<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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
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IRVINE SENSORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-0280334
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3001 Redhill Avenue, Costa Mesa, California
(Address of principal executive offices)
92626
(Zip Code)
(714) 549-8211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
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, September 28,
1997 1997
------------- --------------
<S> <C> <C>
Assets
Current Assets:
Cash $ 1,489,000 $ 1,639,300
Accounts receivable, net of allowances
of $10,000 1,299,800 1,237,700
Inventory 2,685,400 2,577,300
Prepaid expenses 128,500 1,182,900
------------ ------------
Total current assets 5,602,700 6,637,200
------------ ------------
Equipment, furniture and fixtures, net 2,406,700 2,775,800
Other assets 35,500 36,300
------------ ------------
$ 8,044,900 $ 9,449,300
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 2,674,800 $ 4,370,800
Accrued expenses 671,700 684,700
Deferred revenues - 106,100
Notes payable and current portion of
long term debt 1,011,100 2,234,000
------------ ------------
Total current liabilities 4,357,600 7,395,600
------------ ------------
Long term debt 93,200 593,200
Deferred royalties payable - affiliated
company 624,500 613,800
Commitment to employee retirement plan 113,000 -
Convertible subordinated debentures - 250,000
------------ ------------
Minority interest in subsidiary 3,360,000 3,418,100
------------ ------------
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 $238,500 50 50
4,974 shares Series C Convertible
Cumulative Preferred issued and
outstanding; aggregate liquidation
preference of $264,100 50 50
13,000, and no shares Series D Convertible
Preferred issued and outstanding 100 -
Common Stock, $0.01 par value, 40,000,000
shares authorized:
22,490,800 and 21,541,300 shares
issued and outstanding 224,900 215,400
Common Stock warrants, 239,200, and 239,200
issued and outstanding - -
Paid-in capital 48,549,100 46,424,100
Accumulated deficit (49,396,100) (49,579,500)
------------ ------------
Total shareholders' equity (621,900) (2,939,900)
------------ ------------
$ 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 - Contract research & development $ 1,449,500 $ 2,611,100
Product Sales 718,400 1,064,000
----------- -----------
Total revenues 2,167,900 3,675,100
Costs and expenses:
Cost of contract revenues 1,387,900 1,798,100
Cost of product sales 941,500 2,039,700
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> <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.
6
<PAGE>
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.
PROFORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Pro Forma adjustments
Pro Forma -----------------------------------------
Results (1) (2) (3) (4) Historical
December 28, Note 7 Note 7 Note 7 Note 7 December 28,
1997 Para. 1 Para. 2 Para. 3 Para. 4 1997
------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,992,900 2,156,900 222,000 125,000 $ 1,489,000
Accounts receivable, net 1,299,800 1,299,800
Inventory 2,685,400 2,685,400
Prepaid expenses 515,500 387,000 128,500
------------ ------------
Total current assets 8,493,600 5,602,700
------------ ------------
Equipment, furniture and fixtures, net 2,406,700 2,406,700
Other assets 35,500 35,500
------------ ------------
$ 10,935,800 $ 8,044,900
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,674,800 $ 2,674,800
Accrued expenses 671,700 671,700
Notes payable and current portion of L/T debt 1,011,100 1,011,100
------------ ------------
Total current liabilities 4,357,600 4,357,600
Commitment to employee retirement plan - -
------------ ------------
Long-term debt 93,200 93,200
------------ ------------
Deferred royalties payable - affiliated company 624,500 624,500
------------ ------------
Preferred stock of consolidated 118,500 118,500
------------ ------------
Commitment to employee retirement - (113,000) 113,000
------------ ------------
Minority interest in consolidated subsidiary 3,360,000 3,360,000
------------ ------------
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 $238,500 50 50
4,974 shares Series C Convertible Cumulative
Preferred issued and outstanding; aggregate
liquidation preference of $264,100 50 50
37,750 and 13,000 series D Convertible
Preferred issued and outstanding 400 300 100
Common stock, $0.01 par value, 40,000,000
shares authorized;
21,541,300 and 18,710,000 shares issued
and outstanding 231,900 2,200 1,300 3,500 224,900
Common stock warrants and unit warrants;
319,200 outstanding - -
Paid-in capital 51,545,700 2,156,600 219,800 123,700 496,500 48,549,100
Accumulated deficit (49,396,100) (49,396,100)
------------ ------------
Total shareholders' equity 2,382,000 (621,900)
------------ ------------
$ 10.935,800 $ 8,044,900
============ ============
</TABLE>
7
<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 such as the Company's SIRComm infrared device first introduced in 1995,
and Baybeamer model products and introductory costs associated with newer
version 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.
8
<PAGE>
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.
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.
The Year 2000
The Year 2000 Issue is the result of computer programs using two digits
rather than four to define the applicable year. The Company's programs that
have time-sensitive software may recognize a date using "00" as the calendar
year 1900 rather than the calendar year 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
As a result of an ongoing review of its internal computer systems to identify
the systems that could be affected by the Year 2000 issue the Company presently
believes that the only potential system that may be affected is a licensed
product which is covered by vendor support. The vendor has communicated to all
of its customers that they are working on this issue and will supply appropriate
modifications in a timely manner. The Company therefore believes that the Year
2000 issue will have minimal or no impact on the Company.
9
<PAGE>
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.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
Exhibit 10.26. License Agreement
(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.
10
<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: March 17, 1998 By: /s/ John J. Stuart, Jr.
--------------------------------------
John J. Stuart, Jr.
Chief Financial Officer
(Principal Accounting Officer)
11
<PAGE>
EXHIBIT 10.26
LICENSE AGREEMENT
THIS LICENSE AGREEMENT is made and entered into as of the 11th day of March
1998, by and between IRVINE SENSORS CORPORATION, a Delaware Corporation (the
"Company"), and ADVANCED TECHNOLOGY PRODUCTS, LLC, a California limited
liability company ("ATP"), with reference to the following facts:
A. The Company is the owner of certain intellectual property rights
(the "Technology") to two high technology products, the Real Time
Vector Image Processor ("VIP-20") and Electronic Film ("E-Film"). The
Technology is described in Exhibit A annexed hereto.
B. ATP desires to obtain the Technology for $400,000 and to license
the Technology back to the Company to develop the VIP-20 and E-Film
into commercially marketable products.
C. The parties desire to enter into this Agreement to define their
future rights to the Technology.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto do hereby agree as
follows:
1. Purchase of Technology. ATP hereby agrees to purchase the Technology
----------------------
from the Company for the sum of Four Hundred Thousand Dollars ($400,000). The
parties shall use their best efforts to consummate the sale of the Technology by
December 31, 1997.
2. License. ATP hereby grants to the Company and the Company accepts a
-------
transferable, exclusive, worldwide license to use the Technology for the purpose
of developing and manufacturing products utilizing the Technology ("Licensed
Products"), to enter into and perform contracts that utilize the Technology with
any party, and to use, sell or otherwise dispose of Licensed Products in all
countries of the world.
3. Product Development Funding. ATP shall have the right, but not the
---------------------------
obligation, to fund the research and development and manufacturing and marketing
activities to be carried out by the Company, in an amount not to exceed
$1,100,000. If ATP commences to fund such activities it shall have the right to
suspend such funding in its sole discretion.
4. Royalties.
---------
4.1 In consideration of the license granted in section 2 hereof and
its commitment to fund certain activities relating to the Products pursuant to
Section 3 hereof, the Company agrees that its direct sales of Licensed Products
covered by one or more claims of any of the patents or Technology listed in
Exhibit A shall be subject to royalty payments on the Gross Selling Price
thereof (as hereinafter defined). Such royalty shall be paid at the following
rates, subject to the election of investors in ATP's offering of limited
liability company interests (the "Offering"):
a. Royalty Program "A". For investors electing the Share redemption
-------------------
option provided for in Section 5.2 by January 31, 1998, royalties will be paid
<PAGE>
at the rate of 1.0% of the Gross Selling Price of Licensed Products per $100,000
contributed by ATP to the Company on behalf of such investors pursuant to
Sections 1 and 3 hereof, up to a maximum royalty of 15% (for example, if ATP
investors selecting Royalty Program "A" contribute $400,000 to acquire the
Technology and an additional $600,000 pursuant to Section 3, then the royalty
shall be 10%).
b. Royalty Program "B". For investors not electing the Share
-------------------
redemption option provided for in Section 5.2, royalties will be paid at the
following rates for each $100,000 contributed by ATP on behalf of such investors
to the Company pursuant to Sections 1 and 3 hereof: (i) 1% of the Gross Selling
Price of Licensed Products for each $100,000 invested in the Company until
distributions equal $300,000 per $100,000 invested, thereafter (ii) 1/3% of the
Gross Selling Price of Licensed Products for each $100,000 invested in the
Company until distributions equal $1,000,000 per $100,000 invested, thereafter
(iii) 1/10% of the Gross Selling Price of Licensed Products for each $100,000
invested in the Company for the life of the Licensed Products.
4.2 The expression "Gross Selling Price" shall for the purpose of this
Agreement mean the invoice price for Licensed Products sold by the Company
during the term of this Agreement, such price not to include normal discounts
actually granted, insurance fees and packing and transportation charges as
invoiced separately to customers, and duties and sales taxes actually incurred
and paid by the Company in connection with delivery of such Licensed Products.
4.3 Within thirty (30) days after the close of each fiscal quarter of the
Company of each year during which this Agreement shall be in force, the Company
hereby undertakes to submit to ATP a statement in writing duly certified by an
officer of the Company, setting forth with respect to the Company for the
quarterly period concerned:
a) the Gross Selling Price of royalty-bearing Licensed Products sold by
the Company;
b) the royalties and other license fees received by the Company from
its sublicensees; and
c) the royalty accrued to ATP.
Payment of the above-described royalties shall be made within thirty (30) days
after the end of each fiscal quarter of the Company.
5. Reversion of Technology to the Company/Share Redemption Provision
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5.1 At such time as the Company has paid to ATP 315% of the gross capital
contributions contributed by ATP to the Company all of ATP's right, title and
interest in and to the Technology shall forthwith be transferred to the Company,
without any further action on the part of ATP or the Company. This Agreement
shall not terminate, however, and the Company's obligation to pay royalties to
ATP pursuant to Section 4.1 shall continue if there were any investors in the
Offering electing Royalty Program "B." If there were none then this Agreement
shall thereupon terminate.
5.2 Each ATP investor electing Royalty Program "A" as set forth in Section
4.1 above shall have the right to cause the Company to redeem such contributions
by giving notice to ATP within five years after such contribution date, but
prior to such investor receiving an amount of distributions equal to 100% of
said capital contributions. Such redemption shall be in the form of restricted
shares of common stock of ISC to be issued at
<PAGE>
the greater of: (a) the discounted rate of 20% less than the market price of
the Company's common stock at the time of redemption, or (b) $1.00 per share,
for each dollar invested. Notwithstanding the foregoing, if such shares of
common stock of ISC issued pursuant to this redemption provision are
"registered" and "free trading" then they shall be issued at the market price of
the Company with no discount. (For example, if the Company's common stock were
trading at $2.00 per share at the time of redemption then the conversion price,
assuming the shares to be issued were "restricted" and not "free trading," would
be $1.60 per share; however, if the common stock were trading at $.875 at the
time of redemption, then the conversion price would be $1.00). Such redemption
provision shall automatically be triggered if any termination event pursuant to
section 8.1(b) herein shall occur. Any such capital contributions redeemed
pursuant to this section shall reduce, dollar for dollar, the amount of the
Company's obligation set forth in section 5.1 herein.
6. Term of Agreement.
-----------------
6.1 Unless terminated earlier in accordance with the provisions of section
5 or section 9 hereof, this Agreement shall continue in force and effect until
June 30, 2025.
6.2 In the event that this Agreement is terminated in accordance with
section 9 hereof, all rights of the Company under this Agreement shall
terminate, but the accrued obligations of the Company set forth in section 2
shall continue.
7. Warranties of ATP and the Company.
---------------------------------
7.1 ATP represents and warrants to the Company that it has legal power to
enter into this Agreement and to extend the rights granted to the Company in
this Agreement, that subject to payment of the purchase price as set forth in
section 1 hereof, it owns the Technology and has the right to transfer the same
to the Company, and that it has not made any commitments to others inconsistent
with or in derogation of such rights. ATP makes no representations, extends no
warranty of any kind, either expressed or implied, and assumes no
responsibilities whatever with respect to the adequacy, accuracy or utility of
any information obtained by the Company under this Agreement; and ATP assumes no
responsibilities whatever with respect to use by the Company or any third party
of any information obtained by the Company under this Agreement or with respect
to any use, sale or other disposition by the Company or its vendees or other
transferees of any Licensed Products.
7.2 The Company represents and warrants to ATP that it will use its best
efforts to perform all reasonable and customary research and development
activities necessary to bring the Products to market. The Company further
represents and warrants to ATP that it will use its best efforts to manufacture
and market the Products either directly or through third parties.
7.3 The Company represents and warrants to ATP that it is not presently
subject to an material pending or threatened litigation that could affect its
ability to perform under this Agreement.
7.4 Nothing contained in this Agreement shall be construed as a warranty
or representation that the Company will be able to successfully manufacture,
sell or use any Licensed Products or that the manufacture, sale, use or other
disposition of Licensed Products hereunder will be free from infringement of
patents, utility models, copyrights, trademarks and/or design patents of third
parties.
<PAGE>
8. Sublicenses.
-----------
8.1 The Company shall have the right, throughout the term of this
Agreement, to enter into sublicense agreements with third parties for the use of
the Technology. The Company agrees to negotiate all such sublicense agreements
at arms/ length and in good faith, so as to maximize the return to it under each
such sublicense agreement, and, in turn, the return to ATP under this Agreement.
8.2 In the event of the valid termination of the Company's license under
this Agreement for any reason, any existing sublicensee shall have the option
for 90 days from the date of notice of termination by ATP to covert to a direct
license from ATP on comparable terms as contained herein, as nearly as may be
practicable.
8.3 The Company agrees to give ATP (i) notice of any agreement in
principle to enter into any such sublicense, within 10 days of the date of said
agreement, and (ii) a copy of the fully executed agreement promptly upon
execution thereof.
8.4 ATP shall give notice promptly to every sublicensee of any notice of
default sent to the Company hereunder, to enable such sublicensee to utilize the
option provided for in section 8.2. above.
9. Termination.
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9.1 Notwithstanding the provisions of section 4 hereof, this Agreement
may be terminated:
a) by ATP giving notice by registered mail or telegram to the Company in
the event of the Company being in breach of or in default under any duty or
obligation of this Agreement and the Company having failed to remedy such breach
or default within thirty (30) days of ATP having served written notice to remedy
such breach or default, with the date of service deemed to be the date of
mailing or the date of the telegram; or
b) by ATP upon written or telegraphic notice to the Company in the event
of (i) the bankruptcy of ISC, (ii) cessation of operations by ISC, (iii) the
seizure or attachment of all or a substantial part of ISC's assets, or (iv) the
termination of ISC's research and development or manufacturing and marketing
activities relating to the Products. In any of the foregoing events ATP shall
also have the right to elect to not terminate this Agreement, but to treat the
Company as a non-exclusive licensee and ATP will be entitled to contract with
other third parties to further develop and market the Products.
9.2 In the event that a dispute shall arise as to the validity of any
notice of default sent by ATP to the Company hereunder, the parties agree to
submit the same to arbitration in Orange County, California, in accordance with
the then current rules of the American Arbitration Association.
10. Waiver/Severability.
-------------------
10.1 The waiver by either party of a breach or default in any of the
provisions of this Agreement by the other party shall not be construed as a
waiver by such party of any succeeding breach of the same or other provisions
nor shall any delay or omission on the part of either party to exercise or avail
itself of any right, power or privilege that it has or may have hereunder
operate as a waiver of any right, power or privilege by such party.
<PAGE>
10.2 If any term, clause or provision of this Agreement shall be judged
to be invalid, the validity of any other term, clause or provision shall not be
thereby affected and such invalid term, clause or provision shall be deemed
deleted from this Agreement.
11. Applicable Law. This Agreement shall be governed by and construed, and
--------------
any claim or controversy arising with respect thereto shall be determined, in
accordance with the laws and in the competent courts of the State of California.
12. Miscellaneous.
-------------
12.1 This Agreement embodies the entire understanding of the parties as
it relates to their respective rights in and to the Technology, and this
Agreement supersedes any prior agreement or understanding between the parties
with respect to such subject matter. No amendment or modification of this
Agreement shall be valid or binding upon the parties unless signed by their
respective, duly authorized, officers.
12.2 Nothing contained in this Agreement shall be construed as conferring
by implication, estoppel or otherwise upon either party hereunder any license or
other right expect the licenses and rights expressly granted hereunder to a
party hereto.
12.3 This Agreement cannot be assigned by any party without the written
consent of the other party hereto and should any assignment be made by the one
party without the written consent of the other party such assignment will be
null and void.
12.4 Any notice or statement hereunder shall be deemed to be sufficiently
given or rendered when sent by registered mail, postage prepaid, and if given or
rendered to ATP, addressed to:
Advanced Technology Products, LLC
3001 Redhill Avenue
Building III, Suite 208
Costa Mesa, CA 92626
Attn: John C. Carson
or, if given or rendered to the Company, addressed to:
Irvine Sensors Corporation
3001 Redhill Avenue
Costa Mesa, CA 92626
Attn: James D. Evert, President
or in any case to such changed address or person as ATP or the Company shall
have specified to the other by written notice.
IN WITNESS WHEREOF, the parties hereof have caused this Agreement to be signed
as of the date first above written.
IRVINE SENSORS CORPORATION
a Delaware corporation
By: /s/ James D. Evert
--------------------------------------
James D. Evert, President
<PAGE>
ADVANCED TECHNOLOGY PRODUCTS, LLC
a California limited liability company
By: /s/ John C. Carson
--------------------------------
John C. Carson, Managing Member
<PAGE>
EXHIBIT A TO LICENSE AGREEMENT
For purposes of establishing the Company's rights, "Technology" shall be defined
as any and all technology conceived and/or developed by the Company for the
Products defined as "VIP-20" and "Electronic Film" in ATP's Private Placement
Memorandum dated August 1, 1997, including any technology covered by any of the
U.S. Patents secured by the Company through applications made on behalf of the
Products.
