EXHIBIT 13
Irvine Sensors Corporation
Financial Highlights
Fiscal Year Ended
September 27, September 28, September 29, October 1, October 2,
1998 1997 1996 1995 1994
Revenues $ 9,314,500 $ 13,693,200 $ 12,024,200 $ 8,041,400 $ 5,139,400
Loss from operations $(5,798,200) $(14,809,200) $(11,154,700) $(3,071,500) $(2,629,500)
Net loss $(4,243,500) $(14,875,600) $(15,914,700) $(4,137,500) $(2,463,900)
Basic and diluted net loss
per common and common
equivalent share $ (0.19) $ (0.73) $ (0.94) $ (0.28) $ (0.18)
Weighted average number of
shares outstanding 24,597,700 20,475,100 16,874,300 14,966,500 14,141,500
Long-term debt $ 933,700 $ 1,207,000 $ 3,165,600 $ 201,200 $ 81,100
Convertible debt $ - $ 250,000 $ 3,400,000 $ 2,250,000 $ -
Total assets $ 7,064,700 $ 9,449,300 $ 21,742,200 $15,609,200 $10,355,400
Price Range of Common Stock
The following table sets forth the range of representative high and low bid
prices of the Company's common stock in the over-the-counter market for the
periods indicated, as furnished by The NasdaqStock Market. These prices
represent prices among dealers, do not include retail markups, markdowns or
commissions, and may not represent actual transactions:
Fiscal Year Ended
September 27, 1998 September 28, 1997
High Low High Low
Common Stock Bid Prices
First Quarter $1 1/32 $1 $1 1/2 $0 27/32
Second Quarter $2 21/32 $2 19/32 $1 9/16 $1
Third Quarter $2 1/32 $2 $1 5/32 $0 31/32
Fourth Quarter $2 29/32 $1 11/32 $1 9/16 $1 7/32
On January 7, 1999, there were 859 stockholders of record and approximately
9,300 beneficial holders, based on information provided by the Company's
transfer agent.
The Company has not paid cash dividends on any class of its stock since its
incorporation; under Delaware law there are certain restrictions which limit the
Company's ability to pay cash dividends in the future.
Irvine Sensors Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
FISCAL YEAR ENDED SEPTEMBER 27, 1998 vs.
FISCAL YEAR ENDED SEPTEMBER 28, 1997
Revenues in fiscal 1998 of $9,314,500 decreased by $4,378,700 or 32 percent
compared to fiscal 1997. The primary reason for this decrease is attributed to
the closure of the Vermont facility. The decision to close the Vermont location
was centered on lower revenue and the continued increased cost of operations.
When considering corporate revenues generated by excluding the Vermont location,
fiscal 1998 revenues of $9,314,500 increased by $2,709,800 or approximately 41
percent.
Cost of contract revenues of $8,431,800 was 127 percent of contract revenues due
primarily to a substantial increase in reserves for potentially unsaleable
inventories. Cost of product sales of $2,247,000 or 98 percent of product sales
includes the final shut-down costs related to the Vermont facility. By
comparison, in fiscal 1997 cost of product sales were 150 percent of product
sales. Management is continuing to address the high product costs and believes
that gross margins will improve as sales increase and the effect of implemented
cost reductions are realized.
General and administrative expenses of $2,984,400 were reduced by $454,900 or 13
percent in relation to fiscal 1997. As a percentage of total revenues general
and administrative expenses were 32 percent in fiscal 1998 compared to 25
percent in fiscal 1997, however, fiscal 1997 included revenues from the Vermont
facility.
Research and Development decreased by $7,100 or less than 1 percent in the
year-to-year comparison. As a percentage of revenues R&D accounted for
approximately 17 percent in fiscal 1998 compared to approximately 12 percent in
fiscal 1997. The R&D expense in fiscal 1998 includes significant costs
associated with Imagek's development of the electronic film product.
The aggregate decrease of $7,356,300 in fiscal 1998 in cost of revenues, general
and administrative expenses and R&D are the direct result of management's
decision to streamline and control its expenses to fall in line with the reduced
revenue from the Vermont plant closing.
Interest expense declined by $177,400 in fiscal 1998, primarily attributable to
settlement of the Company's bank debt.
Interest income declined by $26,800 in fiscal 1998, primarily attributable to
lower interest rates and the debt pay-off associated with the Vermont facility.
The net loss of $4,243,500 in fiscal 1998 was $10,632,100, or 150 percent less
than fiscal 1997. The Vermont plant closing in fiscal 1997 accounted for
$5,873,400 or 55 percent of this reduced loss.
FISCAL YEAR ENDED SEPTEMBER 28, 1997 vs.
FISCAL YEAR ENDED SEPTEMBER 29, 1996
Revenues in fiscal 1997 of $13,693,200 showed an increase of $1,669,000 or 14
percent compared to fiscal 1996. This increase was primarily attributable to the
Company's Advanced Technology Operations in Costa Mesa. In mid-fiscal year the
Company announced the closing of its Vermont facilities due to the lower than
required revenue base and high fixed cost of operations. In comparing revenues
generated by excluding the Vermont operations, fiscal 1997 revenues were
$6,604,700 compared to $5,460,300 in fiscal 1996, an increase of 21 percent.
Cost of revenues of $17,573,100 in fiscal 1997 was $435,500 higher than in
fiscal 1996; however, as a percentage of revenues, fiscal 1997 showed an
improvement of 14 percentage points over fiscal 1996. Operations excluding
Vermont recorded cost of revenues of $6,586,500 in fiscal 1997 compared to
$6,757,800 in fiscal 1996, a reduction of $171,300 or three percentage points.
In fiscal 1997, cost of revenues included a charge of $1,156,100 to increase the
Company's inventory reserve for, first: Wide Word SRAM memory cubes the Company
has been producing for future deliveries pursuant to an anticipated contract
which had not yet materialized and, second: slower than anticipated sales of its
Flash memory cubes.
General and administrative expenses were reduced by $592,300 in fiscal 1997
compared to fiscal 1996, and research and development expenses were also reduced
by $393,100 in fiscal 1997 compared to fiscal 1996.
These combined reductions of $1,156,700 in cost of sales, general and
administrative, and research and development reflect actual cost reductions
accomplished in fiscal 1997 while management re-structured the Company to take
advantage of new product opportunities and to expand the Company's traditional
customer R&Dbase.
With the decision to close the Vermont facilities, the Company incurred a loss
of $5,873,400 in fiscal 1997 related to the sale of the surplus facilities and
equipment.
Interest income declined by $69,000 in fiscal 1997 primarily related to the
Vermont facilities.
The Company originally accounted for its convertible debentures in accordance
with APB 14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants." However, the Securities and Exchange Commission (SEC) staff
has indicated that convertible debt instruments which are convertible at a
discount from market should be accounted for by treating the maximum discount as
interest expense with an offset to paid-in capital. In November 1997, the
Company was advised that past issuers of such securities have recently restated
prior financial statements to comport with the SEC view. In conformance
therewith, the Company recorded noncash interest expense of $4,396,700
with a like amount added to paid-in capital in the second quarter of fiscal
1996. Because of the offsetting nature of these entries, there is no effect on
Shareholders' equity.
Net loss of $14,875,600 in fiscal 1997 was $1,039,100 lower than the net loss
reported for fiscal 1996. On a comparable basis, excluding plant closure costs
in fiscal 1997, and noncash debenture interest in fiscal 1996, the adjusted net
loss excluding the Vermont operations was $3,381,100 in fiscal 1997 compared to
$5,520,500 in fiscal 1996 - an overall improvement of $2,139,400.
Liquidity, Capital Resources and Impact of Changing Prices
The primary uses of cash and cash equivalents during fiscal 1998 were to
complete the winding down and exit from the Vermont facility, to retire the
Company's bank debt, reductions in trade payables and funding of the Company's
net loss, which also included R&D and start-up costs for its subsidiaries. As a
result of equity financings in fiscal 1998, these uses were accomplished while
improving the Company's working capital by $3,265,100.
At September 27, 1998, the Company had consolidated cash and cash equivalents of
$1,310,400, and subsequent to September 27, 1998, has obtained approximately
$540,000 cash in additional equity financing. The Company anticipates that the
existing working capital and its projected operating results will meet its cash
requirements for the immediate future.
Contracts with government agencies may be suspended or terminated by the
government at any time, subject to certain conditions. Similar termination
provisions are typically included in agreements with prime contractors. In 1983
the Company experienced such termination of one of its contracts. There is no
assurance the Company will not experience suspensions or terminations in the
future. Such termination, if material, could cause a disruption of the Company's
revenue stream and could result in employee layoffs.
At September 27, 1998, the Company's funded backlog was approximately $1,897,800
compared to $1,902,800 at September 28, 1997. In addition, existing contracts
include a large amount of unfunded backlog which typically is funded when the
previously funded amounts have been expended. Subsequent to fiscal year end the
total backlog was $6,044,000 as of December 13, 1998.
Except for historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-
looking statements contained herein are subject to certain risks and
uncertainties, including such factors, among others, as the pace at which new
markets develop, the ability of the Company to introduce new products and ramp
up manufacturing in a timely manner while controlling its operating expenses and
the response of competitors, many of whom are bigger and better financed than
the Company. In addition, the scope of the Company's growth plan may introduce
unanticipated risks and financial requirements. The availability of external
financing for the Company's plan cannot be assured and is subject to numerous
factors including those unrelated to the Company's performance such as economic
and market conditions. Further, the Company's financial performance prior to
substantial growth in revenues may not permit additional equity financing and
may place at risk the continuation of its long-term debt financing because of
inability to achieve financial covenants. Accordingly, investors are advised to
assess forward-looking statements contained herein with caution. Additional
information on various risks and uncertainties potentially affecting the
Company's results are contained in publicly filed disclosures available through
the Securities and Exchange Commission EDGAR database (http://www.sec.gov) or
from the Company's Investor Relations.
Irvine Sensors Corporation
Consolidated Balance Sheets
September 27, September 28,
1998 1997
Assets
Current Assets:
Cash and cash equivalents $ 1,310,400 $ 1,639,300
Accounts receivable, net
of allowances of $10,000 in 1998 and 1997 1,766,100 1,237,700
Inventory 1,532,700 2,577,300
Other current assets 193,500 1,182,900
- -------------------------------------------------------------------------------------------------------
Total current assets 4,802,700 6,637,200
- -------------------------------------------------------------------------------------------------------
Equipment, furniture and fixtures, net 2,224,000 2,775,800
Other assets 38,000 36,300
- -------------------------------------------------------------------------------------------------------
$ 7,064,700 $ 9,449,300
=======================================================================================================
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 1,570,800 $ 4,370,800
Accrued expenses 622,400 684,700
Deferred revenue 50,000 106,100
Notes payable and current portion of long-term debt 52,800 2,234,000
- -------------------------------------------------------------------------------------------------------
Total current liabilities 2,296,000 7,395,600
- -------------------------------------------------------------------------------------------------------
Long-term debt 107,500 593,200
Deferred and subordinated royalties payable - affiliated company 826,200 613,800
Convertible subordinated debentures - 250,000
Preferred stock of consolidated subsidiary - 118,500
Minority interest in consolidated subsidiary 1,488,000 3,418,100
Commitments and Contingencies
Shareholders' Equity (Deficit):
Preferred stock, $0.01 par value, 500,000 shares authorized;
6,966 and 8,785 shares Series B Convertible Cumulative Preferred
outstanding; aggregate liquidation preference of $198,500 50 50
3,964 and 4,974 shares Series C Convertible Cumulative Preferred
outstanding; aggregate liquidation preference of $214,100 50 50
4,400 and none shares Series D Convertible Preferred
outstanding; aggregate liquidation preference of $440,000 50 -
Common stock, $0.01 par value, 40,000,000 shares authorized;
28,457,700 and 21,541,300 shares issued and outstanding 284,600 215,400
Common stock warrants; 162,000 and 340,000 issued and
outstanding - -
Paid-in capital 55,885,250 46,424,100
Accumulated deficit (53,823,000) (49,579,500)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 2,347,000 (2,939,900)
- -------------------------------------------------------------------------------------------------------
$ 7,064,700 $ 9,449,300
=======================================================================================================
See accompanying Notes to Consolidated Financial Statements.
Irvine Sensors Corporation
Consolidated Statements of Operations
Fiscal Year Ended
September 27, September 28, September 29,
1998 1997 1996
Revenues:
Contract research and development $ 6,624,700 $ 5,821,100 $ 3,614,300
Product sales 2,289,800 7,872,100 8,283,900
Other 400,000 - 126,000
- -------------------------------------------------------------------------------------------------------------
Total revenues 9,314,500 13,693,200 12,024,200
- -------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of contract revenues 8,431,800 5,737,800 4,694,400
Cost of product sales 2,247,000 11,835,300 12,443,200
General and administrative 2,984,400 3,439,300 4,031,600
Research and development 1,609,500 1,616,600 2,009,700
(Gain) loss related to plant closure (160,000) 5,873,400 -
- -------------------------------------------------------------------------------------------------------------
15,112,700 28,502,400 23,178,900
- -------------------------------------------------------------------------------------------------------------
Loss from operations (5,798,200) (14,809,200) (11,154,700)
Interest expense (266,200) (443,600) (469,800)
Interest income 12,500 39,300 108,300
Other 299,700 - -
Noncash interest expense related to
convertible debentures - - (4,396,700)
- -------------------------------------------------------------------------------------------------------------
Loss before minority interest and provision for income taxes (5,752,200) (15,213,500) (15,912,900)
Minority interest in loss of subsidiary 365,200 340,500 -
Provision for taxes (2,600) (2,600) (1,800)
- -------------------------------------------------------------------------------------------------------------
Loss before extraordinary item (5,389,600) (14,875,600) (15,914,700)
Extraordinary gain from debt extinguishment 1,146,100 - -
- -------------------------------------------------------------------------------------------------------------
Net loss $ (4,243,500) $ (14,875,600) $(15,914,700)
=============================================================================================================
Basic and Diluted Net Loss Per Share:
Loss before extraordinary item $ (0.24) $ (0.73) $ (0.94)
Extraordinary gain 0.05 - -
- -------------------------------------------------------------------------------------------------------------
Net loss $ (0.19) $ (0.73) $ (0.94)
=============================================================================================================
Weighted average number of
shares outstanding 24,597,700 20,475,100 16,874,300
- -------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
Irvine Sensors Corporation
Consolidated Statement of Shareholders' Equity (Deficit)
Common Stock Common Stock Preferred Stock
Shares Issued Warrants Issued Shares Issued Total Shareholders'
-------------------- --------------- ---------------- Paid-in Accumulated Equity
Number Amount Number Amount Number Amount Capital Deficit (Deficit)
Balance at October 1, 1995 15,566,800 $155,700 126,900 $ - 15,013 $ 200 $ 28,127,400 $(18,789,200) $ 9,494,100
Stock options exercised 257,100 2,600 - - - - 209,100 - 211,700
Common stock issued to
employee retirement
plan 172,900 1,700 - - - - 685,700 - 687,400
Common stock warrants
issued - - 222,000 - - - - - -
Common stock warrants
exercised 109,700 1,100 (109,700) - - - 293,400 - 294,500
Series B and Series C
preferred stock converted
to common stock 50,100 500 - - (1,002) (100) (400) - -
Convertible debentures
converted to common
stock 2,553,400 25,500 - - - - 9,117,500 - 9,143,000
Net loss - - - - - - - (15,914,700) (15,914,700)
Additional paid-in
capital related
to convertible
debentures - - - - - - 4,396,700 - 4,396,700
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 29, 1996 18,710,000 187,100 239,200 - 14,011 100 42,829,400 (34,703,900) 8,312,700
Common stock issued to
employee retirement
plan 347,600 3,500 - - - - 442,000 - 445,500
Convertible debentures
converted to common
stock 2,441,400 24,400 - - - - 3,125,600 - 3,150,000
Series B and Series C
preferred stock
converted to common stock 12,600 100 - - (252) - (100) - -
Sale of common stock 22,200 200 - - - - 19,800 - 20,000
Common stock bonus issued 7,500 100 - - - - 7,400 - 7,500
Common stock warrants
issued - - 118,000 - - - - - -
Common stock warrants
expired - - (17,200) - - - - - -
Net loss - - - - - - - (14,875,600) (14,875,600)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 28, 1997 21,541,300 215,400 340,000 - 13,759 100 46,424,100 (49,579,500) (2,939,900)
Common stock issued to
employee retirement
plan 333,300 3,400 - - - - 496,600 - 500,000
Convertible debentures
converted to common
stock 100,000 1,000 - - - - 249,000 - 250,000
Series B and Series C
preferred stock
converted
to common stock 140,900 1,400 - - (2,829) - (1,400) - -
Common stock issued to
retire liabilities 487,800 4,900 - - - - 753,200 - 758,100
Sale of common stock and
common stock units 2,091,700 20,900 - - - - 3,712,900 - 3,733,800
Stock options exercised 8,200 100 - - - - (100) - -
Common stock warrants
issued - - 116,200 - - - 303,900 - 303,900
Common stock warrants
exercised 294,200 2,900 (294,200) - - - 274,100 - 277,000
Series D preferred units
sold - - 37,750 400 3,283,700 - 3,284,100
Series D preferred units
converted 3,460,300 34,600 - - (33,350) (350) (34,250) - -
Preferred stock of
dissolved subsidiary - - - - - - 118,500 - 118,500
Capital contributed by ATPL - - - - - - 305,000 - 305,000
Net loss - - - - - - - (4,243,500) (4,243,500)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 27, 1998 28,457,700 $284,600 162,000 $ - 15,330 $ 150 $ 55,885,250 $(53,823,000) $ 2,347,000
===============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
Irvine Sensors Corporation
Consolidated Statements of Cash Flows
Fiscal Year Ended
September 27, September 28, September 29,
1998 1997 1996
Cash flows from operating activities:
Cash received from customers $ 8,786,100 $ 15,479,400 $ 11,388,300
Cash paid to suppliers and employees (12,753,600) (18,342,500) (19,008,200)
Interest received 12,500 39,300 108,300
Interest paid (116,200) (443,600) (469,800)
Income taxes paid (2,600) (2,600) (1,800)
Net cash used in operating activities $ (4,073,800) $ (3,270,000) $ (7,983,200)
Cash flows from investing activities:
Capital facilities and equipment expenditure (390,800) (1,113,400) (8,525,200)
Proceeds from refund on equipment purchase - 324,500 -
Proceeds from sale of equipment 149,700 1,051,900 -
Net cash provided by (used in) investing activities (241,100) 263,000 (8,525,200)
Cash flows from financing activities:
Principal payments under notes payable and
capital lease obligations (2,336,900) (253,300) (217,100)
Proceeds from issuance of long-term debt - - 3,013,200
Proceeds from issuance of convertible
subordinate debentures - - 10,293,000
Minority interest in subsidiaries - 2,918,100 500,000
Proceeds from issuance of common and
preferred stock and common stock warrants 5,063,100 27,500 506,200
Proceeds from stock sale by bank 954,800 - -
Contributed capital by ATPL 305,000 - -
Net cash provided by financing activities 3,986,000 2,692,300 14,095,300
Net decrease in cash and cash equivalents (328,900) (314,700) (2,413,100)
Cash and cash equivalents at beginning of year 1,639,300 1,954,000 4,367,100
Cash and cash equivalents at end of year $ 1,310,400 $ 1,639,300 $ 1,954,000
Reconciliation of net loss to net cash used in
operating activities:
Net loss $ (4,243,500) $(14,875,600) $(15,914,700)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization $ 1,546,700 $ 2,994,500 $ 2,268,100
Minority interest in loss of subsidiary (365,200) - -
(Gain) loss on sale of capital facilities
and equipment (309,700) 5,873,400 -
Extraordinary gain (1,146,100) - -
Common stock issued to employee
retirement plan 500,000 445,500 687,400
Stock issued to pay operating expenses (261,700) - -
Noncash interest expense related to
convertible debentures - - 4,396,700
(Increase) decrease in accounts receivable (528,400) 1,786,200 (635,900)
(Increase) decrease in inventory 1,044,600 1,809,400 (1,455,800)
(Increase) decrease in other current assets 989,400 (899,300) (42,100)
(Increase) decrease in other assets (1,700) 151,000 (155,200)
(Decrease) increase in accounts payable
and accrued expenses (1,454,500) 1,921,600 1,159,900
Increase (decrease) in deferred revenue (56,100) (2,276,500) 1,017,600
Increase (decrease) in accrued rent - (458,300) 458,300
Increase in royalties accrued - affiliated
company 212,400 258,100 232,500
Total adjustments 169,700 11,605,600 7,931,500
Net cash used in operating activities $ (4,073,800) $ (3,270,000) $ (7,983,200)
Noncash investing and financing activities:
Capitalized lease obligations $ 170,000 $ - $ 3,200
Conversion of debentures to common stock $ 250,000 $ 3,150,000 $ 10,450,000
Exchange of subsidiary stock $ 1,564,900
Paid in capital from dissolution of subsidiary $ 118,500
Common stock issued to pay bank debt $ 500,000 $ - $ -
Conversion of preferred to common stock $ 34,600 $ - $ -
See accompanying Notes to Consolidated Financial Statements.
Irvine Sensors Corporation
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
CONSOLIDATION
The consolidated financial statements include the accounts of Irvine Sensors
Corporation (the Company) and its subsidiaries, Novalog, Inc. ("Novalog"),
MicroSensors, Inc. ("MSI"), 3D Microelectronics, Inc., 3D MicroSystems, Inc.,
and Imagek, Inc. ("Imagek"). Carson Alexiou Corporation ("CAC"), a former
subsidiary of the Company was dissolved in the current fiscal year. All
significant intercompany transactions and balances have been eliminated in
consolidation.
FISCAL YEAR
The Company's fiscal year ends on the Sunday nearest September 30. Fiscal 1998
(52 weeks) ended on September 27, 1998, fiscal 1997 (52 weeks) ended on
September 28, 1997, and fiscal 1996 (52 weeks) ended on September 29, 1996.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
Company believes its estimates of inventory reserves and estimated costs to
complete on contracts to be the most sensitive estimates impacting financial
position and results of operations in the near term.
REVENUES
The Company's revenues were derived from shipments of functional memory
stacks, shipments of the SIRComm(TM) infrared chip and the development and
manufacture of prototype and sample products for its customers. The Company
continues to contract to develop prototypes and provide research, development,
design, testing and evaluation of complex detection and control defense systems.
The Company's R&D contracts are usually cost plus fixed fee (best effort) or
fixed price and revenues are recognized as costs are incurred and include
applicable fees or profits primarily in the proportion that costs incurred bear
to estimated final costs. Production orders for memory stacks and SIRComm chips
are generally priced in accordance with the Company's established price list.
The Novalog, MicroSensors and Imagek subsidiaries are product-oriented companies
with sales primarily to OEM manufacturers and revenues are recorded when
products are shipped.
The Company provides for anticipated losses on contracts by a charge to income
during the period in which they are first identified. Unbilled accounts
receivable are stated at estimated realizable value.
United States government contract costs, including indirect costs, are subject
to audit and adjustment by negotiations between the Company and government
representatives. Indirect contract costs have been agreed upon through fiscal
1996. Contract revenues have been recorded in amounts which are expected to be
realized upon final settlement.
Other revenues in fiscal 1998 were derived from the sale of intellectual
property to ATPL. (See Note 7 - Related Party Transactions.)
Other revenues in fiscal 1996 were derived from a licensing agreement with
Unitrode to transfer technology required to produce the Company's SIRCommchip.
(See Note 14 - Technology Licenses.)
RESEARCH AND DEVELOPMENT COSTS
A major portion of the Company's operations is comprised of customer-funded
research and prototype development or related activities. The Company also
incurs costs in research and development of new concepts in proprietary
products; such costs are charged to expense as incurred.
INVENTORY
Inventory is valued at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) basis. Inventories are reviewed quarterly to
determine saleability and obsolescence. A reserve is established for slow moving
and obsolete items.
EQUIPMENT, FURNITURE AND FIXTURES
The Company capitalizes costs of additions to equipment, furniture and fixtures,
together with major renewals and betterments. In addition, the Company
capitalizes overhead for all in-house capital projects. Maintenance, repairs,
and minor renewals and betterments are charged to expense. When assets are sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized.
Depreciation of equipment, furniture and fixtures is provided over the estimated
useful lives of the assets, primarily using the straight-line method. The useful
lives are three to seven years. Leasehold improvements are amortized over the
terms of the leases.
INCOME TAXES
Deferred tax assets and liabilities are recorded for differences between the
financial statement and tax basis of the assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
recorded for the amount of income tax payable or refundable for the period
increased or decreased by the change in deferred tax assets and liabilities
during the period.
BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," which supersedes APB
Opinion No. 15, "Earnings per Share." Net loss per share for all periods
presented has been restated to reflect the adoption of SFAS No. 128. Basic net
loss per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per share is based on the assumption that options,
warrants, and convertible preferred stock are included in the calculation of
diluted earnings per share, except when their effect would be anti-dilutive.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130, which is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented, establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. The implementation of SFAS No. 130 is not expected to have a material
effect on the Company's results of operations.
In June 1997,the FASBissued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131, which is effective for fiscal
years beginning after December 15, 1997 and requires restatements of earlier
periods presented, established standards for the way that a public enterprise
reports information about key revenue-producing segments in the annual financial
statements and selected information in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The implementation of SFAS No. 131 is not
expected to have a material effect on the Company's current reporting.
STATEMENT OF CASH FLOWS
For purposes of the Consolidated Statement of Cash Flows, the Company considers
all demand deposits and Certificates of Deposit with original maturities of 90
days or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable and payable, other liabilities and debt
approximate fair value. The fair value of royalties payable to affiliate is not
determinable due to their related party nature.
CONCENTRATION OF CREDIT RISK
The Company has cash deposits at U.S. banks and financial institutions, which
exceed federally insured limits at September 27, 1998. The Company is exposed to
credit loss for amounts in excess of insured limits in the event of non-
performance by the institution; however, the Company does not anticipate non-
performance.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which establishes financial accounting and reporting
standards for stock-based employee compensation. Under SFAS No. 123, companies
are encouraged, but not required, to adopt a method of accounting for stock
compensation awards based upon the estimated fair value at the date the
options/awards are granted as determined through the use of a pricing model (the
"Fair Value Method"). Companies continuing to account for such awards in
accordance with the existing guidance of Accounting Principles Board Option No.
25, "Accounting for Stock Issued to Employees" (APB 25), have to disclose in the
notes to their financial statements the pro forma impact on net income and net
income per share had they utilized the Fair Value Method. This statement became
effective for the Company in fiscal year 1997. The Company continues to account
for stock compensation awards in accordance with APB 25, with the appropriate
footnote disclosure required under SFAS 123.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting For the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which
establishes accounting standards for the impairment of long-lived assets to be
reviewed whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In addition, SFAS 121 requires that
certain long-lived assets be reported at the lower of carrying amount or fair
value less cost to sell. The Company adopted SFAS 121 in fiscal 1997. The
adoption of SFAS 121 had no significant impact on its consolidated financial
position or results of operations.
Note 2 - Issuance of Common Stock and Preferred Stock
During fiscal 1996, the Company issued 257,100 shares of common stock to seven
employees, two of whom are officers and one officer-director, and three non-
employee directors upon exercise of options granted under the Company's Stock
Option Plans. Net proceeds of $211,700 were added to the Company's general
funds.
In conjunction with a fiscal 1995 private financing of $2.25 million of 8
percent convertible subordinated debentures (the "1995 Debentures"), the Company
issued an additional $500,000 of 1995 Debentures in October 1995 (fiscal 1996)
to institutional investors in Europe. The gross proceeds less expenses were
added to the Company's general funds. During fiscal 1996, the Company, at the
request of bondholders, converted the entire $2.75 million of outstanding 1995
Debentures at varying rates into 509,400 shares of the Company's common stock,
which were subsequently registered and may be traded without restrictions.
In a private financing during February and March 1996, the Company issued $11.1
million of 8 percent convertible subordinated debentures due in 1998 (the "1996
Debentures") to institutional and private investors in Canada and Europe. The
1996 Debentures were convertible into shares of common stock at varying rates
which were contingent upon the closing bid prices of the common stock. The
Company had the right to demand conversion of the 1996 Debentures at any time
after March 1997. Interest was payable semiannually on January 31 and July 31 of
each year. The gross proceeds less expenses were added to the
Company's general funds.
During fiscal 1997, the Company, at the request of bondholders, converted
$3,150,000 of the outstanding 1996 Debentures at varying rates into 2,441,400
shares of the Company's common stock. With this conversion, all but $250,000
of the original issue of $11.1 million of the 1996 Debentures was retired. In
May 1996, the Company had registered the resale of 2,997,000 shares of common
stock which the Company then believed would be sufficient to cover the
conversion of the entire $11.1 million series of 1996 Debentures and related
warrants, which had been issued in February and March 1996. However, due to the
decline in the price of the Company's common stock, the number of shares issued
upon conversion of all the Debentures, exceeded the number of shares previously
registered. In January 1998 the Company filed a registration statement which
included the resale of 1,114,810 unregistered shares issued upon conversion of
the 1996 Debentures. This registration was declared effective by the Securities
and Exchange Commission in April 1998.
In January 1998, the Board of Directors authorized a contribution to the
Employee Stock Bonus Plan (the Company's ERISA-qualified Employee Retirement
Plan). The amount represents an annual contribution for fiscal year 1998 and was
made in 333,334 shares of the Company's common stock, which have been issued to
the Plan.
In fiscal 1998, the Company forced conversion of the remaining $250,000 of
outstanding 8 percent Convertible Subordinated Debentures into 100,000 shares of
the Company's common stock. The common shares underlying the convertible
debentures were included in the Company's January 1998 registration statement.
The Company began the sale of Series D Convertible Preferred Stock Units in a
private placement to certain accredited investors in December 1997 and continued
to accept subscriptions thereto through January 2, 1998, at which time, the
Company sold an additional 24,750 Units. The Company issued an aggregate of
37,750 Units at a price of $100.00 per Unit and the net proceeds of $3,284,100
from the sale of these securities were added to the Company's general funds.
The Series D Convertible Preferred Stock Units consist of one share of
Convertible Preferred Stock, plus one five-year Warrant to purchase one share of
common stock of Novalog, Inc., a subsidiary of the Company, and one five-year
Warrant to purchase one share of common stock of Microsensors Inc., a wholly-
owned subsidiary of the Company. Each share of Convertible Preferred Stock is
convertible into common stock of the Company at the rate of 100 shares of Common
for each share of Preferred D, subject to adjustment for stock splits, reverse
stock splits and other similar recapitalization events. The Preferred D shares
have no voting rights, except as required by law, and bear no dividends. (See
Note 17 for calculation of beneficial conversion and imputed dividend resulting
from issuance of Series D Convertible Preferred Stock.) The common shares
underlying
the Preferred D shares were included in the April 1998 registration statement.
In connection with this private placement of 37,750 units, the Company granted
to the placement agent a warrant to purchase up to 3,775 units of Series D
Convertible Preferred Stock units at a price of $110 per unit which was 110
percent of the private placement price of the Units. The warrant is exercisable
during the period beginning the earlier of one year from January 2, 1998 or the
date of registration and expiring on January 2, 2003. Warrants to purchase 500
units were exercised in May 1998 and the proceeds of $55,000 were added to the
Company's general funds.
As of September 27, 1998, at the request of the holders thereof, a total of
33,350 shares of Series D Convertible Preferred Stock have been converted into
3,460,300 shares of common stock.
In January 1998, the Company sold 125,000 Common Stock Units to investors in a
private placement. Each Common Stock Unit consists of one share of common stock
of the Company, plus one five-year Warrant to purchase one share of common stock
of Novalog, Inc., a subsidiary of the Company, and one five-year Warrant to
purchase one share of common stock of Microsensors, Inc., a wholly-owned
subsidiary of the Company. The proceeds of $125,000 from these transactions were
added to the Company's general funds.
In January 1998, a warrant holder exercised outstanding warrants to purchase
222,000 shares of common stock at a price of $1.00 per share. The proceeds from
this warrant exercise have been added to the Company's general funds.
In fiscal 1998, distribution of vested benefits was made from the Company's
Employee Retirement Plan to former employees. Subsequently, 1,819 shares of
Series B and 1,010 shares of Series C Convertible Preferred stock were
surrendered for conversion into 140,900 shares of common stock. The converted
Preferred shares have been retired.
In April 1998, the Company issued, in a private placement to accredited
investors, 700,000 unregistered shares of the Company's common stock. The net
proceeds of $980,000 from this private placement have been added to the
Company's general funds.
In August 1998, holders of 1,128,000 shares of common stock of Novalog exercised
warrants to exchange these shares for 905,000 unregistered shares of common
stock of the Company resulting in an increase of $1,564,900 in total
shareholder's equity and a corresponding decrease in minority interest in
consolidated subsidiary.
In connection with settlement of bank debt, the Company issued 550,000
unregistered shares of common stock in December 1997. (See Note 9 - Notes
Payable.)
Note 3 - Common Stock Warrants
In July 1992, the Company consummated a public offering of 750,000 shares of
common stock and granted the Underwriter an option to purchase up to 112,500
additional shares of common stock to cover over-allotments. In connection with
this offering, the Company granted to the Underwriter warrants to purchase up to
75,000 shares of common stock at a price of $5.10 per share, which was 120
percent of the initial public offering price of the shares. The warrants were
exercisable during the four-year period beginning July 9, 1993, and expiring
July 8, 1997. During fiscal 1995, 57,800 of these warrants were exercised. The
remaining 17,200 were not exercised and expired on July 8, 1997.
In July 1993, the Company granted warrants to a consultant to purchase 30,000
unregistered shares of common stock at $8.875 per share, in connection with
services rendered. The shares underlying these warrants were registered in
fiscal 1995 and the price reduced to $4.50 per share. The warrants were
exercised in fiscal 1996.
In connection with the August 1995 sale of approximately 382,100 shares of
common stock and the issuance of approximately $2.75 million of the 1995
Debentures, the Company granted to the foreign investment banker warrants to
purchase up to approximately 79,700 shares of common stock at prices ranging
from $7.47 to $8.33 per share. In fiscal 1996, the price was reduced to $2.00
per share and the warrants were exercised.
In connection with the sale of $11.1 million of the 1996 Debentures in February
and March 1996, the Company granted warrants to the foreign investment banker to
purchase up to 222,000 shares of common stock at a price to be determined based
on the average conversion prices of the 1996 Debentures. The warrants were
exercised in fiscal 1998.
In fiscal 1997 the Company granted warrants, the value of which it believes to
be not material, to four consultants in varying amounts to purchase up to
118,000 shares of unregistered common stock at prices ranging from $0.9375 to
$1.50.
In fiscal 1998 the Company granted warrants, the value of which it believes to
be not material, to five former employees in varying amounts to purchase up to
44,000 shares of unregistered common stock at a price of $1.00.
As of September 27, 1998, there are a total of 162,000 warrants outstanding of
which 89,000 expire in the year 2000 and 73,000 expire in the year 2002.
Note 4 - Series B and Series C Convertible Preferred Stocks
The Series B and Series C Convertible Cumulative Preferred Stocks, which were
originally issued to the Company's Employee Retirement Plan, each bear a 10
percent cumulative annual dividend, which under Delaware law may generally be
paid only out of (i) retained earnings or (ii) net profit in the current or
preceding fiscal year. To the extent that the dividends are not declared and
paid in any fiscal year, the obligation carries over to the next fiscal year.
These shares of Series B and Series C
Convertible Cumulative Preferred Stocks are not redeemable, carry a liquidation
preference over the common stock of $15.00 and $30.00, respectively, per share
and are convertible, at the option of the holder, into 50 shares of common stock
for each share of Series B and Series C Convertible Cumulative Preferred Stock,
respectively. Distributions of vested benefits made from the Plan to former
employees and the subsequent surrender and conversion into shares of common
stock are as follows:
Preferred Stock Common
Series B Series C Stock
- ------------------------------------------------------
Distribution dates:
Fiscal 1996 522 480 50,100
Fiscal 1997 48 204 12,600
Fiscal 1998 1,819 1,010 140,900
2,389 1,694 203,600
======================================================
The shares of Preferred Series B and Series C tendered for conversion have been
retired.
Undeclared dividends of $94,000 and $95,100 on the remaining outstanding
Preferred Series B and Series C, respectively, will be carried forward to fiscal
1999.
Note 5 - Preferred Stock of Consolidated Subsidiary
The preferred stock outstanding represents an ownership interest in Carson
Alexion Corporation ("CAC"), a former subsidiary of the Company, by former
employees and an Employee Stock Bonus Plan which CAC had formed. The preferred
stock had a $100 par value and there were 1,400 shares authorized and 1,185
shares issued and outstanding at September 28, 1997. There were no conversion
rights or liquidation preferences of this preferred stock which extended to the
common stock of the Company. CAC has been inactive since 1985 and in August
1998, CAC was dissolved by the Massachusetts Commissioner of Corporations. The
outstanding preferred shares were retired and the outstanding balance was added
to the paid-in capital.
Note 6 - Convertible Subordinated Debentures
In July, August and October 1995, the Company issued in a private financing
$2.75 million of 8 percent convertible subordinated debentures (the "1995
Debentures") due in 1997 to institutional and private investors in Canada and
Europe. The 1995 Debentures were convertible into shares of common stock at
$6.50 per share, subject to adjustment under certain conditions. The Company had
the right to demand conversion of the 1995 Debentures at any time after July 31,
1996. Interest was payable semi-annually on January 31 and July 31 of each year.
The 1995 Debentures were subordinated to prior payment of bank indebtedness of
the Company. The gross proceeds less expenses were added to the Company's
general funds. The Company registered the shares underlying the 1995 Debentures
and in fiscal 1996 the 1995 Debentures were converted into 509,400 shares of the
Company's common stock. (See Note 2.)
In a private financing during February and March 1996, the Company issued $11.1
million of 8 percent convertible subordinated debentures due in 1998 (the "1996
Debentures") to institutional and private investors in Canada and Europe. The
1996 Debentures were convertible into shares of common stock at varying rates
which were contingent upon the closing bid prices of the common stock. The
Company had the right to demand conversion of the 1996 Debentures at any time
after March 1997. Interest was payable semiannually on January 31 and July 31 of
each year. The 1996 Debentures were subordinated to prior payment of bank
indebtedness of the Company. The gross proceeds less expenses were added to the
Company's general funds. (See Note 2).
The Company originally accounted for its convertible debentures in accordance
with APB 14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants." However, the Securities and Exchange Commission (SEC) staff
has indicated that convertible debt instruments which are convertible at a
discount from market should be accounted for by treating the maximum discount as
interest expense with an offset to paid-in capital. In November 1997, the
Company was advised that past issuers of such securities had restated prior
financial statements to comport with the SEC view. In conformance therewith, the
Company recognized noncash interest expense of $4,396,700 with a like amount
added to paid-in capital in the second quarter of fiscal 1996. Because of
the offsetting nature of these entries, there was no effect on Shareholders'
equity.
During fiscal 1997, the Company, at the request of bondholders, converted
$3,150,000 of the outstanding 1996 Debentures at varying rates into 2,441,400
shares of the Company's common stock. With this conversion, all but $250,000
of the original issue of $11.1 million of the 1996 Debentures was retired. In
fiscal 1998, the Company forced the conversion of these remaining 1996
Debentures into 100,000 shares of common stock. In May 1996, the Company had
registered the resale of 2,997,000 shares of common stock which the Company then
believed would be sufficient to cover the conversion of the entire $11.1 million
series of 1996 Debentures and related warrants, which had been issued in
February and March 1996. However, due to the decline in the price of the
Company's common stock, the number of shares issued upon conversion of all the
Debentures, exceeded the number of shares previously registered. In January 1998
the Company filed a registration statement which included the resale of
1,114,810 unregistered shares issued upon conversion of the 1996 Debentures.
This registration was declared effective by the Securities and Exchange
Commission in April 1998.
Note 7 - Related Party Transactions
In April 1980, the Company entered into an agreement with R & D Leasing Ltd.
("RDL"), a limited partnership in which the Company's Chairman of the Board and
a Senior Vice-President are general partners with beneficial interests, to
develop certain processes and technology related to chip stacking. The Company
has exclusively licensed this technology from RDL. The Company's exclusive
rights to the technology extend to all uses, both government and commercial.
Since entering into the licensing agreement, the Company has accrued royalty
obligations to RDL at the rate of 3.5% of all Company sales of chip stacks using
the licensed technology. In addition, RDL is entitled to receive an amount equal
to 7% of all royalties earned by the Company from sales of any such products by
the Company's sublicensees, although to date, no such sublicensee royalty income
has been earned. In October 1989, RDL agreed to defer its royalty claims and
subordinate them with respect to all other creditors in exchange for options to
purchase up to 1,000,000 shares of the Company's Common Stock, which are
exercisable by applying the deferred royalties to the purchase. The 1,000,000
options are exercisable at $1.00 until October 1999. If RDL exercises its option
in whole or in part, title to RDL's technology would transfer to the Company and
all further royalty obligations would cease. If the option expires unexercised,
the subordination provisions would terminate and the accrued royalties would be
due and payable in the same manner as any other corporate obligation. As of
September 27, 1998, the Company had accrued $826,200 in deferred royalties
pursuant to this agreement. Due to the RDL subordination, royalties accrued, but
none were paid by the Company during fiscal years 1998, 1997 and 1996.
The company has entered into an Assignment of Patent and Intellectual Rights
(the "Assignment") with F.L. Eide ("Eide"), a Vice-President of the Company. As
part of his employment agreement, Eide has assigned to the Company all rights
and interests to five (5) U.S. Provisional Patent applications owned by him.In
consideration for this Assignment, Eide will receive a 1 percent royalty on the
gross sales revenues of any products incorporating elements of the assigned
technology for the lifetime of any patents resulting from the Provisional Patent
Applications. This Assignment was executed in February 1998.
The Company entered into a sale and licensing of intellectual property rights
related to the Company's Electronic Film System(TM) ("EFS(TM)") to Advanced
Technology Products, LLC ("ATPL"), which funded early development of this
technology and for which the Company's Chief Technical Officer, John C. Carson,
serves as Managing Member. Imagek is the successor to the royalty obligations
under this license. In September 1998, an agreement was consummated with ATPL
under which the royalty obligation was reduced in consideration of the issuance
of 1,221,875 shares of Imagek common stock.
Note 8 - Composition of Certain Financial Statement Captions
September 27, September 28,
1998 1997
- ---------------------------------------------------------------
Accounts receivable:
U.S. government $1,235,300 $1,145,100
Other customers 540,800 92,600
$1,776,100 $1,237,700
===============================================================
Accounts receivable includes unbilled amounts of $886,200 and $600,900 at
September 27, 1998, and September 28, 1997, respectively. Unbilled amounts
represent contract revenues for which billings have not been presented to
customers at year-end. These amounts are billed in accordance with applicable
contract terms, usually within 30 days. Accounts receivable also includes billed
retention of $73,900 and $28,700 at September 27, 1998, and September 28, 1997,
respectively. These amounts are normally collected upon final audit of costs by
the U.S. government.
September 27, September 28,
1998 1997
- --------------------------------------------------
Inventory:
Raw materials $ 0 $ 185,400
Work in process 1,435,400 2,382,900
Finished goods 97,300 9,000
$1,532,700 $2,577,300
==================================================
Title to all inventories remains with the Company. Inventoried materials and
costs relate to work in process on customers' orders and on the Company's
generic module parts and memory stacks which the Company anticipates it will
sell to customers including potential R&D contracts. Work in process includes
amounts which may be sold as products or under contracts. Such inventoried costs
are stated generally at the total of the direct production costs including
overhead. Inventory valuations do not include general and administrative
expenses. Inventories are reviewed quarterly to determine salability and
obsolescence. A reserve is established for slow moving and obsolete items.
September 27, September 28,
1998 1997
- ---------------------------------------------------------------------
Equipment, furniture and fixtures:
Engineering and production
equipment $7,553,700 $7,252,200
Furniture and fixtures 409,500 330,700
Computer software programs 741,100 598,100
Leasehold improvements 777,000 765,400
- ---------------------------------------------------------------------
9,481,300 8,946,400
Less accumulated depreciation
and amortization 7,257,300 6,170,600
$2,224,000 $2,775,800
=====================================================================
September 27, September 28,
1998 1997
- ----------------------------------------------------------------------
Accrued expenses:
Salaries and wages $211,000 $ 267,800
Vacation 235,700 217,700
Payroll taxes 14,700 58,300
Accounting fees 50,000 47,600
Other accrued expenses 111,000 93,300
$622,400 $ 684,700
======================================================================
Note 9 - Notes Payable
Current and long-term debt consists of the following:
September 27, September 28,
1998 1997
- ----------------------------------------------------------------------
Note payable to bank bearing
interest at prime (8.5 percent
at September 28, 1997) plus
1.5 percent due in monthly
installments of $63,400
beginning May 1997 $ - $2,819,200
Capitalized lease
obligations maturing at
various dates through 2000 160,300 8,000
Less current portion 52,800 2,234,000
$107,500 $ 593,200
======================================================================
In December 1997, the Company executed a Forbearance Agreement with its lending
bank whereby the Company agreed to accelerate repayment of the Note Payable to
the bank. The current portion of the debt was reduced by $1,026,900 which was
received from the sale of the assets in October 1997. The Company also agreed,
among other requirements, to reduce the principal balance by payments of
$250,000 in each of the calendar quarters ending December 1997 and March 1998
and thereafter to reduce the remaining balance by a minimum of $200,000
quarterly. Execution of the Forbearance Agreement also resulted in a waiver of
the Company's then financial covenant defaults and an amendment to the loan
agreement eliminating such financial covenants on a prospective basis. In
connection therewith, the Company pledged as collateral one million shares of
Novalog, Inc. common stock held by the Company. The Company also paid down
$500,000 of the Note with 550,000 shares of its stock and under the terms of the
agreement, dependent on the market price of the shares when sold, the Company
would receive a refund if the proceeds from the sale exceeded $500,000.
Subsequently, the Company was informed by the bank that it sold the 550,000
shares and that the proceeds exceeded $500,000. After applying the proceeds to
the then remaining balance of
the note the bank, through September 27, 1998, remitted $772,000 to the Company
and advised the Company that additional proceeds of $183,000 were to be remitted
to the Company. These additional funds have subsequently been received by the
Company. The Company recorded the proceeds that exceeded $500,000 as paid-in
capital.
Note 10 - Income Taxes
Deferred tax assets and liabilities are recorded for differences between the
financial statement and tax basis of the assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
recorded for the amount of income tax payable or refundable for the period
increased or decreased by the change in deferred tax assets and liabilities
during the period.
The tax effects of significant items comprising the Company's deferred tax
calculation as of September 27, 1998 and September 28, 1997 are as follows:
1998 1997
------------ ------------
Current deferred tax assets:
Reserves not currently deductible $ 1,057,000 $ 709,700
Operating loss carrayforwards - 994,400
Long-term deferred tax assets:
Operating loss carryforwards 16,763,000 15,909,200
Tax credit carryforwards 541,000 449,900
Capital loss carryforwards - 8,500
Valuation allowance (18,361,000) (18,026,700)
Net deferred tax asset $ - $ -
=============================================================================
The differences between the Company's effective income tax rate and the
statutory U.S. federal income tax rate for the fiscal years September 27, 1998,
and September 28, 1997, respectively, are as follows:
The total valuation allowance changed $334,000 from September 28, 1997, to
September 27, 1998.
The provisions for income taxes for the fiscal years ended September 27, 1998,
September 28, 1997, and September 29, 1996, consist of provisions for state
income taxes of $2,600, $2,600 and $1,800, respectively. No provisions for
federal income taxes have been made in these fiscal years due to the net
operating losses.
At September 27, 1998, the Company had net operating loss carryforwards of
approximately $46,223,000 for financial reporting and federal income tax
purposes expiring in varying amounts from fiscal year 1999 through fiscal year
2013, and $11,844,000 for California tax purposes expiring in varying amounts
from fiscal year 1999 through fiscal year 2003, available to offset future
federal and California taxable income. In addition, as of September 27, 1998,
the Company had investment tax credits and qualified research credits of
$286,000 and $255,000, respectively, expiring in varying amounts through fiscal
year 2009 and available to offset future federal and California taxes. The
ability of the Company to utilize the net operating loss and credit
carryforwards may be restricted by certain provisions of the Internal Revenue
Code.
Note 11 - Operating Leases
The Company leases certain facilities and equipment under cancelable and
noncancelable lease obligations. Total rental expense for operating leases
amounted to $559,000, $1,685,200 and $1,633,500 for the fiscal years ended
September 27, 1998, September 28, 1997, and September 29, 1996, respectively.
Minimum lease commitments existing at September 27, 1998, are approximately as
follows:
Fiscal years ending:
1999 $ 427,900
2000 397,100
2001 403,000
2002 1,300
- ----------------------------------------
Total minimum payments $1,229,300
========================================
Note 12 - Stock Option Plans and Employee Retirement Plan
In December 1991, the Board of Directors adopted the 1991 Stock Option Plan to
replace 1981 Stock Option Plans, which had expired. This new Plan was approved
by shareholders at the Company's Annual Meeting in February 1992. Under the 1991
Plan, options to purchase an aggregate of 675,000 shares of the Company's common
stock may be granted to both key management employees and non-employee
directors. Options granted may be either Incentive Stock Options or Nonstatutory
Stock Options and the requirements for participation, exercise price and other
terms are similar to the 1981 Plans. As of September 27, 1998, options to
purchase 259,800 shares at prices ranging from $1.4375 (40,000 shares) to $7.75
(8,300 shares) were outstanding under the 1991 Plan, of which 46,800 were
exercisable at September 27, 1998.
In January 1995, the Board of Directors adopted the 1995 Stock Option Plan to
replace the 1991 Plan, which was fully subscribed at the time. The 1995 Plan was
approved by shareholders at the Company's Annual Meeting in February 1995. Under
the 1995 Plan, options to purchase an aggregate of 700,000 shares of the
Company's common stock may be granted to both key management employees and non-
employee directors. In August 1997, the Board of Directors authorized an
increase in the number of options to an aggregate of 1,650,000 shares, and this
increase was ratified by shareholders at the Company's Annual Meeting in
February 1998. Options granted may be either Incentive Stock Options or
Nonstatutory Stock Options, and requirements for participation, exercise price
and other terms are similar to the 1991 Plan. As of September 27, 1998, options
to purchase 1,641,000 shares at prices ranging from $0.98 (580,000 shares) to
$6.50 (10,000 shares) were outstanding under the 1995 Plan, of which 372,800
were exercisable at September 27, 1998.
In November 1998, the Board of Directors approved a new plan, "The 1999 Stock
Option Plan," subject to ratification by shareholders at the Company's Annual
Meeting in February 1999. Under the 1999 Plan, options to purchase an aggregate
of 1,000,000 shares of common stock may be granted to both key management
employees and non-employee directors.
Stock option activity is summarized as follows:
Option Price
Shares Per Share
- ----------------------------------------------------------
1991 Plan:
- ----------
Options outstanding at
October 1, 1995 571,300 1.3125 to $8.625
Exercised (314,100) 1.3125 to 4.09
Cancelled (19,000) 4.09 to 8.625
Expired (27,500) 1.3125 to 4.09
- ----------------------------------------------------------
Options outstanding at
September 29, 1996 210,700 4.28 to 8.625
Granted 143,000 1.4375 to 2.3125
Cancelled (76,500) 6.00 to 7.6875
Expired (51,700) 4.28 to 8.6520
- ----------------------------------------------------------
Options outstanding at
September 28, 1997 225,500 1.4375 to 7.75
Granted 120,000 1.50 to 2.4375
Exercised (8,300) 0.98
Cancelled (52,400) 1.50 to 7.50
Expired (25,000) 7.125 to 7.75
Options outstanding at
September 27, 1998 259,800 0.98 to $7.50
==========================================================
1995 Plan:
- ----------
Options outstanding at
October 1, 1995 228,500 6.00 to $6.50
Granted 343,500 5.0625 to 8.50
Cancelled (128,000) 6.00 to 6.50
- ----------------------------------------------------------
Options outstanding at
September 29, 1996 444,000 5.0625 to 8.50
Granted 1,053,000 0.98 to 2.3125
Cancelled (371,900) 1.00 to 8.50
- ----------------------------------------------------------
Options outstanding at
September 28, 1997 1,125,100 0.98 to 6.50
Granted 581,500 1.00 to 2.8750
Exercised (8,300) 0.98
Cancelled (57,300) 1.00 to 6.25
- ----------------------------------------------------------
Options outstanding at
September 27, 1998 1,641,000 0.98 to $6.50
==========================================================
A summary of outstanding options exercisable under both the 1991
and 1995 Stock Option Plans is shown below.
Weighted average
Range of Number remaining contractual Weighted average Number Weighted average
exercise prices outstanding life (years) exercise price exercisable exercise price
- --------------- ----------- --------------------- ---------------- ----------- ----------------
$ .98 - 1.98 1,771,734 3 $ 1.30 333,088 $ 1.15
2.31 - 2.88 39,000 3 2.62 4,333 2.31
5.00 - 6.25 72,500 1 6.08 47,998 6.08
6.50 - 7.50 17,500 3 1.56 17,500 6.93
--------- -------
1,900,734 402,919
Pursuant to SFAS No. 123 "Accounting for Stock Based Compensation," the Company
is required to disclose the effects on the net loss and per share data as if the
Company had elected to use the fair value approach to account for all of its
employee stock-based compensation plans. Had the compensation cost for the
Company's Plans been determined using the fair value method, the compensation
expense would have had the effects of increasing the Company's net loss for the
years ended September 27, 1998, September 28, 1997, and September 29, 1996 to
the pro forma amounts of $4,754,000, $15,041,000, and $16,255,700 respectively,
with a corresponding pro forma loss per share of $0.19, $0.73, $0.96,
respectively. These pro forma amounts were determined estimating the fair value
of each option granted during fiscal 1996, fiscal 1997 and fiscal 1998 on its
grant date, using the Black-Scholes option-pricing model. Assumptions of no
dividend yield, a risk-free interest rate of 6 percent which approximates the
Federal Reserve Board's rate for treasuries at the time granted, an expected
life of three years, and volatility rates varying from 86.9 to 73.2 percent were
applied to options granted during fiscal years 1998 and 1997, and 1996. The
weighted average fair value at the grant date for the options granted during
fiscal years 1998, 1997, and 1996 was $1.57, $0.75 and $3.47 per option,
respectively.
In fiscal 1982, the Company established an Employee Retirement Plan, which is
effective for fiscal year 1982 and thereafter. The plan provides for annual
contributions to the Company's Stock Bonus Trust (SBT) to be determined by the
Board of Directors and which will not exceed 15 percent of total payroll. At the
discretion of the Trustee, the SBT will purchase common stock at fair market
value or other interest-bearing securities or investments for the accounts of
individual employees who will gain a vested interest of 20 percent in their
accounts after three years of service, and 20 percent each year of service
thereafter, until fully vested after seven years of service. That portion of
cash or stock held in an employee's account and not vested at termination of
employment will be redistributed in accordance with a prearranged formula.
Management believes that the contributions made by the Company to the SBT, to
the extent they relate to government cost-plus-fixed-fee contracts, will be
reimbursable by the U.S. government. In fiscal years 1996, 1997 and 1998 the
Company's contributions to the SBT were 172,900, 347,600 and 333,300 shares of
common stock, respectively, which had estimated market values of $687,400,
$445,500 and $500,000 respectively.
Note 13 - Revenues
In fiscal 1998, contracts with all branches of the U.S. government accounted
for 27 percent of the Company's revenues, and a second-tier government contract
with a prime government contractor accounted for 27 percent. The remaining 46
percent of the Company's revenues were derived from non-government sources. Of
the 27 percent related to the U.S. government agencies, the U.S. Army, the U.S.
Air Force and the U.S. Navy accounted for 24 percent, 12 percent and 8 percent,
respectively, with the remaining revenue of 56 percent being widely diversified
among several other governmental agencies.
Of the 46 percent applicable to non-governmental sources, three (3) customers
accounted for 35 percent, 14 percent and 7 percent, respectively, of the total
commercial revenues.
In fiscal 1997, contracts with all branches of the U.S. government accounted for
43 percent of the Company's revenues, and the remaining 57 percent of the
Company's revenues was derived from non-government sources. Of the 43 percent
applicable to the U.S. government, there were three agencies of the government
that accounted for 55 percent, 13 percent and 11 percent. Other government
agencies accounted for the remaining 21 percent. Of the 57 percent applicable to
non-government sources, two customers accounted for 49 percent and 39 percent of
the revenues.
In fiscal 1996, contracts with all branches of the U.S. government accounted for
31 percent of the Company's revenues, and the remaining 69 percent of the
Company's revenues was derived from non-government sources. Of the 31 percent
applicable to the U.S. government, there was one agency of the government that
accounted for 16 percent. Other government agencies
accounted for the remaining 15 percent. Of the 69 percent applicable to non-
government sources, two customers accounted for 23 percent and 21 percent of the
revenues.
Note 14 - Technology Licenses
In June 1992 the Company and International Business Machines (IBM) entered into
an agreement to develop manufacturing technology required to commercially
produce parts using the Company's technology for stacking integrated circuits.
In June 1993, IBM and the Company jointly announced the opening of a pilot
manufacturing line at an IBM facility. The agreement provided for the Company to
receive royalties on stacked chip parts sold by IBM and will share equally with
IBM any royalties received from the licensing of the jointly developed
manufacturing technology. In April 1996, the Company reached an agreement with
IBM wherein the Company acquired the operating line from IBM and leased the
facilities. This agreement was terminated in fiscal 1997.
In May 1995, the Company and Unitrode Corporation (Unitrode) entered into an
agreement to transfer to Unitrode the technology required to produce the
Company's wireless infrared communication integrated circuit (SIRComm). The
Company will receive licensing and royalty payments for the technology transfer
and on SIRComm products sold by Unitrode.
Note 15 - Deferred Revenues
The Company received prepayments from customers related to services and products
which had not been delivered as of the balance sheet date. Revenues are recorded
upon delivery of these services and products.
Note 16 - Acquisition and Disposal of Equipment
On April 19, 1996, the Company consummated an agreement for the acquisition and
operation of the equipment comprising IBM's cubing line located at IBM's Essex
Junction, Vermont facility. The cubing line was established by IBM to
manufacture the stacked-chip assemblies required to commercialize the Company's
proprietary chip-stacking technology under the joint development alliance that
IBM and the Company entered into in 1992. According to the terms of the
agreement, the Company acquired the equipment and clean room, which comprises
the cubing line for a cash payment of approximately $6.5 million. In addition,
the Company signed a facility lease agreement for the space required to operate
the cubing line under the Company's management within the IBM facility through
December 1998. The terms of the facility lease agreement include escalating rent
payments, which have been straight lined for financial reporting purposes. The
difference between the amount paid and the amount expensed during fiscal 1996
has been reported as accrued rent. The agreement was terminated in fiscal 1997
and the deferred rent balances were netted against rent expense.
As part of the process to terminate the agreement with IBM, the Company disposed
of the equipment acquired from IBM in April 1996 and other fixed assets
purchased and/or constructed at the IBM facility. These assets with a net book
value of $6,925,300 were sold for proceeds of $1,051,900, resulting in a loss on
the disposal of $5,873,400. At September 28, 1997, $1,026,900 of those proceeds
was still receivable and is included in Other current assets on the balance
sheet. During October 1997, these proceeds were received by the Company's lender
and applied against the principal of the Company's long-term debt. (See Note 9).
In December 1997, the Company made a $490,000 cash payment to extinguish its
remaining obligations under a Settlement Agreement. Accordingly, the Company
recorded an extraordinary gain of $1,146,100 on the extinguishment of debt and
reduced accounts payable by the corresponding amounts.
Note 17 - Earnings Per Share
As the Company had a net loss from continuing operations for 1998, 1997 and
1996, basic and diluted net loss per share are the same.
Net loss applicable to common stockholders includes $465,300 for the non-cash
imputed dividend related to the beneficial conversion feature on 24,750 Units of
the Series D Convertible Preferred stock. (See Note 2). The beneficial
conversion feature is computed as the difference between the quoted market price
of a share of common stock on date of issue and the conversion price times all
shares of preferred stock sold and under option. The imputed dividends are a
non-cash, one-time charge based on the immediate conversion feature.
Basic and diluted net loss per common share for 1998, 1997 and 1996 were
calculated as follows:
1998 1997 1996
- ----------------------------------------------------------------------
Net loss $(4,243,500) $(14,875,600) $(15,914,700)
Preferred Stock
cumulative dividend (20,700) (18,700) (28,800)
Preferred Stock
imputed dividend (465,300) - -
Net loss available
to Common stockholders (4,729,500) (14,894,300) (15,943,500)
Basic and diluted
net loss per share $ (0.19) $ (0.73) $ (0.94)
Weighted average
shares outstanding 24,597,700 20,475,100 16,874,300
======================================================================
Note 18 - Fourth Fiscal Quarter Adjustments
The Company's fiscal year end coincides with the Federal budgetary process
providing additional clarification regarding the utility of the Company's
inventory. Accordingly, management performs a comprehensive review of its
inventory in the fourth quarter. Additionally, in the fourth quarter of fiscal
1998, the Company's analysis of organization and financing activities of the
Company's Imagek subsidiary resulted in adjustments to the accounting for
allocation of cash received and certain expenses. Also, subsequent to the close
of the fiscal year, the Company completed a technical analysis of the
transaction settling its bank debt, resulting in a determination to reclassify
the proceeds therefrom as additional paid-in capital rather than gain from debt
extinguishment. Significant adjustments made in the fourth quarter are
summarized below. Certain of these adjustments will result in adjustments to
previously released financial information for earlier quarters of fiscal 1998.
The Company is in the process of evaluating these effects and expects to amend
its reports for the affected periods.
Inventory write-offs and reserves $2,079,000
Reclassification of gain on debt extinguishment
to additional paid-in capital 954,800
Inventory costs charged to R&D expense 795,000
Additional depreciation of equipment, furniture & fixtures 310,000
Reclassification of contract revenue from ATPL
to additional paid-in capital 305,000
----------
Increase in Net Loss $4,443,800
==========
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Irvine Sensors Corporation
Costa Mesa, California
We have audited the accompanying consolidated balance sheet of Irvine Sensors
Corporation as of September 27, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Irvine
Sensors Corporation as of September 27, 1998, and the consolidated results of
its operations and its consolidated cash flows for the year then ended, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Irvine, California
January 6, 1999
-------------
[LOGO OF PRICE WATERHOUSE LLP]
To the Board of Directors and Shareholders of Irvine Sensors Corporation
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of shareholders' equity (deficit) and of cash flows as
of and for each of the two years in the period ended September 28, 1997 present
fairly, in all material respects, the financial position, results of operations
and cash flows of Irvine Sensors Corporation and its subsidiaries as of and for
each of the two years in the period ended September 28, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICE WATERHOUSE LLP
Costa Mesa, California
December 16, 1997
Irvine Sensors Corporation
Corporate Information
Directors James Alexiou/1,2/, Chairman of the Board, Irvine Sensors
Corporation
John C. Carson, Senior Vice-President, Irvine Sensors
Corporation
Joanne S. Carson, Secretary, Irvine Sensors Corporation
Marc Dumont/1/, Financial Advisor
James D. Evert/1/, President and CEO, Irvine Sensors
Corporation
Walter E. Garrigan/2/, Financial Advisor
General Frank P. Ragano/1/, Chairman and CEO of CMS, Inc., a
manufacturer of defense munitions
Vincent F. Sollitto Jr./2/, President and CEO of Photon
Dynamics Inc., a manufacturer of electronic capital
equipment
/1/ Member of the Compensation Committee
/2/ Member of the Audit Committee
Officers John C. Carson, Senior Vice-President
Joanne S. Carson, Secretary
Floyd K. Eide, Vice-President
James D. Evert, President and Chief Executive Officer
John J. Stuart, Jr., Senior Vice-President, Chief Financial
Officer and Treasurer
Executive Offices Irvine Sensors Corporation, 3001 Redhill Avenue,
Building III,
Costa Mesa, California 92626
Counsel Grover T. Wickersham, P.C., Wickersham Law Offices,
430 Cambridge Avenue, Suite 100, Palo Alto, California 94306
Independent Grant Thornton LLP
Accountants Irvine, California 92612
Transfer Agent ChaseMellon Shareholder Services, 400 S. Hope St.,
4th Floor,
Los Angeles, California 90071
www.chasemellon.com
Stock Data Nasdaq Listing: Common Stock - IRSN
Boston Stock Exchange Listing: Common Stock - ISC
Form 10-K Shareholders may obtain without charge a copy of the
Company's Annual Report on Form 10-K for the fiscal year
ended September 27, 1998, as filed with the Securities and
Exchange Commission, without exhibits thereto, and may
obtain any exhibit thereto upon payment of a nominal copying
charge, by writing to Joanne S. Carson, Secretary, Irvine
Sensors Corporation, 3001 Redhill Avenue, Costa Mesa,
California 92626.