<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 July 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 July 2, 2000 there were 42,563,400 shares of Common Stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 2, October 3,
2000 1999
------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 2,063,400 $ 981,100
Marketable securities 1,698,900 -
Accounts receivable, net of allowances
of $448,500 in 2000 and $10,000 in 1999 2,540,800 2,401,500
Stock subscriptions receivable - 600,000
Inventory 2,566,600 2,219,800
Other current assets 259,600 236,750
------------------------------------
Total current assets 9,129,300 6,439,150
Equipment, furniture and fixtures, net 4,112,300 3,546,900
Goodwill, net 160,400 171,600
Capitalized software development costs 519,200 201,700
Other assets 433,200 151,000
------------------------------------
$ 14,354,400 $ 10,510,350
====================================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,159,900 $ 3,310,800
Accrued expenses 1,375,200 752,600
Deferred and subordinated royalties payable - affiliated company - 1,000,000
Accrued dividends 183,100 -
Capital lease obligations - current portion 356,100 311,900
------------------------------------
Total current liabilities 3,074,300 5,375,300
Capital lease obligations, less current portion 300,400 433,200
Minority interest in consolidated subsidiaries 7,961,300 2,489,200
------------------------------------
Total liabilities 11,336,000 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 3,500 shares Series C Convertible Cumulative Preferred
outstanding; aggregate liquidation preference of $105,840 25 50
-0- and 3,900 shares Series D Convertible Preferred
outstanding; aggregate liquidation preference of $-0- - 50
Common stock, $0.01 par value, 60,000,000 shares authorized;
42,563,400 and 35,035,100 shares issued and outstanding 425,600 350,300
Treasury Stock, 20,900 shares at cost (126,700) -
Common stock warrants; 995,700 and 147,000 outstanding - -
Paid-in capital (including common stock subscribed) 74,617,825 64,800,900
Accumulated deficit (71,898,400) (62,938,700)
------------------------------------
Total shareholders' equity 3,018,400 2,212,650
------------------------------------
$ 14,354,400 $ 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 39 Weeks Ended
---------------------------------- --------------------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 1,348,700 $ 1,187,300 $ 5,356,500 $ 4,798,500
Contract research & development 1,145,700 741,200 3,216,100 2,899,200
-------------- ------------- ------------ ------------
Total revenues 2,494,400 1,928,500 8,572,600 7,697,700
-------------- ------------- ------------ ------------
Cost and expenses:
Cost of product sales 1,153,200 1,662,200 3,969,600 3,798,500
Cost of contract revenues 1,435,700 795,400 3,132,500 2,764,200
General and administrative 1,751,200 2,093,800 6,375,300 4,460,500
Research and development 1,971,800 1,490,400 4,660,200 3,363,800
-------------- ------------- ------------ ------------
6,312,000 6,041,800 18,137,700 14,387,000
-------------- ------------- ------------ ------------
Loss from operations (3,817,600) (4,113,300) (9,565,100) (6,689,300)
Interest expense (42,400) (35,300) (135,000) (66,100)
Interest income 74,900 4,200 109,500 13,400
-------------- ------------- ------------ ------------
Loss before minority interest
and provision for income taxes (3,785,100) (4,144,400) (9,590,600) (6,742,000)
Minority interest in loss of subsidiaries 221,400 127,600 634,100 383,700
Provision for income taxes (3,200) (1,200) (3,200) (2,800)
-------------- ------------- ------------ ------------
Net loss $ (3,566,900) $ (4,018,000) $ (8,959,700) $ (6,361,100)
============== ============= ============ ============
Basic and diluted loss per share $ (0.08) $ (0.13) $ (0.23) $ (0.18)
============== ============= ============ ============
Weighted average number
of shares outstanding 42,260,600 29,882,800 38,684,300 34,910,900
============== ============= ============ ============
</TABLE>
See Accompanying Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended
-----------------------------------------------------------------
July 2, 2000 June 27, 1999
------------------------------ ------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,959,700) $ (6,361,100)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization $ 782,100 $ 669,550
Unrealized gain on marketable securities (18,700) -
Loss on disposal of equipment 42,800 15,600
Non-cash employee retirement plan contribution 462,100 394,400
Minority interest in net loss of subsidiaries (634,100) (383,700)
Common stock issued to pay operating expenses 178,400 1,500
Increase in accounts receivable (139,300) (8,000)
Increase in inventory (346,800) (263,400)
Increase in other current assets (22,900) (125,000)
Increase in other assets (12,300) -
Increase (decrease) in accounts payable and
accrued expenses (1,438,300) 1,317,150
Increase in deferred revenues - 56,900
------------ -----------
Total adjustments (1,147,000) 1,675,000
------------- -------------
Net cash used in operating activities (10,106,700) (4,686,100)
Cash flows from investing activities:
Purchase of marketable securities (3,633,000) -
Proceeds from sales of marketable securities 1,952,800 -
Capital facilities and equipment expenditures (1,185,700) (358,000)
Computer software capitalized (317,500) -
Acquisition of intangible assets (280,000) -
------------ -----------
Net cash used in investing activities (3,463,400) (358,000)
Cash flows from financing activities:
Proceeds from issuance of common and
preferred stock and common stock warrants 6,120,300 4,276,800
Proceeds from options & warrants exercised 2,592,200 -
Sale of minority interest in subsidiary 6,199,300 2,332,300
Proceeds from bridge loan & credit line 1,250,000 -
Principal payments of bridge loan & credit line (1,250,000) -
Principal payments under capital leases (259,400) (112,600)
----------- -----------
Net cash provided by financing activities 14,652,400 6,496,500
------------- -------------
Net increase in cash and cash equivalents 1,082,300 1,452,400
Cash and cash equivalents at beginning of period 981,100 1,310,400
------------- -------------
Cash and cash equivalents at end of period $ 2,063,400 $ 2,762,800
============= =============
Noncash investing and financing activities:
Common stock issued to retire deferred and
subordinated royalties payable to affiliated company $ 1,000,000 $ -
============= =============
Accumulated Dividends on preferred stock $ 183,100 $ -
============= =============
Equipment financed with capital leases $ 169,800 $ 745,400
============= =============
Options exercised in exchange for treasury stock $ 126,700 $ -
============= =============
Issuance of subsidiary stock to pay accrued Expenses $ 90,000 $ -
============= =============
Common stock issued for acquisition of equipment $ 13,500 $ -
============= =============
Common stock sold on a subscription basis $ - $ 2,301,600
============= ==============
Principal payment of note payable by
issuance of common stock $ - $ 280,400
============= ==============
Exchange of subsidiary stock $ - $ 1,071,000
============= ==============
</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 July 2, 2000 and June 27,
1999 included herein is unaudited but includes all normal recurring adjustments
which, in the opinion of management of the Company, are necessary to present
fairly the consolidated financial position of the Company at July 2, 2000, the
results of its operations for the 13 and 39-week periods ended July 2, 2000 and
June 27, 1999, and its cash flows for the 39-week periods ended July 2, 2000 and
June 27, 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"),
RedHawk Vision, Inc. ("RedHawk"), 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, second and third quarters of fiscal 2000, holders of
1,219,300 common stock options exercised their options to purchase common stock
of the Company. The net proceeds were $1,770,500. Holders of an additional
108,300 common stock options exercised their options through the sale of 20,900
shares of common stock to the Company valued at $126,700, which was recorded as
treasury stock at July 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. The Company received approximately
$600,000 in net proceeds from this transaction.
During the second and third quarters of fiscal 2000, at the request of
the preferred holders, 2,000 Series B, 1,200 Series C and 3,900 Series D
Preferred shares were converted into 632,600 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. In connection with the sale of these subscription units,
the Company granted warrants to purchase 314,200 and 224,000 shares of common
stock to agents at an exercise price of $1.49 and $2 per share, respectively.
The issuance of common shares required the Company's stockholders to approve an
amendment to the Company's Certificate of
5
<PAGE>
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 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. In
connection with the sale of these subscription units, the Company granted
warrants to purchase 22,900 and 2,300 shares of common stock to agents at an
exercise price of $9.25 and $12 per share, respectively.
Note 4 - Common Stock Warrants
During the first quarter, the Company granted a warrant to purchase
15,000 shares of the Company's common stock at an exercise price of $1.50 per
share to an individual for services provided. The value of the warrant was not
material.
In connection with the sale of common stock subscription units in the
first and second quarters of fiscal 2000, the Company granted warrants to
purchase 337,100 and 563,400 shares of common stock to investors and agents,
respectively at exercise prices of $1.49 to $12 per share. During the third
quarter of 2000, the Company granted warrants to purchase 300,000 shares of
common stock to agents at an exercise price of $12 per share,
Warrants to purchase 429,300 shares of the Company's common stock were
exercised during the three quarters of fiscal 2000 and generated net proceeds of
$611,700.
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. 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.
6
<PAGE>
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 represented 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.
In June 2000, the Board of Directors authorized an additional
contribution to the Employee Stock Bonus Plan in the amount of $167,600. This
amount represented a contribution for the third quarter of fiscal year 2000. The
Company accrued this contribution as an expense during the quarter ended July 2,
2000 and issued 29,000 shares of the Company's common stock to satisfy the
obligation in July 2000.
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. 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 $18,700 for the 39-week period ended July 2, 2000.
7
<PAGE>
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.
Note 10 - Inventories
Inventories consist of the following:
July 2, October 3,
2000 1999
----------- -----------
Raw materials $ 1,304,300 $ 49,900
Work in process 1,196,900 1,995,500
Finished goods 65,400 174,400
------------ ------------
Total $ 2,566,600 $ 2,219,800
============ ============
Included in raw materials is approximately $1.3 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 - Subsequent Event
In July and August 2000, the Company sold approximately 3,960,000
shares of its unregistered common stock, with registration rights, plus warrants
to purchase 1,982,000 shares of unregistered common stock of the Company, with
registration rights, for aggregate gross proceeds of approximately $11.9
million. After expenses of the offering, net proceeds were approximately $11
million.
Note 13 - Reportable Segments
The Company has the following five reportable segments as of July 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
loss is based on loss from operations before income taxes and minority interest
in losses 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 39-week period
ended July 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 $ 3,216,100 $ 5,198,000 $ 59,200 $ - $ - $ 99,300 $ 8,572,600
Intersegment revenue - - - - 2,220,700 - 2,220,700
Interest revenue - 200 - 36,900 72,400 - 109,500
Interest expense - 500 1,700 31,000 97,800 4,000 135,000
Depreciation 453,300 63,900 75,800 96,300 52,300 19,200 760,800
Segment loss (2,372,000) (70,400) (2,248,100) (3,652,200) (158,600) (1,089,300) (9,590.600)
Segment assets 6,648,800 2,133,600 363,600 4,086,800 17,879,100 768,100 31,880,000
Expenditures for segment assets 500,700 33,800 102,700 757,900 98,800 472,600 1,966,500
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments $ 10,793,300
Elimination of intersegment revenues (2,220,700)
------------
Total consolidated revenues $ 8,572,600
============
Assets
Total assets for reportable segments 31,880,000
Elimination of intersegment assets (17,525,600)
------------
Total consolidated assets $ 14,354,400
============
</TABLE>
The following information about the five segments is for the 13-week period
ended July 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 $ 1,145,70 $1,288,800 $ 10,400 $ - $ - $ 49,500 $ 2,494,400
Intersegment revenue - - - - 1,128,200 - 1,128,200
Interest revenue - 100 - 36,900 37,900 - 74,900
Interest expense - 200 900 11,900 26,700 2,700 42,400
Segment profit (loss) (1,085,100) (164,400) (955,700) (1,209,800) 79,300 (449,400) (3,785,100)
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments $ 3,622,600
Elimination of intersegment revenues (1,128,200)
-----------
Total consolidated revenues $ 2,494,400
===========
</TABLE>
9
<PAGE>
During the third 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 39-week period
ended June 27, 1999.
<TABLE>
<CAPTION>
Silicon Corporate
ATD Novalog MSI Film Headquarters Other Totals
--- ------- --- ---- ------------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 2,899,200 $4,780,600 $ 13,900 $ - $ - $ 4,000 $ 7,697,700
Intersegment revenue - - - - 1,894,900 - 1,894,900
Interest revenue - 100 - - 13,300 - 13,400
Interest expense - 400 2,000 - 63,700 - 66,100
Depreciation 503,600 94,500 26,000 14,300 - 31,150 669,550
Segment profit (loss) (1,527,500) 189,700 (1,926,800) (2,593,500) (372,900) (511,000) (6,742,000)
Segment assets 8,228,200 1,600,800 245,800 1,556,000 10,649,500 34,600 22,314,900
Expenditures for segment assets 435,100 63,300 277,300 269,600 - 58,100 1,103,400
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments $ 9,592,600
Elimination of intersegment revenues (1,894,900)
------------
Total consolidated revenues $ 7,697,700
============
Assets
Total assets for reportable segments 22,314,900
Elimination of intersegment assets (10,649,500)
------------
Total consolidated assets $ 11,665,400
============
</TABLE>
The following information about the five segments is for the 13-week period
ended June 27, 1999
<TABLE>
<CAPTION>
Silicon Corporate
ATD Novalog MSI Film Headquarters Other Totals
--- ------- --- ---- ------------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 755,100 $1,169,400 $ - $ - $ - $ 4,000 $ 1,928,500
Intersegment revenue - - - - 695,100 - 695,100
Interest revenue - - - - 4,200 - 4,200
Interest expense - - 2,000 - 33,300 - 35,300
Segment loss (1,047,400) (965,200) (816,700) (1,018,800) (129,800) (166,500) (4,144,400)
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments $ 2,623,600
Elimination of intersegment revenues (695,100)
-----------
Total consolidated revenues $ 1,928,500
===========
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
--------------
Except for historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-
looking statements contained herein are subject to certain risks and
uncertainties, including such factors, among others, as the pace at which new
markets develop, the ability of the Company to introduce new products and ramp
up manufacturing in a timely manner while controlling its operating expenses and
the response of competitors, many of whom are bigger and better financed than
the Company. In addition, the scope of the Company's growth plan may introduce
unanticipated risks and financial requirements. The availability of external
financing for the Company's plan cannot be assured and is subject to numerous
factors including those unrelated to the Company's performance such as economic
and market conditions. Further, the Company's financial performance prior to
substantial growth in revenues may not permit additional equity financing 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's product sales increased 161,400 or 14% and $558,000 or 12%
during the third quarter of fiscal 2000 and for the 39-week period ended July 2,
2000, respectively, compared to similar periods in 1999. The overall increase in
product sales is due to a strong first quarter 2000 to Novalog's customers,
Citizen, Flextronics and M-Flex. The Company's contract research and development
revenue increased $404,500 or 55% and $316,900 or 11% for the 13 and the 39-week
periods ended July 2, 2000, respectively, compared to the similar periods in
1999. The increase in contract revenue is mostly attributable to the Company's
dedication of resources to complete a large contract. Total revenues increased
$565,900 or 29% and $874,900 or 11% during the 13 and 39-week periods ended July
2, 2000, respectively compared to 1999.
Cost of Revenues
The cost of product sales as a percentage of product sales decreased from
140% and 79% for the 13 and 39-week periods ended June 27, 1999, respectively,
to 86% and 74% for the 13 and 39-week periods ended July 2, 2000, respectively.
The gross margin reported for the 3rd quarter 1999 reflects adjustments to
inventory due to obsolescence, poor yields and standard cost variance. Gross
margins for the 39-week period ended July 2, 2000 reflect little change from the
margins for the 39-week period ended June 27, 1999.
Cost of contract revenues as a percentage of contract revenues increased
from 107% to 125% for the 13-week and increased from 95% to 97% for the 39-week
periods ended June 27, 1999 and July 2, 2000, respectively. The Company incurred
losses on two contracts during the third quarter 2000, which caused the overall
gross margin to deteriorate for the 13-week period ended July 2, 2000.
Research and Development
The Company's expenditures in research and development increased $481,400
or 32% during the third quarter of fiscal 2000 and $1,296,400 or 39% for the 39-
week period ended July 2, 2000 compared to similar periods in fiscal 1999.
Novalog has increased research and development spending in an effort to develop
its next generation SIR circuit. MPD introduced a new flash product line and has
consequently increased research and development expenses. Silicon Film has
elevated its level of spending in response to increased efforts toward the
launch of its Electronic Film System product.
11
<PAGE>
General and Administrative
General and Administrative expense (G&A) decreased $342,600 or 16% and
increased $1,914,800 or 43% during the 13 and 39-week periods ended July 2,
2000, respectively, compared to similar periods during 1999. The Company
improved its utilization of personnel during the third quarter 2000, which is
reflected in the increase in contract research and development revenue. The
year-to-date increase is due to the growth and increasing complexity of the
Company's subsidiaries. The Company has responded by expanding support functions
of both the corporate headquarters and the subsidiaries by increasing personnel
and utilization of outside resources for marketing, accounting and strategic
planning. The Company has also increased marketing expenditures in an effort to
increase revenue.
Interest Expense/Interest Income
Interest expense increased $7,100 and $68,900 in the 13 and 39-week
periods ended July 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.
Interest income increased $70,700 and $96,100 in the 13 and 39-week
periods ended July 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 July 2, 2000, the Company had cash and cash equivalents of $2,063,400,
working capital of $6,055,000 and a current ratio of 2.97 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 July 2, 2000, the Company's total backlog was approximately $4.6
million compared to approximately $4.3 million at June 27, 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.
Expected Future Losses. Our net losses through the 39-week period ended
July 2, 2000 were over $9 million with over $3.5 million of that loss being
incurred in the 13-week period ended July 2, 2000. The net loss for the 39-week
period was approximately $2,600,000 (40%) greater than the comparable period in
the previous fiscal year, although the net loss in the 13-week period ended July
2, 2000 was approximately $400,000 less than the comparable 1999 period. See our
Quarterly Report on Form 10-Q for the Period Ended July 2, 2000. Since our
MicroSensors and Silicon Film subsidiaries are continuing to incur significant
development expenses without offsetting revenues, operating losses of this
magnitude are continuing in the current fiscal period. Accordingly, we expect
our consolidated revenues to be less than our earlier expectations and our
losses through our fiscal year ending October 1, 2000 to be much greater than
results as of July 2, 2000 and as compared to last fiscal year. Furthermore,
accounting measurements at interim dates, such as July 2, 2000, inherently rely
on greater estimates than those that will be reflected in the audited year-end
financial statements as of October 1, 2000, which could result in adjustments to
prior periods that could further worsen our results.
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.
12
<PAGE>
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 July 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.
Equity Capital Structure. At July 2, 2000, the Company had 42,563,400
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 July 2, 2000.
Change in Management. On June 22, 2000, we announced that James Evert, who
was our President and Chief Executive Officer beginning in February 1997, had
resigned his positions with the Company and its subsidiaries (other than RedHawk
Vision, Inc.) in order to devote his time to RedHawk Vision, Inc., our newest
operating subsidiary. Robert G. Richards, retired President of Aerojet
Electronic Systems Division and a member of our Scientific Advisory Board since
early 1999, was appointed Chief Executive Officer on an interim basis to serve
while we search for a permanent replacement for Mr. Evert. Competition for
highly qualified chief executive officers in high technology companies is
intense, and there is no assurance that we will be able to find and hire an
acceptable person on terms that the Board of Directors deems appropriate. In
addition, any new chief executive officer, when hired, will want to advance his
or her own vision of the Company's goals and direction, and therefore we cannot
predict whether there will be significant changes to our current business plan
in the future.
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
13
<PAGE>
have a material adverse impact on ISC's results of operations as long as
research and development contracts remain an important element of its business.
Market Acceptance of New Products. Both ISC and its subsidiaries are
focused on markets that are emerging in nature and potentially subject to rapid
growth. Market reaction to new products in such circumstances can be difficult
to predict. There can be no assurance that the present or future products of ISC
or its subsidiaries will be favorably accepted by such markets on a sustained
basis. In addition, because ISC has a limited history of competing in the
intensely competitive commercial electronics industry, there is no assurance
that it will successfully be able to develop, manufacture and market additional
commercial product lines or that such product lines will be accepted in the
commercial marketplace.
Patents and Proprietary Right Protection; Infringement. ISC believes that
its ultimate success, and that of its subsidiaries, will depend, in part, on the
strength of its existing patent protection and the additional patent protection
that it and its subsidiaries may acquire in the future. As of the date hereof,
ISC owns 45 U.S. patents and 8 foreign patents and has other patent applications
pending before the U.S. Patent and Trademark Office as well as various foreign
jurisdictions. Although ISC believes many of these patents to be fundamental in
nature, there can be no assurance that any existing or future patents will
survive a challenge or will otherwise provide meaningful protection from
competition. Furthermore, there is also no assurance that ISC or its
subsidiaries will have the financial resources to provide vigorous defense or
enforcement of patents.
Protection of Proprietary Information. ISC and its subsidiaries treat
technical data as confidential and rely on internal nondisclosure safeguards,
including confidentiality agreements with employees, and on laws protecting
trade secrets, to protect proprietary information. There can be no assurance
that these measures will adequately protect the confidentiality of the
proprietary information of ISC or its subsidiaries or that others will not
independently develop products or technology that are equivalent or superior to
those of ISC or its subsidiaries. ISC or its subsidiaries may receive in the
future communications from third parties asserting that the products of ISC or
its subsidiaries infringe the proprietary rights of third parties. There can be
no assurance that any such claims 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
14
<PAGE>
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.
15
<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
16
<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: August 14, 2000 By: /s/ John J. Stuart, Jr.
John J. Stuart, Jr.
Chief Financial Officer
(Principal Accounting Officer)
17
