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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
(Mark One)
___
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES AND EXCHANGE ACT OF 1934]
For the fiscal year ended October 1, 2000
OR
---
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR
--- 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934]
For the transition period from _________ to _________.
Commission file number 1-8402
----------
IRVINE SENSORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-0280334
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3001 Redhill Avenue, Costa Mesa, California 92626
(Address of principal executive offices) (Zip Code)
(714) 549-8211
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class: which registered:
Common Stock Boston Stock Exchange Incorporated
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
To the extent known by the registrant, the aggregate market value of the Common
Stock held beneficially by non-affiliates of the registrant was approximately
$72,000,000 on December 15, 2000. As the Preferred Stock is not publicly traded
it has not been included in the computation.
As of December 15, 2000, there were 46,736,700 shares of Common Stock
outstanding.
Documents Incorporated by Reference:
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended October 1, 2000 (Part II); portions of the Registrant's Definitive Proxy
Statement to be used in connection with Registrant's Annual Meeting of
Stockholders to be held on March 7, 2001 (Part III).
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IRVINE SENSORS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 1, 2000
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business ...................................................... 4
Item 2. Properties ..................................................... 14
Item 3. Legal Proceedings............................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............. 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................ 16
Item 6. Selected Financial Data ........................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 18
Item 8. Financial Statements and Supplementary Data .................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 18
Item 11. Executive Compensation ......................................... 18
Item 12. Stock Ownership of Certain Beneficial Owners and Management .... 18
Item 13. Certain Relationships and Related Transactions ................. 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ....................................................... 19
Signatures................................................................. 21
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in the Annual Report on Form 10-K constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause Irvine Sensors Corporation (the
"Company") or its industries' actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such forward-
looking statements. These factors include those listed under Part I "Business -
Factors that May Affect Future Results."
Forward-looking statements relate to future events or our future financial
performance. The Company believes it is important to communicate its
expectations to its investors. In some cases, the forward-looking statements may
be identified by terminology such as "may," "will," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of such terms or other comparable terminology. These
statements are only predictions. There may be events in the future that the
Company is not accurately able to predict or over which it may have no control.
Readers should consider statements that contain these or similar words carefully
because they (1) discuss expectations of Irvine the Company about its future
performance; (2) contain projections of the Company's future operating results
or of its future financial condition; (3) state other "forward-looking
information. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under Part I "Business - Factors
that May Affect Future Results." These factors may cause the Company's actual
results to differ materially from any forward-looking statement.
Although management believes that the expectations reflected in the
forward-looking statements are reasonable, there is no guarantee regarding
future results, levels of activity, performance or achievements. Moreover,
neither the Company nor any other person assumes responsibility for the accuracy
and completeness of such statements. The Company is under no duty to update any
of the forward-looking statements after the date of this Annual Report on Form
10-K to conform such statements to actual results.
Readers should be aware that the occurrence of any of the events described
in the risk factors and elsewhere in this Report, including the documents
incorporated by reference, could have a material and adverse effect on the
Company's business, results of operations and financial condition and that upon
the occurrence of any of these events, the trading price of the Company's Common
Stock could decline and investors could lose all or part of their investments.
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PART I.
---------
Item 1. Business
GENERAL
The Company and its subsidiaries are involved in various business activities
related to miniaturized electronics and the applications thereof. The Company
is organized into the following primary business groups:
Irvine Sensors Corporation
--------------------------
Irvine Sensors Corporation ("ISC") is the developer of proprietary technologies
to produce extremely compact packages of solid state microcircuitry, which ISC
believes 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 a variety of fields, including wireless infrared transmission,
miniaturized sensors, image processing, digital photography and internet data
transmission and switching.
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 potentially 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. Until the last few years,
ISC derived most of its revenues from such funded research and development.
Recently, ISC has sought to commercialize its technologies by creating
independently managed subsidiaries that can pursue their own financing
strategies separately from the parent. ISC has received an increasing share of
its consolidated revenues from one such subsidiary.
In October 1995, ISC formed a subsidiary, Novalog, Inc. ("Novalog"), to
commercially exploit its low power chip technology. In April 1997, ISC formed a
subsidiary, MicroSensors, Inc. ("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. ("Silicon Film"),
to commercially exploit some of its digital photography technologies. In March
2000, ISC formed a subsidiary, RedHawk Vision Systems, Inc. ("RedHawk"), to
commercially exploit its technologies for digitally extracting video data. As of
October 1, 2000, ISC owned approximately 95%, 98%, 83% and 95% of the issued
common stock of Novalog, MSI, Silicon Film and RedHawk, respectively. In October
2000, subsequent to the close of fiscal year 2000, ISC formed a subsidiary,
iNetWorks Corporation ("iNetWorks"), to commercially exploit its chip-stacking
technologies to develop proprietary switches and routers for Internet and
telecommunications networks. ISC owns approximately 97% of iNetWorks as of
December 15, 2000.
Novalog, Inc.
-------------
Novalog is a consolidated subsidiary of ISC that designs, develops and sells
proprietary integrated circuits ("ICs") and related products for use in wireless
infrared communication. Novalog's initial products, trademarked SIRComm(TM),
SIR2(TM), MiniSIR(TM) and MiniSIR2(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 its products in
millions of units to manufacturers servicing the IrDA marketplace and, although
there can be no assurance, management anticipates growing demand for such
products. In fiscal 2000, Novalog accounted for approximately 59% of the
Company's consolidated revenues.
MicroSensors, Inc.
------------------
MSI is a consolidated 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. MSI is
developing a proprietary micromachined inertial sensor, called the Silicon
MicroRing Gyro(TM). MSI has demonstrated early prototypes of this device and is
presently seeking strategic partners to facilitate its market introduction. In
addition to inertial sensors, MSI intends to offer Application Specific
Integrated Circuits ("ASICs") designed to read out micromachined sensors and
other electronic systems. MSI is presently shipping engineering samples and
qualification volumes of a proprietary Universal Capacitive Readout (TM)
("UCR"(TM)) ASIC product to potential customers. The Company believes that there
are many uncertainties surrounding
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the development of MSI's business, including the risk that large companies may
be reluctant to purchase critical parts of the nature that MSI is developing
from a small company. This may be true even if MSI succeeds in surmounting all
of the developmental challenges it currently faces. MSI accounted for less than
1% of the Company's consolidated revenues in fiscal 2000.
Silicon Film Technologies, Inc. (formerly Imagek, Inc.)
-------------------------------------------------------
Silicon Film Technologies, Inc. is a consolidated subsidiary of ISC that
designs, develops and intends to sell proprietary electronic film systems and
other digital imaging products and services. Silicon Film has developed and had
manufactured pre-production quantities of a proprietary digital photography
system called "EFS"(TM) which includes a self-contained, compact, battery-
powered cartridge that fits into the film cavity of a standard 35mm camera thus
offering the flexibility to switch between conventional film and digital
photography. Silicon Film is presently qualifying an initial version of the EFS
in preparation to offer it for sale. Other collateral products and services are
planned for introduction by Silicon Film in the future. Silicon Film had no
revenues in fiscal 2000.
RedHawk Vision, Inc.
--------------------
RedHawk Vision, Inc. is a consolidated subsidiary of ISC that designs, develops
and intends to sell personal computer software tools that digitally enhance
video data and extract 35mm quality images from any video source including
personal camcorders, the Internet and television. At the end of fiscal 2000,
RedHawk introduced an initial version of this software for professional use.
RedHawk had no material revenues in fiscal 2000.
iNetWorks Corporation
---------------------
iNetWorks Corporation is a consolidated subsidiary of ISC organized in October
2000 to develop proprietary switches and routers for Internet and
telecommunications networks. iNetWorks is a development stage company and is not
expected to generate revenues in fiscal 2001. iNetWorks is not included in the
Company's consolidated financial statements for the year ended October 1, 2000.
Subsidiaries' Capital Structure
-------------------------------
The capital structure and ownership of ISC's subsidiaries vary depending on the
extent to which the subsidiaries have received equity financing from third-party
sources rather than ISC. After giving effect to the possible conversion of
issued and outstanding preferred stock into common stock, ISC's ownership of all
equity securities of Novalog, MSI, Silicon Film, RedHawk and iNetWorks is
approximately 95%, 98%, 52%, 62% and 97%, respectively. Giving full effect to
the possible exercise of outstanding options and warrants and additional options
that may be granted under existing option plans, ISC's future ownership of these
subsidiaries would be approximately 66%, 57%, 39%, 50% and 93%, for Novalog,
MSI, Silicon Film, RedHawk, and iNetWorks, respectively. Novalog, MSI, Silicon
Film, RedHawk and iNetWorks all have substantial intercompany debts payable to
ISC. In the event that these subsidiaries are successful in attracting
additional third-party equity financing, it is possible that ISC may be required
or may elect to convert these obligations into additional equity securities of
these subsidiaries.
ISC was incorporated in Delaware in January 1988. Pursuant to a merger effective
in May 1988 with a corporation of the same name incorporated in California in
December 1974, the Company succeeded to all of the assets and liabilities of
such predecessor corporation. Its principal executive offices are located at
3001 Redhill Avenue, Building 4, Costa Mesa, California 92626, and its telephone
number is (714) 549-8211.
Novalog was incorporated in California in October 1995. Its principal executive
offices are located at 3001 Redhill Avenue, Building 4, Costa Mesa, California
92626, and its telephone number is (714) 429-1122.
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.
Silicon Film 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.
RedHawk was incorporated in Delaware in March 2000. Its principal executive
offices are located at 3001 Redhill Avenue, Building 4, Costa Mesa, California
92626, and its telephone number is (714) 444-8701.
iNetWorks was incorporated in Nevada in October 2000. Its principal executive
offices are located at 3001 Redhill Avenue, Building 3, Costa Mesa, California
92626, and its telephone number is (714) 444-8737.
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Products and Technology
-----------------------
The Company has a wide variety of technologies that have been derived from its
early entry into the field of chip stacking. The Company is seeking to
commercially exploit many of these technologies through subsidiaries organized
to meet the needs of varying markets.
The Company's Novalog subsidiary has developed a Serial Infrared Communications
chip using elements of the Company's sensor chip design technology. This device
is being used in products in order to allow computers, computer peripherals and
hand-held portable electronics devices such as personal organizers, pagers and
cellular phones to communicate using infrared transmissions in a manner similar
to that used by remote control units for televisions and video cassette
recorders. Novalog has been shipping such devices since 1995.
The Company also has chip design technology relating to electronic readouts that
it is seeking to exploit through its MSI subsidiary. In fiscal 1999, MSI
introduced a Universal Capacitive Readout (UCR) Application Specific Integrated
Circuit ("ASIC") intended for use by manufacturers of micromachined products.
MSI is currently shipping engineering samples and production qualification
volumes of the UCR to various customers. MSI has also developed a proprietary
inertial sensor, the Silicon MicroRing Gyro, intended to provide an inexpensive
means to measure angular motion for a wide variety of potential applications.
Prototypes of the Silicon MicroRing Gyro are presently being demonstrated to
potential customers and strategic partners. In September 1999, a United States
patent, assigned to MSI, was granted covering the design of the Silicon
MicroRing Gyro. The commercial exploitation, if any, of the Silicon MicroRing
Gyro is expected to be paced by product design-in lead times of customers,
principally Original Equipment Manufacturers ("OEMs"). As a result, the Company
does not project material contributions to its consolidated revenue from this
product during fiscal 2001. Furthermore, until potential customers and
strategic partners more fully evaluate the prototypes of the Silicon MicroRing
Gyro, the Company is not in a position to project when, or if, material revenues
will be realized from this product thereafter.
In June 1998, the Company formed its Silicon Film (formerly Imagek) subsidiary
to commercially explore some of its proprietary technologies related to
miniaturized digital cameras. Silicon Film is presently qualifying an initial
product for sale, the EFS-1, and is developing additional products for future
introduction. Silicon Film believes that its proprietary EFS technology has
value advantages to potential customers with substantial investments in
conventional 35mm camera equipment that inhibits the use by those consumers of
self-contained digital cameras. By using the optics of existing cameras, Silicon
Film believes that the EFS product line will be economically competitive to
comparable resolution digital cameras. Market response to the EFS-1 will
determine the degree to which Silicon Film contributes to the consolidated
revenues of the Company in fiscal 2001.
In March 2000, the Company formed its RedHawk subsidiary to exploit its
proprietary software technology for extracting quality still photographs from
any video source. In September 2000, RedHawk introduced an initial version of
its software intended for use by professionals. RedHawk is developing additional
versions of this product for introduction in fiscal year 2001.
In October 2000, the Company formed its iNetWorks subsidiary to exploit its
proprietary chip-stacking technology, combined with superconducting chip
technology, to develop ultra-high-speed switches and routers for Internet and
telecommunications networks. The Company is presently augmenting its funded
research with its own resources to facilitate the development of this technology
while iNetWorks seeks appropriate strategic and financial partners. Development
of this technology for its intended application is projected to require two to
three years and substantial financial resources, sources of which are not
currently established.
In addition to the products developed through its subsidiaries, the Company has
developed a family of standard products consisting of stacked chips, both
packaged and unpackaged, and believes that its chip stacking technology can
offer demonstrable benefits to designers of systems that incorporate numerous
integrated circuits, both memory and otherwise, 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. However, the Company has only recently qualified some of its
stacked packaged chip products for volume production, and it did not realize
material revenues from these products in fiscal year 2000. The economic
attractiveness of the Company's stacked packaged chip products is highly
dependent on market pricing of competitive monolithic parts. The Company
believes, but cannot assure, that such market conditions will be favorable to
the Company's products at some time in fiscal year 2001, but because of the
uncertainty in such market conditions is not able to estimate whether its
stacked packaged chip products will make a material contribution to the
Company's consolidated revenues.
The Company 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. The Company is seeking to
exploit its highest density chip stacking technology through the sale of funded
development and 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 potential sales are at
significantly higher prices than many applications requiring high volume
production. Furthermore, the Company has existing relationships with some of the
potential customers in this market.
Since fiscal 1995, the Company has been shipping quantities of its stacked
unpackaged chip products, largely stacked memory, to customers for both
government and commercial purposes. However, there is no assurance that the
Company will be successful in
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marketing such products for widespread applications. The Company also intends to
continue to market infrared sensing devices for surveillance, acquisition,
tracking and interception applications for a variety of Defense Department and
NASA missions.
Customers' demand for enhanced performance of electronic systems has produced a
wide variety of competitors and competitive systems offering higher density
microelectronics ranging from various three-dimensional designs to highly dense
two-dimensional designs. Although some competitors are generally believed to be
better financed, more experienced and organizationally stronger, the Company is
not aware of any system in existence or under development that can stack chips
more densely than its three-dimensional approach. See "Competition."
The Company 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 using the Company's higher
density chip stacking technology cannot be firmly established, and therefore,
this uncertainty potentially places some of the Company's stacked chip products
at a cost disadvantage. Accordingly, the Company expanded its product offerings
in 1998 to include lower-density stacked electronics that could be more price
competitive. Three U.S. patents have been issued and others are pending
covering these latest additions to the Company's range of stacked chip product
offerings. Products employing these patented approaches have been qualified for
potential use by large manufacturers, and the Company is currently seeking
production orders for fiscal year 2001.
Potential Product Application
-----------------------------
Neural Networks. In 1991, the Company received initial funding from the U.S.
Navy's Office of Naval Research for potential use of certain of its technology
in neural networks. After the successful completion of this phase 1 contract,
the Company received a $5,200,000 follow-on contract from the Navy in June 1993
and an additional $1,700,000 add on in January 1997 to further develop the
neural networks technology. This phase of the contract was completed, and the
Company subsequently received approximately $2,050,000 in additional funding on
related programs through fiscal 2000. The Company is presently pursuing
additional contracts under which it would 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 have the interconnectivity needed to emulate neural network
processing techniques. The Company believes its chip stacking technology offers
a way to achieve the very high levels of interconnectivity necessary to
construct an efficient artificial neural network. To the Company's knowledge,
there are no competitive packaging approaches that are presently available which
are believed to offer this potential. The full embodiment of its neural network
technology is not expected to yield near-term products for the Company, although
it is anticipated to keep the Company actively involved in advanced R&D relevant
to the Company's long-range business interests. However, elements of this
technology, including a proprietary chip set, are currently being developed with
a view to early product utilization.
Embedded Systems. In fiscal 1998, the Company commenced exploration of a
technology to stack chips of different functionality and dimensions within the
same chip stack, in effect creating a complete, miniaturized electronic system
that can be embedded in a higher-level product. The Company refers to this new
technology as "NeoStack." In fiscal 1999, a U.S. Patent was granted on the
Company's NeoStack technology. The Company has initially demonstrated its
NeoStack technology to support a government program to develop a wearable
computer. The Company is presently developing potential commercial applications
of this technology under government contract. The Company's NeoStack technology
is also central to the development of Internet and telecommunications routers
being undertaken by its iNetWorks subsidiary. The Company believes, but cannot
assure, that its NeoStack approach will offer advantages in terms of compactness
and power consumption to developers of a wide variety of embedded computer and
control systems. However, the Company has not yet developed this technology to
the point at which it can make forecasts of potential revenue, if any, resulting
from its licensing or application by OEMs.
Development Contract
--------------------
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 are general partners with beneficial interests, to
develop certain processes and technology related to chip stacking. The Company
has exclusively licensed this 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 had accrued royalty
obligations to RDL at the rate of 3.5 percent of all Company sales of chip
stacks using the licensed technology.
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 at $1 per share, which were
exercisable by applying the deferred royalties to the purchase.
As of March 15, 2000, the Company entered into an Agreement and Plan of
Reorganization to acquire substantially all of the assets of Research &
Development Leasing, Inc. ("RDL") solely in exchange for 1,000,000 shares of
voting common stock of the Company. Prior to March 15, 2000, the Company had
been accruing obligations to RDL for a license to exclusive rights to certain
processes and
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technology related to chip stacking. By consummating the Agreement and Plan of
Reorganization to acquire RDL assets, including its patents and technology, the
Company has terminated its obligation for any further licensing payments to RDL.
The Company's Chairman of the Board and a Senior Vice President were the sole
shareholders of RDL prior to the Company's acquisition of RDL's assets.
Manufacturing
-------------
The Company's hardware subsidiaries use contract manufacturers to fabricate and
assemble their products. Novalog and MSI use semiconductor fabrication and
related manufacturing sources that are widely available worldwide. Silicon Film
uses product components that are also widely available with one exception.
Silicon Film uses imaging chips which are currently available from limited
sources of supply. Silicon Film expects that additional sources of supply will
become available for this component in the future, but the continuity of its
supply of this key component may be at risk until that occurs. RedHawk's
software products are easily manufacturable by either the RedHawk itself or
external vendors. iNetWorks does not yet manufacture products and is seeking
strategic partners to provide manufacturing support in the future.
The Company's ultra-high-density stacking technology involves a standard
manufacturing process which fabricates cubes comprising of approximately 50 die
layers along with ceramic cap and base substrates laminated with an extremely
thin adhesive layer and interconnected with a thin-film bus metalization to
bring the chip input/output signals out to the top surface of the stacks. The
cubes are then segmented or split into subsections as required for the
particular product configuration being built. Finally, the cubes, mini-cubes or
short stacks are burned in, tested, graded, kitted for packaging, out-sourced
for packaging and screening, and returned for final test. The Company's
facility is designed for low volume and prototype production of such parts.
During fiscal 1998, the Company introduced more cost competitive products
manufactured with current state of the art manufacturing technologies. The
Company uses outside third party qualified source vendors for the manufacturing
of these products.
The primary components of the Company's non-memory products are integrated
circuits and infrared detectors. The integrated circuits are designed by the
Company or its subsidiaries for manufacture by others from silicon wafers and
other materials readily available from multiple sources. Due to the ready
availability of these materials, the Company does not have any special
arrangements with suppliers for their purchase. The Company does not produce
detectors. However, the Company 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, the Company designs and assembles
equipment for testing and prototype development. The Company uses the unique
capability of this equipment to seek, qualify for and perform additional
contract research and development for its customers.
Backlog
-------
At November 26, 2000, the Company's consolidated funded backlog was $6,056,600
compared to $3,041,600 at December 15, 1999. The Company anticipates that all
of the funded backlog will be filled in fiscal 2001. In addition, the Company
has unfunded backlog on contracts which typically are funded when the previously
funded amounts have been expended. The Company 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 the Company's short-term
results.
Customers and Marketing
-----------------------
The Company's Advanced Technology Division ("ATD") focuses its marketing efforts
primarily on U.S. military agencies or contractors to those agencies. The
Company is continually seeking and preparing proposals for additional contracts.
The Company also develops potential non-military uses of its technology. 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, the Company believes that there
will be more emphasis and funds directed to advanced technology systems and
research programs for which the Company believes it is qualified to compete.
However, there can be no assurances that the Company will be successful in
competing against the larger defense contractors for potential programs.
The Company's Novalog subsidiary supports Original Equipment Manufacturers
("OEM's") supplying infrared communications devices complying with the standards
of the Infrared Data Association ("IrDA"). The Company believes that 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; (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 (UCR) general purpose
ASIC designed to support a variety of sensors requiring high accuracy
capacitive readout and control electronics.
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Silicon Film is a consumer product-focused enterprise. Both the structure and
staffing of Silicon Film was developed to bring digital imaging products to the
consumer market. The initial product of Silicon Film, the Electronic Film
System (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 system.
The EFS is being positioned as a camera accessory, leveraging off the growing
adoption of digital cameras and their growing infrastructure.
Silicon Film is currently qualifying its initial EFS-1 product for sale. Silicon
Film plans its primary product roll out of the EFS-1 to be through direct
follow-up of inquiries from potential customers it has previously received.
Silicon Film expects to follow this initial roll out with an expansion of
distribution, reseller channels and value-added resellers for broad and vertical
markets through strategic OEM relationships with camera and film companies.
Silicon Film plans to service its customers with an electronic commerce site and
contracted customer service and support facilities.
RedHawk has focused its initial marketing effort on high-end users of
professional photo-editing software. RedHawk's initial product has been
designed as a plug-in to such software. RedHawk is presently developing stand-
alone versions of its software to address broader market opportunities.
iNetWorks ultimate target market is expected to be OEMs and carriers that
support the Internet and telecommunications infrastructure. It is presently
seeking strategic relationships with such entities to facilitate the marketing
of its contemplated products.
In fiscal 2000, contracts with all branches of the U.S. government accounted for
20% of the Company's consolidated revenues and second-tier government contracts
with prime government contractors accounted for 12 percent of the Company's
consolidated revenues; the remaining 68 percent of the Company's consolidated
revenues was derived from non-government sources. During fiscal 2000, revenues
derived from M-Flex, Manufacturers' Services, and the U.S. Army accounted for
approximately 16 percent, 13 percent and 12 percent of total consolidated
revenues, respectively. Loss of these customers would have a material adverse
impact on the Company's short-term consolidated 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. There
is no assurance the Company will not experience suspensions or terminations in
the future.
The Company focuses marketing in specific areas of interest in order to best use
its relatively limited marketing resources. Each operating unit or subsidiary
has a designated individual to direct that unit's marketing efforts.
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 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 the Company's competitors are believed to
be better financed, more experienced and organizationally stronger than the
Company. Accordingly, there can be no assurances that the Company can
successfully compete in such markets.
The Company is aware of three large companies that have developed or acquired
competing approaches to chip stacking. They are Texas Instruments, Inc. (TI),
Thompson CSF (Thompson) and Vertical Circuits, Inc. (VCI), a subsidiary of TRW
Inc. In addition, there are several small companies and divisions of large
companies that have various technologies for stacking a limited number of chips.
The Company is aware of many companies, which are currently servicing the
military market for electro-optical sensors of the type which the Company'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 the Company include
TI, Lockheed Martin Corporation, Raytheon, Litton Industries, Infrared
Industries, Inc., EG&G Judson, OptoElectronics-Textron, Inc. and Boeing
Corporation. The Company believes that most of its competitors in this area have
financial, labor and capital resources greater than those of the Company, and
there is no assurance that the Company will be able to compete successfully.
The Company is aware of several companies that 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 and related applications, the principal competitive factor is the
speed of data transmission achievable. Novalog believes it has competitive
advantages in the battery-powered applications. Competitors to Novalog in this
sector include Hewlett-Packard, Temic-Vishay and Siemens Infineon, among others,
all of whom have financial, labor and capital resources greater than those of
Novalog. Although Novalog is currently experiencing material revenues in
competition with such companies, its ability to protect or expand its market
share in the future is not assured.
9
<PAGE>
MSI is competing in a market populated with several larger competitors relating
to its Silicon MicroRing Gyro, 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
UCR 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.
Silicon Film is not aware of any direct competitors to its EFS product and
believes that its intellectual property will act as a barrier to competitors
seeking to offer identical products, although there can be no assurance of that
result. However, the EFS systems itself is expected to face competition from
increasingly sophisticated generations of digital camera equipment. Peripheral
equipment and services which Silicon Film intends to offer to complement its EFS
products are also likely to attract strong competition if the EFS product line
receives significant market acceptance.
RedHawk is not aware of any direct competitors that presently offer PC-based
software for sale as means to capture quality still photographs from streaming
video. RedHawk is aware of such competitive software products under development
and the existence of a number of hardware applications to achieve this result,
but not presently at the quality level achievable with the RedHawk software.
Given the potential size of the market represented by video captured by consumer
camcorders, RedHawk expects material competition to emerge.
iNetWorks is directly addressing the market currently dominated by Cisco
Systems, Inc. and including such strong competitors as Juniper Networks, Inc.
Given the size and growth of the market opportunity, iNetWorks expects to face
numerous large competitors of this nature if it is able to successfully
development its planned router product.
Research and Development
------------------------
The Company 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 some of the products of its subsidiaries, particularly
iNetWorks, is likely to require substantial external funding. There can be no
assurance that sufficient funding will be available from government or other
sources or that new products of the Company or its subsidiaries will be
successfully developed for volume production.
The Company's expenditures for research and development for the fiscal years
ended October 1, 2000, October 3, 1999, and September 27, 1998 were $8,948,200,
$5,528,000 and $4,128,400, respectively. These expenditures of Company funds
were in addition to the Company'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 the Company's resolve to maintain its competitive advantage by
developing new products and improving upon its existing technology.
The Company has funded its research and development activities primarily through
contracts with the federal government and with funds from the Company's public
and private stock and bond offerings.
Patents, Trademarks and Licenses
--------------------------------
The Company 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 October 1, 2000, 53 U.S. and foreign patents have been issued and other U.S.
and foreign patent applications are pending. Foreign patent applications
corresponding to several of the U.S. patents and patent applications are also
pending. There is no assurance that additional patents will issue 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 the Company's existing patents or any other patent that may
issue in the future would be upheld if the Company seeks enforcement of its
patent rights against an infringer or that the Company will have sufficient
resources to prosecute its rights, nor is there any assurance that patents will
provide meaningful protection from competition.
The Company has been advised by its patent counsel, Myers, Dawes & Andras LLP,
that no adverse patent has been found which might create an infringement problem
in the marketing of the Company's products. If others were to assert that the
Company is using technology covered by patents held by them, the Company would
evaluate the necessity and desirability of seeking a license from the patent
holder. There is no assurance that the Company is not infringing on other
patents or that it could obtain a license if it were so infringing.
Those products and improvements that the Company develops under government
contracts are generally subject to royalty-free use by the government for
government applications. However, the Company 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.
10
<PAGE>
Silicon Film has exclusive world-wide rights to the technology developed in
conjunction with a licensing agreement between the Company and I. Sapir, a
foreign individual, who is now an employee of Silicon Film. Under this
agreement, the Company issued 30,000 shares of its common stock to Mr. Sapir.
Silicon Film has assumed the royalty obligations of this licensing agreement,
which consist of a 1.5% royalty on products incorporating the licensed
technology. This licensing agreement was executed in October 1997 and amended in
March 1999. Silicon Film has received four additional patents and has filed
thirteen additional patent applications relating to the proprietary methods and
designs of its products.
The Company has entered into an assignment of patent and intellectual rights
agreement with F.L. Eide, a Vice-President of the Company. As part of an
employment agreement, Mr. Eide assigned to the Company 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 the technology of these patent assignments for the
lifetime of these patents. This agreement was executed in February 1998.
The Company entered into a sale and licensing of intellectual property rights
related to the EFS to Advanced Technology Products, LLC ("ATPL"), a related
party which funded early development of this technology, for which the Company's
Senior Vice President and Chief Technical Officer serves as Managing Member. In
September 1998, the Company assigned the rights and future royalty obligations
of the ATPL license to Silicon Film. Concurrent with this assignment, ATPL
reduced its royalty entitlements under the license in consideration for the
issuance of 1,222,125 shares of Silicon Film 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.
Environmental Matters
---------------------
The Company 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 the
Company.
Employees
---------
As of October 1, 2000, the Company, including its consolidated subsidiaries, had
134 full-time employees and 23 consultants. Of the full-time employees, 89 were
engaged in engineering, production and technical support, 11 in sales and
marketing and 34 in finance and administration. None of the Company's employees
is represented by a labor union, and the Company has experienced no work
stoppages due to labor problems. The Company considers its employee relations
to be excellent.
Factors that may Affect Future Results
--------------------------------------
The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this annual report on Form 10-K and in other public
disclosures of the Company.
Shift in Business Focus. Since commencing operations, ISC has developed
technology, principally under government research contracts, for various
defense-based applications. Since 1992, ISC has been implementing a fundamental
shift in its business, broadening its focus to include commercial exploitation
of its technology. This shift has been manifested by the purchase and later shut
down of the IBM cubing line, the "carve-out" of the Novalog, MSI, Silicon Film,
RedHawk and iNetWorks subsidiaries and the development of various stacked-memory
products intended for military and aerospace markets. To date, these changes
have developed new revenue sources but have not yet produced sustained
consolidated profitability. Because of this limited and not-yet successful
history, there can be no assurances that ISC's present and contemplated future
products will be widely accepted in commercial marketplaces.
Financing Needs. Although the Company believes that it has adequate liquidity
for its core level of operations, ISC and its subsidiaries have developed
business plans for several emerging product areas based on its technologies. The
product development and market introduction costs of these products cannot
presently be fully funded from internal cash flow. There can be no assurances
that ISC or its subsidiaries will be able to locate external financing for their
business plans on acceptable terms.
Nasdaq Listing Requirements; Penny Stock. ISC's Common Stock is publicly traded
on the Nasdaq SmallCap Market. Effective February 23, 1998, new and more
restrictive standards became effective for listing maintenance on this market.
Prior to the implementation of these new regulations, ISC briefly dropped below
the pending standards due to the loss associated with its Vermont plant closure
and had to establish to the satisfaction of the Nasdaq staff that it had met the
new standards in order to retain its listing. While the Company was able to
meet this requirement, there can be no assurances that the Company will be able
to maintain its compliance in the future. In the foreseeable future, the
Company must meet at least one of the two following standards to maintain its
Nasdaq listing; (i) maintenance of its tangible net worth at $2 million or
greater, or (ii) maintenance of a market capitalization figure in excess of $35
million as measured by market prices for trades executed on Nasdaq. The Company
presently meets both standards. However, the consolidated losses resulting from
the development expenses of some of its subsidiaries will
11
<PAGE>
continue to erode its tangible net worth during fiscal 2001. In that instance
and absent additional equity financing, which cannot be guaranteed, the Company
would be subject to market price risks for the maintenance of its Nasdaq
listing. If ISC were to fail to meet the maintenance requirements for listing on
Nasdaq in the future and the price of ISC's Common Stock was below $5 at such
time, such securities would come within the definition of "penny stock" as
defined in the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and 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. From
transactions covered by Rule 15g-9, the broker-dealer 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 ISC's securities and therefore would affect the ability of
shareholders to sell their securities in the public market and the Company's
ability to finance its business plans.
Equity Capital Structure. At October 1, 2000, the Company had 46,637,800 common
shares issued and outstanding. Approximately 6,420,000 common shares are also
reserved for issuance pursuant to existing preferred stock conversion rights,
and outstanding warrants and options. The approximately 6,940,000 unreserved
common shares of the Company's authorized capital structure may be insufficient
to facilitate the financing of all of the Company's existing and planned
commercial initiatives. There can be no assurances that the Company's
stockholders will authorize an increase in the Company's authorized common
shares.
Third-Party Financing of Subsidiaries. The financing of the Company's Novalog
and Silicon Film subsidiaries to date have involved significant sales of
minority equity interests. The Company has repurchased a substantial portion of
the minority equity interests of Novalog, but does not now have sufficient
discretionary capital to continue this practice with respect to Novalog or any
other subsidiary or to adequately finance the future business plans of any of
its subsidiaries. The Company's subsidiaries are seeking to sell additional
equity interests to finance at least some portion of their business plans. The
Company's ability to enjoy the benefits of any potential increase in value on
the part of its subsidiaries can be greatly reduced by third-party financings.
This is true both because of reduced equity interests in the subsidiaries and
because the Company's control of its subsidiaries is lessened or eliminated.
Significant third-party investment in the Company's subsidiaries will likely
result in third-party investors receiving subsidiary board representation and/or
protective covenants that could result in the Company losing voting control of
its subsidiaries. In certain circumstances, it is possible that the Company or
its subsidiaries could experience very substantial transaction costs or "break-
up" fees in connection with efforts to obtain financing. Third-party financings
of subsidiaries will inherently complicate our fiduciary and contractual
obligations and could leave us more vulnerable to potential future litigation.
The outcome of litigation is inherently unpredictable, and even the costs of
prosecution could have a materially adverse effect on our results of operations.
Dependence on Defense Contract Revenues. Although ISC has been shifting its
focus to include commercial exploitation of its technology, it expects to
continue to be dependent upon research and development contracts with federal
agencies and their contractors for a substantial, but diminishing portion of its
revenues for the foreseeable future. General political and economic conditions,
which cannot be accurately predicted, directly and indirectly affect the
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 ISC's results of operations as long as
research and development contracts remain an important element of its business.
Market Acceptance of New Products. Both ISC and its subsidiaries are focused on
markets that are emerging in nature and potentially subject to rapid growth.
Market reaction to new products in such circumstances can be difficult to
predict. There can be no assurance that the present or future products of ISC
or its subsidiaries will be favorably accepted by such markets on a sustained
basis. In addition, because ISC has a limited history of competing in the
intensely competitive commercial electronics industry, there is no assurance
that it 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.
Patents and Proprietary Right Protection; Infringement. ISC believes that its
ultimate success, and that of its subsidiaries, will depend, in part, on the
strength of its existing patent protection and the additional patent protection
that it and its subsidiaries may acquire in the future. As of the date hereof,
ISC owns 45 U.S. patents and 8 foreign patents and has other patent applications
pending before the U.S. Patent and Trademark Office as well as various foreign
jurisdictions. Although ISC believes many of these patents to be fundamental in
nature, there can be no assurance that any existing or future patents will
survive a challenge or will otherwise provide meaningful protection from
competition. Furthermore, there is also no assurance that ISC or its
subsidiaries will have the financial resources to provide vigorous defense or
enforcement of patents.
Protection of Proprietary Information. ISC and its subsidiaries treat technical
data as confidential and rely on internal nondisclosure safeguards, including
confidentiality agreements with employees, and on laws protecting trade secrets,
to protect proprietary information. There can be no assurance that these
measures will adequately protect the confidentiality of the proprietary
information of ISC or its subsidiaries or that others will not independently
develop products or technology that are equivalent or superior to those of ISC
or its subsidiaries. ISC or its subsidiaries may receive in the future
communications from third parties asserting that the products of ISC or its
subsidiaries infringe the proprietary rights of third parties. There can be no
assurance that any such claims
12
<PAGE>
would not result in protracted and costly litigation. There can be no assurance
that any particular aspect of the technology owned by ISC or its subsidiaries
will not be found to infringe the products of other companies. Other companies
may hold or obtain patents or inventions or may otherwise claim proprietary
rights to technology useful or necessary to ISC's or its subsidiaries' business.
The extent to which ISC or its subsidiaries may be required to seek licenses
under such proprietary rights of third parties and the cost or availability of
such license, cannot be predicted. While it may be necessary or desirable in the
future to obtain licenses relating to one or more of its proposed products or
relating to current or future technologies, there can be no assurance that ISC
or its subsidiaries will be able to do so on commercially reasonable terms.
Government Rights. Whatever degree of protection, if any, is afforded ISC or
its subsidiaries through its patents, proprietary information and other
intellectual property, this protection will not extend to government markets
that utilize certain segments of ISC's technology. The government has the right
to royalty-free use of technologies that ISC has developed under government
contracts, including portions of ISC's stacked circuitry technology. ISC is
free to commercially exploit such government-funded technologies and may assert
its intellectual property rights to seek to block other non-government users
thereof, but there can be no assurances of success in such endeavors.
Competition. ISC and its subsidiaries face strong competition. Most
competitors have considerably greater financial, marketing and technological
resources than does ISC or its subsidiaries. There is no assurance that ISC or
its subsidiaries will be able to compete successfully with such other companies.
Dependence on Suppliers. ISC and its subsidiaries extensively use suppliers in
the manufacture of their products. At the projected level of operations, both
ISC and its subsidiaries have identified sources that are believed to be
adequate to meet identified needs. However, there is no assurance that ISC or
its subsidiaries will be able to cover changing manufacturing needs in the
future. Failure to do so will have a material adverse impact on the operations
of ISC and its subsidiaries.
Possible Technological Advances. ISC and its subsidiaries are in industries
characterized by continuing technological development and, accordingly, will be
required to devote substantial resources to improve already technologically
complex products. Many companies in these industries devote considerably
greater resources to research and development than does ISC or its subsidiaries.
Developments by any of these companies could have a materially adverse effect on
ISC.
Dependence on Key Personnel. ISC and its subsidiaries will depend to a large
extent on the abilities and continued participation of certain key employees.
The loss of key employees could have a material adverse effect on the businesses
of ISC and its subsidiaries. ISC and its subsidiaries have adopted employee
Stock Option Plans designed to attract and retain key employees. The amount of
options available pursuant to shareholder-approved option plans have been
depleted, and there can be no guarantee that shareholders will approve
additional plans in the future. The value of stock option plans to the
subsidiaries will be strongly tied to the timing of any future IPOs, of which
there can be no assurance, and there can, accordingly, be no guarantee of the
efficacy of such options in retaining key employees. Neither ISC nor its
subsidiaries presently maintain "key man" insurance on any key employees. ISC
believes that, as its activities and those of its subsidiaries increase and
change in character, additional, experienced personnel will be required to
implement the business plans of ISC and its subsidiaries. Competition for such
personnel is intense and there is no assurance that they will be available when
required, or that ISC or its subsidiaries will have the ability to attract them.
The above factors are not intended to be inclusive. Failure to satisfactorily
achieve any of the Company's objectives or avoid any of the above or other risks
would likely have a material adverse effect on the Company's business and
results of operations.
13
<PAGE>
Item 2. Properties
The following table sets forth information with respect to the Company's
facilities:
<TABLE>
<CAPTION>
Location Square Feet Monthly Rent Lease Expiration
------------------------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
ISC(1) Costa Mesa, CA 42,600 $50,100 September 2001
Silicon Film Technologies, Inc. Irvine, CA 10,300 15,450 May 2004
------------ ---------------
Total 52,900 $65,550
============ ===============
</TABLE>
____________
(1) Includes facilities for ISC corporate headquarters, ATD, MPD, MSI, RedHawk,
iNetWorks and Novalog.
The facilities used by Advanced Technology Division 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.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
14
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- --------
Robert G. Richards 72 President and Chief Executive Officer
Bernhard Baumgartner 52 Senior Vice President and General Manager -
Commercial Products Group
Mel R. Brashears 55 Senior Vice President and a Director
John C. Carson 62 Senior Vice President, Chief Technical Officer
and a Director
John J. Stuart, Jr. 61 Senior Vice President, Chief Financial Officer and
Treasurer
Mr. Richards has been President and Chief Executive Officer of the Company since
June 2000 and a director of its iNetWorks subsidiary since November 2000. Since
April 1999, Mr. Richards has also served as a member of our Scientific Advisory
Board. Mr. Richards retired as President of Aerojet Electronic Systems Division
in 1993. He is co-author of the book, Infrared Physics and Engineering,
published by McGraw-Hill, and has a M.A. degree from the University of
California at Berkeley.
Mr. Baumgartner has been Senior Vice President and General Manager of the
Company's Commercial Products Group and a director of its Novalog, MSI and
Silicon Film subsidiaries since December 2000. From February 1998 through
November 2000, he was President and CEO of Krones Inc., the U.S. subsidiary of a
German company specializing in industrial control systems and hardware. From
April 1994 to January 1998, he was CEO of Kettner, O+H, a German supplier in the
same industry. Mr. Baumgartner has an MBA from International Institute for
Management Development, Switzerland, an International Senior Management Program
Certificate from Harvard Business School and an M.S. in Civil Engineering from
the University of Graz, Austria.
Dr. Brashears has been Senior Vice President and Chairman and Chief Executive
Officer of the Company's iNetWorks Corporation subsidiary since October 2000.
He has also been a director of ISC since December 2000. From 1999 to September
2000, Dr. Brashears was a self-employed management consultant. From 1996
through 1998, he was President and Chief Operating Officer of Lockheed Martin's
Space & Strategic Missiles Sector, culminating a 27-year career of increasing
management responsibility with Lockheed Missiles and Space Company and its
successors. Dr. Brashears is a graduate of the University of Missouri with B.
S., M. S. and Ph.D. degrees in engineering.
Mr. Carson is a co-founder of ISC and has served as a director and Vice
President since its inception in 1974, becoming a Senior Vice President in April
1982. He was elected Chief Technical Officer in February 1997. Mr. Carson also
serves as a director of MSI (since October 1997) and iNetWorks (since November
2000). 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.
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,
a Vice President in June 1995 and Senior Vice President in November 1998. He
relinquished the position of Treasurer in February 1995 and re-assumed it in
October 1998. Mr. Stuart is also a member of the Board of Directors and is Vice
President of Finance and Chief Financial Officer of Novalog (since October
1995), MSI (since October 1997), RedHawk (since March 2000) and iNetWorks (since
November 2000). He also acted as Chief Financial Officer of Silicon Film from
its organization in August 1998 until May 1999. Mr. Stuart also serves as a
director of euro909.com, a Danish telecommunications and Internet services
company and TaskForce, Inc., an Internet software company, both of which are
unaffiliated with ISC. Mr. Stuart holds a B.S. in Industrial Management from
the Massachusetts Institute of Technology.
15
<PAGE>
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth the range of representative high and low
closing bid prices of the Company's Common Stock (Nasdaq SmallCap Market symbol:
IRSN) in the over-the-counter market for the periods indicated, as furnished by
NASD, Inc. These prices represent prices among dealers, do not include retail
markups, markdowns or commissions, and may not represent actual transactions:
Common Stock
Bid Prices
--------------------------
High Low
--------- -------
Fiscal Year Ended October 1, 2000:
First Quarter $ 2.5625 $1.2188
Second Quarter $18.7500 $1.7500
Third Quarter $11.2500 $3.5000
Fourth Quarter $ 4.5000 $2.0938
Fiscal Year Ended October 3, 1999:
First Quarter $ 1.9375 $1.4063
Second Quarter $ 1.6563 $1.3125
Third Quarter $ 2.0000 $1.4375
Fourth Quarter $ 1.8438 $2.1875
On December 15, 2000, the closing bid and asked prices for the Company's Common
Stock on the Nasdaq SmallCap Market were $1 9/16 and $1 13/16 respectively.
On December 15, 2000, there were approximately 819 stockholders of record and
approximately 20,000 beneficial holders based on information provided by the
Company's transfer agent.
The Company has not paid cash dividends on any class of its stock since its
incorporation. Under Delaware law there are certain restrictions that limit the
Company's ability to pay cash dividends in the future.
Recent Sales of Unregistered Securities
During fiscal year 2000, the Company sold and issued the following
unregistered securities:
On February 29, 2000, the Company issued 3,142,100 shares of common stock
to nineteen accredited investors to satisfy the terms of a subscription unit,
sold during the first fiscal quarter, that was subject to shareholder approval
of amendment to the Company's Certificate of Incorporation increasing the number
of authorized shares of common stock. The purchase price of each unit was $135,
and a unit consisted of the right to acquire one hundred shares of unregistered
common stock of the Company, with registration rights, plus a warrant to
purchase ten shares of unregistered common stock of the Company, with
registration rights, at an exercise price of $2 per share. The Company received
approximately $3,660,000 in net proceeds from this transaction. The placement
agent retained by the Company for this offering received warrants to purchase
224,014 units identical to the units purchased by the investors, exercisable at
$148.50.
On March 15, 2000, the Company sold 228,851 units, resulting in the
issuance of 228,851 unregistered shares of common stock and warrants to purchase
an additional 22,885 shares (exercisable at $12) to three accredited investors
The purchase price was $9.25 per unit, and the Company's net proceeds were
approximately $1,900,000. The placement agent retained by the Company for this
offering received warrants to purchase 22,885 units identical to the units
purchased by the investors, exercisable at $10.175.
On July 21, 2000, the Company sold 2,033,334 units, resulting in the
issuance of 2,033,334 unregistered shares of common stock and warrants to
purchase an additional 1,016,667 shares (exercisable at $2.50) to six accredited
investors. The purchase price was
16
<PAGE>
$3.00 per unit, and the Company's net proceeds were approximately $5,648,000.
The placement agent retained by the Company for this offering received warrants
to purchase 203,334 units identical to the units purchased by the investors,
exercisable at $3.00.
Between August 2 and August 17, 2000, the Company issued and sold 1,930,665
unregistered shares of common stock and warrants to purchase an additional
965,333 shares (exercisable at $2.50) to ten accredited investors. The purchase
price was $3.00 per unit, and the Company's net proceeds were approximately
$5,261,000. The placement agents retained by the Company for this offering
received warrants to purchase 193,067 units consisting of one share and one-half
warrant, exercisable at $3.00.
The issuances of the securities described in the previous four paragraphs
were deemed to be exempt from registration under the Securities Act of 1933, as
amended (the "Act"), in reliance on Section 4(2) of the Act as transactions by
an issuer not involving any public offering. In addition, the recipients of
securities in the above transactions each represented its intention to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates issued in that transaction. The recipients each were
given access to information about the Company.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial data included elsewhere in this 10-K filing. The
consolidated statement of operations data for the fiscal years ended October 1,
2000, October 3, 1999 and September 27, 1998 and the consolidated balance sheet
data at October 1, 2000 and October 3, 1999 are derived from audited
consolidated financial statements incorporated by reference in this 10-K filing.
The consolidated statement of operations data for the fiscal years ended
September 28, 1997 and September 29, 1996, and the consolidated balance sheet
data at September 27, 1998, September 28, 1997 and September 29, 1996 are
derived from audited consolidated financial statements not included in this 10-K
filing. The historical results are not necessarily indicative of results to be
expected in any future period.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------------------
October 1, October 3, September 27, September 28, September 29,
2000 1999 1998 1997 1996
--------------- --------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
------------------------------------------
Total revenues $ 10,769,800 $11,100,200 $ 9,314,500 $ 13,693,200 $ 12,024,200
Loss from operations (16,019,200) (9,785,700) (5,798,200) (14,809,200) (11,154,700)
Net loss (15,038,300) (9,115,700) (4,243,500) (14,875,600) (15,914,700)
Basic net loss per common
and common equivalent share $ (0.37) $ (0.29) $ (0.19) $ (0.73) $ (0.94)
Diluted net loss per common
and common equivalent share $ (0.38) $ (0.29) $ (0.19) $ (0.73) $ (0.94)
Weighted average number of
shares outstanding 40,428,600 31,244,300 24,597,700 20,475,100 16,874,300
Shares used in computing
net loss per share 40,428,600 31,244,300 24,597,700 20,475,100 16,874,300
</TABLE>
Loss per common and common equivalent shares includes, where applicable,
cumulative and imputed dividends on Preferred Stock which have not been declared
or paid.
<TABLE>
<CAPTION>
October 1, October 3, September 27, September 28, September 29,
2000 1999 1998 1997 1996
----------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
---------------------------------
Current assets $14,129,800 $ 6,439,150 $4,802,700 $ 6,637,200 $ 9,648,200
Current liabilities $ 4,683,400 $ 5,375,300 $2,296,000 $ 7,395,600 $ 5,787,100
Working capital (deficit) $ 9,446,400 $ 1,063,850 $2,506,700 $ (758,400) $ 3,861,100
Total assets $20,307,150 $10,510,350 $7,064,700 $ 9,449,300 $21,742,200
Long-term debt $ 224,700 $ 433,200 $ 933,700 $ 1,207,000 $ 3,165,600
Shareholders' equity (deficit) $ 7,586,550 $ 2,212,650 $2,347,000 $(2,939,900) $ 8,312,700
</TABLE>
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operation
------------------------
The information required by Item 7 of this report is set forth on pages 2
through 4 of the Company's 2000 Annual Report to Stockholders and is
incorporated by reference in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
None.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements, together with the report thereon of Grant Thornton LLP
dated November 30, 2000, appearing on pages 6 through 25 of the Company's 2000
Annual Report to Stockholders are incorporated by reference to this Annual
Report on Form 10-K. With the exception of the aforementioned information and
the information incorporated in Item 7, the 2000 Annual Report to Stockholders
is not deemed to be filed as part of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The response to this Item will be contained in the Proxy Statement for the 2001
Annual Meeting under the heading "Nomination and Election of Directors" and is
incorporated herein by reference.
Item 11. Executive Compensation
----------------------
The response to this Item will be contained in the Proxy Statement for the 2001
Annual Meeting under the heading "Executive Compensation and Related
Information" and is incorporated herein by reference.
Item 12. Stock Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------
The response to this Item will be contained in the Proxy Statement for the 2001
Annual Meeting under the heading "Stock Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The response to this Item will be contained in the Proxy Statement for the 2001
Annual Meeting under the heading "Certain Relationships and Related
Transactions" and is incorporated herein by reference.
18
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
<TABLE>
<CAPTION>
Pages in
Annual Report*
--------------
<S> <C>
Consolidated Balance Sheets 9
Consolidated Statements of Operations 10
Consolidated Statement of Shareholders' Equity (Deficit) 11
Consolidated Statements of Cash Flows 12
Notes to Consolidated Financial Statements 13-27
Report of Independent Certified Public Accountants 28
</TABLE>
* Incorporated by reference from the indicated pages of the 2000 Annual
Report to Stockholders.
2. Financial Statement Schedules:
Report of Independent Certified Public Accountants on Financial Statement
Schedules
Schedule for the fiscal years ended October 1, 2000, October 3, 1999, and
September 27, 1998:
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable, or
not required, or because the required information is included in the
financial statements or notes thereto which have been incorporated herein by
reference.
3. Exhibits - The following is a list of the exhibits encompassed in this
report:
Exhibit
Number Exhibit Description
------ -------------------
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)
3.3 By-laws, as amended to date (3)
4.1 Specimen Common Stock certificate (1)
10.1.1 Employee Stock Bonus Plan and Trust Agreement dated June 29, 1982
effective December 31,1982 (4)
10.1.2 Amendment to Employee Stock Bonus Plan and Trust Agreement dated
December 14, 1982 (5)
10.1.3 Amendment to Employee Stock Bonus Plan and Trust Agreement dated
September 25, 1990 (1)
10.1.4 Master Trust Agreement for Employee Deferred Benefit Plans dated
August 22, 1990 (6)
10.1.5 Amendment to Employee Stock Bonus Plan and Trust Agreement dated
October 4, 1993 (7)
10.2 1991 Stock Option Plan (8)
10.3 1995 Stock Option Plan (9)
10.4 1999 Stock Option Plan (10)
10.5 Government Contract DASG60-00-C-0016 dated January 24, 2000
10.6 Government Contract N39998-97-C-5201 as modified March 9, 2000
10.7 Government Contract USZA22-00-C-0013 dated August 14, 2000
10.8 Government Contract N39998-00-C-08118 dated August 31, 2000
10.9 Form of Indemnification Agreement between the Registrant and its
directors and officers
10.10 Lease Agreement for premises at 3001 Redhill Avenue, Costa Mesa,
California, dated August 1, 1994 (11)
10.11 Amendments to Lease Agreement for premises at 3001 Redhill Avenue,
Bldg. III, Costa Mesa, California
10.12 Lease Agreement and Amendments for premises at 3001 Redhill Avenue,
Bldg. IV, Costa Mesa, California
10.13 Amendments to Lease Agreement for premises at 3001 Redhill Avenue,
Bldg. V, Costa Mesa, California
13.1 Portions of Registrant's Annual Report to Stockholders for the fiscal
year ended October 1, 2000
21.1 Subsidiaries of the Registrant
23.1 Consent of Grant Thornton LLP, Independent Certified Public
Accountants
27 Financial Data Schedule
19
<PAGE>
___________
(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) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 filed with the Commission on October 4, 1999 (Registration Number
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) 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.
(5) 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").
(6) 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).
(7) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K/A for the fiscal year ended October 1, 1995.
(8) 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).
(9) Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 333-72201), filed February 11, 1999.
(10) Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 333-94071), filed January 4, 2000.
(11) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended October 2, 1994.
(b) Reports on Form 8-K:
------------------------
No report on Form 8-K was filed by the Company with respect to the quarter
ended October 1, 2000.
20
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
IRVINE SENSORS CORPORATION
--------------------------
By: /s/ James Alexiou
-----------------
James Alexiou
Chairman of the Board
Date: December 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
/s/ Robert G. Richards /s/ John J. Stuart, Jr.
---------------------- -----------------------
Robert G. Richards John J. Stuart, Jr.
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Date: December 29, 2000 Accounting Officer)
Date: December 29, 2000
/s/ Mel R. Brashears /s/ Thomas M. Kelly
-------------------- -------------------
Mel R. Brashears, Director Thomas M. Kelly, Director
Date: December 29, 2000 Date: December 29, 2000
/s/ Joanne S. Carson /s/ Frank P. Ragano
-------------------- -------------------
Joanne S. Carson, Director Frank P. Ragano, Director
Date: December 29, 2000 Date: December 29, 2000
/s/ John C. Carson /s/ Vincent F. Sollitto, Jr.
------------------ ----------------------------
John C.Carson, Director Vincent F. Sollitto, Jr.,
Director Date: December 29, 2000
Date: December 29, 2000
/s/ Marc Dumont /s/ Wolfgang Seidel
--------------- -------------------
Marc Dumont, Director Wolfgang Seidel, Director
Date: December 29, 2000 Date: December 29, 2000
21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
ON FINANCIAL STATEMENT SCHEDULE
-------------------------------
To the Board of Directors of
Irvine Sensors Corporation
Our audits of the consolidated financial statements referred to in our report
dated November 30, 2000 appearing on page 28 of the 2000 Annual Report to
Shareholders of Irvine Sensors Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedule listed in Item
14(a) of this Form 10-K. 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.
/s/ GRANT THORNTON LLP
Irvine, California
November 30, 2000
22
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
----------------------------------------------
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended October 1, 2000:
---------------------------
Allowance for doubtful accounts $ 36,700 $ 164,400 $ 74,700 $ 126,400
Inventory reserves 3,718,800 2,706,700 238,100 6,187,400
Year ended October 3, 1999:
---------------------------
Allowance for doubtful accounts $ 10,000 $ 31,300 $ 4,600 $ 36,700
Inventory reserves 2,456,800 2,245,600 983,600 3,718,800
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
</TABLE>
23
