1 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------________________________________________________________________________________SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, DC 20549------------------------FORM 10-Q
------------------------ (MARK ONE) [X](Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001
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____________
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromto .
COMMISSION FILE NUMBERCommission file number 0-26946
INTEVAC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)(Exact name of registrant as specified in its charter)
CALIFORNIACalifornia 94-3125814 (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,June 30, 2001 approximately11,934,66811,941,834 shares of theRegistrant'sRegistrant’s Common Stock, no par value, were outstanding.- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------2 INTEVAC, INC. INDEXTABLE OF CONTENTSINTEVAC, INC.
INDEX
No. Page PART I. FINANCIAL INFORMATION Item 1.Financial Statements (unaudited) Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Operations and Comprehensive Income 2 Condensed Consolidated Statements of Cash Flows 3 Notes to Condensed Consolidated Financial Statements 4 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3.Quantitative and Qualitative Disclosures About Market Risk 17 PART II. OTHER INFORMATION Item 1.Legal Proceedings 18 Item 2.Changes in Securities 18 Item 3.Defaults Upon Senior Securities 18 Item 4.Submission of Matters to a Vote of Security-Holders 19 Item 5.Other Information 19 Item 6.Exhibits and Reports on Form 8-K 19 SIGNATURES 20 i
3PART 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)
June 30, December 31, 2001 2000 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 24,714 $ 4,616 Short-term investments — 33,787 Accounts receivable, net of allowances of $95 and $114 at June 30, 2001 and December 31, 2000, respectively 10,795 9,593 Inventories 28,681 15,833 Prepaid expenses and other current assets 849 844 Deferred tax assets 4,041 4,041 Total current assets 69,080 68,714 Property, plant and equipment, net 11,183 11,060 Investment in 601 California Avenue LLC 2,431 2,431 Goodwill and other intangibles — 7 Debt issuance costs 652 774 Deferred tax assets and other assets 3,684 3,684 Total assets $ 87,030 $ 86,670 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Notes payable $ — $ 1,904 Accounts payable 6,896 2,757 Accrued payroll and related liabilities 1,843 1,534 Other accrued liabilities 6,027 5,109 Customer advances 21,320 16,317 Total current liabilities 36,086 27,621 Convertible notes 41,245 41,245 Shareholders’ equity: Common stock, no par value 18,894 18,675 Accumulated deficit (9,195 ) (871 ) Total shareholders’ equity 9,699 17,804 Total liabilities and shareholders’ equity $ 87,030 $ 86,670 See accompanying notes.
1
4INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
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 Six months ended June 30, July 1, June 30, July 1, 2001 2000 2001 2000 Net revenues $ 9,490 $ 9,191 $ 19,495 $ 15,083 Cost of net revenues 9,671 7,383 16,276 12,624 Gross profit (loss) (181 ) 1,808 3,219 2,459 Operating expenses: Research and development 3,609 2,516 7,105 4,977 Selling, general and administrative 1,787 (2 ) 3,456 1,583 Restructuring — — — (615 ) Total operating expenses 5,396 2,514 10,561 5,945 Operating loss (5,577 ) (706 ) (7,342 ) (3,486 ) Interest expense (732 ) (759 ) (1,470 ) (1,517 ) Interest income and other, net 1,769 764 488 1,441 Loss from continuing operations before income taxes (4,540 ) (701 ) (8,324 ) (3,562 ) Provision for (benefit from) income taxes — — — — Net loss $ (4,540 ) $ (701 ) $ (8,324 ) $ (3,562 ) Other comprehensive income: Unrealized foreign currency translation adjustment — — — — Total comprehensive loss $ (4,540 ) $ (701 ) $ (8,324 ) $ (3,562 ) Basic earnings per share: Income (loss) from continuing operations $ (0.38 ) $ (0.06 ) $ (0.70 ) $ (0.30 ) Net income (loss) $ (0.38 ) $ (0.06 ) $ (0.70 ) $ (0.30 ) Shares used in per share amounts 11,939 11,786 11,918 11,773 Diluted earnings per share: Income (loss) from continuing operations $ (0.38 ) $ (0.06 ) $ (0.70 ) $ (0.30 ) Net income (loss) $ (0.38 ) $ (0.06 ) $ (0.70 ) $ (0.30 ) Shares used in per share amounts 11,939 11,786 11,918 11,773 See accompanying notes.
2
5INTEVAC, 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)
Six months ended June 30, July 1, 2001 2000 Operating activitiesNet loss $ (8,324 ) $ (3,562 ) Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Depreciation and amortization 2,191 2,466 Foreign currency gain (1 ) — Loss on IMAT investment — 102 Restructuring charge — non-cash portion — 856 Loss on disposal of investment 803 — Changes in assets and liabilities (5,590 ) (169 ) Total adjustments (2,597 ) 3,255 Net cash and cash equivalents used in operating activities (10,921 ) (307 ) Investing activitiesPurchase of investments (5,463 ) (74,905 ) Proceeds from sale of investments 38,447 78,744 Purchase of leasehold improvements and equipment (2,184 ) (1,453 ) Net cash and cash equivalents provided by investing activities 30,800 2,386 Financing activitiesProceeds from issuance of common stock 219 280 Net cash and cash equivalents provided by financing activities 219 280 Net increase in cash and cash equivalents 20,098 2,359 Cash and cash equivalents at beginning of period 4,616 3,295 Cash and cash equivalents at end of period $ 24,714 $ 5,654 Supplemental Schedule of Cash Flow InformationCash paid for: Interest $ 1,374 $ 1,394 Income tax refund — (5,704 ) See accompanying notes.
3
6INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
BUSINESS ACTIVITIES AND BASIS OF PRESENTATIONBusiness Activities and Basis of PresentationIntevac, Inc.
's ("Intevac"’s (“Intevac” or the"Company"“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"“Equipment Business”). The Company also develops highly sensitive electro-optical devicesunder government sponsored R&D contracts(the"Photonics Business"“Photonics Business”).The Equipment Business
is a leading supplier of thin filmmanufactures thin-film depositionsystemsand rapid thermal processing equipment that is used in the manufacture of flat panel displays, and thin-film deposition and lubrication equipment that is used in the manufacture of thin-film 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 Equipment Business also realizes revenues from the sales of flat panel display ("FPD") manufacturing equipment.Spare parts and after-sale service are also sold to purchasers of theCompany'sCompany’s equipment, and sales of components are made to other manufacturers of vacuum equipment.The Photonics Business has developed technology that permits highly sensitive detection of photons in the visible and short wave infrared portions of the spectrum. This technology when combined with advanced silicon integrated circuits makes it possible to produce highly sensitive video cameras. This development work is creating new products for both military and industrial applications. Products include Intensified Digital Video Sensors, cameras incorporating those sensors and Laser Illuminated Viewing and Ranging
("LIVAR(R)"(“LIVAR®”) systems for positive target identification.The financial information at
March 31,June 30, 2001 and for thethree-monththree- and six-month periods endedMarch 31,June 30, 2001 andAprilJuly 1, 2000 is 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 included or incorporated by reference in theCompany'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.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 periodthree- and six-month periods endedMarch 31,June 30, 2001 are not considered indicative of the results to be expected for any future period or for the entire year.2.
INVENTORIESRecent Accounting PronouncementsIn June 1998, the Financial Accounting Standards Board issued SFAS NO. 133, Accounting for Derivative Instruments and Hedging Activities which requires that all derivative financial instruments be carried at fair value and provides for hedge accounting when certain conditions are met. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. To date, the Company has not entered into any derivative financial instrument contracts. Thus the Company anticipates SFAS No. 133 will not have a material impact on the Company’s financial position or results of operations.
4
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Inventories
The 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 Finished goods....................................... 3,136 3,033 ------- ------- $23,884 $15,833 ======= =======47 INTEVAC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, December 31, 2001 2000 (in thousands) Raw materials $ 5,404 $ 4,591 Work-in-progress 11,113 8,209 Finished goods 12,164 3,033 $ 28,681 $ 15,833 The finished goods inventory is represented by completed units at customer sites undergoing installation and acceptance testing.
3. NET INCOME (LOSS) PER SHARE4. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended Six months ended June 30, July 1, June 30, July 1, 2001 2000 2001 2000 (in thousands) Numerator: Loss from continuing operations $ (4,540 ) $ (701 ) $ (8,324 ) $ (3,562 ) Net loss $ (4,540 ) $ (701 ) $ (8,324 ) $ (3,562 ) Numerator for basic earnings per share — loss available to common stockholders (4,540 ) (701 ) (8,324 ) (3,562 ) Effect of dilutive securities: 6 1/2% convertible notes(1) — — — — Numerator for diluted earnings per share — loss available to common stockholders after assumed conversions $ (4,540 ) $ (701 ) $ (8,324 ) $ (3,562 ) Denominator: Denominator for basic earnings per share — weighted-average shares 11,939 11,786 11,918 11,773 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 11,939 11,786 11,918 11,773
THREE MONTHS ENDED --------------------- MARCH 31, APRIL(1) Diluted EPS for the three- and six-month periods ended June 30, 2001 and July 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 the three- and six-month periods ended June 30, 2001 and July 1, 2000 --------- -------- (IN THOUSANDS)Numerator: Loss from continuing operations....................... $(3,784) $(2,861) ======= ======= Net loss.............................................. $(3,784) $(2,861) ======= ======= Numeratorwas 1,999,758.(2) Diluted EPS for basic earnings per share -- loss available to common stockholders................... (3,784) (2,861) Effectthe three- and six-month periods ended June 30, 2001 and July 1, 2000 excludes the effect ofdilutive securities: 6 1/2% convertible notes(1)........................ -- -- ------- ------- Numeratoremployee stock options as their inclusion would be anti-dilutive. The number of employee stock options excluded fordiluted earnings per share -- loss available to common stockholders after assumed conversions........................................ $(3,784) $(2,861) ======= ======= Denominator: Denominatorthe three-month periods ended June 30, 2001 and July 1, 2000 was 199,420 and5
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
86,201, respectively, and the number of employee stock options excluded 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 six-month periods ended June 30, 2001 andassumed conversions.... 11,896 11,759 ======= =======July 1, 2000 was 186,505 and 132,890, 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. 4. SEGMENT REPORTING5. Segment Reporting
Segment Description
Intevac, Inc. has two reportable segments: Equipment and Photonics. The
Company'sCompany’s Equipment business sells complex capital equipment primarily used in the manufacturing of thin-film disks and flat paneldisplays and shrink-wrap films.displays. TheCompany'sCompany’s Photonics business is developing products utilizing electron sources that permit highly sensitive detection of photons in the visible and short-wave infrared spectrum.Included in corporate activities are general corporate expenses, the equity in net loss of an equity investee,
andamortization 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.58 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 ======= ======
Three months ended Six months ended June 30, July 1, June 30, July 1, 2001 2000 2001 2000 (in thousands) Equipment $ 6,183 $ 7,114 $ 14,115 $ 11,973 Photonics 3,307 2,077 5,380 3,110 Total $ 9,490 $ 9,191 $ 19,495 $ 15,083 Business Segment Profit & Loss
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. RESTRUCTURINGand Reconciliation to Consolidated Pre-tax Profit (Loss)
Three months ended Six months ended June 30, July 1, June 30, July 1, 2001 2000 2001 2000 (in thousands) Equipment $ (4,691 ) $ 290 $ (5,254 ) $ (1,479 ) Photonics (400 ) (323 ) (1,062 ) (1,207 ) Corporate activities (486 ) (673 ) (1,026 ) (800 ) Operating loss $ (5,577 ) $ (706 ) $ (7,342 ) $ (3,486 ) Interest expense (732 ) (759 ) (1,470 ) (1,517 ) Interest income 331 534 912 1,085 Other income and expense, net 1,438 230 (424 ) 356 Loss from continuing operations before income taxes $ (4,540 ) $ (701 ) $ (8,324 ) $ (3,562 ) 6. Restructuring
During the third quarter of 1999, the Company 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'sCompany’s staff of contract and regular personnel. The reductions took place at theCompany'sCompany’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 movingout offrom 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
6
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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'sCompany’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 and three completed systems remaining in inventory.AllOf the three systems in inventory,were shipped during 2000 andtwo wereaccepted by the customer andincluded inIntevac2000 revenuesduring 2000. The third system is scheduled for customer acceptanceandrevenue recognitionone was included in2001.2001 revenues. 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
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 $ — $ — 7. Income Taxes
For the
three-monththree- and six-month periods endedMarch 31,June 30, 2001 andAprilJuly 1,2000. The2000, the Company did not accrue a tax benefit due to the inability to realize additional refunds from loss carry-backs. As ofMarch 31,June 30, 2001 theCompany'sCompany’s net deferred tax assets 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 value of these net deferred tax assets. If in the future the Company cannot project with reasonable certainty that it will earn taxable income sufficient to7
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
realize all or part of the value of these net deferred tax assets,
thenthe Company will expense the value of the net deferred tax assets not likely to be realized.7. CAPITAL TRANSACTIONS8. Capital Transactions
During the
three-monthsix-month period endingMarch 31,June 30, 2001, Intevac sold stock to its employees under theCompany'sCompany’s Stock Option and Employee Stock Purchase Plans. A total of91,09998,265 shares were issued for which the Company received$216,000. 710 ITEM$219,000.8
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 March 2001, Form10-Q's10-Q’s and Form8-K's. RESULTS OF OPERATIONS8-K’s.Results of Operations
Three Months Ended
March 31,June 30, 2001 andAprilJuly 1, 2000Net revenues.Net revenues consist primarily of sales of equipment used to manufacture thin-film disks for computer hard disk drives and flat panel displays, related equipment
andsystem components,("Equipment"electron beam processing equipment (“Equipment”) and contract research and development related to the development of highly sensitive electro-optical devices under government sponsored R&D contracts and sales of derivative products("Photonics"(“Photonics”). Net revenues from system sales are recognized upon customer acceptance. Net revenues from sales of related equipment and system components are recognized upon product shipment. Contract research and development revenue is recognized in accordance with contract terms, typically as costs are incurred. Net revenues increasedby 70%3% to$10.0$9.5 million for the three months endedMarch 31,June 30, 2001 from$5.9$9.2 million for the three months endedAprilJuly 1, 2000. Net revenues from Equipmentincreasedsales declined to$7.9$6.2 million for the three months endedMarch 31,June 30, 2001 from$4.9$7.1 million for the three months endedAprilJuly 1, 2000. Theincreasedecrease in Equipmentrevenuesales was primarily the result ofincreased shipmentsa decrease in domestic sales of disk manufacturing equipment,upgrades and spare partswhich was partially offset by an increase in international sales of disk manufacturing equipment and theshipmentsale ofone Rapid Thermal Processing ("RTP") system.the last system in inventory from the Company’s discontinued electron beam product line. Net revenues from Photonics sales increased 59% to $3.3 million for the three months ended June 30, 2001 from $2.1 million for the three months endedMarch 31, 2001 from $1.0July 1, 2000 primarily as a result of increased contract R&D sales.International sales increased 79% to $3.5 million for the three months ended
April 1, 2000. The increase in Photonics net revenues was the result of higher research and development contract expenditures in the three-month period ended March 31, 2001. International sales increased by 247% to $6.9 million for the three months ended March 31,June 30, 2001 from $2.0 million for the three months endedAprilJuly 1, 2000. The increase in international sales was primarily due to an increase in net revenues from disk manufacturingequipment and the shipment of one RTP system.equipment. International sales constituted69%37% of net revenues for the three months endedMarch 31,June 30, 2001 and34%21% of net revenues for the three monthsAprilended July 1, 2000.Backlog.The
Company'sCompany’s backlog of orders for its products was$46.0$52.9 million atMarch 31,June 30, 2001 and$29.1$31.2 million atAprilJuly 1, 2000. 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, installation, warranty costs, scrap and costs attributable to contract research and development. Gross margin
increaseddecreased to34.0%(2%) for the three months endedMarch 31,June 30, 2001 from11.0%20% for the three months endedAprilJuly 1, 2000. Equipment gross marginsincreasedin the second quarter of 2001 were (6%) and were negatively impacted by the provision of a $2.4 million inventory reserve related to45.0%a custom multi chip module system manufactured for a customer that recently ceased operations and by thethree-month period ended March 31,sale of an electron beam processing system at low gross margin. Equipment margin during the second quarter of 2001from 25.7%without the effect of these two items would have been 42%. Equipment gross margin in the second quarter of 2000 was 28% and was depressed as the result of a $1.1 million provision for inventory reserves related to slow moving systems inventory. Equipment gross margin during thethree-month period ended April 1, 2000. Equipment margins increased primarily due to revenue being dominated by shipmentsecond quarter oftechnology upgrades and improved factory utilization.2000 without the effect of the inventory reserve would have been 43%. Photonics gross margins increased to(8.1%) during6% for the three months endedMarch 31,June 30, 2001 from(44.2%) during0% for the three months endedAprilJuly 1, 2000. The Company expects that Photonics grossmargins inmargin will fluctuate from quarter to quarter based on thefirst quarterrelative mix of2000 were unfavorably impacted by the establishmentrevenues derived from sales ofapproximately $0.2 million of inventory reserves and by lower revenues resultingprototype products, fromafully funded research and developmentcontract being on hold for the majority of the period.contracts and from cost shared research and development contracts.9
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 manufacturing equipment, flat panel manufacturing equipment and research by the Photonics Division.
811Company funded research and development expense increased to$3.5$3.6 million for the three months endedMarch 31,June 30, 2001 from $2.5 million for the three months endedAprilJuly 1, 2000 representing34.9%38% and41.8%27%, respectively, of net revenue.ThisThe increase was primarily the result ofincreasedhigher spending for development of flat panel display manufacturing equipment,partially offsetand to a lesser extent, a higher proportion of Photonics research and development being funded byreduced spending forthe Company, rather than by research and developmentof disk manufacturing equipment.contracts.Research and development expenses do not include costs of
$2.1$2.8 million and$0.8$1.5 million, respectively, for the three-month periods endedMarch 31,June 30, 2001 andAprilJuly 1, 2000 related 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$0.3 millionand $0.2 million, respectively,in each of the three-month periods endedMarch 31,June 30, 2001 andAprilJuly 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, 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 quarterof2000, 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, transferredIMAT'sIMAT’s activities and employees to Matsubo and shut down the operations of IMAT.Selling, general and administrative expense increased to
$1.7$1.8 million for the three months endedMarch 31,June 30, 2001 from ($2) thousand for the three months ended July 1, 2000, representing 19% and 0%, respectively, of net revenue. Selling, general and administrative expense was unusually low during the second quarter of 2000 as a result of a $1.5 million reduction in the allowance for doubtful accounts.Interest expense.Interest expense consists primarily of interest on the Company’s convertible notes, and, to a lesser extent, interest on approximately $2.0 million of short-term debt related to the purchase of Cathode Technology in 1996. Interest expense was $0.7 million and $0.8 million, respectively, in the three-month periods ended June 30, 2001 and July 1, 2000. Interest expense declined slightly in the three-month period ended June 30, 2001 due to the retirement during the first quarter of 2001 of the debt related to the Cathode Technology purchase.
Interest income and other, net.Interest income and other, net consists primarily of interest income on the Company’s investments, gain or loss on the disposition of assets, foreign currency hedging gains and losses, early payment discounts on the purchase of inventories, goods and services and, in 2000, the Company’s 49% share of the loss incurred by IMAT. Interest income and other, net increased to $1.8 million, for the three-month period ended June 30, 2001 from $0.8 million for the three-month period ended July 1, 2000 primarily as the result of a $1.2 million gain on the disposition of previously reserved Pacific Gas and Electric commercial paper, partially offset by lower interest income and lower foreign currency hedging gains.
Provision for (benefit from) income taxes.For the three-month periods ended June 30, 2001 and July 1, 2000, the Company did not accrue a tax benefit due to the inability to realize additional refunds from loss carry-backs. As of June 30, 2001 the Company’s deferred tax assets 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 value of these deferred tax assets. If in the future the Company cannot project with reasonable certainty that it will earn sufficient taxable income in the future to realize all or part of the value of these net deferred tax assets, the Company will expense the value of the net deferred tax assets not likely to be realized.
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Six Months Ended June 30, 2001 and July 1, 2000
Net revenues.Net revenues increased 29% to $19.5 million for the six months ended June 30, 2001 from $15.1 million for the six months ended July 1, 2000. Net revenues from Equipment sales increased to $14.1 million for the six months ended June 30, 2001 from $12.0 million for the six months ended July 1, 2000. The increase in net revenues from Equipment was due primarily to the sale of an electron beam manufacturing system during the second quarter of 2001. Net revenues from Photonics increased to $5.4 million for the six months ended June 30, 2001 from $3.1 million for the six months ended July 1, 2000. The increase in Photonics sales was primarily the result of increased contract R&D activities during 2001 in combination with a large research and development contract that was on hold for a portion of the six-month period ended July 1, 2000.
International sales increased 163% to $10.4 million for the six months ended June 30, 2001 from $4.0 million for the six months ended July 1, 2000. The increase in international sales during the six months ended June 30, 2001 was primarily due to an increase in net revenues from disk manufacturing equipment, and to a lesser extent from the sale of a rapid thermal processing system for flat panel display manufacturing. International sales constituted 53% of net revenues for the six months ended June 30, 2001 and 26% of net revenues for the six months ended July 1, 2000.
Gross margin.Gross margin was 17% for the six months ended June 30, 2001 as compared to 16% for the six months ended July 1, 2000. Gross margin in the Equipment business declined to 23% for the six months ended June 30, 2001 from 27% for the six months ended July 1, 2000. Equipment gross margin in the six months ended June 30, 2001 was negatively impacted by the previously mentioned provision of a $2.4 million inventory reserve related to the custom multi chip module system and by the sale of an electron beam processing system at low gross margin. Equipment gross margin during the six months ended June 30, 2001 without the effect of these two items would have been 44%. Equipment gross margin during the six months ended July 1, 2000 was 27% and was depressed as the result of a $1.1 million provision for inventory reserves. Equipment gross margin during the six months ended July 1, 2000 without the effect of this reserve would have been 36%. Photonics gross margin increased to 0% for the six months ended June 30, 2001 from (15%) for the six months ended July 1, 2000. The Company expects that Photonics gross margin will fluctuate from quarter to quarter based on the relative mix of revenues derived from sales of prototype products, from fully funded research and development contracts and from cost shared research and development contracts.
Research and development.Company funded research and development expense increased 43% to $7.1 million for the six months ended June 30, 2001 from $5.0 million for the six months ended July 1, 2000, representing 36% and 33%, respectively, of net revenue. The increase was primarily the result of increased expense for the development of flat panel manufacturing equipment, and to a lesser extent, a higher proportion of Photonics research and development being funded by the Company, rather than by research and development contracts, partially offset by lower expenses for the development of disk manufacturing equipment.
Research and development expenses do not include costs of $4.9 million and $2.3 million, respectively, for the six-month periods ended June 30, 2001 and July 1, 2000 related to contract research and development performed by the Company’s Photonics business. These expenses are included in cost of net revenues.
Research and development expenses also do not include costs of $0.4 million and $0.5 million, respectively, in the six-month periods ended June 30, 2001 and July 1, 2000, reimbursed under the terms of various research and development cost sharing agreements.
Selling, general and administrative.Selling, general and administrative expense increased 118% to $3.5 million for the six months ended June 30, 2001 from $1.6 million for the
threesix months endedAprilJuly 1, 2000, representing16.7%18% and26.9%10%, respectively, of net revenue. The primary reason for the increase was ahigher level of selling, general$1.5 million reduction in the allowance for doubtful accounts during the six months ended July 1, 2000, and to a lesser extent, increased marketing and administrativeexpense 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.staff.Restructuring expense (gain).Restructuring gain was
($0.6)$0.6 million in thethree-month periodsix months endedAprilJuly 1, 2000. During thethreesix months endedAprilJuly 1, 2000 the Company vacated approximately 47,000 square feet of its Santa11
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's convertible notes, and, to a lesser extent, interest on approximately $1.9 million of short-term debt related to the purchase of Cathode Technology in 1996.Interest expense was$0.7approximately $1.5 millionand $0.8 million, respectively,in each of thethree-month periodssix months endedMarch 31,June 30, 2001 andAprilJuly 1, 2000. Interest expense declinedbecauseslightly in 2001 due to the retirement of the debt related to the Cathode Technologydebt was retired in Januarypurchase during the first quarter of 2001.Interest income and other, net.
Interest income and other, net consists primarily of interest income on the Company's investments, foreign currency hedging gains and losses, 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)$0.5 million for thethreesix months endedMarch 31,June 30, 2001 from$0.7$1.4 million for thethreesix months endedAprilJuly 1,20002000. The decrease was primarilyasthe result ofestablishmenta $0.8 million loss on the disposition ofa reserve related to the Company's $2.0 million investment in commercial paper issued byPacific Gas and ElectricCompany, which recently filed for reorganization under Chapter 11 of the US Bankruptcy Code.commercial paper, and to a lesser extent, lower interest income and lower foreign currency hedging gains.Provision for (benefit from) income taxes.
TheFor the six-month periods ended June 30, 2001 and July 1, 2000, the Company did not accrue a tax benefitduring the three-month periods ended March 31, 2001 and April 1, 2000due to the inability to realize additional refunds from loss carry-backs.912 LIQUIDITY AND CAPITAL RESOURCESAs of June 30, 2001 the Company’s deferred tax assets totaled $7.7 million. TheCompany'sCompany believes that it is more likely than not that it will earn sufficient taxable income in the future to realize the value of these deferred tax assets. If in the future the Company cannot project with reasonable certainty that it will earn sufficient taxable income in the future 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.Liquidity and Capital Resources
The Company’s operating activities used cash of
$4.4$10.9 million for thethreesix months endedMarch 31,June 30, 2001. The cash used was due primarily toincreasedinventory increases and the net loss incurred by the Company, which were partially offset byhigherincreases in customer advances, accounts payablea reduction in accounts receivable,and payroll, and by depreciation and amortization.The
Company'sCompany’s investing activities provided cash of$26.2$30.8 million for thethreesix months endedMarch 31,June 30, 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'sCompany’s financing activities provided cash of $0.2 million for thethreesix months endedMarch 31,June 30, 2001 as the result of the sale of theCompany'sCompany’s common stock to its employees through theCompany'sCompany’s employee benefit plans.CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTSCertain Factors Which May Affect Future Operating Results
Our products are complex, constantly evolving, and often designed and manufactured to individual customer
requirements. Intevac'srequirements which requires 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 may be customized to meet individual customer requirements. Intevac has limited manufacturing capacity and engineering resources and may be unable to complete development, manufacture and shipment of its products, or to meet the required technical specifications of 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 a
product'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 suppliers, or 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'sIntevac’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
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adverse effect onIntevac'sIntevac’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'sIntevac’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'sIntevac’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 onIntevac'sIntevac’s business.The Photonics Division does not yet generate a significant portion of its revenues 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 standard photonics 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 of photonics products to military and commercial customers. There can be no assurance that the Company will succeed in these activities and generate significant increases in sales of products based on its photonics technology.1013The sales of our equipment products are dependent on substantial capital investment by our customers.
The majority of our Equipment revenues have historically come from the sale of equipment used to manufacture thin-film disks, and to a lesser extent, from the sale of equipment used to manufacture flat panel displays. The 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 Intevac systems. The magnitude of such capital expenditures requires that our customers have access to large amounts of capital and that they are willing to invest that capital over long periods of timein orderto be able to purchase our equipment. Some of our customers, particularly those that purchase our disk manufacturing products, may not be willing, or able, to make the magnitude of capital investment required 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 manufacturersOthers have been acquired by their competitors. Accordingly, the number of potential customers forIntevac'sIntevac’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'sIntevac’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,
thendemand for new capital equipment such asIntevac'sIntevac’s tends to be amplified. When supply of these commodity products exceeds capacity,thendemand for new capital equipment such asIntevac'sIntevac’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 onIntevac'sIntevac’s business.13
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 been that the number of thin-film disks used worldwide has not grown significantly since 1997. Without an increase in the number of disks required,Intevac'sIntevac’s disk equipment sales are largely limited to upgrades of existing capacity, rather than capacity expansion. While the rapidly falling cost of storage per gigabyte is leading to new applications for disk drives beyond the traditional computer market, it is not clear to what extent the demand from these new applications will be offset by further declines in the average number of disks required per disk drive.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 Anelva Corporation, Applied Films Corporation, 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 could adversely affect our business.
Intevac'sIntevac’s operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. The
Company'sCompany’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, the cost of electricity and natural gas has increased significantly. Such cost increases and any further cost increases will impact theCompany'sCompany’s profitability.Competition is intense for employees in northern California.
Intevac'sIntevac’s operating results depend in significant part upon its ability to retain and attract qualified management, engineering, marketing, manufacturing, customer support, sales and administrative personnel. Competition in northern California for such personnel is intense. 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'sIntevac’s business.A portion of our sales are to international customers.
Sales and operating activities outside of the United States are subject to certain inherent risks, including fluctuations in the value of the United States dollar relative to foreign currencies, tariffs, quotas, taxes and other market barriers, political and economic instability, restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations and potentially adverse tax consequences. Intevac earns a significant portion of its revenue from
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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, for some Japanese customers, Intevac quotes and sells its products in Japanese Yen. Intevac, from time to time, enters into foreign currency contracts in an effort to reduce the overall risk of currency fluctuations to
Intevac'sIntevac’s business. However, there can be no assurance that the offer and sale of products in foreign denominated currencies, and the related foreign currency hedging activities will not adversely affectIntevac'sIntevac’s business.Intevac'sIntevac’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'sIntevac’s gross margins.Our operating results fluctuate significantly.
Over the last
nineten quartersIntevac'sIntevac’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 to1215fluctuate. 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'sIntevac’s stock price is volatile.
Intevac'sIntevac’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 has completed multiple acquisitions as part of its efforts to grow 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 three separate acquisitions. Intevac also acquired its RPC electron beam processing business in late 1997, and after two years initiated plans to close this business. Intevac intends to continue to evaluate new acquisition candidates and diversification strategies. Any acquisition will involve numerous risks, including difficulties in the assimilation of the 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 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.15
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'sIntevac’s disk equipment business.Intevac'sIntevac’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
• any of Intevac’s patent applications will be allowed or that any of the allowed applications will be issued as patents, or • any patent owned by Intevac will not be invalidated, deemed unenforceable, circumvented or challenged, or • the rights granted under our patents will provide competitive advantages to Intevac, or • any of Intevac’s pending or future patent applications will be issued with claims of the scope sought by Intevac, if at all, or • others will not develop similar products, duplicate Intevac’s products or design around the patents owned by Intevac, or • foreign patent rights, intellectual property laws or Intevac’s agreements will protect Intevac’s intellectual property rights. Failure to protect
Intevac'sIntevac’s intellectual property rights could have an adverse effect uponIntevac'sIntevac’s business.From time to time Intevac has received claims that it is infringing third
parties'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 toIntevac'sIntevac’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 uponIntevac'sIntevac’s business.$41$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"“Convertible Notes”) in February 1997, Intevac incurred a substantial increase in the ratio of long-term debt to total capitalization(shareholders'(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 ofMarch 31,June 30, 2001 commit Intevac to substantial principal and interest obligations. The degree to which Intevac is leveraged could have an adverse effect onIntevac'sIntevac’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'sIntevac’s ability to meet its debt service obligations will be dependent onIntevac'sIntevac’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 is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture, treatment and disposal of toxic or other hazardous substances, chemicals, materials or waste. Any failure to comply with current or future regulations could result in substantial civil penalties or criminal fines being imposed on Intevac or its officers, directors or employees, suspension of production, alteration of its manufacturing process or cessation of operations. Such regulations
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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,June 30, 2001, the present directors and their affiliates and executive officers, in the aggregate, beneficially own a majority of the outstanding shares of Common Stock. As a result, these shareholders, acting together, are able to effectively control all matters requiring approval by the shareholders of Intevac, including the election of a majority of the directors and approval of significant corporate transactions.ITEMItem 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market RiskInterest rate risk.The
Company'sCompany’s exposure to market risk for changes in interest rates relates primarily to theCompany'sCompany’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.1417The table below presents principal amounts and related weighted-average interest rates by year of maturity for the
Company'sCompany’s investment portfolio and 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 2001 2002 2003 2004 2005 Beyond Total Value (in thousands) Cash equivalents Variable rate $ 23,028 — — — — — $ 23,028 $ 23,028 Average rate 4.05 % — — — — — Long-term debt Fixed rate — — — $ 41,245 — — $ 41,245 $ 23,613 Average rate 6.50 % 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. AtMarch 31,June 30, 2001, the Companydid not havehad no foreign currency forward exchange contracts.151817
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 lead the Company to believe that it has meritorious defenses against the Durkin suit. However, there can be no assurance that the resolution of the suit will not have a material adverse effect on the
Company'sCompany’s business, operating results and financial condition.On
January 5, 2000,June 12, 2001 theCompany's RPC Technologies, Inc. subsidiary was named asCompany filed adefendantcomplaint in Santa Clara County Superior Court, State of California, against Intarsia Corporation (the “Santa Clara County action”). The complaint alleges causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, quantum meruit and promissory estoppel arising out of Intarsia’s cancellation of an order for alawsuitcustomized sputtering system. On May 15, 2001, Intarsia had previously filed a complaint against the Company in Alameda County Superior Court, State of California (the “Alameda County action”). Intarsia’s complaint alleges causes of action for money had and received and negligent misrepresentation. The suit relates to Intarsia’s initial payment for its order for the customized sputtering system which is the subject of the Santa Clara County action. Intarsia has agreed to transfer the Alameda County action to Santa Clara County, where the two actions will likely be coordinated or consolidated into one action. The Company intends to vigorously defend Intarsia’s suit.On June 29, 2001, the Company filed in
United States Districtthe Santa Clara County action an Application for Right to Attach Order and Order for Issuance of Writ of Attachment (the “Application”) seeking to attach certain of Intarsia’s assets in the amount of $552,586. Prior to the Court ruling on the Application, the Company and Intarsia entered into a stipulation whereby Intarsia granted to the Company a first priority lien and security interest inTexas.certain unencumbered equipment owned by Intarsia valued at $552,654.The
lawsuit was filed by Reita Miller, ExecutrixCompany does not believe, based upon current information, that the outcome of theestatelitigation will have a material adverse impact on the Company’s business, operating results and financial condition.Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
18
Item 4. Submission of
Thomas O. Miller,Matters to a Vote of Security-HoldersThe Company’s annual meeting of shareholders was held May 15, 2001. The following actions were taken at this meeting:
Abstentions Affirmative Negative Votes and Broker Votes Votes Withheld Non-Votes (a) Election of Directors Norman H. Pond 10,256,045 991,815 — 686,808 Edward Durbin 11,241,335 6,525 — 686,808 Robert D. Hempstead 11,231,300 16,560 — 686,808 David N. Lambeth 11,241,385 6,475 — 686,808 H. Joseph Smead 11,241,107 6,753 — 686,808 (b) Ratification of Grant Thornton LLP as independent auditors 11,241,904 3,500 — 689,264 Item 5. Other Information
None.
Item 6. Exhibits 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 FORMReports on Form 8-K(a) The following exhibits are filed herewith:
None.
Exhibit Number Description 3.2 Revised Bylaws of the Registrant (b) Reports on Form 8-K:
None.
1619
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. Date: April 27, 2001 By: /s/ AJIT RODE ------------------------------------ Ajit Rode Chief Executive Officer (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
INTEVAC, INC. |
Date: August 13, 2001 | By: /s/ AJIT RODE Ajit Rode Chief Executive Officer (Principal Executive Officer) | |
Date: August 13, 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) |
20
EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
3.2 | Revised Bylaws of the Registrant |