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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934]
For the fiscal year ended October 3, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934]
For the transition period from _________ to _________.
Commission file number 1-8402
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IRVINE SENSORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-0280334
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3001 Redhill Avenue, Costa Mesa, California 92626
(Address of principal executive offices) (Zip Code)
(714) 549-8211
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class: which registered:
Common Stock Boston Stock Exchange Incorporated
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
To the extent known by the registrant, the aggregate market value of the Common
Stock held beneficially by non-affiliates of the registrant was approximately
$69,000,000 on December 22, 1999. As the Preferred Stock is not publicly traded
it has not been included in the computation.
As of December 22, 1999, there were 36,075,400 shares of Common Stock
outstanding.
Documents Incorporated by Reference:
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended October 3, 1999 (Part II); portions of the Registrant's Definitive Proxy
Statement to be used in connection with Registrant's Annual Meeting of
Stockholders to be held on February 25, 2000 (Part III).
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FORWARD-LOOKING STATEMENTS
Some of the information in this Report contains forward-looking statements
which involve substantial risks and uncertainties. Readers can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. Readers
should consider statements that contain these or similar words carefully because
they (1) discuss expectations of Irvine Sensors Corporation ("the Company")
about its future performance; (2) contain projections of the Company's future
operating results or of its future financial condition; (3) state other
"forward-looking information. The Company believes it is important to
communicate its expectations to its investors. There may be events in the
future however, that the Company is not accurately able to predict or over
which it may have no control. The risk factors discussed in "Factors that May
Affect Future Results," later in this Report, as well as any cautionary language
in this Report, including those portions incorporated by reference, provide
examples of risks, uncertainties and events that may cause the Company's actual
results to differ materially from the expectations described in the forward-
looking statements. Readers should be aware that the occurrence of any of the
events described in the risk factors and elsewhere in this Report, including the
documents incorporated by reference, could have a material and adverse effect on
the Company's business, results of operations and financial condition and that
upon the occurrence of any of these events, the trading price of the Company's
Common Stock could decline and investors could lose all or part of their
investments.
- --------------------------------------------------------------------------------
PART I.
-------
Item 1. Business
GENERAL
The Company and its subsidiaries are involved in various business activities
related to miniaturized electronics and the applications thereof. The Company
is organized into the following primary business groups:
Irvine Sensors Corporation
- --------------------------
Irvine Sensors Corporation ("ISC") is the developer of proprietary technologies
to produce extremely compact packages of solid state microcircuitry, which ISC
believes offer volume, power, weight and operational advantages versus less
miniaturized alternatives. These advantages result from ISC's ability to
assemble microelectronic chips in a three-dimensional "stack" instead of
alongside each other on a flat surface, as is the case with more conventional
methods. These stacking technologies have also led to ISC's development of
collateral technologies for the design of low power and low noise chips,
thinning of chips and various specialized applications of chips and stacked chip
assemblies in fields ranging from wireless infrared transmission to image
processing to digital photography.
ISC's core chip-stacking technology was originally conceived and developed as a
means of addressing the demands of space-based surveillance. However, the
degree of miniaturization potentially realizable from ISC's technologies has
attracted R&D sponsorship from various government funding agencies for a wide
variety of potential military and space applications. Until recently, ISC
derived most of its revenues from such funded research and development.
Recently, ISC has sought to commercialize its technologies by creating
independently managed subsidiaries that can pursue their own financing
strategies separately from the parent. ISC has received an increasing share of
its consolidated revenues from one such subsidiary.
In April 1996, upon termination of a joint development agreement, ISC purchased
a memory-stacking line in Essex Junction, Vermont from IBM, and in October 1997,
disposed of that line and consolidated that sector of its business with its
California operation. In October 1995, ISC formed a subsidiary, Novalog, Inc.
("Novalog"), to commercially exploit its low power chip technology. In April
1997, ISC formed a subsidiary, MicroSensors, Inc. ("MSI"), to commercially
exploit its technologies for low noise readout electronics and miniaturized
inertial sensors. In June 1998, ISC formed a subsidiary, Silicon Film
Technologies, Inc. ("Silicon Film"), formerly Imagek Inc. ("Imagek"), to
commercially exploit some of its digital photography technologies. As of October
3, 1999 ISC owned approximately 95%, 98% and 84% of the issued common stock of
Novalog, MSI and Silicon Film, respectively.
Novalog, Inc.
- -------------
Novalog is a subsidiary of ISC that designs, develops and sells proprietary
integrated circuits ("ICs") and related products for use in wireless infrared
communication. Novalog's initial products, trademarked SIRComm(TM), SIR2(TM),
MiniSIR(TM), MiniSIR2(TM) and BayBeamer(TM), enable infrared, line-of-sight data
transfer between computers, electronic organizers, printers, modems and other
electronic devices that have compatible ports. Novalog is an active participant
in the Infrared Data Association ("IrDA"), which establishes the hardware and
software protocols for such products. Novalog believes its products have
advantages in terms of power
2
consumption, dynamic range, size and economics as compared to the products of
its competitors. Novalog has shipped more than fifteen million units of its
products to manufacturers servicing the IrDA marketplace and, although there can
be no assurance, management anticipates growing demand for such products. In
fiscal 1999, Novalog accounted for approximately 61% of the Company's
consolidated revenues.
MicroSensors, Inc.
- ------------------
MSI is a subsidiary of ISC that was formed to develop and sell proprietary
micromachined sensors and related electronics. Micromachining involves the use
of semiconductor manufacturing processes to build electromechanical devices with
feature sizes measured in microns or fractions thereof. As prices have declined
for micromachined devices, such solid-state units have migrated from initial
aerospace and military applications to automotive, industrial process-control
and medical applications. MSI is developing a proprietary micromachined inertial
sensor, called the Silicon MicroRing Gyro(TM). MSI has demonstrated early
prototypes of this device and is presently seeking strategic partners to
facilitate its market introduction. In addition to inertial sensors, MSI intends
to offer Application Specific Integrated Circuits ("ASICs") designed to read out
micromachined sensors and other electronic systems. MSI is presently shipping
engineering samples of a proprietary Universal Capacitive Readout(TM)
("UCR"(TM)) ASIC product to potential customers. MSI has delivered limited
quantities of a multi-channel readout ASIC designed to the specifications of a
specific customer for potential use in airport x-ray security systems. MSI is
assisting this customer to evaluate whether it will order the MSI ASIC in
quantity, which is presently undetermined. The Company believes that there are
many uncertainties surrounding the development of MSI's business, including the
risk that large companies may be reluctant to purchase critical parts of the
nature that MSI is developing from a small company. This may be true even if MSI
succeeds in surmounting all of the developmental challenges it currently faces.
MSI accounted for approximately 2% of the Company's consolidated revenues in
fiscal 1999.
Silicon Film Technologies, Inc. (formerly Imagek, Inc.)
- -------------------------------------------------------
Silicon Film Technologies Inc. is a subsidiary of ISC, incorporated in Delaware
in June 1998. Silicon Film designs, develops and intends to sell proprietary
electronic film systems and other digital imaging products and services.
Silicon Film has developed and had manufactured pre-production quantities of a
proprietary digital photography system called "EFS"(TM) which includes a self-
contained, compact, battery-powered cartridge that fits into the film cavity of
a standard 35mm camera thus offering the flexibility to switch between
conventional film and digital photography. Silicon Film is presently evaluating
the pre-production units of the EFS to determine if it is ready to accept orders
for this product. Other collateral products and services are planned for
introduction by Silicon Film in the future. Silicon Film had no revenues in
fiscal 1999.
Subsidiaries' Capital Structure
- -------------------------------
The capital structure and ownership of ISC's subsidiaries vary depending on the
extent to which the subsidiaries have received equity financing from third-party
sources rather than ISC. After giving effect to the possible conversion of
issued and outstanding preferred stock into common stock, ISC's ownership of all
equity securities of Novalog, MSI and Silicon Film is approximately 95%, 98% and
64%, respectively. Giving full effect to the possible future exercise of
authorized or issued securities for which additional funds must be conveyed to
its subsidiaries to purchase equity interests, such as warrants and options,
ISC's future ownership of these subsidiaries would be approximately 64%, 54% and
49% for Novalog, MSI and Silicon Film, respectively. In October 1999, Silicon
Film entered into an agreement to potentially offer a significant percentage of
its equity ownership at a valuation roughly equivalent to or greater than that
it has achieved in prior private financings. Placement of this financing would
result in an additional approximate 11% dilution of Irvine Sensors' ownership
interests in Silicon Film. There is no assurance that Silicon Film will proceed
with this financing, which would require Irvine Sensors to agree to
contractually narrow its voting rights and business relations with Silicon Film.
In addition, the proposed financing contains provisions that would require
Silicon Film to repurchase the securities offered under certain circumstances
and also contains default and price protection provisions that could further
substantially dilute Irvine Sensors' ownership of Silicon Film under certain
circumstances. ISC believes that Silicon Film's placement agent will have
completed its due diligence by the first calendar quarter of 2000. ISC is
continuing to evaluate the proposed financing as well as other potential
financing alternatives.
Both Novalog and MSI have substantial intercompany debts payable to ISC. In the
event that these subsidiaries are successful in attracting third-party equity
financing, it is possible that ISC may be required or may elect to convert these
obligations into additional equity securities of these subsidiaries.
ISC was incorporated in Delaware in January 1988. Pursuant to a merger effective
in May 1988 with a corporation of the same name incorporated in California in
December 1974, the Company succeeded to all of the assets and liabilities of
such predecessor corporation. Its principal executive offices are located at
3001 Redhill Avenue, Building 3, Costa Mesa, California 92626, and its
telephone number is (714) 549-8211.
3
Novalog was incorporated in California in October 1995. Its principal executive
offices are located at 3001 Redhill Avenue, Building 4, Costa Mesa, California
92626, and its telephone number is (714) 429-1122. Novalog is a consolidated
subsidiary of ISC.
MSI was incorporated in Delaware in April 1997. Its principal executive offices
are located at 3001 Redhill Avenue, Building 3, Costa Mesa, California 92626,
and its telephone number is (714) 444-8831. MSI is a consolidated subsidiary of
ISC.
Silicon Film was incorporated in Delaware in June 1998. Its principal executive
offices are located at 16265 Laguna Canyon Road, Irvine, California 92618, and
its telephone number is (949) 417-2260. Silicon Film is a consolidated
subsidiary of ISC.
Products and Technology
- -----------------------
The Company has a wide variety of technologies that have been derived from its
early entry into the field of chip stacking. The Company is seeking to
commercially exploit many of these technologies through subsidiaries organized
to meet the needs of varying markets.
The Company's Novalog subsidiary has developed a Serial Infrared Communications
chip using elements of the Company's sensor chip design technology. This device
is being used in products in order to allow computers, computer peripherals and
hand-held portable electronics devices such as personal organizers, pagers and
cellular phones to communicate using infrared transmissions in a manner similar
to that used by remote control units for televisions and video cassette
recorders. Novalog has been shipping such devices since 1995.
The Company also has chip design technology relating to electronic readouts that
it is seeking to exploit through its MSI subsidiary. In fiscal 1998, MSI entered
into its first contractual relationship based on this technology, i.e., a
contract to develop and subsequently ship production quantities of a readout
chip for EG&G Astrophysics, Inc. ("EG&G") to be used in airport x-ray security
systems. MSI completed the development phase of EG&G's contract in fiscal 1998
and commenced limited production shipments under the contract in fiscal 1999.
EG&G is presently evaluating a redesign of their products, with MSI's
assistance. In fiscal 1999, MSI also introduced a Universal Capacitive Readout
(UCR) ASIC intended for use by manufacturers of micromachined products. MSI is
currently shipping samples of the UCR to various customers for evaluation. MSI
has also developed a proprietary inertial sensor, the Silicon MicroRing Gyro,
intended to provide an inexpensive means to measure angular motion for a wide
variety of potential applications. Prototypes of the Silicon MicroRing Gyro are
presently being demonstrated to potential customers and strategic partners. In
September 1999, a United States patent, assigned to MSI, was granted covering
the design of the Silicon MicroRing Gyro. The commercial exploitation, if any,
of the Silicon MicroRing Gyro is expected to be paced by product design-in lead
times of customers, principally Original Equipment Manufacturers ("OEMs"). As a
result, the Company does not project material contributions to its consolidated
revenue from this product during fiscal 2000. Furthermore, until potential
customers and strategic partners more fully evaluate the prototypes of the
Silicon MicroRing Gyro, the Company is not in a position to project when, or if,
material revenues will be realized from this product thereafter.
In June 1998, the Company formed its Silicon Film (formerly Imagek) subsidiary
to commercially explore some of its proprietary technologies related to
miniaturized digital cameras. Silicon Film has recently begun to offer an
initial product for sale, the EFS-1, and is developing additional products for
future introduction. Silicon Film believes that its proprietary EFS technology
has value advantages to potential customers with substantial investments in
conventional 35mm camera equipment that inhibits the use by those consumers of
self-contained digital cameras. By using the optics of existing cameras, Silicon
Film believes that the EFS product line will be economically competitive to
comparable resolution digital cameras. Market response to the EFS-1 will
determine the degree to which Silicon Film contributes to the consolidated
revenues of the Company in fiscal 2000. The Company believes, but cannot
assure, that this contribution could be material.
In addition to the products developed through its subsidiaries, the Company has
developed a family of standard products consisting of stacked chips, both
packaged and unpackaged, and believes that its chip stacking technology can
offer demonstrable benefits to designers of systems that incorporate numerous
integrated circuits, both memory and otherwise, by improving speed and reducing
size, weight and power usage. In addition, since ISC's technology reduces the
number of interconnections between chips, potential system failure points can
also decrease. However, the Company has only recently qualified some of its
stacked packaged chip products for volume production, and it did not realize
material revenues from these products in fiscal year 1999. The economic
attractiveness of the Company's stacked packaged chip products is highly
dependent on market pricing of competitive monolithic parts. The Company
believes, but cannot assure, that such market conditions will be favorable to
the Company's products at some time in fiscal year 2000, but because of the
uncertainty in such market conditions is not able to estimate whether its
stacked packaged chip products will make a material contribution to the
Company's consolidated revenues.
The Company believes that the features achievable with its chip stacking
technology will have application in space and in aircraft in which weight and
volume considerations are dominant, as well as in various other applications in
which portability is required and speed is important. The Company is seeking to
exploit its highest density chip stacking technology through the sale of funded
development and products to high end, high margin government and commercial
users to whom the technical improvement will be most valuable. While these
applications tend to require lower unit volume, the potential sales are at
significantly higher prices than
4
many applications requiring high volume production. Furthermore, the Company has
existing relationships with some of the potential customers in this market.
Since fiscal 1995, the Company has been shipping quantities of its stacked
unpackaged chip products, largely stacked memory, to customers for both
government and commercial purposes. However, there is no assurance that the
Company will be successful in marketing such products for widespread
applications. The Company also intends to continue to market infrared sensing
devices for surveillance, acquisition, tracking and interception applications
for a variety of Defense Department and NASA missions.
Customers' demand for enhanced performance of electronic systems has produced a
wide variety of competitors and competitive systems offering higher density
microelectronics ranging from various three-dimensional designs to highly dense
two-dimensional designs. Although some competitors are generally believed to be
better financed, more experienced and organizationally stronger, the Company is
not aware of any system in existence or under development that can stack chips
more densely than its three-dimensional approach. See "Competition."
The Company is not aware of any technical disadvantages to its chip stacking
technology. However, until high volume production is achieved, as to which there
is no assurance, the ultimate cost of products using the Company's higher
density chip stacking technology cannot be firmly established, and therefore,
this uncertainty potentially places some of the Company's stacked chip products
at a cost disadvantage. Accordingly, the Company expanded its product offerings
in 1998 to include lower-density stacked electronics that could be more price
competitive. Two U.S. patents have been allowed and others are pending covering
these latest additions to the Company's range of stacked chip product offerings.
Products employing these patented approaches have been qualified for potential
use by large manufacturers, and the Company is currently seeking production
orders for fiscal year 2000.
Potential Product Application
- -----------------------------
Neural Networks. In 1991, the Company received funding from the U.S. Navy's
Office of Naval Research for potential use of certain of its technology in
neural networks. After the successful completion of this phase 1 contract, the
Company received a $5,200,000 follow-on contract from the Navy in June 1993 and
an additional $1,700,000 add on in January 1997 to further develop the neural
networks technology. This phase of the contract was completed, and the Company
subsequently received approximately $1,900,000 in additional funding on two
related programs through fiscal 1999. The Company is presently pursuing
additional contracts under which it would deliver demonstration products to
various branches of the DOD. Neural networks contain large numbers of sensing
nodes which continuously interact with each other, similar to the way that the
neurons of a human brain interact to process sensory stimuli. Neural networks
are the subject of scientific inquiry because pattern recognition and learning
tasks, which humans perform well, and computers perform poorly, appear to be
dependent on such processing. Neither conventional computers nor advanced
parallel processors have the interconnectivity needed to emulate neural network
processing techniques. The Company believes its chip stacking technology offers
a way to achieve the very high levels of interconnectivity necessary to
construct an efficient artificial neural network. To the Company's knowledge,
there are no competitive packaging approaches that are presently available which
are believed to offer this potential. The full embodiment of its neural network
technology is not expected to yield near-term products for the Company, although
it is anticipated to keep the Company actively involved in advanced R&D relevant
to the Company's long-range business interests. However, elements of this
technology, including a proprietary chip set, are currently being developed with
a view to early product utilization.
Embedded Systems. In fiscal 1998, the Company commenced exploration of a
technology to stack chips of different functionality and dimensions within the
same chip stack, in effect creating a complete, miniaturized electronic system
that can be embedded in a higher-level product. The Company refers to this new
technology as "NeoStack." In fiscal 1999, a U.S. Patent was granted on the
Company's NeoStack technology. The Company has initially demonstrated its
NeoStack technology to support a government program to develop a wearable
computer. The Company is also using the NeoStack technology in the development
of a high-speed, removable optical storage system for Digital Versatile Disk
("DVD") systems. The Company believes, but cannot assure, that its NeoStack
approach will offer advantages in terms of compactness and power consumption to
developers of a wide variety of embedded computer and control systems. However,
the Company has not yet developed this technology to the point at which it can
make forecasts of potential revenue, if any, resulting from its licensing or
application by OEMs.
Development Contract
- --------------------
In April 1980, the Company entered into an agreement with R & D Leasing Ltd.,
("RDL"), a limited partnership in which the Company's Chairman of the Board and
a Senior Vice-President are general partners with beneficial interests, to
develop certain processes and technology related to chip stacking. The Company
has exclusively licensed this technology from RDL. The Company's exclusive
rights to the technology extend to all uses, both government and commercial.
Under this agreement, the Company has been accruing royalty obligations to RDL
at the rate of 3.5% of all Company revenues derived from the licensed
technology. In addition, RDL is entitled to receive an amount equal to 7% of
all royalties earned by the Company through the Company's sublicensees of the
licensed technology, although to date, no such sublicensee royalty income has
been earned.
5
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 by applying the deferred
royalties to the purchase at the exercise price of $1.00 per share. In
September 1999, the Company and RDL negotiated an extension of the subordination
and option exercise period through March 1999. If RDL exercises its option in
whole or in part, title to RDL's technology would transfer to the Company and
all further royalty obligations would cease. If the option expires unexercised,
the subordination provisions would terminate and the accrued royalties would be
due and payable in the same manner as any other corporate obligation.
At October 3, 1999, the Company has accrued $1,000,000 in deferred royalties
pursuant to a settlement agreement with RDL to limit total accrued royalties to
$1,000,000 through April 3, 2000, in conjunction with the six-month extension of
the subordination and option exercise period. No royalties were paid by the
Company during fiscal years 1999, 1998 and 1997. The Company believes that the
terms of these foregoing transactions were no less favorable to the Company than
would have been obtained from a non-affiliated third party for similar services.
Manufacturing
- -------------
The Company's subsidiaries use contract manufacturers to fabricate and assemble
their products. Novalog and MSI use semiconductor fabrication and related
manufacturing sources that are widely available worldwide. Silicon Film uses
product components that are also widely available with one exception. Silicon
Film uses imaging chips which are currently available from one supplier.
Silicon Film expects that additional sources of supply will become available for
this component in the future, but the continuity of its supply of this key
component may be at risk until that occurs.
The Company's ultra-high-density stacking technology involves a standard
manufacturing process which fabricates cubes comprising of approximately 50 die
layers along with ceramic cap and base substrates laminated with an extremely
thin adhesive layer and interconnected with a thin-film bus metalization to
bring the chip input/output signals out to the top surface of the stacks. The
cubes are then segmented or split into subsections as required for the
particular product configuration being built. Finally, the cubes, mini-cubes or
short stacks are burned in, tested, graded, kitted for packaging, out-sourced
for packaging and screening, and returned for final test. The Company's
facility is designed for low volume and prototype production of such parts.
During fiscal 1998, the Company introduced more cost competitive products
manufactured with current state of the art manufacturing technologies. The
Company uses outside third party qualified source vendors for the manufacturing
of these products.
The primary components of the Company's non-memory products are integrated
circuits and infrared detectors. The integrated circuits are designed by the
Company for manufacture by others from silicon wafers and other materials
readily available from multiple sources. Due to the ready availability of these
materials, the Company does not have any special arrangements with suppliers for
their purchase. The Company does not produce detectors. However, the Company
has developed a process, which enables it to use relatively low cost, and
unsophisticated detectors which are generally available from numerous sources.
Because of the nature of the sophisticated research and development work
performed under its development contracts, the Company designs and assembles
equipment for testing and prototype development. The Company uses the unique
capability of this equipment to seek, qualify for and perform additional
contract research and development for its customers.
Backlog
- -------
At December 15, 1999, the Company's funded backlog was $3,041,600 compared to
$3,468,600 at December 13, 1998. The Company anticipates that all of the funded
backlog will be filled in fiscal 2000. In addition, the Company has unfunded
backlog on contracts which typically are funded when the previously funded
amounts have been expended. The Company is also continuing to negotiate for
additional research contracts and commercial product sales, which, if obtained,
could materially increase its backlog. Failure to obtain these contracts in a
timely manner could materially affect the Company's short-term results.
Customers and Marketing
- -----------------------
The Company's Advanced Technology Division ("ATD") focuses its marketing efforts
primarily on U.S. military agencies or contractors to those agencies. The
Company is continually seeking and preparing proposals for additional contracts.
The Company also develops potential non-military uses of its technology. As a
result of the post cold-war defense cutbacks, many defense contractors have
experienced declines in their business base as government agencies' budgets are
reduced. However, even if this trend continues, the Company believes that there
will be more emphasis and funds directed to advanced technology systems and
research programs for which the Company believes it is qualified to compete.
However, there can be no assurances that the Company will be successful in
competing against the larger defense contractors for potential programs.
The Company's Novalog subsidiary supports Original Equipment Manufacturers
("OEM's") supplying infrared communications devices complying with the standards
of the Infrared Data Association ("IrDA"). The Company believes that Novalog's
active participation in IrDA facilitates its marketing to those customers.
6
MSI directs its marketing toward three commercial areas: (i) Customers with a
need for Application Specific Integrated Circuits such as the type developed for
EG&G; (ii) OEMs that have a need for the cost and performance features that
could be provided by MSI's Silicon MicroRing Gyro, with particular emphasis
toward manufacturers of electronic toys and games, industrial monitoring
equipment, medical instrumentation and automotive markets; and (iii) the
manufacturers of micromachined sensors who may be able to utilize MSI's
Universal Capacitive Readout (UCR) general purpose ASIC designed to support a
variety of sensors requiring high accuracy capacitive readout and control
electronics.
Silicon Film is a consumer product-focused enterprise. Both the structure and
staffing of Silicon Film was developed to bring digital imaging products to the
consumer market. The initial product of Silicon Film, the Electronic Film System
(EFS) is designed to enable 35mm camera owners to shoot digital or traditional
photography with equipment they currently own. The initial target market, termed
"prosumers" are defined as high end hobbyists and business photographers who
have made a significant investment in their camera system. The EFS is being
positioned as a camera accessory, leveraging off the growing adoption of digital
cameras and their growing infrastructure.
Pre-production units of the initial EFS-1 product have been manufactured, and
Silicon Film is currently evaluating these units to determine when to accept
general orders for this product. Silicon Film presently forecasts general
availability of the EFS-1 for consumer sale in the first calendar quarter of
2000. Silicon Film plans its product roll out of the EFS-1 to be through direct
follow-up of inquiries from potential customers it has previously received.
Silicon Film expects to follow this initial roll out with an expansion of
distribution, reseller channels and value-added resellers for broad and vertical
markets through strategic OEM relationships with camera and film companies.
Silicon Film plans to service its customers with an electronic commerce site and
contracted customer service and support facilities.
In fiscal 1999, contracts with all branches of the U.S. government and second-
tier government contracts with prime government contractors accounted for 18
percent and 19 percent, respectively, of the Company's consolidated revenues;
the remaining 63 percent of the Company's consolidated revenues was derived from
non-government sources. During fiscal 1999, revenues derived from 3Com, Citizen
Electronics, and the U.S. Army accounted for approximately 25 percent, 21
percent and 10 percent of total consolidated revenues, respectively. Loss of
these customers would have a material adverse impact on the Company's short-term
consolidated results.
Contracts with government agencies may be suspended or terminated by the
government at any time, subject to certain conditions. Similar termination
provisions are typically included in agreements with prime contractors. There is
no assurance the Company will not experience suspensions or terminations in the
future.
The Company focuses its marketing in specific areas of interest in order to best
use its relatively limited marketing resources. Each operating unit or
subsidiary has a designated individual to direct that unit's marketing efforts.
Competition
- -----------
The demand for high performance semiconductors has produced a wide variety of
competitors and competitive systems, ranging from various three-dimensional
designs to highly dense two-dimensional designs. For most commercial
applications, the principal competitive factor for such products is the cost
premium over less densely packaged electronics. For some applications in which
volume and weight are critical, such as space or avionics, density becomes the
principal competitive factor. Many of the Company's competitors are believed to
be better financed, more experienced and organizationally stronger than the
Company. Accordingly, there can be no assurances that the Company can
successfully compete in such markets.
The Company is aware of three large companies that have developed or acquired
competing approaches to chip stacking. They are Texas Instruments, Inc. (TI),
Thompson CSF (Thompson) and Vertical Circuits, Inc. (VCI), a newly formed
subsidiary of TRW Inc. In addition, there are several small companies and
divisions of large companies that have various technologies for stacking a
limited number of chips.
The Company is aware of many companies, which are currently servicing the
military market for electro-optical sensors of the type which the Company's
products are also designed to support. The principal competitive factor in this
business area is the performance sensitivity and selectivity achievable by
alternative sensor approaches and designs. Competitors to the Company include
TI, Lockheed Martin Corporation, Raytheon, Litton Industries, Infrared
Industries, Inc., EG&G Judson, OptoElectronics-Textron, Inc. and Boeing
Corporation. The Company believes that most of its competitors in this area have
financial, labor and capital resources greater than those of the Company, and
there is no assurance that the Company will be able to compete successfully.
The Company is aware of several companies that currently service the market for
serial infrared detectors of the type sold by Novalog. For battery-powered
applications, the principal competitive factors are power consumption and cost.
For desktop and related applications, the principal competitive factor is the
speed of data transmission achievable. Novalog believes it has competitive
advantages in the battery-powered applications. Competitors to Novalog in this
sector include Hewlett-Packard, Temic-Vishay and
7
Siemons Infenion, among others, all of whom have financial, labor and capital
resources greater than those of Novalog. Although Novalog is currently
experiencing material revenues in competition with such companies, its ability
to protect or expand its market share in the future is not assured.
MSI is competing in a market populated with several larger competitors relating
to its Silicon MicroRing Gyro, including such companies as Delco Electronics,
Motorola, Bosch Corporation, Siemans and Systron-Donner. The principal
competitive factor for these applications is believed to be cost. MSI has no
present knowledge of competitors planning to introduce ASICs competitive to its
UCR product, but given the widespread availability of integrated circuit design
capabilities in the electronics industry, the emergence of competitive products
is believed to be likely.
Silicon Film is not aware of any direct competitors to its EFS product and
believes that its intellectual property will act as a barrier to competitors
seeking to offer identical products, although there can be no assurance of that
result. However, the EFS systems itself is expected to face competition from
increasingly sophisticated generations of digital camera equipment. Peripheral
equipment and services which Silicon Film intends to offer to complement its EFS
products are also likely to attract strong competition if the EFS product line
receives significant market acceptance.
Research and Development
- ------------------------
The Company believes government and commercial research contracts will provide
the major portion of funding necessary for continuing development of some of its
products. However, the manufacture of stacked circuitry modules in volume will
require substantial additional funds, which may involve additional equity or
debt financing or a joint venture, license or other arrangement. Furthermore,
the development of some of the products of its subsidiaries is likely to
require external funding. There can be no assurance that sufficient funding
will be available from government or other sources or that new products of the
Company of its subsidiaries will be successfully developed for volume
production.
The Company's expenditures for research and development for the fiscal years
ended October 3, 1999, September 27, 1998, and September 28, 1997 were
$5,528,000, $4,128,400 and $1,616,600, respectively. These expenditures of
Company funds were in addition to the Company's cost of revenues associated with
its customer-sponsored research and development activities. The spending levels
of Company funds on research and development compared to its overall expenses
are indicative of the Company's resolve to maintain its competitive advantage by
developing new products and improving upon its existing technology.
The Company has funded its research and development activities primarily through
contracts with the federal government and with funds from the Company's public
and private stock and bond offerings.
Patents, Trademarks and Licenses
- --------------------------------
The Company has a policy of protecting its investment in technology by seeking
to obtain, where practical, patents on the inventions made by its employees. As
of October 3, 1999, 53 U.S. and foreign patents have been issued and other U.S.
and foreign patent applications are pending. Foreign patent applications
corresponding to several of the U.S. patents and patent applications are also
pending. There is no assurance that additional patents will issue in the U.S.
or elsewhere. Moreover, the issuance of a patent does not carry any assurance
of successful application, commercial success or adequate protection. There is
no assurance that the Company's existing patents or any other patent that may
issue in the future would be upheld if the Company seeks enforcement of its
patent rights against an infringer or that the Company will have sufficient
resources to prosecute its rights, nor is there any assurance that patents will
provide meaningful protection from competition.
The Company has been advised by its patent counsel, Thomas Plante, Esq., that no
adverse patent has been found which might create an infringement problem in the
marketing of the Company's products. If others were to assert that the Company
is using technology covered by patents held by them, the Company would evaluate
the necessity and desirability of seeking a license from the patent holder.
There is no assurance that the Company is not infringing on other patents or
that it could obtain a license if it were so infringing.
Those products and improvements that the Company develops under government
contracts are generally subject to royalty-free use by the government for
government applications. However, the Company has negotiated certain "non-
space" exclusions in government contracts and has the right to file for patent
protection on commercial products which may result from government-funded
research and development activities.
The Company has exclusive rights to technology developed under an agreement with
R & D Leasing, Ltd. ("RDL"), a limited partnership. Under the agreement, the
Company will pay royalties of 3.5% of all direct sales by the Company, of the
basic devices using the technology. RDL will also receive 7% of all income
earned by the Company from sublicensees. The Company's Chairman of the Board
and its Senior Vice-President and Chief Technical Officer have a beneficial
interest in RDL. See "Development Contracts."
8
Silicon Film has exclusive world-wide rights to the technology developed in
conjunction with a licensing agreement between the Company and I. Sapir, a
foreign individual, who is now an employee of Silicon Film. Under this
agreement, the Company issued 30,000 shares of its common stock to Mr. Sapir.
Silicon Film has assumed the royalty obligations of this licensing agreement,
which consist of a 1.5% royalty on products incorporating the licensed
technology. This licensing agreement was executed in October 1997 and amended in
March 1999. In 1999, Silicon Film filed ten additional patent applications
relating to the proprietary methods and designs of its products.
The Company has entered into an assignment of patent and intellectual rights
agreement with F.L. Eide, a Vice-President of the Company. As part of an
employment agreement, Mr. Eide assigned to the Company all rights and interests
to five U.S. Provisional Patent Applications owned by him. In consideration for
this assignment, Mr. Eide will receive a 1% royalty on the gross sales revenues
of any products incorporating the technology of these patent assignments for the
lifetime of these patents. This agreement was executed in February 1998.
The Company entered into a sale and licensing of intellectual property rights
related to the EFS to Advanced Technology Products, LLC ("ATPL"), a related
party which funded early development of this technology, for which the Company's
Senior Vice President and Chief Technical Officer serves as Managing Member. In
September 1998, the Company assigned the rights and future royalty obligations
of the ATPL license to Silicon Film. Concurrent with this assignment, ATPL
reduced its royalty entitlements under the license in consideration for the
issuance of 1,222,125 shares of Silicon Film common stock. ATPL retains a
royalty entitlement of 2% of the first $30 million of EFS sales, declining
thereafter as a function of sales volume.
Environmental Matters
- ---------------------
The Company believes that it is substantially in compliance with all regulations
concerning the discharge of materials into the environment, and such regulations
have not had a material effect on the capital expenditures or operations of the
Company.
Employees
- ---------
As of October 3, 1999, the Company, including its consolidated subsidiaries, had
91 full-time employees and 10 consultants. Of the full-time employees, 66 were
engaged in engineering, production and technical support, 8 in sales and
marketing and 17 in finance and administration. None of the Company's employees
is represented by a labor union, and the Company has experienced no work
stoppages due to labor problems. The Company considers its employee relations to
be excellent.
The Year 2000
- -------------
The year 2000 issue is the result of computer programs using two digits, rather
than four to define the applicable year. Programs that have time-sensitive
software may recognize a date using "00" as the calendar year 1900 rather than
the calendar year 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The Company views the year 2000 problem as an important business issue that
could affect its business, as well as that of its suppliers and customers. Until
the last several years, the Company's business has primarily been R&D, and its
more recent business activities have not involved the shipment of products or
components with embedded controllers that might be affected by the Year 2000
problem. However, Irvine Sensors customers may have integrated the Company's
devices into higher level products or systems affected by the Year 2000 problem,
and, to the extent that its customers' business may be disrupted, the Company's
business and that of its subsidiaries is also subject to potential disruptions
from such a cause. The Company does not have sufficient access to higher-level
designs of its customers' products to be able to definitively assess this risk,
but does not currently view this risk to be high.
In addition, the Company does utilize a number of computerized information
systems to accurately process date-sensitive information across its operation,
and any of these programs or computer systems is a potential source of year 2000
system failures. Irvine Sensors has worked to identify and resolve such
potential impacts on the Company's computerized systems. The Company has been
advised by its vendors that their systems are compliant with year 2000 issues.
Finally, the Company's general business operations could be adversely impacted
were there to be material interruptions either in the country's banking or
financial systems or the procurement activities of its customers. The Company
currently believes that costs of addressing these issues will not have a
material adverse impact on the Company's financial position. Nevertheless, if
Irvine Sensors and third parties upon which it relies are unable to address this
issue in a timely manner, it could result in a material financial risk to the
Company. In order to mitigate the various risks associated with the Year 2000
problem, Irvine Sensors continues to work with its suppliers and customers,
including the disclosure and exchange of relevant information, to proactively
manage the calendar transition. The Company does not have a formal contingency
plan should these preparations prove inadequate.
9
Factors that may affect Future Results
- --------------------------------------
The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this annual report on Form 10-K and in other public
disclosures of the Company.
Shift in Business Focus. Since commencing operations, ISC has developed
technology, principally under government research contracts, for various
defense-based applications. Since 1992, ISC has been implementing a fundamental
shift in its business, broadening its focus to include commercial exploitation
of its technology. This shift has been manifested by the purchase and later shut
down of the IBM cubing line, the "carve-out" of the Novalog, MSI and Silicon
Film subsidiaries and the development of various stacked-memory products
intended for military and aerospace markets. To date, these changes have
developed new revenue sources but have not yet produced sustained consolidated
profitability. Because of this limited and not-yet successful history, there can
be no assurances that ISC's present and contemplated future products will be
widely accepted in commercial marketplaces.
Financing Needs. Although the Company believes that it has adequate liquidity
for its core level of operations, ISC and its subsidiaries have developed
business plans for several emerging product areas based on its technologies. The
product development and market introduction costs of these products cannot
presently be fully funded from internal cash flow. There can be no assurances
that ISC or its subsidiaries will be able to locate external financing for their
business plans on acceptable terms.
Nasdaq Listing Requirements. ISC's Common Stock is publicly traded on the Nasdaq
SmallCap Market. Effective February 23, 1998, new and more restrictive standards
became effective for listing maintenance on this market. Prior to the
implementation of these new regulations, ISC briefly dropped below the pending
standards due to the loss associated with its Vermont plant closure and had to
establish to the satisfaction of the Nasdaq staff that it had met the new
standards in order to retain its listing. While the Company was able to meet
this requirement, there can be no assurances that the Company will be able to
maintain its compliance in the future. In the foreseeable future, the Company
must meet at least one of the two following standards to maintain its Nasdaq
listing; (i) maintenance of its tangible net worth at $2 million or greater, or
(ii) maintenance of a market capitalization figure in excess of $35 million as
measured by market prices for trades executed on Nasdaq. While the Company
presently has a market cap substantially in excess of the $35 million Nasdaq
standard, its tangible net worth is slightly below $2 million. Furthermore, the
consolidated losses resulting from the development expenses of some of its
subsidiaries will continue to erode its tangible net worth for at least a
portion of fiscal 2000. In that instance and absent additional equity financing,
which cannot be guaranteed, the Company would be subject to market price risks
for the maintenance of its Nasdaq listing. If ISC were to fail to meet the
maintenance requirements for listing on Nasdaq in the future and the price of
ISC's Common Stock was below $5 at such time, such securities would come within
the definition of "penny stock" as defined in the Securities Exchange Act of
1934, as amended (the "Exchange Act") and be covered by Rule 15g-9 of the
Exchange Act. That Rule imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors. From transactions covered by Rule 15g-9, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Consequently, Rule 15g-9, if it were to become applicable, would affect
the ability or willingness of broker-dealers to sell ISC's securities and
therefore would affect the ability of shareholders to sell their securities in
the public market and the Company's ability to finance its business plans.
Equity Capital Structure. At October 3, 1999, the Company had 35,035,100 common
shares issued and outstanding. The common shares reserved for issuance pursuant
to existing preferred stock conversion rights, royalty conversion agreements and
outstanding warrants and options have essentially depleted the balance of the
Company's authorized capital structure of 40,000,000 common shares. Although the
Company has authorized preferred stock which is presently unissued and
unreserved, without an increase in its authorized common shares, the Company
will be severely hampered in seeking equity financing in the future. Since the
Company does not presently have sources of significant debt financing,
unavailability of equity financing could impair the Company's ability to finance
its future business plans or those of its present or future subsidiaries or its
ability to respond to unforeseen circumstances. There can be no assurances that
the Company's stockholders will authorize an increase in the Company's
authorized common shares.
Third-Party Financing of Subsidiaries. The financing of the Company's Novalog
and Silicon Film subsidiaries to date have involved significant sales of
minority equity interests. The Company has repurchased a substantial portion of
the minority equity interests of Novalog, but does not now have sufficient
discretionary capital to continue this practice with respect to Novalog or any
other subsidiary or to adequately finance the future business plans of any of
its subsidiaries. The Company's subsidiaries are seeking to sell additional
equity interests to finance at least some portion of their business plans. The
Company's ability to enjoy the benefits of any potential increase in value on
the part of its subsidiaries can be greatly reduced by third-party financings.
This is true both because of reduced equity interests in the subsidiaries and
because the Company's control of its subsidiaries is lessened or eliminated.
Significant third-party investment in the Company's subsidiaries will likely
result in third-party investors receiving subsidiary board representation and/or
protective covenants that could result in the Company losing voting control of
its
10
subsidiaries. In the case of Silicon Film, it presently has an investment
banking relationship seeking significant third-party financing involving such
features plus additional investor protection. If approved by the Company and
subsequently consummated, this financing would reduce the Company's ownership
interest in Silicon Film to slightly above 50% after the placement of the
financing and to slightly below 40% after the fully-dilutive effect of warrants
and options. Additional dilution could be experienced due to default or price
anti-dilution provisions or a subsequent IPO. In certain circumstances, it is
possible that we or our subsidiaries could experience very substantial
transactions costs or "break-up" fees in connection with efforts to obtain
financing. Third-party financings of subsidiaries will inherently complicate our
fiduciary and contractual obligations and could leave us more vulnerable to
potential future litigation. The outcome of litigation is inherently
unpredictable, and even the costs of prosecution could have a materially adverse
effect on our results of operations.
Dependence on Defense Contract Revenues. Although ISC has been shifting its
focus to include commercial exploitation of its technology, it expects to
continue to be dependent upon research and development contracts with federal
agencies and their contractors for a substantial, but diminishing portion of its
revenues for the foreseeable future. General political and economic conditions,
which cannot be accurately predicted, directly and indirectly affect the
quantity and allocation of expenditures by federal agencies. Even the timing of
incremental funding commitments to existing, but partially-funded contracts can
be affected by such factors. Therefore, cutbacks in the federal budget could
have a material adverse impact on ISC's results of operations as long as
research and development contracts remain an important element of its business.
Market Acceptance of New Products. Both ISC and its subsidiaries are focused on
markets that are emerging in nature and potentially subject to rapid growth.
Market reaction to new products in such circumstances can be difficult to
predict. There can be no assurance that the present or future products of ISC or
its subsidiaries will be favorably accepted by such markets on a sustained
basis. In addition, because ISC has a limited history of competing in the
intensely competitive commercial electronics industry, there is no assurance
that it will successfully be able to develop, manufacture and market additional
commercial product lines or that such product lines will be accepted in the
commercial marketplace.
Patents and Proprietary Right Protection; Infringement. ISC believes that its
ultimate success, and that of its subsidiaries, will depend, in part, on the
strength of its existing patent protection and the additional patent protection
that it and its subsidiaries may acquire in the future. As of the date hereof,
ISC owns 44 U.S. patents and 8 foreign patents and has other patent applications
pending before the U.S. Patent and Trademark Office as well as various foreign
jurisdictions. Although ISC believes many of these patents to be fundamental in
nature, there can be no assurance that any existing or future patents will
survive a challenge or will otherwise provide meaningful protection from
competition. Furthermore, there is also no assurance that ISC or its
subsidiaries will have the financial resources to provide vigorous defense or
enforcement of patents.
Protection of Proprietary Information. ISC and its subsidiaries treat technical
data as confidential and rely on internal nondisclosure safeguards, including
confidentiality agreements with employees, and on laws protecting trade secrets,
to protect proprietary information. There can be no assurance that these
measures will adequately protect the confidentiality of the proprietary
information of ISC or its subsidiaries or that others will not independently
develop products or technology that are equivalent or superior to those of ISC
or its subsidiaries. ISC or its subsidiaries may receive in the future
communications from third parties asserting that the products of ISC or its
subsidiaries infringe the proprietary rights of third parties. There can be no
assurance that any such claims would not result in protracted and costly
litigation. There can be no assurance that any particular aspect of the
technology owned by ISC or its subsidiaries will not be found to infringe the
products of other companies. Other companies may hold or obtain patents or
inventions or may otherwise claim proprietary rights to technology useful or
necessary to ISC's or its subsidiaries' business. The extent to which ISC or its
subsidiaries may be required to seek licenses under such proprietary rights of
third parties and the cost or availability of such license, cannot be predicted.
While it may be necessary or desirable in the future to obtain licenses relating
to one or more of its proposed products or relating to current or future
technologies, there can be no assurance that ISC or its subsidiaries will be
able to do so on commercially reasonable terms.
Government Rights. Whatever degree of protection, if any, is afforded ISC or its
subsidiaries through its patents, proprietary information and other intellectual
property, this protection will not extend to government markets that utilize
certain segments of ISC's technology. The government has the right to
royalty-free use of technologies that ISC has developed under government
contracts, including portions of ISC's stacked circuitry technology. ISC is free
to commercially exploit such government-funded technologies and may assert its
intellectual property rights to seek to block other non-government users
thereof, but there can be no assurances of success in such endeavors.
Competition. ISC and its subsidiaries face strong competition. Most competitors
have considerably greater financial, marketing and technological resources than
does ISC or its subsidiaries. There is no assurance that ISC or its subsidiaries
will be able to compete successfully with such other companies.
11
Dependence on Suppliers. ISC and its subsidiaries extensively use suppliers in
the manufacture of their products. At the projected level of operations, both
ISC and its subsidiaries have identified sources that are believed to be
adequate to meet identified needs. However, there is no assurance that ISC or
its subsidiaries will be able to cover changing manufacturing needs in the
future. Failure to do so will have a material adverse impact on the operations
of ISC and its subsidiaries.
Possible Technological Advances. ISC and its subsidiaries are in industries
characterized by continuing technological development and, accordingly, will be
required to devote substantial resources to improve already technologically
complex products. Many companies in these industries devote considerably greater
resources to research and development than does ISC or its subsidiaries.
Developments by any of these companies could have a materially adverse effect on
ISC.
Dependence on Key Personnel. ISC and its subsidiaries will depend to a large
extent on the abilities and continued participation of certain key employees.
The loss of key employees could have a material adverse effect on the businesses
of ISC and its subsidiaries. ISC and its subsidiaries have adopted employee
Stock Option Plans designed to attract and retain key employees. The value of
such options to the subsidiaries will be strongly tied to the timing of any
future IPOs, of which there can be no assurance, and there can, accordingly, be
no guarantee of the efficacy of such options in retaining key employees. Neither
ISC or its subsidiaries presently maintain "key man" insurance on any key
employees although Silicon Film is planning to secure such insurance on its
Chief Executive Officer. ISC believes that, as its activities and those of its
subsidiaries increase and change in character, additional, experienced personnel
will be required to implement the business plans of ISC and its subsidiaries.
Competition for such personnel is intense and there is no assurance that they
will be available when required, or that ISC or its subsidiaries will have the
ability to attract them.
The above factors are not intended to be inclusive. Failure to satisfactorily
achieve any of the Company's objectives or avoid any of the above or other risks
would likely have a material adverse effect on the Company's business and
results of operations.
12
Item 2. Properties
The following table sets forth information with respect to the Company's
facilities:
Square Monthly
Location Feet Rent Lease Expiration
-------- ------ ------- ----------------
ISC(1) Costa Mesa, CA 30,339 $32,300 September 2001
Silicon Film Technologies, Inc. Irvine, CA 10,300 7,725 May 2004
------ -------
Total 40,639 $40,025
====== =======
- ------------
(1) Includes facilities for ISC corporate headquarters, ATD, MPD, MSI and
Novalog.
The facilities used by Advanced Technology Division include laboratories
containing clean rooms for operations requiring a working environment with
reduced atmospheric particles. The Company believes that its facilities are
adequate for their respective operations, and that the facilities of the Company
are maintained in good repair.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- --------
James D. Evert 57 President, Chief Executive Officer and a Director
John C. Carson 61 Senior Vice President, Chief Technical Officer and a Director
John J. Stuart, Jr. 60 Senior Vice President, Chief Financial Officer and Treasurer
Floyd L. Eide 63 Vice President and General Manager - MicroElectronics Division
Mr. Evert has been President, Chief Executive Officer and a director of ISC
since February 1997. He also serves in those capacities for Novalog since
February 1997 and as a director of MSI since October 1997 and a director of
Silicon Film since August 1998. Prior to joining ISC, Mr. Evert was an
independent management consultant. In that role from December 1993 until January
1995, he assisted Fujitsu Microelectronics, Inc. in the formation of a graphics
product subsidiary and subsequently served as Vice-President of that unit from
January 1995 to February 1996. Mr. Evert is a graduate of Syracuse University
with a B.S. degree in Electrical Engineering.
Mr. Carson is a co-founder of ISC and has served as a Senior Vice President
since its inception in 1974 and a director since April 1982. He was elected
Chief Technical Officer in February 1997. Mr. Carson also serves as a director
of MSI (since October 1997). Mr. Carson has been awarded 15 patents for smart
sensors, 3D packaging and single processing architectures, including neural
networks. Mr. Carson holds a B S. in Physics from the Massachusetts Institute of
Technology.
Mr. Stuart joined ISC in January 1983 as its Manager of Special Projects and
Communications, became ISC's Chief Financial Officer and Treasurer in July 1985,
and a Vice President in June 1995. He relinquished the position of Treasurer in
February 1995. Effective October 1998, Mr. Stuart re-assumed the position of
Treasurer in addition to his other responsibilities. Mr. Stuart is also a member
of the Board of Directors and is Vice President of Finance and Chief Financial
Officer of both Novalog (since October 1995) and MSI (since October 1997). He
also acted as Chief Financial Officer of Silicon Film since its organization in
August 1998 until May 1999. Mr. Stuart holds a B.S. in Industrial Management
from the Massachusetts Institute of Technology.
Mr. Eide joined ISC in August 1997 as Vice President and General Manager -
MicroElectronics Division. From November 1987 to August 1997, Mr. Eide was Chief
Operating Officer and Vice President, Engineering of Dense-Pac Microsystems Inc.
He is a graduate of Fairleigh Dickenson University with a M.S. in Solid State
Physics and a B.S. in Physics.
14
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth the range of representative high and low
bid prices of the Company's Common Stock (Nasdaq SmallCap Market symbol: IRSN)
in the over-the-counter market for the periods indicated, as furnished by NASD,
Inc. These prices represent prices among dealers, do not include retail markups,
markdowns or commissions, and may not represent actual transactions:
Common Stock
Bid Prices
High Low
---- ---
Fiscal Year Ended October 3, 1999:
First Quarter $1 15/16 $1 13/32
Second Quarter $1 21/32 $1 5/16
Third Quarter $2 $1 7/16
Fourth Quarter $1 27/32 $1 7/32
Fiscal Year Ended September 27, 1998:
First Quarter $1 1/32 $1
Second Quarter $2 21/32 $2 19/32
Third Quarter $2 1/32 $2
Fourth Quarter $2 29/32 $1 11/32
On December 22, 1999, the closing bid and asked prices for the Company's Common
Stock on the Nasdaq SmallCap Market were $2 1/8 and $2 3/32 respectively.
On December 22, 1999, there were approximately 885 stockholders of record and
approximately 9,500 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.
15
Item 6. Selected Financial Data
The following table summarizes certain selected consolidated financial data and
is qualified by the more detailed Consolidated Financial Statements incorporated
herein by reference (see Item 8, below):
Fiscal Year Ended
-----------------
October 3, September 27, September 28, September 29, October 1,
1999 1998 1997 1996 1995
Consolidated Statement of Operations Data:
- ------------------------------------------
Total revenues $11,100,200 $ 9,314,500 $ 13,693,200 $ 12,024,200 $ 8,041,400
Loss from operations (9,785,700) (5,798,200) (14,809,200) (11,154,700) (3,071,500)
Net loss (9,115,700) (4,243,500) (14,875,600) (15,914,700) (4,137,500)
Basic and diluted net loss per common
and common equivalent share $ (0.29) $ (0.19) $ (0.73) $(0.94) $(0.28)
Weighted average number of
shares outstanding 31,244,300 24,597,700 20,475,100 16,874,300 14,966,500
Shares used in computing
net loss per share 31,244,300 24,597,700 20,475,100 16,874,300 14,966,500
Loss per common and common equivalent shares includes, where applicable,
cumulative and imputed dividends on Preferred Stock which have not been declared
or paid.
October 3, September 27, September 28, September 29, October 1,
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
- ---------------------------------
Current assets $ 6,640,850 $4,802,700 $ 6,637,200 $ 9,648,200 $ 9,927,500
Current liabilities $ 5,375,300 $2,296,000 $ 7,395,600 $ 5,787,100 $ 3,545,400
Working capital (deficit) $ 1,265,550 $2,506,700 $ (758,400) $ 3,861,100 $ 6,382,100
Total assets $10,510,350 $7,064,700 $ 9,449,300 $21,742,200 $15,609,200
Long-term debt $ 433,200 $ 933,700 $ 1,207,000 $ 3,165,600 $ 201,200
Shareholders' equity (deficit) $ 2,212,650 $2,347,000 $(2,939,900) $ 8,312,700 $ 9,494,100
16
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operation
------------------------
The information required by Item 7 of this report is set forth on pages 2
through 4 of the Company's 1999 Annual Report to Stockholders and is
incorporated by reference in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
None.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements, together with the reports thereon of Grant Thornton
LLP, dated December 21, 1999 and PricewaterhouseCoopers LLP, dated December 16,
1997, appearing on pages 5 through 22 of the Company's 1999 Annual Report to
Stockholders are incorporated by reference to this Annual Report on Form 10-K.
With the exception of the aforementioned information and the information
incorporated in Item 7, the 1999 Annual Report to Stockholders is not deemed to
be filed as part of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
On October 1,1998, the Company dismissed PricewaterhouseCoopers LLP as its
independent accountants effective as of the Company's fiscal year ended
September 27,1998. The Registrant's Audit Committee participated in and approved
the decision to change independent accountants. On October 1, 1998, the Company
selected Grant Thornton LLP to act as its independent accountants effective as
of the company's fiscal year ended September 27,1998. At the Company's Annual
Meeting of February 26, 1999, shareholders approved the selection of Grant
Thornton LLP to act as its independent accountants for the fiscal year ended
October 3, 1999.
PART III
---------
The following items included in the Company's Definitive Proxy Statement dated
January 25, 1999 to be used in connection with the Company's Annual Meeting of
Stockholders to be held on February 26, 1999 are incorporated herein by
reference:
Pages in Proxy
-----------------
Item 10. Directors and Executive Officers of the Registrant 2-5
Item 11. Executive Compensation 7-10
Item 12 Security Ownership of Certain Beneficial Owners and Management 7-8
Item 13. Certain Relationships and Related Transactions 15
17
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
Pages in
Annual Report*
--------------
Consolidated Balance Sheets 5
Consolidated Statements of Operations 6
Consolidated Statement of Shareholders' Equity (Deficit) 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9-21
Reports of Independent Certified Public Accountants 22
* Incorporated by reference from the indicated pages
of the 1999 Annual Report to Stockholders.
2. Financial Statement Schedule:
Reports of Independent Certified Public Accountants on Financial
Statement Schedules
Schedule for the fiscal years ended October 3, 1999, September 27,
1998, and September 28, 1997.
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable, or not required, or because the required information
is included in the financial statements or notes thereto which
have been incorporated herein by reference.
3. Exhibits - The following is a list of the exhibits encompassed in
this report:
Exhibit
Number Exhibit Description
------ -------------------
3.1 Certificate of Incorporation of the Registrant, as amended and
currently in effect (1)
3.2 Certificate of Designation of Preferences of Series D Convertible
Preferred Stock (2)
3.3 By-laws, as amended to date (3)
4.1 Specimen Common Stock certificate (1)
5.1 Opinion of Grover T. Wickersham, P.C.re legality (4)
10.1 Lease Agreement for the premises at 3001 Redhill Avenue, Building
III, Costa Mesa, California (5)
10.2.1 Employee Stock Bonus Plan and Trust Agreement dated June 29, 1982
effective December 31,1982 (6)
10.2.2 Amendment to Employee Stock Bonus Plan and Trust Agreement dated
December 14, 1982 (7 )
10.2.3 Amendment to Employee Stock Bonus Plan and Trust Agreement dated
September 25, 1990 (1)
10.2.4 Master Trust Agreement for Employee Deferred Benefit Plans dated
August 22, 1990 (8)
10.2.5 Amendment to Employee Stock Bonus Plan and Trust Agreement dated
October 4, 1993 (9)
10.3 Agreement with R&D Leasing, Ltd. and Note Payable dated June 23,
1989 (10)
10.4 License Agreement with R&D Leasing, Ltd. dated October 20, 1989
(10)
10.5 Agreement with R&D Leasing, Ltd. dated October 1, 1990 (11)
10.6 1991 Stock Option Plan (12)
10.7 1995 Stock Option Plan (13)
10.8 Contract between the Company and NASA Management Office - JPL dated
March 12, 1996 (3)
10.9 Contract between the Company and Wright-Patterson Air Force Base
dated August 12, 1996 (3)
10.10 Contract #DAAH01-9B-C-R075 with U.S. Army Aviation and Missile
Command (14)
10.11 1999 Stock Option Agreement (4) 21.1 Subsidiaries of the Registrant
(2)
13 Portions of Registrant's Annual Report to Stockholders for the
fiscal year ended October 3, 1999
21.1 Subsidiaries of the Registrant (2)
23.1 Consent of Grant Thornton LLP, Independent Certified Public
Accountants (see page II-11 of the Registration Statement)
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants (4)
23.3 Consent of Thomas J. Plante, Esq., Patent Counsel (see page II-12
of the Registration Statement)
23.4 Consent of Grover T. Wickersham, P.C. (included in Exhibit 5.1,
above)
27 Financial Data Schedule
18
- -----------
(1) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended September 29, 1991.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 filed with the Commission on October 4, 1999 (Registration
Number 333-88385).
(3) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K/A for the fiscal year ended September 28, 1996.
(4) To be filed by amendment.
(5) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended October 2, 1994.
(6) Incorporated by reference to Part II of Pre-effective Amendment No. 3 to
the S-18 Registration Statement filed with the Commission's Los Angeles
Regional Office on May 27, 1982.
(7) Incorporated by reference to Part II of Registrant's Registration
Statement on Form S-1 filed with the Commission on March 23, 1983
(Registration No. 2-82596) (the "S-1 Registration Statement").
(8) Incorporated by reference to Part II of Pre-effective Amendment No. 3 to
the Form S-2 filed with the Commission on March 3, 1987 (Registration No.
33-10134).
(9) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K/A for the fiscal year ended October 1, 1995.
(10) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended October 1, 1989.
(11) Incorporated by reference to Part IV of Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1990.
(12) Incorporated by reference to Part II of Pre-effective Amendment No. 2 to
the Form S-2 filed with the Commission on July 9, 1992 (Registration No.
33-47977).
(13) Incorporated by reference to Registrant's Form S-8 Registration Statement
filed February 11, 1999.
(14) Incorporated by reference to Registrant's Form 10-Q for the Period Ended
June 27, 1998, filed August 12, 1998.
(b) Reports on Form 8-K:
------------------------
No report on Form 8-K was filed by the Company with respect to the quarter
ended October 3, 1999.
19
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
IRVINE SENSORS CORPORATION
--------------------------
By: /s/ James Alexiou
_____________________________
James Alexiou
Chairman of the Board
Date: December 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
/s/ James Evert /s/ John J. Stuart, Jr.
_____________________________ __________________________
James Evert John J. Stuart, Jr.
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Accounting
Date: December 31, 1999 Officer)
Date: December 31, 1999
/s/ John C. Carson /s/ Frank P. Ragano
_____________________________ __________________________
John C.Carson, Director Frank P. Ragano, Director
Date: December 31, 1999 Date: December 31, 1999
/s/ Joanne S. Carson /s/ Vincent F. Sollitto, Jr.
_____________________________ __________________________
Joanne S. Carson, Director Vincent F. Sollitto, Jr.,
Date: December 31, 1999 Director
Date: December 31, 1999
/s/ Marc Dumont /s/ Wolfgang Seidel
_____________________________ __________________________
Marc Dumont, Director Wolfgang Seidel, Director
Date: December 31, 1999 Date: December 31, 1999
/s/ Walter E. Garrigan
_____________________________
Walter E. Garrigan, Director
Date: December 31, 1999
20
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
ON FINANCIAL STATEMENT SCHEDULES
--------------------------------
To the Board of Directors of
Irvine Sensors Corporation
Our audits of the consolidated financial statements referred to in our report
dated December 21, 1999 appearing on page 22 of the 1999 Annual Report to
Shareholders of Irvine Sensors Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedules listed in Item
14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/ GRANT THORNTON LLP
Irvine, California
December 21, 1999
To the Board of Directors of
Irvine Sensors Corporation
Our audit of the consolidated financial statements referred to in our report
dated December 16,1997 appearing on page 22 of the 1999 Annual Report to
Shareholders of Irvine Sensors Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedules for the year
ended September 28, 1997 listed in Item 14(a) of this Form 10-K. In our
opinion, these Financial Statement Schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICE WATERHOUSE LLP
Costa Mesa, California
December 16, 1997
21
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
----------------------------------------------
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
---------- ---------- ---------- ----------
Year ended October 3,1999:
- --------------------------
Allowance for doubtful accounts $ 10,000 $ 31,268 $ 4,567 $ 36,701
Inventory reserves 2,456,800 2,245,600 983,600 3,718,800
Year ended September 27,1998:
- -----------------------------
Allowance for doubtful accounts $ 10,000 $ - $ - $ 10,000
Inventory reserves 2,184,800 1,306,700 1,034,700 2,456,800
Year ended September 28, 1997:
- ------------------------------
Allowance for doubtful accounts $ 10,000 $ - $ - $ 10,000
Inventory reserves 2,043,700 1,156,100 1,015,000 2,184,800
22