<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 19
For the quarterly period ended June 28, 1998
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 28, 1998 there were 27,119,300 shares of Common Stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 28, September 29,
1998 1997
------------------ ------------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 787,800 $ 1,639,300
Accounts receivable, net of allowances of $10,000 2,787,300 1,237,700
Inventory 3,363,900 2,577,300
Prepaid expenses 509,300 1,182,900
------------------ ------------------
Total current assets 7,448,300 6,637,200
------------------ ------------------
Equipment, furniture and fixtures, net 2,127,900 2,775,800
Other assets 31,900 36,300
------------------ ------------------
$ 9,608,100 $ 9,449,300
================== ==================
Liabilities and shareholders' equity (deficit)
- ----------------------------------------------
Current liabilities:
Accounts payable $ 1,304,400 $ 4,370,800
Accrued expenses 492,300 684,700
Deferred revenues - 106,100
Notes payable and current portion of long-term debt - 2,234,000
------------------ ------------------
Total current liabilities 1,796,700 7,395,600
------------------ ------------------
Long-term debt - 593,200
------------------ ------------------
Deferred and subordinated royalties payable - affiliated 626,200 613,800
company
------------------ ------------------
8% Convertible subordinated debentures - 250,000
------------------ ------------------
Minority interest in consolidated subsidiary 3,141,700 3,418,100
------------------ ------------------
Preferred stock of consolidated subsidiary 118,500 118,500
------------------ ------------------
Shareholders' equity (deficit):
Preferred stock, $0.01 par value, 500,000 shares
authorized;
6,971 shares Series B Convertible Cumulative
Preferred issued and outstanding; aggregate liquidation
preference of $198,700 50 50
3,970 shares Series C Convertible Cumulative
Preferred issued and outstanding; aggregate liquidation
preference of $214,400 50 50
7,400 and no shares Series D Convertible Preferred
Issued and outstanding 100 -
Common stock, $0.01 par value, 40,000,000 shares
authorized;
27,119,300 and 21,541,300 shares issued and outstanding 271,200 215,400
Common stock warrants and unit warrants; 162,000 and - -
340,000 outstanding
Paid-in capital 53,515,000 46,424,100
Accumulated deficit (49,861,400) (49,579,500)
------------------ ------------------
Total shareholders' equity (deficit) 3,925,000 (2,939,900)
------------------ ------------------
$ 9,608,100 $ 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 39 Weeks Ended
------------------------------------- -------------------------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues :
Contract research & development $ 1,828,000 $ 1,408,300 $ 5,074,200 $ 4,669,700
Product sales 373,500 2,316,300 1,628,500 5,984,300
Other 200,000 - 400,000 -
-------------- -------------- -------------- --------------
Total revenues 2,401,500 3,724,600 7,102,700 10,654,000
Cost and expenses:
Cost of contract revenues 1,349,900 1,056,700 4,397,000 2,746,500
Cost of product sales 706,400 3,608,700 1,884,600 10,369,000
General & administrative 753,800 708,100 2,097,800 2,441,600
Research and development 169,800 476,900 371,900 1,388,800
-------------- -------------- -------------- --------------
2,979,900 5,850,400 8,751,300 16,945,900
-------------- -------------- -------------- --------------
Loss from operations (578,400) (2,125,800) (1,648,600) (6,291,900)
Interest expense (13,900) (88,300) (112,900) (313,700)
Interest income 2,300 9,200 11,300 25,500
-------------- -------------- -------------- --------------
Loss before minority interest
and income taxes (590,000) (2,204,900) (1,750,200) (6,580,100)
Minority interest in loss of subsidiary (110,700) (51,000) (324,800) (174,300)
Provision for income taxes - 800 2,600 2,600
-------------- -------------- -------------- --------------
Loss before extraordinary item (479,300) (2,154,700) (1,428,000) (6,408,400)
Extraordinary item - debt extinguishment - - 1,146,100 -
Net loss $ (479,300) $ (2,154,700) $ (281,900) $ (6,408,400)
============== ============== ============== ==============
Basic and Diluted Earnings Per Share :
Loss before extraordinary item $ (0.02) $ (0.10) $ (0.08) $ (0.32)
-------------- -------------- -------------- --------------
Extraordinary item $ - $ - $ 0.05 $ -
-------------- -------------- -------------- --------------
Net loss $ (0.02) $ (0.10) $ (0.03) $ (0.32)
============== ============== ============== ==============
Weighted average number
of shares outstanding 24,967,700 21,013,600 23,306,600 20,287,900
============== ============== ============== ==============
</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 28, 1998 June 29, 1997
------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 5,553,200 $ 11,621,200
Cash paid to suppliers and employees (9,726,900) (13,215,000)
Interest received 11,300 25,500
Interest paid (112,900) (313,700)
Income taxes paid (2,600) (2,600)
------------- -------------
Net cash used in operating activities $(4,277,900) $(1,884,600)
Cash flows from investing activities:
Equipment disposal 37,800 -
Capital facilities and equipment expenditures (229,400) (1,012,600)
------------- -------------
Net cash used in investing activities (191,600) (1,012,600)
Cash flows from financing activities:
Proceeds from issuance of common & preferred stock 4,713,400 -
Common stock issued for services 261,700 7,600
Principal payments under notes payable
and capital lease obligations (2,327,200) (136,100)
Proceeds from stock sale by bank 921,700 -
Proceeds from issuance of minority
interest in subsidiary 48,400 1,884,500
------------- -------------
Net cash provided by financing activities 3,618,000 1,756,000
----------- -----------
Net decrease in cash and cash equivalents (851,500) (1,141,200)
Cash and cash equivalents at beginning of period 1,639,300 1,954,000
----------- -----------
Cash and cash equivalents at end of period $ 787,800 $ 812,800
=========== ===========
Reconciliation of net income (loss) to net cash used in operating
activities:
Net loss $ (281,900) $(6,408,400)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization $ 839,500 $ 2,367,700
Common stock issued to employee retirement plan 500,000 397,300
Minority interest in loss of subsidiary (324,800) (174,300)
(Increase) decrease in accounts receivable (1,549,600) 967,200
(Increase) decrease in inventory (786,600) 244,300
Decrease in prepaid expenses and other assets 678,000 121,600
Increase (decrease) in accounts payable
and accrued expenses (3,258,800) 1,956,900
(Decrease) in deferred revenues (106,100) (1,278,100)
(Decrease) in long-term accrued expenses - (275,000)
Increase in royalties accrued - affiliated company 12,400 196,200
----------- ------------
Total adjustments (3,996,000) 4,523,800
----------- -----------
Net cash used in operating activities $(4,277,900) $(1,884,600)
=========== ===========
Non-cash investing and financing activities:
Principal payment of note payable by
issuance of common stock $ 500,000 $ -
=========== ===========
Conversion of debentures to common stock $ 250,000 $ 3,000,000
=========== ===========
Conversion of preferred to common stock $ 30,300 $ -
=========== ===========
</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 June 28, 1998 and June 29, 1997
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 28, 1998, the
results of its operations for the 39 week periods ended June 28, 1998 and June
29, 1997 and its cash flows for the 39 week periods ended June 28, 1998 and June
29, 1997. 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., 3D
Microsystems, Inc. and IMAGEK, Inc. All significant intercompany transactions
and balances have been eliminated in consolidation.
Note 2 - Convertible Subordinated Debentures
In 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. This
registration was declared effective by the Securities and Exchange Commission in
April 1998.
Note 3 - Bank Loan
In December 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
which was 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 covenant 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 Company also paid down $500,000 of the
Note with 550,000 shares of its stock and under the terms of the agreement,
dependent on the market price of the shares when sold, the Company would receive
a refund if the proceeds from the sale exceeded $500,000. These shares have
been included in the April 1998 registration statement referred to in Note 2.
Subsequently, the Company was informed by the bank that it sold the 500,000
shares and that the proceeds exceeded $500,000. After applying the proceeds to
the then remaining balance of the note the bank, through June 28, 1998, remitted
$772,000 to the Company and advised the Company that estimated additional
proceeds, net of expected expenses, of $150,000 were to be remitted to the
Company. The Company recognized these refunds and expected refundable proceeds
in the third quarter of 1998 in the approximate net amount of $922,000. The
Company has recorded the proceeds that exceeded $500,000 as paid-in capital. In
its original filing on Form 10-Q for the period ended June 28, 1998, the Company
reported these proceeds as extraordinary gain from debt extinguishment. On
review, the Company determined that the more appropriate treatment was to record
the excess proceeds as paid-in capital. This resulted in the following changes:
5
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet : June 28, 1998
- ---------------------------- -------------
<S> <C>
Paid-in Capital
As previously reported $ 52,593,300
Restated $ 53,515,000
Accumulated deficit
As previously reported $(48,939,700)
Restated $(49,861,400)
<CAPTION>
13 Weeks ended 39 weeks ended
Consolidated Statement of Operations June 28, 1998 June 28, 1998
- ------------------------------------ -------------- --------------
<S> <C> <C>
Extraordinary item debt extinguishment
As previously reported $ 921,700 $2,067,800
Restated $ - $1,146,100
Net income (loss)
As previously reported $ 442,400 $ 639,800
Restated $(479,300) $ (281,900)
<CAPTION>
Consolidated Statement of Cash Flows
- ------------------------------------
<S> <C>
Proceeds from stock sale by bank
As previously reported $ -
Restated $921,700
</TABLE>
See also Note 10 for restated earnings per share which includes the effect of
this adjustment.
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 June 28, 1998 the Company had accrued
$626,200 in deferred royalties payable to RDL.
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, at
which time, the Company sold an additional 24,750 Units. The Company issued an
aggregate of 37,750 Units at a price of $100.00 per Unit and the net proceeds of
$3,284,100 from the sale of these securities were 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. (See
Note 10 for calculation of beneficial conversion and imputed dividend resulting
from issuance of Series D Convertible Preferred Stock.) The common shares
underlying the Preferred D shares were included in the April 1998 registration
statement (see Note 2). In connection with this private placement of 37,750
units, the Company granted to the placement agent a warrant to purchase up to
500 units of Series D Convertible Preferred Stock units at a price of $1.10 per
unit which was 110% of the private placement
6
<PAGE>
price of the Units. The warrant is exercisable during the period beginning the
earlier of one year from January 2, 1998 or the date of registration and
expiring on January 2, 2003. The warrants were exercised in May 1998 and the
proceeds of $55,000 were added to the Company's general funds.
As of June 28, 1998, at the request of the holders thereof, a total of 30,350
shares of Series D Convertible Preferred Stock have been converted into
3,035,000 shares of common stock.
Note 6 Issuance of Common Stock
In January 1998, the Company sold 125,000 Common Stock Units to investors in
a private placement. Each Common Stock 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 were included in the
April 1998 registration statement. (see 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 were included in the April 1998 registration statement. (see Note 2)
In the 39-week period of fiscal 1998, distribution of vested benefits was
made from the Company's Employee Retirement Plan to former employees.
Subsequently, 1,815 shares of Series B and 1,006 shares of Series C Convertible
Preferred stock were surrendered for conversion into 140,922 shares of common
stock. The converted Preferred shares have been retired.
Note 7 Private Placement of Common Stock
In April 1998, the Company issued, in a private placement to accredited
investors, 700,000 unregistered shares of the Company's common stock. The net
proceeds of $980,000 from this private placement have been added to the
Company's general funds.
Note 8 Employee Retirement Plan
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.
Note 9 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 10 Earnings Per Share
As the Company had net losses from continuing operations for the 13 and 39
week periods of fiscal 1998 and 1997, basic and diluted net loss per share are
the same.
In its original filing on Form 10-Q for the periods ended March 29, 1998, and
June 28, 1998, the Company did not calculate the effect of an imputed dividend
associated with the sale of the Series D Convertible Preferred Stock. Earnings
per share have been recalculated below for the effect of the imputed dividend
and for the effect of the extraordinary gain restatement discussed in Note 3.
Accordingly, basic and diluted earnings per share as shown herein applicable to
common stockholders includes $465,300 for the non-cash imputed dividend related
to the beneficial conversion feature on 24,750 Units of the Series D Convertible
Preferred stock. (See Note 5.) The beneficial conversion feature is computed as
the difference between the quoted market price of a share of common stock on
date of issue and the conversion price times all shares of preferred stock sold
and under option. The imputed dividends are a non-cash, one-time charge based on
the immediate conversion feature.
7
<PAGE>
Basic and diluted earnings per common share for the 13 and 39 week periods of
fiscal 1998 and 1997 were calculated as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
------------------------------------- -------------------------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (479,300) $ (2,154,700) $ (281,900) $ (6,408,400)
Preferred Stock imputed dividend - - (465,300) -
------------------------------------------------------------------------------------
Net loss available to Common Stkhldrs $ (479,300) $ (2,154,700) $ (747,200) $ (6,408,400)
====================================================================================
Basic & diluted earnings per share :
As previously reported
Loss before extraordinary item $ (0.03) $ (0.10) $ (0.06) $ (0.32)
Extraordinary item $ 0.04 $ - $ 0.09 $ -
-------------- -------------- -------------- --------------
Net income (loss) $ 0.01 $ (0.10) $ 0.03 $ (0.32)
============== ============== ============== ==============
Restated
Loss before extraordinary item $ (0.02) $ (0.10) $ (0.08) $ (0.32)
Extraordinary item $ - $ - $ 0.05 $ -
-------------- -------------- -------------- --------------
Net loss $ (0.02) $ (0.10) $ (0.03) $ (0.32)
============== ============== ============== ==============
Weighted average number
of shares outstanding 24,967,700 21,013,600 23,306,600 20,287,900
============== ============== ============== ==============
</TABLE>
8
<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 $2,401,500 in the third quarter of fiscal
1998 and $7,102,700 for the 39 week period ended June 28, 1998, compared to
$3,724,600 and $10,654,000 respectively, in the prior fiscal year. This
represents a decrease of 36% and 33%, respectively, for the current quarter and
39-week periods for fiscal 1998 when compared to fiscal 1997.
The decline of over $1 million and $3 million in product revenues in the 13
and 39 week periods, respectively, in this fiscal year compared to similar
periods last year, are primarily attributable to reduced demand for memory cube
products which were produced at the now closed Vermont facility. The Company's
Novalog, Inc. subsidiary reported a decrease in revenues of 39% over last year's
39-week period due in large part to the effects of the Asian market disruption.
The Microsensors, Inc. subsidiary which began operations at the start of the
1998 fiscal year, derived additional revenues in the third fiscal quarter from
its first development contract, and anticipates delivering its first products in
the second half of calendar 1998, although there is no assurance that unforeseen
factors will not impact the current anticipated product rollout.
Mitigating the foregoing, Contract research & development revenues showed a
30% improvement in the current third quarter of this fiscal year compared to the
same period last year. The improvement of $419,700 is primarily attributable to
an improved funded backlog and completed development work.
Other revenues represent the sale of intellectual property rights to Advanced
Technology Products, LLC. (ATPL). These rights have been exclusively licensed
back to the Company on a royalty basis. The Company's maximum royalty obligation
will be based on a declining percentage of sales of products incorporating the
licensed rights. The percentage initially will be between 4% and 15% based on
the total funds provided by ATPL including developmental funding, declining to
between 0.4% and 1.5% as the volume of product sales increases. The above
intellectual property rights relate to the technology involved in E-film and VIP
20 products. The Managing Member and two investors in ATPL are affiliates of the
Company with an aggregate ownership interest of less than 10%. Also, a former
patent holder of technology acquired by the Company and used in E-Film will
receive a royalty fee ranging from 3% to 1%, depending on volume, solely on E-
film products. In conjunction with the formation of the Company's IMAGEK, Inc.
subsidiary, the Company is attempting to negotiate prepayment of some or all of
these royalty obligations in consideration of equity participation in IMAGEK.
There can be no assurances that said negotiations will be successful.
Cost of Revenues
Cost of contract research & development revenues as a percentage of revenues
was 74% in the third quarter of fiscal 1998. This was virtually the same as the
75% in the third quarter of fiscal 1997. For the 39-week periods, fiscal 1998
shows an increase of 28% over the comparable fiscal 1997 period, due primarily
to the mix of contracts. Cost of product sales in the
9
<PAGE>
current 39-week period at 116% of product sales was 58% lower than the
comparable period last year. This substantial reduction is attributable
primarily to the elimination of the high production costs the Company had
experienced in fiscal 1997 at the Vermont location, which is now closed.
General and Administrative
For the 39-week periods, a reduction of $343,800 in general and
administrative expense (G&A) was achieved in fiscal 1998 compared to the
comparable period in the prior fiscal year. These decreases reflect cost
reductions first put in place in mid-fiscal 1997 and continuing into fiscal 1998
as management restructures the Company to achieve greater efficiency. In the
third quarter of fiscal 1998, G&A increased by $45,700 over the prior year due
to a ramping up of marketing expenses.
Research and Development
The Company's Contract Revenues are predominantly research and development
paid for by the Company's customers; and, as it relate to Government contracts,
the Company retains royalty-free commercial rights to patented technologies and
products. In addition, the Company expends its own internally generated funds
on other specific research and development projects. In the third quarter the
Company spent $169,800 and fiscal year to date, it has spent $371,900 in
addition to the customer-funded research and development costs recorded as
Contract Revenues. This represents a decrease in internally funded research and
development of $1,016,900 to date this year compared to the 39-week period in
fiscal 1997. Almost half of this cost-savings was related to projects at the
now closed Vermont facility. There have been similar reductions of internally
funded research and development expenditures in Costa Mesa and the subsidiaries
operations. The Company has focused on obtaining customer funding for portions
of these costs to the extent such arrangements would not jeopardize the
Company's patent potentials. Notwithstanding the foregoing, the Company
anticipates that there will be substantial research and development expenditures
for its MSI and IMAGEK subsidiaries in the fourth quarter of 1998.
Interest Expense/Interest Income
Interest expense in the third quarter of fiscal 1998 decreased $74,400 from
the corresponding period of last fiscal year resulting from the reduction of the
bank loan and conversion of the remaining 8% Convertible Preferred Debentures.
Liquidity and Capital Resources
At June 28, 1998, the Company had cash and cash equivalents of $787,800,
working capital of $5,651,600 and a current ratio of 4.1-to-1. Of major
significance, in the nine month period from September 29, 1997 (fiscal year
end), the Company has eliminated both its current and long term notes payable
debt. This represents the reduction of almost $3 million in liabilities. During
the nine-month period, the Company obtained additional equity funding
aggregating approximately $5 million. The Company anticipates, although there
can be no assurances, that through equity funding of its subsidiaries, strategic
partnerships, existing working capital and its projected operating results,
sufficient cash will be generated to meet its requirements for the immediate
future and for the projected growth of its subsidiary businesses.
At June 28,1998, the Company's funded backlog was approximately $2.5 million
compared to $2.4 million at June 29, 1997 after excluding the backlog of product
orders associated with the now closed Vermont facility.
Capital expenditures of approximately $600,000 are expected to be consummated
in the fourth quarter of fiscal 1998. Several items of process equipment,
accounting for approximately $475,000 of the above total, are needed to complete
research and development contracts already in-house. The remainder of the above
amount is being used to upgrade the Company's computer network to current
technology. It is expected that all of the above equipment will be lease
financed.
In December 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 covenant 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 Company also paid down $500,000 of the
Note through the issuance
10
<PAGE>
of 550,000 shares of its common stock and under the terms of the agreement,
dependent on the market price of the shares when sold, the Company could receive
a refund if the proceeds from the sale exceeded $500,000. The Company has been
informed by the bank that it sold the 500,000 shares and that the proceeds have
exceeded $500,000. The Bank first applied the proceeds in excess of $500,000 to
extinguish the remaining balance of the note, and then refunded $772,000 to the
Company. The Bank also advised the Company that there was an additional $150,000
of proceeds, net of expenses, refundable to the Company. The Company recognized
these refunds and expected net refundable proceeds in the third quarter of 1998
in the approximate net amount of $922,000. The Company recorded the proceeds
that exceeded $500,000 as Paid-in Capital.
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 a program update, which will be issued in August 1998,
will supply appropriate modifications. The Company therefore believes that the
Year 2000 issue will have minimal or no impact on the Company.
Factors that may affect Future Results
The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this quarterly report on Form 10-Q and in other public
disclosures of the Company.
Shift in Business Focus. Since commencing operations, the Company has
developed technology, principally under government research contracts, for
various defense-based applications. Since 1992 the Company has been
implementing a fundamental shift in its business, broadening its focus to
include commercial exploitation of its technology. This shift has been
manifested by the purchase and later shut down of the IBM cubing line, the
"carve-out" of the Novalog, MSI and IMAGEK subsidiaries and the development of
various stacked-memory products intended for military and aerospace markets.
Until recently, these changes have expanded the Company's source of revenues but
have also increased its losses. Recent net profits, while reflecting
operational improvements, also include extraordinary items not expected to
recur. Accordingly, there is no history that is predictive of the Company's
present and contemplated future products being widely accepted in commercial
marketplaces, or the Company's ability to achieve sustainable profitable
operations.
Dependence on Defense Contract Revenues. Although the Company has been
shifting its focus to include commercial exploitation of its technology, it
expects to continue to be dependent upon research and development contracts with
the federal agencies and their contractors for a substantial, but diminishing
portion of its revenues for the foreseeable future. General political and
economic conditions, which cannot be accurately predicted, directly and
indirectly affect the quality and allocation of expenditures by federal
agencies. Even the timing of incremental funding commitments to existing, but
partially funded contracts can be affected by such factors. Therefore, cutbacks
in the federal budget could have a material adverse impact on the Company's
results.
Financing Needs. The need for additional funding of the Company's
subsidiaries is expected to be substantial and will be determined by the
progress and cost of the development and commercialization of the subsidiaries'
products based on their business plans and other activities. The Company
anticipates, although there can be no assurances, that through equity funding of
its subsidiaries, strategic partnerships, existing working capital and its
projected operating results, sufficient cash will be generated to meet its
requirements for the immediate future and for the projected growth of its
subsidiary businesses. If the Company experiences unanticipated cash
requirements, the Company could require additional funds. The source,
availability, and terms of such funds have not been determined and, if found,
there can be no assurance that such funds will be available on terms acceptable
to the Company.
The above factors are not intended to be inclusive. Failure to
satisfactorily achieve any of the Company's objectives or avoid any of the above
or other risks would likely have a material adverse effect on the Company's
business and results of operations.
11
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
In April 1998, the Company issued, in a private placement to accredited
investors, 700,000 unregistered shares of the Company's common stock. The shares
were sold at a price of $1.40 per share and were issued to 7 accredited
investors. The investors are as follows:
Carl Herrin
Elim Corporation
Neal Clement
Richard Price
M. E. Trowbridge
J. Bruns Clement
Riley Hagan, Jr.
The shares 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 10.27* Contract # DAAH01-9B-C-R075 with US Army Aviation &
Missile Command
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
None
*Previously filed
12
<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: January 26, 1999 By: /s/ John J. Stuart, Jr.
--------------------------------------
John J. Stuart, Jr.
Chief Financial Officer
(Principal Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from third
quarter 10-Q and is qualified in its entirety by reference to such financial
statments.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 787,800
<SECURITIES> 0
<RECEIVABLES> 2,787,300
<ALLOWANCES> 10,000
<INVENTORY> 3,363,900
<CURRENT-ASSETS> 7,488,300
<PP&E> 8,725,900
<DEPRECIATION> 6,598,000
<TOTAL-ASSETS> 9,608,100
<CURRENT-LIABILITIES> 1,796,700
<BONDS> 0
271,200
200
<COMMON> 0
<OTHER-SE> 3,653,600
<TOTAL-LIABILITY-AND-EQUITY> 9,608,100
<SALES> 7,102,700
<TOTAL-REVENUES> 7,102,700
<CGS> 6,281,600
<TOTAL-COSTS> 8,379,400
<OTHER-EXPENSES> 371,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,900
<INCOME-PRETAX> (1,750,200)
<INCOME-TAX> 2,600
<INCOME-CONTINUING> (1,428,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,146,100
<CHANGES> 0
<NET-INCOME> (281,900)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
