1 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, DC 20549------------------------ FORMForm 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 SEPTEMBER 30, 2000 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) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2001 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-26946
INTEVAC, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)Intevac, Inc.
(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]þ No[ ]oAPPLICABLE ONLY TO CORPORATE ISSUERS:
On
September 30, 2000 approximately 11,842,235November 5, 2001 12,003,622 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 Financial Statements (unaudited) Condensed Consolidated Balance Sheets 2 Condensed Consolidated Statements of Operations and Comprehensive Income 3 Condensed Consolidated Statements of Cash Flows 4 Notes to Condensed Consolidated Financial Statements 5 Management’s Discussion and Analysis of Financial Condition and Results of Operations 10 Quantitative and Qualitative Disclosures About Market Risk 18 PART II. OTHER INFORMATION Legal Proceedings 19 SIGNATURES...........................................................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 i31
PART I. FINANCIAL INFORMATION
ITEMItem 1.FINANCIAL STATEMENTSFinancial StatementsINTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED)ASSETS Current assets: Cash and cash equivalents................................. $ 8,827 $ 3,295 Short-term investments.................................... 29,751 37,600 Accounts receivable, net of allowances of $157 and $1,713 at September 30, 2000 and December 31, 1999, respectively........................................... 10,880 5,744 Income taxes recoverable.................................. -- 5,463 Inventories............................................... 18,590 15,965 Prepaid expenses and other current assets................. 478 512 Deferred tax asset........................................ 4,571 4,571 ------- ------- Total current assets................................... 73,097 73,150 Property, plant, and equipment, net......................... 9,996 12,375 Investment in 601 California Avenue LLC..................... 2,431 2,431 Goodwill and other intangibles.............................. 1,324 2,105 Debt issuance costs......................................... 834 1,018 Deferred tax assets and other assets........................ 3,154 3,303 ------- ------- Total assets...................................... $90,836 $94,382 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable............................................. $ 1,904 $ -- Accounts payable.......................................... 1,824 1,014 Accrued payroll and related liabilities................... 1,646 1,533 Other accrued liabilities................................. 5,671 9,173 Customer advances......................................... 15,420 9,851 ------- ------- Total current liabilities......................... 26,465 21,571 Convertible notes........................................... 41,245 41,245 Long-term notes payable..................................... -- 1,943 Shareholders' equity: Common stock, no par value................................ 18,644 18,170 Retained earnings......................................... 4,482 11,453 ------- ------- Total shareholders' equity............................. 23,126 29,623 ------- ------- Total liabilities and shareholders' equity........ $90,836 $94,382 ======= =======(In thousands)
September 29, December 31, 2001 2000 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 23,236 $ 4,616 Short-term investments — 33,787 Accounts receivable, net of allowances of $96 and $114 at September 29, 2001 and December 31, 2000, respectively 5,441 9,593 Inventories 31,891 15,833 Prepaid expenses and other current assets 804 844 Deferred tax asset 681 1,307 Total current assets 62,053 65,980 Property, plant, and equipment, net 10,146 11,060 Investment in 601 California Avenue LLC 2,431 2,431 Goodwill and other intangibles — 7 Debt issuance costs 590 774 Deferred tax assets and other assets 3,010 3,684 Total assets $ 78,230 $ 83,936 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Notes payable $ — $ 1,904 Accounts payable 4,889 2,757 Accrued payroll and related liabilities 2,062 1,534 Other accrued liabilities 2,792 2,375 Customer advances 22,700 16,317 Total current liabilities 32,443 24,887 Convertible notes 41,245 41,245 Shareholders’ equity: Common stock, no par value 19,093 18,675 Accumulated deficit (14,551 ) (871 ) Total shareholders’ equity 4,542 17,804 Total liabilities and shareholders’ equity $ 78,230 $ 83,936 See accompanying notes.
142
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25, 2000 1999 2000 1999 ------------- ------------- ------------- -------------Net revenues.............................. $11,036 $13,822 $26,119 $ 35,841 Cost of net revenues...................... 10,432 12,323 23,056 33,169 ------- ------- ------- -------- Gross profit.............................. 604 1,499 3,063 2,672 Operating expenses: Research and development................ 2,726 3,283 7,703 11,135 Selling, general and administrative..... 1,387 1,615 2,970 5,602 Restructuring........................... (23) 2,224 (638) 2,202 ------- ------- ------- -------- Total operating expenses........ 4,090 7,122 10,035 18,939 ------- ------- ------- -------- Operating income (loss)................... (3,486) (5,623) (6,972) (16,267) Interest expense.......................... (758) (911) (2,275) (2,919) Interest income and other, net............ 835 1,281 2,276 3,213 ------- ------- ------- -------- Income (loss) from continuing operations before income taxes..................... (3,409) (5,253) (6,971) (15,973) Provision for (benefit from) income taxes................................... -- (1,996) -- (6,070) ------- ------- ------- -------- Income (loss) from continuing operations.............................. (3,409) (3,257) (6,971) (9,903) Gain from repurchase of convertible notes, net of applicable income taxes.......... -- 2,881 -- 3,844 ------- ------- ------- -------- Net income (loss)......................... $(3,409) $ (376) $(6,971) $ (6,059) ======= ======= ======= ======== Other comprehensive income (loss): Unrealized foreign currency translation adjustment........................... -- -- -- (122) ------- ------- ------- -------- Total adjustments......................... -- -- -- (122) ------- ------- ------- -------- Total comprehensive income (loss)......... $(3,409) $ (376) $(6,971) $ (6,181) ======= ======= ======= ======== Basic earnings per share: Income (loss) from continuing operations........................... $ (0.29) $ (0.28) $ (0.59) $ (0.84) Net income (loss)....................... $ (0.29) $ (0.03) $ (0.59) $ (0.51) Shares used in per share amounts........ 11,822 11,706 11,789 11,799 Diluted earnings per share: Income (loss) from continuing operations........................... $ (0.29) $ (0.28) $ (0.59) $ (0.84) Net income (loss)....................... $ (0.29) $ (0.03) $ (0.59) $ (0.51) Shares used in per share amounts........ 11,822 11,706 11,789 11,799(In thousands, except per share amounts)(Unaudited)
Three Months Ended Nine Months Ended Sept 29, Sept 30, Sept 29, Sept 30, 2001 2000 2001 2000 Net revenues $ 8,414 $ 11,036 $ 27,909 $ 26,119 Cost of net revenues 6,732 10,432 23,008 23,056 Gross profit 1,682 604 4,901 3,063 Operating expenses: Research and development 3,845 2,726 10,950 7,703 Selling, general and administrative 1,641 1,387 5,097 2,970 Restructuring — (23 ) — (638 ) Total operating expenses 5,486 4,090 16,047 10,035 Operating loss (3,804 ) (3,486 ) (11,146 ) (6,972 ) Interest expense (723 ) (758 ) (2,193 ) (2,275 ) Interest income and other, net 471 835 959 2,276 Loss before income taxes (4,056 ) (3,409 ) (12,380 ) (6,971 ) Provision for income taxes 1,300 — 1,300 — Net loss $ (5,356 ) $ (3,409 ) $ (13,680 ) $ (6,971 ) Total comprehensive loss $ (5,356 ) $ (3,409 ) $ (13,680 ) $ (6,971 ) Basic earnings (loss) per share: Net loss $ (0.45 ) $ (0.29 ) $ (1.15 ) $ (0.59 ) Shares used in per share amounts 11,983 11,822 11,939 11,789 Diluted earnings (loss) per share: Net loss $ (0.45 ) $ (0.29 ) $ (1.15 ) $ (0.59 ) Shares used in per share amounts 11,983 11,822 11,939 11,789 See accompanying notes.
253
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED ------------------------------ SEPTEMBER 30, SEPTEMBER 25, 2000 1999 ------------- -------------OPERATING ACTIVITIES Net loss.................................................... $ (6,971) $ (6,059) Adjustments to reconcile net income to net cash and cash equivalents used in operating activities: Depreciation and amortization............................. 3,660 4,079 Gain on foreign exchange contracts........................ -- (659) Gain on purchase of convertible notes..................... -- (6,201) Foreign currency loss..................................... 1 4 (Gain) loss on IMAT investment............................ 125 (35) Restructuring charge -- non-cash portion.................. 856 -- Loss on disposal of equipment............................. -- 107 Changes in assets and liabilities......................... 1,380 1,997 -------- -------- Total adjustments........................................... 6,022 (708) -------- -------- Net cash and cash equivalents used in operating activities................................................ (949) (6,767) INVESTING ACTIVITIES Purchase of investments..................................... (86,963) (28,291) Proceeds from sale of investments........................... 94,812 46,726 Purchase of leasehold improvements and equipment............ (1,842) (1,143) -------- -------- Net cash and cash equivalents provided by investing activities................................................ 6,007 17,292 FINANCING ACTIVITIES Proceeds from issuance of common stock...................... 474 712 Repurchase of convertible notes............................. -- (9,664) Repurchase of common stock.................................. -- (1,665) -------- -------- Net cash and cash equivalents provided by (used in) financing activities...................................... 474 (10,617) -------- -------- Net increase (decrease) in cash and cash equivalents........ 5,532 (92) Cash and cash equivalents at beginning of period............ 3,295 3,991 -------- -------- Cash and cash equivalents at end of period.................. $ 8,827 $ 3,899 ======== ======== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid (received) for: Interest.................................................. $ 2,762 $ 3,474 Income taxes.............................................. -- -- Income tax refund......................................... (5,803) (1,382) Other non-cash changes: Inventories transferred from property, plant and equipment.............................................. $ (639) $ (1,641)(In thousands)(Unaudited)
Nine Months Ended Sept 29, Sept 30, 2001 2000 Net loss $ (13,680 ) $ (6,971 ) Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Depreciation and amortization 3,195 3,660 Deferred income taxes 1,300 — Foreign currency loss (35 ) 1 Loss on IMAT investment — 125 Restructuring charge — non-cash portion — 856 Loss on disposal of investment 803 — Changes in assets and liabilities (2,791 ) 1,380 Total adjustments 2,472 6,022 Net cash and cash equivalents used in operating activities (11,208 ) (949 ) Purchase of investments (5,463 ) (86,963 ) Proceeds from sale of investments 38,447 94,812 Purchase of leasehold improvements and equipment (3,574 ) (1,842 ) Net cash and cash equivalents provided by investing activities 29,410 6,007 Proceeds from issuance of common stock 418 474 Net cash and cash equivalents provided by financing activities 418 474 Net increase in cash and cash equivalents 18,620 5,532 Cash and cash equivalents at beginning of period 4,616 3,295 Cash and cash equivalents at end of period $ 23,236 $ 8,827 Cash paid (received) for: Interest $ 2,715 $ 2,762 Income tax refund — (5,803 ) Other non-cash changes: Inventories transferred from property, plant and equipment $ 1,519 $ 639 See accompanying notes.
364
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS1. BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
1. Business Activities and Basis of Presentation Intevac, 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 flat panel displays and thin-film disks for computer disk drivesand 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 manufactures thin-film deposition and rapid thermal processing equipment that is
a leading supplierused in the manufacture ofsputtering systemsflat panel displays, and thin-film deposition and lubrication equipment that is usedtoin the manufacture of thin-film disks for computer hard disk drives.Sputtering is a vacuum deposition process used to deposit multiple thin-film layers on a disk. The Equipment Business also realizes revenues from the sales of disk lubrication equipment, contact stop-start ("CSS") test equipment and 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®”) systems for positive target identification.
The financial information at September
30, 200029, 2001 and for the three- and nine-month periods ended September30, 200029, 2001 and September25, 199930, 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”) 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 byaccounting principles generally accepted in the United States of AmericaU.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 31,1999.2000.The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of AmericaU.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 financialstatements.statement. Certain prior year balances have been reclassified to conform with the current year presentation.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- and nine-month periods ended September
30, 200029, 2001 are not considered indicative of the results to be expected for any future period or for the entire year.475
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) 2. INVENTORIES— (Continued)
2. Inventories The components of inventory consist of the following:
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (IN THOUSANDS)Raw materials...................................... $ 3,832 $ 2,307 Work-in-progress................................... 10,090 13,658 Finished goods..................................... 4,668 -- ------- ------- $18,590 $15,965 ======= =======
September 29, December 31, 2001 2000 (In thousands) Raw materials $ 4,823 $ 4,591 Work-in-progress 14,031 8,209 Finished goods 13,037 3,033 $ 31,891 $ 15,833 A significant portion of the finished goods is represented by inventory at customer sites undergoing installation and acceptance testing.
3. REPURCHASE OF CONVERTIBLE NOTES During the three-month period ended September 25, 1999, the Company repurchased $12,250,000, face value, of its outstanding 6 1/2% Convertible Subordinated Notes (the "Convertible Notes"). The repurchase resulted in a gain of $2,881,000 (net of income taxes). During the nine-month period ended September 25, 1999, the Company repurchased $16,255,000, face value, of its Convertible Notes. The repurchase resulted in a gain of $3,844,000 (net of income taxes). 4. NET INCOME (LOSS) PER SHARE
3. Net Income (Loss) Per Share The following table sets forth the computation of basic and diluted earnings (loss) per share:
Three Months Ended Nine Months Ended Sept 29, Sept 30, Sept 29, Sept 30, 2001 2000 2001 2000 (In thousands) Numerator: Loss from continuing operations $ (5,356 ) $ (3,409 ) $ (13,680 ) $ (6,971 ) Net loss $ (5,356 ) $ (3,409 ) $ (13,680 ) $ (6,971 ) Numerator for basic earnings per share — loss available to common stockholders (5,356 ) (3,409 ) (13,680 ) (6,971 ) Effect of dilutive securities: 6 1/2% convertible notes(1) — — — — Numerator for diluted earnings per share — loss available to common stockholders after assumed conversions $ (5,356 ) $ (3,409 ) $ (13,680 ) $ (6,971 ) Denominator: Denominator for basic earnings per share — weighted-average shares 11,983 11,822 11,939 11,789 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 11,983 11,822 11,939 11,789
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER(1) Diluted EPS for the three- and nine-month periods ended September 29, 2001 and September 30, SEPTEMBER 25, SEPTEMBER2000 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- and nine-month periods ended September 29, 2001 and September 30,SEPTEMBER 25,20001999 2000 1999 ------------- ------------- ------------- ------------- (IN THOUSANDS)Numerator: Loss from continuing operations.......... $(3,409) $(3,257) $(6,971) $(9,903) ======= ======= ======= ======= Net loss................................. $(3,409) $ (376) $(6,971) $(6,059) ======= ======= ======= ======= Numerator for basic earnings per share -- loss available to common stockholders.......................... (3,409) (376) (6,971) (6,059) Effect of dilutive securities: 6 1/2% convertible notes(1)........... -- -- -- -- ------- ------- ------- ------- Numerator for diluted earnings per share -- loss available to common stockholders after assumed conversions........................... $(3,409) $ (376) $(6,971) $(6,059) ======= ======= ======= =======was 1,999,758.586
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)— (Continued)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER(2) Diluted EPS for the three- and nine-month periods ended September 29, 2001 and September 30, SEPTEMBER 25, SEPTEMBER2000 excludes the effect of shares issuable pursuant to employee stock options as their inclusion would be anti-dilutive. The number of employee stock option shares excluded for the three-month periods ended September 29, 2001 and September 30,SEPTEMBER 25,20001999was 50,274 and 189,107, respectively, and the number of employee stock option shares excluded for the nine-month periods ended September 29, 2001 and September 30, 20001999 ------------- ------------- ------------- ------------- (IN THOUSANDS)Denominator: Denominator for basic earnings per share -- weighted-average shares...... 11,822 11,706 11,789 11,799 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 shareswas 141,095 andassumed conversions........ 11,822 11,706 11,789 11,799 ======= ======= ======= =======151,629, respectively.- --------------- (1) Diluted EPS for the three- and nine-month periods ended September 30, 2000 and September 25, 1999 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 September 30, 2000 and September 25, 1999 was 1,999,758, and the number of "as converted" shares excluded for the nine-month periods ended September 30, 2000 and September 25, 1999 was 1,999,758 and 2,460,445, respectively. (2) Diluted EPS for the three- and nine-month periods ended September 30, 2000 and September 25, 1999 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 September 30, 2000 and September 25, 1999 was 189,107 and 115,681, respectively, and the number of employee stock options excluded for the nine-month periods ended September 30, 2000 and September 25, 1999 was 151,629 and 193,788, respectively. 5. SEGMENT REPORTING
4. Segment Reporting
Segment Description Intevac, Inc. has two reportable segments: Equipment and Photonics. The
Company'sCompany’s Equipment business sells complex capital equipment used in the manufacturing ofthin-film disks,flat panel displays andshrink-wrap films.thin-film disks. 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 equity investee,amortization expenses related to certain intangible assets and the reversal of a portion of a restructuring reserve established in September 1999, less an allocation of corporate expenses to operating units equal to 1% of net revenues.Business Segment Net Revenues
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- (IN THOUSANDS)Equipment................................ $ 8,942 $11,751 $20,915 $30,205 Photonics................................ 2,094 2,071 5,204 5,636 ------- ------- ------- ------- Total.......................... $11,036 $13,822 $26,119 $35,841 ======= ======= ======= =======Business Segment Net Revenues 69 INTEVAC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Business Segment Profit & Loss
Three Months Ended Nine Months Ended Sept 29, Sept 30, Sept 29, Sept 30, 2001 2000 2001 2000 (In thousands) Equipment $ 6,547 $ 8,942 $ 20,662 $ 20,915 Photonics 1,867 2,094 7,247 5,204 Total $ 8,414 $ 11,036 $ 27,909 $ 26,119
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------ SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- (IN THOUSANDS)Equipment.......................... $(2,530) $(2,658) $(4,009) $(11,824) Photonics.......................... (458) (221) (1,665) (481) Corporate activities............... (498) (2,744) (1,298) (3,962) ------- ------- ------- -------- Operating income (loss)............ $(3,486) $(5,623) $(6,972) $(16,267) Interest expense................... (758) (911) (2,275) (2,919) Interest income.................... 619 582 1,704 1,650 Other income and expense, net...... 216 699 572 1,563 ------- ------- ------- --------Business Segment Profit & Loss from continuing operations before income taxes.............. $(3,409) $(5,253) $(6,971) $(15,973) ======= ======= ======= ========6. RESTRUCTURING
Three Months Ended Nine Months Ended Sept 29, Sept 30, Sept 29, Sept 30, 2001 2000 2001 2000 (In thousands) Equipment $ (2,402 ) $ (2,530 ) $ (7,656 ) $ (4,009 ) Photonics (976 ) (458 ) (2,038 ) (1,665 ) Corporate activities (426 ) (498 ) (1,452 ) (1,298 ) Operating income (loss) (3,804 ) (3,486 ) (11,146 ) (6,972 ) Interest expense (723 ) (758 ) (2,193 ) (2,275 ) Interest income 209 619 1,121 1,704 Other income and expense, net 262 216 (162 ) 572 Loss from continuing operations before income taxes $ (4,056 ) $ (3,409 ) $ (12,380 ) $ (6,971 )
5. 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
outof theCompany'sCompany’s staff7
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of contract and regular personnel. The reductions took place at the
Company'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 and $1,164,000 for the write-off of leasehold improvements and other costs associated with restructuring. 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 third quarter of 2000, the Company completed all activities related to closing the building. As a result, the Company reversed the remaining $23,000 of the restructuring reserve during the third 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
outof theCompany'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
theits 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 systems and three completed systems remaining in inventory.The Company has orders for the three systems and they are scheduled for customer acceptance in 2000 and 2001 and will be included in future Intevac 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 residualvalueobligations at the end of the leases.710 INTEVAC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Of the three systems in inventory, two were included in 2000 revenues and one is included in 2001 revenues. One of the two leased systems was sold to the lessee in the three months ending September 29, 2001.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.
RPC Building 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 For the three- and nine-month periods ended September 29, 2001 and September 30,
2000.2000, the Company did not accrue a tax benefit due to the inability to realize additional refunds from loss carry-backs. Based on management’s review, the Company increased its deferred tax asset valuation reserve by $1.3 million during8
INTEVAC, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the three-month period ended September 29, 2001. As of September 29, 2001 the Company’s net deferred tax assets totaled $3.7 million. 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, the Company will expense the value of the net deferred tax assets not likely to be realized.
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......................... (1) (1) Reversal of restructuring charge................ (24) -- ------ ------ Balance at September 30, 2000..................... -- -- ====== ======7. Capital Transactions 7. CAPITAL TRANSACTIONSDuring the nine-month period ending September
30, 2000,29, 2001, Intevac sold stock to its employees under theCompany'sCompany’s Stock Option and Employee Stock Purchase Plans. A total of127,711160,053 shares were issued for which the Company received$474,000. 811 ITEM$418,000.9
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"“believes”,"expects"“expects”,"anticipates"“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 March2000,2001, Form10-Q's10-Q’s and Form8-K's. RESULTS OF OPERATIONS Three Months Ended September 30, 2000 and September 25, 19998-K’s.Results of Operations
Three Months Ended September 29, 2001 and September 30, 2000 Net revenues.Net revenues consist primarily of sales of equipment used to manufacture flat panel displays and thin-film disks for computer hard disk drives,
and flat panel displays,related equipment and system 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 decreased by20%24% to $8.4 million for the three-month period ended September 29, 2001 from $11.0 million for the three-month period ended September 30,20002000. Net revenues from$13.8Equipment declined to $6.5 million for the three-month period ended September25, 1999. Net revenues29, 2001 fromEquipment sales declined to$8.9 million for the three-month period ended September 30,2000 from $11.8 million for the three-month period ended September 25, 1999.2000. The decrease in Equipment sales was primarily the result of a decrease ininternationaldomestic sales of disk manufacturing equipment, which was partially offset by an increase indomesticinternational sales ofdiskflat panel manufacturing equipment and electron beam processing manufacturing equipment. Net revenues from Photonicssales increased by 1%decreased to $1.9 million for the three-month period ended September 29, 2001 from $2.1 million for the three-month period ended September 30, 2000.International sales
decreasedincreased by72%122% to $5.5 million for the three-month period ended September 29, 2001 from $2.5 million for the three-month period ended September 30,2000 from $9.0 million for the three-month period ended September 25, 1999.2000. Thedecreaseincrease in international sales was primarily due toa decreasean increase in net revenues fromdiskflat panel display and electron beam processing manufacturing equipment. International sales constituted 66% of net revenues for the three-month period ended September 29, 2001 and 23% of net revenues for the three-month period ended September 30,2000 and 65% of net revenues for the three-month period ended September 25, 1999.2000.Backlog.The
Company'sCompany’s backlog of orders for its products was $42.1 million at September 29, 2001 and $37.1 million at September 30,2000 and $17.9 million at September 25, 1999.2000. 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 and installation labor and overhead, warranty costs, scrap and costs attributable to contract research and development. Gross margin
decreasedincreased to 20% for the three-month period ended September 29, 2001 from 5% for the three-month period ended September 30, 2000from 11% for the three-month period ended September 25, 1999as the result oflower gross marginsan increase inboth Equipment and Photonics.Equipment gross marginsdeclinedto9% for the three-month period ended September 30, 200032% from13% for the three-month period ended September 25, 1999.9%, partially offset by a decrease in Photonics gross margins to (22%) from (4%).Equipment gross margins were depressed in the third quarter of 2000 as the result of the establishment of a $2.0 million inventory reserve related to the expected cost of updating and reconfiguring slow moving disk sputtering systems in inventory. Excluding the effect of this reserve, Equipment gross margins
were 32%. Equipment gross margins were depressedin the third quarter of1999 as the result of high costs incurred on the delivery of the first MDP-250K disk sputtering system and under-absorption of manufacturing overhead. Photonics gross margins declined to (4%) for the three-month period ended September 30,2000from 7% for the three-month period ended September 25, 1999.were 32%.Photonics gross margins were negatively impacted as the result of an increased proportion of Photonics revenue from cost-sharing research and development contracts. The Company expects that Photonics gross margins will fluctuate from quarter to quarter based on
912the relative mix of sales derived from prototype products, from fully funded research and development contracts and from cost-shared research and development contracts.10
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. Company funded research and development expensedecreasedincreased to $3.8 million for the three-month period ended September 29, 2001 from $2.7 million for the three-month period ended September 30, 2000,from $3.3 million for the three-month period ended September 25, 1999,representing25%46% and24%25%, respectively, of net revenue. Thisdecreaseincrease was primarily the result oflowerhigher spending for development ofdisk manufacturing equipment,flat panel manufacturingequipment and Company funded Photonics research and development.equipment.Research and development expenses do not include costs of
$1.9$1.6 million and$1.8$2.0 million, respectively, for the three-month periods ended September30, 200029, 2001 and September25, 199930, 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 million and $0.4 million, respectively,expense for the three-monthperiodsperiod ended September 30, 2000 does not include $0.1 million of costs reimbursed under the terms of a research and development cost sharing agreement with a Japanese company. Since 1993 the Company has received $9.5 million under this cost sharing agreement. Research and development expense for the three-month period ended September25, 1999,29, 2001 does not include $32,000 of costs reimbursed under the terms of a research and development cost sharing agreement with theCompany's Japanese flat panel manufacturing equipmentNational Institute of Standards and Technology related to developmentpartner. Since 1993 the Company has received $9.5 millionoffunds under this cost sharing agreement.super lattice sources for thin-film disk manufacturing.Selling, general and administrative.Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial, travel, management, legal and professional services and bad debt expense. Domestic sales are made by the
Company'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, transferredIMAT'sIMAT’s activities and employees to Matsubo, which became a distributor of the Company’s flat panel products, and shut down the operations of IMAT.Selling, general and administrative expense
decreasedincreased to $1.6 million for the three-month period ended September 29, 2001 from $1.4 million for the three-month period ended September 30, 2000,from $1.6 million for the three-month period ended September 25, 1999,representing13%20% and12%13%, respectively, of net revenue. The primary reason for thedeclineincrease wasthe discontinuation of the Company's electron beam processing equipment product line. Restructuring expense. Restructuring expense declined from $2.2 million during the third quarter of 1999 to ($23) thousandan increase in thethird quarter of 2000. In September 1999 the Company adopted a plan to reduce expenses. The expense reduction plan included closure of one of the buildings at its Santa Clara facilityselling, general anda reduction in force of seven employees at the Company's facilities in Santa Clara, CA. The Company incurred a restructuring charge of $2.2 millionadministrative salaries related to the Equipment business.Restructuring expense.Restructuring expense
reduction plan. The significant components of this charge included $0.9 million for rent due onwas ($23,000) during thelease of the building (net of expected sublease income), $0.1 million for costs associated with operating the building through May 2000, $0.6 million for the write-off of leasehold improvements and $0.6 million for moving out of the building.three-month period ended September 30, 2000. During the third quarter of 2000, the Company completedthe expense reductiona September 1999 restructuring plan and reversed the unused$23 thousand$23,000 balance of therestructuring reserve established during the third quarter of 1999.related reserve.Interest expense.Interest expense consists primarily of interest on the
Company'sCompany’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$0.8$0.7 million and$0.9$0.8 million, respectively, in the three-month periods ended September30, 200029, 2001 and September25, 1999.30, 2000. Interest expense declined due toa reduction inthebalance outstandingretirement of theCompany's Convertible Notes due 2004.$1.9 million of short-term debt during the first quarter of 2001.Interest income and other, net.Interest income and other, net consists primarily of interest income and dividends on the
Company'sCompany’s investments, foreign currency hedging gains and losses, early payment discounts on the purchase of inventories, goods and services and, in 2000, theCompany'sCompany’s 49% share of the loss incurred by IMAT.1013Interest income and other, net declined to $0.5 million for the three-month period ended September 29, 2001 from $0.8 million for the three-month period ended September 30,2000 from $1.3 million for2000. The decline was primarily thethree-month period ended September 25, 1999. Interest income and other, net for the three months ended September 30, 2000 included approximately $0.6 millionresult of reduced interest income caused by lower cash balances andapproximately $0.1 million of dividend income on the Preferred Share the Company owns in 601 California Avenue LLC. Interest income and other, net for the three months ended September 25, 1999 included approximately $1.0 million of dividend income on the Preferred Share the Company owns in 601 California Avenue LLC and approximately $0.6 million oflower interestincome which was partially offset by approximately $0.3 million of foreign currency hedging losses. The $1.0 million payment from 601 California Avenue LLC was equivalent to approximately two and one half years of accumulated dividends in arrears. Dividends on the Preferred Share are now current. 6 1/2% Convertible Subordinated Notes Due 2004. In July 1998, the Company's Board of Directors approved the repurchase in the open market of up to $19.0 million of its 6 1/2% Convertible Notes. The Company repurchased $12.3 million of these notesrates duringthe three months ended September 25, 1999 from which it recognized a gain of $2.9 million, net of applicable taxes.2001.Provision for (benefit from) income taxes.
The Company's estimated effective tax rates forFor the three-month periods ended September 29, 2001 and September 30, 2000,and September 25, 1999 were 0% and a benefit rate of 38%, respectively. Thethe Company did not accrue a tax benefitduring the three-month period ended September 30, 2000due to the inability to realize additional refunds from loss carry-backs. Based on management’s review, the Company increased its deferred tax asset valuation11
reserve by $1.3 million during the three-month period ended September 29, 2001. As of September30, 200029, 2001 theCompany'sCompany’s net deferred tax assets totaled$7.7$3.7 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 Companydetermines it is more likelycannot project with reasonable certainty that it willnotearn taxable incomein the futuresufficient to 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.Nine Months Ended September 30, 2000 and September 25, 1999
Nine Months Ended September 29, 2001 and September 30, 2000 Net revenues.Net revenues
decreasedincreased by27%7% to $27.9 million for the nine-month period ended September 29, 2001 from $26.1 million for the nine-month period ended September 30,20002000. Net revenues from$35.8Equipment sales declined slightly to $20.7 million for the nine-month period ended September25, 1999. Net revenues29, 2001 fromEquipment sales declined to$20.9 million for the nine-month period ended September 30,20002000. Net revenues from$30.2Photonics increased to $7.2 million for the nine-month period ended September25, 1999. The decrease in net revenues29, 2001 fromEquipment was due primarily to a decrease in sales of disk manufacturing systems, and to a lesser extent flat panel manufacturing systems, partially offset by increased sales of system upgrades and components. Net revenues from Photonics decreased to$5.2 million for the nine-month period ended September 30,2000 from $5.6 million for the nine-month period ended September 25, 1999.2000. Thedecreaseincrease in Photonics sales was primarily the result ofaincreased contract research and developmentcontract that was on holdsales partially offset by reduced product sales.International sales increased by 147% to $15.9 million for
most ofthethree-monthnine-month period endedApril 1, 2000. International sales decreased by 72% toSeptember 29, 2001 from $6.4 million for the nine-month period ended September 30,2000 from $23.3 million for the nine-month period ended September 25, 1999.2000. Thedecreaseincrease in international sales was primarily due toa decreasean increase innet revenues fromsales of disk manufacturing equipment, and to a lesser extent an increase in the sales of rapid thermal processing systems for flat panelmanufacturing equipment.display manufacturing. International sales constituted 57% of net revenues for the nine-month period ended September 29, 2001 and 25% of net revenues for the nine-month period ended September 30,2000 and 65% of net revenues2000.Gross margin.Gross margin was 18% for the nine-month period ended September
25, 1999. Gross margin. Gross margin was29, 2001 as compared to 12% for the nine-month period ended September 30,2000 as compared2000. Gross margin in the Equipment business increased to7%26% for the nine-month period ended September25, 1999. Gross margin in the Equipment business increased29, 2001 as compared to 19% for the nine-month period ended September 30,2000 as compared to 9% for the nine-month period ended September 25, 1999.2000. Equipment gross marginsincreasedin the nine-monthperiodperiods ended September 29, 2001 and September 30, 2000,as the result of a favorable mix of relatively high margin upgrades for the Company's installed base of MDP-250 systems and a reduced level of manufacturing overhead, whichrespectively, werepartially offsetnegatively impacted by the establishment of $2.4 million and $3.1 million of inventory reserves related toslow movingsystems inventory. Excluding the effect ofthis reserve,these reserves, Equipment gross margins were 37% and 34%. Equipment, respectively, in the nine-month periods ended September 29, 2001 and September 30, 2000.Photonics gross margins
were depressed inincreased slightly to (5%) for the nine-month period ended September25, 1999 as the result of the sale of three used disk sputtering systems at heavily discounted prices, 1114 establishment of a $0.4 million cost to market reserve on a used MDP-250B disk sputtering system remaining in inventory, high initial costs to complete the Company's first production rapid thermal processing system and first MDP-250K disk sputtering system, payment of $0.5M as part of the settlement of the patent claim with CVC Products, Inc. and under-absorption of manufacturing overhead. Photonics gross margins declined to29, 2001 from (10%) for the nine-month period endedSeptemberSeptember��30,2000 from 10% for the nine-month period ended September 25, 1999.2000. Photonics gross margins in both years have been negatively impactedduring the nine-month period ended September 25, 2000 as the resultby a significant portion ofan increased proportion of Photonicsrevenue being derived from cost-sharing research and development contracts. The Company expects that Photonics gross margins will fluctuate based on the relative mix of sales derived from 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
decreasedincreased by31%42% to $11.0 million for the nine-month period ended September 29, 2001 from $7.7 million for the nine-month period ended September 30, 2000,from $11.1 million for the nine-month period ended September 25, 1999,representing29%39% and31%29%, respectively, of net revenue. Thisreductionincrease was primarily the result ofdecreasedincreased expense for the development ofdiskflat panel display manufacturing equipment andrapid thermal processing equipment, and to a lesser extent,photonics products, partially offset by reduced spending forPhotonics products and electron beam processingdevelopment of disk manufacturing equipment.Research and development expenses do not include costs of
$4.2$7.1 million and$4.7$4.3 million, respectively, for the nine-month periods ended September30, 200029, 2001 and September25, 199930, 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 $0.6 million and $0.7 million, respectively, inexpense for the nine-monthperiodsperiod ended September 30, 2000 does not include $0.6 million of costs reimbursed under the terms of a research and development cost sharing agreement with a Japanese company. Research and development expense for the nine-month period ended September25, 1999,29, 2001 does not include $0.4 million of costs reimbursed under the terms of a research and development cost sharing agreement with theCompany's Japanese flat panel manufacturing equipmentNational Institute of Standards and Technology related to developmentpartner.of super lattice sources for thin-film disk manufacturing.12
Selling, general and administrative.Selling, general and administrative expense
decreasedincreased by47%72% to $5.1 million for the nine-month period ended September 29, 2001 from $3.0 million for the nine-month period ended September 30, 2000,from $5.6 million for the nine-month period ended September 25, 1999,representing11%18% and16%11%, respectively, of net revenue. The primary reasons for thedeclineincrease were a $1.5 million credit to bad debt expenseand the discontinuation of the Company's electron beam processing equipment product line. Restructuring expense (gain). Restructuring expense (gain) was ($0.6) million and $2.2 million induring the nine-monthperiodsperiod ended September 30, 2000 and increased selling, general and administrative salaries in the Equipment business during the nine-month period ended September25, 1999, respectively. In March 1999,29, 2001.Restructuring expense (gain).Restructuring gain was ($0.6) million in the
Company completed a reduction in force of approximately 10% of its worldwide staff and incurred employee severance costs of approximately $115,000. In March 1999, the Company also negotiated an early termination of its lease commitment in Rocklin, California, which resulted in a $132,000 reduction of previously expensed closure costs. This $132,000 reduction in restructuring costs was partially offset by the $115,000 of restructuring costs related to the Company's March 1999 reduction in force. Innine-month period ended September1999 the Company adopted a plan to reduce expenses. The expense reduction plan included closure of one of the buildings at its Santa Clara facility and a reduction in force of seven employees at the Company's facilities in Santa Clara, CA. The Company incurred a restructuring charge of $2.2 million related to the expense reduction plan. The significant components of this charge included $0.9 million for future rent due on the lease of the building (net of expected sublease income), $0.1 million for costs associated with operating the building through May 2000 and $1.2 million for the write-off of leasehold improvements and other costs associated with restructuring.30, 2000. During thethreenine months endedApril 1,September 30, 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 declined to $2.2 million in the nine-month period ended September 29, 2001 from $2.3 million in the nine-month period ended September 30, 2000,
from $2.9 million in the nine-month period ended September 25, 1999. Interest expense declineddue toa reduction inthebalance outstandingretirement of $1.9 million of short-term debt during theCompany's Convertible Notes due 2004. 1215first quarter of 2001.Interest income and other, net.Interest income and other, net decreased to $1.0 million for the nine-month period ended September 29, 2001 from $2.3 million for the nine-month period ended September 30,
2000 from $3.22000. The decrease was primarily the result of a $0.8 millionforloss on thenine-month period ended September 25, 1999. Interest incomedisposition of Pacific Gas andother, net for the nine-month period ended September 30, 2000 included approximately $1.7 million ofElectric commercial paper and lower interest incomeapproximately $0.3 million of dividend income on the Preferred Share the Company owns in 601 California Avenue LLCdue to reduced interest rates andapproximately $0.2 million of foreign currency hedging gains. Interest income and other, net for the nine-month period ended September 25, 1999 included approximately $1.6 million of interest income, approximately $1.0 million of dividend income on the Preferred Share the Company owns in 601 California Avenue LLC, approximately $0.5 million of foreign currency hedging gains. 6 1/2% Convertible Subordinated Notes Due 2004. The Company repurchased $16.3 million of its Convertible Notes during the nine-month period ended September 25, 1999 from which it recognized a gain of $3.8 million, net of applicable taxes.cash balances.Provision for (benefit from) income taxes.
The Company's estimated effective tax rates forFor the nine-month periods ended September 29, 2001 and September 30, 2000,and September 25, 1999 were 0% and a benefit rate of 38%, respectively. Thethe Company did not accrue a tax benefitduring the nine-month period ended September 30, 2000due to the inability to realize additional refunds from loss carry-backs. Based on management’s review, the Company increased its deferred tax asset valuation reserve by $1.3 million during the nine-month period ended September 29, 2001. As of September30, 200029, 2001 theCompany'sCompany’s net deferred tax assets totaled$7.7$3.7 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 Companydetermines it is more likelycannot project with reasonable certainty that it willnotearn taxable incomein the futuresufficient to 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.LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
The
Company'sCompany’s operating activities used cash of$0.9$11.2 million for the nine-month period ended September30, 2000.29, 2001. The cash used was due primarily to increases in inventory and to the net loss incurred by the Company, which was partially offset by an increase in customer advances, by a decrease in accounts receivable and by depreciation and amortization.The
Company'sCompany’s investing activities provided cash of$6.0$29.4 million for the nine-month period ended September30, 200029, 2001 as a result of the net sale of investments, which was partially offset by the purchase of fixed assets.The
Company'sCompany’s financing activities provided cash of$0.5$0.4 million for the nine-month period ended September30, 200029, 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 RESULTSThe
disk drive industry is cyclicalCompany believes that its available sources of funds andsubjectanticipated cash flows from operations will be adequate toprolonged down-cycles.finance current operations and anticipated capital expenditures through at least fiscal 2001.Certain Factors Which May Affect Future Operating Results
Our products are complex, constantly evolving, and are often designed and manufactured to individual customer requirements which require additional engineering.
Intevac’s Equipment Division products have a large number of components and are highly complex. Intevac
derives a significant proportionmay 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 itsrevenues from salesproducts,13
or to meet the required technical specifications ofequipmentits products in a timely manner. Such delays could lead tomanufacturersrescheduling ofcomputer disk drivesorders in backlog, or in extreme situations, to cancellation of orders. In addition, Intevac may incur substantial unanticipated costs early in a product’s life cycle, such as increased engineering, manufacturing, installation anddisk drive components. The disk drive industrysupport costs which may not be able to be passed on to the customer. In some instances, Intevac iscyclical anddependent upon a sole supplier or a limited number of suppliers, or hasexperienced long periodsqualified only a single or limited number ofover-supply and intensely competitive pricing. Since 1997, many of the manufacturers of hard disk drives and their componentsuppliers,have reported substantial losses. These down-cycles reduce the demandforthe disk manufacturing equipment we sell. As a result Intevac has experienced significant reductionscomplex components or sub-assemblies utilized in itsquarterly revenues, and has incurred quarterly losses since the third quarterproducts. Any of1998. Intevac is not able to accurately predict when the industry conditions that have depressed our sales will become more favorable. Rapid increases in areal density are reducing the number of thin-film disks required per disk drive. Over the past few years the amount of data that can be stored on a single thin-film computer disk has been growing at approximately 100% per year. Although the number of disk drives produced has continued to significantly increase each year, the increase in areal density has resulted in a reduction in the number of disks required per disk drive. The result has been that the number of thin-film disks used worldwide has not grown significantly since 1997. Without an increase in the number of disks required, Intevac's disk equipment sales 1316 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 fromthesenew applications will offset further declines in the average number of disks required per disk drive. Intevac's business is subject to rapid technical change. Intevac'sfactors could adversely affect Intevac’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'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.Competition is intense
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
our competitors are largeprototype products that demonstrate this technology. Revenues have been derived primarily from research andwell financed. Intevac experiences intense competitiondevelopment contracts funded by the United States Government and its contractors. The Company continues 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 theEquipment Business. For example, Intevac's disk sputteringplanned transition to volume sales of photonics productsexperience competition worldwide from two principal competitors, Unaxis AG ("Unaxis")to military andAnelva Corporation ("Anelva"), each of which is a large manufacturer of complex vacuum equipment and thin-film disk manufacturing systems and has sold a substantial number of thin-film disk sputtering machines worldwide. Both Unaxis and Anelva have substantially greater financial, technical, marketing, manufacturing and other resources than Intevac.commercial customers. There can be no assurance thatIntevac's competitorsthe Company willnot develop enhancements to, or future generations of, competitive products that will offer superior price or performance features or that new competitors will not enter Intevac's marketssucceed in these activities anddevelop such enhanced products. Given the lengthy sales cycle and thegenerate significantinvestment required to integrate equipment into the manufacturing process, Intevac believes that once a manufacturer has selected a particular supplier's equipment for a specific application, that manufacturer generally relies upon that supplier's equipment and frequently will continue to purchase any additional equipment for that application from the same supplier. Accordingly, competition for customersincreases inthe equipment industry is intense, and suppliers of equipment may offer substantial pricing concessions and incentives to attract new customers or retain existing customers. Thesales ofour equipmentproductsare dependentbased onsubstantial capital investment by our customers.its photonics technology.
The sales of our equipment products are dependent on substantial capital investment by our customers. The majority of our Equipment revenues have historically come from the sale of equipment used to manufacture thin-film disks, and to a lesser extent, from the sale of equipment used to manufacture flat panel displays. The
systems Intevac sells typically cost between $1 and $5 million each. Thepurchase ofIntevac'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.Because of the prolonged industry downturn, someSome 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, the reduction of the number of disks used per disk drive 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. Others have been acquired by their customers or by their competitors. Accordingly, the potential market 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
14
not able to accurately predict when the industry conditions that have depressed our disk equipment sales will become more favorable, particularly in light of the current widespread weakness of the economy.
Demand for capital equipment is cyclical. Intevac’s Equipment Division sells capital equipment to capital intensive industries, which sell commodity products such as disks, disk drives and flat panel displays. These industries operate with high fixed costs. When demand for these commodity products exceeds capacity, demand for new capital equipment such as Intevac’s tends to be amplified. When supply of these commodity products exceeds capacity, 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 2001, 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. Over the past few years the amount of data that can be stored on a single thin-film computer disk has been increasing 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. TrendFocus, a market research firm specializing in the disk drive industry, projects that number of thin-film disks used worldwide will decline in 2001 from 2000 levels . Without an increase in the number of disks required, Intevac’s disk equipment sales are largely limited to upgrades of existing capacity, rather than capacity expansion.
Our competitors are large and well financed and competition is intense. Intevac experiences intense competition in the Equipment Division. For example, Intevac’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, manufacturing and other resources than Intevac. There can be no assurance that Intevac’s competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features or that new competitors will not enter Intevac’s markets and develop such enhanced products.
Given the lengthy sales cycle and the significant investment required to integrate equipment into the manufacturing process, Intevac believes that once a manufacturer has selected a particular supplier’s equipment for a specific application, that manufacturer generally relies upon that supplier’s equipment and frequently will continue to purchase any additional equipment for that application from the same supplier. Accordingly, competition for customers in the equipment industry is intense, and suppliers of equipment may offer substantial pricing concessions and incentives to attract new customers or retain existing customers.
$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 to repurchase $16.3 million of the Convertible Notes. The $41.2 million of the Convertible Notes that remain outstanding as of September 29, 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.
15
Intevac’s business is dependent on its intellectual property. There can be no assurance that:
• any of Intevac’s patent applications will be allowed or that any of the allowed applications will be issued as patents, or • any patent owned by Intevac will not be invalidated, deemed unenforceable, circumvented or challenged, or • the rights granted under our patents will provide competitive advantages to Intevac, or • any of Intevac’s pending or future patent applications will be issued with claims of the scope sought by Intevac, if at all, or • others will not develop similar products, duplicate Intevac’s products or design around the patents owned by Intevac, or • foreign patent rights, intellectual property laws or Intevac’s agreements will protect Intevac’s intellectual property rights. Failure to protect Intevac’s intellectual property rights could have an adverse effect upon Intevac’s business.
From time to time Intevac has received claims that it is infringing third parties’ intellectual property rights. There can be no assurance that third parties will not in the future claim infringement by Intevac with respect to current or future patents, trademarks, or other proprietary rights relating to Intevac’s disk sputtering systems, flat panel manufacturing equipment or other products. Any present or future claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require Intevac to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to Intevac, or at all. Any of the foregoing could have an adverse effect upon Intevac’s business.
Our operating results fluctuate significantly. Over the last eleven 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 fluctuate. As a result, period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance.
Intevac’s stock price is volatile. Intevac’s stock price has experienced both significant increases in valuation, and significant decreases in valuation, over short periods of time. Intevac believes that factors such as announcements of developments related to Intevac’s business, fluctuations in Intevac’s operating results, failure to meet securities analysts’ expectations, general conditions in the disk drive and thin-film media manufacturing industries and the worldwide economy, announcements of technological innovations, new systems or product enhancements by Intevac or its competitors, fluctuations in the level of cooperative development funding, acquisitions, changes in governmental regulations, developments in patents or other intellectual property rights and changes in Intevac’s relationships with customers and suppliers could cause the price of Intevac’s Common Stock to continue to fluctuate substantially. In addition, in recent years the stock market in general, and the market for small capitalization and high technology stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any of these factors could adversely affect the market price of Intevac’s Common Stock.
16
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.
Competition is intense for employees in northern California. Intevac’s operating results depend in significant part upon its ability to retain and attract qualified management, engineering, marketing, manufacturing, customer support, sales and administrative personnel. Competition in northern California for such personnel is intense. 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.
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. For example, the Company’s facility in California has been subject, in the last year, to electrical blackouts as a consequence of a shortage of available electrical power. These types of disruptions, or other unanticipated disruptions, could adversely impact the Company’s profitability.
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
opera- 1417 tionsoperations 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's international sales areIntevac generally
made to customers in the Far East and the company typicallyquotes 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 toIntevac'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,pricecompetitive 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 eleven quarters Intevac's operating income or loss as a percentage of net revenues has fluctuated from approximately (79%) to 8% of net revenues. Over the same period revenues per quarter have fluctuated between $35.8 million and $5.9 million. Intevac anticipates that its revenues and operating margins will continue to fluctuate. As a result, period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Intevac's stock price is volatile. Intevac's stock price has experienced both significant increases and decreases in valuation over short periods of time. Factors such as announcements of developments related to Intevac's business, fluctuations in Intevac's operating results, failure to meet securities analysts' expectations, general conditions in the disk drive and thin-film media manufacturing industries and the worldwide economy, announcements of technological innovations, new systems or product enhancements by Intevac or its competitors, fluctuations in the level of cooperative development funding, acquisitions, changes in governmental regulations, developments in patents or other intellectual property rights and changes in Intevac's relationships with customers and suppliers could cause the price of Intevac's Common Stock to continue to fluctuate substantially. In addition, in recent years the stock market in general, and the market for small capitalization and high technology stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any of these factors could adversely affect the market price of Intevac's Common Stock. Competition is intense for employees in northern California. Intevac's operating results depend in significant part upon its ability to retain and attract qualified management, engineering, marketing, manufacturing, customer support, sales and administrative personnel. Competition in northern California for such personnel is intense and there can be no assurance that Intevac will be successful in attracting and retaining such personnel. The failure to attract and retain such personnel could have an adverse effect on Intevac's business.
Intevac routinely evaluates acquisition candidates and other diversification strategies. Intevac has completed multiple acquisitions as part of its efforts to grow and diversify its business. For example,
Intevac'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,although itand subsequently closed thisbusiness in early 2000.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 with1518operating 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 dilutiveissuanceissuances17
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. Our products are complex, constantly evolving, and often manufactured to individual customer requirements. Intevac's Equipment products have a large number of components and are highly complex. Intevac may experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. In addition, some of the systems built by Intevac must be customized to meet individual customer site or operating requirements. Intevac has limited manufacturing capacity and may be unable to complete the development or meet the technical specifications of its new systems or enhancements or to manufacture and ship these systems or enhancements in a timely manner. In addition, Intevac may incur substantial unanticipated costs early in a product's life cycle, such as increased cost of materials due to expediting charges, other purchasing inefficiencies and greater than expected installation and support costs which cannot be passed on to the customer. In certain instances, Intevac is dependent upon a sole supplier or a limited number of suppliers, or has qualified only a single or limited number of suppliers, for certain complex components or sub-assemblies utilized in its products. Any of these factors could adversely affect Intevac's business. Intevac's business is dependent on its intellectual property. There can be no assurance that: - any of Intevac's patent applications will be allowed or that any of the allowed applications will be issued as patents, or - any patent owned by Intevac will not be invalidated, deemed unenforceable, circumvented or challenged, or - the rights granted under our patents will provide competitive advantages to Intevac, or - any of Intevac's pending or future patent applications will be issued with claims of the scope sought by Intevac, if at all, or - others will not develop similar products, duplicate Intevac's products or design around the patents owned by Intevac, or - foreign patent rights, intellectual property laws or Intevac's agreements will protect Intevac's intellectual property rights. Failure to protect Intevac's intellectual property rights could have an adverse effect upon Intevac's business. From time to time Intevac has received claims that it is infringing third parties' intellectual property rights. There can be no assurance that third parties will not in the future claim infringement by Intevac with respect to current or future patents, trademarks, or other proprietary rights relating to Intevac's disk sputtering systems, flat panel manufacturing equipment or other products. Any present or future claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require Intevac to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be 1619 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 repurchased $16.3 million of the Convertible Notes. The $41.2 million of the Convertible Notes that remain outstanding commit Intevac to substantial principal and interest obligations. The degree to which Intevac is leveraged could have an adverse effect on Intevac's ability to obtain additional financing for working capital, acquisitions or other purposes and could make it more vulnerable to industry downturns and competitive pressures. Intevac's ability to meet its debt service obligations will be dependent on Intevac's future performance, which will be subject to financial, business and other factors affecting the operations of Intevac, many of which are beyond its control. A majority of the Common Stock outstanding is controlled by the directors and executive officers of Intevac. The present directors and their affiliates and executive officers, in the aggregate, beneficially own a majority of Intevac's outstanding shares of Common Stock. As a result, these shareholders, acting together, are able to effectively control all matters requiring approval by the shareholders of Intevac, including the election of a majority of the directors and approval of significant corporate transactions.
Intevac uses hazardous materials. Intevac is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture, treatment and disposal of toxic or other hazardous substances, chemicals, materials or waste. Any failure to comply with current or future regulations could result in substantial civil penalties or criminal fines being imposed on Intevac or its officers, directors or employees, suspension of production, alteration of its manufacturing process or cessation of operations. Such regulations could require Intevac to acquire expensive remediation or abatement equipment or to incur substantial expenses to comply with environmental regulations. Any failure by Intevac to properly manage the use, disposal or storage of, or adequately restrict the release of, hazardous or toxic substances could subject Intevac to significant
liabilities ITEMliabilities.A majority of the Common Stock outstanding is controlled by the directors and executive officers of Intevac.
Based on the shares outstanding on September 29, 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.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Part III, Item 7,Quantitative and Qualitative Disclosures About Market RiskInterest rate risk.The Company’s exposure to market risk for changes in interest rates relates primarily to the
Registrant's Annual Report on Form 10-KCompany’s investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high quality credit rated 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.The table below presents principal amounts and related weighted-average interest rates by year of maturity for the
year ended December 31, 1999. 1720Company’s investment portfolio and debt obligations.
Fair 2001 2002 2003 2004 2005 Beyond Total Value (In thousands) Cash equivalents Variable rate $ 21,428 — — — — — $ 21,428 $ 21,428 Average rate 3.21 % — — — — — Long-term debt Fixed rate — — — $ 41,245 — — $ 41,245 $ 21,447 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’s operating results. At September 29, 2001, the Company had no foreign currency forward exchange contracts.
18
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's business, operating results and financial condition. A motion by the defendants in the lawsuit to have the suit dismissed on forum non conveniens grounds was denied byOn July 27, 2000 the Connecticut Superior
Court. The Connecticut Superior Court'sCourt disallowed the defendants’ motion to dismiss the lawsuit. That decision was appealed todeny the defendants motion is currently under review bythe Connecticut Supreme Court. OnJanuary 5, 2000,October 30, 2001 theCompany's RPC Technologies, Inc. subsidiary was namedConnecticut 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. At this time, Intevac does not know whether the plaintiffs will choose to recommence litigation against the Company in Australia. Any such action could expose Intevac to further risk, plus the expense and uncertainties of defending the matter in alawsuitdistant foreign jurisdiction.On June 12, 2001 the Company filed a complaint in
United States DistrictSanta Clara County Superior Court,in Texas.State of California, against Intarsia Corporation. Thelawsuit wascomplaint relates to Intarsia’s cancellation of an order for a customized sputtering system and seeks damages of at least $3.3 million. On July 26, 2001 Intarsia filedby Reita Miller, Executrix ofa cross-complaint against theestate of Thomas O. Miller, and family members of Mrs. Miller. The suit names RPC Technologies, Inc., RPC Industries, Inc. and Intevac, Inc. as defendants. IncludedCompany in thesuits allegations are assertions that Thomas O. Miller protracted leukemia and died as the result of working in and around Broad Beam accelerators manufactured by RPC Industries, Inc. and installed at Mr. Miller's employer, Tetra Pak. Preliminary investigations leadSanta Clara County Superior Court. On August 14, 2001, the Company filed a demurrer tobelieve thatthe cross-complaint and on October 11, 2001, Intarsia filed an amended cross-complaint. The amended cross-complaint includes allegations of fraud, negligent misrepresentation, breach of contract and breach of covenant of good faith and fair dealing, and seeks damages in the amount of $349,000 plus additional relief as may be deemed appropriate by the court. The Company believes it has a meritorious case and defenses,againstbut in theMiller suit. However, there canevent the Company does not prevail, the Company could beno assurance thatliable for $349,000 plus any other relief awarded Intarsia by theresolutioncourt.Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of
the suit will not haveMatters to amaterial adverse effectVote of Security HoldersNone.
19
Item 5. Other Information
None.
Item 6. Exhibits and Reports on
the Company's business. The lawsuit is scheduled for trial in February 2001. 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. 1821 ITEM 6. EXHIBITS AND REPORTS ON FORMForm 8-K(a) The following exhibits are filed herewith:
EXHIBIT NUMBER DESCRIPTION ------- -----------27.1 Financial Data ScheduleNone.
(b) Reports on Form 8-K:
None.
192220
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: November 7, 2000 By: /s/ NORMAN H. POND ------------------------------------ Norman H. Pond Chairman of the Board (Principal Executive Officer) Date: November 7, 2000 By: /s/ CHARLES B. EDDY III ------------------------------------ Charles B. Eddy III
INTEVAC, INC. Date: November 12, 2001 By: /s/ NORMAN H. POND
Norman H. Pond
Chairman of the Board and Chief Executive Officer (Principal Executive Officer)Date: November 12, 2001 By: /s/ CHARLES B. EDDY III
Charles B. Eddy III
Vice President, Finance and Administration, ChiefFinancial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 2023 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- -----------27.1FinancialData ScheduleOfficer, Treasurer and Secretary (Principal Financial and Accounting Officer)21