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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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
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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 March 4, 1999 was approximately $42,794,000 (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 March 4, 1999 approximately 11,943,145 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 1999 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.
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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. The Company'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 the Company's Business".
PART I
ITEM 1. BUSINESS
OVERVIEW
Intevac, Inc.'s ("Intevac" or the "Company") primary business is the
design, manufacture and sale of complex capital equipment that is used to
manufacture products such as thin-film disks for computer disk drives and flat
panel displays (the "Equipment Business"). The Company also develops highly
sensitive electro-optical devices under government sponsored R&D contracts (the
"Photonics Business").
The Equipment Business recorded sales of $90.6 million in 1998 and 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 the Company's equipment, and sales of
components are made to other manufacturers of vacuum equipment.
The Photonics Business began in 1995 when the Company's night vision
business was sold. The terms of the sale permitted Intevac to utilize the night
vision technology for non-competitive products. The majority of Photonics
Business revenues are from government sponsored R&D contracts. The Photonics
Business has been primarily developing technology that permits highly sensitive
detection in the short-wave infrared spectrum in electron sources with very
precise characteristics. This development work is aimed at creating new products
for both military and industrial applications and generated sales of $5.7
million in 1998. The Company expects that product sales will become a larger
percentage of Photonics Business revenues in 1999 and beyond.
EQUIPMENT BUSINESS PRODUCTS
Disk Sputtering Equipment
The Equipment Business' principal product is the MDP-250B disk sputtering
system. The Company offers this system for list prices ranging from $2.0 million
to $3.5 million, depending upon configuration, to both captive and merchant
thin-film disk manufacturers. The MDP-250 is 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 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. Intevac MDP-250 disk sputtering systems
are currently in operation at the following customers: Fuji Electric, Fujitsu
Limited, Hitachi, HMT Technology, IBM, Komag, MaxMedia, Mitsubishi, Nippon Sheet
Glass, Seagate Technology, Sony and Trace Storage Technology.
The mechanical design of the MDP-250 has characteristics which are similar
to the cluster tools which are widely used in semiconductor manufacturing in
that each process station is separately vacuum pumped and is vacuum isolated
during processing. The MDP-250 does not require a carrier or pallet to transport
disks through the system. Rather, disks are automatically loaded into the system
from cassettes, processed, and then automatically returned to the cassette. A
number of process stations are offered, including multiple options for
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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.
In September 1998 the Company announced that it was developing a new disk
sputtering system, the MDP-250K. The MDP-250K disk sputtering system is derived
from its predecessor, the MDP-250B. Maximum throughput is targeted to be 1100
disks per hour compared to 550 disks per hour for the MDP-250B. Vacuum levels
and transport time have been improved, which should lead to reduced
contamination and improved magnetic performance. Leading edge deposition
techniques, such as ion beam and RF magnetron deposition will be fully
integrated. Windows NT based software, a graphical user interface and modern
factory host communications are incorporated. The MDP-250K is expected to be
available during the third quarter of 1999.
Disk Lubrication Equipment
The Company, through its 1996 acquisition of San Jose Technology Corp.
("SJT"), is a leading supplier of systems used to lubricate thin-film disks. The
Company's principal lubrication product is the 7G Gravity-Flo Luber. Lubrication
is the production step that typically follows disk sputtering in the manufacture
of thin-film disks. During lubrication, a microscopic layer of lubricant is
applied to the disk's surface to improve durability and reduce surface friction.
SJT's 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.
Disk Test Equipment
In 1996, the Company acquired Lotus Technologies, Inc. ("Lotus"), a leading
manufacturer of CSS test equipment for hard disk drives and components. Lotus'
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. The Company 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 the Company 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 has 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. The Company 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 the Company developed its first flat panel sputtering machine
("D-STAR") capable of sputtering glass substrates as large as 550 mm by 650 mm.
In 1998 the Company 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 the Company initiated a project to develop a rapid
thermal processing ("RTP") system to be used in the manufacture of FPDs. The
Company's RTP system can be used to rapidly modify the
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characteristics of thin films deposited on glass substrates. For example, the
Company's RTP systems can be used to activate thin films after ion implantation.
The Company has delivered four RTP systems to date.
Electron Beam Processing Equipment
The Company acquired its electron beam processing equipment product line in
1997 when it purchased substantially all the assets and liabilities of RPC
Industries, Inc. ("RPC") of Hayward, California. The Company's principal
electron beam offering is its line of BroadBeam processors. Broad Beam
processors have historically sold for prices ranging from $0.6 million to $2.0
million, depending upon configuration, and are typically used for curing inks,
coatings and adhesives, in the manufacture of shrink-wrap films and for in-line
sterilization. Customers currently using BroadBeam equipment include Dupont,
Tetra Pack, S.D. Warren, International Paper and Gulf States Paper.
PHOTONICS BUSINESS TECHNOLOGY AND PRODUCTS
The Photonics Business is developing technology that permits highly
sensitive detection in the short-wave infrared spectrum in electron sources with
very precise characteristics. These photonics development efforts are funded
primarily with government sponsored R&D contracts. This development work is
aimed at creating new products for both military and industrial applications.
In 1998 the Photonics division demonstrated the use of electron bombarded
charge coupled devices ("EBCCDs") as the detector in a new camera operating with
high sensitivity in the infrared ("IR") portion of the spectrum. EBCCDs provide
high sensitivity detection and high-resolution imagery in the visible and short
wave infrared spectrum. This camera has been combined with a laser illuminator
to enable a new type of system that achieves recognition of military targets at
ranges of several kilometers. This technique, termed laser illuminated viewing
and ranging ("LIVAR"), is expected to be incorporated into several military
programs, and contracts are in place to develop equipment for three
applications.
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
The industries that the Company markets its products to are generally
characterized by rapid technological change and evolving industry standards. As
a result, the Company routinely invests substantial amounts in research and
development and expects to continue an active development program. The Company's
research and development expenses were $12.7 million, $10.7 million and $8.4
million, respectively, in 1998, 1997 and 1996. Research and development expenses
represented 13.3%, 8.0% and 9.5%, respectively, of net revenues in 1998, 1997
and 1996. Research and development expenses do not include costs of $1.8
million, $1.3 million and $1.3 million that were incurred by the Company in
1998, 1997 and 1996, respectively, and were reimbursed under the terms of cost
sharing agreements.
SALES CHANNEL, CUSTOMERS AND MARKETING
The selling process for the Company's equipment products is often a
multi-level and long-term process involving individuals from marketing,
engineering, operations, customer service and senior management. The 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 the Company'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, the Company's systems typically have a lengthy sales
cycle, during which the Company may expend substantial funds and management time
and effort with no assurance that a sale will result.
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The Company sells and markets its disk manufacturing products directly in
the United States, and through exclusive distributors in Japan (Matsubo) and
Korea (Chung Song). During 1997 the Company 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. Electron beam processing equipment
is marketed directly by the Company and by distributors in Europe. The Company
also services its customers in Southeast Asia through a wholly owned subsidiary
in Singapore and a branch office in Taiwan.
Historically, a significant portion of the Company's revenues in any
particular period have been attributable to sales to a limited number of
customers. For example, Matsubo, HMT Technology and MMC Technology each
accounted for more than 10% of the Company's total net revenues in 1998 and
Matsubo, HMT Technology and Trace Storage Technology each accounted for more
than 10% of the Company's total net revenues in 1997. Matsubo, Seagate and HMT
Technology each accounted for more than 10% of the Company's total net revenues
in 1996. The Company's largest customers change from period to period as large
fabrication facilities are completed and new projects are initiated. The Company
expects 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. As
purchases related to a particular new or expanded fabrication facility are
completed, sales to that customer may decrease sharply or cease altogether.
Foreign sales accounted for 53% of revenues in 1998, 64% in 1997 and 41% in
1996. The majority of the Company's foreign sales are to companies in the Far
East and the Company anticipates that sales to customers in the Far East will
continue to be a significant portion of its revenues.
CUSTOMER SUPPORT
The Company 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 the Company's
equipment process scientists who also visit customers at their plants to assist
in process development projects. The Company 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.
The Company generally provides a one-year warranty on its equipment. During
this warranty period any necessary non-consumable parts are supplied and
installed. Currently, the Company has field service offices located in the
United States, Singapore and Taiwan. In addition, service in Japan, Malaysia and
Korea is provided by the Company'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 the Company's manufacturing is conducted at its
headquarters facility in Santa Clara, California, with smaller manufacturing
facilities located in Hayward, California (electron beam processing equipment)
and Los Gatos, California (disk test equipment). The Company's manufacturing
operations include electromechanical assembly, mechanical and vacuum assembly,
fabrication of the sputter sources, and system assembly, alignment and testing.
The Company makes extensive use of the infrastructure serving the semiconductor
equipment business. The Company 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. The Company has a well-equipped fabrication center that produces parts
on short notice for engineering, manufactures a portion of the fabricated parts
used in Intevac products and sells fabricated parts to commercial customers.
The Company'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, the Company
currently designs its products to use standard parts where possible. The Company
performs manufacturing activities that add value or that require unique
technology or specialized knowledge
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and, taking advantage of its Silicon Valley location, utilizes subcontractors to
perform other manufacturing activities.
BACKLOG
The Company's backlog was $26.1 million and $73.8 million at December 31,
1998 and December 31, 1997, respectively. The Company 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 the Company's customers cannot be
determined with accuracy, and therefore the Company's backlog at any certain
date may not be indicative of future demand for the Company's products.
PATENTS AND LICENSING
The Company currently has 25 patents issued in the United States and 3
patents issued in foreign countries, and has patent applications pending in the
United States and foreign countries. Of the 25 U.S. patents, 8 relate to
sputtering, 10 relate to RTP, 1 relates to lubrication systems and 6 relate to
photonics. Two foreign patents relate to sputtering and 1 relates to photonics.
In addition, the Company 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, 1998, the Company had 286 employees, including 8 contract
employees. 95 of these employees are in research and development, 114 are in
manufacturing, and 77 are in administration, customer support and marketing.
RISK FACTORS AFFECTING THE COMPANY'S BUSINESS
Cyclical Nature of the Disk Drive Industry
The Company has derived a significant proportion of its net revenues from
sales of its disk sputtering systems to manufacturers constructing new thin-film
disk fabrication facilities. The construction of new thin-film disk fabrication
facilities involves extremely large capital expenditures, resulting in few
thin-film disk fabrication facilities being constructed worldwide at any
particular time. A substantial investment is also required by disk manufacturers
to install and integrate additional thin-film disk manufacturing equipment in
connection with upgrading or expanding their existing fabrication facilities.
These costs are far in excess of the cost of purchasing the Company's system.
The magnitude of such capital expenditures has caused certain thin-film disk
manufacturers to forego purchasing significant additional thin-film disk
manufacturing equipment. Consequently, only a limited number of opportunities
for the Company to sell its systems may exist at any given time. Therefore,
winning or losing an order from any particular customer can significantly affect
the Company's operating results.
The disk drive industry is cyclical and historically has experienced
periods of under- and over-supply of product. Periods of oversupply result in
significantly reduced demand for thin-film disks and for the capital equipment
used to manufacture such disks, including the systems manufactured and marketed
by the Company. During 1997 and 1998 a number of manufacturers of hard disk
drives and a number of their suppliers reported substantial losses. Many of
these manufacturers attributed their problems to an excess supply of hard
drives, or in the case of component suppliers, an excess supply of components
for hard drives (including thin film disks). As a result, during the second half
of 1998 the Company experienced significant reductions in quarterly revenues and
incurred net losses in both the third and fourth quarters of 1998.
Rapid Technical Change
The Company's ability to remain competitive requires substantial
investments in research and development to advance its technologies. The failure
to develop, manufacture and market new systems, or to enhance
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existing systems, would have a material adverse effect on the Company's
business, financial condition and results of operations. In the past, the
Company has experienced delays from time to time in the introduction of, and
certain technical difficulties with, certain of its systems and enhancements. In
addition, the Company's competitors can be expected to continue to develop and
introduce new and enhanced products, any of which could cause a decline in
market demand for the Company's systems or a reduction in the Company's margins
as a result of intensified price competition.
The Company'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. The Company'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 a sustained
material adverse effect on the Company's business, financial condition and
results of operations. New product transitions could adversely affect sales of
existing systems, and product introductions could contribute to quarterly
fluctuations in operating results as orders for new products commence and orders
for existing products decline. There can be no assurance that the Company will
be successful in selecting, developing, manufacturing and marketing new products
or enhancements of existing products.
For example, changes in the manufacturing processes for thin-film disks
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company anticipates continued rapid
changes in the requirements of the disk drive industry and thin-film disk
manufacturing technologies. There can be no assurance that the Company will be
able to develop, manufacture and sell systems that respond adequately to such
changes. In addition, the computer disk drive industry is subject to constantly
evolving technological standards. There can be no assurance that future
technological innovations will not reduce demand for thin-film disks. The
Company's business, financial condition and results of operations could be
materially adversely affected by any trend toward technology that would replace
thin-film disks as a storage medium.
Competition
The Company experiences intense competition in the Equipment Business. For
example, the Company's disk sputtering business experiences 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 the Company. There can be no assurance that the Company'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 the Company's markets and develop such
enhanced products.
Given the lengthy sales cycle and the significant investment required to
integrate equipment into the manufacturing process, the Company 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.
International Operations and Foreign Exchange Exposure
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. The Company earns a significant portion of its revenue
from
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international sales, and these sales have included the installation of the
Company's products in European countries and Far Eastern countries such as
Japan, Singapore, Malaysia, Korea, Thailand, and Taiwan. All of the Far Eastern
countries with which the Company does business have banking systems and foreign
currencies that have experienced serious troubles and therefore subject the
Company's customers to substantial business risks. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's business, financial condition or results of operations. In particular,
although the Company's international sales have historically been denominated in
United States dollars, such sales will not all be denominated in dollars in the
future, and currency exchange fluctuations in countries where the Company does
business could materially adversely the Company's business, financial condition
and results of operations.
The Company'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 the Company's products to be
more, or less, competitive than its competitors' products. Currency fluctuations
will decrease, or increase, the Company's cost structure relative to those of
its competitors, which could impact the Company's gross margins. For example,
during 1998 the exchange rate for Japanese Yen fluctuated between approximately
113 Yen/$ and 147 Yen/$. The Company generally quotes and sells its products in
US dollars. However, for certain Japanese customers, the Company quotes and
sells its products in Japanese Yen. The Company, from time to time, enters into
foreign currency contracts in an effort to reduce the overall risk of currency
fluctuations to the Company'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 materially adversely affect
the Company's financial condition and results of operations.
Fluctuation in Operating Results
Over the last eight quarters the Company's operating income or (loss) as a
percentage of net revenues has fluctuated from approximately (47%) to 16% of net
revenues. The Company anticipates that its operating margin will continue to
fluctuate. As a result, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
Diversification and Potential Acquisitions
The Company routinely evaluates acquisition candidates and other
diversification strategies. There can be no assurance that the Company's efforts
in these areas will be successful. The Company completed one acquisition in 1997
and three acquisitions in 1996. Any future acquisition may result in potentially
dilutive issuance of equity securities, the write-off of in-process research and
development and the assumption of debt and contingent liabilities, any of which
could materially adversely affect the Company's business, financial condition
and results of operations. Additionally, as a result of the Company's ongoing
repurchase of its stock in the open market, the Company may not be able to use
the "pooling of interests" method of accounting in some acquisitions, and the
Company may therefore be required to amortize any intangible assets acquired in
connection with any acquisition.
Additionally, unanticipated expenses may be incurred relating to the
integration of technologies, research and development, and administrative
functions. 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.
Manufacturing
The Company's Equipment products have a large number of components and are
highly complex. The Company 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 the Company
must be customized to meet individual customer site or operating requirements.
The Company has limited manufacturing capacity and may be unable to complete the
development or meet the technical specifications
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of its new systems or enhancements or to manufacture and ship these systems or
enhancements in a timely manner. Such an occurrence would materially adversely
affect the Company's business, financial condition and results of operations as
well as its relationships with customers. In addition, the Company 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, the Company 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 such events could
materially adversely affect the Company's business, financial condition and
results of operations.
Intellectual Property
There can be no assurance that any of the Company's patent applications
will be allowed or that any of the allowed applications will be issued as
patents. There can be no assurance that any patent owned by the Company will not
be invalidated, deemed unenforceable, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to the Company or
that any of the Company's pending or future patent applications will be issued
with claims of the scope sought by the Company, if at all. Furthermore, there
can be no assurance that others will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company. In
addition, there can be no assurance that foreign patent rights, intellectual
property laws or the Company's agreements will protect the Company's
intellectual property rights. Failure to protect the Company's intellectual
property rights could have a material adverse effect upon the Company's
business, financial condition and results of operations.
There has been substantial litigation in the technology industry regarding
intellectual property rights. The Company has from time to time received claims
that it is infringing third parties' intellectual property rights. In August
1993, Rockwell International Corporation ("Rockwell") sued the Federal
government alleging infringement of certain patent rights with respect to the
contracts the Federal government has had with a number of companies, including
Intevac. The Federal government has notified Intevac that it may be liable in
connection with contracts for certain products in the Company's discontinued
night vision business. In January 1999, a settlement was negotiated between the
Federal government and Rockwell and approved by the court. Under the settlement,
all of Intevac's exposure related to government sales is eliminated. Rockwell
has not pursued any claims related to non-governmental sales of the products in
question.
In July 1998, CVC Products, Inc. ("CVC") indicated that they believed that
the Company was infringing one of their patents relating to sputter source
design. Upon investigation, Intevac's patent attorney advised the Company that
it was not infringing on CVC's patent. In response to CVC's threats of legal
action, Intevac filed a complaint for declaratory judgement of non-infringement
and patent invalidity against CVC on December 1, 1998. CVC filed a counterclaim
on January 14, 1999. Although the Company believes that it has meritorious
defense against the CVC counterclaim, there can be no assurance that the
resolution of the claims by CVC will not have a material adverse effect on the
Company's business, operating results and financial condition.
There can be no assurance that third parties will not in the future claim
infringement by the Company with respect to current or future patents,
trademarks, or other proprietary rights relating to the Company'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 the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. Any of the foregoing could have a material adverse effect
upon the Company's business, operating results and financial condition.
In addition, the Company believes that one of its competitors may be
infringing the Company's patent rights in connection with products currently
being offered by this competitor. Although the Company has not undertaken formal
legal proceedings, the Company has informed this competitor that the Company
believes its patent rights are being infringed and that the Company may
undertake litigation to protect its patent rights if necessary. If undertaken,
such litigation could be costly, time-consuming and result in legal claims being
made against the Company. This could have a material adverse effect on the
Company's business, operating
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results and financial condition, and, in addition, there could be no assurance
that the Company would ultimately prevail in any such litigation.
Retention of Employees
The Company believes that it has good relations with its employees. None of
the Company's employees is represented by a labor union, and the Company has
never experienced a work stoppage. The Company's operating results will 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 the Company will be successful in
attracting and retaining such personnel. The failure to attract and retain such
personnel could make it difficult to undertake or could significantly delay the
Company's research and development efforts and any necessary expansion of its
manufacturing capabilities or other activities, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Leverage
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, the
Company incurred a substantial increase in the ratio of long-term debt to total
capitalization (shareholders' equity plus long-term debt). The ratio at December
31, 1998 and 1997 was approximately 59.5% and 58.4%, respectively. As a result
of this indebtedness, the Company incurred substantial principal and interest
obligations. The degree to which the Company is leveraged could have a material
adverse effect on the Company'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. The Company's
ability to meet its debt service obligations will be dependent on the Company's
future performance, which will be subject to financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control.
Possible Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company'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 the Company 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 the Company's relationships with customers and suppliers could cause
the price of the Company's Common Stock 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. Such fluctuations could adversely affect the market price
of the Company's Common Stock.
Concentration of Stock Ownership
Based on the shares outstanding on December 31, 1998, the present directors
and their affiliates and executive officers, in the aggregate, own beneficially
approximately 56.7% of the Company'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 the Company, including the
election of a majority of the directors and approval of significant corporate
transactions.
Environmental Regulations
The Company 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
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substantial civil penalties or criminal fines being imposed on the Company or
its officers, directors or employees, suspension of production, alteration of
its manufacturing process or cessation of operations. Such regulations could
require the Company to acquire expensive remediation or abatement equipment or
to incur substantial expenses to comply with environmental regulations. Any
failure by the Company to properly manage the use, disposal or storage of, or
adequately restrict the release of, hazardous or toxic substances could subject
the Company to significant liabilities.
ITEM 2. PROPERTIES
The Company leases all of its facilities, including approximately 175,400
square feet in Santa Clara, California. These buildings house manufacturing,
research and development, marketing and administration, and the Company's
headquarters offices. The leases for these buildings expire in October 1999
(8,300 square feet) and March 2002 (167,100 square feet). The Company has an
option to extend the lease with respect to 167,100 square feet for an additional
five-year period, with a monthly base rent to be negotiated by the Company and
the lessor. If the Company 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.
The Company leases an 18,900 square-foot building in Rocklin, California
which used to house the RTP Business. This lease expires in November 2000. The
Company is actively attempting to sublet the property for the remaining term of
the lease.
The Company leases a facility of approximately 6,600 square feet in Los
Gatos, California to house the Lotus Technology Division. This lease expires in
May 1999.
The Company leases a facility of approximately 31,500 square feet in
Hayward, California to house the RPC Technologies Division. This lease expires
in March 2001.
The Company leases a facility of approximately 2,400 square feet in
Singapore to house the Singapore customer support organization. This lease
expires in December 1999. The Company has an option to extend the lease for an
additional year at market rates.
The Company leases approximately 1,400 square feet in Taiwan to house the
Taiwan customer support organization. The lease expires in October 1999.
The Company leases approximately 600 square feet in Malaysia to house the
Malaysia customer support organization. The lease expires in February 1999. The
Company has an option to extend the lease for an additional year.
The Company believes that its current facilities are suitable and adequate
for its current and foreseeable operations. The Company currently operates with
one full manufacturing shift and one partial manufacturing shift. The Company
believes that it currently has sufficient productive capacity to meet its
current needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
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.
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EXECUTIVE OFFICERS AND DIRECTORS
Certain information about the Company's directors and executive officers is
listed below:
NAME AGE POSITION
---- --- --------
Executive Officers and Directors:
Norman H. Pond....................... 60 Chairman of the Board, President and
Chief Executive Officer
Charles B. Eddy III.................. 48 Vice President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
Robert D. Hempstead.................. 55 Chief Operating Officer and Director
Edward Durbin(1)..................... 71 Director
David N. Lambeth(1)(2)............... 51 Director
H. Joseph Smead(2)................... 73 Director
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Pond is a founder of the Company and has served as Chairman of the
Board, President and Chief Executive Officer since February 1991. Before joining
the Company, 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 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 the Company 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.
Dr. Hempstead has served as Chief Operating Officer of the Company since
April 1996. He was appointed a Director of the Company in 1997. Before joining
the Company, 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 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.
Mr. Durbin has served as a Director of the Company 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. Lambeth has served as a Director of the Company since May 1996. Dr.
Lambeth has been Professor of electrical and computer engineering and Associate
Director of the Data Storage Systems at Carnegie Mellon University since 1989.
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
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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 the Company 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 currently serves as Chairman of the Board of Directors of
Kaiser and as a director for all of Kaiser's subsidiaries. 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company'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,
1998, there were approximately 2,300 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 1997
First Quarter........................................ $22.500 $13.250
Second Quarter....................................... $16.625 $12.500
Third Quarter........................................ $17.125 $10.750
Fourth Quarter....................................... $14.625 $ 7.750
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
DIVIDEND POLICY
The Company 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. The Company's line of
credit prohibits the payment of cash dividends on the Company's capital stock.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with the consolidated financial
statements of the Company, 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,
-------------------------------------------------
1998 1997 1996 1995(2) 1994
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net Revenues:
Disk, flat panel and other............................. $ 95,975 $133,207 $88,232 $42,187 $18,266
MBE(1)................................................. -- -- -- 695 2,185
-------- -------- ------- ------- -------
Total net revenues.............................. 95,975 133,207 88,232 42,882 20,451
Cost of net revenues:
Disk, flat panel and other............................. 71,717 91,255 55,652 27,280 11,799
MBE(1)................................................. -- -- -- 434 858
-------- -------- ------- ------- -------
Total cost of net revenues...................... 71,717 91,255 55,652 27,714 12,657
-------- -------- ------- ------- -------
Gross Profit............................................. 24,258 41,952 32,580 15,168 7,794
Operating expenses:
Research and development............................... 12,743 10,716 8,425 2,603 3,515
Selling, general and administrative.................... 10,879 11,399 8,391 4,550 2,248
Restructuring.......................................... 1,088 -- -- -- --
Acquired in-process research and development........... -- 299 5,835 -- --
-------- -------- ------- ------- -------
Total operating expenses........................ 24,710 22,414 22,651 7,153 5,763
-------- -------- ------- ------- -------
Operating income (loss).................................. (452) 19,538 9,929 8,015 2,031
Interest expense......................................... (4,187) (3,581) (175) (13) (63)
Interest income and other income, net.................... 3,176 3,268 1,569 942 533
-------- -------- ------- ------- -------
Income (loss) from continuing operations before income
taxes.................................................. (1,463) 19,225 11,323 8,944 2,501
Provision for (benefit from) income taxes................ (882) 6,728 6,350 3,179 826
-------- -------- ------- ------- -------
Income (loss) from continuing operations................. (581) 12,497 4,973 5,765 1,675
Income (loss) from discontinued operations............... 1,005 -- -- 1,335 (267)
-------- -------- ------- ------- -------
Net income............................................... $ 424 $ 12,497 $ 4,973 $ 7,100 $ 1,408
======== ======== ======= ======= =======
Basic earnings per share:
Income (loss) from continuing operations............... $ (0.05) $ 1.00 $ 0.40 $ 1.58 $ 2.39
Net income............................................. $ 0.04 $ 1.00 $ 0.40 $ 1.94 $ 2.01
Shares used in per share calculations.................. 12,052 12,514 12,311 3,653 700
Diluted earnings per share:
Income (loss) from continuing operations............... $ (0.05) $ 0.94 $ 0.39 $ 0.58 $ 0.18
Net income............................................. $ 0.03 $ 0.94 $ 0.39 $ 0.72 $ 0.15
Shares used in per share calculations.................. 12,354 15,385 12,901 9,881 9,489
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 60,916 $ 71,142 $ 938 $20,422 $13,347
Working capital.......................................... 77,774 78,025 15,847 21,327 23,229
Total assets............................................. 122,976 147,794 68,085 51,160 42,749
Long-term debt........................................... 59,461 59,480 730 -- --
Redeemable Series 1 Preferred Stock...................... -- -- -- -- 6,100
Total shareholders' equity............................... 40,436 42,435 33,736 27,320 22,987
Cash dividends declared per common share................. -- -- -- 0.495 --
- ---------------
(1) In the fourth quarter of 1993, the Company sold its Molecular Beam Epitaxi
("MBE") Operations and acquired 20% of the outstanding capital stock of
Chorus, a manufacturer of MBE products. The Company 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, the Company (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.
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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. The Company'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 the Company'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 the Company's disk
sputtering systems and related equipment used to manufacture thin-film disks for
computer hard disk drives, and, to a lesser extent, system components, flat
panel display manufacturing equipment, electron beam processing equipment and
contract research and development in the photonics business. Net revenues from
the sales of sputtering systems, flat panel equipment and electron beam
processing equipment are recognized upon customer acceptance. Net revenues from
the sales of system components and other systems are recognized upon product
shipment. Contract research and development net revenue is recognized in
accordance with contract terms, typically as costs are incurred. Net revenues
totaled $96.0 million, $133.2 million and $88.2 million in 1998, 1997 and 1996,
respectively. Net 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, electron beam processing equipment and contract research and
development in the photonics business. Net revenues increased from 1996 to 1997
primarily due to an increase in net revenues from disk sputtering systems and
related equipment and to a lesser extent as the result of an increase in net
revenues from flat panel equipment and contract research and development in the
photonics business. The Company's backlog of orders at December 31, 1998 was
$26.1 million as compared to a December 31, 1997 order backlog of $73.8 million.
The majority of these orders are expected to be recognized for revenue during
the first half of 1999. Given the Company's manufacturing lead times and its
unwillingness to build systems in anticipation of orders not yet received, it is
likely revenues in the first half of 1999 will continue at approximately the
reduced levels experienced during the second half of 1998. There can be no
assurance that these lower revenue levels will not extend beyond the first half
of 1999.
Matsubo, the Company's Japanese distributor, HMT Technology and MMC
Technology each accounted for more than 10% of the Company's net revenues during
1998. The shipments to Matsubo in 1998 were delivered to Fuji Electric,
Mitsubishi, Hitachi, Nippon Sheet Glass and Fujitsu. Matsubo, HMT Technology and
Trace Storage Technology each accounted for more than 10% of the Company's net
revenues during 1997. Matsubo, Seagate and HMT Technology each accounted for
more than 10% of the Company's net revenues during 1996.
Foreign sales totaled $51.0 million, $84.7 million and $36.4 million in
1998, 1997 and 1996, respectively. Foreign sales accounted for 53%, 64% and 41%
of net revenues in 1998, 1997 and 1996, respectively. The decrease in foreign
sales from 1997 to 1998 was primarily the result of decreased sales of
equipment, primarily disk sputtering systems. The increase in foreign sales from
1996 to 1997 was primarily the result of increased sales of equipment, primarily
disk sputtering systems. Substantially all of the Company's foreign sales are to
customers in the Far East. Substantially all of the Company's sales were
denominated in US dollars.
Gross margin. Cost of net revenues consists primarily of purchased
materials, fabrication, assembly, test, installation, warranty costs and costs
attributable to contract research and development. Gross margin for disk, flat
panel and other was 25.3%, 31.5% and 36.9% in 1998, 1997 and 1996, respectively.
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, both of which currently generate gross
margins below those generated by disk equipment. The reduction in gross margins
in
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1997 from 1996 was primarily due to reduced margins on equipment, primarily disk
sputtering systems, for which product costs increased more than the Company's
ability to increase prices.
Gross margins declined from 27.0% during the third quarter of 1998 to 5.2%
during the fourth quarter of 1998. Additions to inventory reserves, low volume
and a greater percentage of revenue derived from contract research and
development were the primary reasons for the decline in gross margins.
Additionally, during the fourth quarter of 1998, a number of used MDP-250B
systems became available for resale: four systems as the result of the
bankruptcy of StorMedia; and one system as the result of the Company's desire to
upgrade its internally capitalized MDP-250B training system to a newer model
MDP-250K system. As of December 31, 1998 the Company had received orders for
four of these five used systems. In January 1999, the Company acquired the four
used MDP-250B systems from StorMedia for resale. The Company plans to deliver
these systems during the first half of 1999 and expects that there will be
little contribution to gross margin from these systems which were re-marketed at
values approximating cost. As a result of the above factors, the Company expects
that gross margins will continue to be depressed during the first half of 1999.
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 the company's photonics
business. Company funded research and development expense totaled $12.7 million,
$10.7 million and $8.4 million in 1998, 1997 and 1996, respectively. The $2.0
million increase from 1997 to 1998 was caused primarily by higher expenses
related to development of disk equipment, partially offset by a reduction in
expenses related to development of flat panel equipment. The $2.3 million
increase from 1996 to 1997 was caused primarily by higher expenses related to
development of disk equipment, including the development of a new line of
contact stop-start test equipment and development of flat panel manufacturing
equipment.
Research and development expenses do not include costs of $1.4 million,
$1.3 million and $1.3 million that were incurred by the Company in 1998, 1997
and 1996, respectively, and reimbursed under the terms of a research and
development cost sharing agreement with the Company's Japanese development
partner. At December 31, 1998, $8.2 million of the $9.5 million in funds
available under this cost sharing agreement had been used. Future joint
development under this agreement is contingent upon the Company's ability to
negotiate further amendments to the development agreement. There can be no
assurance that the Company will obtain further amendments to the development
agreement.
Selling, general and administrative. Selling, general and administrative
expense consists primarily of selling, marketing, financial, travel, management,
legal and professional services costs. Domestic sales are made by the Company's
direct sales force, whereas international sales are made by distributors that
typically provide sales, installation, warranty and ongoing customer support.
Selling, general and administrative expense totaled $10.9 million, $11.4 million
and $8.4 million in 1998, 1997 and 1996, respectively, representing 11.3%, 8.6%
and 9.5% of net revenues. The $0.5 million decrease in selling, general and
administration expenses from 1997 to 1998 was primarily the result of headcount
reductions that took place in March and August of 1998. The $3.0 million
increase in selling, general and administrative expenses from 1996 to 1997 was
primarily the result of increased marketing and administration expenses related
to increased sales of disk equipment and to a lesser extent, increased corporate
administrative costs and the acquisition of RPC in late 1997.
Restructuring expense. In March 1998, the Company's management adopted a
restructuring plan to relocate its Rapid Thermal Processing Operation from
Rocklin, California to the Company's Santa Clara, California headquarters and to
close the Rocklin facility. The restructuring plan also included a 20% reduction
in the worldwide staff of the Company's contract and regular employees. In
August 1998, the Company terminated an additional 9% of its workforce. As a
result of the restructuring plan and the August reduction in force, the Company
incurred approximately $1.1M of restructuring expense during 1998. The
restructuring expense included approximately $0.7M related to closure of the
Rocklin facility and approximately $0.4M of severance pay for terminated
employees.
Acquired in-process research and development. The Company recognized a
charge for acquired in-process research and development of $0.3 million during
1997 as a result of the acquisition of RPC and
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recognized a charge for acquired in-process research and development of $5.8
million in 1996 as a result of the acquisitions of SJT and Lotus.
Interest expense. Interest expense in 1998 and 1997 consisted primarily of
interest on the Convertible Notes issued in the first quarter of 1997. Interest
expense totaled $4.2 million, $3.6 million and $0.2 million in 1998, 1997 and
1996, respectively.
Interest and other income, net. Interest and other income, net totaled $3.2
million, $3.3 million and $1.6 million in 1998, 1997 and 1996, respectively.
Interest and other income in 1998 consisted of interest income on the Company's
investments, dividend income on the Company's interest in the 601 California
Avenue LLC, deferred income related to the sale of the Company's interest in
Chorus Corporation and early payment discounts, which were partially offset by
losses on foreign currency forward contracts. Interest and other income in 1997
consisted of interest income, deferred income related to the sale of the
Company's interest in Chorus Corporation and early payment discounts, which were
partially offset by a foreign currency translation loss. Other income during
1996 consisted primarily of deferred income recognized on the sale of the
Company's interest in Chorus Corporation and interest income and, to a lesser
extent, early payment discounts.
Discontinued operations. In March 1995, the Company adopted a formal plan
to discontinue its night vision business. The Company sold its night vision
business to Litton Systems, Inc. in May 1995. In 1998 the Company recognized net
income from discontinued operations of $1.0 million, net of income taxes,
generated 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.
Provision for income taxes. For the year ended December 31, 1998, the
Company had a $387,000 tax benefit provision on pretax income of $37,000. The
Company's tax benefit was primarily due to tax-exempt interest income and
benefits from the Company's foreign sales corporation, partially offset by
non-deductible goodwill amortization. Income tax expense as a percentage of
pretax income was 35% and 56% in 1997 and 1996, respectively. The Company's tax
rate in 1996 differed from the applicable statutory rates primarily due to
non-deductible expenses for acquired in-process research and development and
goodwill amortization, state income taxes and benefits from the Company's
foreign sales corporation.
A net deferred tax asset of $8.2 million is reflected in the financial
statements at December 31, 1998. Based on the Company's historical taxable
income and projected future earnings, management believes it is more likely than
not that the Company will realize the benefit of this asset.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities in 1998 used cash of $5.1 million,
primarily due to a $16.6 million decrease in customer advances, a $3.0 million
decrease in accrued payroll and other liabilities and a $2.6 million decrease in
accounts payable, which were partially offset by an $11.8 million decrease in
inventory and $7.4 million of depreciation and amortization.
Investing activities in 1998 used cash of $12.7 million primarily due to
the net purchase of $10.2 million of investments and the purchase of $2.9
million of property and equipment.
Financing activities in 1998 used $2.7 million of cash primarily as a
result of the repurchase of 457,000 shares of the Company's common stock for
$3.8 million under the Company's stock repurchase plan, which was partially
offset by $1.1 million in proceeds from the sale of the Company's stock to
employees under the employee stock option and employee stock purchase plans.
At December 31, 1998, the Company had $60.9 million of cash, cash
equivalents and short-term investments. In addition, the Company has a $10.0
million revolving line of credit, which expires May 1, 1999. Borrowings bear
interest at prime rate or the LIBOR rate plus 175 basis points. The line of
credit agreement requires the Company to maintain certain financial ratios and
other financial conditions. The Company expects to renew the line of credit in
1999.
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The Company intends to undertake approximately $5.0 million in capital
expenditures during the next 12 months. The Company believes the existing cash
and cash equivalent balances and credit facilities will be sufficient to meet
its cash requirements for at least the next twelve months. While operating
activities may provide cash in certain periods, to the extent the Company may
experience growth in the future, the Company anticipates that its operating and
investing activities may use cash and, consequently, such growth may require the
Company to obtain additional sources of financing. The Company may also from
time to time consider the acquisition of complementary businesses, products or
technologies, which may require additional financing. There can be no assurance
that such financing will be available on attractive terms, on a non-dilutive
basis, or at all.
YEAR 2000
The Company is preparing for the impact of the arrival of the Year 2000 on
its business, as well as on the business of its customers, suppliers and
business partners. The "Year 2000 Issue" is a term used to describe the problems
created by systems that are unable to accurately interpret dates after December
31, 1999. These problems are derived predominately from the fact that many
software programs have historically categorized "years" in a two-digit format.
The Year 2000 Issue creates potential risks for the Company, including potential
problems in the Company's products as well as in the Information Technology
("IT") and non-IT systems that the Company uses in its business operations. The
Company may also be exposed to risks from third parties with which the Company
interacts who fail to adequately address their own Year 2000 Issues.
Intevac is in the process of implementing plans to address Year 2000 Issues
both within and outside the Company. In addressing the Year 2000 issues and
risks, the Company has focused, and will continue to focus, its efforts on the
Company's enterprise-wide and departmental operations, products, critical
suppliers (including service providers) and key customers. Within Intevac, these
efforts are intended to encompass all major categories of computer systems in
use by the Company, including those utilized in manufacturing, engineering,
sales, finance and human resources. The Company's risk assessment includes
understanding the Year 2000 readiness of its critical suppliers. The Company's
risk assessment process associated with critical suppliers includes soliciting
and analyzing responses to questionnaires, and, where necessary, follow-up with
the supplier.
The Company is utilizing a phased approach to identifying and remediating
Year 2000 Issues. The first phase, compiling an inventory of all systems that
face risks from Year 2000 Issues, was substantially completed by year-end 1998.
The evaluation, remediation and validation & implementation phases are expected
to be complete by mid-1999 for all areas. The Company is acting to remedy issues
as they are revealed, while it simultaneously completes its assessment of Year
2000 risks.
Corrective actions completed to date include the implementation of system
upgrades to the Company's materials and financial software, upgrades to file
server operating systems and replacement of payroll and human resource software.
The Company also issued a Product Information Bulletin to customers outlining
the Year 2000 Issues faced by the Company's principal product, the MDP-250
sputtering system, and proposed fixes.
Cost incurred to date in addressing Year 2000 Issues have not been
material. Based on assessment and correction projects underway, the Company does
not expect the total cost of addressing the Year 2000 Issue to be material. As
the Company's risk assessment and correction activities continue, these cost
estimates may change. In addition, the Company's total cost estimate does not
include potential costs related to any customer or other claims resulting from
the Company's failure to adequately correct Year 2000 issues.
Although the Company does not currently expect any significant disruption
to its operations or operating results as a result of Year 2000 Issues, the
Company is taking all steps it believes are appropriate to identify and resolve
any Year 2000 Issues. However, there can be no assurance that the Company will
be able to identify, assess and correct Year 2000 Issues in a timely or
successful manner. The Company's failure to identify, assess and correct Year
2000 Issues in a timely manner could have a material, adverse effect on the
Company's business, financial condition and results of operations.
19
20
The Company currently believes that its most reasonably likely worst case
Year 2000 scenario would relate to problems with systems of third parties which
would create the greatest risks with infrastructure, including water and sewer
services, electricity, transportation, telecommunications and critical suppliers
of materials and supplies. The Company has not yet prepared a contingency plan
for dealing with these potential problems. The Company will be assessing various
scenarios and will prepare the necessary contingency plan over the course of
1999.
The foregoing statements regarding the Company's Year 2000 plans and the
Company's expectation for resolving these issues and costs associated therewith
are forward-looking statements and actual results could vary. The Company's
success in addressing Year 2000 Issues could be impacted by the severity of the
problems to be resolved within the Company, by Year 2000 Issues affecting its
suppliers and service providers and by the costs associated with third party
consultants and software necessary to address these issues.
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
1999 2000 2001 2002 2003 BEYOND TOTAL VALUE
------- ---- ------ ---- ---- ------- ------- -------
(IN THOUSANDS)
Cash equivalents
Variable rate............ $ 2,846 -- -- -- -- -- $ 2,846 $ 2,846
Average rate............. 4.89% -- -- -- -- --
Short-term investments
Variable rate............ $56,925 -- -- -- -- -- $56,925 $56,925
Average rate............. 3.88% -- -- -- -- --
Total investments
Securities............... $59,771 -- -- -- -- -- $59,771 $59,771
Average rate............. 3.93% -- -- -- -- --
Long-term debt
Fixed rate............... -- -- $1,961 -- -- $57,500 $59,461 $36,461
Average rate............. 6.47% 6.47% 6.47% 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, 1998, the Company had approximately $11.6 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. These
contracts expire at various dates through the third quarter of 1999.
20
21
The following table provides information about the Company's foreign
currency forward exchange contracts at December 31, 1998.
AVERAGE ESTIMATED
NOTIONAL CONTRACT FAIR
AMOUNT RATE VALUE
-------- -------- ---------
(IN THOUSANDS
EXCEPT CONTRACT RATE)
Foreign currency forward exchange contracts:
Japanese yen.............................................. $11,592 120.33 $(894)
------- -----
$11,592 $(894)
======= =====
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, 1998 and 1997, 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, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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 19, 1999
23
24
INTEVAC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,991 $ 24,431
Short-term investments.................................... 56,925 46,711
Accounts receivable, net of allowances of $1,629 and
$1,505 at December 31, 1998 and 1997, respectively...... 10,169 9,634
Inventories, including $3,389 and $8,259 at customers at
December 31, 1998 and 1997, respectively................ 22,102 35,915
Short-term note receivable, arising from the sale of the
investment in Chorus Corporation, net of allowance of
$395 at December 31, 1997............................... -- --
Prepaid expenses and other current assets................. 658 641
Deferred tax assets....................................... 7,008 6,572
-------- --------
Total current assets............................... 100,853 123,904
Property, plant, and equipment, at cost:
Buildings and improvements................................ 6,262 6,212
Machinery and equipment................................... 17,747 13,875
-------- --------
24,009 20,087
Less accumulated depreciation and amortization............ 10,878 6,327
-------- --------
13,131 13,760
Investment in 601 California Avenue LLC..................... 2,431 2,431
Goodwill, net of amortization of $3,471 and $2,273 at
December 31, 1998 and 1997, respectively.................. 3,083 4,281
Other intangibles, net of amortization of $1,981 and $1,378
at December 31, 1998 and 1997, respectively............... 460 1,063
Debt issuance costs, net of amortization of $603 and $274 at
December 31, 1998 and 1997, respectively.................. 1,700 2,029
Deferred tax assets and other long term assets.............. 1,318 326
-------- --------
Total assets....................................... $122,976 $147,794
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,034 $ 4,585
Accrued payroll and related liabilities................... 1,880 1,949
Accrued income taxes...................................... 701 3,605
Accrued product warranties................................ 2,015 2,561
Other accrued liabilities................................. 4,097 2,265
Book overdraft............................................ 722 1,873
Customer advances......................................... 11,630 28,247
Net liabilities of discontinued operations................ -- 794
-------- --------
Total current liabilities.......................... 23,079 45,879
Convertible notes........................................... 57,500 57,500
Other long-term debt........................................ 1,961 1,980
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 -- 11,887 and 12,154 at
December 31, 1998 and 1997, respectively............... 17,917 17,336
Other comprehensive income................................ 122 --
Retained earnings......................................... 22,397 25,099
-------- --------
Total shareholders' equity......................... 40,436 42,435
-------- --------
Total liabilities and shareholders' equity......... $122,976 $147,794
======== ========
See accompanying notes.
24
25
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- -------- -------
Net revenues................................................ $95,975 $133,207 $88,232
Cost of net revenues........................................ 71,717 91,255 55,652
------- -------- -------
Gross profit................................................ 24,258 41,952 32,580
Operating expenses:
Research and development.................................. 12,743 10,716 8,425
Selling, general, and administrative...................... 10,879 11,399 8,391
Restructuring............................................. 1,088 -- --
Acquired in-process research and development.............. -- 299 5,835
------- -------- -------
Total operating expenses.......................... 24,710 22,414 22,651
------- -------- -------
Operating income (loss)..................................... (452) 19,538 9,929
Interest expense............................................ (4,187) (3,581) (175)
Interest income............................................. 2,832 2,270 662
Other income and expense, net............................... 344 998 907
------- -------- -------
Income (loss) from continuing operations before income
taxes..................................................... (1,463) 19,225 11,323
Provision for (benefit from) income taxes................... (882) 6,728 6,350
------- -------- -------
Income (loss) from continuing operations.................... (581) 12,497 4,973
Discontinued operations:
Gain from discontinued operations, net of applicable
income taxes of $495................................... 1,005 -- --
------- -------- -------
Income from discontinued operations......................... 1,005 -- --
------- -------- -------
Net income.................................................. $ 424 $ 12,497 $ 4,973
======= ======== =======
Other comprehensive income:
Unrealized foreign currency translation adjustment........ 122 -- --
------- -------- -------
Total adjustments........................................... 122 -- --
------- -------- -------
Total comprehensive income.................................. $ 546 $ 12,497 $ 4,973
======= ======== =======
Basic earnings per share:
Income (loss) from continuing operations.................. $ (0.05) $ 1.00 $ 0.40
Net income................................................ $ 0.04 $ 1.00 $ 0.40
Shares used in per share amounts.......................... 12,052 12,514 12,311
Diluted earnings per share:
Income (loss) from continuing operations.................. $ (0.05) $ 0.94 $ 0.39
Net income................................................ $ 0.03 $ 0.94 $ 0.39
Shares used in per share amounts.......................... 12,354 15,385 12,901
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, 1995................. 12,248 $15,304 $ -- $12,016 $27,320
Initial public offering costs.............. -- (7) -- -- (7)
Sale of common stock under stock option
plan.................................... 139 438 -- -- 438
Sale of common stock under employee stock
purchase plan........................... 62 322 -- -- 322
Income tax benefits realized from activity
in employee stock plans................. -- 690 -- -- 690
Net income................................. -- -- -- 4,973 4,973
------ ------- ---- ------- -------
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
====== ======= ==== ======= =======
See accompanying notes.
26
27
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDING DECEMBER 31,
---------------------------------
1998 1997 1996
-------- --------- --------
OPERATING ACTIVITIES
Income (loss) from continuing operations.................... $ (581) $ 12,497 $ 4,973
Income from discontinued operations......................... 1,005 -- --
-------- --------- --------
Net income.................................................. 424 12,497 4,973
Adjustments to reconcile net income to net cash and cash
equivalents provided by (used in) operating activities:
Depreciation.............................................. 5,244 2,588 1,354
Amortization of intangibles............................... 2,130 2,435 1,490
Acquired in-process research and development.............. -- 299 5,835
Gain on sale of Chorus investment......................... (395) (785) (593)
Gain on sale of discontinued operations................... (794) -- --
Loss on IMAT investment................................... 206 144 --
Restructuring charge -- non-cash portion.................. 506 -- --
Loss on disposal of equipment............................. 206 79 5
Changes in assets and liabilities:
Accounts receivable..................................... (535) 8,377 (12,344)
Inventory............................................... 11,818 (8,494) (11,313)
Prepaid expenses and other assets....................... (1,651) (2,119) (1,132)
Accounts payable........................................ (2,551) (107) 1,464
Accrued payroll and other accrued liabilities........... (3,049) 5,593 (284)
Customer advances....................................... (16,617) 5,102 5,251
Discontinued operations -- non-cash changes and working
capital
changes............................................... -- 194 (380)
-------- --------- --------
Total adjustments........................................... (5,482) 13,306 (10,647)
-------- --------- --------
Net cash and cash equivalents provided by (used in)
operating activities...................................... (5,058) 25,803 (5,674)
INVESTING ACTIVITIES
Purchase of investments..................................... (56,500) (118,345) (2,571)
Proceeds from sales and maturities of investments........... 46,286 71,634 2,571
Purchase of equipment....................................... (2,898) (6,092) (3,854)
Investment in Cathode Technology Corporation................ -- -- (1,074)
Investment in San Jose Technology Corporation............... -- -- (2,270)
Investment in Lotus Technologies, Inc....................... -- -- (8,135)
Investment in IMAT.......................................... -- (436) --
Investment in RPC Industries................................ -- (955) --
Proceeds from sale of Chorus Investment..................... 395 785 770
-------- --------- --------
Net cash and cash equivalents used in investing
activities................................................ (12,717) (53,409) (14,563)
FINANCING ACTIVITIES
Notes payable and line of credit repayments................. -- (27) --
Proceeds from issuance of common stock...................... 1,131 956 753
Repurchase of common stock.................................. (3,796) (5,027) --
Proceeds from convertible bond offering..................... -- 55,197 --
-------- --------- --------
Net cash and cash equivalents provided by (used in)
financing activities...................................... (2,665) 51,099 753
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ (20,440) 23,493 (19,484)
Cash and cash equivalents at beginning of period............ 24,431 938 20,422
-------- --------- --------
Cash and cash equivalents at end of period.................. $ 3,991 $ 24,431 $ 938
======== ========= ========
Cash paid (received) for:
Interest.................................................. $ 3,841 $ 2,074 $ 149
Income taxes.............................................. 4,065 6,233 9,321
Income tax refund......................................... -- -- (250)
Other non-cash changes:
Investment in Cathode Technology Corporation through
assumption of notes payable............................. $ -- $ -- $ 1,980
Inventories transferred to (from) property, plant and
equipment............................................... (767) 567 3,094
Income tax benefit realized from activity in employee
stock plans............................................. 120 273 690
See accompanying notes.
27
28
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND NATURE OF OPERATIONS
Intevac, Inc. ("Intevac" or the "Company") was formed in October 1990 for
the purpose of acquiring certain business assets and liabilities from Varian
Associates, Inc. ("Varian"). In February 1991, certain agreements were entered
into between Varian and the Company, which provided for the transfer of the
assets and business of Varian's disk sputtering equipment business, night vision
device business and molecular beam epitaxy ("MBE") equipment business to
Intevac. In October 1993, certain assets of the MBE business were exchanged for
a 20% ownership in the outstanding stock of Chorus Corporation ("Chorus"), a
manufacturer of MBE products. In the second quarter of 1995, the Company
completed the sale of its night vision business to Litton Systems, Inc. for
cash. The Company retained certain personnel from the night vision business and
formed the Photonics Technology Division ("PTD").
The Company 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 subsidiaries in Singapore and Malaysia and a branch office in Taiwan.
In the first quarter of 1996, the Company purchased all of the outstanding
stock of Cathode Technology Corporation ("Cathode"). Cathode designs and
manufactures magnetron sputter sources for use in the Company's disk sputtering
systems. In the second quarter of 1996, the Company purchased all of the
outstanding stock of San Jose Technology Corp. ("SJT"). SJT is a manufacturer of
systems used to lubricate thin film disks. Also in the second quarter of 1996,
the Company purchased all of the outstanding stock of Lotus Technologies, Inc.
("Lotus"). Lotus is a manufacturer of contact stop/start test equipment for disk
drives and drive components. All three of the acquisitions were accounted for
under the purchase method.
In the fourth quarter of 1997, the Company announced a reorganization which
included the formation of the Disk Equipment Business Unit and the Flat Panel
Display Equipment Division. The Disk Equipment Business Unit includes Intevac's
Vacuum System Division, the San Jose Technology Division and the Lotus
Technology Division. The Flat Panel Display Equipment Division includes
Intevac's D-Star line of sputtering equipment and Intevac's Rapid Thermal
Processing ("RTP") Operation. Also in the fourth quarter of 1997, the Company
purchased all of the assets of RPC Industries ("RPC"). RPC is a manufacturer of
electron beam processing systems. This acquisition was accounted for under the
purchase method.
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 other systems and 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,
28
29
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $5,931,000 and $5,895,000 for 1998, respectively, $5,184,000 and
$5,871,000 for 1997, respectively and $3,265,000 and $3,758,000 for 1996,
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.
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 $72,000, $1,796,000 and $3,743,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Advertising Expenses
The Company accounts for advertising costs as expense in the period in
which they are incurred. Advertising expenses for 1998, 1997 and 1996 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 $1,839,000 and $2,136,000
at December 31, 1998 and 1997, 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.
29
30
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and cash equivalents represent cash accounts and money market funds.
Short-term investments of $56,925,000 and $46,711,000 at December 31, 1998 and
1997, respectively, consist 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, 1998 and 1997. Gross realized gains and losses for the years ended
December 31, 1998, 1997 and 1996 were not significant.
Foreign Exchange Contracts
The Company may enter into foreign currency forward exchange contracts to
hedge certain of its foreign currency transaction, translation, and
re-measurement exposures. The Company's accounting policies for some of these
instruments are based on the Company's designation of such instruments as
hedging transactions. Instruments not designated as a hedge transaction will be
"marked to market" at the end of each accounting period. The criteria the
Company uses for designating an instrument as a hedge include effectiveness in
exposure reduction and one-to-one matching of the derivative financial
instrument to the underlying transaction being hedged. Gains and losses on
foreign currency forward exchange contracts that are designated and effective as
hedges of existing transactions are recognized in income in the same period as
losses and gains on the underlying transactions are recognized and generally
offset.
During fiscal 1998, the Company entered into yen denominated foreign
currency forward exchange contracts to hedge anticipated yen denominated sales.
The Company has not designated these foreign currency forward contracts as hedge
transactions; therefore, the contracts have been "marked to market." No foreign
currency contracts were entered into in fiscal 1997 or 1996.
As of December 31, 1998, the Company had foreign currency forward exchange
contracts outstanding denominated in Japanese yen for approximately $11,592,000.
The contracts expire on various dates through the third quarter of 1999. In
fiscal 1998, the Company has recorded transaction losses related to these
contracts of $894,000. The carrying amount and fair value of the contracts as of
December 31, 1998 were ($894,000) and ($894,000), respectively.
While the contract amounts provide one measure of the volume of the
transactions outstanding at December 31, 1998, they do not represent the amount
of the Company's exposure to credit risk. The Company's exposure to credit risk
(arising from the possible inability of the counter-parties to meet the terms of
their contracts) is generally limited to the amount, if any, by which the
counter-parties' obligations exceed the obligations of the Company.
Inventories
Inventories for systems and components are stated at the lower of standard
cost (which approximates actual cost on a first-in, first-out basis) or market.
Inventories consist of the following:
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
Raw materials.......................................... $ 6,907 $ 8,784
Work-in-progress....................................... 11,653 18,756
Finished goods......................................... 3,542 8,375
--