26, 20021 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,Washington, DC 20549------------------------FORM 10-Q
------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO____________ . COMMISSION FILE NUMBER
(MARK ONE) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 30, 2002 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 0-26946
INTEVAC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)(Exact name of registrant as specified in its charter)
CALIFORNIA94-3125814 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.(State or other jurisdiction of
incorporation or organization)(IRS Employer
Identification No.)INCORPORATION OR ORGANIZATION)3560
BASSETT STREET SANTA CLARA, CALIFORNIABassett StreetSanta Clara, California 95054(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(Address of principal executive office, including Zip Code)Registrant’s telephone number, including area code: (408) 986-9888
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]x No[ ]oAPPLICABLE ONLY TO CORPORATE ISSUERS:
On March
31, 2001 approximately 11,934,66830, 2002, 12,060,003 shares of theRegistrant'sRegistrant’s Common Stock, no par value, were outstanding.- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------2 INTEVAC, INC. INDEXTABLE OF CONTENTSi3INTEVAC, INC.
INDEX
No. Page FINANCIAL INFORMATION Financial Statements (unaudited) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations and Comprehensive Loss 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Management’s Discussion and Analysis of Financial Condition and Results of Operations 10 Quantitative and Qualitative Disclosures About Market Risk 18 OTHER INFORMATION Legal Proceedings 19 Changes in Securities 19 Defaults Upon Senior Securities 19 Submission of Matters to a Vote of Security-Holders 19 Other Information 20 Exhibits and Reports on Form 8-K 20 SIGNATURES 21 2
PART I. FINANCIAL INFORMATION
ITEMItem 1.
FINANCIAL STATEMENTSFinancial StatementsINTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS(IN THOUSANDS)
MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ (UNAUDITED)ASSETS Current assets: Cash and cash equivalents................................. $26,693 $ 4,616 Short-term investments.................................... 4,973 33,787 Accounts receivable, net of allowances of $112 and $114 at March 31, 2001 and December 31, 2000, respectively..... 7,717 9,593 Inventories............................................... 23,884 15,833 Prepaid expenses and other current assets................. 1,196 844 Deferred tax asset........................................ 4,041 4,041 ------- ------- Total current assets................................... 68,504 68,714 Property, plant, and equipment, net......................... 10,581 11,060 Investment in 601 California Avenue LLC..................... 2,431 2,431 Goodwill and other intangibles.............................. 2 7 Debt issuance costs......................................... 713 774 Deferred tax assets and other assets........................ 3,684 3,684 ------- ------- Total assets...................................... $85,915 $86,670 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable............................................. $ -- $ 1,904 Accounts payable.......................................... 6,397 2,757 Accrued payroll and related liabilities................... 1,895 1,534 Other accrued liabilities................................. 4,883 5,109 Customer advances......................................... 17,259 16,317 ------- ------- Total current liabilities.............................. 30,434 27,621 Convertible notes........................................... 41,245 41,245 Shareholders' equity: Common stock, no par value................................ 18,891 18,675 Accumulated deficit....................................... (4,655) (871) ------- ------- Total shareholders' equity............................. 14,236 17,804 ------- ------- Total liabilities and shareholders' equity........ $85,915 $86,670 ======= =======(In thousands)
March 30, December 31, 2002 2001 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 14,464 $ 18,157 Accounts receivable, net of allowances of $227 and $225 at March 30, 2002 and December 31, 2001 10,078 8,046 Income taxes recoverable 2,214 — Inventories 23,222 21,691 Prepaid expenses and other current assets 711 478 Total current assets 50,689 48,372 Property, plant and equipment, net 7,735 8,864 Investment in 601 California Avenue LLC 2,431 2,431 Debt issuance costs and other long-term assets 441 498 Total assets $ 61,296 $ 60,165 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,259 $ 2,628 Accrued payroll and related liabilities 1,797 1,573 Other accrued liabilities 3,755 3,547 Customer advances 16,519 13,464 Total current liabilities 24,330 21,212 Convertible notes 37,545 37,545 Shareholders’ equity: Common stock, no par value 19,237 19,093 Accumulated other comprehensive income 135 122 Accumulated deficit (19,951 ) (17,807 ) Total shareholders’ equity (579 ) 1,408 Total liabilities and shareholders’ equity $ 61,296 $ 60,165 See accompanying notes.
143
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVEINCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)LOSS
THREE MONTHS ENDED --------------------- MARCH 31, APRIL 1, 2001 2000 --------- --------Net revenues................................................ $10,005 $ 5,892 Cost of net revenues........................................ 6,605 5,241 ------- ------- Gross profit................................................ 3,400 651 Operating expenses: Research and development.................................. 3,496 2,461 Selling, general and administrative....................... 1,669 1,585 Restructuring expense (gain).............................. -- (615) ------- ------- Total operating expenses.......................... 5,165 3,431 ------- ------- Operating loss.............................................. (1,765) (2,780) Interest expense............................................ (738) (758) Interest income and other, net.............................. (1,281) 677 ------- ------- Loss from continuing operations before income taxes......... (3,784) (2,861) Provision for (benefit from) income taxes................... -- -- ------- ------- Net loss.................................................... $(3,784) $(2,861) ======= ======= Other comprehensive income: Unrealized foreign currency translation adjustment........ -- -- ------- ------- Total comprehensive loss.................................... $(3,784) $(2,861) ======= ======= Basic earnings per share: Income (loss) from continuing operations.................. $ (0.32) $ (0.24) Net income (loss)......................................... $ (0.32) $ (0.24) Shares used in per share amounts.......................... 11,896 11,759 Diluted earnings per share: Income (loss) from continuing operations.................. $ (0.32) $ (0.24) Net income (loss)......................................... $ (0.32) $ (0.24) Shares used in per share amounts.......................... 11,896 11,759(In thousands, except per share amounts)(Unaudited)
Three months ended March 30, March 31, 2002 2001 Net revenues $ 6,670 $ 10,005 Cost of net revenues 5,707 6,605 Gross profit 963 3,400 Operating expenses: Research and development 3,129 3,496 Selling, general and administrative 1,710 1,669 Total operating expenses 4,839 5,165 Operating loss (3,876 ) (1,765 ) Interest expense (667 ) (738 ) Interest income and other, net 185 (1,292 ) Loss before income taxes (4,358 ) (3,795 ) Benefit from income taxes (2,214 ) — Net loss $ (2,144 ) $ (3,795 ) Other comprehensive income: Foreign currency translation adjustment 13 11 Total comprehensive loss $ (2,131 ) $ (3,784 ) Basic and diluted loss per share: Net loss $ (0.18 ) $ (0.32 ) Shares used in per share amounts 12,041 11,896 See accompanying notes.
254
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED --------------------- MARCH 31, APRIL 1, 2001 2000 --------- --------OPERATING ACTIVITIES Net loss.................................................... $(3,784) $ (2,861) Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Depreciation and amortization............................. 1,128 1,246 Foreign currency (gain) loss.............................. (1) -- Loss on IMAT investment................................... -- 47 Restructuring charge -- non-cash portion.................. -- 856 Unrealized loss on investments............................ 2,000 -- Changes in assets and liabilities......................... (3,714) (829) ------- -------- Total adjustments........................................... (587) 1,320 ------- -------- Net cash and cash equivalents used in operating activities................................................ (4,371) (1,541) INVESTING ACTIVITIES Purchase of investments..................................... (5,463) (44,846) Proceeds from sale of investments........................... 32,277 47,141 Purchase of leasehold improvements and equipment............ (582) (956) ------- -------- Net cash and cash equivalents provided by investing activities................................................ 26,232 1,339 FINANCING ACTIVITIES Proceeds from issuance of common stock...................... 216 258 ------- -------- Net cash and cash equivalents provided by financing activities................................................ 216 258 ------- -------- Net increase in cash and cash equivalents................... 22,077 56 Cash and cash equivalents at beginning of period............ 4,616 3,295 ------- -------- Cash and cash equivalents at end of period.................. $26,693 $ 3,351 ======= ======== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid (received) for: Interest.................................................. $ 1,374 $ 1,394(In thousands)(Unaudited)
Three months ended March 30, March 31, 2002 2001 Net loss $ (2,144 ) $ (3,795 ) Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Depreciation and amortization 841 1,128 Foreign currency gain — (1 ) Unrealized loss on investments — 2,000 Changes in assets and liabilities (2,378 ) (3,714 ) Total adjustments (1,537 ) (587 ) Net cash and cash equivalents used in operating activities (3,681 ) (4,382 ) Purchase of investments — (5,463 ) Proceeds from sale of investments — 32,277 Purchase of leasehold improvements and equipment (169 ) (582 ) Net cash and cash equivalents provided by (used in) investing activities (169 ) 26,232 Proceeds from issuance of common stock 144 216 Net cash and cash equivalents provided by financing activities 144 216 Effect of exchange rate changes on cash 13 11 Net increase (decrease) in cash and cash equivalents (3,693 ) 22,077 Cash and cash equivalents at beginning of period 18,157 4,616 Cash and cash equivalents at end of period $ 14,464 $ 26,693 Cash paid for: Interest $ 1,220 $ 1,374 See accompanying notes.
365
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
BUSINESS ACTIVITIES AND BASIS OF PRESENTATIONBusiness Activities and Basis of PresentationIntevac, Inc.
's ("Intevac" or the "Company") primary business is’s businesses are the design, manufacture and sale of complex capital equipmentthat isused to manufacture products such asthin-film disks for computer disk drives andflat panel displays(the "Equipment Business"and thin-film disks (“Equipment”). The Company also developsand the development of highly sensitive electro-optical devices and systems (“Photonics”).Systems sold by the Equipment Division are typically used to deposit highly engineered thin-films of material on a substrate, or to modify the characteristics and properties of thin-films already deposited on a substrate. Systems manufactured by the Equipment Division generally utilize proprietary manufacturing techniques and processes and operate under
government sponsored R&D contracts (the "Photonics Business").high levels of vacuum. TheEquipment Business is a leading supplier of thin film depositionsystemsused inare designed for high-volume continuous operation and use precision robotics, computerized controls and complex software programs to fully automate and control themanufacture ofproduction process. Products manufactured with these systems include cell phone color displays, automotive displays, computer monitors and disks for computer hard disk drives.Intevac's systems are used to deposit multiple thin-film layers on a disk including undercoats, magnetic alloys, protective overcoats and lubricant.The EquipmentBusinessDivision has alsorealizes revenues fromdesigned ultra high vacuum automated equipment for Photonics to be used for thesalesfuture manufacture offlat panel display ("FPD") manufacturing 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.low-cost low-light-level cameras.The Photonics
Business has developed technologyDivision is developing electro-optical devices and systems thatpermitspermit highly sensitive detection of photons in the visible and short wave infrared portions of the spectrum. Thistechnology when combined with advanced silicon integrated circuits makes it possible to produce highly sensitive video cameras. Thisdevelopment work is aimed at creating new products for both military and industrial applications. Products includeIntensified Digital Video Sensors, cameras incorporating those sensors andLaser Illuminated Viewing and Ranging("LIVAR(R)"(“LIVAR®”) systems for positive targetidentification.identification at long range, low-cost low-light-level cameras for use in security and military applications and photodiodes for use in high-speed fiber optic systems.The financial information at March
31, 200130, 2002 and for the three-month periods ended March 30, 2002 and March 31, 2001and April 1, 2000is unaudited, but includes all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States of America("(“U.S.GAAP"GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, it does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, refer to the Consolidated Financial Statements and footnotes thereto includedor incorporated by referencein theCompany'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2000.2001.The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
The Company evaluates the collectibility of trade receivables on an ongoing basis and provides
forreserves against potential losses when appropriate.The results for the three-month period ended March
31, 200130, 2002 are not considered indicative of the results to be expected for any future period or for the entire year.6
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2.
INVENTORIESInventoriesThe components of inventory consist of the following:
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ (IN THOUSANDS)Raw materials........................................ $ 6,000 $ 4,591 Work-in-progress..................................... 14,748 8,209
March 30, December 31, 2002 2001 (in thousands) Raw materials $ 5,664 $ 5,659 Work-in-progress 9,187 11,962 Finished goods 8,371 4,070 $ 23,222 $ 21,691 Finished
goods....................................... 3,136 3,033 ------- ------- $23,884 $15,833 ======= =======47 INTEVAC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The finishedgoods inventoryis represented byconsists of completed units at customer sites undergoing installation and acceptance testing.3.
NET INCOME (LOSS) PER SHARENet Income (Loss) Per ShareThe following table sets forth the computation of basic and diluted earnings per share:
Three months ended March 30, March 31, 2002 2001 (in thousands) Numerator: Numerator for basic earnings per share — loss available to common stockholders (2,144 ) (3,795 ) Effect of dilutive securities: 6 1/2% convertible notes(1) — — Numerator for diluted earnings per share — loss available to common stockholders after assumed conversions $ (2,144 ) $ (3,795 ) Denominator: Denominator for basic earnings per share — weighted-average shares 12,041 11,896 Effect of dilutive securities: Employee stock options(2) — — 6 1/2% convertible notes(1) — — Dilutive potential common shares — — Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions 12,041 11,896
THREE MONTHS ENDED --------------------- MARCH(1) Diluted EPS for the three-month periods ended March 30, 2002 and March 31, APRIL 1,20012000 --------- -------- (IN THOUSANDS)Numerator: Loss from continuing operations....................... $(3,784) $(2,861) ======= ======= Net loss.............................................. $(3,784) $(2,861) ======= ======= Numeratorexclude “as converted” treatment of the convertible notes as their inclusion would be anti-dilutive. The number of “as converted” shares excluded forbasic earnings per share -- loss available to common stockholders................... (3,784) (2,861) Effectthe three-month periods ended March 30, 2002 and March 31, 2001 was 1,820,364 and 1,999,758, respectively.(2) Diluted EPS for the three-month periods ended March 30, 2002 and March 31, 2001 exclude the effect of dilutive securities: 6 1/2% convertible notes(1)........................ -- -- ------- ------- Numeratoremployee stock options as their inclusion would be anti-dilutive. The number of employee stock option shares excluded fordiluted earnings per share -- loss available to common stockholders after assumed conversions........................................ $(3,784) $(2,861) ======= ======= Denominator: Denominator for basic earnings per share -- weighted-average shares............................ 11,896 11,759 Effect of dilutive securities: Employee stock options(2).......................... -- -- 6 1/2% convertible notes(1)........................ -- -- ------- ------- Dilutive potential common shares...................... -- -- ------- ------- Denominator for diluted earnings per share -- adjusted weighted-average sharesthe three-month periods ended March 30, 2002 andassumed conversions.... 11,896 11,759 ======= =======March 31, 2001 was 59,882 and 173,590, respectively.- --------------- (1) Diluted EPS for the three-month periods ended March 31, 2001 and April 1, 2000 excludes "as converted" treatment of the convertible notes as their inclusion would be anti-dilutive. The number of "as converted" shares excluded for both the three-month periods ended March 31, 2001 and April 1, 2000 was 1,999,758. (2) Diluted EPS for the three-month periods ended March 31, 2001 and April 1, 2000 excludes the effect of employee stock options as their inclusion would be anti-dilutive. The number of employee stock options excluded for the three-month periods ended March 31, 2001 and April 1, 2000 was 173,590 and 179,578, respectively.7
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4.
SEGMENT REPORTINGSegment Reporting
Segment Description Intevac, Inc. has two reportable operating segments: Equipment and Photonics. The
Company'sCompany’s EquipmentbusinessDivision sells complex capital equipment used in the manufacturing ofthin-film disks,flat panel displays andshrink-wrap films.thin-film disks. TheCompany'sCompany’s PhotonicsbusinessDivision is developingproductsdevices and systems utilizing electron sources that permit highly sensitive detection of photons in the visible and the short-wave infrared spectrum.Included in corporate activities are general corporate expenses
the equity in net loss of equity investee and amortization expenses related to certain intangible assets, and a restructuring reserve first established in September 1999,less an allocation of corporate expenses to operating units equal to 1% of net revenues.5
Business Segment Net Revenues
Three months ended March 30, March 31, 2002 2001 (in thousands) Equipment $ 4,935 $ 7,932 Photonics 1,735 2,073 Total $ 6,670 $ 10,005
Business Segment Profit & Loss
Three months ended March 30, March 31, 2002 2001 (in thousands) Equipment $ (2,651 ) $ (563 ) Photonics (698 ) (662 ) Corporate activities (527 ) (540 ) Operating loss (3,876 ) (1,765 ) Interest expense (667 ) (738 ) Interest income 74 581 Other income and expense, net 111 (1,873 ) Loss before income taxes $ (4,358 ) $ (3,795 )
Geographic Area Net Trade Revenues
?Three months ended? March 30, March 31, 2002 2001 (in thousands) United States $ 4,237 $ 3,101 Far East 2,133 6,704 Europe 300 60 Rest of World — 140 Total $ 6,670 $ 10,005 8
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) Business Segment Net Revenues
THREE MONTHS ENDED --------------------- MARCH 31, APRIL 1, 2001 2000 --------- -------- (IN THOUSANDS)Equipment................................................ $ 7,932 $4,859 Photonics................................................ 2,073 1,033 ------- ------ Total.......................................... $10,005 $5,892 ======= ======Business Segment Profit & Loss— (Continued)
THREE MONTHS ENDED --------------------- MARCH 31, APRIL 1, 2001 2000 --------- -------- (IN THOUSANDS)Equipment............................................... $ (563) $(1,769) Photonics............................................... (662) (884) Corporate activities.................................... (540) (127) ------- ------- Operating loss.......................................... (1,765) (2,780) Interest expense........................................ (738) (758) Interest income......................................... 581 551 Other income and expense, net........................... (1,862) 126 ------- ------- Loss from continuing operations before income taxes..... $(3,784) $(2,861) ======= =======5.
RESTRUCTURING DuringIncome TaxesThe Company accrued a $2.2 million tax benefit for the three-month period ended March 30, 2002. This resulted from recent federal tax law changes that allow losses incurred in 2001 and 2002 to be carried back 5 years. The Company paid federal income taxes of approximately $5.1 million for 1996 and $0.9 million for 1997. The Company believes that at least $2.2 million of taxes paid are recoverable based on the loss incurred in 2001 and that additional taxes may also be recoverable, but the amount will not be determined and recorded until the Company files its 2001 federal income tax return either in the second or third quarter of
1999,2002. For theCompany adopted an expense reduction plan that included closing one of the buildings at its Santa Clara facility and a reduction in force of 7 employees out of the Company's staff of contract and regular personnel. The reductions took place at the Company's facilities in Santa Clara, California. The Company incurred a charge of $2,225,000 related to the expense reduction plan. The significant components of this charge included $873,000 for future rent due on the building (net of expected sublease income), $160,000 for costs associated with operating the building through May 2000, $580,000 for the write-off of leasehold improvements and $584,000 for moving out of the building. In the fourth quarter of 1999, $97,000 of the restructuring reserve was reversed due to lower than expected costs on the closure of the facility. During the first quarter of 2000, the Company vacated the building and negotiated a lease termination for that space with its landlord, which released the Company from the obligation to pay any rent after April 30, 2000. As a result, the Company reversed $615,000 of the restructuring reserve during the first quarter of 2000. During the fourth quarter of 1999, the Company adopted a plan to discontinue operations at its RPC Technologies, Inc. electron beam processing equipment subsidiary and to close the RPC facility in Hayward, California. Twenty-six employees out of the Company's staff of contract and regular personnel were terminated as a result. The Company incurred a charge of $1,639,000 related to this plan. The significant components of this charge include $679,000 for inventory write-downs which were charged to cost of sales, $264,000 for fixed asset write-offs, $200,000 for closure of the facility, $163,000 for employee severance costs, $161,000 for future rent due on the facility and $152,000 for write-off of intangibles. In the first quarter of 2000, Intevac sold certain assets of the RPC Technologies, Inc. subsidiary to Quemex Technology. Proceeds from the sale included a cash payment, assumption of the Hayward facility lease and the assumption of certain other liabilities. Excluded from the sale were two previously leased 69 INTEVAC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) systems andthreecompleted systems remaining in inventory. All three systems in inventory were shipped during 2000 and two were accepted by the customer and included in Intevac revenues during 2000. The third system is scheduled for customer acceptance and revenue recognition in 2001. The Company was able to reverse the portions of the restructuring reserve established to provide for future rents due on the facility and for the closure of the facility. However, since Intevac retained ownership of the two leased systems, the Company established an equivalent reserve to provide for any residual value at the end of the leases. The following table displays the activity in the building closure restructuring reserve, established in the third quarter of 1999, and in the RPC operation discontinuance restructuring reserve, established in the fourth quarter of 1999, through December 31, 2000.
BUILDING RPC OPERATION CLOSURE DISCONTINUANCE RESTRUCTURING RESTRUCTURING ------------- -------------- (IN THOUSANDS)Original restructuring charge..................... $2,225 $1,639 Actual expense incurred......................... (511) (851) Reversal of restructuring charge................ (97) -- ------ ------ Balance at December 31, 1999...................... 1,617 788 Actual expense incurred......................... (815) (365) Valuation reserve -- leased systems............. -- (361) Reversal of restructuring charge................ (615) -- ------ ------ Balance at April 1, 2000.......................... 187 62 Actual expense incurred......................... (162) (61) ------ ------ Balance at July 1, 2000........................... 25 1 Actual expense incurred......................... (2) (1) Reversal of restructuring charge................ (23) -- ------ ------ Balance at December 31, 2000...................... -- -- ====== ======6. INCOME TAXES The Company's estimated tax rate was 0% for the three-month periodsmonths ended March 31, 2001,and April 1, 2000. Thethe Company did not accrue a tax benefit due to the inability at that time to realize additional refunds from loss carry-backs.As of March 31, 2001 the Company'sThe Company’s $16.5 million deferred tax asset is fully offset by a $16.5 million valuation allowance, resulting in a net deferred taxassets totaled $7.7 million. The Company believes that it is more likely than not that it will earn sufficient taxable income in the future to realize the valueasset ofthese net deferred tax assets. If in the future the Company cannot project with reasonable certainty that it will earn taxable income sufficient to realize all or part of the value of these net deferred tax assets, then the Company will expense the value of the net deferred tax assets not likely to be realized. 7. CAPITAL TRANSACTIONSzero at March 30, 2002.6. Capital Transactions
During the three-month period ending March
31, 2001,30, 2002, Intevac sold stock to its employees under theCompany's Stock Option andCompany’s Employee Stock PurchasePlans.Plan. A total of91,09956,381 shares were issued for which the Company received$216,000. 710 ITEM$144,000.9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of OperationsThis Quarterly Report on Form 10-Q contains forward-looking statements which involve risks and uncertainties. Words such as
"believes," "expects," "anticipates"“believes,” “expects,” “anticipates” and the like indicate forward-looking statements. TheCompany'sCompany’s actual results may differ materially from those discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the risk factors set forth elsewhere in this Quarterly Report on Form 10-Q under"Certain“Certain Factors Which May Affect Future OperatingResults"Results” and in other documents the Company files from time to time with the Securities and Exchange Commission, including theCompany'sCompany’s Annual Report on Form 10-K filed in March2001,2002, Form10-Q's10-Q’s and Form8-K's. RESULTS OF OPERATIONS Three Months Ended March 31, 20018-K’s.Critical Accounting Policies and
April 1, 2000 Net revenues. NetEstimatesManagement’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
consist primarilyand expenses and related disclosures ofsales of equipment used to manufacture thin-film disks for computer hard disk drivescontingent assets andflat panel displays, related equipment and system components ("Equipment") and contract research and developmentliabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, income taxes, warranty obligations, long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under thedevelopmentcircumstances, the results ofhighly sensitive electro-optical devices under government sponsored R&D contractswhich form the basis for making judgments about the carrying value of assets and liabilities. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis. The Audit Committee and our auditors review significant estimates and judgements prior to the public release of our financial results.Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K. We believe the following critical accounting policies affect the more significant judgments and estimates made in the preparation of our consolidated financial statements.
Revenue Recognition — Intevac recognizes revenue using the guidance from SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements.” Intevac’s revenue recognition policy requires that there be persuasive evidence of a sales
of derivative products ("Photonics"). Net revenues from system salescontract, that the price is fixed, that product title has transferred, that product payment is not contingent on any factors and is reasonably assured, and that the Company has completed all the material tasks and deliverables required by the contract.Revenues for systems are recognized upon customer acceptance.
Net revenues from salesFor large deposition and RTP systems shipped through a distributor, revenue is typically recognized after the distributor has accepted the system at Intevac’s factory and the system has been shipped. For large deposition and RTP systems sold direct to end customers, revenue is recognized after installation and acceptance ofrelated equipmentthe system at the customer site. When the Company believes that there may be higher than normal end-user installation and acceptance issues for systems shipped through a distributor, such as when the first unit of a newly designed systemcomponentsis delivered, then the Company defers revenue recognition until the distributor’s customer has also accepted the system. Revenues for technology upgrades, spare parts, consumable and prototype products built by the Photonics Division are generally recognized uponproductshipment.ContractService and maintenance contract revenue, which to date has been insignificant, is recognized ratably over applicable contract periods or as the service is performed.The Company performs best efforts research and development
revenuework under various research contracts. Revenue on these contracts is recognized in accordance with contract terms, typically as costs are incurred. Typically, for each contract, the Company commits to perform certain research and development efforts up to an agreed upon amount. In connection with these contracts, the Company receives funding on an incremental basis up to a ceiling. 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 end10
of the contract. In the event a particular contract over-runs its agreed upon amount, the Company may be liable for the additional costs.Inventories — Intevac makes provisions for potentially excess and obsolete inventory based on backlog and forecasted demand. However, order backlog is subject to revisions, cancellations, and rescheduling. Actual demand will inevitably differ from forecasted demand due to a number of factors. For example, the thin-film disk industry has suffered from over-capacity and poor financial results, which has led to industry consolidation. Consolidation can lead to the availability of used equipment that competes at very low prices with the Company’s products. Financial stress and consolidation in the Company’s customer base can also lead to the cancellation of orders for products after the Company has incurred substantial costs related to those orders. Such problems have resulted, and may continue to result, in excess and obsolete inventory, and the provision of related reserves.
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 warranty cost is recorded at the time revenue is recognized.
Results of Operations
Three Months Ended March 30, 2002 and March 31, 2001
Net revenues.Net revenues
increasedconsist primarily of sales of equipment used to manufacture flat panel displays, equipment used to manufacture thin-film disks, related equipment and system components, and contract research and development related to the development of electro-optical devices and systems. Net revenues decreased by70%33% to $6.7 million for the three months ended March 30, 2002 from $10.0 million for the three months ended March 31,20012001. Net revenues from$5.9Equipment decreased to $4.9 million for the three months endedApril 1, 2000. Net revenuesMarch 30, 2002 fromEquipment increased to$7.9 million for the three months ended March 31,2001 from $4.9 million for the three months ended April 1, 2000.2001. Theincreasedecrease in Equipment revenue was the result ofincreaseddecreased shipments of flat panel manufacturing equipment and of disk equipmentupgrades andspareparts andparts. Equipment revenues included theshipmentsale ofone Rapid Thermal Processing ("RTP")a MDP 200 modular add-on system that was integrated with a previously delivered MDP 250 disk manufacturing system. Net revenues from Photonicsincreaseddecreased to $1.7 million for the three months ended March 30, 2002 from $2.1 million for the three months ended March 31,2001 from $1.0 million for the three months ended April 1, 2000.2001. Theincreasedecrease in Photonics net revenues was the result ofhigherlower research and development contractexpendituresrevenues in the three-month period ended March31, 2001.30, 2002, partially offset by revenue from the sale of two Model 120 LIVAR Cameras.International sales
increaseddecreased by247%65% to $2.4 million for the three months ended March 30, 2002 from $6.9 million for the three months ended March 31,2001 from $2.0 million for the three months ended April 1, 2000.2001. Theincreasedecrease in international sales was due toan increasea reduction in net revenues from disk manufacturing equipment andthe shipment of one RTP system.from flat panel manufacturing equipment. International sales constituted 37% of net revenues for the three months ended March 30, 2002 and 69% of net revenues for the three months ended March 31,2001 and 34% of net revenues for the three months April 1, 2000.2001.Backlog.The
Company'sCompany’s backlog of orders for its products was $27.3 million at March 30, 2002 and $46.0 million at March 31,2001 and $29.1 million at April 1, 2000.2001. The reduction was primarily due to a lower backlog of flat panel deposition systems, five of which were taken to revenue in the fourth quarter of 2001. The Company includes in backlog the value of purchase orders for its products that have scheduled delivery dates.�� Gross margin.Cost of net revenues consists primarily of purchased materials, fabrication, assembly, test and installation labor and overhead, customer-specific engineering costs, warranty costs, royalties, provisions for inventory reserves, scrap and costs attributable to contract research and development. Gross margin
increaseddecreased to 14.4% for the three months ended March 30, 2002 from 34.0% for the three months ended March 31,2001 from 11.0% for the three months ended April 1, 2000.2001.Equipment gross margins
increaseddecreased to 15.5% for the three-month period ended March 30, 2002 from 45.0% for the three-month period ended March 31,2001 from 25.7% for the three-month period ended April 1, 2000.2001. Equipment marginsincreaseddecreased primarily due torevenue being dominated by shipmenta reduction in shipments of technology upgrades andimproved factory utilization.high initial costs to complete Intevac’s first MDP 200 system. Photonics gross margins increased to 11.3% during the three months ended March 30, 2002 from (8.1%) during the three months ended March 31,2001 from (44.2%) during the three months ended April 1, 2000.2001. Photonics gross margins in the first quarter of2000200211
wereunfavorablyfavorably impacted by theestablishmentshipment ofapproximately $0.2 million of inventory reserves2 LIVAR® camera systems and bylower revenues resultingthe mix of sales derived fromafully funded research and developmentcontract being on hold for the majority of the period.contracts versus cost-shared research and development contracts.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
diskflat panel manufacturing equipment,flat paneldisk manufacturing equipment, and research by the Photonics Division.811Company funded research and development expenseincreaseddecreased to $3.1 million for the three months ended March 30, 2002 from $3.5 million for the three months ended March 31, 2001,from $2.5 million for the three months ended April 1, 2000,representing34.9%46.9% and41.8%34.9%, respectively, of net revenue. Thisincreasedecrease was primarily the result ofincreasedreduced spending for development of flat panel manufacturing equipment, partially offset byreducedincreased spending fordevelopment of disk manufacturing equipment.photonics.Research and development expenses do not include costs of
$2.1$1.3 million and$0.8$2.1 million, respectively, for the three-month periods ended March 30, 2002 and March 31, 2001and April 1, 2000related to contract research and development performed by theCompany'sCompany’s Photonics business. These expenses are included in cost ofgoods sold.net revenues.Research and development expenses also do not include costs of $0.1 million
and $0.2 million, respectively,in each of the three-month periods ended March 30, 2002 and March 31, 2001,and April 1, 2000,reimbursed under the terms of various research and development cost sharing agreements.Selling, general and administrative.Selling, general and administrative expense consists primarily of selling, marketing, customer support, production of customer samples, financial, travel, management, legal and professional
services.services and bad debt expense. Domestic sales are made by theCompany'sCompany’s direct sales force, whereas international sales are made by distributors and representatives thattypicallyprovide services such as sales, installation, warranty andongoingcustomer support. The Company also has a subsidiary in Singapore to support customers in Southeast Asia.Through the second quarter of 2000, the Company marketed its flat panel manufacturing equipment to the Far East through its Japanese joint venture, IMAT. During the third quarter of 2000 the Company and its joint venture partner, Matsubo, transferred IMAT's activities and employees to Matsubo and shut down the operations of IMAT.Selling, general and administrative expense
increased towas $1.7 million for thethree monthsboth the three-month periods ended March 30, 2002 and March 31, 2001,from $1.6 million for the three months ended April 1, 2000,representing16.7%25.6% and26.9%16.7%, respectively, of net revenue.The reason for the increase was a higher level of selling, general and administrative expense in both the Equipment Business and in Photonics. This higher level of expense was driven by an increase in selling, general and administrative headcount to 33 employees at March 31, 2001 from 29 employees at April 1, 2000. Restructuring and other expense. Restructuring expense was ($0.6) million in the three-month period ended April 1, 2000. During the three months ended April 1, 2000 the Company vacated approximately 47,000 square feet of its Santa Clara Headquarters and negotiated an early lease termination for the space. As a result the Company reversed approximately $0.6 million of previously accrued restructuring expense relating to future rents on the vacated space.Interest expense.Interest expense consists primarily of interest on the
Company'sCompany’s convertiblenotes, and, to a lesser extent, interest on approximately $1.9 million of short-term debt related to the purchase of Cathode Technology in 1996.notes. Interest expense was $0.7 millionand $0.8 million, respectively,in both of the three-month periods ended March 30, 2002 and March 31,2001 and April 1, 2000. Interest expense declined because the Cathode Technology debt was retired in January2001.Interest income and other, net.Interest income and other, net
consists primarily of interest income on the Company's investments, foreign currency hedging gainstotaled $0.2 million andlosses, early payment discounts on the purchase of inventories, goods and services and the Company's 49% share of the loss incurred by IMAT. Interest income and other, net decreased to($1.3) million for the three months ended March 30, 2002 and March 31, 2001,fromrespectively. Interest income and other, net in 2002 consisted of $0.2 million of interest and dividend income on investments. Interest income and other, net in 2001 consisted of $0.7 millionforof interest and dividend income on investments offset by thethree months ended April 1, 2000 primarily as the result ofestablishment of a reserve related to theCompany'sCompany’s $2.0 million investment in commercial paper issued by Pacific Gas and Electric Company, whichrecentlyhad filed for reorganization under Chapter 11 of the US BankruptcyCode.Code in early 2001.Provision for (benefit from) income taxes.The Company accrued a $2.2 million tax benefit for the three-month period ended March 30, 2002. This resulted from recent federal tax law changes that allow losses incurred in 2001 and 2002 to be carried back 5 years. The Company paid federal income taxes of approximately $5.1 million for 1996 and $0.9 million for 1997. The Company believes that at least $2.2 million of taxes paid are recoverable based on the loss incurred in 2001 and that additional taxes may also be recoverable, but the amount will not be determined and recorded until the Company files its 2001 federal income tax return either in the second or third quarter of 2002. For the three months ended March 31, 2001, the Company did not accrue a tax benefit
during the three-month periods ended March 31, 2001 and April 1, 2000due to the inability at that time to realize additional refunds from loss carry-backs.912 LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
The
Company'sCompany’s operating activities used cash of $3.7 million during the three months ended March 30, 2002. The cash used was due primarily to the net loss incurred and increases in receivables and inventory, which were partially offset by increased customer advances and depreciation and amortization. In the three12
months ended March 31, 2001, the Company’s operating activities used cash of $4.4 millionfor the three months ended March 31, 2001. The cash used wasdue primarily to increased inventory and the net loss incurred by theCompany, which were partially offset by higher accounts payable, a reduction in accounts receivable, depreciation and amortization.Company.The
Company'sCompany’s investing activitiesprovided cash of $26.2 million for the three months ended March 31, 2001 as a result of the net sale of investments, which was partially offset by the purchase of fixed assets. During the quarter, the Company converted the majority of its short term investments into cash or cash equivalents. The Company's financing activities providedused cash of $0.2 million for the three months ended March 30, 2002 as a result of the purchase of fixed assets. In the three months ended March 31, 2001, the Company’s investing activities provided cash of $26.2 million as a result of the net sale of investments. During the three months ended March 31, 2001, the Company converted the majority of its short-term investments into cash or cash equivalents.The Company’s financing activities provided cash of $0.1 million and $0.2 million for the three-month periods ended March 30, 2002 and March 31, 2001, respectively, as the result of the sale of the
Company'sCompany’s stock to its employees through theCompany'sCompany’s employee benefit plans.CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTSIntevac has incurred operating losses each year since 1998 and the Company cannot predict with certainty when it will return to profitability. We anticipate generating positive cash flow during the 2002 fiscal year, but that is dependent on continued growth in the business and our continued ability to obtain advances from our customers. Additionally, as of March 30, 2002 we had $37.5 million of outstanding Convertible Notes, which mature in March 2004. We do not currently have the funds available to repay the debt and there can be no assurance that the Company will be able to restructure the debt or secure additional equity and/or debt financing to redeem the Convertible Notes on terms favorable to the Company and its shareholders, if the Convertible Notes are not converted by their holders into Intevac common stock prior to their maturity.
Certain Factors Which May Affect Future Operating Results
$37.5 Million of convertible notes are outstanding and will mature in 2004.
In connection with the sale of $57.5 million of its 6 1/2% Convertible Subordinated Notes Due 2004 (the “Convertible Notes”) in February 1997, Intevac incurred a substantial increase in the ratio of long-term debt to total capitalization (shareholders’ equity plus long-term debt). At each noteholder’s option, the Convertible Notes may be exchanged, prior to maturity, into Intevac common shares at a price of $20.625 per share, which is substantially above current market price. During 2001 and 1999 Intevac spent a total of $11.9 million to repurchase $20.0 million of the Convertible Notes. The $37.5 million of the Convertible Notes that remain outstanding as of March 30, 2002 commit Intevac to substantial principal and interest obligations that are significantly in excess of the Company’s $14.5 million cash balance at March 30, 2002. Intevac may, from time to time, repurchase and retire additional Convertible Notes prior to their maturity date.
The degree to which Intevac is leveraged could have an adverse effect on Intevac’s ability to obtain additional financing for working capital, acquisitions or other purposes, and could make it more vulnerable to industry downturns and competitive pressures. Intevac’s ability to meet its debt service obligations will be dependent on Intevac’s future performance, which will be subject to financial, business and other factors affecting the operations of Intevac, many of which are beyond its control. In the event that the Company’s noteholders do not choose to exchange their Convertible Notes for Intevac common stock prior to the Convertible Notes’ 2004 maturity date, the Company will be required to repay the Convertible Notes at maturity. If this is the case, then there can be no assurance that the Company will have generated sufficient cash from operations to repay the Convertible Notes without raising additional capital through the sale of additional debt or equity. Additionally, there can be no assurance that the Company will be able to secure additional equity and/or debt financing on terms favorable to the Company and its shareholders, or at all.
The majority of Intevac’s new products address new and emerging markets. Intevac has invested heavily in the development of products that address new markets. The Equipment Division has developed a flexible deposition tool and a rapid thermal processing tool to address growing segments of the flat panel display equipment market that are intended to displace products offered by competing manufacturers. The Photonics Division’s LIVAR target identification system and low-cost low-light level camera products are designed to offer significantly improved capability relative to any products currently offered in the marketplace. Additionally, the Photonics Division is entering a new market for the
13
Company with its photodiodes for fiber optic communication systems. Failure of these products to perform as intended or to successfully penetrate these new markets and develop into profitable product lines will have an adverse effect on Intevac’s business.
Demand for capital equipment is cyclical. Intevac sells capital equipment to capital intensive industries, which manufacture and sell commodity products such as flat panel displays and disk drives. These industries operate with high fixed costs. When demand for these commodity products exceeds capacity, then demand for new capital equipment such as Intevac’s tends to be amplified. When supply of these commodity products exceeds capacity, then demand for new capital equipment such as Intevac’s tends to be depressed. The cyclical nature of the capital equipment industry means that in some years sales of new systems by the Company will be unusually high, and that in other years sales of new systems by the Company will be severely depressed. Failure to anticipate or respond quickly to the industry business cycle could have an adverse effect on Intevac’s business.
The Equipment Business is subject to rapid technical change. Intevac’s ability to remain competitive requires substantial investments in research and development. The failure to develop, manufacture and market new systems, or to enhance existing systems, will have an adverse effect on Intevac’s business. From time to time in the past, Intevac has experienced delays in the introduction of, and technical difficulties with, some of its systems and enhancements. Intevac’s future success in developing and selling equipment will depend upon a variety of factors, including accurate prediction of future customer requirements, technology advances, cost of ownership, introduction of new products on schedule, cost-effective manufacturing and product performance in the field. Intevac’s new product decisions and development commitments must anticipate continuously evolving industry requirements significantly in advance of sales. Any failure to accurately predict customer requirements and to develop new generations of products to meet those requirements would have an adverse effect on Intevac’s business.
Our products are complex, constantly evolving and are often designed and manufactured to individual customer
requirements. Intevac'srequirements that require additional engineering.Intevac’s Equipment Division products have a large number of components and are highly complex. Intevac may experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. In addition, some of the systems built by Intevac
maymust be customized to meet individual customer site or operating requirements. Intevac has limited manufacturing capacity and engineering resources and may be unable to complete the development, manufacture and shipment of its products, or to meet the required technical specificationsoffor its products in a timely manner. Such delays could lead to rescheduling of orders in backlog, or in extreme situations, to cancellation of orders. In addition, Intevac may incur substantial unanticipated costs early in aproduct'sproduct’s life cycle, such as increased engineering, manufacturing, installation and support costs which may not be able to be passed on to the customer. Incertainsome instances, Intevac is dependent upon a sole supplier or a limited number of suppliersor has qualified only a single or limited number of suppliers,forcertaincomplex components or sub-assemblies utilized in its products. Any of these factors could adversely affectIntevac'sIntevac’s business.The Equipment Division is subject to rapid technical change. Intevac's ability to remain competitive requires substantial investments in research and development. The failure to develop, manufacture and market new systems, or to enhance existing systems, would have an adverse effect on Intevac's business. In the past, Intevac has experienced delays from time to time in the introduction of, and technical difficulties with, some of its systems and enhancements. Intevac's success in developing and selling equipment depends upon a variety of factors, including accurate prediction of future customer requirements, technology advances, cost of ownership, introduction of new products on schedule, cost-effective manufacturing and product performance in the field. Intevac's new product decisions and development commitments must anticipate continuously evolving industry requirements significantly in advance of sales. Any failure to accurately predict customer requirements and to develop new generations of products to meet those requirements would have an adverse effect on Intevac's business. The Photonics Division
The Photonics Business does not yet generate asignificantportion of itsrevenues from product sales.To date the activities of the Photonics Division have concentrated on the development of its technology and prototype products that demonstrate this technology. Revenues have been derived primarily from research and development contracts funded by the United States Government and its contractors. The Company
planscontinues to develop standardphotonicsPhotonics products for sale to military and commercial customers. The Photonics Division will require substantial further investment in sales and marketing, in product development and in additional production facilities to support the planned transition to volume sales ofphotonicsPhotonics products to military and commercial customers. There can be no assurance that the Company will succeed in these activities and generate significantincreases insales of products based on itsphotonicsPhotonics technology.1013 The sales of our equipment products are dependent on substantial capital investment by our customers. The majority of our Equipment revenues have historically come from the sale of equipment used to manufacture thin-film disks, and to a lesser extent, from the sale of equipment used to manufacture flat panel displays.14
The sales of our Equipment products are dependent on substantial capital investment by our customers. The purchase of
Intevac'sIntevac’s systems, along with the purchase of other related equipment and facilities, requires extremely large capital expenditures by our customers. These costs are far in excess of the cost of the Intevacsystems.systems alone. The magnitude of such capital expenditures requires that our customers have access to large amounts of capital and that theyarebe willing to invest that capital over long periods of timein orderto be able to purchase our equipment. Some of our customersparticularly those that purchase our disk manufacturing products,may not be willing, or able, to make the magnitude of capital investmentrequired to purchase our products. The disk drive industry has been severely impacted by excess capacity since 1997. Intevac derives a significant proportion of its revenues from sales of equipment to manufacturers of computer disk drives and disk drive components. The disk drive industry has experienced a long period of over-supply and intensely competitive pricing. Since 1997, many of the manufacturers of hard disk drives and their component suppliers have reported substantial losses. Some of these manufacturers have gone out of business. Some of these manufacturers have been acquired by their competitors. Accordingly, the number of potential customers for Intevac's disk equipment products has been reduced. As a result of these factors, Intevac has experienced significant reductions in its quarterly revenues, and has incurred quarterly losses, since the third quarter of 1998. Additionally, the financial strength of the industry has deteriorated which subjects Intevac to increased credit risk on its accounts receivable. Intevac is not able to accurately predict when the industry conditions that have depressed our disk equipment sales will become more favorable. Demand for capital equipment is cyclical. Intevac's Equipment Division sells capital equipment to capital intensive industries, which sell commodity products such as disk drives and flat panel displays. These industries operate with high fixed costs. When demand for these commodity products exceeds capacity, then demand for new capital equipment such as Intevac's tends to be amplified. When supply of these commodity products exceeds capacity, then demand for new capital equipment such as Intevac's tends to be depressed. The cyclical nature of the capital equipment industry means that in some years, such as 1997, sales of new systems by the Company will be unusually high, and that in other years, such as 2000, sales of new systems by the Company will be severely depressed. Failure to anticipate, or respond quickly to the industry business cycle could have an adverse effect on Intevac's business. Rapid increases in areal density are reducing the number of thin-film disks required per disk drive.required.
Rapid increases in areal density are reducing the number of thin-film disks required per disk drive. Over the past few years the amount of data that can be stored on a single thin-film computer disk has been
growingincreasing at approximately 100% per year. Although the number of disk drives produced has continued to increase each year, the growth in areal density has resulted in a reduction in the number of disks required per disk drive.The result has beenTrendFocus, a market research firm specializing in the disk drive industry, projects that the number of thin-film disks used worldwidehas not grown significantly since 1997.declined in 2001 from 2000 levels and are expected to remain at the same level in 2002. Without a significant technological change or an increase in the number of disks required,Intevac'sIntevac’s disk equipment sales are largely limited to upgrades of existingcapacity,systems, rather than capacityexpansion. While the rapidly falling cost of storage per gigabyte is leading to new applications for disk drives beyond the traditional computer market, it is not clear to what extent the demand from these new applications will be offset by further declines in the average number of disks required per disk drive.expansion or system replacement.
Our competitors are large and well financed and competition is intense. Intevac experiences intense competition in the Equipment Division. For example,
Intevac'sIntevac’s equipment products experience competition worldwide from competitors including AnelvaCorporation, Applied FilmsCorporation, Ulvac Japan, Ltd. and Unaxis Holdings, Ltd., each of which have sold substantial numbers of systems worldwide. Anelva, Ulvac and Unaxis all have substantially greater financial, technical, marketing,1114manufacturing and other resources than Intevac. There can be no assurance thatIntevac'sIntevac’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 enterIntevac'sIntevac’s markets and develop such enhanced products.Given the lengthy sales cycle and the significant investment required to integrate equipment into the manufacturing process, Intevac believes that once a manufacturer has selected a particular
supplier'ssupplier’s equipment for a specific application, that manufacturer generally relies upon thatsupplier'ssupplier’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.Business interruptions
Intevac’s business is dependent on its intellectual property. There can be no assurance that:
• any of Intevac’s pending or future patent applications will be allowed or that any of the allowed applications will be issued as patents, or • any patent owned by Intevac will not be invalidated, deemed unenforceable, circumvented or challenged, or • the rights granted under our patents will provide competitive advantages to Intevac, or • any of Intevac’s pending or future patent applications will be issued with claims of the scope sought by Intevac, if at all, or • others will not develop similar products, duplicate Intevac’s products or design around the patents owned by Intevac, or • patent rights, intellectual property laws or Intevac’s agreements will adequately protect Intevac’s intellectual property rights. Failure to adequately protect Intevac’s intellectual property rights could
adversely affect ourhave an adverse effect upon Intevac’s business.Intevac's15
From time to time Intevac has received claims that it is infringing third parties’ intellectual property rights. There can be no assurance that third parties will not in the future claim infringement by Intevac with respect to current or future patents, trademarks, or other proprietary rights relating to Intevac’s disk sputtering systems, flat panel manufacturing equipment or other products. Any present or future claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require Intevac to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to Intevac, or at all. Any of the foregoing could have an adverse effect upon Intevac’s business.
Our operating results fluctuate significantly. Over the last nine quarters Intevac’s operating loss as a percentage of net revenues has fluctuated between approximately (59%) and (1%) of net revenues. Over the same period sales per quarter have fluctuated between $23.6 million and $5.9 million. Intevac anticipates that its sales and operating margins will continue to fluctuate. As a result, period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance.
Operating costs in northern California are high. Intevac’s operations are located in Santa Clara, California. The cost of living in northern California is extremely high, which increases both the cost of doing business and the cost and difficulty of recruiting new employees. Intevac’s operating results depend in significant part upon its ability to effectively manage costs and to retain and attract qualified management, engineering, marketing, manufacturing, customer support, sales and administrative personnel. The failure to control costs and to attract and retain qualified personnel could have an adverse effect on Intevac’s business.
Business interruptions could adversely affect our business. Intevac’s operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control.
The Company's facility in California is currently subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event these blackouts continue or increase in severity, they could disrupt the operations of the facility.Additionally, thecostcosts of electricity and natural gashashave increased significantly.Such cost increases and anyAny further cost increases will impact theCompany's profitability. Competition is intense for employees in northern California. Intevac's operating results depend in significant part upon itsCompany’s ability toretain and attract qualified management, engineering, marketing, manufacturing, customer support, sales and administrative personnel. Competition in northern California for such personnel is intense. The cost of living in northern California is also extremely high, which further increases the cost and difficulty of recruiting new employees. There can be no assurance that Intevac will be successful in attracting new employees and retaining its staff. The failure to attract and retain such personnel could have an adverse effect on Intevac's business. A portionachieve profitability.
A majority of our sales are to international customers. Sales and operating activities outside of the United States are subject to
certaininherent risks, including fluctuations in the value of the United States dollar relative to foreign currencies, tariffs, quotas, taxes and other market barriers, political and economic instability, restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations and potentially adverse tax consequences. Intevac earns a significant portion of its revenue from international sales, and there can be no assurance that any of these factors will not have an adverse effect onIntevac'sIntevac’s business.Intevac generally quotes and sells its products in US dollars. However,
forin someJapanese customers,cases, Intevacquoteshas quoted andsellssold its products in Japanese Yen. In those cases Intevacfrom time to time, entersmay enter into foreign currency contracts in an effort to reduce the overall risk of currency fluctuations toIntevac'sIntevac’s business. However, there can be no assurance that the offer and sale of products denominated in foreigndenominatedcurrencies, and the related foreign currency hedging activities will not adversely affectIntevac's business. Intevac'sIntevac’s results of operations.Intevac’s two principal competitors for disk sputtering equipment are based in foreign countries and have cost structures based on foreign currencies. Accordingly, currency fluctuations could cause
Intevac'sIntevac’s products to be more, or less, competitive than itscompetitors'competitors’ products. Currency fluctuations will decrease, or increase,Intevac'sIntevac’s cost structure relative to those of its competitors, which could impactIntevac's gross margins. Our operating results fluctuate significantly. Over the last nine quarters Intevac's operating loss as a percentage of net revenues has fluctuated from approximately (79%) to (8%) of net revenues. Over the same period sales per quarter have fluctuated between $13.8 million and $5.9 million. Intevac anticipates that its sales and operating margins will continue to 1215 fluctuate. As a result, period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Intevac's stock price is volatile. Intevac'sIntevac’s competitive position.16
Intevac’s stock price is volatile. Intevac’s stock price has experienced both significant increases in valuation, and significant decreases in valuation, over short periods of time. Intevac believes that factors such as announcements of developments related to
Intevac'sIntevac’s business, fluctuations inIntevac'sIntevac’s operating results, failure to meet securitiesanalysts'analysts’ expectations, general conditions in the disk drive and thin-film media manufacturing industries and the worldwide economy, announcements of technological innovations, new systems or product enhancements by Intevac or its competitors, fluctuations in the level of cooperative development funding, acquisitions, changes in governmental regulations, developments in patents or other intellectual property rights and changes inIntevac'sIntevac’s relationships with customers and suppliers could cause the price ofIntevac'sIntevac’s Common Stock to continue to fluctuate substantially. In addition, in recent years the stock market in general, and the market for small capitalization and high technology stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any of these factors could adversely affect the market price ofIntevac'sIntevac’s Common Stock.Intevac routinely evaluates acquisition candidates and other diversification strategies.
Intevac routinely evaluates acquisition candidates and other diversification strategies. Intevac has completed multiple acquisitions as part of its efforts to
growexpand and diversify its business. For example,Intevac'sIntevac’s business was initially acquired from Varian Associates in 1991. Additionally, Intevac acquired its current gravity lubrication, CSS test equipment and rapid thermal processing product lines in threeseparateacquisitions. Intevac also acquired its RPC electron beam processing business in late 1997, andafter two years initiated plans to closesubsequently closed this business. Intevac intends to continue to evaluate new acquisition candidates and diversification strategies. Any acquisition will involve numerous risks, including difficulties in the assimilation of the acquiredcompany'scompany’s employees, operations and products, uncertainties associated with operating in new markets and working with new customers, and the potential loss of the acquiredcompany'scompany’s key employees. Additionally, unanticipated expenses, difficulties and consequences may be incurred relating to the integration of technologies, research and development, and administrative functions. Any future acquisitions may result in potentially dilutive issuance of equity securities, acquisition related write-offs and the assumption of debt and contingent liabilities. Any of the above factors could adversely affectIntevac'sIntevac’s business.Thin-film disks could be replaced by a new technology. Intevac believes that thin-film disks will continue to be the dominant medium for data storage for the foreseeable future. However, it is possible that competing technologies may at some time reduce the demand for thin-film disks, which would adversely affect Intevac's disk equipment business. Intevac's business is dependent on its intellectual property. There can be no assurance that: - any of Intevac's patent applications will be allowed or that any of the allowed applications will be issued as patents, or - any patent owned by Intevac will not be invalidated, deemed unenforceable, circumvented or challenged, or - the rights granted under our patents will provide competitive advantages to Intevac, or - any of Intevac's pending or future patent applications will be issued with claims of the scope sought by Intevac, if at all, or - others will not develop similar products, duplicate Intevac's products or design around the patents owned by Intevac, or 1316 - foreign patent rights, intellectual property laws or Intevac's agreements will protect Intevac's intellectual property rights. Failure to protect Intevac's intellectual property rights could have an adverse effect upon Intevac's business. From time to time Intevac has received claims that it is infringing third parties' intellectual property rights. There can be no assurance that third parties will not in the future claim infringement by Intevac with respect to current or future patents, trademarks, or other proprietary rights relating to Intevac's disk sputtering systems, flat panel manufacturing equipment or other products. Any present or future claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require Intevac to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to Intevac, or at all. Any of the foregoing could have an adverse effect upon Intevac's business. $41 Million of convertible notes are outstanding and will mature in 2004. In connection with the sale of $57.5 million of its 6 1/2% Convertible Subordinated Notes Due 2004 (the "Convertible Notes") in February 1997, Intevac incurred a substantial increase in the ratio of long-term debt to total capitalization (shareholders' equity plus long-term debt). During 1999 Intevac spent $9.7 million in cash to repurchase $16.3 million of the Convertible Notes. The $41.2 million of the Convertible Notes that remain outstanding as of March 31, 2001 commit Intevac to substantial principal and interest obligations. The degree to which Intevac is leveraged could have an adverse effect on Intevac's ability to obtain additional financing for working capital, acquisitions or other purposes and could make it more vulnerable to industry downturns and competitive pressures. Intevac's ability to meet its debt service obligations will be dependent on Intevac's future performance, which will be subject to financial, business and other factors affecting the operations of Intevac, many of which are beyond its control. Intevac uses hazardous materials.
Intevac uses hazardous materials. Intevac is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture, treatment and disposal of toxic or
otherotherwise hazardous substances, chemicals, materials or waste. Any failure to comply with current or future regulations could result in substantial civil penalties or criminal fines being imposed on Intevac or its officers, directors or employees, suspension of production, alteration of its manufacturing process or cessation of operations. Such regulations could require Intevac to acquire expensive remediation or abatement equipment or to incur substantial expenses to comply with environmental regulations. Any failure by Intevac to properly manage the use, disposal or storage of, or adequately restrict the release of, hazardous or toxic substances could subject Intevac to significant liabilities.
A majority of the Common Stock outstanding is controlled by the directors and executive officers of Intevac. Based on the shares outstanding on March
31, 2001,30, 2002, thepresentcurrent directors and their affiliates and executive officers, in the aggregate, beneficially own a majority of the outstanding shares of Common Stock.As a result, theseThese shareholders, acting together, are able to effectively control all matters requiring approval by the shareholders of Intevac, including the election of a majority of the directors and approval of significant corporate transactions.ITEMThe Company’s officers and directors also hold 7% of the outstanding Convertible Notes.17
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market RiskInterest 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 commercial paper and market auction rate bonds. 14The table below presents principal amounts and related weighted-average interest rates by year of maturity for the 17Company's investment portfolio andCompany’s debt obligations.
FAIR 2001 2002 2003 2004 2005 BEYOND TOTAL VALUE ------- ---- ---- ------- ---- ------ ------- ------- (IN THOUSANDS)Cash equivalents Variable rate................ $23,884 -- -- -- -- -- $23,884 $23,884 Average rate................. 5.18% -- -- -- -- -- Short-term investments Variable rate................ $ 4,973 -- -- -- -- -- $ 4,973 $ 4,973 Average rate................. 6.48% -- -- -- -- -- Total investments Securities................... $28,857 -- -- -- -- -- $28,857 $28,857 Average rate................. 5.40% -- -- -- -- -- Long-term debt Fixed rate................... -- -- -- $41,245 -- -- $41,245 $21,551 Average rate................. 6.50% 6.50% 6.50% 6.50% -- --
Fair 2002 2003 2004 2005 2006 Beyond Total Value (in thousands) Long-term debt Fixed rate — — $ 37,545 — — — $ 37,545 $ 20,697 Average rate 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'sCompany’s operating results. At March31, 2001,30, 2002, the Company did not have foreign currency forward exchange contracts.1518
PART II. OTHER INFORMATION
ITEMItem 1.
LEGAL PROCEEDINGSLegal ProceedingsOn June 12, 1996 two Australian Army Black Hawk Helicopters collided in midair during nighttime maneuvers. Eighteen Australian servicemen perished and twelve were injured. The Company was named as a defendant in a lawsuit related to this crash. The lawsuit was filed in Stamford, Connecticut Superior Court on June 10, 1999 by Mark Durkin, the administrator of the estates of the deceased crewmembers, the injured crewmembers and the spouses of the deceased and/or injured crewmembers. Included in the
suit'ssuit’s allegations are assertions that the crash was caused by defective night vision goggles. The suit names three US manufacturers of military night vision goggles, of which Intevac was one. The suit also names the manufacturer of thepilot'spilot’s helmets, two manufacturers of night vision system test equipment and the manufacturer of the helicopter. The suit claims damages for 13 personnel killed in the crash, 5 personnel injured in the crash and spouses of those killed or injured. It is known that the Australian Army established a Board of Inquiry to investigate the accident and that the Board of Inquiry concluded that the accident was not caused by defective night vision goggles.Preliminary investigations leadOn July 27, 2000 the Connecticut Superior Court disallowed the defendants’ motion to dismiss the lawsuit. That decision was appealed to the Connecticut Supreme Court. On October 30, 2001 the Connecticut Supreme Court reversed the Superior Court’s decision and remanded the case to the trial court with the direction to grant the defendants’ motions to dismiss the suit subject to conditions already agreed to by the defendants. These conditions agreed to by the defendants include (1) consenting to jurisdiction in Australia; (2) accepting service of process in connection with an action in Australia; (3) making their personnel and records available for litigation in Australia; (4) waiving any applicable statutes of limitation in Australia up to six months from the date of dismissal of this action or for such other reasonable time as may be required as a condition of dismissing this action; (5) satisfying any judgement that may be entered against them in Australia; and (6) consenting to the reopening of the action in Connecticut in the event the above conditions are not met as to any proper defendant in the action. The plaintiffs have not commenced litigation against the Company in Australia. Any such action could expose Intevac to
believe that it has meritorious defensesfurther risk, plus the expense and uncertainties of defending the matter in a distant foreign jurisdiction.On June 12, 2001 the Company filed a complaint in Santa Clara County Superior Court, State of California, against Intarsia Corporation. The complaint related to Intarsia’s cancellation of an order for a customized sputtering system and sought damages of at least $3.3 million. On July 26, 2001 Intarsia filed a cross-complaint against the
Durkin suit. However, there can be no assurance thatCompany in theresolutionSanta Clara County Superior Court. On August 14, 2001, the Company filed a demurrer to the cross-complaint, and on October 11, 2001, Intarsia filed an amended cross-complaint. The amended cross-complaint included allegations of fraud, negligent misrepresentation, breach of contract and breach of covenant of good faith and fair dealing, and sought damages in the amount of $349,000 plus additional relief as may have been deemed appropriate by the court. On February 1, 2002 the Company and Intarsia agreed to resolve the matter. The terms of thesuit willsettlement did nothavematerially effect the Company’s financial results.Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a
material adverse effect on the Company's business, operating resultsVote of Security-HoldersNone.
19
Item 5. Other Information
None.
Item 6. Exhibits and
financial condition. On January 5, 2000, the Company's RPC Technologies, Inc. subsidiary was named as a defendant in a lawsuit filed in United States District Court in Texas. The lawsuit was filed by Reita Miller, Executrix of the estate of Thomas O. Miller, and family members of Mrs. Miller. The suit names RPC Technologies, Inc. and RPC Industries, Inc. as defendants. Included in the suits allegations are assertions that Thomas O. Miller contracted leukemia and died as the result of working in and around Broad Beam accelerators manufactured by RPC Industries, Inc. and installed at Mr. Miller's employer, Tetra Pak. The suit was settled in early 2001 by the Company's insurers without cost to the Company. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: None. (b)Reports on Form8-K:8-K
(a) The following exhibits are filed herewith:
Exhibit Number Description 3.2 Revised Bylaws of the Registrant 10.10 Compensation Package for Kevin Fairbairn, dated January 24, 2002
(b) Reports on Form 8-K: None.
161920
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTEVAC, INC.
INTEVAC, INC. Date: April
27, 2001 By: /s/ AJIT RODE ------------------------------------ Ajit Rode Chief Executive Officer (Principal Executive Officer)26, 2002
By: /s/ KEVIN FAIRBAIRN
Kevin Fairbairn President, Chief Executive Officer and Director (Principal Executive Officer) Date: April
27, 2001 By: /s/ CHARLES B. EDDY III ------------------------------------ Charles B. Eddy III Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 17
| By: | /s/ CHARLES B. EDDY III |
| Charles B. Eddy III | |
| Vice President, Finance and Administration, | |
| Chief Financial Officer, Treasurer and Secretary | |
| (Principal Financial and Accounting Officer) |
21
EXHIBIT INDEX
| Exhibit | Description | |||
| 3.2 | Revised Bylaws of the Registrant | |||
| 10.10 | Compensation Package for Kevin Fairbairn, dated January 24, 2002. | |||