-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rg5MvA3UFJs3Ub0+Gwc5SI522PdaR2EDEWP8pt4EFzZnDqgxfHDbbJnh2si7MX38 GssrbZEqKbztBPHlTy1rtg== 0000898430-99-000070.txt : 19990113 0000898430-99-000070.hdr.sgml : 19990113 ACCESSION NUMBER: 0000898430-99-000070 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19990112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IRVINE SENSORS CORP/DE/ CENTRAL INDEX KEY: 0000357108 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 330280334 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08402 FILM NUMBER: 99504697 BUSINESS ADDRESS: STREET 1: 3001 REDHILL AVE CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7145498211 MAIL ADDRESS: STREET 1: 3001 REDHILL AVE STREET 2: BLDG 3 STE 104 CITY: COSTA MESA STATE: CA ZIP: 92626 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED SEPTEMBER 27, 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 27, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED] For the transition period from _________ to _________. Commission file number 1-8402 ---------- IRVINE SENSORS CORPORATION (Exact name of registrant as specified in its charter) Delaware 33-0280334 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3001 Redhill Avenue, Costa Mesa, California 92626 (Address of principal executive offices) (Zip Code) (714) 549-8211 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered: Common Stock Boston Stock Exchange Incorporated Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes [X] No [_] To the extent known by the registrant, the aggregate market value of the Common Stock held beneficially by non-affiliates of the registrant was approximately $36,106,900 on January 7, 1999. As the Preferred Stock is not publicly traded it has not been included in the computation. As of December 19, 1998, there were 28,457,763 shares of Common Stock outstanding. Documents Incorporated by Reference: Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended September 27, 1998 (Part II); portions of the Registrant's Definitive Proxy Statement to be used in connection with Registrant's Annual Meeting of Stockholders to be held on February 26, 1999 (Part III). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_]. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + Except for historical information contained herein, this annual report on + +Form 10-K 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 those discussed herein and in other+ +public disclosures of the Company, which could cause actual results to differ + +materially from those projected or discussed. Investors are cautioned not to + +place undue reliance on these forward-looking statements, which reflect + +management's analysis only as of the date hereof. See "Factors that may affect+ +Future Results.". + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PART I. ------- Item 1. Business GENERAL The Company and its subsidiaries are organized into the following primary business groups: Irvine Sensors Corporation - -------------------------- Irvine Sensors Corporation ("ISC") is the developer of proprietary technologies to produce extremely compact packages of solid state microcircuitry, which offer volume, power, weight and operational advantages versus less miniaturized alternatives. These advantages result from ISC's ability to assemble microelectronic chips in a three-dimensional "stack" instead of alongside each other on a flat surface, as is the case with more conventional methods. These stacking technologies have also led to ISC's development of collateral technologies for the design of low power and low noise chips, thinning of chips and various specialized applications of chips and stacked chip assemblies in fields ranging from wireless infrared transmission to image processing to digital photography. ISC's core chip-stacking technology was originally conceived and developed as a means of addressing the demands of space-based surveillance. However, the degree of miniaturization realizable from ISC's technologies has attracted R&D sponsorship from various government funding agencies for a wide variety of potential military and space applications. Since its inception, ISC has derived most of its revenues from such funded research and development. Since the early 1990s, ISC has sought to commercially exploit its technologies and has received an increasing share of its consolidated revenues from commercial sales of its products. During June 1992, ISC entered into a joint development agreement with IBM to commercialize ISC's chip-stacking technology for computer memory applications. In April 1996, ISC purchased a memory-stacking line in Essex Junction, Vermont from IBM, and in October 1997, disposed of that line and consolidated that sector of its business with its California operation. In October 1995, ISC formed a subsidiary, Novalog, Inc. ("Novalog"), to commercially exploit its low power chip technology in the field of wireless infrared data communications. In April 1997, ISC formed a subsidiary, MicroSensors, Inc. ("MSI"), to commercially exploit its technologies for low noise readout electronics and miniaturized inertial sensors. In June 1998, ISC formed a subsidiary, Imagek, Inc. ("Imagek") to commercially exploit its digital photography technologies. Novalog, Inc. - ------------- Novalog is a privately financed subsidiary of ISC which designs, develops and sells proprietary integrated circuits ("ICs") for use in wireless infrared communication. Novalog's initial products, trademarked SIRComm(TM), SIR2(TM), MiniSIR(TM), MiniSIR2(TM) and BayBeamer(TM), enable infrared, line-of-sight data transfer between computers, electronic organizers, printers, modems and other electronic devices that have compatible ports. Novalog is an active participant in the Infrared Data Association ("IrDA"), which establishes the hardware and software protocols for such products. Novalog believes its products have advantages in terms of power consumption, dynamic range, size and economics as compared to the products of its competitors. Novalog has shipped more than five million units of its products to manufacturers servicing the IrDA marketplace. In fiscal 1998, Novalog accounted for approximately 11% of the Company's consolidated revenues. MicroSensors, Inc. - ------------------ MSI is a wholly-owned subsidiary of ISC that was formed to develop and sell proprietary micromachined sensors and related electronics. Micromachining involves the use of semiconductor manufacturing processes to build electromechanical devices with feature sizes measured in microns or fractions thereof. As prices have declined for micromachined devices, such solid-state units have migrated from initial aerospace and military applications to automotive, industrial process-control and medical applications. SRI Consulting (Menlo Park, CA) has reported that some observers expect sensors built in this manner to eventually replace virtually all electromechanical sensors, creating a market of several billion dollars annually. MSI has supported a U.S. government contract conducted by ISC for development of a proprietary microgyro with projected performance features heretofore achievable only at much higher cost. Subsequent to the completion of this contract, MSI has demonstrated functional units of the MicroRing Gyro. Effective October 1997, MSI negotiated its first commercial contract and has commenced development and shipment of engineering samples of a multi-channel readout chip pursuant to that contract. Production shipments pursuant to this contract are scheduled to begin in fiscal 1999. MSI accounted for approximately 3% of the Company's consolidated revenues in fiscal 1998. Imagek, Inc. - ------------ Imagek Inc. is a subsidiary of ISC which designs, develops and intends to sell proprietary electronic film systems and other digital imaging products and services. Although dependent on completion of required financing, the success of which cannot be assured, Imagek is planning to introduce in fiscal 1999 the EFS- 1(TM) Electronic Film System that includes a self contained, compact, battery- powered cartridge that fits into the film cavity of a 35mm camera thus offering the flexibility to switch between conventional film and digital photography. Other collateral products and services are planned for introduction subsequent to the EFS-1(TM). ISC was incorporated in Delaware in January 1988. Pursuant to a merger effective in May 1988 with a corporation of the same name incorporated in California in December 1974, the Company succeeded to all of the assets and liabilities of such predecessor corporation. Its principal executive offices are located at 3001 Redhill Avenue, Building. 3, Costa Mesa, California 92626, and its telephone number is (714) 549-8211. Novalog was incorporated in California in October 1995. Its principal executive offices are located at 125 Kalmus Drive, #K-1, Costa Mesa, California 92626, and its telephone number is (714) 429-1122. Novalog is a consolidated subsidiary of ISC. MSI was incorporated in Delaware in April 1997. Its principal executive offices are located at 3001 Redhill Avenue, Building 3, Costa Mesa, California 92626, and its telephone number is (714) 444-8831. MSI is a consolidated subsidiary of ISC. Imagek was incorporated in Delaware in June 1998. Its principal executive offices are located at 3001 Redhill Avenue, Building 3, Costa Mesa, California 92626, and its telephone number is (714) 444-8723. Imagek is a consolidated subsidiary of ISC. Products and Technology - ----------------------- The Company has developed a variety of products consisting of stacked memory chips, and believes that its chip stacking technology can offer demonstrable benefits to designers of systems that incorporate numerous integrated circuits, by improving speed and reducing size, weight and power usage. In addition, since ISC's technology reduces the number of interconnections between chips, potential system failure points can also decrease. The Company believes that the features achievable with its chip stacking technology will have application in space and in aircraft in which weight and volume considerations are dominant, as well as in various other applications in which portability is required and speed is important. The Company is presently seeking to exploit its potential market by focusing on the sale of chip stacking products to high end, high margin government and commercial users to whom the technical improvement will be most valuable. While these applications tend to require lower unit volume, the sales are at significantly higher prices than many applications requiring high volume production. Furthermore, the Company has existing relationships with some of the potential customers in this market. Since fiscal 1995, the Company has been shipping quantities of its stacked memory products to customers for both government and commercial purposes. However, there is no assurance that the Company will be successful in marketing such products for widespread applications. The Company also intends to continue to market infrared sensing devices for surveillance, acquisition, tracking and interception applications for a variety of Department of Defense ("DOD") and NASA missions. The Company is not aware of any technical disadvantages to its chip stacking technology. However, until high volume production is achieved, as to which there is no assurance, the ultimate cost of products utilizing the Company's higher density chip stacking technology cannot be firmly established, potentially placing the Company's stacked chip products at a cost disadvantage. Accordingly, in fiscal 1998, the Company expanded its product offerings to include lower-density stacked electronics that the Company believes could be more price competitive. In addition to its chip stacking technology, the Company has developed a Serial Infrared Communications chip using elements of its sensor chip design technology. This device is being used in products which allows computers and computer peripherals to communicate using infrared transmissions in a manner similar to that employed by remote control units for televisions and video cassette recorders. Novalog has been shipping such devices since 1995. The Company also has chip design technology relating to electronic readouts that it is exploiting through its MSI subsidiary. In fiscal 1998, MSI entered into its first contractual relationship based on this technology, i.e., a contract to develop and subsequently ship production quantities of its readout chip for EG&G Astrophysics, Inc. ("EG&G") to be utilized in airport security systems. MSI successfully completed the development phase of EG&G's contract in fiscal 1998, and will commence production shipments under the contract in fiscal 1999. MSI has also developed a proprietary Silicon MicroRing Gyro intended to provide an inexpensive means to measure angular motion for a wide variety of potential applications. The Silicon MicroRing Gyro is presently being packaged for evaluation by potential customers. Commercial exploitation of this product is expected to be paced by the product design-in lead times required by such customers. As a result, the Company does not project material contributions to its consolidated revenues from this product during fiscal 1999. In June 1998, the Company formed its Imagek subsidiary to commercially explore its proprietary technologies, focused on miniaturized digital cameras. Imagek is presently developing the production version of its initial product, the EFS-1(TM), which is an electronic film system including a cartridge that can be inserted into an existing film camera allowing that camera to take digital pictures without modification to the camera itself. Imagek is seeking private financing to introduce this product and support its business plan. Imagek believes that its proprietary EFS technology has value advantages to potential customers with substantial investment in conventional 35MM camera equipment that inhibits the adoption by those consumers of self-contained digital cameras. By utilizing the optics of existing cameras, Imagek believes that the EFS product will be economically competitive to comparable resolution digital cameras. Potential Product Applications - ------------------------------ Neural Networks. In 1991, the Company received initial funding from the U.S. Navy's Office of Naval Research for potential use of its technology in neural networks. After the completion of this exploratory phase, the Company received various add-on and collateral contracts aggregating over $9 million, through fiscal 1998, to further develop the neural network technology. The Company is presently pursuing additional contracts, under which the Company expects to deliver demonstration products to various branches of the DOD. Neural networks contain large numbers of sensing nodes which continuously interact with each other, similar to the way that the neurons of a human brain interact to process sensory stimuli. Neural networks are the subject of scientific inquiry because pattern recognition and learning tasks, which humans perform well and computers perform poorly, appear to be dependent on such processing. Neither conventional computers nor advanced parallel processors currently have the interconnectivity needed to fully emulate neural network processing techniques. The Company believes its chip stacking technology could offer a way to achieve the very high levels of interconnectivity necessary to construct an efficient artificial neural network. To the Company's knowledge, no other presently available packaging approaches are believed to offer this potential. The full embodiment of this technology is not expected to yield near-term products for the Company, although it is anticipated to keep the Company actively involved in advanced R&D relevant to the Company's long-range business interests. However, elements of this technology, including a proprietary chip set, are currently being developed with a view to product utilization, although there can be no assurances as to the potential success of such development. Wearable Computers. In fiscal 1998, the Company commenced exploration of a technology to stack chips of different functionality and dimensions within the same chip stack. The Company refers to this new technology as NeoStack. The Company is using its NeoStack technology to support a government program undertaken by the Boeing Corporation ("Boeing"), to develop a wearable computer. The Company believes that its NeoStack approach could offer advantages in terms of compactness and power consumption to developers of wearable computer systems. However, because of remaining developmental requirements, the Company is presently unable to forecast when or if such technology will be incorporated in commercial products and, because of product design lead times, does not anticipate such incorporation during fiscal 1999. Development Contracts - --------------------- In April 1980, 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% of all Company sales of chip stacks using the licensed technology. In addition, RDL is entitled to receive an amount equal to 7% of all royalties earned by 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 until October 1999. If RDL exercises its option in whole or in part, title to RDL's technology would transfer to the Company and all further royalty obligations would cease. If the option expires unexercised, the subordination provisions would terminate and the accrued royalties would be due and payable in the same manner as any other corporate obligation. As of September 27, 1998, the Company had accrued $826,200 in deferred royalties pursuant to this agreement. Due to the RDL subordination, royalties accrued, but none were paid by the Company during fiscal years 1998, 1997 and 1996. Manufacturing - ------------- At the present time, the Company stacks DRAM, SRAM and FLASH memory die purchased from commercial sources into cube-shaped assemblies at its own facility. The cubes are then either packaged or segmented into subsections as required for the particular product configuration being built. Outside vendor support is utilized for packaging. During fiscal 1998, the Company introduced products involving the stacking of pre-packaged die using widely-available fabrication technologies. The Company uses outside third party qualified source vendors for the manufacturing of these products. The primary components of the Company's non-memory products are integrated circuits and infrared detectors. The integrated circuits are designed by the Company for manufacture by others from silicon wafers and other materials readily available from multiple sources. Due to the ready availability of these materials, the Company does not have any special arrangements with suppliers for their purchase. The Company does not produce detectors. However, the Company has developed a process which enables it to use relatively low cost and unsophisticated detectors which are generally available from numerous sources. Because of the nature of the sophisticated research and development work performed under its development contracts, the Company designs and assembles equipment for testing and prototype development. The Company utilizes the unique capability of this equipment to seek, qualify for and perform additional contract research and development for its customers. Backlog - ------- At December 13, 1998, the Company's funded backlog was $3,468,600 compared to $2,263,200 at December 14, 1997. The Company anticipates that all of the funded backlog will be filled in fiscal 1999. In addition, the Company has substantial unfunded backlog on contracts which typically are funded when the previously funded amounts have been expended. The Company is also continuing to negotiate for additional research contracts and commercial product sales, which, if obtained, could materially increase its backlog. Failure to obtain these contracts in a timely manner could materially affect the Company's short-term results. Customers and Marketing - ----------------------- The Company's Advanced Technology Division ("ATD") focuses its product marketing efforts on U.S. military agencies or contractors to those agencies. The Company is continually seeking and preparing proposals for additional contracts. As a result of the post cold war defense cutbacks, many defense contractors have experienced declines in their business base as government agencies' budgets are reduced. However, even if this trend continues, the Company believes there will be more emphasis and funds directed toward advanced technology systems and research programs for which the Company believes it is qualified to compete. However, there can be no assurances that the Company will be successful in competing against the larger defense contractors for potential programs. The Company's Novalog subsidiary supports Original Equipment Manufacturers ("OEM's") supplying infrared communications devices complying with the standards of the Infrared Data Association ("IrDA"). Novalog's active participation in IrDA facilitates its marketing to those customers. MSI directs its marketing toward three commercial areas: (i) Customers with a need for Application Specific Integrated Circuits ("ASICs") such as the type developed for EG&G; (ii) OEMs that have a need for the cost and performance features that could be provided by MSI's Silicon MicroRing Gyro, with particular emphasis toward manufacturers of electronic toys and games, industrial monitoring equipment, medical instrumentation and automotive markets; and (iii) the manufacturers of micromachined sensors who may be able to utilize MSI's Universal Capacitive Readout(TM) ("UNICAP(TM)") general purpose ASIC designed to support a variety of sensors requiring high accuracy capacitive readout and control electronics. Imagek is a consumer product focused enterprise. Both the structure and staffing of Imagek was developed to bring digital imaging products to the consumer market. The initial product of Imagek, the Electronic Film System ("EFS") is designed to enable 35mm camera owners to shoot digital or traditional photography with equipment they currently own. The initial target market, termed "prosumers", are defined as high end hobbyists and business photographers who have made a significant investment in their camera systems. The EFS is being positioned as a camera accessory, leveraging off the growing adoption of digital cameras and related infrastructure. Imagek is planning a limited roll out of the initial EFS-1(TM) product, largely through direct follow-up of inquiries from potential customers it has received, and expects to follow with an expansion of distribution, reseller channels and value-added resellers for broad and vertical markets. Imagek plans to service its customers with a sophisticated electronic commerce site, an 800 access number, and a customer web site information vehicle. In fiscal 1998, contracts with all branches of the U.S. government accounted for 54% of the Company's consolidated revenues, the remaining 46% of the Company's revenues was derived from non-government sources. During fiscal 1998, revenues derived from the U.S. Army and the various divisions of the Boeing Corporation accounted for approximately 13% and 14% of total consolidated revenues, respectively. Loss of these customers would have a material adverse impact on the Company's results. Contracts with government agencies may be suspended or terminated by the government at any time, subject to certain conditions. Similar termination provisions are typically included in agreements with prime contractors. From time to time, the Company has experienced such suspensions or terminations, and there is no assurance the Company will not experience such suspensions or terminations in the future. The Company focuses its marketing in specific areas of interest in order to best utilize its relatively limited marketing resources. Each operating unit or subsidiary has a designated individual to direct that unit's marketing efforts. The Company is presently recruiting for a senior management executive to coordinate these activities corporate-wide. Competition - ----------- The demand for high performance semiconductors has produced a wide variety of competitors and competitive systems, ranging from various three-dimensional designs to highly dense two-dimensional designs. For most commercial applications, the principal competitive factor for such products is the cost premium over less densely packaged electronics. For some application in which volume and weight are critical, such as space or avionics, density becomes the principal competitive factor. Many of the Company's competitors are believed to be better financed, more experienced and organizationally stronger than the Company. Accordingly, there can be no assurances that the Company can successfully compete in such markets. The Company is aware of two large companies that have developed competing approaches to chip stacking. They are Texas Instruments, Inc. (TI) and Thompson CSF (Thompson). In addition, there are several small companies and divisions of large companies that have various technologies for stacking a limited number of chips. The Company is aware of many companies which are currently servicing the military market for electro-optical sensors of the type which the Company's products are also designed to support. The principal competitive factor in this business area is the performance sensitivity and selectivity achievable by alternative sensor approaches and designs. Competitors to the Company include Santa Barbara Research Center, TI, Lockheed Martin Corporation, Raytheon, Litton Industries, Infrared Industries, Inc., EG&G Judson, OptoElectronics-Textron, Inc., and Boeing Corporation. The Company believes that most of its competitors in this area have financial, labor and capital resources greater than those of the Company and there is no assurance that the Company will be able to compete successfully. The Company is aware of several companies which currently service the market for serial infrared detectors of the type sold by Novalog. For battery-powered applications, the principal competitive factors are power consumption and cost. For desktop applications, the principal competitive factor is the speed of data transmission achievable. Novalog believes that it has competitive advantages in the battery-powered applications. Competitors to Novalog include Hewlett- Packard, Temic, Sharp, and IBM, among others, all of whom have financial, labor and capital resources greater than those of Novalog. MSI is competing in a market populated with several larger competitors as relates to its Silicon MicroRing Gyro, including such companies as Delco Electronics, Motorola, Bosch Corporation, Siemens and Systron-Donner. The principal competitive factor for these applications is believed to be cost. MSI has no present knowledge of competitors planning to introduce ASICs competitive to its planned UNICAP product, but given the widespread availability of integrated circuit design capabilities in the electronics industry, the emergence of competitive products is believed to be likely. Imagek is not aware of any direct competitors to its contemplated EFS product line and believes that its intellectual property will act as a barrier to competitors seeking to offer identical products, although there can be no assurances of that result. However, the EFS system itself is expected to face competition from increasingly sophisticated generations of digital camera equipment. Peripheral equipment and services which Imagek intends to offer to complement its EFS products are also likely to attract strong competition if the EFS product line receives significant market acceptance. Research and Development - ------------------------- The Company believes government and commercial research contracts will provide the major portion of funding necessary for continuing development of some of its products. However, the manufacture of stacked circuitry modules in volume will require substantial additional funds, which may involve additional equity or debt financing or a joint venture, license or other arrangement. Furthermore, the development of the products of its subsidiaries are likely to require such external funding. There can be no assurance that sufficient funding will be available from government or other sources or that new products of the Company or its subsidiaries will be successfully developed for volume production. The Company's consolidated expenditures for research and development for the fiscal years ended September 27, 1998, September 28, 1997, and September 29, 1996 were $1,609,500, $1,616,600 and $2,009,700, respectively. These expenditures of Company funds were in addition to the Company's cost of revenues associated with its customer-sponsored research and development activities. The spending levels of Company funds on research and development compared to its overall expenses are indicative of the Company's resolve to maintain its competitive advantage by developing new products and improving upon its existing technology. The Company has funded its research and development activities primarily through contracts with the federal government and with funds from the Company's public and private stock and bond offerings. Patents, Trademarks and Licenses - -------------------------------- The Company has a policy of protecting its investment in technology by seeking to obtain, where practical, patents on the inventions made by its employees. As of September 27, 1998, 50 U.S. and foreign patents have been issued and assigned to the Company or its subsidiaries and other U.S. and foreign patent applications are pending. There is no assurance that additional patents assignable to the Company will be issued in the U.S. or elsewhere. Moreover, the issuance of a patent does not carry any assurance of successful application, commercial success or adequate protection. There is no assurance that the Company's existing patents or any other patent that may issue in the future would be upheld if the Company seeks enforcement of its patent rights against an infringer or that the Company will have sufficient resources to prosecute its rights, nor is there any assurance that patents will provide meaningful protection from competition. The Company has been advised by its patent counsel, Thomas Plante, Esq., that no adverse patent has been found which might create an infringement problem in the marketing of the Company's products. If others were to assert that the Company is utilizing technology covered by patents held by them, the Company would evaluate the necessity and desirability of seeking a license from the patent holder. There is no assurance that the Company is not infringing on other patents or that it could obtain a license if it were so infringing. Those products and improvements which the Company develops under government contracts are generally subject to royalty-free use by the government for government applications. However, the Company has negotiated certain "non- space" exclusions in government contracts and has the right to file for patent protection on commercial products which may result from government-funded research and development activities. The Company has exclusive world-wide rights to technology developed under an agreement with R & D Leasing, Ltd. ("RDL"), a limited partnership. Under the agreement, the Company will pay royalties of 3.5% of all direct sales, by the Company, of the basic devices using the technology. RDL will also receive 7% of all income earned by the Company from sublicensees. The Company's Chairman of the Board and a Senior Vice-President have a beneficial interest in RDL. See "Development Contracts." The Company has exclusive world-wide rights to U.S., United Kingdom and Japanese patents covering the basic concept of the EFS pursuant to an agreement executed in October 1997 with I. Sapir, a foreign individual ("Sapir"). Under this agreement the Company issued 30,000 shares of common stock, and assumed an obligation to pay a non-refundable $35,000 to Elba Systems LTD, a prior holder of rights under the patent. Imagek is the successor to the rights and obligations of this licensing agreement pursuant to which EFS sales will bear a 3% royalty payable to Sapir on the gross sales price up to $50 million sales per annum and a 1% royalty thereafter. The company has entered into an Assignment of Patent and Intellectual Rights (the "Assignment") with F. L. Eide, ("Eide") a Vice-President of the Company. As part of his employment agreement, Eide has assigned to the Company all rights and interests to five (5) U.S. Provisional Patent applications owned by him. In consideration for this Assignment, Eide will receive a 1% royalty on the gross sales revenues of any products incorporating elements of the assigned technology for the lifetime of any patents resulting from the Provisional Patent Applications. This Assignment was executed in February 1998. The Company entered into a sale and licensing of intellectual property rights related to the EFS to Advanced Technology Products, LLC ("ATPL"), a related party which funded early development of this technology for which the Company's Chief Technical Officer serves as Managing Member. In September 1998, the Company assigned the rights and royalty obligations of the ATPL license to Imagek. Concurrent with this assignment, ATPL reduced its royalty entitlements under the license in consideration of the issuance of 1,221,875 shares of Imagek common stock. ATPL retains a royalty entitlement of 2% of the first $30 million of EFS sales, declining thereafter as a function of sales volume. Environmental Matters - --------------------- The Company believes that it is substantially in compliance with all regulations concerning the discharge of materials into the environment, and such regulations have not had a material effect on the capital expenditures or operations of the Company. Employees - --------- As of September 27, 1998, the Company, including its consolidated subsidiaries, had 68 full-time employees and 10 consultants. Of the full-time employees, 46 were engaged in engineering, production and technical support, 4 in sales and marketing and 18 in finance and administration. None of the Company's employees is represented by a labor union and the Company has experienced no work stoppages due to labor problems. The Company considers its employee relations to be excellent. The Year 2000 - ------------- The year 2000 issue is the result of computer programs using two digits, rather than four to define the applicable year. Programs that have time-sensitive software may recognize a date using "00" as the calendar year 1900 rather than the calendar year 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company views the year 2000 problem as an important business issue that could affect its business, as well as that of its suppliers and customers. Until the last several years, the Company's business has primarily been R&D, and its more recent business activities have not involved the shipment of products or components with embedded controllers that might be affected by the Year 2000 problem. However, Irvine Sensors' customers may have integrated the Company's devices into higher level products or systems affected by the Year 2000 problem, and, to the extent that its customers' business may be disrupted, the Company's business and that of its subsidiaries is also subject to potential disruptions from such a cause. In addition, the Company does utilize a number of computerized information systems to accurately process date-sensitive information across its operation, and any of these programs or computer systems are potential sources of year 2000 system failures. Irvine Sensors is working to identify and resolve such potential impacts on the Company's computerized systems. The Company has been advised by its vendors that their systems will be compliant with year 2000 issues in a timely manner. Finally, the Company's general business operations could be adversely impacted were there to be material interruptions either in the country's banking or financial systems or the procurement activities of its customers. Irvine Sensors has not completed its assessment of the full scope of these risks and the actions necessary to address them, but the Company currently believes that costs of addressing these issues will not have a material adverse impact on the Company's financial position. Nevertheless, if Irvine Sensors and third parties upon which it relies are unable to address this issue in a timely manner, it could result in a material financial risk to the Company. In order to mitigate the various risks associated with the Year 2000 problem, Irvine Sensors is working with its suppliers and customers, including the disclosure and exchange of relevant information, to proactively manage the calendar transition. Factors that may affect Future Results - -------------------------------------- The future operating results of the Company are highly uncertain, and the following factors should be carefully reviewed in addition to the other information contained in this annual report on Form 10-K and in other public disclosures of the Company. Shift in Business Focus. Since commencing operations, ISC has developed technology, principally under government research contracts, for various defense-based applications. Since 1992, ISC has been implementing a fundamental shift in its business, broadening its focus to include commercial exploitation of its technology. This shift has been manifested by the purchase and later shut down of the IBM cubing line, the "carve-out" of the Novalog, MSI and Imagek 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 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 present 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. 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. 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 ICS'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 41 U.S. patents and 9 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 which 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 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 or its subsidiaries presently maintain "key man" insurance on any key employees. ISC believes that, as its activities and those of its subsidiaries increase and change in character, additional, experienced personnel will be required to implement the business plans of ISC and its subsidiaries. Competition for such personnel is intense and there is no assurance that they will be available when required, or that ISC or its subsidiaries will have the ability to attract them. The above factors are not intended to be inclusive. Failure to satisfactorily achieve any of the Company's objectives or avoid any of the above or other risks would likely have a material adverse effect on the Company's business and results of operations. Item 2. Properties The following table sets forth information with respect to the Company's facilities:
Location Square Feet Lease Expiration ---------------------- ----------- ---------------- ATD Costa Mesa, California 18,973 September 2001 MSI Costa Mesa, California 4,500 September 2001 Novalog Costa Mesa, California 4,100 April 1999 All Other Costa Mesa, California 6,400 September 2001 ------ Total 33,973
The facilities used by ATD include laboratories containing clean rooms for operations requiring a working environment with reduced atmospheric particles. The Company believes that its facilities are adequate for their respective operations, and that the facilities of the Company are maintained in good repair. The Company plans to consolidate Novalog with its other facilities upon the expiration of Novalog's lease. Item 3. Legal Proceedings. None. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The following table sets forth the range of representative high and low bid prices of the Company's Common Stock (NASDAQ SmallCap Market symbol: IRSN) in the over-the-counter market for the periods indicated, as furnished by NASD, Inc. These prices represent prices among dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions. The Common Stock is also listed on the Boston Stock Exchange under the symbol "ISC."
Common Stock Bid Prices High Low -------- -------- Fiscal Year Ended September 27, 1998: First Quarter $1 1/32 $1 Second Quarter $2 21/32 $2 19/32 Third Quarter $2 1/32 $2 Fourth Quarter $2 29/32 $1 11/32 Fiscal Year Ended September 28, 1997 First Quarter $1 1/2 $0 27/32 Second Quarter $1 9/16 $1 Third Quarter $1 5/32 $0 31/32 Fourth Quarter $1 9/16 $1 7/32
On January 7, 1999, the closing bid and ask prices for the Company's Common Stock were $1 13/32 and $1 7/16 respectively. On January 7, 1999, there were approximately 859 stockholders of record and approximately 9,300 beneficial holders based on information provided by the Company's transfer agent. The Company has not paid cash dividends on any class of its stock since its incorporation. Under Delaware law there are certain restrictions which limit the Company's ability to pay cash dividends. Item 6. Selected Financial Data. The following table summarizes certain selected consolidated financial data and is qualified by the more detailed Consolidated Financial Statements incorporated herein by reference (see Item 8, below):
FISCAL YEAR ENDED ------------------------------------------------------------------------------ September 27, September 28, September 29, October 1, October 2, 1998 1997 1996 1995 1994 -------------- -------------- -------------- ------------ ------------ Consolidated Statement of Operations Data: - ------------------------------------------ Total revenues $ 9,314,500 $ 13,693,200 $ 12,024,200 $ 8,041,400 $ 5,139,400 Loss from operations (5,798,200) (14,809,200) (11,154,700) (3,071,500) (2,629,500) Net loss (4,243,500) (14,875,600) (15,914,700) (4,137,500) (2,463,900) Basic and diluted net loss per common and common equivalent share $ (0.19) $ (0.73) $ (0.94) $ (0.28) $ (0.18) Weighted average number of shares outstanding 24,597,700 20,475,100 16,874,300 14,966,500 14,141,500 Shares used in computing net loss per share 24,597,700 20,475,100 16,874,300 14,966,500 14,141,500
Loss per common and common equivalent shares includes, where applicable, cumulative and imputed dividends on Preferred Stock which have not been declared or paid.
September 27, September 28, September 29, October 1, October 2, 1998 1997 1996 1995 1994 ------------- -------------- ------------- ----------- ----------- Consolidated Balance Sheet Data: - -------------------------------- Current assets $4,802,700 $ 6,637,200 $ 9,648,200 $ 9,927,500 $ 6,795,500 Current liabilities $2,296,000 $ 7,395,600 $ 5,787,100 $ 3,545,400 $ 1,355,400 Working capital $2,506,700 $ (758,400) $ 3,861,100 $ 6,382,100 $ 5,440,100 Total assets $7,064,700 $ 9,449,300 $21,742,200 $15,609,200 $10,355,400 Long-term debt $ 933,700 $ 1,207,000 $ 3,165,600 $ 201,200 $ 81,100 Shareholders' equity (deficit) $2,347,000 $(2,939,900) $ 8,312,700 $ 9,494,100 $ 8,800,400
Item 7. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operation. --------------------- The information required by Item 7 of this report is set forth on pages 2 through 4 of the Company's 1998 Annual Report to Stockholders and is incorporated by reference in this Annual Report on Form 10-K. Item 7a. Quantitative and Qualitative Disclosures about Market Risk. ----------------------------------------------------------- None Item 8. Financial Statements and Supplementary Data. -------------------------------------------- The financial statements, together with the reports thereon appearing on pages 5 through 18 of the Company's 1998 Annual Report to Stockholders are incorporated by reference to this Annual Report on Form 10-K. With the exception of the aforementioned information and the information incorporated in Item 7, the 1998 Annual Report to Stockholders is not deemed to be filed as part of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. --------------------- Change in certifying accountant previously reported on the Company's Form 8-K filed October 2, 1998. PART III -------- The following items included in the Company's Definitive Proxy Statement dated January 25, 1999 to be used in connection with the Company's Annual Meeting of Stockholders to be held on February 26, 1999 are incorporated herein by reference:
Pages in Proxy -------------- Item 10. Directors and Executive Officers of the Registrant. 2-5 Item 11. Executive Compensation. 7-10 Item 12. Security Ownership of Certain Beneficial Owners and Management. 7-8 Item 13. Certain Relationships and Related Transactions. 15
PART IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements Pages in Annual Report* -------------- Consolidated Balance Sheets 5 Consolidated Statements of Operations 6 Consolidated Statement of Shareholders' Equity 7 Consolidated Statements of Cash Flows 8 Notes to Consolidated Financial Statements 9-19 Reports of Independent Certified Public Accountants 19-20 * Incorporated by reference from the indicated pages of the 1998 Annual Report to Stockholders. 2. Financial Statement Schedules: Reports of Independent Certified Public Accountants on Financial Statements Schedules for the fiscal years ended September 27, 1998 and September 28, 1997, and September 29, 1996. Schedule II - Valuation and Qualifying Accounts Schedule III - Amounts Due From Directors and Officers. All other schedules have been omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto which have been incorporated herein by reference. 3. Exhibits - The following is a list of the exhibits encompassed in this report: Exhibit Number Exhibit Description - ------ ------------------- 3.1 Certificate of Incorporation, as amended to date.(8) 3.2 By-Laws, as amended to date.(14) 4.1 Specimen Common Stock certificate. (8) 10.2 Lease Agreements for the premises at 3001 Redhill Avenue, Building III, Costa Mesa, California. (11) 10.3 Employee Stock Bonus Plan and Trust Agreement dated June 29, 1982 effective December 31, 1982 (3) Amendment dated December 14, 1982 (4) 10.4 Amendment to Employee Stock Bonus Plan and Trust Agreement dated September 25, 1990. (8) 10.5 Master Trust Agreement for Employee Deferred Benefit Plans dated August 22, 1990. (5) 10.6 Agreement with R&D Leasing, Ltd. and Note Payable dated June 23, 1989. (6) 10.7 License Agreement with R&D Leasing, Ltd. dated October 20, 1989.(6) 10.8 Agreement with R&D Leasing, Ltd. dated October 1, 1990. (7) 10.9 Contract between the Company and U.S. Army Strategic Defense Command dated September 28, 1990. (7) 10.10 1991 Stock Option Plan, as adopted by the Board of Directors December 9, 1991 (8) 10.11 Form of Stock Option Agreement for 1991 Stock Option Plan. (9) 10.12 Contract between the Company and Office of Naval Research dated July 8, 1993. (10) 10.13 Amendment to Employee Stock Bonus Plan and Trust agreement dated October 4, 1993. (12) 10.15 Contract between the Company and Naval Air Warfare Center dated March 31, 1995. (12) 10.16 License Agreement with Unitrode Integrated Circuits Corporation dated May 30, 1995. (12) 10.22 Contract between the Company and NASA Management Office - JPL dated March 12, 1996 (14) 10.23 Contract between the Company and Office of Naval Research dated July 19, 1996 (14) 10.24 Contract between the Company and Wright-Patterson Air Force Base dated August 12, 1996 (14) 10.25 Purchase Order from Loral Federal Systems Co. dated April 26, 1996 (14) 13 Portions of Registrant's Annual Report to Stockholders for the fiscal year ended September 27, 1998. 21 Subsidiaries of the Registrant 23.1 Consent of Grant Thornton LLP, Independent Accountants 23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants 24 Consent of Thomas J. Plante, Esq., Patent Counsel 27 Financial Data Schedule. (1) Incorporated by reference to Part II of Registrant's Registration Statement on Form S-18 filed with the Commission's Los Angeles Regional Office on December 23, 1981 (Registration No. 2-75512-LA) (the "S-18 Registration Statement"). (2) Incorporated by reference to Part II of Pre-effective Amendment No. 1 to the S-18 Registration Statement filed with the Commission's Los Angeles Regional Office on February 10, 1982; 1987 amendment filed by amendment to Form 10-K for the fiscal year ended September 27, 1987. (3) Incorporated by reference to Part II of Pre-effective Amendment No. 3 to the S-18 Registration Statement filed with the Commission's Los Angeles Regional Office on May 27, 1982. (4) Incorporated by reference to Part II of Registrant's Registration Statement on Form S-1 filed with the Commission on March 23, 1983 (Registration No. 2-82596) (the "S-1 Registration Statement"). (5) Incorporated by reference to Part II of Pre-effective Amendment No. 3 to the Form S-2 filed with the Commission on March 3, 1987 (Registration No. 33-10134). (6) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K for the fiscal year ended October 1, 1989. (7) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1990. (8) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K for the fiscal year ended September 29, 1991. (9) Incorporated by reference to Part II of Pre-effective Amendment No. 2 to the Form S-2 filed with the Commission on July 9, 1992 (Registration No. 33-47977). (10) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K for the fiscal year ended October 3, 1993. (11) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K for the fiscal year ended October 2, 1994. (12) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K/A for the fiscal year ended October 1, 1995. (13) Incorporated by reference to Registrant's Form 8-K dated April 19, 1996. (14) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K/A for the fiscal year ended September 28, 1996. (b) Reports on Form 8-K: ------------------------ No report on Form 8-K was filed by the Company with respect to the quarter ended September 27, 1998. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IRVINE SENSORS CORPORATION -------------------------- By: /s/ James Alexiou ------------------------ James Alexiou Chairman of the Board Date: January 8, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ James Evert /s/ Walter E. Garrigan - ----------------------------- --------------------------------- James Evert Walter E. Garrigan, Director Chief Executive Officer Date: January 8, 1999 (Principal Executive Officer) Date: January 8, 1999 /s/ John C. Carson /s/ John J. Stuart, Jr. - ----------------------------- -------------------------------- John C. Carson, Director John J. Stuart, Jr. Date: January 8, 1999 Chief Financial Officer (Principal Financial and Accounting Officer) Date: January 8, 1999 /s/ Joanne S. Carson /s/ Frank P. Ragano - ----------------------------- -------------------------------- Joanne S. Carson, Director Frank P. Ragano, Director Date: January 8, 1999 Date: January 8, 1999 /s/ Marc Dumont /s/ Vincent F. Sollitto, Jr. - ----------------------------- -------------------------------- Marc Dumont, Director Vincent F. Sollitto, Jr., Director Date: January 8, 1999 Date: January 8, 1999 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- ON FINANCIAL STATEMENT SCHEDULES -------------------------------- To the Board of Directors of Irvine Sensors Corporation Our audit of the consolidated financial statements referred to in our report dated January 6, 1999 appearing on page 20 of the 1998 Annual Report to Shareholders of Irvine Sensors Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ GRANT THORNTON LLP Irvine, California January 6, 1999 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Irvine Sensors Corporation Our audits of the consolidated financial statements referred to in our report dated December 16, 1997 appearing on page 19 of the 1998 Annual Report to Shareholders of Irvine Sensors Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules for the years ended September 28, 1997 and September 29, 1996 listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP PRICE WATERHOUSE LLP Costa Mesa, California December 16, 1997 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ----------------------------------------------
Balance at Charged to Balance Beginning Costs and at End of Year Expenses Deductions of Year ---------- ---------- ---------- ---------- Year ended September 27, 1998: - ------------------------------ Allowance for doubtful accounts $ 10,000 $ - $ - $ 10,000 Inventory reserves 2,184,800 1,306,700 1,034,700 2,456,800 Year ended September 28, 1997: - ------------------------------ Allowance for doubtful accounts $ 10,000 $ - $ - $ 10,000 Inventory reserves 2,043,700 1,156,100 1,015,000 2,184,800 Year ended September 29, 1996: - ------------------------------ Allowance for doubtful accounts $ 10,000 $ - $ - $ 10,000 Inventory reserves 380,800 1,662,900 - 2,043,700
EX-13 2 PORTIONS OF REGISTRANT'S ANNUAL REPORT EXHIBIT 13 Irvine Sensors Corporation Financial Highlights
Fiscal Year Ended September 27, September 28, September 29, October 1, October 2, 1998 1997 1996 1995 1994 Revenues $ 9,314,500 $ 13,693,200 $ 12,024,200 $ 8,041,400 $ 5,139,400 Loss from operations $(5,798,200) $(14,809,200) $(11,154,700) $(3,071,500) $(2,629,500) Net loss $(4,243,500) $(14,875,600) $(15,914,700) $(4,137,500) $(2,463,900) Basic and diluted net loss per common and common equivalent share $ (0.19) $ (0.73) $ (0.94) $ (0.28) $ (0.18) Weighted average number of shares outstanding 24,597,700 20,475,100 16,874,300 14,966,500 14,141,500 Long-term debt $ 933,700 $ 1,207,000 $ 3,165,600 $ 201,200 $ 81,100 Convertible debt $ - $ 250,000 $ 3,400,000 $ 2,250,000 $ - Total assets $ 7,064,700 $ 9,449,300 $ 21,742,200 $15,609,200 $10,355,400
Price Range of Common Stock The following table sets forth the range of representative high and low bid prices of the Company's common stock in the over-the-counter market for the periods indicated, as furnished by The NasdaqStock Market. These prices represent prices among dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions:
Fiscal Year Ended September 27, 1998 September 28, 1997 High Low High Low Common Stock Bid Prices First Quarter $1 1/32 $1 $1 1/2 $0 27/32 Second Quarter $2 21/32 $2 19/32 $1 9/16 $1 Third Quarter $2 1/32 $2 $1 5/32 $0 31/32 Fourth Quarter $2 29/32 $1 11/32 $1 9/16 $1 7/32
On January 7, 1999, there were 859 stockholders of record and approximately 9,300 beneficial holders, based on information provided by the Company's transfer agent. The Company has not paid cash dividends on any class of its stock since its incorporation; under Delaware law there are certain restrictions which limit the Company's ability to pay cash dividends in the future. Irvine Sensors Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations FISCAL YEAR ENDED SEPTEMBER 27, 1998 vs. FISCAL YEAR ENDED SEPTEMBER 28, 1997 Revenues in fiscal 1998 of $9,314,500 decreased by $4,378,700 or 32 percent compared to fiscal 1997. The primary reason for this decrease is attributed to the closure of the Vermont facility. The decision to close the Vermont location was centered on lower revenue and the continued increased cost of operations. When considering corporate revenues generated by excluding the Vermont location, fiscal 1998 revenues of $9,314,500 increased by $2,709,800 or approximately 41 percent. Cost of contract revenues of $8,431,800 was 127 percent of contract revenues due primarily to a substantial increase in reserves for potentially unsaleable inventories. Cost of product sales of $2,247,000 or 98 percent of product sales includes the final shut-down costs related to the Vermont facility. By comparison, in fiscal 1997 cost of product sales were 150 percent of product sales. Management is continuing to address the high product costs and believes that gross margins will improve as sales increase and the effect of implemented cost reductions are realized. General and administrative expenses of $2,984,400 were reduced by $454,900 or 13 percent in relation to fiscal 1997. As a percentage of total revenues general and administrative expenses were 32 percent in fiscal 1998 compared to 25 percent in fiscal 1997, however, fiscal 1997 included revenues from the Vermont facility. Research and Development decreased by $7,100 or less than 1 percent in the year-to-year comparison. As a percentage of revenues R&D accounted for approximately 17 percent in fiscal 1998 compared to approximately 12 percent in fiscal 1997. The R&D expense in fiscal 1998 includes significant costs associated with Imagek's development of the electronic film product. The aggregate decrease of $7,356,300 in fiscal 1998 in cost of revenues, general and administrative expenses and R&D are the direct result of management's decision to streamline and control its expenses to fall in line with the reduced revenue from the Vermont plant closing. Interest expense declined by $177,400 in fiscal 1998, primarily attributable to settlement of the Company's bank debt. Interest income declined by $26,800 in fiscal 1998, primarily attributable to lower interest rates and the debt pay-off associated with the Vermont facility. The net loss of $4,243,500 in fiscal 1998 was $10,632,100, or 150 percent less than fiscal 1997. The Vermont plant closing in fiscal 1997 accounted for $5,873,400 or 55 percent of this reduced loss. FISCAL YEAR ENDED SEPTEMBER 28, 1997 vs. FISCAL YEAR ENDED SEPTEMBER 29, 1996 Revenues in fiscal 1997 of $13,693,200 showed an increase of $1,669,000 or 14 percent compared to fiscal 1996. This increase was primarily attributable to the Company's Advanced Technology Operations in Costa Mesa. In mid-fiscal year the Company announced the closing of its Vermont facilities due to the lower than required revenue base and high fixed cost of operations. In comparing revenues generated by excluding the Vermont operations, fiscal 1997 revenues were $6,604,700 compared to $5,460,300 in fiscal 1996, an increase of 21 percent. Cost of revenues of $17,573,100 in fiscal 1997 was $435,500 higher than in fiscal 1996; however, as a percentage of revenues, fiscal 1997 showed an improvement of 14 percentage points over fiscal 1996. Operations excluding Vermont recorded cost of revenues of $6,586,500 in fiscal 1997 compared to $6,757,800 in fiscal 1996, a reduction of $171,300 or three percentage points. In fiscal 1997, cost of revenues included a charge of $1,156,100 to increase the Company's inventory reserve for, first: Wide Word SRAM memory cubes the Company has been producing for future deliveries pursuant to an anticipated contract which had not yet materialized and, second: slower than anticipated sales of its Flash memory cubes. General and administrative expenses were reduced by $592,300 in fiscal 1997 compared to fiscal 1996, and research and development expenses were also reduced by $393,100 in fiscal 1997 compared to fiscal 1996. These combined reductions of $1,156,700 in cost of sales, general and administrative, and research and development reflect actual cost reductions accomplished in fiscal 1997 while management re-structured the Company to take advantage of new product opportunities and to expand the Company's traditional customer R&Dbase. With the decision to close the Vermont facilities, the Company incurred a loss of $5,873,400 in fiscal 1997 related to the sale of the surplus facilities and equipment. Interest income declined by $69,000 in fiscal 1997 primarily related to the Vermont facilities. The Company originally accounted for its convertible debentures in accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." However, the Securities and Exchange Commission (SEC) staff has indicated that convertible debt instruments which are convertible at a discount from market should be accounted for by treating the maximum discount as interest expense with an offset to paid-in capital. In November 1997, the Company was advised that past issuers of such securities have recently restated prior financial statements to comport with the SEC view. In conformance therewith, the Company recorded noncash interest expense of $4,396,700 with a like amount added to paid-in capital in the second quarter of fiscal 1996. Because of the offsetting nature of these entries, there is no effect on Shareholders' equity. Net loss of $14,875,600 in fiscal 1997 was $1,039,100 lower than the net loss reported for fiscal 1996. On a comparable basis, excluding plant closure costs in fiscal 1997, and noncash debenture interest in fiscal 1996, the adjusted net loss excluding the Vermont operations was $3,381,100 in fiscal 1997 compared to $5,520,500 in fiscal 1996 - an overall improvement of $2,139,400. Liquidity, Capital Resources and Impact of Changing Prices The primary uses of cash and cash equivalents during fiscal 1998 were to complete the winding down and exit from the Vermont facility, to retire the Company's bank debt, reductions in trade payables and funding of the Company's net loss, which also included R&D and start-up costs for its subsidiaries. As a result of equity financings in fiscal 1998, these uses were accomplished while improving the Company's working capital by $3,265,100. At September 27, 1998, the Company had consolidated cash and cash equivalents of $1,310,400, and subsequent to September 27, 1998, has obtained approximately $540,000 cash in additional equity financing. The Company anticipates that the existing working capital and its projected operating results will meet its cash requirements for the immediate future. Contracts with government agencies may be suspended or terminated by the government at any time, subject to certain conditions. Similar termination provisions are typically included in agreements with prime contractors. In 1983 the Company experienced such termination of one of its contracts. There is no assurance the Company will not experience suspensions or terminations in the future. Such termination, if material, could cause a disruption of the Company's revenue stream and could result in employee layoffs. At September 27, 1998, the Company's funded backlog was approximately $1,897,800 compared to $1,902,800 at September 28, 1997. In addition, existing contracts include a large amount of unfunded backlog which typically is funded when the previously funded amounts have been expended. Subsequent to fiscal year end the total backlog was $6,044,000 as of December 13, 1998. 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 and may place at risk the continuation of its long-term debt financing because of inability to achieve financial covenants. Accordingly, investors are advised to assess forward-looking statements contained herein with caution. Additional information on various risks and uncertainties potentially affecting the Company's results 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. Irvine Sensors Corporation Consolidated Balance Sheets
September 27, September 28, 1998 1997 Assets Current Assets: Cash and cash equivalents $ 1,310,400 $ 1,639,300 Accounts receivable, net of allowances of $10,000 in 1998 and 1997 1,766,100 1,237,700 Inventory 1,532,700 2,577,300 Other current assets 193,500 1,182,900 - ------------------------------------------------------------------------------------------------------- Total current assets 4,802,700 6,637,200 - ------------------------------------------------------------------------------------------------------- Equipment, furniture and fixtures, net 2,224,000 2,775,800 Other assets 38,000 36,300 - ------------------------------------------------------------------------------------------------------- $ 7,064,700 $ 9,449,300 ======================================================================================================= Liabilities and Shareholders' Equity (Deficit) Current Liabilities: Accounts payable $ 1,570,800 $ 4,370,800 Accrued expenses 622,400 684,700 Deferred revenue 50,000 106,100 Notes payable and current portion of long-term debt 52,800 2,234,000 - ------------------------------------------------------------------------------------------------------- Total current liabilities 2,296,000 7,395,600 - ------------------------------------------------------------------------------------------------------- Long-term debt 107,500 593,200 Deferred and subordinated royalties payable - affiliated company 826,200 613,800 Convertible subordinated debentures - 250,000 Preferred stock of consolidated subsidiary - 118,500 Minority interest in consolidated subsidiary 1,488,000 3,418,100 Commitments and Contingencies Shareholders' Equity (Deficit): Preferred stock, $0.01 par value, 500,000 shares authorized; 6,966 and 8,785 shares Series B Convertible Cumulative Preferred outstanding; aggregate liquidation preference of $198,500 50 50 3,964 and 4,974 shares Series C Convertible Cumulative Preferred outstanding; aggregate liquidation preference of $214,100 50 50 4,400 and none shares Series D Convertible Preferred outstanding; aggregate liquidation preference of $440,000 50 - Common stock, $0.01 par value, 40,000,000 shares authorized; 28,457,700 and 21,541,300 shares issued and outstanding 284,600 215,400 Common stock warrants; 162,000 and 340,000 issued and outstanding - - Paid-in capital 55,885,250 46,424,100 Accumulated deficit (53,823,000) (49,579,500) - ------------------------------------------------------------------------------------------------------- Total shareholders' equity (deficit) 2,347,000 (2,939,900) - ------------------------------------------------------------------------------------------------------- $ 7,064,700 $ 9,449,300 =======================================================================================================
See accompanying Notes to Consolidated Financial Statements. Irvine Sensors Corporation Consolidated Statements of Operations
Fiscal Year Ended September 27, September 28, September 29, 1998 1997 1996 Revenues: Contract research and development $ 6,624,700 $ 5,821,100 $ 3,614,300 Product sales 2,289,800 7,872,100 8,283,900 Other 400,000 - 126,000 - ------------------------------------------------------------------------------------------------------------- Total revenues 9,314,500 13,693,200 12,024,200 - ------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of contract revenues 8,431,800 5,737,800 4,694,400 Cost of product sales 2,247,000 11,835,300 12,443,200 General and administrative 2,984,400 3,439,300 4,031,600 Research and development 1,609,500 1,616,600 2,009,700 (Gain) loss related to plant closure (160,000) 5,873,400 - - ------------------------------------------------------------------------------------------------------------- 15,112,700 28,502,400 23,178,900 - ------------------------------------------------------------------------------------------------------------- Loss from operations (5,798,200) (14,809,200) (11,154,700) Interest expense (266,200) (443,600) (469,800) Interest income 12,500 39,300 108,300 Other 299,700 - - Noncash interest expense related to convertible debentures - - (4,396,700) - ------------------------------------------------------------------------------------------------------------- Loss before minority interest and provision for income taxes (5,752,200) (15,213,500) (15,912,900) Minority interest in loss of subsidiary 365,200 340,500 - Provision for taxes (2,600) (2,600) (1,800) - ------------------------------------------------------------------------------------------------------------- Loss before extraordinary item (5,389,600) (14,875,600) (15,914,700) Extraordinary gain from debt extinguishment 1,146,100 - - - ------------------------------------------------------------------------------------------------------------- Net loss $ (4,243,500) $ (14,875,600) $(15,914,700) ============================================================================================================= Basic and Diluted Net Loss Per Share: Loss before extraordinary item $ (0.24) $ (0.73) $ (0.94) Extraordinary gain 0.05 - - - ------------------------------------------------------------------------------------------------------------- Net loss $ (0.19) $ (0.73) $ (0.94) ============================================================================================================= Weighted average number of shares outstanding 24,597,700 20,475,100 16,874,300 - -------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. Irvine Sensors Corporation Consolidated Statement of Shareholders' Equity (Deficit)
Common Stock Common Stock Preferred Stock Shares Issued Warrants Issued Shares Issued Total Shareholders' -------------------- --------------- ---------------- Paid-in Accumulated Equity Number Amount Number Amount Number Amount Capital Deficit (Deficit) Balance at October 1, 1995 15,566,800 $155,700 126,900 $ - 15,013 $ 200 $ 28,127,400 $(18,789,200) $ 9,494,100 Stock options exercised 257,100 2,600 - - - - 209,100 - 211,700 Common stock issued to employee retirement plan 172,900 1,700 - - - - 685,700 - 687,400 Common stock warrants issued - - 222,000 - - - - - - Common stock warrants exercised 109,700 1,100 (109,700) - - - 293,400 - 294,500 Series B and Series C preferred stock converted to common stock 50,100 500 - - (1,002) (100) (400) - - Convertible debentures converted to common stock 2,553,400 25,500 - - - - 9,117,500 - 9,143,000 Net loss - - - - - - - (15,914,700) (15,914,700) Additional paid-in capital related to convertible debentures - - - - - - 4,396,700 - 4,396,700 - ------------------------------------------------------------------------------------------------------------------------------- Balance at September 29, 1996 18,710,000 187,100 239,200 - 14,011 100 42,829,400 (34,703,900) 8,312,700 Common stock issued to employee retirement plan 347,600 3,500 - - - - 442,000 - 445,500 Convertible debentures converted to common stock 2,441,400 24,400 - - - - 3,125,600 - 3,150,000 Series B and Series C preferred stock converted to common stock 12,600 100 - - (252) - (100) - - Sale of common stock 22,200 200 - - - - 19,800 - 20,000 Common stock bonus issued 7,500 100 - - - - 7,400 - 7,500 Common stock warrants issued - - 118,000 - - - - - - Common stock warrants expired - - (17,200) - - - - - - Net loss - - - - - - - (14,875,600) (14,875,600) - ------------------------------------------------------------------------------------------------------------------------------- Balance at September 28, 1997 21,541,300 215,400 340,000 - 13,759 100 46,424,100 (49,579,500) (2,939,900) Common stock issued to employee retirement plan 333,300 3,400 - - - - 496,600 - 500,000 Convertible debentures converted to common stock 100,000 1,000 - - - - 249,000 - 250,000 Series B and Series C preferred stock converted to common stock 140,900 1,400 - - (2,829) - (1,400) - - Common stock issued to retire liabilities 487,800 4,900 - - - - 753,200 - 758,100 Sale of common stock and common stock units 2,091,700 20,900 - - - - 3,712,900 - 3,733,800 Stock options exercised 8,200 100 - - - - (100) - - Common stock warrants issued - - 116,200 - - - 303,900 - 303,900 Common stock warrants exercised 294,200 2,900 (294,200) - - - 274,100 - 277,000 Series D preferred units sold - - 37,750 400 3,283,700 - 3,284,100 Series D preferred units converted 3,460,300 34,600 - - (33,350) (350) (34,250) - - Preferred stock of dissolved subsidiary - - - - - - 118,500 - 118,500 Capital contributed by ATPL - - - - - - 305,000 - 305,000 Net loss - - - - - - - (4,243,500) (4,243,500) - ------------------------------------------------------------------------------------------------------------------------------- Balance at September 27, 1998 28,457,700 $284,600 162,000 $ - 15,330 $ 150 $ 55,885,250 $(53,823,000) $ 2,347,000 ===============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. Irvine Sensors Corporation Consolidated Statements of Cash Flows
Fiscal Year Ended September 27, September 28, September 29, 1998 1997 1996 Cash flows from operating activities: Cash received from customers $ 8,786,100 $ 15,479,400 $ 11,388,300 Cash paid to suppliers and employees (12,753,600) (18,342,500) (19,008,200) Interest received 12,500 39,300 108,300 Interest paid (116,200) (443,600) (469,800) Income taxes paid (2,600) (2,600) (1,800) Net cash used in operating activities $ (4,073,800) $ (3,270,000) $ (7,983,200) Cash flows from investing activities: Capital facilities and equipment expenditure (390,800) (1,113,400) (8,525,200) Proceeds from refund on equipment purchase - 324,500 - Proceeds from sale of equipment 149,700 1,051,900 - Net cash provided by (used in) investing activities (241,100) 263,000 (8,525,200) Cash flows from financing activities: Principal payments under notes payable and capital lease obligations (2,336,900) (253,300) (217,100) Proceeds from issuance of long-term debt - - 3,013,200 Proceeds from issuance of convertible subordinate debentures - - 10,293,000 Minority interest in subsidiaries - 2,918,100 500,000 Proceeds from issuance of common and preferred stock and common stock warrants 5,063,100 27,500 506,200 Proceeds from stock sale by bank 954,800 - - Contributed capital by ATPL 305,000 - - Net cash provided by financing activities 3,986,000 2,692,300 14,095,300 Net decrease in cash and cash equivalents (328,900) (314,700) (2,413,100) Cash and cash equivalents at beginning of year 1,639,300 1,954,000 4,367,100 Cash and cash equivalents at end of year $ 1,310,400 $ 1,639,300 $ 1,954,000 Reconciliation of net loss to net cash used in operating activities: Net loss $ (4,243,500) $(14,875,600) $(15,914,700) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization $ 1,546,700 $ 2,994,500 $ 2,268,100 Minority interest in loss of subsidiary (365,200) - - (Gain) loss on sale of capital facilities and equipment (309,700) 5,873,400 - Extraordinary gain (1,146,100) - - Common stock issued to employee retirement plan 500,000 445,500 687,400 Stock issued to pay operating expenses (261,700) - - Noncash interest expense related to convertible debentures - - 4,396,700 (Increase) decrease in accounts receivable (528,400) 1,786,200 (635,900) (Increase) decrease in inventory 1,044,600 1,809,400 (1,455,800) (Increase) decrease in other current assets 989,400 (899,300) (42,100) (Increase) decrease in other assets (1,700) 151,000 (155,200) (Decrease) increase in accounts payable and accrued expenses (1,454,500) 1,921,600 1,159,900 Increase (decrease) in deferred revenue (56,100) (2,276,500) 1,017,600 Increase (decrease) in accrued rent - (458,300) 458,300 Increase in royalties accrued - affiliated company 212,400 258,100 232,500 Total adjustments 169,700 11,605,600 7,931,500 Net cash used in operating activities $ (4,073,800) $ (3,270,000) $ (7,983,200) Noncash investing and financing activities: Capitalized lease obligations $ 170,000 $ - $ 3,200 Conversion of debentures to common stock $ 250,000 $ 3,150,000 $ 10,450,000 Exchange of subsidiary stock $ 1,564,900 Paid in capital from dissolution of subsidiary $ 118,500 Common stock issued to pay bank debt $ 500,000 $ - $ - Conversion of preferred to common stock $ 34,600 $ - $ -
See accompanying Notes to Consolidated Financial Statements. Irvine Sensors Corporation Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies CONSOLIDATION The consolidated financial statements include the accounts of Irvine Sensors Corporation (the Company) and its subsidiaries, Novalog, Inc. ("Novalog"), MicroSensors, Inc. ("MSI"), 3D Microelectronics, Inc., 3D MicroSystems, Inc., and Imagek, Inc. ("Imagek"). Carson Alexiou Corporation ("CAC"), a former subsidiary of the Company was dissolved in the current fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. FISCAL YEAR The Company's fiscal year ends on the Sunday nearest September 30. Fiscal 1998 (52 weeks) ended on September 27, 1998, fiscal 1997 (52 weeks) ended on September 28, 1997, and fiscal 1996 (52 weeks) ended on September 29, 1996. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Company believes its estimates of inventory reserves and estimated costs to complete on contracts to be the most sensitive estimates impacting financial position and results of operations in the near term. REVENUES The Company's revenues were derived from shipments of functional memory stacks, shipments of the SIRComm(TM) infrared chip and the development and manufacture of prototype and sample products for its customers. The Company continues to contract to develop prototypes and provide research, development, design, testing and evaluation of complex detection and control defense systems. The Company's R&D contracts are usually cost plus fixed fee (best effort) or fixed price and revenues are recognized as costs are incurred and include applicable fees or profits primarily in the proportion that costs incurred bear to estimated final costs. Production orders for memory stacks and SIRComm chips are generally priced in accordance with the Company's established price list. The Novalog, MicroSensors and Imagek subsidiaries are product-oriented companies with sales primarily to OEM manufacturers and revenues are recorded when products are shipped. The Company provides for anticipated losses on contracts by a charge to income during the period in which they are first identified. Unbilled accounts receivable are stated at estimated realizable value. United States government contract costs, including indirect costs, are subject to audit and adjustment by negotiations between the Company and government representatives. Indirect contract costs have been agreed upon through fiscal 1996. Contract revenues have been recorded in amounts which are expected to be realized upon final settlement. Other revenues in fiscal 1998 were derived from the sale of intellectual property to ATPL. (See Note 7 - Related Party Transactions.) Other revenues in fiscal 1996 were derived from a licensing agreement with Unitrode to transfer technology required to produce the Company's SIRCommchip. (See Note 14 - Technology Licenses.) RESEARCH AND DEVELOPMENT COSTS A major portion of the Company's operations is comprised of customer-funded research and prototype development or related activities. The Company also incurs costs in research and development of new concepts in proprietary products; such costs are charged to expense as incurred. INVENTORY Inventory is valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) basis. Inventories are reviewed quarterly to determine saleability and obsolescence. A reserve is established for slow moving and obsolete items. EQUIPMENT, FURNITURE AND FIXTURES The Company capitalizes costs of additions to equipment, furniture and fixtures, together with major renewals and betterments. In addition, the Company capitalizes overhead for all in-house capital projects. Maintenance, repairs, and minor renewals and betterments are charged to expense. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. Depreciation of equipment, furniture and fixtures is provided over the estimated useful lives of the assets, primarily using the straight-line method. The useful lives are three to seven years. Leasehold improvements are amortized over the terms of the leases. INCOME TAXES Deferred tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period. BASIC AND DILUTED NET LOSS PER SHARE Net loss per share is calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which supersedes APB Opinion No. 15, "Earnings per Share." Net loss per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that options, warrants, and convertible preferred stock are included in the calculation of diluted earnings per share, except when their effect would be anti-dilutive. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130, which is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented, establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The implementation of SFAS No. 130 is not expected to have a material effect on the Company's results of operations. In June 1997,the FASBissued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131, which is effective for fiscal years beginning after December 15, 1997 and requires restatements of earlier periods presented, established standards for the way that a public enterprise reports information about key revenue-producing segments in the annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The implementation of SFAS No. 131 is not expected to have a material effect on the Company's current reporting. STATEMENT OF CASH FLOWS For purposes of the Consolidated Statement of Cash Flows, the Company considers all demand deposits and Certificates of Deposit with original maturities of 90 days or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts receivable and payable, other liabilities and debt approximate fair value. The fair value of royalties payable to affiliate is not determinable due to their related party nature. CONCENTRATION OF CREDIT RISK The Company has cash deposits at U.S. banks and financial institutions, which exceed federally insured limits at September 27, 1998. The Company is exposed to credit loss for amounts in excess of insured limits in the event of non- performance by the institution; however, the Company does not anticipate non- performance. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which establishes financial accounting and reporting standards for stock-based employee compensation. Under SFAS No. 123, companies are encouraged, but not required, to adopt a method of accounting for stock compensation awards based upon the estimated fair value at the date the options/awards are granted as determined through the use of a pricing model (the "Fair Value Method"). Companies continuing to account for such awards in accordance with the existing guidance of Accounting Principles Board Option No. 25, "Accounting for Stock Issued to Employees" (APB 25), have to disclose in the notes to their financial statements the pro forma impact on net income and net income per share had they utilized the Fair Value Method. This statement became effective for the Company in fiscal year 1997. The Company continues to account for stock compensation awards in accordance with APB 25, with the appropriate footnote disclosure required under SFAS 123. IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting For the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which establishes accounting standards for the impairment of long-lived assets to be reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, SFAS 121 requires that certain long-lived assets be reported at the lower of carrying amount or fair value less cost to sell. The Company adopted SFAS 121 in fiscal 1997. The adoption of SFAS 121 had no significant impact on its consolidated financial position or results of operations. Note 2 - Issuance of Common Stock and Preferred Stock During fiscal 1996, the Company issued 257,100 shares of common stock to seven employees, two of whom are officers and one officer-director, and three non- employee directors upon exercise of options granted under the Company's Stock Option Plans. Net proceeds of $211,700 were added to the Company's general funds. In conjunction with a fiscal 1995 private financing of $2.25 million of 8 percent convertible subordinated debentures (the "1995 Debentures"), the Company issued an additional $500,000 of 1995 Debentures in October 1995 (fiscal 1996) to institutional investors in Europe. The gross proceeds less expenses were added to the Company's general funds. During fiscal 1996, the Company, at the request of bondholders, converted the entire $2.75 million of outstanding 1995 Debentures at varying rates into 509,400 shares of the Company's common stock, which were subsequently registered and may be traded without restrictions. In a private financing during February and March 1996, the Company issued $11.1 million of 8 percent convertible subordinated debentures due in 1998 (the "1996 Debentures") to institutional and private investors in Canada and Europe. The 1996 Debentures were convertible into shares of common stock at varying rates which were contingent upon the closing bid prices of the common stock. The Company had the right to demand conversion of the 1996 Debentures at any time after March 1997. Interest was payable semiannually on January 31 and July 31 of each year. The gross proceeds less expenses were added to the Company's general funds. During fiscal 1997, the Company, at the request of bondholders, converted $3,150,000 of the outstanding 1996 Debentures at varying rates into 2,441,400 shares of the Company's common stock. With this conversion, all but $250,000 of the original issue of $11.1 million of the 1996 Debentures was retired. In May 1996, the Company had registered the resale of 2,997,000 shares of common stock which the Company then believed would be sufficient to cover the conversion of the entire $11.1 million series of 1996 Debentures and related warrants, which had been issued in February and March 1996. However, due to the decline in the price of the Company's common stock, the number of shares issued upon conversion of all the Debentures, exceeded the number of shares previously registered. In January 1998 the Company filed a registration statement which included the resale of 1,114,810 unregistered shares issued upon conversion of the 1996 Debentures. This registration was declared effective by the Securities and Exchange Commission in April 1998. In January 1998, the Board of Directors authorized a contribution to the Employee Stock Bonus Plan (the Company's ERISA-qualified Employee Retirement Plan). The amount represents an annual contribution for fiscal year 1998 and was made in 333,334 shares of the Company's common stock, which have been issued to the Plan. In fiscal 1998, the Company forced conversion of the remaining $250,000 of outstanding 8 percent Convertible Subordinated Debentures into 100,000 shares of the Company's common stock. The common shares underlying the convertible debentures were included in the Company's January 1998 registration statement. The Company began the sale of Series D Convertible Preferred Stock Units in a private placement to certain accredited investors in December 1997 and continued to accept subscriptions thereto through January 2, 1998, at which time, the Company sold an additional 24,750 Units. The Company issued an aggregate of 37,750 Units at a price of $100.00 per Unit and the net proceeds of $3,284,100 from the sale of these securities were added to the Company's general funds. The Series D Convertible Preferred Stock Units consist of one share of Convertible Preferred Stock, plus one five-year Warrant to purchase one share of common stock of Novalog, Inc., a subsidiary of the Company, and one five-year Warrant to purchase one share of common stock of Microsensors Inc., a wholly- owned subsidiary of the Company. Each share of Convertible Preferred Stock is convertible into common stock of the Company at the rate of 100 shares of Common for each share of Preferred D, subject to adjustment for stock splits, reverse stock splits and other similar recapitalization events. The Preferred D shares have no voting rights, except as required by law, and bear no dividends. (See Note 17 for calculation of beneficial conversion and imputed dividend resulting from issuance of Series D Convertible Preferred Stock.) The common shares underlying the Preferred D shares were included in the April 1998 registration statement. In connection with this private placement of 37,750 units, the Company granted to the placement agent a warrant to purchase up to 3,775 units of Series D Convertible Preferred Stock units at a price of $110 per unit which was 110 percent of the private placement price of the Units. The warrant is exercisable during the period beginning the earlier of one year from January 2, 1998 or the date of registration and expiring on January 2, 2003. Warrants to purchase 500 units were exercised in May 1998 and the proceeds of $55,000 were added to the Company's general funds. As of September 27, 1998, at the request of the holders thereof, a total of 33,350 shares of Series D Convertible Preferred Stock have been converted into 3,460,300 shares of common stock. In January 1998, the Company sold 125,000 Common Stock Units to investors in a private placement. Each Common Stock Unit consists of one share of common stock of the Company, plus one five-year Warrant to purchase one share of common stock of Novalog, Inc., a subsidiary of the Company, and one five-year Warrant to purchase one share of common stock of Microsensors, Inc., a wholly-owned subsidiary of the Company. The proceeds of $125,000 from these transactions were added to the Company's general funds. In January 1998, a warrant holder exercised outstanding warrants to purchase 222,000 shares of common stock at a price of $1.00 per share. The proceeds from this warrant exercise have been added to the Company's general funds. In fiscal 1998, distribution of vested benefits was made from the Company's Employee Retirement Plan to former employees. Subsequently, 1,819 shares of Series B and 1,010 shares of Series C Convertible Preferred stock were surrendered for conversion into 140,900 shares of common stock. The converted Preferred shares have been retired. In April 1998, the Company issued, in a private placement to accredited investors, 700,000 unregistered shares of the Company's common stock. The net proceeds of $980,000 from this private placement have been added to the Company's general funds. In August 1998, holders of 1,128,000 shares of common stock of Novalog exercised warrants to exchange these shares for 905,000 unregistered shares of common stock of the Company resulting in an increase of $1,564,900 in total shareholder's equity and a corresponding decrease in minority interest in consolidated subsidiary. In connection with settlement of bank debt, the Company issued 550,000 unregistered shares of common stock in December 1997. (See Note 9 - Notes Payable.) Note 3 - Common Stock Warrants In July 1992, the Company consummated a public offering of 750,000 shares of common stock and granted the Underwriter an option to purchase up to 112,500 additional shares of common stock to cover over-allotments. In connection with this offering, the Company granted to the Underwriter warrants to purchase up to 75,000 shares of common stock at a price of $5.10 per share, which was 120 percent of the initial public offering price of the shares. The warrants were exercisable during the four-year period beginning July 9, 1993, and expiring July 8, 1997. During fiscal 1995, 57,800 of these warrants were exercised. The remaining 17,200 were not exercised and expired on July 8, 1997. In July 1993, the Company granted warrants to a consultant to purchase 30,000 unregistered shares of common stock at $8.875 per share, in connection with services rendered. The shares underlying these warrants were registered in fiscal 1995 and the price reduced to $4.50 per share. The warrants were exercised in fiscal 1996. In connection with the August 1995 sale of approximately 382,100 shares of common stock and the issuance of approximately $2.75 million of the 1995 Debentures, the Company granted to the foreign investment banker warrants to purchase up to approximately 79,700 shares of common stock at prices ranging from $7.47 to $8.33 per share. In fiscal 1996, the price was reduced to $2.00 per share and the warrants were exercised. In connection with the sale of $11.1 million of the 1996 Debentures in February and March 1996, the Company granted warrants to the foreign investment banker to purchase up to 222,000 shares of common stock at a price to be determined based on the average conversion prices of the 1996 Debentures. The warrants were exercised in fiscal 1998. In fiscal 1997 the Company granted warrants, the value of which it believes to be not material, to four consultants in varying amounts to purchase up to 118,000 shares of unregistered common stock at prices ranging from $0.9375 to $1.50. In fiscal 1998 the Company granted warrants, the value of which it believes to be not material, to five former employees in varying amounts to purchase up to 44,000 shares of unregistered common stock at a price of $1.00. As of September 27, 1998, there are a total of 162,000 warrants outstanding of which 89,000 expire in the year 2000 and 73,000 expire in the year 2002. Note 4 - Series B and Series C Convertible Preferred Stocks The Series B and Series C Convertible Cumulative Preferred Stocks, which were originally issued to the Company's Employee Retirement Plan, each bear a 10 percent cumulative annual dividend, which under Delaware law may generally be paid only out of (i) retained earnings or (ii) net profit in the current or preceding fiscal year. To the extent that the dividends are not declared and paid in any fiscal year, the obligation carries over to the next fiscal year. These shares of Series B and Series C Convertible Cumulative Preferred Stocks are not redeemable, carry a liquidation preference over the common stock of $15.00 and $30.00, respectively, per share and are convertible, at the option of the holder, into 50 shares of common stock for each share of Series B and Series C Convertible Cumulative Preferred Stock, respectively. Distributions of vested benefits made from the Plan to former employees and the subsequent surrender and conversion into shares of common stock are as follows: Preferred Stock Common Series B Series C Stock - ------------------------------------------------------ Distribution dates: Fiscal 1996 522 480 50,100 Fiscal 1997 48 204 12,600 Fiscal 1998 1,819 1,010 140,900 2,389 1,694 203,600 ====================================================== The shares of Preferred Series B and Series C tendered for conversion have been retired. Undeclared dividends of $94,000 and $95,100 on the remaining outstanding Preferred Series B and Series C, respectively, will be carried forward to fiscal 1999. Note 5 - Preferred Stock of Consolidated Subsidiary The preferred stock outstanding represents an ownership interest in Carson Alexion Corporation ("CAC"), a former subsidiary of the Company, by former employees and an Employee Stock Bonus Plan which CAC had formed. The preferred stock had a $100 par value and there were 1,400 shares authorized and 1,185 shares issued and outstanding at September 28, 1997. There were no conversion rights or liquidation preferences of this preferred stock which extended to the common stock of the Company. CAC has been inactive since 1985 and in August 1998, CAC was dissolved by the Massachusetts Commissioner of Corporations. The outstanding preferred shares were retired and the outstanding balance was added to the paid-in capital. Note 6 - Convertible Subordinated Debentures In July, August and October 1995, the Company issued in a private financing $2.75 million of 8 percent convertible subordinated debentures (the "1995 Debentures") due in 1997 to institutional and private investors in Canada and Europe. The 1995 Debentures were convertible into shares of common stock at $6.50 per share, subject to adjustment under certain conditions. The Company had the right to demand conversion of the 1995 Debentures at any time after July 31, 1996. Interest was payable semi-annually on January 31 and July 31 of each year. The 1995 Debentures were subordinated to prior payment of bank indebtedness of the Company. The gross proceeds less expenses were added to the Company's general funds. The Company registered the shares underlying the 1995 Debentures and in fiscal 1996 the 1995 Debentures were converted into 509,400 shares of the Company's common stock. (See Note 2.) In a private financing during February and March 1996, the Company issued $11.1 million of 8 percent convertible subordinated debentures due in 1998 (the "1996 Debentures") to institutional and private investors in Canada and Europe. The 1996 Debentures were convertible into shares of common stock at varying rates which were contingent upon the closing bid prices of the common stock. The Company had the right to demand conversion of the 1996 Debentures at any time after March 1997. Interest was payable semiannually on January 31 and July 31 of each year. The 1996 Debentures were subordinated to prior payment of bank indebtedness of the Company. The gross proceeds less expenses were added to the Company's general funds. (See Note 2). The Company originally accounted for its convertible debentures in accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." However, the Securities and Exchange Commission (SEC) staff has indicated that convertible debt instruments which are convertible at a discount from market should be accounted for by treating the maximum discount as interest expense with an offset to paid-in capital. In November 1997, the Company was advised that past issuers of such securities had restated prior financial statements to comport with the SEC view. In conformance therewith, the Company recognized noncash interest expense of $4,396,700 with a like amount added to paid-in capital in the second quarter of fiscal 1996. Because of the offsetting nature of these entries, there was no effect on Shareholders' equity. During fiscal 1997, the Company, at the request of bondholders, converted $3,150,000 of the outstanding 1996 Debentures at varying rates into 2,441,400 shares of the Company's common stock. With this conversion, all but $250,000 of the original issue of $11.1 million of the 1996 Debentures was retired. In fiscal 1998, the Company forced the conversion of these remaining 1996 Debentures into 100,000 shares of common stock. In May 1996, the Company had registered the resale of 2,997,000 shares of common stock which the Company then believed would be sufficient to cover the conversion of the entire $11.1 million series of 1996 Debentures and related warrants, which had been issued in February and March 1996. However, due to the decline in the price of the Company's common stock, the number of shares issued upon conversion of all the Debentures, exceeded the number of shares previously registered. In January 1998 the Company filed a registration statement which included the resale of 1,114,810 unregistered shares issued upon conversion of the 1996 Debentures. This registration was declared effective by the Securities and Exchange Commission in April 1998. 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 has accrued royalty obligations to RDL at the rate of 3.5% of all Company sales of chip stacks using the licensed technology. In addition, RDL is entitled to receive an amount equal to 7% of all royalties earned by 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 until October 1999. If RDL exercises its option in whole or in part, title to RDL's technology would transfer to the Company and all further royalty obligations would cease. If the option expires unexercised, the subordination provisions would terminate and the accrued royalties would be due and payable in the same manner as any other corporate obligation. As of September 27, 1998, the Company had accrued $826,200 in deferred royalties pursuant to this agreement. Due to the RDL subordination, royalties accrued, but none were paid by the Company during fiscal years 1998, 1997 and 1996. The company has entered into an Assignment of Patent and Intellectual Rights (the "Assignment") with F.L. Eide ("Eide"), a Vice-President of the Company. As part of his employment agreement, Eide has assigned to the Company all rights and interests to five (5) U.S. Provisional Patent applications owned by him.In consideration for this Assignment, Eide will receive a 1 percent royalty on the gross sales revenues of any products incorporating elements of the assigned technology for the lifetime of any patents resulting from the Provisional Patent Applications. This Assignment was executed in February 1998. The Company entered into a sale and licensing of intellectual property rights related to the Company's Electronic Film System(TM) ("EFS(TM)") to Advanced Technology Products, LLC ("ATPL"), which funded early development of this technology and for which the Company's Chief Technical Officer, John C. Carson, serves as Managing Member. Imagek is the successor to the royalty obligations under this license. In September 1998, an agreement was consummated with ATPL under which the royalty obligation was reduced in consideration of the issuance of 1,221,875 shares of Imagek common stock. Note 8 - Composition of Certain Financial Statement Captions September 27, September 28, 1998 1997 - --------------------------------------------------------------- Accounts receivable: U.S. government $1,235,300 $1,145,100 Other customers 540,800 92,600 $1,776,100 $1,237,700 =============================================================== Accounts receivable includes unbilled amounts of $886,200 and $600,900 at September 27, 1998, and September 28, 1997, respectively. Unbilled amounts represent contract revenues for which billings have not been presented to customers at year-end. These amounts are billed in accordance with applicable contract terms, usually within 30 days. Accounts receivable also includes billed retention of $73,900 and $28,700 at September 27, 1998, and September 28, 1997, respectively. These amounts are normally collected upon final audit of costs by the U.S. government. September 27, September 28, 1998 1997 - -------------------------------------------------- Inventory: Raw materials $ 0 $ 185,400 Work in process 1,435,400 2,382,900 Finished goods 97,300 9,000 $1,532,700 $2,577,300 ================================================== Title to all inventories remains with the Company. Inventoried materials and costs relate to work in process on customers' orders and on the Company's generic module parts and memory stacks which the Company anticipates it will sell to customers including potential R&D contracts. Work in process includes amounts which may be sold as products or under contracts. Such inventoried costs are stated generally at the total of the direct production costs including overhead. Inventory valuations do not include general and administrative expenses. Inventories are reviewed quarterly to determine salability and obsolescence. A reserve is established for slow moving and obsolete items. September 27, September 28, 1998 1997 - --------------------------------------------------------------------- Equipment, furniture and fixtures: Engineering and production equipment $7,553,700 $7,252,200 Furniture and fixtures 409,500 330,700 Computer software programs 741,100 598,100 Leasehold improvements 777,000 765,400 - --------------------------------------------------------------------- 9,481,300 8,946,400 Less accumulated depreciation and amortization 7,257,300 6,170,600 $2,224,000 $2,775,800 ===================================================================== September 27, September 28, 1998 1997 - ---------------------------------------------------------------------- Accrued expenses: Salaries and wages $211,000 $ 267,800 Vacation 235,700 217,700 Payroll taxes 14,700 58,300 Accounting fees 50,000 47,600 Other accrued expenses 111,000 93,300 $622,400 $ 684,700 ====================================================================== Note 9 - Notes Payable Current and long-term debt consists of the following: September 27, September 28, 1998 1997 - ---------------------------------------------------------------------- Note payable to bank bearing interest at prime (8.5 percent at September 28, 1997) plus 1.5 percent due in monthly installments of $63,400 beginning May 1997 $ - $2,819,200 Capitalized lease obligations maturing at various dates through 2000 160,300 8,000 Less current portion 52,800 2,234,000 $107,500 $ 593,200 ====================================================================== In December 1997, the Company executed a Forbearance Agreement with its lending bank whereby the Company agreed to accelerate repayment of the Note Payable to the bank. The current portion of the debt was reduced by $1,026,900 which was received from the sale of the assets in October 1997. The Company also agreed, among other requirements, to reduce the principal balance by payments of $250,000 in each of the calendar quarters ending December 1997 and March 1998 and thereafter to reduce the remaining balance by a minimum of $200,000 quarterly. Execution of the Forbearance Agreement also resulted in a waiver of the Company's then financial covenant defaults and an amendment to the loan agreement eliminating such financial covenants on a prospective basis. In connection therewith, the Company pledged as collateral one million shares of Novalog, Inc. common stock held by the Company. The Company also paid down $500,000 of the Note with 550,000 shares of its stock and under the terms of the agreement, dependent on the market price of the shares when sold, the Company would receive a refund if the proceeds from the sale exceeded $500,000. Subsequently, the Company was informed by the bank that it sold the 550,000 shares and that the proceeds exceeded $500,000. After applying the proceeds to the then remaining balance of the note the bank, through September 27, 1998, remitted $772,000 to the Company and advised the Company that additional proceeds of $183,000 were to be remitted to the Company. These additional funds have subsequently been received by the Company. The Company recorded the proceeds that exceeded $500,000 as paid-in capital. Note 10 - Income Taxes Deferred tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period. The tax effects of significant items comprising the Company's deferred tax calculation as of September 27, 1998 and September 28, 1997 are as follows: 1998 1997 ------------ ------------ Current deferred tax assets: Reserves not currently deductible $ 1,057,000 $ 709,700 Operating loss carrayforwards - 994,400 Long-term deferred tax assets: Operating loss carryforwards 16,763,000 15,909,200 Tax credit carryforwards 541,000 449,900 Capital loss carryforwards - 8,500 Valuation allowance (18,361,000) (18,026,700) Net deferred tax asset $ - $ - ============================================================================= The differences between the Company's effective income tax rate and the statutory U.S. federal income tax rate for the fiscal years September 27, 1998, and September 28, 1997, respectively, are as follows: The total valuation allowance changed $334,000 from September 28, 1997, to September 27, 1998. The provisions for income taxes for the fiscal years ended September 27, 1998, September 28, 1997, and September 29, 1996, consist of provisions for state income taxes of $2,600, $2,600 and $1,800, respectively. No provisions for federal income taxes have been made in these fiscal years due to the net operating losses. At September 27, 1998, the Company had net operating loss carryforwards of approximately $46,223,000 for financial reporting and federal income tax purposes expiring in varying amounts from fiscal year 1999 through fiscal year 2013, and $11,844,000 for California tax purposes expiring in varying amounts from fiscal year 1999 through fiscal year 2003, available to offset future federal and California taxable income. In addition, as of September 27, 1998, the Company had investment tax credits and qualified research credits of $286,000 and $255,000, respectively, expiring in varying amounts through fiscal year 2009 and available to offset future federal and California taxes. The ability of the Company to utilize the net operating loss and credit carryforwards may be restricted by certain provisions of the Internal Revenue Code. Note 11 - Operating Leases The Company leases certain facilities and equipment under cancelable and noncancelable lease obligations. Total rental expense for operating leases amounted to $559,000, $1,685,200 and $1,633,500 for the fiscal years ended September 27, 1998, September 28, 1997, and September 29, 1996, respectively. Minimum lease commitments existing at September 27, 1998, are approximately as follows: Fiscal years ending: 1999 $ 427,900 2000 397,100 2001 403,000 2002 1,300 - ---------------------------------------- Total minimum payments $1,229,300 ======================================== Note 12 - Stock Option Plans and Employee Retirement Plan In December 1991, the Board of Directors adopted the 1991 Stock Option Plan to replace 1981 Stock Option Plans, which had expired. This new Plan was approved by shareholders at the Company's Annual Meeting in February 1992. Under the 1991 Plan, options to purchase an aggregate of 675,000 shares of the Company's common stock may be granted to both key management employees and non-employee directors. Options granted may be either Incentive Stock Options or Nonstatutory Stock Options and the requirements for participation, exercise price and other terms are similar to the 1981 Plans. As of September 27, 1998, options to purchase 259,800 shares at prices ranging from $1.4375 (40,000 shares) to $7.75 (8,300 shares) were outstanding under the 1991 Plan, of which 46,800 were exercisable at September 27, 1998. In January 1995, the Board of Directors adopted the 1995 Stock Option Plan to replace the 1991 Plan, which was fully subscribed at the time. The 1995 Plan was approved by shareholders at the Company's Annual Meeting in February 1995. Under the 1995 Plan, options to purchase an aggregate of 700,000 shares of the Company's common stock may be granted to both key management employees and non- employee directors. In August 1997, the Board of Directors authorized an increase in the number of options to an aggregate of 1,650,000 shares, and this increase was ratified by shareholders at the Company's Annual Meeting in February 1998. Options granted may be either Incentive Stock Options or Nonstatutory Stock Options, and requirements for participation, exercise price and other terms are similar to the 1991 Plan. As of September 27, 1998, options to purchase 1,641,000 shares at prices ranging from $0.98 (580,000 shares) to $6.50 (10,000 shares) were outstanding under the 1995 Plan, of which 372,800 were exercisable at September 27, 1998. In November 1998, the Board of Directors approved a new plan, "The 1999 Stock Option Plan," subject to ratification by shareholders at the Company's Annual Meeting in February 1999. Under the 1999 Plan, options to purchase an aggregate of 1,000,000 shares of common stock may be granted to both key management employees and non-employee directors. Stock option activity is summarized as follows: Option Price Shares Per Share - ---------------------------------------------------------- 1991 Plan: - ---------- Options outstanding at October 1, 1995 571,300 1.3125 to $8.625 Exercised (314,100) 1.3125 to 4.09 Cancelled (19,000) 4.09 to 8.625 Expired (27,500) 1.3125 to 4.09 - ---------------------------------------------------------- Options outstanding at September 29, 1996 210,700 4.28 to 8.625 Granted 143,000 1.4375 to 2.3125 Cancelled (76,500) 6.00 to 7.6875 Expired (51,700) 4.28 to 8.6520 - ---------------------------------------------------------- Options outstanding at September 28, 1997 225,500 1.4375 to 7.75 Granted 120,000 1.50 to 2.4375 Exercised (8,300) 0.98 Cancelled (52,400) 1.50 to 7.50 Expired (25,000) 7.125 to 7.75 Options outstanding at September 27, 1998 259,800 0.98 to $7.50 ========================================================== 1995 Plan: - ---------- Options outstanding at October 1, 1995 228,500 6.00 to $6.50 Granted 343,500 5.0625 to 8.50 Cancelled (128,000) 6.00 to 6.50 - ---------------------------------------------------------- Options outstanding at September 29, 1996 444,000 5.0625 to 8.50 Granted 1,053,000 0.98 to 2.3125 Cancelled (371,900) 1.00 to 8.50 - ---------------------------------------------------------- Options outstanding at September 28, 1997 1,125,100 0.98 to 6.50 Granted 581,500 1.00 to 2.8750 Exercised (8,300) 0.98 Cancelled (57,300) 1.00 to 6.25 - ---------------------------------------------------------- Options outstanding at September 27, 1998 1,641,000 0.98 to $6.50 ========================================================== A summary of outstanding options exercisable under both the 1991 and 1995 Stock Option Plans is shown below.
Weighted average Range of Number remaining contractual Weighted average Number Weighted average exercise prices outstanding life (years) exercise price exercisable exercise price - --------------- ----------- --------------------- ---------------- ----------- ---------------- $ .98 - 1.98 1,771,734 3 $ 1.30 333,088 $ 1.15 2.31 - 2.88 39,000 3 2.62 4,333 2.31 5.00 - 6.25 72,500 1 6.08 47,998 6.08 6.50 - 7.50 17,500 3 1.56 17,500 6.93 --------- ------- 1,900,734 402,919
Pursuant to SFAS No. 123 "Accounting for Stock Based Compensation," the Company is required to disclose the effects on the net loss and per share data as if the Company had elected to use the fair value approach to account for all of its employee stock-based compensation plans. Had the compensation cost for the Company's Plans been determined using the fair value method, the compensation expense would have had the effects of increasing the Company's net loss for the years ended September 27, 1998, September 28, 1997, and September 29, 1996 to the pro forma amounts of $4,754,000, $15,041,000, and $16,255,700 respectively, with a corresponding pro forma loss per share of $0.19, $0.73, $0.96, respectively. These pro forma amounts were determined estimating the fair value of each option granted during fiscal 1996, fiscal 1997 and fiscal 1998 on its grant date, using the Black-Scholes option-pricing model. Assumptions of no dividend yield, a risk-free interest rate of 6 percent which approximates the Federal Reserve Board's rate for treasuries at the time granted, an expected life of three years, and volatility rates varying from 86.9 to 73.2 percent were applied to options granted during fiscal years 1998 and 1997, and 1996. The weighted average fair value at the grant date for the options granted during fiscal years 1998, 1997, and 1996 was $1.57, $0.75 and $3.47 per option, respectively. In fiscal 1982, the Company established an Employee Retirement Plan, which is effective for fiscal year 1982 and thereafter. The plan provides for annual contributions to the Company's Stock Bonus Trust (SBT) to be determined by the Board of Directors and which will not exceed 15 percent of total payroll. At the discretion of the Trustee, the SBT will purchase common stock at fair market value or other interest-bearing securities or investments for the accounts of individual employees who will gain a vested interest of 20 percent in their accounts after three years of service, and 20 percent each year of service thereafter, until fully vested after seven years of service. That portion of cash or stock held in an employee's account and not vested at termination of employment will be redistributed in accordance with a prearranged formula. Management believes that the contributions made by the Company to the SBT, to the extent they relate to government cost-plus-fixed-fee contracts, will be reimbursable by the U.S. government. In fiscal years 1996, 1997 and 1998 the Company's contributions to the SBT were 172,900, 347,600 and 333,300 shares of common stock, respectively, which had estimated market values of $687,400, $445,500 and $500,000 respectively. Note 13 - Revenues In fiscal 1998, contracts with all branches of the U.S. government accounted for 27 percent of the Company's revenues, and a second-tier government contract with a prime government contractor accounted for 27 percent. The remaining 46 percent of the Company's revenues were derived from non-government sources. Of the 27 percent related to the U.S. government agencies, the U.S. Army, the U.S. Air Force and the U.S. Navy accounted for 24 percent, 12 percent and 8 percent, respectively, with the remaining revenue of 56 percent being widely diversified among several other governmental agencies. Of the 46 percent applicable to non-governmental sources, three (3) customers accounted for 35 percent, 14 percent and 7 percent, respectively, of the total commercial revenues. In fiscal 1997, contracts with all branches of the U.S. government accounted for 43 percent of the Company's revenues, and the remaining 57 percent of the Company's revenues was derived from non-government sources. Of the 43 percent applicable to the U.S. government, there were three agencies of the government that accounted for 55 percent, 13 percent and 11 percent. Other government agencies accounted for the remaining 21 percent. Of the 57 percent applicable to non-government sources, two customers accounted for 49 percent and 39 percent of the revenues. In fiscal 1996, contracts with all branches of the U.S. government accounted for 31 percent of the Company's revenues, and the remaining 69 percent of the Company's revenues was derived from non-government sources. Of the 31 percent applicable to the U.S. government, there was one agency of the government that accounted for 16 percent. Other government agencies accounted for the remaining 15 percent. Of the 69 percent applicable to non- government sources, two customers accounted for 23 percent and 21 percent of the revenues. Note 14 - Technology Licenses In June 1992 the Company and International Business Machines (IBM) entered into an agreement to develop manufacturing technology required to commercially produce parts using the Company's technology for stacking integrated circuits. In June 1993, IBM and the Company jointly announced the opening of a pilot manufacturing line at an IBM facility. The agreement provided for the Company to receive royalties on stacked chip parts sold by IBM and will share equally with IBM any royalties received from the licensing of the jointly developed manufacturing technology. In April 1996, the Company reached an agreement with IBM wherein the Company acquired the operating line from IBM and leased the facilities. This agreement was terminated in fiscal 1997. In May 1995, the Company and Unitrode Corporation (Unitrode) entered into an agreement to transfer to Unitrode the technology required to produce the Company's wireless infrared communication integrated circuit (SIRComm). The Company will receive licensing and royalty payments for the technology transfer and on SIRComm products sold by Unitrode. Note 15 - Deferred Revenues The Company received prepayments from customers related to services and products which had not been delivered as of the balance sheet date. Revenues are recorded upon delivery of these services and products. Note 16 - Acquisition and Disposal of Equipment On April 19, 1996, the Company consummated an agreement for the acquisition and operation of the equipment comprising IBM's cubing line located at IBM's Essex Junction, Vermont facility. The cubing line was established by IBM to manufacture the stacked-chip assemblies required to commercialize the Company's proprietary chip-stacking technology under the joint development alliance that IBM and the Company entered into in 1992. According to the terms of the agreement, the Company acquired the equipment and clean room, which comprises the cubing line for a cash payment of approximately $6.5 million. In addition, the Company signed a facility lease agreement for the space required to operate the cubing line under the Company's management within the IBM facility through December 1998. The terms of the facility lease agreement include escalating rent payments, which have been straight lined for financial reporting purposes. The difference between the amount paid and the amount expensed during fiscal 1996 has been reported as accrued rent. The agreement was terminated in fiscal 1997 and the deferred rent balances were netted against rent expense. As part of the process to terminate the agreement with IBM, the Company disposed of the equipment acquired from IBM in April 1996 and other fixed assets purchased and/or constructed at the IBM facility. These assets with a net book value of $6,925,300 were sold for proceeds of $1,051,900, resulting in a loss on the disposal of $5,873,400. At September 28, 1997, $1,026,900 of those proceeds was still receivable and is included in Other current assets on the balance sheet. During October 1997, these proceeds were received by the Company's lender and applied against the principal of the Company's long-term debt. (See Note 9). In December 1997, the Company made a $490,000 cash payment to extinguish its remaining obligations under a Settlement Agreement. Accordingly, the Company recorded an extraordinary gain of $1,146,100 on the extinguishment of debt and reduced accounts payable by the corresponding amounts. Note 17 - Earnings Per Share As the Company had a net loss from continuing operations for 1998, 1997 and 1996, basic and diluted net loss per share are the same. Net loss applicable to common stockholders includes $465,300 for the non-cash imputed dividend related to the beneficial conversion feature on 24,750 Units of the Series D Convertible Preferred stock. (See Note 2). The beneficial conversion feature is computed as the difference between the quoted market price of a share of common stock on date of issue and the conversion price times all shares of preferred stock sold and under option. The imputed dividends are a non-cash, one-time charge based on the immediate conversion feature. Basic and diluted net loss per common share for 1998, 1997 and 1996 were calculated as follows:
1998 1997 1996 - ---------------------------------------------------------------------- Net loss $(4,243,500) $(14,875,600) $(15,914,700) Preferred Stock cumulative dividend (20,700) (18,700) (28,800) Preferred Stock imputed dividend (465,300) - - Net loss available to Common stockholders (4,729,500) (14,894,300) (15,943,500) Basic and diluted net loss per share $ (0.19) $ (0.73) $ (0.94) Weighted average shares outstanding 24,597,700 20,475,100 16,874,300 ======================================================================
Note 18 - Fourth Fiscal Quarter Adjustments The Company's fiscal year end coincides with the Federal budgetary process providing additional clarification regarding the utility of the Company's inventory. Accordingly, management performs a comprehensive review of its inventory in the fourth quarter. Additionally, in the fourth quarter of fiscal 1998, the Company's analysis of organization and financing activities of the Company's Imagek subsidiary resulted in adjustments to the accounting for allocation of cash received and certain expenses. Also, subsequent to the close of the fiscal year, the Company completed a technical analysis of the transaction settling its bank debt, resulting in a determination to reclassify the proceeds therefrom as additional paid-in capital rather than gain from debt extinguishment. Significant adjustments made in the fourth quarter are summarized below. Certain of these adjustments will result in adjustments to previously released financial information for earlier quarters of fiscal 1998. The Company is in the process of evaluating these effects and expects to amend its reports for the affected periods. Inventory write-offs and reserves $2,079,000 Reclassification of gain on debt extinguishment to additional paid-in capital 954,800 Inventory costs charged to R&D expense 795,000 Additional depreciation of equipment, furniture & fixtures 310,000 Reclassification of contract revenue from ATPL to additional paid-in capital 305,000 ---------- Increase in Net Loss $4,443,800 ========== REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors Irvine Sensors Corporation Costa Mesa, California We have audited the accompanying consolidated balance sheet of Irvine Sensors Corporation as of September 27, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Irvine Sensors Corporation as of September 27, 1998, and the consolidated results of its operations and its consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Irvine, California January 6, 1999 ------------- [LOGO OF PRICE WATERHOUSE LLP] To the Board of Directors and Shareholders of Irvine Sensors Corporation In our opinion, the consolidated balance sheet and the related consolidated statements of operations, of shareholders' equity (deficit) and of cash flows as of and for each of the two years in the period ended September 28, 1997 present fairly, in all material respects, the financial position, results of operations and cash flows of Irvine Sensors Corporation and its subsidiaries as of and for each of the two years in the period ended September 28, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP PRICE WATERHOUSE LLP Costa Mesa, California December 16, 1997 Irvine Sensors Corporation Corporate Information Directors James Alexiou/1,2/, Chairman of the Board, Irvine Sensors Corporation John C. Carson, Senior Vice-President, Irvine Sensors Corporation Joanne S. Carson, Secretary, Irvine Sensors Corporation Marc Dumont/1/, Financial Advisor James D. Evert/1/, President and CEO, Irvine Sensors Corporation Walter E. Garrigan/2/, Financial Advisor General Frank P. Ragano/1/, Chairman and CEO of CMS, Inc., a manufacturer of defense munitions Vincent F. Sollitto Jr./2/, President and CEO of Photon Dynamics Inc., a manufacturer of electronic capital equipment /1/ Member of the Compensation Committee /2/ Member of the Audit Committee Officers John C. Carson, Senior Vice-President Joanne S. Carson, Secretary Floyd K. Eide, Vice-President James D. Evert, President and Chief Executive Officer John J. Stuart, Jr., Senior Vice-President, Chief Financial Officer and Treasurer Executive Offices Irvine Sensors Corporation, 3001 Redhill Avenue, Building III, Costa Mesa, California 92626 Counsel Grover T. Wickersham, P.C., Wickersham Law Offices, 430 Cambridge Avenue, Suite 100, Palo Alto, California 94306 Independent Grant Thornton LLP Accountants Irvine, California 92612 Transfer Agent ChaseMellon Shareholder Services, 400 S. Hope St., 4th Floor, Los Angeles, California 90071 www.chasemellon.com Stock Data Nasdaq Listing: Common Stock - IRSN Boston Stock Exchange Listing: Common Stock - ISC Form 10-K Shareholders may obtain without charge a copy of the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1998, as filed with the Securities and Exchange Commission, without exhibits thereto, and may obtain any exhibit thereto upon payment of a nominal copying charge, by writing to Joanne S. Carson, Secretary, Irvine Sensors Corporation, 3001 Redhill Avenue, Costa Mesa, California 92626. EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 - Subsidiaries of the Registrant - ------------------------------------------- Novalog, Inc. 151 Kalmus Drive, Unit K-1 Costa Mesa, California 92626 MicroSensors, Inc. 3001 Redhill Ave., Building 4 Costa Mesa, California 92626 Imagek, Inc. 3001 Redhill Ave., Building 3 Costa Mesa, California 92626 3D Microelectronics Inc. 3001 Redhill Ave., Building 3 Costa Mesa, California 92626 3D Microsystems, Inc. 3001 Redhill Ave., Building 3 Costa Mesa, California 92626 EX-23.1 4 CONSENT OF GRANT THORNTON Exhibit 23.1 - ------------ CONSENT OF GRANT THORNTON LLP, INDEPENDENT ACCOUNTANTS - ------------------------------------------------------ We hereby consent to the incorporation by reference in the Prospectus constituting part of this Registration Statement on Form S-8 (No. 2-85501) of Irvine Sensors Corporation of our report dated January 6, 1999, which appears on page 20 of the Annual Report to Shareholders which is incorporated by reference in this Annual report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page 20 of this Form 10-K. /s/ GRANT THORNTON LLP Grant Thornton LLP Irvine, California January 6, 1999 EX-23.2 5 CONSENT OF PRICEWATERHOUSECOOPERS Exhibit 23.2 - ------------ CONSENT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------- We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (no. 333-45269) and Form S-8 (no. 2-85501) of Irvine Sensors Corporation of our report dated December 16, 1997, which appears on page 19 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page 20 of this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Costa Mesa, California January 6, 1999 EX-24 6 CONSENT OF THOMAS J. PLANTE Exhibit 24 - Consent of Patent Counsel - -------------------------------------- I hereby consent to the reference to me in this Annual Report - Form 10-K of Irvine Sensors Corporation under the section entitled "Patents, Trademarks and Licenses." /s/ Thomas J. Plante THOMAS J. PLANTE, Esq. Irvine, California January 8, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS SEP-27-1998 SEP-29-1997 SEP-27-1998 1,310,400 0 1,776,100 10,000 1,532,700 4,802,700 9,481,300 7,257,300 7,064,700 2,296,000 0 150 0 284,600 2,062,250 7,064,700 2,289,800 9,314,500 2,247,000 10,678,800 1,609,500 0 266,200 (5,752,200) 2,600 (5,389,600) 1,146,100 0 0 (4,243,500) (0.19) (0.19)
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