Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 0-26946
INTEVAC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3125814
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3550 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 986-9888
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
none none
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (no par value)
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 90 days. Yes [X] No [ ]
Indicate by a 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 or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of February 28, 2000 was approximately $25,759,000 (based on the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market System for the last trading day prior to that date).
Shares of Common Stock held by each executive officer, director, and holder of
5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
On February 28, 2000 approximately 11,799,754 shares of the Registrant's
Common Stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III. SUCH PROXY STATEMENT
WILL BE FILED WITHIN 120 DAYS AFTER THE END OF THE FISCAL YEAR COVERED BY THIS
ANNUAL REPORT ON FORM 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. Words such as "believes", "expects",
"anticipates" and the like indicate forward-looking statements. Intevac's actual
results may differ materially from the results discussed in the forward-looking
statements for a variety of reasons, including those set forth under "Risk
Factors Affecting Intevac's Business".
PART I
ITEM 1. BUSINESS
OVERVIEW
Intevac, Inc.'s ("Intevac" or the "Company") businesses are the design,
manufacture and sale of complex capital equipment used to manufacture products
such as thin-film disks and flat panel displays (the "Equipment Business") and
the development of highly sensitive electro-optical devices (the "Photonics
Business").
The Equipment Business is a leading supplier of sputtering systems used to
manufacture thin-film disks for computer hard disk drives. Sputtering is a
complex vacuum deposition process used to deposit multiple thin-film layers on a
disk. The Equipment Business also realizes revenues from the sales of disk
lubrication equipment, contact stop-start ("CSS") test equipment, flat panel
display ("FPD") manufacturing equipment and electron beam processing equipment.
Spare parts and after-sale service are also sold to purchasers of Intevac's
equipment, and sales of components are made to other manufacturers of vacuum
equipment. The Equipment Business recorded significantly reduced sales of $36.0
million in 1999. The reduction in sales was primarily the result of
over-capacity in the disk drive industry which significantly reduced demand for
Intevac's products.
The Photonics Business has developed technology that permits highly
sensitive detection of photons in the visible and short wave infrared portions
of the spectrum. This technology when combined with advanced silicon integrated
circuits makes it possible to produce highly sensitive video cameras. This
development work is creating new products for both military and industrial
applications. Products include Intensified Digital Video Sensors, cameras
incorporating those sensors and Laser Illuminated Viewing and Ranging systems
for positive target identification. The Photonics Business recorded increased
sales of $7.0 million in 1999 mostly from government sponsored R&D contracts.
Intevac expects a continued high level of this R & D work in 2000. Intevac
expects increased prototype product shipments in 2000 and significant production
shipments commencing in 2001.
EQUIPMENT BUSINESS
Disk Sputtering Systems
The Equipment Business' principal products are disk sputtering systems.
Intevac offers these systems for list prices ranging from $2.5 million to $3.5
million, depending upon configuration, to both captive and merchant thin-film
disk manufacturers. The MDP-250K, the latest version of the MDP-250 family of
disk sputtering systems, began shipments in 1999. There are approximately 110
Intevac MDP-250 disk sputtering systems installed at Fuji Electric, Fujitsu
Limited, Hitachi, HMT Technology, MMC Technology, Mitsubishi, Nippon Sheet
Glass, Seagate Technology, Sony and Trace Storage Technology.
Intevac's sputtering systems are used by disk manufacturers to apply thin
layers of undercoats, magnetic alloys and protective overcoats to thin-film
disks used in the manufacture of computer hard disk drives. The MDP-250 system
has the capability to sputter multi-layers (multiple magnetic layers with
interspersed non-magnetic layers); to sputter onto alternative substrates (such
as glass and ceramic), as well as conventional aluminum substrates; and to make
media with the appropriate characteristics for use with magneto-resistive ("MR")
heads and giant magneto-resistive ("GMR") heads. The mechanical design of the
MDP-250 family has characteristics similar to the cluster tools widely used in
semiconductor manufacturing in that each of the twelve process stations is
separately vacuum pumped and vacuum isolated. The MDP-250 does not require a
carrier or pallet to transport disks through the system. Rather, disks are
automatically
2
3
loaded into the system from cassettes, processed, and then automatically
returned to the cassette. A number of process station options are offered,
including multiple options for the deposition of thin films, heating stations,
cooling stations and cleaning stations. Furthermore, these process stations can
be moved from any machine process position to any other to easily accommodate
process changes.
The MDP-250K provides many improvements to the proven MDP-250 platform. The
MDP-250K doubles throughput to as many as 1100 disks per hour. The MDP-250K
improves the process vacuum level by an order of magnitude, a key factor in
manufacturing advanced media. The MDP-250K's new control system gives
manufacturers powerful new capabilities to define and control more sophisticated
process recipes. A number of improved process capabilities have also been
developed in conjunction with the MDP 250K system.
Cluster Tool Module
The rapid increase in areal density has caused the thin-films deposited by
our MDP-250 series of equipment to become much more complex quickly. This
increased complexity is leading to the need for additional flexibility in the
equipment to accommodate a number of new processing requirements. To answer this
need, Intevac developed the MDP-200 system, which is planned for initial
delivery in 2000. The MDP-200 is a modular system that allows manufacturers to
seamlessly integrate any number of additional process stations onto their
MDP-250 sputtering equipment. The MDP-200 provides the capability to process
disks through process stations serially or in parallel giving manufacturers
broad flexibility to integrate process steps with different process times. The
MDP-200 can accommodate a variety of processes including heating, cleaning,
thin-film deposition, cooling, and vapor lubrication. This arrangement improves
isolation between process steps which is of increasing importance for new
processes, such as advanced carbon and vapor lubrication, which utilize
materials that are not compatible with sputtering processes.
New Carbon Technology
One method for increasing the areal density of disks is to reduce the
thickness of the carbon overcoat that protects the underlying magnetic film from
wear and corrosion. By reducing the thickness of the overcoat the disk drive
head can fly closer to the magnetic film which increases signal strength. To
achieve thinner carbon overcoats Intevac has developed its new carbon technology
("NCT") process station. The NCT process station is able to apply very hard,
diamond-like carbon overcoats to disks that permit the carbon overcoats to be
reduced in thickness by about half.
Disk Lubrication Equipment
Lubrication is the production step that follows disk sputtering in the
manufacture of thin-film disks. Intevac, through its 1996 acquisition of San
Jose Technology Corp. ("SJT"), is the leading supplier of gravity disk
lubrication systems. During lubrication, a microscopic layer of lubricant is
applied to the disk's surface to improve durability and reduce surface friction.
This is accomplished by immersing the disks in a solvent that has been mixed
with a small amount of lubricant. Intevac's gravity disk lubrication products
allow thin-film disk manufacturers to uniformly lubricate disks in a temperature
controlled, low vibration, contamination free environment with a minimal amount
of solvent loss.
Intevac recently introduced its Vapor Lubrication System (the "VLS"). The
VLS is a new approach to disk lubrication that couples vacuum sputter coating
with a vacuum lubrication process. The VLS is an alternative to the traditional
gravity lubrication process and offers a number of process enhancements to disk
manufacturers. Since the disks never leave vacuum after sputtering, the exposure
of the disk to atmosphere between the sputtering and lubrication steps is
eliminated. This improves process control, reduces the risk of contamination and
improves the bonding of the lubricant to the disk. Additionally, more efficient
use is made of clean room space and the process is environmentally friendly as
large quantities of expensive solvents are eliminated from the lubrication
process. Intevac plans to ship its first VLS in 2000.
3
4
MDP-250 Upgrade Path
Many of the new process and system technologies that Intevac has developed
for its MDP-250K system have been designed to be compatible with the installed
base of MDP-250 systems. The MDP-200, the Vapor Lubrication System, all process
stations, and a number of the speed and vacuum enhancements can be retrofitted
to Intevac's existing installed based of MDP-250 systems. Intevac's intent is to
afford our customers a cost-effective solution that significantly upgrades and
extends the capabilities of their installed base of equipment in a manner that
is complementary to the next generation MDP-250K.
Disk Test Equipment
In 1996, Intevac acquired Lotus Technologies, Inc. ("Lotus"), a leading
manufacturer of CSS test equipment for hard disk drives and components.
Intevac's family of PC-based CSS test equipment performs precise measurements of
disk wear, friction, stiction and start-stop torque related to the interface of
the read-write head with the thin-film disk.
Flat Panel Display Manufacturing Equipment
FPDs are used for a variety of applications such as PCs, workstations and
video displays. The manufacture of several types of flat panel displays, such as
active matrix liquid crystal display ("AMLCD") and plasma display panel ("PDP"),
requires the use of a sputtering process to deposit thin-film layers of
different materials onto a glass substrate. Intevac believes that the skills and
technologies that it has developed for the thin-film disk manufacturing industry
are directly applicable to the FPD manufacturing industry. These skills and
technologies include its expertise and experience in sputtering, rapid heating,
high vacuum, isolated process chambers and material handling. In addition, as
with the thin-film disk manufacturing industry, the FPD industry involves
providing complex, expensive capital equipment to a small number of customers
worldwide.
In 1992 Intevac initiated a program to develop a sputtering system for this
market under an agreement with its development partner, Ebara Corporation
("Ebara"). Under the agreement, as amended, Ebara agreed to pay one-half of the
development costs of the flat panel sputtering system in exchange for joint
ownership of the intellectual property rights and the exclusive right to
manufacture and sell in Japan the flat panel sputtering systems developed under
the agreement. Intevac has retained the exclusive right to manufacture and sell
such flat panel sputtering systems outside of Japan. Each party is required to
pay royalties to the other party on its flat panel sputtering system sales.
In 1997 Intevac developed its first flat panel sputtering machine
("D-STAR") capable of sputtering glass substrates as large as 550 mm by 650 mm.
In 1998 Intevac delivered a scaled-up version of its D-STAR unit capable of
sputtering glass substrates as large as 1.2 meters by 1.6 meters ("RIGEL")
optimized for the production of PDPs.
Additionally, in 1994 Intevac initiated a project to develop a rapid
thermal processing ("RTP") system to be used in the manufacture of FPDs.
Intevac's RTP system can be used to rapidly modify the characteristics of thin
films deposited on glass substrates. For example, Intevac's RTP systems can be
used to activate thin films after ion implantation. Intevac has delivered six
RTP systems to date.
Electron Beam Processing Equipment
In December 1999, Intevac incurred a charge of $1.6 million related to a
plan to terminate its electron beam product line. The plan includes the delivery
of the three electron beam systems on order and substantially completed at the
end of 1999 and subsequent closure of the Hayward facility where the systems
were manufactured.
4
5
PHOTONICS BUSINESS
History
Intevac's Photonics' products have been developed by a team that initially
began working together in the 1980's in the Varian central research labs and
night vision business unit. When Intevac was formed in 1991, it acquired
Varian's night vision business, and the related Varian central research lab
activities and technology. The central research lab group became part of the R&D
department for Intevac's Night Vision Business and continued to develop
Intevac's photocathode technology. In 1995, Intevac sold its Night Vision
Business to Litton Industries. However, the technical team remained at Intevac
and formed the Photonics division. Since 1995 the Photonics Division has been
further developing its technology, with the majority of its activities being
funded by R&D contracts from the United States Government. During this period
the Photonics division has also worked collaboratively with other research
organizations, including Stanford University, Lawrence Livermore National
Laboratory and The Charles Stark Draper Laboratory.
Technology
Intevac's Intensified Digital Video Sensor exemplifies Intevac's Photonics
technology. The Intensified Digital Video Sensor is a small vacuum tube about an
inch in diameter and a half-inch thick. The Intensified Digital Video Sensor has
a transparent glass window on one side through which photons are focused onto a
thin film photocathode attached to the vacuum side of the window. When a photon
strikes the photocathode through the window, an electron is emitted into the
vacuum. The electron is then accelerated and strikes a Charge Coupled Device
("CCD"). The CCD then outputs a high-resolution video signal.
The Intensified Digital Video Sensor offers both high sensitivity and high
resolution. It works well in the visible as well as the short infra-red range of
the spectrum, which permits the device to be coupled with an eye safe laser
"flashlight" that enables high resolution imaging at very long ranges. The
output is video, which frees the user from having to hold the device to the eye
and permits remote viewing and image processing. The Company believes it has
capability and features not possible with the direct view night vision devices
currently in use by the military.
LIVAR(TM) Target Identification System:
Intevac integrated its Intensified Digital Video Sensor technology with a
laser illuminator to create its Laser Illuminated Viewing and Ranging system
("LIVAR(TM)"). The LIVAR(TM) system is similar to RADAR, but with a number of
improvements. The illuminator is an eye safe laser, rather than a microwave
source, and the reflected signal is displayed as a digital video image, rather
than as a blip. This enables real time, high-resolution imagery for target
identification at much longer ranges than was previously possible.
The potential benefit of the LIVAR(TM) system is clear for military
conflicts such as that which occurred in Kosovo. In the Kosovo war, casualties
to US servicemen were politically unacceptable, which meant that our aircraft
could only operate at high altitudes where they were relatively safe from ground
launched missile attacks. It was also unacceptable to inflict collateral damage
to the other sides' civilians or to other untargeted assets. However, these
goals are mutually exclusive unless capability exists for positively identifying
targets from long ranges.
Currently the military uses several means for target location and
identification including forward-looking infrared ("FLIR") systems and RADAR.
While these systems can sense targets at relatively long ranges, the resolution
is poor, and positive identification is difficult, or impossible. The LIVAR(TM)
system complements the existing FLIR and RADAR technology and enables target
identification in addition to target sensing. Because of these advantages,
LIVAR(TM) is currently under consideration by the US military as a key
capability to be deployed in a number of the US military's weapons systems
including the Joint Strike Fighter, the Predator drone, a HumVee mounted system,
and a man-portable system.
In January 2000, Intevac received a $1.0 million contract from the U.S.
Army for the development and demonstration of a low cost, man-portable targeting
and surveillance system. The targeting and surveillance system will utilize
LIVAR(TM) technology and enable identification of targets at long ranges under
day/night
5
6
conditions, a significant improvement in both resolution and range over existing
target identification systems. Intevac will manufacture, test and deliver one
unit under this one-year development program.
High Performance Cameras
In September 1999, the first of seven highly sensitive short wave infra red
cameras was accepted by Intevac's customer, Lockheed Martin Missiles & Space,
for use in the U.S. Air Force's Airborne Laser ("ABL") program. The ABL system
will be carried aboard a modified Boeing 747 and will be capable of shooting
down theater ballistic missiles launched hundreds of kilometers away. The highly
sensitive Intevac camera is an enabling technology for this program.
The key technology in the ABL camera is a highly sensitive photocathode,
which emits electrons that are detected by a CCD. The electron bombarded CCD
("EBCCD") was developed under a cost shared Technology Development Agreement
with the Defense Advanced Research Projects Agency ("DARPA"). The ABL program
was the first application using this technology.
Low Cost Low Light Level Cameras
Today's low light level ("LLL") cameras, derived from military research,
are too expensive for most applications. Intevac intends to reduce this cost to
less than $500 per camera, a cost at which the Company believes that large
available markets for commercial security cameras, law enforcement and
traditional military night vision tubes will be addressed.
During 1999, Intevac was selected by the National Institute of Standards
and Technology ("NIST") to develop a Low Cost, Low Light Level Video Camera. The
two-year, $10 million cost-sharing project involves the development of a new
active pixel imaging sensor by National Semiconductor, further development of
Intevac's Intensified Digital Video Sensor, development of automated processing
and assembly equipment by Intevac's Equipment business, and product integration
and development of low cost manufacturing processes by Intevac's Photonics
business.
Unlike present LLL cameras, which work well only in darkness, the new
cameras will perform just as well in all types of lighting conditions, including
bright daylight. CMOS chip technology, now used to make most computer chips,
will be used to fabricate a chip with the necessary camera and sensor
electronics. This chip will be incorporated into the Intensified Digital Video
Sensor to form the new LLL camera.
Negative Electron Affinity Electron Sources
Development is also being done on negative electron affinity ("NEA")
electron sources. NEA electron sources provide an enabling technology to be used
in semiconductor test and photolithography equipment, which may permit a
significant reduction in the feature size of integrated circuits.
RESEARCH AND DEVELOPMENT
Intevac's products serve markets characterized by rapid technological
change and evolving industry standards. As a result, Intevac routinely invests
substantial amounts in research and development and expects to continue an
active development program. Intevac's research and development expenses were
$14.1 million, $12.7 million and $10.7 million, respectively, in 1999, 1998 and
1997. Research and development expenses represented 32.9%, 13.3% and 8.0%,
respectively, of net revenues in 1999, 1998 and 1997. Research and development
expenses do not include costs of $1.1 million, $1.8 million and $1.3 million
that were incurred by Intevac in 1999, 1998 and 1997, respectively, that were
reimbursed under the terms of cost sharing agreements, nor do research and
development expenses include costs of $5.9 million, $4.8 million and $4.7
million in 1999, 1998 and 1997, respectively, related to contract research and
development.
SALES CHANNEL, CUSTOMERS AND MARKETING
The selling process for Intevac's equipment products is often a multi-level
and long-term process involving individuals from marketing, engineering,
operations, customer service and senior management. The
6
7
process is lengthy and involves making samples for the prospective customer and
responding to individual needs for moderate levels of machine customization.
Installing and integrating new equipment requires a substantial investment by a
customer. Sales of Intevac's systems depend, in significant part, upon the
decision of a prospective customer to replace obsolete equipment or to increase
manufacturing capacity by upgrading or expanding existing manufacturing
facilities or constructing new manufacturing facilities, all of which typically
involve a significant capital commitment. Therefore, customers often require a
significant number of product presentations and demonstrations before making a
purchasing decision. Accordingly, Intevac's systems typically have a lengthy
sales cycle, during which Intevac may expend substantial funds and management
time and effort with no assurance that a sale will result.
Intevac sells and markets its disk manufacturing products directly in the
United States, and through an exclusive distributor in Japan (Matsubo). During
1997, Intevac established a joint venture in Japan with Matsubo, Intevac Matsubo
Advanced Technology ("IMAT" Inc.), to market its flat panel display products in
the Far East. Intevac also services its customers in Southeast Asia through a
wholly owned subsidiary in Singapore.
Historically, a significant portion of Intevac's revenues in any particular
period have been attributable to sales to a limited number of customers. For
example, 66%, 71% and 69% of Intevac's total revenues in 1999, 1998 and 1997,
respectively, were accounted for by the three largest customers in each of the
those years. Intevac's largest customers change from period to period and it is
expected that sales of its products to relatively few customers will continue to
account for a high percentage of its net revenues in the foreseeable future.
Foreign sales accounted for 60% of revenues in 1999, 53% of revenues in
1998, and 64% of revenues in 1997. The majority of Intevac's foreign sales are
to companies in the Far East and Intevac anticipates that sales to customers in
the Far East will continue to be a significant portion of its revenues.
CUSTOMER SUPPORT
Intevac provides process and applications support, customer training,
installation, start-up assistance and emergency service support to its
customers. Process and applications support is provided by Intevac's equipment
process scientists who also visit customers at their plants to assist in process
development projects. Intevac conducts training classes for process scientists,
machine operators and machine service personnel. Additional training is also
given during the machine installation. Installation and start up support is
generally provided within the United States by the Intevac customer service
organization. This group also assists with the installation and start up of
systems in overseas locations as required.
Intevac generally provides a one-year warranty on its equipment. During
this warranty period any necessary non-consumable parts are supplied and
installed. Currently, Intevac has field service offices located in the United
States and Singapore. In addition, service in Japan, Malaysia and Korea is
provided by Intevac's distributor and representatives using personnel who have
received training at Intevac. Intevac and its distributors stock consumables and
spare parts to support the installed base of systems. These parts are available
on a 24-hour per day basis.
MANUFACTURING
The majority of Intevac's manufacturing is conducted at its headquarters
facility in Santa Clara, California with a smaller manufacturing facility
located in Hayward, California. Intevac's manufacturing operations include
electromechanical assembly, mechanical and vacuum assembly, fabrication of the
sputter sources and system assembly, alignment and testing. Intevac makes
extensive use of the infrastructure serving the semiconductor equipment
business. Intevac purchases vacuum pumps, valves, instrumentation and fittings,
power supplies, printed wiring board assemblies, computers and control circuitry
and custom mechanical parts made by forging, machining and welding. Intevac has
a well-equipped fabrication center that produces parts for engineering,
manufactures a portion of the fabricated parts used in Intevac products and
sells fabricated parts to commercial customers.
7
8
Intevac's manufacturing strategy is to operate with low fixed costs, to
produce high quality, cost-effective systems and low cost replacement parts and
to be able to respond effectively to changes in volume. To do this, Intevac
currently designs its products to use standard parts where possible. Intevac
performs manufacturing activities that add value or that require unique
technology or specialized knowledge and, taking advantage of its Silicon Valley
location, utilizes subcontractors to perform other manufacturing activities.
BACKLOG
Intevac's backlog was $24.6 million and $26.1 million at December 31, 1999
and December 31, 1998, respectively. Intevac includes in its backlog only those
customer orders for systems, component parts and contract research and
development for which it has accepted signed purchase orders with assigned
delivery dates. The equipment requirements of Intevac's customers cannot be
determined with accuracy, and therefore Intevac's backlog at any certain date
may not be indicative of future demand for Intevac's products.
PATENTS AND LICENSING
Intevac currently has 30 patents issued in the United States and 9 patents
issued in foreign countries, and has patent applications pending in the United
States and foreign countries. Of the 30 U.S. patents, 9 relate to sputtering, 10
relate to RTP, 1 relates to lubrication systems and 10 relate to photonics. Five
foreign patents relate to sputtering and 4 relate to photonics. In addition,
Intevac has the right to utilize certain patents under licensing arrangements
with Litton Industries, Varian Associates, Stanford University, Lawrence
Livermore Laboratories and Alum Rock Technology.
EMPLOYEES
At December 31, 1999, Intevac had 209 employees, including 5 contract
employees. 83 of these employees were in research and development, 89 in
manufacturing, and 37 in administration, customer support and marketing.
RISK FACTORS AFFECTING INTEVAC'S BUSINESS
The disk drive industry is cyclical and subject to prolonged downcycles.
Intevac derives a significant proportion of its revenues from sales of
equipment to manufacturers of computer disk drives and disk drive components.
The disk drive industry is cyclical and has experienced long periods of
over-supply and intensely competitive pricing. Since 1997, many of the
manufacturers of hard disk drives and their component suppliers have reported
substantial losses. These downcycles reduce the demand for the disk
manufacturing equipment we sell. As a result Intevac has experienced significant
reductions in its quarterly revenues, and has incurred quarterly losses, since
the third quarter of 1998. Intevac is not able to accurately predict when the
industry conditions that have depressed our sales will become more favorable.
Rapid increases in areal density are reducing the number of thin film disks
required per disk drive.
Over the past few years the amount of data that can be stored on a single
thin-film computer disk has been growing at approximately 100% per year.
Although the number of disk drives produced has continued to significantly
increase each year, the increase in areal density has resulted in a reduction in
the number of disks required per disk drive. The result has been that the number
of thin-film disks used worldwide has not grown significantly since 1997.
Without an increase in the number of disks required, Intevac's disk equipment
sales are largely limited to upgrades of existing capacity, rather than capacity
expansion. While the rapidly falling cost of storage per gigabyte is leading to
new applications for disk drives beyond the traditional computer market, it is
not clear to what extent the demand from these new applications will be offset
by further declines in the average number of disks required per disk drive.
8
9
Intevac's business is subject to rapid technical change.
Intevac's ability to remain competitive requires substantial investments in
research and development. The failure to develop, manufacture and market new
systems, or to enhance existing systems, would have an adverse effect on
Intevac's business. In the past, Intevac has experienced delays from time to
time in the introduction of, and technical difficulties with, some of its
systems and enhancements. Intevac's success in developing and selling equipment
depends upon a variety of factors, including accurate prediction of future
customer requirements, technology advances, cost of ownership, introduction of
new products on schedule, cost-effective manufacturing and product performance
in the field. Intevac's new product decisions and development commitments must
anticipate continuously evolving industry requirements significantly in advance
of sales. Any failure to accurately predict customer requirements and to develop
new generations of products to meet those requirements would have an adverse
effect on Intevac's business.
Competition is intense and our competitors are large and well financed.
Intevac experiences intense competition in the Equipment Business. For
example, Intevac's disk sputtering products experience competition worldwide
from two principal competitors, Balzers A.G. ("Balzers") and Anelva Corporation
("Anelva"), each of which is a large manufacturer of complex vacuum equipment
and thin-film disk manufacturing systems and has sold a substantial number of
thin-film disk sputtering machines worldwide. Both Balzers and Anelva have
substantially greater financial, technical, marketing, manufacturing and other
resources than Intevac. There can be no assurance that Intevac's competitors
will not develop enhancements to, or future generations of, competitive products
that will offer superior price or performance features or that new competitors
will not enter Intevac's markets and develop such enhanced products.
Given the lengthy sales cycle and the significant investment required to
integrate equipment into the manufacturing process, Intevac believes that once a
manufacturer has selected a particular supplier's equipment for a specific
application, that manufacturer generally relies upon that supplier's equipment
and frequently will continue to purchase any additional equipment for that
application from the same supplier. Accordingly, competition for customers in
the equipment industry is intense, and suppliers of equipment may offer
substantial pricing concessions and incentives to attract new customers or
retain existing customers.
The sales of our equipment products are dependent on substantial capital
investment by our customers.
The majority of our Equipment revenues have historically come from the sale
of equipment used to manufacture thin film disks and to a lesser extent from the
sale of equipment used to manufacture flat panel displays. The systems Intevac
sells typically cost between $1 and $3 million each. Flat Panel sputtering
systems tend to sell for substantially more than $3 million each. The purchase
of Intevac's systems, along with the purchase of other related equipment and
facilities, requires extremely large capital expenditures by our customers.
These costs are far in excess of the cost of the Intevac systems. The magnitude
of such capital expenditures requires that our customers have access to large
amounts of capital and that they are willing to invest that capital over long
periods of time in order to be able to purchase our equipment. Because of the
prolonged industry downturn, some of our customers may not be willing, or able,
to make the magnitude of capital investment required to purchase our products.
A large portion of our sales are to international customers.
Sales and operating activities outside of the United States are subject to
certain inherent risks, including fluctuations in the value of the United States
dollar relative to foreign currencies, tariffs, quotas, taxes and other market
barriers, political and economic instability, restrictions on the export or
import of technology, potentially limited intellectual property protection,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. Intevac earns a significant portion of its revenue
from international sales, and there can be no assurance that any of these
factors will not have an adverse effect on Intevac's business.
9
10
Intevac generally quotes and sells its products in US dollars. However, for
some Japanese customers, Intevac quotes and sells its products in Japanese Yen.
Intevac, from time to time, enters into foreign currency contracts in an effort
to reduce the overall risk of currency fluctuations to Intevac's business.
However, there can be no assurance that the offer and sale of products in
foreign denominated currencies, and the related foreign currency hedging
activities will not adversely affect Intevac's business.
Intevac's two principal competitors for disk sputtering equipment are based
in foreign countries and have cost structures based on foreign currencies.
Accordingly, currency fluctuations could cause Intevac's products to be more, or
less, competitive than its competitors' products. Currency fluctuations will
decrease, or increase, Intevac's cost structure relative to those of its
competitors, which could impact Intevac's gross margins.
Our operating results fluctuate significantly.
Over the last eight quarters Intevac's operating income or loss as a
percentage of net revenues has fluctuated from approximately (79%) to 8% of net
revenues. Over the same period sales per quarter have fluctuated between $35.8
million and $7.1 million. Intevac anticipates that its sales and operating
margins will continue to fluctuate. As a result, period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
Intevac's stock price is volatile.
Intevac's stock price has experienced both significant increases in
valuation, and significant decreases in valuation, over short periods of time.
Intevac believes that factors such as announcements of developments related to
Intevac's business, fluctuations in Intevac's operating results, failure to meet
securities analysts' expectations, general conditions in the disk drive and
thin-film media manufacturing industries and the worldwide economy,
announcements of technological innovations, new systems or product enhancements
by Intevac or its competitors, fluctuations in the level of cooperative
development funding, acquisitions, changes in governmental regulations,
developments in patents or other intellectual property rights and changes in
Intevac's relationships with customers and suppliers could cause the price of
Intevac's Common Stock to continue to fluctuate substantially. In addition, in
recent years the stock market in general, and the market for small
capitalization and high technology stocks in particular, has experienced extreme
price fluctuations which have often been unrelated to the operating performance
of affected companies. Any of these factors could adversely affect the market
price of Intevac's Common Stock.
Competition is intense for employees in northern California.
Intevac's operating results depend in significant part upon its ability to
retain and attract qualified management, engineering, marketing, manufacturing,
customer support, sales and administrative personnel. Competition in northern
California for such personnel is intense and there can be no assurance that
Intevac will be successful in attracting and retaining such personnel. The
failure to attract and retain such personnel could have an adverse effect on
Intevac's business.
Intevac routinely evaluates acquisition candidates and other diversification
strategies.
Intevac has completed multiple acquisitions as part of its efforts to grow
and diversify its business. For example, Intevac's business was initially
acquired from Varian Associates in 1991. Additionally, Intevac acquired its
current gravity lubrication, CSS test equipment and rapid thermal processing
product lines in three separate acquisitions. Intevac also acquired its RPC
electron beam processing business in late 1997, and after two years initiated
plans to close this business. Intevac intends to continue to evaluate new
acquisition candidates and diversification strategies. Any acquisition will
involve numerous risks, including difficulties in the assimilation of the
acquired company's employees, operations and products, uncertainties associated
with operating in new markets and working with new customers, and the potential
loss of the acquired company's key employees. Additionally, unanticipated
expenses may be incurred relating to the integration of technologies, research
and development, and administrative functions. Any future acquisitions may
result in potentially
10
11
dilutive issuance of equity securities, acquisition related write-offs and the
assumption of debt and contingent liabilities. Any of the above factors could
adversely affect Intevac's business.
Thin-film disks could be replaced by a new technology.
Intevac believes that thin-film disks will continue to be the dominant
medium for data storage for the foreseeable future. However, it is possible that
competing technologies may at some time reduce the demand for thin-film disks,
which would adversely affect Intevac's disk equipment business.
Our products are complex, constantly evolving, and often manufactured to
individual customer requirements.
Intevac's Equipment products have a large number of components and are
highly complex. Intevac may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. In addition, some of the systems built by Intevac must be
customized to meet individual customer site or operating requirements. Intevac
has limited manufacturing capacity and may be unable to complete the development
or meet the technical specifications of its new systems or enhancements or to
manufacture and ship these systems or enhancements in a timely manner. In
addition, Intevac may incur substantial unanticipated costs early in a product's
life cycle, such as increased cost of materials due to expediting charges, other
purchasing inefficiencies and greater than expected installation and support
costs which cannot be passed on to the customer. In certain instances, Intevac
is dependent upon a sole supplier or a limited number of suppliers, or has
qualified only a single or limited number of suppliers, for certain complex
components or sub-assemblies utilized in its products. Any of these factors
could adversely affect Intevac's business.
Intevac's business is dependent on its intellectual property.
There can be no assurance that:
- any of Intevac's patent applications will be allowed or that any of the
allowed applications will be issued as patents, or
- any patent owned by Intevac will not be invalidated, deemed
unenforceable, circumvented or challenged, or
- the rights granted under our patents will provide competitive advantages
to Intevac, or
- any of Intevac's pending or future patent applications will be issued
with claims of the scope sought by Intevac, if at all, or
- others will not develop similar products, duplicate Intevac's products or
design around the patents owned by Intevac, or
- foreign patent rights, intellectual property laws or Intevac's agreements
will protect Intevac's intellectual property rights.
Failure to protect Intevac's intellectual property rights could have an
adverse effect upon Intevac's business.
From time to time Intevac has received claims that it is infringing third
parties' intellectual property rights. There can be no assurance that third
parties will not in the future claim infringement by Intevac with respect to
current or future patents, trademarks, or other proprietary rights relating to
Intevac's disk sputtering systems, flat panel manufacturing equipment or other
products. Any present or future claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require Intevac to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
Intevac, or at all. Any of the foregoing could have an adverse effect upon
Intevac's business.
11
12
$41 Million of convertible notes are outstanding and will mature in 2004.
In connection with the sale of $57.5 million of its 6 1/2% Convertible
Subordinated Notes Due 2004 (the "Convertible Notes") in February 1997, Intevac
incurred a substantial increase in the ratio of long-term debt to total
capitalization (shareholders' equity plus long-term debt). During 1999 Intevac
spent $9.7 million in cash to repurchase $16.3 million of the Convertible Notes.
The $41.2 million of the Convertible Notes that remain outstanding as of
December 31, 1999 commit Intevac to substantial principal and interest
obligations. The degree to which Intevac is leveraged could have an adverse
effect on Intevac's ability to obtain additional financing for working capital,
acquisitions or other purposes and could make it more vulnerable to industry
downturns and competitive pressures. Intevac's ability to meet its debt service
obligations will be dependent on Intevac's future performance, which will be
subject to financial, business and other factors affecting the operations of
Intevac, many of which are beyond its control.
A majority of the Common Stock outstanding is controlled by the directors and
executive officers of Intevac.
Based on the shares outstanding on December 31, 1999, the present directors
and their affiliates and executive officers, in the aggregate, beneficially own
57.6% of Intevac's outstanding shares of Common Stock. As a result, these
shareholders, acting together, are able to effectively control all matters
requiring approval by the shareholders of Intevac, including the election of a
majority of the directors and approval of significant corporate transactions.
Intevac uses hazardous materials.
Intevac is subject to a variety of governmental regulations relating to the
use, storage, discharge, handling, emission, generation, manufacture, treatment
and disposal of toxic or other hazardous substances, chemicals, materials or
waste. Any failure to comply with current or future regulations could result in
substantial civil penalties or criminal fines being imposed on Intevac or its
officers, directors or employees, suspension of production, alteration of its
manufacturing process or cessation of operations. Such regulations could require
Intevac to acquire expensive remediation or abatement equipment or to incur
substantial expenses to comply with environmental regulations. Any failure by
Intevac to properly manage the use, disposal or storage of, or adequately
restrict the release of, hazardous or toxic substances could subject Intevac to
significant liabilities.
ITEM 2. PROPERTIES
Intevac leases all of its facilities, including approximately 167,100
square feet in Santa Clara, California. These buildings house manufacturing,
research and development, marketing and administration, and Intevac's
headquarters offices. The lease for these buildings expires in March 2002.
Intevac has an option to extend the lease for an additional five-year period,
with a monthly base rent to be negotiated by Intevac and the lessor. If Intevac
and the lessor are unable to reach agreement with respect to such monthly base
rent, the monthly base rent for the extension will be determined by an appraisal
process set forth in the lease. Intevac expects to vacate, and offer for sublet,
approximately 47,000 square feet of its Santa Clara facility during the first
quarter of 2000.
Intevac leases a facility of approximately 31,500 square feet in Hayward,
California to house the RPC Technologies Division. This lease will be terminated
effective July 2000.
Intevac leases a facility of approximately 2,400 square feet in Singapore
to house the Singapore customer support organization. This lease expires in
December 2000. Intevac has an option to extend the lease for an additional year
at market rates.
Intevac believes that its current facilities are suitable and adequate for
its current and foreseeable operations. Intevac operates with one full
manufacturing shift and one partial manufacturing shift. Intevac believes that
it currently has sufficient productive capacity to meet its current needs.
12
13
ITEM 3. LEGAL PROCEEDINGS
On June 12, 1996 two Australian Army Black Hawk Helicopters collided in
midair during nighttime maneuvers. Eighteen Australian servicemen perished and
twelve were injured. The Company was named as a defendant in a lawsuit related
to this crash. The lawsuit was filed in Stamford, Connecticut Superior Court on
June 10, 1999 by Mark Durkin, the administrator of the estates of the deceased
crewmembers, the injured crewmembers and the spouses of the deceased and/or
injured crewmembers. Included in the suit's allegations are assertions that the
crash was caused by defective night vision goggles. The suit names three US
manufacturers of military night vision goggles, of which Intevac was one. The
suit also names the manufacturer of the pilot's helmets, two manufacturers of
night vision system test equipment and the manufacturer of the helicopter. The
suit claims damages for 13 personnel killed in the crash, 5 personnel injured in
the crash and spouses of those killed or injured.
It is known that the Australian Army established a Board of Inquiry to
investigate the accident and that the Board of Inquiry concluded that the
accident was not caused by defective night vision goggles. Preliminary
investigations lead the Company to believe that it has meritorious defenses
against the Durkin suit. However, there can be no assurance that the resolution
of the suit will not have a material adverse effect on the Company's business,
operating results and financial condition.
On January 5, 2000, the Company's RPC Technologies, Inc. subsidiary was
named as a defendant in a lawsuit filed in United States District Court in
Texas. The lawsuit was filed by Reita Miller, Executrix of the estate of Thomas
O. Miller, and family members of Mrs. Miller. The suit names RPC Technologies,
Inc. and RPC Industries, Inc. as defendants. Included in the suits allegations
are assertions that Thomas O. Miller protracted leukemia and died as the result
of working in and around Broad Beam accelerators manufactured by RPC Industries,
Inc and installed at Mr. Miller's employer, Tetra Pak. Preliminary
investigations lead the Company to believe that it has meritorious defenses
against the Miller suit. However, there can be no assurance that the resolution
of the suit will not have a material adverse effect on the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS AND DIRECTORS
Certain information about Intevac's directors and executive officers is
listed below:
NAME AGE POSITION
---- --- --------
Executive Officers and
Directors:
Norman H. Pond.................. 61 Chairman of the Board, President and Chief Executive Officer
Charles B. Eddy III............. 49 Vice President, Finance and Administration, Chief Financial
Officer, Treasurer and Secretary
Edward Durbin(1)................ 72 Director
Robert D. Hempstead............. 56 Director
David N. Lambeth(1)(2).......... 52 Director
H. Joseph Smead(2).............. 74 Director
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Pond is a founder of Intevac and has served as Chairman of the Board,
President and Chief Executive Officer since February 1991. Before joining
Intevac, from 1988 to 1990, Mr. Pond served as President and Chief Operating
Officer of Varian Associates, Inc. ("Varian"), a publicly held manufacturer of
semiconductor, communication, defense and medical products where he was
responsible for overall management of Varian's operations. From 1984 to 1988,
Mr. Pond was President of Varian's Electron Device and
13
14
Systems Group and became a Director of Varian in 1986. Prior to joining Varian,
Mr. Pond was employed by Teledyne, a diversified electronics company, from 1963
to 1984 where he served in various positions, including as Group Executive. Mr.
Pond holds a B.S. in physics from the University of Missouri at Rolla and a M.S.
in physics from the University of California at Los Angeles.
Mr. Eddy has served as Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary of Intevac since April 1991. Mr. Eddy
served as Chief Financial Officer of Videonics, Inc., a manufacturer of consumer
video editing equipment, from 1987 to 1991 and served as Chief Financial Officer
of Parallel Computers, Inc., a startup computer company, from 1983 to 1987. Mr.
Eddy was with Intel Corporation from 1974 to 1983 where he served in a variety
of positions, including controller and plant manager. Mr. Eddy holds a B.S. in
engineering science from the University of Virginia and a M.B.A. from Dartmouth
College.
Mr. Durbin has served as a Director of Intevac since February 1991. Mr.
Durbin is the Vice Chairman of Kaiser Aerospace and Electronics Corporation
("Kaiser"), a privately held manufacturer of electronic and electro-optical
systems, responsible for marketing and business development since joining Kaiser
in 1975. Mr. Durbin currently serves as a director for all of Kaiser's
subsidiaries. Mr. Durbin holds a B.S. in electrical engineering from The Cooper
Union and a M.S. in electrical engineering from the Polytechnic Institute of
Brooklyn.
Dr. Hempstead has served as a Director of Intevac since March 1997 and
served as Chief Operating Officer of Intevac from April 1996 through June 1999.
Before joining Intevac, Dr. Hempstead served as Executive Vice President of
Censtor Corp., a manufacturer of computer disk drive heads and disks, from
November 1994 to February 1996. He was a self-employed consultant from 1989 to
November 1994. Dr. Hempstead is currently Chief Technology Officer at Veeco
Instruments. Dr. Hempstead holds a B.S. and M.S. in electrical engineering from
Massachusetts Institute of Technology and a Ph.D. in physics from the University
of Illinois.
Dr. Lambeth has served as a Director of Intevac since May 1996. Dr. Lambeth
has been Professor of both Electrical and Computer Engineering and Material
Science Engineering at Carnegie Mellon University since 1989. Dr. Lambeth was
Associate Director of the Data Storage Systems at Carnegie Mellon University
from 1989 to 1999. Since 1988, Dr. Lambeth has been the owner of Lambeth
Systems, an engineering consulting firm. From 1973 to 1988, Dr. Lambeth worked
at Eastman Kodak Company's Research Laboratories, most recently as the head of
the Magnetic Material Laboratory. Dr. Lambeth holds a B.S. in electrical
engineering from the University of Missouri and a Ph.D. in physics from the
Massachusetts Institute of Technology.
Dr. Smead has served as a Director of Intevac since February 1991. Dr.
Smead joined Kaiser in 1974 and served as Kaiser's President from 1974 until
October 1, 1997. Dr. Smead served as President and Chairman of the Board of
Directors of K Systems, Inc., Kaiser's parent company, from 1977 until October
1, 1997. Dr. Smead served as Chairman of the Board of Directors of Kaiser and as
a director for all of Kaiser's subsidiaries until December 31, 1999. Dr. Smead
continues to serve as a director of Kaiser. Dr. Smead holds a B.S. in electrical
engineering from the University of Colorado, a M.S. in electrical engineering
from the University of Washington and a Ph.D. in electrical engineering from
Purdue University.
14
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Intevac's Common Stock commenced trading on the Nasdaq National Market on
November 21, 1995 and is traded under the symbol "IVAC." As of December 31,
1999, there were approximately 2,000 holders of record of the Common Stock. The
following table sets forth for the periods indicated the high and low closing
sale prices for the Common Stock as reported on the Nasdaq National Market.
HIGH LOW
------- ------
Fiscal 1998
First Quarter........................................... $10.375 $7.625
Second Quarter.......................................... $11.125 $7.500
Third Quarter........................................... $10.875 $6.250
Fourth Quarter.......................................... $10.000 $5.875
Fiscal 1999
First Quarter........................................... $10.125 $5.625
Second Quarter.......................................... $ 6.250 $4.125
Third Quarter........................................... $ 6.125 $4.500
Fourth Quarter.......................................... $ 4.625 $2.750
DIVIDEND POLICY
Intevac currently anticipates that it will retain its earnings, if any, for
use in the operation of its business and does not expect to pay cash dividends
on its capital stock in the foreseeable future.
15
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data of Intevac is qualified by reference
to and should be read in conjunction with the consolidated financial statements
of Intevac, including the notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations, each appearing
elsewhere in this Report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995(2)
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net Revenues:
Disk, flat panel and other.............................. $ 42,962 $ 95,975 $133,207 $88,232 $42,187
MBE(1).................................................. -- -- -- -- 695
-------- -------- -------- ------- -------
Total net revenues............................. 42,962 95,975 133,207 88,232 42,882
Cost of net revenues:
Disk, flat panel and other.............................. 40,410 71,717 91,255 55,652 27,280
MBE(1).................................................. -- -- -- -- 434
-------- -------- -------- ------- -------
Total cost of net revenues..................... 40,410 71,717 91,255 55,652 27,714
-------- -------- -------- ------- -------
Gross Profit............................................ 2,552 24,258 41,952 32,580 15,168
Operating expenses:
Research and development................................ 14,136 12,743 10,716 8,425 2,603
Selling, general and administrative..................... 7,226 10,879 11,399 8,391 4,550
Restructuring and other................................. 3,069 1,088 -- -- --
Acquired in-process research and development............ -- -- 299 5,835 --
-------- -------- -------- ------- -------
Total operating expenses....................... 24,431 24,710 22,414 22,651 7,153
-------- -------- -------- ------- -------
Operating income (loss)................................. (21,879) (452) 19,538 9,929 8,015
Interest expense........................................ (3,711) (4,187) (3,581) (175) (13)
Interest income and other income, net................... 3,632 3,176 3,268 1,569 942
-------- -------- -------- ------- -------
Income (loss) from continuing operations before income
taxes................................................. (21,958) (1,463) 19,225 11,323 8,944
Provision for (benefit from) income taxes............... (8,344) (882) 6,728 6,350 3,179
-------- -------- -------- ------- -------
Income (loss) from continuing operations................ (13,614) (581) 12,497 4,973 5,765
Income from discontinued operations..................... -- 1,005 -- -- 1,335
Income from repurchase of convertible notes............. 3,844 -- -- -- --
-------- -------- -------- ------- -------
Net income (loss).............................. $ (9,770) $ 424 $ 12,497 $ 4,973 $ 7,100
======== ======== ======== ======= =======
Basic earnings per share:
Income (loss) from continuing operations................ $ (1.16) $ (0.05) $ 1.00 $ 0.40 $ 1.58
Net income (loss)....................................... $ (0.83) $ 0.04 $ 1.00 $ 0.40 $ 1.94
Shares used in per share calculations................... 11,777 12,052 12,514 12,311 3,653
Diluted earnings per share:
Income (loss) from continuing operations................ $ (1.16) $ (0.05) $ 0.94 $ 0.39 $ 0.58
Net income (loss)....................................... $ (0.83) $ 0.03 $ 0.94 $ 0.39 $ 0.72
Shares used in per share calculations................... 11,777 12,354 15,385 12,901 9,881
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 40,895 $ 60,916 $ 71,142 $ 938 $20,422
Working capital......................................... 51,579 77,774 78,025 15,847 21,327
Total assets............................................ 94,382 122,976 147,794 68,085 51,160
Long-term debt.......................................... 43,188 59,461 59,480 730 --
Total shareholders' equity.............................. 29,623 40,436 42,435 33,736 27,320
Cash dividends declared per common share................ -- -- -- -- 0.495
- ---------------
(1) In the fourth quarter of 1993, Intevac sold its Molecular Beam Epitaxi
("MBE") Operations and acquired 20% of the outstanding capital stock of
Chorus, a manufacturer of MBE products. Intevac retained rights to sell
certain other residual used systems of the MBE business that were not
exchanged with Chorus. The sale of these used systems was completed during
the first quarter of 1995.
(2) During 1995, Intevac (a) effected a recapitalization in which each
outstanding share of Series A Preferred Stock was exchanged for two thirds
of a share of Common Stock and $0.76 ($9.9 million in aggregate), (b) paid
$4.9 million of dividends to the common shareholders, (c) paid $6.1 million
to redeem the Series 1 Preferred Stock, and (d) received approximately $12.0
million from the sale of common stock during the Initial Public Offering.
16
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. Words such as "believes", "expects",
"anticipates" and the like indicate forward-looking statements. Intevac's actual
results may differ materially from the results discussed in the forward-looking
statements for a variety of reasons, including those set forth under "Risk
Factors Affecting Intevac's Business" and should be read in conjunction with the
Consolidated Financial Statements and related Notes contained elsewhere in this
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Net revenues. Net revenues consist primarily of sales of Intevac's disk
sputtering systems and related equipment used to manufacture thin-film disks for
computer hard disk drives, contract research and development, system components,
flat panel display manufacturing equipment, and electron beam systems. Net
revenues from the sales of sputtering systems, flat panel equipment and electron
beam systems are recognized upon customer acceptance. Net revenues from the
sales of system components are recognized upon product shipment. Revenue from
contract research and development is recognized in accordance with contract
terms, typically as costs are incurred. Net revenues totaled $43.0 million,
$96.0 million and $133.2 million in 1999, 1998 and 1997, respectively. Equipment
revenues totaled $36.0 million, $90.6 million and $129.6 million in 1999, 1998
and 1997, respectively. Equipment revenues decreased in 1999 from 1998 primarily
due to a decrease in net revenues from disk sputtering systems and related
equipment and to a lesser extent a decrease in net revenues from electron beam
systems and flat panel display manufacturing equipment. Equipment revenues
decreased in 1998 from 1997 primarily due to a decrease in net revenues from
disk sputtering systems and related equipment, which was partially offset by an
increase in net revenues from flat panel equipment and electron beam systems.
Photonics revenues totaled $7.0 million, $5.7 million and $3.6 million in 1999,
1998 and 1997, respectively. Photonics revenues increased from 1997 through 1999
as the result of an increase in revenues from research and development
contracts. Intevac's backlog of orders at December 31, 1999 was $24.6 million as
compared to a December 31, 1998 order backlog of $26.1 million. The majority of
these orders are expected to be recognized for revenue throughout 2000. Intevac
expects that revenues during the first quarter of 2000 will be less than or
equal to the revenue level reported during the fourth quarter of 1999. There can
be no assurance that the reduced level of revenue experienced during the fourth
quarter of 1999 will not continue beyond the first quarter of 2000.
In 1999, Matsubo (Intevac's Japanese distributor), Seagate and Lockheed
Martin each accounted for more than 10% of Intevac's consolidated revenues and
in aggregate accounted for 66% of net revenues. In 1998, Matsubo, HMT Technology
and MMC Technology each accounted for more than 10% of Intevac's consolidated
revenues and in aggregate accounted for 71% of net revenues. In 1997, Matsubo,
HMT Technology and Trace Storage Technology each accounted for more than 10% of
Intevac's consolidated revenues and in aggregate accounted for 69% of net
revenues.
International sales totaled $25.7 million, $51.0 million and $84.7 million
in 1999, 1998 and 1997, respectively. International sales accounted for 60%, 53%
and 64% of net revenues in 1999, 1998 and 1997, respectively. The decrease in
foreign sales from 1998 to 1999 was the result of decreased sales of equipment,
primarily disk sputtering systems, and to a lesser extent, decreased sales of
electron beam systems, which were offset partially by an increase in sales of
rapid thermal processing systems used to produce flat panel displays. The
decrease in foreign sales from 1997 to 1998 was primarily the result of
decreased sales of equipment, primarily disk sputtering systems. Substantially
all of Intevac's international sales are to customers in the Far East and a
portion of these sales are denominated in Japanese Yen.
Gross margin. Cost of net revenues consists primarily of purchased
materials, fabrication, assembly, test, installation, warranty costs, royalties,
scrap and costs attributable to contract research and development. Gross margin
was 5.9%, 25.3%, and 31.5% in 1999, 1998, and 1997, respectively. Gross margins
declined in 1999 from 1998 as the result of under-absorption of manufacturing
overhead due to low manufacturing volume, the sale of four used disk sputtering
systems at heavily discounted prices, high initial costs to complete Intevac's
first MDP-250K disk sputtering system and first production rapid thermal
processing system, write-down of
17
18
RPC inventory related to the plan to discontinue operations, payment of $0.5
million as part of the settlement of a patent claim, establishment of a $0.4
million cost to market reserve on a used MDP-250B disk sputtering system
remaining in inventory and an increase in the percentage of total revenue
derived from research and development contracts. The reduction in gross margins
in 1998 from 1997 was primarily due to lower volumes and increased pricing
pressure in the equipment business and, to a lesser extent, the negative gross
margin incurred on the first RIGEL flat panel sputtering system acceptance and a
greater percentage of net revenues being derived from electron beam processing
equipment and contract research and development in the photonics business.
Research and development. Research and development expense consists
primarily of prototype materials, salaries and related costs of employees
engaged in ongoing research, design and development activities for disk
equipment, flat panel display manufacturing equipment and electron beam
processing equipment, and the costs of research by Intevac's photonics business.
Company funded research and development expense totaled $14.1 million, $12.7
million and $10.7 million in 1999, 1998 and 1997, respectively. The increase
from 1998 to 1999 was caused primarily by higher expenses related to development
of flat panel manufacturing equipment and photonics products. The increase from
1997 to 1998 was caused primarily by higher expenses related to development of
disk manufacturing equipment, partially offset by a reduction in expenses
related to development of flat panel equipment.
Research and development expenses do not include costs of $5.9 million,
$4.8 million and $4.7 million in 1999, 1998 and 1997, respectively, related to
contract research and development. These expenses are included in cost of goods
sold.
Research and development expenses also do not include costs of $1.1
million, $1.8 million and $1.3 million that were incurred by Intevac in 1999,
1998 and 1997, respectively, and reimbursed under the terms of research and
development cost sharing agreements related to development of equipment for
manufacturing flat panel displays and development of vapor lubrication equipment
for manufacturing thin film disks.
Selling, general and administrative. Selling, general and administrative
expense consists primarily of selling, marketing, customer support, financial,
travel, management, legal and professional services costs. Domestic sales are
made by Intevac's direct sales force, whereas international sales are made by
distributors that typically provide sales, installation, warranty and ongoing
customer support. Intevac also has a subsidiary in Singapore to support
customers in Southeast Asia. Intevac markets its flat panel manufacturing
equipment to the Far East through its Japanese joint venture, IMAT. Selling,
general and administrative expense totaled $7.2 million, $10.9 million and $11.4
million in 1999, 1998 and 1997, respectively, representing 16.8%, 11.3% and 8.6%
of net revenues. The primary reason for the decrease from 1998 to 1999 was a
lower level of selling, general and administrative expense in the Equipment
Business. The lower level of expense was primarily due to a decline in selling,
general and administrative staff from 77 employees to 37 employees during 1999
as a result of a March 1999 reduction in force, attrition, and the reassignment
of certain administrative employees to operations. The decrease in selling,
general and administration expenses from 1997 to 1998 was primarily the result
of a decline in selling, general and administrative staff from 99 employees to
77 employees as a result of reductions in force that took place in March and
August of 1998.
Restructuring and other expense. Restructuring and other expense was $3.1
million and $1.1 million in 1999 and 1998, respectively.
During the fourth quarter of 1999, Intevac adopted a plan to discontinue
operations at its RPC Technologies, Inc. electron beam processing equipment
subsidiary and to close RPC's facility in Hayward, California. Twenty-two
employees out of Intevac's staff of contract and regular personnel will be
terminated as a result. Intevac incurred a charge of $1,639,000 related to this
plan. The significant components of this charge included $679,000 for inventory
write-downs which were charged to cost of revenues, $264,000 for fixed asset
write-offs, $200,000 for closure of the facility, $163,000 for employee
severance costs, $161,000 for future rent due on the facility and $152,000 for
write-off of intangibles. As of December 31, 1999, approximately $679,000 of
inventory had been written down, $152,000 of intangibles had been written off
and $788,000 remained in other accrued liabilities related to the other items of
the plan.
18
19
During the third quarter of 1999, Intevac adopted an expense reduction plan
that included closing one of the buildings at its Santa Clara facility and a
reduction in force of 7 employees out of Intevac's staff of contract and regular
personnel. The reductions took place at Intevac's facilities in Santa Clara,
California. Intevac incurred a charge of $2,225,000 related to the expense
reduction plan. The significant components of this charge included $873,000 for
future rent due on the building (net of expected sublease income), $160,000 for
costs associated with maintaining the building through May 2000, $580,000 for
the write-off of leasehold improvements and $584,000 for moving out of the
building. As of December 31, 1999, approximately $179,000 had been spent moving
out of the building, $167,000 had been spent on rent due on the facility,
$93,000 of fixed assets had been written off, $52,000 had been spent on
operating costs and $20,000 in termination benefits had been paid out to
affected employees. In the fourth quarter of 1999, $97,000 of the restructuring
reserve was reversed due to lower than expected costs on the closure of the
facility, leaving a balance of $1,617,000 in other accrued liabilities at
December 31, 1999.
During the first quarter of 1999, Intevac implemented a reduction in force
of 17 employees out of Intevac's staff of contract and regular personnel. The
reductions took place at Intevac's facilities in Santa Clara, California.
Intevac incurred a charge of $115,000 related to severance costs for the
affected employees. As of December 31, 1999, all of the severance had been paid.
During the third quarter of 1998, Intevac implemented a reduction in force
of 27 employees out of Intevac's staff of contract and regular personnel. The
reductions took place at Intevac's facilities in Santa Clara, CA; Hayward, CA;
Singapore; and Taiwan. Intevac incurred a charge of $71,000 related to severance
costs for the affected employees.
During the first quarter of 1998, Intevac adopted an expense reduction plan
that included a reduction in force of 90 employees out of Intevac's staff of
contract and regular personnel. The reductions took place at Intevac's
facilities in Santa Clara, CA; Los Gatos, CA; Rocklin, CA; and Taiwan.
Additionally, Intevac relocated its RTP Operation from Rocklin to Intevac's
Santa Clara headquarters and closed the Rocklin facility. Intevac incurred a
charge of $1,164,000 related to the expense reduction plan. The significant
components of this charge included $290,000 for closure of the Rocklin facility,
$462,000 for the balance of the rent due on the lease for such facility and
$392,000 for employee severance costs. Closure of the facility was completed in
the second quarter of 1998. In the fourth quarter of 1998, $147,000 of the
restructuring reserve was reversed due to lower than expected costs incurred on
the closure of the Rocklin facility. In the first quarter of 1999, Intevac
negotiated an early termination of its lease commitment in Rocklin, CA. which
resulted in Intevac reversing the remaining $132,000 of the restructuring
reserve.
Acquired in-process research and development. Intevac recognized a charge
for acquired in-process research and development of $0.3 million during 1997 as
a result of the acquisition of its electron beam processing equipment product
line.
Interest expense. Interest expense consists primarily of interest on the
Convertible Notes issued in the first quarter of 1997, and to a lesser extent,
interest on approximately $2.0 million of long-term debt related to the purchase
of Cathode Technology in 1996. Interest expense totaled $3.7 million, $4.2
million and $3.6 million in 1999, 1998 and 1997, respectively. The decline in
interest expense was primarily the result of the repurchase by Intevac of $16.3
million of its 6.5% Convertible Notes Due 2004 (the "Convertible Notes") during
1999. The repurchase reduced the balance outstanding of the Convertible Notes to
$41.2 million.
Interest income and other, net. Interest income and other, net totaled $3.6
million, $3.2 million and $3.3 million in 1999, 1998 and 1997, respectively.
Interest income and other, net in 1999 consisted of $2.1 million of interest
income on Intevac's investments, $1.1 million of dividends on Intevac's interest
in the 601 California Avenue LLC, and $0.5 million of gains on foreign currency
forward contracts. Interest income and other, net in 1998 consisted of $2.8
million of interest income on Intevac's investments, $0.7 million of dividends
on Intevac's interest in the 601 California Avenue LLC, $0.4 million of deferred
income related to the sale of Intevac's interest in Chorus Corporation, early
payment discounts, and $0.9 million of losses on foreign currency forward
contracts. Interest income and other, net in 1997 consisted of $2.3 million of
interest income, $0.8 million of deferred income related to the sale of
Intevac's interest in Chorus Corporation and early payment discounts, which were
partially offset by a foreign currency translation loss.
19
20
Discontinued operations. In March 1995, Intevac adopted a formal plan to
discontinue its night vision business and sold its night vision business to
Litton Systems, Inc. in May 1995. In 1998, Intevac recognized net income from
discontinued operations of $1.0 million, net of income taxes, from the reversal
of reserves established at the time of the sale and from payment received from
Litton for excess warranty reserves transferred during the sale of the night
vision business.
6 1/2% Convertible Subordinated Notes Due 2004. In July 1998, Intevac's
Board of Directors approved the repurchase in the open market of up to $19.0
million of the Convertible Notes. Intevac repurchased $16.3 million of its
Convertible Notes during 1999 from which it recognized a gain of $3.8 million,
net of applicable taxes.
Provision for (benefit from) income taxes. For the year ended December 31,
1999, Intevac realized a $8.3 million tax benefit provision, equivalent to a 38%
annual tax rate, on a pretax loss from continuing operations of $22.0 million.
Intevac's 1999 effective tax rate differed from the applicable statutory rates
primarily due to benefits from tax-exempt interest income, which were partially
offset by nondeductible goodwill amortization. A net deferred tax asset of $7.7
million is reflected in the financial statements at December 31, 1999.
Management believes it is more likely than not that Intevac will realize the
benefit of this asset.
For the year ended December 31, 1998, Intevac realized a $0.9 million tax
benefit provision, equivalent to a 60% annual tax rate, on a pretax loss from
continuing operations of $1.5 million. Intevac's 1998 tax benefit was primarily
due to tax-exempt interest income and benefits from Intevac's foreign sales
corporation, partially offset by non-deductible goodwill amortization.
For the year ended December 31, 1997, income tax expense as a percentage of
pretax income was 35%.
LIQUIDITY AND CAPITAL RESOURCES
Intevac's operating activities in 1999 used cash of $7.7 million primarily
as a result of the net loss incurred by Intevac, the non-cash gain on the
purchase of Convertible Notes and a reduction in customer advances which were
partially offset by depreciation and amortization, a reduction in inventory and
an increase in accrued liabilities.
Investing activities in 1998 provided cash of $17.6 million primarily due
to the net sale of $19.3 million of investments, which was partially offset by
the purchase of $1.7 million of property and equipment.
Financing activities in 1998 used $10.6 million of cash as a result of the
repurchase of $16.3 million of Intevac's Convertible Notes due 2004 for $9.7
million and the repurchase of 321,000 shares of Intevac's common stock for $1.6
million under Intevac's stock repurchase plan, which was partially offset by
$0.7 million in proceeds from the sale of Intevac's stock to employees under the
employee stock option and employee stock purchase plans.
At December 31, 1999, Intevac had $40.9 million of cash, cash equivalents
and short-term investments. Intevac intends to undertake approximately $3
million in capital expenditures during the next 12 months and believes the
existing cash and cash equivalent balances will be sufficient to meet its cash
requirements for the next twelve months and for the foreseeable future.
YEAR 2000
In late 1999, Intevac completed the remediation and testing of its systems
to ensure compliance with the Year 2000. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
Costs of remediation efforts were immaterial.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems or the products or
services of third parties. The Company will continue to
20
21
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest rate risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with high quality credit issuers
and, by policy, limits the amount of credit exposure to any one issuer.
Short-term investments typically consist of investments in tax-exempt market
auction rate preferred municipal bonds.
The table below presents principal amounts and related weighted-average
interest rates by year of maturity for the Company's investment portfolio and
debt obligations.
FAIR
2000 2001 2002 2003 2004 BEYOND TOTAL VALUE
------- ------ ---- ---- ------- ------ ------- -------
(IN THOUSANDS)
Cash equivalents
Variable rate.................... $ 2,730 -- -- -- -- -- $ 2,730 $ 2,730
Average rate..................... 5.72% -- -- -- -- --
Short-term investments
Variable rate.................... $37,600 -- -- -- -- -- $37,600 $37,600
Average rate..................... 4.44% -- -- -- -- --
Total investments
Securities....................... $40,330 -- -- -- -- -- $40,330 $40,330
Average rate..................... 4.53% -- -- -- -- --
Long-term debt
Fixed rate....................... -- $1,943 -- -- $41,245 -- $43,188 $27,566
Average rate..................... 6.46% 6.46% 6.50% 6.50% 6.50% --
Foreign exchange risk. From time to time, the Company enters into foreign
currency forward exchange contracts to economically hedge certain of its
anticipated foreign currency transaction, translation and re-measurement
exposures. The objective of these contracts is to minimize the impact of foreign
currency exchange rate movements on the Company's operating results. At December
31, 1999, the Company had approximately $1.5 million (notional amount) of
short-term foreign currency forward exchange contracts denominated in yen, which
have not been designated as hedge contracts for accounting purposes. This
contract expires in the first quarter of 2000.
The following table provides information about the Company's foreign
currency forward exchange contracts at December 31, 1999.
AVERAGE ESTIMATED
NOTIONAL CONTRACT FAIR
AMOUNT RATE VALUE
--------- --------- ----------
(IN THOUSANDS EXCEPT CONTRACT RATE)
Foreign currency forward exchange contracts:
Japanese yen......................................... $1,532 118.16 $(251)
------ -----
$1,532 $(251)
====== =====
21
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEVAC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 23
Consolidated Balance Sheets................................. 24
Consolidated Statements of Income and Comprehensive
Income.................................................... 25
Consolidated Statements of Shareholders' Equity............. 26
Consolidated Statements of Cash Flows....................... 27
Notes to Consolidated Financial Statements.................. 28
22
23
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Intevac, Inc.
We have audited the accompanying consolidated balance sheets of Intevac,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of income and comprehensive income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Intevac, Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
San Jose, California
January 21, 2000
23
24
INTEVAC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------
1999 1998
------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,295 $ 3,991
Short-term investments.................................... 37,600 56,925
Accounts receivable, net of allowances of $1,713 and
$1,629 at December 31, 1999 and 1998,
respectively............................................ 5,744 10,169
Income taxes recoverable.................................. 5,463 --
Inventories, including $0 and $3,389 at customers at
December 31, 1999 and 1998,
respectively............................................ 15,965 22,102
Prepaid expenses and other current assets................. 512 658
Deferred tax assets....................................... 4,571 7,008
------- --------
Total current assets........................................ 73,150 100,853
Property, plant, and equipment, at cost:
Buildings and improvements................................ 6,441 6,262
Machinery and equipment................................... 18,017 17,747
------- --------
24,458 24,009
Less accumulated depreciation and amortization............ 12,083 10,878
------- --------
12,375 13,131
Investment in 601 California Avenue LLC..................... 2,431 2,431
Goodwill, net of amortization of $4,516 and $3,471 at
December 31, 1999 and 1998, respectively.................. 2,038 3,083
Other intangibles, net of amortization of $2,374 and $1,981
at December 31, 1999 and 1998, respectively............... 67 460
Debt issuance costs, net of amortization of $1,285 and $603
at December 31, 1999 and 1998, respectively............... 1,018 1,700
Deferred tax assets and other long term assets.............. 3,303 1,318
------- --------
Total assets....................................... $94,382 $122,976
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,014 $ 2,034
Accrued payroll and related liabilities................... 1,533 1,880
Accrued income taxes...................................... 2,778 701
Accrued product warranties................................ 801 2,015
Other accrued liabilities................................. 5,262 4,097
Book overdraft............................................ 332 722
Customer advances......................................... 9,851 11,630
------- --------
Total current liabilities................................... 21,571 23,079
Convertible notes........................................... 41,245 57,500
Other long-term debt........................................ 1,943 1,961
Commitments and contingencies
Shareholders' equity:
Undesignated preferred stock, no par value, 10,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock, no par value:
Authorized shares -- 50,000
Issued and outstanding shares -- 11,715 and 11,887 at
December 31, 1999 and 1998, respectively............... 18,170 17,917
Other comprehensive income................................ -- 122
Retained earnings......................................... 11,453 22,397
------- --------
Total shareholders' equity......................... 29,623 40,436
------- --------
Total liabilities and shareholders' equity......... $94,382 $122,976
======= ========
See accompanying notes.
24
25
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
Net revenues................................................ $42,962 $95,975 $133,207
Cost of net revenues........................................ 40,410 71,717 91,255
------- ------- --------
Gross profit................................................ 2,552 24,258 41,952
Operating expenses:
Research and development.................................. 14,136 12,743 10,716
Selling, general, and administrative...................... 7,226 10,879 11,399
Restructuring and other................................... 3,069 1,088 --
Acquired in-process research and development.............. -- -- 299
------- ------- --------
Total operating expenses.......................... 24,431 24,710 22,414
------- ------- --------
Operating income (loss)..................................... (21,879) (452) 19,538
Interest expense............................................ (3,711) (4,187) (3,581)
Interest income............................................. 2,100 2,832 2,270
Other income and expense, net............................... 1,532 344 998
------- ------- --------
Income (loss) from continuing operations before income
taxes..................................................... (21,958) (1,463) 19,225
Provision for (benefit from) income taxes................... (8,344) (882) 6,728
------- ------- --------
Income (loss) from continuing operations.................... (13,614) (581) 12,497
Extraordinary items:
Gain from discontinued operations, net of applicable
income taxes of $495................................... -- 1,005 --
Gain from repurchase of convertible notes, net of
applicable income taxes of $2,355...................... 3,844 -- --
------- ------- --------
Income from extraordinary items............................. 3,844 1,005 --
------- ------- --------
Net income (loss)........................................... $(9,770) $ 424 $ 12,497
------- ------- --------
Other comprehensive income:
Unrealized foreign currency translation adjustment........ -- 122 --
------- ------- --------
Total adjustments........................................... -- 122 --
------- ------- --------
Total comprehensive income (loss)........................... $(9,770) $ 546 $ 12,497
======= ======= ========
Basic earnings per share:
Income (loss) from continuing operations.................. $( 1.16) $ (0.05) $ 1.00
Net income (loss)......................................... $ (0.83) $ 0.04 $ 1.00
Shares used in per share amounts.......................... 11,777 12,052 12,514
Diluted earnings per share:
Income (loss) from continuing operations.................. $ (1.16) $ (0.05) $ 0.94
Net income (loss)......................................... $ (0.83) $ 0.03 $ 0.94
Shares used in per share amounts.......................... 11,777 12,354 15,385
See accompanying notes.
25
26
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER TOTAL
---------------- COMPREHENSIVE RETAINED STOCKHOLDER'S
SHARES AMOUNT INCOME EARNINGS EQUITY
------ ------- ------------- -------- -------------
Balance at December 31, 1996................ 12,449 16,747 -- 16,989 33,736
Sale of common stock under stock option
plan................................... 37 106 -- -- 106
Sale of common stock under employee stock
purchase plan.......................... 143 850 -- -- 850
Repurchase of common stock................ (475) (640) -- (4,387) (5,027)
Income tax benefits realized from activity
in employee stock plans................ -- 273 -- -- 273
Net income................................ -- -- -- 12,497 12,497
------ ------- ---- ------- -------
Balance at December 31, 1997................ 12,154 17,336 -- 25,099 42,435
Sale of common stock under stock
option plan............................ 39 130 -- -- 130
Sale of common stock under employee stock
purchase plan.......................... 151 1,001 -- -- 1,001
Repurchase of common stock................ (457) (670) -- (3,126) (3,796)
Income tax benefits realized from activity
in employee stock plans................ -- 120 -- -- 120
Change in foreign currency translation
adjustments............................ -- -- 122 -- 122
Net income................................ -- -- -- 424 424
------ ------- ---- ------- -------
Balance at December 31, 1998................ 11,887 $17,917 $122 $22,397 $40,436
Sale of common stock under stock
option plan............................ 27 38 -- -- 38
Sale of common stock under employee stock
purchase plan.......................... 122 684 -- -- 684
Repurchase of common stock................ (321) (491) -- (1,174) (1,665)
Income tax benefits realized from activity
in employee stock plans................ -- 22 -- -- 22
Change in foreign currency translation
adjustments............................ -- -- (122) -- (122)
Net income................................ -- -- -- (9,770) (9,770)
------ ------- ---- ------- -------
Balance at December 31, 1999................ 11,715 $18,170 $ -- $11,453 $29,623
====== ======= ==== ======= =======
See accompanying notes.
26
27
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDING DECEMBER 31,
---------------------------------
1999 1998 1997
-------- -------- ---------
OPERATING ACTIVITIES
Income (loss) from continuing operations.................... $(13,614) $ (581) $ 12,497
Income from extraordinary items............................. 3,844 1,005 --
-------- -------- ---------
Net income (loss)........................................... (9,770) 424 12,497
Adjustments to reconcile net income to net cash and cash
equivalents provided by (used in) operating activities:
Depreciation.............................................. 3,805 5,244 2,588
Amortization of intangibles............................... 1,578 2,130 2,435
Acquired in-process research and development.............. -- -- 299
Gain on sale of Chorus investment......................... -- (395) (785)
Gain on sale of discontinued operations................... -- (794) --
Gain on purchase of convertible notes..................... (6,199) -- --
(Gain)/loss on IMAT investment............................ (39) 206 144
Restructuring and other charges -- non-cash portion....... 428 506 --
Loss on disposal of equipment............................. 336 206 79
Changes in assets and liabilities:
Accounts receivable..................................... (1,038) (535) 8,377
Inventory............................................... 4,147 11,818 (8,494)
Prepaid expenses and other assets....................... 586 (1,651) (2,119)
Accounts payable........................................ (1,020) (2,551) (107)
Accrued payroll and other accrued liabilities........... 1,287 (3,049) 5,593
Customer advances....................................... (1,779) (16,617) 5,102
Discontinued operations -- non-cash changes and working
capital
changes............................................... -- -- 194
-------- -------- ---------
Total adjustments........................................... 2,092 (5,482) 13,306
-------- -------- ---------
Net cash and cash equivalents provided by (used in)
operating activities...................................... (7,678) (5,058) 25,803
INVESTING ACTIVITIES
Purchase of investments..................................... (50,880) (56,500) (118,345)
Proceeds from sales and maturities of investments........... 70,205 46,286 71,634
Purchase of equipment....................................... (1,736) (2,898) (6,092)
Investment in IMAT.......................................... -- -- (436)
Investment in RPC Industries................................ -- -- (955)
Proceeds from sale of Chorus Investment..................... 395 785
-------- -------- ---------
Net cash and cash equivalents provided by (used in)
investing activities...................................... 17,589 (12,717) (53,409)
FINANCING ACTIVITIES
Notes payable and line of credit repayments................. -- -- (27)
Proceeds from issuance of common stock...................... 722 1,131 956
Repurchase of common stock.................................. (1,665) (3,796) (5,027)
Repurchase of Intevac convertible notes..................... (9,664) -- --
Proceeds from convertible bond offering..................... -- -- 55,197
-------- -------- ---------
Net cash and cash equivalents provided by (used in)
financing activities...................................... (10,607) (2,665) 51,099
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ (696) (20,440) 23,493
Cash and cash equivalents at beginning of period............ 3,991 24,431 938
-------- -------- ---------
Cash and cash equivalents at end of period.................. $ 3,295 $ 3,991 $ 24,431
======== ======== =========
Cash paid (received) for:
Interest.................................................. $ 3,555 $ 3,481 $ 2,074
Income taxes.............................................. -- 4,065 6,233
Income tax refund......................................... (3,099) -- --
Other non-cash changes:
Inventories transferred to (from) property, plant and
equipment............................................... $ 1,942 $ (767) $ 567
Income tax benefit realized from activity in employee
stock plans............................................. 22 120 273
See accompanying notes.
27
28
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND NATURE OF OPERATIONS
Intevac, Inc.'s ("Intevac" or the "Company") Equipment Business is a
leading supplier of static sputtering systems and related manufacturing
equipment used to manufacture thin-film disks for computer hard disk drives. The
Company's principal product, the MDP-250 disk sputtering system, enables disk
manufacturers to produce high performance, high capacity disks. The Company
sells its sputtering systems to both captive and merchant thin film disk
manufacturers. The Company sells and markets its products directly in the United
States, and through exclusive distributors in Japan and Korea. The Company
supports its customers in Southeast Asia through its wholly owned subsidiary in
Singapore.
The Company's Photonics Business develops technology that permits highly
sensitive detection of photons in the visible and short wave infrared portions
of the spectrum. This technology when combined with advanced silicon integrated
circuits makes it possible to produce highly sensitive video cameras. This
development work is creating new products for both military and industrial
applications.
During the fourth quarter of 1999, the Company adopted a plan to
discontinue its electron beam processing equipment product line and to close the
facility in Hayward, California where that equipment is built.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Intevac and
its wholly owned subsidiaries. All inter-company transactions and balances have
been eliminated.
Revenue Recognition
Systems and components -- Revenues for disk sputtering systems, flat panel
equipment and electron beam processing systems are recognized upon customer
acceptance. Revenues for system component sales are recognized upon shipment.
Service and Maintenance -- Service and maintenance contract revenue, which
to date has been insignificant, is recognized ratably over applicable contract
periods or as services are performed.
Technology Development -- The Company performs best efforts research and
development work under various research contracts. Revenue on these contracts is
recognized in accordance with contract terms, typically as costs are incurred.
Typically, for each contract, the Company commits to perform certain research
and development efforts up to an agreed upon amount. In connection with these
contracts, the Company receives funding on an incremental basis up to a ceiling.
Upon completion of each contract, each party will typically receive certain
rights to the technical and computer software data developed under the contract.
Some of these contracts are cost sharing in nature, where Intevac is reimbursed
for a portion of the total costs expended. In addition, the Company has, from
time to time, negotiated with a third party to fund a portion of the Company's
costs in return for a joint interest to the Company's rights at the end of the
contract.
Net revenues and related cost of net revenues associated with these
contracts were $7,067,000 and $7,071,000 for 1999, respectively, $5,931,000 and
$5,959,000 for 1998, respectively and $5,184,000 and $5,871,000 for 1997,
respectively.
Warranty
The Company's standard warranty is twelve months from customer acceptance.
During this warranty period any necessary non-consumable parts are supplied and
installed. A provision for the estimated cost of warranty is recorded upon
customer acceptance for systems and upon shipment for non-system products.
28
29
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
International Distribution Costs
The Company makes payments to agents and distributors under certain
agreements related to international sales in return for obtaining orders and
providing installation and warranty services. Certain of these payments to
agents and distributors are included in cost of net revenues. These amounts
totaled approximately $0, $72,000 and $1,796,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
Advertising Expenses
The Company accounts for advertising costs as expense in the period in
which they are incurred. Advertising expenses for 1999, 1998 and 1997 were
insignificant.
Customer Advances
Customer advances generally represent nonrefundable deposits invoiced by
the Company in connection with receiving customer purchase orders and shipment
of the systems. Customer advances related to systems that have not been shipped
to customers included in accounts receivable represent $930,000 and $1,839,000
at December 31, 1999 and 1998, respectively.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Short-term investments consist principally of high-quality debt instruments
with maturities generally between one and twelve months and are carried at fair
value. These investments are typically short-term in nature and therefore bear
minimal risk.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. At December 31, 1998, all debt securities were classified as
available-for-sale under Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities". Securities
classified as available-for-sale are reported at fair market value with the
related unrealized gains and losses included in retained earnings. Realized
gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in other income and expenses. The
cost of securities sold is based on the specific identification method.
Cash and cash equivalents represent cash accounts and money market funds.
Short-term investments of $37,600,000 and $56,925,000 at December 31, 1999 and
1998, respectively, consist primarily of investments in tax-exempt market
auction rate preferred municipal bonds. Fair values are based on quoted market
prices. The amount of unrealized gain or loss was not significant for the years
ended December 31, 1999 and 1998. Gross realized gains and losses for the years
ended December 31, 1999, 1998 and 1997 were not significant.
Long-lived Assets
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and Long-lived Assets to be Disposed Of", the carrying value
of intangible assets and other long-lived assets is reviewed on a regular basis
for the existence of facts or circumstances, both internal and external, that
may suggest impairment. To date, no such impairment has been indicated. Should
there be impairment in the future, Intevac will measure the amount of the
impairment based on undiscounted expected future cash flows from the impaired
assets. The cash flow estimates that will be used will contain management's best
estimates, using assumptions and projections appropriate and customary at the
time.
29
30
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEM