<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 28, 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 December 28, 1997 there were 22,490,800 shares of Common Stock
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
IRVINE SENSORS CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
December 28, 1997
---------------------------
Pro Forma September 28,
(Note 7) Actual 1997
------------ ------------ -------------
<S> <C> <C> <C>
Assets
Current Assets:
Cash $ 3,992,900 $ 1,489,000 $ 1,639,300
Accounts receivable, net of allowances of $10,000 1,299,800 1,299,800 1,237,700
Inventory 2,685,400 2,685,400 2,577,300
Prepaid expenses 515,500 128,500 1,182,900
------------ ------------ ------------
Total current assets 8,493,600 5,602,700 6,637,200
------------ ------------ ------------
Equipment, furniture and fixtures, net 2,406,700 2,406,700 2,775,800
Other assets 35,500 35,500 36,300
------------ ------------ ------------
$ 10,935,800 $ 8,044,900 $ 9,449,300
============ ============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 2,674,800 $ 2,674,800 $ 4,370,800
Accrued expenses 671,700 671,700 684,700
Deferred revenues - - 106,100
Notes payable and current portion of long term debt 1,011,100 1,011,100 2,234,000
------------ ------------ ------------
Total current liabilities 4,357,600 4,357,600 7,395,600
------------ ------------ ------------
Long term debt 93,200 93,200 593,200
Deferred royalties payable - affiliated company 624,500 624,500 613,800
Commitment to employee retirement plan - 113,000 -
Convertible subordinated debentures - - 250,000
------------ ------------ ------------
Minority interest in subsidiary 3,360,000 3,360,000 3,418,100
------------ ------------ ------------
Preferred stock of consolidated subsidiary 118,500 118,500 118,500
------------ ------------ ------------
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 50
5,178 shares Series C Convertible Cumulative Preferred
issued and outstanding; aggregate liquidation
preference of $264,100 50 50 50
37,750, 13,000, and no shares Series D Convertible
Preferred issued and outstanding 400 100 -
Common Stock, $0.01 par value, 40,000,000 shares authorized:
23,193,300, 22,490,800 and 21,541,300 shares
issued and outstanding 231,900 224,900 215,400
Common Stock warrants, 19,200, 239,200, and 239,200
issued and outstanding - - -
Paid-in capital 51,545,700 48,549,100 46,424,100
Accumulated deficit (49,396,100) (49,396,100) (49,579,500)
------------ ------------ ------------
Total shareholders' equity 2,382,000 (621,900) (2,939,900)
------------ ------------ ------------
$ 10,935,800 $ 8,044,900 $ 9,449,300
============ ============ ============
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
2
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
13 Weeks Ended
---------------------------
December 28, December 29,
1997 1996
------------ ------------
<S> <C> <C>
Revenues $ 2,167,900 $ 3,675,100
Other - -
----------- -----------
Total revenues 2,167,900 3,675,100
Costs and expenses:
Cost of revenues 2,329,400 3,837,800
General and administrative 692,800 852,900
Research and development 138,700 431,700
----------- -----------
3,160,900 5,122,400
----------- -----------
Loss from operations (993,000) (1,447,300)
Interest expense (75,100) (126,900)
Interest income 5,700 2,900
----------- -----------
Loss before minority interest and income taxes (1,062,400) (1,571,300)
Minority interest in loss of subsidiary (99,900) (50,400)
Provision for income taxes 200 200
----------- -----------
Loss before extraordinary item (962,700) (1,521,100)
----------- -----------
Extraordinary item - debt extinguishment 1,146,100 -
----------- -----------
Net income (loss) $ 183,400 $(1,521,100)
=========== ===========
Basic and Diluted Earnings Per Share:
Loss before extraordinary item $ (0.04) $ (0.08)
----------- -----------
Extraordinary item $ 0.05 $ -
----------- -----------
Net income (loss) $ 0.01 $ (0.08)
=========== ===========
Weighted average number of shares outstanding 21,900,200 19,313,400
=========== ===========
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------
December 28, December 29,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,999,000 $ 2,526,800
Cash paid to suppliers and employees (2,261,400) (3,678,600)
Interest received 5,700 2,900
Interest paid (75,100) (80,100)
Income taxes paid (200) (200)
----------- -----------
Net cash used in operating activities $ (332,000) $(1,229,200)
Cash flows from investing activities:
Equipment disposal 37,800 -
Capital facilities and equipment expenditures (17,800) (451,300)
----------- -----------
Net cash used in investing activities 20,000 (451,300)
Cash flows from financing activities:
Proceeds from issuance of preferred shares 1,122,900 -
Common stock issued for services 261,700 -
Principal payments under notes payable
and capital lease obligations (1,222,900) (21,500)
Proceeds from issuance of minority
interest in subsidiary - 1,482,600
----------- -----------
Net cash provided by financing activities 161,700 1,461,100
----------- -----------
Net decrease in cash and cash equivalents (150,300) (219,400)
Cash and cash equivalents at beginning of period 1,639,300 1,954,000
----------- -----------
Cash and cash equivalents at end of period $ 1,489,000 $ 1,734,600
=========== ===========
Reconciliation of net loss to net cash used
in operating activities:
Net income (loss) $ 183,400 $(1,521,100)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization $ 349,100 $ 764,200
Commitment to employee retirement plan 113,000 88,600
Minority interest in loss of subsidiary (58,100) (50,300)
(Increase) in accounts receivable (62,100) (1,148,300)
(Increase) in inventory (108,100) (37,200)
Decrease in prepaid expenses and other assets 1,055,200 117,700
Increase (decrease) in accounts payable
and accrued expenses (1,709,000) 869,500
(Decrease) increase in deferred revenues (106,100) (253,100)
(Decrease) in accrued rent - (91,700)
Increase in royalties accrued -
affiliated company 10,700 32,500
----------- -----------
Total adjustments 515,400 291,900
----------- -----------
Net cash used in operating activities $ (332,000) $(1,229,200)
=========== ===========
Noncash investing and financing activities:
Principal payment of note payable by
issuance of common stock $ 500,000 $ -
=========== ===========
Conversion of debentures to common stock $ 250,000 $ 1,550,000
=========== ===========
Commitment to employee retirement plan $ 113,000 $ 88,600
=========== ===========
</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
1997 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 28, 1997 and December
29, 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 December
28, 1997, the results of its operations for the 13 week periods ended December
28, 1997 and December 29, 1996 and its cash flows for the 13 week periods ended
December 28, 1997 and December 29, 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"), MicroSensors, Inc. ("MSI"), 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 1998, the Company, forced conversion of
the remaining $250,000 of outstanding 8% Convertible Subordinated Debentures
into 100,000 shares of the Company's common stock. In May 1996, the Company had
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. However, due to
the decline in the price of the Company's common stock, the number of shares
issued upon conversion of all the Debentures, including the aforementioned
100,000 shares, exceeded the number of shares previously registered. In January
1998, the Company filed a registration statement which included the resale of
1,114,810 unregistered shares issued upon conversion of the 1996 Debentures.
Note 3 - Bank Loan
During the three month period ended December 28, 1997, the Company entered
into a Forbearance Agreement with the Company's lending Bank to redefine the
repayment terms of the note payable, following the sale of the related
collateral. Under the new terms of the loan, the Company paid $1,229,900 of the
principal balance, and an additional $500,000 was satisfied by issuing 550,000
shares of common stock to the lender. These shares have been included in the
January 1998 registration statement referred to in Note 2.
Note 4 - 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 December 28, 1997, the Company had
accrued $624,000 in deferred royalties payable to RDL.
5
<PAGE>
Note 5 - Series D Convertible Preferred Units
As referred to in the Company's Annual Report on Form 10-K for fiscal 1997
(see "Management's Discussion of Liquidity, Capital Resources and Impact of
Changing Prices"), the Company began the sale of Series D Convertible Preferred
Stock Units in a private placement to certain accredited investors in December
1997 and continued to accept subscriptions thereto through January 2, 1998. The
Company issued an aggregate of 13,000 Units at a price of $100.00 per Unit in
December 1997 and the net proceeds of $1,092,500 from the sale of these
securities have been added to the Company's general funds.
The Series D Convertible Preferred Stock Units consist of one share of
Convertible Preferred Stock, plus one five-year Warrant to purchase one share of
common stock of Novalog, Inc., a subsidiary of the Company and, one five-year
Warrant to purchase one share of common stock of Microsensors Inc., a wholly-
owned subsidiary of the Company. Each share of Convertible Preferred Stock is
convertible into common stock of the Company at the rate of 100 shares of Common
for each share of Preferred D, subject to adjustment for stock splits, reverse
stock splits and other similar recapitalization events. The Preferred D shares
have no voting rights, except as required by law, and bear no dividends. The
common shares underlying the Preferred D shares have been included in the
January 1998 registration statement referred to in Note 2.
Note 6 - Debt Extinguishment
On December 26, 1997, the Company made a $490,000 cash payment to
extinguish its remaining obligations under a Settlement Agreement with a vendor.
Accordingly, the Company recorded an extraordinary gain of $1,146,100 on the
extinguishment of debt and reduced accounts payable by the corresponding amount.
Note 7 - Subsequent Events
In January 1998, the Company sold an additional 24,750 Units of the Series
D Preferred Stock Units (see Note 5) and the net proceeds of $2,156,900 from the
sale of these securities have been added to the Company's general funds. The
common shares underlying the Preferred D shares have been included in the
January 1998 registration statement referred to in Note 2.
In January 1998, a warrantholder exercised outstanding warrants to purchase
222,000 shares of Common Stock at a price of $1.00 per share. The proceeds from
this warrant exercise have been added to the Company's general funds. These
shares have been included in the January 1998 registration statement referred to
in Note 2.
In January 1998, the Company sold 125,000 Common Stock Units to investors
in a private placement. Each Unit consists of one share of Common Stock of the
Company, plus one five-year Warrant to purchase one share of common stock of
Novalog, Inc., a subsidiary of the Company and one five-year Warrant to purchase
one share of common stock of Microsensors Inc., a wholly-owned subsidiary of the
Company. The proceeds of $125,000 from these transactions were added to the
Company's general funds. These shares have been included in the January 1998
registration statement referred to in Note 2.
In January 1998, the Board of Directors authorized a contribution to the
Employee Stock Bonus Plan, (the Company's ERISA-qualified Employee Retirement
Plan). The amount represents an annual contribution for fiscal year 1998 and
was made in 333,334 shares of the Company's common stock which have been issued
to the Plan.
The accompanying pro forma Consolidated Balance Sheet gives retroactive
effect to the aforementioned subsequent events, assuming that the transactions
had been completed as of December 28, 1997.
6
<PAGE>
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 and Exchange Commission EDGAR
database (http://www.sec.gov) or from the Company's Investor Relations
Department.
Results of Operations
Revenues
The Company achieved revenues of $2,167,900 during the first quarter of
fiscal 1998, including $304,800 from its now closed Vermont location. In fiscal
1997's first quarter, reported revenues of $3,675,100 included revenues of
$844,300 from the Vermont location and $1.2 million of contract funding for
work performed in the prior fiscal year. Thus on an adjusted comparable basis,
revenues in this year's first quarter reflects an improvement of $232,300
related to the Costa Mesa operations. The Company's Novalog, Inc. subsidiary
reported an increase of greater than 80 percent over last year's first quarter
revenues and its new Microsensors, Inc. subsidiary which began operations at the
start of the fiscal year, received its first development contract, from which
$200,000 in revenues were realized in the first quarter of fiscal 1998. These
revenues are reflected in the Company's consolidated revenues for the first
quarter of fiscal 1998.
Cost of Revenues
Cost of revenues as a percentage of revenues increased from 104 percent for
the first quarter of fiscal 1997 to 107 percent for fiscal 1998. On an adjusted
basis to exclude the Vermont location in both years, cost of revenues in the
first quarter of fiscal 1998 was 99 percent compared to 71 percent in the year
earlier quarter. The increase was primarily due to the fact that the gross
margins at Novalog were less than anticipated due to phase out of old product
lines and introductory costs associated with new products.
Research and Development
The Company decreased its expenditure in research and development by
$293,000 or 68 percent during the first quarter of fiscal 1998. Approximately
one-half of this reduction is attributable to the Vermont closing. There has
been a similar reduction of research and development expenditures in the Costa
Mesa operations. The Company is now focusing on attempting to obtain customer
funding for portions of these costs to the extent such arrangements would not
jeopardize the company's patent potentials.
General and Administrative
In the first quarter of fiscal 1998, General and Administrative expense
(G&A) decreased $160,100 or 19 percent from the first quarter of fiscal 1997.
The decrease reflects cost reductions first put in place in mid-fiscal 1997 and
continuing in fiscal 1998 as management restructures the Company to achieve
maximum efficiency.
Interest Expense/Interest Income
Interest expense in the first quarter of fiscal 1998 decreased $51,800 from
the first quarter of last fiscal year in conjunction with the reduction of the
bank loan and conversion of the remaining 8% Convertible Preferred Debentures.
7
<PAGE>
Liquidity and Capital Resources
At December 28, 1997, the Company had cash and cash equivalents of
$1,489,000, working capital of $1,245,100 and a current ratio of 1.3 to 1.
Subsequent to December 28, 1997, the Company obtained additional equity funding
of approximately $2,503,900 and anticipates, although there can be no
assurances, that the existing working capital and its projected operating
results will be sufficient to meet its cash requirements for the immediate
future and for the growth of its subsidiary businesses.
At December 28, 1997, the Company's funded backlog was approximately $2.6
million compared to $5.7 million at December 29, 1996 which included
approximately $4.0 at the Vermont facility.
In October 1997, the Company executed a Forbearance Agreement with its
lending bank whereby the Company agreed to accelerate repayment of the Note
Payable to the bank. The current portion of the debt was reduced by $1,026,900
received from the sale of the assets in October 1997. The Company also agreed,
among other requirements, to reduce the principal balance by payments of
$250,000 in each of the calendar quarters ending December 1997 and March 1998
and thereafter to reduce the remaining balance by a minimum of $200,000
quarterly. Execution of the Forbearance Agreement also resulted in a waiver of
the Company's financial covenants defaults and an amendment to the loan
agreement eliminating such financial covenants on a prospective basis. In
connection therewith the Company pledged as collateral one million shares of
Novalog, Inc. common stock held by the Company.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
On December 24, 1997 the Company issued in a private placement an aggregate
of 13,000 Preferred Stock Units, each Unit consisting of one share of
Convertible Series D Preferred Stock of the Company, one Warrant to purchase one
share of Novalog, Inc. Common Stock and one Warrant to purchase one share of
Microsensors, Inc. Common Stock (the "Units"). Each share of Series D Preferred
Stock is convertible into 100 shares of the Company's Common Stock, at any time,
at the option of the holder. Each of the Novalog and Microsensors Warrants are
exercisable for five years, at an exercise price of $1.00 per share.
The Units were sold at a price of $100 per Unit and were issued to 8
accredited investors, of which 5 are individuals or entities located outside the
United States. The investors are as follows:
Banque Privee Edmund de Rothschild S.A.
Purling Holdings Limited
Preston Asset Management
C.S. Rennie
Marc Rebagliati
Oxcal Venture Fund, L.P.
Glenbrook Capital Limited Partnership
MLPF & S FPO Uible & Poe FBO Harold F. Poe
The Units were sold pursuant to exemptions from the registration
requirements of the Securities Act of 1933, as amended, as set forth in Section
4(2) and/or Rule 506 of Regulation D promulgated thereunder. Each investor was
furnished with information on the offering and the Company and each had the
opportunity to verify the information supplied. Additionally, the Company
obtained a representation from each investor of such investor's intent to
acquire the securities for the purpose of investment only, and not with a view
toward the subsequent distribution thereof. The securities bear an appropriate
restrictive legend.
8
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K dated October 23, 1997 was filed on November 4,
1997. This report covered the final shutdown of the former Vermont
facilities and the disposition of the associated assets.
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 2, 1998 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-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> DEC-28-1997
<CASH> 1,489,000
<SECURITIES> 0
<RECEIVABLES> 1,309,800
<ALLOWANCES> 10,000
<INVENTORY> 2,685,400
<CURRENT-ASSETS> 5,602,700
<PP&E> 8,926,400
<DEPRECIATION> 6,519,700
<TOTAL-ASSETS> 8,044,900
<CURRENT-LIABILITIES> 4,357,600
<BONDS> 0
500
0
<COMMON> 224,900
<OTHER-SE> (847,300)
<TOTAL-LIABILITY-AND-EQUITY> 8,044,900
<SALES> 2,167,900
<TOTAL-REVENUES> 2,167,900
<CGS> 2,329,400
<TOTAL-COSTS> 3,022,200
<OTHER-EXPENSES> 138,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,100
<INCOME-PRETAX> (1,062,400)
<INCOME-TAX> 200
<INCOME-CONTINUING> (962,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,146,100
<CHANGES> 0
<NET-INCOME> 183,400
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
