<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 January 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 January 2, 2000 there were 35,974,100 shares of Common Stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
January 2, October 3,
2000 1999
--------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents............................................ $ 3,985,000 $ 981,100
Accounts receivable, net of allowances
of $56,600 in 2000 and $10,000 in 1999............................ 2,655,800 2,401,500
Stock subscriptions receivable....................................... 320,900 600,000
Inventory............................................................ 2,576,100 2,219,800
Other current assets................................................. 262,850 438,450
--------------------------------
Total current assets.............................................. 9,800,650 6,640,850
Equipment, furniture and fixtures, net................................... 3,684,900 3,546,900
Goodwill................................................................. 171,600 171,600
Other assets............................................................. 589,900 151,000
--------------------------------
$ 14,247,050 $ 10,510,350
================================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable..................................................... $ 3,583,400 $ 3,310,800
Accrued expenses..................................................... 1,214,700 752,600
Deferred revenues.................................................... 59,300 -
Deferred and subordinated royalties payable - affiliated company..... 1,000,000 1,000,000
Contingent liability on common stock subscribed...................... 1,018,000 -
Bridge loan and line-of-credit....................................... 665,000 -
Capital lease obligations - current portion.......................... 311,900 311,900
--------------------------------
Total current liabilities......................................... 7,852,300 5,375,300
Capital lease obligations................................................ 360,000 433,200
Contingent liability on common stock subscribed.......................... 1,102,900 -
Minority interest in consolidated subsidiaries........................... 3,124,800 2,489,200
--------------------------------
Total liabilities................................................. 12,440,000 8,297,700
--------------------------------
Shareholders' Equity:
Preferred stock, $0.01 par value, 500,000 shares authorized; 6,400
shares Series B Convertible Cumulative Preferred
outstanding; aggregate liquidation preference of $95,600.......... 50 50
3,500 shares Series C Convertible Cumulative Preferred
outstanding; aggregate liquidation preference of $105,840......... 50 50
2,400 shares Series D Convertible Preferred
outstanding; aggregate liquidation preference of $240,000......... 50 50
Common stock, $0.01 par value, 40,000,000 shares authorized;
35,974,100 and 35,035,100 shares issued and outstanding......... 359,700 350,300
Common stock warrants; 189,500 and 147,000 outstanding............... - -
Paid-in capital (including common stock subscribed).................. 66,884,000 64,800,900
Accumulated deficit.................................................. (65,436,800) (62,938,700)
---------------------------------
Total shareholders' equity...................................... 1,807,050 2,212,650
---------------------------------
$ 14,247,050 $ 10,510,350
=================================
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
2
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------------
January 2, December 27,
2000 1998
------------ --------------
<S> <C> <C>
Revenues:
Product sales............................... $ 2,416,200 $ 1,775,200
Contract research & development............. 866,900 972,700
------------------------------
Total revenues................................... 3,283,100 2,747,900
------------------------------
Cost and expenses:
Cost of product sales....................... 1,902,000 1,224,100
Cost of contract revenues................... 681,500 1,093,500
General and administrative.................. 2,202,900 1,063,200
Research and development.................... 1,168,700 808,000
------------------------------
5,955,100 4,188,800
------------------------------
Loss from operations............................. (2,672,000) (1,440,900)
Interest expense............................ (44,600) (14,800)
Interest income............................. 1,900 6,000
------------------------------
Loss before minority interest
and provision for income taxes.............. (2,714,700) (1,449,700)
Minority interest in loss of subsidiaries........ 216,600 86,200
Provision for income taxes....................... - -
------------------------------
Net loss......................................... $(2,498,100) $(1,363,500)
==============================
Basic and diluted loss per share................. $ (0.07) $ (0.05)
==============================
Weighted average number
of shares outstanding.......................... 35,947,100 28,697,300
==============================
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------------------------------------
January 2, 2000 December 27, 1998
------------------------------ -------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(2,498,100) $(1,363,500)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation...................................... $ 246,700 $ 202,100
Minority interest in net loss of subsidiaries..... (216,600) (86,200)
(Increase) decrease in accounts receivable........ (253,300) 151,100
(Increase) decrease in inventory.................. (356,300) 62,400
Decrease in other current assets.................. 175,600 214,600
(Increase) decrease in other assets............... (351,700) 9,600
Increase in accounts payable and
accrued expenses................................. 734,700 201,300
Increase in deferred revenues..................... 59,300 272,000
------------ ------------
Total adjustments................................. 37,400 1,026,900
------------ ------------
Net cash used in operating activities.............. (2,460,700) (336,600)
Cash flows from investing activities:
Capital facilities and equipment expenditures....... (384,700) (128,200)
Acquisition of intangible assets.................... (87,200) -
------------ ------------
Net cash used in investing activities.............. (471,900) (128,200)
Cash flows from financing activities:
Proceeds from issuance of common and
preferred stock and common stock warrants.......... 600,000 55,000
Proceeds from options & warrants exercised.......... 383,600 -
Proceeds from Series D preferred conversion......... 209,000 -
Sale of minority interest in subsidiary............. 852,800 324,900
Proceeds from common stock subscribed............... 1,178,900 -
Proceeds from contingent liability on common stock
subscribed........................................ 2,120,900 -
Proceeds from bridge loan & credit line............. 665,000 -
Principal payments under notes payable.............. (73,700) (5,900)
------------ ------------
Net cash provided by financing activities.............. 5,936,500 374,000
------------ ------------
Net increase (decrease) in cash and cash equivalents... 3,003,900 (90,800)
Cash and cash equivalents at beginning of period....... 981,100 1,310,400
------------ ------------
Cash and cash equivalents at end of period............. $ 3,985,000 $ 1,219,600
============ ============
Noncash investing and financing activities:
Common Stock sold on a subscription basis........... $ 320,900 $ -
============ ============
</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 January 2, 2000 and December
27, 1998 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 January 2,
2000, the results of its operations for the 13-week periods ended January 2,
2000 and December 27, 1998 and its cash flows for the 13-week periods ended
January 2, 2000 and December 27, 1998.
The consolidated financial statements include the accounts of Irvine
Sensors Corporation 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.
Note 2 - 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 has accrued royalty
obligations to RDL at the rate of 3.5 percent of all Company sales of chip
stacks using the licensed technology. In addition, RDL is entitled to receive an
amount equal to 7 percent of all royalties earned by the Company from sales of
any such products by the Company's sublicensees, although to date, no such
sublicensee royalty income has been earned. In October 1989, RDL agreed to defer
its royalty claims and subordinate them with respect to all other creditors in
exchange for options to purchase up to 1,000,000 shares of the Company's Common
Stock, which are exercisable by applying the deferred royalties to the purchase.
The 1,000,000 options are exercisable at $1.00 each until April 2000. If RDL
exercises its option in whole or in part, title to RDL's technology would
transfer to the Company and all further royalty obligations would cease. If the
option expires unexercised, the subordination provisions would terminate and the
accrued royalties would be due and payable in the same manner as any other
corporate obligation. As of January 2, 2000, the Company had accrued $1,000,000
in deferred royalties pursuant to this agreement.
Note 3 - 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
$192,300 from this exercise.
5
<PAGE>
Note 4 - 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, (the Company's ERISA-qualified Employee
Retirement Plan) in the amount of $161,400. This amount represents a
contribution for the first quarter of fiscal year 2000 and will be consummated
by the issuance of 88,300 shares of the Company's common stock, 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 has recognized this contribution as an expense during the quarter ended
January 2, 2000.
Note 5 - 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.
Note 6 - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
January 2, October 3,
2000 1999
--------------- ---------------
<S> <C> <C>
Raw materials..................... $ 746,000 $ 49,900
Work in process................... 1,659,300 1,995,500
Finished goods.................... 170,800 174,400
--------------- ---------------
Total.................... $ 2,576,100 $ 2,219,800
=============== ===============
</TABLE>
Note 7 - 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 issuance of common shares requires the Company's stockholders
to approve an amendment to the Company's Certificate of Incorporation increasing
the number of authorized shares of common stock. The subscriptions are
irrevocable on the part of subscribers, even if the increase in authorized
shares is not approved by the Company's stockholders. If approval of such
increase or subsequent registration of the shares issuable pursuant to the
subscriptions has not been obtained by June 1, 2000, the Company is obligated to
pay subscribers a registration incentive until such approval and registration
has been obtained. The amount of this incentive is a percentage of the principal
invested, increasing in stages from 3% per month in June 2000 to 10% per month
in February and March of 2001. The maximum obligation of the Company to pay
registration incentives is 50% of the principal invested, or $2,120,900. The
Company has recorded 50% of the gross proceeds received from the subscription
transaction as a liability and the balance as paid-in-capital. If action by the
Company's stockholders on the proposed amendment is affirmative and the common
shares are subsequently registered, the Company will reclassify this liability
to equity. The Company received approximately $3.6 million in net proceeds from
this transaction; all but approximately $320,900 of which was received prior to
the close of the quarter ended January 2, 2000. The balance was recorded as a
subscription receivable which has subsequently been received.
6
<PAGE>
Note 8 - Subsequent Event
In February 2000, Silicon Film implemented 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 will also result 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 loss 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 to below 40% of Silicon Film's common
stock.
Note 9 - Reportable Segments
The Company has the following 5 reportable segments as of January 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. The following information about the 5 segments is for the
quarter ended January 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.. $ 866,900 $2,343,000 $ 42,100 $ - $ - $ 31,100 $ 3,283,100
Intersegment revenue.............. - - - - 670,800 - 670,800
Interest revenue.................. - 100 - - 1,800 - 1,900
Interest expense.................. - 100 1,900 5,200 36,600 800 44,600
Depreciation...................... 167,400 23,100 23,000 29,400 - 3,800 246,700
Segment profit (loss)............. (628,600) 129,100 (596,900) (1,195,700) (214,500) (208,100) (2,714,700)
Segment assets.................... 8,461,200 2,638,600 401,700 2,461,500 13,705,100 112,450 27,780,550
Expenditures for segment assets... 57,400 12,300 4,600 310,500 - - 384,800
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments....................................................................... $ 3,953,900
Elimination of intersegment revenues......................................................................... (670,800)
--------------
Total consolidated revenues............................................................................. $ 3,283,100
==============
Assets
Total assets for reportable segments......................................................................... $ 27,780,550
Elimination of intersegment assets........................................................................... (13,533,500)
--------------
Total consolidated assets............................................................................... $ 14,247,050
==============
</TABLE>
7
<PAGE>
During the first fiscal quarter of 1999, the Company had the following 5
reportable segments: ATD, Novalog, MSI, Silicon Film and Corporate Headquarters.
The following information about the 5 segments is for the fiscal quarter ended
December 27, 1998.
<TABLE>
<CAPTION>
Silicon Corporate
ATD Novalog MSI Film Headquarters Other Totals
--- ------- --- ------- ------------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers.... $ 972,700 $1,761,300 $ 13,900 $ - $ - $ - $ 2,747,900
Intersegment revenue................ - - - - 599,800 - 599,800
Interest revenue.................... - 50 - - 5,900 - 5,950
Interest expense.................... - 150 - - 14,600 - 14,750
Depreciation........................ 168,200 27,100 2,200 4,500 - 100 202,100
Segment profit (loss)............... (400,900) 388,800 (549,800) (690,200) (344,800) (162,800) (1,449,700)
Segment assets...................... 4,503,200 1,761,600 328,000 363,300 9,550,300 6,400 16,512,800
Expenditures for segment assets..... 52,500 94,300 48,400 33,000 - 1,600 229,800
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments............................................................................ $ 3,347,700
Elimination of intersegment revenues.............................................................................. (599,800)
-------------
Total consolidated revenues.................................................................................. $ 2,747,900
=============
Assets
Total assets for reportable segments.............................................................................. $16,512,800
Elimination of intersegment assets................................................................................ (9,550,300)
-------------
Total consolidated assets.................................................................................... $ 6,962,500
=============
</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
through the Securities and Exchange Commission EDGAR database
(http://www.sec.gov) or from the Company's Investor Relations Department.
Results of Operations
Revenues
The Company achieved consolidated revenues of $3,283,100 during the first
quarter of fiscal 2000 compared to fiscal 1999's first quarter revenues of
$2,747,900. This is an improvement of $535,200, all of which is attributable to
increased product sales of Novalog, Inc., one of the Company's consolidated
subsidiaries. The Company's other principal revenue source, funded research and
development contracts, generated $105,800 less in revenues in the current
quarter compared to the comparable period last year. This decline was partially
attributable to late passage of the Federal defense budget and corresponding
delays in funding of some of the Company's contracts.
8
<PAGE>
Cost of Revenues
Cost of contract revenues as a percentage of contract revenues decreased
from 112 percent for the first quarter of fiscal 1999 to 79 percent in fiscal
2000. The primary cause of this decrease relates to reduced overhead expenses
and to higher overhead absorption by research and development activities and
inventory. The cost of product sales as a percentage of product sales increased
from 69% for the 1999 first fiscal quarter to 79% in the comparable 2000 fiscal
period. This decline in gross margin is primarily due to increasing pressure
from Novalog customers to lower product prices in order to remain competitive.
Research and Development
During the first quarter of fiscal 2000, the Company's expenditures in
research and development increased by $360,700 or 45% over the expenditures in
the first fiscal quarter of 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 $1,139,700 or 107
percent from the first quarter of fiscal 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.
Interest Expense/Interest Income
In the first fiscal quarter of 2000 interest expense increased $29,800
since the first quarter of last fiscal year as a result of capital leases that
have been entered into since the end of fiscal quarter 1999.
Liquidity and Capital Resources
At January 2, 2000, the Company had cash and cash equivalents of
$3,985,000, working capital of $1,948,350 and a current ratio of 1.25 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 January 2, 2000, the Company's total backlog was approximately $4.2
million compared to approximately $6 million at December 27, 1998.
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 purchase and later shut
down of the IBM cubing line, 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
9
<PAGE>
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. While the Company
presently has a market cap substantially in excess of the $35 million Nasdaq
standard, its tangible net worth is below $2 million. Furthermore, the
consolidated losses resulting from the development expenses of some of its
subsidiaries will continue to erode its tangible net worth for at least a
portion of fiscal 2000. In that instance and absent additional equity
financing, which cannot be guaranteed, the Company could become 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 January 2, 2000, the Company had
35,974,100 common shares issued and outstanding. The common shares reserved for
issuance pursuant to existing preferred stock conversion rights, royalty
conversion agreements and outstanding warrants and options have essentially
depleted the balance of the Company's authorized capital structure of 40,000,000
common shares. Although the Company has authorized preferred stock which is
presently unissued and unreserved, without an increase in its authorized common
shares, the Company will be severely hampered in seeking equity financing in the
future. Since the Company does not presently have sources of significant debt
financing, unavailability of equity financing could impair the Company's ability
to finance its future business plans or those of its present or future
subsidiaries or its ability to respond to unforeseen circumstances. The Company
has proposed an amendment to its Certificate of Incorporation to authorize the
issuance of additional shares of common stock, but there can be no assurances
that the Company's stockholders will approve such an amendment.
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
10
<PAGE>
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 44 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 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
11
<PAGE>
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.
12
<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
13
<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: February 21, 2000 By: /s/ John J. Stuart, Jr.
John J. Stuart, Jr.
Chief Financial Officer
(Principal Accounting Officer)
14
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<INVENTORY> 2,576,100
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<TOTAL-LIABILITY-AND-EQUITY> 14,247,050
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<OTHER-EXPENSES> 1,168,700
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<INTEREST-EXPENSE> 44,600
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