<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 December 29, 1996
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 December 29, 1996 there were 19,612,700 shares of Common Stock
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 29, September 29,
1996 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,734,600 $ 1,954,000
Accounts receivable, net of allowances of $10,000 4,172,200 3,023,900
Inventory 4,423,900 4,386,700
Prepaid expenses 171,400 283,600
------------ -------------
Total current assets 10,502,100 9,648,200
------------ -------------
Equipment, furniture and fixtures, net 11,593,800 11,906,700
Other assets 181,800 187,300
------------ -------------
$22,277,700 $ 21,742,200
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,927,500 $ 2,197,800
Accrued expenses 1,075,900 936,100
Deferred revenues 2,129,500 2,382,600
Notes payable and current portion of long-term debt 338,700 270,600
------------ -------------
Total current liabilities 6,471,600 5,787,100
------------ -------------
Long-term debt 2,720,300 2,809,900
Deferred royalties payable - affiliated company 388,200 355,700
Long-term accrued expenses 366,600 458,300
Commitment to employee retirement plan 88,600 -
Convertible subordinated debentures 1,850,000 3,400,000
------------ ------------
Minority interest in subsidiary 1,932,300 500,000
------------ ------------
Preferred stock of consolidated subsidiary 118,500 118,500
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SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 500,000 shares authorized;
8,833 shares Series B Convertible Cumulative
Preferred issued and outstanding; aggregate liquidation
preference of $238,500 50 50
5,178 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;
19,612,700 and 18,710,000 shares issued and outstanding 196,100 187,100
Common stock warrants; 239,200
issued and outstanding - -
Paid-in capital 38,872,000 37,331,000
Accumulated deficit (30,726,600) (29,205,500)
------------ ------------
Total shareholders' equity 8,341,600 8,812,700
------------ ------------
$22,277,700 $21,742,200
============ ============
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
2
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IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------------
December 29, December 31,
1996 1995
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<S> <C> <C>
Revenues $ 3,675,100 $ 2,506,500
Other - 72,000
----------- -----------
Total revenues 3,675,100 2,578,500
Costs and expenses:
Cost of revenues 3,837,800 2,613,600
General and administrative 852,900 869,500
Research and development 431,700 372,400
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5,122,400 3,855,500
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Loss from operations (1,447,300) (1,277,000)
Interest expense (126,900) (34,500)
Interest income 2,900 39,200
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Loss before income taxes and
minority interest in subsidiary (1,571,300) (1,272,300)
Provision for income taxes 200 900
Minority interest in
loss of subsidiary (50,400) -
----------- -----------
Net loss $(1,521,100) $(1,273,200)
=========== ===========
Net loss per common and
common equivalent share $ (0.08) $ (0.08)
=========== ===========
Weighted average number
of shares outstanding 19,313,400 15,846,700
=========== ===========
</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
--------------------------------------------------------
December 29, 1996 December 31, 1995
---------------------------- --------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 2,526,800 $ 1,987,700
Cash paid to suppliers and employees (3,678,600) (4,934,000)
Interest received 2,900 39,200
Interest paid (80,100) (7,300)
Income taxes paid (200) (900)
------------ ------------
Net cash used in operating activities $(1,229,200) $(2,915,300)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital facilities and equipment expenditures (451,300) (729,800)
------------ ------------
Net cash used in investing activities (451,300) (729,800)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of minority
interest in subsidiary 1,482,600 -
Proceeds from issuance of convertible
subordinate debentures - 450,000
Principal payments under notes payable
and capital lease obligations (21,500) (67,000)
Proceeds from common stock issued - 68,100
------------ ------------
Net cash provided by financing activities 1,461,100 451,100
------------ ------------
Net decrease in cash and cash equivalents (219,400) (3,194,000)
Cash and cash equivalents at beginning of period 1,954,000 4,367,100
------------ ------------
Cash and cash equivalents at end of period $ 1,734,600 $ 1,173,100
============ ============
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Net loss $(1,521,100) $(1,273,200)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization $ 764,200 $ 394,700
Commitment to employee retirement plan 88,600 149,800
Minority interest in loss of subsidiary (50,300) -
(Increase) in accounts receivable (1,148,300) (590,800)
(Increase) in inventory (37,200) (1,354,500)
Decrease in prepaid expenses and other assets 117,700 26,900
Increase (decrease) in accounts payable
and accrued expenses 869,500 (327,600)
(Decrease) increase in deferred revenues (253,100) 59,400
(Decrease) in accrued rent (91,700) -
Increase in royalties accrued - affiliated company 32,500 -
------------ ------------
Total adjustments 291,900 (1,642,100)
------------ ------------
Net cash used in operating activities $(1,229,200) $(2,915,300)
============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of debentures to common stock $ 1,550,000 $ -
============ ============
Commitment to employee retirement plan $ 88,600 $ 149,800
============ ============
</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 December 29, 1996 and December
31, 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
29, 1996, the results of its operations for the 13 week periods ended December
29, 1996 and December 31, 1995 and its cash flows for the 13 week periods ended
December 29, 1996 and December 31, 1995. 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"), CPO 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 quarter of fiscal 1997, the Company, at the request of bond
holders, converted $1,550,000 of outstanding Debentures at varying rates into
902,700 shares of the Company's common stock. Approximately 171,800 of these
shares have not been registered as of this date. In May 1996, the Company
registered 2,997,000 shares which the Company then believed would be sufficient
to cover the conversion of all $11.1 million of the 8% Convertible Subordinated
Debentures, which had been issued in February and March 1996. Due to the
decline in the price of the Company's stock all of the registered shares were
issued upon conversions by bond holders and as of December 29, 1996, the
aforementioned 171,800 shares have not been registered. Furthermore the Company
projects that approximately 1,675,000 additional unregistered shares could be
required to convert the remaining $1,850,000 of outstanding debentures at
December 29, 1996.
NOTE 3 - ISSUANCE OF MINORITY INTEREST IN SUBSIDIARY
During the period September through December 1996, 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 was in compliance with two of the three financial covenants of
its bank loan as of December 29, 1996 and received a waiver of the third
covenant as of December 29, 1996.
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
5
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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 December 29,
1996, the Company had accrued $388,200 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 risk 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 achieved strong revenues during the first quarter of fiscal 1997.
The increase of $1,097,600 or 43 percent in revenues from the first quarter of
fiscal 1996 was primarily attributable to the funding of follow-on and new
contracts received from U.S. Government's military agencies and subcontracts
from major Government contractors. During most of fiscal 1996, the Company's
Advanced Technology Operation (ATO) was hindered by delays in contract
procurements and funding as a result of the 1996 Federal Government's budget
crisis. In the first quarter of fiscal 1997, the Company was finally awarded a
follow-on contract in the amount of $1.5 million with funding of $1.3 million
which the Company had anticipated receiving in fiscal 1996. The Company was
also awarded three additional contracts in the first quarter of fiscal 1997. At
the Company's Computer Products Operations (CPO), increased product shipments
also contributed to the increase in revenues, however, unit selling prices
declined due to a drop in Dynamic Random Access Memory (DRAM) chip prices. The
Company's Novalog subsidiary reported an increase in product shipments of its
serial infrared communications chip (SIRComm), however, revenues were slightly
lower than the corresponding year-earlier period due to competitive price
pressure.
COST OF REVENUES
Cost of revenues as a percentage of revenues increased from 101 percent for
the first quarter of fiscal 1996 to 104 percent for fiscal 1997. The increase
was attributable to CPO's inability to absorb its indirect costs structure and
this condition will continue until full manufacturing capability is achieved or
its costs are reduced, of which there can be no assurances. At Novalog, the
recent slow down in the personal computer market and increased competition
impacted its ability to sustain its strong gross margin. ATO was able to
control its indirect costs thereby contributing to the overall percentage
decrease in cost of revenues.
6
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RESEARCH AND DEVELOPMENT
The Company increased its expenditure in research and development by $59,300
or 16 percent during the first quarter of fiscal 1997. The increases were
primarily attributable to efforts directed at developing the next generation
SIRComm products and design efforts aimed at developing new products at CPO.
GENERAL AND ADMINISTRATIVE
General and administrative expense (G&A) decreased $16,600 or 2 percent from
the first quarter of fiscal 1996. The decrease was primarily due to maintaining
a relatively level administrative infrastructure as the year earlier period.
INTEREST EXPENSE/INTEREST INCOME
Interest expense increased $92,400 from the first quarter of fiscal 1996.
Interest income decreased $36,300 from the first quarter of fiscal 1996. The
increase in interest expense was primarily attributable to interest payable on
the Company's $3.0 million bank loan established in April 1996. Interest income
decreased as a result of less cash and cash equivalents held in deposits during
fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The primary uses of cash and cash equivalents during the first quarter of
fiscal 1997 were to fund the Company's net loss, working capital requirements
and capital facilities and equipment expenditures. The increases in accounts
receivable and accounts payable resulted from large sales and purchases made
during the month of December 1996 and are expected to decrease in the next
quarter. The Company has reduced the rate of investment in improvements to its
facilities and capital equipment both in California and Vermont and anticipates
the current rate of capital expenditures to remain low in the immediate future.
During the period September through December 1996, 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.
In May 1996, the Company negotiated a loan from a bank in the amount of $3
million. The terms of the loan requires the Company to meet certain covenants.
The Company was in compliance with two of the three covenants at December 29,
1996 and obtained a waiver of the third as of December 29, 1996.
At December 29, 1996, the Company had cash and cash equivalents of
$1,734,600, working capital of $4,030,500 and a current ratio of 1.6 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 December 29, 1996, the Company's funded backlog was approximately $5.7
million compared to $4.5 million at December 31, 1995. In addition, existing
contracts include a small amount of unfunded backlog which typically is funded
when the previously funded amounts have been expended.
7
<PAGE>
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: February 10, 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> 3-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> DEC-29-1996
<CASH> 1,734,600
<SECURITIES> 0
<RECEIVABLES> 4,182,200
<ALLOWANCES> 10,000
<INVENTORY> 4,423,900
<CURRENT-ASSETS> 10,502,100
<PP&E> 19,061,000
<DEPRECIATION> 7,467,200
<TOTAL-ASSETS> 22,277,700
<CURRENT-LIABILITIES> 6,471,600
<BONDS> 4,570,300
100
0
<COMMON> 196,100
<OTHER-SE> 8,145,400
<TOTAL-LIABILITY-AND-EQUITY> 22,277,700
<SALES> 3,675,100
<TOTAL-REVENUES> 3,675,100
<CGS> 3,837,800
<TOTAL-COSTS> 4,690,700
<OTHER-EXPENSES> 431,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126,900
<INCOME-PRETAX> (1,571,300)
<INCOME-TAX> 200
<INCOME-CONTINUING> (1,521,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,521,100)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
