1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________________
Commission file number 0-26946
INTEVAC, INC.
(Exact name of registrant as specified in its charter)
California 94-3125814
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3550 Bassett Street, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 986-9888
________________________________________________________________________________
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X ____________ No ___________
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _________ No _________
APPLICABLE ONLY TO CORPORATE ISSUERS:
On March 30, 1996, approximately 12,250,959 shares of the Registrant's
Common Stock, no par value, were outstanding.
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INTEVAC, INC.
NO. INDEX PAGE
- - --- ----- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
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PART I--FINANCIAL INFORMATION
ITEM I--FINANCIAL STATEMENTS
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Mar. 30, Dec. 31,
1996 1995
---------- ----------
Unaudited)
Current Assets:
Cash and cash equivalents............................................ $ 14,119 $ 20,422
Short-term investments............................................... 2,571 ---
Accounts receivable, net of allowances of $560 and $461
at March 30, 1996 and December 31, 1995, respectively.............. 9,753 4,439
Inventories.......................................................... 18,308 16,468
Short-term note receivable........................................... 177 177
Prepaid expenses and other current assets............................ 348 503
Deferred tax asset................................................... 3,158 3,158
Net current assets of discontinued operations........................ 73 777
---------- ----------
Total current assets............................................. 48,507 45,944
Property, plant and equipment, net...................................... 4,637 3,479
Investments............................................................. 2,431 2,431
Goodwill and other intangibles.......................................... 2,946 ---
Deferred tax and other assets........................................... 83 83
---------- ----------
Total assets..................................................... $ 58,604 $ 51,937
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Notes payable........................................................ $ 1,250 $ ---
Accounts payable..................................................... 2,233 2,681
Accrued payroll and related liabilities.............................. 1,189 1,075
Other accrued liabilities............................................ 3,804 4,668
Customer advances.................................................... 19,027 14,436
Net liabilities of discontinued operations........................... 1,153 1,757
---------- ----------
Total current liabilities........................................ 28,656 24,617
Long-term notes payable................................................. 730 ---
Shareholders' equity:
Common stock......................................................... 15,305 15,304
Retained earnings.................................................... 13,913 12,016
---------- ----------
Total shareholders' equity....................................... 29,218 27,320
---------- ----------
Total liabilities and shareholders' equity....................... $ 58,604 $ 51,937
========== ==========
See accompanying notes.
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three months ended
-------------------------------
Mar. 30, Apr. 1,
1996 1995
---------- ----------
Net revenues:
Disk, flat panel, and other.......................................... $ 15,126 $ 4,674
MBE.................................................................. --- 695
---------- ----------
Total net revenues...................................................... 15,126 5,369
Cost of net revenues:
Disk, flat panel, and other.......................................... 9,203 3,244
MBE.................................................................. --- 434
---------- ----------
Total cost of net revenues.............................................. 9,203 3,678
---------- ----------
Gross profit............................................................ 5,923 1,691
Operating expenses:
Research and development............................................. 1,379 340
Selling, general and administrative.................................. 1,887 871
---------- ----------
Total operating expenses........................................... 3,266 1,211
---------- ----------
Operating income........................................................ 2,657 480
Other income, net....................................................... 261 234
---------- ----------
Income from continuing operations before income taxes................... 2,918 714
Provision for income taxes.............................................. 1,021 247
---------- ----------
Income from continuing operations....................................... 1,897 467
Income from discontinued operations..................................... --- 1,335
---------- ----------
Net income.............................................................. $ 1,897 $ 1,802
========== ==========
Per share:
Income from continuing operations.................................... $ 0.15 $ 0.05
Net income........................................................... $ 0.15 $ 0.18
Shares used in per share amounts........................................ 12,631 10,295
See accompanying notes.
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
------------------------
Mar. 30, Apr. 1,
1996 1995
-------- --------
OPERATING ACTIVITIES
Net income ............................................................. $ 1,897 $ 1,802
Adjustments to reconcile net income to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization ..................................... 335 341
Loss on disposal of equipment ..................................... --- 22
Gain on disposition of discontinued operations .................... --- (1,398)
Changes in assets and liabilities ................................. (3,506) 1,504
-------- --------
Total adjustments ...................................................... (3,171) 469
-------- --------
Net cash and cash equivalents provided by (used in)
operating activities ................................................ (1,274) 2,271
INVESTING ACTIVITIES
Purchase of short-term investments ..................................... (2,571) (1,000)
Proceeds from sale of short-term investments ........................... --- 2,998
Investment in CT corporation ........................................... (1,074) ---
Purchase of property and equipment ..................................... (1,385) (745)
-------- --------
Net cash and cash equivalents provided by (used
in) investing activities ............................................ (5,030) 1,253
FINANCING ACTIVITIES
Proceeds from issuance of common stock ................................. 1 60
Repurchase of common stock ............................................. --- (7)
Redemption of redeemable Series 1 Preferred Stock ...................... --- (1,525)
-------- --------
Net cash and cash equivalents provided by (used
in) financing activities ............................................ 1 (1,472)
-------- --------
Net increase (decrease) in cash and cash equivalents ................... (6,303) 2,052
Cash and cash equivalents at beginning of period ....................... 20,422 9,268
-------- --------
Cash and cash equivalents at end of period ............................. 14,119 11,320
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid (received) for:
Interest ............................................................ --- ---
Income taxes ........................................................ $ 1,850 ---
Income tax refund ................................................... --- ---
Other noncash changes:
Investment in CT corporation through assumption of
notes payable ....................................................... $ 1,980 ---
See accompanying notes.
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INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
Intevac, Inc. ("Intevac" or the "Company") is a supplier of static
sputtering systems used to manufacture thin-film disks for computer hard disk
drives. The Company's principal product, the MDP-250B system, enables disk
manufacturers to achieve high coercivities, high signal-to-noise ratios, minimal
disk defects, durability and uniformity, all of which are necessary in the
production of high performance, high capacity disks. The Company sells its
static sputtering systems to both captive and merchant thin film disk
manufacturers. The Company sells and markets its products directly in the United
States, and through exclusive distributors in Japan, Taiwan and Korea. The
Company supports its customers in Southeast Asia through its wholly owned
subsidiary in Singapore.
The financial information for the three-month periods ended March 30,
1996 and April 1, 1995 are unaudited, but include all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial information set forth herein, in accordance
with generally accepted accounting principles for interim financial information,
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for annual financial statements. For further
information, refer to the Consolidated Financial Statements and footnotes
thereto included or incorporated by reference in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
The results for the three-month period ended March 30, 1996 are not
considered indicative of the results to be expected for any future period or for
the entire year.
2. INVENTORIES
The components of inventory consist of the following:
March 30, December 31,
1996 1995
----------- -----------
(in thousands)
Raw Materials $ 3,499 $ 2,900
Work in Progress 8,898 10,818
Finished Goods 5,911 2,750
----------- -----------
$ 18,308 $ 16,468
=========== ===========
A significant portion of the finished goods inventory is represented by
completed units at customer sites undergoing installation and acceptance
testing.
3. INCOME TAXES
The effective tax rates used for the three-month periods ending March
30, 1996 and April 1, 1995 were 35% and 36%, respectively. This rate is based on
the estimated annual tax rate complying with Financial Accounting Standards No.
109, "Accounting for Income Taxes".
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INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock and dilutive common equivalent shares from convertible
preferred stock (using the if-converted method) and from stock options and
warrants (using the treasury stock method). Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common stock and common
equivalent shares issued by the Company at prices below the assumed initial
public offering (IPO) price during the twelve-month period preceding the date of
the initial filing of the registration statement have been included in the
calculation of common equivalent shares, using the treasury stock method based
on an assumed IPO price, as if they were outstanding for all periods presented
prior to the IPO date.
5. LINE OF CREDIT
During 1993, the Company entered into a Business Loan Agreement with a
bank, which was amended and restated in March 1996 and which provides for a
total of $10.0 million in available borrowings based on eligible receivables.
The agreement is for a revolving line of credit, which is available until March
13, 1997, when the outstanding principal will be payable. Interest on
outstanding amounts is due monthly. The line of credit bears interest, at the
option of the Company, at the prime rate, or the London Interbank Offering Rate
(LIBOR) plus two and one-half percent per annum. In the event of default,
interest on the outstanding loan increases to 5.00% over the prime rate.
As of March 30, 1996, no amounts were outstanding under the agreement.
The Company is required to maintain certain financial ratios and other financial
conditions. Substantially all of the Company's assets are pledged as collateral
on the borrowings.
6. SUBSEQUENT EVENTS
On May 3, 1996, the Company acquired San Jose Technology Corp. ("SJT")
for approximately $3.7 million cash. SJT is a supplier of systems used to
lubricate thin-film disks for computer hard disk drives. Lubrication is the
production step that typically follows disk sputtering in the manufacture of
thin-film disks.
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ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward looking statements
that are accompanied by cautionary statements that identify important factors
that could cause actual results to differ materially from those in the forward
looking statement.
OVERVIEW
Intevac is a leading supplier of static sputtering systems used to
manufacture thin film disks for computer hard disk drives. Sputtering is a
complex vacuum deposition process used to deposit multiple thin-film layers on a
disk. The Company has three primary sources of net revenues: sales of disk
sputtering systems, sales of system components and contract research and
development activities. The Company's disk sputtering systems, which generally
represent the majority of the Company's revenue, are sold to vertically
integrated disk drive manufacturers and to original equipment manufacturers that
sell disk media to disk drive manufacturers. Intevac's systems component
business consists primarily of sales of spare parts and after-sale service to
purchasers of the Company's disk sputtering systems, as well as sales of
components to other manufacturers of vacuum equipment. Contract research and
development revenues have been primarily derived from contracts with ARPA for
development projects for the flat panel industry.
Through the first quarter of 1995, the Company also received revenues
from the sales of molecular beam epitaxi ("MBE") systems. The Company acquired
the MBE business from Varian in February 1991 and sold the business to a third
party in October 1993. The Company does not expect any MBE revenues in the
future.
Income from discontinued operations represents results from the sales
of night vision products, primarily of night vision goggles and devices and the
sale of the night vision business to Litton Systems, Inc.
in May 1995.
On January 24, 1996, Intevac acquired Cathode Technology Corporation
("CTC"), a developer of advanced sputter source technology for the production of
disks used in computer hard disk drives, for $1.1 million in cash and $2.0
million in notes. Intevac intends to incorporate CTC's sputter technology into
its MDP-250 sputter system.
On May 3, 1996, Intevac acquired San Jose Technology Corp. ("SJT"), a
manufacturer of systems used to lubricate thin-film disks, for $3.7 million in
cash. The Company intends to explore means of integrating SJT's lubrication
systems with the Company's sputtering systems.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 30, 1996 AND APRIL 1, 1995
Net revenues. Disk, flat panel and other net revenues consist primarily
of sales of the Company's disk sputtering systems and, to a lesser extent,
system components and contract research and development. Net revenues from the
sales of systems are recognized upon customer acceptance. System component sales
are recognized upon product shipment, and contract research and development is
recognized in accordance with contract terms, typically as costs are incurred.
MBE net revenues consist primarily of sales of used MBE equipment not included
in the sale of the MBE business. Net revenues increased by 182% to $15.1 million
for the three months ended March 30, 1996 from $5.4 million the three months
ended April 1, 1995. The increase in net revenues was primarily due to an
increase in the sales of disk sputtering systems.
There were no net revenues from the sale of MBE systems for the three
months ended March 30, 1996 as compared to net revenues of $0.7 million for the
three months ended April 1, 1995. The Company wound down the MBE business
following the exchange of substantially all of the assets related to this
business with a third party for stock in late 1993.
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International sales increased by 770% to $6.7 million for the three
months ended March 30, 1996 from $0.8 million for the three months ended April
1, 1995. The increase in revenues from international sales was primarily due to
an increase in the sales of disk sputtering systems. International sales
constituted 45% of net revenues for the three months ended March 30, 1996 and
14% of net revenues for the three months ended April 1, 1995.
Gross margin. Cost of net revenues consist primarily of purchased
materials, fabrication, assembly, test, installation, international distributor
costs, warranty costs and, to a lesser extent, costs attributable to contract
research and development. Gross margin from disk, flat panel and other sales was
39.2% for the three months ended March 30, 1996 as compared to 30.6% for the
three months ended April 1, 1995. The improvement in gross margins was primarily
due to increased manufacturing efficiencies resulting from higher production
volume.
Research and development. Research and development expense consists
primarily of prototype materials, salaries and related costs of employees
engaged in ongoing research, design and development activities for disk
sputtering equipment, flat panel manufacturing equipment, and research by the
Advanced Technology Division. Company funded research and development expense
increased by 306% to $1.4 million for the three months ended March 30, 1996 from
$0.3 million for the three months ended April 1, 1995, representing 9.1% and
6.3%, respectively, of net revenue. The increase in research and development
expense was primarily the result of increased expense for the development of
disk sputtering products and flat panel display manufacturing machines and, to a
lesser extent, increased expense in the Advanced Technology Division.
Research and development expenses do not include costs of $0.4 million
in each of the three months ended March 30, 1996 and April 1, 1995, reimbursed
under the terms of a research and development cost sharing agreement with the
Company's Japanese flat panel manufacturing equipment ("D-Star") development
partner. On February 14, 1996, this research and development cost sharing
agreement was amended, to increase the Company's development partner's total
funding commitment from $4.3 million to $5.5 million. Under the terms of the
research and development cost sharing agreement, Intevac and its development
partner each pay half of all D-Star development costs. At March 30, 1996, $0.9
million of the $5.5 million development funding committed by the Company's
development partner remained to be spent on the D-Star development project, $0.6
million of which remains to be received from the Company's development partner.
Selling, general and administrative. Selling, general and
administrative expense consists primarily of selling, marketing, financial,
travel, management, legal and professional services. Domestic sales are made by
the Company's direct sales force whereas international sales are made by
distributors that typically provide sales, installation, warranty and ongoing
customer support. International distributor costs are included in cost of net
revenues. Selling, general and administrative expense increased by 117% to $1.9
million for the three months ended March 30, 1996 from $0.9 million for the
three months ended April 1, 1995 representing 12.5% and 16.2%, respectively, of
net revenue. The increase in selling, general and administrative expense was
primarily the result of increased expense associated with the marketing and
support of disk sputtering systems, and to a lesser extent, increased public
company costs subsequent to the Company's initial public offering in November
1995. Administrative headcount grew to 55 employees at March 30, 1996 from 34
employees at April 1, 1995.
Other income, net. Other income, net consists primarily of interest
income on the Company's short-term investments, and to a lesser extent, early
payment discounts on the purchase of inventories, goods and services. Other
income, net increased by 11% to $0.3 million for the three months ended March
30, 1996 from $0.2 million for the three months ended April 1, 1995, as the
result of increased interest income from higher cash balances, offset partially
by the Company shifting a portion of its cash and short-term investments into
tax exempt short-term investments with lower pretax yields.
Discontinued operations. In March 1995, the Company adopted a formal
plan to discontinue its night vision business. The Company sold its night vision
business to Litton Systems, Inc. in May of 1995. Accordingly, the results of
operations data for the three months ended April 1, 1995 reflect the night
vision
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business as a discontinued operation. Net revenues included in discontinued
operations for the three months ended April 1, 1995 were $4.2 million. Included
in income from discontinued operations for the three months ended April 1, 1995
is a net gain after taxes of approximately $1.3 million, net of a reserve of
approximately $2.6 million to provide for estimated closing, environmental
remediation and warranty costs from the sale of the night vision business.
Provision for income taxes. Income tax expense as a percentage of
pretax income for the three months ended March 30, 1996 and April 1, 1995, was
35% and 36%, respectively. The Company's tax rate for these periods differs from
the applicable statutory rates primarily due to tax exempt interest income and
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of $1.3 million for the
three months ended March 30, 1996. The decrease was due primarily to increased
accounts receivable and increased inventory which were partially offset by
increased customer advances and net income.
The Company's investing activities used cash of $5.0 million for the
three months ended March 30, 1996. The decrease was due primarily to the
purchase of short-term investments, the purchase of fixed assets and the
Company's purchase of Cathode Technology Corporation.
The Company's financing activities provided cash of $1,000 for the
three months ended March 30, 1996. The increase was due primarily to the
exercise of stock options by employees.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
FLUCTUATION OF RESULTS OF OPERATIONS
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company believes that its
operating results will continue to fluctuate on a quarterly and annual basis due
to a variety of factors. These factors include the cyclicality of the thin-film
disk manufacturing and disk drive industries, patterns of capital spending by
customers, the timing of significant orders, order cancellations and shipment
rescheduling, market acceptance of the Company's products, unanticipated delays
in design, engineering or production or in customer acceptance of product
shipments, changes in pricing by the Company or its competitors, the timing of
product announcements or introductions by the Company or its competitors, the
mix of systems sold, the relative proportions of sputtering systems, system
components and subassemblies, changes in product development costs, expenses
associated with acquisitions and exchange rate fluctuations. Over the last eight
quarters the Company's operating income (loss) as a percentage of net revenues
has fluctuated from approximately (32)% to 27% of net revenues. The Company
anticipates that its operating margin will continue to fluctuate. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
At times the Company has derived a significant proportion of its net
revenues from sales of its systems to manufacturers constructing new thin-film
disk fabrication facilities. The construction of new thin-film disk fabrication
facilities involves extremely large capital expenditures, resulting in few
thin-film disk fabrication facilities being constructed worldwide at any
particular time. A substantial investment is also required by disk manufacturers
to install and integrate additional thin-film disk manufacturing equipment in
connection with upgrading or expanding their existing fabrication facilities.
These costs are far in excess of the cost of purchasing the Company's system.
The magnitude of such capital expenditures has caused certain thin-film disk
manufacturers to forego purchasing significant additional thin-film disk
manufacturing equipment. Consequently, only a limited number of opportunities
for the Company to sell it systems may exist at any given time. According to a
September 15, 1995 report by TrendFOCUS, an independent market research firm,
there are 180 installed disk sputtering lines worldwide and only 13 companies in
the world with five or more installed disk sputtering lines. Therefore, winning
or losing an order from any particular customer can significantly affect the
Company's operating results. In addition, the Company's opportunities to
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sell its systems are further limited by the fact that a substantial majority of
the manufacturers of thin-film disks have adopted an in-line approach as opposed
to the Company's static approach to thin-film disk manufacturing. Many of these
manufacturers have invested significant amounts of capital in their in-line
systems, and as such there may be significant resistance to change to a static
approach in the future.
The disk drive industry is cyclical and historically has experienced
periods of oversupply, resulting in significantly reduced demand for thin-film
disks and for the capital equipment used to manufacture such disks, including
the systems manufactured and marketed by the Company. In recent years, the disk
drive industry has experienced significant growth, which, in turn, has caused
significant growth in the capital equipment industry supplying manufacturers of
thin-film disks. There can be no assurance that such growth will continue. The
Company anticipates that a significant portion of new orders will depend upon
demand from thin-film disk manufacturers building or expanding fabrication
facilities, and there can be no assurance that such demand will exist. The
Company's business, financial condition and results of operations could be
materially adversely affected by downturns or slowdowns in the disk drive
market.
Due to all of the foregoing factors, the Company expects its quarterly
operating results to fluctuate significantly and may in certain quarters be
below the expectations of public market analysts and investors. In such event it
is likely the price of the Company's Common Stock would be materially adversely
affected.
COMPETITION
The Company believes that the principal competitive factors are system
performance and features, reliability and uptime, overall cost of ownership and
customer support. The Company believes that it competes favorably with respect
to each of these factors. The Company believes it is the principal United
States-based supplier of sputtering systems for thin-film disks.
The Company experiences intense competition worldwide from three
principal competitors, Ulvac, Leybold and 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. Each of Ulvac and Leybold is a manufacturer of static and in-line
sputtering systems and Anelva is a manufacturer of static systems, and each has
substantially greater financial, technical, marketing, manufacturing and other
resources than the Company. The Company also experiences competition from other
manufacturers of in-line sputtering systems used in thin-film disk fabrication
facilities as well as the manufacturers of thin-film disks that have developed
the capability to manufacture their own sputtering systems. There can be no
assurance that the Company's competitors will not develop enhancements to, or
future generations of, competitive products that will offer superior price or
performance features or that new competitors will not enter the Company's
markets and develop such enhanced products. Furthermore, the failure of
manufacturers of thin-film disks currently using in-line machines and
manufacturers using internally developed sputtering systems to switch to static
sputtering systems in the future could adversely affect the Company's ability to
increase its sputtering system market share.
In addition, the Company's three principal competitors are based in
foreign countries and have cost structures and system prices based on foreign
currencies. Accordingly, currency fluctuations could cause the Company's
dollar-priced products to be less competitive than its competitors' products
priced in other currencies. Currency fluctuations could also increase the
Company's cost structure relative to those of its competitors, which could make
it more difficult for the Company to maintain its competitiveness. Given the
lengthy sales cycle and the significant investment required to integrate a disk
sputtering system into the manufacturing process, the Company believes that once
a thin-film disk manufacturer has selected a particular supplier's disk
sputtering equipment, the manufacturer generally relies upon that equipment for
the specific production line application and frequently will continue to
purchase its other disk sputtering equipment from the same supplier.
Accordingly, the Company expects to experience difficulty in selling to a
particular customer for a significant period of time if that customer selects a
competitor's disk sputtering equipment. Because of these competitive factors,
there can be no assurance that the Company will be able to compete successfully
in the future. Increased competitive pressure could cause the Company to lower
prices for its products, thereby adversely affecting the Company's business,
financial condition and results of operations.
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SALES CHANNEL, CUSTOMERS AND MARKETING
The selling process for the Company's products is often a multi-level
and long-term process involving individuals from marketing, engineering,
operations, customer service and senior management. The process is lengthy and
involves making sample thin-film disks for the prospective customer and
responding to individual needs for moderate levels of machine customization.
Intevac sells static sputtering systems to both captive and merchant thin-film
disk manufacturers. Captive thin-film disk manufacturers produce disks to be
used in disk drives they manufacture, and merchant thin-film disk manufacturers
produce disks to be included in disk drives manufactured by third parties. The
Company sells and markets its products directly in the United States, and
through exclusive distributors in Japan (Matsubo), Taiwan (Scientek) and Korea
(Chung Song). The Company has established a wholly-owned subsidiary in Singapore
to support its customers in Southeast Asia.
Historically, a significant portion of the Company's revenues in any
particular period have been attributable to sales to a limited number of
customers. For example, Seagate, HMT Technology, and Matsubo accounted for 40%,
20% and 17%, respectively, of the Company's total net revenues in 1995, and
Trace Storage Technology, Matsubo, Seagate, Varian Associates and Komag
accounted for 25%, 15%, 13%, 12% and 10%, respectively, of the Company's total
net revenues during 1994. Western Digital, Matsubo and Trace Storage Technology
accounted for 21%, 14% and 11%, respectively, of the Company's total net
revenues during 1993. Historically, a significant portion of the Company's
revenues in any particular period have been attributable to sales to a limited
number of customers. The Company's largest customers change from period to
period as large thin-film disk fabrication facilities are completed and new
projects are initiated. The Company expects that sales of its products to
relatively few customers will continue to account for a high percentage of its
net revenues in the foreseeable future. For example, a majority of the Company's
current backlog represents orders from Seagate for a new facility Seagate is
constructing in Singapore. In the event Seagate experiences a delay in the
construction of the new facility or defers the completion of its construction,
the Company's net revenues and operating results could be materially adversely
affected. In addition, Seagate recently acquired Conner Peripherals, Inc. Conner
has significant disk media manufacturing operations, uses an internally
developed in-line disk sputtering system, and has never purchased a system from
the Company. There can be no assurance that the combined entity will not favor
Conner's internally developed disk sputtering system over the Company's system,
or delay, reduce or cease purchases of the Company's products for other reasons,
or that this acquisition will not otherwise have a material adverse effect on
the Company's business, financial condition and results of operations. None of
the Company's customers has entered into a long-term agreement requiring it to
purchase the Company's products. As purchases related to a particular new or
expanded fabrication facility are completed, sales to that customer may decrease
sharply or cease altogether. If completed contracts are not replaced on a timely
basis by new orders from the same or other customers, the Company's net revenues
could be adversely affected. The loss of a significant customer, any reduction
in orders from any significant customer or the cancellation of a significant
order from a customer, including reductions or cancellations due to customer
departures from recent buying patterns, financial difficulties of a customer or
market, economic or competitive conditions in the disk drive industry, could
materially adversely affect the Company's business, financial condition and
results of operations.
Foreign sales accounted for 20% of revenue in 1995, 40% in 1994, and
32% in 1993. The Company anticipates that foreign sales will continue to be a
significant portion of its revenues in the foreseeable future. In addition, the
Company has orders from Seagate, a domestic customer, to deliver and install a
significant number of machines in Seagate's newly constructed manufacturing
facility in Singapore. In order to effectively service customers located in
Singapore and the surrounding region, the Company has established a sales and
service operation in Singapore. 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,
12.
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restrictions on the export or import of technology, potentially limited
intellectual property protection, difficulties in staffing and managing
international operations and potentially adverse tax consequences. There can be
no assurance that any of these factors will not have a material adverse effect
on the Company's business, financial condition or results of operations. In
particular, although the Company's international sales have been denominated in
United States dollars, such sales and expenses may not be denominated in dollars
in the future, and currency exchange fluctuations in countries where the Company
does business could materially adversely affect the Company's business,
financial condition and results of operations.
Installing and integrating new sputtering systems into the thin-film
disk manufacturing process requires a substantial investment by a customer.
Sales of the Company's systems depend, in significant part, upon the decision of
a prospective customer to replace obsolete equipment or to increase
manufacturing capacity by upgrading or expanding existing manufacturing
facilities or constructing new manufacturing facilities, all of which typically
involve a significant capital commitment. Therefore, customers often require a
significant number of product presentations and demonstrations, as well as
substantial interaction with the Company's senior management, before making a
purchasing decision. Accordingly, the Company's systems typically have a lengthy
sales cycle during which the Company may expend substantial funds and management
time and effort with no assurance that a sale will result. Furthermore, the
Company's expense levels are based, in part, on its expectations as to future
net revenues. If revenue levels are below expectations, operating results are
likely to be adversely affected. Net income, if any, may be disproportionately
affected by a reduction in net revenues because a proportionately smaller amount
of the Company's expenses varies with its net revenues. The impact of these and
other factors on the Company's sales and operating results in any future period
cannot be forecasted with certainty.
RESEARCH AND DEVELOPMENT
The disk drive industry in general, and the thin film disk
manufacturing industry in particular, are characterized by rapid technological
change and evolving industry standards. The Company has invested substantial
amounts in research and development for its disk sputtering systems and flat
panel display manufacturing equipment. The Company's research and development
expenses in 1995, 1994 and 1993 were $2.6 million, $3.5 million and $3.1
million, respectively, and represented 6.1%, 17.2% and 14.0%, respectively, of
net revenues. The Company's ability to remain competitive has required and will
continue to require substantial investments in research and development to
advance its technologies. The failure to develop, manufacture and market new
systems, or to enhance existing systems, would have a material adverse effect on
the Company's business, financial condition and results of operations. In the
past, the Company has experienced delays from time to time in the introduction
of, and certain technical difficulties with, certain of its systems and
enhancements. In addition, the Company's competitors can be expected to continue
to develop and introduce new and enhanced products, any of which could cause a
decline in market demand for the Company's systems or a reduction in the
Company's margins as a result of intensified price competition.
Changes in the manufacturing processes for thin-film disks could also
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company anticipates continued changes in the
requirements of the disk drive industry and thin-film disk manufacturing
technologies. There can be no assurance that the Company will be able to
develop, manufacture and sell systems that respond adequately to such changes.
In addition, the data storage industry is subject to constantly evolving
technological standards. There can be no assurance that future technological
innovations will not reduce demand for thin-film disks. The Company's business,
financial condition and results of operations could be materially adversely
affected by any trend toward technology that would replace thin-film disks as a
storage medium.
The Company's success in developing and selling new and enhanced
systems depends upon a variety of factors, including accurate prediction of
future customer requirements, technology advances, cost of
13.
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ownership, introduction of new products on schedule, cost-effective
manufacturing and product performance in the field. The Company's new product
decisions and development commitments must anticipate the requirements for the
continuously evolving disk drive industry approximately two or more years in
advance of sales. Any failure to accurately predict customer requirements and to
develop new generations of products to meet those requirements would have a
sustained material adverse effect on the Company's business, financial condition
and results of operations. New product transitions could adversely affect sales
of existing systems, and product introductions could contribute to quarterly
fluctuations in operating results as orders for new products commence and orders
for existing products decline. There can be no assurance that the Company will
be successful in selecting, developing, manufacturing and marketing new products
or enhancements of existing products.
MANUFACTURING
In certain instances, the Company is dependent upon a sole supplier or
a limited number of suppliers, or has qualified only a single or limited number
of suppliers, for certain complex components or sub-assemblies utilized in its
products. In addition, the Company makes extensive use of suppliers serving the
semiconductor equipment business and such suppliers may choose to give priority
to their semiconductor equipment customers that are much larger than the
Company. Any prolonged inability to obtain adequate deliveries could require the
Company to pay more for inventory, parts and other supplies, seek alternative
sources of supply, delay its ability to ship its products and damage
relationships with current and prospective customers. Any such delay or damage
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's backlog was $45.6 million and $25.2 million at March 30,
1996 and April 1, 1995, respectively. The Company includes in its backlog only
those customer orders for systems, component parts and contract research and
development for which it has accepted signed purchase orders with assigned
delivery dates. In the case of a cancellation of a system order, the Company's
system sales contracts generally provide for a non-refundable deposit, depending
upon when the order is cancelled, typically 30%. The equipment requirements for
thin-film disk manufacturers cannot be determined with accuracy, and therefore
the Company's backlog at any certain date may not be indicative of future demand
for the Company's manufacturing systems.
Due to recent increases in backlog, the average time between order and
shipment of the Company's systems may increase substantially in the future. The
Company's ability to quickly increase its manufacturing capacity in response to
short-term increases in demand could be limited given the complexity of the
manufacturing process, the lengthy lead times necessary to obtain critical
components and the need for highly skilled personnel. The failure of the Company
to satisfy any such short-term increases in demand and to keep pace with
customer demand would lead to further extensions of delivery times, which could
deter customers from placing additional orders, and could adversely affect
product quality. There can be no assurance that the Company will be successful
in increasing its manufacturing capacity.
Orders in backlog are subject to cancellation, and although the Company
generally requires a deposit on orders for its systems, such deposits may not be
sufficient to cover the expenses incurred by the Company for the manufacture of
the cancelled systems or fixed operating expenses associated with such systems
to the date of cancellation. The Company may from time to time manufacture a
system in anticipation of an order that may not be placed during the period or
at all. In any given quarter in which such system is manufactured, the Company
will not receive funds to cover the manufacturing costs. Orders may be subject
to delay, deferral or rescheduling by a customer. From the date the Company
receives an order, it often takes more than six months before the net revenues
from such order are recognized and even longer before final payment is received.
The relatively long manufacturing cycles of many of the Company's products has
caused and could cause shipments of such products to be delayed from one quarter
to the next,
14.
15
which could materially adversely affect the Company's business, financial
condition and results of operations for a particular quarter. Announcements by
the Company or its competitors of new products and technologies could cause
customers to defer purchases of the Company's existing systems, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company's systems have a large number of components and are highly
complex. The Company may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. In addition, some of the systems built by the Company must be
customized to meet individual customer site or operating requirements. The
Company has limited manufacturing capacity and may be unable to complete the
development or meet the technical specifications of its new systems or
enhancements or to manufacture and ship these systems or enhancements in a
timely manner. Such an occurrence would materially adversely affect the
Company's business, financial condition and results of operations as well as its
relationships with customers. In addition, the Company may incur substantial
unanticipated costs early in a product's life cycle, such as increased cost of
materials due to expediting charges, other purchasing inefficiencies and greater
than expected installation and support costs which cannot be passed on to the
customer. Any of such events could materially adversely affect the Company's
business, financial condition and results of operations.
FPD MANUFACTURING EQUIPMENT
The Company has limited experience in the development, manufacture,
sale and marketing of flat panel display manufacturing equipment, having sold
one RTP system to date and having not yet completed development of its flat
panel display sputtering system. There can be no assurance that the market for
flat panel display manufacturing equipment targeted by the Company will develop
as quickly or to the degree the Company currently anticipates, or that the
Company's proposed flat panel display manufacturing equipment will achieve
customer acceptance or that the Company will achieve any net revenues from the
sale of its proposed flat panel display manufacturing equipment. There can be no
assurance the Company will receive additional customer sponsored research and
development funding in the future. The failure to receive additional customer
sponsored research and development funds could result in the Company internally
funding the development of such flat panel display manufacturing equipment, and
the costs of such research and development may have a material adverse effect on
the Company's results of operations. There can be no assurance that the Company
in any event will continue to fund research and development in the flat panel
display area.
MANAGEMENT OF EXPANDING OPERATIONS
The Company has recently experienced a period of rapid expansion in its
operations that has placed, and could continue to place, a significant strain on
the Company's management and other resources. The Company's ability to manage
its expanding operations effectively will require it to continue to improve its
operational, financial, and management information systems, and to train,
motivate and manage its employees. If the Company's management is unable to
manage its expanding operations effectively, the Company's results of operations
could be adversely affected.
PATENTS, INTELLECTUAL PROPERTY AND LICENSING
There can be no assurance that any of the Company's patent applications
will be allowed or that any of the allowed applications will be issued as
patents. There can be no assurance that any patent owned by the Company will not
be invalidated, deemed unenforceable, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to the Company or
that any of the Company's pending or future patent applications will be issued
with claims of the scope sought by the Company, if at all. Furthermore, there
can be no assurance that others will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company. In
addition, there can be no assurance that foreign patent rights, intellectual
property laws or the Company's agreements will protect the
15.
16
Company's intellectual property rights. Failure to protect the Company's
intellectual property rights could have a material adverse effect upon the
Company's business, financial condition and results of operations.
There have also been substantial amounts of litigation in the
technology industry regarding intellectual property rights. The Company has from
time to time received claims that it is infringing third parties' intellectual
property rights. In August 1993, Rockwell International Corporation ("Rockwell")
sued the Federal government alleging infringement of certain patent rights with
respect to the contracts the Federal government has had with a number of
companies, including Intevac. The Federal government has notified Intevac that
it may be liable to the Federal government in connection with contracts for
certain products from the Company's discontinued night vision business. Although
the Company believes it will have no material liability to the Federal
government under these contracts, there can be no assurance that the resolution
of the claims by Rockwell with the Federal government will not have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future patents,
trademarks, or other proprietary rights relating to the Company's disk
sputtering systems, flat panel manufacturing equipment or other products. Any
present or future claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. Any of the foregoing could have a material adverse effect
upon the Company's business, operating results and financial condition.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations
relating to the use, storage, discharge, handling, emission, generation,
manufacture, treatment and disposal of toxic or other hazardous substances,
chemicals, materials or waste. Any failure to comply with current or future
regulations could result in substantial civil penalties or criminal fines being
imposed on the Company or its officers, directors or employees, suspension of
production, alteration of its manufacturing process or cessation of operations.
Such regulations could require the Company to acquire expensive remediation or
abatement equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to properly manage the
use, disposal or storage of, or adequately restrict the release of, hazardous or
toxic substances could subject the Company to significant liabilities.
POTENTIAL ACQUISITIONS
The Company's business strategy includes expanding its product lines
and markets through internal product development and acquisitions of technology
or companies, such as the acquisition of Cathode Technology Corporation in
January 1996, a developer of advanced sputter source technology for the
production of disks used in computer hard disk drives, and the acquisition of
San Jose Technology Corp. in May 1996, a manufacturer of systems used to
lubricate thin-film disks. Any future acquisition may result in potentially
dilutive issuance of equity securities, the incurrence of debt and contingent
liabilities and amortization expense related to intangible assets acquired, any
of which could materially adversely affect the Company's business, financial
condition and results of operations. In particular, the Company will not be able
to use the "pooling of interests" method of accounting in connection with any
acquisition consummated within at least two years following the Company's
initial public offering, which was completed in November, 1995 and the Company
will therefore be required to amortize any intangible assets acquired in
connection with any acquisition consummated during that period. In addition,
acquired businesses may be experiencing operating losses. Any acquisition will
involve numerous risks, including difficulties in the assimilation of the
acquired company's employees, operations and products, uncertainties associated
with operating in new markets and working with new customers, and the potential
loss of the acquired company's key employees.
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POSSIBLE VOLATILITY OF STOCK PRICE
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, failure to meet securities analysts' expectations, general conditions
in the disk drive and thin-film media manufacturing industries and the worldwide
economy, announcements of technological innovations, new systems or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in the Company's relationships with customers and suppliers could cause
the price of the Company's Common Stock to fluctuate substantially. In addition,
in recent years the stock market in general, and the market for small
capitalization and high technology stocks in particular, has experienced extreme
price fluctuations which have often been unrelated to the operating performance
of affected companies. Such fluctuations could adversely affect the market price
of the Company's Common Stock.
CONCENTRATION OF STOCK OWNERSHIP
As of March 30, 1996, the present directors and their affiliates and
executive officers, in the aggregate, own beneficially approximately 78% of the
Company's outstanding shares of Common Stock. As a result, these shareholders,
acting together, are able to effectively control all matters requiring approval
by the shareholders of the Company, including the election of a majority of the
directors and approval of significant corporate transactions.
17.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10.12 Amended and Restated Loan Agreement,
dated March 14, 1996
Exhibit 11.1 Computation of Net Income Per Share
Exhibit 27 Financial Data Schedule
(b) On January 24, 1996, the registrant filed a report on Form 8-K,
regarding the acquisition of Cathode Technology Corporation.
18.
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SIGNATURES
Pursuant to the requirements of the Securities and 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: May 10, 1996 By: /s/ CHARLES B. EDDY III
-------------------------------------------
Charles B. Eddy III
Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
19.
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EXHIBIT INDEX
EXHIBIT
NUMBER
- - ------
10.12 Amended and Restated Loan Agreement, dated March 14, 1996
11.1 Computation of Net Income Per Share
27 Financial Data Schedule
20.