<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to ________
Commission file number 1-8402
------
IRVINE SENSORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-0280334
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3001 Redhill Avenue, Costa Mesa, California
(Address of principal executive offices)
92626
(Zip Code)
(714) 549-8211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of April 2, 2000 there were 42,187,730 shares of Common Stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 2, October 3,
2000 1999
----------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,501,100 $ 981,100
Marketable securities 2,649,200 -
Accounts receivable, net of allowances
of $437,000 in 2000 and $10,000 in 1999 2,692,500 2,401,500
Stock subscriptions receivable 15,200 600,000
Inventory 2,605,100 2,219,800
Other current assets 263,200 236,750
----------------------------------------
Total current assets 12,726,300 6,439,150
Equipment, furniture and fixtures, net 3,705,000 3,546,900
Goodwill, net 163,400 171,600
Capitalized software development costs 432,600 201,700
Other assets 349,300 151,000
----------------------------------------
$ 17,376,600 $ 10,510,350
========================================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,082,100 $ 3,310,800
Accrued expenses 950,400 752,600
Deferred and subordinate royalties payable-affiliated company - 1,000,000
Capital lease obligations- current portion 311,900 311,900
----------------------------------------
Total current liabilities 2,344,400 5,375,300
Capital lease obligations, less current portion 270,800 433,200
Minority interest in consolidated subsidiaries 8,383,300 2,489,200
----------------------------------------
Total liabilities 10,998,500 8,297,700
----------------------------------------
Shareholders' Equity:
Preferred stock, $0.01 par value, 500,000 shares authorized;
4,400 and 6,400 shares Series B Convertible Cumulative Preferred
outstanding; aggregate liquidation preference of $95,600 50 50
2,300 and 3,964 shares Series C Convertible Cumulative Preferred
outstanding; aggregate liquidation preference of $105,840 25 50
2,500 and 4,400 shares Series D Convertible Preferred
outstanding; aggregate liquidation preference of $240,000 25 50
Common stock, $0.01 par value, 60,000,000 shares authorized;
42,187,700 and 35,035,100 shares issued and outstanding 421,900 350,300
Treasury Stock, 15,700 shares at cost (110,400) -
Common stock warrants; 747,000 and 147,000 outstanding - -
Paid-in capital (including common stock subscribed) 74,398,000 64,800,900
Accumulated deficit (68,331,500) (62,938,700)
----------------------------------------
Total shareholders' equity 6,378,100 2,212,650
----------------------------------------
$ 17,376,600 $ 10,510,350
========================================
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
2
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks ended 26 Weeks Ended
-----------------------------------------------------------------------
April 2, March 28, April 2, March 28,
2000 1999 2000 1999
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues :
Product sales $ 1,591,600 $ 1,836,000 $ 4,007,800 $ 3,611,200
Contract research & development 1,203,500 1,185,300 2,070,400 2,158,000
-----------------------------------------------------------------------
Total revenues 2,795,100 3,021,300 6,078,200 5,769,200
-----------------------------------------------------------------------
Cost and expenses:
Cost of product sales 914,400 912,200 2,816,400 2,136,300
Cost of contract revenues 1,015,300 875,300 1,696,800 1,968,800
General and administrative 2,421,200 1,303,500 4,624,100 2,366,700
Research and development 1,519,700 1,065,300 2,688,400 1,873,400
-----------------------------------------------------------------------
5,870,600 4,156,300 11,825,700 8,345,200
-----------------------------------------------------------------------
Loss from operations (3,075,500) (1,135,000) (5,747,500) (2,576,000)
Interest expense (48,000) (16,100) (92,600) (30,800)
Interest income 32,700 3,200 34,600 9,200
-----------------------------------------------------------------------
Loss before minority interest
and provision for income taxes (3,090,800) (1,147,900) (5,805,500) (2,597,600)
Minority interest in loss of
subsidiaries 196,100 169,800 412,700 256,100
Provision for income taxes - (1,600) - (1,600)
-----------------------------------------------------------------------
Net loss $(2,894,700) $ (979,700) $(5,392,800) $(2,343,100)
=======================================================================
Basic and diluted loss per share $(0.08) $(0.03) $(0.15) $(0.08)
=======================================================================
Weighted average number
of shares outstanding 37,012,700 29,331,200 36,633,700 28,744,100
=======================================================================
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended
--------------------------------------------------------
April 2, 2000 March 28, 1999
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,392,800) $(2,343,100)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation $ 505,200 $ 365,400
Unrealized gain on marketable securities (9,900) -
Loss on disposal of equipment 42,800 -
Non-cash employee retirement plan contribution 294,400 257,000
Minority interest in net loss of subsidiaries (412,700) (256,100)
Common stock issued to pay operating expenses 178,400 217,900
Increase in accounts receivable (291,000) (230,800)
Increase in inventory (385,300) (560,200)
(Increase) decrease in other current assets (26,500) 34,200
Decrease in other assets 500 -
Increase (decrease) in accounts payable and
accrued expenses (1,940,900) 619,500
Increase in deferred revenues - (50,000)
----------- ----------
Total adjustments (2,045,000) 396,900
----------- -----------
Net cash used in operating activities (7,437,800) (1,946,200)
Cash flows from investing activities:
Purchase of marketable securities (2,639,300) -
Capital facilities and equipment expenditures (680,400) (325,200)
Computer software capitalized (230,900) -
Acquisition of intangible assets (202,800) -
----------- ----------
Net cash used in investing activities (3,753,400) (325,200)
Cash flows from financing activities:
Proceeds from issuance of common and
preferred stock and common stock warrants 6,130,700 1,106,000
Proceeds from options & warrants exercised 2,317,100 -
Proceeds from Series D preferred conversion 209,000 -
Sale of minority interest in subsidiary 6,216,800 1,279,900
Proceeds from bridge loan & credit line 1,250,000 -
Principal payments of bridge loan & credit line (1,250,000) -
Principal payments under capital leases (162,400) (29,900)
----------- ----------
Net cash provided by financing activities 14,711,200 2,356,000
----------- -----------
Net increase in cash and cash equivalents 3,520,000 84,600
Cash and cash equivalents at beginning of period 981,100 1,310,400
----------- -----------
Cash and cash equivalents at end of period $ 4,501,100 $ 1,395,000
=========== ===========
Noncash investing and financing activities:
Common stock sold on a subscription basis $ 15,200 $ -
=========== ===========
Options exercised in exchange for treasury stock $ 110,400 $ -
=========== ===========
Conversion of preferred stock to common stock $ 50 $ -
=========== ===========
Common stock issued to retire deferred and subordinated
royalties payable to affiliated company $ 1,000,000 $ -
=========== ===========
Common stock issued for acquisition of equipment $ 13,500 $ -
=========== ===========
Issuance of subsidiary stock to pay accrued expenses $ 90,000 $ -
=========== ===========
Exchange of subsidiary stock $ - $ 1,223,500
=========== ===========
Equipment financed with capital leases $ - $ 343,300
=========== ===========
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
IRVINE SENSORS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
The information contained in the following Condensed Notes to Consolidated
Financial Statements is condensed from that which would appear in the annual
consolidated financial statements. Accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the
consolidated financial statements and related notes thereto contained in the
1999 Annual Report to Shareholders of Irvine Sensors Corporation (the
"Company"). It should be understood that accounting measurements at interim
dates inherently involve greater reliance on estimates than at year-end. The
results of operations for the interim periods presented are not necessarily
indicative of the results expected for the entire year.
The consolidated financial information as of April 2, 2000 and March 28,
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 April 2, 2000, the
results of its operations for the 13 and 26-week periods ended April 2, 2000 and
March 28, 1999, and its cash flows for the 26-week periods ended April 2, 2000
and March 28, 1999.
The consolidated financial statements include the accounts of Irvine
Sensors Corporation ("ISC") and its subsidiaries, Novalog, Inc. ("Novalog"),
MicroSensors, Inc. ("MSI"), Silicon Film Technologies, Inc. ("Silicon Film"), 3D
Microelectronics, Inc. and 3D Microsystems, Inc. All significant intercompany
transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to the prior periods to conform
with the current period presentation.
Note 2 - Issuance of Common Stock
During the first and second quarters of fiscal 2000, holders of 1,205,000
common stock options exercised their options to purchase common stock of the
Company. The net proceeds were $1,756,300. Holders of an additional 108,300
common stock options exercised their options through the sale of 15,700 shares
of common stock to the Company valued at $110,400, which was recorded as
treasury stock at April 2, 2000.
During the first quarter of fiscal 2000, the Company issued 444,400 shares
of its common stock to accredited investors who had subscribed to purchase such
stock during fiscal 1999.
During the second quarter of fiscal 2000, at the request of the preferred
holders, 2,000 Series B, 1,200 Series C and 100 Series D Preferred shares were
converted into 329,700 shares of the Company's common stock.
In March 2000, the Company filed a registration statement which included
the resale of 4,331,644 unregistered shares. This registration statement
included all previously unregistered shares that had been issued as of March 17,
2000. The Securities and Exchange Commission declared this registration
effective in March 2000.
Note 3- Subscriptions for Common Stock and Warrants
During the first quarter of fiscal 2000, the Company sold approximately
31,400 common stock subscription units. Each unit consists 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 $3.6 million in net proceeds
from this transaction. The issuance of common shares required the Company's
stockholders to approve an amendment to the Company's Certificate of
Incorporation increasing the number of authorized shares of common stock or be
required to pay subscribers a registration incentive up to $2,120,900. The
shareholders approved the amendment at the Annual Shareholder's Meeting in
February 2000. The Company issued 3,142,100 shares of common stock to the unit
subscribers
5
<PAGE>
and subsequently registered these shares in March 2000 (See Note 2 above.).
Consequently, the Company reclassified its contingent liability on common stock
subscribed of $2,120,900 (recorded as of the end of the Company's first fiscal
2000 quarter) to stockholders' equity.
During the second quarter of fiscal 2000, the Company sold approximately
2,300 common stock subscription units. Each unit consists 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
$12 per share. The Company received approximately $1.9 million in net proceeds
from this transaction. The Company issued 228,900 shares of common stock to the
unit subscribers and subsequently registered these shares in March 2000.
Note 4 - Common Stock Warrants
In connection with the sale of common stock subscription units in the first
quarter of fiscal 2000, the Company granted warrants to purchase 852,400 shares
of common stock to investors and agents at an exercise price of $2 per share.
In connection with the sale of common stock subscription units in the
second quarter of fiscal 2000, the Company granted warrants to purchase 48,100
shares of common stock to investors and agents at an exercise price of $12 per
share.
Warrants to purchase 399,800 shares of common stock of the Company were
exercised during the first and second quarters of fiscal 2000; the proceeds were
$560,800.
Note 5 - Series D Convertible Preferred Stock Units
In connection with a Series D Convertible Preferred Stock Unit private
placement in fiscal 1998, the Company granted to the placement agent warrants to
purchase up to 3,775 units of Series D Convertible Preferred Stock units ("Agent
Warrants") at a price of $110 per unit, which was 110% of the private placement
price of the Units. The Agent Warrants were 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. Agent Warrants to purchase 1,775
units were exercised during the quarter ended January 2, 2000, which represented
the balance of the unexercised Agent Warrants. The Company realized proceeds of
$209,000 from this exercise.
Note 6 - Employee Retirement Plan
In December 1998, the Board of Directors authorized a contribution to the
Employee Stock Bonus Plan, (the Company's ERISA-qualified Employee Retirement
Plan). This amount was the full annual contribution for fiscal year 1999 and was
made in 330,000 shares of the Company's common stock, which were issued to the
Plan. The value of the shares, $500,100, was added to the Company's paid-in
capital at the time of the contribution, and the expense of the contribution was
amortized on a quarterly basis during the fiscal year based on payroll in each
quarterly period. The unamortized portion of the contribution in any quarterly
period was recorded in a contra-equity account.
In December 1999, the Board of Directors authorized a contribution to the
Employee Stock Bonus Plan in the amount of $161,400. This amount represented a
contribution for the first quarter of fiscal year 2000 contingent upon
stockholder approval of an amendment to the Company's Certificate of
Incorporation authorizing the issuance of additional shares of common stock.
The Company accrued this contribution as an expense during the quarter ended
January 2, 2000 and issued 88,300 shares of the Company's common stock to
satisfy the obligation in March 2000.
In February 2000, the Board of Directors authorized an additional
contribution to the Employee Stock Bonus Plan in the amount of $133,000. This
amount represents a contribution for the second quarter of fiscal year 2000. The
Company issued 11,700 shares of the Company's common stock to satisfy the
obligation in March 2000.
6
<PAGE>
Note 7 - 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 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. In March 2000, the options were exercised, resulting in the
issuance of 1,000,000 shares of common stock to Research & Development Leasing,
Inc., a successor to RDL, and the satisfaction of $1,000,000 of accrued royalty
obligations. In addition, all rights to the licensed intellectual property were
transferred to the Company.
Note 8 - Minority Interest in Subsidiaries
During December 1999, Silicon Film sold 85,750 and 10,000 shares of its
Series B Preferred Stock to third parties and to the Company, respectively. The
net proceeds of $852,800 from third parties are reflected in the consolidated
cash position of the Company and resulted in a corresponding increase in
minority interest in consolidated subsidiaries.
In February 2000, Silicon Film effected a 1-for-3 reverse split of its
issued common stock and, subsequent to such split, issued 1,466,667 shares of
its Series C Convertible Preferred Stock (the "Series C Preferred") in a Private
Placement. The Series C Preferred bears an 8% cumulative dividend, payable after
three years, has a priority in liquidation and is convertible into common stock
of Silicon Film, at the election of the holder, at the rate of 1 common share
for each 1 share of Series C Preferred tendered for conversion. The net proceeds
from this transaction were approximately $5.3 million. This transaction also
resulted in a corresponding increase in minority interest in consolidated
subsidiaries of approximately $5.3 million. After this transaction, the Company
retains an 84% ownership of the common stock of Silicon Film, which is the basis
for the allocation of minority interest of subsidiaries. Upon conversion of all
outstanding convertible preferred stock, the Company's ownership position would
be approximately 53% of Silicon Film's common stock. In addition, future
exercise of authorized and outstanding warrants and options could reduce the
Company's ownership of Silicon Film's common stock to below 40%.
Note 9 - Marketable Securities and Cash Equivalents
The Company's marketable securities consist of investments in short-term,
government-backed securities, and commercial paper. Market value is determined
by the most recently traded price of the security at the balance sheet date.
The Company's marketable securities are classified as trading securities,
which are bought and held principally for the purpose of selling them in the
near term. Realized and unrealized gains are included in interest income in the
Statements of Operations. Total unrealized gains were approximately $10,000 for
the 26-week period ended April 2, 2000.
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
7
<PAGE>
Note 10 - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
April 2, October 3,
2000 1999
---------- ----------
<S> <C> <C>
Raw materials $1,162,600 $ 49,900
Work in process 1,348,400 1,995,500
Finished goods 94,100 174,400
---------- ----------
Total $2,605,100 $2,219,800
========== ==========
</TABLE>
Included in raw materials is approximately $1.1 million of inventory
related to the Company's Silicon Film subsidiary.
Note 11 - Software Development Costs and Purchased Software
Software development and purchased software costs are capitalized when
technological feasibility and marketability of the related product have been
established. The Company will amortize capitalized software costs beginning when
the product is available for general release to customers. Annual amortization
expense will be calculated using the straight-line method over the estimated
useful life of the product, not to exceed five years. The Company evaluates the
carrying value of unamortized capitalized software costs at each balance sheet
date to determine whether any net realizable value adjustments are required.
Note 12 - Reportable Segments
The Company has the following five reportable segments as of April 2, 2000:
Advanced Technology Division (ATD), Novalog, MSI, Silicon Film and Corporate
Headquarters. ATD derives most of its revenues from research and development
contracts funded primarily by governmental agencies. Novalog designs, develops
and sells proprietary integrated circuits ("ICs") and related products for use
in wireless infrared communication. MSI develops and sells proprietary
micromachined sensors and related electronics. Silicon Film designs and develops
proprietary electronic films systems and other digital imaging products and
services. Corporate Headquarters provides accounting, inventory control and
management consulting services to the consolidated subsidiaries. Corporate
revenue consists of charges to the subsidiaries for these services and corporate
assets consist of loans to subsidiaries and goodwill for reacquisition of
subsidiary stock.
The accounting policies used to develop segment information correspond to
those described in the summary of significant accounting policies. Segment
profit or loss is based on profit or loss from operations before income taxes
and minority interest in profit and loss of subsidiaries. The reportable
segments are distinct business units operating in different industries, except
the Corporate Headquarters segment, which spans the activities of the other
segments. Each segment is separately managed, with separate marketing and
distribution systems.
8
<PAGE>
The following information about the five segments is for the 26-week period
ended April 2, 2000.
<TABLE>
<CAPTION>
Silicon Corporate
ATD Novalog MSI Film Headquarters Other Totals
------------ ----------- ------------ ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 2,070,400 $3,909,200 $ 48,800 $ - $ - $ 49,800 $ 6,078,200
Intersegment revenue - - - - 1,092,500 - 1,092,500
Interest revenue - 100 - - 34,500 - 34,600
Interest expense - 300 800 19,100 71,100 1,300 92,600
Depreciation 332,600 46,800 48,300 61,500 - 16,000 505,200
Segment profit (loss) (1,286,900) 94,000 (1,292,400) (2,442,400) (237,900) (639,900) (5,392,800)
Segment assets 9,135,100 2,023,800 351,800 5,106,600 15,880,700 595,900 33,093,900
Expenditures for segment assets 152,600 33,800 67,800 371,100 - 55,100 680,400
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable $ 7,170,700
segments
Elimination of intersegment revenues (1,092,500)
------------
Total consolidated revenues $ 6,078,200
============
Assets
Total assets for reportable segments $ 33,093,900
Elimination of intersegment assets (15,717,300)
Total consolidated assets $ 17,376,600
============
</TABLE>
The following information about the five segments is for the 13-week period
ended April 2, 2000.
<TABLE>
<CAPTION>
Silicon Corporate
ATD Novalog MSI Film Headquarters Other Totals
---------- ----------- ------------ ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $1,203,500 $1,566,200 $ 6,700 $ - $ - $ 18,700 $ 2,795,100
Intersegment revenue - - - - 421,700 - 421,700
Interest revenue - - - - 32,700 - 32,700
Interest expense - 200 (1,100) 13,900 34,500 500 48,000
Depreciation 167,400 23,100 23,000 29,400 - 3,800 246,700
Segment profit (loss) (658,300) (35,100) (695,500) (1,246,700) (23,400) (431,800) (3,090,800)
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable
segments $ 3,216,800
Elimination of intersegment revenues (421,700)
-----------
Total consolidated revenues $ 2,795,100
===========
</TABLE>
9
<PAGE>
During the second fiscal quarter of 1999, the Company had the following five
reportable segments: ATD, Novalog, MSI, Silicon Film and Corporate Headquarters.
The following information about the five segments is for the 26-week period
ended March 28, 1999.
<TABLE>
<CAPTION>
Silicon Corporate
ATD Novalog MSI Film Headquarters Other Totals
------------ ----------- ------------ ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $2,144,100 $3,611,200 $ 13,900 $ - $ - $ - $ 5,769,200
Intersegment revenue - - - - 1,199,800 - 1,199,800
Interest revenue - 100 - - 9,100 - 9,200
Interest expense - 400 - - 30,400 - 30,800
Depreciation 273,300 64,800 22,900 1,700 - 2,700 365,400
Segment profit (loss) (480,100) 1,154,900 (1,112,100) (1,574,700) (243,100) (342,500) (2,597,600)
Segment assets 5,233,200 1,909,800 476,900 742,400 9,655,500 5,800 18,023,600
Expenditures for segment assets 107,600 - 105,500 83,000 - 29,100 325,200
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable
segments $ 6,969,000
Elimination of intersegment revenues (1,199,800)
-----------
Total consolidated revenues $ 5,769,200
===========
Assets
Total assets for reportable segments $18,023,600
Elimination of intersegment assets (9,655,500)
-----------
Total consolidated assets $ 8,368,100
===========
</TABLE>
The following information about the five segments is for the 13-week period
ended March 28, 1999
<TABLE>
<CAPTION>
Silicon Corporate
ATD Novalog MSI Film Headquarters Other Totals
------------ ----------- ------------ ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $1,171,400 $1,849,900 $ - $ - $ - $ - $ 3,021,300
Intersegment revenue - - - - 600,000 - 600,000
Interest revenue - - - - 3,200 - 3,200
Interest expense - 300 - - 15,800 - 16,100
Depreciation 105,100 37,700 20,700 - - 2,600 166,100
Segment profit (loss) (179,200) 766,100 (562,300) (884,500) (108,300) (179,700) (1,147,900)
Expenditures for segment assets 55,100 - 57,100 50,000 - 27,500 189,700
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable
segments $ 3,621,300
Elimination of intersegment revenues (600,000)
-----------
Total consolidated revenues $ 3,021,300
===========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
--------------
Except for historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-
looking statements contained herein are subject to certain risks and
uncertainties, including such factors, among others, as the pace at which new
markets develop, the ability of the Company to introduce new products and ramp
up manufacturing in a timely manner while controlling its operating expenses and
the response of competitors, many of whom are bigger and better financed than
the Company. In addition, the scope of the Company's growth plan may introduce
unanticipated risks and financial requirements. The availability of external
financing for the Company's plan cannot be assured and is subject to numerous
factors including those unrelated to the Company's performance such as economic
and market conditions. Further, the Company's financial performance prior to
substantial growth in revenues may not permit additional equity financing or
long-term debt financing. Accordingly, investors are advised to assess forward-
looking statements contained herein with caution. Additional information on
various risk and uncertainties potentially affecting the Company's results are
discussed below and are contained in publicly filed disclosures available
10
<PAGE>
through the Securities and Exchange Commission EDGAR database
(http://www.sec.gov) or from the Company's Investor Relations Department.
Results of Operations
Revenues
The Company's product sales decreased 244,400 or 13% during the second
quarter of fiscal 2000 compared to the second quarter of fiscal 1999. Product
sales of Novalog, Inc. declined due to increased competitive pressure. Product
sales increased $396,600 or 11% during the 26-week period ended April 2, 2000
compared to the same period in fiscal 1999 due to a strong first quarter 2000.
The Company's contract research and development revenue did not experience a
significant change in either the 13 or the 26-week periods ended April 2, 2000
compared to the similar periods in 1999. Total revenues declined $226,200 or 7%
and increased $309,000 or 5% during the 13 and 26-week periods ended April 2,
2000, respectively compared to 1999.
Cost of Revenues
The cost of product sales as a percentage of product sales increased from 50%
and 59% for the 13 and 26-week periods ended March 28, 1999, respectively, to
57% and 70% for the 13 and 26-week periods ended April 2, 2000, respectively.
This decline in gross margin is primarily due to increasing pressure from
Novalog customers to lower product prices in order to remain competitive. Cost
of contract revenues as a percentage of contract revenues increased from 74% to
84% for the 13-week period ended March 28, 1999 and April 2, 2000, respectively
due to losses on two specific contracts that were recognized during the second
fiscal 2000 quarter. However, the Company's cost of contract revenues as a
percentage of contract revenues decreased for the 26-week period from 91% in
1999 to 82% in 2000. The primary cause of this decrease relates to reduced
overhead expenses and to higher overhead absorption by research and development
activities.
Research and Development
The Company's expenditures in research and development increased $454,400
or 43% during the second quarter of fiscal 2000 and $815,000 or 44% for the 26-
week period ended April 2, 2000 compared to similar periods in fiscal 1999. The
Company's subsidiary Silicon Film has elevated its level of spending in response
to increased efforts toward the launch of its Electronic Film System product.
General and Administrative
General and Administrative expense (G&A) increased $1,117,700 or 86% and
$2,257,400 or 95% during the 13 and 26-week periods ended April 2, 2000,
respectively, compared to similar periods during 1999. The growth and increasing
complexity of the Company's subsidiaries has resulted in the need to expand
support functions of both the corporate headquarters and the subsidiaries. This
has been accomplished through increased personnel and utilization of outside
resources for marketing, accounting and strategic planning.
Interest Expense/Interest Income
Interest expense increased $31,900 and $61,800 in the 13 and 26-week
periods ended April 2, 2000, respectively, compared to similar periods during
1999 primarily as a result of capital leases that have been entered into since
the end of fiscal 1999. Additionally, Silicon Film had borrowings
outstanding under a bridge loan and a line-of-credit during the first quarter of
fiscal 2000, which contributed to the increase in interest expense.
11
<PAGE>
Interest income increased $29,500 and $25,400 in the 13 and 26-week periods
ended April 2, 2000, respectively, compared to similar periods during 1999. The
Company invested proceeds from equity financings during the first and second
quarters of 2000 in marketable securities whose interest rates average 6%.
Liquidity and Capital Resources
At April 2, 2000, the Company had cash and cash equivalents of $4,501,100,
working capital of $10,381,900 and a current ratio of 5.4 to 1.0. The Company
anticipates, although there can be no assurances, that the existing working
capital and its projected operating results will be sufficient to meet its cash
requirements for the near future.
At April 2, 2000, the Company's total backlog was approximately $5.9
million compared to approximately $4.3 million at March 28, 1999.
Factors that may affect Future Results
The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this quarterly report on Form 10-Q and in other public
disclosures of the Company.
Shift in Business Focus. Since commencing operations, 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 "carve-out" of the
Novalog, MSI and Silicon Film 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. 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. As of April 2, 2000,
the Company met both conditions to maintain its Nasdaq listing described above.
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.
12
<PAGE>
Equity Capital Structure. At April 2, 2000, the Company had 42,187,700
common shares issued and outstanding. The common shares reserved for issuance
pursuant to existing preferred stock conversion rights and outstanding warrants
and options essentially had depleted the balance of the Company's authorized
capital structure of 40,000,000 common shares as of January 2, 2000. During the
annual shareholders meeting held in February 2000, the Company's stockholders
approved an amendment to its Certificate of Incorporation to authorize the
issuance of 20,000,000 additional shares of common stock, which increased
authorized common stock to 60,000,000 shares at April 2, 2000.
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 the case of Silicon Film, it has recently concluded a significant third
party financing involving such features as described above plus additional
investor protection. This financing has reduced the Company's ownership interest
in Silicon Film, assuming conversion of Silicon Film's convertible preferred
stock, to slightly above 50% after the placement of the financing and to
slightly below 40% after the fully dilutive effect of warrants and options.
Additional dilution could be experienced due to default or price anti-dilution
provisions of the financing or a subsequent IPO. Third-party financings of
subsidiaries inherently complicate the Company's fiduciary and contractual
obligations and could leave the Company 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 the Company's
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 46 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.
13
<PAGE>
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 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
value of such options 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 although Silicon Film is planning to secure such insurance on its
Chief Executive Officer. 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.
14
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
None
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Irvine Sensors Corporation
(Registrant)
Date: May 2, 2000 By: /s/ John J. Stuart, Jr.
--------------------------------------
John J. Stuart, Jr.
Chief Financial Officer
(Principal Accounting Officer)
16
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-01-2000
<PERIOD-START> OCT-04-1999
<PERIOD-END> APR-02-2000
<CASH> 4,501,100
<SECURITIES> 0
<RECEIVABLES> 2,692,500
<ALLOWANCES> 436,700
<INVENTORY> 2,605,100
<CURRENT-ASSETS> 12,726,300
<PP&E> 11,052,200
<DEPRECIATION> 7,347,200
<TOTAL-ASSETS> 17,376,600
<CURRENT-LIABILITIES> 2,344,400
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<COMMON> 421,900
<OTHER-SE> 6,145,500
<TOTAL-LIABILITY-AND-EQUITY> 17,376,600
<SALES> 4,007,800
<TOTAL-REVENUES> 6,078,200
<CGS> 2,816,400
<TOTAL-COSTS> 11,825,700
<OTHER-EXPENSES> 2,877,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,600
<INCOME-PRETAX> (5,747,500)
<INCOME-TAX> 0
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