<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 June 29, 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 June 29, 1997 there were 21,013,600 shares of Common Stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 29, September 29,
1997 1996
------------- --------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 812,800 $ 1,954,000
Accounts receivable, net of allowances of $10,000 2,056,700 3,023,900
Inventory 4,142,400 4,386,700
Prepaid expenses 161,900 283,600
------------ ------------
Total current assets 7,173,800 9,648,200
------------ ------------
Equipment, furniture and fixtures, net 10,551,600 11,906,700
Other assets 187,400 187,300
------------ ------------
$ 17,912,800 $ 21,742,200
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 4,007,300 $ 2,197,800
Accrued expenses 1,083,500 936,100
Deferred revenues 1,104,500 2,382,600
Notes payable and current portion of long-term debt 511,500 270,600
------------ ------------
Total current liabilities 6,706,800 5,787,100
------------ ------------
Long-term debt 2,432,900 2,809,900
Deferred royalties payable - affiliated company 551,900 355,700
Long-term accrued expenses 183,300 458,300
Commitment to employee retirement plan 397,300 -
Convertible subordinated debentures 400,000 3,400,000
------------ ------------
Minority interest in subsidiary 2,210,200 500,000
------------ ------------
Preferred stock of consolidated subsidiary 118,500 118,500
------------ ------------
Shareholders' Equity:
Preferred stock, $0.01 par value, 500,000 shares authorized;
8,785 shares Series B Convertible Cumulative
Preferred issued and outstanding; aggregate liquidation
preference of $237,200 50 50
4,974 shares Series C Convertible Cumulative
Preferred issued and outstanding; aggregate liquidation
preference of $253,700 50 50
Common stock, $0.01 par value, 40,000,000 shares authorized;
21,013,600 and 18,710,000 shares issued and outstanding 210,100 187,100
Common stock warrants; 319,200 issued and outstanding - -
Paid-in capital 40,315,600 37,331,000
Accumulated deficit (35,613,900) (29,205,500)
------------ ------------
Total shareholders' equity 4,911,900 8,312,700
------------ ------------
$ 17,912,800 $ 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 39 Weeks Ended
---------------------------- ----------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 3,724,600 $ 1,917,700 $10,654,000 $ 6,469,900
Other - - - 72,000
----------- ----------- ----------- -----------
Total revenues 3,724,600 1,917,700 10,654,000 6,541,900
Cost and expenses:
Cost of revenues 4,665,400 3,478,400 13,115,500 8,392,100
General and administrative 708,100 1,016,700 2,441,600 2,912,200
Research and development 476,900 474,600 1,388,800 1,293,500
----------- ----------- ----------- -----------
5,850,400 4,969,700 16,945,900 12,597,800
----------- ----------- ----------- -----------
Loss from operations (2,125,800) (3,052,000) (6,291,900) (6,055,900)
Interest expense (88,300) (152,400) (313,700) (233,000)
Interest income 9,200 49,100 25,500 94,600
----------- ----------- ----------- -----------
Loss before provision
for income taxes (2,204,900) (3,155,300) (6,580,100) (6,194,300)
Provision for income taxes 800 - 2,600 1,800
Minority interest in
loss of subsidiary (51,000) - (174,300) -
----------- ----------- ----------- -----------
Net loss $(2,154,700) $(3,155,300) $(6,408,400) $(6,196,100)
=========== =========== =========== ===========
Net loss per common and
common equivalent share $ (0.10) $ (0.19) $ (0.32) $ (0.38)
=========== =========== =========== ===========
Weighted average number
of shares outstanding 21,013,600 16,990,400 20,287,900 16,341,800
=========== =========== =========== ===========
</TABLE>
See Accompanying condensed Notes to Consolidated Financial Statements.
3
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
39 Weeks Ended
------------------------------
June 29, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 11,621,200 $ 6,754,800
Cash paid to suppliers and employees (13,215,000) (13,541,000)
Interest received 25,500 94,600
Interest paid (313,700) (110,200)
Income taxes paid (2,600) (1,800)
------------ ------------
Net cash used in operating activities $ (1,884,600) $ (6,803,600)
Cash flows from investing activities:
Capital facilities and equipment expenditures (1,012,600) (8,177,300)
------------ ------------
Net cash used in investing activities (1,012,600) (8,177,300)
Cash flows from financing activities:
Proceeds from issuance of minority
interest in subsidiary 1,884,500 -
Proceeds from issuance of convertible
subordinate debentures - 10,330,300
Proceeds from long-term debt - 3,013,200
Principal payments under notes payable
and capital lease obligations (136,100) (194,900)
Proceeds from common stock issued 7,600 506,000
------------ ------------
Net cash provided by financing activities 1,756,000 13,654,600
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,141,200) (1,326,300)
Cash and cash equivalents at beginning of period 1,954,000 4,367,100
------------ ------------
Cash and cash equivalents at end of period $ 812,800 $ 3,040,800
============ ============
Reconciliation of net loss to net cash used in operating activities:
Net loss $ (6,408,400) $ (6,196,100)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization $ 2,367,700 $ 1,506,200
Commitment to employee retirement plan 397,300 168,000
Common stock issued to retirement plan - 327,300
Minority interest in loss of subsidiary (174,300) -
Decrease in accounts receivable 967,200 212,900
Decrease (increase) in inventory 244,300 (5,055,100)
Decrease in prepaid expenses and other assets 121,600 (42,000)
Increase in accounts payable
and accrued expenses 1,956,900 679,300
(Decrease) increase in deferred revenues (1,278,100) 1,595,900
(Decrease) in long-term accrued expenses (275,000) -
Increase in royalties accrued - affiliated company 196,200 -
------------ ------------
Total adjustments 4,523,800 (607,500)
------------ ------------
Net cash used in operating activities $ (1,884,600) $ (6,803,600)
============ ============
Noncash investing and financing activities:
Conversion of debentures to common stock $ 3,000,000 $ 7,900,000
============ ============
Commitment to employee retirement plan $ 397,300 $ 495,300
============ ============
Capitalized lease obligations $ - $ 13,200
============ ============
</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 June 29, 1997 and June 30, 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 June 29, 1997, the
results of its operations for the 39 week periods ended June 29, 1997 and June
30, 1996 and its cash flows for the 39 week periods ended June 29, 1997 and June
30, 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., 3D Microsystems, Inc. and
MicroSensors, Inc. All significant intercompany transactions and balances have
been eliminated in consolidation.
Note 2 - Convertible Subordinated Debentures
During the 39 weeks of fiscal 1997, the Company, at the request of bond
holders, converted $3,000,000 of outstanding 8% Convertible Subordinated
Debentures at varying rates into 2,283,500 shares of the Company's common stock.
With these conversions, all but $400,000 of the original issue of $11.1 million
of these Debentures were retired. In May 1996, the Company had registered the
resale of 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 June 29, 1997, exceeded this
registration by 1,552,500 and the resale of such shares are presently
unregistered. Furthermore, the Company projects that approximately 250,000
additional unregistered shares could be required to convert the remaining
outstanding debentures at June 29, 1997. The Company is currently in the
process of preparing a new registration statement to register the resale of 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 June 1997 (fiscal
1997), the Company's subsidiary, Novalog, Inc. issued, in a private placement to
accredited investors, approximately 2.58 million shares of common stock, which
resulted in a 27 percent minority interest in that subsidiary. The net proceeds
of approximately $2.4 million were added to Novalog's general funds. At June
29, 1997, Novalog had a cash balance of $624,100. These funds may not be used
to retire any portion of Novalog's original debt to the parent.
Note 4 - Bank Loan
The Company remained in compliance with one of the financial covenants of its
long-term bank loan as of June 29, 1997 and received a waiver of the other two
financial covenants as of June 29, 1997. The Company has advised its bank of
the Company's intent to terminate its lease of IBM facilities and to dispose of
5
<PAGE>
related Company-owned equipment employed therein effective September 1997. The
bank has advised the Company that such termination may constitute default of
other provisions of its long-term bank loan should the proceeds from such
equipment disposition not fully retire the principal due on said long-term loan.
In such event the bank would have the right to accelerate the balance due on the
loan.
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 June 29, 1997, the Company had accrued
$551,900 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 third quarter of fiscal
1997 reporting $3,724,600 for the 13 week period. The increase of $1,806,900 or
94 percent greater than the third quarter of fiscal 1996 was primarily
attributable to increased contract revenues at the Company's Advanced Technology
Operation (ATO) and increased product shipments by the Company's Computer
Products Operations (CPO). In the third quarter of fiscal 1997, ATO completed
the negotiations and has begun work on several new contracts which the Company
had been awarded. Third quarter revenues at the Company's Novalog subsidiary
from sales of its serial infrared communications chip (SIRComm), showed minimal
improvement over the two previous quarters of the current fiscal year.
Year to date revenues of $10,654,000 for the 39 week period show an increase
of $4,112,100 or 63 percent greater than last year's comparable period. Both
the ATO and CPO units reported significantly higher revenues for the 39 week
period this year.
6
<PAGE>
Cost of Revenues
Cost of revenues for the third quarter of fiscal 1997 as a percent of
revenues were 125 percent compared to 181 percent in the third quarter of fiscal
1996. The decrease reflects cost reduction measures which included reductions
in staffing and other expenses at both the ATO and CPO units, and improved cost
recovery at ATO.
ATO has put in place various cost reduction measures and, upon receiving
follow-on funding on certain contracts and negotiating additional pending
contract awards, the timing of which events cannot be predicted or assured, will
be in position to recover costs which have currently been expensed.
With the high fixed costs of the CPO operation and the inability to obtain
sufficient product orders to support large-scale continuous manufacturing
operations, the Company, during the quarter ended June 29, 1997, exercised its
right to terminate the Company's lease on manufacturing space inside IBM by
giving the required 120 days notice. The Company intends to vacate these
premises by the end of the fiscal year and to consolidate the manufacturing of
its stacked chip products at its Costa Mesa facilities.
Novalog's cost of revenues are expected to improve in the fourth quarter of
fiscal 1997 with the introduction of newly released products, however there can
be no assurances that unexpected delays or other factors will not impact the
currently anticipated results
Cost of revenues for the 39 week period as a percent of revenues was 123
percent or 5 percentage points lower than the comparable period last year. This
improvement is attributable to the increased shipments at CPO and the cost
reductions previously mentioned.
Research and Development
In the 39 week period, R & D costs of $1,388,800 was $95,300 more than last
year's 39 week period, but as a percentage of revenues represents a reduction of
seven percentage points as a result of the significant increase in revenues.
These R&D costs are primarily associated with new products which the Company
expects to market in the future.
General and Administrative
General and administrative expenses (G&A) in the third quarter of fiscal
1997, were decreased by $308,600 or 34 percentage points compared to the third
quarter of fiscal 1996. In the fiscal 1996 period, the G&A expense of
$1,016,700 represented 53 percent of revenues compared to $708,100 or 19 percent
in the fiscal 1997 period. In the 39 week period, a reduction of $470,600 was
achieved compared to the prior year's comparable period. These decreases in
labor costs and other expenses reflect substantial on-going cost reductions at
the Company's ATO and CPO units.
Interest Expense
Interest expense decreased $64,100 in the 13 week period and increased
$80,700 in the 39 week period compared to the corresponding periods of fiscal
1996. These differences 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). The Convertible Debentures were
issued in February and March 1996 and holders thereof began converting such
Debentures in May 1996, with all but $400,000 of such Debentures being converted
by June 29, 1997.
7
<PAGE>
Net Loss
Net loss for the 13 and 39 week periods, after recognizing the loss
apportionment to minority shareholders in Novalog, Inc., was $2,154,700 and
$6,408,400 respectively. The third quarter loss showed an improvement of
$1,000,600 compared to last year's third quarter. For the 39 week period the
loss was $212,300 greater than last year's comparable period.
Liquidity and Capital Resources
The primary uses of cash and cash equivalents during the 13 and 39 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 June 1997 (fiscal
1997), the Company's subsidiary, Novalog, Inc. issued, in a private placement to
accredited investors, approximately 2.58 million shares of common stock, which
resulted in a 27 percent minority interest in that subsidiary. The net proceeds
of approximately $2.4 million were added to Novalog's general funds. At June
29, 1997, Novalog had cash on hand of $624,100. These funds may not be used to
retire any portion of Novalog's original debt to the parent.
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 June 29, 1997
and obtained a waiver of the other two as of June 29, 1997.
At June 29, 1997, the Company had cash and cash equivalents of $812,800,
working capital of $467,000 and a current ratio of 1.1 to 1. The Company
anticipates that the existing working capital and pre-payments from customers
may be sufficient to meet its cash requirements in the immediate future.
At June 29, 1997, the Company's funded backlog was approximately $5.3 million
compared to $9.2 million at June 30, 1996. In addition, existing contracts
include amounts of unfunded backlog which typically is funded when the
previously funded amounts have been expended.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
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: August 13, 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 THE
COMPANY'S THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 812,800
<SECURITIES> 0
<RECEIVABLES> 2,056,700
<ALLOWANCES> 10,000
<INVENTORY> 4,142,400
<CURRENT-ASSETS> 7,173,800
<PP&E> 19,622,300
<DEPRECIATION> 9,070,700
<TOTAL-ASSETS> 17,912,800
<CURRENT-LIABILITIES> 6,706,800
<BONDS> 2,832,900
100
0
<COMMON> 210,100
<OTHER-SE> 4,701,700
<TOTAL-LIABILITY-AND-EQUITY> 17,912,800
<SALES> 10,654,000
<TOTAL-REVENUES> 10,654,000
<CGS> 13,115,500
<TOTAL-COSTS> 15,557,100
<OTHER-EXPENSES> 1,388,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 313,700
<INCOME-PRETAX> (6,580,100)
<INCOME-TAX> 2,600
<INCOME-CONTINUING> (6,408,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,408,400)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
