10-K/A 1 0001.txt FORM 10-K/A - FYE OCTOBER 1, 2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10K/A (Mark One) ___ /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES AND EXCHANGE ACT OF 1934] For the fiscal year ended October 1, 2000 OR --- / / TRANSITION REPORT PURSUANT TO SECTION 13 OR --- 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934] For the transition period from _________ to _________. Commission file number 1-8402 ---------- IRVINE SENSORS CORPORATION (Exact name of registrant as specified in its charter) Delaware 33-0280334 (State or other jurisdiction of (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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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/A or any amendment to this Form 10-K/A. [_] 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 $72,000,000 on December 15, 2000. As the Preferred Stock is not publicly traded it has not been included in the computation. As of December 15, 2000, there were 46,736,700 shares of Common Stock outstanding. Documents Incorporated by Reference: Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended October 1, 2000 (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 March 7, 2001 (Part III). IRVINE SENSORS CORPORATION ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR ENDED OCTOBER 1, 2000 TABLE OF CONTENTS PAGE PART I Item 1. Business ...................................................... 4 Item 2. Properties ..................................................... 14 Item 3. Legal Proceedings............................................... 14 Item 4. Submission of Matters to a Vote of Security Holders............. 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................................................ 16 Item 6. Selected Financial Data ........................................ 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 18 Item 8. Financial Statements and Supplementary Data .................... 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................... 18 PART III Item 10. Directors and Executive Officers of the Registrant ............. 18 Item 11. Executive Compensation ......................................... 22 Item 12. Stock Ownership of Certain Beneficial Owners and Management .... 23 Item 13. Certain Relationships and Related Transactions ................. 25 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................................................... 25 Signatures................................................................. 28 2 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in the Annual Report on Form 10-K/A constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause Irvine Sensors Corporation (the "Company") or its industries' actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward- looking statements. These factors include those listed under Part I "Business - Factors that May Affect Future Results." Forward-looking statements relate to future events or our future financial performance. The Company believes it is important to communicate its expectations to its investors. In some cases, the forward-looking statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. There may be events in the future that the Company is not accurately able to predict or over which it may have no control. Readers should consider statements that contain these or similar words carefully because they (1) discuss expectations of Irvine the Company about its future performance; (2) contain projections of the Company's future operating results or of its future financial condition; (3) state other "forward-looking information. In evaluating these statements, you should specifically consider various factors, including the risks outlined under Part I "Business - Factors that May Affect Future Results." These factors may cause the Company's actual results to differ materially from any forward-looking statement. Although management believes that the expectations reflected in the forward-looking statements are reasonable, there is no guarantee regarding future results, levels of activity, performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of such statements. The Company is under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K/A to conform such statements to actual results. Readers should be aware that the occurrence of any of the events described in the risk factors and elsewhere in this Report, including the documents incorporated by reference, could have a material and adverse effect on the Company's business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of the Company's Common Stock could decline and investors could lose all or part of their investments. 3 PART I. --------- Item 1. Business GENERAL The Company and its subsidiaries are involved in various business activities related to miniaturized electronics and the applications thereof. The Company is 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 ISC believes 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 a variety of fields, including wireless infrared transmission, miniaturized sensors, image processing, digital photography and internet data transmission and switching. 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 potentially 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. Until the last few years, ISC derived most of its revenues from such funded research and development. Recently, ISC has sought to commercialize its technologies by creating independently managed subsidiaries that can pursue their own financing strategies separately from the parent. ISC has received an increasing share of its consolidated revenues from one such subsidiary. In October 1995, ISC formed a subsidiary, Novalog, Inc. ("Novalog"), to commercially exploit its low power chip technology. 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, Silicon Film Technologies, Inc. ("Silicon Film"), to commercially exploit some of its digital photography technologies. In March 2000, ISC formed a subsidiary, RedHawk Vision Systems, Inc. ("RedHawk"), to commercially exploit its technologies for digitally extracting video data. As of October 1, 2000, ISC owned approximately 95%, 98%, 83% and 95% of the issued common stock of Novalog, MSI, Silicon Film and RedHawk, respectively. In October 2000, subsequent to the close of fiscal year 2000, ISC formed a subsidiary, iNetWorks Corporation ("iNetWorks"), to commercially exploit its chip-stacking technologies to develop proprietary switches and routers for Internet and telecommunications networks. ISC owns approximately 97% of iNetWorks as of December 15, 2000. Novalog, Inc. ------------- Novalog is a consolidated subsidiary of ISC that designs, develops and sells proprietary integrated circuits ("ICs") and related products for use in wireless infrared communication. Novalog's initial products, trademarked SIRComm(TM), SIR2(TM), MiniSIR(TM) and MiniSIR2(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 its products in millions of units to manufacturers servicing the IrDA marketplace and, although there can be no assurance, management anticipates growing demand for such products. In fiscal 2000, Novalog accounted for approximately 59% of the Company's consolidated revenues. MicroSensors, Inc. ------------------ MSI is a consolidated 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. MSI is developing a proprietary micromachined inertial sensor, called the Silicon MicroRing Gyro(TM). MSI has demonstrated early prototypes of this device and is presently seeking strategic partners to facilitate its market introduction. In addition to inertial sensors, MSI intends to offer Application Specific Integrated Circuits ("ASICs") designed to read out micromachined sensors and other electronic systems. MSI is presently shipping engineering samples and qualification volumes of a proprietary Universal Capacitive Readout (TM) ("UCR"(TM)) ASIC product to potential customers. The Company believes that there are many uncertainties surrounding 4 the development of MSI's business, including the risk that large companies may be reluctant to purchase critical parts of the nature that MSI is developing from a small company. This may be true even if MSI succeeds in surmounting all of the developmental challenges it currently faces. MSI accounted for less than 1% of the Company's consolidated revenues in fiscal 2000. Silicon Film Technologies, Inc. (formerly Imagek, Inc.) ------------------------------------------------------- Silicon Film Technologies, Inc. is a consolidated subsidiary of ISC that designs, develops and intends to sell proprietary electronic film systems and other digital imaging products and services. Silicon Film has developed and had manufactured pre-production quantities of a proprietary digital photography system called "EFS"(TM) which includes a self-contained, compact, battery- powered cartridge that fits into the film cavity of a standard 35mm camera thus offering the flexibility to switch between conventional film and digital photography. Silicon Film is presently qualifying an initial version of the EFS in preparation to offer it for sale. Other collateral products and services are planned for introduction by Silicon Film in the future. Silicon Film had no revenues in fiscal 2000. RedHawk Vision, Inc. -------------------- RedHawk Vision, Inc. is a consolidated subsidiary of ISC that designs, develops and intends to sell personal computer software tools that digitally enhance video data and extract 35mm quality images from any video source including personal camcorders, the Internet and television. At the end of fiscal 2000, RedHawk introduced an initial version of this software for professional use. RedHawk had no material revenues in fiscal 2000. iNetWorks Corporation --------------------- iNetWorks Corporation is a consolidated subsidiary of ISC organized in October 2000 to develop proprietary switches and routers for Internet and telecommunications networks. iNetWorks is a development stage company and is not expected to generate revenues in fiscal 2001. iNetWorks is not included in the Company's consolidated financial statements for the year ended October 1, 2000. Subsidiaries' Capital Structure ------------------------------- The capital structure and ownership of ISC's subsidiaries vary depending on the extent to which the subsidiaries have received equity financing from third-party sources rather than ISC. After giving effect to the possible conversion of issued and outstanding preferred stock into common stock, ISC's ownership of all equity securities of Novalog, MSI, Silicon Film, RedHawk and iNetWorks is approximately 95%, 98%, 52%, 62% and 97%, respectively. Giving full effect to the possible exercise of outstanding options and warrants and additional options that may be granted under existing option plans, ISC's future ownership of these subsidiaries would be approximately 66%, 57%, 39%, 50% and 93%, for Novalog, MSI, Silicon Film, RedHawk, and iNetWorks, respectively. Novalog, MSI, Silicon Film, RedHawk and iNetWorks all have substantial intercompany debts payable to ISC. In the event that these subsidiaries are successful in attracting additional third-party equity financing, it is possible that ISC may be required or may elect to convert these obligations into additional equity securities of these subsidiaries. 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 4, 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 3001 Redhill Avenue, Building 4, Costa Mesa, California 92626, and its telephone number is (714) 429-1122. 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. Silicon Film was incorporated in Delaware in June 1998. Its principal executive offices are located at 16265 Laguna Canyon Road, Irvine, California 92618, and its telephone number is (949) 417-2260. RedHawk was incorporated in Delaware in March 2000. Its principal executive offices are located at 3001 Redhill Avenue, Building 4, Costa Mesa, California 92626, and its telephone number is (714) 444-8701. iNetWorks was incorporated in Nevada in October 2000. Its principal executive offices are located at 3001 Redhill Avenue, Building 3, Costa Mesa, California 92626, and its telephone number is (714) 444-8737. 5 Products and Technology ----------------------- The Company has a wide variety of technologies that have been derived from its early entry into the field of chip stacking. The Company is seeking to commercially exploit many of these technologies through subsidiaries organized to meet the needs of varying markets. The Company's Novalog subsidiary has developed a Serial Infrared Communications chip using elements of the Company's sensor chip design technology. This device is being used in products in order to allow computers, computer peripherals and hand-held portable electronics devices such as personal organizers, pagers and cellular phones to communicate using infrared transmissions in a manner similar to that used 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 seeking to exploit through its MSI subsidiary. In fiscal 1999, MSI introduced a Universal Capacitive Readout (UCR) Application Specific Integrated Circuit ("ASIC") intended for use by manufacturers of micromachined products. MSI is currently shipping engineering samples and production qualification volumes of the UCR to various customers. MSI has also developed a proprietary inertial sensor, the Silicon MicroRing Gyro, intended to provide an inexpensive means to measure angular motion for a wide variety of potential applications. Prototypes of the Silicon MicroRing Gyro are presently being demonstrated to potential customers and strategic partners. In September 1999, a United States patent, assigned to MSI, was granted covering the design of the Silicon MicroRing Gyro. The commercial exploitation, if any, of the Silicon MicroRing Gyro is expected to be paced by product design-in lead times of customers, principally Original Equipment Manufacturers ("OEMs"). As a result, the Company does not project material contributions to its consolidated revenue from this product during fiscal 2001. Furthermore, until potential customers and strategic partners more fully evaluate the prototypes of the Silicon MicroRing Gyro, the Company is not in a position to project when, or if, material revenues will be realized from this product thereafter. In June 1998, the Company formed its Silicon Film (formerly Imagek) subsidiary to commercially explore some of its proprietary technologies related to miniaturized digital cameras. Silicon Film is presently qualifying an initial product for sale, the EFS-1, and is developing additional products for future introduction. Silicon Film believes that its proprietary EFS technology has value advantages to potential customers with substantial investments in conventional 35mm camera equipment that inhibits the use by those consumers of self-contained digital cameras. By using the optics of existing cameras, Silicon Film believes that the EFS product line will be economically competitive to comparable resolution digital cameras. Market response to the EFS-1 will determine the degree to which Silicon Film contributes to the consolidated revenues of the Company in fiscal 2001. In March 2000, the Company formed its RedHawk subsidiary to exploit its proprietary software technology for extracting quality still photographs from any video source. In September 2000, RedHawk introduced an initial version of its software intended for use by professionals. RedHawk is developing additional versions of this product for introduction in fiscal year 2001. In October 2000, the Company formed its iNetWorks subsidiary to exploit its proprietary chip-stacking technology, combined with superconducting chip technology, to develop ultra-high-speed switches and routers for Internet and telecommunications networks. The Company is presently augmenting its funded research with its own resources to facilitate the development of this technology while iNetWorks seeks appropriate strategic and financial partners. Development of this technology for its intended application is projected to require two to three years and substantial financial resources, sources of which are not currently established. In addition to the products developed through its subsidiaries, the Company has developed a family of standard products consisting of stacked chips, both packaged and unpackaged, and believes that its chip stacking technology can offer demonstrable benefits to designers of systems that incorporate numerous integrated circuits, both memory and otherwise, 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. However, the Company has only recently qualified some of its stacked packaged chip products for volume production, and it did not realize material revenues from these products in fiscal year 2000. The economic attractiveness of the Company's stacked packaged chip products is highly dependent on market pricing of competitive monolithic parts. The Company believes, but cannot assure, that such market conditions will be favorable to the Company's products at some time in fiscal year 2001, but because of the uncertainty in such market conditions is not able to estimate whether its stacked packaged chip products will make a material contribution to the Company's consolidated revenues. 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 seeking to exploit its highest density chip stacking technology through the sale of funded development and 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 potential 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 unpackaged chip products, largely stacked memory, to customers for both government and commercial purposes. However, there is no assurance that the Company will be successful in 6 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 Defense Department and NASA missions. Customers' demand for enhanced performance of electronic systems has produced a wide variety of competitors and competitive systems offering higher density microelectronics ranging from various three-dimensional designs to highly dense two-dimensional designs. Although some competitors are generally believed to be better financed, more experienced and organizationally stronger, the Company is not aware of any system in existence or under development that can stack chips more densely than its three-dimensional approach. See "Competition." 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 using the Company's higher density chip stacking technology cannot be firmly established, and therefore, this uncertainty potentially places some of the Company's stacked chip products at a cost disadvantage. Accordingly, the Company expanded its product offerings in 1998 to include lower-density stacked electronics that could be more price competitive. Three U.S. patents have been issued and others are pending covering these latest additions to the Company's range of stacked chip product offerings. Products employing these patented approaches have been qualified for potential use by large manufacturers, and the Company is currently seeking production orders for fiscal year 2001. Potential Product Application ----------------------------- Neural Networks. In 1991, the Company received initial funding from the U.S. Navy's Office of Naval Research for potential use of certain of its technology in neural networks. After the successful completion of this phase 1 contract, the Company received a $5,200,000 follow-on contract from the Navy in June 1993 and an additional $1,700,000 add on in January 1997 to further develop the neural networks technology. This phase of the contract was completed, and the Company subsequently received approximately $2,050,000 in additional funding on related programs through fiscal 2000. The Company is presently pursuing additional contracts under which it would 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 have the interconnectivity needed to emulate neural network processing techniques. The Company believes its chip stacking technology offers a way to achieve the very high levels of interconnectivity necessary to construct an efficient artificial neural network. To the Company's knowledge, there are no competitive packaging approaches that are presently available which are believed to offer this potential. The full embodiment of its neural network 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 early product utilization. Embedded Systems. In fiscal 1998, the Company commenced exploration of a technology to stack chips of different functionality and dimensions within the same chip stack, in effect creating a complete, miniaturized electronic system that can be embedded in a higher-level product. The Company refers to this new technology as "NeoStack." In fiscal 1999, a U.S. Patent was granted on the Company's NeoStack technology. The Company has initially demonstrated its NeoStack technology to support a government program to develop a wearable computer. The Company is presently developing potential commercial applications of this technology under government contract. The Company's NeoStack technology is also central to the development of Internet and telecommunications routers being undertaken by its iNetWorks subsidiary. The Company believes, but cannot assure, that its NeoStack approach will offer advantages in terms of compactness and power consumption to developers of a wide variety of embedded computer and control systems. However, the Company has not yet developed this technology to the point at which it can make forecasts of potential revenue, if any, resulting from its licensing or application by OEMs. Development Contract -------------------- 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 7 technology related to chip stacking. By consummating the Agreement and Plan of Reorganization to acquire RDL assets, including its patents and technology, the Company has 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. Manufacturing ------------- The Company's hardware subsidiaries use contract manufacturers to fabricate and assemble their products. Novalog and MSI use semiconductor fabrication and related manufacturing sources that are widely available worldwide. Silicon Film uses product components that are also widely available with one exception. Silicon Film uses imaging chips which are currently available from limited sources of supply. Silicon Film expects that additional sources of supply will become available for this component in the future, but the continuity of its supply of this key component may be at risk until that occurs. RedHawk's software products are easily manufacturable by either the RedHawk itself or external vendors. iNetWorks does not yet manufacture products and is seeking strategic partners to provide manufacturing support in the future. The Company's ultra-high-density stacking technology involves a standard manufacturing process which fabricates cubes comprising of approximately 50 die layers along with ceramic cap and base substrates laminated with an extremely thin adhesive layer and interconnected with a thin-film bus metalization to bring the chip input/output signals out to the top surface of the stacks. The cubes are then segmented or split into subsections as required for the particular product configuration being built. Finally, the cubes, mini-cubes or short stacks are burned in, tested, graded, kitted for packaging, out-sourced for packaging and screening, and returned for final test. The Company's facility is designed for low volume and prototype production of such parts. During fiscal 1998, the Company introduced more cost competitive products manufactured with current state of the art manufacturing 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 or its subsidiaries 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 uses the unique capability of this equipment to seek, qualify for and perform additional contract research and development for its customers. Backlog ------- At November 26, 2000, the Company's consolidated funded backlog was $6,056,600 compared to $3,041,600 at December 15, 1999. The Company anticipates that all of the funded backlog will be filled in fiscal 2001. In addition, the Company has 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 marketing efforts primarily on U.S. military agencies or contractors to those agencies. The Company is continually seeking and preparing proposals for additional contracts. The Company also develops potential non-military uses of its technology. 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 that there will be more emphasis and funds directed to 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"). The Company believes that 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; (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 (UCR) general purpose ASIC designed to support a variety of sensors requiring high accuracy capacitive readout and control electronics. 8 Silicon Film is a consumer product-focused enterprise. Both the structure and staffing of Silicon Film was developed to bring digital imaging products to the consumer market. The initial product of Silicon Film, 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 system. The EFS is being positioned as a camera accessory, leveraging off the growing adoption of digital cameras and their growing infrastructure. Silicon Film is currently qualifying its initial EFS-1 product for sale. Silicon Film plans its primary product roll out of the EFS-1 to be through direct follow-up of inquiries from potential customers it has previously received. Silicon Film expects to follow this initial roll out with an expansion of distribution, reseller channels and value-added resellers for broad and vertical markets through strategic OEM relationships with camera and film companies. Silicon Film plans to service its customers with an electronic commerce site and contracted customer service and support facilities. RedHawk has focused its initial marketing effort on high-end users of professional photo-editing software. RedHawk's initial product has been designed as a plug-in to such software. RedHawk is presently developing stand- alone versions of its software to address broader market opportunities. iNetWorks ultimate target market is expected to be OEMs and carriers that support the Internet and telecommunications infrastructure. It is presently seeking strategic relationships with such entities to facilitate the marketing of its contemplated products. In fiscal 2000, contracts with all branches of the U.S. government accounted for 20% of the Company's consolidated revenues and second-tier government contracts with prime government contractors accounted for 12 percent of the Company's consolidated revenues; the remaining 68 percent of the Company's consolidated revenues was derived from non-government sources. During fiscal 2000, revenues derived from M-Flex, Manufacturers' Services, and the U.S. Army accounted for approximately 16 percent, 13 percent and 12 percent of total consolidated revenues, respectively. Loss of these customers would have a material adverse impact on the Company's short-term consolidated 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. There is no assurance the Company will not experience suspensions or terminations in the future. The Company focuses marketing in specific areas of interest in order to best use its relatively limited marketing resources. Each operating unit or subsidiary has a designated individual to direct that unit's marketing efforts. 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 applications 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 three large companies that have developed or acquired competing approaches to chip stacking. They are Texas Instruments, Inc. (TI), Thompson CSF (Thompson) and Vertical Circuits, Inc. (VCI), a subsidiary of TRW Inc. 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 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 that 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 and related applications, the principal competitive factor is the speed of data transmission achievable. Novalog believes it has competitive advantages in the battery-powered applications. Competitors to Novalog in this sector include Hewlett-Packard, Temic-Vishay and Siemens Infineon, among others, all of whom have financial, labor and capital resources greater than those of Novalog. Although Novalog is currently experiencing material revenues in competition with such companies, its ability to protect or expand its market share in the future is not assured. 9 MSI is competing in a market populated with several larger competitors relating 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 UCR 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. Silicon Film is not aware of any direct competitors to its EFS product and believes that its intellectual property will act as a barrier to competitors seeking to offer identical products, although there can be no assurance of that result. However, the EFS systems itself is expected to face competition from increasingly sophisticated generations of digital camera equipment. Peripheral equipment and services which Silicon Film intends to offer to complement its EFS products are also likely to attract strong competition if the EFS product line receives significant market acceptance. RedHawk is not aware of any direct competitors that presently offer PC-based software for sale as means to capture quality still photographs from streaming video. RedHawk is aware of such competitive software products under development and the existence of a number of hardware applications to achieve this result, but not presently at the quality level achievable with the RedHawk software. Given the potential size of the market represented by video captured by consumer camcorders, RedHawk expects material competition to emerge. iNetWorks is directly addressing the market currently dominated by Cisco Systems, Inc. and including such strong competitors as Juniper Networks, Inc. Given the size and growth of the market opportunity, iNetWorks expects to face numerous large competitors of this nature if it is able to successfully development its planned router product. 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 some of the products of its subsidiaries, particularly iNetWorks, is likely to require substantial 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 expenditures for research and development for the fiscal years ended October 1, 2000, October 3, 1999, and September 27, 1998 were $8,948,200, $5,528,000 and $4,128,400, 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 October 1, 2000, 53 U.S. and foreign patents have been issued and other U.S. and foreign patent applications are pending. Foreign patent applications corresponding to several of the U.S. patents and patent applications are also pending. There is no assurance that additional patents will issue 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, Myers, Dawes & Andras LLP, 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 using 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 that 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. 10 Silicon Film has exclusive world-wide rights to the technology developed in conjunction with a licensing agreement between the Company and I. Sapir, a foreign individual, who is now an employee of Silicon Film. Under this agreement, the Company issued 30,000 shares of its common stock to Mr. Sapir. Silicon Film has assumed the royalty obligations of this licensing agreement, which consist of a 1.5% royalty on products incorporating the licensed technology. This licensing agreement was executed in October 1997 and amended in March 1999. Silicon Film has received four additional patents and has filed thirteen additional patent applications relating to the proprietary methods and designs of its products. The Company has entered into an assignment of patent and intellectual rights agreement with F.L. Eide, a Vice-President of the Company. As part of an employment agreement, Mr. Eide assigned to the Company all rights and interests to five U.S. Provisional Patent Applications owned by him. In consideration for this assignment, Mr. Eide will receive a 1% royalty on the gross sales revenues of any products incorporating the technology of these patent assignments for the lifetime of these patents. This agreement 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 Senior Vice President and Chief Technical Officer serves as Managing Member. In September 1998, the Company assigned the rights and future royalty obligations of the ATPL license to Silicon Film. Concurrent with this assignment, ATPL reduced its royalty entitlements under the license in consideration for the issuance of 1,222,125 shares of Silicon Film 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 October 1, 2000, the Company, including its consolidated subsidiaries, had 134 full-time employees and 23 consultants. Of the full-time employees, 89 were engaged in engineering, production and technical support, 11 in sales and marketing and 34 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. 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, Silicon Film, RedHawk and iNetWorks subsidiaries and the development of various stacked-memory products intended for military and aerospace markets. To date, these changes have developed new revenue sources but have not yet produced sustained consolidated profitability. Because of this limited and not-yet successful history, there can be no assurances that ISC's present and contemplated future products will be widely accepted in commercial marketplaces. Financing Needs. Although the Company believes that it has adequate liquidity for its core level of operations, ISC and its subsidiaries have developed business plans for several emerging product areas based on its technologies. The product development and market introduction costs of these products cannot presently be fully funded from internal cash flow. There can be no assurances that ISC or its subsidiaries will be able to locate external financing for their business plans on acceptable terms. Nasdaq Listing Requirements; Penny Stock. ISC's Common Stock is publicly traded on the Nasdaq SmallCap Market. Effective February 23, 1998, new and more restrictive standards became effective for listing maintenance on this market. Prior to the implementation of these new regulations, ISC briefly dropped below the pending standards due to the loss associated with its Vermont plant closure and had to establish to the satisfaction of the Nasdaq staff that it had met the new standards in order to retain its listing. While the Company was able to meet this requirement, there can be no assurances that the Company will be able to maintain its compliance in the future. In the foreseeable future, the Company must meet at least one of the two following standards to maintain its Nasdaq listing; (i) maintenance of its tangible net worth at $2 million or greater, or (ii) maintenance of a market capitalization figure in excess of $35 million as measured by market prices for trades executed on Nasdaq. The Company presently meets both standards. However, the consolidated losses resulting from the development expenses of some of its subsidiaries will 11 continue to erode its tangible net worth during fiscal 2001. In that instance and absent additional equity financing, which cannot be guaranteed, the Company would be subject to market price risks for the maintenance of its Nasdaq listing. If ISC were to fail to meet the maintenance requirements for listing on Nasdaq in the future and the price of ISC's Common Stock was below $5 at such time, such securities would come within the definition of "penny stock" as defined in the Securities Exchange Act of 1934, as amended (the "Exchange Act") and be covered by Rule 15g-9 of the Exchange Act. That Rule imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. From transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Consequently, Rule 15g-9, if it were to become applicable, would affect the ability or willingness of broker- dealers to sell ISC's securities and therefore would affect the ability of shareholders to sell their securities in the public market and the Company's ability to finance its business plans. Equity Capital Structure. At October 1, 2000, the Company had 46,637,800 common shares issued and outstanding. Approximately 8,118,200 common shares are also reserved for issuance pursuant to existing preferred stock conversion rights, and outstanding warrants and options. The approximately 5,241,800 common shares of the Company's authorized capital structure may be insufficient to facilitate the financing of all of the Company's existing and planned commercial initiatives. There can be no assurances that the Company's stockholders will authorize an increase in the Company's authorized common shares. Third-Party Financing of Subsidiaries. The financing of the Company's Novalog and Silicon Film subsidiaries to date have involved significant sales of minority equity interests. The Company has repurchased a substantial portion of the minority equity interests of Novalog, but does not now have sufficient discretionary capital to continue this practice with respect to Novalog or any other subsidiary or to adequately finance the future business plans of any of its subsidiaries. The Company's subsidiaries are seeking to sell additional equity interests to finance at least some portion of their business plans. The Company's ability to enjoy the benefits of any potential increase in value on the part of its subsidiaries can be greatly reduced by third-party financings. This is true both because of reduced equity interests in the subsidiaries and because the Company's control of its subsidiaries is lessened or eliminated. Significant third-party investment in the Company's subsidiaries will likely result in third-party investors receiving subsidiary board representation and/or protective covenants that could result in the Company losing voting control of its subsidiaries. In certain circumstances, it is possible that the Company or its subsidiaries could experience very substantial transaction costs or "break- up" fees in connection with efforts to obtain financing. Third-party financings of subsidiaries will inherently complicate our fiduciary and contractual obligations and could leave us more vulnerable to potential future litigation. The outcome of litigation is inherently unpredictable, and even the costs of prosecution could have a materially adverse effect on our results of operations. Dependence on Defense Contract Revenues. Although ISC has been shifting its focus to include commercial exploitation of its technology, it expects to continue to be dependent upon research and development contracts with federal agencies and their contractors for a substantial, but diminishing portion of its revenues for the foreseeable future. General political and economic conditions, which cannot be accurately predicted, directly and indirectly affect the quantity and allocation of expenditures by federal agencies. Even the timing of incremental funding commitments to existing, but partially funded contracts can be affected by such factors. Therefore, cutbacks in the federal budget could have a material adverse impact on ISC's results of operations as long as research and development contracts remain an important element of its business. Market Acceptance of New Products. Both ISC and its subsidiaries are focused on markets that are emerging in nature and potentially subject to rapid growth. Market reaction to new products in such circumstances can be difficult to predict. There can be no assurance that the present or future products of ISC or its subsidiaries will be favorably accepted by such markets on a sustained basis. In addition, because ISC has a limited history of competing in the intensely competitive commercial electronics industry, there is no assurance that it will successfully be able to develop, manufacture and market additional commercial product lines or that such product lines will be accepted in the commercial marketplace. Patents and Proprietary Right Protection; Infringement. ISC believes that its ultimate success, and that of its subsidiaries, will depend, in part, on the strength of its existing patent protection and the additional patent protection that it and its subsidiaries may acquire in the future. As of the date hereof, ISC owns 45 U.S. patents and 8 foreign patents and has other patent applications pending before the U.S. Patent and Trademark Office as well as various foreign jurisdictions. Although ISC believes many of these patents to be fundamental in nature, there can be no assurance that any existing or future patents will survive a challenge or will otherwise provide meaningful protection from competition. Furthermore, there is also no assurance that ISC or its subsidiaries will have the financial resources to provide vigorous defense or enforcement of patents. Protection of Proprietary Information. ISC and its subsidiaries treat technical data as confidential and rely on internal nondisclosure safeguards, including confidentiality agreements with employees, and on laws protecting trade secrets, to protect proprietary information. There can be no assurance that these measures will adequately protect the confidentiality of the proprietary information of ISC or its subsidiaries or that others will not independently develop products or technology that are equivalent or superior to those of ISC or its subsidiaries. ISC or its subsidiaries may receive in the future communications from third parties asserting that the products of ISC or its subsidiaries infringe the proprietary rights of third parties. There can be no assurance that any such claims 12 would not result in protracted and costly litigation. There can be no assurance that any particular aspect of the technology owned by ISC or its subsidiaries will not be found to infringe the products of other companies. Other companies may hold or obtain patents or inventions or may otherwise claim proprietary rights to technology useful or necessary to ISC's or its subsidiaries' business. The extent to which ISC or its subsidiaries may be required to seek licenses under such proprietary rights of third parties and the cost or availability of such license, cannot be predicted. While it may be necessary or desirable in the future to obtain licenses relating to one or more of its proposed products or relating to current or future technologies, there can be no assurance that ISC or its subsidiaries will be able to do so on commercially reasonable terms. Government Rights. Whatever degree of protection, if any, is afforded ISC or its subsidiaries through its patents, proprietary information and other intellectual property, this protection will not extend to government markets that utilize certain segments of ISC's technology. The government has the right to royalty-free use of technologies that ISC has developed under government contracts, including portions of ISC's stacked circuitry technology. ISC is free to commercially exploit such government-funded technologies and may assert its intellectual property rights to seek to block other non-government users thereof, but there can be no assurances of success in such endeavors. Competition. ISC and its subsidiaries face strong competition. Most competitors have considerably greater financial, marketing and technological resources than does ISC or its subsidiaries. There is no assurance that ISC or its subsidiaries will be able to compete successfully with such other companies. Dependence on Suppliers. ISC and its subsidiaries extensively use suppliers in the manufacture of their products. At the projected level of operations, both ISC and its subsidiaries have identified sources that are believed to be adequate to meet identified needs. However, there is no assurance that ISC or its subsidiaries will be able to cover changing manufacturing needs in the future. Failure to do so will have a material adverse impact on the operations of ISC and its subsidiaries. Possible Technological Advances. ISC and its subsidiaries are in industries characterized by continuing technological development and, accordingly, will be required to devote substantial resources to improve already technologically complex products. Many companies in these industries devote considerably greater resources to research and development than does ISC or its subsidiaries. Developments by any of these companies could have a materially adverse effect on ISC. Dependence on Key Personnel. ISC and its subsidiaries will depend to a large extent on the abilities and continued participation of certain key employees. The loss of key employees could have a material adverse effect on the businesses of ISC and its subsidiaries. ISC and its subsidiaries have adopted employee Stock Option Plans designed to attract and retain key employees. The amount of options available pursuant to shareholder-approved option plans have been depleted, and there can be no guarantee that shareholders will approve additional plans in the future. The value of stock option plans to the subsidiaries will be strongly tied to the timing of any future IPOs, of which there can be no assurance, and there can, accordingly, be no guarantee of the efficacy of such options in retaining key employees. Neither ISC nor its subsidiaries presently maintain "key man" insurance on any key employees. 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. 13 Item 2. Properties The following table sets forth information with respect to the Company's facilities:
Location Square Feet Monthly Rent Lease Expiration ------------------------------- ------------- --------------- ---------------- ISC(1) Costa Mesa, CA 42,600 $50,100 September 2001 Silicon Film Technologies, Inc. Irvine, CA 10,300 15,450 May 2004 ------------ --------------- Total 52,900 $65,550 ============ ===============
____________ (1) Includes facilities for ISC corporate headquarters, ATD, MPD, MSI, RedHawk, iNetWorks and Novalog. The facilities used by Advanced Technology Division 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. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. 14 EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position ---- --- -------- Robert G. Richards 73 President and Chief Executive Officer Bernhard Baumgartner 52 Senior Vice President and General Manager - Commercial Products Group Mel R. Brashears 55 Senior Vice President and a Director John C. Carson 62 Senior Vice President, Chief Technical Officer and a Director John J. Stuart, Jr. 61 Senior Vice President, Chief Financial Officer and Treasurer Mr. Richards has been President and Chief Executive Officer of the Company since June 2000 and a director of its iNetWorks subsidiary since October 2000. Since April 1999, Mr. Richards has also served as a member of our Scientific Advisory Board. Mr. Richards retired as President of Aerojet Electronic Systems Division in 1993. He is co-author of the book, Infrared Physics and Engineering, published by McGraw-Hill, and has a M.A. degree from the University of California at Berkeley. Mr. Baumgartner has been Senior Vice President and General Manager of the Company's Commercial Products Group and a director of its Novalog, MSI and Silicon Film subsidiaries since December 2000. From February 1998 through November 2000, he was President and CEO of Krones Inc., the U.S. subsidiary of a German company specializing in industrial control systems and hardware. From April 1994 to January 1998, he was CEO of Kettner, O+H, a German supplier in the same industry. Mr. Baumgartner has an MBA from International Institute for Management Development, Switzerland, an International Senior Management Program Certificate from Harvard Business School and an M.S. in Civil Engineering from the University of Graz, Austria. Dr. Brashears has been Chairman and Chief Executive Officer of the Company's iNetWorks Corporation subsidiary since October 2000. He has also been a director of ISC since December 2000. From October through December 2000, he was also a Senior Vice President of Irvine Sensors, a position he resigned after becoming a director. From January 1999 to September 2000, he was self-employed. From January 1996 through December 1998, he was President and Chief Operating Officer of Lockheed Martin's $8B Space & Strategic Missiles Sector. Prior to 1996, Dr. Brashears held numerous positions in a 27-year career of increasing management responsibility with Lockheed and its successors. Dr. Brashears is a graduate of the University of Missouri with B.S., M.S. and Ph.D. degrees in engineering. John C. Carson is a co-founder of the Company and has served as a Senior Vice President since April 1982 and as a director since the Company's inception in 1974 until January 2001. He was elected Chief Technical Officer in February 1997. Mr. Carson also serves as a director of MSI (since October 1997) and iNetWorks (since November 2000). Mr. Carson has been awarded 15 patents for smart sensors, 3D packaging and single processing architectures, including neural networks. Mr. Carson holds a B.S. in Physics from the Massachusetts Institute of Technology. John J. Stuart joined the Company in January 1983 as its Manager of Special Projects and Communications, became the Company's Chief Financial Officer and Treasurer in July 1985, and a Vice President in June 1995. He relinquished the position of Treasurer in February 1995. Effective October 1998, Mr. Stuart re- assumed the position of Treasurer in addition to his other responsibilities. Mr. Stuart has been an Advisory Member of the Company's Board of Directors since November 1998. Mr. Stuart is also a member of the Board of Directors and is Vice President of Finance and Chief Financial Officer of Novalog (since October 1995), MSI (since October 1997), RedHawk Vision (since March 2000) and iNetWorks (since October 2000). He was also Chief Financial Officer of Silicon Film Technologies from its organization in August 1998 until May 1999. Mr. Stuart holds a B.S. in Industrial Management from the Massachusetts Institute of Technology. 15 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 closing 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: Common Stock Bid Prices -------------------------- High Low --------- ------- Fiscal Year Ended October 1, 2000: First Quarter $ 2.5625 $1.2188 Second Quarter $18.7500 $1.7500 Third Quarter $11.2500 $3.5000 Fourth Quarter $ 4.5000 $2.0938 Fiscal Year Ended October 3, 1999: First Quarter $ 1.9375 $1.4063 Second Quarter $ 1.6563 $1.3125 Third Quarter $ 2.0000 $1.4375 Fourth Quarter $ 1.8438 $2.1875 On December 15, 2000, the closing bid and asked prices for the Company's Common Stock on the Nasdaq SmallCap Market were $1 9/16 and $1 13/16 respectively. On December 15, 2000, there were approximately 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 that limit the Company's ability to pay cash dividends in the future. Recent Sales of Unregistered Securities --------------------------------------- During fiscal year 2000, the Company sold and issued the following unregistered securities: On February 29, 2000, the Company issued 3,142,100 shares of common stock to nineteen accredited investors to satisfy the terms of a subscription unit, sold during the first fiscal quarter, that was subject to shareholder approval of amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of common stock. The purchase price of each unit was $135, and a unit consisted 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 $3,660,000 in net proceeds from this transaction. The placement agent retained by the Company for this offering received warrants to purchase 224,014 units identical to the units purchased by the investors, exercisable at $148.50. On March 15, 2000, the Company sold 228,851 units, resulting in the issuance of 228,851 unregistered shares of common stock and warrants to purchase an additional 22,885 shares (exercisable at $12) to three accredited investors The purchase price was $9.25 per unit, and the Company's net proceeds were approximately $1,900,000. The placement agent retained by the Company for this offering received warrants to purchase 22,885 units identical to the units purchased by the investors, exercisable at $10.175. On July 21, 2000, the Company sold 2,033,334 units, resulting in the issuance of 2,033,334 unregistered shares of common stock and warrants to purchase an additional 1,016,667 shares (exercisable at $2.50) to six accredited investors. The purchase price was 16 $3.00 per unit, and the Company's net proceeds were approximately $5,648,000. The placement agent retained by the Company for this offering received warrants to purchase 203,334 units identical to the units purchased by the investors, exercisable at $3.00. Between August 2 and August 17, 2000, the Company issued and sold 1,930,665 unregistered shares of common stock and warrants to purchase an additional 965,333 shares (exercisable at $2.50) to ten accredited investors. The purchase price was $3.00 per unit, and the Company's net proceeds were approximately $5,261,000. The placement agents retained by the Company for this offering received warrants to purchase 193,067 units consisting of one share and one-half warrant, exercisable at $3.00. The issuances of the securities described in the previous four paragraphs were deemed to be exempt from registration under the Securities Act of 1933, as amended (the "Act"), in reliance on Section 4(2) of the Act as transactions by an issuer not involving any public offering. In addition, the recipients of securities in the above transactions each represented its intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in that transaction. The recipients each were given access to information about the Company. Item 6. Selected Financial Data The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this 10-K filing. The consolidated statement of operations data for the fiscal years ended October 1, 2000, October 3, 1999 and September 27, 1998 and the consolidated balance sheet data at October 1, 2000 and October 3, 1999 are derived from audited consolidated financial statements incorporated by reference in this 10-K filing. The consolidated statement of operations data for the fiscal years ended September 28, 1997 and September 29, 1996, and the consolidated balance sheet data at September 27, 1998, September 28, 1997 and September 29, 1996 are derived from audited consolidated financial statements not included in this 10-K filing. The historical results are not necessarily indicative of results to be expected in any future period.
Fiscal Year Ended ----------------------------------------------------------------------------------------- October 1, October 3, September 27, September 28, September 29, 2000 1999 1998 1997 1996 --------------- --------------- ----------------- ----------------- ------------- Consolidated Statement of Operations Data: ------------------------------------------ Total 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 net loss per common and common equivalent share $ (0.37) $ (0.29) $ (0.19) $ (0.73) $ (0.94) Diluted net loss per common and common equivalent share $ (0.38) $ (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 Shares used in computing net loss per share 40,428,600 31,244,300 24,597,700 20,475,100 16,874,300
Loss per common and common equivalent shares includes, where applicable, cumulative and imputed dividends on Preferred Stock which have not been declared or paid.
October 1, October 3, September 27, September 28, September 29, 2000 1999 1998 1997 1996 ----------------- --------------- --------------- --------------- --------------- Consolidated Balance Sheet Data: --------------------------------- Current assets $14,129,800 $ 6,439,150 $4,802,700 $ 6,637,200 $ 9,648,200 Current liabilities $ 4,683,400 $ 5,375,300 $2,296,000 $ 7,395,600 $ 5,787,100 Working capital (deficit) $ 9,446,400 $ 1,063,850 $2,506,700 $ (758,400) $ 3,861,100 Total assets $20,307,150 $10,510,350 $7,064,700 $ 9,449,300 $21,742,200 Long-term debt $ 224,700 $ 433,200 $ 933,700 $ 1,207,000 $ 3,165,600 Shareholders' equity (deficit) $ 7,586,550 $ 2,212,650 $2,347,000 $(2,939,900) $ 8,312,700
17 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 2000 Annual Report to Stockholders and is incorporated by reference in this Annual Report on Form 10-K/A. Item 7A. Quantitative and Qualitative Disclosures About Market Risk None. Item 8. Financial Statements and Supplementary Data The financial statements, together with the report thereon of Grant Thornton LLP dated November 30, 2000, appearing on pages 6 through 25 of the Company's 2000 Annual Report to Stockholders are incorporated by reference to this Annual Report on Form 10-K/A. With the exception of the aforementioned information and the information incorporated in Item 7, the 2000 Annual Report to Stockholders is not deemed to be filed as part of this Annual Report on Form 10-K/A. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III -------- Item 10. Directors and Executive Officers of the Registrant Nominees -------- The Company's By-laws provide for a board of not less than six nor more than eleven directors. The By-laws, as currently in effect, provide for a board of seven directors, as of this Annual Meeting, March 7, 2001. Each director to be elected will hold office until the next annual meeting of stockholders and until his or her successor is elected and has qualified, or until such director's earlier death, resignation or removal. Unless otherwise instructed, the Proxy holders will vote the Proxies received by them FOR the Company's seven nominees named below. Proxies cannot be voted for a greater number of persons than the number of nominees named. In the event that any nominee of the Company is unable or declines to serve as a director at the time of the Annual Meeting or any postponements or adjournments thereof, the Proxies will be voted for any substitute nominee who shall be designated by the Proxy holders or Board of Directors to fill the vacancy. In the event that additional persons are nominated for election as directors, the Proxy holders intend to vote all Proxies received by them in such a manner in accordance with cumulative voting as will assure the election of as many of the nominees listed below as possible, and, in such event, the specific nominees to be voted for will be determined by the Proxy holders. Accordingly, the Company seeks discretionary authority to cumulate votes. It is not expected that any nominee will be unable or will decline to serve as director. Required Vote ------------- Directors are elected by a plurality of the votes present and in person or represented by proxy and entitled to vote on the proposal. The seven nominees receiving the most votes will be elected as the Board of Directors for the coming year. Votes may be cast in favor or withheld; votes that are withheld will be 18 excluded entirely from the vote and will have no effect. A broker-non-vote will not be treated as entitled to vote on this matter. The Board recommends voting "FOR" the seven nominees listed below. The names of the Company's nominees for director, their ages as of March 7, 2001 and certain information about them, are set forth below:
Name Age Position with Company/Principal Occupation ---- --- ------------------------------------------ Mel R. Brashears 55 Director Marc Dumont 57 Director Maurice C. ("Michael") Inman, Jr. 69 Director Thomas M. Kelly 59 Director Robert G. Richards 73 President, Chief Executive Officer and Director Wolfgang Seidel 58 Director Vincent F. Sollitto, Jr. 52 Director
19 Dr. Brashears has been Chairman and Chief Executive Officer of the Company's iNetWorks Corporation subsidiary since October 2000. He has also been a director of ISC since December 2000. From October through December 2000, he was also a Senior Vice President of Irvine Sensors, a position he resigned after becoming a director. From January 1999 to September 2000, he was self-employed. From January 1996 through December 1998, he was President and Chief Operating Officer of Lockheed Martin's $8B Space & Strategic Missiles Sector. Prior to 1996, Dr. Brashears held numerous positions in a 27-year career of increasing management responsibility with Lockheed and its successors. Dr. Brashears is a graduate of the University of Missouri with B. S., M. S. and Ph.D. degrees in engineering. Mr. Dumont became a director of the Company in April 1994. Mr. Dumont has been an international consultant and investment banker for more than five years. Mr. Dumont is also on the Board of Directors of Novalog since October 1996. From January 1981 to March 1995, Mr. Dumont was President of PSA International S.A., a PSA Peugeot Citroen Group company. Mr. Dumont is a graduate of the University of Louvain, Belgium with degrees in Electrical Engineering and Applied Economics and holds an MBA from the University of Chicago. Mr. Inman has been a director of the Company since January 2001. He is the principal of Inman and Associates, P.C., a law firm specializing in international labor matters. From 1996 through 1998, Mr. Inman was Chairman of Inman, Steinberg, Nye & Stone. P.C., a law firm, and from 1987 to 1996, he was Senior Partner of Inman, Weisz & Steinberg, also a law firm. From 1981 to 1986, Mr. Inman was General Counsel and Chief Legal Officer of the U.S. Immigration and Naturalization Service, in which capacity he represented the U.S. Government in various international matters. Mr. Inman has a B.S. degree in Finance from the University of California at Los Angeles and an L.L.B. (J.D.) from Harvard Law School. Dr. Kelly became a director of the Company in October 2000 and has been a director of its Silicon Film subsidiary since its organization in August 1998. From 1968 until his retirement in early 1998, Dr. Kelly held positions of increasing responsibility with Eastman Kodak Company. Most recently, he served as Director of Kodak's Digital Products Center, General Manager of all Digital Capture Products, and General Manager of Digital Camera Products. Dr. Kelly led the development of Kodak's initial digital cameras and worked closely with Apple Computer on the launch of the first consumer digital camera. Dr. Kelly holds a Ph.D. in Physics from Wayne State University and a B.S. in Physics from LeMoyne College. Mr. Richards has been President and Chief Executive Officer of the Company since June 2000, a director since January 2001 and a director of the Company's iNetWorks subsidiary since October 2000. Since April 1999, Mr. Richards has also served as a member of the Company's Scientific Advisory Board. Mr. Richards retired as President of Aerojet Electronic Systems Division in 1993. He is co- author of the book, "Infrared Physics and Engineering", published by McGraw- Hill, and has an M.A. degree from the University of California at Berkeley. Mr. Seidel has been a director of the Company since June 1999. He is principal of a management consulting firm specializing in mergers and acquisitions, Seidel and Partner, located in Munich, Germany. He has held this position since 1992. Prior to this time, Mr. Seidel was a principal in the acquisition, management and sale of German companies. Mr. Seidel holds a masters degree (Dipl. Ing) in Mechanical and Aircraft Engineering from Munich Technical University. Mr. Sollitto has been a director of the Company since October 1997. He is the Chief Executive Officer of Photon Dynamics, Inc., a position he has held since June 1996. Photon Dynamics is a provider of yield management solutions to the flat panel display industry. Prior to joining Photon Dynamics, Mr. Sollitto was with Fujitsu Microelectronics, Inc. from September 1993 to February 1996 as General Manager of its Business Unit Operations. Mr. Sollitto is also a director of Photon Dynamics, as well as Ultratech Stepper, Inc., a manufacturer of photolithographic equipment for the semiconductor industry, and Applied Films Corporation, a provider of thin film-coated glass and film coating equipment for the flat panel display industry. A graduate of Tufts College, Mr. Sollitto holds a B.S. degree in Electrical Engineering. Directors and officers are elected on an annual basis. The term of each director expires at the Company's next annual meeting of stockholders or at such time as his or her successor is duly elected and qualified. Officers serve at the discretion of the Board of Directors. There are no family relationships between any director, executive officer or other key personnel and any other director, executive officer or other key personnel of the Company. 20 Possible Stockholder Nominations -------------------------------- In connection with this Annual Meeting, the Company timely received from two stockholders notice of two additional nominations for minority representation on the board of directors that may be made at the Annual Meeting. The Board of Directors, in selecting this year's management slate, decided to establish a smaller Board consisting of seven members, each of which had extensive industrial, government or financial contacts useful to the Company's business plan, thereby leaving room for later expansion of the Board in the event that future key strategic or financial partners seek Board representation. Accordingly, the Board declined to include on management's slate either of these suggested stockholder nominations, and the Company is not soliciting proxies with respect to these nominations. In order to permit the Company's stockholders to consider those additional possible nominations, the nominating stockholders or their designated representatives must appear at the Annual Meeting and formally nominate the individuals set forth in their respective notices. As of the date of this 10-K/A, management has no definitive information concerning the final intentions of the noticing stockholders and in particular whether they intend to solicit proxies in accordance with the rules and regulations of the SEC. Management strongly believes that the election of stockholder nominees to the Board could hinder the Board's effectiveness by impacting its collegiality and causing loss of industrial, governmental and financial contacts represented by any management nominees displaced by stockholder nominees. Moreover, no management nominees have consented to serve with non-management nominees, if elected, and may decide that it is not in their respective best interests to serve on a board with one or more stockholder- nominated members due to potential liability and other concerns. Management's designated Proxies will not vote in favor of any of the non- management nominees, if any stand for election at the Annual Meeting, and urge all stockholders to vote FOR the Company's seven nominees listed above. Compensation of Directors ------------------------- Directors who are employees of the Company are not separately compensated for their services as directors or as members of committees of the Board of Directors. During fiscal 2000, directors who were not employees of the Company received $2,000 for each board meeting attended, $500 for each Audit or Compensation Committee meeting attended and were reimbursed for reasonable travel and other expenses. Board Meetings and Committees ----------------------------- The Board of Directors held a total of seven meetings during the fiscal year ended October 1, 2000 and took action by unanimous written consent on 11 occasions. No director attended fewer than 75% of the meetings of the Board of Directors or committees of which he or she was a member during the fiscal year ended October 1, 2000. The Audit Committee of the Board of Directors met twice during the fiscal year ended October 1, 2000. This Committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of our accountants, the scope of the annual audits, fees to be paid to our accountants, the performance of our accountants and our accounting practices. During fiscal 2000, neither the Board of Directors nor the Company's independent certified public accountants raised any issues with respect to matters that required formal review. The current members of the Audit Committee are Messrs. Alexiou, Kelly and Sollitto. A new board member will be appointed to replace Mr. Alexiou on the Audit Committee upon his retirement from the Board as of the Annual Meeting. The Compensation Committee of the Board of Directors met three times during the fiscal year ended October 1, 2000. This Committee makes recommendations to the Board of Directors as to the salaries of officers, administers the Company's executive bonus programs and recommends to the Board the award of stock options to key employees, officers and directors. The current members of the Compensation Committee are General Frank Ragano and Messrs. Alexiou, Dumont and Seidel. General Ragano and Mr. Alexiou are both retiring from the Board as of the Annual Meeting, and at least one new member will be appointed to the Compensation Committee following the election of the new Board at the Annual Meeting. 21 The Company had a temporary nominating committee consisting of Messrs. Kelly, Seidel and Sollitto to review and make recommendations to the Board for management nominees for election to the Board at the Annual Meeting. The Company does not have a permanent nominating committee or any committee permanently performing the functions of a nominating committee. Executive Officers ------------------ The names of the Company's current executive officers who are not also directors of the Company and certain information about each of them are set forth below: Bernhard Baumgartner, age 52, has been Senior Vice President and General Manager of the Company's Commercial Products Group and a director of its Novalog, MSI and Silicon Film subsidiaries since December 2000. From February 1998 through November 2000, he was President and CEO of Krones Inc., the U.S. subsidiary of a German company specializing in industrial control systems and hardware. From April 1994 to January 1998, he was CEO of Kettner, O+H, a German supplier in the same industry. Mr. Baumgartner has an MBA from International Institute for Management Development, Switzerland, an International Senior Management Program Certificate from Harvard Business School and an M.S. in Civil Engineering from the University of Graz, Austria. John C. Carson, age 62, is a co-founder of the Company and has served as a Senior Vice President since April 1982 and as a director since the Company's inception in 1974 until January 2001. He was elected Chief Technical Officer in February 1997. Mr. Carson also serves as a director of MSI (since October 1997) and iNetWorks (since November 2000). Mr. Carson has been awarded 15 patents for smart sensors, 3D packaging and single processing architectures, including neural networks. Mr. Carson holds a B S. in Physics from the Massachusetts Institute of Technology. John J. Stuart, age 61, joined the Company in January 1983 as its Manager of Special Projects and Communications, became the Company's Chief Financial Officer and Treasurer in July 1985, and a Vice President in June 1995. He relinquished the position of Treasurer in February 1995. Effective October 1998, Mr. Stuart re-assumed the position of Treasurer in addition to his other responsibilities. Mr. Stuart has been an Advisory Member of the Company's Board of Directors since November 1998. Mr. Stuart is also a member of the Board of Directors and is Vice President of Finance and Chief Financial Officer of Novalog (since October 1995), MSI (since October 1997), RedHawk Vision (since March 2000) and iNetWorks (since October 2000). He was also Chief Financial Officer of Silicon Film Technologies from its organization in August 1998 until May 1999. Mr. Stuart holds a B.S. in Industrial Management from the Massachusetts Institute of Technology. Item 11. Executive Compensation Compensation of Executive Officers ---------------------------------- For fiscal years ended October 1, 2000, October 3, 1999 and September 27, 1998, the compensation awarded or paid to, or earned by the two people who served as the Company's Chief Executive Officer during the fiscal year ended October 1, 2000, and each of the three other executive officers of the Company whose annual salary and bonus exceeded $100,000 in fiscal 2000 (the "Named Executive Officers") is shown in the following table: 22 Summary Compensation Table
Long Term Compensation Annual Compensation Payouts ------------------------------ -------------- Other Annual Name and Compen- Options/ All Other Principal Fiscal sation SARs Compen- Position(s) Year Salary($) Bonus($) ($)(1) (#) sation ($)(2) ----------- ---- -------- ------- ----- --------- ------------- Robert G. Richards 2000 53,870 - - 3,000 - President and Chief Executive Officer(3) James D. Evert 2000 235,755 26,884 5,465 - 13,952 President and Chief 1999 200,000 47,760 3,030 - 18,390 Executive Officer (4) 1998 200,000 57,700 1,400 200,000 15,970 John C. Carson 2000 151,528 9,680 2,600 15,000 23,150 Senior Vice President 1999 151,528 7,170 4,730 30,000 18,390 Chief Technical Officer 1998 146,500 14,170 3,230 50,000 25,120 John J. Stuart, Jr. 2000 135,100 15,230 600 15,000 20,689 Senior Vice President, 1999 135,100 16,770 4,910 30,000 18,330 Chief Financial Officer 1998 120,000 15,520 7,550 50,000 12,660
_________________ (1) As permitted by the rules promulgated by the SEC, no amounts are shown for "perquisites," where such amounts for the Named Executive Officers do not exceed the lesser of 10% of the sum of such executive bonus salary or $50,000. (2) Amounts in this column represent the value of shares contributed to the named individual's account in the Employee Stock Bonus Plan. See "Employee Stock Bonus Plan". (3) Mr. Richards became employed by the Company in June 2000. (4) Includes $220,369 paid to Mr. Evert in his capacity as President and Chief Executive Officer of the Company through June 2000, at which time he resigned to assume the positions of President and Chief Executive Officer of RedHawk Vision, Inc., a consolidated subsidiary of the Company. The balance of his fiscal 2000 compensation, $15,386, was earned by Mr. Evert in his capacity as President and Chief Executive Officer of RedHawk Vision, Inc. Information is provided as to all of Mr. Evert's compensation for the full fiscal year pursuant to Item 402(a)(4) of Regulation S-K. Employment Agreements --------------------- The Company has no employment agreements with any Named Executive Officer. Item 12. Stock Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The following table sets forth, as of December 31, 2000, certain information with respect to shares beneficially owned by (i) each person who is known by the Company to be the beneficial owner of more than 5% of the Company's outstanding classes of voting securities, (ii) each directors and director nominee, (iii) the executive officers named in the Summary Compensation Table and (iv) all current directors and executive officers as a group. Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided; in computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of such acquisition rights. As a result, the 23 percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person's actual voting power at any particular date. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock. To the Company's knowledge, the entities named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Amount and Nature of Beneficial Ownership
Sole Voting Shared Voting Percent Title of or Investment or Investment Aggregate of Name Class Power Power(1) Amount Class(2) ---- ----- --------- -------------- --------- ---------- James Alexiou (3) Common 713,376(4) 2,022,160(5) 2,735,536 5.81% 3001 Redhill Ave. Preferred - 6,597 6,597 100.00% Costa Mesa, California Bernhard Baumgartner Common - - - - Mel R. Brashears Common 75,000 - 75,000 * John C. Carson (3)(6) Common 485,623(7) 2,022,160(5) 2,507,783 5.33% 3001 Redhill Ave. Preferred - 6,597 6,597 100.00% Costa Mesa, California Joanne S. Carson (3)(6) Common 161,359(8) - 161,359 * Marc Dumont Common 101,184(9) - 101,184 * James D. Evert Common 322,222(10) - 322,222 * Maurice C. Inman Common 10,000 - 10,000 - Thomas M. Kelly Common - - - - Frank P. Ragano (3) Common 74,550(11) - 74,550 * Robert G. Richards Common 27,200(12) - 27,200 * Wolfgang Seidel Common 222,833(13) - 222,833 * Vincent F. Sollitto, Jr. Common 44,000(11) - 44,000 * John J. Stuart, Jr. Common 315,812(7) 2,022,160(5) 2,337,972 4.97% 3001 Redhill Ave., Preferred - 6,597 6,597 100.00% Costa Mesa, California All directors and executive officers Common 2,230,937(14) 2,022,160(5) 4,253,097 8.97% as a group (13 persons) Preferred - 6,597 6,597 100.00%
___________________________ * Less than 1%. 24 (1) Such shares of Common and Series B and Series C Preferred Stock are held by the Company's Stock Bonus Plan; the named individual shares the power to vote and dispose of such shares. (2) Percentages have been calculated based upon the number of outstanding shares on December 31, 2000 plus Common Stock deemed outstanding at such date pursuant to Rule 13d-3(d)(1) under the Securities Exchange Act of 1934. (3) Retiring as a director as of the Annual Meeting. (4) Includes 43,334 shares issuable upon exercise of currently exercisable common stock options. (5) Includes 1,692,310 shares of Common Stock and 329,850 shares issuable upon conversion of Series B and Series C Preferred Stock, all of which are held by the Company's Stock Bonus Plan, by virtue of the named individual's shared power to vote and dispose of such shares. (6) The amounts and percentages for each of John C. Carson and Joanne S. Carson, who are husband and wife, exclude amounts held by the other spouse as separate property. (7) Includes 60,334 shares issuable upon exercise of currently exercisable common stock options. (8) Includes 18,334 shares issuable upon exercise of currently exercisable common stock options. (9) Includes 55,684 shares issuable upon exercise of currently exercisable common stock options and warrants. (10) Includes 147,000 shares issuable upon exercise of currently exercisable common stock options. (11) Includes 40,000 shares issuable upon exercise of currently exercisable common stock options. (12) Includes 20,000 shares issuable upon exercise of currently exercisable common stock options. (13) Includes 8,333 shares issuable upon exercise of currently exercisable common stock options. (14) Includes 369,987 shares issuable upon exercise of currently exercisable common stock options and warrants, which represents the sum of all such shares issuable upon exercise of currently exercisable options and warrants held by all executive officers and directors as a group. Four current directors are retiring from the Board as of the Annual Meeting, although one individual will remain as an executive officer. Excluding the securities beneficially owned by retiring directors who will not remain as executive officers, the aggregate securities ownership of all executive officers and directors as a group is 1,281,652 shares. Item 13. Certain Relationships and Related Transactions Certain 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. 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. 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: 25 1. Financial Statements
Pages in Annual Report* -------------- Consolidated Balance Sheets 9 Consolidated Statements of Operations 10 Consolidated Statements of Shareholders' Equity (Deficit) 11 Consolidated Statements of Cash Flows 12 Notes to Consolidated Financial Statements 13-27 Report of Independent Certified Public Accountants 28
* Incorporated by reference from the indicated pages of the 2000 Annual Report to Stockholders. 2. Financial Statement Schedules: Report of Independent Certified Public Accountants on Financial Statement Schedules Schedule for the fiscal years ended October 1, 2000, October 3, 1999, and September 27, 1998: Schedule II - Valuation and Qualifying Accounts 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 of the Registrant, as amended and currently in effect (1) 3.2 Certificate of Designation of Preferences of Series D Convertible Preferred Stock (2) 3.3 By-laws, as amended to date (3) 4.1 Specimen Common Stock certificate (1) 10.1.1 Employee Stock Bonus Plan and Trust Agreement dated June 29, 1982 effective December 31,1982 (4) 10.1.2 Amendment to Employee Stock Bonus Plan and Trust Agreement dated December 14, 1982 (5) 10.1.3 Amendment to Employee Stock Bonus Plan and Trust Agreement dated September 25, 1990 (1) 10.1.4 Master Trust Agreement for Employee Deferred Benefit Plans dated August 22, 1990 (6) 10.1.5 Amendment to Employee Stock Bonus Plan and Trust Agreement dated October 4, 1993 (7) 10.2 1991 Stock Option Plan (8) 10.3 1995 Stock Option Plan (9) 10.4 1999 Stock Option Plan (10) 10.5 Government Contract DASG60-00-C-0016 dated January 24, 2000 (12) 10.6 Government Contract N39998-97-C-5201 as modified March 9, 2000 (12) 10.7 Government Contract USZA22-00-C-0013 dated August 14, 2000 (12) 10.8 Government Contract N39998-00-C-08118 dated August 31, 2000 (12) 10.9 Form of Indemnification Agreement between the Registrant and its directors and officers 10.10 Lease Agreement for premises at 3001 Redhill Avenue, Costa Mesa, California, dated August 1, 1994 (11) 10.11 Amendments to Lease Agreement for premises at 3001 Redhill Avenue, Bldg. III, Costa Mesa, California (12) 10.12 Lease Agreement and Amendments for premises at 3001 Redhill Avenue, Bldg. IV, Costa Mesa, California (12) 10.13 Amendments to Lease Agreement for premises at 3001 Redhill Avenue, Bldg. V, Costa Mesa, California (12) 13.1 Portions of Registrant's Annual Report to Stockholders for the fiscal year ended October 1, 2000 21.1 Subsidiaries of the Registrant (12) 23.1 Consent of Grant Thornton LLP, Independent Certified Public Accountants 27 Financial Data Schedule (12)
____________ (1) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K for the fiscal year ended September 29, 1991. (2) (Incorporated by reference to the Registrant's Registration Statement on Form S-1 filed with the Commission on October 4, 1999 (Registration Number 333-88385). (3) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K/A for the fiscal year ended September 28, 26 1996. (4) 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. (5) 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"). (6) 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). (7) Incorporated by reference to Part IV of Registrant's Annual Report on Form 10-K/A for the fiscal year ended October 1, 1995. (8) 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). (9) Incorporated by reference to Registrant's Registration Statement on Form S- 8 (File No. 333-72201), filed February 11, 1999. (10) Incorporated by reference to Registrant's Registration Statement on Form S-8 (File No. 333-94071), filed January 4, 2000. (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) Previously filed. (b) Reports on Form 8-K: ------------------------ No report on Form 8-K was filed by the Company with respect to the quarter ended October 1, 2000. 27 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: December 29, 2000 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/ Robert G. Richards /s/ John J. Stuart, Jr. ---------------------- ----------------------- Robert G. Richards John J. Stuart, Jr. Chief Executive Officer Chief Financial Officer (Principal Executive Officer) (Principal Financial and Date: December 29, 2000 Accounting Officer) Date: January 29, 2001 /s/ Mel R. Brashears /s/ Thomas M. Kelly -------------------- ------------------- Mel R. Brashears, Director Thomas M. Kelly, Director Date: December 29, 2000 Date: December 29, 2000 /s/ Joanne S. Carson /s/ Frank P. Ragano -------------------- ------------------- Joanne S. Carson, Director Frank P. Ragano, Director Date: December 29, 2000 Date: December 29, 2000 /s/ John C. Carson /s/ Vincent F. Sollitto, Jr. ------------------ ---------------------------- John C.Carson, Director Vincent F. Sollitto, Jr., Date: December 29, 2000 Director Date: December 29, 2000 /s/ Marc Dumont /s/ Wolfgang Seidel --------------- ------------------- Marc Dumont, Director Wolfgang Seidel, Director Date: December 29, 2000 Date: December 29, 2000 28 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- ON FINANCIAL STATEMENT SCHEDULE ------------------------------- To the Board of Directors of Irvine Sensors Corporation Our audits of the consolidated financial statements referred to in our report dated November 30, 2000 appearing on page 28 of the 2000 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/A) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K/A. In our opinion, this Financial Statement Schedule presents 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 November 30, 2000 29 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ----------------------------------------------
Balance at Charged to Balance Beginning Costs and at End of Year Expenses Deductions of Year ---------- ---------- ---------- ---------- Year ended October 1, 2000: --------------------------- Allowance for doubtful accounts $ 36,700 $ 164,400 $ 74,700 $ 126,400 Inventory reserves 3,718,800 2,706,700 238,100 6,187,400 Year ended October 3, 1999: --------------------------- Allowance for doubtful accounts $ 10,000 $ 31,300 $ 4,600 $ 36,700 Inventory reserves 2,456,800 2,245,600 983,600 3,718,800 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
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