<PAGE>
As Filed with the Securities and Exchange Commission on October 20, 1999
Registration No. 333-88385
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
IRVINE SENSORS CORPORATION
(Name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 33441 33-0280334
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or jurisdiction) Classification Code Number) Identification No.)
</TABLE>
----------------
3001 Redhill Avenue
Costa Mesa, California 92626
(714) 549-8211
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
----------------
James D. Evert, Chief Executive Officer
Irvine Sensors Corporation
3001 Redhill Avenue, Building III
Costa Mesa, California 92626
(714) 549-8211
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
----------------
With Copy To:
Debra K. Weiner
Grover T. Wickersham, P.C.
430 Cambridge Avenue, Suite 100
Palo Alto, California 94306
----------------
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Exchange Act of 1933 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
*******************************************************************************
* Information contained in this prospectus is not complete and may be *
* changed. We may not sell these securities until the registration statement *
* filed with the Securities and Exchange Commission is effective. This *
* prospectus is not an offer to sell these securities and it is not *
* soliciting an offer to buy these securities in any state where the offer or*
* sale is not permitted. *
*******************************************************************************
Subject to Completion Dated October 20, 1999
8,270,731 Shares
IRVINE SENSORS CORPORATION
Common Stock
This prospectus covers a total of 8,270,731 shares of our common stock.
Certain of our stockholders, whom we refer to in this prospectus as the selling
stockholders, have shares of our common stock that they may reoffer or resale
from time to time in the public market. This prospectus may also be used by the
selling stockholders' pledgees, donees, transferees or other successors in
interest. Sometimes we refer to the selling stockholders and their pledgees,
donees, transferees or other successors in interest as the sellers. See "Selling
Stockholders" for a list of the selling stockholders. Of the shares offered by
this prospectus, we issued (1) 535,340 shares in a private placement conducted
in March 1999, 4,000,000 shares in a private placement conducted in June 1999,
and an additional 444,445 shares in a private placement conducted in October
1999, (2) 189,946 shares for services provided to us during 1998 or 1999 or for
retirement of debt, (3) 1,522,500 shares to purchase common stock upon exercise
of warrants that were exercisable by paying us in shares of Novalog, Inc., one
of our subsidiaries, (4) 400,000 shares issued under the terms of a negotiated
stock purchase agreement in which the holder surrendered shares of Novalog to us
in exchange for our shares of common stock, (5) 110,000 shares issued in
settlement of a dispute, (6) 67,500 shares issuable upon exercise of outstanding
warrants, (7) 1,000 shares issued to a former executive officer and (8)
1,000,000 shares issuable upon exercise of an option issued in exchange for an
agreement to defer royalties under a license agreement with a related party.
The sellers may offer the shares of common stock from time to time in
brokerage transactions, which may include block transactions, in the over-the-
counter market or negotiated transactions at prices and terms prevailing at the
times of such sales, at prices related to such market prices or at negotiated
prices. The sellers may sell the shares directly to purchasers, through broker-
dealers acting as agents for the Sellers or to broker-dealers who may purchase
the sellers' shares as principals and then sell the shares from time to time in
the over-the-counter market, in negotiated transactions or otherwise, or by a
combination of these methods. Broker-dealers who effect these transactions may
receive compensation in the form of discounts or commissions from the sellers or
from the purchasers of the shares for whom the broker-dealers may act as an
agent or to whom them may sell as a principal, or both. See "Plan of
Distribution."
We will not receive any part of the proceeds from the resale of the shares
by the selling stockholders. The selling stockholders and broker-dealers, if
any, acting in connection with such sales, might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any commission
received by them and any profit on the resale of such securities might be deemed
to be underwriting discounts and commissions under the Securities Act.
Our common stock is traded on The Nasdaq SmallCap Market(SM) under the
symbol "IRSN" and on the Boston Stock Exchange under the symbol "ISC." On
September 28, 1999, the closing sale price of our common stock on Nasdaq was
$1.625 per share.
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 9.
__________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<PAGE>
The date of this Prospectus is October , 1999.
<PAGE>
Neither we nor the selling shareholders have authorized any dealer, salesman or
other person to give any information or to make any representation other than
those contained or incorporated by reference in this prospectus. You must not
rely upon any information or representation not contained or incorporated by
reference in this prospectus as if we had authorized it. This prospectus does
not constitute an offer to sell or the solicitation of an offer to buy any
securities other than the registered securities to which it relates, nor does
this prospectus constitute an offer to sell or the solicitation of an offer to
buy securities in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction. The information contained in
this prospectus is accurate as of the date on the cover. When we or a selling
shareholder deliver this prospectus or make a sale pursuant to this prospectus,
we are not implying that the information is current as of the date of the
delivery or sale.
_________________
TABLE OF CONTENTS
_________________
<TABLE>
<CAPTION>
Page
----
<S> <C>
About this Prospectus......................................... 3
Where You Can Find More Information........................... 4
Forward Looking Statements.................................... 5
Prospectus Summary............................................ 6
Risk Factors.................................................. 9
Use of Proceeds............................................... 21
Price Range of Common Stock................................... 21
Dividend Policy............................................... 22
Capitalization................................................ 23
Selected Financial Data....................................... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
Business...................................................... 31
Management.................................................... 42
Principal Stockholders........................................ 50
Selling Stockholders.......................................... 54
Description of Capital Stock.................................. 58
Plan of Distribution.......................................... 61
Experts....................................................... 63
Legal Matters................................................. 63
Financial Statements.......................................... F-1
</TABLE>
3
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the SEC
using a "shelf" registration process. Under this shelf registration process, the
selling shareholders may sell up to 8,270,731 shares of our common stock
described in this prospectus in one or more offerings.
The selling shareholders received these shares of common stock in several
different ways:
. Holders of a total of 535,340 shares purchased their stock in a private
placement conducted in March 1999, holders of 4,000,000 shares purchased
their stock in a private placement conducted in June 1999 and holders of
an additional 444,445 shares purchased their stock in a private
placement conducted in October 1999;
. Holders of a total of 189,946 shares received their shares in exchange
for services provided to us during 1998 or 1999 or for retirement of
outstanding debt;
. Holders of a total of 1,522,500 shares received their shares by
exercising warrants for our common stock and by transferring to us
shares of Novalog;
. One holder received a total of 400,000 shares in a negotiated stock
purchase agreement whereby she transferred to us shares of Novalog she
had previously purchased;
. One holder received a total of 110,000 shares in settlement of a
dispute;
. Holders of warrants are entitled to exercise those warrants for a total
of 67,500 shares;
. One holder, a former executive officer of Irvine Sensors, received 1,000
shares as a departing gift; and
. One holder has an option to purchase up to 1,000,000 shares upon
exercise of an option granted to it in exchange for an agreement to
defer royalties under a license agreement for certain technology we
licensed in 1980.
You should carefully read this prospectus together with additional information
described under the next heading, "Where You Can Find More Information."
As used in this prospectus, unless the context requires otherwise, "we," "us,"
Irvine Sensors", "ISC" or the "Company" means Irvine Sensors Corporation, a
Delaware corporation and its predecessor California corporation and consolidated
subsidiaries.
4
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You can inspect and copy these reports, proxy
statements and other information at the public reference facilities of the SEC,
in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade
Center, Suite 1300, New York, New York 10048; and Suite 1400, Citicorp Center,
500 W. Madison Street, Chicago, Illinois 60661-2511. You can also obtain copies
of these materials from the public reference section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. The SEC
also maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC (http://www.sec.gov). You can also inspect reports and other
information we file with the Nasdaq SmallCap Market at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
We have filed a registration statement and related exhibits with the SEC
under the Securities Act of 1933, as amended. We refer to that act throughout
this prospectus as the Securities Act. The registration statement contains
additional information about us and the common stock. You may inspect the
registration statement and exhibits without charge at the office of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and you may obtain copies from
the SEC at prescribed rates.
You may also request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Corporate Secretary
Irvine Sensors Corporation
3001 Redhill Avenue, Building 3
Costa Mesa, CA 92626
Telephone: (714) 549-8211
You should rely only on the information provided in this prospectus and any
supplement. We have not authorized anyone else to provide you with different
information.
Simply because this prospectus has been delivered or a sale has been made
pursuant to this prospectus, you should not assume that such delivery or sale
created an implication that all of the facts in the prospectus have remained
unchanged. The statements made in this prospectus are made as of the respective
dates indicated.
5
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements which involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these or similar words carefully because they (1)
discuss our expectations about our future performance; (2) contain projections
of our future operating results or of our future financial condition; (3) state
other "forward-looking information. We believe it is important to communicate
our expectations to our investors. There may be events in the future, however,
that we are not accurately able to predict or over which we have no control. The
risk factors discussed in "Risk Factors," later in this prospectus, as well as
any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. You will
find additional risks described from time to time in our filings with the SEC.
Before you invest in our common stock, you should be aware that the occurrence
of any of the events described in the risk factors and elsewhere in this
prospectus could have a material and adverse effect on our business, results of
operations and financial condition and that upon the occurrence of any of these
events, the trading price of our common stock could decline and you could lose
all or part of your investment.
6
<PAGE>
PROSPECTUS SUMMARY
The Company
We are the developer of proprietary technologies to produce extremely
compact packages of solid state microcircuitry, which offer volume, power,
weight and operational advantages versus less miniaturized alternatives. These
advantages result from our ability to assemble microelectronic chips in a three-
dimensional "stack" instead of alongside each other on a flat surface, as is the
case with more conventional methods. These stacking technologies have also led
to our development of collateral technologies for the design of low power and
low noise chips, thinning of chips and various specialized applications of chips
and stacked chip assemblies in fields ranging from image processing to digital
photography.
Our core chip-stacking technology was originally conceived and developed as
a means of addressing the demands of space-based surveillance. However, the
degree of miniaturization which could be realized from our technologies
historically attracted research and development sponsorship from various U.S.
government funding agencies for a wide variety of potential military and space
applications. Since inception, we have derived most of our consolidated revenues
from government-funded research and development. However, since the early 1990s,
we have sought to commercially exploit our technologies, and we have received a
significant share of our consolidated revenues from the sale of commercial
products.
In October 1995, we formed a subsidiary, Novalog, Inc. (Novalog), to
commercially exploit our low power chip technology in the field of wireless
infrared data communication. In April 1997, we formed a subsidiary,
MicroSensors, Inc. (MSI), to commercially exploit our technologies for low noise
readout electronics and miniaturized inertial sensors as applied to the field of
microelectromechanical systems or "MEMS." In June 1998, we formed a subsidiary,
Silicon Film Technologies, Inc. (SFT), formerly Imagek, Inc., to commercially
exploit our technologies for miniaturized digital cameras and imaging devices.
All three of these subsidiaries are consolidated subsidiaries, as we have sold a
minority interest in each entity to outside investors. The business plans of
each of these consolidated subsidiaries require substantial additional capital.
We have not yet identified the sources for this needed funding. Therefore, we
cannot promise you that any of the subsidiaries will be able to secure the
financing they need or that the financing will be available on acceptable terms.
This offering will not permit us to fully finance the long-term business plans
of our consolidated subsidiaries.
We were originally incorporation in California in December 1974. We changed
our state of incorporation to Delaware by incorporating a new corporation in
January 1988 and merging the original California corporation into the new
corporation in May 1988. Our principal executive offices are located at 3001
Redhill Avenue, Building. 3, Costa Mesa, California 92626, and our telephone
number is (714) 549-8211. Our Web site is located at www.irvine-sensors.com. The
information contained on our Web site is not part of this prospectus.
7
<PAGE>
The Offering
Common Stock Offered by the Selling Stockholders...... 8,270,731 shares
Common Stock Outstanding.............................. 35,385,836 as of October
4, 1999. This number does
not include (1) up to
2,361,220 shares we may
issue upon exercise of
outstanding options
granted pursuant to our
stock option plans and
826,200 shares we may
issue upon exercise of
outstanding options
granted to a related
party; (2) up to 97,000
shares we may issue upon
exercise of outstanding
warrants; and (3) up to
1,061,500 shares we may
issue upon conversion of
outstanding shares of our
convertible preferred
stock. Also, this number
does not include an
indeterminate number of
shares that we may be
required to issue under
the terms of warrants
that may become
exercisable under certain
conditions. See
"Description of Capital
Stock."
Risk Factors......................................... An investment in our
common stock involves a
high degree of risk and
purchase of the shares
should not be considered
by any persons who cannot
afford to lose their
entire investment. See
"Risk Factors."
Use of Proceeds...................................... We will receive no
proceeds from the sale of
the shares by the selling
stockholders.
Nasdaq Symbol........................................ IRSN
Boston Stock Exchange Symbol......................... ISC
8
<PAGE>
Summary Financial Data
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Fiscal Years Ended 39 Weeks Ended
----------------------------------------------------------------------------- ---------------------------
October 2, October 1, September 29, September 28, September 27, June 28, June 27,
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 5,139,400 $ 8,041,400 $ 12,024,200 $ 13,693,200 $ 9,314,500 $ 7,102,700 $ 7,697,700
Loss from
operations (2,629,500) (3,071,500) (11,154,700) (14,809,200) (5,798,200) (1,648,600) (6,533,500)
Net loss (2,463,900) (4,137,500) (15,914,700) (14,875,600) (4,243,500) (281,900) (6,205,300)
Basic and diluted net
loss per common
and common
equivalent shares $ (0.18) $ (0.28) $ (0.94) $ (0.73) $ (0.19) $ (0.03) $ (0.18)
Weighted average
number of shares
outstanding 14,141,500 14,966,500 16,874,300 20,475,100 24,597,700 23,306,600 34,910,900
</TABLE>
We have not paid cash dividends on any class of our stock since our
formation. Under Delaware law there are certain restrictions which currently
limit our ability to pay cash dividends. We do not anticipate paying cash
dividends at any time in the foreseeable future and we may never declare cash
dividends.
Loss per common and common equivalent shares includes, where applicable,
cumulative dividends on Preferred Stock which have not been declared or paid.
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
October 2, October 1, September 29, September 28, September 27, June 27,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 6,795,500 $ 9,927,500 $ 9,648,200 $ 6,637,200 $4,802,700 $ 9,054,100
Current liabilities 1,355,400 3,545,400 5,787,100 7,395,600 2,296,000 3,625,350
Working capital 5,440,100 6,382,100 3,861,100 (758,400) 2,506,700 5,272,950
Total assets 10,355,400 15,609,200 21,742,200 9,449,300 7,064,700 11,665,400
Long-term debt 81,100 2,451,200 6,565,600 1,457,000 933,700, 3,728,100
Shareholders' equity 8,800,400 9,494,100 8,312,700 (2,939,900) 2,347,000 4,311,950
</TABLE>
9
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus,
including our consolidated financial statements and the related notes, before
you purchase any shares of our Common Stock. Additional risks and uncertainties,
including those generally affecting the market in which we operate or that we
current deem immaterial, may also impair our business.
We have a History of Losses and a Substantial Accumulated Deficit
Since our inception in December 1974, we have incurred substantial losses
in every fiscal year. Our net losses were $(4,243,500) for the fiscal year ended
September 27, 1998, $(14,875,600) for the fiscal year ended September 28, 1997
and $(15,914,700) for the fiscal year ended September 29, 1996. In our current
fiscal year, we have recorded a net loss of $(6,205,300) for the 39 weeks ended
June 27, 1999. As of June 27, 1999, we had an accumulated deficit of
$(60,184,200). Although Novalog has been profitable for the past two quarters,
we cannot promise you that our other subsidiaries or divisions will become
profitable in the foreseeable future, if at all, or that any of our subsidiaries
will maintain profitability, once achieved.
We anticipate that our expenses relating to developing, marketing and
supporting the commercial development of our technologies through our various
divisions and consolidated subsidiaries will increase substantially in the
future. In particular, we expect to spend significantly on the following
activities:
. Developing new market opportunities for our current and future
products and services;
. Funding more research and development to improve our current products
and to create new products and technologies;
. Expanding and improving our sales and marketing operations;
. Developing new channels for distributing our products and providing
our services;
. Expanding and improving our financial and operational infrastructure
and
. Broadening our customer support capabilities.
Accordingly, in the foreseeable future, we expect to experience additional
losses as our expenses for developing, marketing and supporting our current
technologies and products and developing new technologies and products exceed
our total revenues. These additional losses will increase our accumulated
deficit.
10
<PAGE>
For more detailed information concerning our losses and other operating
results, please see the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We have Shifted Our Business Focus
Since commencing operations, we have devoted most of our resources to
developing technologies for various defense-based applications, principally
under government research contracts. In 1992, we began a fundamental shift in
our business by broadening our focus to include commercial exploitation of our
technologies. Since 1992, we have implemented this movement toward
commercialization in a number of ways, including (1) the purchase and later shut
down of the IBM cubing line; (2) the creation of the Novalog, MSI and SFT
subsidiaries, each of which focuses on particular commercial applications of our
technologies; and (3) the development of various stacked-memory products
intended for military and aerospace markets. Novalog began selling its products
in October 1995; MSI received its first commercial contract in June 1998 and SFT
is attempting to raise funds to continue the development of its products.
Therefore, while the changes noted above have made possible new consolidated
revenue sources, they have not yet produced profitability on a consolidated
company level. Because of this limited and not-yet successful commercial
history, we cannot promise you that we will be able to make a successful shift
from government research and development contract work to being a company that
has products the commercial marketplace will accept and purchase.
Our Future Operating Results are Uncertain and are Likely to Fluctuate
Significantly
Our revenues, gross margins and other operating results may vary
significantly from quarter to quarter. The fluctuations may be due to a number
of factors, many of which are beyond our control. These factors include:
. Our or our competitors' introduction of new or enhanced products;
. Market acceptance of our or our customers' existing or planned
products;
. Conflicting demands or other disruptions to our manufacturing sources
of supply;
. The time it takes for us to bring to market our products currently
under development; and
. Our or our competitors' price changes or changes in pricing models;
Due to all of the foregoing factors, we do not believe that period-to-
period comparisons of our historical results of operations are good predictors
of future performance. Furthermore, it is possible that in some future quarters
our results of operations may fall below the expectations of securities analysts
and investors. In such event, the trading price of our stock will likely be
materially and adversely affected. Please also see "Management's Discussion and
Analysis of
11
<PAGE>
Financial Condition and Results of Operations" for a more detailed
analysis of our period-to-period results.
We Expect to Need Additional Financing
If we cannot raise funds, when needed, on acceptable terms, we may not be
able to develop or enhance our products, take advantage of future opportunities
or respond to competitive pressures or unanticipated requirements, which could
materially and adversely affect our business and annual results of operations.
The failure to generate sufficient cash flows or to raise sufficient funds to
finance growth could require us to delay or abandon some or all of our plans or
forego new market opportunities, making it difficult for us to respond to
competitive pressures. We believe that our cash reserves and cash flows from
operations will be adequate to fund our operations for at least the next 12
months. Nevertheless, we may need to raise more money within the next 12 months
for unforeseen reasons. In addition, we are likely to need to raise more money
thereafter either because the product development and market introduction costs
of the products currently contemplated in our business plan and those of our
subsidiaries are not yet being fully funded by internally-generated cash flows
or because our plans have changed in response to our market circumstances and
opportunities. Our capital requirements depend on many factors, including, but
not limited to:
. The rate at which we develop and introduce our products and services;
. The market acceptance and competitive position of our products and
services;
. The level of promotion and advertising required to market our products
and services and attain a competitive position in the marketplace and
. The response of competitors to our products and services.
At the time we require additional funding, such funding might not be
available on terms favorable to our stockholders or us or in sufficient amounts.
If additional funds are raised through the issuance of common stock, such stock
might be offered at a price lower than the fair market value of our common stock
at the time of the sale and would therefore reduce the value of the common stock
of our then current stockholders. Even if the value of our common stock does not
decrease, the percentage ownership of our then current stockholders will be
reduced by the issuance of the new stock. Furthermore, if the present offering
is fully subscribed, the amount of common stock available for future financing
would be virtually depleted. If that occurs, approval of our shareholders,
which we can not promise we could secure, would be required to make additional
shares of common stock available for issuance.
You are Facing a Substantial Investment Risk by Purchasing Our Stock
Your investment in our common stock must be considered an investment risk
due to the nature of our business, the industry in which we operate, the present
stage of our development, as
12
<PAGE>
well as the corresponding factors for our subsidiaries. Our future and that of
our subsidiaries is greatly dependent upon the successful introduction of new
products related to various emerging market areas. The subsidiary operations are
additionally subject to all of the risks inherent in a new business enterprise,
including (1) the absence of a substantial operating history, (2) the shortage
of cash, (3) undercapitalization and (4) the substantial expense of new product
development. We expect to encounter various problems, expenses, complications
and delays in connection with the development of our products and business and
those of our subsidiaries. We cannot promise you that we or our subsidiaries
will be able to overcome such obstacles and achieve, and then sustain,
profitable operations.
We Remain Dependent on Defense Contract Revenues which are Subject to Economic
and Other Risks Beyond Our Control
Although we have been shifting our focus to include commercial exploitation
of our technology, we expect to continue to be dependent upon research and
development contracts with federal agencies and their contractors for a
substantial, but diminishing portion of our consolidated revenues for the
foreseeable future. General political and economic conditions, which no one can
accurately predict, directly and indirectly affect the quantity 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 our results of operations as long as research and development
contracts remain an important element of our business.
Our Future Success Depends on the Timely Completion and Market Acceptance of New
Products and Our Ability to Keep Up with Rapid Technological Change
Rapidly changing technology, evolving industry standards, frequent
announcements and introductions of new or enhanced products and services and
changing customer demands characterize the markets for our products. Both we and
our subsidiaries are focused on emerging markets that are potentially subject to
rapid growth. It is very difficult to predict market reaction to new products in
such circumstances. It is critical to our success that we move quickly to market
with new products before technological advances make them obsolete. We may not
be able to do so. We are also dependent upon our ability to adapt to rapidly
changing technologies, to adapt our products to meet evolving industry standards
and to continually improve the performance, features and reliability of our
products in response to both changing customer demands and competitive product
offerings. Moreover, we cannot promise you that customers in these emerging
markets will react favorably to ours or our subsidiaries' present or future
products. It is important that we not only receive favorable market reaction
initially, in order to begin generating sales, but we must be able to sustain
the customers' level of interest in our products. In addition, because we have a
limited history of competing in the intensely competitive commercial electronics
industry, we cannot promise you that we will successfully be able to develop,
manufacture and market additional commercial product lines or that such product
lines will be accepted in the commercial marketplace. If we fail to successfully
and quickly adapt to changing technologies and customer requirements, our
business, results of operations and financial condition could be materially and
adversely affected.
Our Markets are Highly Competitive
The commercial electronics markets into which we and are subsidiaries are
entering are intensely competitive and rapidly evolving. We expect competition
to continue to increase both from existing competitors and new market entrants.
We believe that our ability to compete depends on many factors both within and
beyond our control, including:
. The performance, features, price and reliability of our products as
compared to those of our competitors;
. The timing and market acceptance of new products and enhancements to
existing products developed by us and our competitors;
. The quality of our customer service and support and
. The effectiveness of our sales and marketing efforts.
Virtually all of our current and potential competitors have longer
operating histories in the commercial electronics market, and significantly
greater financial, technical, marketing and other resources than we do. As such,
they may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many of our current and potential
competitors have greater name recognition and more extensive customer bases.
These competitors may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies, or offer more attractive
terms to purchasers than we can.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any one of which could impair our
finances and business prospects. We cannot assure you that we will be able to
compete successfully against existing or potential competitors or that
competitive pressures will not materially impair our finances or business
prospects.
Forward-looking statements may prove inaccurate
We have made forward-looking statements in this prospectus that are subject
to risks and uncertainties. You should note that many factors, some of which are
discussed elsewhere in this prospectus, could affect future financial results
and could cause those results to differ materially from those expressed in our
forward-looking statements contained in this prospectus. See "Forward-Looking
Statements" on page 6.
We may be Unable to Protect Our Proprietary Rights in Our Products and
Technology
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of patent, copyright, trade secret and trademark laws. As of the
date hereof, we own 41 U.S. patents and 9 foreign patents,
13
<PAGE>
and we have other patent applications pending before the U.S. Patent and
Trademark Office as well as various foreign jurisdictions. We cannot assure you
that patents will issue based on any of our patent applications. Even if patents
do issue, our existing and future patents and other intellectual property rights
maybe successfully challenged by others or invalidated. We cannot promise you
that any existing or future patents will survive a challenge or will otherwise
provide meaningful protection from competition. Furthermore, we cannot assure
you that we or our subsidiaries will have the financial resources to provide
vigorous defense or enforcement of patents or other intellectual property
rights. If our proprietary rights are infringed by a third party, the value of
our technology and products could be diminished and additional competition might
result from the third party's use of those rights, which would materially and
adversely affect our business and results of operations. If patents do not issue
from our patent applications because third parties already claim patent
protection, our use of certain of our technologies and products would be
restricted unless we entered into arrangements with the third-party owners,
which might not be possible on reasonable terms.
We and our subsidiaries generally enter into confidentiality or license
agreements with our employees, consultants and corporate partners and control
access to and distribution of our technologies, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights
from unauthorized use or disclosure, parties may attempt to disclose, obtain or
use our solutions or technologies. We cannot assure you that the steps we have
taken will prevent misappropriate use of our products or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States. There is
also the risk that third parties could independently develop products or
technology that are equivalent or superior to ours or that of our subsidiaries.
In such case, we would have no course of action against such third parties.
We have licensed, and we may license in the future, proprietary rights to
third parties. While we attempt to ensure that the quality of our brand is
maintained by the business partners to whom we grant non-exclusive licenses,
they may take actions that could materially and adversely affect the value of
our proprietary rights or our reputation. In addition, we cannot assure you that
these licensees will take the same steps we have taken to prevent
misappropriation of our solutions or technologies.
Third Parties May Assert Infringement Claims Against Us
Third parties may assert infringement claims against us. We do not believe
that our technological processes infringe the proprietary rights of others, but
we cannot assure you that third parties will not assert claims that we violate
their rights. Although there have not been any claims of these types in the
past, any claims or litigation, if they occur, could subject us to significant
liability for damages or could result in invalidation of our rights. In
addition, even if we were to prevail, litigation could be time-consuming and
expense to defend and could result in diversion of our time and attention, which
could materially and adversely affect our business and results of operations.
Any claims or litigation from third parties might also result in limitations on
our ability to use the intellectual property subject to these claims or
litigation unless we
14
<PAGE>
entered into arrangements with the third parties responsible for the claims or
litigation, which might be unavailable on reasonable terms, if at all.
Government Rights Limit Our Intellectual Property Rights
Whatever degree of protection, if any, is afforded to us or our
subsidiaries through our patents, proprietary information and other intellectual
property, this protection will not extend to government markets that use certain
segments of our technology. The government has the right to royalty-free use of
technologies which we have developed under government contracts, including
portions of our stacked circuitry technology. We are free to commercially
exploit such government-funded technologies and may assert our intellectual
property rights to seek to block other non-government users thereof, but we
cannot assure you we could successfully do so.
We are Highly Dependent on Our Third Party Suppliers
Since the closure of our manufacturing facilities for the stacked cubing
line in Vermont, we have had no significant manufacturing capabilities and have
no plans to handle the manufacture of our products in the foreseeable future. We
and our subsidiaries extensively use third party suppliers to manufacture our
products and prototypes of our future products. At the projected level of
operations, both we and our subsidiaries have identified sources that are
believed to be adequate to meet identified needs. However, we cannot assure you
that we or our subsidiaries will be able to cover changing manufacturing needs
in the future. If we are unable to do so, that failure will have a material
adverse impact on the our operations and that of our subsidiaries. Moreover,
since we do not have our own manufacturing capability, we may be less able to
respond to competitive changes in the marketplace than our competitors who do
have control of their own manufacturing facilities. That could give our
competitors a substantial advantage.
We May be Unable to Maintain Our Listing on the Nasdaq(TM) SmallCap Market and
Our Stock Could Become Subject to the Penny Stock Rules
Our common stock is publicly traded on the Nasdaq SmallCap Market. In 1998,
The Nasdaq Stock Market put into effect new and more restrictive standards for
companies wanting to maintain their listing on this market. Prior to the
implementation of these new regulations, we briefly dropped below the pending
standards due to the substantial loss associated with our Vermont plant closure.
In order to retain our listing, we had to demonstrate to the satisfaction of the
Nasdaq staff that we met the new standards and that we could stay in compliance
with those new standards for the foreseeable future. While we were able to meet
the new requirements at that time, we have at times since then come very close
to falling below one or more of the maintenance requirements. We cannot promise
you that we will be able to stay in compliance with the SmallCap Market
maintenance requirements in the future. In particular, we expect that
anticipated losses from our MSI and SFT consolidated subsidiaries as they
continue to develop their products are likely to continue to erode our
consolidated net worth until, and if, such subsidiaries are able to generate
material revenues from the sales of their planned products. Accordingly, our
continued compliance with the Nasdaq listing requirements may be dependent
15
<PAGE>
on maintenance of a $35 million or greater market cap, unless or until we
successfully raise additional equity financing. We cannot promise you that we
will be able to do so. We do believe that we have reduced the risk of being
delisted since we were able to raise funds in recent private placements of our
equity securities. However, this capital infusion only eliminates the risk of
delisting for the foreseeable future. It does not permanently eliminate the
risk.
If our common stock is delisted from Nasdaq, and, at the time, the price of
our common stock is less than $5 per share, such securities would come within
the definition of "penny stock" as defined in the Securities Exchange Act of
1934, as amended. The stock would then be covered by Rule 15g-9 of the Exchange
Act. That rule imposes additional sales practice requirements on broker-dealers
who sell such securities to persons other than established customers and
accredited investors. For a broker to conduct transactions covered by Rule 15g-
9, he or she must make a special suitability determination for the purchaser and
receive the purchaser's written agreement to the transaction prior to the sale.
Consequently, Rule 15g-9, if it were to become applicable, would affect the
ability or willingness of broker-dealers to sell our securities and therefore
would affect the ability of stockholders to sell their securities in the public
market and our ability to finance our business plans.
Our Success Depends on Certain Key Employees
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel and their ability to
execute our growth strategy. The loss of the services of any of our senior level
management or other key employees would likely have a material adverse effect on
our business and quarterly and annual results of operations.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in our industry is
extremely intense. We may be unable to retain our key employees or to attract,
assimilate and retain other highly qualified employees in the future. We expect
in the future to continue to experience difficulty in hiring and retaining
highly skilled employees with appropriate qualifications.
A Legal Dispute between Novalog and One of its Customers Could ADversely Impact
Our Consolidated Results of Operations
In September 1999, Novalog, one of our consolidated subsidiaries had a
dispute with one of its customers regarding a supply contract. That customer
filed a lawsuit against Novalog seeking unspecified damages and the rights to
manufacture a certain model of an integrated circuit chip used to control
wireless infrared data transmission, which chip is proprietary to Novalog. Since
the filing of the lawsuit, Novalog and the customer have been negotiating a
settlement to resolve the dispute. Pending the completion of those settlement
discussions, the customer has withdrawn the lawsuit without prejudice, and
Novalog has continued shipping the chip that is the subject of the dispute to
the customer. If the settlement discussions are not successful, Novalog would
expect the customer to promptly reinstate the lawsuit. The outcome of any
litigation is uncertain. An adverse judgment in this potential litigation could
have a materially adverse impact on Novalog which, in turn, would also
negatively impact ISCSs consolidated results of operations.
Future Sales of Shares by Existing Stockholders Could Affect Our Stock Price
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could decline. As of the date of this prospectus, we have a total of
approximately 6.8 million shares that we have sold in non-public offerings and
therefore are considered "restricted stock" under Rule 144 promulgated under the
Securities Act. We also have approximately 1.0 million additional shares
issuable upon exercise of warrants and options that are exercisable for
restricted stock. We are registering all of these shares for resale by the
purchasers on the registration statement of which this prospectus is a part. In
addition, as much as 1.0 million shares of restricted stock registered under a
registration statement declared effective in April 1998 are believed to still be
held by their original holders and are eligible for sale pursuant to that
earlier registration statement. If our stockholders sell
16
<PAGE>
substantial amounts of our common stock in the public market, the market price
of our common stock could decline.
You Should not Rely on Press Releases, News Articles or Other Information not
Contained in this Prospectus
From time to time, we issue press releases concerning our products and
services or other information about us or our subsidiaries. In addition,
traditional and electronic publications or discussion forums may present
information about us or our products and services. The information contained in
these press releases, publications or forums may not be accompanied by other
important information necessary for investors to fairly understand our business
and the risks associated with an investment in our stock due, in part, to the
practical limitations on the form and length of these channels of
communications. In addition, online message boards and other forms of online
communication among investors or other persons are not forums in which we have
provided the information. It is common that some of the information posted or
discussed in these forums is inaccurate. Therefore, you should not rely on any
information not contained in this prospectus in making a decision to buy or sell
our stock.
Potential Year 2000 Risks May Adversely Affect Our Business
Beginning in the year 2000, the date fields coded in computer systems and
software products will need to accept four-digit entries in order to distinguish
between the 21st and 20th century dates. There is significant uncertainty in the
software industry regarding the potential effects associated with Year 2000
compliance issues. To address these concerns, we have reviewed internally
developed software included in our systems. Further we are working with our
external suppliers and service providers with respect to both third-party
applications in our systems and third-party applications in our information
technology infrastructure to ensure that these third-party systems and
applications will be able to interoperate with our hardware and software
infrastructure where necessary and support our needs into the year 2000. Based
on these efforts, we believe we have no significant Year 2000 issues within our
systems or services. We have not engaged in any official process designed to
independently verify our Year 2000 readiness or to assess potential costs
associated with Year 2000 risks, nor have we made any contingency plans to
address these risks. Further, we have not deferred any of our ongoing
development efforts to address Year 2000 issues and do not anticipate any
material payments to vendors to remediate Year 2000 problems. However, we cannot
assure you that unanticipated costs associated with any Year 2000 compliance
will not exceed our present expectations and have a material adverse effect on
our business and quarterly and annual results of operations.
The most likely Year 2000 failure scenario attributable to a supplier or
customer is a systematic failure beyond our control or the supplier's or
customer's immediate control, such as a prolonged data communication,
telecommunications or electrical failure. A failure of this sort could interrupt
the manufacturing or procurement operations of our customers or suppliers. The
primary business risks to us in the event of such a failure would include
suspension of pending orders, disruption of collections and lost business due to
supply interruptions. Any of these risks
17
<PAGE>
could have a material adverse effect on our business and quarterly and annual
results of operations.
The Price of Our Common Stock is Likely to be Volatile
The market prices of the securities of technology companies have been
especially volatile. Our stock, in particular, may be volatile because it is
relatively thinly traded. If our revenues do not grow or grow more slowly than
we anticipate, or if operating or capital expenditures exceed our expectations
or cannot be adjusted accordingly, the market price of our common stock could be
materially and adversely affected. In addition, if the market for technology
stocks or the stock market in general experiences a loss in investor confidence,
the market price of our common stock could be materially and adversely affected
for reasons unrelated to our business or results of operations. General market
price declines or volatility in the future could adversely affect the price of
our common stock. Short-term trading strategies of certain investors can also
have a significant effect on the price of specific securities. Investors may be
unable to resell their shares of our common stock at or above the offering
price.
We do not Expect to Pay Dividends
We have never paid any cash dividends on our common stock, and we do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain any future earnings for funding growth and therefore, do not
expect to pay any dividends in the foreseeable future.
Provisions of Our Corporate Charter Documents Could Delay or Prevent a Change of
Control
Our Certificate of Incorporation grants our board of directors the
authority to determine the relative rights and preferences of our preferred
stock and gives the board the authority to issue such shares, all without
further stockholder approval. As a result, our board of directors could
authorize the issuance of a series of preferred stock that would grant to
holders preferred rights to our company's assets upon liquidation, the right to
special voting privileges, the right to receive dividends before dividends would
be declared upon the common stock and the right to redemption of such shares,
together with a premium, prior to the redemption of common stock. Our existing
common and preferred stockholders have no redemption rights. The ability of the
board to issue large blocks of preferred stock could have a potential anti-
takeover effect, and the issuance of preferred stock in accordance with such
authority may delay or prevent a change of control of our company.
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<PAGE>
USE OF PROCEEDS
We will receive no part of the proceeds of any sales or transactions made
by the selling stockholders and/or their respective pledgees, donees,
transferees or other successors in interest hereunder. Nevertheless, we will pay
substantially all of the expenses incident to the offering of the shares, other
than any discounts, concessions or commissions payable to any underwriters,
dealers or agents, which expenses will be borne by each selling stockholders.
PRICE RANGE OF COMMON STOCK
Our Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"IRSN" and on the Boston Stock Exchange under the symbol "ISC." The following
table sets forth the high and low closing prices for the Common Stock on the
Nasdaq SmallCap Market for the periods indicated. Prices reflect bids posted by
market makers and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
Fiscal Year Ended September 28, 1997:
First Quarter................................ $ 1-1/2 $0-27/32
Second Quarter............................... 1-9/16 1
Third Quarter................................ 1-5/32 0-31/32
Fourth Quarter............................... 1-9/16 1-7/32
Fiscal Year Ended September 27, 1998:
First Quarter................................ $ 1-1/32 $ 1
Second Quarter............................... 2-21/32 2-19/32
Third Quarter................................ 2-1/32 2
Fourth Quarter............................... 2-29/32 1-11/32
Fiscal Year Ending September 26, 1999:
First Quarter................................ $ 1-7/8 $ 1-3/8
Second Quarter............................... 1-21/32 1-1/4
Third Quarter................................ 1-15/16 1-13/32
Fourth Quarter (through September 30, 1999)... 1-13/16 1-7/32
</TABLE>
On September 17, 1999, there were 888 stockholders of record and
approximately 9,300 beneficial holders, based on information provided by
ChaseMellon Shareholder Services, our transfer agent.
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<PAGE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
intend to retain future earnings, if any, to fund the development and growth of
our business and, therefore, we do not anticipate paying any cash dividends in
the foreseeable future. In addition, under Delaware law there are certain
restrictions which currently limit our ability to pay cash dividends. Any future
decisions concerning the payment of dividends on our common stock will depend
upon our results of operations, financial condition and capital expenditure
plans, as well as such other factors as our board of directors, in its sole
discretion, may consider relevant.
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<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of
ISC as of June 27, 1999. You should read this table in conjunction with our
consolidated financial statements and the related notes included in this
prospectus.
<TABLE>
<CAPTION>
June 27, 1999
-------------
(unaudited)
<S> <C>
Current portion of long-term $ 288,600
debt......................................................... ============
Long-term debt................................................ 504,500
------------
Shareholders' equity:
Preferred stock, $0.01 par value: 500,000 shares
authorized; 6,437 shares Series B Convertible
Cumulative Preferred outstanding; aggregate
liquidation preference of $198,100....................... 50
3,745 shares Series C Convertible Cumulative
Preferred outstanding, aggregate liquidation
preference of $213,900................................... 50
3,900 shares Series D Convertible Cumulative
Preferred outstanding, aggregate liquidation
preference of $390,000................................... 50
Common stock, $0.01 par value: 40,000,000 shares
authorized; 34,905,911(1) shares outstanding............. 349,100
Paid in capital............................................... 64,252,400
Employee retirement plan contributions........................ (105,600)
Accumulated deficit........................................... (60,184,100)
------
Total shareholders' equity.................................. 4,311,950
----------
$ 5,105,050
============
</TABLE>
- ---------------
(1) This number does not include (1) up to 2,361,220 shares we may issue upon
exercise of outstanding options granted pursuant to our stock option plans
and 826,200 shares we may issue upon exercise of outstanding options granted
to a related party; (2) up to 97,000 shares we may issue upon exercise of
outstanding warrants; (3) up to 1,061,500 shares we may issue upon
conversion of outstanding shares of our convertible preferred stock; and
(4) an indeterminate number of shares that could be issued upon exercise
of certain warrants that may become issuable in the future under certain
conditions. See "Description of Capital Stock."
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<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our financial statements and notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
consolidated financial data as of and for the fiscal year ended September 27,
1998 are derived from consolidated financial statements that have been audited
by Grant Thornton LLP, independent auditors. The selected consolidated financial
data as of September 28, 1997, and September 29, 1996, and for each of the two
fiscal years in the period ended September 29, 1997 are derived from
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP independent accountants. The selected consolidated
financial data as of October 1, 1995 and October 2, 1994 and for each of the two
years in the period ended October 1, 1995 are derived from consolidated
financial statements that have been audited by PricewaterhouseCoopers LLP,
independent accountants, which are not incorporated by reference or included
herein. The selected consolidated financial data for the 39 weeks ended June 27,
1999 and June 28, 1998 and at June 27, 1999 have been derived from unaudited
consolidated financial statements included elsewhere in this prospectus. The
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, which our management considers necessary for a
fair presentation of the financial position and results of operations for these
periods. Operating results for the 39 weeks ended June 27, 1999 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ended September 26, 1999 or for future periods.
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Fiscal Years Ended 39 Weeks Ended
-------------------------------------------------------------------------------- ---------------------------
October 2, October 1, September 29, September 28, September 27, June 28, June 27,
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited)
Total revenues $ 5,139,400 $ 8,041,400 $ 12,024,200 $ 13,693,200 $ 9,314,500 $ 7,102,700 $ 7,697,700
Loss from (2,629,500) (3,071,500) (11,154,700) (14,809,200) (5,798,200) (1,648,600) (6,533,500)
operations
Net loss (2,463,900) (4,137,500) (15,914,700) (14,875,600) (4,243,500) (281,900) (6,205,300)
Basic and diluted
net
loss per common
and $ (0.18) $ (0.28) $ (0.94) $ (0.73) $ (0.19) $ (0.03) $ (0.18)
common equivalent
shares
Weighted average
number of shares
outstanding 14,141,500 14,966,500 16,874,300 20,475,100 24,597,700 23,306,600 34,910,900
</TABLE>
Basic and diluted net loss per common and common equivalent shares
includes, where applicable, cumulative dividends on Preferred Stock which have
not been declared or paid.
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<PAGE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
October 2, October 1, September 29, September 28, September 27, June 27,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 6,795,500 $ 9,927,500 $ 9,648,200 $ 6,637,200 $4,802,700 $ 8,898,300
Current 1,355,400 3,545,400 5,787,100 7,395,600 2,296,000 3,625,350
liabilities
Working capital 5,440,100 6,382,100 3,861,100 (758,400) 2,506,700 5,428,650
Total assets 10,355,400 15,609,200 21,742,200 9,449,300 7,064,700 11,665,400
Long-term debt 81,100 2,451,200 6,565,600 1,457,000 933,700, 3,728,100
Shareholders'
equity
(deficit) 8,800,400 9,494,100 8,312,700 (2,939,900) 2,347,000 4,311,950
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Thirty-nine Week Period Ended June 27, 1999 vs. Thirty-nine Week Period
Ended June 28, 1998
ISC achieved revenues of $7,697,700 for the 39-week period ended June 27,
1999, compared to $7,102,700 in the prior fiscal year.
Product sales increased $3,170,000 (or 195%) in the 39-week period, in this
fiscal year compared to last year's similar period. The increase in product
revenue is primarily attributable to the sales activity of Novalog. Novalog has
experienced an increased demand in Novalog's products, specifically the patented
NOVALOG SIRCommIII wireless infrared control circuit chip. Significant
customers such as Citizen Electronics have placed large purchase orders with
Novalog.
Contract research and development revenue declined $2,175,000 (or 43%) in
the 39-week period in this fiscal year compared to the 39-week period ended June
27, 1998. ISC's 1998 earnings included a significant contract with Advanced
Technology Products LLC. (ATPL), which was not expected to reoccur. The
$400,000 of other revenues in the 39-week period in 1998 represented the sale of
intellectual property rights to ATPL in connection with the research and
development contract. The terms of the intellectual property rights transaction
and the relationship of ATPL to ISC are described in Patents, Trademarks and
Licenses. Also contributing to the decline in research and development revenue
was ISC's reallocation of resources to the development stage subsidiaries, which
resulted in late contract awards.
Cost of contract research and development revenues as a percentage of
contract revenues increased from 82% in the 39-week period ended June 28, 1998
to 95% in the 39-week period ended June 27, 1999. ISC's overhead cost pool has
grown slightly since 1998 as a result of higher revenue in the first two
quarters of 1999 compared to similar periods in 1998. However, due to slow
bookings and other factors described above, ISC experienced a decline in revenue
during the 39-week period ended June 27, 1999 compared to the similar period in
1998, resulting in an increase in unapplied overhead and cost of contract
revenue as a percentage of contract revenue.
Cost of product sales as a percentage of product revenue was 86% in the 39-
week period ended June 27, 1999, compared to 99% in the 39-week period ended
June 27, 1998. Novalog, the primary source for cost of product sales, has
reduced overhead costs and has negotiated prices that more closely reflect die
yields.
ISC's general and administrative expenses increased $1,848,100 in the 39-
week period ended June 27, 1999 compared to the comparable period in 1998. The
increase is attributed to several factors. The 1998 general and administrative
expenses did not include the costs of ISC's two start-up operations, SFT and the
MicroElectronics Products Division (MPD). Additionally,
24
<PAGE>
ISC's audit and tax fees increased significantly in the 39-week period ended
June 27, 1999 compared to 1998.
ISC increased its expenditures in research and development by $2,653,300
during the 39-week period as compared to the prior year, primarily as a result
of increased product development activities in two subsidiaries. SFT's research
expenditures during the 39-week period for developing its Electronic Film System
exceeded the prior year by $1,344,000. MSI exceeded its prior year research
expenditures during the current year 39-week period by $927,500 in developing
its microgyro and universal capacitive readout chip.
Interest expense in the third quarter of fiscal 1999 decreased $46,800 from
the corresponding period of last fiscal year due to the retirement of ISC's bank
loan. Mitigating this factor, however, is the increased expense of $21,000
during the third quarter of 1999 compared to 1998 due to the interest expense
related to capital leases entered into to finance capital asset acquisitions.
Fiscal Year Ended September 27, 1998 vs. Fiscal Year Ended September 28,
1997
Revenues in fiscal 1998 of $9,314,500 decreased by $4,378,700 or 32 percent
compared to fiscal 1997. The primary reason for this decrease is attributed to
the closure of the Vermont facility. The decision to close the Vermont location
was centered on lower revenue and the continued increased cost of operations.
When considering corporate revenues generated by excluding the Vermont location,
fiscal 1998 revenues of $9,314,500 increased by $2,709,800 or approximately 41
percent.
Cost of contract revenues of $8,431,800 was 127 percent of contract
revenues due primarily to a substantial increase in reserves for potentially
unsaleable inventories. Cost of product sales of $2,247,000 or 98 percent of
product sales includes the final shut-down costs related to the Vermont
facility. By comparison, in fiscal 1997 cost of product sales were 150 percent
of product sales. Management is continuing to address the high product costs and
believes that gross margins will improve as sales increase and the effect of
implemented cost reductions are realized.
General and administrative expenses of $2,984,400 were reduced by $454,900
or 13 percent in relation to fiscal 1997. As a percentage of total revenues
general and administrative expenses were 32 percent in fiscal 1998 compared to
25 percent in fiscal 1997, however, fiscal 1997 included revenues from the
Vermont facility.
Research and Development decreased by $7,100 or less than 1 percent in the
year-to-year comparison. As a percentage of revenues R&D accounted for
approximately 17 percent in fiscal 1998 compared to approximately 12 percent in
fiscal 1997. The R&D expense in fiscal 1998 includes significant costs
associated with SFT's development of the electronic film product.
25
<PAGE>
The aggregate decrease of $7,356,300 in fiscal 1998 in cost of revenues,
general and administrative expenses and R&D are the direct result of
management's decision to streamline and control its expenses to fall in line
with the reduced revenue from the Vermont plant closing.
Interest expense declined by $177,400 in fiscal 1998, primarily
attributable to settlement of ISC's bank debt.
Interest income declined by $26,800 in fiscal 1998, primarily attributable
to lower interest rates and the debt pay-off associated with the Vermont
facility.
The net loss of $4,243,500 in fiscal 1998 was $10,632,100, or 150 percent
less than fiscal 1997. The Vermont plant closing in fiscal 1997 accounted for
$5,873,400 or 55 percent of this reduced loss.
Fiscal Year Ended September 28, 1997 vs. Fiscal Year Ended September 29,
1996
Revenues in fiscal 1997 of $13,693,200 showed an increase of $1,669,000 or
14 percent compared to fiscal 1996. This increase was primarily attributable to
ISC's Advanced Technology Operations in Costa Mesa. In mid-fiscal year ISC
announced the closing of its Vermont facilities due to the lower than required
revenue base and high fixed cost of operations. In comparing revenues generated
by excluding the Vermont operations, fiscal 1997 revenues were $6,604,700
compared to $5,460,300 in fiscal 1996, an increase of 21 percent.
Cost of revenues of $17,573,100 in fiscal 1997 was $435,500 higher than in
fiscal 1996; however, as a percentage of revenues, fiscal 1997 showed an
improvement of 14 percentage points over fiscal 1996. Operations excluding
Vermont recorded cost of revenues of $6,586,500 in fiscal 1997 compared to
$6,757,800 in fiscal 1996, a reduction of $171,300 or three percentage points.
In fiscal 1997, cost of revenues included a charge of $1,156,100 to increase
ISC's inventory reserve for, first: Wide Word SRAM memory cubes ISC has been
producing for future deliveries pursuant to an anticipated contract which had
not yet materialized and, second: slower than anticipated sales of its Flash
memory cubes.
General and administrative expenses were reduced by $592,300 in fiscal 1997
compared to fiscal 1996, and research and development expenses were also reduced
by $393,100 in fiscal 1997 compared to fiscal 1996.
These combined reductions of $1,156,700 in cost of sales, general and
administrative, and research and development reflect actual cost reductions
accomplished in fiscal 1997 while management re-structured ISC to take advantage
of new product opportunities and to expand ISC's traditional customer R&D base.
With the decision to close the Vermont facilities, ISC incurred a loss of
$5,873,400 in fiscal 1997 related to the sale of the surplus facilities and
equipment. Interest income declined by $69,000 in fiscal 1997 primarily related
to the Vermont facilities.
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ISC originally accounted for its convertible debentures in accordance with
APB 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants." However, the Securities and Exchange Commission (SEC) staff has
indicated that convertible debt instruments which are convertible at a discount
from market should be accounted for by treating the maximum discount as interest
expense with an offset to paid-in capital. In November 1997, ISC was advised
that past issuers of such securities have recently restated prior financial
statements to comport with the SEC view. In conformance therewith, ISC recorded
noncash interest expense of $4,396,700 with a like amount added to paid-in
capital in the second quarter of fiscal 1996. Because of the offsetting nature
of these entries, there is no effect on Shareholders' equity.
Net loss of $14,875,600 in fiscal 1997 was $1,039,100 lower than the net
loss reported for fiscal 1996. On a comparable basis, excluding plant closure
costs in fiscal 1997, and noncash debenture interest in fiscal 1996, the
adjusted net loss excluding the Vermont operations was $3,381,100 in fiscal 1997
compared to $5,520,500 in fiscal 1996 - an overall improvement of $2,139,400.
Liquidity and Capital Resources
The primary uses of cash and cash equivalents during fiscal 1998 were to
complete the winding down and exit from the Vermont facility, to retire ISC's
bank debt, reductions in trade payables and funding of ISC's net loss, which
also included R&D and start-up costs for its subsidiaries. As a result of equity
financings in fiscal 1998, these uses were accomplished while improving ISC's
working capital by $3,265,100.
At June 27, 1999, ISC had cash and cash equivalents of $2,762,800, working
capital of $5,272,850 and a current ratio of 2.45 to 1. During the nine-month
period ended June 27, 1999 ISC obtained additional equity funding and debt to
equity conversions aggregating approximately $6.9 million. After the end of the
1999 fiscal year, ISC raised an additional $600,000 through the issuance of an
additional 444,445 shares of common stock. In connection with ISC's acquisition
of capital assets, ISC entered into capital lease financing agreements totaling
$745,400, which resulted in an increase in current financing payments due of
$288,600 .
Contracts with government agencies may be suspended or terminated by the
government at any time, subject to certain conditions. Similar termination
provisions are typically included in agreements with prime contractors. In 1999
ISC experienced such termination of several of its contracts. There is no
assurance ISC will not experience suspensions or terminations in the future.
Such termination, if material, could cause a disruption of ISC's revenue stream
and could result in employee layoffs.
At June 27, 1999, ISC's backlog was approximately $5.3 million compared to
$2.5 million at June 28, 1998. Of the 1999 backlog, $1 million is due to an
outstanding purchase order for 40,200 application specification integrated
circuits (ASICs).
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Year 2000 Compliance
The year 2000 issue is the result of computer programs using two digits,
rather than four to define the applicable year. 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.
ISC views the year 2000 problem as an important business issue that could
affect its business, as well as that of its suppliers and customers. Until the
last several years, ISC's business has primarily been R&D, and its more recent
business activities have not involved the shipment of products or components
with embedded controllers that might be affected by the Year 2000 problem.
However, Irvine Sensors customers may have integrated ISC's devices into higher
level products or systems affected by the Year 2000 problem, and, to the extent
that its customers' business may be disrupted, ISC's business and that of its
subsidiaries is also subject to potential disruptions from such a cause. ISC
does not presently believe this risk to be material.
In addition, ISC does utilize a number of computerized information systems
to accurately process date-sensitive information across its operation, and any
of these programs or computer systems are potential sources of year 2000 system
failures. Irvine Sensors is working to identify and resolve such potential
impacts on ISC's computerized systems. ISC has been advised by its vendors that
their systems will be compliant with year 2000 issues in a timely manner.
Finally, ISC's general business operations could be adversely impacted were
there to be material interruptions either in the country's power infrastructure,
banking or financial systems or the procurement activities of its customers.
ISC's facilities do not contain elevators that might be subject to such
disruptions. Irvine Sensors has not completed its assessment of the full scope
of these risks and the actions necessary to address them, but ISC currently
believes that the actions that ISC can take to address such concerns are
limited, at best, and therefore, that the costs of addressing these issues will
not have a material adverse impact on ISC's financial position. Nevertheless,
if Irvine Sensors and third parties upon which it relies are unable to address
this issue in a timely manner, it could result in a material financial risk to
ISC. In order to mitigate the various risks associated with the Year 2000
problem, Irvine Sensors is working with its suppliers and customers, including
the disclosure and exchange of relevant information, to proactively manage the
calendar transition. Furthermore, ISC is investigating the costs of installing
backup power generation systems both to mitigate against possible disruptions
resulting from the Year 2000 problem as well as power interruptions resulting
from other causes.
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BUSINESS
Irvine Sensors Corporation, and its subsidiaries are organized into the
following primary business groups:
Irvine Sensors Corporation
ISC is the developer of proprietary technologies to produce extremely
compact packages of solid state microcircuitry, which offer volume, power,
weight and operational advantages versus less miniaturized alternatives. These
advantages result from ISC's ability to assemble microelectronic chips in a
three-dimensional "stack" instead of alongside each other on a flat surface, as
is the case with more conventional methods. These stacking technologies have
also led to ISC's development of collateral technologies for the design of low
power and low noise chips, thinning of chips and various specialized
applications of chips and stacked chip assemblies in fields ranging from
wireless infrared transmission to image processing to digital photography .
ISC's core chip-stacking technology was originally conceived and developed
as a means of addressing the demands of space-based surveillance. However, the
degree of miniaturization realizable from ISC's technologies has attracted R&D
sponsorship from various government funding agencies for a wide variety of
potential military and space applications. Since its inception, ISC has derived
most of its revenues from such funded research and development. Since the early
1990s, ISC has sought to commercially exploit its technologies and has received
an increasing share of its consolidated revenues from commercial sales of its
products.
During June 1992, ISC entered into a joint development agreement with IBM
to commercialize ISC's chip-stacking technology for computer memory
applications. In April 1996, ISC purchased a memory-stacking line in Essex
Junction, Vermont from IBM, and in October 1997, disposed of that line and
consolidated that sector of its business with its California operation. In
October 1995, ISC formed a subsidiary, Novalog, Inc., or Novalog, to
commercially exploit its low power chip technology in the field of wireless
infrared data communications. In April 1997, ISC formed a subsidiary,
MicroSensors, Inc., or MSI, to commercially exploit its technologies for low
noise readout electronics and miniaturized inertial sensors. In June 1998, ISC
formed a subsidiary, Silicon Film Technologies, Inc. (formerly Imagek, Inc.) to
commercially exploit its digital photography technologies.
ISC was originally incorporated in California in December 1974 and
reincorporated in Delaware in January 1988. Its principal executive offices are
located at 3001 Redhill Avenue, Building. 3, Costa Mesa, California 92626, and
its telephone number is (714) 549-8211.
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Novalog, Inc.
Novalog is a privately financed consolidated subsidiary of ISC which
designs, develops and sells proprietary integrated circuits ("ICs") for use in
wireless infrared communication. Novalog's initial products, trademarked
SIRComm(TM), SIR2(TM), MiniSIR(TM), MiniSIR2(TM) and BayBeamer(TM), enable
infrared, line-of-sight data transfer between computers, electronic organizers,
printers, modems and other electronic devices that have compatible ports.
Novalog is an active participant in the Infrared Data Association ("IrDA"),
which establishes the hardware and software protocols for such products. Novalog
believes its products have advantages in terms of power consumption, dynamic
range, size and economics as compared to the products of its competitors.
Novalog has shipped more than five million units of its products to
manufacturers servicing the IrDA marketplace. In fiscal 1998, Novalog accounted
for approximately 11% of the company's consolidated revenues.
Novalog was incorporated in California in October 1995. Its principal
executive offices are located at 125 Kalmus Drive, #K-1, Costa Mesa, California
92626, and its telephone number is (714) 429-1122.
MicroSensors, Inc.
MSI is a wholly-owned subsidiary of ISC that was formed to develop and sell
proprietary micromachined sensors and related electronics. Micromachining
involves the use of semiconductor manufacturing processes to build
electromechanical devices with feature sizes measured in microns or fractions
thereof. As prices have declined for micromachined devices, such solid-state
units have migrated from initial aerospace and military applications to
automotive, industrial process-control and medical applications. SRI Consulting
(Menlo Park, CA) has reported that some observers expect sensors built in this
manner to eventually replace virtually all electromechanical sensors, creating a
market of several billion dollars annually. MSI has supported a U.S.
government contract conducted by ISC for development of a proprietary microgyro
with projected performance features heretofore achievable only at much higher
cost. Subsequent to the completion of this contract, MSI has demonstrated
functional units of the MicroRing Gyro. Effective October 1997, MSI negotiated
its first commercial contract and has commenced development and shipment of
engineering samples of a multi-channel readout chip pursuant to that contract.
Production shipments pursuant to this contract are scheduled to begin in fiscal
1999. MSI accounted for approximately 3% of ISC's consolidated revenues in
fiscal 1998.
MSI was incorporated in Delaware in April 1997. Its principal executive
offices are located at 3001 Redhill Avenue, Building 3, Costa Mesa, California
92626, and its telephone number is (714) 444-8831.
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Silicon Film Technologies, Inc. (formerly Imagek, Inc.)
Silicon Film Technologies, Inc. is a privately financed consolidated
subsidiary of ISC. SFT designs, develops and intends to sell proprietary
electronic film systems and other digital imaging products and services.
Although dependent on completion of required financing, the success of which
cannot be assured, SFT is planning to introduce in calendar 1999 the EFS-1(TM)
Electronic Film System that includes a self contained, compact, battery-powered
cartridge that fits into the film cavity of a 35mm camera thus offering the
flexibility to switch between conventional film and digital photography. Other
collateral products and services are planned for introduction subsequent to the
EFS-1.
SFT was incorporated in Delaware in June 1998. Its principal executive
offices are located at 16265 Laguna Canyon Road, Irvine, California 92618, and
its telephone number is (949) 417-2260.
Products and Technology
ISC has developed a variety of products consisting of stacked memory chips,
and believes that its chip stacking technology can offer demonstrable benefits
to designers of systems that incorporate numerous integrated circuits, by
improving speed and reducing size, weight and power usage. In addition, since
ISC's technology reduces the number of interconnections between chips, potential
system failure points can also decrease.
ISC believes that the features achievable with its chip stacking technology
will have application in space and in aircraft in which weight and volume
considerations are dominant, as well as in various other applications in which
portability is required and speed is important. ISC is presently seeking to
exploit its potential market by focusing on the sale of chip stacking products
to high end, high margin government and commercial users to whom the technical
improvement will be most valuable. While these applications tend to require
lower unit volume, the sales are at significantly higher prices than many
applications requiring high volume production. Furthermore, ISC has existing
relationships with some of the potential customers in this market.
Since fiscal 1995, ISC has been shipping quantities of its stacked memory
products to customers for both government and commercial purposes. However,
there is no assurance that ISC will be successful in marketing such products for
widespread applications. ISC also intends to continue to market infrared
sensing devices for surveillance, acquisition, tracking and interception
applications for a variety of Department of Defense, or "DOD" and NASA missions.
ISC is not aware of any technical disadvantages to its chip stacking
technology. However, until high volume production is achieved, as to which
there is no assurance, the ultimate cost of products utilizing ISC's higher
density chip stacking technology cannot be firmly established, potentially
placing ISC's stacked chip products at a cost disadvantage.
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Accordingly, in fiscal 1998, ISC expanded its product offerings to include
lower-density stacked electronics that it believes could be more price
competitive.
In addition to its chip stacking technology, ISC has developed a Serial
Infrared Communications chip using elements of its sensor chip design
technology. This device is being used in products which allows computers and
computer peripherals to communicate using infrared transmissions in a manner
similar to that employed by remote control units for televisions and video
cassette recorders. Novalog has been shipping such devices since 1995. ISC also
has chip design technology relating to electronic readouts that it is exploiting
through its MSI subsidiary. MSI has developed a proprietary Silicon MicroRing
Gyro intended to provide an inexpensive means to measure angular motion for a
wide variety of potential applications. The Silicon MicroRing Gyro is presently
being packaged for evaluation by potential customers. Commercial exploitation of
this product is expected to be paced by the product design-in lead times
required by such customers. As a result, ISC does not project material
contributions to its consolidated revenues from this product during fiscal 1999.
In June 1998, ISC formed its SFT subsidiary to commercially explore its
proprietary technologies, focused on miniaturized digital cameras. SFT is
presently completing the development of a production version of its initial
product, the EFS-1, which is an electronic film system including a cartridge
that can be inserted into an existing film camera allowing that camera to take
digital pictures without modification to the camera itself. SFT continues to
seek private financing to enable it to introduce this product and support its
business plan. SFT believes that its proprietary EFS technology has value
advantages to potential customers with substantial investment in conventional
35MM camera equipment that inhibits the adoption by those consumers of self-
contained digital cameras. By utilizing the optics of existing cameras, SFT
believes that the EFS product will be economically competitive to comparable
resolution digital cameras.
Potential Product Applications
Neural Networks. In 1991, ISC received initial funding from the U.S.
Navy's Office of Naval Research for potential use of its technology in neural
networks. After the completion of this exploratory phase, ISC received various
add-on and collateral contracts aggregating over $9 million, through fiscal
1998, to further develop the neural network technology. ISC is presently
pursuing additional contracts, under which ISC expects to deliver demonstration
products to various branches of the DOD. Neural networks contain large numbers
of sensing nodes which continuously interact with each other, similar to the way
that the neurons of a human brain interact to process sensory stimuli. Neural
networks are the subject of scientific inquiry because pattern recognition and
learning tasks, which humans perform well and computers perform poorly, appear
to be dependent on such processing. Neither conventional computers nor advanced
parallel processors currently have the interconnectivity needed to fully emulate
neural network processing techniques. ISC believes its chip stacking technology
could offer a way to achieve the very high levels of interconnectivity necessary
to construct an efficient artificial neural network. To ISC's knowledge, no
other presently available packaging approaches are believed to offer this
potential. The full embodiment of this technology is not expected to yield
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near-term products for ISC, although it is anticipated to keep ISC actively
involved in advanced R&D relevant to ISC's long-range business interests.
However, elements of this technology, including a proprietary chip set, are
currently being developed with a view to product utilization, although there can
be no assurances as to the potential success of such development.
Wearable Computers. In fiscal 1998, ISC commenced exploration of a
technology to stack chips of different functionality and dimensions within the
same chip stack. ISC refers to this new technology as NeoStack(TM). ISC is using
its NeoStack technology to support a government program undertaken by the Boeing
Corporation ("Boeing"), to develop a wearable computer. ISC believes that its
NeoStack approach could offer advantages in terms of compactness and power
consumption to developers of wearable computer systems. However, because of
remaining developmental requirements, ISC is presently unable to forecast when
or if such technology will be incorporated in commercial products and, because
of product design lead times, does not anticipate such incorporation during
fiscal 1999.
Development Contracts
In April 1980, ISC entered into an agreement with R & D Leasing Ltd., or
"RDL", a limited partnership in which James Alexiou, ISC's Chairman of the
Board, and John Carson, its Senior Vice-President and Chief Technical Officer,
are general partners with beneficial interests, to develop certain processes and
technology related to chip stacking. ISC has exclusively licensed this
technology from RDL. ISC's exclusive rights to the technology extend to all
uses, both government and commercial. Since entering into the licensing
agreement, ISC has accrued royalty obligations to RDL at the rate of 3.5% of all
ISC's sales of chip stacks using the licensed technology. In addition, RDL is
entitled to receive an amount equal to 7% of all royalties earned by ISC from
sales of any such products by ISC's sublicensees, although to date, no such
sublicensee royalty income has been earned.
In October 1989, RDL agreed to defer its royalty claims and subordinate
them with respect to all other creditors in exchange for options to purchase up
to 1,000,000 shares of ISC's Common Stock, which are exercisable by applying the
deferred royalties to the purchase. The 1,000,000 options are exercisable at
$1.00 until October 1999. If RDL exercises its option in whole or in part,
title to RDL's technology would transfer to ISC and all further royalty
obligations would cease. If the option expires unexercised, the subordination
provisions would terminate and the accrued royalties would be due and payable in
the same manner as any other corporate obligation.
As of September 27, 1998, ISC had accrued $826,200 in deferred royalties
pursuant to this agreement. Due to the RDL subordination, royalties accrued, but
none were paid by ISC during fiscal years 1996, 1997 and 1998.
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Manufacturing
At the present time, ISC stacks DRAM, SRAM and FLASH memory die purchased
from commercial sources into cube-shaped assemblies at its own facility. The
cubes are then either packaged or segmented into subsections as required for the
particular product configuration being built. Outside vendor support is used
for packaging. During fiscal 1998, ISC introduced products involving the
stacking of pre-packaged die using widely-available fabrication technologies.
ISC uses outside third party qualified source vendors for the manufacturing of
these products.
The primary components of ISC's non-memory products are integrated circuits
and infrared detectors. The integrated circuits are designed by ISC for
manufacture by others from silicon wafers and other materials readily available
from multiple sources. Due to the ready availability of these materials, ISC
does not have any special arrangements with suppliers for their purchase. ISC
does not produce detectors. However, ISC has developed a process which enables
it to use relatively low cost and unsophisticated detectors which are generally
available from numerous sources.
Because of the nature of the sophisticated research and development work
performed under its development contracts, ISC designs and assembles equipment
for testing and prototype development. ISC uses the unique capability of this
equipment to seek, qualify for and perform additional contract research and
development for its customers.
Backlog
At June 27, 1999, ISC's funded backlog was $5.3 million compared to $2.5
million at June 28, 1998. ISC anticipates that all of the funded backlog will be
filled in fiscal 2000. In addition, ISC has substantial unfunded backlog on
contracts which typically are funded when the previously funded amounts have
been expended. ISC is also continuing to negotiate for additional research
contracts and commercial product sales, which, if obtained, could materially
increase its backlog. Failure to obtain these contracts in a timely manner
could materially affect ISC's short-term results.
Customers and Marketing
ISC's Advanced Technology Division or "ATD" focuses its product marketing
efforts on U.S. military agencies or contractors to those agencies. ISC is
continually seeking and preparing proposals for additional contracts. As a
result of the post cold war defense cutbacks, many defense contractors have
experienced declines in their business base as government agencies' budgets are
reduced. However, even if this trend continues, ISC believes there will be more
emphasis and funds directed toward advanced technology systems and research
programs for which ISC believes it is qualified to compete. However, there is
no assurance that ISC will be successful in competing against the larger defense
contractors for potential programs.
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Novalog supports Original Equipment Manufacturers or "OEM's" supplying
infrared communications devices complying with the standards of the Infrared
Data Association, otherwise known as "IrDA". We believe Novalog's active
participation in IrDA facilitates its marketing to those customers.
MSI directs its marketing toward three commercial areas: (i) Customers
with a need for Application Specific Integrated Circuits, or "ASICs," such as
the type developed for EG&G; (ii) OEMs that have a need for the cost and
performance features that could be provided by MSI's Silicon MicroRing Gyro,
with particular emphasis toward manufacturers of electronic toys and games,
industrial monitoring equipment, medical instrumentation and automotive markets;
and (iii) the manufacturers of micromachined sensors who may be able to utilize
MSI's Universal Capacitive Readout(TM) or UNICAP(TM)", general purpose ASIC
designed to support a variety of sensors requiring high accuracy capacitive
readout and control electronics.
SFT is a consumer product-focused enterprise. Both the structure and
staffing of SFT were developed to bring digital imaging products to the consumer
market. The initial product of SFT, the Electronic Film System, or "EFS," is
designed to enable 35mm camera owners to shoot digital or traditional
photography with equipment they currently own. The initial target market,
termed "prosumers," are defined as high end hobbyists and business photographers
who have made a significant investment in their camera systems. The EFS is
being positioned as a camera accessory, leveraging off the growing adoption of
digital cameras and related infrastructure.
SFT is planning a limited roll out of the initial EFS-1(TM) product,
largely through direct follow-up of inquiries from potential customers it has
received, and expects to follow with an expansion of distribution, reseller
channels and value-added resellers for broad and vertical markets. SFT plans to
service its customers with a sophisticated electronic commerce site, an 800
access number, and a customer web site information vehicle.
In fiscal 1998, contracts with all branches of the U.S. government
accounted for 54% of the company's consolidated revenues, the remaining 46% of
the company's consolidated revenues was derived from non-government sources.
During fiscal 1998, revenues derived from the U.S. Army and the various
divisions of the Boeing Corporation accounted for approximately 13% and 14% of
total consolidated revenues, respectively. Loss of these customers would have a
material adverse impact on the company's results.
Contracts with government agencies may be suspended or terminated by the
government at any time, subject to certain conditions. Similar termination
provisions are typically included in agreements with prime contractors. From
time to time, ISC has experienced such suspensions or terminations, and there is
no assurance ISC will not experience such suspensions or terminations in the
future.
The ISC and its subsidiaries focus their marketing in specific areas of
interest in order to best use their relatively limited marketing resources.
Each operating unit or subsidiary has a
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designated individual to direct that unit's marketing efforts. ISC is presently
recruiting for a senior management executive to coordinate these activities
corporate-wide.
Competition
The demand for high performance semiconductors has produced a wide variety
of competitors and competitive systems, ranging from various three-dimensional
designs to highly dense two-dimensional designs. For most commercial
applications, the principal competitive factor is for such products is the cost
premium over less densely packaged electronics. For some applications in which
volume and weight are critical, such as space or avionics, density becomes the
principal competitive factor. Many of ISC's competitors are believed to be
better financed, more experienced and organizationally stronger than the
company. Accordingly, there is no assurance that ISC and its subsidiaries can
successfully compete in such markets.
ISC is aware of two large companies that have developed competing
approaches to chip stacking. They are Texas Instruments, Inc. (TI) and Thompson
CSF (Thompson). In addition, there are several small companies and divisions of
large companies that have various technologies for stacking a limited number of
chips.
ISC is aware of many companies which are currently servicing the military
market for electro-optical sensors of the type which ISC's products are also
designed to support. The principal competitive factor in this business area is
the performance sensitivity and selectivity achievable by alternative sensor
approaches and designs. Competitors to ISC include Santa Barbara Research
Center, TI, Lockheed Martin Corporation, Raytheon, Litton Industries, Infrared
Industries, Inc., EG&G Judson, OptoElectronics-Textron, Inc., and Boeing
Corporation. ISC believes that most of its competitors in this area have
financial, labor and capital resources greater than those of ISC and there is no
assurance that ISC will be able to compete successfully.
ISC is aware of several companies, which currently service the market for
serial infrared detectors of the type sold by Novalog. For battery-powered
applications, the principal competitive factors are power consumption and cost.
For desktop applications, the principal competitive factor is the speed of data
transmission achievable. Novalog believes that it has competitive advantages in
the battery-powered applications. Competitors to Novalog include Hewlett-
Packard, Temic, Sharp, and IBM, among others, all of whom have financial, labor
and capital resources greater than those of Novalog.
MSI is competing in a market populated with several larger competitors as
relates to its Silicon MicroRing Gryo, including such companies as Delco
Electronics, Motorola, Bosch Corporation, Siemens and Systron-Donner. The
principal competitive factor for these applications is believed to be cost. MSI
has no present knowledge of competitors planning to introduce ASICs competitive
to its planned UNICAP product, but given the widespread availability of
integrated circuit design capabilities in the electronics industry, the
emergence of competitive products is believed to be likely.
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SFT is not aware of any direct competitors to its contemplated EFS product
line and believes that its intellectual property will act as a barrier to
competitors seeking to offer identical products, although there can be no
assurances of that result. However, the EFS system itself is expected to face
competition from increasingly sophisticated generations of digital camera
equipment. Peripheral equipment and services, which SFT intends to offer to
complement its EFS products are also likely to attract strong competition if the
EFS product line receives significant market acceptance.
Research and Development
ISC believes government and commercial research contracts will provide the
major portion of funding necessary for continuing development of some of its
products. However, the manufacture of stacked circuitry modules in volume will
require substantial additional funds, which may involve additional equity or
debt financing or a joint venture, license or other arrangement. Furthermore,
the development of the products of its subsidiaries are likely to require such
external funding. There can be no assurance that sufficient funding will be
available from government or other sources or that new products of ISC or its
subsidiaries will be successfully developed for volume production.
ISC's consolidated expenditures for research and development for the fiscal
year ended September 27, 1998 were $1,609,500, $1,616,600 for the fiscal year
ended September 28, 1997, and $2,009,700 for the fiscal year ended September 29,
1996. R&D expenditures for the 39 week period ended June 27, 1999 were
$3,025,200 compared to $371,900 at June 28, 1998. These expenditures of company
funds were in addition to ISC's cost of revenues associated with its customer-
sponsored research and development activities. The spending levels of company
funds on research and development compared to its overall expenses are
indicative of ISC's resolve to maintain its competitive advantage by developing
new products and improving upon its existing technology. ISC has funded its
research and development activities primarily through contracts with the federal
government and with funds from ISC's public and private stock and bond
offerings.
Patents, Trademarks and Licenses
ISC has a policy of protecting its investment in technology by seeking to
obtain, where practical, patents on the inventions made by its employees. As of
June 27, 1999, 50 U.S. and foreign patents have been issued and assigned to ISC
or its subsidiaries and other U.S. and foreign patent applications are pending.
There is no assurance that additional patents assignable to ISC will be issued
in the U.S. or elsewhere. Moreover, the issuance of a patent does not carry any
assurance of successful application, commercial success or adequate protection.
There is no assurance that ISC's existing patents or any other patent that may
issue in the future would be upheld if ISC seeks enforcement of its patent
rights against an infringer or that ISC will have sufficient resources to
prosecute its rights, nor is there any assurance that patents will provide
meaningful protection from competition.
38
<PAGE>
ISC has been advised by its patent counsel, Thomas Plante, Esq., that no
adverse patent has been found which might create an infringement problem in the
marketing of ISC's products. If others were to assert that ISC is utilizing
technology covered by patents held by them, ISC would evaluate the necessity and
desirability of seeking a license from the patent holder. There is no assurance
that ISC is not infringing on other patents or that it could obtain a license if
it were so infringing.
Those products and improvements which ISC develops under government
contracts are generally subject to royalty-free use by the government for
government applications. However, ISC has negotiated certain "non-space"
exclusions in government contracts and has the right to file for patent
protection on commercial products which may result from government-funded
research and development activities.
ISC has exclusive world-wide rights to technology developed under an
agreement with R & D Leasing, Ltd. ("RDL"), a limited partnership. Under the
agreement, ISC will pay royalties of 3.5% of all direct sales by ISC of the
basic devices using the technology. RDL will also receive 7% of all income
earned by ISC from sublicensees. ISC's Chairman of the Board and its Senior
Vice-President/Chief Technical Officer have beneficial interests in RDL. See
"Development Contracts."
ISC has exclusive world-wide rights to U.S., United Kingdom and Japanese
patents covering the basic concept of the EFS pursuant to an agreement executed
in October 1997 with Izak Sapir, a foreign individual. Under this agreement ISC
issued 30,000 shares of common stock, and assumed an obligation to pay a non-
refundable $35,000 to Elbit Systems Ltd, a prior holder of rights under the
patent. SFT is the successor to the rights and obligations of this licensing
agreement pursuant to which EFS sales will bear a 3% royalty payable to Mr.
Sapir on the gross sales price up to $50 million sales per annum and a 1%
royalty thereafter.
In February 1998, ISC entered into an Assignment of Patent and Intellectual
Rights with Floyd L. Eide, a Vice-President of ISC. As part of his employment
agreement, Mr. Eide assigned to ISC all rights and interests to five U.S.
Provisional Patent applications owned by him. In consideration for this
assignment of rights, Mr. Eide will receive a 1% royalty on the gross sales
revenues of any products incorporating elements of the assigned technology for
the lifetime of any patents resulting from the Provisional Patent Applications.
ISC entered into a sale and licensing of intellectual property rights
related to the EFS to Advanced Technology Products, LLC, or "ATPL," a related
party which funded early development of this technology for which John Carson,
ISC's Senior Vice President and Chief Technical Officer serves as Managing
Member. In September 1998, ISC assigned the rights and royalty obligations of
the ATPL license to SFT. Concurrent with this assignment, ATPL reduced its
royalty entitlements under the license in consideration of the issuance of
1,221,875 shares of SFT's common stock. ATPL retains a royalty entitlement of
2% of the first $30 million of EFS sales, declining thereafter as a function of
sales volume.
39
<PAGE>
Environmental Matters
ISC believes that it is substantially in compliance with all regulations
concerning the discharge of materials into the environment, and such regulations
have not had a material effect on the capital expenditures or operations of ISC.
Employees
As of August 31, 1999, ISC, including its consolidated subsidiaries, had 96
full-time employees and 23 consultants. Of the full-time employees, 67 were
engaged in engineering, production and technical support, 7 in sales and
marketing and 14 in finance and administration. None of ISC's employees is
represented by a labor union, and ISC has experienced no work stoppages due to
labor problems. ISC considers its employee relations to be excellent.
Properties
The following table sets forth information with respect to ISC's and its
subsidiaries' facilities:
<TABLE>
<CAPTION>
Square Monthly Lease Expiration
Location Feet Rent -------------------
-------- ---- ----
<S> <C> <C> <C> <C>
ISC(1) Costa Mesa, CA 30,339 $32,300 September 2001
Silicon Film Technologies, Inc. Irvine, CA 10,300 7,725 May 2004
------ -------
Total 40,639 $40,025
====== =======
</TABLE>
____________
(1) Includes facilities for our corporate headquarters, our Advanced Technology
Operations unit, MSI and Novalog.
The facilities used by ATD include laboratories containing clean rooms for
operations requiring a working environment with reduced atmospheric particles.
The Company believes that its facilities are adequate for their respective
operations, and that the facilities of the Company are maintained in good
repair.
40
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information as of September 30, 1999
with respect to each person who is an executive officer or director of ISC:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- ---------
<S> <C> <C> <C>
James Alexiou(1)(2) 67 Chairman of the Board
James D. Evert 57 President, Chief Executive Officer and a Director
John C. Carson 60 Senior Vice President, Chief Technical Officer and a
Director
Joanne S. Carson 60 Director and Secretary
Marc Dumont(1) 56 Director
Walter Garrigan(2) 72 Director
Frank P. Ragano(1) 71 Director
Wolfgang Seidel 57 Director
Vincent F. Sollitto, Jr.(2) 51 Director
John J. Stuart, Jr. 59 Vice President, Chief Financial Officer and Treasurer
Floyd L. Eide 63 Vice President and General Manager - MicroElectronics Division
</TABLE>
- -----------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Alexiou is a co-founder of ISC and has served as Chairman of the Board
and a director since its inception in 1974. He also served as ISC's President
from 1974 until September 1992 and its Chief Executive Officer from 1974 until
he retired from this position in September 1994. He was subsequently re-elected
to the positions of President and Chief Executive Officer in October 1996 but
resigned those positions in January 1997. Mr. Alexiou also serves as Chairman of
the Board of MicroSensors, Inc. ("MSI"), a wholly owned subsidiary of ISC (since
October 1997) and Novalog. Mr. Alexiou is also President of the Orange County
Philharmonic Society. Mr. Alexiou holds a B.S. in business management and an
M.A. in economics from Boston University.
41
<PAGE>
Mr. Evert has been President, Chief Executive Officer and a director of ISC
since February 1997. He also serves in those capacities for Novalog since
February 1997 and as a director of MSI since October 1997. Prior to joining
ISC, Mr. Evert was an independent management consultant. In that role from
December 1993 until January 1995, he assisted Fujitsu Microelectronics, Inc. in
the formation of a graphics product subsidiary and subsequently served as Vice-
President of that unit from January 1995 to February 1996. Mr. Evert is a
graduate of Syracuse University with a B.S. degree in Electrical Engineering.
Mr. Carson is a co-founder of ISC and has served as a Senior Vice President
since its inception in 1974 and a director since April 1982. He was elected
Chief Technical Officer in February 1997. Mr. Carson also serves as a director
of MSI (since October 1997). Mr. Carson has been awarded 15 patents for smart
sensors, 3D packaging and single processing architectures, including neural
networks. Mr. Carson holds a B S. in Physics from the Massachusetts Institute of
Technology.
Mrs. Carson has been a director of ISC since its inception and became its
Corporate Secretary in December 1981. Mrs. Carson holds a degree in Business
from the Chandler School for Woman.
Mr. Dumont became a director of ISC in April 1994. Mr. Dumont has been an
international consultant and investment banker for more than five years. Mr.
Dumont is also on the Board of Directors of Novalog since October 1996. From
January 1981 to March 1995, Mr. Dumont was President of PSA International S.A.,
a PSA Peugeot Citroen Group company. Mr. Dumont is a graduate of the University
of Louvain, Belgium with degrees in Electrical Engineering and Applied Economics
and holds an MBA from the University of Chicago.
Mr. Garrigan served as a director of ISC from February 1989 until he
retired in 1994. He was re-elected to the Board in February 1997. Mr. Garrigan
is a retired investment banker and financial consultant. Mr. Garrigan holds AB
and Juris Doctor degrees from Rutgers University and is a member of the Bar of
the District of Columbia.
General Ragano became a director of ISC in June 1985. Since December 1988,
General Ragano has been Chairman and Chief Executive Officer of CMS, Inc., a
manufacturer of defense munitions. General Ragano is also on the Board of
Directors of MSI (since October 1997). General Ragano holds a B.S. degree from
Duquesne University and an MBA from Syracuse University.
Mr. Seidel became a director in June 1999. He is principal of a management
consulting firm specializing in mergers and acquisitions, Seidel and Partner,
located in Munich, Germany. He has held this position since 1992. Prior to this
time, Mr. Seidel was a principal in the acquisition, management and sale of
German companies. Mr. Seidel holds a masters degree (Dipl. Ing) in Mechanical
and Aircraft Engineering from Munich Technical University.
Mr. Sollitto has been a director of ISC since October 1997. He is Chief
Executive Officer of Photon Dynamics, Inc., a position he has held since June
1996. Prior to joining Photon
42
<PAGE>
Dynamics, Mr. Sollitto was with Fujitsu Microelectronics, Inc. ("FMI") from
September 1993 to February 1996 as General Manager of its Business Unit
Operations. A graduate of Tufts College, Mr. Sollitto holds a B.S. degree in
Electrical Engineering.
Mr. Stuart joined ISC in January 1983 as its Manager of Special Projects
and Communications, became ISC's Chief Financial Officer and Treasurer in July
1985, and a Vice President in June 1995. He relinquished the position of
Treasurer in February 1995. Effective October 1998, Mr. Stuart re-assumed the
position of Treasurer in addition to his other responsibilities. Mr. Stuart is
also a member of the Board of Directors and is Vice President of Finance and
Chief Financial Officer of both Novalog (since October 1995) and MSI (since
October 1997). He also acted as Chief Financial Officer of SFT since its
organization in August 1998 until May 1999. Mr. Stuart holds a B.S. in
Industrial Management from the Massachusetts Institute of Technology.
Mr. Eide joined ISC in August 1997 as Vice President and General Manager -
MicroElectronics Division. From November 1987 to August 1997, Mr. Eide was Chief
Operating Officer and Vice President, Engineering of Dense-Pac Microsystems Inc.
He is a graduate of Fairleigh Dickenson University with a M.S. in Solid State
Physics and a B.S. in Physics.
Directors and officers are elected on an annual basis. The term of each
director expires at ISC's next annual meeting of stockholders or at such time as
his or her successor is duly elected and qualified. Officers serve at the
discretion of the Board of Directors.
There are no family relationships between any director, executive officer
or other key personnel and any other director, executive officer or other key
personnel of ISC, other than between John C. Carson and Joanne S. Carson, who
are husband and wife.
Board Committees
The board of directors has an audit committee and a compensation committee.
The audit committee reviews the independence of ISC's independent certified
public accountants, recommends the engagement and discharge of independent
accountants and reviews accounting policies, internal accounting controls and
results of audit engagements. During fiscal 1998, neither the board of
directors nor ISC's independent certified public accountants raised any issues
with respect to matters which required formal review.
The compensation committee makes recommendations to the board as to the
salaries of officers, administers ISC's executive bonus programs and recommends
to the board the award of stock options to key employees, officers and
directors.
ISC does not have a nominating committee or any committee performing the
functions of a nominating committee.
43
<PAGE>
Executive Compensation
Directors' Compensation
Directors who are employees of ISC are not separately compensated for their
services as directors or as members of committees of the board of directors.
During fiscal 1998, directors who were not employees of ISC received $1,600 for
each board meeting attended and were reimbursed for reasonable travel and other
expenses. No compensation is paid for attendance at meetings of the committees
of the board of directors.
Executive Compensation
For fiscal years ended September 27, 1998, September 28,1997, and September
29,1996, the compensation awarded or paid to, or earned by ISC's Chief Executive
Officer, and each of the three other executive officers of ISC whose annual
salary and bonus exceeded $100,000 in fiscal 1998 (the "Named Executive
Officers"), is shown in the following table:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------
Annual Compensation Awards
------------------------------- -----------------------
Other
Name Annual Restricted
and Compen- Stock Options/ All Other
Principal Fiscal sation Awards SARs Compensa-
Position(s) Year Salary($) Bonus($) ($)(1) ($)- (#) tion($)(2)
- ---------------------------- ---- ------- ------ -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
James D. Evert 1998 200,000 77,700 1,392 - 200,000 15,974
President and Chief 1997 92,288 47,500 - 7,500 300,000 8,770
Executive Officer 1996 - - - - - -
John C. Carson 1998 146,500 8,240 3,229 - 50,000 25,124
Senior Vice President 1997 146,500 - 3,865 - 100,000 14,255
1996 146,500 - 1,080 - - 18,033
John J. Stuart, Jr. 1998 120,000 10,360 7,552 - 50,000 12,660
Vice President, Treasurer 1997 120,000 - 5,091 - 100,000 11,888
Chief Financial Officer 1996 120,000 - 1,044 - - 16,050
Floyd L. Eide 1998 120,000 7,500 - - - 15,971
Vice President 1997 13,848 - - - 100,000 945
</TABLE>
- -----------------
(1) As permitted by the rules promulgated by the SEC, no amounts are shown for
"perquisites," where such amounts for the Named Executive Officers do not
exceed the lesser of 10% of the sum of such executive bonus salary or
$50,000.
(2) Amounts in this column represent the value of shares contributed to the
named individual's account in the Employee Stock Bonus Plan. See "Employee
Stock Bonus Plan".
Employment Agreements
ISC had no employment agreements with any of its executive officers during
the fiscal year ended September 27, 1998 and has not entered into any such
agreements in the current fiscal year.
44
<PAGE>
Option Grants
The following table sets forth certain information regarding grants of stock
options made during the fiscal year ended September 27, 1998 to the Named
Executive Officers. No stock appreciation rights ("SARs") were granted during
fiscal 1998.
Options Granted During Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------- Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise or Option Term(3)
Options Employees in Base Price Expiration ----------------------
Name Granted(1) Fiscal Year(2) ($/Share) Date 5% ($) 10% ($)
- ----- ---------- -------------- ----------- ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
James D. Evert 200,000 28.5% 1.5937 02/26/2002 50,200 105,500
John C. Carson 50,000 7.1% 1.50 05/06/2002 11,800 24,800
John J. Stuart, Jr. 50,000 7.1% 1.50 05/06/2002 11,800 24,800
</TABLE>
- -------------------
(1) Options granted become exercisable at the rate of 33% annually over a three
year period after one year from the date of grant.
(2) Based on an aggregate of 701,500 options granted under ISC's option plans
in the fiscal year ended September 27, 1998.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date and are not intended to forecast possible future
appreciation, if any, in the price of the Common Stock. The gains shown
are net of the option exercise price, but do not include deductions for
taxes or other expenses associated with the exercise of the options or the
sale of the underlying shares. The actual gains, if any, on the stock
option exercises will depend on the future performance of the Common Stock,
the optionholder's continued employment through the option vesting period
and the date on which the options are exercised.
45
<PAGE>
Option Exercises During Last Fiscal Year and Fiscal Year-End Values
The following table contains information relating to the exercise of
stock options granted under the 1991 and 1995 Stock Option Plans by the Named
Executive Officers in fiscal 1998, as well as the number and value of their
unexercised options as of September 27, 1998.
Aggregated Option Exercises During Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares Value at Fiscal Year End (#)(2) at Fiscal Year End (#)(3)
Acquired on Realized -------------------------- -------------------------
Name Exercise(#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James D. Evert - - 75,000 425,000 22,500 108,800
John C. Carson - - 33,333 116,667 27,300 69,700
John J. Stuart, Jr. - - 33,333 116,667 27,300 69,700
</TABLE>
- ----------------------
(1) Represents the fair market value of Common Stock on the date of exercise
(based on the closing sales price reported on the Nasdaq SmallCap Market or
the actual sales price if the shares were sold by the optionee), less the
exercise price, and does not necessarily indicate that the shares were sold
by the optionee.
(2) Includes both in-the-money and out-of-the money options.
(3) Fair market value of ISC's Common Stock on the last trading day of fiscal
1998 ($1.80 per share), less the applicable exercise prices, multiplied by
the number of options.
Employee Stock Bonus Plan
All of ISC's employees are eligible to participate in the Employee Stock
Bonus Plan, which has been established by ISC in lieu of a retirement plan.
Employees are enrolled in the plan as of the day following the date on which the
employee completes at least one hour of work. In order to share in ISC's
contribution to the Plan in any Plan year, an employee must have worked a
minimum of 1,000 hours during the Plan year, and be employed by ISC at the end
of the Plan year. To date, the Plan has been funded only with previously
unissued shares of ISC's Common and Preferred stock; thus ISC has not incurred
any cash expense in connection therewith. The Plan's assets are allocated
annually to the participating employees' accounts in the respective ratios that
each participating employee's compensation bears to the total compensation of
participating employees. An employee's participation in the Plan terminates on
his retirement, disability or death, at which time the employee will receive
that portion of his account which has vested. Generally, an employee's account
vests at a rate of 20% per year after completing three years of employment and
is 100% vested after seven years of employment. All executive officers named in
the Summary Compensation Table participate in ISC's Employee Stock Bonus Plan.
ISC contributed 172,900 shares of common stock to the ESBP for the fiscal year
ended September 29, 1996, 347,600 shares for the fiscal year ended September 28,
1997 and 333,300 shares for the fiscal year ended September 27, 1998.
46
<PAGE>
The value of contributions to the accounts of the Named Executive Officers
for the fiscal year ended September 27, 1998 has been included in "All Other
Compensation" in the Summary Compensation Table.
ISC maintains an Executive Compensation Retirement Plan wherein certain
executives may receive compensation based on a combination of age, length of
service and a percentage of average salary during the 36 months preceding their
retirement date. Mr. Alexiou was eligible to receive such compensation in fiscal
1998 and was paid $136,700.
Certain Transactions
In April 1980, ISC entered into an agreement with R & D Leasing Ltd., or
RDL, a limited partnership in which ISC's Chairman of the Board and a Senior
Vice President, are general partners with beneficial interests, to develop
certain processes and technology related to chip stacking. ISC has exclusively
licensed this technology from RDL. ISC's exclusive rights to the technology
extend to all uses, both government and commercial. Since entering into the
licensing agreement, ISC has accrued royalty obligations to RDL at the rate of
3.5% of all ISC sales of chip stacks using the licensed technology. In addition,
RDL is entitled to receive an amount equal to 7% of all royalties earned by ISC
from sales of those products by ISC's sublicenses, although to date, no such
sublicense royalty income has been earned.
In October 1989, RDL agreed to defer its royalty claims and subordinate
them with respect to all other creditors in exchange for options to purchase up
to 1,000,000 shares of ISC's Common Stock, which are exercisable by applying the
deferred royalties to the purchase. The 1,000,000 options are exercisable at
$1.00 until October 1999. If RDL exercises its option in whole or in part, title
to RDL's technology will transfer to ISC and all further royalty obligations
would cease. If the option expires unexercised, the subordination provisions
will terminate and the accrued royalties will be due and payable in the same
manner as any other corporate obligation.
As of September 27, 1998, ISC had accrued $826,200 in deferred royalties
pursuant to this agreement. Due to the RDL subordination, royalties accrued, but
none were paid by ISC during the fiscal years 1998, 1997 and 1996.
In February 1998, ISC entered into an Assignment of Patent and Intellectual
Rights, or the "Assignment" with Floyd L. Eide, a Vice-President of ISC. As part
of this agreement, Mr. Eide has assigned to ISC all rights and interests to five
U.S. Provisional Patent Applications owned by him. In consideration for this
Assignment, Mr. Eide will receive a 1% royalty on the gross sales revenues of
any products incorporating elements of the assigned technology for the lifetime
of any patents resulting from the Provisional Patent Applications.
47
<PAGE>
ISC entered into a sale and licensing of intellectual property rights
related to the Electronic Film System or EFStm, to Advanced Technology Products,
LLC or ATPL, a related party which funded early development of this technology
in which ISC's Chief Technology Officer, Mr. John Carson, serves as Managing
Member. In September 1998, ISC assigned the rights and royalty obligations of
the ATPL license to SFT, a majority-owned subsidiary of ISC. Concurrent with
this assignment, ATPL reduced its royalty entitlements under the license in
consideration for the issuance of 1,221,875 shares of SFT's common stock. ATPL
retains a royalty entitlement of 2% of the first $30 million of EFS sales,
declining thereafter as a function of sales volume.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of October 4, 1999 with
respect to shares of our voting equity securities beneficially owned by:
. Each person whom we know to be the beneficial owner of more than five
percent of our outstanding shares of common stock;
. Each of the executive officers named in the Summary Compensation Table;
. Each of our directors; and
. All current executive officers and directors as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act. Under this rule, certain shares may be deemed to be
beneficially owned by more than one person, if, for example, persons share the
power to vote or the power to dispose of the shares. In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire shares, for example, upon exercise of an option or warrant or upon
conversion of outstanding convertible preferred shares, within 60 days of the
date of the table; in computing the percentage ownership of any person, the
amount of shares is deemed to include the amount of shares beneficially owned by
that person, and only that person, by reason of those acquisition rights. As a
result, the percentage of outstanding shares of any person, as shown in the
following table does not necessarily reflect the person's actual voting power at
any particular date.
The percentage of beneficial ownership for the following table is based on
34,910,911 shares of common stock outstanding as of August 31, 1999. Shares of
outstanding convertible preferred shares are deemed converted as indicated in
the footnotes to the table. Ownership of preferred stock as separate equity
securities includes only shares of Series B and Series C convertible preferred
stock, all of which is owned by our Employee Stock Bonus Plan and administered
by certain persons listed in the table. Shares of Series D convertible preferred
stock are non-voting securities until converted, and therefore, are not included
in the calculations of preferred stock as a separate class of voting equity
securities. Shares of Series D convertible preferred shares are deemed
converted, where indicated in footnotes, in presenting common stock ownership in
this table.
Unless otherwise indicated, the address for each listed stockholder is: c/o
Irvine Sensors Corporation, 3001 Redhill Avenue, Building 3, Costa Mesa,
California 92626. To our knowledge, except as indicated in the footnotes to this
table, the persons named in the table have sole voting and investment power with
respect to the equity securities indicated.
49
<PAGE>
<TABLE>
<CAPTION>
Sole Voting Shared Voting
Class of or or
Equity Investment Investment Aggregate Percent
Name and Address Securities Power Power(1) Amount(2) of Class
---------------- ---------- ----- -------- --------- --------
<S> <C> <C> <C> <C> <C>
James Alexiou Common 567,862.5 (3) 1,553,983.5 2,121,846.0 5.8%
Preferred 1,378.85 8,803.15 10,182.0 100.0
(4)(5)
James D. Evert Common 220,222.0 (6) 1,747,478.0 (7) 1,967,700 5.5
Preferred - 10,182.0 (7) 10,182.0 100.0
John C. Carson(8) Common 1,186,257.0 (9) 1,470,376.0 2,656,633.0 7.3
Preferred 1,853.94 8,328.06 10,182.0 100.0
(4)(10)
Joanne S. Carson(8) Common 219,876.0 (11) - 219,876.0 *
Preferred - - - 0
Marc Dumont Common 147,164.0 (12) - 147,164.0 *
Preferred - - - 0
Walter Garrigan Common 13,333.0 (13) - 13,333.0 *
Preferred - - - 0
Frank P. Ragano Common 74,367.0 (14) - 74,367.0 *
Preferred - - - 0
Wolfgang Seidel Common 214,500.0 - 214,500.0 *
Preferred - - - 0
Vincent F. Sollitto, Jr. Common 17,333.0 (15) - 17,333.0 *
Preferred - - - 0
John J. Stuart, Jr. Common 506,756.0 (16) 1,591.388.0 2,098,144.0 5.9
Preferred 908.04 9,273.96 10,182.0 100.0
(4)(17)
Floyd Eide Common 125,146.0 (18) - 128,846.0 *
Preferred - - - -
FundSelect E Common 3,393,545 (19) - 3,393,545 9.6
HYPO-INVEST Preferred - - - -
Luxembourg S.A. 4,
MUE Alphonse Weicker
L-2721 Luxembourg-
Kirchberg
All directors and Common 3,305,616.5 (20) 1,120,791.5 (21) 4,426,408 11.8
executive officers as Preferred 4,140.83 (22) 6,041.17 (23) 10,182.0 100.0
a group (11 persons)
(See footnotes beginning on following page.)
</TABLE>
50
<PAGE>
_________
* Less than one percent.
(1) All shares in the "Shared Voting or Investment Power" column are shares held
in our Employee Stock Bonus Plan. The Common Stock and shares of Series B
and C Convertible Preferred Stock (which are convertible at a ratio of 1:50)
are voted and otherwise controlled by Messrs. Alexiou, Evert, Carson and
Stuart, until distributed to the employees upon their termination. The ESBP
currently owns an aggregate of 1,238,378 shares of Common Stock and 509,100
shares of Series B and Series C Convertible Preferred Stock, which
collectively convert into a total of 1,747,478 shares of Common Stock and
therefore are entitled to cast that many votes. In order to simplify the
share ownership in this table, the shares allocated to the individual
accounts of Messrs. Alexiou, Evert, Carson and Stuart are omitted, as to
each individual, in this column and each individual disclaims beneficial
ownership of the shares in this column. The shares in the ESBP allocated to
the accounts of these individuals are included in the column "Sole Voting or
Investment Power" and are noted in the footnotes to this table.
(2) Includes all securities that the named individual may vote, including those
in the column "Sole Voting or Investment Power" and "Shared Voting and
Investment Power."
(3) Includes (i) 289,369 shares of Common Stock held in the name of the Alexiou
Family Trust, as to which Mr. Alexiou and his wife jointly serve as trustee;
(ii) 74,999 shares of Common Stock issuable upon exercise of currently
exercisable stock options under our incentive stock option plans; (iii)
826,200 shares of Common Stock issuable upon exercise of an option granted
to R & D Leasing Ltd., an entity owned 50% by Mr. Alexiou and 50% by Mr.
Carson; Mr. Alexiou disclaims beneficial ownership of the 413,100 option
shares representing Mr. Carson's ownership interest in RDL; (iv) 10,000
shares of Common Stock issuable upon conversion of 100 shares of Series D
convertible preferred stock held in the name of the Alexiou Family Trust;
(v) 124,552 shares of common stock and 68,942.5 shares of common stock
issuable upon conversion of 1,001.42 shares of Series B convertible
preferred stock and 377.43 shares of Series C convertible preferred stock
held in Mr. Alexiou's vested account in the ESBP.
(4) The named individual is an administrator of our Employee Stock Bonus Plan
and in that capacity, he has the power to vote and dispose of the shares in
the ESBP. The numbers in the "Shared Voting or Investment Power" column
represent only the securities held by our ESBP that are not allocated to the
vested account of the named individual. The named individual disclaims
beneficial ownership of all of the shares in the ESBP other than those in
his vested account, which are included and noted in the column "Sole Voting
or Investment Power."
(5) Includes 1,001.42 shares of Series B Convertible Preferred Stock and 377.43
shares of Series C Convertible Preferred Stock, all held in Mr. Alexiou's
vested account in our ESBP. The 68,942.50 shares of Common Stock issuable
upon conversion of these shares are included in Mr. Alexiou's Common Stock
ownership total as though the shares had been converted. The Series D
Convertible Preferred Shares are not included in the total number of shares
of Preferred Stock for Mr. Stuart since the Series D Convertible Preferred
Stock is not a voting equity security until converted.
(6) Includes (i) 175,000 shares of Common Stock issuable upon exercise of
currently exercise stock options and (ii) 15,500 shares of Common Stock held
indirectly in an IRA account for the benefit of Mr. Evert.
(7) Mr. Evert's ESBP account has not yet vested. Accordingly, athe shares shown
represent all of the Common and Preferred shares in the EsbP by reason of
Mr. Evert's position as one of the administrators of the ESBP.
(8) John C. Carson and Joanne S. Carson are husband and wife. However, the
securities held as separate property by each of them have not been
aggregated with those owned by his or her spouse in order to give the reader
a clearer understanding of how many shares are owned by each person. Both
Mr. and Mrs. Carson disclaim beneficial ownership of the securities owned by
his or her spouse as separate property.
(9) Includes (i) 82,666 shares of Common Stock issuable upon exercise of
currently exercisable stock options under our incentive stock option plans;
(ii) 826,200 shares of Common Stock issuable upon exercise of an option
granted to R & D Leasing Ltd., an entity owned 50% by Mr. Alexiou and 50% by
Mr. Carson; Mr. Carson disclaims beneficial ownership of the 413,100 option
shares representing Mr. Alexiou's ownership interest in RDL; (iii) 184,405
shares of Common Stock and 92,697 shares of Common Stock issuable upon
conversion of 1,214.95 shares of Series B Convertible Preferred Stock and
638.99 shares of Series C Convertible Preferred Stock held in Mr. Carson's
vested account in the ESBP.
51
<PAGE>
(10) Includes 1,214.95 shares of Series B Convertible Preferred Stock and 638.99
shares of Series C Convertible Preferred Stock all held in Mr. Carson's
vested account in our ESBP. The 1,853.94 shares of Common Stock issuable
upon conversion of these shares are included in Mr. Carson's Common Stock
ownership total as though the shares had been converted.
(11) Includes 21,666 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(12) Includes (i) 101,644 shares of Common Stock issuable upon exercise of
currently exercisable stock options and (ii) 10,000 shares held indirectly
by a holding company controlled by Mr. Dumont.
(13) All of the 13,333 shares of Common Stock are shares of Common Stock
issuable upon exercise of currently exercisable stock options.
(14) Includes 28,332 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(15) Includes 13,333 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(16) Includes (i) 253,000 shares of Common Stock held in the name of the Stuart
Family Trust, as to which Mr. Stuart and his wife jointly serve as trustee;
(ii) 82,666 shares of Common Stock issuable upon exercise of currently
exercisable stock options under our incentive stock option plans; (iii)
15,000 shares of Common Stock issuable upon conversion of 150 shares of
Series D Convertible Preferred Stock; (iv) 110,688 shares of Common Stock
and 45,402 shares of Common Stock issuable upon conversion of 575.61 shares
of Series B Convertible Preferred Stock and 332.43 shares of Series C
Convertible Preferred Stock held in Mr. Stuart's vested ESBP account; and
(v) 12,800 shares of Common Stock held indirectly in an IRS account of Mr.
Stuart's wife.
(17) Includes 575.61 shares of Series B Convertible Preferred Stock and 332.43
shares of Series C Convertible Preferred Stock, all held in Mr. Stuart's
vested account in our ESBP. The 45,4002 shares of Common Stock issuable
upon conversion of these shares are included in Mr. Stuart's Common Stock
ownership total as though the shares had been converted. The Series D
Convertible Preferred Shares are not included in the total number of shares
of Preferred Stock for Mr. Stuart since the Series D Convertible Preferred
Stock is not a voting equity security until converted.
(18) Includes (i) 73,333 shares of Common Stock issuable upon exercise of
currently exercisable stock options.
(19) Does not include an indeterminate number of shares of Common Stock that
could be issued pursuant to the exercise of a warrant that becomes
exercisable under certain circumstances following the effective date of
the registration statement of which this prospectus is a part.
(20) Includes (i) 542,369 shares of Common Stock held indirectly by family
trusts (see Notes 5 and 16); and (ii) 38,300 shares of Common Stock held
indirectly in IRAs or a holding company (see Notes 6, 12 and 16); (iii)
1,493,192 shares issuable upon exercise of currently exercisable stock
options; (iv) 25,000 shares issuable upon conversion of currently
convertible Series D Convertible Preferred Stock; (v) 419,645 shares held
in the Company's ESBP in vested accounts of executive officers and
directors; (vi) 207,041.5 shares of Common Stock issuable upon conversion
of Series B and C Convertible Preferred Stock held in the Company's ESBP in
vested accounts of executive officers and directors; and (vi) 826,200
shares issuable upon exercise of the option held by RDL (see Notes 3 and
9).
(21) Includes all shares of Common Stock and deemed converted shares of Series B
and Series C Convertible Preferred Stock held in our ESBP that are not held
in the vested accounts of Messrs. Alexiou, Evert, Carson and Stuart, who
vote and otherwise control the shares. This total includes (i) 818,733
shares of Common Stock and (ii) 302,058.5 shares of Common Stock issuable
upon conversion of 3,645.02 shares of Series B Convertible Preferred Stock
and 2,396.15 shares of Series C Convertible Preferred Stock.
(22) Includes (1) 2,791.98 shares of Series B Convertible Preferred Stock and
(ii) 1,348.85 shares of Series C Convertible Preferred Stock in vested ESBP
accounts. No Series D shares are included in this total because Series D
Convertible Preferred Stock is a non-voting equity security.
(23) Includes 6,041.17 shares of Series B and Series C Convertible Preferred
Stock held in unvested accounts in the ESBP.
52
<PAGE>
SELLING STOCKHOLDERS
The selling stockholders, which term includes their transferees, pledgees,
donees or their successors, may from time to time offer and sell pursuant to
this prospectus any or all of the 8,270,731 shares of common stock. The selling
shareholders received these shares of common stock in one of the following
transactions:
. Holders of a total of 535,340 shares purchased their stock in a private
placement conducted in March 1999, holders of 4,000,000 shares purchased
their stock in a private placement conducted in June 1999 and holders of
an additional 444,445 shares purchased their stock in a private
placement conducted in October 1999;
. Holders of a total of 189,946 shares received their shares in exchange
services provided to us during 1998 or 1999 or for retirement of
outstanding debt; and
. Holders of a total of 1,522,500 shares received their shares by
exercising warrants for our common stock by transferred to us shares of
Novalog;
. One holder received a total of 400,000 shares in a negotiated stock
purchase agreement under the terms of which she transferred to us shares
of Novalog she had previously purchased;
. One holder received a total of 110,000 shares in settlement of a
dispute;
. Holders of warrants are entitled to exercise those warrants for a total
of 67,500 shares;
. One holder, a former executive officer of Irvine Sensors, received 1,000
shares as a departing gift; and
. One holder has an option to purchase up to 1,000,000 shares upon
exercise of an option granted to it in exchange for an agreement to
defer royalties under a license agreement for certain technology we
licensed in 1980.
The selling stockholders, or their pledgees, donees, transferees or other
successors in interests, may offer the shares of common stock owned by them for
sale as principals for their own accounts at any time and from time to time, on
the Nasdaq SmallCap Market or in the over-the-counter market or otherwise at
prices and terms at prices then prevailing or related to the then current market
price. The selling stockholders, or their pledgees, donees, transferees or other
successors in interests, may also offer the shares in private sales at prices
they negotiate. We will not receive any of the proceeds from the sale of any of
the shares. Selling stockholders are not obligated to reimburse us for any
portion of the expenses we incur in connection with this offering.
Except as otherwise disclosed herein, to our knowledge and based on certain
representations made by the selling stockholders, none of the selling
stockholders has, or within
53
<PAGE>
the past three years has had, any position, office or other material
relationship with us or any of our predecessors or affiliates.
The following table sets forth the name of each such selling stockholder
and the shares of common stock beneficially owned by each such holder as of
August 31, 1999 and immediately after the offering (assuming the sale of all of
their shares offered hereby). Since the date on which they provided us with the
relevant information, the selling stockholders may have sold, transferred or
otherwise disposed of all or a portion of their shares of common stock.
Except as indicated below, the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
Beneficial Ownership
Number of Shares Following Offering
Beneficially Owned Shares ---------------------
Prior to the to be Number of Percent
Name Offering Sold(1) Shares Owned
- ------------------------------ ------------------ ---------- ---------- --------
<S> <C> <C> <C> <C>
Banque Privee Edmond de
Rothschild, S.A. Luxembourg (1) 1,003,000 905,000 98,000 --
Nutley Investments (1) 112,500 112,500 0 --
Mourgue d'Algue et Cie (1) 50,000 50,000 0 --
Xavier Roland 125,000 125,000 0 --
Jean Dumont 75,000 75,000 0 --
Marc Dumont 45,500 12,500 33,000 --
Claude Eyraud 25,000 25,000 0 --
Serge Dubois 55,000 55,000 0 --
Paul Dutrieux 100,000 100,000 0 --
Roger H. Felberbaum 25,000 25,000 0 --
Lawrence R. Turel & Lori R. Turel JT 25,000 25,000 0 --
Anthony P. Turel, Jr. 12,500 12,500 0 --
Christopher G. Louis 15,000 15,000 0 --
Anthanasios .J. Foster 15,000 15,000 0 --
Richmont Consulting International (2) 15,280 15,280 0 --
Edda Brown (3) 400,000 400,000 0 --
David Pinto 117,587 11,000 106,587 *
JLA Associates 13,333 13,333 0 --
Bruce A. Capobianco 5,000 5,000 0 --
Katherine Kraemer 14,000 14,000 0 --
J. Mark Holland 26,000 26,000 0 --
Thomas J. Plante (4) 150,900 40,000 110,900 *
Leo P. Meyers 8,333 8,333 0 --
Richard Rice 20,000 20,000 0 --
Neal Clement 750,000 68,000 682,000 2%
</TABLE>
(See footnotes on following page.)
54
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Beneficial Ownership
Beneficially Owned Shares Following Offering
--------------------
Prior to the to be Number of Percent
Name Offering Sold(1) Shares Owned
- ---------------------------------------- ------------------ ------------ ---------- -------
<S> <C> <C> <C> <C>
Regency One LLC (1) 70,000 70,000 0 --
Eugene G. Lonerghan, Jr. 80,000 70,000 10,000 *
Preston Assets Management (1) 150,000 140,000 10,000 *
Myles T. Stott 40,000 40,000 0 --
Ronald Hale and Rowena E. Hale,
co-trustees 16,000 16,000 0 --
Crescent International Limited (1) 144,736 68,000 76,736 *
The Aresh Family Trust 33,340 33,340 0 --
Grover T. Wickersham, P.C. (5) 20,000 20,000 0 --
Oxcal Venture Fund LP (6) 110,000 110,000 0 --
Bensym, Inc. 10,000 10,000 0 --
Frank P. Ragano (7) 69,368 4,000 65,368 *
Vincent F. Sollito, Jr. (8) 7,333 4,000 3,333 *
I.N.I (9) 40,000 40,000 0 --
LTD (10) 27,500 27,500 0 --
Aggressive Investors Partnership (11) 836,400 836,400 0 --
FundSelect E (12) 3,393,545 3,395,545 0 --
Wolfgang Seidel (13) 214,500 214,500 0 --
R & D Leasing Ltd. (14) 1,000,000 1,000,000 0 --
</TABLE>
____________
* Less than 1%.
(1) The Selling Stockholder is an offshore corporation or partnership that has
invested either as principal or on behalf of its clients. In the latter
circumstances, the laws of certain jurisdictions protect the identity of
such clients from public disclosure. The Shares registered hereby on behalf
of the Selling Stockholder were issued upon exercise of warrants.
(2) The 15,280 shares owned by the Selling Stockholder are also included in the
total shares beneficially owned by Edda Brown because, due to her voting and
investment control over the Selling Stockholder, she would be deemed to be
the beneficial owner of such shares.
(3) See footnote (2). The Selling Stockholder is directly selling 400,000 shares
held in her own name.
(4) The Selling Stockholder serves as patent counsel to ISC.
(5) The Selling Stockholder is a professional corporation that serves as legal
counsel to ISC. The shareholders of the corporation are Grover T. Wickersham
and Debra K. Weiner.
(6) Grover T. Wickersham, a partner in the law firm of Grover T. Wickersham,
P.C., legal counsel to ISC, may be deemed to be a beneficial owner of the
Selling Shareholder because of his investment control. He disclaims such
beneficial ownership.
(7) Includes 23,333 shares issuable upon exercise of currently exercisable stock
options. The Selling Stockholder is a director of ISC.
(8) Includes 3,333 shares issuable upon exercise of currently exercisable stock
options. The Selling Stockholder is a director of ISC.
(9) Includes 40,000 shares issuable upon exercise of currently exercisable
warrants.
(10)Includes 27,500 shares issuable upon exercise of currently exercisable
warrants.
(11)The Selling Stockholder is a German investment partnership.
(12)The Selling Stockholder is a publicly-held German mutual fund.
(13)The Selling Stockholder is a director of ISC.
55
<PAGE>
(14) Includes 1,000,000 shares issuable upon exercise of currently exercisable
options issued in exchange for an agreement to defer royalties. The Selling
Stockholder is a limited partnership in which ISC's Chairman of the Board
and a Senior Vice-President are general partners with beneficial interests.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
As of September 1, 1999, we are authorized to issue up to 40,000,000 shares
of common stock, and 500,000 shares of preferred stock. As of October 4, 1999
there are approximately 35,385,356 shares of common stock issued and
outstanding, 6,437 shares of Series B preferred stock, 3,745 shares of Series C
preferred stock outstanding and 3,900 shares of Series D preferred stock
outstanding.
Common Stock
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the board may from time to time determine. Each
stockholder is entitled to one vote for each share of common stock held on all
matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is provided for in our
certificate of incorporation. Cumulative voting means that stockholders may take
the full number of votes they are entitled to cast in the election of directors,
which would be the number of shares they own multiplied by the number of
directors being elected, and distribute those votes among one or more of the
candidates, as each stockholder sees fit. Someone must give notice of his or her
intention to cumulate votes at the meeting, but once notice is given, all
stockholders then have the right to cumulate votes.
The common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon a liquidation, dissolution or winding-up of ISC,
the assets legally available for distribution to stockholders are distributable
ratably among the holders of the common stock and any participating preferred
stock outstanding at that time after payment of liquidation preferences, if any,
on any outstanding preferred stock and payment of other claims of creditors.
Each outstanding share of common stock is, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
Preferred Stock
Our board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of this preferred stock. However, the effects
might include, among other things:
57
<PAGE>
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of ISC without further action
by the stockholders.
Furthermore, holders of such preferred stock may have other rights,
including economic rights, senior to the common stock, and, as a result, the
issuance thereof could have a material adverse effect on the value of the common
stock. We have issued and outstanding three series of preferred stock which
possess the following characteristics.
Series B and Series C Convertible Cumulative Preferred Stock
The shares of our Series B and Series C convertible cumulative preferred
stock, which were issued solely to our Employee Retirement Plan, each bear a 10
percent cumulative annual dividend, which under Delaware law may generally be
paid only out of (1) retained earnings or (2) net profit in the current or
preceding fiscal year. To the extent that the dividends are not declared and
paid in any fiscal year, the obligation carries over to the next fiscal year.
The shares of Series B and Series C convertible cumulative preferred stock are
not redeemable, carry a liquidation preference over the common stock of $15.00
for the Series B and $30.00 for the Series C preferred stock, per share and are
convertible, at the option of the holder, into 50 shares of common stock for
each share of Series B and Series C convertible cumulative preferred stock. This
number proportionately adjusts if we effect a stock split, reverse split or
other similar event of recapitalization. To date, all former employees entitled
to distributions or transfers pursuant to the Employee Retirement Plan have
elected to convert their holdings of Series B and Series C convertible
cumulative preferred stock into common stock, thereby forfeiting entitlements to
future declarations of dividends. Undeclared dividends of $94,000 on the
outstanding Series B and $95,100 on the outstanding Series C preferred stock
have been carried forward to fiscal 1999. The shares of Series B and Series C
preferred stock outstanding as of March 28, 1999 would convert into an aggregate
of 509,100 shares of common stock.
Series D Convertible Preferred Stock
Shares of Series D preferred stock are convertible at the option of the
holder at any time into 100 shares of our common stock, subject to adjustment
for stock splits, reverse stock splits and other similar recapitalization
events. In the event of any liquidation, dissolution or winding up of ISC,
holders of the Series D preferred shares are entitled to receive a liquidation
preference of $100 per share. The Series D preferred shares carry no voting
rights, except as required by law, do not bear dividends and are not redeemable.
The Series D preferred shares carry a conversion premium of 10% per annum,
payable in our unregistered shares of common stock; provided, however, that if
our common stock has traded for 20 consecutive trading days at a price
58
<PAGE>
of at least $3.00 per share, the conversion premium expires and is of no further
effect. To date, our stock price has not traded at that level during the period
in which we have had outstanding Series D preferred stock. The shares of Series
D convertible preferred stock outstanding as of March 28, 1999 would convert
into approximately 438,200 shares of common stock.
Common Stock Purchase Warrants
In October 1999, we issued a common stock purchase warrant to the one
accredited investor who purchased shares in our October 1999 private placement.
The warrant becomes exercisable on the date of the October 1999 private
placement and terminates 90 days after the effective date of the registration
statement of which this prospectus is a part. This is referred to as the
"potential exercise period." The warrant becomes exercisable during the
potential exercise period only if the closing price of our common stock closes
below $1.35 for (1) 10 consecutive trading days or (2) 20 non-consecutive
trading days during the period. We refer to either of these occurrences as the
"trigger event". In the event the warrant becomes exercisable because of the
occurrence of a trigger event, the holder of the warrant will be entitled to
purchase a specified number of unregistered shares of our common stock for the
purchase price of $0.01 per share. The number of shares issuable upon exercise
of the warrant will be that number that results in an average price per share of
the shares purchased by the warrantholder in the October 1999 private placement
plus the warrantholder's warrant shares based on the trading price of our stock.
The average purchase price of the private placement shares and warrant shares
will be equal to the lowest closing price of our common stock during the 10
consecutive or 20 non-consecutive trading days that constitute the trigger
event. However, in no event will the warrantholder be entitled to purchase more
shares upon exercise of the warrant than would result in the holder's average
purchase price being lower than the lowest closing price of our common stock
recorded during the 52-week period preceding the date of the trigger event. In
addition, the number of shares issuable pursuant to the warrant cannot exceed
the limitations imposed by the limitations imposed by the our authorized capital
on September 30, 1999.
In October 1999, we issued a common stock purchase warrant in connection
with a private placement conducted by our consolidated subsidiary, Silicon Film
Technologies, Inc. The purchase right represented by the warrant is exercisable
on or after September 25, 2000 and will terminate at the close of business,
California time, on September 23, 2001. The purchase price of each share
issuable upon exercise of the warrant will be $1.35, payable in Silicon Film
Technologies Series B Preferred Stock valued at $10.00 per share or Silicon Film
Technologies common stock valued at $0.60 per share. The warrant entitles the
holder to purchase an aggregate number of shares equal to $400,000, at a value
of $1.35 per share.
59
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus covers the resale of the shares of common stock by the
selling stockholders, or their pledgees, donees, transferees or other successors
in interests. These persons are collectively referred to as the sellers.
The sellers may from time to time sell the shares of common stock offered
hereunder. They may make these sales on the Nasdaq SmallCap Market or in the
over-the-counter market or otherwise at prices and on terms then prevailing or
related to the then current market price, or in negotiated transactions. They
may sell the shares of common stock:
. to or through one or more broker-dealers, acting as agent or principal
in underwritten offerings;
. block trades;
. agency placements;
. exchange distributions;
. brokerage transactions;
. privately negotiated transactions;
. short sales; or
. in any combination of transactions.
Any or all of the sales or other transactions involving the common stock
described in this prospectus, whether effected by the sellers, any broker dealer
or others, may be made pursuant to this prospectus. In addition, sellers with
shares of common stock that qualify for sale pursuant to Rule 144 under the
Securities Act may sell those shares under Rule 144 rather than pursuant to this
prospectus.
To comply with the securities laws of certain states, the common stock may
be sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, shares of common stock may not be sold unless they have
been registered or qualified for sale or an exemption from registration or
qualification requirements is available and is complied with under applicable
state securities laws.
Irvine Sensors Corporation and the selling stockholders have agreed, and
later may further agree, to indemnify each other and certain persons, including
broker-dealers or others, against certain liabilities in connection with any
offering of the common stock, including liabilities arising under the Securities
Act.
60
<PAGE>
We will amend or supplement this Prospectus in the following circumstances
and to the following extent: (1) if the securities are to be sold at a price
other than the prevailing market price, to disclose such price; (2) if the
securities are to be sold in block transactions and the purchaser intends to
resell, to disclose the nature and extent of such arrangements; or (3) if the
compensation to be paid to broker-dealers is other than usual and customary
discounts, concessions or commissions, to disclose the terms of such broker-
dealer compensation. In the above-circumstances, the Sellers may not make any
offers or sales until an effective amendment or prospectus supplement is
available.
In connection with any transaction involving our common stock, broker-
dealers or others may receive from the sellers, and may in turn pay to other
broker-dealers or others, compensation in the form of commissions, discounts or
concessions in amounts to be negotiated at the time. The sellers and any broker-
dealers acting in connection with such sales, might be deemed to be
"underwriters" within the meaning of section 2(11) of the Securities Act and any
commission received by them and any profit on the resale of such securities may
be deemed to be underwriting discounts and commissions under the Securities Act.
We will not receive any part of the proceeds from the sale of the shares of
common stock by the selling stockholder
61
<PAGE>
EXPERTS
The consolidated financial statements of Irvine Sensors Corporation for the
fiscal year ended September 27, 1998 have been included in reliance on the
report of Grant Thornton LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Irvine Sensors Corporation as of
and for the fiscal years ended September 28, 1997 and September 29, 1996, have
been included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The statements contained in the section entitled "Business Patents,
Trademarks and Licenses" of the annual report on Form 10-K for the fiscal year
ended September 27, 1998, incorporated by reference in this Prospectus, are
included in reliance upon the opinion of Thomas J. Plante, Esq. Irvine,
California, patent counsel for ISC, and upon his authority as an expert. Mr.
Plante is a selling stockholder in this prospectus.
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of common
stock offered by this prospectus will be passed upon for us by Grover T.
Wickersham, P.C., Palo Alto, California. That law firm is the owner of 20,000
shares of Common Stock, and is a selling stockholder in this prospectus.
62
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Irvine Sensors Corporation
Costa Mesa, California
We have audited the accompanying consolidated balance sheet of Irvine Sensors
Corporation as of September 27, 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Irvine
Sensors Corporation as of September 27, 1998, and the consolidated results of
its operations and its consolidated cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Grant Thornton LLP
Irvine, California
January 6, 1999
F - 1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Irvine Sensors Corporation
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of shareholders' equity (deficit) and of cash flows as
of and for each of the two years in the period ended September 28, 1997 present
fairly, in all material respects, the financial position, results of operations
and cash flows of Irvine Sensors Corporation and its subsidiaries as of and for
each of the two years in the period ended September 28, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Costa Mesa, California
December 16, 1997
F - 2
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, September 27, June 27,
1997 1998 1999
-------------- -------------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 1,639,300 $ 1,310,400 $ 2,762,800
Accounts receivable, net of allowances of $10,000
in 1997 and 1998 and $72,300 in 1999.......................... 1,237,700 1,766,100 1,774,100
Stock subscriptions receivable................................. - - 2,301,600
Inventory...................................................... 2,577,300 1,532,700 1,796,100
Other current assets........................................... 1,182,900 193,500 263,700
------------ ------------ ------------
Total current assets......................................... 6,637,200 4,802,700 8,898,300
Equipment, furniture and fixtures, net.......................... 2,775,800 2,224,000 2,674,300
Other assets.................................................... 36,300 38,000 92,800
------------ ------------ ------------
$ 9,449,300 $ 7,064,700 $ 11,665,400
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................... $ 4,370,800 $ 1,570,800 $ 2,583,250
Accrued expenses............................................... 684,700 622,400 646,600
Deferred revenue............................................... 106,100 50,000 106,900
Notes payable and current portion of long-term debt............ 2,234,000 52,800 288,600
------------ ------------ ------------
Total current liabilities.................................... 7,395,600 2,296,000 3,625,350
Long term debt.................................................. 593,200 107,500 504,500
Deferred and subordinated royalties payable -
affiliated company............................................. 613,800 826,200 826,200
Convertible subordinated debentures............................. 250,000 - -
Preferred stock of consolidated subsidiary...................... 118,500 - -
Minority interest in consolidated subsidiaries.................. 3,418,100 1,488,000 2,397,400
------------ ------------ ------------
Total liabilities............................................ 12,389,200 4,717,700 7,353,450
------------ ------------ ------------
Shareholders' equity (deficit):
Preferred Stock, $0.01 par value; 500,000 shares authorized;
8,785, 6,966 and 6,437 shares Series B Convertible
Cumulative Preferred outstanding; aggregate
liquidation preference of $198,100........................... 50 50 50
4,974, 3,964 and 3,745 shares Series C Convertible
Cumulative Preferred outstanding; aggregate
liquidation preference of $213,900........................... 50 50 50
None, 4,400 and 3,900 shares Series D Convertible
Preferred outstanding; aggregate liquidation
preference of $390,000....................................... - 50 50
Common stock, $0.01 par value, 40,000,000 shares
authorized; 21,541,300, 28,457,700 and
34,905,900 shares issued and outstanding...................... 215,400 284,600 349,100
Common stock warrants; 340,000, 162,000 and
97,000 issued and outstanding................................. - - -
Paid-in capital................................................ 46,424,100 55,885,250 64,252,400
Employee retirement plan contributions......................... - - (105,600)
Accumulated deficit............................................ (49,579,500) (53,823,000) (60,184,100)
------------ ------------ ------------
Total shareholders' equity (deficit).......................... (2,939,900) 2,347,000 4,311,950
------------ ------------ ------------
$ 9,449,300 $ 7,064,700 $ 11,665,400
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F - 3
<PAGE>
IRVINE SENSORS
CORPORATION
CONSOLIDATED SSTATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended 39 Weeks Ended
------------------------------------------------ -------------------------------
September 29, September 28, September 27,
1996 1997 1998 June 28, 1998 June 27, 1999
-------------- -------------- -------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract research and
development................... $ 3,614,300 $ 5,821,100 $ 6,624,700 $ 5,074,200 $ 2,899,200
Product sales................... 8,283,900 7,872,100 2,289,800 1,628,500 4,798,500
Other........................... 126,000 - 400,000 400,000 -
------------ ------------ ----------- ----------- -----------
Total revenues................ 12,024,200 13,693,200 9,314,500 7,102,700 7,697,700
------------ ------------ ----------- ----------- -----------
Costs and expenses:
Cost of contract revenues....... 4,694,400 5,737,800 8,431,800 4,162,100 2,764,200
Cost of product sales........... 12,443,200 11,835,300 2,247,000 1,604,900 4,137,100
General and administrative...... 4,031,600 3,439,300 2,984,400 2,612,400 4,460,500
Research and development........ 2,009,700 1,616,600 1,609,500 371,900 3,025,200
(Gain) loss related to
plant closure................. - 5,873,400 (160,000) - -
------------ ------------ ----------- ----------- -----------
23,178,900 28,502,400 15,112,700 8,751,300 14,387,000
------------ ------------ ----------- ----------- -----------
Loss from operations............. (11,154,700) (14,809,200) (5,798,200) (1,648,600) (6,689,300)
Interest expense................ (469,800) (443,600) (266,200) (112,900) (66,100)
Interest income................. 108,300 39,300 12,500 11,300 13,400
Other........................... - - 299,700 - -
Noncash interest expense
related to convertible
debentures.................... (4,396,700) - - - -
------------ ------------ ----------- ----------- -----------
Loss before minority interest and
provision for income taxes...... (15,912,900) (15,213,500) (5,752,200) (1,750,200) (6,742,000)
Minority interest in loss of
subsidiaries.................... - 340,500 365,200 324,800 383,700
Provision for income taxes....... (1,800) (2,600) (2,600) (2,600) (2,800)
------------ ------------ ----------- ----------- -----------
Loss before extraordinary item... (15,914,700) (14,875,600) (5,389,600) (1,428,000) (6,361,100)
Extraordinary item - debt
extinguishment.................. - - 1,146,100 1,146,100 -
------------ ------------ ----------- ----------- -----------
Net loss......................... $(15,914,700) $(14,875,600) $(4,243,500) $ (281,900) $(6,361,100)
============ ============ =========== =========== ===========
Basic and diluted loss per
share:
Loss before extraordinary
item.......................... $(0.94) $(0.73) $(0.24) $(0.08) $(0.18)
============ ============ =========== =========== ===========
Extraordinary item.............. - - $0.05 $0.05 -
============ ============ =========== =========== ===========
Net loss........................ $(0.94) $(0.73) $(0.19) $(0.03) $(0.18)
============ ============ =========== =========== ===========
Weighted average number of
shares outstanding.............. 16,874,300 20,475,100 24,597,700 23,306,600 34,910,900
</TABLE>
The accompanying notes are an integral part of these statements.
F - 4
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Common Stock
Shares Issued Warrants Issued
--------------------- --------------------
Number Amount Number Amount
---------- -------- ---------- -------
<S> <C> <C> <C> <C>
Balance at October 1, 1995................... 15,566,800 $155,700 126,900 $ -
Stock options exercised................... 257,100 2,600 - -
Common stock issued to
employee retirement plan............... 172,900 1,700 - -
Common stock warrants
issued................................. - 222,000 -
Common stock warrants
exercised.............................. 109,700 1,100 (109,700) -
Series B and Series C preferred
stock converted to common
stock.................................. 50,100 500 - -
Convertible debentures
converted to common stock.............. 2,553,400 25,500 - -
Net loss.................................. - - - -
Additional paid-in capital related
to convertible debentures.............. - - - -
---------- -------- --------- -------
Balance at September 29, 1996................ 18,710,000 187,100 239,200 -
Common stock issued to
employee retirement plan............... 347,600 3,500 - -
Convertible debentures
converted to common stock.............. 2,441,400 24,400 - -
Series B and Series C
preferred stock converted
to common stock........................ 12,600 100 - -
Sale of common stock...................... 22,200 200 - -
Common stock bonus issued................. 7,500 100 - -
Common stock warrants
issued................................. - - 118,000 -
Common stock warrants
expired................................ - - (17,200) -
Net loss.................................. - - - -
---------- -------- --------- -------
Balance at September 28, 1997................ 21,541,300 215,400 340,000 -
Common stock issued to
employee retirement plan............... 333,300 3,400 - -
Convertible debentures
converted to common stock.............. 100,000 1,000 - -
Series B and Series C
preferred stock converted
to common stock........................ 140,900 1,400 - -
Common stock issued to
retire liabilities..................... 487,800 4,900 - -
Sale of common stock and
common stock units..................... 2,091,700 20,900 - -
Stock options exercised................... 8,200 100 - -
Common stock warrants issued.............. - - 116,200 -
Common stock warrants
exercised.............................. 294,200 2,900 (294,200) -
Series D preferred units sold............. - - - -
Series D preferred units
converted.............................. 3,460,300 34,600 - -
Preferred stock of dissolved
subsidiary............................. - - - -
Capital contributed by ATPL............... - - - -
Net loss.................................. - - - -
---------- -------- --------- -------
Balance at September 27, 1998................ 28,457,700 $284,600 162,000 $ -
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock Total
Shares Issued Total Shareholders'
---------------------- Paid-in Accumulated Equity
Number Amount Capital (Deficit) (Deficit)
---------- --------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1995............... 15,013 $ 200 $28,127,400 $(18,789,200) $ 9,494,100
Stock options exercised............... - - 209,100 - 211,700
Common stock issued to
employee retirement plan........... - - 685,700 - 687,400
Common stock warrants
issued............................... - - - - -
Common stock warrants
exercised............................ - - 293,400 - 294,500
Series B and Series C preferred
stock converted to common
stock.............................. (1,002) (100) (400) - -
Convertible debentures
converted to common stock.......... - - 9,117,500 - 9,143,000
Net loss.............................. - - - (15,914,700) (15,914,700)
Additional paid-in capital related
to convertible debentures.......... - - 4,396,700 - 4,396,700
------- ------ ----------- ------------ ------------
Balance at September 29, 1996............ 14,011 100 42,829,400 (34,703,900) 8,312,700
Common stock issued to
employee retirement plan........... - - 442,000 - 445,500
Convertible debentures
converted to common stock.......... - - 3,125,600 - 3,150,000
Series B and Series C
preferred stock converted
to common stock.................... (252) - (100) - -
Sale of common stock.................. - - 19,800 - 20,000
Common stock bonus issued............. - - 7,400 - 7,500
Common stock warrants
issued............................. - - - - -
Common stock warrants
expired............................ - - - - -
Net loss.............................. - - - (14,875,600) (14,875,600)
------- ------ ----------- ------------ ------------
Balance at September 28, 1997............ 13,759 100 46,424,100 (49,579,500) (2,939,900)
Common stock issued to
employee retirement plan........... - - 496,600 - 500,000
Convertible debentures
converted to common stock.......... - - 249,000 - 250,000
Series B and Series C
preferred stock converted
to common stock.................... (2,829) - (1,400) - -
Common stock issued to
retire liabilities................. - - 753,200 - 758,100
Sale of common stock and
common stock units................. - - 3,712,900 - 3,733,800
Stock options exercised............... - - (100) - -
Common stock warrants issued.......... - - 303,900 - 303,900
Common stock warrants
exercised.......................... - - 274,100 - 277,000
Series D preferred units sold......... 37,750 400 3,283,700 - 3,284,100
Series D preferred units
converted.......................... (33,350) (350) (34,250) - -
Preferred stock of dissolved
subsidiary......................... - - 118,500 - 118,500
Capital contributed by ATPL........... - - 305,000 - 305,000
Net loss.............................. - - - (4,243,500) (4,243,500)
------- ------ ----------- ------------ ------------
Balance at September 27, 1998............ 15,330 $ 150 $55,885,250 $(53,823,000) $ 2,347,000
</TABLE>
(Continued on following page)
F - 5
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (continued)
<TABLE>
<CAPTION>
Common Stock
Common Stock Warrants Issued
Shares Issued
--------------------- --------------------
Number Amount Number Amount
---------- -------- ---------- -------
<S> <C> <C> <C> <C>
Balance at September 27, 1998............... 28,457,700 284,600 162,000 -
Common stock issued to
employee retirement plan.............. 330,000 3,300 - -
Series B and Series C
preferred stock converted
to common stock....................... 37,300 400 - -
Common stock issued to
retire liabilities.................... 189,900 1,900 - -
Sale of common stock and
common stock units.................... 4,536,500 45,400 - -
Stock options exercised.................. 120,900 1,200 - -
Common stock warrants issued............. - - - -
Common stock warrants
exercised............................. 65,000 600 (65,000) -
Series D preferred units
converted............................. 56,100 600 - -
Common stock issued in exchange
for subsidiary stock.................. 1,112,500 11,100 - -
Net loss................................. - - - -
---------- -------- --------- -------
Balance at June 27, 1999
(unaudited).............................. 34,905,900 $349,100 97,000 $ -
========== ======== ========= =======
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock Total
Shares Issued Total Shareholders'
---------------------- Paid-in Accumulated Equity
Number Amount Capital (Deficit) (Deficit)
---------- --------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at September 27, 1998............ 15,330 150 55,885,250 (53,823,000) 2,347,000
Common stock issued to
employee retirement plan........... - - 391,300 - 394,600
Series B and Series C
preferred stock converted
to common stock.................... (748) - (350) - 50
Common stock issued to
retire liabilities................. - - 278,500 - 280,400
Sale of common stock and
common stock units................. - - 6,158,300 - 6,203,700
Stock options exercised............... - - 114,900 - 116,100
Common stock warrants issued.......... - - 81,200 - 81,200
Common stock warrants
exercised.......................... - - 68,400 - 69,000
Series D preferred units
converted.......................... (500) - (600) - -
Common stock issued in exchange
for subsidiary stock............... - - 1,169,900 - 1,181,000
Net loss.............................. - - - (6,361,100) (6,361,100)
------- ------ ----------- ------------ -----------
Balance at June 27, 1999
(unaudited)........................... 14,082 $150 $64,146,800 $(60,184,100) $ 4,311,950
======= ====== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F - 6
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended 39 Weeks Ended
--------------------------------------------------- --------------------------------
September 29, September 28, September 27,
1996 1997 1998 June 28, 1998 June 27, 1999
----------------- --------------- --------------- ---------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(15,914,700) $(14,875,600) $(4,243,500) $ (281,900) $(6,361,100)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation....................... 2,268,100 2,994,500 1,546,700 839,500 669,550
(Gain) loss on disposal of
equipment....................... - 5,873,400 (309,700) - 15,600
Extraordinary gain................. - - (1,146,100) - -
Non-cash employee retirement
plan contribution............... 687,400 445,500 500,000 500,000 394,400
Minority interest in net loss of
subsidiaries.................... - - (365,200) (324,800) (383,700)
Common stock issued to pay
operating expenses.............. - - 261,700 261,700 1,500
Noncash interest expense
related to convertible
debentures...................... 4,396,700 - - - -
(Increase) decrease in accounts
receivable...................... (635,900) 1,786,200 (528,400) (1,549,600) (8,000)
(Increase) decrease in
inventory....................... (1,455,800) 1,809,400 1,044,600 (786,600) (263,400)
(Increase) decrease in other
current assets.................. (42,100) (899,300) 989,400 678,000 (125,000)
(Increase) decrease in other
non-current assets.............. (155,200) 151,000 (1,700) - -
Increase (decrease) in accounts
payable and accrued
expenses........................ 1,159,900 1,921,600 (1,977,900) (3,258,800) 1,317,150
Increase (decrease) in deferred
revenues........................ 1,017,600 (2,276,500) (56,100) (106,100) 56,900
Increase (decrease) in accrued
rent............................ 458,300 (458,300) - - -
Increase in royalties accrued -
affiliated company.............. 232,500 258,100 212,400 12,400 -
----------------- --------------- --------------- ---------------- --------------
Net cash used in operating
activities...................... (7,983,200) (3,270,000) (4,073,800) (4,016,200) (4,686,100)
================= =============== =============== ================ ==============
Cash flows from investing activities:
Capital facilities and equipment
expenditures......................... (8,525,200) (1,113,400) (390,800) (229,400) (358,000)
Proceeds from refund on
equipment purchase................... - 324,500 - - -
Equipment disposal..................... - 1,051,900 149,700 37,800 -
================= =============== =============== ================ ==============
Net cash (used in) provided by
investing activities................. (8,525,200) 263,000 (241,100) (191,600) (358,000)
----------------- --------------- --------------- ---------------- --------------
</TABLE>
(Continued on following page)
F - 7
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Fiscal Year Ended 39 Weeks Ended
-------------------------------------------------------------------------------------
September 29, September 28, September 27,
1996 1997 1998 June 28, 1998 June 27, 1999
----------------- --------------- --------------- ---------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Principal payments under notes
payable and capital lease
investing activities
obligations.......................... $ (217,100) $ (253,300) $(2,336,900) $(2,327,200) $ (112,600)
Proceeds from issuance of
long-term debt....................... 3,013,200 - - - -
Proceeds from issuance of
convertible subordinated
debentures........................... 10,293,000 - - - -
Sale of minority interest in
subsidiaries......................... 500,000 2,918,100 - 48,400 2,332,300
Proceeds from issuance of common
and preferred stock and common
stock warrants....................... 506,200 27,500 5,063,100 4,713,400 4,276,800
Proceeds from stock sale by bank
Contributed capital by ATPL............ - - 954,800 921,700 -
- - 305,000 - -
----------------- --------------- --------------- ---------------- --------------
Net cash provided by financing
activities......................... 14,095,300 2,692,300 3,986,000 3,356,300 6,496,500
----------------- --------------- --------------- ---------------- --------------
Net increase (decrease) in cash and cash
equivalents............................ (2,413,100) (314,700) (328,900) (851,500) 1,452,400
Cash and cash equivalents at beginning
of period.............................. 4,367,100 1,954,000 1,639,300 1,639,300 1,310,400
----------------- --------------- --------------- ---------------- --------------
Cash and cash equivalents at end of
period................................. $ 1,954,000 $ 1,639,300 $ 1,310,400 $ 787,800 $ 2,762,800
================= =============== =============== ================ ==============
Noncash investing and financing
activities:
Principal payment of note payable by
issuance of common stock........... $ - $ - $ 500,000 $ 500,000 $ 280,400
================= =============== =============== ================ ==============
Equipment financed with capital
leases................................. $ 3,200 $ - $ 170,000 $ - $ 745,400
================= =============== =============== ================ ==============
Conversion of debentures to
common stock....................... $ 10,450,000 $ 3,150,000 $ 250,000 $ 250,000 $ -
================= =============== =============== ================ ==============
Exchange of subsidiary stock........... $ - $ - $ 1,564,900 $ - $ 1,071,000
================= =============== =============== ================ ==============
Paid-in capital from dissolution
of subsidiary...................... $ - $ - $ 118,500 $ - $ -
================= =============== =============== ================ ==============
Conversion of preferred to
common stock....................... $ - $ - $ 34,600 $ 30,300 $ -
================= =============== =============== ================ ==============
Stock sold on a subscription basis..... $ - $ - $ - $ - $ 2,301,600
================= =============== =============== ================ ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F - 8
<PAGE>
IRVINE SENSORS CORPORATION
Notes to Consolidated Financial Statements
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)
Note 1 - Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Irvine
Sensors Corporation (the Company) and its subsidiaries, Novalog, MicroSensors,
Inc. ("MSI"), 3D Microelectronics, Inc., 3D MicroSystems, Inc., and Silicon Film
Technologies, Inc. ("SFT") (formerly Imagek, Inc.). Carson Alexiou Corporation
("CAC"), a former subsidiary of the Company, was dissolved in the fiscal year
ended September 27, 1998. All significant intercompany transactions and balances
have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest September 30. Fiscal
1996 (52 weeks) ended on September 29, 1996, fiscal 1997 (52 weeks) ended on
September 28, 1997, and fiscal 1998 (52 weeks) ended on September 27, 1998.
Interim Financial Statements
The consolidated financial information as of June 28, 1998 and June 27,
1999 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 27, 1999, and
the consolidated results of its operations and its consolidated cash flows for
the 39 week periods ended June 28, 1998 and June 27, 1999. Certain
reclassifications have been made to prior year's financial statements to conform
to the current year presentation.
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 whole year.
F - 9
<PAGE>
IRVINE SENSORS CORPORATION
Notes to Consolidated Financial Statements
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)
Note 1 - Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
Company believes its estimates of inventory reserves and estimated costs to
complete on contracts to be the most sensitive estimates impacting financial
position and results of operations in the near term.
Revenues
The Company's revenues were derived from shipments of functional memory
stacks, shipments of the SIRComm(TM) infrared chip and the development and
manufacture of prototype and sample products for its customers. The Company
continues to contract to develop prototypes and provide research, development,
design, testing and evaluation of complex detection and control defense systems.
The Company's research and development contracts are usually cost plus fixed fee
(best effort) or fixed price and revenues are recognized as costs are incurred
and include applicable fees or profits primarily in the proportion that costs
incurred bear to estimated final costs. Production orders for memory stacks and
SIRComm chips are generally priced in accordance with the Company's established
price list. Novalog's revenues result from shipment of products with sales
primarily to OEM manufacturers. Revenues are recorded when products are shipped.
SFT has not completed final development of its products and expects to recognize
revenue when products are shipped to end-users.
The Company provides for anticipated losses on contracts by a charge to
operations during the period in which they are first identified. Unbilled
accounts receivable are stated at estimated realizable value.
United States government contract costs, including indirect costs, are
subject to audit and adjustment by negotiations between the Company and
government representatives. Indirect contract costs have been agreed upon
through fiscal 1997. Contract revenues have been recorded in amounts, which are
expected to be realized upon final settlement.
Other revenues in fiscal 1996 were derived from a licensing agreement with
Unitrode to transfer technology required to produce the Company's SIRCommchip.
(See Note 16 - Technology Licenses.) Other revenues in fiscal 1998 were derived
from sale of intellectual property to ATPL. (See Note 8 - Related Party
Transactions.)
F - 10
<PAGE>
IRVINE SENSORS CORPORATION
Notes to Consolidated Financial Statements
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)
Note 1 - Summary of Significant Accounting Policies (continued)
Research and Development Costs
A major portion of the Company's operations is comprised of customer-funded
research and prototype development or related activities. The Company also
incurs costs in research and development of new concepts in proprietary
products. Such costs are charged to expense as incurred.
Inventory
Inventory is valued at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) basis. Inventories are reviewed quarterly to
determine realizability and obsolescence. Specific reserves are recorded for
slow moving and obsolete items.
Equipment, Furniture and Fixtures
The Company capitalizes costs of additions to equipment, furniture and
fixtures, together with major renewals and betterments. In addition, the Company
capitalizes overhead for all in-house capital projects. Maintenance, repairs,
and minor renewals and betterments are charged to expense. When assets are sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized.
Depreciation of equipment, furniture and fixtures is recorded over the estimated
useful lives of the assets, primarily three to seven years. Leasehold
improvements are amortized over the shorter of the terms of the leases or the
lives of the assets.
Income Taxes
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax basis of the assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is recorded for the amount of income tax payable or refundable for the
period increased or decreased by the change in deferred tax assets and
liabilities during the period.
F - 11
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 1 - Summary of Significant Accounting Policies (continued)
Basic and Diluted Net Loss per Share
Net loss per share is calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," which supersedes APB
Opinion No. 15, "Earnings per Share." Net loss per share for all periods
presented has been restated to reflect the adoption of SFAS128. Basic net loss
per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per share is based on the assumption that options,
warrants, and convertible preferred stock are included in the calculation of
diluted earnings per share, except when their effect would be anti-dilutive.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all demand deposits and Certificates of Deposit with original
maturities of 90 days or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable and payable, other liabilities and debt
approximate fair value. The fair value of royalties payable to affiliate is not
determinable due to their related party nature.
Concentration of Credit Risk
The Company has cash deposits at U.S. banks and financial institutions,
which exceeded federally insured limits at June 27, 1999. The Company is exposed
to credit loss for amounts in excess of insured limits in the event of non-
performance by the institution; however, the Company does not anticipate non-
performance.
F-12
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 1 - Summary of Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which establishes financial accounting and reporting
standards for stock-based employee compensation. Under SFAS 123, companies are
encouraged, but not required, to adopt a method of accounting for stock
compensation awards based upon the estimated fair value at the date the
options/awards are granted as determined through the use of a pricing model (the
"Fair Value Method"). Companies continuing to account for such awards in
accordance with the existing guidance of Accounting Principles Board Option No.
25, "Accounting for Stock Issued to Employees" (APB 25), are required to
disclose in the notes to their financial statements the pro forma impact on net
income and net income per share had they utilized the Fair Value Method. This
statement is effective for the Company in fiscal year 1997. The Company
continues to account for stock compensation awards in accordance with APB 25,
with the appropriate footnote disclosure required under SFAS 123.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting For the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which
establishes accounting standards for the impairment of long-lived assets to be
reviewed whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In addition, SFAS 121 requires that
certain long-lived assets be reported at the lower of carrying amount or fair
value less cost to sell. The Company adopted SFAS 121 in fiscal 1997. The
adoption of SFAS 121 had no significant impact on its consolidated financial
position or results of operations.
Note 2 - Issuance of Common and Preferred Stock
During fiscal 1996, the Company issued 257,100 shares of common stock to
seven employees, two of whom are officers and one officer-director, and three
non-employee directors upon exercise of options granted under the Company's
Stock Option Plans. Net proceeds of $211,700 were added to the Company's general
fund.
F-13
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 2 - Issuance of Common and Preferred Stock (continued)
In conjunction with a fiscal 1995 private financing of $2.25 million of 8
percent convertible subordinated debentures (the "1995 Debentures"), the Company
issued an additional $500,000 of 1995 Debentures in October 1995 (fiscal 1996)
to institutional investors in Europe. The gross proceeds less expenses were
added to the Company's general funds. During fiscal 1996, the Company, at the
request of bondholders, converted the entire $2.75 million of outstanding 1995
Debentures at varying rates into 509,400 shares of the Company's common stock,
which were subsequently registered and may be traded without restrictions.
In a private financing during February and March 1996, the Company issued
$11.1 million of eight percent convertible subordinated debentures due in 1998
(the "1996 Debentures") to institutional and private investors in Canada and
Europe. The 1996 Debentures were convertible into shares of common stock at
varying rates which were contingent upon the closing bid prices of the common
stock. The Company had the right to demand conversion of the 1996 Debentures at
any time after March 1997. Interest was payable semiannually on January 31 and
July 31 of each year. The gross proceeds less expenses were added to the
Company's general funds.
During fiscal 1997, the Company, at the request of bondholders, converted
$3,150,000 of the outstanding 1996 Debentures at varying rates into 2,441,400
shares of the Company's common stock. With these conversions, all but $250,000
of the original issue of $11.1 million of the 1996 Debentures was retired. In
May 1996, the Company had registered the resale of 2,997,000 shares of common
stock which the Company then believed would be sufficient to cover the
conversion of the entire $11.1 million series of 1996 Debentures and related
warrants, 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, 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. The Securities and Exchange Commission declared this
registration effective in April 1998.
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.
F-14
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 2 - Issuance of Common and Preferred Stock (continued)
In fiscal 1998, the Company forced conversion of the remaining $250,000 of
outstanding eight percent Convertible Subordinated Debentures into 100,000
shares of the Company's common stock. The common shares underlying the
convertible debentures were included in the Company's January 1998 registration
statement.
In connection with settlement of bank debt, the Company issued 550,000
unregistered shares of common stock in December 1997. (See Note 10 - Notes
Payable.)
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. 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, and one five-year Warrant to purchase one share of
common stock of MSI. 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 19 -
Earnings Per Share 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. In connection with this private placement, the Company
granted to the placement agent a warrant to purchase up to 3,775 units of Series
D Convertible Preferred Stock units at a price of $110 per unit which was 110
percent of the private placement 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. Warrants to purchase 500
units were exercised in May 1998 and the proceeds of $55,000 were added to the
Company's general funds. In addition, the placement agent exercised warrants to
purchase 1,000 units in the period between October and December 1998, and
warrants to purchase 500 units were exercised in March 1999. All of the
proceeds were added to the Company's general funds.
As of June 27, 1999, at the request of the holders thereof, a total of
33,850 shares of Series D Convertible Preferred Stock have been converted into
3,516,500 shares of common stock.
F-15
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 2 - Issuance of Common and Preferred Stock (continued)
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, and one five-year Warrant to purchase one share of common
stock of MSI. The proceeds of $125,000 from these transactions were added to the
Company's general funds.
In January 1998, a warrant holder 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.
In fiscal 1998 and through June 27, 1999 distribution of vested benefits
was made from the Company's Employee Retirement Plan to former employees.
Subsequently, 1,819 shares of Series B and 1,010 shares of Series C Convertible
Preferred stock were surrendered for conversion into 140,900 shares of common
stock in fiscal 1998. Also, 528 shares of Series B and 217 shares of Series C
Convertible Preferred Stock were surrendered for conversion into 37,300 shares
of common through June 27, 1999. The converted Preferred shares have been
retired.
In April 1998, the Company issued 700,000 unregistered shares of the
Company's common stock in a private placement to accredited investors. The net
proceeds of $980,000 from this private placement have been added to the
Company's general funds.
In August 1998, holders of 1,128,000 shares of common stock of Novalog
exercised warrants to exchange these shares for 905,000 unregistered shares of
common stock of the Company resulting in an increase of $1,564,900 (net of
losses previously allocated to minority interest) in total shareholders' equity
and a corresponding decrease in minority interest in consolidated subsidiary.
During the first quarter of fiscal 1999, holders of 1,125,000 shares of
common stock of Novalog exercised warrants to exchange these shares for 587,500
shares of common stock of the Company resulting in an increase of $781,900,
which is net of loss previously allocated to minority interest, in total
shareholders' equity and a corresponding decrease in minority interest in
consolidated subsidiary.
F-16
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 2 - Issuance of Common and Preferred Stock (continued)
In the second quarter of fiscal 1999, the Company purchased 500,000 shares
of common stock of Novalog through the issuance of 400,000 shares of common
stock of the Company. Holders of 30,000 shares of common stock of Novalog
exercised warrants to exchange these shares for 30,000 shares of common stock of
the Company. These second quarter transactions resulted in an increase of
$441,600, which is net of losses previously allocated to minority interest, in
total shareholders' equity and a corresponding decrease in minority interest in
consolidated subsidiaries of $441,600. (See Note 6- Minority Interest in
Subsidiaries) Subsequent to fiscal year ended September 26, 1999 one accredited
investor subscribed to purchase 444,445 unregistered shares of the Company's
common stock in a private placement. The gross proceeds of $600,000 will be
added to the Company's general funds upon receipt.
Note 3 - Common Stock Warrants
In July 1992, the Company consummated a public offering of 750,000 shares
of common stock and granted the Underwriter an option to purchase up to 112,500
additional shares of common stock to cover over-allotments. In connection with
this offering, the Company granted to the Underwriter warrants to purchase up to
75,000 shares of common stock at a price of $5.10 per share, which was 120
percent of the initial public offering price of the shares. The warrants were
exercisable during the four-year period beginning July 9, 1993, and expiring
July 8, 1997. During fiscal 1995, 57,800 of these warrants were exercised. The
remaining 17,200 were not exercised and expired on July 8, 1997.
In July 1993, the Company granted warrants to a consultant to purchase
30,000 unregistered shares of common stock at $8.875 per share, in connection
with services rendered. The shares underlying these warrants were registered in
fiscal 1995 and the price reduced to $4.50 per share. The warrants were
exercised in fiscal 1996.
In connection with the August 1995 sale of approximately 382,100 shares of
common stock and the issuance of approximately $2.75 million of the 1995
Debentures, the Company granted to the foreign investment banker warrants to
purchase up to approximately 79,700 shares of common stock at prices ranging
from $7.47 to $8.33 per share. In fiscal 1996, the price was reduced to $2.00
per share and the warrants were exercised.
In connection with the sale of $11.1 million of the 1996 Debentures in
February and March 1996, the Company granted warrants to the foreign investment
banker to purchase up to 222,000 shares of common stock at a price to be
determined based on the average conversion prices of the 1996 Debentures. The
warrants were exercised in fiscal 1998.
F-17
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 3 - Common Stock Warrants (continued)
In fiscal 1997 the Company granted warrants, the value of which it believes
to be not material, to four consultants in varying amounts to purchase up to
118,000 shares of unregistered common stock at prices ranging from $0.9375 to
$1.50.
In fiscal 1998 the Company granted warrants, the value of which it believes
to be not material, to five former employees in varying amounts to purchase up
to 44,000 shares of unregistered common stock at a price of $1.00.
As of June 27, 1999, there were a total of 147,000 warrants outstanding of
which 74,000 expire in the year 2000 and 73,000 expire in the year 2002.
Note 4 - Series B and Series C Convertible Preferred Stocks
The Series B and Series C Convertible Cumulative Preferred Stocks were
originally issued to the Company's Employee Retirement Plan, and each bear a 10
percent cumulative annual dividend, which under Delaware law may generally be
paid only out of (i) retained earnings or (ii) net profit in the current or
preceding fiscal year. To the extent that the dividends are not declared and
paid in any fiscal year, the obligation carries over to the next fiscal year.
These shares of Series B and Series C Convertible Cumulative Preferred Stocks
are not redeemable, carry a liquidation preference over the common stock of
$15.00 and $30.00, respectively, per share and are convertible, at the option of
the holder, into 50 shares of common stock for each share of Series B and Series
C Convertible Cumulative Preferred Stock, respectively. Distributions of vested
benefits made from the Plan to former employees and the subsequent surrender and
conversion into shares of common stock are as follows:
<TABLE>
<CAPTION>
Preferred Stock
----------------------------- Common
Series B Series C Stock
-------- -------- -----
<S> <C> <C> <C>
Distribution dates:
Fiscal 1996 522 480 50,100
Fiscal 1997 48 204 12,600
Fiscal 1998 1,819 1,010 140,900
----- ----- -------
Total 2,389 1,694 203,600
===== ===== =======
</TABLE>
The shares of Preferred Series B and Series C, respectively, tendered for
conversion have been retired.
Undeclared dividends of $94,000 and $95,100 on the remaining outstanding
Preferred Series B and Series C, respectively, will be carried forward to fiscal
1999.
F-18
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 5 - Preferred Stock of Consolidated Subsidiary
The preferred stock outstanding represents an ownership interest in Carson
Alexiou Corporation ("CAC"), a former subsidiary of the Company, by former
employees and an Employee Stock Bonus Plan which CAC had formed. The preferred
stock had a $100 par value and there were 1,400 shares authorized and 1,185
shares issued and outstanding at September 28, 1997. There were no conversion
rights or liquidation preferences of this preferred stock, which extended to the
common stock of the Company. CAC has been inactive since 1985 and in August
1998, the Massachusetts Commissioner of Corporations dissolved CAC. The
outstanding preferred shares were retired and the outstanding balance was added
to the paid-in capital.
Note 6 Minority Interest in Subsidiaries
In addition to the Novalog transactions discussed in Note 2 - Issuance of
Common and Preferred Stock, MSI and SFT participated in equity transactions,
which affected the minority interest in consolidated subsidiaries.
The Company sold Series D Convertible Preferred Stock Units in a private
placement to certain accredited investors in December 1997 and January 1998.
The Series D Convertible Preferred Stock Units consist of, among other rights,
one five-year warrant to purchase one share of common stock of MSI. During the
second quarter of fiscal 1999, holders of 125,000 shares of Series D Convertible
Preferred Stock Units exercised warrants attached to the Units to purchase
125,000 shares of common stock of MSI. The net proceeds of $125,000 were added
to the Company's general funds and are reflected in the consolidated cash
position of the Company. The transaction resulted in an increase in minority
interest in consolidated subsidiaries of $125,000.
During the first quarter of fiscal 1999, SFT issued 25,900 shares of its
Series A Convertible Preferred Stock (the "Series A Preferred") in a Private
Placement. The Series A Preferred bears no yield, has a priority in liquidation
and is convertible into common stock of SFT at the election of the holder, at
the rate of 10 common shares for each 1 share of Series A Preferred tendered for
conversion. The net proceeds of $324,900 resulting from this transaction were
added to SFT's general funds and are reflected in the consolidated cash position
of the Company. In the second quarter of fiscal 1999, SFT issued an additional
58,000 shares of its Series A Preferred in a Private Placement. The net
proceeds of $830,000 were added to SFT's general funds and are reflected in the
consolidated cash position of the Company. These transactions resulted in a
corresponding increase in minority interest in consolidated subsidiaries of
$1,154,900.
F-19
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 6 Minority Interest in Subsidiaries (continued)
During the third quarter of fiscal 1999, SFT issued 110,000 shares of its
Series B Convertible Preferred Stock (the "Series B Preferred") in a Private
Placement. The Series B Preferred bears no yield, has a priority in liquidation
and is convertible into common stock of SFT, at the election of the holder, at
the rate of 16-2/3 common shares for each 1 share of Series B Preferred tendered
for conversion. The net proceeds of $1,070,400 resulting from this transaction
were added to SFT's general funds and are reflected in the consolidated cash
position of the Company. This transaction resulted in a corresponding increase
in minority interest in consolidated subsidiaries of $1,070,400.
Note 7 - Convertible Subordinated Debentures
In July, August and October 1995, the Company issued in a private financing
$2.75 million of eight percent convertible subordinated debentures (the "1995
Debentures") due in 1997 to institutional and private investors in Canada and
Europe. The 1995 Debentures were convertible into shares of common stock at
$6.50 per share, subject to adjustment under certain conditions. The Company had
the right to demand conversion of the 1995 Debentures at any time after July 31,
1996. Interest was payable semi-annually on January 31 and July 31 of each year.
The 1995 Debentures were subordinated to prior payment of bank indebtedness of
the Company. The gross proceeds less expenses were added to the Company's
general funds. The Company registered the shares underlying the 1995 Debentures
and in fiscal 1996 the 1995 Debentures were converted into 509,400 shares of the
Company's common stock. (See Note 2 Issuance of Common and Preferred Stock.)
In a private financing during February and March 1996, the Company issued
$11.1 million of eight percent convertible subordinated debentures due in 1998
(the "1996 Debentures") to institutional and private investors in Canada and
Europe. The 1996 Debentures were convertible into shares of common stock at
varying rates which were contingent upon the closing bid prices of the common
stock. The Company had the right to demand conversion of the 1996 Debentures at
any time after March 1997. Interest was payable semiannually on January 31 and
July 31 of each year. The 1996 Debentures were subordinated to prior payment of
bank indebtedness of the Company. The gross proceeds less expenses were added to
the Company's general funds. (See Note 2 Issuance of Common and Preferred
Stock.)
F-20
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 7 - Convertible Subordinated Debentures (continued)
The Company originally accounted for its convertible debentures in
accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants." However, the Securities and Exchange Commission (SEC)
staff has indicated that convertible debt instruments which are convertible at a
discount from market should be accounted for by treating the maximum discount as
interest expense with an offset to paid-in capital. In November 1997, the
Company was advised that past issuers of such securities had restated prior
financial statements to comport with the SEC view. In conformance therewith, the
Company recognized noncash interest expense of $4,396,700 with a like amount
added to paid-in capital in the second quarter of fiscal 1996. Because of the
offsetting nature of these entries, there was no effect on Shareholders' equity.
During fiscal 1997, the Company, at the request of bondholders, converted
$3,150,000 of the outstanding 1996 Debentures at varying rates into 2,441,400
shares of the Company's common stock. With these conversions, all but $250,000
of the original issue of $11.1 million of the 1996 Debentures was retired. In
fiscal 1998, the Company forced the conversion of these remaining 1996
Debentures into 100,000 shares of common stock. In May 1996, the Company had
registered the resale of 2,997,000 shares of common stock which the Company then
believed would be sufficient to cover the conversion of the entire $11.1 million
series of 1996 Debentures and related warrants, 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, 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. The
Securities and Exchange Commission declared this registration effective in April
1998.
Note 8 - 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 of the Board and
a Senior Vice-President were general partners with beneficial interests, to
develop certain processes and technology related to chip stacking. RDL
subsequently reorganized as a corporation of which the Company's Chairman of the
Board and a Senior Vice-President are sole shareholders. The Company has
exclusively licensed the developed technology from RDL. The Company's exclusive
rights to the technology extend to all uses, both government and commercial.
Since entering into the licensing agreement, the Company has
accrued royalty obligations to RDL at the rate of 3.5 percent of all Company
sales of chip stacks using
F-21
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 8 - Related Party Transactions (continued)
the licensed technology. In addition, RDL is entitled to receive an amount equal
to seven percent of all royalties earned by the Company from sales of any such
products by the Company's sublicensees, although to date, no such sublicensee
royalty income has been earned.
In October 1989, RDL agreed to defer its royalty claims and subordinate
them with respect to all other creditors in exchange for options to purchase up
to 1,000,000 shares of the Company's Common Stock, which are exercisable by
applying the deferred royalties to the purchase. The 1,000,000 options are
exercisable at $1.00 each until October 1999. If RDL exercises its option in
whole or in part, title to RDL's technology would transfer to the Company and
all further royalty obligations would cease. If the option expires unexercised,
the subordination provisions would terminate and the accrued royalties would be
due and payable in the same manner as any other corporate obligation. As of June
27, 1999 the Company had accrued $826,200 in deferred royalties payable to RDL.
Due to the RDL subordination, royalties accrued, but the Company paid none
during the current period of fiscal 1999 and fiscal years 1998, 1997 and 1996.
The Company has entered into an Assignment of Patent and Intellectual
Rights (the "Assignment") with F.L. Eide ("Eide"), a Vice-President of the
Company. As part of his employment agreement, Eide has assigned to the Company
all rights and interests to five (5) U.S. Provisional Patent applications owned
by him. In consideration for this Assignment, Eide will receive a one percent
royalty on the gross sales revenues of any products incorporating elements of
the assigned technology for the lifetime of any patents resulting from the
Provisional Patent Applications. This Assignment was executed in February 1998.
The Company entered into a sale and licensing of intellectual property
rights related to the Company's Electronic Film System(TM) ("EFS(TM)") to
Advanced Technology Products, LLC ("ATPL"), which funded early development of
this technology and for which the Company's Chief Technical Officer, John C.
Carson, serves as Managing Member. SFT is the successor to the royalty
obligations under this license. In September 1998, an agreement was consummated
with ATPL under which the royalty obligation was reduced in consideration of the
issuance of 1,221,875 shares of SFT common stock.
F-22
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 9 - Composition of Certain Financial Statement Captions
<TABLE>
<CAPTION>
September 28, 1997 September 27, 1998
------------------ ------------------
<S> <C> <C>
Accounts receivable:
U.S. government $1,145,100 $1,235,300
Other customers 92,600 540,800
---------- ----------
Total $1,237,700 $1,776,100
========== ==========
</TABLE>
Accounts receivable include unbilled amounts of $600,900 and $886,200 at
September 28, 1997, and September 27, 1998, respectively. Unbilled amounts
represent contract revenues for which billings have not been presented to
customers at year-end. These amounts are billed in accordance with applicable
contract terms, usually within 30 days. Accounts receivable also include billed
retention of $28,700 and $73,900 at September 28, 1997, and September 27, 1998,
respectively. These amounts are normally collected upon final audit of costs by
the U.S. government.
<TABLE>
<CAPTION>
September 28, 1997 September 27, 1998
------------------ ------------------
<S> <C> <C>
Inventory:
Raw materials $ 185,400 $ -
Work in process 2,382,900 1,435,400
Finished goods 9,000 97,300
---------- ----------
Total $2,577,300 $1,532,700
========== ==========
</TABLE>
Title to all inventories remains with the Company. Inventoried materials
and costs relate to work in process on customers' orders and on the Company's
generic module parts and memory stacks, which the Company anticipates it will
sell to customers including potential research and development contracts. Work
in process includes amounts that may be sold as products or under contracts.
Such inventoried costs are stated generally at the total of the direct
production costs including overhead. Inventory valuations do not include general
and administrative expenses. Inventories are reviewed quarterly to determine
realizability and obsolescence. Specific reserves are recorded for slow moving
and obsolete items.
F-23
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 9 - Composition of Certain Financial Statement Captions (continued)
<TABLE>
<CAPTION>
September 28, 1997 September 27, 1998
------------------ ------------------
<S> <C> <C>
Equipment, furniture and
fixtures:
Engineering and production
equipment $7,252,200 $7,553,700
Furniture and fixtures 330,700 409,500
Computer software programs 598,100 741,100
Leasehold improvements 765,400 777,000
---------- ----------
8,946,400 9,481,300
Less accumulated depreciation
and amortization 6,170,600 7,257,300
---------- ----------
Net $2,775,800 $2,224,000
========== ==========
Accrued expenses:
Salaries and wages $ 267,800 $ 211,000
Vacation 217,700 235,700
Payroll taxes 58,300 14,700
Accounting fees 47,600 50,000
Other accrued expenses 3,300 111,000
---------- ----------
Total $ 684,700 $ 622,400
========== ==========
</TABLE>
Note 10 - Notes Payable
Current and long-term debt consists of the following:
<TABLE>
<CAPTION>
September 28, 1997 September 27, 1998
------------------ ------------------
<S> <C> <C>
Note payable to bank bearing
interest at prime (8.5 percent
at September 28, 1997) plus
1.5 percent due in monthly
installments of $63,400
beginning May 1997 $2,819,200 $ -
Capitalized lease
obligations maturing at
various dates through 2000 8,000 160,300
Less current portion 2,234,000 52,800
---------- ----------
Total $ 593,200 $ 107,500
========== ==========
</TABLE>
F-24
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 10 - Notes Payable (continued)
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
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. Subsequently, the
Company was informed by the bank that it sold the 550,000 shares and that the
proceeds exceeded $500,000. After applying the proceeds to the then remaining
balance of the note the bank, through September 27, 1998, remitted $772,000 to
the Company and advised the Company that additional proceeds of $183,000 were to
be remitted to the Company. The Company has subsequently received these
additional funds. The Company recorded the proceeds that exceeded $500,000 as
paid-in capital.
During the 39 week period ended June 27, 1999 the Company entered into an
additional $745,400 of capitalized lease obligations. Principal payments of
$112,600 have been made, resulting in notes payable of $793,100 at June 27,
1999.
During the second quarter of fiscal 1999, the Company sold 267,670 units
consisting of two shares of unregistered common stock of the Company, one two-
year warrant to purchase one share of common stock of SFT owned by the Company
and one three-year warrant to purchase one common share of MSI owned by the
Company. Through June 27, 1999, net proceeds of $752,000 from the sale of these
units had been received and added to the Company's general funds.
F-25
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 11 - Stock Subscriptions Receivable
During the third quarter of fiscal 1999, the Company sold 4,000,000 shares
of unregistered common stock of the Company. At June 27, 1999, net proceeds of
$3,148,400 from the sale of these units had been received and added to the
Company's general funds, and an additional $2,301,600 of the aforementioned
units were subscribed. The Company received the proceeds associated with these
subscribed units subsequent to June 27, 1999.
Note 12 - Income Taxes
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax basis of the assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is recorded for the amount of income tax payable or refundable for the
period increased or decreased by the change in deferred tax assets and
liabilities during the period.
The tax effects of significant items comprising the Company's income tax
calculation as of September 28, 1997, and September 27, 1998, are as follows:
<TABLE>
<CAPTION>
September 28, September 27,
1997 1998
------------- -------------
<S> <C> <C>
Current deferred tax assets:
Reserves not currently
deductible $ 709,700 $ 1,057,000
Operating loss carryforwards 949,400 -
Long-term deferred tax assets:
Operating loss carryforwards 15,909,200 16,763,000
Tax credit carryforwards 449,900 541,000
Capital loss carryforwards 8,500 -
Valuation allowance $(18,026,700) $(18,361,000)
------------ ------------
Net deferred tax asset $ - $ -
============ =============
</TABLE>
F-26
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 12 - Income Taxes (continued)
The differences between the Company's effective income tax rate and the
statutory U.S. federal income tax rate for the fiscal years September 28, 1997,
and September 27, 1998, respectively, are as follows:
The total valuation allowance changed $334,000 from September 28, 1997, to
September 27, 1998.
The provisions for income taxes for the fiscal years ended September 29,
1996, September 28, 1997, and September 27, 1998, consist of provisions for
state taxes of $1,800, $2,600 and $2,600, respectively. No provisions for
federal income taxes have been made in these fiscal years due to the net
operating losses.
At September 27, 1998, the Company had net operating loss carryforwards of
approximately $46,223,000 for financial reporting and federal income tax
purposes expiring in varying amounts from fiscal year 1999 through fiscal year
2013, and $11,884,000 for California tax purposes expiring in varying amounts
from fiscal year 1999 through fiscal year 2003, available to offset future
federal and California taxable income. In addition, as of September 27, 1998,
the Company had investment tax credits and qualified research credits of
$286,000 and $255,000, respectively, expiring in varying amounts through fiscal
year 2009 and available to offset future federal taxes. The ability of the
Company to utilize the net operating loss and credit carryforwards may be
restricted by certain provisions of the Internal Revenue Code.
Note 13 - Operating Leases
The Company leases certain facilities and equipment under cancelable and
noncancelable lease obligations. Total rental expense for operating leases
amounted to $1,633,500, $1,685,200 and $559,000 for the fiscal years ended
September 29, 1996, September 28, 1997, and September 27, 1998, respectively.
Approximate minimum lease commitments existing at September 27, 1998 are as
follows:
<TABLE>
<S> <C>
Fiscal years ending:
1999 $ 427,900
2000 397,100
2001 403,000
2002 1,300
----------
Total minimum payments $1,229,300
==========
</TABLE>
F-27
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 14 - Stock Option Plans and Employee Retirement Plan
In December 1991, the Board of Directors adopted the 1991 Stock Option Plan
to replace 1981 Stock Option Plans, which had expired. This new Plan was
approved by shareholders at the Company's Annual Meeting in February 1992. Under
the 1991 Plan, options to purchase an aggregate of 675,000 shares of the
Company's common stock may be granted to both key management employees and non-
employee directors. Options granted may be either Incentive Stock Options or
Nonstatutory Stock Options and the requirements for participation, exercise
price and other terms are similar to the 1981 Plans. As of September 27, 1998,
options to purchase 259,800 shares at prices ranging from $1.4375 (40,000
shares) to $7.75 (8,300 shares) were outstanding under the 1991 Plan, of which
46,800 were exercisable at September 27, 1998.
In January 1995, the Board of Directors adopted the 1995 Stock Option Plan
to replace the 1991 Plan, which was fully subscribed at the time. The 1995 Plan
was approved by shareholders at the Company's Annual Meeting in February 1995.
Under the 1995 Plan, options to purchase an aggregate of 700,000 shares of the
Company's common stock may be granted to both key management employees and non-
employee directors. In August 1997, the Board of Directors authorized an
increase in the number of options to an aggregate of 1,650,000 shares, subject
to ratification by shareholders at the Company's Annual Meeting in February
1998. Options granted may be either Incentive Stock Options or Nonstatutory
Stock Options, and requirements for participation exercise price and other terms
are similar to the 1991 Plan. As of September 27, 1998, options to purchase
1,649,300 shares at prices ranging from $0.98 (580,000 shares) to $6.50 (10,000
shares) were outstanding under the 1995 Plan, of which 372,800 were exercisable
at September 27, 1998.
In February 1999, the Board of Directors adopted a new plan, "The 1999
Stock Option Plan." Under the 1999 Plan, options to purchase an aggregate of
1,000,000 shares of common stock may be granted to both key management employees
and non-employee directors.
F-28
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 14 - Stock Option Plans and Employee Retirement Plan (continued)
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Option Price Per Share
----------------------
1991 Plan:
- ----------
<S> <C> <C>
Options outstanding at October 1, 1995 571,300 $1.3125 to $8.625
Exercised (314,100) 1.3125 to 4.09
Cancelled (19,000) 4.09 to 8.625
Expired (27,500) 1.3125 to 4.09
--------
Options outstanding at September 29, 1996 210,700 4.28 to 8.625
Granted 143,000 1.4375 to 2.3125
Cancelled (76,500) 6.00 to 7.6875
Exercised (51,700) 4.28 to 8.6520
--------
Options outstanding at September 28, 1997 225,500 1.4375 to 7.75
Granted 120,000 1.50 to 2.4375
Exercised (8,200) 0.98
Cancelled (52,400) 1.50 to 7.50
Expired (25,000) 7.125 to 7.75
--------
Options outstanding at September 27, 1998 259,900 $0.98 to $7.50
--------
</TABLE>
<TABLE>
<CAPTION>
Option Price Per Share
----------------------
1995 Plan:
- ----------
<S> <C> <C>
Options outstanding at October 1, 1995 228,500 $6.00 to $6.50
Granted 343,500 5.0625 to 8.50
Cancelled (128,000) 6.00 to 6.50
---------
Options outstanding at September 29, 1996 444,000 5.0625 to 8.50
Granted 1,053,000 0.98 to 2.3125
Cancelled (371,900) 1.00 to 8.50
---------
Options outstanding at September 28, 1997 1,125,100 0.98 to 6.50
Granted 581,500 1.00 to 2.8750
Cancelled (57,300) 1.00 to 6.25
---------
Options outstanding at September 27, 1998 1,649,300 $0.98 to $6.50
---------
</TABLE>
F-29
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 14 - Stock Option Plans and Employee Retirement Plan (continued)
A summary of outstanding options exercisable under both the 1991 and 1995
Stock Option Plans is shown below.
<TABLE>
<CAPTION>
Weighted
average
remaining Weighted Weighted
Range of Number contractual life average Number average
exercise prices outstanding (years) exercise price exercisable exercise price
- --------------- ----------- ------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .98 - 1.98 1,780,200 3 $1.30 333,088 $1.15
2.31 - 2.88 39,000 3 2.62 4,333 2.31
5.00 - 6.25 72,500 1 6.08 47,998 6.08
6.50 - 7.50 17,500 3 1.56 17,500 6.93
--------- -------
1,909,200 402,919
========= =======
</TABLE>
Pursuant to SFAS No. 123 "Accounting for Stock Based Compensation," the
Company is required to disclose the effects on the net loss and per share data
as if the Company had elected to use the fair value approach to account for all
of its employee stock-based compensation plans. Had compensation cost for the
Company's Plans been determined using the fair value method, compensation
expense would have had the effects of increasing the Company's net loss for the
years ended September 29, 1996, September 28, 1997 and September 27, 1998, to
the pro forma amounts of $16,255,700, $15,041,000 and $4,754,000, respectively,
with a corresponding pro forma loss per share of $0.96, $0.73 and $0.19
respectively. These pro forma amounts were determined estimating the fair value
of each option granted during fiscal 1996, 1997 and fiscal 1998 on its grant
date, using the Black-Scholes option-pricing model. Assumptions of no dividend
yield, a risk-free interest rate of 6 percent which approximates the Federal
Reserve Board's rate for treasuries at the time granted, an expected life of
three years, and volatility rates varying from 86.9 to 73.2 percent were applied
to options granted during fiscal years 1996, 1997 and 1998. The weighted average
fair value at the grant date for the options granted during fiscal years 1996,
1997 and 1998 was $3.47, $0.75 and $1.57 per option, respectively.
F-30
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 14 - Stock Option Plans and Employee Retirement Plan (continued)
In fiscal 1982, the Company established an Employee Retirement Plan, which
is effective for fiscal year 1982 and thereafter. The plan provides for annual
contributions to the Company's Stock Bonus Trust (SBT) to be determined by the
Board of Directors and which will not exceed 15 percent of total payroll. At the
discretion of the Trustee, the SBT will purchase common stock at fair market
value or other interest-bearing securities or investments for the accounts of
individual employees who will gain a vested interest of 20 percent in their
accounts after three years of service, and 20 percent each year of service
thereafter, until fully vested after seven years of service. That portion of
cash or stock held in an employee's account and not vested at termination of
employment will be redistributed in accordance with a prearranged formula.
Management believes that the contributions made by the Company to the SBT, to
the extent they relate to government cost-plus-fixed-fee contracts, will be
reimbursable by the U.S. government. In fiscal years 1996, 1997 and 1998 the
Company's contributions to the SBT were 172,900, 347,600 and 333,300 shares of
common stock, respectively, which had estimated market values of $687,400,
$445,500 and $500,000 respectively.
Note 15 - Revenues
In fiscal 1996, contracts with all branches of the U.S. government
accounted for 31 percent of the Company's revenues, and the remaining 69 percent
of the Company's revenues was derived from non-government sources. Of the 31
percent applicable to the U.S. government, there was one agency of the
government that accounted for 16 percent. Other government agencies accounted
for the remaining 15 percent. Of the 69 percent applicable to non-government
sources, two customers accounted for 23 percent and 21 percent of the revenues.
In fiscal 1997, contracts with all branches of the U.S. government
accounted for 43 percent of the Company's revenues, and the remaining 57 percent
of the Company's revenues was derived from non-government sources. Of the 43
percent applicable to the U.S. government, there were three agencies of the
government that accounted for 55 percent, 13 percent and 11 percent. Other
government agencies accounted for the remaining 21 percent. Of the 57 percent
applicable to non-government sources, two customers accounted for 49 percent and
39 percent of the revenues.
F-31
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 15 Revenues (continued)
In fiscal 1998, contracts with all branches of the U.S. government
accounted for 27 percent of the Company's revenues, and a second-tier government
contract with a prime government contractor accounted for 27 percent. The
remaining 46 percent of the Company's revenues were derived from non-government
sources. Of the 27 percent related to the U.S. government agencies, the U.S.
Army, the U.S. Air Force and the U.S. Navy accounted for 24 percent, 12 percent
and 8 percent, respectively, with the remaining revenue of 56 percent being
widely diversified among several other governmental agencies. Of the 46 percent
applicable to non-governmental sources, three customers accounted for 35
percent, 14 percent and 7 percent, respectively, of the total commercial
revenues.
Note 16 - Technology Licenses
In June 1992 the Company and International Business Machines (IBM) entered
into an agreement to develop manufacturing technology required to commercially
produce parts using the Company's technology for stacking integrated circuits.
In June 1993, IBM and the Company jointly announced the opening of a pilot
manufacturing line at an IBM facility. The agreement provided for the Company to
receive royalties on stacked chip parts sold by IBM and will share equally with
IBM any royalties received from the licensing of the jointly developed
manufacturing technology. In April 1996, the Company reached an agreement with
IBM wherein the Company acquired the operating line from IBM and leased the
facilities. This agreement was terminated in fiscal 1997.
In May 1995, the Company and Unitrode Corporation (Unitrode) entered into
an agreement to transfer to Unitrode the technology required to produce the
Company's wireless infrared communication integrated circuit (SIRComm). The
Company will receive licensing and royalty payments for the technology transfer
and on SIRComm products sold by Unitrode.
Note 17 - Deferred Revenues
The Company received prepayments from customers related to services and
products, which had not been delivered as of the balance sheet date. Revenues
are recorded upon delivery of these services and products.
F-32
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 18 - Acquisition and Disposal of Equipment
On April 19, 1996, the Company consummated an agreement for the acquisition
and operation of the equipment comprising IBM's cubing line located at IBM's
Essex Junction, Vermont facility. The cubing line was established by IBM to
manufacture the stacked-chip assemblies required to commercialize the Company's
proprietary chip-stacking technology under the joint development alliance that
IBM and the Company entered into in 1992. According to the terms of the
agreement, the Company acquired the equipment and clean room, which comprises
the cubing line for a cash payment of approximately $6.5 million. In addition,
the Company signed a facility lease agreement for the space required to operate
the cubing line under the Company's management within the IBM facility through
December 1998. The terms of the facility lease agreement include escalating rent
payments, which have been straight lined for financial reporting purposes. The
difference between the amount paid and the amount expensed during fiscal 1996
has been reported as accrued rent. The agreement was terminated in fiscal 1997
and the deferred rent balances were netted against rent expense.
As part of the process to terminate the agreement with IBM, the Company
disposed of the equipment acquired from IBM in April 1996 and other fixed assets
purchased and/or constructed at the IBM facility. These assets with a net book
value of $6,925,300 were sold for proceeds of $1,051,900, resulting in a loss on
the disposal of $5,873,400. At September 28, 1997, $1,026,900 of those proceeds
was still receivable and is included in other current assets on the balance
sheet. During October 1997, these proceeds were received by the Company's lender
and applied against the principal of the Company's long-term debt. (See Note 9
Composition of Certain Financial Statement Captions.)
In December 1997, the Company made a $490,000 cash payment to extinguish
its remaining obligations under a Settlement Agreement. Accordingly, the Company
recorded an extraordinary gain of $1,146,100 on the extinguishment of debt and
reduced accounts payable by the corresponding amounts.
F-33
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 19 - Earnings Per Share
As the Company had a net loss from continuing operations for 1996, 1997 and
1998, basic and diluted net loss per share are the same.
Net loss 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 2 - Issuance of
Common and Preferred Stock.) 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 noncash, one-time charges based on
the immediate conversion feature.
Basic and diluted net loss per common share for 1996, 1997 and 1998 were
calculated as follows:
<TABLE>
<CAPTION>
September 29, September 28, September 27, June 27,
1996 1997 1998 1999
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Net loss $(15,914,700) $(14,875,600) $ (4,243,500) $(6,361,100)
Preferred stock cumulated
dividend (28,800) (18,700) (20,700) -
Preferred stock imputed
dividend - - (465,300) -
------------ ------------ ------------ -----------
Net loss available to
common stockholders $(15,943,500) $(14,894,300) $ (4,729,500) $(6,361,100)
============ ============ ============ ===========
Basic and diluted net loss
per share $ (0.94) $ (0.73) $ (0.19) $ (0.18)
Weighted average shares
outstanding 16,874,300 20,475,100 24,597,700 34,910,900
============ ============ ============ ===========
</TABLE>
F-34
<PAGE>
IRVINE SENSORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997 and September 27, 1998
(Information as of and for the 39 week periods ended
June 28, 1998 and June 27, 1999 is unaudited)(continued)
Note 20 - Fourth Quarter Fiscal 1998 Adjustments
The Company's fiscal year end coincides with the federal budgetary process
providing additional clarification regarding the utility of the Company's
inventory. Accordingly, management performs a comprehensive review of its
inventory in the fourth quarter. Additionally, in the fourth quarter of fiscal
1998, the Company's analysis of organization and financing activities of the
Company's SFT subsidiary resulted in adjustments to the accounting for
allocation of cash received and certain expenses. Also, subsequent to the close
of the fiscal year, the Company completed a technical analysis of the
transaction settling its bank debt, resulting in a determination to reclassify
the proceeds therefrom as additional paid-in capital rather than gain from debt
extinguishment. Significant adjustments made in the fourth quarter are
summarized below. Certain of these adjustments resulted in adjustments to
previously released financial information for earlier quarters of fiscal 1998.
The Company subsequently amended its reports for the affected periods.
<TABLE>
<CAPTION>
<S> <C>
Inventory write-offs and reserves $2,079,000
Reclassification of gain on debt extinguishment
to additional paid-in capital 954,800
Inventory costs charged to R&D expense 795,000
Additional depreciation of equipment, furniture & fixtures 310,000
Reclassification of contract revenue from ATPL to
additional paid-in capital 305,000
----------
Increase to Net Loss $4,443,800
==========
</TABLE>
F-35
<PAGE>
8,270,731 Shares
IRVINE SENSORS CORPORATION
Common Stock
October , 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses payable by the Registrant in connection with the issuance and
distribution of the securities being registered are estimated to be as follows:
<TABLE>
<S> <C> <C>
SEC registration fee............... $ 3,736
Accounting fees and expenses....... 25,000 *
Legal fees and expenses............ 60,000 *
Blue sky legal fees and expenses... 3,000 *
Miscellaneous expenses............. 5,000 *
------- -
Total........................... $96,736 *
======= =
</TABLE>
______________
* Estimated expenses
Item 14. Indemnification of Directors and Officers
The General Corporation Law of the State of Delaware (the "General
Corporation Law") provides for the indemnification of directors, officers,
employees and other agents of the corporation under certain circumstances as set
forth in section 145. Section 145 permits a corporation to indemnify its agents,
typically directors and officers, for expenses incurred or settlements or
judgments paid in connection with certain legal proceedings. Only those legal
proceedings arising out of such persons' actions as agents of the corporation
may be grounds for indemnification.
Whether or not indemnification may be paid in a particular case
depends upon whether the agent wins, loses or settles the suit and upon whether
a third party or the corporation itself is the plaintiff. The section provides
for mandatory indemnification, no matter who the plaintiff is, when an agent is
successful on the merits of a suit. In all other cases, indemnification is
permissive.
If the agent loses or settles a suit brought by a third party, he or
she may be indemnified for expenses incurred and settlements or judgments paid.
Such indemnification may be authorized upon a finding that the agent acted in
good faith and in a manner he or she reasonably believed to be in the best
interests of the corporation.
If the agent loses or settles a suit brought by or on behalf of the
corporation, his or her right to indemnification is more limited. If he or she
is adjudged liable to the corporation, the court in which such proceeding was
held must determine whether it would be fair and reasonable to indemnify him or
her for expenses which such court shall determine. If the agent settles such a
II-1
<PAGE>
suit with court approval, he or she may be indemnified for expenses incurred in
connection with the defense and settlement of the suit, upon a finding that the
agent acted in good faith and in a manner he or she reasonably believed to be in
the best interests of the corporation and its stockholders.
Under Section 145, the indemnification discussed above may be
authorized by a majority vote of the disinterested directors or stockholders
(the person to be indemnified is excluded from voting his or her shares) or the
court in which the proceeding was brought.
Under Section 145, a corporation may authorize, by by-law, agreement
or otherwise, the indemnification of its agents in excess of that expressly
permitted by Section 145. The Registrant's By-laws provide that indemnification
shall be mandatory in all cases where it is permitted by Section 145.
Section 102(b) of the General Corporation Law permits corporations to
eliminate or limit the personal liability of a director to the corporation or
its stockholders for monetary damages for breach of the fiduciary duty as a
director. The Registrant's Certificate of Incorporation provides for elimination
of personal liability of directors for breach of fiduciary duty as a director
except for the following: (i) for any breach of such director's duty of loyalty
to the Corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) under Section 174 of the General Corporation Law; or (iv) for any
transaction from which such director derived an improper personal benefit. The
Registrant's Certificate of Incorporation further provides that modification or
repeal of this provision may not affect the elimination of liability therein
provided with respect to a director's personal liability for any act or omission
that occurs prior to such modification or repeal.
Finally, a corporation has the power to purchase indemnity insurance
for its agents, even if it would not have the power to indemnify them. The
Registrant has purchased such insurance.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended (the "Act") may be permitted to directors, officers or persons
controlling the Registrant pursuant to the foregoing provisions, the Registrant
has been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Item 15. Recent Sales of Unregistered Securities
Within the last three years, Irvine Sensors Corporation has issued and
sold the following unregistered securities on the dates and for the
consideration indicated:
From time to time during 1996 and 1997, ISC issued an aggregate of
2,541,339 shares of Common Stock upon conversion of previously-issued
convertible subordinated debentures totalling $3,400,000. The conversion price
for the shares ranged from $0.95 to $2.50 per share. The issuances were made
pursuant to the exemption provided in Section 3(a)(9) of the Act, which pertains
to the exchange of any security by the issuer with its existing security holders
II-2
<PAGE>
where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.
From time to time during 1997, the Company issued an aggregate of
321,740 shares of Common Stock to 13 persons to whom ISC owed money. The price
per share ranged from $0.83 per share to $1.01 per share, for total
consideration of $331,300. These shares were issued in a series of transactions
not involving a public offering in accordance with Section 4(2) of the Act. Such
exemption was predicted on the fact that the sales were made to a small number
of sophisticated, accredited investors. Each investor had access to business and
financial information about the Registrant, and represented that he/it was
purchasing for his/its own account and not with a view towards distribution of
the securities acquired.
In December 1997, the Company issued 550,000 unregistered shares of
Common Stock to Howard Bank, N.A. in cancellation of $500,000 in debt owed to
the bank. These shares were issued in a transaction not involving a public
offering in accordance with Section 4(2) of the Act. Such exemption was
predicted on the fact that the issuance was made to a single, institutional
investor who was sophisticated and accredited investor.
In the period between December 1997 and January 1998, the Company
issued an aggregate of 37,750 Units of its Series D Convertible Preferred Stock
and Warrants to purchase Common Stock, for gross proceeds of $3,775,000. The
securities were issued to a total of 32 investors, of which 26 are offshore
investors and four of the U.S. investors were investments on behalf of officers
and directors of ISC. These securities were issued in a transaction not
involving a public offering in accordance with Section 4(2) of the Act. Such
exemption was predicted on the fact that the sales were made to a limited number
of sophisticated, accredited investors. Each investor had access to business and
financial information about the Company, and represented that he/it was
purchasing for his/its own account and not with a view towards distribution of
the securities acquired.
In January 1998, the Company issued an aggregate of 125,000 units
consisting of one share of Common Stock and one Warrants, for gross proceeds of
$125,000. Three investors participated in this offering, all of whom are
sophisticated, accredited investors. Each investor had access to business and
financial information about the Company, and represented that he/it was
purchasing for his/its own account and not with a view towards distribution of
the securities acquired. The offering was made pursuant to Section 4(2) of the
Act.
In April 1998, the company issued an aggregate of 700,000 shares of
its unregistered Common Stock to a total of five sophisticated, accredited
investors, in a transaction exempt from the registration requirements of the Act
pursuant to Section 4(2). The Company received gross proceeds of $980,000 in
this offering. Each investor had access to business and financial information
about the Company, and represented that he/it was purchasing for his/its own
account and not with a view towards distribution of the securities acquired.
From time to time during 1998, the Company issued an aggregate of
131,482 shares in connection with the conversion of outstanding shares of Series
D Convertible Preferred Stock.
II-3
<PAGE>
The issuances were made in accordance with the exemption from registration
provided in Section 3(a)(9) of the Act.
Between August 1998 and January 1999, the Company issued an aggregate
of 1,522,500 shares of its unregistered Common Stock to a total of 14
sophisticated, accredited investors, of whom 10 are non-U.S. persons. These
investors exercised warrants by paying an aggregate of 2,283,000 shares of
common stock of Novalog. The shares were issued in a transaction exempt from the
registration requirements of the Act pursuant to Section 4(2). Each investor had
access to business and financial information about the Company, and represented
that he/it was purchasing for his/its own account and not with a view towards
distribution of the securities acquired.
In November 1998, the Company issued 1,000 unregistered shares as a
retirement bonus to its long-time controller. The transaction was exempt under
Section 4(2) of the Act.
In January 1999, the Company issued 400,000 unregistered shares of its
Common Stock to one sophisticated, accredited investor who paid for the shares
by transfer of 500,000 shares of Novalog. The transaction was made pursuant to
Section 4(2) of the Act.
In March 1999, the Company issued to nine investors a total of 267,670
Units consisting of two shares of Common Stock, and one warrant in each of
Silicon Film Technologies, Inc. and MicroSensors, Inc., two of the Company's
subsidiaries. The Company received gross proceeds of $803,010. The securities
were issued in a transaction exempt from the registration requirements of the
Act pursuant to Section 4(2). Each investor had in a transaction exempt from the
registration requirements of the Act pursuant to Section 4(2). The Company
received gross proceeds of $980,000 in this offering. Each investor had access
to business and financial information about the Company, and represented that
he/it was purchasing for his/its own account and not with a view towards
distribution of the securities acquired.
From time to time in 1999, the Company cancelled debt in the amount of
$280,890.50 in consideration for the issuance of a total of 189,946 unregistered
shares of its Common Stock. Thirteen creditors were issued shares, all of whom
in a transaction exempt from the registration requirements of the Act pursuant
to Section 4(2). Each investor had access to business and financial information
about the Company, and represented that he/she/it was purchasing for his/her/its
own account and not with a view towards distribution of the securities acquired.
The transaction was exempt pursuant to Section 4(2) of the Act.
In June 1999, the Company issued an aggregate of 4,000,000
unregistered shares of Common Stock to three offshore, sophisticated, accredited
investors, at a purchase price of $1.40 per share. The transaction was exempt
pursuant to Section 4(2) of the Act. Each investor had access to business and
financial information about the Company, and represented that he/she/it was
purchasing for his/its own account and not with a view towards distribution of
the securities acquired.
II-4
<PAGE>
In October 1999, the Company issued an aggregate of 444,445
unregistered shares of Common Stock to one offshore, sophisticated, accredited
investor at a purchase price of $1.35 per share. This investor also purchased
shares in June 1999. The transaction was exempt pursuant to Section 4(2) of the
Act. Each investor had access to business and financial information about the
Company, and represented that he/she/it was purchasing for his/its own account
and not with a view towards distribution of the securities acquired. The
investor also received a 90-day warrant that may entitle the holder to purchase
additional shares at $0.01 per share under circumstances described in the
warrant.
In October 1999, the Company issued a warrant to a single, offshore
accredited investor who invested in a financing of Silicon Film Technologies,
Inc., a consolidated subsidiary of the Company. The warrant is exercisable for
one year beginning in October 2000. It entitles the holder to purchase shares of
Irvine Sensors Corporation Common Stock,at a purchase price of $1.35, the
consideration for which are the shares of Silicon Film Technologies stock then
owned by the holder or other consideration acceptable to the Company. If the
holder owns Series B Convertible Preferred Stock, each share will be valued at
$10; if the Series B Preferred Stock has been converted to common stock, each
share of common stock will be valued at $0.60.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The following exhibits listed in accordance with the number assigned
to each in the exhibit table of Item 601 of Regulation S-K are included in Part
II of this Registration Statement:
3.1 Certificate of Incorporation of the Registrant, as amended and currently
in effect (1)
3.2 Certificate of Designation of Preferences of Series D Convertible
Preferred Stock (2)
3.2 By-laws, as amended to date (3)
4.1 Specimen Common Stock certificate (1)
5.1 Opinion of Grover T. Wickersham, P.C. re legality (4)
10.1 Lease Agreement for the premises at 3001 Redhill Avenue, Building III,
Costa Mesa, California (5)
10.2.1 Employee Stock Bonus Plan and Trust Agreement dated June 29, 1982
effective December 31,1982 (6)
10.2.2 Amendment to Employee Stock Bonus Plan and Trust Agreement dated
December 14, 1982 (7)
10.2.3 Amendment to Employee Stock Bonus Plan and Trust Agreement dated
September 25, 1990 (1)
10.2.4 Master Trust Agreement for Employee Deferred Benefit Plans dated August
22, 1990 (8)
10.2.5 Amendment to Employee Stock Bonus Plan and Trust Agreement dated October
4, 1993 (9)
10.3 Agreement with R&D Leasing, Ltd. and Note Payable dated June 23, 1989
(10)
10.4 License Agreement with R&D Leasing, Ltd. dated October 20, 1989 (10)
10.5 Agreement with R&D Leasing, Ltd. dated October 1, 1990 (11)
10.6 1991 Stock Option Plan (12)
10.7 1995 Stock Option Plan (13)
10.7 Contract between the Company and NASA Management Office - JPL dated March
12, 1996 (3)
10.8 Contract between the Company and Wright-Patterson Air Force Base dated
August 12, 1996 (3)
10.9 Contract #DAAH01-9B-C-R075 with U.S. Army Aviation and Missile Command
(14)
10.10 1999 Stock Option Agreement (4)
21.1 Subsidiaries of the Registrant (2)
23.1 Consent of Grant Thornton LLP., Independent Accountants (see page II-11
of Pre-Effective Amendment No. 1 to the Registration Statement)
23.2 Consent of PricewaterhouseCoopers LLP., Independent Accountants (see page
II-12 of Pre-Effective No. 1 of the Registration Statement)
II-5
<PAGE>
23.3 Consent of Thomas J. Plante, Esq., Patent Counsel (see page II-12 of the
originally-filed Registration Statement)
23.4 Consent of Grover T. Wickersham, P.C. (included in Exhibit 5.1, above)
24.1 Power of Attorney (included on page II-9 of the originally-filed
Registration Statement)
___________
(1) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended September 29, 1991.
(2) Filed as an exhibit to the original filing of the Registration Statement on
Form S-1, filed with the Commission on October 4, 1999 (Registration No.
333-88385)
(3) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K/A for the fiscal year ended September 28, 1996.
(4) Filed herewith.
(5) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended October 2, 1994.
(6) Incorporated by reference to Part II of Pre-effective Amendment No. 3 to
the S-18 Registration Statement filed with the Commission's Los Angeles
Regional Office on May 27, 1982.
(7) Incorporated by reference to Part II of Registrant's Registration Statement
on Form S-1 filed with the Commission on March 23, 1983 (Registration No.
2-82596) (the "S-1 Registration Statement").
(8) Incorporated by reference to Part II of Pre-effective Amendment No. 3 to
the Form S-2 filed with the Commission on March 3, 1987 (Registration No.
33-10134).
(9) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K/A for the fiscal year ended October 1, 1995.
(10) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended October 1, 1989.
(11) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1990.
(12) Incorporated by reference to Part II of Pre-effective Amendment No. 2 to
the Form S-2 filed with the Commission on July 9, 1992 (Registration No.
33-47977).
(13) Incorporated by reference to Registrant's Form S-8 Registration Statement
filed February 11, 1999.
(14) Incorporated by reference to Registrant's Form 10-Q for the Period Ended
June 27, 1998, filed August 12, 1998.
(b) Financial Statement Schedules
Reports of Independent Certified Public Accountants on Financial Statement
Schedules for the fiscal years ended September 29, 1996, September 28, 1997 and
September 27, 1998:
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable, or are
not required, or because the required information is included in the financial
statements or notes thereto.
II-6
<PAGE>
Item 17. Undertakings
(a) Rule 415 Offering
-----------------
The Registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the " Securities Act");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
- -----------------
registration statement is on Form S-8, and the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Exchange Act that are incorporated by reference in the registration
statement.
(2) That for purposes of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Filings Incorporating Subsequent Exchange Act Documents by Reference
--------------------------------------------------------------------
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934, as amended) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration
II-7
<PAGE>
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Request for Acceleration of Effective Date or filing of
-------------------------------------------------------
Registration Statement on Form S-8
----------------------------------
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
///
///
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-1 and has duly caused this
amended registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Costa Mesa, California, on October 20,
1999.
IRVINE SENSORS CORPORATION
By: /s/ James D. Evert
----------------------------------
James D. Evert
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ James D. Evert President, Chief Executive Officer October 20, 1999
- -------------------------- and Director (Principal
James D. Evert Executive Officer)
/s/ John J. Stuart, Jr. Vice President and October 20, 1999
- -------------------------- Chief Financial Officer
John J. Stuart, Jr. (Principal Financial and
Accounting Officer)
</TABLE>
II-9
<PAGE>
<TABLE>
<S> <C> <C>
/s/ James Alexiou* Chairman of the Board October 20, 1999
- ------------------------------
James Alexiou
/s/ John C. Carson* Director October 20, 1999
- ------------------------------
John C. Carson
/s/ Joanne S. Carson* Director October 20, 1999
- ------------------------------
Joanne S. Carson
/s/ Marc Dumont* Director October 20, 1999
- ------------------------------
Marc Dumont
/s/ Walter E. Garrigan* Director October 20, 1999
- ------------------------------
Walter E. Garrigan
/s/ Frank P. Ragano* Director October 20, 1999
- ------------------------------
Frank P. Ragano
/s/ Wolfgang Seidel* Director October 20, 1999
- ------------------------------
Wolfgang Seidel
/s/ Vincent F. Sollitto, Jr.* Director October 20, 1999
- ------------------------------
Vincent F. Sollitto, Jr.
- ------------------------------
* By John J. Stuart, Jr., attorney-in-fact.
</TABLE>
II-10
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We have issued our report dated January 6, 1999, accompanying the
consolidated financial statements of Irvine Sensors Corporation contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus. We also
consent to the use of our report on the Financial Statement Schedules and to the
use of our name as it appears under the captions "Experts" and "Selected
Consolidated Financial Data".
Grant Thornton LLP
Irvine, California
October 15, 1999
II-11
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated December 16, 1997, relating to the consolidated financial
statements and financial statement schedules of Irvine Sensors Corporation,
which appear in such Registration Statement. We also consent to the references
to us under the headings "Experts" and "Selected Financial Data" in such
Registration Statement.
PricewaterhouseCoopers LLP
Costa Mesa, California
October 14, 1999
II-12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Irvine Sensor Corporation
Our audit of the consolidated financial statements referred to in our
report dated January 6, 1999 appearing on page F-1 of this Registration
Statement also included an audit of the Financial Statement Schedule listed in
Item 14(a) of this Registration Statement. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
GRANT THORNTON LLP
Costa Mesa, California
January 6, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Irvine Sensor Corporation
Our audits of the consolidated financial statements referred to in our report
dated December 16, 1997 appearing on page F-2 of this Registration Statement
also included an audit of the Financial Statement Schedules for the years ended
September 28, 1997 and September 29, 1996 listed in Item 16(b) of this
Registration Statement. In our opinion, these Financial Statement Schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Costa Mesa, California
December 16, 1997
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
<TABLE>
<CAPTION>
Balance at Charged to Costs Balance at End of
Beginning of Year and Expenses Deductions Year
----------------- ---------------- ---------- -----------------
<S> <C> <C> <C> <C>
Year ended September 27, 1998:
- ------------------------------
Allowance for doubtful accounts $ 10,000 $ - $ - $ 10,000
Inventory reserves 2,184,800 1,306,700 1,034,700 2,456,800
Year ended September 28, 1997:
- ------------------------------
Allowance for doubtful accounts $ 10,000 $ - $ - $ 10,000
Inventory reserves 2,043,700 1,156,100 1,015,00 2,184,800
Year Ended September 29, 1996:
- ------------------------------
Allowance for doubtful accounts $ 10,000 $ - $ - $ 10,000
Inventory reserves 380,800 1,662,900 $ - 2,043,700
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ------- ----------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended and currently in effect (1)
3.2 Certificate of Designation of Preferences of Series D Convertible Preferred Stock (2)
3.2 By-laws, as amended to date (3)
4.1 Specimen Common Stock certificate (1)
5.1 Opinion of Grover T. Wickersham, P.C. re legality (4)
10.1 Lease Agreement for the premises at 3001 Redhill Avenue, Building III, Costa Mesa,
California (5)
10.2.1 Employee Stock Bonus Plan and Trust Agreement dated June 29, 1982 effective
December 31, 1982 (6)
10.2.2 Amendment to Employee Stock Bonus Plan and Trust Agreement dated December 14,
1982 (7)
10.2.3 Amendment to Employee Stock Bonus Plan and Trust Agreement dated September 25,
1990 (1)
10.2.4 Master Trust Agreement for Employee Deferred Benefit Plans dated August 22, 1990 (8)
10.2.5 Amendment to Employee Stock Bonus Plan and Trust Agreement dated October 4, 1993
(9)
10.3 Agreement with R&D Leasing, Ltd. and Note Payable dated June 23, 1989 (10)
10.4 License Agreement with R&D Leasing, Ltd. dated October 20, 1989 (10)
10.5 Agreement with R&D Leasing, Ltd. dated October 1, 1990 (11)
10.6 1991 Stock Option Plan (12)
10.7 1995 Stock Option Plan (13)
10.7 Contract between the Company and NASA Management Office - JPL dated March 12,
1996 (3)
10.8 Contract between the Company and Wright-Patterson Air Force Base dated August 12,
1996 (3)
10.9 Contract #DAAH01-9B-C-R075 with U.S. Army Aviation and Missile Command (14
10.10 1999 Stock Option Plan (4)
21.1 Subsidiaries of the Registrant (2)
23.1 Consent of Grant Thornton LLP., Independent Accountants (see page II-11 of the
Registration Statement)
23.2 Consent of PricewaterhouseCoopers LLP., Independent Accountants (see page II-12
of Pre-Effective Amendment No. 1 to the Registration Statement)
23.3 Consent of Thomas J. Plante, Esq., Patent Counsel (see page II-12 of the
originally-filed Registration Statement)
23.4 Consent of Grover T. Wickersham, P.C. (included in Exhibit 5.1, above)
24.1 Power of Attorney (included on page II-9 of the originally-filed Registration Statement)
</TABLE>
___________
(1) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended September 29, 1991.
(2) Filed as an Exhibit to the original filing of the Registration Statement on
Form S-1, filed with the Commission on October 4, 1999 (Registration No.
333-88385)
(3) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K/A for the fiscal year ended September 28, 1996.
<PAGE>
(4) Filed herewith.
(5) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended October 2, 1994.
(6) Incorporated by reference to Part II of Pre-effective Amendment No. 3 to
the S-18 Registration Statement filed with the Commission's Los Angeles
Regional Office on May 27, 1982.
(7) Incorporated by reference to Part II of Registrant's Registration Statement
on Form S-1 filed with the Commission on March 23, 1983 (Registration No.
2-82596) (the "S-1 Registration Statement").
(8) Incorporated by reference to Part II of Pre-effective Amendment No. 3 to
the Form S-2 filed with the Commission on March 3, 1987 (Registration No.
33-10134).
(9) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K/A for the fiscal year ended October 1, 1995.
(10) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended October 1, 1989.
(11) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1990.
(12) Incorporated by reference to Part II of Pre-effective Amendment No. 2 to
the Form S-2 filed with the Commission on July 9, 1992 (Registration No.
33-47977).
(13) Incorporated by reference to Registrant's Form S-8 Registration Statement
filed February 11, 1999.
(14) Incorporated by reference to Registrant's Form 10-Q for the Period Ended
June 27, 1998, filed August 12, 1998.
<PAGE>
EXHIBIT 5.1
GROVER T. WICKERSHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
430 CAMBRIDGE AVENUE, SUITE 100
PALO ALTO, CALIFORNIA 94306
TELEPHONE: (650) 323-6400
FAX: (650) 323-1108
GROVER T. WICKERSHAM E-Mail Address: [email protected]
DEBRA K. WEINER
October 19, 1999
Irvine Sensors Corporation
3001 Redhill Avenue, Building III
Costa Mesa, CA 92626
Gentlemen:
We refer to the Registration Statement on Form S-1 (the "Registration
Statement") of Irvine Sensors Corporation, a Delaware corporation (the
"Company"), filed with the Securities and Exchange Commission (the
"Commission"), File No. 333-88385, covering the registration under the
Securities Act of 1933, as amended (the "Act") of an aggregate of 8,270,731
shares of common stock, $0.01 par value, of the Company (the "Shares") for
resale by certain selling stockholders of the Company (the "Selling
Stockholders").
We have examined the Registration Statement, the Certificate of
Incorporation and By-laws of the Company and such records, certificates and
other documents as we have considered necessary or appropriate for the purposes
of this opinion.
Based on the foregoing, it is our opinion that:
1. The Company is duly organized, validly existing and in good
standing under the laws of the State of Delaware; and
2. The Shares issued to the Selling Stockholders or issuable upon
exercise of the outstanding warrants or options as described in the Registration
Statement are duly authorized and are (or will be, when issued in accordance
with the terms of the respective instruments) validly issued, fully paid and
nonassessable.
<PAGE>
Irvine Sensors Corporation
October 19, 1999
Page 2
We hereby consent to the use of our name in the Registration Statement
under the caption "Legal Matters," as counsel who will pass upon the legality of
the Shares for the Company and to the filing of this opinion as an exhibit to
the Registration Statement. In giving this consent, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the Act
or the Rules and Regulations promulgated thereunder.
Very truly yours,
Grover T. Wickersham, P.C.
<PAGE>
EXHIBIT 10.10
1999 IRVINE SENSORS CORPORATION
STOCK OPTION PLAN
1. Name, Effective Date and Purpose
--------------------------------
(a) This Plan document is intended to implement and govern the 1999 Stock
Option Plan of Irvine Sensors Corporation, a Delaware corporation (the
"Company"). The Plan provides for the granting of options that are either (i)
intended to qualify as incentive stock options ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) for the granting of options that are not intended
to so qualify ("Nonstatutory Stock Options"). Unless specified otherwise, all
the provisions of this Plan relate equally to both incentive and Nonstatutory
Stock Options.
(b) This Stock Option Plan is established effective as of January ,
1999. The purpose of this Plan is to promote the growth and general prosperity
of the Company and its Affiliated Companies by permitting the Company, through
the grant of Incentive Stock Options and Nonstatutory Stock Options ("Options")
to purchase shares of its common stock, $0.01 par value ("Common Stock"), to
attract and retain the best available persons for positions of substantial
responsibility and to provide certain key employees, directors, consultants and
advisors with an additional incentive to contribute to the success of the
Company and its Affiliated Companies. For purposes of this Plan, the term
"Affiliated Companies" shall mean any component member of a controlled group of
corporations, as defined under Section 1563 of the Code, in which the Company is
also a component member.
2. Administration
--------------
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board").
(b) The Board shall have sole authority, in its absolute discretion, to
determine which of the eligible persons of the Company and its Affiliated
Companies shall receive Options ("Optionees"), and, subject to the express
provisions and restrictions of this Plan, shall have sole authority, in its
absolute discretion, to determine the time when Options shall be granted, the
terms and conditions of an Option other than those terms and conditions fixed
under this Plan, the number of shares that may be issued upon exercise of an
Option and the means of payment for such shares, and shall have authority to do
everything necessary or appropriate to administer the Plan, including but not
limited to (i) setting different terms and conditions for different Options and
(ii) interpreting the Plan. All decisions, determinations and interpretations of
the Board shall be final and binding on all Optionees.
(c) The Board shall have the authority to delegate some or all of the
powers granted to it pursuant to this Section 2 to a committee (the "Committee")
appointed by the Board. The Board may from time to time remove members from, or
add members to, the Committee, and vacancies on the Committee shall be filled by
the Board. All decisions, determinations and interpretations of the Committee
shall be final and binding on all Optionees, unless otherwise determined by the
Board.
(d) The following definitions shall apply to the Plan:
(i) Restricted Stockholder. An individual who, at the time an Option
is granted under the Plan, beneficially owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or of its
Parent Corporation or Subsidiary Corporations, if any, with stock ownership to
be determined in light of the attribution rules set forth in Section 425 (d) of
the Internal Revenue Code.
<PAGE>
(ii) Parent Corporation. A corporation as defined in Section 425(e)
of the Code.
(iii) Subsidiary Corporation. A corporation as defined in Section
425(f) of the Code.
(iv) Employment. Includes the formal employment relationships, as
well as directorships and/or consulting or other advisory relationships with the
Company or any of its Affiliated Companies; however, the term "employee," as
used in Section 3 of the Plan refers to the formal employment relationship only.
3. Eligibility
-----------
(a) The Board (or the Committee, if so authorized by the Board) may, in
its discretion, grant one or more Incentive Stock Options under the Plan to any
employee of the Company or its Affiliated Companies, including any employee who
is a Director of the Company or of any of its Affiliated Companies presently
existing or hereafter organized or acquired. Such Incentive Stock Options may be
granted to one or more such employees without being granted to other eligible
employees, as the Board (or Committee) may deem fit.
(b) The Board (or the Committee, if so authorized by the Board), may, in
its discretion, grant one or more Nonstatutory Stock Options under the Plan to
any employee, including officers or directors of the Company or any Affiliated
Company, any director of the Company or any Affiliated Company, or any
consultants or advisors of the Company or any Affiliated Company presently
existing or hereafter organized or acquired. Such Nonstatutory Stock Options may
be granted to one or more such persons without being granted to other eligible
persons, as the Board may deem fit.
4. Stock to be Optioned
--------------------
The maximum aggregate number of shares that may be optioned and sold under
the Plan is 2,650,000 shares of authorized Common Stock of the Company. This
constitutes an absolute cumulative limitation on the total number of shares that
may be optioned under the Plan. All shares to be optioned and sold under the
Plan may be either authorized but unissued shares or shares held in the
treasury. Shares of Common Stock that (a) are repurchased by the Company after
issuance hereunder pursuant to the exercise of an Option or (b) are not
purchased by the Optionee prior to the expiration of the applicable Option
Period (as described hereinbelow) shall again become available to be covered by
Options to be issued hereunder and shall not, as of the effective date of such
repurchase or expiration, be counted as covered by an outstanding Option for
purposes of the above-described maximum number of shares that may be optioned
hereunder.
5. Option Price
------------
(a) The Option Price for Incentive Stock Option shares of Common Stock to
be issued under the Plan shall be not less than 100% of the fair market value of
such shares on the date on which the Option covering such shares is granted by
the Board (or the Committee, if so authorized by the Board), except that if on
the date on which such Incentive Stock Option is granted the Optionee is a
Restricted Stockholder, then such Option Price shall be not less than 110% of
the fair market value of the shares of Common Stock subject to the Option on the
date such Option is granted by the Board (or the Committee, if so authorized).
The fair market value of shares of Common Stock for all purposes of the Plan is
to be determined by the Board (or the Committee, if so authorized by the Board)
in its sole discretion, exercised in good faith.
(b) The Option Price for Nonstatutory Stock Option shares of Common Stock
to be issued under the Plan shall be determined by the Board (or the Committee,
if so authorized by the Board) and shall not be less than 85% of the fair market
value of such shares on the date on which the Option covering such shares is
granted by the Board (or the Committee, if so authorized by the Board). The fair
market value of shares of Common Stock for all purposes of the Plan is to be
determined by the Board (or the Committee, if so authorized by the Board) in its
sole discretion, exercised in good faith.
2
<PAGE>
6. Term of Plan
------------
The Plan shall become effective upon January , 1999, and shall continue
in effect until January , 2009, unless terminated earlier by action of the
Board. No Option hereunder may be granted after January , 2009.
7. Exercise of Option
------------------
Subject to the restrictions, conditions and/or limitations set forth in
this Plan document and/or any applicable Stock Option Agreement entered into
hereunder, Options granted under this Plan shall be exercisable in accordance
with the following rules:
(a) Subject to the specific provisions of this Section 7, Options shall
become exercisable at such times and in such installments (which may be
cumulative) as the Board shall provide in the terms of each individual Option;
provided, however, that by a resolution adopted after an Option is granted the
Board may, on such terms and conditions as it may determine to be appropriate
and subject to the specific provisions of this Section 7, accelerate the time at
which such Option or installment thereof may be exercised. For the purposes of
this Plan, any accrued installment of an Option granted hereunder shall be
referred to as an "Accrued Installment."
(b) Subject to the provisions of Subsections 7(c), (d) or (e) concerning
the expiration of Options under the circumstances specified therein, an Option
may be exercised when Accrued Installments accrue as provided in the terms under
which such Option was granted and at any time thereafter within a period of ten
years from the Option Grant Date of Incentive Stock Options (five years for
Restricted Stockholders), and within a period of ten years from the Option Grant
Date of Nonstatutory Stock Options, subject, however, to the further
restrictions contained in this Section 7. In no event shall any Option be
exercised on or after the tenth anniversary (fifth anniversary as to Restricted
Stockholders) of the date on which the Option is granted by the Board, or by the
Committee, if so authorized (hereafter the "Option Grant Date") of such
Incentive Stock Options, or on or after the tenth anniversary of the Option
Grant Date of such Nonstatutory Stock Options regardless of the circumstances
then existing (including but not limited to the death or termination of
employment of the Optionee). The fifth anniversary of the Option Grant Date and
the tenth anniversary of the Option Grant Date shall be hereafter designated the
"Fifth Anniversary Date" and the "Tenth Anniversary Date," respectively.
(c) Notwithstanding the foregoing provisions of this Section 7, in the
event a formal agreement is executed by the Company and other concerned parties
with respect to any of the following transactions (a "Corporate Transaction"),
outstanding Options will become fully exercisable for all of the shares at the
time subject to such Option unless the successor company or parent thereof, if
any, assumes the Options or issues substitute options as part of the Corporate
Transaction. Corporate Transactions include: (i) the direct or indirect sale or
exchange by the stockholders of the Company of all or substantially all of the
stock of the Company; (ii) a merger or consolidation in which the Company is not
the surviving corporation or in which the stockholders do not retain at least a
majority of the voting stock of the Company; (iii) the sale, exchange or other
transfer of all or substantially all of the assets of the Company (other than a
sale, exchange or transfer to one or more Affiliated Companies); or (iv) a
liquidation or dissolution of the Company. In the event of a Corporate
Transaction, the immediately fully exercisable Options shall be exercisable
until the earlier of (a) the applicable expiration date of the Option; or (b)
the date of the Corporate Transaction. Notwithstanding the foregoing, in the
event that any agreement pertaining to a Corporate Transaction shall be
terminated without consummating the Corporate Transaction, any unexercised
unaccrued installments that had become exercisable solely by reason of the
provisions of this Subsection 7(c) shall again become unaccrued and
unexercisable as of said termination of such agreement, subject, however, to
such installments accruing pursuant to the normal accrual schedule provided in
the terms under which such Option was granted. Any exercise of an installment
prior to said termination of said agreement shall remain effective
notwithstanding that such installment became exercisable solely by reason of the
Company entering into said agreement to dispose of the stock or assets of the
Company.
3
<PAGE>
(d) Subject to the provisions of Subsection 7(e) hereinbelow involving the
death or disability of an Optionee while an employee, director, consultant or
advisor of the Company or an Affiliated Company, as of the effective date of the
termination of employment or directorship of an Optionee of the Company (or
Affiliated Company) for any reason other than death or disability (the
"Termination Date"), any unexercised Accrued Installments of the Option granted
hereunder to such terminated Optionee shall expire and become unexercisable as
of the earlier of (i) the applicable expiration date of the Option; or (ii) 30
days following said Termination Date; provided, however, that the Board may
extend such 30-day period for a period of up to the applicable Fifth Anniversary
Date with respect to non-statutory stock options. Any installments under said
Option which have not accrued as of said Termination Date shall expire and
become unexercisable as of said Termination Date. Any portion of an Option that
expires hereunder shall remain unexercisable and be of no effect whatsoever
after such expiration notwithstanding that such Optionee may be reemployed by,
or again become a director of or consultant or advisor to the Company or an
Affiliated Company.
(e) Notwithstanding the foregoing provisions of this Section 7, in the
event of the death of an Optionee while an employee, director, consultant or
advisor of the Company (or an Affiliated Company), or in the event of the
termination of employment by reason of the Optionee's permanent and total
disability, the unexercised Accrued Installments of the Option granted hereunder
to such Optionee shall expire and become unexercisable as of the earlier of (i)
the applicable expiration date of the Option, or (ii) the date determined by the
Board (or Committee) that is between six and 12 months from the date of the
Optionee's death (if applicable), or (iii) the 12 months from the date of the
termination of employment, directorship, consulting or advisory relationship by
reason of disability (if applicable). Any such Accrued Installments of a
deceased Optionee may be exercised prior to their expiration by (and only by)
the person or persons to whom the Optionee's Option rights shall pass by will or
by the laws of descent and distribution, if applicable, subject, however, to all
terms and conditions of this Plan and the applicable Stock Option Agreement
governing the exercise of Options granted hereunder. Any installments under a
deceased Optionee's Option that have not accrued as of the date of his or her
death shall expire and become unexercisable as of said date of death.
Installments continue to accrue during the post-termination period of
exercisability for Optionees who have suffered a permanent and total disability.
For purpose of this Subsection 7(e), an Optionee shall be deemed employed by the
Company (or Affiliated Company) during any period of leave or absence from
active employment as authorized by the Company (or Affiliated Company).
(f) An Option shall be deemed exercised when written notice of such
exercise has been given to the Company at it principal business office by the
person entitled to exercise the Option and full payment in cash or cash
equivalents (or other acceptable forms of payment as provided in Section 10 of
this Plan) for the shares with respect to which the Option is exercised has been
received by the Company. Until the issuance of the stock certificates, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to optioned shares notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other rights for which the record date
is prior to the date the stock certificate is issued except as provided in
Section 20.
(g) An Option may be exercised in accordance with this Section 7 as to all
or any portion of the shares covered by an Accrued Installment of the Option
from time to time during the applicable option period, but shall not be
exercisable with respect to fractions of a share.
(h) As soon as practicable after any proper exercise of an Option in
accordance with the provisions of this Plan, the Company shall, without transfer
or issue tax to the Optionee, deliver to the Optionee at the main office of the
Company, or such other place as shall be mutually acceptable, a certificate or
certificates representing the shares of Common Stock as to which the Option has
been exercised. The time of issuance and delivery of the Common Stock may be
postponed by the Company for such period as may be required for it with
reasonable diligence to comply with any applicable listing requirements of any
national or regional securities exchange and any law or regulation applicable to
the issuance and delivery of such shares.
(i) During the lifetime of an Optionee, an Option may be exercised only by
the Optionee.
4
<PAGE>
8. Authorization to Issue Options and Stockholder Approval
-------------------------------------------------------
Options granted under the Plan shall be conditioned upon the Company
obtaining any required permits from appropriate governmental agencies, free of
any conditions not acceptable to the Board, authorizing the Company to issue
such Options, provided, however, such condition shall lapse as of the effective
date of issuance of such permit(s) in a form to which the Company does not
object within 60 days. The grant of Options under the Plan also is conditioned
on approval of the Plan by the vote or written consent of the holders of a
majority of the outstanding shares of the Company's Common Stock; and no Option
granted hereunder shall be effective or exercisable unless and until the Plan
has been so approved.
9. Limit on Value of Optioned Shares
---------------------------------
With respect to Incentive Stock Options granted, the aggregate fair market
value, as determined at the time the Option is granted, of the shares of Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by any single Optionee during any calendar year under this Plan and
any other plans of the Company or an Parent or Subsidiary, may not exceed
$100,000.
10. Payment of Exercise Price
-------------------------
Options may be exercised by payment of the option price (i) in cash or cash
equivalent; (ii) by tender to the Company of shares of the Company's Common
Stock owned by the Optionee having a value, as determined by the Board not less
than the exercise price, and which either have been owned by the Optionee for
more than six months or which were not acquired, directly or indirectly, from
the Company; (iii) by the assignment of the proceeds of a sale of some or all of
the shares being acquired upon exercise of the option ("Same Day Sale"), (iv) in
the case of employees of the Company or any Affiliated Company, by the
Optionee's recourse promissory note, (v) by the withholding of shares being
acquired upon exercise of the Option having a value, as determined by the Board,
not less than the exercise price; or (vi) by such other consideration and method
of payment as the Board, in its sole discretion, may allow. The Board (or
Committee, if so authorized) may restrict the forms of payment permitted in
connection with any Option grant. Any permitted promissory note shall be due and
payable not more than five years after the Option is granted, and interest shall
be payable at least annually and be at least equal to the minimum interest rate
necessary to avoid imputed interest under the Code. The Board has the authority
to permit or require the Optionee to secure any promissory note used to exercise
an Option with the shares of stock acquired on exercise of the Option and/or
with other collateral acceptable to the Company. Optionees may elect to have
shares withheld upon exercise to satisfy tax withholding obligations.
11. Stock Option Agreement
----------------------
The terms and conditions of Options granted under the Plan shall be
evidenced by a Stock Option Agreement (hereinafter referred to as the
"Agreement") executed by the Company and the person to whom the Option is
granted. Each Agreement shall contain the following provisions approved by the
Board (or the Committee):
(a) A provision fixing the number of shares which may be issued upon
exercise of the Option:
(b) A provision establishing the Option price per share:
(c) A provision establishing the times and the installments in which
Options may be exercised;
(d) A provision incorporating therein this Plan by reference;
(e) A provision clarifying which Options are intended to be Incentive
Stock Options and which are intended to be Nonstatutory Stock Options;
5
<PAGE>
(f) A provision fixing the maximum duration of an Option as not more than
ten years from the Option Grant Date, except in the case of Options granted to
Restricted Stockholders, in which instance such maximum duration shall not
exceed five years;
(g) Such representations and warranties by the Optionee as may be required
by Section 21 of this Plan or as may be required by the Board (or the Committee)
in its discretion;
(h) Any other restrictions (in addition to those established under this
Plan) as may be established by the Board (or the Committee) with respect to the
exercise of the Option, the transfer of the Option, and/or the transfer of the
shares purchased by exercise of the Option, provided that such restrictions are
not in conflict with this Plan; and
(i) Such other terms and conditions not inconsistent with this Plan as may
be established by the Board (or the Committee).
12. Taxes, Fees and Expenses
------------------------
The Company shall pay all original issue and transfer taxes (but not income
taxed, if any) with respect to the grant of Options and/or the issue and
transfer of shares pursuant to the exercise of such Options, and all other fees
and expenses necessarily incurred by the Company in connection therewith, and
will from time to time use its best efforts to comply with all laws and
regulations which, in the opinion of counsel for the Company, shall be
applicable thereto.
13. Withholding of Taxes
--------------------
The grant of Options hereunder and the issuance of Common Stock pursuant to
the exercise of such Options is conditioned upon the Company's reservation of
the right to withhold, in accordance with any applicable law, from any
compensation payable to the Optionee any taxes required to be withheld by
federal, state or local law as a result of the grant or exercise of any such
Option.
14. Amendment or Termination of the Plan
------------------------------------
(a) The Board may amend this Plan from time to time in such respects as
the Board may deem advisable, provided, however, that no such amendment shall
operate to (i) change the class of persons eligible to receive Options under the
Plan; (ii) affect adversely an Optionee's rights under this Plan with respect to
any Option granted hereunder prior to the adoption of such amendment, except as
may be necessary, in the judgment of counsel to the Company, to comply with any
applicable law; or (iii) increase the maximum aggregate number of shares which
may be optioned and sold under the Plan, unless such increase is approved by the
stockholders of the Company in accordance with Delaware law.
(b) The Board may at any time terminate this Plan. Any such termination of
the Plan shall not, without the written consent of the Optionee, alter the terms
of Options already granted, and such Options shall remain in full force and
effect as if this Plan had not been terminated.
15. Options Not Transferable
------------------------
Options granted under this Plan may not be sold, pledged, hypothecated,
assigned, encumbered, gifted or otherwise transferred or alienated in any
manner, either voluntarily or involuntarily by operation of law, otherwise than
by will or the laws of descent or distribution, and may be exercised during the
lifetime of an Optionee only by such Optionee.
16. No restrictions on Transfer of Stock
------------------------------------
Common Stock issued pursuant to the exercise of an Option granted under
this Plan (hereinafter "Optionee Stock"), or any interest in such Optioned
Stock, may be sold, assigned, gifted, pledged, hypothecated, encumbered or
otherwise transferred or alienated in any manner by the holder(s) thereof,
subject, however, to any representations or warranties requested under Section
21 of this Plan and also subject to any restrictions imposed pursuant to Section
11(h) of this Plan and to
6
<PAGE>
compliance with any applicable federal, state or other local law, regulation or
rule governing the sale or transfer of stock or securities.
17. Reservation of Shares of Common Stock
-------------------------------------
The Company, during the term of this Plan, will at all times reserve and
keep available such number of shares of its Common Stock as shall be sufficient
to satisfy the requirements of the Plan.
18. Restrictions on Issuance of Shares
----------------------------------
The Company, during the term of this Plan, will use its best efforts to
seek to obtain from the appropriate regulatory agencies any requisite
authorization in order to issue and sell such number of shares of its Common
Stock as shall be sufficient to satisfy the requirements of the Plan. The
inability of the Company to obtain from any such regulatory agency having
jurisdiction thereof the authorization deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any shares of its stock hereunder
to the inability of the Company to confirm to its satisfaction that any issuance
and sale of any shares of such stock will meet applicable legal requirements
shall relieve the Company of any liability in respect of the non-issuance or
sale of such stock as to which such authorization or confirmation have not been
obtained.
19. Notices
-------
Any notice to be given to the Company pursuant to the provisions of this
Plan shall be addressed to the Company in care of its Secretary at its principal
office, and any notice to be given to an Optionee to whom an Option is granted
hereunder shall be addressed to him or her at the address given beneath such
Optionee's signature on the Stock Option Agreement, or at such other address as
such Optionee or his transferee (upon the transfer of Optionee Stock) may
hereafter designate in writing to the Company. Any such notice shall be deemed
duly given when enclosed in a properly sealed envelope or wrapper addressed as
aforesaid, registered or certified, and deposited, postage and registry or
certification fee prepaid, in a post office or branch post office regularly
maintained by the United States Postal Service. It shall be the obligation of
each Optionee and each transferee holding Optionee Stock to provide the
Secretary of the Company, by letter mailed as provided hereinabove, with written
notice of his or her correct mailing address.
20. Adjustments Upon Changes in Capitalization
------------------------------------------
If the outstanding shares of Common Stock of the Company are increased,
decreased, changed into or exchanged for a different number or kind of shares of
the Company through reorganization, recapitalization, reclassification, stock
dividend, stock split or reverse stock split, upon proper authorization of the
Board, an appropriate and proportionate adjustment shall be made in the number
and kind of shares which may be issued upon exercise of Options granted under
the Plan; provided, however, that no such adjustment need be made if, upon the
advice of counsel, the Board determines that such adjustment may result in the
receipt of federally taxable income to holders of Options granted hereunder or
the holders of Common Stock or other classes of the Company's securities.
21. Representations and Warranties
------------------------------
As a condition to the exercise of any portion of an Option, the Company may
require the person exercising such Option to make any representation and/or
warranty to the Company as may, in the judgment of counsel to the Company, be
required under any applicable law or regulation, including but not limited to a
representation and warranty that the shares are being acquired only for
investment and without any present intention to sell or distribute such shares
if, in the opinion of counsel for the Company, such a representation is required
under the Securities Act of 1933, as amended (the "Securities Act"), or any
other applicable law, regulation or rule of any governmental agency.
7
<PAGE>
22. No Enlargement of Employee Rights
---------------------------------
This Plan is purely voluntary on the part of the Company, and while the
Company hopes to continue it indefinitely, the continuance of the Plan shall not
be deemed to constitute a contract between the Company and any employee, or to
be consideration for or a condition of the employment of any employee. Nothing
contained in the Plan shall be deemed to give any employee the right to be
retained in his employ of the Company or its Affiliated Companies, or to
interfere with the right of the Company or an Affiliated Company to discharge or
retire any employee thereof at any time. No employee shall have any right to or
interest in options authorized hereunder prior to the grant of such an Option to
such employee, and upon such grant such employee shall have only such rights and
interests as are expressly provided herein, subject, however, to all applicable
provisions of the Company's Certificate of Incorporation, as the same may be
amended from time to time.
23. Legends on Stock Certificates
-----------------------------
Unless an appropriate registration statement is filed pursuant to the
Securities Act, with respect to the shares of Common Stock issuable under this
Plan, each certificate representing such Common Stock shall be endorsed on its
face with the following legend or its equivalent:
"Neither the Option pursuant to which the shares represented by this
certificate are issued nor said shares have been registered under the
Securities Act of 1933, as amended (the "Act"). Transfer or sale of such
securities or any interest therein is unlawful except after registration,
or pursuant to an exemption from the registration requirements thereunder."
24. Specific Performance
--------------------
The Options granted hereunder and the Optionee Stock issued pursuant to the
exercise of such an Option cannot be readily purchased or sold in the open
market, and, for that reason among others, the Company and its stockholders will
be irreparably damaged in the event that this Plan is not specifically enforced.
Should any dispute arise concerning the sale or other disposition of an Option
and/or Optionee Stock, an injunction may be issued restraining such sale or
other disposition of such Option and/or Optionee Stock pending the determination
of such controversy. In the event of any controversy concerning the right or
obligation to purchase or sell any such Option or Optionee Stock, such right or
obligation shall be enforceable in a court of equity by a decree of specific
performance. Such remedy shall, however, be cumulative and not exclusive, and
shall be in addition to any other remedy which the parties may have.
25. Invalid Provisions
------------------
In the event that any provision of this Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein invalid or unenforceable, and all such other provisions shall
be given full force and effect to the same extent as though the invalid or
unenforceable provision was not contained herein.
26. Applicable Law
--------------
This Plan shall be governed by and construed in accordance with the laws of
the State of California.
27. Successors and Assigns
----------------------
This Plan shall be binding on and inure to the benefit of the Company and
the employees, directors, consultants, advisers and/or independent contractors
to whom an Option is granted hereunder, and such Optionees' heirs, executors,
administrators, legatees, personal representatives, assignees and transferees.
8
