Exhibit 13
Irvine Sensors Corporation
Financial Highlights
Fiscal Year Ended
October 1, October 3, September 27, September 28, September 29,
2000 1999 1998 1997 1996
----------------------------------------------------------------------------
Revenues $ 10,769,800 $ 11,100,200 $ 9,314,500 $ 13,693,200 $ 12,024,200
============================================================================
Loss from operations $(16,019,200) $ (9,785,700) $ (5,798,200) $(14,809,200) $(11,154,700)
============================================================================
Net Loss $(15,038,300) $ (9,115,700) $ (4,243,500) $(14,875,600) $(15,914,700)
============================================================================
Basic and diluted net loss per common
and common equivalent share $ (0.37) $ (0.29) $ (0.19) $ (0.73) $ (0.94)
============================================================================
Weighted average number of
shares outstanding 40,428,600 31,244,300 24,597,700 20,475,100 16,874,300
============================================================================
Long-term debt $ 224,700 $ 433,200 $ 933,700 $ 1,207,000 $ 3,165,600
============================================================================
Convertible debt $ -- $ -- $ -- $ 250,000 $ 3,400,000
============================================================================
Total assets $ 20,307,150 $ 10,510,350 $ 7,064,700 $ 9,449,300 $ 21,742,200
============================================================================
Price Range of Common Stock
The following table sets forth the range of representative high and low bid
prices of the Company's common stock in the over-the-counter market for the
periods indicated, as furnished by The Nasdaq Stock Market. These prices
represent prices among dealers, do not include retail markups, markdowns or
commissions, and may not represent actual transactions:
Fiscal Year Ended
October 1, 2000 October 3, 1999
High Low High Low
Common Stock Bid Prices
First Quarter $ 2.56 $ 1.22 $ 1.94 $ 1.97
Second Quarter $ 18.75 $ 1.75 $ 1.66 $ 1.31
Third Quarter $ 11.25 $ 3.50 $ 2.00 $ 1.44
Fourth Quarter $ 4.50 $ 2.09 $ 1.84 $ 1.22
On December 22, 2000, there were 819 stockholders of record and approximately
20,000 beneficial holders, based on information provided by the Company's
transfer agent.
The Company has not paid cash dividends on any class of its stock since its
incorporation; under Delaware law there are certain restrictions, which limit
the Company's ability to pay cash dividends in the future.
1
Irvine Sensors Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
FISCAL YEAR ENDED OCTOBER 1, 2000 vs.
FISCAL YEAR ENDED OCTOBER 3, 1999
Fiscal 2000 product sales of $6,105,700 decreased by $912,200 or 13 percent
compared to fiscal 1999. Novalog's competition has forced Novalog to decrease
its prices, resulting in smaller proceeds from equivalent sales. Also, the wafer
market is tight due to high demand from manufacturers of cellular phones,
pagers, etc. Novalog was unable to fulfill some sales orders as a result, and
thus recognized lower product sales. Additionally, MSI realized $200,000 revenue
during fiscal 1999 from a chip customer, which did not reoccur in 2000. Fiscal
2000 contract revenue of $4,282,900 increased by $202,200 or 5 percent compared
to fiscal 1999.
Cost of product sales as a percentage of product sales increased in fiscal 2000
to 77 percent from 74 percent in 1999. The slight increase in product costs is
directly related to the lower prices Novalog's customers are dictating as a
result of the IRDA market competition.
Cost of contract revenues of $4,087,300 was 95 percent of contract revenues, an
increase from 78 percent in fiscal 1999. This increase was a result of
significant contract overruns and reserves established in anticipation of future
overruns on contracts in progress.
General and administrative expenses of $9,010,200 increased by $2,013,100 or 29
percent in relation to fiscal 1999, largely as a result of the growth in the
Company's consolidated subsidiaries. Additionally, the creation of RedHawk and
iNetworks resulted in significant general and administrative expenses. As a
percentage of total revenues, general and administrative expenses were
approximately 84 percent in fiscal 2000 compared to 63 percent in fiscal 1999,
again reflecting the substantial fiscal 2000 increase in expenses of the
Company's subsidiaries, four of which generated no significant revenues.
Research and Development increased to $8,984,200 in fiscal 2000 compared to
$5,528,000 in fiscal 1999. The $3,456,200 or 63% increase was due to the product
development expenses of the MicroSensors and Silicon Film consolidated
subsidiaries. Additionally, ATD spent over $2 million toward the development of
potential future commercial products during 2000 and Novalog spent approximately
$300,000 developing its next generation product. As a percentage of revenues,
R&D accounted for approximately 83 percent in fiscal 2000 compared to 50 percent
in fiscal 1999.
The aggregate increase of $5,903,100 in fiscal 2000 operating costs and expenses
are the direct result of management's decision to further implement the
Company's strategy to develop, market and sell commercial products through its
subsidiaries.
Interest expense increased $79,700 or 76 percent in fiscal 2000 due to
additional equipment acquired through capital leases.
Interest income increased $163,600 in fiscal 2000 due to the short-term
investment of proceeds from the Company's equity offerings.
The consolidated net loss of $15,038,300 in fiscal 2000 was $5,922,600 or 65
percent greater than fiscal 1999. The increased net loss of the MicroSensors,
Silicon Film and RedHawk subsidiaries accounted for approximately 70 percent of
this increase.
FISCAL YEAR ENDED OCTOBER 3, 1999 vs.
FISCAL YEAR ENDED SEPTEMBER 27, 1998
Consolidated revenues in fiscal 1999 of $11,100,200 increased by $1,785,700 or
19 percent compared to fiscal 1998. The primary reason for this increase is the
increased sales realized by Novalog.
Cost of contract revenues of $3,163,200 was 78 percent of contract revenues, an
improvement from the 86 percent figure of fiscal 1998. This improvement was
primarily due to attempts made to reduce cost of operations during fiscal 1999.
Cost of product sales was $5,197,600 or approximately 74 percent of product
sales in fiscal 1999. By comparison, fiscal 1998 cost of
2
product sales was 85 percent of product sales, reflecting final shutdown costs
of the Vermont facility, which did not recur in fiscal 1999. Additionally, the
Company realized better product margins due to the increase in sales volume.
General and administrative expenses of $6,997,100 increased by $3,506,700 or 100
percent in relation to fiscal 1998, largely as a result of the growth in the
Company's consolidated subsidiaries. As a percentage of total revenues, general
and administrative expenses were approximately 63 percent in fiscal 1999
compared to 37 percent in fiscal 1998, again reflecting the substantial fiscal
1999 increase in expenses of the Company's subsidiaries, two of which generated
no revenues.
Research and Development increased to $5,528,000 in fiscal 1999, a growth of
$1,399,600 or 34 percent in the year-to-year comparison. The growth was due to
the product development expenses of the MicroSensors and Silicon Film
consolidated subsidiaries. As a percentage of revenues, R&D accounted for
approximately 50 percent in fiscal 1999 compared to approximately 44 percent in
fiscal 1998, with the product development expenses of MicroSensors and Silicon
Film accounting for the difference, without corresponding revenues.
The aggregate increase of $5,773,200 in fiscal 1999 of operating costs and
expenses are the direct result of management's decision to further implement the
Company's strategy to develop, market and sell commercial products through its
subsidiaries.
Interest expense declined by $161,900 in fiscal 1999 due to final retirement of
debt associated with the Vermont facility in fiscal 1998, which did not recur in
fiscal 1999.
Interest income increased by $26,100 in fiscal 1999 due to the short-term
investment of proceeds from the Company's equity offerings.
The consolidated net loss of $9,115,700 in fiscal 1999 was $4,872,200, or 115
percent greater than fiscal 1998. The increased net loss of the MicroSensors and
Silicon Film subsidiaries accounted for over 88 percent of this increase.
Liquidity, Capital Resources and Impact of Changing Prices
At October 1, 2000, the Company had consolidated cash and cash equivalents of
$8,785,700, which represents an increase of $7,804,600 since October 3, 1999.
The net cash used in operating activities was $13,346,900 during fiscal 2000.
The primary use of cash was to fund the research and development and other
operating expenses of its MicroSensors and Silicon Film subsidiaries and
investments in potential commercializable products in ATD.
The Company used $4,376,300 in investing activities during fiscal 2000. Cash
used in investing activities primarily consisted of acquiring marketable
securities, net of proceeds from the sale of such securities of $1,195,400 and
acquiring property, plant and equipment for $2,375,600. The Company also entered
into capital lease agreements to acquire an additional $173,700 of equipment.
During fiscal 2000, the Company obtained net cash of $25,527,800 from financing
activities. Cash provided by financing activities included $17,019,500 from the
issuance of common and preferred stock and common stock warrants, $6,199,300
from the sale of common and preferred stock in subsidiaries to minority interest
shareholders and proceeds from common stock options and warrants exercised of
$2,430,100. Net cash provided by equity and minority interest transactions was
reduced by principal payments on loans of $1,250,000 and capital leases payable
of $330,100.
As a result of equity financing in fiscal 2000, the further development
activities of MicroSensors and Silicon Film were accomplished while increasing
the Company's working capital $8,382,550. The Company anticipates that the
existing working capital and its projected financing results will meet its cash
requirements for the immediate future.
Contracts with government agencies may be suspended or terminated by the
government at any time, subject to certain conditions. Similar termination
provisions are typically included in agreements with prime contractors. Since
its inception, the Company has experienced such termination of its contracts on
two occasions. There is no assurance the Company will not experience suspensions
or terminations in the future. Such termination, if material, could cause a
disruption of the Company's revenue stream and could result in employee layoffs.
3
At October 1, 2000, the Company's funded backlog was approximately $5,534,800
compared to $ 3,928,900 at October 3, 1999. In addition, existing contracts
include a large amount of unfunded backlog, which typically is funded when the
previously funded amounts have been expended. Subsequent to fiscal year end the
total backlog was $6,056,600 as of November 26, 2000.
Except for historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
forward-looking statements contained herein are subject to certain risks and
uncertainties, including such factors, among others, as the pace at which new
markets develop, the ability of the Company to introduce new products and ramp
up manufacturing in a timely manner while controlling its operating expenses and
the response of competitors, many of whom are bigger and better financed than
the Company. In addition, the scope of the Company's growth plan may introduce
unanticipated risks and financial requirements. The availability of external
financing for the Company's plan cannot be assured and is subject to numerous
factors including those unrelated to the Company's performance such as economic
and market conditions. Further, the Company's financial performance prior to
substantial growth in revenues may not permit additional equity financing and
may place at risk the continuation of its long-term debt financing because of
inability to achieve financial covenants. Accordingly, investors are advised to
assess forward-looking statements contained herein with caution. Additional
information on various risks and uncertainties potentially affecting the
Company's results are contained in publicly filed disclosures available through
the Securities and Exchange Commission EDGAR database (http://www.sec.gov) or
from the Company's Investor Relations.
4
Irvine Sensors Corporation
Consolidated Balance Sheets
October 1, October 3,
2000 1999
----------------------------
Assets
Current Assets:
Cash and cash equivalents $ 8,785,700 $ 981,100
Marketable securities 1,230,900 --
Accounts receivable, net of allowances
of $126,400 in 2000 and $36,700 in 1999 2,323,000 2,401,500
Stock subscriptions receivable -- 600,000
Inventory 1,577,600 2,219,800
Other current assets 212,600 236,750
----------------------------
Total current assets 14,129,800 6,439,150
Equipment, furniture and fixtures, net 4,856,800 3,546,900
Goodwill 157,300 171,600
Capitalized software development costs 578,200 201,700
Other assets 585,050 151,000
----------------------------
$ 20,307,150 $ 10,510,350
============================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 2,118,300 $ 3,310,800
Accrued expenses 1,318,000 752,600
Accrued loss on contracts 582,700 --
Accrued dividends 300,400 --
Deferred and subordinated royalties payable - affiliated company -- 1,000,000
Capital lease obligations - current portion 364,000 311,900
----------------------------
Total current liabilities 4,683,400 5,375,300
Capital lease obligations 224,700 433,200
Minority interest in consolidated subsidiaries 7,812,500 2,489,200
----------------------------
Total liabilities 12,720,600 8,297,700
Commitments and contingencies (Note 9)
Shareholders' Equity:
Preferred stock, $0.01 par value, 500,000 shares authorized:
Series B Convertible Cumulative Preferred, 4,300 and 6,400 shares
outstanding; aggregate liquidation preference of $64,500 25 50
Series C Convertible Cumulative Preferred, 2,300 and 3,500 shares
outstanding; aggregate liquidation preference of $33,000 25 50
Series D Convertible Preferred, none and 2,400 shares
outstanding; aggregate liquidation preference of $-0- -- 50
Common stock, $0.01 par value, 60,000,000 shares authorized;
46,637,800 and 35,035,100 shares issued and outstanding 466,400 350,300
Common stock warrants and unit warrants; 3,354,100 and
147,000 outstanding -- --
Paid-in capital (including common stock subscribed) 85,097,100 64,800,900
Accumulated deficit (77,977,000) (62,938,700)
----------------------------
Total shareholders' equity 7,586,550 2,212,650
----------------------------
$ 20,307,150 $ 10,510,350
============================
See Accompanying Notes to Consolidated Financial Statements.
5
Irvine Sensors Corporation
Consolidated Statements of Operations
Fiscal Year Ended
--------------------------------------------
October 1, October 3, September 27,
2000 1999 1998
--------------------------------------------
Revenues:
Product sales $ 6,105,700 $ 7,017,900 $ 2,289,800
Contract research & development 4,282,900 4,080,700 6,624,700
Other 381,200 1,600 400,000
--------------------------------------------
Total revenues 10,769,800 11,100,200 9,314,500
--------------------------------------------
Cost and expenses:
Cost of product sales 4,707,300 5,197,600 1,942,200
Cost of contract revenues 4,087,300 3,163,200 5,711,700
General and administrative 9,010,200 6,997,100 3,490,400
Research and development 8,984,200 5,528,000 4,128,400
Loss related to plant closure -- -- (160,000)
--------------------------------------------
26,789,000 20,885,900 15,112,700
--------------------------------------------
Loss from operations (16,019,200) (9,785,700) (5,798,200)
Interest expense (184,000) (104,300) (266,200)
Interest income 202,200 38,600 12,500
Other -- -- 299,700
--------------------------------------------
Loss before minority interest
and provision for income taxes (16,001,000) (9,851,400) (5,752,200)
Minority interest in loss of subsidiaries 965,900 738,500 365,200
Provision for income taxes (3,200) (2,800) (2,600)
--------------------------------------------
Loss before extraordinary item (15,038,300) (9,115,700) (5,389,600)
Extraordinary item - debt extinguishment -- -- 1,146,100
--------------------------------------------
Net loss $(15,038,300) $ (9,115,700) $ (4,243,500)
============================================
Loss Per Common Share:
Basic Loss Per Share
Loss before extraordinary item $ (0.37) $ (0.29) $ (0.24)
Extraordinary item -- -- 0.05
--------------------------------------------
Net loss $ (0.37) $ (0.29) $ (0.19)
============================================
Diluted Loss Per Share
Loss before extraordinary item $ (0.38) $ (0.29) $ (0.24)
Extraordinary item -- -- 0.05
--------------------------------------------
Net loss $ (0.38) $ (0.29) $ (0.19)
============================================
Weighted average number
of shares outstanding 40,428,600 31,244,300 24,597,700
============================================
See Accompanying Notes to Consolidated Financial Statements.
6
Irvine Sensors Corporation
Consolidated Statements of Shareholders' Equity (Deficit)
Common Stock Common Stock Preferred Stock
Shares Issued Warrants Issued Shares Issued
------------------------------------------------------------------------
Number Amount Number Number Amount
---------- --------- --------- ------ ------
Balance at September 28, 1997 21,541,300 $ 215,400 340,000 13,750 $ 100
---------- --------- --------- ------ ------
Common stock issued to employee
retirement plan 333,300 3,400 -- -- --
Convertible debentures converted
to common stock 100,000 1,000 -- -- --
Series B and Series C preferred
stock converted to common stock 140,900 1,400 -- (2,800) --
Common stock issued to retire
liabilities 487,800 4,900 -- -- --
Sale of common stock and common
stock units 2,091,700 20,900 -- -- --
Stock options exercised 8,200 100 -- -- --
Common stock warrants issued -- -- 116,200 -- --
Common stock warrants exercised 294,200 2,900 (294,200) -- --
Series D preferred units sold -- -- -- 37,750 400
Series D preferred units converted 3,460,300 34,600 -- (33,350) (350)
Preferred stock of dissolved
subsidiary -- -- -- -- --
Capital contributed by ATPL -- -- -- -- --
Net loss -- -- -- -- --
---------- --------- --------- ------ ------
Balance at September 27, 1998 28,457,700 $ 284,600 162,000 15,350 $ 150
---------- --------- --------- ------ ------
Common stock issued to employee
retirement plan 330,000 3,300 -- -- --
Series B and Series C preferred
stock converted to common stock 51,500 500 -- (1,050) --
Series D preferred units converted 206,100 2,000 -- (2,000) --
Common stock issued to retire
liabilities 190,000 1,900 -- -- --
Common stock issued to purchase
shares of subsidiaries 1,127,500 11,300 -- -- --
Sale of common stock and common
stock units 4,536,400 45,400 -- -- --
Common stock subscribed,
444,400 shares -- -- -- -- --
Common stock options exercised 120,900 1,200 -- -- --
Common stock warrants exercised 15,000 100 (15,000) -- --
Net loss -- -- -- -- --
---------- --------- --------- ------ ------
Balance at October 3, 1999 35,035,100 $ 350,300 147,000 12,300 $ 150
---------- --------- --------- ------ ------
Common stock issued to employee
retirement plan 135,100 1,400 -- -- --
Series B and Series C preferred
stock converted to common stock 165,100 1,700 -- (3,300) (50)
Series D preferred units converted 471,900 4,700 -- (2,400) (50)
Series D warrants exercised 190,000 1,900 -- -- --
Common stock issued to retire
royalty liabilities 1,000,000 10,000 -- -- --
Common stock issued to pay
operating expenses 18,800 200 -- -- --
Common stock issued to acquire
capital assets 1,400 -- -- -- --
Sale of common stock and common
stock units 7,397,000 74,000 -- -- --
Issuance of common stock subscribed
in 1999 444,400 4,400 -- -- --
Common stock options exercised 1,329,700 13,300 -- -- --
Common stock warrants issued -- -- 3,711,400 -- --
Common stock warrants exercised 449,300 4,500 (449,300) -- --
Common stock warrants expired -- -- (55,000) -- --
Dividends on Series C preferred
stock of subsidiary -- -- -- -- --
Net loss -- -- -- -- --
---------- --------- --------- ------ ------
Balance at October 1, 2000 46,637,800 $ 466,400 3,354,100 6,600 $ 50
========== ========= ========= ====== ======
[WIDE TABLE CONTINUED FROM ABOVE]
Paid-in Accumulated Shareholders'
Capital Deficit Equity(Deficit)
------------ ------------ ---------------
Balance at September 28, 1997 $ 46,424,100 $(49,579,500) $ (2,939,900)
------------ ------------ ------------
Common stock issued to employee
retirement plan 496,600 -- 500,000
Convertible debentures converted
to common stock 249,000 -- 250,000
Series B and Series C preferred
stock converted to common stock (1,400) -- --
Common stock issued to retire
liabilities 753,200 -- 758,100
Sale of common stock and common
stock units 3,712,900 -- 3,733,800
Stock options exercised (100) -- --
Common stock warrants issued 303,900 -- 303,900
Common stock warrants exercised 274,100 -- 277,000
Series D preferred units sold 3,283,700 -- 3,284,100
Series D preferred units converted (34,250) -- --
Preferred stock of dissolved
subsidiary 118,500 -- 118,500
Capital contributed by ATPL 305,000 -- 305,000
Net loss -- (4,243,500) (4,243,500)
------------ ------------ ------------
Balance at September 27, 1998 $ 55,885,250 $(53,823,000) $ 2,347,000
------------ ------------ ------------
Common stock issued to employee
retirement plan 496,900 -- 500,200
Series B and Series C preferred
stock converted to common stock (500) -- --
Series D preferred units converted 163,500 -- 165,500
Common stock issued to retire
liabilities 280,600 -- 282,500
Common stock issued to purchase
shares of subsidiaries 1,147,950 -- 1,159,250
Sale of common stock and common
stock units 6,082,100 -- 6,127,500
Common stock subscribed,
444,400 shares 600,000 -- 600,000
Common stock options exercised 131,200 -- 132,400
Common stock warrants exercised 13,900 -- 14,000
Net loss -- (9,115,700) (9,115,700)
------------ ------------ ------------
Balance at October 3, 1999 $ 64,800,900 $(62,938,700) $ 2,212,650
------------ ------------ ------------
Common stock issued to employee
retirement plan 460,700 -- 462,100
Series B and Series C preferred
stock converted to common stock (1,650) -- --
Series D preferred units converted (4,650) -- --
Series D warrants exercised 207,100 -- 209,000
Common stock issued to retire
royalty liabilities 990,000 -- 1,000,000
Common stock issued to pay
operating expenses 178,200 -- 178,400
Common stock issued to acquire
capital assets 13,500 -- 13,500
Sale of common stock and common
stock units 16,345,500 -- 16,419,500
Issuance of common stock subscribed
in 1999 (4,400) -- --
Common stock options exercised 1,772,600 -- 1,785,900
Common stock warrants issued -- -- --
Common stock warrants exercised 639,700 -- 644,200
Common stock warrants expired -- -- --
Dividends on Series C preferred
stock of subsidiary (300,400) -- (300,400)
Net loss -- (15,038,300) (15,038,300)
------------ ------------ ------------
Balance at October 1, 2000 $ 85,097,100 $(77,977,000) $ 7,586,550
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements.
7
Irvine Sensors Corporation
Consolidated Statements of Cash Flows
Fiscal Year Ended
-------------------------------------------------------------------------
October 1, October 3, September 27,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(15,038,300) $ (9,115,700) $ (4,243,500)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization $ 1,078,900 $ 911,450 1,546,700
Unrealized gain on marketable securities (35,500) -- --
(Gain) loss on disposal of equipment 205,200 -- (309,700)
Non-cash employee retirement plan contribution 668,100 500,200 500,000
Minority interest in net loss of subsidiaries (965,900) (738,500) (365,200)
Extraordinary gain -- -- (1,146,100)
Common stock issued to pay operating expenses 178,400 380,800 (261,700)
(Increase) decrease in accounts receivable 78,500 (635,400) (528,400)
(Increase) decrease in inventory 642,200 (687,100) 1,044,600
(Increase) decrease in other current assets 24,050 (280,750) 989,400
Increase in other assets (22,150) -- (1,700)
Increase (decrease) in accounts payable
and accrued expenses (743,100) 1,837,200 (1,454,500)
Increase in accrued loss on contracts 582,700 -- --
Decrease in deferred revenues -- (50,000) (56,100)
Increase in royalties accrued - affiliated company -- 173,800 212,400
------------ ------------ ------------
Total adjustments 1,691,400 1,411,700 169,700
------------ ------------ ------------
Net cash used in operating activities (13,346,900) (7,704,000) (4,073,800)
Cash flows from investing activities:
Proceeds from sales of marketable securities 2,437,600 -- --
Purchase of marketable securities (3,633,000) -- --
Capital facilities and equipment expenditures (2,375,600) (1,453,400) (390,800)
Proceeds from sale of equipment -- -- 149,700
Capitalized software (376,500) -- --
Acquisition of intangible assets (428,800) (77,200) --
------------ ------------ ------------
Net cash used in investing activities (4,376,300) (1,530,600) (241,100)
Cash flows from financing activities:
Proceeds from issuance of common and
preferred stock and common stock warrants 17,019,500 6,439,400 5,063,100
Proceeds from options and warrants exercised 2,430,100 -- --
Proceeds from Series D Units exercised 209,000 -- --
Sale of minority interest in subsidiary 6,199,300 2,661,100 --
Proceeds from bridge loan and credit line 1,250,000 -- --
Principal payments on bridge loan and credit (1,250,000) -- --
line
Proceeds from stock sale by bank
-- -- 954,800
Contributed capital by ATPL -- -- 305,000
Principal payments of notes payable and capital leases (330,100) (195,200) (2,336,900)
------------ ------------ ------------
Net cash provided by financing activities 25,527,800 8,905,300 3,986,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 7,804,600 (329,300) (328,900)
Cash and cash equivalents at beginning of period 981,100 1,310,400 1,639,300
------------ ------------ ------------
Cash and cash equivalents at end of period $ 8,785,700 $ 981,100 $ 1,310,400
============ ============ ============
Noncash investing and financing activities:
Common stock issued to retire deferred and
subordinated royalties payable to affiliated company $ 1,000,000 -- --
Dividends on Series C preferred stock of subsidiary $ 300,400 -- --
Equipment financed with capital leases $ 173,700 $ 780,300 $ 170,000
Common stock issued to acquire equipment $ 13,500 -- --
Issuance of subsidiary stock to pay expenses $ 90,000 -- --
Conversion of preferred stock to common stock $ 100 $ 500 $ 34,600
Exchange of subsidiary stock -- $ 987,650 $ 1,564,900
Stock sold on a subscription basis -- $ 600,000 --
Stock issued in exchange for shares in subsidiary -- $ 171,600 --
Costs of financing paid with options in subsidiaries -- $ 38,500 --
Principal payment of note payable by issuance of
common stock -- -- $ 500,000
Conversion of debentures to common stock -- -- $ 250,000
Paid-in capital from dissolution of subsidiary -- -- $ 118,500
See Accompanying Notes to Consolidated Financial Statements.
8
Irvine Sensors Corporation
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
CONSOLIDATION
The consolidated financial statements include the accounts of Irvine Sensors
Corporation (the Company) and its subsidiaries, Novalog, Inc. ("Novalog"),
MicroSensors, Inc. ("MSI"), Silicon Film Technologies, Inc. ("Silicon Film"),
RedHawk Vision Systems, Inc. ("RedHawk"), 3D Microelectronics, Inc. and 3D
MicroSystems, Inc. Carson Alexiou Corporation ("CAC"), a former subsidiary of
the Company, was dissolved in fiscal 1998. All significant intercompany
transactions and balances have been eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year ends on the Sunday nearest September 30. Fiscal 2000
(52 weeks) ended on October 1, 2000, Fiscal 1999 (53 weeks) ended on October 3,
1999, and fiscal 1998 (52 weeks) ended on September 27, 1998.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
Company believes its estimates of inventory reserves and estimated costs to
complete on contracts to be the most sensitive estimates impacting financial
position and results of operations in the near term.
REVENUES
The Company's revenues were derived from shipments of the SIRComm(TM) infrared
chip, shipments of functional memory stacks, and the development and manufacture
of prototype and sample products for its customers. The Company continues to
contract to develop prototypes and provide research, development, design,
testing and evaluation of complex detection and control defense systems. The
Company's research and development contracts are usually cost plus fixed fee
(best effort) or fixed price and revenues are recognized as costs are incurred
and include applicable fees or profits primarily in the proportion that costs
incurred bear to estimated final costs. Production orders for memory stacks and
SIRComm chips are generally priced in accordance with the Company's established
price list.
The Company provides for anticipated losses on contracts by a charge to income
during the period in which they are first identified. Unbilled accounts
receivable are stated at estimated realizable value.
United States government contract costs, including indirect costs, are subject
to audit and adjustment by negotiations between the Company and government
representatives. Indirect contract costs have been agreed upon through fiscal
1998. Contract revenues have been recorded in amounts that are expected to be
realized upon final settlement.
Other revenues in fiscal 1998 were derived from sale of intellectual property to
ATPL. (See Note 8 - Related Party Transactions.)
The Novalog, MSI, Silicon Film and RedHawk subsidiaries are product-oriented
companies with sales primarily to OEM manufacturers. Revenues are recorded when
products are shipped.
RESEARCH AND DEVELOPMENT COSTS
A major portion of the Company's operations is comprised of customer-funded
research and prototype development or related activities. The Company also
incurs costs for research and development of new concepts in proprietary
products. Such costs are charged to expense as incurred.
INVENTORY
Inventory is valued at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) basis. Inventories are reviewed quarterly to
determine salability and obsolescence. A reserve is established for slow moving
and obsolete items.
EQUIPMENT, FURNITURE AND FIXTURES
The Company capitalizes costs of additions to equipment, furniture and fixtures,
together with major renewals and betterments. In addition, the Company
capitalizes overhead and general and administrative costs for all in-house
capital projects. Maintenance, repairs, and minor renewals and betterments are
charged to expense. When assets are sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized.
9
Depreciation of equipment, furniture and fixtures is provided over the estimated
useful lives of the assets, primarily using the straight-line method. The useful
lives are three to seven years. Leasehold improvements are amortized over the
terms of the leases.
SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE
Software development and purchased software costs are capitalized when
technological feasibility and marketability of the related product have been
established. The Company will amortize capitalized software costs beginning when
the product is available for general release to customers. Annual amortization
expense will be calculated using the straight-line method over the estimated
useful life of the product, not to exceed five years. The Company evaluates the
carrying value of unamortized capitalized software costs at each balance sheet
date to determine whether any net realizable value adjustments are required.
INTANGIBLE ASSETS
The excess of total acquisition cost over the fair value of net assets acquired
(goodwill) is being amortized on a straight-line basis over 15 years. The
Company reviews the carrying value of goodwill for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Other acquired intangibles are being amortized on a straight-line
basis over their estimated useful lives of 5 years.
INCOME TAXES
Deferred tax assets and liabilities are recorded for differences between the
financial statement and tax basis of the assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
recorded for the amount of income tax payable or refundable for the period
increased or decreased by the change in deferred tax assets and liabilities
during the period.
BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per share is based upon the weighted average number of common
shares outstanding. Diluted net loss per share is based on the assumption that
options, warrants, and convertible preferred stock are included in the
calculation of diluted earnings per share, except when their effect would be
anti-dilutive. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ADOPTED
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 revised standards for the
way that a public enterprise reports information about key revenue producing
segments in the annual financial statements and selected information in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. All periods
presented have been restated in accordance with this pronouncement. See Note 20
- - Reportable Segments.
STATEMENTS OF CASH FLOWS
For purposes of the Consolidated Statements of Cash Flows, the Company considers
all demand deposits and Certificates of Deposit with original maturities of 90
days or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable and payable, other liabilities and debt
approximate fair value. The fair value of royalties payable to affiliate is not
determinable due to their related party nature.
CONCENTRATION OF CREDIT RISK
The Company has cash deposits at U.S. banks and financial institutions, which
exceed federally insured limits at October 1, 2000. The Company is exposed to
credit loss for amounts in excess of insured limits in the event of
non-performance by the institution; however, the Company does not anticipate
non-performance.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation as prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the
disclosure provisions of Statement of Financial Accounting Standards 123,
"Accounting for Stock-based Compensation" ("SFAS 123"). SFAS 123 requires pro
forma disclosures of net income and net income per share as if the fair value
based method of accounting for stock-based awards had been applied. Under the
fair value based method, compensation cost is recorded based on the value of the
award at the grant date and is recognized over the service period.
10
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 fiscal year financial
statements to conform with the current year presentation.
Note 2 - Issuance of Common and Preferred Stock
In fiscal 1998, the Company forced conversion of the remaining $250,000 of
outstanding 8 percent Convertible Subordinated Debentures into 100,000 shares of
the Company's common stock. The common shares underlying the convertible
debentures were included in the Company's January 1998 registration statement.
In connection with settlement of bank debt, the Company issued 550,000
unregistered shares of common stock in December 1997. (See Note 10 -
Extraordinary Item - Debt Extinguishment.)
The Company began the sale of Series D Convertible Preferred Stock Units in a
private placement to certain accredited investors in December 1997 and continued
to accept subscriptions thereto through January 2, 1998, at which time, the
Company sold an additional 24,750 Units. The Company issued an aggregate of
37,750 Units at a price of $100.00 per Unit and the net proceeds of $3,284,100
from the sale of these securities were added to the Company's general funds.
The Series D Convertible Preferred Stock Units consist of one share of
Convertible Preferred Stock, plus one five-year Warrant to purchase one share of
common stock of Novalog, Inc., a subsidiary of the Company, and one five-year
Warrant to purchase one share of common stock of MSI, a wholly-owned subsidiary
of the Company (see Note 5). Each share of Convertible Preferred Stock is
convertible into common stock of the Company at the rate of 100 shares of common
stock for each share of Preferred D, subject to adjustment for stock splits,
reverse stock splits and other similar recapitalization events. The Preferred D
shares have no voting rights, except as required by law, and bear no dividends.
(See Note 17 for calculation of beneficial conversion and imputed dividend
resulting from issuance of Series D Convertible Preferred Stock.) The common
shares underlying the Preferred D shares were included in the April 1998
registration statement. In connection with this private placement of 37,750
units, the Company granted to the placement agent a warrant to purchase up to
3,775 units of Series D Convertible Preferred Stock units at a price of $110 per
unit which was 110 percent of the private placement price of the Units. The
warrant is exercisable during the period beginning the earlier of one year from
January 2, 1998 or the date of registration and expiring on January 2, 2003. The
placement agent exercised warrants to purchase 500 units in May 1998 and 1,000
units in the period between October and December 1998. Additional warrants to
purchase 500 units were exercised in March 1999. All of the proceeds were added
to the Company's general funds.
As of October 3, 1999, at the request of the holders thereof, a total of 35,350
shares of Series D Convertible Preferred Stock Units have been converted into
3,666,400 shares of common stock.
In January 1998, the Board of Directors authorized a contribution to the
Employee Stock Bonus Plan (the Company's ERISA-qualified Employee Retirement
Plan). The amount represents an annual contribution for fiscal year 1998 and was
made in 333,334 shares of the Company's common stock, which have been issued to
the Plan.
In January 1998, the Company sold 125,000 Common Stock Units to investors in a
private placement. Each Common Stock Unit consists of one share of common stock
of the Company, plus one five-year Warrant to purchase one share of common stock
of Novalog, Inc., a subsidiary of the Company, and one five-year Warrant to
purchase one share of common stock of MicroSensors, Inc., a wholly-owned
subsidiary of the Company. The proceeds of $125,000 from these transactions were
added to the Company's general funds.
In January 1998, a warrant holder exercised outstanding warrants to purchase
222,000 shares of common stock at a price of $1.00 per share. The proceeds from
this warrant exercise have been added to the Company's general funds.
In April 1998, the Company issued, in a private placement to accredited
investors, 700,000 unregistered shares of the Company's common stock. The net
proceeds of $980,000 from this private placement have been added to the
Company's general funds.
In August 1998, holders of 1,128,000 shares of common stock of Novalog exercised
warrants to exchange these shares for 905,000 unregistered shares of common
stock of the Company resulting in an increase of $1,564,900 in total
shareholders' equity and a corresponding decrease in minority interest in
consolidated subsidiary.
In fiscal 1998, distribution of vested benefits was made from the Company's
Employee Retirement Plan to former employees. Subsequently, 1,819 shares of
Series B and 1,010 shares of Series C Convertible Preferred stock were
surrendered for conversion into 140,900 shares of common stock. The converted
Preferred shares have been retired.
11
In December 1998, the Board of Directors authorized a contribution to the
Employee Stock Bonus Plan (the Company's ERISA-qualified Employee Retirement
Plan). The amount represents an annual contribution for fiscal year 1999 and was
made in 330,000 shares of the Company's common stock, which have been issued to
the Plan.
During fiscal 1999, the Company sold 4,980,800 shares of unregistered common
stock of the Company to accredited investors in connection with a series of
private placement offerings. Included in these offerings was the sale of 267,670
units, which consisted of two shares of unregistered common stock of the
Company, one two-year warrant to purchase one share of common stock of Silicon
Film owned by the Company and one three-year warrant to purchase one common
share of MSI owned by the Company. The net proceeds were $6,439,400.
During fiscal 1999, the Company issued 190,000 shares of unregistered common
stock of the Company to vendors and consultants in exchange for services
provided.
During fiscal 1999, holders of 120,900 common stock options exercised their
options to purchase unregistered common stock of the Company. The net proceeds
were $132,400.
During fiscal 1999, holders of 1,655,000 shares of common stock of Novalog
exchanged these shares for 1,017,500 unregistered shares of common stock of the
Company through warrant exercise and other means. These transactions resulted in
a decrease of $1,038,000 to the minority interest liability.
During fiscal 1999, the Company issued 110,000 shares of common stock of the
Company to an unrelated party in exchange for an ownership interest in ATPL, a
related party (See Note 7 - Related Party Transactions). The ownership interest
includes 127,500 shares of common stock of Silicon Film and rights to future
royalties under the ATPL license terms. The transaction resulted in recording
goodwill of $171,600 related to the acquisition of the common stock of Silicon
Film, and a net increase of $121,300 to shareholders' equity, which is net of
losses previously allocated to minority interest shareholders.
In October 1999, the Company filed a registration statement which included the
resale of 8,270,731 unregistered shares. This registration statement included
all previously unregistered shares that had been issued as of October 3, 1999.
The Securities and Exchange Commission declared this registration effective in
October 1999.
During the first quarter of fiscal 2000, the Company sold approximately 31,400
common stock subscription units. Each unit consists of the right to acquire one
hundred shares of unregistered common stock of the Company, with registration
rights, plus a warrant to purchase ten shares of unregistered common stock of
the Company, with registration rights, at an exercise price of $2 per share. The
Company received approximately $3.6 million in net proceeds from this
transaction. In connection with the sale of these subscription units, the
Company granted warrants to purchase 379,300 and 224,000 shares of common stock
to agents at an exercise price of $1.49 and $2 per share, respectively. The
issuance of common shares required the Company's stockholders to approve an
amendment to the Company's Certificate of Incorporation increasing the number of
authorized shares of common stock or be required to pay subscribers a
registration incentive up to $2,120,900. The shareholders approved the amendment
at the Annual Shareholder's Meeting in February 2000. The Company issued
3,142,100 shares of common stock to the unit subscribers and subsequently
registered these shares in March 2000 (See below). Consequently, the Company
reclassified its contingent liability on common stock subscribed of $2,120,900
(recorded as of the end of the Company's first fiscal 2000 quarter) to
stockholders' equity.
During the second quarter of fiscal 2000, the Company sold approximately 2,300
common stock subscription units. Each unit consists of the right to acquire one
hundred shares of unregistered common stock of the Company, with registration
rights, plus a warrant to purchase ten shares of unregistered common stock of
the Company, with registration rights, at an exercise price of $12 per share.
The Company received approximately $1.9 million in net proceeds from this
transaction. The Company issued 228,900 shares of common stock to the unit
subscribers and subsequently registered these shares in March 2000. In
connection with the sale of these subscription units, the Company granted
warrants to purchase 22,900 and 2,300 shares of common stock to agents at an
exercise price of $9.25 and $12 per share, respectively.
During fiscal 2000, holders of 1,224,200 common stock options exercised their
options to purchase common stock of the Company. The net proceeds were
$1,785,000. Holders of an additional 130,000 common stock options exercised
their options through the sale of 24,500 shares of common stock to the Company
valued at $142,400, which was recorded as treasury stock.
During fiscal 2000, the Company issued 444,400 shares of its common stock to
accredited investors who had subscribed to purchase such stock during fiscal
1999. The Company received approximately $600,000 in net proceeds from this
transaction.
During fiscal 2000, at the request of the preferred holders, 2,000 Series B,
1,300 Series C and 2,400 Series D Preferred shares were converted into 637,000
shares of the Company's common stock.
12
In March 2000, the Company filed a registration statement, which included the
resale of 4,331,644 unregistered shares. This registration statement included
all previously unregistered shares that had been issued as of March 17, 2000.
The Securities and Exchange Commission declared this registration effective in
March 2000.
In July and August 2000, the Company sold approximately 3,964,000 shares of its
unregistered common stock, with registration rights, plus warrants to purchase
1,982,000 shares of unregistered common stock of the Company, with registration
rights, for aggregate gross proceeds of approximately $11.9 million. After
expenses of the offering, net proceeds were approximately $10.9 million. In
connection with this offering the Company issued 696,400 warrants to agents and
investment bankers at exercise prices of $3 and $6.
During fiscal 2000 the Company entered into an Agreement and Plan of
Reorganization to acquire substantially all of the assets of Research &
Development Leasing, Inc. ("RDL"), a related party (Note 7), by issuance of
1,000,000 shares of the Company's common stock to settle $1,000,000 of accrued
royalty obligations and to terminate any further obligations under an agreement
entered into in April 1980.
Note 3 - Common Stock Warrants
In connection with the sale of $11.1 million of the 1996 Debentures, the Company
granted warrants to the foreign investment banker to purchase up to 222,000
shares of common stock at a price to be determined based on the average
conversion prices of the 1996 Debentures. The warrants were exercised in fiscal
1998.
In fiscal 1998 the Company granted warrants, the value of which it believes to
be not material, to five former employees in varying amounts to purchase up to
44,000 shares of unregistered common stock at a price of $1.00.
Warrants to purchase 15,000 shares of common stock of the Company were exercised
in 1999; the proceeds were $14,000.
During fiscal 2000, the Company granted warrants to purchase 15,000 and 25,000
shares of the Company's common stock at an exercise price of $1.50 per share to
individuals for services provided. The value of the warrants were not material.
During fiscal 2000, the Company granted warrants to purchase 27,500 shares of
the Company's common stock to a leasing company in connection with equipment
financing.
In connection with the sale of common stock subscription units in the first and
second quarters of fiscal 2000, the Company granted warrants to purchase 965,500
shares of common stock to investors and agents, respectively at exercise prices
of $1.49 to $12 per share.
In connection with the sale of common stock in July and August of fiscal 2000,
the Company granted warrants to purchase 1,982,000, 396,400 and 300,000 shares
of common stock to investors, agents and investment bankers, respectively at
exercise prices of $2.50, $3 and $6 per share, respectively.
Warrants to purchase 449,300 shares of the Company's common stock were exercised
during fiscal 2000 and generated net proceeds of $644,200.
Warrants to purchase 55,000 shares of the Company's common stock expired during
fiscal 2000.
As of October 1, 2000, there are a total of 3,354,100 warrants outstanding, of
which 75,500 expire in the year 2001, 28,500 expire in the year 2002, 2,633,400
expire in the year 2004 and 616,700 expire in the year 2005.
Note 4 - Series B and Series C Convertible Preferred Stocks
The Series B and Series C Convertible Cumulative Preferred Stocks, which were
originally issued to the Company's Employee Retirement Plan, each bear a 10
percent cumulative annual dividend, which under Delaware law may generally be
paid only out of (i) retained earnings or (ii) net profit in the current or
preceding fiscal year. To the extent that the dividends are not declared and
paid in any fiscal year, the obligation carries over to the next fiscal year.
These shares of Series B and Series C Convertible Cumulative Preferred Stocks
are not redeemable, carry a liquidation preference over the common stock of
$15.00 and $30.00, respectively, per share and are convertible, at the option of
the holder, into 50 shares of common stock for each share of Series B and Series
C Convertible Cumulative Preferred Stock, respectively. Distributions of vested
benefits made from the Plan to former employees and the subsequent surrender and
conversion into shares of common stock are as follows:
Preferred Stock Common
Series B Series C Stock
------------------------------------------
Distribution dates:
Fiscal 1998 1,800 1,000 140,900
Fiscal 1999 600 450 51,500
Fiscal 2000 2,000 1,300 165,100
13
The shares of Preferred Series B and Series C tendered for conversion have been
retired. Undeclared dividends of $65,200 and $67,500 on the remaining
outstanding Preferred Series B and Series C, respectively, will be carried
forward to fiscal 2001.
Note 5 - Series D Convertible Preferred Stock Units
In connection with a Series D Convertible Preferred Stock Unit private placement
in fiscal 1998, the Company granted to the placement agent warrants to purchase
up to 3,775 units of Series D Convertible Preferred Stock units ("Agent
Warrants") at a price of $110 per unit, which was 110% of the private placement
price of the Units. Agent Warrants to purchase 1,900 units were exercised during
fiscal 2000. The Company realized proceeds of $209,000 from this exercise.
Note 6 - Minority Interest in Subsidiaries
During fiscal 1999, Silicon Film sold 83,900 shares of its Series A Convertible
Preferred Stock (the "Series A Preferred") in a Private Placement. The Series A
Preferred bears no yield, has a priority in liquidation and is convertible into
common stock of Silicon Film, at the election of the holder, at the rate of 25
common shares (as adjusted for a price protection feature which was resolved by
Silicon Film's Board of Directors on October 19, 1998) for each 1 share of
Series A Preferred tendered for conversion. The net proceeds of $1,136,900 are
reflected in the consolidated cash position of the Company and increased
minority interest in consolidated subsidiaries.
During fiscal 1999, Silicon Film sold 143,400 and 150,000 shares of its Series B
Convertible Preferred Stock (the "Series B Preferred") to outsiders and to the
Company, respectively, in a series of Private Placements. The Series B Preferred
bears no yield, has a priority in liquidation and is convertible into common
stock of Silicon Film, at the election of the holder, at the rate of 16-2/3
common shares for each 1 share of Series B Preferred tendered for conversion.
The proceeds were $1,365,700, net of financing costs (includes $38,500 financing
costs satisfied with noncash sources) and purchases by the Company, and are
reflected in the consolidated cash position of the Company. The resulting
increase in minority interest in consolidated subsidiaries was $1,365,700.
Subsequent to October 3, 1999, Silicon film sold an additional 85,750 and 10,000
shares of its Series B Preferred Stock to outsiders and to ISC, respectively.
The net cash proceeds were $957,500.
During fiscal 1999, Silicon Film issued 85,000 options to purchase common shares
of Silicon Film's stock at exercise prices ranging from $0.60 to $1.00 in
exchange for various services. These transactions resulted in a net increase in
minority interest liability of $98,300.
During fiscal 1999, Silicon Film granted 3,311,500 options to employees,
officers and directors to purchase common shares of Silicon Film's stock. As of
October 3, 1999, there are 4,561,500 options outstanding, of which 466,700 are
exercisable.
The Company sold Series D Convertible Preferred Stock Units in a private
placement to certain accredited investors in December 1997 and January 1998 (See
Note 2 - Issuance of Common and Preferred Stock). During the second quarter of
fiscal 2000, holders of 125,000 shares of Series D Convertible Preferred Stock
Units exercised warrants attached to the Units to purchase 125,000 shares of
common stock of MSI. The net proceeds of $125,000 were added to the Company's
general funds and are reflected in the consolidated cash position of the
Company. The transaction resulted in an increase in minority interest in
consolidated subsidiaries of $125,000.
During fiscal 1999, MSI granted 815,500 options to employees, officers and
directors to purchase common shares of MSI's stock. As of October 3, 1999, there
are 1,636,500 options outstanding, of which 235,600 are exercisable.
During fiscal 1999, Novalog granted 625,000 options to employees, officers and
directors to purchase common shares of Novalog's stock. As of October 3, 1999,
there are 1,878,000 options outstanding, of which 797,200 are exercisable.
During fiscal 2000, Silicon Film sold 85,750 and 10,000 shares of its Series B
Preferred Stock to third parties and to the Company, respectively. The net
proceeds of $862,800 from third parties are reflected in the consolidated cash
position of the Company and resulted in a corresponding increase in minority
interest in consolidated subsidiaries.
In February 2000, Silicon Film effected a 1-for-3 reverse split of its issued
common stock and, subsequent to such split, issued 1,466,667 shares of its
Series C Convertible Preferred Stock (the "Series C Preferred") in a Private
Placement. The Series C Preferred bears an 8% cumulative dividend, payable after
three years, has a priority in liquidation and is convertible into common stock
of Silicon Film, at the election of the holder, at the rate of 1 common share
for each 1 share of Series C Preferred tendered for conversion. The net proceeds
from this transaction were approximately $5.3 million. This transaction
14
also resulted in a corresponding increase in minority interest in consolidated
subsidiaries of approximately $5.3 million. After this transaction, the Company
retains an 85% ownership of the common stock of Silicon Film, which is the basis
for the allocation of minority interest. Upon conversion of all outstanding
convertible preferred stock, the Company's ownership position would be
approximately 54% of Silicon Film's common stock. In addition, future exercise
of authorized and outstanding warrants and options could reduce the Company's
ownership of Silicon Film's common stock to approximately 42 percent.
Note 7 - Related Party Transactions
In April 1980, the Company entered into an agreement with R & D Leasing Ltd.
("RDL"), a limited partnership in which the Company's Chairman of the Board and
a Senior Vice-President are general partners with beneficial interests, to
develop certain processes and technology related to chip stacking. The Company
has exclusively licensed this technology from RDL. The Company's exclusive
rights to the technology extend to all uses, both government and commercial.
Since entering into the licensing agreement, the Company had accrued royalty
obligations to RDL at the rate of 3.5 percent of all Company sales of chip
stacks using the licensed technology. In October 1989, RDL agreed to defer its
royalty claims and subordinate them with respect to all other creditors in
exchange for options to purchase up to 1,000,000 shares of the Company's Common
Stock at $1 per share, which were exercisable by applying the deferred royalties
to the purchase. As of March 15, 2000, the Company entered into an Agreement and
Plan of Reorganization to acquire substantially all of the assets of Research &
Development Leasing, Inc. ("RDL") solely in exchange for 1,000,000 shares of
voting common stock of the Company. Prior to March 15, 2000, the Company had
been accruing obligations to RDL for a license to exclusive rights to certain
processes and technology related to chip stacking. By consummating the Agreement
and Plan of Reorganization to acquire RDL's assets, including its patents and
technology, the Company has settled $1,000,000 of accrued royalty obligations
and terminated its obligation for any further licensing payments to RDL. The
Company's Chairman of the Board and a Senior Vice President were the sole
shareholders of RDL prior to the Company's acquisition of RDL's assets.
The Company has entered into an Assignment of Patent and Intellectual Rights
(the "Assignment") with F. L. Eide ("Eide"), a Vice-President of the Company. As
part of his employment agreement, Eide has assigned to the Company all rights
and interests to five (5) U.S. Provisional Patent applications owned by him. In
consideration for this Assignment, Eide will receive a 1 percent royalty on the
gross sales revenues of any products incorporating elements of the assigned
technology for the lifetime of any patents resulting from the Provisional Patent
Applications. This Assignment was executed in February 1998.
In October 1997, the Company entered a License Agreement with Itzhak Sapir.
Pursuant to which Sapir granted a royalty bearing exclusive, worldwide license
under various U.S. and foreign patents owned by Sapir relating to digital
photographic products, principally a product that allows an unmodified 35mm SLR
camera to capture digital images. In connection with the Technology Assignment
Agreement mentioned above, Silicon Film acquired all of the Company's rights
under the License Agreement, and Sapir entered into an agreement with Silicon
Film to such effect. In February 1999, Sapir became a senior mechanical engineer
at Silicon Film. Effective March 26, 1999, Silicon Film issued Sapir a warrant
(which vested in full upon issuance) to purchase 275,000 share of Silicon Film's
common stock at a price of $1.00 per share in exchange for a reduction in
Silicon Film's royalty obligation to Sapir under the License Agreement from
their original levels to 1.5% of all EFS sales. During fiscal 2000, Silicon Film
issued 50,000 pre-split shares of Silicon Film's common stock to Sapir, which
had a market value of $1.80 per share, and $10,000 in settlement of royalty
obligations to Sapir.
During fiscal 1998, the Company entered into a sale and licensing of
intellectual property rights agreement covering the Company's Electronic Film
System(TM) ("EFS(TM)") to Advanced Technology Products, LLC ("ATPL"). The
Company's Senior Vice President and Chief Technical Officer, John C. Carson,
serves as Managing Member of ATPL. The Company was the successor to the licensed
rights and future royalty obligations under this agreement until September 1998,
when the Company granted Silicon Film a license to use the technology and
intellectual property rights of the Company that are necessary to Silicon Film's
business. Silicon Film has agreed to prospectively grant, upon the Company's
request, a license to the Company to access Silicon Film's technology and
intellectual property rights when necessary for the Company to participate in
government contracts. In September 1998, another agreement was consummated with
ATPL under which the future royalty obligation was reduced in consideration for
the issuance of 1,222,125 shares of Silicon Film common stock. No value was
recorded by Silicon Film as a result of this transaction due to the uncertainty
related to valuing either the consideration given or received in this exchange.
15
Note 8 - Composition of Certain Financial Statement Captions
October 1, October 3,
2000 1999
-------------------------------------
Accounts receivable:
U.S. government $1,386,500 $1,115,000
Other customers 936,500 1,286,500
-------------------------------------
$2,323,000 $2,401,500
=====================================
Accounts receivable include unbilled amounts of $316,000 and $452,600 at October
1, 2000 and October 3, 1999, respectively. Unbilled amounts represent contract
revenues for which billings have not been presented to customers at year-end.
These amounts are billed in accordance with applicable contract terms, usually
within 30 days. Accounts receivable also include billed retentions of $5,000 at
both October 1, 2000, and October 3, 1999, respectively. These amounts are
normally collected upon final audit of costs by the U.S. government.
October 1, October 3,
2000 1999
-------------------------------------
Inventory:
Raw materials $1,088,000 $ 49,900
Work in process 446,100 1,995,500
Finished goods 43,500 174,400
------------------------------------
$1,577,600 $2,219,800
====================================
Title to all inventories remains with the Company. Inventoried materials and
costs relate to work in process on customers' orders and on the Company's
generic module parts and memory stacks, which the Company anticipates it will
sell to customers including potential R&D contracts. Work in process includes
amounts that may be sold as products or under contracts. Raw materials consist
primarily of silicon wafers and other electronic components. Such inventoried
costs are stated generally at the total of the direct production costs including
overhead. Inventory valuations do not include general and administrative
expenses. Inventories are reviewed quarterly to determine salability and
obsolescence. A reserve is established for slow moving and obsolete items.
October 1, October 3,
2000 1999
-------------------------------------
Equipment, furniture and fixtures:
Engineering and production
equipment $8,350,800 $7,415,100
Furniture and fixtures 551,700 438,300
Construction in progress 1,387,300 866,500
Computer software programs 1,050,200 872,400
Leasehold improvements 1,017,600 808,800
------------------------------------
12,357,600 10,401,100
Less accumulated depreciation
and amortization (7,500,800) (6,854,200)
------------------------------------
$4,856,800 $3,546,900
====================================
Accrued expenses:
Salaries and wages $ 347,400 $ 335,600
Vacation 364,500 267,300
Payroll taxes 139,400 16,100
ESBP Contribution 206,000 -
Royalties 75,000 75,000
Other accrued expenses 185,700 58,600
------------------------------------
$1,318,000 $ 752,600
====================================
16
Note 9 - Commitments and Contingencies
The Company leases certain facilities and equipment under cancelable and
noncancelable capital and operating leases. Minimum payments under capital lease
obligations and operating lease commitments existing at October 1, 2000 are as
follows:
Capital Operating
Fiscal Year Leases Leases
- ----------- ------- ---------
2001 $ 458,800 $ 812,800
2002 201,100 262,800
2003 42,100 252,700
2004 - 140,100
2005 - -
Thereafter - -
------------------ -----------------
Future minimum lease payments 702,000 $ 1,468,400
=================
Amounts representing interest (113,300)
------------------
Present value of net
minimum lease payments $ 588,700
==================
Total rental expense for operating leases amounted to $582,000, $525,900 and
$559,000 for the fiscal years ended October 1, 2000, October 3, 1999, and
September 27, 1998, respectively.
The Company and its subsidiaries have entered into contingent employment
agreements with key members of management that provide for aggregate base
compensation of $1,050,040 for fiscal year 2001, subject to achievement of
specified objectives.
Note 10 - Debt Extinguishment
In December 1997, the Company executed a Forbearance Agreement with its lending
bank whereby the Company agreed to accelerate repayment of the Note Payable to
the bank. The current portion of the debt was reduced by $1,026,900, which was
received from the sale of the assets in October 1997. The Company also agreed,
among other requirements, to reduce the principal balance by payments of
$250,000 in each of the calendar quarters ending December 1997 and March 1998
and thereafter to reduce the remaining balance by a minimum of $200,000
quarterly. Execution of the Forbearance Agreement also resulted in a waiver of
the Company's financial covenant defaults and an amendment to the loan agreement
eliminating such financial covenants on a prospective basis. In connection
therewith, the Company pledged as collateral one million shares of Novalog, Inc.
common stock held by the Company. The Company also paid down $500,000 of the
Note with 550,000 shares of its stock and under the terms of the agreement,
dependent on the market price of the shares when sold, the Company would receive
a refund if the proceeds from the sale exceeded $500,000. Subsequently, the
Company was informed by the bank that it sold the 550,000 shares and that the
proceeds exceeded $500,000. After applying the proceeds to the then remaining
balance of the note the bank, through September 27, 1998, remitted $772,000 to
the Company and advised the Company that additional proceeds of $183,000 were to
be remitted to the Company. The Company received these additional funds during
fiscal 2000. The Company recorded the proceeds that exceeded $500,000 as paid-in
capital
Note 11 - Income Taxes
Deferred tax assets and liabilities are recorded for differences between the
financial statement and tax basis of the assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
recorded for the amount of income tax payable or refundable for the period
increased or decreased by the change in deferred tax assets and liabilities
during the period.
17
The tax effects of significant items comprising the Company's income tax
calculation as of October 1, 2000 and October 3, 1999, are as follows:
October 1, October 3,
2000 1999
-------------------------------------
Current deferred tax assets:
Reserves not currently
deductible $ 473,000 $1,591,000
Long-term deferred tax assets:
Operating loss carryforwards 21,664,000 19,988,000
Tax credit carryforwards 1,691,000 866,000
Valuation allowance (23,828,000) (22,445,000)
-------------------------------------
Net deferred tax asset $ - $ -
=====================================
The differences between the Company's effective income tax rate and the
statutory U.S. federal income tax rate for the fiscal years ended October 1,
2000, October 3, 1999, and September 27, 1998, respectively, related primarily
to the total valuation allowance changing $1,069,000 from October 3, 1999 to
October 1, 2000 and $4,084,000 from September 27, 1998 to October 3, 1999.
The provisions for income taxes for the fiscal years ended October 1, 2000,
October 3, 1999, and September 27, 1998, consist of provisions for state income
taxes of $3,200, $2,800 and $2,600, respectively. No provisions for federal
income taxes have been made in these fiscal years due to the net operating
losses.
At October 1, 2000, the Company had net operating loss carryforwards of
approximately $60,115,600 for financial reporting and federal income tax
purposes expiring in varying amounts from fiscal year 2001 through fiscal year
2020, and $20,998,000 for California tax purposes expiring in varying amounts
from fiscal year 2001 through fiscal year 2005, available to offset future
federal and California taxable income. In addition, as of October 1, 2000, the
Company had investment tax credits and qualified research credits of $14,000 and
$754,000, respectively, expiring in varying amounts through fiscal year 2020 and
available to offset future federal taxes. The ability of the Company to utilize
the net operating loss and credit carryforwards may be restricted by certain
provisions of the Internal Revenue Code due to changes in ownership of the
Company's common stock.
Note 12 - Stock Option Plans and Employee Retirement Plan
In December 1991, the Board of Directors adopted the 1991 Stock Option Plan to
replace 1981 Stock Option Plans, which had expired. This new Plan was approved
by shareholders at the Company's Annual Meeting in February 1992. Under the 1991
Plan, options to purchase an aggregate of 675,000 shares of the Company's common
stock may be granted to both key management employees and non-employee
directors. Options granted may be either Incentive Stock Options or Nonstatutory
Stock Options, and the requirements for participation, exercise price and other
terms are similar to the 1981 Plans. As of October 1, 2000, options to purchase
100,500 shares at prices ranging from $0.98 (33,300 shares) to $1.98 (4,000
shares) were outstanding under the 1991 Plan, of which 72,200 were exercisable
at October 1, 2000.
In January 1995, the Board of Directors adopted the 1995 Stock Option Plan to
replace the 1991 Plan, which was fully subscribed at the time. The 1995 Plan was
approved by shareholders at the Company's Annual Meeting in February 1995. Under
the 1995 Plan, options to purchase an aggregate of 700,000 shares of the
Company's common stock may be granted to both key management employees and
non-employee directors. In August 1997, the Board of Directors authorized an
increase in the number of options to an aggregate of 1,650,000 shares, which was
ratified by shareholders at the Company's Annual Meeting in February 1998.
Options granted may be either Incentive Stock Options or Nonstatutory Stock
Options, and requirements for participation, exercise price and other terms are
similar to the 1991 Plan. As of October 1, 2000, options to purchase 581,200
shares at prices ranging from $1.00 (151,700 shares) to $2.875 (6,800 shares)
were outstanding under the 1995 Plan, of which 363,700 were exercisable at
October 1, 2000.
18
In November 1998, the Board of Directors approved a new plan, "The 1999 Stock
Option Plan." Under the 1999 Plan, options to purchase an aggregate of 1,000,000
shares of common stock may be granted to both key management employees and
non-employee directors. The 1999 Plan was ratified by shareholders at the
Company's Annual Meeting in February 1999. Options granted may be either
Incentive Stock Options or Nonstatutory Stock Options. Requirements for
participation, exercise price and other terms are similar to the 1991 and 1995
Plans. As of October 1, 2000, options to purchase 695,700 shares at prices
ranging from $1.3594 (145,600 shares) to $2.955 (233,000 shares) were
outstanding under the 1999 Plan, of which 96,600 were exercisable at October 1,
2000.
Stock option activity is summarized as follows:
Option Price
Shares Per Share
-----------------------------------------
Options outstanding at
September 28, 1997 1,360,600 $0.98 to $7.75
Granted 701,500 1.00 to 2.88
Exercised (16,600) 0.98
Cancelled (109,700) 1.00 to 7.50
Expired (25,000) 7.13 to 7.75
------------
Options outstanding at
September 27, 1998 1,910,800 $0.98 to $7.50
Granted 673,800 0.98 to 1.92
Exercised (129,300) 0.98 to 1.69
Cancelled (101,400) 1.00 to 6.50
Expired (7,500) 7.50
------------
Options outstanding at
October 3, 1999 2,346,400 $0.98 to $6.25
Granted 576,200 1.34 to 2.96
Exercised (1,354,300) 0.98 to 2.88
Cancelled (118,400) 1.00 to 2.31
Expired (72,500) 5.00 to 6.25
------------
Options outstanding at
October 1, 2000 1,377,400 $0.98 to $2.96
============
A summary of outstanding options exercisable under the 1991, 1995 and 1999 Stock
Option Plans is shown below.
Weighted average
Range of Number remaining contractual Weighted average Number Weighted average
exercise prices Outstanding life (years) exercise price Exercisable exercise price
- ----------------------------------------------------------------------------------------------------------------------------
$0.98 - 1.98 1,122,600 2 $1.44 529,200 $1.32
2.16 - 2.96 254,800 4 2.91 3,300 2.88
------------ -----------
1,377,400 532,500
============ ===========
Pursuant to SFAS No. 123 "Accounting for Stock Based Compensation," the Company
is required to disclose the effects on the net loss and per share data as if the
Company had elected to use the fair value approach to account for all of its
employee stock-based compensation plans. Had the compensation cost for the
Company's Plans been determined using the fair value method, the compensation
expense would have had the effects of increasing the Company's net loss for the
years ended October 1, 2000, October 3, 1999, and September 27, 1998, to the pro
forma amounts of $15,533,600, $9,425,800 and $4,582,500, respectively, with a
corresponding pro forma loss per share of $0.38, $0.30, and $0.19, respectively.
These pro forma amounts were determined estimating the fair value of each option
granted during fiscal 2000, 1999 and 1998 on its grant date, using the
Black-Scholes option-pricing model. Assumptions of no dividend yield, a
risk-free interest rate of 6 percent which approximates the Federal Reserve
Board's rate for treasuries at the time granted, an expected life of three
years, and volatility rates varying from 86.9 to 73.2 percent were applied to
options granted during fiscal years 2000, 1999 and 1998. The weighted average
fair value at the grant date for the options granted during fiscal years 2000,
1999 and 1998 was $1.74, $0.92, and $1.57 per option, respectively.
In fiscal 1982, the Company established an Employee Retirement Plan, which is
effective for fiscal year 1982 and thereafter. The plan provides for annual
contributions to the Company's Stock Bonus Trust (SBT) to be determined by the
Board of Directors and which will not exceed 15 percent of total payroll. At the
discretion of the Trustee, the SBT will purchase common stock at fair market
value or other interest-bearing securities or investments for the accounts of
individual employees who will
19
gain a vested interest of 20 percent in their accounts after three years of
service, and 20 percent each year of service thereafter, until fully vested
after seven years of service. That portion of cash or stock held in an
employee's account and not vested at termination of employment will be
redistributed in accordance with a prearranged formula. Management believes that
the contributions made by the Company to the SBT, to the extent they relate to
government cost-plus-fixed-fee contracts, will be reimbursable by the U.S.
government. In fiscal years 2000, 1999 and 1997 the Company's contributions to
the SBT were 135,100 330,000 and 333,300 shares of common stock, respectively,
which had estimated market values of $462,100, $500,200 and $500,000,
respectively. As of October 1, 2000 the Company had not yet issued 69,600 shares
of common stock to the SBT for the fourth quarter 2000 contribution, and accrued
a liability for its estimated market value of $206,000 (See Note 9).
Note 13 - Revenues
In fiscal 2000, contracts with all branches of the U.S. government accounted for
20 percent of the Company's revenues, and a second-tier government contract with
a prime government contractor accounted for 12 percent. The remaining 68 percent
of the Company's revenues were derived from non-government sources. Of the 32
percent related to the U.S. government agencies, the U.S. Army, the U.S. Air
Force and the U.S. Navy accounted for 36 percent, 4 percent and 21 percent,
respectively, with the remaining revenue of 38 percent being widely diversified
among several other governmental agencies. Of the 68 percent applicable to
non-governmental sources, 2 customers accounted for 19 percent and 23 percent,
respectively, of the total commercial revenues.
In fiscal 1999, contracts with all branches of the U.S. government accounted for
18 percent of the Company's revenues, and a second-tier government contract with
a prime government contractor accounted for 19 percent. The remaining 63 percent
of the Company's revenues were derived from non-government sources. Of the 18
percent related to the U.S. government agencies, the U.S. Army, the U.S. Air
Force and the U.S. Navy accounted for 54 percent, 9 percent and 6 percent,
respectively, with the remaining revenue of 31 percent being widely diversified
among several other governmental agencies. Of the 36 percent applicable to
non-governmental sources, 2 customers accounted for 33 percent and 29 percent,
respectively, of the total commercial revenues.
In fiscal 1998, contracts with all branches of the U.S. government accounted for
27 percent of the Company's revenues, and a second-tier government contract with
a prime government contractor accounted for 27 percent. The remaining 46 percent
of the Company's revenues were derived from non-government sources. Of the 27
percent related to the U.S. government agencies, the U.S. Army, the U.S. Air
Force and the U.S. Navy accounted for 24 percent, 12 percent and 8 percent,
respectively, with the remaining revenue of 56 percent being widely diversified
among several other governmental agencies. Of the 46 percent applicable to
non-governmental sources, three (3) customers accounted for 35 percent, 14
percent and 7 percent, respectively, of the total commercial revenues.
Note 14 - Marketable Securities and Cash Equivalents
The Company's marketable securities consist of investments in short-term,
government-backed securities, and commercial paper. The Company determines
proper classification of investments at the time of purchase and re-evaluates
such designations at each balance sheet date.
All marketable securities are classified as held-to-maturity, and are stated at
amortized cost. Unrealized gains are included in interest income in the
Statements of Operations. Total unrealized gains were approximately $35,500 at
October 1, 2000.
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Note 15 - Acquisition and Disposal of Equipment and Extraordinary Item
On April 19, 1996, the Company consummated an agreement for the acquisition and
operation of the equipment comprising IBM's cubing line located at IBM's Essex
Junction, Vermont facility. The cubing line was established by IBM to
manufacture the stacked-chip assemblies required to commercialize the Company's
proprietary chip-stacking technology under the joint development alliance that
IBM and the Company entered into in 1992. According to the terms of the
agreement, the Company acquired the equipment and clean room, which comprises
the cubing line for a cash payment of approximately $6.5 million. In addition,
the Company signed a facility lease agreement for the space required to operate
the cubing line under the Company's management within the IBM facility through
December 1998. The terms of the facility lease agreement include escalating rent
payments, which have been straight lined for financial reporting purposes. The
difference between the amount paid and the amount expensed during fiscal 1996
has been reported as accrued rent. The agreement was terminated in fiscal 1997
and the deferred rent balances were netted against rent expense.
20
As part of the process to terminate the agreement with IBM, the Company disposed
of the equipment acquired from IBM in April 1996 and other fixed assets
purchased and/or constructed at the IBM facility. These assets with a net book
value of $6,925,300 were sold for proceeds of $1,051,900, resulting in a loss on
the disposal of $5,873,400. During October 1997, $1,026,000 of these proceeds
were received by the Company's lender and applied against the principal of the
Company's long-term debt.
In December 1997, the Company made a $490,000 cash payment to extinguish its
remaining obligations under a Settlement Agreement. Accordingly, the Company
recorded an extraordinary gain of $1,146,100 on the extinguishment of debt and
reduced accounts payable by the corresponding amounts.
Note 16 - Loss Per Share
Net loss applicable to common stockholders for fiscal 1998 includes $465,300 for
the non-cash imputed dividend related to the beneficial conversion feature on
24,750 Units of the Series D Convertible Preferred stock. (See Note 2 - Issuance
of Common and Preferred Stock.) The beneficial conversion feature is computed as
the difference between the quoted market price of a share of common stock on
date of issue and the conversion price times all shares of preferred stock sold
and under option. The imputed dividends are a non-cash, one-time charge based on
the immediate conversion feature.
Basic and diluted net loss per common share for fiscal years 2000, 1999 and 1998
were calculated as follows:
2000 1999 1998
--------------------------------------------------------
Basic Net Loss Per Share:
Net loss $(15,038,300) $ (9,115,700) $ (4,243,500)
========================================================
Basic net loss per share $ (0.37) $ (0.29) $ (0.19)
========================================================
Diluted Net Loss Per Share:
Net loss $(15,038,300) $ (9,115,700) $ (4,243,500)
Preferred Stock cumulative dividend (300,400) (20,100) (20,700)
Preferred Stock imputed dividend -- -- (465,300)
--------------------------------------------------------
Net loss available to Common Stockholders $(15,338,700) $ (9,135,800) $ (4,729,500)
========================================================
Diluted net loss per share $ (0.38) $ (0.29) $ (0.19)
========================================================
Weighted average number of
shares outstanding 40,428,600 31,244,300 24,597,700
========================================================
Note 17 - Reportable Segments
The Company's operating segments are distinct business units operating in
different industries, except the Corporate Headquarters segment, which spans the
activities of the other segments. Each segment is separately managed, with
separate marketing and distribution systems. The Company's seven operating
segments are Advanced Technology Division (ATD), Novalog, Microelectronics
Products Division (MPD), MicroSensors, Inc. (MSI), RedHawk Vision (RedHawk),
Silicon Film Technologies (Silicon Film) and Corporate Headquarters. The
following five operating segments meet the criteria for reportable segments
disclosure as of October 1, 2000: ATD, Novalog, MSI, RedHawk, Silicon Film and
Corporate Headquarters. ATD derives most of its revenues from research and
development contracts funded primarily by governmental agencies. Novalog
designs, develops and sells proprietary integrated circuits ("ICs") and related
products for use in wireless infrared communication. MSI develops and sells
proprietary micromachined sensors and related electronics. Silicon Film designs
and develops proprietary electronic films systems and other digital imaging
products and services. Corporate Headquarters provides accounting, inventory
control and management consulting services to the consolidated subsidiaries.
Corporate revenue consists of charges to the subsidiaries for these services and
corporate assets consist of loans to subsidiaries and goodwill for reacquisition
of subsidiary stock.
21
The accounting policies used to develop segment information correspond to those
described in the summary of significant accounting policies. Segment profit or
loss is based on profit or loss from operations before income taxes and minority
interest in profit and loss of subsidiaries.
The following information about the 5 segments is for the year ended October 1,
2000.
Silicon Corporate
ATD Novalog MSI Film Headquarters Other Totals
----------- ---------- ---------- --------- ------------ ----------- ------------
Revenues from external customers $ 4,282,900 $6,308,600 $ 69,900 $ - $ - $ 108,400 $ 10,769,800
Intersegment revenue - - - - 2,514,700 - 2,514,700
Interest revenue - 6,400 - 43,400 152,400 - 202,200
Interest expense - 500 4,700 39,200 131,400 8,200 184,000
Depreciation 690,400 86,900 111,500 142,300 14,000 33,800 1,078,900
Segment operating profit (loss) (4,442,900) 478,700 (3,303,700) (6,087,600) (727,800) (1,917,700) (16,001,000)
Segment assets 11,578,300 2,239,100 742,500 4,453,400 21,867,700 885,950 41,766,950
Expenditures for segment assets 798,400 46,900 495,500 1,242,700 191,100 607,000 3,381,600
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments $ 13,284,500
Elimination of intersegment revenues (2,514,700)
---------------
Total consolidated revenues $ 10,769,800
===============
Assets
Total assets for reportable segments $ 41,766,950
Elimination of intersegment assets (21,459,800)
---------------
Total consolidated assets $ 20,307,150
===============
The following information about the 5 segments is for the year ended October 3,
1999.
Silicon Corporate
ATD Novalog MSI Film Headquarters Other Totals
----------- ----------- ----------- ----------- ------------- --------- ------------
Revenues from external customers $ 4,080,700 $6,787,900 $ 197,300 $ 1,600 $ - $ 32,700 $ 11,100,200
Intersegment revenue - - - - 2,320,000 - 2,320,000
Interest revenue - 2,100 - 4,600 31,900 - 38,600
Interest expense - 500 3,700 1,600 97,800 700 104,300
Depreciation 694,950 118,100 58,400 32,000 - 8,000 911,450
Segment operating profit (loss) (2,275,200) 481,800 (2,641,400) (4,132,600) (536,600) (747,400) (9,851,400)
Segment assets 5,816,200 2,392,900 503,100 1,517,500 12,721,100 109,050 23,059,850
Expenditures for segment assets 1,163,900 58,400 349,200 748,000 - 55,300 2,374,800
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments $ 13,420,200
Elimination of intersegment revenues (2,320,000)
------------
Total consolidated revenues $ 11,100,200
============
Assets
Total assets for reportable segments $ 23,059,850
Elimination of intersegment assets (12,549,500)
------------
Total consolidated assets $ 10,510,350
============
22
During fiscal 1998, the Company had the following 6 reportable segments: ATD,
CPO, Novalog, MSI, Silicon Film and Corporate Headquarters.
The following information about the 6 segments is for the year ended September
27, 1998.
Silicon Corporate
ATD CPO Novalog MSI Film Headquarters Other Totals
----------- --------- ----------- ---------- ----------- ------------ ---------- -----------
Revenues from external customers $ 7,231,900 $ 352,700 $ 1,026,100 $ 300,000 $ - $ - $ 403,800 $ 9,314,500
Intersegment revenue - - - - - 1,911,000 - 1,911,000
Interest revenue - - 2,500 - - 10,000 - 12,500
Interest expense - 107,400 900 - - 157,900 - 266,200
Depreciation 1,221,100 166,700 108,300 - - 50,600 - 1,546,700
Segment operating profit (loss) (1,694,300) 99,000 (1,636,300) (1,080,400) (1,042,200) (172,700) (225,300) (5,752,200)
Segment assets 5,728,100 65,900 710,500 233,200 321,400 27,631,800 5,600 34,696,500
Expenditures for segment assets 533,400 - 15,900 11,500 - - - 560,800
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments $ 11,225,500
Elimination of intersegment revenues (1,911,000)
------------
Total consolidated revenues $ 9,314,500
============
Assets
TTotal assets for reportable segments $ 34,696,500
Elimination of intersegment assets (27,631,800)
-----------
Total consolidated assets $ 7,064,700
===========
23
Irvine Sensors Corporation
Report of Independent Certified Public Accountants
- --------------------------------------------------------------------------------
To the Board of Directors
Irvine Sensors Corporation
Costa Mesa, California
We have audited the accompanying consolidated balance sheets of Irvine Sensors
Corporation as of October 1, 2000 and October 3, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Irvine
Sensors Corporation as of October 1, 2000 and October 3, 1999, and the
consolidated results of its operations and its consolidated cash flows for each
of the three years then ended, in conformity with accounting principles
generally accepted in the United State of America.
Grant Thornton LLP
Irvine, California
November 30, 2000
24