorized;
20,836,100 and 18,710,000 shares issued and outstanding 208,400 187,100
Common stock warrants; 239,200
issued and outstanding - -
Paid-in capital 40,159,800 37,331,000
Accumulated deficit (33,459,200) (29,205,500)
------------ ------------
Total shareholders' equity 6,909,100 8,312,700
------------ ------------
$ 20,253,500 $ 21,742,200
============ ============
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
2
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
---------------------------- -----------------------------
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 3,254,300 $ 2,045,700 $ 6,929,400 $ 4,552,200
Other - - - 72,000
----------- ----------- ----------- -----------
Total revenues 3,254,300 2,045,700 6,929,400 4,624,200
Cost and expenses:
Cost of revenues 4,612,300 2,300,100 8,450,100 4,913,700
General and administrative 880,600 1,026,000 1,733,500 1,895,500
Research and development 480,200 446,500 911,900 818,900
----------- ----------- ----------- -----------
5,973,100 3,772,600 11,095,500 7,628,100
----------- ----------- ----------- -----------
Loss from operations (2,718,800) (1,726,900) (4,166,100) (3,003,900)
Interest expense (98,500) (46,100) (225,400) (80,600)
Interest income 13,400 6,300 16,300 45,500
----------- ----------- ----------- -----------
Loss before provision
for income taxes (2,803,900) (1,766,700) (4,375,200) (3,039,000)
Provision for income taxes 1,600 900 1,800 1,800
Minority interest in
loss of subsidiary (72,900) - (123,300) -
----------- ----------- ----------- -----------
Net loss $(2,732,600) $(1,767,600) $(4,253,700) $(3,040,800)
=========== =========== =========== ===========
Net loss per common and
common equivalent share $ (0.13) $ (0.11) $ (0.21) $ (0.19)
=========== =========== =========== ===========
Weighted average number
of shares outstanding 20,506,700 16,183,200 19,916,700 16,015,700
=========== =========== =========== ===========
</TABLE>
See Accompanying condensed Notes to Consolidated Financial Statements.
3
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
26 Weeks Ended
-------------------------------
March 30, 1997 March 31, 1996
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 7,490,600 $ 4,860,600
Cash paid to suppliers and employees (8,311,500) (8,660,500)
Interest received 16,300 45,500
Interest paid (261,200) (78,200)
Income taxes paid (1,800) (1,800)
----------- -----------
Net cash used in operating activities $(1,067,600) $(3,834,400)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital facilities and equipment expenditures (761,800) (1,260,500)
----------- -----------
Net cash used in investing activities (761,800) (1,260,500)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of minority
interest in subsidiary 1,482,600 -
Proceeds from issuance of convertible
subordinate debentures - 10,330,300
Proceeds from long-term debt - 13,200
Principal payments under notes payable and capital lease obligations (40,700) (138,800)
Proceeds from common stock issued - 227,300
----------- -----------
Net cash provided by financing activities 1,441,900 10,432,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (387,500) 5,337,100
Cash and cash equivalents at beginning of period 1,954,000 4,367,100
----------- -----------
Cash and cash equivalents at end of period $ 1,566,500 $ 9,704,200
=========== ===========
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Net loss $(4,253,700) $(3,040,800)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization $ 1,558,800 $ 840,600
Commitment to employee retirement plan 219,000 314,900
Minority interest in loss of subsidiary (123,300) -
Decrease in accounts receivable 561,200 236,400
(Increase) in inventory (384,300) (2,768,100)
Decrease in prepaid expenses and other assets 127,300 20,200
Increase (decrease) in accounts payable
and accrued expenses 1,009,300 (320,800)
Increase in deferred revenues 278,100 883,200
(Decrease) in accrued rent (183,300) -
Increase in royalties accrued - affiliated company 123,300 -
----------- -----------
Total adjustments 3,186,100 (793,600)
----------- -----------
Net cash used in operating activities $(1,067,600) $(3,834,400)
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of debentures to common stock $ 2,850,000 $ -
=========== ===========
Commitment to employee retirement plan $ 219,000 $ 314,900
=========== ===========
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
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
1996 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 March 30, 1997 and March 31,
1996 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 March 30, 1997, the
results of its operations for the 26 week periods ended March 30, 1997 and March
31, 1996 and its cash flows for the 26 week periods ended March 30, 1997 and
March 31, 1996. Certain reclassifications have been made to prior year's
financial statements to conform to the current year presentation.
The consolidated financial statements include the accounts of Irvine Sensors
Corporation and its subsidiaries Carson Alexiou Corporation ("CAC"), Novalog,
Inc. ("Novalog"), 3D Microelectronics, Inc. and 3D Microsystems, Inc. All
significant intercompany transactions and balances have been eliminated in
consolidation.
NOTE 2 - CONVERTIBLE SUBORDINATED DEBENTURES
During the first 26 weeks of fiscal 1997, the Company, at the request of bond
holders, converted $2,850,000 of outstanding 8% Convertible Subordinated
Debentures at varying rates into 2,126,100 shares of the Company's common stock.
With these conversions, all but $550,000 of the original issue of $11.1 million
of these Debentures were retired. In May 1996, the Company had registered
2,997,000 shares of common stock which the Company then believed would be
sufficient to cover the conversion of the entire $11.1 million series of
Debentures, which had been issued in February and March 1996. However, due to
the decline in the price of the Company's common stock, the number of shares
issued pursuant to Debenture conversions through March 30, 1997, exceeded this
registration by 1,395,100 and such shares are presently unregistered.
Furthermore, the Company projects that approximately 400,000 additional
unregistered shares could be required to convert the remaining outstanding
debentures at March 30, 1997. The Company is currently in the process of
preparing a new registration statement to register the additional shares issued
and issuable pursuant to Debenture conversions.
NOTE 3 - ISSUANCE OF MINORITY INTEREST IN SUBSIDIARY
During the period September 1996 (fiscal 1996) through December 1996 (fiscal
1997), the Company's subsidiary, Novalog, Inc. issued, in a private placement to
accredited investors, approximately 2.1 million shares of common stock, which
resulted in a 23 percent minority interest in that subsidiary. The net proceeds
of approximately $2 million were added to Novalog's general funds.
NOTE 4 - BANK LOAN
The Company remained in compliance with one of the financial covenants of its
bank loan as of March 30, 1997 and received a waiver of the other two covenants
as of March 30, 1997.
5
<PAGE>
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 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 March 30, 1997, the Company had
accrued $479,000 in deferred royalties payable to RDL.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
- -------------
Except for historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
forward-looking statements contained herein are subject to certain risks and
uncertainties, including such factors, among others, as the pace at which new
markets develop, the ability of the Company to introduce new products and ramp
up manufacturing in a timely manner while controlling its operating expenses and
the response of competitors, many of whom are bigger and better financed than
the Company. In addition, the scope of the Company's growth plan may introduce
unanticipated risks and financial requirements. The availability of external
financing for the Company's plan cannot be assured and is subject to numerous
factors including those unrelated to the Company's performance such as economic
and market conditions. Further, the Company's financial performance prior to
substantial growth in revenues may not permit additional equity financing and
may place at risk the continuation of its long-term debt financing because of
inability to achieve financial covenants. Accordingly, investors are advised to
assess forward-looking statements contained herein with caution. Additional
information on various risks and uncertainties potentially affecting the
Company's results are discussed below and are contained in publicly filed
disclosures available through the Securities Exchange Commission EDGAR database
(http://www.sec.gov) or from the Company's Investor Relations.
RESULTS OF OPERATIONS
REVENUES
The Company continued its revenue growth during the second quarter of fiscal
1997 reporting $3,254,300 for the 13 week period. The increase of $1,208,600 or
59 percent in revenues over the second quarter of fiscal 1996 was primarily
attributable to increased product shipments by the Company's Computer Products
Operations (CPO). In the second quarter of fiscal 1997, the Company's Advanced
Technology Operation (ATO) experienced delays in finalizing contracts which the
Company has been awarded. Second quarter revenues at the Company's Novalog
subsidiary from sales of its serial infrared communications chip (SIRComm),
remained essentially at the same level as the first quarter of the current
fiscal year.
Year to date revenues of $6,929,400 for the 26 week period show an increase
of $2,305,200 or 50 percent greater than last year's comparable period. Both
the ATO and CPO units reported significantly higher revenues for the 26 week
period this year.
COST OF REVENUES
Cost of revenues as a percentage of revenues increased from 112 percent in
the second quarter of fiscal 1996 to 142 percent in the second quarter of fiscal
1997. The increase continues to be attributable to CPO's inability to recover
its indirect costs through improved gross margins and this condition will
continue until full manufacturing capability is achieved or its costs are
reduced, of which there can be no assurances. Unless this condition is improved
in the immediate future, the Company may exercise its right to terminate the
Company's lease on manufacturing space inside IBM upon 120 days notice.
Novalog's cost of revenues are expected to improve materially in the second half
of the fiscal year with the introduction of
6
<PAGE>
new products, although there can be no assurance that unexpected delays or other
factors could not impact the currently anticipated results. ATO has put in place
various cost reduction measures and upon finalization of pending contract
awards, the timing of which cannot be predicted, will be in position to recover
costs which have currently been expensed.
Cost of revenues for the 26 week period as a percent of revenues was 122
percent or 16 percentage points higher than the comparable period last year.
Again, this is attributable to the previously mentioned condition at CPO.
RESEARCH AND DEVELOPMENT
The Company increased its expenditures in research and development by $33,700
in the second quarter of fiscal 1997 compared to the same period last year.
However, as a percent of revenues these costs decreased from 22 percent in the
comparable period last year to 15 percent in this year's second quarter. In the
26 week period, R & D costs of $911,900 was $93,000 more than last year's 26
week period , but as a percentage of revenues represents a reduction of five
percentage points. These R&D costs are primarily related to the development of
new products at all three of the company's operating units.
GENERAL AND ADMINISTRATIVE
General and administrative expenses (G&A) in the second quarter of fiscal
1997, were decreased by $145,400 or 23 percentage points compared to the second
quarter of fiscal 1996, when the expense of $1,026,000 represented 50 percent of
revenues compared to 27 percent in the second quarter this year. In the 26 week
period, a reduction of $162,000 was achieved compared to the prior year's
comparable period. These decreases reflect on-going cost reductions at the
Company's ATO and CPO units.
INTEREST EXPENSE
Interest expense increased $52,400 and $144,800 for the 13 and 26 week
periods respectively, compared to the corresponding periods of fiscal 1996.
These increases are primarily attributable to interest payable on the Company's
$3.0 million bank loan established in April 1996, and interest payable on the
Convertible Debentures (see Note 2).
NET LOSS
Net loss for the 13 and 26 week periods, after recognizing the loss
apportionment to minority shareholders in Novalog, Inc., was $2,732,600 and
$4,253,700 respectively, or increases of $965,000 and $1,212,900 over the losses
reported in the corresponding periods of last year.
LIQUIDITY AND CAPITAL RESOURCES
The primary uses of cash and cash equivalents during the 13 and 26 week
periods of fiscal 1997 were to fund the Company's net loss, working capital
requirements and capital facilities and equipment expenditures. The Company has
reduced the rate of investment in improvements to its facilities and capital
equipment both in California and Vermont and anticipates that the rate of
capital expenditures will remain low in the immediate future.
During the period September 1996 (fiscal 1996) through December 1996 (fiscal
1997), the Company's subsidiary, Novalog, Inc. issued, in a private placement to
accredited investors, approximately 2.1 million shares of common stock, which
resulted in a 23 percent minority interest in that subsidiary. The net proceeds
of approximately $2 million were added to Novalog's general funds.
7
<PAGE>
In May 1996, the Company negotiated a loan from a bank in the amount of $3
million. The terms of the loan require the Company to meet certain covenants.
The Company remained in compliance with one of the covenants at March 30, 1997
and obtained a waiver of the other two as of March 30, 1997.
At March 30, 1997, the Company had cash and cash equivalents of $1,566,500,
working capital of $1,660,400 and a current ratio of 1.2 to 1. The Company
anticipates that the existing working capital and its ability to obtain pre-
payments from customers will be sufficient to meet its cash requirements for the
immediate future.
At March 30, 1997, the Company's funded backlog was approximately $6.6
million compared to $5.6 million at March 31, 1996. In addition, existing
contracts include a small amount of unfunded backlog which typically is funded
when the previously funded amounts have been expended.
At the annual meeting of shareholders, held on February 28, 1997,
shareholders were asked to approve a possible amendment to the Company's
Certificate of Incorporation giving the Board of Directors discretionary
authorization to effect a reverse stock split in the range of 2-to-1 and 5-to-1.
Although the Company has no current intent to effectuate such a reverse stock
split, the matter was placed before Shareholders to give the Company the ability
to respond to proposed new Nasdaq listing requirements, if required. The
shareholders approved this proposal as reported in Part II, item 4 hereunder.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------
The Company's annual meeting of shareholders was held on February
28, 1997 pursuant to notice duly given to all shareholders on the record date
of December 20, 1996. Proxies for the meeting were solicited pursuant to
Regulation 14 of the Securities Exchange Act of 1934.
The shareholders approved a possible amendment to the Company's Certificate
of Incorporation to effect a reverse stock split of the Common Stock of between
2-to-1 and 5-to-1, in the discretion of the Board of Directors. There were
14,532,883 votes in favor of the proposal, 1,872,202 negative votes, 148,949
abstentions and 14,000 broker non-votes.
The shareholders also ratified a proposal appointing Price Waterhouse LLP
to continue as the Company's independent accountants for the fiscal year 1997.
There were 15,931,993 votes in favor of the proposal, 555,176 negative votes,
80,865 abstentions and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRVINE SENSORS CORPORATION
-------------------------------------------
(Registrant)
Date: April 25, 1997 By: /s/ John J. Stuart, Jr.
-------------------------------------------
John J. Stuart, Jr.
Chief Financial Officer
(Principal Accounting Officer)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from first
quarter 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 1,566,500
<SECURITIES> 0
<RECEIVABLES> 2,472,700
<ALLOWANCES> 10,000
<INVENTORY> 4,771,000
<CURRENT-ASSETS> 8,950,900
<PP&E> 19,371,500
<DEPRECIATION> 8,261,800
<TOTAL-ASSETS> 20,253,500
<CURRENT-LIABILITIES> 7,290,500
<BONDS> 3,103,200
100
0
<COMMON> 208,400
<OTHER-SE> 6,700,600
<TOTAL-LIABILITY-AND-EQUITY> 20,253,500
<SALES> 6,929,400
<TOTAL-REVENUES> 6,929,400
<CGS> 8,450,100
<TOTAL-COSTS> 10,183,600
<OTHER-EXPENSES> 911,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225,400
<INCOME-PRETAX> (4,375,200)
<INCOME-TAX> 1,800
<INCOME-CONTINUING> (4,253,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,253,700)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
