EXHIBIT 13
IRVINE SENSORS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 Exchange Commission EDGAR database
(www.sec.gov) or from the Company's Investor Relations.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 29, 1996 vs.
FISCAL YEAR ENDED OCTOBER 1, 1995
The Company continued in fiscal 1996 with record-setting revenues of
$12,024,200, which represents a 50 percent increase from fiscal 1995. The
growth in revenues was primarily attributable to increases in shipments of
products from the Company's Computer Products Operations (CPO) in Vermont and,
to a lesser extent, shipments of the Company's new serial infrared
communications chip (SIRComm) from the Company's subsidiary, Novalog, Inc. The
SIRComm chip has continued to gain market acceptance since its introduction in
late fiscal 1995. The increase in shipments from CPO was a result of
substantial increases in bookings that began in the second half of fiscal 1995
combined with the continued ramp-up in production of stacked memory products
achieved during fiscal 1996. The increase in product revenues was offset
slightly by a decrease in contract revenues which was primarily attributable to
procurement delays related to the Company's Advanced Technology Operations
(ATO). ATO, which is largely dependent on contracts from the U.S. government's
military agencies and subcontracts from major government contractors, continued
to be adversely impacted during fiscal 1996 by delays in contracts funding and
awards caused by the federal government's budget crisis earlier in the year.
The Company anticipates some delays in contract funding and awards to be
rectified in the first quarter of fiscal 1997.
Other revenues were derived from a license agreement with Unitrode
Corporation which involves the transfer of technology allowing Unitrode to
produce Novalog's SIRComm chip.
Cost of revenues percent as compared to 90 percent in fiscal year 1995. The
increase was attributable to the Company's inability to absorb additional
indirect costs incurred while it ramped up its revenue-generating capacities
during fiscal 1996. A substantial escalation of overhead costs occurred at CPO
as a result of the IBM cubing line acquisition and facility lease, the
completion of the joint development activities with IBM to commercialize the
Company's chip-stacking technology, and from efforts to ramp up production of
stacked memory products to meet existing backlog requirements and projected
bookings. After management's review of the existing backlog of orders and the
anticipated cost to complete such orders at CPO, the Company established a
reserve at September 29, 1996 for the estimated loss upon completion of these
orders. The accrued loss has been recorded as a reduction of the inventory
valuation at September 29, 1996. Funding delays on existing contracts and the
delays in obtaining new contracts created under-absorbed costs at ATO. The
increase in costs of revenues was offset slightly by Novalog's improved margins
experienced during fiscal 1996 attributable to efficiencies realized from the
increase in shipments of its SIRComm chip. The Company anticipates the cost of
revenues ratio to improve during fiscal 1997 at CPO resulting from anticipated
manufacturing efficiencies and at ATO attributable to improved backlog of funded
research and development contracts.
The Company increased its expenditure in research and development by
$729,700 or 57 percent compared to fiscal 1995. The increase was primarily
attributable to efforts directed at developing new products.
During fiscal 1996, the Company experienced growth in its administrative
infrastructure in conjunction with the increase in business activity and the
anticipation of future growth driven by the transition to a products-based
company. General and Administrative (G&A) expense increased $1,497,400 compared
to fiscal 1995. As a percentage of revenues, G&A was 34 percent in fiscal 1996
compared to 32 percent in fiscal 1995. The increase in G&A expense is primarily
attributable to additional marketing costs associated with promoting the
Company's products and efforts directed toward obtaining new
research and development contract awards. In addition, the Company incurred non-
recurring legal expense in connection with the IBM cube line acquisition and
facility lease, its financing activities, and in the incorporation of its
subsidiary, Novalog, Inc.
Interest expense increased $413,900 during fiscal 1996 compared to fiscal
1995. The increase in interest expense was primarily attributable to interest
incurred on subordinated debenture bonds (see Note 6 of Notes to Consolidated
Financial Statements) and, to a lesser extent, interest on capital lease
obligations incurred primarily during fiscal 1995. Interest income increased
slightly from fiscal 1995 as a result of additional cash and cash equivalents
held in deposits during fiscal 1996 which were obtained from the financing
activities discussed above.
Net loss for fiscal 1996 was $11,518,000 compared to $3,035,800 in fiscal
1995 and net loss per share went from ($0.20) per share in fiscal 1995 to
($0.68) per share in fiscal 1996.
FISCAL YEAR ENDED OCTOBER 1, 1995 vs.
FISCAL YEAR ENDED OCTOBER 2, 1994
Another year of record revenues of $8,041,400 showed a 57 percent increase
over fiscal 1994. Fiscal 1995 saw the introduction of the Company's new serial
infrared communications chip (SIRCommTM) with production volumes shipped to
major manufacturers occurring primarily in the fourth fiscal quarter.
Production quantities of Memory Short StacksTM from the Company's Computer
Products Operations in Vermont were also shipped throughout fiscal 1995 to
major manufacturers in the aerospace and commercial industries. In addition to
the growth experienced by the Company's products-based operations, the
Company's core contract research and development operation continued to
experience substantial increases from efforts on existing contracts and from
several large contracts obtained during fiscal 1995 which included revenues
from the delivery of custom chip stacks.
Cost of revenues remained substantially unchanged from fiscal 1994 at 90
percent of revenues. There were no major changes in the cost structure of the
contract research and development operation, while cost of revenues as a
percent of revenues decreased at the Computer Products Operation primarily due
to lower start-up and training costs during 1995 as the operation became more
efficient. Start-up costs of the SIRComm operation, which have been expensed,
were a major contributor to the high cost of sales percent of revenues, but by
September these costs had been absorbed and the unit was performing up to the
Company's expectations.
The Company increased its research and development (R&D) expenditures by
$435,700 or 52 percent over last year's expenditures. This increase reflects
the Company's resolve to maintain its competitive advantage by developing new
products and advancing its core technology. As a percent of revenues, R&D
remained consistent with fiscal 1994 at 16 percent of revenues.
General and Administrative expenses increased $222,500. However, as a
percent of revenues, they decreased to 32 percent in fiscal 1995 from 45
percent in fiscal 1994. The increase in G&A consisted primarily of additional
labor costs required to handle the growth in business activity.
The Company's financial condition continues to reflect the impact of its
significant growth in operations as evidenced by the increases in accounts
receivable, inventory and accounts payable. Inventory in particular was
impacted by the growth in backlog at the Computer Products Operation for Memory
Short Stacks and, to a lesser extent, anticipated sales of custom chip stacks
by the California facility. The Company invested approximately $3.1 million in
capital facilities and equipment (including $395,800 of capital lease
obligations) which were required to achieve and sustain the growth in
operations.
During July and August 1995, the Company raised approximately $4.2 million
in private financings from institutional and corporate investors in Canada and
Europe through the sale of approximately 382,100 shares of common stock and
$2.25 million of convertible subordinated debenture bonds (see
Notes 2 and 6 of Notes to Consolidated Financial Statements).
LIQUIDITY, CAPITAL RESOURCES AND IMPACT OF CHANGING PRICES
During fiscal 1996, the Company raised approximately $13.8 million (net of
related expenses) from financing activities which included the issuance of
$11.6 million 8 percent convertible subordinated debentures (see Note 6 of
Notes to Consolidated Financial Statements) and a $3 million bank loan (see
Note 9 of Notes to Consolidated Financial Statements). In addition, during
September 1996, the Company received a subscription of $0.5 million to purchase
a 5 percent minority interest in its subsidiary, Novalog, Inc. During the first
half of fiscal 1997, the Company anticipates the issuance of up to an
additional $2.5 million of common stock in Novalog for a total of a 30 percent
minority interest. The primary uses of cash and cash equivalents during fiscal
1996 were for capital facilities and equipment expenditures, funding of the
Company's net loss, and
the buildup of work-in-process inventory. The Company invested approximately
$8.5 million in capital facilities and equipment, which included the acquisition
of the IBM cubing line with an approximate $6.5 million cash payment to IBM. The
Company is anticipating the current rate of capital expenditures (excluding the
IBM transaction) to decrease in the immediate future. The approximate $1.5
million increase in inventory resulted from the growth in backlog at CPO and
production of custom chip stacks by ATO. An approximate $1 million increase in
deferred revenues slightly offset the cash used for operations which represented
advanced customer payments received for CPO products scheduled for delivery in
the second half of fiscal 1997.
At September 29, 1996, the Company had cash and cash equivalents of
$1,954,000, working capital of $3,861,100 and a current ratio of 1.7 to 1. The
Company anticipates that the existing working capital and its projected
operating results will be sufficient to meet its cash requirements for the
immediate future. However, the Company's expansion of its Vermont operation has
materially increased its operating and working capital requirements. The
Company has undertaken this expansion with the expectation that revenues will
grow due to increased orders for its stacked memory products. There can be no
assurances that such increased orders will be forthcoming, and failure to
achieve such revenue growth would adversely affect the Company's results of
operations and its liquidity and capital resources.
At September 29, 1996, the Company's funded backlog was approximately
$6,063,400 compared to $5,506,900 at October 1, 1995. In addition, existing
contracts include a small amount of unfunded backlog which typically is funded
when the previously funded amounts have been expended.
Irvine Sensors Corporation
Consolidated Balance Sheet
September 29, October 1,
1996 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,954,000 $ 4,367,100
Accounts receivable,
net of allowances
of $10,000 3,023,900 2,388,000
Inventory 4,386,700 2,930,900
Prepaid expenses 283,600 241,500
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Total current assets 9,648,200 9,927,500
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Equipment, furniture and
fixtures, net 11,906,700 5,649,600
Other assets 187,300 32,100
- ---------------------------------------------------------------------------
$ 21,742,200 $ 15,609,200
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,197,800 $ 1,302,500
Accrued expenses 936,100 671,500
Deferred revenue 2,382,600 1,365,000
Notes payable and current
portion of long-term debt 270,600 206,400
- ---------------------------------------------------------------------------
Total current liabilities 5,787,100 3,545,400
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Long-term debt 2,809,900 78,000
Deferred royalties payable -
affiliated company 355,700 123,200
Convertible subordinated debentures 3,400,000 2,250,000
Preferred stock of consolidated
subsidiary 118,500 118,500
Subscription to acquire interest
in subsidiary 500,000 -
Long-term accrued expenses 458,300 -
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
500,000 shares authorized;
8,833 shares Series B Convertible
Cumulative Preferred outstanding;
aggregate liquidation preference of
$225,200 50 100
5,178 shares Series C Convertible
Cumulative Preferred outstanding;
aggregate liquidation preference of
$248,500 50 100
Common stock, $0.01 par value,
40,000,000 shares authorized;
18,710,000 and 15,566,800 shares
issued and outstanding 187,100 155,700
Common stock warrants; 239,200
and 126,900 issued and outstanding - -
Paid-in capital 37,331,000 27,025,700
Accumulated deficit (29,205,500) (17,687,500)
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Total shareholders' equity 8,312,700 9,494,100
- ---------------------------------------------------------------------------
$ 21,742,200 $ 15,609,200
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IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Year Ended
September 29, October 1, October 2,
1996 1995 1994
Revenues $ 11,898,200 $ 7,877,000 $ 4,918,700
Other 126,000 164,400 220,700
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Total revenues 12,024,200 8,041,400 5,139,400
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Costs and expenses:
Cost of revenues 17,137,600 7,298,700 4,612,900
General and administrative 4,031,600 2,534,200 2,311,700
Research and development 2,009,700 1,280,000 844,300
- -----------------------------------------------------------------------------------------------------------------------
23,178,900 11,112,900 7,768,900
- -----------------------------------------------------------------------------------------------------------------------
Loss from operations (11,154,700) (3,071,500) (2,629,500)
Interest expense (469,800) (55,900) (7,100)
Interest income 108,300 92,600 173,500
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Loss before provision for income taxes (11,516,200) (3,034,800) (2,463,100)
Provision for income taxes 1,800 1,000 800
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Net loss $(11,518,000) $(3,035,800) $(2,463,900)
- ----------------------------------------------------------------------------------------------------------------------
Net loss per common and
common equivalent share $ (0.68) $ (0.20) $ (0.18)
- ----------------------------------------------------------------------------------------------------------------------
Weighted average number of
shares outstanding 16,874,300 14,966,500 14,141,500
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See accompanying Notes to Consolidated Financial Statements.
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Common Stock Preferred Stock
Shares Issued Warrants Issued Shares Issued
------------- ---------------------------------- Total
Shareholders' Paid-in Accumulated
Number Amount Number Amount Number Amount Capital (Deficit) Equity
Balance at October 3, 1993 13,152,500 $131,500 155,000 $ - 16,190 $200 $15,033,500 $(12,187,800) $ 2,977,400
Stock options exercised 127,900 1,300 - - - - 21,900 - 23,200
Common stock issued to
employee retirement plan 43,200 400 - - - - 356,900 - 357,300
Sale of common stock 1,362,100 13,600 - - - - 7,844,500 - 7,858,100
Common stock warrants issued - - 161,200 - - - - - -
Common stock warrants
exercised 25,000 300 (25,000) - - - 48,000 - 48,300
Net loss - - - - - - - (2,463,900) (2,463,900)
Balance at October 2, 1994 14,710,700 $147,100 291,200 $ - 16,190 $200 $23,304,800 $(14,651,700) $ 8,800,400
Stock options exercised 103,100 1,000 - - - - 219,900 - 220,900
Common stock issued to
employee retirement plan 68,000 700 - - - - 471,600 - 472,300
Sale of common stock 382,100 3,800 - - - - 1,933,500 - 1,937,300
Common stock warrants issued - - 79,700 - - - - - -
Common stock warrants
exercised 244,000 2,500 (244,000) - - - 1,096,500 - 1,099,000
Series B and Series C preferred
stock converted to common
stock 58,900 600 - - (1,177) - (600) - -
Net loss - - - - - - - (3,035,800) (3,035,800)
Balance at October 1, 1995 15,566,800 $155,700 126,900 $ - 15,013 $200 $27,025,700 $(17,687,500) $ 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 - - - - - - - (11,518,000) (11,518,000)
Balance at September 29, 1996 18,710,000 $187,100 239,200 $ - 14,011 $100 $37,331,000 $(29,205,500) $ 8,312,700
Irvine Sensors Corporation
Consolidated Statement of Cash Flows
Fiscal Year Ended
September 29, October 1, October 2,
1996 1995 1994
Cash flows from operating activities:
Cash received from customers $ 11,388,300 $ 7,237,900 $ 4,506,100
Cash paid to suppliers and employees (19,008,200) (10,457,200) (6,384,800)
Interest received 108,300 92,600 173,500
Interest paid (469,800) (55,900) (7,100)
Income taxes paid (1,800) (1,000) (800)
Net cash used in operating activities $ (7,983,200) $(3,183,600) $(1,713,100)
Cash flows from investing activities:
Marketable securities, at cost - 4,447,500 (4,447,500)
Capital facilities and equipment expenditure (8,525,200) (3,105,500) (2,334,000)
Net cash used in investing activities (8,525,200) 1,342,000 (6,781,500)
Cash flows from financing activities:
Principal payments under notes payable and
capital lease obligations (217,100) (131,600) (74,000)
Proceeds from issuance of long-term debt 3,013,200 395,800 3,700
Proceeds from issuance of convertible
subordinate debentures 10,293,000 2,250,000 -
Subscription to acquire interest in subsidiary 500,000
Proceeds from issuance of common stock and
common stock warrants 506,200 3,257,200 7,929,600
Net cash provided by financing activities 14,095,300 5,771,400 7,859,300
Net increase (decrease) in cash and cash equivalents (2,413,100) 3,929,800 (635,300)
Cash and cash equivalents at beginning of year 4,367,100 437,300 1,072,600
Cash and cash equivalents at end of year $ 1,954,000 $ 4,367,100 $ 437,300
Reconciliation of net loss to net cash used in operating activities:
Net loss $(11,518,000) $(3,035,800) $(2,463,900)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization $ 2,268,100 $ 1,004,600 $ 535,700
Common stock issued to employee
retirement plan 687,400 472,300 357,300
(Increase) in accounts receivable (635,900) (803,500) (633,300)
(Increase) in inventory (1,455,800) (2,677,800) (227,600)
(Increase) decrease in prepaid expenses (42,100) (168,400) 13,500
(Increase) in other assets (155,200) (20,900) -
Increase in accounts payable and accrued
expenses 1,159,900 828,000 497,500
Increase in deferred revenue 1,017,600 1,174,200 190,800
Increase in accrued rent 458,300 - -
Increase in royalties accrued - affiliated
company 232,500 43,700 16,900
Total adjustments 3,534,800 (147,800) 750,800
Net cash used in operating activities $ (7,983,200) $(3,183,600) $(1,713,100)
Noncash investing and financing activities:
Common stock issued to employee retirement
plan $ 687,400 $ 72,300 $ 357,300
Capitalized lease obligations $ 3,200 $ 395,800 $ 3,700
Conversion of debentures to common stock $ 10,450,000 $ - $ -
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. and Carson
Alexiou Corporation ("CAC"). 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
1996 (52 weeks) ended on September 29, 1996, fiscal 1995 (52 weeks) ended on
October 1, 1995, and fiscal 1994 (52 weeks) ended on October 2, 1994.
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.
REVENUES
The Company's revenues include shipments of functional memory stacks from
its Vermont facility, shipments of the SIRComm infrared chip and from prototype
development and manufacture of 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 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 1994. Contract revenues have been recorded in amounts which are
expected to be realized upon final settlement.
Other revenues in the fiscal years 1995 and 1994 were derived from a license
agreement with IBM wherein the Company and IBM jointly developed certain of the
Company's technology and products. In addition, other revenues in fiscal 1996
and 1995 were derived from a licensing agreement with Unitrode to transfer
technology required to produce the Company's SIRComm chip. (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.
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.
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.
Expenditures for repairs and maintenance were $369,500, $210,800 and
$113,900 in fiscal years 1996, 1995 and 1994, respectively.
INCOME TAXES
Taxes are provided, at the appropriate rates, for all taxable items included in
the statement of operations regardless of the period in which such items are
reported for tax purposes. Investment tax credits are accounted for under the
"flow through" method, whereby the benefit is recognized in the year in which
the credit is realized.
EARNINGS PER SHARE
Computations of primary earnings per share are based on the weighted average
number of shares of common stock outstanding, including dilutive stock options,
convertible preferred stock and common stock warrants where applicable.
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, accounts
receivable, accounts payable, and other liabilities approximate the fair value
due to the short-term nature of these instruments.
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 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), will have to disclose
in the Notes to the Consolidated Financial Statements the pro forma impact on
net income and net income per share had the Company utilized the Fair Value
Method. This statement will be effective for the Company in fiscal year 1997.
The Company anticipates accounting for future stock compensation awards in
accordance with APB 25 with the appropriate footnote disclosure required under
SFAS 123.
Note 2 - Issuance of Common Stock and Series A Preferred Stock
During fiscal 1994, the Company issued 127,900 shares of common stock to
eight employees, one of whom is a director, and four non-employee directors
upon exercise of options and warrants granted under the Company's Stock Option
Plans. The net proceeds of approximately $23,200 were added to the Company's
general funds.
In February 1994, the Company completed the sale of approximately 1.36
million unregistered shares of the Company's common stock in a private
financing to institutional and corporate investors in Canada and Europe. After
regulatory requirements were met by holders of these securities, restrictive
legends on these shares were removed and the shares could then be traded
without restrictions. The net proceeds of approximately $7.9 million were added
to the Company's general funds. There are no restrictions on the use of these
funds.
In August 1995, the Company completed the sale of approximately 382,100
unregistered shares of the Company's common stock in a private financing
pursuant to Regulation S to institutional and private investors in Canada and
Europe. The Company agreed to use its best efforts to register these shares for
subsequent resale by the holders thereof. After regulatory requirements were
met by holders of these securities, restrictive legends on these shares were
removed and the shares could then be traded without restrictions. The net
proceeds of approximately $1.9 million were added to the Company's general fund.
During fiscal 1995, the Company issued 103,100 shares of common stock to ten
employees and one non-employee director upon exercise of options granted under
the Company's Stock Option plans. Net proceeds of $220,900 were added to the
Company's general fund.
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 fund.
In conjunction with the 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 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 bond holders, 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 are convertible into shares of common stock at varying
rates which are contingent upon the closing bid prices of the common stock. The
Company has the right to demand conversion of the 1996 Debentures at any time
after March 1997. Interest is payable semiannually on January 31 and July 31 of
each year. The 1996 Debentures are subordinated to prior payment of bank
indebtedness of the Company. The gross proceeds less expenses were added to the
Company's general funds. In May 1996, the Company filed a registration
statement covering 2,997,000 shares, the approximate number of shares estimated
to underly the 1996 Debentures based on the then projected trading range of the
Company's stock. As of the date hereof, said adjustment would require the
additional registration of approximately 1,800,000 shares of common stock.
During the second half of fiscal 1996, the Company, at the request of bond
holders, converted $7.7 million of outstanding 1996 Debentures at varying rates
into 2,044,000 shares of the Company's common stock which may be traded without
restriction.
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 are
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 and
17,200 remain outstanding.
In February 1992, the Company granted a warrant to its legal counsel to
purchase 25,000 unregistered shares of common stock at a price of $1.3125 in
connection with services rendered. The warrant was exercised in March 1994 and
the proceeds were added to the Company's general funds.
In February 1993 and July 1993, the Company granted warrants to two
consultants to purchase 25,000 and 30,000 unregistered shares of common stock
at prices of $4.72 and $8.875 per share, respectively, in connection with
services rendered. The shares underlying these warrants were registered in
fiscal 1995 and the prices reduced to $4.50 per share. The warrant for 25,000
shares was exercised in fiscal 1995 and the warrant for 30,000 shares was
exercised in fiscal 1996.
In connection with the February 1994 sale of approximately 1.36 million
shares of common stock to investors in Canada and Europe, the Company granted
to the foreign investment banker, warrants to purchase up to 136,200 shares of
common stock at an average price of $8.23 per share. In fiscal 1995, the price
was reduced to $4.50 per share and the warrants were exercised.
In February 1994, the Company granted a warrant to its legal counsel to
purchase 25,000 unregistered shares of common stock at a price of $8.75 per
share in connection with services rendered. In fiscal 1995, the price was
reduced to $4.50 per share and the warrant was exercised.
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. The net proceeds of $294,500 were
added to the Company's general fund.
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 the1996 Debentures. The
warrants are exercisable beginning March 1997.
As of September 29, 1996, there are a total of 239,200 warrants outstanding
of which 17,200 expire in July 1997 and 222,000 expire in March 2001.
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:
October 1994 880 297 58,900
March 1996 522 480 50,100
_______________________________________
1,402 777 109,000
_______________________________________
_______________________________________
The shares of Preferred Series B and Series C, respectively, tendered for
conversion have been retired.
Undeclared dividends of $92,700 and $93,200 on the remaining outstanding
Preferred Series B and Series C, respectively, will be carried forward to
fiscal 1997.
Note 5 - Preferred Stock of Consolidated Subsidiary
The preferred stock outstanding represents an ownership interest in CAC by
former employees and an Employee Stock Bonus Plan (ESBP) which CAC had formed.
The preferred stock has a $100 par value and there are 1,400 shares authorized
and 1,185 shares issued and outstanding. There are no conversion rights or
liquidation preferences of this preferred stock which extend to the common
stock of the Company.
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.
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 are convertible into shares of common stock at varying
rates which are contingent upon the closing bid prices of the common stock. The
Company has the right to demand conversion of the 1996 Debentures at any time
after March 1997. Interest is payable semiannually on January 31 and July 31 of
each year. The 1996 Debentures are subordinated to prior payment of bank
indebtedness of the Company. The gross proceeds less expenses were added to the
Company's general funds. In May 1996, the Company filed a registration
statement covering 2,997,000 shares, the approximate number of shares estimated
to underly the 1996 Debentures based on the then projected trading range of the
Company's stock. As of the date hereof, said adjustment would require the
registration of approximately 1,800,000 additional shares of common stock.
During the second half of fiscal 1996, the Company, at the request of bond
holders, converted $7.7 million of outstanding 1996 Debentures at varying rates
into 2,044,000 shares of the Company's common stock.
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 CEO and a Senior
Vice-President are general partners with beneficial interests, to design an
electronic circuit, to develop certain fabrication processes and to build
equipment for testing electronic integrated circuits. In connection with the
development of the electronic test equipment under the RDL agreement, certain
other proprietary fabrication processes were developed to which RDL retained
ownership. Upon the occurrence of certain specified events, such as the use of
patented fabrication processes in connection with contracts, the agreement with
RDL provides that the Company will pay RDL a royalty fee of 3.5 percent of
revenues from sales of the basic devices using the processes created during the
development of this equipment. In June 1989, the Board of Directors approved an
agreement with RDL whereby $40,000 of royalty fees was converted to a long-term
note payable and a warrant to purchase shares of the Company's common stock.
The note was unsecured, bore no interest and had a due date of June 30, 1995.
The warrant to purchase 200,000 shares of common stock at $0.20 per share had
an expiration date of June 30, 1995. In October 1989, the Board of Directors
approved an amendment
to the RDL agreement limiting the royalty fees under certain circumstances and
deferring and subordinating all royalty claims with respect to all other
creditors for an initial period of five years. The amendment allows the Company,
at RDL's option, to pay up to $250,000 of accrued royalties in shares of the
Company's common stock at a price of $0.50 per share. In the event that RDL
extends the period to ten years the amount would be increased to $1,000,000 and
the price would increase to $1.00 per share. Should RDL exercise its option to
accept payment in shares of the Company's common stock, in whole or in part,
title to RDL's technology would transfer to the Company and future royalty
obligations would cease. In fiscal 1994, RDL extended the period to ten years.
In October 1990, the Company and RDL consummated an agreement in which full
settlement of the $40,000 note payable was arranged. RDL forgave $20,000 of the
Company's $40,000 debt, evidenced by the aforementioned $40,000 note payable,
and surrendered its warrant to purchase 200,000 shares of the Company's stock
in exchange for a cash payment of $5,000 and 200,000 unregistered shares of the
Company's common stock. As of September 29, 1996, the Company owed RDL $355,700
in deferred royalty fees.
Note 8 - Composition of Certain Financial Statement Captions
September 29, October 1,
1996 1995
____________________________
Accounts receivable:
U.S. government $ 1,608,800 $ 2,094,500
Other customers 1,415,100 293,500
____________________________
$ 3,023,900 $ 2,388,000
____________________________
____________________________
Accounts receivable includes unbilled amounts of $1,151,600 and $1,423,000
at September 29, 1996 and October 1, 1995, 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 $63,000 and $43,600 at September 29, 1996 and October 1,
1995, respectively. These amounts are normally collected upon final audit of
costs by the U.S. government.
Costs incurred beyond the contract funded amount included in unbilled
accounts receivable amount to $201,900 at September 29, 1996. This amount,
although not yet funded, is within the scope of the contract and the Company
does not expect to sustain a loss with respect to such costs.
September 29, October 1,
1996 1995
______________________________
Inventory:
Raw Materials $ 537,900 $ 488,600
Work in Process 2,862,300 1,842,600
Finished Goods 986,500 599,700
______________________________
$ 4,386,700 $ 2,930,900
______________________________
______________________________
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. 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.
September 29, October 1,
1996 1995
____________________________
Equipment, furniture and fixtures:
Engineering and production
equipment $ 16,615,800 $ 8,527,600
Furniture and fixtures 353,300 335,600
Computer software programs 739,900 371,200
Leasehold improvements 900,700 850,100
____________________________
18,609,700 10,084,500
Less accumulated depreciation
and amortization 6,703,000 4,434,900
____________________________
$ 11,906,700 $ 5,649,600
____________________________
____________________________
Engineering and production equipment includes approximately $209,800 and
$396,500 of capitalized leases at September 29, 1996 and October 1, 1995,
respectively. Accumulated amortization of capitalized leases amounted to
$66,324 and $30,700 at September 29, 1996 and October 1, 1995, respectively.
September 29, October 1,
1996 1995
__________________________
Accrued expenses:
Salaries and wages $ 353,900 $ 292,500
Vacation 236,900 183,500
Payroll taxes 57,100 33,900
Accounting fees 55,800 42,100
Accrued rent 91,700 -
Other accrued expenses 140,700 119,500
__________ __________
$ 936,100 $ 671,500
__________________________
__________________________
Note 9 - Notes Payable
Current and long-term debt consists of the following:
September 29, October 1,
1996 1995
__________________________
Note payable to bank bearing
interest at prime plus 1.5%
due in monthly installments of
$63,400 beginning May 1997 $ 3,000,000 $ -
Capitalized lease
obligations maturing at
various dates through 1997 80,400 284,400
Less current portion 270,600 206,400
__________________________
$ 2,809,900 $ 78,000
__________________________
__________________________
The aggregate minimum principal maturities are $270,600, $517,700, $561,700,
$618,900 and $682,000 in the years ending September 30, 1997 through 2001,
respectively, and $429,500 thereafter.
The Company was in compliance with two of the three financial covenants of its
bank loan as of September 29, 1996 and as of the first quarter ended December
29, 1996, and received a waiver of the third covenant as of September 29, 1996
and December 31, 1996. The Company anticipates that it will be in full
compliance with the restrictive covenants in future quarters.
Note 10 - Income Taxes
Effective October 4, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income tax. The cumulative effect of adopting SFAS No. 109 on the Company's
financial statements for the year ended October 2, 1994 was not material.
Deferred income taxes reflect the net tax effects of (i) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(ii) operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's income tax calculation as of
September 29, 1996 are as follows:
Current deferred tax assets:
Differences between book
and tax basis of property $ 878,800
Reserves not currently deductible 2,500
Long-term deferred tax assets:
Operating loss carryforwards 11,322,400
Tax credit carryforwards 403,500
Capital loss carryforwards 8,500
Valuations allowance (12,615,700)
____________
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 29,1996
and October 1, 1995, respectively, are as follows:
The total valuation allowance changed $4,598,400 from October 1, 1995 to
September 29, 1996. At September 29, 1996, the portion of the valuation
allowance attributed to deferred tax assets for which subsequently recognized
tax benefit will be allocated directly to contributed capital was $1,107,100.
The provisions for income taxes for the fiscal years ended September 29,
1996, October 1, 1995, and October 2, 1994, consist of provisions for state
income taxes of $1,800, $1,000, and $800, respectively. No provisions for
federal income taxes have been made in these fiscal years due to the net
operating losses.
At September 29, 1996, the Company had net operating loss carryforwards of
approximately $29,997,900 for financial reporting and federal income tax
purposes expiring in varying amounts from fiscal year 1997 through fiscal year
2011, and $14,236,500 for California and Vermont State Franchise tax purposes
expiring in varying amounts from fiscal year 1997 through fiscal year 2001,
available to offset future federal, California, and Vermont taxable income. In
addition, as of September 29, 1996, the Company had investment tax credits and
qualified research credits of $133,400 and $270,100, respectively, expiring in
varying amounts through fiscal year 2008 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.
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 $1,633,500, $562,500, and $347,100, for the fiscal years ended
September 29, 1996, October 1, 1995, and October 2, 1994, respectively. Minimum
lease commitments existing at September 29, 1996 are approximately as follows:
Fiscal years ending:
1997 $ 2,020,700
1998 1,959,700
1999 500,300
2000 5,800
____________
Total minimum payments $ 4,486,500
____________
____________
Note 12 - Stock Option Plans and Employee Retirement Plan
In December 1981, the Company's shareholders adopted two stock option plans:
the 1981 Incentive Stock Option Plan (Incentive Plan) and the 1981 Nonstatutory
Stock Option Plan (Nonstatutory Plan). The Incentive Plan provided for the
granting of options to key management employees and the Nonstatutory Plan
provided for the granting of options to both key management employees and
non-employee directors. The maximum number of shares which could be optioned
and sold under the two plans was 1,450,000 shares, of which no more than
800,000 and 400,000 could be optioned and sold to directors and non-director
officers, respectively. Under the terms of the Incentive Plan, options could be
granted at an exercise price equal to the fair market value of the Company's
common stock on the date the options were granted and under the terms of the
Nonstatutory Plan, options could be granted at 85 percent of the fair market
value, on the date the options were granted. If, however, the optionee owned
more than 10 percent of the outstanding common stock of the Company, the
exercise price of incentive stock options would be at least 110 percent of such
fair market value. Options, generally, are not exercisable before one year from
the date of grant, and are generally exercisable in installments. Options
granted under the Incentive Plan may not exceed five years in duration and
options granted under the Nonstatutory Plan may not exceed ten years in
duration. The plans terminated on December 11, 1991, after which date no
options could be granted under the plans. As of September 29, 1996, there were
no outstanding options under the plans.
In December 1991, the Board of Directors adopted the 1991 Stock Option Plan
to replace the 1981 Plans which had terminated. 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 29, 1996, options to purchase 210,700 shares at prices ranging from
$4.28 (15,000 shares) to $8.625 (30,000 shares) were outstanding under the Plan,
of which 90,200 were exercisable at September 29, 1996.
In January 1995, the Board of Directors adopted the 1995 Stock Option Plan
to replace the 1991 Plan which had terminated. This new 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. 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 29, 1996, options
to purchase 444,000 shares at prices ranging from $5.0625 (50,000 shares) to
$8.50 (100,000 shares) were outstanding under the Plan, of which 20,000 were
exercisable at September 29, 1996.
Stock option activity is summarized as follows:
Option Price
Shares Per Share
________________________________
1981 Plan:
_________
Options outstanding at
October 3, 1993 170,000 $0.17 to $1.5625
Exercised (117,600) 0.17 to 0.8125
__________
Options outstanding at
October 2, 1994 52,400 0.5625 to 1.5625
Exercised (48,400) 0.5625 to 1.5625
__________
Options outstanding at
October 1, 1995 4,000 0.5625
Exercised 4,000 $0.5625
__________
Options outstanding at
September 29, 1996 -
__________
__________
1991 Plan:
_________
Options outstanding at
October 3, 1993 472,000 $1.3125 to $8.625
Granted 65,500 7.125 to 7.75
Exercised (10,500) 1.3125 to 4.09
__________
Options outstanding at
October 2, 1994 527,000 1.3125 to 8.625
Granted 98,500 6.00
Exercised (54,200) 1.3125 to 7.75
__________
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
__________
__________
1995 Plan:
_________
Granted in fiscal 1995 228,500 $6.00 to $6.50
__________
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
__________
__________
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 1994,
1995 and 1996 the Company's contributions to the SBT were 43,200, 68,000 and
172,900 shares of common stock, respectively, which had estimated market values
of $357,300, $472,300 and $687,400, respectively.
Note 13 - Revenues
In fiscal 1996, contracts with all branches of the U.S. government accounted
for 31% of the Company's revenues and the remaining 69% of the Company's
revenues was derived from non-government sources. Of the 31% applicable to the
U.S. government, there was one agency of the government that accounted for 16%.
Other government agencies accounted for the remaining 15%. Of the 69%
applicable to non-government sources, two customers accounted for 23% and 21%
of the revenues.
In fiscal 1995, contracts with all branches of the U.S. government accounted
for 74% of the Company's revenues and the remaining 26% of the Company's
revenues was derived from non-government sources. Of the 74% applicable to the
U.S. government, there were two agencies of the government that accounted for
30% and 21%, respectively. Other government agencies accounted for the
remaining 23%. There were no non-government customers who individually
accounted for more than 10%.
In fiscal 1994, contracts with all branches of the U.S. government accounted
for 83% of the Company's revenues and the remaining 17% of the Company's
revenues was derived from non-government sources. Of the 83% applicable to the
U.S. government, there were four agencies of the government that accounted for
22%, 21%, 15%, and 14%, respectively. Other government agencies accounted for
the remaining 11%. There were no non-government customers who individually
accounted for more than 10%.
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 Company will 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.
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 September 29, 1996. Revenues will
be recorded upon delivery of these services and products.
Note 16 - Acquisition 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 and recently completed. 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 includes 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.
Irvine Sensors Corporation
Report of Independent Accountants
To the Board of Directors and Shareholders of Irvine Sensors Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Irvine Sensors Corporation and its subsidiaries at September 29, 1996, and
October 1, 1995, and the results of their operations and their cash flows for
each of the three years in the period ended September 29, 1996, 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/ Price Waterhouse
Costa Mesa, California
January 10, 1997