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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 28, 1996
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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.
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(Exact name of registrant as specified in its charter)
California 94-3125814
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3550 Bassett Street, Santa Clara, California 95054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 986-9888
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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 September 28, 1996, approximately 12,345,125 shares of the
Registrant's Common Stock, no par value, were outstanding.
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INTEVAC, INC.
NO. INDEX PAGE
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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....................................................................... 19
Item 2. Changes in Securities................................................................... 19
Item 3. Defaults Upon Senior Securities......................................................... 19
Item 4. Submission of Matters to a Vote of Security-Holders..................................... 19
Item 5. Other Information....................................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................................ 19
SIGNATURES
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PART I--FINANCIAL INFORMATION
ITEM I--FINANCIAL STATEMENTS
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Sep. 28, Dec. 31,
1996 1995
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(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .............................................. $ 1,253 $20,422
Accounts receivable, net of allowances of $813 and $461 at September 28,
1996 and December 31, 1995, respectively .......................... 7,957 4,439
Inventories ............................................................ 32,041 16,468
Short-term note receivable ............................................. -- 177
Prepaid expenses and other current assets .............................. 369 503
Deferred tax asset ..................................................... 4,311 3,158
Net current assets of discontinued operations .......................... 17 777
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Total current assets ........................................................ 45,948 45,944
Property, plant and equipment, net .......................................... 5,764 3,479
Investments ................................................................. 2,431 2,431
Goodwill and other intangibles .............................................. 7,842 --
Deferred tax and other assets ............................................... 83 83
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Total assets ................................................................ $62,068 $51,937
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LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Notes payable .......................................................... $ 4,751 $ --
Accounts payable ....................................................... 4,372 2,681
Accrued payroll and related liabilities ................................ 1,307 1,075
Other accrued liabilities .............................................. 4,277 4,668
Customer advances ...................................................... 15,892 14,436
Net liabilities of discontinued operations ............................. 753 1,757
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Total current liabilities ................................................... 31,352 24,617
Long-term notes payable ..................................................... 730 --
Deferred tax liability ...................................................... 835 --
Shareholders' equity:
Common stock ........................................................... 15,664 15,304
Retained earnings ...................................................... 13,487 12,016
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Total shareholders' equity .................................................. 29,151 27,320
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Total liabilities and shareholders' equity .................................. $62,068 $51,937
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See accompanying notes.
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
Sep. 28, Sep. 30, Sep. 28, Sep. 30,
1996 1995 1996 1995
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Net revenues:
Disk, flat panel, and other ................ $24,603 $12,071 $59,964 $27,850
MBE ........................................ -- -- -- 695
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Total net revenues .............................. 24,603 12,071 59,964 28,545
Cost of net revenues:
Disk, flat panel, and other ................ 16,043 7,702 37,474 18,062
MBE ........................................ -- -- -- 434
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Total cost of net revenues ...................... 16,043 7,702 37,474 18,496
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Gross profit .................................... 8,560 4,369 22,490 10,049
Operating expenses:
Research and development ................... 2,406 746 5,790 1,666
Selling, general and administrative ........ 2,235 1,106 6,081 3,107
Acquired in-process research and development -- -- 5,835 --
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Total operating expenses ............... 4,641 1,852 17,706 4,773
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Operating income ................................ 3,919 2,517 4,784 5,276
Other income, net ............................... 523 186 977 694
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Income from continuing operations
before income taxes ....................... 4,442 2,703 5,761 5,970
Provision for income taxes ...................... 1,643 973 4,290 2,136
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Income from continuing operations ............... 2,799 1,730 1,471 3,834
Income from discontinued operations ............. -- -- -- 1,335
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Net income ...................................... $ 2,799 $ 1,730 $ 1,471 $ 5,169
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Per share:
Income from continuing operations .......... $ 0.22 $ 0.16 $ 0.11 $ 0.36
Net income ................................. $ 0.22 $ 0.16 $ 0.11 $ 0.49
Shares used in per share amounts ................ 12,956 10,760 12,858 10,528
See accompanying notes.
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
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Sep. 28, Sep. 30,
1996 1995
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OPERATING ACTIVITIES
Net income ............................................................. $ 1,471 $ 5,169
Adjustments to reconcile net income to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization ..................................... 1,886 676
Acquired in-process research and development ...................... 5,835 --
Loss on disposal of equipment ..................................... 5 90
Gain on disposition of discontinued operations .................... -- (1,398)
Changes in assets and liabilities ................................. (17,903) 39
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Total adjustments ...................................................... (10,177) (593)
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Net cash and cash equivalents provided by operating activities ......... (8,706) 4,576
INVESTING ACTIVITIES
Purchase of short-term investments ..................................... (2,571) (3,001)
Proceeds from sale of short-term investments ........................... 2,571 7,080
Proceeds from sale of discontinued operation ........................... -- 7,546
Proceeds from sale of Chorus Investment ................................ 177 500
Investment in Cathode Technology Corporation ........................... (1,074) --
Investment in San Jose Technology Corporation .......................... (2,270) --
Investment in Lotus Technologies, Inc. ................................. (8,135) --
Purchase of property and equipment ..................................... (3,022) (2,218)
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Net cash and cash equivalents provided by (used in) investing activities (14,324) 9,907
FINANCING ACTIVITIES
Net borrowings under line of credit agreement .......................... 3,501 --
Proceeds from issuance of common stock ................................. 360 171
Repurchase of common stock ............................................. -- (4)
Dividends on common stock .............................................. -- (4,922)
Dividends on redeemable Series 1 Preferred Stock ....................... -- (25)
Exchange of Series A Preferred Stock for common stock .................. -- (9,895)
Redemption of redeemable Series 1 Preferred Stock ...................... -- (6,100)
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Net cash and cash equivalents provided by (used in) financing activities 3,861 (20,775)
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Net increase (decrease) in cash and cash equivalents ................... (19,169) (6,292)
Cash and cash equivalents at beginning of period ....................... 20,422 9,268
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Cash and cash equivalents at end of period ............................. $ 1,253 $ 2,976
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SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid (received) for:
Interest .......................................................... $ 53 $ --
Income taxes ...................................................... 7,500 2,272
Income tax refund ................................................. (250) --
Other non-cash changes:
Investment in Cathode Technology 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 leading supplier of
static sputtering systems and related manufacturing equipment used to
manufacture thin-film disks for computer hard disk drives. The Company's
principal product, the MDP-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 at September 28, 1996 and for the three- and
nine-month periods ended September 28, 1996 and September 30, 1995 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 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- and nine-month periods ended September 28,
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:
Sep. 28, Dec. 31,
1996 1995
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(in thousands)
Raw Materials $ 9,218 $ 2,900
Work in Progress 19,243 10,818
Finished Goods 3,580 2,750
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$32,041 $16,468
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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 nine-month periods ending
September 28, 1996 and September 30, 1995 were 37.0% (after excluding the $5.8
million of non-tax deductible acquisition related in-process research and
development expense) and 35.8% of pretax income, 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 stock options
(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.
6. PUBLIC OFFERING
During the second quarter of 1996, the Company filed a registration
statement for a public offering of the Company's common stock. On August 13,
1996 the registration statement was withdrawn. During the third quarter of 1996,
the Company wrote off $282,000 of expenses related to the offering.
7. LINE OF CREDIT
In September 1996, the Company entered into a Loan and Security
Agreement with two banks which provides for a total of $20.0 million in
available borrowings based on eligible receivables and inventory. This agreement
replaces the Company's prior line of credit. The agreement is for a revolving
line of credit, which is available until May 1, 1997, when the outstanding
principal will be payable. 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 for receivable advances and at the prime
rate plus one percent, or the LIBOR plus three and one-half percent per annum
for inventory advances. Interest on outstanding Prime Rate Advances is due
monthly and interest on LIBOR Advances is due at the end of the Interest Period
as elected by the borrower. The Interest Period can be one, three or six months.
In the event of default, interest on the outstanding loan increases to 5.00%
above the interest rate applicable immediately prior to the default. At
September 28, 1996, $3.5 million of borrowings was outstanding under the
agreement.
8. ACQUISITIONS
On May 3, 1996, the Company completed the acquisition of the
outstanding stock of San Jose Technology Corp. ("SJT"), a supplier of thin-film
disk lubrication systems. The total purchase price was $3,715,000. On June 6,
1996, the Company completed the acquisition of the outstanding stock of Lotus
Technologies, Inc. ("LTI"), a supplier of contact stop/start equipment for
computer hard disk drives and components. The total purchase price was
$8,335,000. The following unaudited pro-forma information assumes the
acquisitions occured at the beginning of the nine months presented:
Nine Months Ended
Sep. 28, Sep. 30,
1996 1995
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Net sales ...................................... $ 63,670 $ 31,773
Net income from continuing operations .......... 7,104 3,100
Net income from discontinued operations ........ -- 1,335
Per share:
Income from continuing operations ......... $ 0.55 $ 0.29
Net income ................................ $ 0.55 $ 0.42
The proforma information excludes the $5.8 million write-off of acquired in
process research and development.
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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 as a result of certain of the risk factors set forth elsewhere
in this Quarterly Report on Form 10-Q and other documents the Company files from
time to time with the Securities and Exchange Commission, specifically the
Company's Annual Report on Form 10-K filed in March 1996, Form 10-Q's and Form
8-K's.
OVERVIEW
Intevac is a leading supplier of static sputtering systems and related
manufacturing equipment 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 and related disk manufacturing
equipment; sales of system components; and contract research and development
activities. Disk sputtering systems and related disk manufacturing equipment
generally represent the majority of the Company's revenue, and 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 display ("FPD") industry.
Revenues from the sale of FPD products have not been material.
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. MBE revenues in the first quarter of 1995 were derived
from the sales of used MBE equipment that had not been sold with the business.
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.
In the first quarter of 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.
On May 3, 1996, Intevac acquired San Jose Technology Corp. ("SJT"), a
supplier of thin-film disk lubrication systems, for $3.7 million in cash.
On June 6, 1996, Intevac acquired Lotus Technologies, Inc. ("LTI"), a
supplier of contact stop/start test equipment for computer hard disk drives and
components, for $8.3 million.
The Company's backlog was $66.1 million and $55.3 million at September
28, 1996 and September 30, 1995, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
Net revenues. Disk, flat panel and other net revenues consist primarily
of sales of the Company's disk sputtering systems and related equipment used to
manufacture thin-film disks for computer hard disk drives, and to a lesser
extent, system components and contract research and development. Net revenues
from the sales of sputtering systems are recognized upon customer acceptance.
Sales of related equipment and system components
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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 system sales. Net revenues increased by
104% to $24.6 million for the three months ended September 28, 1996 from $12.1
million the three months ended September 30, 1995. The increase in net revenues
was primarily due to an increase in the sales of disk sputtering systems and to
a lesser extent, sales of products acquired in the acquisitions of SJT and LTI
and increased sales of system components.
International revenues increased by 97% to $7.4 million for the three
months ended September 28, 1996 from $3.8 million for the three months ended
September 30, 1995. The increase in revenues from international sales was
primarily due to an increase in sales of disk sputtering systems. International
sales constituted 30% of net revenues for the three months ended September 28,
1996 and 32% of net revenues for the three months ended September 30, 1995.
Gross margin. Cost of net revenues consists primarily of purchased
materials, fabrication, assembly, test, installation, international distributor
costs, warranty costs, scrap and costs attributable to contract research and
development. Gross margin from disk, flat panel and other sales was 34.8% for
the three months ended September 28, 1996 as compared to 36.2% for the three
months ended September 30, 1995. The reduction in gross margins was primarily
due the sale of two used systems at discounted prices and the write-down of
inventory related to the Company's 5 1/4" product, the MDP-250C disk sputtering
system. The MDP-250C inventory was written down as a result of the uncertain
market for 5 1/4" disk drives which caused the Company to put production of this
product on hold.
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
Company's Advanced Technology Division. Company funded research and development
expense increased to $2.4 million for the three months ended September 28, 1996
from $0.7 million for the three months ended September 30, 1995, representing
9.8% and 6.2%, respectively, of net revenue. The increase was primarily the
result of increased development expense in disk manufacturing products and, to a
lesser extent, increased development expense in laser texturing products.
Research and development expense does not include costs of $0.6 million
and $0.2 million in the three months ended September 28, 1996 and September 30,
1995, respectively, reimbursed to the Company under the terms of a research and
development cost sharing agreement with the Company's Japanese flat panel
manufacturing equipment ("D-Star") development partner. In addition, research
and development expense does not include expenditures in connection with
contract research and development activities since these are charged to cost of
sales.
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 102% to $2.2
million for the three months ended September 28, 1996 from $1.1 million for the
three months ended September 30, 1995 representing 9.1% and 9.2%, 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, the result of the
write-off of $282,000 of offering expenses related to the withdrawal of the
Company's secondary stock offering on August 19, 1996 and increased public
company costs subsequent to the Company's initial public offering in November
1995. Selling, general and administrative headcount grew to 71 employees at
September 28, 1996 from 41 employees at September 30, 1995.
Other income, net. Other income primarily consists of income related to
the sale of the Company's 20% interest in the capital stock of Chorus, interest
income on the Company's short term investments net of any interest expense, and
early payment discounts on the purchase of inventories, goods and services.
Other income increased by 181% to $0.5 million for the three months ended
September 28, 1996 from $0.2 million for the three months ended September 30,
1995. The increase in other income was primarily the result of income related to
the sale of the Company's 20% interest in the capital stock of Chorus, a
manufacturer of molecular beam epitaxi products.
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Provision for income taxes. Income tax expense as a percentage of
pretax income for the three months ended September 28, 1996 and September 30,
1995, was 37% and 36%, respectively. The increase in the tax rate was the result
of non-tax deductible goodwill amortization related to the acquisitions of SJT
and LTI. The Company's tax rate for these periods differs from the applicable
statutory rates primarily due to the benefit received from the Company's Foreign
Sales Corporation and state income taxes.
NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
Net revenues. Net revenues increased by 110% to $60.0 million for the
nine months ended September 28, 1996 from $28.5 million for the nine months
ended September 30, 1995. The increase in net revenues was primarily due to an
increase in the sales of disk sputtering systems and to a lesser extent as the
result of the sale of new products acquired in the acquisitions of SJT and LTI.
There were no net revenues from the sale of MBE systems for the nine
months ended September 28, 1996 as compared to net revenues of $0.7 million for
the nine months ended September 30, 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. MBE revenues in the
first quarter of 1995 were derived from the sales of used MBE equipment that had
not been sold with the business.
International revenues increased by 172% to $21.3 million for the nine
months ended September 28, 1996 from $7.8 million for the nine months ended
September 30, 1995. The increase in revenues from international sales was
primarily due to an increase in the sales of disk sputtering systems.
International revenues constituted 35% of net revenues for the nine months ended
September 28, 1996 and 27% of net revenues for the nine months ended September
30, 1995.
Gross margin. Gross margin from disk, flat panel and other sales was
37.5% for the nine months ended September 28, 1996 as compared to 35.2% for the
nine months ended September 30, 1995. The improvement in gross margins was
primarily due to increased manufacturing efficiencies resulting from higher
production volume. The Company believes that gross margins experienced in the
first nine months of 1996 were higher than should generally be expected and are
not indicative of margins in future periods.
Research and development. Company funded research and development
expense increased to $5.8 million for the nine months ended September 28, 1996
from $1.7 million for the nine months ended September 30, 1995, representing
9.7% and 5.8%, respectively, of net revenue. The increase was primarily the
result of increased development expense in disk manufacturing products and, to a
lesser extent, increased development expense in flat panel display manufacturing
products and laser texturing products.
Research and development expense does not include costs of $1.3 million
and $0.7 million in the nine months ended September 28, 1996 and September 30,
1995, respectively, reimbursed to the Company under the terms of a research and
development cost sharing agreement with the Company's Japanese D-Star
development partner. On February 14, 1996, this research and development cost
sharing agreement was amended to increase the 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 September 28, 1996,
all of the $5.5 million development funding committed by the Company's
development partner had been spent on the D-Star development project. There can
be no assurance that the Company's development partner will provide any further
funding. In addition, research and development expenses do not include
expenditures in connection with contract research and development activities
since these are charged to cost of sales.
Selling, general and administrative. Selling, general and
administrative expense increased by 96% to $6.1 million for the nine months
ended September 28, 1996 from $3.1 million for the nine months ended September
30, 1995 representing 10.1% and 10.9%, 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. To a lesser extent, selling general and administrative
costs rose as a result of the acquisition of SJT on May 3, 1996 and LTI on June
6, 1996 and increased public company costs subsequent to the Company's initial
public offering in November 1995. Selling, general and administrative headcount
grew to 71 employees at September 28, 1996 from 41 employees at September 30,
1995.
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Acquired In-Process Research and development. The increase of $5.8
million was the result of a write-off of acquired in-process research and
development related to the acquisitions of SJT and LTI.
Other income, net. Other income primarily consists of income related to
the sale of the Company's 20% interest in the capital stock of Chorus, interest
income on the Company's short term investments net of any interest expense, and
early payment discounts on the purchase of inventories, goods and services.
Other income increased by 41% to $0.9 million for the nine months ended
September 28, 1996 from $0.6 million for the nine months ended September 30,
1995, primarily as the result income related to the sale of the Company's 20%
interest in the capital stock of Chorus .
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 nine months ended September 30, 1995 reflect the night
vision business as a discontinued operation. Net revenues included in
discontinued operations for the nine months ended September 30, 1995 were $4.2
million. Included in income from discontinued operations for the nine months
ended September 30, 1995 is a net gain after taxes of approximately $1.4
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. As of September 28, 1996, the Company had completed closure of
the night vision business' Palo Alto facility and $0.8 million remained in the
Company's closure reserve to provide for any additional expenses which may be
incurred.
Provision for income taxes. Income tax expense as a percentage of
pretax income for the nine months ended September 28, 1996 and September 30,
1995, was 37% (after excluding the $5.8 million of non-tax deductible
acquisition related in-process research and development expense) and 36%,
respectively. The increase in the tax rate was the result of non-tax deductible
goodwill amortization related to the acquisitions of SJT and LTI. The Company's
tax rate for these periods differs from the applicable statutory rates primarily
due to the benefit received from the Company's Foreign Sales Corporation and
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of $8.7 million for the
nine months ended September 28, 1996. The cash used in operations was driven
primarily by increases in inventory and receivables of $14.6 million and $2.7
million, respectively. This was partially offset by a $5.8 million non-cash
acquisition related write-off of acquired in-process research and development,
$1.9 million of depreciation and amortization and $1.5 million of net income.
The Company's investing activities used cash of $14.3 million for the
nine months ended September 28, 1996 due to $11.5 million for the acquisitions
of LTI, SJT and CTC and the purchase of $3.0 million of fixed assets. This was
partially offset by proceeds of $0.2 million from the sale of the Chorus capital
stock.
The Company's financing activities provided cash of $3.9 million for
the nine months ended September 28, 1996, due to $3.5 million of net borrowings
under the Company's line of credit and $0.4 million received from sales of stock
under the Company's employee stock purchase and stock option programs.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
FLUCTUATIONS OF RESULTS OF OPERATIONS
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company derives most of its
net revenues from the sale of a small number of sputtering systems. The number
of systems accepted by customers in any particular quarter has varied from zero
to seven and, as a result, the Company's net revenues and operating results for
a particular period could be materially adversely affected if an anticipated
order for even one system is not received in time to permit shipment and
customer acceptance during that accounting period. The Company's backlog at the
beginning of a quarter may not include all system orders needed to
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achieve the Company's revenue objectives for that quarter. 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 canceled systems or
fixed operating expenses associated with such systems to the date of
cancellation. From time to time, in order to meet anticipated customer demand,
the Company has manufactured disk sputtering systems in advance of the receipt
of orders for such systems. The Company expects to continue this practice in the
future. In the event that anticipated orders are not received as expected, then
the Company could be materially adversely affected as the result of higher
inventory levels and increased exposure to surplus and obsolete inventory
write-offs. 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 have caused and could cause shipments
of such products to be delayed from one quarter to the next, 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.
Installing and integrating new sputtering systems into the thin-film
disk manufacturing process requires a substantial investment by a customer.
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
revenues and operating results in any future period cannot be forecasted with
certainty. 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.
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 reschedulings, 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, discounts
offered by the Company to sell demonstration units, the mix of systems sold, the
relative proportions of sputtering systems, system components and subassemblies,
and contract research and development net revenues, the availability and cost of
components and subassemblies, changes in product development costs, expenses
associated with any acquisitions and exchange rate fluctuations. Over the last
ten quarters the Company's gross margin and operating income (loss) as a
percentage of net revenues has fluctuated from approximately 27% to 41% of net
revenues and (32)% to 27% of net revenues, respectively. The Company anticipates
that its gross and operating margins 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.
CYCLICALITY OF THE MEDIA MANUFACTURING INDUSTRY
The Company's business depends upon capital expenditures by
manufacturers of thin-film disks, including manufacturers that are opening new
fabrication facilities, expanding or upgrading existing facilities or replacing
obsolete equipment, which in turn depend upon the current and anticipated market
demand for hard disk drives. The disk drive industry is cyclical and
historically has experienced periods of oversupply. Within the past year, many
media manufacturers have undertaken programs to increase capacity. In addition,
Hyundai has announced plans to commence media manufacturing. This industry-wide
increase in capacity may lead to a period of oversupply of thin-film disks,
resulting in significantly reduced demand for thin-film disk production and for
the capital equipment used in such production, including the systems
manufactured and marketed by the Company. In recent years, particularly in very
recent periods, 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
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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.
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. In addition, the cyclicality of the
disk drive industry, among other factors, may cause prospective customers to
postpone decisions regarding major capital expenditures, including purchases of
the Company's systems. In the event customers delay the purchase of the
Company's systems, the Company's business, financial condition and results of
operations could be materially adversely affected.
INTENSE COMPETITION
The Company experiences intense competition worldwide from three
principal competitors, Ulvac Japan, Ltd. ("Ulvac"), Leybold A.G. ("Leybold") and
Anelva Corporation ("Anelva"), each of which is a large manufacturer of complex
vacuum equipment and thin-film disk manufacturing systems and has sold a
substantial number of thin-film disk sputtering machines worldwide. Ulvac is a
manufacturer of in-line systems, 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. 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. Accordingly, competition for customers
in the disk sputtering equipment industry is particularly intense, and suppliers
of disk sputtering equipment may offer pricing concessions and incentives to
attract new customers, which could adversely affect the Company's business,
financial condition and results of operations. Because of these competitive
factors, there can be no assurance that the Company will be able to compete
successfully in the future.
CUSTOMER CONCENTRATION
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. 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.
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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 portion of the Company's backlog at
September 28, 1996 represented orders from Seagate for a new facility Seagate is
constructing in Singapore. In the event Seagate, or any other customer with
multiple units on order, experiences a delay in the construction of a new
facility or defers the completion of its construction, the Company's net
revenues and operating results could be materially adversely affected. 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.
LIMITED NUMBER OF OPPORTUNITIES
The Company's business depends upon capital expenditures by
manufacturers of thin-film disks, of which there are a limited number worldwide.
According to TrendFOCUS, an independent market research firm, as of the end of
1995 there were 187 installed disk sputtering lines (sputtering systems and
related equipment such as plating, polishing, texturing, lubrication and test
equipment as well as related handling equipment) worldwide and only 14 companies
in the world with five or more installed disk sputtering lines. Therefore,
winning or losing an order from any particular customer could significantly
affect the Company's operating results. In addition, the Company's opportunities
to sell its systems are further limited by the fact that many 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. These
manufacturers have invested significant amounts of capital in their in-line
systems, and there may be significant resistance to change to a static approach
in the future. 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 its systems may exist at any given time.
RAPID TECHNOLOGICAL CHANGE
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. As a result, the Company must continue
to enhance its existing systems and to develop and manufacture new systems with
improved capabilities. This has required and will continue to require
substantial investments by the Company 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
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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 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.
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.
The Company's operating results will depend in significant part upon
its ability to retain and attract qualified management, engineering,
manufacturing, marketing, customer support and sales personnel. Competition for
such personnel is intense and the Company has difficulties attracting such
personnel, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The failure to attract and retain such
personnel could make it difficult to undertake or could significantly delay the
Company's research and development efforts and the expansion of its
manufacturing capabilities or other activities, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
MANUFACTURING RISKS
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. Due to increases in
demand, 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, which could have a materially
adverse effect on the Company's business, financial condition and results of
operations.
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
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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 conducts substantially all of its manufacturing activities
at its leased facilities in Santa Clara, California. The Company's Santa Clara
facility is located in a seismically active area. A major catastrophe (such as
an earthquake or other natural disaster) could result in a prolonged
interruption of the Company's business.
FLAT PANEL DISPLAY MANUFACTURING EQUIPMENT
In 1995, the Company spent approximately $2.5 million on various
programs to fund the development of equipment and processes for use in the flat
panel display ("FPD") industry, approximately 72% which was paid for by the
Company's development partners. In exchange for certain development funding, the
Company has granted to one of its development partners the exclusive rights to
manufacture and market the Company's FPD sputtering systems in Japan. The
Company has limited experience in the development, manufacture, sale and
marketing of FPD manufacturing equipment, having sold two Rapid Thermal
Processing ("RTP") systems to date and having not yet completed development of
its FPD sputtering system. There can be no assurance that the market for FPD
manufacturing equipment targeted by the Company will develop as quickly or to
the degree the Company currently anticipates, or that the Company's proposed FPD
manufacturing equipment will achieve customer acceptance or that the Company
will achieve any net revenues from the sale of its proposed FPD 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 FPD
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 FPD area.
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
Sales to customers in countries other than the United States accounted
for 32%, 40% and 20% of revenues in 1993, 1994 and 1995, respectively. The
Company anticipates that international sales will continue to account for a
substantial portion of net revenues in the future. In addition, the Company has
orders from Seagate, a domestic customer, to deliver and install a significant
number of machines in Seagate's 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 United States are subject to certain
inherent risks, including fluctuations in the value of the United States dollar
relative to foreign currencies, tariffs, quotas, taxes and other market
barriers, political and economic instability, restrictions on the export or
import of technology, potentially limited intellectual property protection,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. 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.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company currently has 22 patents issued in the United States, and
has pending patent applications in the United States and foreign countries. Of
the 22 patents, seven relate to sputtering, 10 relate to RTP, one relates to
lubrication systems and four relate to other areas not in Intevac's mainstream
business. The Company has the right to utilize certain patents under licensing
arrangements with Litton Industries, Varian Associates, Stanford University,
Lawrence Livermore Laboratories and Alum Rock Technology. 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
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at all. Furthermore, there can be no assurance that others will not develop
similar products, duplicate the Company's products or design around the patents
owned by the Company. In addition, there can be no assurance that foreign patent
rights, intellectual property laws or the Company's agreements will protect the
Company's intellectual property rights. Failure to protect the Company's
intellectual property rights could have a material adverse effect upon the
Company's business, financial condition and results of operations.
There 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. In addition, the Company has recently become aware that a third party
has sent correspondence to a consortium, of which the Company is a party, in a
proposed government sponsored research and development program claiming that the
work to be done under this program may infringe patents owned by this third
party. The Company and its subcontractors have reviewed the correspondence and
patents and believe these claims are without merit; however, there can be no
assurance that litigation will not result from such development program. There
can be no assurance that other third parties will not in the future claim
infringement by the Company with respect to current or future patents,
trademarks, or other proprietary rights relating to the Company's disk
sputtering systems, flat panel manufacturing equipment or other products. Any
present or future claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. Any of the foregoing could have a material adverse effect
upon the Company's business, operating results and financial condition.
In addition, the Company believes that one of its competitors may be
infringing the Company's patent rights in connection with products currently
being offered by this competitor. Although the Company has not undertaken formal
legal proceedings, the Company has informed this competitor that the Company
believes its patent rights are being infringed and that the Company may
undertake litigation to protect its patent rights if necessary. If undertaken,
such litigation could be costly, time-consuming and result in legal claims being
made against the Company. This could have a material adverse effect on the
Company's business, operating results and financial condition, and, in addition,
there could be no assurance that the Company would ultimately prevail in any
such litigation.
ACQUISITIONS
The Company's business strategy includes acquiring technologies or
businesses that enable it to expand its current product offerings in the
thin-film disk manufacturing market. The Company has completed three
acquisitions during 1996 and expects that it may pursue additional acquisitions
in the future. 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 due to a shareholder being
greater than a 50% holder of the Company's Common Stock prior to the Company's
initial public offering, in connection with any acquisition consummated prior to
November 21, 1997 and the Company will therefore be required to amortize any
intangible assets acquired in connection with any acquisition consummated during
that period.
The Company incurred a charge to operations of $5.8 million in the
quarter ended June 29, 1996, to reflect the purchase of in-process research and
development pursuant to the two acquisitions completed in the second quarter. In
addition, the Company intends to amortize intangible assets of approximately
$8.8 million of costs relating to the two acquisitions completed in the second
quarter as well as the acquisition completed during the first quarter of 1996.
The amortization period for such costs will be over useful lives, which range
from two years to seven years. Additional, unanticipated expenses may be
incurred relating to the integration of technologies and research and
development and administrative functions. Any acquisition will involve numerous
risks, including difficulties in the assimilation of the acquired company's
employees, operations and products, uncertainties associated with operating in
new markets and
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working with new customers, the potential loss of the acquired company's key
employees as well as the costs associated with completing the acquisition and
integrating the acquired company.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party
or to which any of its property is subject.
ITEM 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 10.13 Loan and Security Agreement, dated
September 3, 1996
Exhibit 11.1 Computation of Net Income Per Share
Exhibit 27 Financial Data Schedule
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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: November 5, 1996 By: /s/ NORMAN H. POND
-------------------------------------
Norman H. Pond
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
Date: November 5, 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)
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EXHIBIT INDEX
EXHIBIT
NUMBER
10.13 Loan and Security Agreement, dated September 3, 1996
11.1 Computation of Net Income Per Share
27 Financial Data Schedule
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