EX-13.1 10 0010.txt PORTIONS OF ANNUAL REPORT Exhibit 13 Irvine Sensors Corporation Financial Highlights
Fiscal Year Ended October 1, October 3, September 27, September 28, September 29, 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------- Revenues $ 10,769,800 $ 11,100,200 $ 9,314,500 $ 13,693,200 $ 12,024,200 ============================================================================ Loss from operations $(16,019,200) $ (9,785,700) $ (5,798,200) $(14,809,200) $(11,154,700) ============================================================================ Net Loss $(15,038,300) $ (9,115,700) $ (4,243,500) $(14,875,600) $(15,914,700) ============================================================================ Basic and diluted net loss per common and common equivalent share $ (0.37) $ (0.29) $ (0.19) $ (0.73) $ (0.94) ============================================================================ Weighted average number of shares outstanding 40,428,600 31,244,300 24,597,700 20,475,100 16,874,300 ============================================================================ Long-term debt $ 224,700 $ 433,200 $ 933,700 $ 1,207,000 $ 3,165,600 ============================================================================ Convertible debt $ -- $ -- $ -- $ 250,000 $ 3,400,000 ============================================================================ Total assets $ 20,307,150 $ 10,510,350 $ 7,064,700 $ 9,449,300 $ 21,742,200 ============================================================================
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 Nasdaq Stock Market. These prices represent prices among dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions: Fiscal Year Ended October 1, 2000 October 3, 1999 High Low High Low Common Stock Bid Prices First Quarter $ 2.56 $ 1.22 $ 1.94 $ 1.97 Second Quarter $ 18.75 $ 1.75 $ 1.66 $ 1.31 Third Quarter $ 11.25 $ 3.50 $ 2.00 $ 1.44 Fourth Quarter $ 4.50 $ 2.09 $ 1.84 $ 1.22 On December 22, 2000, there were 819 stockholders of record and approximately 20,000 beneficial holders, based on information provided by the Company's transfer agent. The Company has not paid cash dividends on any class of its stock since its incorporation; under Delaware law there are certain restrictions, which limit the Company's ability to pay cash dividends in the future. 1 Irvine Sensors Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations FISCAL YEAR ENDED OCTOBER 1, 2000 vs. FISCAL YEAR ENDED OCTOBER 3, 1999 Fiscal 2000 product sales of $6,105,700 decreased by $912,200 or 13 percent compared to fiscal 1999. Novalog's competition has forced Novalog to decrease its prices, resulting in smaller proceeds from equivalent sales. Also, the wafer market is tight due to high demand from manufacturers of cellular phones, pagers, etc. Novalog was unable to fulfill some sales orders as a result, and thus recognized lower product sales. Additionally, MSI realized $200,000 revenue during fiscal 1999 from a chip customer, which did not reoccur in 2000. Fiscal 2000 contract revenue of $4,282,900 increased by $202,200 or 5 percent compared to fiscal 1999. Cost of product sales as a percentage of product sales increased in fiscal 2000 to 77 percent from 74 percent in 1999. The slight increase in product costs is directly related to the lower prices Novalog's customers are dictating as a result of the IRDA market competition. Cost of contract revenues of $4,087,300 was 95 percent of contract revenues, an increase from 78 percent in fiscal 1999. This increase was a result of significant contract overruns and reserves established in anticipation of future overruns on contracts in progress. General and administrative expenses of $9,010,200 increased by $2,013,100 or 29 percent in relation to fiscal 1999, largely as a result of the growth in the Company's consolidated subsidiaries. Additionally, the creation of RedHawk and iNetworks resulted in significant general and administrative expenses. As a percentage of total revenues, general and administrative expenses were approximately 84 percent in fiscal 2000 compared to 63 percent in fiscal 1999, again reflecting the substantial fiscal 2000 increase in expenses of the Company's subsidiaries, four of which generated no significant revenues. Research and Development increased to $8,984,200 in fiscal 2000 compared to $5,528,000 in fiscal 1999. The $3,456,200 or 63% increase was due to the product development expenses of the MicroSensors and Silicon Film consolidated subsidiaries. Additionally, ATD spent over $2 million toward the development of potential future commercial products during 2000 and Novalog spent approximately $300,000 developing its next generation product. As a percentage of revenues, R&D accounted for approximately 83 percent in fiscal 2000 compared to 50 percent in fiscal 1999. The aggregate increase of $5,903,100 in fiscal 2000 operating costs and expenses are the direct result of management's decision to further implement the Company's strategy to develop, market and sell commercial products through its subsidiaries. Interest expense increased $79,700 or 76 percent in fiscal 2000 due to additional equipment acquired through capital leases. Interest income increased $163,600 in fiscal 2000 due to the short-term investment of proceeds from the Company's equity offerings. The consolidated net loss of $15,038,300 in fiscal 2000 was $5,922,600 or 65 percent greater than fiscal 1999. The increased net loss of the MicroSensors, Silicon Film and RedHawk subsidiaries accounted for approximately 70 percent of this increase. FISCAL YEAR ENDED OCTOBER 3, 1999 vs. FISCAL YEAR ENDED SEPTEMBER 27, 1998 Consolidated revenues in fiscal 1999 of $11,100,200 increased by $1,785,700 or 19 percent compared to fiscal 1998. The primary reason for this increase is the increased sales realized by Novalog. Cost of contract revenues of $3,163,200 was 78 percent of contract revenues, an improvement from the 86 percent figure of fiscal 1998. This improvement was primarily due to attempts made to reduce cost of operations during fiscal 1999. Cost of product sales was $5,197,600 or approximately 74 percent of product sales in fiscal 1999. By comparison, fiscal 1998 cost of 2 product sales was 85 percent of product sales, reflecting final shutdown costs of the Vermont facility, which did not recur in fiscal 1999. Additionally, the Company realized better product margins due to the increase in sales volume. General and administrative expenses of $6,997,100 increased by $3,506,700 or 100 percent in relation to fiscal 1998, largely as a result of the growth in the Company's consolidated subsidiaries. As a percentage of total revenues, general and administrative expenses were approximately 63 percent in fiscal 1999 compared to 37 percent in fiscal 1998, again reflecting the substantial fiscal 1999 increase in expenses of the Company's subsidiaries, two of which generated no revenues. Research and Development increased to $5,528,000 in fiscal 1999, a growth of $1,399,600 or 34 percent in the year-to-year comparison. The growth was due to the product development expenses of the MicroSensors and Silicon Film consolidated subsidiaries. As a percentage of revenues, R&D accounted for approximately 50 percent in fiscal 1999 compared to approximately 44 percent in fiscal 1998, with the product development expenses of MicroSensors and Silicon Film accounting for the difference, without corresponding revenues. The aggregate increase of $5,773,200 in fiscal 1999 of operating costs and expenses are the direct result of management's decision to further implement the Company's strategy to develop, market and sell commercial products through its subsidiaries. Interest expense declined by $161,900 in fiscal 1999 due to final retirement of debt associated with the Vermont facility in fiscal 1998, which did not recur in fiscal 1999. Interest income increased by $26,100 in fiscal 1999 due to the short-term investment of proceeds from the Company's equity offerings. The consolidated net loss of $9,115,700 in fiscal 1999 was $4,872,200, or 115 percent greater than fiscal 1998. The increased net loss of the MicroSensors and Silicon Film subsidiaries accounted for over 88 percent of this increase. Liquidity, Capital Resources and Impact of Changing Prices At October 1, 2000, the Company had consolidated cash and cash equivalents of $8,785,700, which represents an increase of $7,804,600 since October 3, 1999. The net cash used in operating activities was $13,346,900 during fiscal 2000. The primary use of cash was to fund the research and development and other operating expenses of its MicroSensors and Silicon Film subsidiaries and investments in potential commercializable products in ATD. The Company used $4,376,300 in investing activities during fiscal 2000. Cash used in investing activities primarily consisted of acquiring marketable securities, net of proceeds from the sale of such securities of $1,195,400 and acquiring property, plant and equipment for $2,375,600. The Company also entered into capital lease agreements to acquire an additional $173,700 of equipment. During fiscal 2000, the Company obtained net cash of $25,527,800 from financing activities. Cash provided by financing activities included $17,019,500 from the issuance of common and preferred stock and common stock warrants, $6,199,300 from the sale of common and preferred stock in subsidiaries to minority interest shareholders and proceeds from common stock options and warrants exercised of $2,430,100. Net cash provided by equity and minority interest transactions was reduced by principal payments on loans of $1,250,000 and capital leases payable of $330,100. As a result of equity financing in fiscal 2000, the further development activities of MicroSensors and Silicon Film were accomplished while increasing the Company's working capital $8,382,550. The Company anticipates that the existing working capital and its projected financing 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. Since its inception, the Company has experienced such termination of its contracts on two occasions. 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. 3 At October 1, 2000, the Company's funded backlog was approximately $5,534,800 compared to $ 3,928,900 at October 3, 1999. 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 $6,056,600 as of November 26, 2000. 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. 4 Irvine Sensors Corporation Consolidated Balance Sheets
October 1, October 3, 2000 1999 ---------------------------- Assets Current Assets: Cash and cash equivalents $ 8,785,700 $ 981,100 Marketable securities 1,230,900 -- Accounts receivable, net of allowances of $126,400 in 2000 and $36,700 in 1999 2,323,000 2,401,500 Stock subscriptions receivable -- 600,000 Inventory 1,577,600 2,219,800 Other current assets 212,600 236,750 ---------------------------- Total current assets 14,129,800 6,439,150 Equipment, furniture and fixtures, net 4,856,800 3,546,900 Goodwill 157,300 171,600 Capitalized software development costs 578,200 201,700 Other assets 585,050 151,000 ---------------------------- $ 20,307,150 $ 10,510,350 ============================ Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 2,118,300 $ 3,310,800 Accrued expenses 1,318,000 752,600 Accrued loss on contracts 582,700 -- Accrued dividends 300,400 -- Deferred and subordinated royalties payable - affiliated company -- 1,000,000 Capital lease obligations - current portion 364,000 311,900 ---------------------------- Total current liabilities 4,683,400 5,375,300 Capital lease obligations 224,700 433,200 Minority interest in consolidated subsidiaries 7,812,500 2,489,200 ---------------------------- Total liabilities 12,720,600 8,297,700 Commitments and contingencies (Note 9) Shareholders' Equity: Preferred stock, $0.01 par value, 500,000 shares authorized: Series B Convertible Cumulative Preferred, 4,300 and 6,400 shares outstanding; aggregate liquidation preference of $64,500 25 50 Series C Convertible Cumulative Preferred, 2,300 and 3,500 shares outstanding; aggregate liquidation preference of $33,000 25 50 Series D Convertible Preferred, none and 2,400 shares outstanding; aggregate liquidation preference of $-0- -- 50 Common stock, $0.01 par value, 60,000,000 shares authorized; 46,637,800 and 35,035,100 shares issued and outstanding 466,400 350,300 Common stock warrants and unit warrants; 3,354,100 and 147,000 outstanding -- -- Paid-in capital (including common stock subscribed) 85,097,100 64,800,900 Accumulated deficit (77,977,000) (62,938,700) ---------------------------- Total shareholders' equity 7,586,550 2,212,650 ---------------------------- $ 20,307,150 $ 10,510,350 ============================
See Accompanying Notes to Consolidated Financial Statements. 5 Irvine Sensors Corporation Consolidated Statements of Operations
Fiscal Year Ended -------------------------------------------- October 1, October 3, September 27, 2000 1999 1998 -------------------------------------------- Revenues: Product sales $ 6,105,700 $ 7,017,900 $ 2,289,800 Contract research & development 4,282,900 4,080,700 6,624,700 Other 381,200 1,600 400,000 -------------------------------------------- Total revenues 10,769,800 11,100,200 9,314,500 -------------------------------------------- Cost and expenses: Cost of product sales 4,707,300 5,197,600 1,942,200 Cost of contract revenues 4,087,300 3,163,200 5,711,700 General and administrative 9,010,200 6,997,100 3,490,400 Research and development 8,984,200 5,528,000 4,128,400 Loss related to plant closure -- -- (160,000) -------------------------------------------- 26,789,000 20,885,900 15,112,700 -------------------------------------------- Loss from operations (16,019,200) (9,785,700) (5,798,200) Interest expense (184,000) (104,300) (266,200) Interest income 202,200 38,600 12,500 Other -- -- 299,700 -------------------------------------------- Loss before minority interest and provision for income taxes (16,001,000) (9,851,400) (5,752,200) Minority interest in loss of subsidiaries 965,900 738,500 365,200 Provision for income taxes (3,200) (2,800) (2,600) -------------------------------------------- Loss before extraordinary item (15,038,300) (9,115,700) (5,389,600) Extraordinary item - debt extinguishment -- -- 1,146,100 -------------------------------------------- Net loss $(15,038,300) $ (9,115,700) $ (4,243,500) ============================================ Loss Per Common Share: Basic Loss Per Share Loss before extraordinary item $ (0.37) $ (0.29) $ (0.24) Extraordinary item -- -- 0.05 -------------------------------------------- Net loss $ (0.37) $ (0.29) $ (0.19) ============================================ Diluted Loss Per Share Loss before extraordinary item $ (0.38) $ (0.29) $ (0.24) Extraordinary item -- -- 0.05 -------------------------------------------- Net loss $ (0.38) $ (0.29) $ (0.19) ============================================ Weighted average number of shares outstanding 40,428,600 31,244,300 24,597,700 ============================================
See Accompanying Notes to Consolidated Financial Statements. 6 Irvine Sensors Corporation Consolidated Statements of Shareholders' Equity (Deficit)
Common Stock Common Stock Preferred Stock Shares Issued Warrants Issued Shares Issued ------------------------------------------------------------------------ Number Amount Number Number Amount ---------- --------- --------- ------ ------ Balance at September 28, 1997 21,541,300 $ 215,400 340,000 13,750 $ 100 ---------- --------- --------- ------ ------ Common stock issued to employee retirement plan 333,300 3,400 -- -- -- Convertible debentures converted to common stock 100,000 1,000 -- -- -- Series B and Series C preferred stock converted to common stock 140,900 1,400 -- (2,800) -- Common stock issued to retire liabilities 487,800 4,900 -- -- -- Sale of common stock and common stock units 2,091,700 20,900 -- -- -- Stock options exercised 8,200 100 -- -- -- Common stock warrants issued -- -- 116,200 -- -- Common stock warrants exercised 294,200 2,900 (294,200) -- -- Series D preferred units sold -- -- -- 37,750 400 Series D preferred units converted 3,460,300 34,600 -- (33,350) (350) Preferred stock of dissolved subsidiary -- -- -- -- -- Capital contributed by ATPL -- -- -- -- -- Net loss -- -- -- -- -- ---------- --------- --------- ------ ------ Balance at September 27, 1998 28,457,700 $ 284,600 162,000 15,350 $ 150 ---------- --------- --------- ------ ------ Common stock issued to employee retirement plan 330,000 3,300 -- -- -- Series B and Series C preferred stock converted to common stock 51,500 500 -- (1,050) -- Series D preferred units converted 206,100 2,000 -- (2,000) -- Common stock issued to retire liabilities 190,000 1,900 -- -- -- Common stock issued to purchase shares of subsidiaries 1,127,500 11,300 -- -- -- Sale of common stock and common stock units 4,536,400 45,400 -- -- -- Common stock subscribed, 444,400 shares -- -- -- -- -- Common stock options exercised 120,900 1,200 -- -- -- Common stock warrants exercised 15,000 100 (15,000) -- -- Net loss -- -- -- -- -- ---------- --------- --------- ------ ------ Balance at October 3, 1999 35,035,100 $ 350,300 147,000 12,300 $ 150 ---------- --------- --------- ------ ------ Common stock issued to employee retirement plan 135,100 1,400 -- -- -- Series B and Series C preferred stock converted to common stock 165,100 1,700 -- (3,300) (50) Series D preferred units converted 471,900 4,700 -- (2,400) (50) Series D warrants exercised 190,000 1,900 -- -- -- Common stock issued to retire royalty liabilities 1,000,000 10,000 -- -- -- Common stock issued to pay operating expenses 18,800 200 -- -- -- Common stock issued to acquire capital assets 1,400 -- -- -- -- Sale of common stock and common stock units 7,397,000 74,000 -- -- -- Issuance of common stock subscribed in 1999 444,400 4,400 -- -- -- Common stock options exercised 1,329,700 13,300 -- -- -- Common stock warrants issued -- -- 3,711,400 -- -- Common stock warrants exercised 449,300 4,500 (449,300) -- -- Common stock warrants expired -- -- (55,000) -- -- Dividends on Series C preferred stock of subsidiary -- -- -- -- -- Net loss -- -- -- -- -- ---------- --------- --------- ------ ------ Balance at October 1, 2000 46,637,800 $ 466,400 3,354,100 6,600 $ 50 ========== ========= ========= ====== ====== [WIDE TABLE CONTINUED FROM ABOVE] Paid-in Accumulated Shareholders' Capital Deficit Equity(Deficit) ------------ ------------ --------------- Balance at September 28, 1997 $ 46,424,100 $(49,579,500) $ (2,939,900) ------------ ------------ ------------ Common stock issued to employee retirement plan 496,600 -- 500,000 Convertible debentures converted to common stock 249,000 -- 250,000 Series B and Series C preferred stock converted to common stock (1,400) -- -- Common stock issued to retire liabilities 753,200 -- 758,100 Sale of common stock and common stock units 3,712,900 -- 3,733,800 Stock options exercised (100) -- -- Common stock warrants issued 303,900 -- 303,900 Common stock warrants exercised 274,100 -- 277,000 Series D preferred units sold 3,283,700 -- 3,284,100 Series D preferred units converted (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 $ 55,885,250 $(53,823,000) $ 2,347,000 ------------ ------------ ------------ Common stock issued to employee retirement plan 496,900 -- 500,200 Series B and Series C preferred stock converted to common stock (500) -- -- Series D preferred units converted 163,500 -- 165,500 Common stock issued to retire liabilities 280,600 -- 282,500 Common stock issued to purchase shares of subsidiaries 1,147,950 -- 1,159,250 Sale of common stock and common stock units 6,082,100 -- 6,127,500 Common stock subscribed, 444,400 shares 600,000 -- 600,000 Common stock options exercised 131,200 -- 132,400 Common stock warrants exercised 13,900 -- 14,000 Net loss -- (9,115,700) (9,115,700) ------------ ------------ ------------ Balance at October 3, 1999 $ 64,800,900 $(62,938,700) $ 2,212,650 ------------ ------------ ------------ Common stock issued to employee retirement plan 460,700 -- 462,100 Series B and Series C preferred stock converted to common stock (1,650) -- -- Series D preferred units converted (4,650) -- -- Series D warrants exercised 207,100 -- 209,000 Common stock issued to retire royalty liabilities 990,000 -- 1,000,000 Common stock issued to pay operating expenses 178,200 -- 178,400 Common stock issued to acquire capital assets 13,500 -- 13,500 Sale of common stock and common stock units 16,345,500 -- 16,419,500 Issuance of common stock subscribed in 1999 (4,400) -- -- Common stock options exercised 1,772,600 -- 1,785,900 Common stock warrants issued -- -- -- Common stock warrants exercised 639,700 -- 644,200 Common stock warrants expired -- -- -- Dividends on Series C preferred stock of subsidiary (300,400) -- (300,400) Net loss -- (15,038,300) (15,038,300) ------------ ------------ ------------ Balance at October 1, 2000 $ 85,097,100 $(77,977,000) $ 7,586,550 ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements. 7 Irvine Sensors Corporation Consolidated Statements of Cash Flows
Fiscal Year Ended ------------------------------------------------------------------------- October 1, October 3, September 27, 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net loss $(15,038,300) $ (9,115,700) $ (4,243,500) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization $ 1,078,900 $ 911,450 1,546,700 Unrealized gain on marketable securities (35,500) -- -- (Gain) loss on disposal of equipment 205,200 -- (309,700) Non-cash employee retirement plan contribution 668,100 500,200 500,000 Minority interest in net loss of subsidiaries (965,900) (738,500) (365,200) Extraordinary gain -- -- (1,146,100) Common stock issued to pay operating expenses 178,400 380,800 (261,700) (Increase) decrease in accounts receivable 78,500 (635,400) (528,400) (Increase) decrease in inventory 642,200 (687,100) 1,044,600 (Increase) decrease in other current assets 24,050 (280,750) 989,400 Increase in other assets (22,150) -- (1,700) Increase (decrease) in accounts payable and accrued expenses (743,100) 1,837,200 (1,454,500) Increase in accrued loss on contracts 582,700 -- -- Decrease in deferred revenues -- (50,000) (56,100) Increase in royalties accrued - affiliated company -- 173,800 212,400 ------------ ------------ ------------ Total adjustments 1,691,400 1,411,700 169,700 ------------ ------------ ------------ Net cash used in operating activities (13,346,900) (7,704,000) (4,073,800) Cash flows from investing activities: Proceeds from sales of marketable securities 2,437,600 -- -- Purchase of marketable securities (3,633,000) -- -- Capital facilities and equipment expenditures (2,375,600) (1,453,400) (390,800) Proceeds from sale of equipment -- -- 149,700 Capitalized software (376,500) -- -- Acquisition of intangible assets (428,800) (77,200) -- ------------ ------------ ------------ Net cash used in investing activities (4,376,300) (1,530,600) (241,100) Cash flows from financing activities: Proceeds from issuance of common and preferred stock and common stock warrants 17,019,500 6,439,400 5,063,100 Proceeds from options and warrants exercised 2,430,100 -- -- Proceeds from Series D Units exercised 209,000 -- -- Sale of minority interest in subsidiary 6,199,300 2,661,100 -- Proceeds from bridge loan and credit line 1,250,000 -- -- Principal payments on bridge loan and credit (1,250,000) -- -- line Proceeds from stock sale by bank -- -- 954,800 Contributed capital by ATPL -- -- 305,000 Principal payments of notes payable and capital leases (330,100) (195,200) (2,336,900) ------------ ------------ ------------ Net cash provided by financing activities 25,527,800 8,905,300 3,986,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 7,804,600 (329,300) (328,900) Cash and cash equivalents at beginning of period 981,100 1,310,400 1,639,300 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 8,785,700 $ 981,100 $ 1,310,400 ============ ============ ============ Noncash investing and financing activities: Common stock issued to retire deferred and subordinated royalties payable to affiliated company $ 1,000,000 -- -- Dividends on Series C preferred stock of subsidiary $ 300,400 -- -- Equipment financed with capital leases $ 173,700 $ 780,300 $ 170,000 Common stock issued to acquire equipment $ 13,500 -- -- Issuance of subsidiary stock to pay expenses $ 90,000 -- -- Conversion of preferred stock to common stock $ 100 $ 500 $ 34,600 Exchange of subsidiary stock -- $ 987,650 $ 1,564,900 Stock sold on a subscription basis -- $ 600,000 -- Stock issued in exchange for shares in subsidiary -- $ 171,600 -- Costs of financing paid with options in subsidiaries -- $ 38,500 -- Principal payment of note payable by issuance of common stock -- -- $ 500,000 Conversion of debentures to common stock -- -- $ 250,000 Paid-in capital from dissolution of subsidiary -- -- $ 118,500
See Accompanying Notes to Consolidated Financial Statements. 8 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"), Silicon Film Technologies, Inc. ("Silicon Film"), RedHawk Vision Systems, Inc. ("RedHawk"), 3D Microelectronics, Inc. and 3D MicroSystems, Inc. Carson Alexiou Corporation ("CAC"), a former subsidiary of the Company, was dissolved in fiscal 1998. 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 2000 (52 weeks) ended on October 1, 2000, Fiscal 1999 (53 weeks) ended on October 3, 1999, and fiscal 1998 (52 weeks) ended on September 27, 1998. 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 the SIRComm(TM) infrared chip, shipments of functional memory stacks, 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 research and development 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 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 1998. Contract revenues have been recorded in amounts that are expected to be realized upon final settlement. Other revenues in fiscal 1998 were derived from sale of intellectual property to ATPL. (See Note 8 - Related Party Transactions.) The Novalog, MSI, Silicon Film and RedHawk subsidiaries are product-oriented companies with sales primarily to OEM manufacturers. Revenues are recorded when products are shipped. 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 for 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 salability 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 and general and administrative costs 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. 9 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. SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE Software development and purchased software costs are capitalized when technological feasibility and marketability of the related product have been established. The Company will amortize capitalized software costs beginning when the product is available for general release to customers. Annual amortization expense will be calculated using the straight-line method over the estimated useful life of the product, not to exceed five years. The Company evaluates the carrying value of unamortized capitalized software costs at each balance sheet date to determine whether any net realizable value adjustments are required. INTANGIBLE ASSETS The excess of total acquisition cost over the fair value of net assets acquired (goodwill) is being amortized on a straight-line basis over 15 years. The Company reviews the carrying value of goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Other acquired intangibles are being amortized on a straight-line basis over their estimated useful lives of 5 years. 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 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 ADOPTED In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 revised 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. All periods presented have been restated in accordance with this pronouncement. See Note 20 - Reportable Segments. STATEMENTS OF CASH FLOWS For purposes of the Consolidated Statements 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 sheets 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 October 1, 2000. 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 The Company accounts for stock-based employee compensation as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure provisions of Statement of Financial Accounting Standards 123, "Accounting for Stock-based Compensation" ("SFAS 123"). SFAS 123 requires pro forma disclosures of net income and net income per share as if the fair value based method of accounting for stock-based awards had been applied. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period. 10 RECLASSIFICATIONS Certain reclassifications have been made to the 1999 fiscal year financial statements to conform with the current year presentation. Note 2 - Issuance of Common and Preferred Stock 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. In connection with settlement of bank debt, the Company issued 550,000 unregistered shares of common stock in December 1997. (See Note 10 - Extraordinary Item - Debt Extinguishment.) 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 MSI, a wholly-owned subsidiary of the Company (see Note 5). Each share of Convertible Preferred Stock is convertible into common stock of the Company at the rate of 100 shares of common stock 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. The placement agent exercised warrants to purchase 500 units in May 1998 and 1,000 units in the period between October and December 1998. Additional warrants to purchase 500 units were exercised in March 1999. All of the proceeds were added to the Company's general funds. As of October 3, 1999, at the request of the holders thereof, a total of 35,350 shares of Series D Convertible Preferred Stock Units have been converted into 3,666,400 shares of common stock. 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 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 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 shareholders' equity and a corresponding decrease in minority interest in consolidated subsidiary. 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. 11 In December 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 1999 and was made in 330,000 shares of the Company's common stock, which have been issued to the Plan. During fiscal 1999, the Company sold 4,980,800 shares of unregistered common stock of the Company to accredited investors in connection with a series of private placement offerings. Included in these offerings was the sale of 267,670 units, which consisted of two shares of unregistered common stock of the Company, one two-year warrant to purchase one share of common stock of Silicon Film owned by the Company and one three-year warrant to purchase one common share of MSI owned by the Company. The net proceeds were $6,439,400. During fiscal 1999, the Company issued 190,000 shares of unregistered common stock of the Company to vendors and consultants in exchange for services provided. During fiscal 1999, holders of 120,900 common stock options exercised their options to purchase unregistered common stock of the Company. The net proceeds were $132,400. During fiscal 1999, holders of 1,655,000 shares of common stock of Novalog exchanged these shares for 1,017,500 unregistered shares of common stock of the Company through warrant exercise and other means. These transactions resulted in a decrease of $1,038,000 to the minority interest liability. During fiscal 1999, the Company issued 110,000 shares of common stock of the Company to an unrelated party in exchange for an ownership interest in ATPL, a related party (See Note 7 - Related Party Transactions). The ownership interest includes 127,500 shares of common stock of Silicon Film and rights to future royalties under the ATPL license terms. The transaction resulted in recording goodwill of $171,600 related to the acquisition of the common stock of Silicon Film, and a net increase of $121,300 to shareholders' equity, which is net of losses previously allocated to minority interest shareholders. In October 1999, the Company filed a registration statement which included the resale of 8,270,731 unregistered shares. This registration statement included all previously unregistered shares that had been issued as of October 3, 1999. The Securities and Exchange Commission declared this registration effective in October 1999. During the first quarter of fiscal 2000, the Company sold approximately 31,400 common stock subscription units. Each unit consists of the right to acquire one hundred shares of unregistered common stock of the Company, with registration rights, plus a warrant to purchase ten shares of unregistered common stock of the Company, with registration rights, at an exercise price of $2 per share. The Company received approximately $3.6 million in net proceeds from this transaction. In connection with the sale of these subscription units, the Company granted warrants to purchase 379,300 and 224,000 shares of common stock to agents at an exercise price of $1.49 and $2 per share, respectively. The issuance of common shares required the Company's stockholders to approve an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of common stock or be required to pay subscribers a registration incentive up to $2,120,900. The shareholders approved the amendment at the Annual Shareholder's Meeting in February 2000. The Company issued 3,142,100 shares of common stock to the unit subscribers and subsequently registered these shares in March 2000 (See below). Consequently, the Company reclassified its contingent liability on common stock subscribed of $2,120,900 (recorded as of the end of the Company's first fiscal 2000 quarter) to stockholders' equity. During the second quarter of fiscal 2000, the Company sold approximately 2,300 common stock subscription units. Each unit consists of the right to acquire one hundred shares of unregistered common stock of the Company, with registration rights, plus a warrant to purchase ten shares of unregistered common stock of the Company, with registration rights, at an exercise price of $12 per share. The Company received approximately $1.9 million in net proceeds from this transaction. The Company issued 228,900 shares of common stock to the unit subscribers and subsequently registered these shares in March 2000. In connection with the sale of these subscription units, the Company granted warrants to purchase 22,900 and 2,300 shares of common stock to agents at an exercise price of $9.25 and $12 per share, respectively. During fiscal 2000, holders of 1,224,200 common stock options exercised their options to purchase common stock of the Company. The net proceeds were $1,785,000. Holders of an additional 130,000 common stock options exercised their options through the sale of 24,500 shares of common stock to the Company valued at $142,400, which was recorded as treasury stock. During fiscal 2000, the Company issued 444,400 shares of its common stock to accredited investors who had subscribed to purchase such stock during fiscal 1999. The Company received approximately $600,000 in net proceeds from this transaction. During fiscal 2000, at the request of the preferred holders, 2,000 Series B, 1,300 Series C and 2,400 Series D Preferred shares were converted into 637,000 shares of the Company's common stock. 12 In March 2000, the Company filed a registration statement, which included the resale of 4,331,644 unregistered shares. This registration statement included all previously unregistered shares that had been issued as of March 17, 2000. The Securities and Exchange Commission declared this registration effective in March 2000. In July and August 2000, the Company sold approximately 3,964,000 shares of its unregistered common stock, with registration rights, plus warrants to purchase 1,982,000 shares of unregistered common stock of the Company, with registration rights, for aggregate gross proceeds of approximately $11.9 million. After expenses of the offering, net proceeds were approximately $10.9 million. In connection with this offering the Company issued 696,400 warrants to agents and investment bankers at exercise prices of $3 and $6. During fiscal 2000 the Company entered into an Agreement and Plan of Reorganization to acquire substantially all of the assets of Research & Development Leasing, Inc. ("RDL"), a related party (Note 7), by issuance of 1,000,000 shares of the Company's common stock to settle $1,000,000 of accrued royalty obligations and to terminate any further obligations under an agreement entered into in April 1980. Note 3 - Common Stock Warrants In connection with the sale of $11.1 million of the 1996 Debentures, 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 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. Warrants to purchase 15,000 shares of common stock of the Company were exercised in 1999; the proceeds were $14,000. During fiscal 2000, the Company granted warrants to purchase 15,000 and 25,000 shares of the Company's common stock at an exercise price of $1.50 per share to individuals for services provided. The value of the warrants were not material. During fiscal 2000, the Company granted warrants to purchase 27,500 shares of the Company's common stock to a leasing company in connection with equipment financing. In connection with the sale of common stock subscription units in the first and second quarters of fiscal 2000, the Company granted warrants to purchase 965,500 shares of common stock to investors and agents, respectively at exercise prices of $1.49 to $12 per share. In connection with the sale of common stock in July and August of fiscal 2000, the Company granted warrants to purchase 1,982,000, 396,400 and 300,000 shares of common stock to investors, agents and investment bankers, respectively at exercise prices of $2.50, $3 and $6 per share, respectively. Warrants to purchase 449,300 shares of the Company's common stock were exercised during fiscal 2000 and generated net proceeds of $644,200. Warrants to purchase 55,000 shares of the Company's common stock expired during fiscal 2000. As of October 1, 2000, there are a total of 3,354,100 warrants outstanding, of which 75,500 expire in the year 2001, 28,500 expire in the year 2002, 2,633,400 expire in the year 2004 and 616,700 expire in the year 2005. 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 1998 1,800 1,000 140,900 Fiscal 1999 600 450 51,500 Fiscal 2000 2,000 1,300 165,100 13 The shares of Preferred Series B and Series C tendered for conversion have been retired. Undeclared dividends of $65,200 and $67,500 on the remaining outstanding Preferred Series B and Series C, respectively, will be carried forward to fiscal 2001. Note 5 - Series D Convertible Preferred Stock Units In connection with a Series D Convertible Preferred Stock Unit private placement in fiscal 1998, the Company granted to the placement agent warrants to purchase up to 3,775 units of Series D Convertible Preferred Stock units ("Agent Warrants") at a price of $110 per unit, which was 110% of the private placement price of the Units. Agent Warrants to purchase 1,900 units were exercised during fiscal 2000. The Company realized proceeds of $209,000 from this exercise. Note 6 - Minority Interest in Subsidiaries During fiscal 1999, Silicon Film sold 83,900 shares of its Series A Convertible Preferred Stock (the "Series A Preferred") in a Private Placement. The Series A Preferred bears no yield, has a priority in liquidation and is convertible into common stock of Silicon Film, at the election of the holder, at the rate of 25 common shares (as adjusted for a price protection feature which was resolved by Silicon Film's Board of Directors on October 19, 1998) for each 1 share of Series A Preferred tendered for conversion. The net proceeds of $1,136,900 are reflected in the consolidated cash position of the Company and increased minority interest in consolidated subsidiaries. During fiscal 1999, Silicon Film sold 143,400 and 150,000 shares of its Series B Convertible Preferred Stock (the "Series B Preferred") to outsiders and to the Company, respectively, in a series of Private Placements. The Series B Preferred bears no yield, has a priority in liquidation and is convertible into common stock of Silicon Film, at the election of the holder, at the rate of 16-2/3 common shares for each 1 share of Series B Preferred tendered for conversion. The proceeds were $1,365,700, net of financing costs (includes $38,500 financing costs satisfied with noncash sources) and purchases by the Company, and are reflected in the consolidated cash position of the Company. The resulting increase in minority interest in consolidated subsidiaries was $1,365,700. Subsequent to October 3, 1999, Silicon film sold an additional 85,750 and 10,000 shares of its Series B Preferred Stock to outsiders and to ISC, respectively. The net cash proceeds were $957,500. During fiscal 1999, Silicon Film issued 85,000 options to purchase common shares of Silicon Film's stock at exercise prices ranging from $0.60 to $1.00 in exchange for various services. These transactions resulted in a net increase in minority interest liability of $98,300. During fiscal 1999, Silicon Film granted 3,311,500 options to employees, officers and directors to purchase common shares of Silicon Film's stock. As of October 3, 1999, there are 4,561,500 options outstanding, of which 466,700 are exercisable. The Company sold Series D Convertible Preferred Stock Units in a private placement to certain accredited investors in December 1997 and January 1998 (See Note 2 - Issuance of Common and Preferred Stock). During the second quarter of fiscal 2000, holders of 125,000 shares of Series D Convertible Preferred Stock Units exercised warrants attached to the Units to purchase 125,000 shares of common stock of MSI. The net proceeds of $125,000 were added to the Company's general funds and are reflected in the consolidated cash position of the Company. The transaction resulted in an increase in minority interest in consolidated subsidiaries of $125,000. During fiscal 1999, MSI granted 815,500 options to employees, officers and directors to purchase common shares of MSI's stock. As of October 3, 1999, there are 1,636,500 options outstanding, of which 235,600 are exercisable. During fiscal 1999, Novalog granted 625,000 options to employees, officers and directors to purchase common shares of Novalog's stock. As of October 3, 1999, there are 1,878,000 options outstanding, of which 797,200 are exercisable. During fiscal 2000, Silicon Film sold 85,750 and 10,000 shares of its Series B Preferred Stock to third parties and to the Company, respectively. The net proceeds of $862,800 from third parties are reflected in the consolidated cash position of the Company and resulted in a corresponding increase in minority interest in consolidated subsidiaries. In February 2000, Silicon Film effected a 1-for-3 reverse split of its issued common stock and, subsequent to such split, issued 1,466,667 shares of its Series C Convertible Preferred Stock (the "Series C Preferred") in a Private Placement. The Series C Preferred bears an 8% cumulative dividend, payable after three years, has a priority in liquidation and is convertible into common stock of Silicon Film, at the election of the holder, at the rate of 1 common share for each 1 share of Series C Preferred tendered for conversion. The net proceeds from this transaction were approximately $5.3 million. This transaction 14 also resulted in a corresponding increase in minority interest in consolidated subsidiaries of approximately $5.3 million. After this transaction, the Company retains an 85% ownership of the common stock of Silicon Film, which is the basis for the allocation of minority interest. Upon conversion of all outstanding convertible preferred stock, the Company's ownership position would be approximately 54% of Silicon Film's common stock. In addition, future exercise of authorized and outstanding warrants and options could reduce the Company's ownership of Silicon Film's common stock to approximately 42 percent. Note 7 - Related Party Transactions In April 1980, the Company entered into an agreement with R & D Leasing Ltd. ("RDL"), a limited partnership in which the Company's Chairman of the Board and a Senior Vice-President are general partners with beneficial interests, to develop certain processes and technology related to chip stacking. The Company has exclusively licensed this technology from RDL. The Company's exclusive rights to the technology extend to all uses, both government and commercial. Since entering into the licensing agreement, the Company had accrued royalty obligations to RDL at the rate of 3.5 percent of all Company sales of chip stacks using the licensed technology. In October 1989, RDL agreed to defer its royalty claims and subordinate them with respect to all other creditors in exchange for options to purchase up to 1,000,000 shares of the Company's Common Stock at $1 per share, which were exercisable by applying the deferred royalties to the purchase. As of March 15, 2000, the Company entered into an Agreement and Plan of Reorganization to acquire substantially all of the assets of Research & Development Leasing, Inc. ("RDL") solely in exchange for 1,000,000 shares of voting common stock of the Company. Prior to March 15, 2000, the Company had been accruing obligations to RDL for a license to exclusive rights to certain processes and technology related to chip stacking. By consummating the Agreement and Plan of Reorganization to acquire RDL's assets, including its patents and technology, the Company has settled $1,000,000 of accrued royalty obligations and terminated its obligation for any further licensing payments to RDL. The Company's Chairman of the Board and a Senior Vice President were the sole shareholders of RDL prior to the Company's acquisition of RDL's assets. 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. In October 1997, the Company entered a License Agreement with Itzhak Sapir. Pursuant to which Sapir granted a royalty bearing exclusive, worldwide license under various U.S. and foreign patents owned by Sapir relating to digital photographic products, principally a product that allows an unmodified 35mm SLR camera to capture digital images. In connection with the Technology Assignment Agreement mentioned above, Silicon Film acquired all of the Company's rights under the License Agreement, and Sapir entered into an agreement with Silicon Film to such effect. In February 1999, Sapir became a senior mechanical engineer at Silicon Film. Effective March 26, 1999, Silicon Film issued Sapir a warrant (which vested in full upon issuance) to purchase 275,000 share of Silicon Film's common stock at a price of $1.00 per share in exchange for a reduction in Silicon Film's royalty obligation to Sapir under the License Agreement from their original levels to 1.5% of all EFS sales. During fiscal 2000, Silicon Film issued 50,000 pre-split shares of Silicon Film's common stock to Sapir, which had a market value of $1.80 per share, and $10,000 in settlement of royalty obligations to Sapir. During fiscal 1998, the Company entered into a sale and licensing of intellectual property rights agreement covering the Company's Electronic Film System(TM) ("EFS(TM)") to Advanced Technology Products, LLC ("ATPL"). The Company's Senior Vice President and Chief Technical Officer, John C. Carson, serves as Managing Member of ATPL. The Company was the successor to the licensed rights and future royalty obligations under this agreement until September 1998, when the Company granted Silicon Film a license to use the technology and intellectual property rights of the Company that are necessary to Silicon Film's business. Silicon Film has agreed to prospectively grant, upon the Company's request, a license to the Company to access Silicon Film's technology and intellectual property rights when necessary for the Company to participate in government contracts. In September 1998, another agreement was consummated with ATPL under which the future royalty obligation was reduced in consideration for the issuance of 1,222,125 shares of Silicon Film common stock. No value was recorded by Silicon Film as a result of this transaction due to the uncertainty related to valuing either the consideration given or received in this exchange. 15 Note 8 - Composition of Certain Financial Statement Captions October 1, October 3, 2000 1999 ------------------------------------- Accounts receivable: U.S. government $1,386,500 $1,115,000 Other customers 936,500 1,286,500 ------------------------------------- $2,323,000 $2,401,500 ===================================== Accounts receivable include unbilled amounts of $316,000 and $452,600 at October 1, 2000 and October 3, 1999, 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 include billed retentions of $5,000 at both October 1, 2000, and October 3, 1999, respectively. These amounts are normally collected upon final audit of costs by the U.S. government. October 1, October 3, 2000 1999 ------------------------------------- Inventory: Raw materials $1,088,000 $ 49,900 Work in process 446,100 1,995,500 Finished goods 43,500 174,400 ------------------------------------ $1,577,600 $2,219,800 ==================================== 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 that may be sold as products or under contracts. Raw materials consist primarily of silicon wafers and other electronic components. 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. October 1, October 3, 2000 1999 ------------------------------------- Equipment, furniture and fixtures: Engineering and production equipment $8,350,800 $7,415,100 Furniture and fixtures 551,700 438,300 Construction in progress 1,387,300 866,500 Computer software programs 1,050,200 872,400 Leasehold improvements 1,017,600 808,800 ------------------------------------ 12,357,600 10,401,100 Less accumulated depreciation and amortization (7,500,800) (6,854,200) ------------------------------------ $4,856,800 $3,546,900 ==================================== Accrued expenses: Salaries and wages $ 347,400 $ 335,600 Vacation 364,500 267,300 Payroll taxes 139,400 16,100 ESBP Contribution 206,000 - Royalties 75,000 75,000 Other accrued expenses 185,700 58,600 ------------------------------------ $1,318,000 $ 752,600 ==================================== 16 Note 9 - Commitments and Contingencies The Company leases certain facilities and equipment under cancelable and noncancelable capital and operating leases. Minimum payments under capital lease obligations and operating lease commitments existing at October 1, 2000 are as follows: Capital Operating Fiscal Year Leases Leases ----------- ------- --------- 2001 $ 458,800 $ 812,800 2002 201,100 262,800 2003 42,100 252,700 2004 - 140,100 2005 - - Thereafter - - ------------------ ----------------- Future minimum lease payments 702,000 $ 1,468,400 ================= Amounts representing interest (113,300) ------------------ Present value of net minimum lease payments $ 588,700 ================== Total rental expense for operating leases amounted to $582,000, $525,900 and $559,000 for the fiscal years ended October 1, 2000, October 3, 1999, and September 27, 1998, respectively. The Company and its subsidiaries have entered into contingent employment agreements with key members of management that provide for aggregate base compensation of $1,050,040 for fiscal year 2001, subject to achievement of specified objectives. Note 10 - Debt Extinguishment 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 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. The Company received these additional funds during fiscal 2000. The Company recorded the proceeds that exceeded $500,000 as paid-in capital Note 11 - 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. 17 The tax effects of significant items comprising the Company's income tax calculation as of October 1, 2000 and October 3, 1999, are as follows: October 1, October 3, 2000 1999 ------------------------------------- Current deferred tax assets: Reserves not currently deductible $ 473,000 $1,591,000 Long-term deferred tax assets: Operating loss carryforwards 21,664,000 19,988,000 Tax credit carryforwards 1,691,000 866,000 Valuation allowance (23,828,000) (22,445,000) ------------------------------------- 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 ended October 1, 2000, October 3, 1999, and September 27, 1998, respectively, related primarily to the total valuation allowance changing $1,069,000 from October 3, 1999 to October 1, 2000 and $4,084,000 from September 27, 1998 to October 3, 1999. The provisions for income taxes for the fiscal years ended October 1, 2000, October 3, 1999, and September 27, 1998, consist of provisions for state income taxes of $3,200, $2,800 and $2,600, respectively. No provisions for federal income taxes have been made in these fiscal years due to the net operating losses. At October 1, 2000, the Company had net operating loss carryforwards of approximately $60,115,600 for financial reporting and federal income tax purposes expiring in varying amounts from fiscal year 2001 through fiscal year 2020, and $20,998,000 for California tax purposes expiring in varying amounts from fiscal year 2001 through fiscal year 2005, available to offset future federal and California taxable income. In addition, as of October 1, 2000, the Company had investment tax credits and qualified research credits of $14,000 and $754,000, respectively, expiring in varying amounts through fiscal year 2020 and available to offset future federal 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 due to changes in ownership of the Company's common stock. 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 October 1, 2000, options to purchase 100,500 shares at prices ranging from $0.98 (33,300 shares) to $1.98 (4,000 shares) were outstanding under the 1991 Plan, of which 72,200 were exercisable at October 1, 2000. 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, which 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 October 1, 2000, options to purchase 581,200 shares at prices ranging from $1.00 (151,700 shares) to $2.875 (6,800 shares) were outstanding under the 1995 Plan, of which 363,700 were exercisable at October 1, 2000. 18 In November 1998, the Board of Directors approved a new plan, "The 1999 Stock Option Plan." 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. The 1999 Plan was ratified by shareholders at the Company's Annual Meeting in February 1999. Options granted may be either Incentive Stock Options or Nonstatutory Stock Options. Requirements for participation, exercise price and other terms are similar to the 1991 and 1995 Plans. As of October 1, 2000, options to purchase 695,700 shares at prices ranging from $1.3594 (145,600 shares) to $2.955 (233,000 shares) were outstanding under the 1999 Plan, of which 96,600 were exercisable at October 1, 2000. Stock option activity is summarized as follows: Option Price Shares Per Share ----------------------------------------- Options outstanding at September 28, 1997 1,360,600 $0.98 to $7.75 Granted 701,500 1.00 to 2.88 Exercised (16,600) 0.98 Cancelled (109,700) 1.00 to 7.50 Expired (25,000) 7.13 to 7.75 ------------ Options outstanding at September 27, 1998 1,910,800 $0.98 to $7.50 Granted 673,800 0.98 to 1.92 Exercised (129,300) 0.98 to 1.69 Cancelled (101,400) 1.00 to 6.50 Expired (7,500) 7.50 ------------ Options outstanding at October 3, 1999 2,346,400 $0.98 to $6.25 Granted 576,200 1.34 to 2.96 Exercised (1,354,300) 0.98 to 2.88 Cancelled (118,400) 1.00 to 2.31 Expired (72,500) 5.00 to 6.25 ------------ Options outstanding at October 1, 2000 1,377,400 $0.98 to $2.96 ============ A summary of outstanding options exercisable under the 1991, 1995 and 1999 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 ---------------------------------------------------------------------------------------------------------------------------- $0.98 - 1.98 1,122,600 2 $1.44 529,200 $1.32 2.16 - 2.96 254,800 4 2.91 3,300 2.88 ------------ ----------- 1,377,400 532,500 ============ ===========
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 October 1, 2000, October 3, 1999, and September 27, 1998, to the pro forma amounts of $15,533,600, $9,425,800 and $4,582,500, respectively, with a corresponding pro forma loss per share of $0.38, $0.30, and $0.19, respectively. These pro forma amounts were determined estimating the fair value of each option granted during fiscal 2000, 1999 and 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 2000, 1999 and 1998. The weighted average fair value at the grant date for the options granted during fiscal years 2000, 1999 and 1998 was $1.74, $0.92, and $1.57 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 19 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 2000, 1999 and 1997 the Company's contributions to the SBT were 135,100 330,000 and 333,300 shares of common stock, respectively, which had estimated market values of $462,100, $500,200 and $500,000, respectively. As of October 1, 2000 the Company had not yet issued 69,600 shares of common stock to the SBT for the fourth quarter 2000 contribution, and accrued a liability for its estimated market value of $206,000 (See Note 9). Note 13 - Revenues In fiscal 2000, contracts with all branches of the U.S. government accounted for 20 percent of the Company's revenues, and a second-tier government contract with a prime government contractor accounted for 12 percent. The remaining 68 percent of the Company's revenues were derived from non-government sources. Of the 32 percent related to the U.S. government agencies, the U.S. Army, the U.S. Air Force and the U.S. Navy accounted for 36 percent, 4 percent and 21 percent, respectively, with the remaining revenue of 38 percent being widely diversified among several other governmental agencies. Of the 68 percent applicable to non-governmental sources, 2 customers accounted for 19 percent and 23 percent, respectively, of the total commercial revenues. In fiscal 1999, contracts with all branches of the U.S. government accounted for 18 percent of the Company's revenues, and a second-tier government contract with a prime government contractor accounted for 19 percent. The remaining 63 percent of the Company's revenues were derived from non-government sources. Of the 18 percent related to the U.S. government agencies, the U.S. Army, the U.S. Air Force and the U.S. Navy accounted for 54 percent, 9 percent and 6 percent, respectively, with the remaining revenue of 31 percent being widely diversified among several other governmental agencies. Of the 36 percent applicable to non-governmental sources, 2 customers accounted for 33 percent and 29 percent, respectively, of the total commercial 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. Note 14 - Marketable Securities and Cash Equivalents The Company's marketable securities consist of investments in short-term, government-backed securities, and commercial paper. The Company determines proper classification of investments at the time of purchase and re-evaluates such designations at each balance sheet date. All marketable securities are classified as held-to-maturity, and are stated at amortized cost. Unrealized gains are included in interest income in the Statements of Operations. Total unrealized gains were approximately $35,500 at October 1, 2000. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Note 15 - Acquisition and Disposal of Equipment and Extraordinary Item 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. 20 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. During October 1997, $1,026,000 of these proceeds were received by the Company's lender and applied against the principal of the Company's long-term debt. 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 16 - Loss Per Share Net loss applicable to common stockholders for fiscal 1998 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 - Issuance of Common and Preferred Stock.) 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 fiscal years 2000, 1999 and 1998 were calculated as follows:
2000 1999 1998 -------------------------------------------------------- Basic Net Loss Per Share: Net loss $(15,038,300) $ (9,115,700) $ (4,243,500) ======================================================== Basic net loss per share $ (0.37) $ (0.29) $ (0.19) ======================================================== Diluted Net Loss Per Share: Net loss $(15,038,300) $ (9,115,700) $ (4,243,500) Preferred Stock cumulative dividend (300,400) (20,100) (20,700) Preferred Stock imputed dividend -- -- (465,300) -------------------------------------------------------- Net loss available to Common Stockholders $(15,338,700) $ (9,135,800) $ (4,729,500) ======================================================== Diluted net loss per share $ (0.38) $ (0.29) $ (0.19) ======================================================== Weighted average number of shares outstanding 40,428,600 31,244,300 24,597,700 ========================================================
Note 17 - Reportable Segments The Company's operating segments are distinct business units operating in different industries, except the Corporate Headquarters segment, which spans the activities of the other segments. Each segment is separately managed, with separate marketing and distribution systems. The Company's seven operating segments are Advanced Technology Division (ATD), Novalog, Microelectronics Products Division (MPD), MicroSensors, Inc. (MSI), RedHawk Vision (RedHawk), Silicon Film Technologies (Silicon Film) and Corporate Headquarters. The following five operating segments meet the criteria for reportable segments disclosure as of October 1, 2000: ATD, Novalog, MSI, RedHawk, Silicon Film and Corporate Headquarters. ATD derives most of its revenues from research and development contracts funded primarily by governmental agencies. Novalog designs, develops and sells proprietary integrated circuits ("ICs") and related products for use in wireless infrared communication. MSI develops and sells proprietary micromachined sensors and related electronics. Silicon Film designs and develops proprietary electronic films systems and other digital imaging products and services. Corporate Headquarters provides accounting, inventory control and management consulting services to the consolidated subsidiaries. Corporate revenue consists of charges to the subsidiaries for these services and corporate assets consist of loans to subsidiaries and goodwill for reacquisition of subsidiary stock. 21 The accounting policies used to develop segment information correspond to those described in the summary of significant accounting policies. Segment profit or loss is based on profit or loss from operations before income taxes and minority interest in profit and loss of subsidiaries. The following information about the 5 segments is for the year ended October 1, 2000.
Silicon Corporate ATD Novalog MSI Film Headquarters Other Totals ----------- ---------- ---------- --------- ------------ ----------- ------------ Revenues from external customers $ 4,282,900 $6,308,600 $ 69,900 $ - $ - $ 108,400 $ 10,769,800 Intersegment revenue - - - - 2,514,700 - 2,514,700 Interest revenue - 6,400 - 43,400 152,400 - 202,200 Interest expense - 500 4,700 39,200 131,400 8,200 184,000 Depreciation 690,400 86,900 111,500 142,300 14,000 33,800 1,078,900 Segment operating profit (loss) (4,442,900) 478,700 (3,303,700) (6,087,600) (727,800) (1,917,700) (16,001,000) Segment assets 11,578,300 2,239,100 742,500 4,453,400 21,867,700 885,950 41,766,950 Expenditures for segment assets 798,400 46,900 495,500 1,242,700 191,100 607,000 3,381,600 Reconciliation to Consolidated Amounts Revenues Total revenues for reportable segments $ 13,284,500 Elimination of intersegment revenues (2,514,700) --------------- Total consolidated revenues $ 10,769,800 =============== Assets Total assets for reportable segments $ 41,766,950 Elimination of intersegment assets (21,459,800) --------------- Total consolidated assets $ 20,307,150 ===============
The following information about the 5 segments is for the year ended October 3, 1999.
Silicon Corporate ATD Novalog MSI Film Headquarters Other Totals ----------- ----------- ----------- ----------- ------------- --------- ------------ Revenues from external customers $ 4,080,700 $6,787,900 $ 197,300 $ 1,600 $ - $ 32,700 $ 11,100,200 Intersegment revenue - - - - 2,320,000 - 2,320,000 Interest revenue - 2,100 - 4,600 31,900 - 38,600 Interest expense - 500 3,700 1,600 97,800 700 104,300 Depreciation 694,950 118,100 58,400 32,000 - 8,000 911,450 Segment operating profit (loss) (2,275,200) 481,800 (2,641,400) (4,132,600) (536,600) (747,400) (9,851,400) Segment assets 5,816,200 2,392,900 503,100 1,517,500 12,721,100 109,050 23,059,850 Expenditures for segment assets 1,163,900 58,400 349,200 748,000 - 55,300 2,374,800 Reconciliation to Consolidated Amounts Revenues Total revenues for reportable segments $ 13,420,200 Elimination of intersegment revenues (2,320,000) ------------ Total consolidated revenues $ 11,100,200 ============ Assets Total assets for reportable segments $ 23,059,850 Elimination of intersegment assets (12,549,500) ------------ Total consolidated assets $ 10,510,350 ============
22 During fiscal 1998, the Company had the following 6 reportable segments: ATD, CPO, Novalog, MSI, Silicon Film and Corporate Headquarters. The following information about the 6 segments is for the year ended September 27, 1998.
Silicon Corporate ATD CPO Novalog MSI Film Headquarters Other Totals ----------- --------- ----------- ---------- ----------- ------------ ---------- ----------- Revenues from external customers $ 7,231,900 $ 352,700 $ 1,026,100 $ 300,000 $ - $ - $ 403,800 $ 9,314,500 Intersegment revenue - - - - - 1,911,000 - 1,911,000 Interest revenue - - 2,500 - - 10,000 - 12,500 Interest expense - 107,400 900 - - 157,900 - 266,200 Depreciation 1,221,100 166,700 108,300 - - 50,600 - 1,546,700 Segment operating profit (loss) (1,694,300) 99,000 (1,636,300) (1,080,400) (1,042,200) (172,700) (225,300) (5,752,200) Segment assets 5,728,100 65,900 710,500 233,200 321,400 27,631,800 5,600 34,696,500 Expenditures for segment assets 533,400 - 15,900 11,500 - - - 560,800 Reconciliation to Consolidated Amounts Revenues Total revenues for reportable segments $ 11,225,500 Elimination of intersegment revenues (1,911,000) ------------ Total consolidated revenues $ 9,314,500 ============ Assets TTotal assets for reportable segments $ 34,696,500 Elimination of intersegment assets (27,631,800) ----------- Total consolidated assets $ 7,064,700 ===========
23 Irvine Sensors Corporation Report of Independent Certified Public Accountants -------------------------------------------------------------------------------- To the Board of Directors Irvine Sensors Corporation Costa Mesa, California We have audited the accompanying consolidated balance sheets of Irvine Sensors Corporation as of October 1, 2000 and October 3, 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years then ended. 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 in accordance with auditing standards generally accepted in the United States of America. 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 audits provide 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 October 1, 2000 and October 3, 1999, and the consolidated results of its operations and its consolidated cash flows for each of the three years then ended, in conformity with accounting principles generally accepted in the United State of America. Grant Thornton LLP Irvine, California November 30, 2000 24