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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-26946
INTEVAC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3125814
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3560 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 986-9888
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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none none
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK (NO PAR VALUE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of February 26, 2001 was approximately $20,087,000 (based on the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market System for the last trading day prior to that date).
Shares of Common Stock held by each executive officer, director, and holder of
5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
On February 26, 2001 approximately 11,934,668 shares of the Registrant's
Common Stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 2001 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III. SUCH PROXY STATEMENT
WILL BE FILED WITHIN 120 DAYS AFTER THE END OF THE FISCAL YEAR COVERED BY THIS
ANNUAL REPORT ON FORM 10-K.
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This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. Words such as "believes," "expects,"
"anticipates" and the like indicate forward-looking statements. Intevac's actual
results may differ materially from the results discussed in the forward-looking
statements for a variety of reasons, including those set forth under "Risk
Factors Affecting Intevac's Business."
PART I
ITEM 1. BUSINESS
OVERVIEW
Intevac, Inc.'s ("Intevac" or the "Company") businesses are the design,
manufacture and sale of complex capital equipment used to manufacture products
such as thin-film disks and flat panel displays (the "Equipment Division") and
the development of highly sensitive electro-optical devices (the "Photonics
Division").
The Equipment Division is a leading supplier of 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 Equipment Division also realizes revenues from the sales of disk
lubrication equipment and flat panel display ("FPD") manufacturing equipment.
Upgrades, spare parts and after-sale service are also sold to purchasers of
Intevac's equipment, and sales of components are made to other manufacturers of
vacuum equipment. The Equipment Division recorded sales of $28.8 million in
2000, down from $36.0 million in 1999. 2000 Equipment Division revenues resulted
primarily from the sales of technology upgrades, spare parts and consumables for
disk manufacturing equipment, rather than from the sale of new disk
manufacturing systems. The Company expects this trend to continue in 2001 for
its disk manufacturing products. However, the Company entered 2001 with a
substantial backlog of orders for its FPD manufacturing equipment and expects
substantial revenue growth in the Equipment Division during 2001, primarily as a
result of increased sales of FPD manufacturing equipment.
The Photonics Division develops electro-optical devices that permit highly
sensitive detection of photons in the visible and short wave infrared portions
of the spectrum. This technology, when combined with advanced silicon integrated
circuits, makes it possible to produce highly sensitive digital video cameras.
This development work is aimed at creating new products for both military and
industrial applications. Products under development include Intensified Digital
Video Sensors, LIVAR(R) systems for positive target identification, and low-cost
low-light-level cameras. Intevac's Intensified Digital Video Sensor offers both
high sensitivity and high resolution. The output of this sensor is digital
video. Systems using this sensor have capabilities and features not possible
with the direct view night vision devices currently in use by the military. For
example, these systems free the user from having to hold the device to the eye
and permit remote viewing and image processing. Intevac integrated its
Intensified Digital Video Sensor technology with a laser illuminator to create
its LIVAR(R) ("Laser Illuminated Viewing and Ranging") system. The LIVAR(R)
system is similar to RADAR, but with a number of improvements. The illuminator
is an eye safe laser, rather than a microwave source, and the reflected signal
is displayed as a digital video image. Photonics Division sales, which consisted
primarily of contract research and development, increased to $7.3 million in
2000 from $7.0 million in 1999. The Photonics Division has completed
approximately $23 million of government-sponsored research and development since
1994.
EQUIPMENT
Disk Sputtering Systems
Intevac sputtering systems are typically offered at list prices ranging
from $2.5 million to $3.5 million, depending upon configuration, to both captive
and merchant thin-film disk manufacturers. There are approximately 110 Intevac
MDP-250 disk sputtering systems installed worldwide at Fuji Electric, Fujitsu
Limited, Hitachi, Komag, MMC Technology, Mitsubishi, Nippon Sheet Glass, Seagate
Technology, Sony and Trace Storage Technology.
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Intevac's sputtering systems are used by disk manufacturers to apply thin
layers of undercoats, magnetic alloys and protective overcoats to thin-film
disks used in the manufacture of computer hard disk drives. The MDP-250 system
has the capability to sputter multi-layers (multiple magnetic layers with
interspersed non-magnetic layers); to sputter onto alternative substrates (such
as glass and ceramic), as well as conventional aluminum substrates; and to make
media with the appropriate characteristics for use with magneto-resistive ("MR")
heads and giant magneto-resistive ("GMR") heads. The mechanical design of the
MDP-250 family has characteristics similar to the cluster tools widely used in
semiconductor manufacturing in that each of the twelve process stations is
separately vacuum pumped and vacuum isolated. The MDP-250 does not require a
carrier or pallet to transport disks through the system. Rather, disks are
automatically loaded into the system from cassettes, processed, and then
automatically returned to the cassette. A number of process station options are
offered, including multiple options for the deposition of thin films, heating
stations, cooling stations and cleaning stations. Furthermore, these process
stations can be moved from any machine process position to any other to easily
accommodate process changes.
Cluster Tool Add-On Module
The rapid increase in areal density has caused the thin films deposited by
our MDP-250 series of equipment to quickly become much more complex. This
increased complexity is leading to the need for additional process stations and
flexibility in the equipment to accommodate both an increased number of process
steps and new processing requirements. To answer these needs, Intevac developed
the MDP-200, a modular add-on system that allows manufacturers to seamlessly
integrate any number of additional process stations onto their MDP-250
sputtering equipment in a vacuum environment. The MDP-200 provides the
capability to process disks through process stations serially or in parallel
giving manufacturers broad flexibility to integrate process steps with different
process times. The MDP-200 can accommodate a variety of processes including
heating, thin-film deposition, cooling, and vapor lubrication. This arrangement
also improves vacuum isolation between process steps, which is of increasing
importance for some new processes, such as advanced carbon and vapor
lubrication, which utilize materials that are not compatible with the sputtering
processes for the underlayers and magnetics.
New Carbon Technology
One method for increasing the areal density of disks is to reduce the
thickness of the carbon overcoat that protects the underlying magnetic film from
wear and corrosion. By reducing the thickness of the overcoat the disk drive
head can fly closer to the magnetic film which increases signal strength. To
achieve thinner carbon overcoats Intevac has developed its new carbon technology
("NCT") process station. The NCT process station is able to apply very hard,
diamond-like carbon overcoats to disks that permit the carbon overcoats to be
reduced in thickness to below 50 angstroms.
Disk Lubrication Equipment
Lubrication is the production step that follows disk sputtering in the
manufacture of thin-film disks. Intevac, through its 1996 acquisition of San
Jose Technology Corp. ("SJT"), is the leading supplier of gravity flow disk
lubrication systems. During lubrication, a microscopic layer of lubricant is
applied to the disk's surface to improve durability, reduce corrosion and reduce
surface friction. This is accomplished by immersing the disks in a solvent that
has been mixed with a small amount of lubricant. Intevac's gravity disk
lubrication products allow thin-film disk manufacturers to uniformly lubricate
disks in a temperature controlled, low vibration, contamination free environment
with a minimal amount of solvent loss.
Intevac's Vapor Lubrication System (the "VLS") is a new approach to disk
lubrication that couples vacuum sputter coating with a vacuum lubrication
process. The VLS is an alternative to the traditional gravity lubrication
process and offers a number of process enhancements to disk manufacturers. Since
the disks never leave vacuum after sputtering, the exposure of the disk to
atmosphere between the sputtering and lubrication steps is eliminated. This
improves process control, reduces the risk of contamination and improves the
bonding of the lubricant to the disk. Additionally, more efficient use is made
of clean room space and the process is environmentally friendly as large
quantities of expensive solvents are eliminated from the lubrication process.
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MDP-250 Upgrade Path
Many of the new process and system technologies that Intevac has developed
for its newest MDP-250 systems have been designed to be backwards compatible and
field installable. The MDP-200, the Vapor Lubrication System, all process
stations, and a number of the speed and vacuum enhancements can be retrofitted
to Intevac's existing installed based of MDP-250 systems. Intevac's intent is to
afford our customers a cost-effective solution that significantly upgrades and
extends the capabilities of their installed base of equipment in a manner that
is complementary to the latest generation MDP-250 systems.
Flat Panel Display Sputtering Equipment
FPD's are used for a variety of applications such as PCs, handheld
communication devices, workstations and video displays. The manufacture of
several types of flat panel displays, such as active matrix liquid crystal
display ("AMLCD") and plasma display panel ("PDP"), requires the use of a
sputtering process to deposit thin-film layers of different materials onto a
glass substrate. Intevac believes that the skills and technologies that it has
developed for the thin-film disk manufacturing industry are directly applicable
to the FPD manufacturing industry. These skills and technologies include its
expertise and experience in sputtering, rapid heating, high vacuum, isolated
process chambers and substrate transport. In addition, as with the thin-film
disk manufacturing industry, the FPD industry involves providing complex,
expensive capital equipment to a small number of customers worldwide.
Intevac developed its FPD sputtering system for this market under an
agreement with its development partner, Ebara Corporation ("Ebara"). Under the
agreement, as amended, Ebara agreed to pay one-half of the development costs of
the flat panel sputtering system in exchange for joint ownership of the
intellectual property rights and the exclusive right to manufacture and sell in
Japan the flat panel sputtering systems developed under the agreement. Intevac
has retained the exclusive right to manufacture and sell such flat panel
sputtering systems outside of Japan. Each party is required to pay royalties to
the other party on its flat panel sputtering system sales. Ebara has not yet
exercised its right to manufacture FPD equipment.
Intevac's D-STAR(R) flat panel sputtering systems are scalable and have
been manufactured in sizes capable of sputtering glass substrates as small as
550 mm by 650 mm to as large as 1.2 meters by 1.6 meters.
During 2000 Intevac manufactured a custom D-STAR(R) system for a customer
with a multi-chip module application. That customer cancelled its order shortly
before shipment of the system. The Company has a substantial inventory
investment in the custom system and is in active dialog with the customer to
resolve the cancellation. Depending on the results of the dialog with the
customer, Intevac may have to establish a cost-to-market reserve for this system
in the future.
Flat Panel Display Rapid Thermal Processing Equipment
Intevac's rapid thermal processing ("RTP") systems are used to rapidly
modify the characteristics of thin films deposited on glass substrates such as
are used in the manufacture of FPD's. Intevac's patented RTP technology enables
manufacturers to change the properties of these thin films by thermally
processing them at temperatures that would otherwise distort and destroy the
underlying glass substrate. Processes that Intevac's RTP systems are suitable
for include thin-film activation after ion implant, dehydrogenation,
densification and crystallization. Intevac's RTP systems are in use at Sony,
Sanyo and a joint manufacturing facility of Sony and Toyota.
An arc lamp with a patented reflector that produces an intense and highly
uniform spectral output is the core of the RTP system. The lamp/reflector system
enables transient annealing rather than heating of the entire substrate. In
transient annealing a uniform line of radiation is focused onto the moving
substrate and a narrow band of the substrate is brought up to peak process
temperature at any time. The substrate remains undistorted because at all times
the majority of its area is at a relative cool temperature and can act to
stabilize the small area, which is very hot. Exposure time is typically under
one second.
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Electron Beam Processing Equipment
In December 1999, Intevac incurred a charge of $1.6 million related to a
plan to terminate its electron beam product line. The plan included the delivery
of the three electron beam systems on order and subsequent closure of the
Hayward facility where the systems were manufactured. In March 2000, the Company
sold the electron beam business to Quemex Technology, Ltd. ("Quemex") and Quemex
assumed responsibility for Intevac's Hayward facility. Intevac retained rights
to the three systems on order, which were completed and shipped.
PHOTONICS
History
Intevac's Photonics products have been developed by a team that initially
began working together in the 1980's in the Varian central research labs and
night vision business unit. When Intevac was formed in 1991, it acquired
Varian's night vision business, and the related Varian central research lab
activities and technology. The central research lab group became part of the R&D
department for Intevac's night vision business and continued to develop
Intevac's photocathode technology. In 1995, Intevac sold its night vision
business to Litton Industries. However, the technical team remained at Intevac
and formed the Photonics Division. Since 1995 the Photonics Division has been
further developing its technology, with the majority of its activities being
funded by R&D contracts from the United States Government. During this period
the Photonics Division has also worked collaboratively with other research
organizations, including Stanford University, Lawrence Livermore National
Laboratory and The Charles Stark Draper Laboratory.
Technology
Intevac's Intensified Digital Video Sensor exemplifies Intevac's Photonics
technology. The Intensified Digital Video Sensor is a vacuum device about an
inch in diameter and a quarter-inch thick. The Intensified Digital Video Sensor
has a transparent glass window on one side through which photons are focused
onto a photocathode on the vacuum side of the window. When a photon strikes the
photocathode, an electron is emitted into the vacuum. The electron is then
accelerated and strikes a Charge Coupled Device ("CCD"). The CCD then outputs a
high-resolution video signal.
The Intensified Digital Video Sensor offers both high sensitivity and high
resolution. It works well in the visible as well as the near infrared range of
the spectrum. The output is video, which frees the user from having to hold the
device to the eye and permits remote viewing and image processing. The Company
believes it has capability and features not possible with the direct view night
vision devices currently in use by the military.
LIVAR(R) Target Identification System
Intevac integrated its Intensified Digital Video Sensor technology with a
laser illuminator to create its Laser Illuminated Viewing and Ranging system
("LIVAR(R)"). The LIVAR(R) system is similar to RADAR, but with a number of
improvements. The illuminator is an eye safe laser, rather than a longer
wavelength microwave source, and the reflected signal is displayed as a digital
video image, rather than as a blip. This enables real time, high-resolution
imagery for target identification at much longer ranges than was previously
possible.
The potential benefit of the LIVAR(R) system is clear for military
conflicts such as that which occurred in Kosovo. In the Kosovo conflict,
casualties to US servicemen were politically unacceptable, which meant that
aircraft could only operate at high altitudes where they were relatively safe
from ground launched missile attacks. It was also unacceptable to inflict
collateral damage to the other sides' civilians or to other untargeted assets.
However, these goals are mutually exclusive unless capability exists for
positively identifying targets from long ranges.
Currently the military uses several means for target location and
identification including forward-looking infrared ("FLIR") systems and RADAR.
While these systems can sense targets at relatively long ranges, the
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resolution is poor, and positive identification is difficult, or impossible. The
LIVAR(R) system complements the existing FLIR and RADAR technology and enables
target identification in addition to target sensing. Because of these
advantages, LIVAR(R) is currently under consideration by the US military as a
key capability to be deployed in a number of the US military's weapons systems
including the Joint Strike Fighter, Unmanned Aerial Vehicles, Unmanned Ground
Vehicles, and a man-portable system.
Intevac is under contract from the U.S. Army for the development and
demonstration of a low cost, man-portable targeting and surveillance system. The
targeting and surveillance system will utilize LIVAR(R) technology, which will
enable identification of targets at long ranges under day/night conditions, a
significant improvement in both resolution and range over existing target
identification systems. Intevac expects to deliver this unit during 2001.
High Performance Cameras
In September 1999, the first of seven highly sensitive short-wave infra-red
cameras was accepted by Intevac's customer, Lockheed Martin Missiles & Space,
for use in the U.S. Air Force's Airborne Laser ("ABL") program. The ABL system
will be carried aboard a modified Boeing 747 and will be capable of shooting
down theater ballistic missiles launched hundreds of kilometers away. The highly
sensitive Intevac camera is an enabling technology for this program.
The key technology in the ABL camera is a highly sensitive photocathode,
which emits electrons that are detected by a CCD. The electron bombarded CCD
("EBCCD") was developed under a cost shared Technology Development Agreement
with the Defense Advanced Research Projects Agency ("DARPA"). The ABL program
was the first application using this technology.
Low Cost Low Light Level Cameras
Today's low light level cameras, derived from military night vision
technology, are too expensive for most commercial applications. Intevac's
objective is to reduce this cost to $500 per camera, a cost at which the Company
believes that large available markets for commercial security cameras, law
enforcement and traditional military night vision tubes could be addressed.
Intevac is currently developing this low light level video camera with National
Semiconductor under a $10 million cost-sharing program sponsored by the National
Institute of Standards and Technology ("NIST"). The NIST program involves the
development of a CMOS chip that integrates an active pixel imaging sensor with
camera electronics by National Semiconductor; photocathode design, product
integration and development of low cost manufacturing processes by Intevac's
Photonics Division; and development of automated processing and assembly
equipment by Intevac's Equipment Division.
Unlike present low light level cameras, which work well only in darkness,
these Electron Bombarded Active Pixel Sensor ("EBAPS(TM)") cameras should
perform just as well in all types of lighting conditions, including bright
daylight. Intevac plans to begin commercial sales in 2002.
Negative Electron Affinity Electron Sources
Development is also being done on negative electron affinity ("NEA")
electron sources. NEA electron sources provide an enabling technology to be used
in semiconductor test and photolithography equipment, which could significantly
improve throughput and permit a significant reduction in the feature size of
integrated circuits.
RESEARCH AND DEVELOPMENT
Intevac's products serve markets characterized by rapid technological
change and evolving industry standards. As a result, Intevac routinely invests
substantial amounts in research and development and expects to continue an
active development program. Intevac's research and development expenses were
$10.6 million, $14.1 million and $12.7 million, respectively, in 2000, 1999 and
1998. Research and development expenses represented 29%, 33% and 13%,
respectively, of net revenues in 2000, 1999 and 1998. Research and
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development expenses do not include costs of $0.7 million, $1.1 million and $1.8
million that were incurred by Intevac in 2000, 1999 and 1998, respectively, that
were reimbursed under the terms of research and development cost sharing
agreements related to development of disk and flat panel manufacturing
equipment. Additional research and development expenses of $6.0 million, $5.9
million and $4.8 million in 2000, 1999 and 1998, respectively, were incurred
under contract for the Company's Photonics customers. These costs are included
in cost of goods sold.
SALES CHANNEL, CUSTOMERS AND MARKETING
Domestic equipment sales are made by the Equipment Division direct sales
force. International equipment sales are made by the Company's exclusive
distributor in Japan, Matsubo; the Company's subsidiary in Singapore; and by
sales representatives in Korea and Taiwan. The Company's distributor and sales
representatives typically provide sales, installation, warranty and ongoing
customer support. Through the second quarter of 2000, Intevac marketed its flat
panel manufacturing equipment to Far East customers through its Japanese joint
venture, IMAT, after which Intevac and its joint venture partner, Matsubo,
transferred IMAT's activities and employees to Matsubo and terminated the
operations of IMAT. Photonics sales are made by the Photonics Division direct
sales force.
The selling process for Intevac's equipment 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 samples for the prospective customer and responding to
individual needs for moderate levels of machine customization. Installing and
integrating new equipment requires a substantial investment by a customer. Sales
of Intevac'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 before making a purchasing
decision. Accordingly, Intevac's systems typically have a lengthy sales cycle,
during which Intevac may expend substantial funds and management time and effort
with no assurance that a sale will result.
The selling process for Intevac's Photonics Division primarily involves the
solicitation of contracts and subcontracts from government agencies and from
government contractors and subcontractors. Some contracts are bid at a fixed
cost, some contracts are bid at cost plus a fee and some contracts are bid on a
cost-sharing basis. The sales process involves government procurement
regulations and is dependant on the continuing availability of government
funding for the Company's research programs. Future production orders for
Intevac's military products are dependent on the government funding of the
weapons systems that utilize Intevac products such as LIVAR(R).
Historically, a significant portion of Intevac's revenues in any particular
period has been attributable to sales to a limited number of customers. For
example, 46%, 66% and 71% of Intevac's total revenues in 2000, 1999 and 1998,
respectively, were accounted for by the three largest customers in each of the
those years. Intevac's largest customers change from period to period and it is
expected 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.
Foreign sales accounted for 27% of revenues in 2000, 60% of revenues in
1999 and 53% of revenues in 1998. The majority of Intevac's foreign sales are to
companies in the Far East and Intevac anticipates that sales to customers in the
Far East will continue to be a significant portion of its revenues.
CUSTOMER SUPPORT
Intevac provides process and applications support, customer training,
installation, start-up assistance and emergency service support to its
customers. Process and applications support is provided by Intevac's equipment
process engineers who also visit customers at their plants to assist in process
development projects. Intevac conducts training classes for process engineers,
machine operators and machine service personnel. Additional training is also
given during the machine installation. Installation and start up support is
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provided within the United States by the Intevac customer service organization.
This group also assists with the installation and start up of systems in
overseas locations as required.
Intevac generally provides a one-year warranty on its equipment. During
this warranty period any necessary non-consumable parts are supplied and
installed. Intevac employees provide field service support primarily in the
United States, Singapore and Malaysia. In other countries, field service support
is provided by Intevac's distributors and sales representatives, supplemented by
Intevac factory support. Intevac and its distributor stock consumables and spare
parts to support the installed base of systems. These parts are available on a
24-hour per day basis.
MANUFACTURING
All of Intevac's manufacturing is conducted at its facility in Santa Clara,
California. Intevac's Equipment manufacturing operations include
electromechanical assembly, mechanical and vacuum assembly, fabrication of the
sputter sources and system assembly, alignment and testing. Intevac's Photonics
manufacturing operations include growth of advanced photocathodes and assembly
of complex vacuum devices under clean room conditions utilizing a number of
advanced processing techniques. Intevac makes extensive use of the
infrastructure serving the semiconductor equipment business. Intevac purchases
vacuum pumps, valves, instrumentation and fittings, power supplies, printed
wiring board assemblies, computers and control circuitry and custom mechanical
parts made by forging, machining and welding. Intevac has a well-equipped
fabrication center that manufactures a portion of the fabricated parts used in
Intevac products and also sells fabricated parts to commercial customers.
Intevac's manufacturing strategy is to operate with low fixed costs, to
produce high quality, cost-effective systems and low cost replacement parts and
to be able to respond effectively to changes in volume. To do this, Intevac
currently designs its products to use standard parts where possible. Intevac
performs manufacturing activities that add value or that require unique
technology or specialized knowledge and, taking advantage of its Silicon Valley
location, utilizes subcontractors to perform other manufacturing activities.
BACKLOG
Intevac's backlog was $42.1 million and $24.6 million at December 31, 2000
and December 31, 1999, respectively. Intevac 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. The equipment requirements of Intevac's customers cannot be
determined with accuracy, and therefore Intevac's backlog at any certain date
may not be indicative of future demand for Intevac's products.
PATENTS AND LICENSING
Intevac currently has 30 patents issued in the United States and 17 patents
issued in foreign countries, and has patent applications pending in the United
States and foreign countries. Of the 30 U.S. patents, 11 relate to sputtering, 7
relate to RTP, 10 relate to photonics, 1 relates to lubrication systems and 1
relates to CSS. Five foreign patents relate to sputtering, 11 relate to
photonics and 1 relates to RTP. In addition, Intevac has the right to utilize
certain patents under licensing arrangements with Litton Industries, Stanford
University, Lawrence Livermore Laboratories and Alum Rock Technology.
EMPLOYEES
At December 31, 2000, Intevac had 190 employees, including 16 contract
employees. 86 of these employees were in research and development, 72 in
manufacturing, and 32 in administration, customer support and marketing.
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RISK FACTORS AFFECTING INTEVAC'S BUSINESS
Our products are complex, constantly evolving, and often manufactured to
individual customer requirements.
Intevac's Equipment Division products have a large number of components and
are highly complex. Intevac may experience delays and technical and
manufacturing difficulties in future introductions or volume production of new
systems or enhancements. In addition, some of the systems built by Intevac must
be customized to meet individual customer site or operating requirements.
Intevac has limited manufacturing capacity and may be unable to complete the
development or meet the technical specifications of its new systems or
enhancements or to manufacture and ship these systems or enhancements in a
timely manner. In addition, Intevac may incur substantial unanticipated costs
early in a product's life cycle, such as increased cost of materials due to
expediting charges, other purchasing inefficiencies and greater than expected
installation and support costs which cannot be passed on to the customer. In
certain instances, Intevac is dependent upon a sole supplier or a limited number
of suppliers, or has qualified only a single or limited number of suppliers, for
certain complex components or sub-assemblies utilized in its products. Any of
these factors could adversely affect Intevac's business.
The Equipment Division is subject to rapid technical change.
Intevac's ability to remain competitive requires substantial investments in
research and development. The failure to develop, manufacture and market new
systems, or to enhance existing systems, would have an adverse effect on
Intevac's business. In the past, Intevac has experienced delays from time to
time in the introduction of, and technical difficulties with, some of its
systems and enhancements. Intevac's success in developing and selling equipment
depends upon a variety of factors, including accurate prediction of future
customer requirements, technology advances, cost of ownership, introduction of
new products on schedule, cost-effective manufacturing and product performance
in the field. Intevac's new product decisions and development commitments must
anticipate continuously evolving industry requirements significantly in advance
of sales. Any failure to accurately predict customer requirements and to develop
new generations of products to meet those requirements would have an adverse
effect on Intevac's business.
The Photonics Division does not yet generate a significant portion of its
revenues from product sales.
To date the activities of the Photonics Division have concentrated on the
development of its technology and prototype products that demonstrate this
technology. Revenues have been derived primarily from research and development
contracts funded by the United States Government and its contractors. The
Company plans to develop standard photonics products for sale to military and
commercial customers. The Photonics Division will require substantial further
investment in sales and marketing, in product development and in additional
production facilities to support the planned transition to volume sales of
photonics products to military and commercial customers. There can be no
assurance that the Company will succeed in these activities and generate
significant increases in sales of products based on its photonics technology.
The sales of our equipment products are dependent on substantial capital
investment by our customers.
The majority of our Equipment revenues have historically come from the sale
of equipment used to manufacture thin-film disks, and to a lesser extent, from
the sale of equipment used to manufacture flat panel displays. The purchase of
Intevac's systems, along with the purchase of other related equipment and
facilities, requires extremely large capital expenditures by our customers.
These costs are far in excess of the cost of the Intevac systems. The magnitude
of such capital expenditures requires that our customers have access to large
amounts of capital and that they are willing to invest that capital over long
periods of time in order to be able to purchase our equipment. Some of our
customers, particularly those that purchase our disk manufacturing products, may
not be willing, or able, to make the magnitude of capital investment required to
purchase our products.
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The disk drive industry has been severely impacted by excess capacity since
1997.
Intevac derives a significant proportion of its revenues from sales of
equipment to manufacturers of computer disk drives and disk drive components.
The disk drive industry has experienced a long period of over-supply and
intensely competitive pricing. Since 1997, many of the manufacturers of hard
disk drives and their component suppliers have reported substantial losses. Some
of these manufacturers have gone out of business. Some of these manufacturers
have been acquired by their competitors. Accordingly, the number of potential
customers for Intevac's disk equipment products has been reduced. As a result of
these factors, Intevac has experienced significant reductions in its quarterly
revenues, and has incurred quarterly losses, since the third quarter of 1998.
Intevac is not able to accurately predict when the industry conditions that have
depressed our disk equipment sales will become more favorable.
Demand for capital equipment is cyclical.
Intevac's Equipment Division sells capital equipment to capital intensive
industries, which sell commodity products such as disk drives and flat panel
displays. These industries operate with high fixed costs. When demand for these
commodity products exceeds capacity, then demand for new capital equipment such
as Intevac's tends to be amplified. When supply of these commodity products
exceeds capacity, then demand for new capital equipment such as Intevac's tends
to be depressed. The cyclical nature of the capital equipment industry means
that in some years, such as 1997, sales of new systems by the Company will be
unusually high, and that in other years, such as 2000, sales of new systems by
the Company will be severely depressed.
Rapid increases in areal density are reducing the number of thin-film disks
required per disk drive.
Over the past few years the amount of data that can be stored on a single
thin-film computer disk has been growing at approximately 100% per year.
Although the number of disk drives produced has continued to increase each year,
the growth in areal density has resulted in a reduction in the number of disks
required per disk drive. The result has been that the number of thin-film disks
used worldwide has not grown significantly since 1997. Without an increase in
the number of disks required, Intevac's disk equipment sales are largely limited
to upgrades of existing capacity, rather than capacity expansion. While the
rapidly falling cost of storage per gigabyte is leading to new applications for
disk drives beyond the traditional computer market, it is not clear to what
extent the demand from these new applications will be offset by further declines
in the average number of disks required per disk drive.
Our competitors are large and well financed and competition is intense.
Intevac experiences intense competition in the Equipment Division. For
example, Intevac's equipment products experience competition worldwide from
competitors including, Anelva Corporation, Applied Films Corporation, Ulvac
Japan, Ltd. and Unaxis Holdings, Ltd., each of which have sold substantial
numbers of systems worldwide. Anelva, Ulvac and Unaxis all have substantially
greater financial, technical, marketing, manufacturing and other resources than
Intevac. There can be no assurance that Intevac's competitors will not develop
enhancements to, or future generations of, competitive products that will offer
superior price or performance features or that new competitors will not enter
Intevac's markets and develop such enhanced products.
Given the lengthy sales cycle and the significant investment required to
integrate equipment into the manufacturing process, Intevac believes that once a
manufacturer has selected a particular supplier's equipment for a specific
application, that manufacturer generally relies upon that supplier's equipment
and frequently will continue to purchase any additional equipment for that
application from the same supplier. Accordingly, competition for customers in
the equipment industry is intense, and suppliers of equipment may offer
substantial pricing concessions and incentives to attract new customers or
retain existing customers.
Competition is intense for employees in northern California.
Intevac's operating results depend in significant part upon its ability to
retain and attract qualified management, engineering, marketing, manufacturing,
customer support, sales and administrative personnel.
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Competition in northern California for such personnel is intense. The cost of
living in northern California is also extremely high, which further increases
the cost and difficulty of recruiting new employees. There can be no assurance
that Intevac will be successful in attracting new employees and retaining its
staff. The failure to attract and retain such personnel could have an adverse
effect on Intevac's business.
Business interruptions could adversely affect our business.
Intevac's operations are vulnerable to interruption by fire, earthquake,
power loss, telecommunications failure and other events beyond our control. The
Company's facility in California is currently subject to electrical blackouts as
a consequence of a shortage of available electrical power. In the event these
blackouts continue or increase in severity, they could disrupt the operations of
the facility. Additionally, the cost of electricity and natural gas has
increased significantly. Such cost increases and any further cost increases will
impact the Company's profitability.
A portion of our sales are to international customers.
Sales and operating activities outside of the United States are subject to
certain inherent risks, including fluctuations in the value of the United States
dollar relative to foreign currencies, tariffs, quotas, taxes and other market
barriers, political and economic instability, restrictions on the export or
import of technology, potentially limited intellectual property protection,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. Intevac earns a significant portion of its revenue
from international sales, and there can be no assurance that any of these
factors will not have an adverse effect on Intevac's business.
Intevac generally quotes and sells its products in US dollars. However, for
some Japanese customers, Intevac quotes and sells its products in Japanese Yen.
Intevac, from time to time, enters into foreign currency contracts in an effort
to reduce the overall risk of currency fluctuations to Intevac's business.
However, there can be no assurance that the offer and sale of products in
foreign denominated currencies, and the related foreign currency hedging
activities will not adversely affect Intevac's business.
Intevac's two principal competitors for disk sputtering equipment are based
in foreign countries and have cost structures based on foreign currencies.
Accordingly, currency fluctuations could cause Intevac's products to be more, or
less, competitive than its competitors' products. Currency fluctuations will
decrease, or increase, Intevac's cost structure relative to those of its
competitors, which could impact Intevac's gross margins.
Our operating results fluctuate significantly.
Over the last eight quarters Intevac's operating loss as a percentage of
net revenues has fluctuated from approximately (79%) to (8%) of net revenues.
Over the same period sales per quarter have fluctuated between $13.8 million and
$5.9 million. Intevac anticipates that its sales and operating margins will
continue to fluctuate. As a result, period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
Intevac's stock price is volatile.
Intevac's stock price has experienced both significant increases in
valuation, and significant decreases in valuation, over short periods of time.
Intevac believes that factors such as announcements of developments related to
Intevac's business, fluctuations in Intevac's operating results, failure to meet
securities analysts' expectations, general conditions in the disk drive and
thin-film media manufacturing industries and the worldwide economy,
announcements of technological innovations, new systems or product enhancements
by Intevac or its competitors, fluctuations in the level of cooperative
development funding, acquisitions, changes in governmental regulations,
developments in patents or other intellectual property rights and changes in
Intevac's relationships with customers and suppliers could cause the price of
Intevac's Common Stock to continue to fluctuate substantially. In addition, in
recent years the stock market in general, and the market for small
capitalization and high technology stocks in particular, has experienced extreme
price fluctuations which
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have often been unrelated to the operating performance of affected companies.
Any of these factors could adversely affect the market price of Intevac's Common
Stock.
Intevac routinely evaluates acquisition candidates and other diversification
strategies.
Intevac has completed multiple acquisitions as part of its efforts to grow
and diversify its business. For example, Intevac's business was initially
acquired from Varian Associates in 1991. Additionally, Intevac acquired its
current gravity lubrication, CSS test equipment and rapid thermal processing
product lines in three separate acquisitions. Intevac also acquired its RPC
electron beam processing business in late 1997, and after two years initiated
plans to close this business. Intevac intends to continue to evaluate new
acquisition candidates and diversification strategies. Any acquisition will
involve numerous risks, including difficulties in the assimilation of the
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. Additionally, unanticipated
expenses may be incurred relating to the integration of technologies, research
and development, and administrative functions. Any future acquisitions may
result in potentially dilutive issuance of equity securities, acquisition
related write-offs and the assumption of debt and contingent liabilities. Any of
the above factors could adversely affect Intevac's business.
Thin-film disks could be replaced by a new technology.
Intevac believes that thin-film disks will continue to be the dominant
medium for data storage for the foreseeable future. However, it is possible that
competing technologies may at some time reduce the demand for thin-film disks,
which would adversely affect Intevac's disk equipment business.
Intevac's business is dependent on its intellectual property.
There can be no assurance that:
- any of Intevac's patent applications will be allowed or that any of the
allowed applications will be issued as patents, or
- any patent owned by Intevac will not be invalidated, deemed
unenforceable, circumvented or challenged, or
- the rights granted under our patents will provide competitive advantages
to Intevac, or
- any of Intevac's pending or future patent applications will be issued
with claims of the scope sought by Intevac, if at all, or
- others will not develop similar products, duplicate Intevac's products or
design around the patents owned by Intevac, or
- foreign patent rights intellectual property laws or Intevac's agreements
will protect Intevac's intellectual property rights.
Failure to protect Intevac's intellectual property rights could have an
adverse effect upon Intevac's business.
From time to time Intevac has received claims that it is infringing third
parties' intellectual property rights. There can be no assurance that third
parties will not in the future claim infringement by Intevac with respect to
current or future patents, trademarks, or other proprietary rights relating to
Intevac's disk sputtering systems, flat panel manufacturing equipment or other
products. Any present or future claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require Intevac to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
Intevac, or at all. Any of the foregoing could have an adverse effect upon
Intevac's business.
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$41 Million of convertible notes are outstanding and will mature in 2004.
In connection with the sale of $57.5 million of its 6 1/2% Convertible
Subordinated Notes Due 2004 (the "Convertible Notes") in February 1997, Intevac
incurred a substantial increase in the ratio of long-term debt to total
capitalization (shareholders' equity plus long-term debt). During 1999 Intevac
spent $9.7 million in cash to repurchase $16.3 million of the Convertible Notes.
The $41.2 million of the Convertible Notes that remain outstanding as of
December 31, 2000 commit Intevac to substantial principal and interest
obligations. The degree to which Intevac is leveraged could have an adverse
effect on Intevac's ability to obtain additional financing for working capital,
acquisitions or other purposes and could make it more vulnerable to industry
downturns and competitive pressures. Intevac's ability to meet its debt service
obligations will be dependent on Intevac's future performance, which will be
subject to financial, business and other factors affecting the operations of
Intevac, many of which are beyond its control.
Intevac uses hazardous materials.
Intevac is subject to a variety of governmental regulations relating to the
use, storage, discharge, handling, emission, generation, manufacture, treatment
and disposal of toxic or other hazardous substances, chemicals, materials or
waste. Any failure to comply with current or future regulations could result in
substantial civil penalties or criminal fines being imposed on Intevac or its
officers, directors or employees, suspension of production, alteration of its
manufacturing process or cessation of operations. Such regulations could require
Intevac to acquire expensive remediation or abatement equipment or to incur
substantial expenses to comply with environmental regulations. Any failure by
Intevac to properly manage the use, disposal or storage of, or adequately
restrict the release of, hazardous or toxic substances could subject Intevac to
significant liabilities.
A majority of the Common Stock outstanding is controlled by the directors and
executive officers of Intevac.
Based on the shares outstanding on December 31, 2000, the present directors
and their affiliates and executive officers, in the aggregate, beneficially own
a majority of the outstanding shares of Common Stock. As a result, these
shareholders, acting together, are able to effectively control all matters
requiring approval by the shareholders of Intevac, including the election of a
majority of the directors and approval of significant corporate transactions.
ITEM 2. PROPERTIES
Intevac leases its 119,583 square feet facility in Santa Clara, California.
The lease for this building expires in March 2007. Intevac has an option to
extend the lease for an additional five-year period, with a monthly base rent to
be negotiated by Intevac and the lessor. If Intevac and the lessor are unable to
reach agreement with respect to such monthly base rent, an appraisal process set
forth in the lease will determine the monthly base rent for the extension.
Intevac also leases a facility of approximately 2,400 square feet in Singapore
to house the Singapore customer support organization. This lease expires in
December 2001. Intevac believes that its current facilities are suitable and
adequate for its current and foreseeable operations. Intevac operates with one
full manufacturing shift and one partial manufacturing shift. Intevac believes
that it currently has sufficient productive capacity to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS
On June 12, 1996 two Australian Army Black Hawk Helicopters collided in
midair during nighttime maneuvers. Eighteen Australian servicemen perished and
twelve were injured. The Company was named as a defendant in a lawsuit related
to this crash. The lawsuit was filed in Stamford, Connecticut Superior Court on
June 10, 1999 by Mark Durkin, the administrator of the estates of the deceased
crewmembers, the injured crewmembers and the spouses of the deceased and/or
injured crewmembers. Included in the suit's allegations are assertions that the
crash was caused by defective night vision goggles. The suit names three US
manufacturers of military night vision goggles, of which Intevac was one. The
suit also names the manufacturer of the pilot's helmets, two manufacturers of
night vision system test equipment and the
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manufacturer of the helicopter. The suit claims damages for 13 personnel killed
in the crash, 5 personnel injured in the crash and spouses of those killed or
injured.
It is known that the Australian Army established a Board of Inquiry to
investigate the accident and that the Board of Inquiry concluded that the
accident was not caused by defective night vision goggles. Preliminary
investigations lead the Company to believe that it has meritorious defenses
against the Durkin suit. However, there can be no assurance that the resolution
of the suit will not have a material adverse effect on the Company's business,
operating results and financial condition.
On January 5, 2000, the Company's RPC Technologies, Inc. subsidiary was
named as a defendant in a lawsuit filed in United States District Court in
Texas. The lawsuit was filed by Reita Miller, Executrix of the estate of Thomas
O. Miller, and family members of Mrs. Miller. The suit named RPC Technologies,
Inc. and RPC Industries, Inc. as defendants. Included in the suits allegations
were assertions that Thomas O. Miller protracted leukemia and died as the result
of working in and around Broad Beam accelerators manufactured by RPC Industries,
Inc and installed at Mr. Miller's employer, Tetra Pak. The suit was settled in
early 2001 by the Company's insurers without cost to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
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EXECUTIVE OFFICERS AND DIRECTORS
Certain information about Intevac's directors and executive officers is
listed below:
NAME AGE POSITION
---- --- --------
Executive Officers and Directors:
Norman H. Pond....................... 62 Chairman of the Board
Ajit Rode............................ 48 Chief Executive Officer & President of Equipment
Division
Charles B. Eddy III.................. 50 Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary
Verle Aebi........................... 46 President of Photonics Division
Edward Durbin(1)..................... 73 Director
Robert D. Hempstead.................. 57 Director
David N. Lambeth(1)(2)............... 53 Director
H. Joseph Smead(2)................... 75 Director
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Pond is a founder of Intevac and has served as Chairman of the Board
since February 1991. Mr. Pond served as President and Chief Executive Officer
from February 1991 until July 2000. Before joining Intevac, from 1988 to 1990,
Mr. Pond served as President and Chief Operating Officer of Varian Associates,
Inc., a publicly held manufacturer of semiconductor, communication, defense and
medical products where he was responsible for overall management of Varian's
operations. From 1984 to 1988, Mr. Pond was President of Varian's Electron
Device and Systems Group and became a Director of Varian in 1986. Prior to
joining Varian, Mr. Pond was employed by Teledyne, a diversified electronics
company, from 1963 to 1984 where he served in various positions, including as
Group Executive. Mr. Pond holds a BS in physics from the University of Missouri
at Rolla and a MS in physics from the University of California at Los Angeles.
Dr. Rode has served as Chief Executive Officer of the Company and President
of the Equipment Division since July 2000. Before joining Intevac, Dr. Rode
served as Senior Vice President & General Manager of Semiconductor Systems,
Inc., a division of FSI International, a publicly held supplier of photoresist
processing equipment to the semiconductor, thin-film head and multi-chip module
markets. From 1997 to 1998, Dr. Rode was employed by Spectrian, where he served
as Vice President of the Multi-Carrier Power Amplifier product group. From 1995
to 1997, Dr. Rode was employed by Novellus Systems as General Manager of the CVD
Business Unit. Dr. Rode holds a Bachelor of Technology in electrical engineering
from the Indian Institute of Technology, a MS and Ph.D. in electrical
engineering from Oregon State University and a MBA from University of Portland.
Mr. Eddy has served as Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary of Intevac since April 1991. Mr. Eddy
served as Chief Financial Officer of Videonics, Inc., a manufacturer of consumer
video editing equipment, from 1987 to 1991 and served as Chief Financial Officer
of Parallel Computers, Inc., a startup computer company, from 1983 to 1987. Mr.
Eddy was with Intel Corporation from 1974 to 1983 where he served in a variety
of positions, including controller and plant manager. Mr. Eddy holds a BS in
engineering science from the University of Virginia and a MBA from Dartmouth
College.
Mr. Aebi has served as President of the Photonics Division since July 2000.
Mr. Aebi served as General Manager of the Photonics Division since May 1995 and
was elected as a Vice President of the Company in September 1995. From 1988
through 1994, Mr. Aebi was the Engineering Manager of the Company's night vision
business, where he was responsible for new product development in the areas of
advanced photocathodes and image intensifiers. Mr. Aebi holds a BS in physics
and an MS in electrical engineering from Stanford University.
Mr. Durbin has served as a Director of Intevac since February 1991. Mr.
Durbin joined Kaiser Aerospace and Electronics Corporation, a privately held
manufacturer of electronic and electro-optical systems, in 1975
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and served as Vice Chairman with responsibility for marketing and business
development until January 2001. Mr. Durbin holds a BS in electrical engineering
from The Cooper Union and a MS in electrical engineering from the Polytechnic
Institute of Brooklyn.
Dr. Hempstead has served as a Director of Intevac since March 1997 and
served as Chief Operating Officer of Intevac from April 1996 through June 1999.
Before joining Intevac, Dr. Hempstead served as Executive Vice President of
Censtor Corp., a manufacturer of computer disk drive heads and disks, from
November 1994 to February 1996. He was a self-employed consultant from 1989 to
November 1994. Dr. Hempstead is currently Chief Technology Officer at Veeco
Instruments. Dr. Hempstead holds a BS and MS in electrical engineering from
Massachusetts Institute of Technology and a Ph.D. in physics from the University
of Illinois.
Dr. Lambeth has served as a Director of Intevac since May 1996. Dr. Lambeth
has been Professor of both Electrical and Computer Engineering and Material
Science Engineering at Carnegie Mellon University since 1989. Dr. Lambeth was
Associate Director of the Data Storage Systems at Carnegie Mellon University
from 1989 to 1999. Since 1988, Dr. Lambeth has been the owner of Lambeth
Systems, an engineering consulting and research firm. From 1973 to 1988, Dr.
Lambeth worked at Eastman Kodak Company's Research Laboratories, most recently
as the head of the Magnetic Materials Laboratory. Dr. Lambeth holds a BS in
electrical engineering from the University of Missouri and a Ph.D. in physics
from the Massachusetts Institute of Technology.
Dr. Smead has served as a Director of Intevac since February 1991. Dr.
Smead joined Kaiser Aerospace and Electronics Corporation in 1974 and served as
Kaiser's President from 1974 until October 1, 1997. Dr. Smead served as
President and Chairman of the Board of Directors of K Systems, Inc., Kaiser's
parent company, from 1977 until October 1, 1997. Dr. Smead served as Chairman of
the Board of Directors of Kaiser until December 31, 1999. Dr. Smead resigned as
a director of Kaiser and its subsidiaries on December 1, 2000. Dr. Smead holds a
BS in electrical engineering from the University of Colorado, a MS in electrical
engineering from the University of Washington and a Ph.D. in electrical
engineering from Purdue University.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Intevac's Common Stock commenced trading on the Nasdaq National Market on
November 21, 1995 and is traded under the symbol "IVAC." As of December 31,
2000, there were approximately 2,000 holders of record of the Common Stock. The
following table sets forth for the periods indicated the high and low closing
sale prices for the Common Stock as reported on the Nasdaq National Market.
HIGH LOW
------- ------
Fiscal 1999
First Quarter........................................... $10.125 $5.625
Second Quarter.......................................... $ 6.250 $4.125
Third Quarter........................................... $ 6.125 $4.500
Fourth Quarter.......................................... $ 4.625 $2.750
Fiscal 2000
First Quarter........................................... $ 8.000 $3.500
Second Quarter.......................................... $ 4.625 $2.688
Third Quarter........................................... $ 7.090 $3.313
Fourth Quarter.......................................... $ 5.130 $3.130
DIVIDEND POLICY
Intevac currently anticipates that it will retain its earnings, if any, for
use in the operation of its business and does not expect to pay cash dividends
on its capital stock in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data of Intevac is qualified by reference
to and should be read in conjunction with the consolidated financial statements
of Intevac, including the notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations, each appearing
elsewhere in this report.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................. $ 36,049 $ 42,962 $ 95,975 $133,207 $88,232
Cost of net revenues......................... 34,059 40,410 71,717 91,255 55,652
-------- -------- -------- -------- -------
Gross profit................................. 1,990 2,552 24,258 41,952 32,580
Operating expenses:
Research and development................... 10,576 14,136 12,743 10,716 8,425
Selling, general and administrative........ 4,415 7,226 10,879 11,399 8,391
Restructuring and other.................... (638) 3,069 1,088 -- --
Acquired in-process research and
development............................. -- -- -- 299 5,835
-------- -------- -------- -------- -------
Total operating expenses........... 14,353 24,431 24,710 22,414 22,651
-------- -------- -------- -------- -------
Operating income (loss)...................... (12,363) (21,879) (452) 19,538 9,929
Interest expense............................. (3,033) (3,711) (4,187) (3,581) (175)
Interest income and other income, net........ 3,072 3,632 3,176 3,268 1,569
-------- -------- -------- -------- -------
Income (loss) from continuing operations
before income taxes........................ (12,324) (21,958) (1,463) 19,225 11,323
Provision for (benefit from) income taxes.... -- (8,344) (882) 6,728 6,350
-------- -------- -------- -------- -------
Income (loss) from continuing operations..... (12,324) (13,614) (581) 12,497 4,973
Income from discontinued operations.......... -- -- 1,005 -- --
Income from repurchase of convertible
notes...................................... -- 3,844 -- -- --
-------- -------- -------- -------- -------
Net income (loss)............................ $(12,324) $ (9,770) $ 424 $ 12,497 $ 4,973
======== ======== ======== ======== =======
Basic earnings per share:
Income (loss) from continuing operations... $ (1.04) $ (1.16) $ (0.05) $ 1.00 $ 0.40
Net income (loss).......................... $ (1.04) $ (0.83) $ 0.04 $ 1.00 $ 0.40
Shares used in per share calculations...... 11,803 11,777 12,052 12,514 12,311
Diluted earnings per share:
Income (loss) from continuing operations... $ (1.04) $ (1.16) $ (0.05) $ 0.94 $ 0.39
Net income (loss).......................... $ (1.04) $ (0.83) $ 0.03 $ 0.94 $ 0.39
Shares used in per share calculations...... 11,803 11,777 12,354 15,385 12,901
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................ $ 38,403 $ 40,895 $ 60,916 $ 71,142 $ 938
Working capital.............................. 41,093 51,579 77,774 78,025 15,847
Total assets................................. 86,670 94,382 122,976 147,794 68,085
Long-term debt............................... 41,245 43,188 59,461 59,480 730
Total shareholder's equity................... 17,804 29,623 40,436 42,435 33,736
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. Words such as "believes," "expects,"
"anticipates" and the like indicate forward-looking statements. Intevac's actual
results may differ materially from the results discussed in the forward-looking
statements for a variety of reasons, including those set forth under "Risk
Factors Affecting Intevac's Business" and should be read in conjunction with the
Consolidated Financial Statements and related Notes contained elsewhere in this
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Net revenues. Net revenues consist primarily of sales of equipment used to
manufacture thin-film disks for computer hard disk drives and flat panel
displays, related equipment and system components ("Equipment") and contract
research and development related to the development of highly sensitive
electro-optical devices under government sponsored R&D contracts and sales of
derivative products ("Photonics"). Net revenues from system sales are recognized
upon customer acceptance. Net revenues from sales of related equipment and
system components are recognized upon product shipment. Contract research and
development revenue is recognized in accordance with contract terms, typically
as costs are incurred. Net revenues totaled $36.0 million, $43.0 million and
$96.0 million in 2000, 1999 and 1998, respectively. Equipment revenues totaled
$28.8 million, $36.0 million and $90.6 million in 2000, 1999 and 1998,
respectively. Equipment revenues decreased in 2000 from 1999 primarily due to a
decrease in sales of disk manufacturing systems, and to a lesser extent flat
panel manufacturing systems, partially offset by increased sales of system
upgrades and components. Equipment revenues decreased in 1999 from 1998
primarily due to a decrease in net revenues from disk sputtering systems and
related equipment and to a lesser extent a decrease in net revenues from
electron beam systems and flat panel display manufacturing equipment. Photonics
revenues totaled $7.2 million, $7.0 million and $5.7 million in 2000, 1999 and
1998, respectively. Photonics revenues increased from 1999 to 2000 as the result
of an increase in product shipments, which was partially offset by a lower level
of revenues from contract research and development. Photonics revenues increased
from 1998 to 1999 as the result of an increase in revenues from research and
development contracts. Intevac's backlog of orders at December 31, 2000 was
$42.1 million as compared to a December 31, 1999 order backlog of $24.6 million.
In 2000, MMC Technology, Seagate, Westt and Matsubo (Intevac's Japanese
distributor) each accounted for more than 10% of Intevac's consolidated revenues
and in aggregate accounted for 56% of net revenues. In 1999, Matsubo, Seagate
and Lockheed Martin each accounted for more than 10% of Intevac's consolidated
revenues and in aggregate accounted for 66% of net revenues. In 1998, Matsubo,
HMT Technology and MMC Technology each accounted for more than 10% of Intevac's
consolidated revenues and in aggregate accounted for 71% of net revenues.
International sales totaled $9.6 million, $25.7 million and $51.0 million
in 2000, 1999 and 1998, respectively. International sales accounted for 27%, 60%
and 53% of net revenues in 2000, 1999 and 1998, respectively. The decrease in
international sales from 1999 to 2000 was primarily due to a decrease in net
revenues from disk manufacturing equipment. The decrease in foreign sales from
1998 to 1999 was the result of decreased sales of equipment, primarily disk
sputtering systems, and to a lesser extent, decreased sales of electron beam
systems, which were offset partially by an increase in sales of rapid thermal
processing systems used to produce flat panel displays. Substantially all of
Intevac's international sales are to customers in the Far East.
Gross margin. Cost of net revenues consists primarily of purchased
materials, fabrication, assembly, test, installation, warranty costs, royalties,
provisions for inventory reserves, scrap and costs attributable to contract
research and development. Gross margin was 6%, 6% and 25% in 2000, 1999, and
1998, respectively.
Gross margin in the Equipment Division was 12%, 7% and 28% in 2000, 1999
and 1998, respectively. Equipment Division gross margin during 2000 was
negatively impacted by establishment of $5.1 million of reserves related to slow
moving equipment inventory and a $0.8 million write-off of goodwill related to
electronically swept source technology. 2000 Equipment Division gross margin
excluding the effect of these
18
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two items would have been 32%. Gross margin declined in 1999 from 1998 as the
result of under-absorption of manufacturing overhead due to low manufacturing
volume, the sale of four used disk sputtering systems at heavily discounted
prices, high initial costs to complete Intevac's first MDP-250K disk sputtering
system and first production rapid thermal processing system, write-down of RPC
inventory related to the plan to discontinue operations, payment of $0.5M as
part of the settlement of a patent claim, establishment of a $0.4 million cost
to market reserve on a used MDP-250B disk sputtering system remaining in
inventory and an increase in the percentage of total revenue derived from
research and development contracts.
Gross margin in the Photonics Division was (8%), 7% and 12% in 2000, 1999
and 1998, respectively. Photonics gross margin declined from 1998 to 2000 as the
result of an increased proportion of Photonics revenue resulting from
cost-sharing contracts, as opposed to, fully funded research and development
contracts.
Research and development. Research and development expense consists
primarily of prototype materials, salaries and related costs of employees
engaged in ongoing research, design and development activities for disk
manufacturing equipment and flat panel display manufacturing equipment, and
research by the Photonics Division. Company funded research and development
expense totaled $10.6 million, $14.1 million and $12.7 million in 2000, 1999 and
1998, respectively. The decrease from 1999 to 2000 was primarily the result of
lower expenses related to the development of disk manufacturing products. The
increase from 1998 to 1999 was caused primarily by higher expenses related to
development of flat panel manufacturing equipment and photonics products.
Research and development expenses do not include costs of $6.0 million,
$5.9 million and $4.8 million in 2000, 1999 and 1998, respectively, related to
Photonics contract research and development. These expenses are included in cost
of goods sold. Research and development expenses also do not include costs of
$0.7 million, $1.1 million and $1.8 incurred by Intevac in 2000, 1999 and 1998,
respectively, and reimbursed under the terms of research and development cost
sharing agreements related to development of disk and flat panel manufacturing
equipment.
Selling, general and administrative. Selling, general and administrative
expense consists primarily of selling, marketing, customer support, financial,
travel, management, legal and professional services and bad debt expense.
Domestic equipment sales are made by the Equipment Division direct sales force.
International equipment sales are made by the Company's exclusive distributor in
Japan, Matsubo; the Company's subsidiary in Singapore; and by sales
representatives in Korea and Taiwan. The Company's distributor and sales
representatives typically provide sales, installation, warranty and ongoing
customer support. Through the second quarter of 2000, Intevac marketed its flat
panel manufacturing equipment to Far East customers through its Japanese joint
venture, IMAT, after which Intevac and its joint venture partner, Matsubo,
transferred IMAT's activities and employees to Matsubo and terminated the
operations of IMAT. Photonics sales are made by the of the Photonics Division
direct sales force.
Selling, general and administrative expense totaled $4.4 million, $7.2
million and $10.9 million in 2000, 1999 and 1998, respectively, representing
12%, 17% and 11% of net revenues. The primary reasons for the decrease from 1999
to 2000 were a $1.5 million credit to bad debt expense and a $1.2 million
reduction in expense related to elimination of the electron beam processing
equipment product line. The primary reason for the decrease from 1998 to 1999
was a lower level of selling, general and administrative expense in the
Equipment Division. The lower level of expense was primarily due to a decline in
selling, general and administrative staff from 77 employees to 37 employees
during 1999 as a result of a March 1999 reduction in force, attrition, and the
reassignment of certain administrative employees to operations.
Restructuring and other expense (gain). Restructuring and other expense
(gain) was ($0.6) million, $3.1 million and $1.1 million in 2000, 1999 and 1998,
respectively.
During the fourth quarter of 1999, Intevac adopted a plan to discontinue
operations at its RPC Technologies, Inc. electron beam processing equipment
subsidiary and to close RPC's facility in Hayward, California. Twenty-six
employees out of Intevac's staff of contract and regular personnel were
terminated as a result. Intevac incurred a charge of $1,639,000 related to this
plan. The significant components of this charge included $679,000 for inventory
write-downs which were charged to cost of revenues, $264,000 for fixed asset
19
21
write-offs, $200,000 for closure of the facility, $163,000 for employee
severance costs, $161,000 for future rent due on the facility and $152,000 for
write-off of intangibles. In the first quarter of 2000, Intevac sold certain
assets of the RPC Technologies, Inc. subsidiary to Quemex Technology. Proceeds
from the sale included a cash payment, assumption of the Hayward facility lease
and assumption of certain other liabilities. Excluded from the sale were two
previously leased systems and three completed systems remaining in inventory.
The Company was able to reverse the portions of the restructuring reserve
established to provide for future rents due on the facility and for the closure
of the facility. However, since Intevac retained ownership of the two leased
systems, the Company established an equivalent reserve to provide for any
residual value at the end of the leases.
During the third quarter of 1999, Intevac adopted an expense reduction plan
that included closing one of the buildings at its Santa Clara facility and a
reduction in force of 7 employees out of Intevac's staff of contract and regular
personnel. The reductions took place at Intevac's facilities in Santa Clara,
California. Intevac incurred a charge of $2,225,000 related to the expense
reduction plan. The significant components of this charge included $873,000 for
future rent due on the building (net of expected sublease income), $160,000 for
costs associated with maintaining the building through May 2000 and $1,192,000
for the write-off of leasehold improvements and other costs associated with
restructuring. In the fourth quarter of 1999, $97,000 of the restructuring
reserve was reversed due to lower than expected costs on the closure of the
facility. During first quarter of 2000, the Company vacated approximately 47,000
square feet of its Santa Clara Headquarters and negotiated a lease termination
with its landlord, which released the Company from the obligation to pay any
rent after April 30, 2000. As a result, the Company reversed $615,000 of
previously accrued restructuring expense relating to future rents on the vacated
space. During the third quarter of 2000, the Company completed all activities
related to closing the vacated portion of the building and reversed the
remaining $23,000 of the restructuring reserve.
During the first quarter of 1999, Intevac implemented a reduction in force
of 17 employees out of Intevac's staff of contract and regular personnel. The
reductions took place at Intevac's facilities in Santa Clara, California.
Intevac incurred a charge of $115,000 related to severance costs for the
affected employees. As of December 31, 1999, all of the severance had been paid.
During the third quarter of 1998, Intevac implemented a reduction in force
of 27 employees out of Intevac's staff of contract and regular personnel. The
reductions took place at Intevac's facilities in Santa Clara, CA; Hayward, CA;
Singapore; and Taiwan. Intevac incurred a charge of $71,000 related to severance
costs for the affected employees.
During the first quarter of 1998, Intevac adopted an expense reduction plan
that included a reduction in force of 90 employees out of Intevac's staff of
contract and regular personnel. The reductions took place at Intevac's
facilities in Santa Clara, CA; Los Gatos, CA; Rocklin, CA; and Taiwan.
Additionally, Intevac relocated its RTP Operation from Rocklin to Intevac's
Santa Clara headquarters and closed the Rocklin facility. Intevac incurred a
charge of $1,164,000 related to the expense reduction plan. The significant
components of this charge included $290,000 for closure of the Rocklin facility,
$462,000 for the balance of the rent due on the lease for such facility and
$392,000 for employee severance costs. Closure of the facility was completed in
the second quarter of 1998. In the fourth quarter of 1998, $147,000 of the
restructuring reserve was reversed due to lower than expected costs incurred on
the closure of the Rocklin facility. In the first quarter of 1999, Intevac
negotiated an early termination of its lease commitment in Rocklin, CA, which
resulted in Intevac reversing the remaining $132,000 of the restructuring
reserve.
Interest expense. Interest expense consists primarily of interest on the
Convertible Notes issued in the first quarter of 1997, and to a lesser extent,
interest on approximately $2.0 million of long-term debt related to the purchase
of Cathode Technology in 1996. Interest expense totaled $3.0 million, $3.7
million and $4.2 million in 2000, 1999 and 1998, respectively. The decline in
interest expense was primarily the result of the repurchase by Intevac of $16.3
million of its 6.5% Convertible Notes Due 2004 (the "Convertible Notes") during
1999. The repurchase reduced the balance outstanding of the Convertible Notes to
$41.2 million.
Interest income and other, net. Interest income and other, net totaled $3.1
million, $3.6 million and $3.2 million in 2000, 1999 and 1998, respectively.
Interest income and other, net in 2000 consisted of
20
22
$2.3 million of interest income on investments, $0.4 million of dividends on
Intevac's interest in 601 California Avenue LLC, $0.2 million of gains on
foreign currency forward contracts and $0.2 million of early payment discounts
and other income. Interest income and other, net in 1999 consisted of $2.1
million of interest income on Intevac's investments, $1.1 million of dividends
on Intevac's interest in 601 California Avenue LLC, and $0.5 million of gains on
foreign currency forward contracts. Interest income and other, net in 1998
consisted of $2.8 million of interest income on Intevac's investments, $0.7
million of dividends on Intevac's interest in the 601 California Avenue LLC,
$0.4 million of deferred income related to the sale of Intevac's interest in
Chorus Corporation, early payment discounts, and $0.9 million of losses on
foreign currency forward contracts.
Discontinued operations. In March 1995, Intevac adopted a formal plan to
discontinue its night vision business and sold its night vision business to
Litton Systems, Inc. in May 1995. In 1998, Intevac recognized net income from
discontinued operations of $1.0 million, net of income taxes, from the reversal
of reserves established at the time of the sale and from payment received from
Litton for excess warranty reserves transferred during the sale of the night
vision business.
6 1/2% Convertible Subordinated Notes Due 2004. In July 1998, Intevac's
Board of Directors approved the repurchase in the open market of up to $19.0
million of the Convertible Notes. Intevac repurchased $16.3 million of its
Convertible Notes during 1999 from which it recognized a gain of $3.8 million,
net of applicable taxes.
Provision for (benefit from) income taxes. The Company's estimated
effective tax rate 2000 was 0%. The Company did not accrue a tax benefit during
2000 due to the inability to realize additional refunds from loss carry-backs.
As of December 31, 2000 the Company's deferred tax assets totaled $7.7 million.
The Company believes that it is more likely than not that it will earn
sufficient taxable income in the future to realize the value of these deferred
tax assets. If in the future the Company determines it is more likely that it
will not earn taxable income in the future sufficient to realize the value of
these deferred tax assets then the Company will expense the value of the
deferred tax assets not likely to be realized.
For the year ended December 31, 1999, Intevac realized a $8.3 million tax
benefit provision, equivalent to a 38% annual tax rate, on a pretax loss from
continuing operations of $22.0 million. Intevac's 1999 effective tax rate
differed from the applicable statutory rates primarily due to benefits from
tax-exempt interest income, which were partially offset by nondeductible
goodwill amortization. A net deferred tax asset of $7.7 million is reflected in
the financial statements at December 31, 1999. Management believes it is more
likely than not that Intevac will realize the benefit of this asset.
For the year ended December 31, 1998, Intevac realized a $0.9 million tax
benefit provision, equivalent to a 60% annual tax rate, on a pretax loss from
continuing operations of $1.5 million. Intevac's 1998 tax benefit was primarily
due to tax-exempt interest income and benefits from Intevac's foreign sales
corporation, partially offset by non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities in 2000 provided cash of $22,000, primarily as a
result of the net loss incurred being offset by an increase in customer
advances, a refund of federal taxes paid in prior years, depreciation,
amortization and an increase in accrued liabilities. Investing activities in
2000 provided cash of $0.8 million primarily due to the net sale of $3.8 million
of investments, which was partially offset by the purchase of $3.0 million of
property and equipment. Financing activities in 2000 provided cash of $0.5
million from the sale of Intevac's stock to employees under the employee stock
option and employee stock purchase plans.
At December 31, 2000, Intevac had $38.4 million of cash, cash equivalents
and short-term investments. Intevac intends to undertake approximately $6
million in capital expenditures during the next 12 months and believes the
existing cash and cash equivalent balances will be sufficient to meet its cash
requirements for the next twelve months and for the foreseeable future.
In January 2001, securities representing $6 million of the Company's
portfolio of short-term investments were either downgraded or put on credit
watch by Standard and Poors ("S&P"). $2 million of the $6 million is invested in
commercial paper issued by Pacific Gas & Electric, whose financial condition has
been
21
23
negatively impacted by the California energy crisis. The other $4 million is
invested in securities guaranteed by ACA Financial Guaranty Corporation ("ACA").
ACA's credit rating was downgraded when it failed to raise additional equity
capital. ACA recently announced that a group of investors has agreed to provide
ACA with new equity capital. S&P announced that upon funding of this commitment,
S&P will remove ACA from CreditWatch with negative implications and affirm the
single "A" financial strength rating of ACA. The Company is closely monitoring
the situation and will determine during the first quarter of 2001 if the
establishment of any reserves is required related to these securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest rate risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with high quality credit issuers
and, by policy, limits the amount of credit exposure to any one issuer.
Short-term investments typically consist of investments in commercial paper and
market auction rate bonds.
The table below presents principal amounts and related weighted-average
interest rates by year of maturity for the Company's investment portfolio and
debt obligations.
FAIR
2001 2002 2003 2004 2005 BEYOND TOTAL VALUE
------- ---- ---- ------- ---- ------ ------- -------
(IN THOUSANDS)
Cash equivalents
Variable rate............... $ 2,887 -- -- -- -- -- $ 2,887 $ 2,887
Average rate................ 6.58% -- -- -- -- --
Short-term investments
Variable rate............... $33,787 -- -- -- -- -- $33,787 $33,787
Average rate................ 6.94% -- -- -- -- --
Total investments
Securities.................. $36,674 -- -- -- -- -- $36,674 $36,674
Average rate................ 6.91% -- -- -- -- --
Long-term debt
Fixed rate.................. -- -- -- $41,245 -- -- $41,245 $19,798
Average rate................ 6.50% 6.50% 6.50% 6.50% -- --
Foreign exchange risk. From time to time, the Company enters into foreign
currency forward exchange contracts to economically hedge certain of its
anticipated foreign currency transaction, translation and re-measurement
exposures. The objective of these contracts is to minimize the impact of foreign
currency exchange rate movements on the Company's operating results. At December
31, 2000, the Company did not have foreign currency forward exchange contracts.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEVAC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
----
Report of Grant Thornton LLP, Independent Auditors.......... 24
Report of Ernst & Young LLP, Independent Auditors........... 25
Consolidated Balance Sheets................................. 26
Consolidated Statements of Operations and Comprehensive
Income.................................................... 27
Consolidated Statement of Shareholders' Equity.............. 28
Consolidated Statements of Cash Flows....................... 29
Notes to Consolidated Financial Statements.................. 30
23
25
REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Intevac, Inc.
We have audited the accompanying consolidated balance sheet of Intevac,
Inc. as of December 31, 2000 and the related consolidated statements of
operations and comprehensive income, shareholders' equity and cash flows for the
year then ended. Our audit also included the 2000 data in the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Intevac, Inc. at December 31, 2000 and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the 2000 data in the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
GRANT THORNTON LLP
San Jose, California
January 26, 2001
24
26
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Intevac, Inc.
We have audited the accompanying consolidated balance sheet of Intevac,
Inc. as of December 31, 1999 and the related consolidated statements of
operations and comprehensive income, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1999. Our audits also
included the 1998 and 1999 data in the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Intevac, Inc. at December 31, 1999 and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the 1998 and 1999 data in the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
January 21, 2000
25
27
INTEVAC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------
2000 1999
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,616 $ 3,295
Short-term investments.................................... 33,787 37,600
Trade and other accounts receivable, net of allowances of
$114 and $1,713 at December 31, 2000 and 1999,
respectively............................................ 9,593 5,744
Income taxes recoverable.................................. -- 5,463
Inventories, including $3,033 and $0 at customers at
December 31, 2000 and 1999, respectively................ 15,833 15,965
Prepaid expenses and other current assets................. 844 512
Deferred tax assets....................................... 4,041 4,571
------- -------
Total current assets................................ 68,714 73,150
Property, plant, and equipment, at cost:
Leasehold improvements.................................... 5,705 6,441
Machinery and equipment................................... 19,836 18,017
------- -------
25,541 24,458
Less accumulated depreciation and amortization............ 14,481 12,083
------- -------
11,060 12,375
Investment in 601 California Avenue LLC..................... 2,431 2,431
Goodwill, net of amortization of $6,554 and $4,516 at
December 31, 2000 and 1999, respectively.................. -- 2,038
Other intangibles, net of amortization of $2,434 and $2,374
at December 31, 2000 and 1999, respectively............... 7 67
Debt issuance costs, net of amortization of $1,529 and
$1,285 at December 31, 2000 and 1999, respectively........ 774 1,018
Deferred tax assets and other long term assets.............. 3,684 3,303
------- -------
Total assets........................................ $86,670 $94,382
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Book overdraft............................................ $ 814 $ 332
Notes payable............................................. 1,904 --
Accounts payable.......................................... 1,943 1,014
Accrued payroll and related liabilities................... 1,534 1,533
Other accrued liabilities................................. 5,109 8,841
Customer advances......................................... 16,317 9,851
------- -------
Total current liabilities........................... 27,621 21,571
Convertible notes........................................... 41,245 41,245
Other long-term debt........................................ -- 1,943
Commitments................................................. -- --
Shareholders' equity:
Undesignated preferred stock, no par value, 10,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock, no par value:
Authorized shares -- 50,000
Issued and outstanding shares -- 11,844 and 11,715 at
December 31, 2000 and 1999, respectively............... 18,675 18,170
Retained earnings (accumulated deficit)................... (871) 11,453
------- -------
Total shareholders' equity.......................... 17,804 29,623
------- -------
Total liabilities and shareholders' equity.......... $86,670 $94,382
======= =======
See accompanying notes.
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28
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
Net revenues................................................ $ 36,049 $ 42,962 $95,975
Cost of net revenues........................................ 34,059 40,410 71,717
-------- -------- -------
Gross profit................................................ 1,990 2,552 24,258
Operating expenses:
Research and development.................................. 10,576 14,136 12,743
Selling, general, and administrative...................... 4,415 7,226 10,879
Restructuring and other................................... (638) 3,069 1,088
-------- -------- -------
Total operating expenses.......................... 14,353 24,431 24,710
-------- -------- -------
Operating income (loss)..................................... (12,363) (21,879) (452)
Interest expense............................................ (3,033) (3,711) (4,187)
Interest income............................................. 2,341 2,100 2,832
Other income and expense, net............................... 731 1,532 344
-------- -------- -------
Income (loss) from continuing operations before income
taxes..................................................... (12,324) (21,958) (1,463)
Provision for (benefit from) income taxes................... -- (8,344) (882)
-------- -------- -------
Income (loss) from continuing operations.................... (12,324) (13,614) (581)
Discontinued operations:
Gain from discontinued operations, net of applicable
income taxes of $495................................... -- -- 1,005
Extraordinary item:
Gain from repurchase of convertible notes, net of
applicable income taxes of $2,355...................... -- 3,844 --
-------- -------- -------
Net income (loss)........................................... $(12,324) $ (9,770) $ 424
-------- -------- -------
Other comprehensive income:
Unrealized foreign currency translation adjustment........ -- -- 122
-------- -------- -------
Total comprehensive income (loss)................. $(12,324) $ (9,770) $ 546
======== ======== =======
Basic earnings per share:
Income (loss) from continuing operations.................. $ ( 1.04) $ (1.16) $ (0.05)
Net income (loss)......................................... $ (1.04) $ (0.83) $ 0.04
Shares used in per share amounts.......................... 11,803 11,777 12,052
Diluted earnings per share:
Income (loss) from continuing operations.................. $ (1.04) $ (1.16) $ (0.05)
Net income (loss)......................................... $ (1.04) $ (0.83) $ 0.03
Shares used in per share amounts.......................... 11,803 11,777 12,354
See accompanying notes.
27
29
INTEVAC, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED RETAINED
COMMON STOCK OTHER EARNINGS TOTAL
---------------- COMPREHENSIVE (ACCUM. STOCKHOLDER'S
SHARES AMOUNT INCOME DEFICIT) EQUITY
------ ------- ------------- -------- -------------
Balance at December 31, 1997............... 12,154 $17,336 $ -- $ 25,099 $ 42,435
Sale of common stock under stock option
plan.................................. 39 130 -- -- 130
Sale of common stock under employee stock
purchase plan......................... 151 1,001 -- -- 1,001
Repurchase of common stock............... (457) (670) -- (3,126) (3,796)
Income tax benefits realized from
activity in employee stock plans...... -- 120 -- -- 120
Change in foreign currency translation
adjustments........................... -- -- 122 -- 122
Net income............................... -- -- -- 424 424
------ ------- ----- -------- --------
Balance at December 31, 1998............... 11,887 $17,917 $ 122 $ 22,397 $ 40,436
Sale of common stock under stock option
plan.................................. 27 38 -- -- 38
Sale of common stock under employee stock
purchase plan......................... 122 684 -- -- 684
Repurchase of common stock............... (321) (491) -- (1,174) (1,665)
Income tax benefits realized from
activity in employee stock plans...... -- 22 -- -- 22
Change in foreign currency translation
adjustments........................... -- -- (122) -- (122)
Net loss................................. -- -- -- (9,770) (9,770)
------ ------- ----- -------- --------
Balance at December 31, 1999............... 11,715 $18,170 $ -- $ 11,453 $ 29,623
Sale of common stock under stock option
plan.................................. 20 58 -- -- 58
Sale of common stock under employee stock
purchase plan......................... 109 418 -- -- 418
Income tax benefits realized from
activity in employee stock plans...... -- 29 -- -- 29
Net loss................................. -- -- -- (12,324) (12,324)
------ ------- ----- -------- --------
Balance at December 31, 2000............... 11,844 $18,675 $ -- $ (871) $ 17,804
====== ======= ===== ======== ========
See accompanying notes.
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30
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDING DECEMBER 31,
---------------------------------
2000 1999 1998
--------- -------- --------
OPERATING ACTIVITIES
Income (loss) from continuing operations.................... $ (12,324) $(13,614) $ (581)
Gain from discontinued operations & extraordinary item...... -- 3,844 1,005
--------- -------- --------
Net income (loss)........................................... (12,324) (9,770) 424
Adjustments to reconcile net income (loss) to net cash and
cash equivalents provided by (used in) operating
activities:
Depreciation.............................................. 3,721 3,805 5,244
Amortization of intangibles............................... 2,342 1,578 2,130
Gain on sale of Chorus investment......................... -- -- (395)
Gain on sale of discontinued operations................... -- -- (794)
Gain on purchase of convertible notes..................... -- (6,199) --
(Gain)/loss on IMAT investment............................ 125 (39) 206
Restructuring and other charges -- non-cash portion....... 856 428 506
Loss on disposal of equipment............................. 2 336 206
Changes in assets and liabilities:
Accounts receivable..................................... 1,614 (1,038) (535)
Inventory............................................... (343) 4,147 11,818
Prepaid expenses and other assets....................... (332) 586 (1,651)
Accounts payable........................................ 929 (1,020) (2,551)
Accrued payroll and other accrued liabilities........... (3,034) 1,287 (3,049)
Customer advances....................................... 6,466 (1,779) (16,617)
--------- -------- --------
Total adjustments.................................. 12,346 2,092 (5,482)
--------- -------- --------
Net cash and cash equivalents provided by (used in)
operating activities............................. 22 (7,678) (5,058)
INVESTING ACTIVITIES
Purchase of investments..................................... (116,271) (50,880) (56,500)
Proceeds from sales and maturities of investments........... 120,084 70,205 46,286
Purchase of equipment....................................... (2,990) (1,736) (2,898)
Proceeds from sale of Chorus Investment..................... -- -- 395
--------- -------- --------
Net cash and cash equivalents provided by (used in)
investing activities............................. 823 17,589 (12,717)
FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 476 722 1,131
Repurchase of common stock.................................. -- (1,665) (3,796)
Repurchase of Intevac convertible notes..................... -- (9,664) --
--------- -------- --------
Net cash and cash equivalents provided by (used in)
financing activities............................. 476 (10,607) (2,665)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 1,321 (696) (20,440)
Cash and cash equivalents at beginning of period............ 3,295 3,991 24,431
--------- -------- --------
Cash and cash equivalents at end of period.................. $ 4,616 $ 3,295 $ 3,991
========= ======== ========
Cash paid (received) for:
Interest.................................................. $ 2,789 $ 3,555 $ 3,481
Income taxes.............................................. 2 -- 4,065
Income tax refund......................................... (5,803) (3,099) --
Other non-cash changes:
Inventories transferred to (from) property, plant and
equipment............................................... $ 304 $ 1,942 $ (767)
Income tax benefit realized from activity in employee
stock plans............................................. 29 22 120
See accompanying notes.
29
31
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND NATURE OF OPERATIONS
Intevac, Inc.'s ("Intevac" or the "Company") Equipment Division is a
leading supplier of 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 Equipment Division also
realizes revenues from the sales of disk lubrication equipment and flat panel
display ("FPD") manufacturing equipment. Upgrades, spare parts and after-sale
service are also sold to purchasers of Intevac's equipment, and sales of
components are made to other manufacturers of vacuum equipment. The Company
sells and markets its products directly in the United States and Singapore, and
through an exclusive distributor in Japan and sales representatives in Korea and
Taiwan. The Company supports its customers in Southeast Asia through its wholly
owned subsidiary in Singapore.
The Company's Photonics Division develops technology that permits highly
sensitive detection of photons in the visible and short wave infrared portions
of the spectrum. This technology when combined with advanced silicon integrated
circuits makes it possible to produce highly sensitive video cameras. This
development work is creating new products for both military and industrial
applications.
During the fourth quarter of 1999, the Company adopted a plan to
discontinue its electron beam processing equipment product line and to close the
facility in Hayward, California where that equipment was built.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Intevac and
its wholly owned subsidiaries. All inter-company transactions and balances have
been eliminated.
Revenue Recognition
Systems and components -- Revenues for disk sputtering systems, flat panel
equipment and electron beam processing systems are recognized upon customer
acceptance. Revenues for system component sales are recognized upon shipment.
Service and Maintenance -- Service and maintenance contract revenue, which
to date has been insignificant, is recognized ratably over applicable contract
periods or as services are performed.
Technology Development -- The Company performs best efforts research and
development work under various research contracts. Revenue on these contracts is
recognized in accordance with contract terms, typically as costs are incurred.
Typically, for each contract, the Company commits to perform certain research
and development efforts up to an agreed upon amount. In connection with these
contracts, the Company receives funding on an incremental basis up to a ceiling.
Upon completion of each contract, each party will typically receive certain
rights to the technical and computer software data developed under the contract.
Some of these contracts are cost sharing in nature, where Intevac is reimbursed
for a portion of the total costs expended. In addition, the Company has, from
time to time, negotiated with a third party to fund a portion of the Company's
costs in return for a joint interest to the Company's rights at the end of the
contract.
Net revenues and related cost of net revenues associated with these
contracts were $5,975,000 and $7,090,000 for 2000, respectively, $7,067,000 and
$7,071,000 for 1999, respectively and $5,931,000 and $5,861,000 for 1998,
respectively.
30
32
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warranty
The Company's standard warranty is twelve months from customer acceptance.
During this warranty period any necessary non-consumable parts are supplied and
installed. A provision for the estimated cost of warranty is recorded upon
customer acceptance for systems and upon shipment for non-system products.
International Distribution Costs
The Company makes payments to agents and distributors under certain
agreements related to international sales in return for obtaining orders and
providing installation and warranty services. Certain of these payments to
agents and distributors are included in cost of net revenues. These amounts
totaled approximately $0, $0 and $72,000 for the years ended December 31, 2000,
1999 and 1998, respectively.
Advertising Expenses
The Company accounts for advertising costs as expense in the period in
which they are incurred. Advertising expenses for 2000, 1999 and 1998 were
insignificant.
Customer Advances
Customer advances generally represent nonrefundable deposits invoiced by
the Company in connection with receiving customer purchase orders and shipment
of the systems. Customer advances related to systems that have not been shipped
to customers, and included in accounts receivable were $2,719,000 and $930,000
at December 31, 2000 and 1999, respectively.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Short-term investments consist principally of high-quality debt instruments
with maturities generally between one and twelve months and are carried at fair
value. These investments are typically short-term in nature and therefore bear
minimal risk.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. At December 31, 2000 and 1999, all debt securities were classified as
available-for-sale under Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities." Securities
classified as available-for-sale are reported at fair market value with the
related unrealized gains and losses included in retained earnings. Realized
gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in other income and expenses. The
cost of securities sold is based on the specific identification method.
Cash and cash equivalents represent cash accounts and money market funds.
Short-term investments of $33,787,000 at December 31, 2000 consist primarily of
investments in commercial paper and market auction rate bonds. Short-term
investments of $37,600,000 at December 31, 1999 consist primarily of investments
in tax-exempt market auction rate preferred municipal bonds. Fair values are
based on quoted market prices. The amount of unrealized gain or loss was not
significant for the years ended December 31, 2000, 1999 and 1998. Gross realized
gains and losses for the years ended December 31, 2000, 1999 and 1998 were not
significant.
31
33
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-lived Assets
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and Long-lived Assets to be Disposed Of," the carrying value
of intangible assets and other long-lived assets is reviewed on a regular basis
for the existence of facts or circumstances, both internal and external, that
may suggest impairment. Intevac will determine if any impairment exists based on
undiscounted expected future cash flows from the impaired assets. The cash flow
estimates that will be used will contain management's best estimates, using
assumptions and projections appropriate and customary at the time. Any
adjustment to the carrying value of the long-lived assets would be based on the
estimated fair value of the assets. In 2000, the Company determined that the
intangible assets related to the purchase of Cathode Technology Corporation and
Lotus Technologies, Inc. had become impaired. At December 31, 2000 the remaining
goodwill related to those purchases, amounting to $1,056,000, was written off.
Foreign Exchange Contracts
The Company may enter into foreign currency forward exchange contracts to
hedge certain of its foreign currency transaction, translation and
re-measurement exposures. The Company's accounting policies for some of these
instruments are based on the Company's designation of such instruments as
hedging transactions. Instruments not designated as a hedge transaction will be
"marked to market" at the end of each accounting period. The criteria the
Company uses for designating an instrument as a hedge include effectiveness in
exposure reduction and one-to-one matching of the derivative financial
instrument to the underlying transaction being hedged. Gains and losses on
foreign currency forward exchange contracts that are designated and effective as
hedges of existing transactions are recognized in income in the same period as
losses and gains on the underlying transactions are recognized and generally
offset.
During fiscal 2000, 1999 and 1998, the Company entered into yen denominated
foreign currency forward exchange contracts to hedge anticipated yen denominated
sales. The Company has not designated these foreign currency forward contracts
as hedge transactions; therefore, the contracts have been "marked to market."
As of December 31, 2000, the Company had no foreign currency forward
exchange contracts outstanding. In fiscal 2000, the Company realized gains of
$111,000 related to foreign currency forward exchange contracts.
While the notional amounts of foreign exchange contracts are often used to
express the volume of these transactions, the potential accounting loss on these
transactions if all counterparties failed to perform is limited to the amounts,
if any, by which the counterparties' obligations exceed the Company's obligation
to the counterparties.
Inventories
Inventories for systems and components are stated at the lower of standard
cost (which approximates actual cost on a first-in, first-out basis) or market.
Inventories consist of the following:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Raw materials............................................ $ 4,591 $ 2,307
Work-in-progress......................................... 8,209 13,658
Finished goods........................................... 3,033 --
------- -------
$15,833 $15,965
======= =======
32
34
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property, Plant and Equipment
Equipment and leasehold improvements are carried at cost less allowances
for accumulated depreciation and amortization. Gains and losses on dispositions
are reflected in the statements of income.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which are generally three to seven years for
machinery and equipment. Amortization of leasehold improvements is computed
using the shorter of the remaining terms of the leases or the estimated economic
useful lives of the improvements.
Intangible Assets
The Company amortizes intangible assets on a straight-line basis over the
estimated useful lives, which range from two to seven years.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net income or shareholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities and the foreign currency translation adjustments,
which prior to the adoption were reported separately in shareholders' equity, to
be included in other comprehensive income.
As of December 31, 1998, the $122,000 balance of accumulated other
comprehensive income was comprised entirely of accumulated foreign currency
translation adjustments. No income tax effect has been recorded related to the
comprehensive income. There was no accumulated other comprehensive income as of
December 31, 2000 or 1999.
Employee Stock Plans
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with provisions of the Accounting Principles Board's
Opinion No. 25 ("APB 25"), "Accounting For Stock Issued to Employees." In 1995,
the Financial Accounting Standards Board ("FASB") released Statement of
Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company is continuing to
account for its employee stock plans in accordance with the provisions of APB
25. Under APB 25, because the exercise prices of the Company's stock options
granted to employees equal the market prices of the underlying stock on the date
of grant, no compensation expense is recognized.
33
35
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net income (loss) per share
The following table sets forth the computation of basic and diluted
earnings per share:
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
Numerator:
Income (loss) from continuing operations.......... $(12,324) $(13,614) $ (581)
Gain from discontinued operations & extraordinary
item, net of applicable income taxes........... -- 3,844 1,005
-------- -------- -------
Net income (loss)................................. $(12,324) $ (9,770) $ 424
======== ======== =======
Numerator for basic earnings per share -- income
(loss) available to common stockholders........ (12,324) (9,770) 424
Effect of dilutive securities:
6 1/2% convertible notes(1).................... -- -- --
-------- -------- -------
Numerator for diluted earnings per share -- income
(loss) available to common stockholders after
assumed conversions............................ $(12,324) $ (9,770) $ 424
======== ======== =======
Denominator:
Denominator for basic earnings per share --
weighted-average shares........................ 11,803 11,777 12,052
Effect of dilutive securities:
Employee stock options(2)...................... -- -- 302
6 1/2% convertible notes(1).................... -- -- --
-------- -------- -------
Dilutive potential common shares.................. -- -- 302
-------- -------- -------
Denominator for diluted earnings per share --
adjusted weighted-average shares and assumed
conversions.................................... 11,803 11,777 12,354
======== ======== =======
- ---------------
(1) Diluted EPS for the twelve-month periods ended December 31, 2000, December
31, 1999 and December 31, 1998 excludes "as converted" treatment of the
Convertible Notes as their inclusion would be anti-dilutive. The number of
"as converted" shares excluded from the twelve-month periods ended December
31, 2000, 1999 and 1998 was 1,999,758, 2,345,273 and 2,787,879,
respectively.
(2) Diluted EPS for the twelve-month period ended either December 31, 2000 or
December 31, 1999 excludes the effect of employee stock options as their
inclusion would be anti-dilutive. The number of employee stock options
excluded from the twelve-month periods ended December 31, 2000 and 1999 was
156,504 and 169,564, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principals generally accepted in the United States of America 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 the 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.
34
36
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CONCENTRATIONS
Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash equivalents, short-term
investments, accounts receivable and foreign exchange forward contracts. The
Company generally invests its excess cash in money market funds, in market
auction rate preferred municipal bonds and in commercial paper, which have
contracted maturities generally within one year. By policy, the Company's
investments in commercial paper, certificates of deposit, Eurodollar time
deposits, or banker's acceptances are rated A1/P1 or better. Investments in tax
exempt or tax advantaged instruments, such as variable rate municipal bonds are
rated A or better. To date, the Company has not incurred losses related to these
investments.
In January 2001, securities representing $6 million of the Company's
portfolio of short-term investments were either downgraded or put on credit
watch by Standard and Poors ("S&P"). $2 million of the $6 million is invested in
commercial paper issued by Pacific Gas & Electric, whose financial condition has
been negatively impacted by the California energy crisis. The other $4 million
is invested in securities guaranteed by ACA Financial Guaranty Corporation
("ACA"). ACA's credit rating was downgraded when it failed to raise additional
equity capital. ACA recently announced that a group of investors has agreed to
provide ACA with new equity capital. S&P announced that upon funding of this
commitment, S&P will remove ACA from CreditWatch with negative implications and
affirm the single "A" financial strength rating of ACA. The Company is closely
monitoring the situation and will determine during the first quarter of 2001 if
the establishment of any reserves is required related to these securities.
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 performs credit evaluations of its customers' financial
conditions and requires deposits on system orders but does not generally require
collateral or other security to support customer receivables. The Company's
largest customers tend to change from period to period as a function of each
customer's plans to renovate, or add to existing production capacity.
Products
Disk sputtering equipment contributed a significant portion of the
Company's revenues in 2000, 1999 and 1998. The Company expects that its ability
to maintain or expand its current levels of revenues and to return to
profitability in the future will depend upon its success in enhancing its
existing systems and developing and manufacturing competitive disk sputtering
equipment and its success in developing other products such as flat panel
display equipment and photonics devices.
Markets
The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, changes in customer
requirements, new product introductions and enhancements. The market for capital
equipment is dependent 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 business cycle and the individual industry cyclicality may cause
prospective customers to postpone decisions regarding purchases of the Company's
systems.
Materials
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
35
37
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Inventories
The Company makes inventory provisions for potentially excess and obsolete
inventory based on backlog and forecasted demand. However, such backlog demand
is subject to revisions, cancellations, and rescheduling. Actual demand will
inevitably differ from such anticipated demand, and such differences may have a
material effect on the financial statements.
Competition
The Company experiences intense competition worldwide in the equipment
business from competitors, most of which have substantially greater financial,
technical, marketing, manufacturing and other resources than the Company. 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. 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.
4. DISCONTINUED OPERATIONS
In the first quarter of 1995, the Company adopted a formal plan to
discontinue the operations of its night vision business. Accordingly, the
consolidated statements of operations and cash flows for all periods presented
reflect the night vision operations as discontinued. In the second quarter of
1995, the Company sold its night vision business to Litton Systems, Inc. for
cash of $7,546,000.
The Company established a reserve of $2,622,000 for costs associated with
the sale. The significant components of this charge included $795,000 for
warranty costs, $680,000 for estimated environmental remediation costs
associated with the site of the night vision operations, and $476,000 for
write-offs of certain prepaid expenses and other assets. Remediation efforts
were completed in 1997. Warranty on all products shipped by the business expired
in November 1997. In the first quarter of 1998, the remaining reserve of
$794,000 associated with closing the business was reversed. In the second
quarter of 1998, Litton reimbursed the Company for $706,000 in excess warranty
reserves transferred at the time of the sale. Both of these amounts are
reflected as income from discontinued operations, net of applicable income
taxes.
5. EQUITY INVESTMENTS
601 California Avenue LLC
In 1995, the Company entered into a Limited Liability Company Operating
Agreement (the "Operating Agreement"), which expires December 31, 2015, with 601
California Avenue LLC (the "LLC"), a California limited liability company formed
and owned by the Company and certain shareholders of the Company at that time.
Under the Operating Agreement, the Company transferred its leasehold interest in
the site of the Company's discontinued night vision business (the "Site") in
exchange for a preferred share in the LLC with a face value of $3,900,000. The
Company is accounting for the investment under the cost method and has
36
38
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recorded its investment in the LLC at $2,431,000, which represents the Company's
historical carrying value of the leasehold interest in the Site. The preferred
share in the LLC pays a 10% annual cumulative preferred dividend.
During 1996, the LLC formed a joint venture with Stanford University (the
"Stanford JV") to develop the property. The project was completed and leased in
August 1998. The Company received dividends of $390,000, $1,077,000 and $650,000
from the LLC in 2000, 1999 and 1998, respectively. The dividends received during
1998 and 1999 consisted of the annual $390,000 dividend plus the cumulative
dividends earned in prior years. As of December 31, 2000 all outstanding
cumulative dividends on the preferred share had been paid. These dividends are
included in other income and expense.
IMAT Inc.
On June 27, 1997, the Company entered into an agreement with Matsubo to
form a joint venture responsible for the sales and service of Intevac's flat
panel display equipment in Japan and other Asian countries. The Company invested
$436,000 for 49% of the voting stock of the joint venture. The joint venture is
being accounted for under the equity method. Gains and losses related to the
Company's share of the joint venture are reflected in other income and expense,
net on the consolidated statements of income. The Company's equity in the net
income or (loss) of IMAT, Inc. was ($125,000), $15,000 and ($217,000) in 2000,
1999 and 1998, respectively. Revenues have been recognized for 2 system
shipments to IMAT, which were accepted by the customer in 1999. In February of
1999, the Company entered into an agreement to guarantee up to 14,700,000 Yen of
IMAT's debt. During the third quarter of 2000, the Company and its joint venture
partner, Matsubo, transferred IMAT's activities and employees to Matsubo and
terminated the operations of IMAT.
6. LINE OF CREDIT
As of December 31, 2000, the Company had secured its $1,904,000 note
related to the purchase of Cathode Technology Corporation ("Cathode") with a
stand-by letter of credit through its bank. No additional lines of credit
existed at December 31, 2000.
7. COMMITMENTS
The Company leases certain facilities under non-cancelable operating leases
that expire at various times up to 2007. The facility leases require the Company
to pay for all normal maintenance costs. The lease for the primary facility in
Santa Clara includes an option to extend the lease for an additional five-year
period.
Future minimum rental payments under these leases at December 31, 2000 are
as follows (in thousands):
2001....................................................... $ 1,861
2002....................................................... 2,614
2003....................................................... 2,953
2004....................................................... 3,070
2005....................................................... 3,192
-------
Total............................................ $13,690
=======
Gross rental expense was approximately $1,596,000, $2,652,000 and
$2,977,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Offsetting rental expense for the periods ending December 31, 2000, 1999 and
1998 was sublease income of $62,000, $238,000 and $238,000, respectively.
37
39
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
In 1991, the Company established a defined contribution retirement plan
with 401(k) plan features. The plan covers all United States employees eighteen
years and older. Employees may make contributions by a percentage reduction in
their salaries, not to exceed the statutorily prescribed annual limit. The
Company made contributions of $123,000, $170,000 and $204,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. Administrative expenses
relating to the plan are insignificant.
9. NOTES PAYABLE
In 1996, the Company issued notes related to the purchase of Cathode. The
notes bear interest at 5.58% compounded monthly and payable quarterly. Principal
payments on the note are made quarterly based on unit sales of the Cathode
sputter sources. The remaining balance on the notes was paid in full in January
2001.
10. CONVERTIBLE NOTES
During the first quarter of 1997, the Company completed an offering of
$57.5 million of its 6 1/2% Convertible Subordinated Notes (the "Convertible
Notes"), which mature on March 1, 2004. Interest is payable to the note holders
on each March 1st and September 1st. The notes are convertible into shares of
the Company's common stock at $20.625 per share. Expenses associated with the
offering of approximately $2.3 million have been deferred. Such expenses are
being amortized to interest expense over the term of the notes.
During 1999, the Company repurchased $16,255,000, face value, of its
Convertible Notes. The repurchase resulted in a gain of $3,844,000 (net of
income taxes).
11. SEGMENT REPORTING
Segment Description
Intevac, Inc. has two reportable operating segments: equipment and
photonics. The Company's Equipment Division sells complex capital equipment used
in the manufacturing of thin-film disks, flat panel displays, shrink-wrap films
and for in-line sterilization. The Company's Photonics Division is developing
products utilizing electron sources that permit highly sensitive detection in
the short-wave infrared spectrum.
Included in corporate activities are general corporate expenses,
elimination of inter-segment revenues, the equity in net loss of equity investee
(see Note 5) and amortization expenses related to certain intangible assets.
Assets of corporate activities include unallocated cash and short-term
investments, deferred income taxes and certain intangibles and other assets.
Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on profit
or loss from operations before interest, other income and expense and income
taxes. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
38
40
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Business Segment Net Revenues
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Equipment
Trade............................................... $28,797 $36,008 $90,257
Inter-segment....................................... -- -- 354
------- ------- -------
28,797 36,008 90,611
Photonics
Trade............................................... 7,252 6,954 5,718
Corporate activities................................ -- -- (354)
------- ------- -------
Total....................................... $36,049 $42,962 $95,975
======= ======= =======
Business Segment Profit & Loss
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
Equipment(1)........................................ $ (8,048) $(16,667) $ 2,257
Photonics........................................... (2,164) (935) (125)
Corporate activities(2)............................. (2,151) (4,277) (2,584)
-------- -------- -------
Operating income (loss)............................. (12,363) (21,879) (452)
Interest expense.................................... (3,033) (3,711) (4,187)
Interest income..................................... 2,341 2,100 2,832
Other income and expense, net....................... 731 1,532 344
-------- -------- -------
Income (loss) from continuing operations before
income taxes...................................... $(12,324) $(21,958) $(1,463)
======== ======== =======
(1) Includes restructuring and other charge of $1,639 and $1,088 in 1999 and
1998, respectively.
(2) Includes restructuring and other charge of $2,128 in 1999.
Business Segment Assets
2000 1999 1998
------- ------- --------
(IN THOUSANDS)
Equipment............................................ $32,207 $29,871 $ 41,825
Photonics............................................ 4,404 4,483 5,032
Corporate activities................................. 50,059 60,028 76,119
------- ------- --------
Total assets............................... $86,670 $94,382 $122,976
======= ======= ========
39
41
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Business Segment Property, Plant & Equipment
ADDITIONS 2000 1999 1998
--------- ------ ------ ------
(IN THOUSANDS)
Equipment(1)(2).......................................... $2,237 $4,230 $1,734
Photonics................................................ 656 794 1,015
Corporate activities..................................... 401 278 149
------ ------ ------
Total additions................................ $3,294 $5,302 $2,898
====== ====== ======
(1) Includes inventory transferred to fixed assets of $304 and $1,942 in 2000
and 1999, respectively.
DEPRECIATION 2000 1999 1998
------------ ------ ------ ------
(IN THOUSANDS)
Equipment(1)............................................. $2,387 $2,808 $3,364
Photonics................................................ 716 512 328
Corporate activities..................................... 618 485 308
------ ------ ------
Total depreciation............................. $3,721 $3,805 $4,000
====== ====== ======
(1) Excludes amortization related to assets leased to a third party of $1,244 in
1998.
Geographic Area Net Trade Revenues
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
United States......................................... $26,466 $17,254 $44,983
Far East.............................................. 9,414 25,372 49,050
Europe................................................ 49 234 391
Rest of World......................................... 120 102 1,551
------- ------- -------
Total revenues.............................. $36,049 $42,962 $95,975
======= ======= =======
Major Customers
In 2000, MMC Technology, Seagate, Westt and Matsubo, the Company's Japanese
distributor, each accounted for more than 10% of the Company's consolidated
revenues and in aggregate accounted for 56% of net revenues. In 1999 Matsubo,
Seagate and Lockheed Martin each accounted for more than 10% of the Company's
consolidated revenues and in aggregate accounted for 66% of net revenues. In
1998 Matsubo, HMT Technology and MMC Technology each accounted for more than 10%
of the Company's consolidated revenues and in aggregate accounted for 71% of net
revenues.
12. SHAREHOLDERS' EQUITY
The Company's Articles of Incorporation authorizes 10,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the shareholders.
40
42
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option/Stock Issuance Plans
The Board of Directors approved the 1991 Stock Option/Stock Issuance Plan
(the "1991 Plan") in 1991. The maximum number of shares that may be issued over
the term of the 1991 Plan is 2,666,667 shares.
The 1991 Plan is divided into two separate components: the Option Grant
Program and the Stock Issuance Program. Under the Option Grant Program, the
Company may grant either incentive stock options or nonqualified options or
implement stock appreciation rights provisions at the discretion of the Board of
Directors. Exercisability, option price, and other terms are determined by the
Board of Directors, but the option price shall not be less than 85% and 100% of
the fair market value for nonqualified options and incentive stock options,
respectively, as determined by the Board of Directors. Options granted under the
1991 Stock Option/Stock Issuance Plan are immediately exercisable; however,
unexercised options and shares purchased upon the exercise of the options are
subject to vesting over a five-year period. The Company may repurchase shares
that are not vested. Zero shares, one share and 7,169 shares were subject to
repurchase at December 31, 2000, 1999 and 1998, respectively.
In 1995, the Board of Directors approved adoption of (i) the 1995 Stock
Option/Stock Issuance Plan (the "1995 Plan") under which employees, non-employee
directors and consultants may be granted stock options to purchase stock or
issued shares of stock at not less than 85% of fair market value on the
grant/issuance date; and (ii) the Employee Stock Purchase Plan. The 1995 Plan,
as amended in 2000, serves as the successor equity incentive program to the
Company's 1991 Plan. Upon adoption of the 1995 Plan, all shares available for
issuance under the 1991 Plan were transferred to the 1995 Plan. As of December
31, 2000, 2,120,400 shares of common stock are authorized for future issuance
under the 1995 Plan. Options granted under the 1995 Plan are exercisable upon
vesting and generally vest over a five-year period. Options currently expire no
later than ten years from the date of grant.
Options to purchase 878,157, 692,457 and 481,551 shares were vested at
December 31, 2000, 1999 and 1998, respectively.
In the third quarter of 1998, the Company approved an exchange program that
offered to each employee that held stock options granted between August 19, 1996
and July 31, 1998, the opportunity to exchange their options for newly granted
stock options. The new option would be for the same number of shares as
originally granted, but the vesting period would start on the day the new option
was granted. This offer was open for a two-week period of time. The exercise
price of the new option was set at the fair market value of Intevac common stock
on the date each employee notified the Company of their acceptance of the
exchange offer during the period. New stock options were granted for a total of
500,700 shares of common stock. The new option prices ranged from $6.250 to
$8.375.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of this Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
multiple option pricing model with the following weighted average assumptions
for 2000, 1999 and 1998, respectively: risk-free interest rates of 5.17%, 6.15%
and 4.66%; dividend yields of 0.0%, 0.0% and 0.0%; volatility factors of the
expected market price of the Company's common stock of 0.936, 0.855 and 0.800;
and a weighted-average expected life of the option of 0.25, 0.25 and 0.25 years
beyond each respective vesting period.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion,
41
43
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
Under the 1995 Employee Stock Purchase Plan, as amended in 1999, (the
"ESPP"), the Company is authorized to issue up to 1,000,000 shares of common
stock to participating employees. Under the terms of the ESPP, employees can
choose to have up to 10% of their annual base earnings withheld to purchase the
Company's common stock. The purchase price of the stock is 85% of the lower of
the subscription date fair market value or the purchase date fair market value.
Approximately 75% of eligible employees have participated in the ESPP. Under the
ESPP, the Company sold 108,784, 122,325 and 150,819 shares to employees in 2000,
1999 and 1998, respectively. As of December 31, 2000, 412,870 shares remained
reserved for issuance under the ESPP. The Company does not recognize
compensation cost related to employee purchase rights under the Plan. To comply
with the pro forma reporting requirements of FAS 123, compensation cost is
estimated for the fair value of the employees' purchase rights using the
Black-Scholes model with the following assumptions for those rights granted in
2000, 1999 and 1998, respectively: risk-free interest rates of 5.36%, 5.78% and
4.68%; dividend yield of 0.0%, 0.0% and 0.0%; expected volatility of 0.936,
0.855 and 0.800; and an expected life of 2.00, 1.99 years and 1.98 years (the
offering period ends July 31, 2002 for the subscription period that began in
August 2000). The weighted average fair value of those purchase rights granted
in 2000, 1999 and 1998 were $2.78, $2.94 and $5.37, respectively.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
2000 1999 1998
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net income (loss)......................... $(13,143) $(11,027) $(1,491)
Pro forma earnings (loss) per share
Basic............................................. $ (1.11) $ (0.94) $ (0.12)
Diluted........................................... $ (1.11) $ (0.94) $ (0.12)
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding -- beginning
of year............... 1,496,370 $5.82 1,599,762 $6.92 1,573,713 $ 8.77
Granted............... 336,100 3.75 399,100 4.70 713,700 7.16
Exercised............. (20,261) 2.86 (26,497) 1.45 (39,350) 3.22
Forfeited............. (241,912) 5.99 (475,995) 8.82 (648,301) 11.90
Outstanding -- end of
year.................. 1,570,297 5.39 1,496,370 5.82 1,599,762 6.92
Exercisable at end of
year.................. 878,157 $5.84 797,470 $5.81 715,072 $ 5.98
Weighted-average fair
value of options
granted during the
year.................. $2.20 $2.64 $ 3.86
42
44
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 2000
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
- ------------------------ ----------------- ---------------- -------------- ----------------- --------------
$ 0.150 - $ 3.063 142,811 3.43 yrs $ 1.52 134,211 $ 1.42
$ 3.375 - $ 3.375 220,000 9.47 yrs $ 3.38 20,000 $ 3.38
$ 3.625 - $ 3.813 176,300 8.98 yrs $ 3.80 30,460 $ 3.81
$ 4.190 - $ 5.375 181,760 8.87 yrs $ 5.03 36,180 $ 5.37
$ 6.000 - $ 6.000 359,827 4.61 yrs $ 6.00 359,827 $ 6.00
$ 6.063 - $ 7.625 387,099 6.88 yrs $ 6.95 243,599 $ 7.16
$ 7.688 - $10.000 79,000 7.63 yrs $ 8.20 32,280 $ 8.30
$11.625 - $21.250 23,500 5.51 yrs $17.92 21,600 $18.41
--------- -------
$ 0.150 - $21.250 1,570,297 6.89 yrs $ 5.39 878,157 $ 5.84
13. INCOME TAXES
The provision for income taxes on income from continuing operations
consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
Federal:
Current............................................. $ -- $(8,552) $ 630
Deferred............................................ -- 843 (1,420)
------- ------- -------
-- (7,709) (790)
State:
Current............................................. 2 2 124
Deferred............................................ (2) (637) (216)
------- ------- -------
-- (635) (92)
------- ------- -------
Total....................................... $ -- $(8,344) $ (882)
======= ======= =======
The tax benefits associated with exercises of nonqualified stock options
and disqualifying dispositions of stock acquired through the incentive stock
option and employee stock purchase plans reduce taxes currently payable for
2000, 1999 and 1998 as shown above by $29,000, $22,000 and $120,000,
respectively. Such benefits are credited to additional paid-in capital when
realized.
43
45
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets computed in accordance with SFAS 109 are as
follows (in thousands):
DECEMBER 31,
-----------------
2000 1999
------- ------
Deferred tax assets:
Vacation accrual........................................ $ 389 $ 309
Warranty reserve........................................ 310 333
Bad debt reserve........................................ 47 713
Inventory valuation..................................... 3,959 1,981
Restructuring........................................... -- 1,001
AMT credit carry-forward................................ 520 1,641
Federal and State NOL carry-forward..................... 4,903 592
Other................................................... 1,401 1,581
------- ------
11,529 8,151
Valuation allowance for deferred tax assets............. (3,605) --
------- ------
Total deferred tax assets....................... $ 7,924 $8,151
------- ------
Deferred tax liabilities:
Other................................................... $ 202 $ 429
------- ------
Total deferred tax liabilities.................. $ 202 $ 429
------- ------
Net deferred tax assets................................... $ 7,722 $7,722
======= ======
A valuation allowance of $3,605,000 has been established due to the
uncertainty of realizing certain tax credit and loss carry-forwards. The Federal
and State NOL carry-forwards of $11,416,000 and $13,696,000 expire in 2020 and
2005, respectively, if not previously utilized. The AMT credit carry-forwards do
not expire.
A reconciliation of the income tax provision on income from continuing
operations at the federal statutory rate of 35% to the income tax provision at
the effective tax rate is as follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -----
Income taxes computed at the federal statutory rate..... $(4,314) $(7,685) $(512)
State taxes (net of federal benefit).................... (640) (413) (60)
Foreign Sales Corporation benefit....................... -- -- (114)
Tax exempt income....................................... (14) (467) (788)
Goodwill amortization................................... 713 366 419
Effect of tax rate changes and other permanent
differences........................................... 650 (145) 173
Valuation allowance..................................... 3,605 -- --
------- ------- -----
Total......................................... $ -- $(8,344) $(882)
======= ======= =====
14. RESEARCH AND DEVELOPMENT COST SHARING AGREEMENTS
The Company entered into an agreement with a Japanese company to perform
best efforts joint research and development work. The nature of the project is
to develop a glass-coating machine to be used in the production of flat panel
displays. The Company was funded for one-half of the actual costs of the project
up to a ceiling of $9,450,000. At December 31, 1999, the Company had received
the entire amount under the contract. Qualifying costs of approximately
$3,108,000, $1,467,000 and $1,706,000 for the years ended
44
46
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000, 1999 and 1998, respectively, were incurred on this project,
resulting in offsets against research and development costs of approximately
$583,000, $736,000 and $1,410,000 in 2000, 1999 and 1998, respectively. As of
December 31, 2000, the entire advance had been applied to qualifying costs.
Upon completion of the research and development work, if successful, each
party will receive certain manufacturing and marketing rights for separate
regions of the world. The agreement also calls for certain royalty payments by
each party to the other party, based on production and sales. The royalty rate
will be 5% for each party.
15. RESTRUCTURING AND OTHER
During the fourth quarter of 1999, the Company adopted a plan to
discontinue operations at its RPC Technologies, Inc. electron beam processing
equipment subsidiary and to close RPC's facility in Hayward, California.
Twenty-six employees out of the Company's staff of contract and regular
personnel were terminated as a result. The Company incurred a charge of
$1,639,000 in 1999 related to this plan. The significant components of this
charge included $679,000 for inventory write-downs which were charged to cost of
sales, $264,000 for fixed asset write-offs, $200,000 for closure of the
facility, $163,000 for employee severance costs, $161,000 for future rent due on
the facility and $152,000 for write-off of intangibles. In the first quarter of
2000, Intevac sold certain assets of the RPC Technologies, Inc. subsidiary to
Quemex Technology. Proceeds from the sale included a cash payment, assumption of
the Hayward facility lease and the assumption of certain other liabilities.
Excluded from the sale were two previously leased systems and three completed
systems remaining in inventory. The Company recognized revenue in 2000 for two
of the three completed systems and the remaining system is scheduled for
customer acceptance in 2001 and is expected to be included in future Intevac
revenues. The Company was able to reverse the portions of the restructuring
reserve established to provide for future rents due on the facility and for the
closure of the facility. However, since Intevac retained ownership of the two
leased systems, the Company established an equivalent reserve to provide for any
residual value at the end of the leases.
During the third quarter of 1999, the Company adopted an expense reduction
plan that included closing one of the buildings at its Santa Clara facility and
a reduction in force of 7 employees out of the Company's staff of contract and
regular personnel. The reductions took place at the Company's facilities in
Santa Clara, California. The Company incurred a charge of $2,225,000 in 1999
related to the expense reduction plan. The significant components of this charge
included $873,000 for future rent due on the building (net of expected sublease
income), $160,000 for costs associated with operating the building through May
2000 and $1,192,000 for the write-off of leasehold improvements and other costs
associated with restructuring. In the fourth quarter of 1999, $97,000 of the
restructuring reserve was reversed due to lower than expected costs on the
closure of the facility. During the first quarter of 2000, the Company vacated
the building and negotiated a lease termination for that space with its
landlord, which released the Company from the obligation to pay any rent after
April 30, 2000. As a result, the Company reversed $615,000 of the restructuring
reserve during the first quarter of 2000. During the third quarter of 2000, the
Company completed all activities related to closing the building. As a result,
the Company reversed the remaining $23,000 of the restructuring reserve during
the third quarter of 2000.
During the first quarter of 1999, the Company implemented a reduction in
force of 17 employees out of the Company's staff of contract and regular
personnel. The reductions took place at the Company's facilities in Santa Clara,
California. The Company incurred a charge of $115,000 in 1999 related to
severance costs for the affected employees. As of December 31, 1999, all of the
severance had been paid.
During the third quarter of 1998, the Company implemented a reduction in
force of 27 employees out of the Company's staff of contract and regular
personnel. The reductions took place at the Company's facilities in Santa Clara,
CA; Hayward, CA; Singapore; and Taiwan. The Company incurred a charge of $71,000
in 1998 related to severance costs for the affected employees.
45
47
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the first quarter of 1998, the Company adopted an expense reduction
plan that included a reduction in force of 90 employees out of the Company's
staff of contract and regular personnel. The reductions took place at the
Company's facilities in Santa Clara, CA; Los Gatos, CA; Rocklin, CA; and Taiwan.
Additionally, the Company relocated its RTP Operation from Rocklin to the
Company's Santa Clara headquarters and closed the Rocklin facility. The Company
incurred a charge of $1,164,000 in 1998 related to the expense reduction plan.
The significant components of this charge included $290,000 for closure of the
Rocklin facility, $462,000 for the balance of the rent due on the lease for such
facility and $392,000 for employee severance costs. Closure of the facility was
completed in the second quarter of 1998. In the fourth quarter of 1998, $147,000
of the restructuring reserve was reversed due to lower than expected costs
incurred on the closure of the Rocklin facility. In the first quarter of 1999,
the Company negotiated an early termination of its lease commitment in Rocklin,
CA, which resulted in the Company reversing the remaining $132,000 of the
restructuring reserve.
The following table displays the activity in the building closure
restructuring reserve, established in the third quarter of 1999, and in the RPC
operation discontinuance restructuring reserve, established in the fourth
quarter of 1999, through September 30, 2000.
BUILDING RPC OPERATION
CLOSURE DISCONTINUANCE
RESTRUCTURING RESTRUCTURING
------------- --------------
(IN THOUSANDS)
Original restructuring charge..................... $2,225 $1,639
Actual expense incurred......................... (511) (851)
Reversal of restructuring charge................ (97) --
------ ------
Balance at December 31, 1999...................... 1,617 788
Actual expense incurred......................... (815) (365)
Valuation reserve -- leased systems............. -- (361)
Reversal of restructuring charge................ (615) --
------ ------
Balance at April 1, 2000.......................... 187 62
Actual expense incurred......................... (162) (61)
------ ------
Balance at July 1, 2000........................... 25 1
Actual expense incurred......................... (2) (1)
Reversal of restructuring charge................ (23) --
------ ------
Balance at December 31, 2000...................... -- --
====== ======
16. OTHER ACCRUED LIABILITIES
DECEMBER 31,
----------------
2000 1999
------ ------
(IN THOUSANDS)
Accrued income taxes....................................... $3,085 $2,778
Accrued product warranties................................. 745 801
Restructuring accruals..................................... -- 2,405
Accrued interest expense................................... 894 894
Accrued rent expense....................................... 269 688
Other...................................................... 116 1,275
------ ------
Total other accrued liabilities.................. $5,109 $8,841
====== ======
46
48
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
----------------------------------------------------
APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
-------- ------- ------------- ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Net sales...................................... $ 5,892 $9,191 $11,036 $ 9,930
Gross profit................................... 651 1,808 604 (1,073)
Net loss....................................... (2,861) (701) (3,409) (5,353)
Basic earnings per share....................... $ (0.24) $(0.06) $ (0.29) $ (0.45)
Diluted earnings per share..................... (0.24) (0.06) (0.29) (0.45)
THREE MONTHS ENDED
------------------------------------------------------
MARCH 27, JUNE 26, SEPTEMBER 25, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Net sales.................................... $11,749 $10,270 $13,822 $ 7,121
Gross profit................................. 993 180 1,499 559
Net loss..................................... (2,985) (2,698) (376) (3,711)
Basic earnings per share..................... $ (0.25) $ (0.23) $ (0.03) $ (0.32)
Diluted earnings per share................... (0.25) (0.23) (0.03) (0.32)
47
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this item is included under the caption
"Ratification of Independent Public Auditors" in the Company's Proxy Statement
for the 2001 Annual Meeting of Shareholders and is incorporated herein by
reference.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by this item relating to the Company's directors
and nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers and key employees is
included under the caption "Executive Officers and Directors" under Item 4 in
Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 2001 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"Ownership of Securities" in the Company's Proxy Statement for the 2001 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"Certain Transactions" in the Company's Proxy Statement for the 2001 Annual
Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Annual Report on Form 10-K.
1. The following consolidated financial statements of Intevac, Inc.
are filed in Part II, Item 8 of this Report on Form 10-K:
Report of Grant Thornton LLP, Independent Auditors
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets -- December 31, 2000 and 1999
Consolidated Statements of Operations and Comprehensive Income for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements -- Years Ended December 31,
2000, 1999 and 1998
48
50
2. Financial Statement Schedules.
The following financial statement schedule of Intevac, Inc. is filed
in Part IV, Item 14(a) of this Annual Report on Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted since the required information
is not present in amounts sufficient to require submission of the schedule
or because the information required is included in the consolidated
financial statements or notes thereto.
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*3.1 Amended and Restated Articles of Incorporation of the
Registrant
*3.2 Bylaws of the Registrant
***4.2 Indenture, dated as of February 15, 1997, between the
Company and State Street Bank and Trust Company of
California, N.A. as Trustee, including the form of the
Convertible Notes
*10.1 The Registrant's 1991 Stock Option/Stock Issuance Plan
*10.2 The Registrant's 1995 Stock Option/Stock Issuance Plan, as
amended
*10.3 The Registrant's Employee Stock Purchase Plan, as amended
10.5 Lease, dated February 5, 2001 regarding the space located at
3560, 3570 and 3580 Basset Street Santa Clara, California
*10.8 601 California Avenue LLC Limited Liability Operating
Agreement, dated July 28, 1995
*10.9 The Registrant's 401(k) Profit Sharing Plan
*10.11 Stock Sale Agreement, Note Secured by Stock Pledge Agreement
and Stock Pledge Agreement by and between Intevac, Inc. and
Paul Colombo, dated August 24, 1994, as amended
**10.13 Stock Purchase Agreement by and among Lotus Technologies,
Inc., Lewis Lipton, Dennis Stark, Steve Romine and Intevac,
Inc., dated June 6, 1996
21.1 Subsidiaries of the Registrant
23.1 Consent of Grant Thornton LLP, Independent Auditors
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 46)
- ---------------
* Previously filed as an exhibit to the Registration Statement on Form S-1
(No. 33-97806)
** Previously filed as an exhibit to the Registration Statement on Form S-1
(No. 333-05531)
*** Previously filed as an exhibit to the Registration Statement on Form S-3
(No. 333-24275)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K.
49
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 8, 2001.
INTEVAC, INC.
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)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Norman H. Pond and Charles B. Eddy III,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ NORMAN H. POND Chairman of the Board March 8, 2001
- ------------------------------------------ (Principal Executive Officer)
(Norman H. Pond)
/s/ CHARLES B. EDDY III Vice President, Finance and March 8, 2001
- ------------------------------------------ Administration, Chief Financial Officer
(Charles B. Eddy III) Treasurer and Secretary (Principal
Financial and Accounting Officer)
/s/ EDWARD DURBIN Director March 8, 2001
- ------------------------------------------
(Edward Durbin)
/s/ ROBERT D. HEMPSTEAD Director March 8, 2001
- ------------------------------------------
(Robert D. Hempstead)
/s/ DAVID N. LAMBETH Director March 8, 2001
- ------------------------------------------
(David N. Lambeth)
/s/ H. JOSEPH SMEAD Director March 8, 2001
- ------------------------------------------
(H. Joseph Smead)
50
52
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
INTEVAC, INC.
ADDITIONS
------------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO COSTS OTHER ACCOUNTS -- DEDUCTIONS -- END
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE(1) OF PERIOD
----------- ---------- ---------------- ----------------- ------------- ----------
Year ended December 31, 1998:
Deducted from asset
accounts:
Allowance for doubtful
accounts.............. $1,504,600 $ 246,038 $ 0 $121,290 $1,629,348
Year ended December 31, 1999:
Deducted from asset
accounts:
Allowance for doubtful
accounts.............. $1,629,348 $ 151,802 $ 0 $ 68,074 $1,713,076
Year ended December 31, 2000:
Deducted from asset
accounts:
Allowance for doubtful
accounts.............. $1,713,076 $(1,544,172) $(2,892) $ 52,500 $ 113,512
Valuation allowance
against deferred tax
assets................ 0 3,604,716 0 0 3,604,716
- ---------------
(1) Typically includes write-offs of amounts deemed uncollectible.
51
53
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*3.1 Amended and Restated Articles of Incorporation of the
Registrant
*3.2 Bylaws of the Registrant
***4.2 Indenture, dated as of February 15, 1997, between the
Company and State Street Bank and Trust Company of
California, N.A. as Trustee, including the form of the
Convertible Notes
*10.1 The Registrant's 1991 Stock Option/Stock Issuance Plan
*10.2 The Registrant's 1995 Stock Option/Stock Issuance Plan, as
amended
*10.3 The Registrant's Employee Stock Purchase Plan, as amended
10.5 Lease, dated February 5, 2001 regarding the space located at
3560, 3570 and 3580 Basset Street Santa Clara, California
*10.8 601 California Avenue LLC Limited Liability Operating
Agreement, dated July 28, 1995
*10.9 The Registrant's 401(k) Profit Sharing Plan
*10.11 Stock Sale Agreement, Note Secured by Stock Pledge Agreement
and Stock Pledge Agreement by and between Intevac, Inc. and
Paul Colombo, dated August 24, 1994, as amended
**10.13 Stock Purchase Agreement by and among Lotus Technologies,
Inc., Lewis Lipton, Dennis Stark, Steve Romine and Intevac,
Inc., dated June 6, 1996
21.1 Subsidiaries of the Registrant
23.1 Consent of Grant Thornton LLP, Independent Auditors
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 46)
- ---------------
* Previously filed as an exhibit to the Registration Statement on Form S-1
(No. 33-97806)
** Previously filed as an exhibit to the Registration Statement on Form S-1
(No. 333-05531)
*** Previously filed as an exhibit to the Registration Statement on Form S-3
(No. 333-24275)