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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
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)
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CALIFORNIA 94-3125814
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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3550 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 986-9888
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
On September 27, 1997 approximately 12,613,900 shares of the Registrant's
Common Stock, no par value, were outstanding.
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INTEVAC, INC.
INDEX
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NO. PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets..................................... 3
Condensed Consolidated Statements of Income............................... 4
Condensed Consolidated Statements of Cash Flows........................... 5
Notes to Condensed Consolidated Financial Statements...................... 6
Management's Discussion and Analysis of Financial Condition and Results of
ITEM 2. Operations................................................................ 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings......................................................... 21
ITEM 2. Changes in Securities..................................................... 21
ITEM 3. Defaults Upon Senior Securities........................................... 21
ITEM 4. Submission of Matters to a Vote of Security-Holders....................... 21
ITEM 5. Other Information......................................................... 21
ITEM 6. Exhibits and Reports on Form 8-K.......................................... 21
SIGNATURES............................................................................. 22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
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SEPTEMBER 27, DECEMBER 31,
1997 1996
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(UNAUDITED)
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Current assets:
Cash and cash equivalents........................................ $ 1,813 $ 938
Short-term investments........................................... 63,669 --
Accounts receivable, net of allowances of $1,384 and $1,024 at
September 27, 1997 and December 31, 1996, respectively........ 14,401 17,570
Inventories...................................................... 34,185 25,666
Short-term note receivable, net of allowance of $395 and $1,180
at September 27, 1997 and December 31, 1996, respectively..... -- --
Prepaid expenses and other current assets........................ 504 507
Deferred tax asset............................................... 5,521 4,397
-------- -------
Total current assets..................................... 120,093 49,078
Property, plant, and equipment, net................................ 12,995 9,273
Long-term investments.............................................. 397 --
Investment in 601 California Avenue LLC............................ 2,431 2,431
Goodwill and other intangibles..................................... 5,682 7,301
Debt issuance costs................................................ 2,111 --
Deferred tax assets and other assets............................... 2 2
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Total assets............................................. $ 143,711 $ 68,085
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................... $ -- $ 1,252
Accounts payable................................................. 8,033 4,465
Accrued payroll and related liabilities.......................... 1,720 1,937
Other accrued liabilities........................................ 8,762 4,275
Customer advances................................................ 21,156 20,702
Net liabilities of discontinued operations....................... 621 600
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Total current liabilities................................ 40,292 33,231
Convertible notes.................................................. 57,500 --
Long-term notes payable............................................ 1,955 730
Deferred tax liability............................................. 406 388
Shareholders' equity:
Common stock, no par value....................................... 17,648 16,747
Retained earnings................................................ 25,910 16,989
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Total shareholders' equity............................... 43,558 33,736
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Total liabilities and shareholders' equity............... $ 143,711 $ 68,085
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</TABLE>
See accompanying notes.
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
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SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
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Net revenues........................... $30,350 $24,603 $95,254 $59,964
Cost of net revenues................... 21,186 16,043 65,805 37,474
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Gross profit........................... 9,164 8,560 29,449 22,490
Operating expenses:
Research and development............. 3,225 2,406 7,687 5,790
Selling, general and
administrative.................... 2,907 2,235 8,328 6,081
Acquired in-process research and
development....................... -- -- -- 5,835
------- ------- ------- -------
Total operating expenses..... 6,132 4,641 16,015 17,706
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Operating income....................... 3,032 3,919 13,434 4,784
Interest expense....................... (1,046) (35) (2,494) (90)
Interest income and other, net......... 816 558 2,789 1,067
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Income from continuing operations
before income taxes.................. 2,802 4,442 13,729 5,761
Provision for income taxes............. 871 1,643 4,805 4,290
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Net income............................. $ 1,931 $ 2,799 $ 8,924 $ 1,471
======= ======= ======= =======
Primary earnings per share............. $ 0.15 $ 0.22 $ 0.68 $ 0.11
Shares used in per share amounts....... 13,104 12,956 13,097 12,858
Fully diluted earnings per share....... $ 0.15 $ 0.21 $ 0.67 $ 0.11
Shares used in per share amounts....... 13,138 13,027 15,305 12,881
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See accompanying notes.
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
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SEPTEMBER 27, SEPTEMBER 28,
1997 1996
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OPERATING ACTIVITIES
Net income........................................................ $ 8,924 $ 1,471
Adjustments to reconcile net income to net cash and cash
equivalents provided by (used in) operating activities:
Depreciation and amortization................................... 3,632 1,886
Acquired in-process research and development.................... -- 5,835
Gain on sale of Chorus investment............................... (785) --
Loss on IMAT investment......................................... 39 --
Loss on disposal of equipment................................... 38 5
Changes in assets and liabilities............................... 1,290 (17,903)
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Total adjustments................................................. 4,214 (10,177)
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Net cash and cash equivalents provided by (used in) operating
activities...................................................... 13,138 (8,706)
INVESTING ACTIVITIES
Purchase of investments........................................... (95,442) (2,571)
Proceeds from sale of investments................................. 31,773 2,571
Proceeds from sale of Chorus investment........................... 785 177
Investment in Cathode Technology Corporation...................... -- (1,074)
Investment in San Jose Technology Corporation..................... -- (2,270)
Investment in Lotus Technologies, Inc............................. -- (8,135)
Investment in IMAT................................................ (436) --
Purchase of leasehold improvements and equipment.................. (5,014) (3,022)
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Net cash and cash equivalents used in investing activities........ (68,334) (14,324)
FINANCING ACTIVITIES
Net borrowings under line of credit agreement..................... (2) 3,501
Notes payable repayments.......................................... (25) --
Proceeds from issuance of common stock............................ 901 360
Proceeds from convertible bond offering........................... 55,197 --
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Net cash and cash equivalents provided by financing activities.... 56,071 3,861
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Net increase (decrease) in cash and cash equivalents.............. 875 (19,169)
Cash and cash equivalents at beginning of period.................. 938 20,422
-------- --------
Cash and cash equivalents at end of period........................ $ 1,813 $ 1,253
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SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid (received) for:
Interest........................................................ $ 2,016 $ 53
Income taxes.................................................... 5,440 7,500
Income tax refund............................................... -- (250)
Other non-cash changes:
Investment in Cathode Technology Corporation through assumption
of notes payable............................................. $ -- $ 1,980
Inventories capitalized for internal use........................ 567 --
</TABLE>
See accompanying notes.
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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
Intevac, Inc. ("Intevac" or the "Company") is a leading supplier of static
sputtering systems and related manufacturing equipment used to manufacture
thin-film disks for computer hard disk drives. Sputtering is a complex vacuum
deposition process used to deposit multiple thin-film layers on a disk. The
Company's primary objective is to be the industry leader in supplying disk
sputtering equipment by providing disk sputtering systems which have both the
highest overall performance and the lowest cost of ownership in the industry.
The Company's principal product, the MDP-250B, enables disk manufacturers to
achieve high coercivities, high signal-to-noise ratios, minimal disk defects,
durability and uniformity, all of which are necessary in the production of high
performance, high capacity disks. The Company sells its static sputtering
systems and related manufacturing equipment to both captive and merchant
thin-film disk manufacturers. The Company sells and markets its products
directly in the United States, and through exclusive distributors in Japan and
Korea. The Company has established subsidiaries in Singapore and Malaysia and a
branch office in Taiwan to support its customers in Southeast Asia.
The Company also realizes revenues from the sales of system components,
contract research and development activities and rapid thermal processing
equipment for flat panel display ("FPD") manufacturing. Intevac's system
component business consists primarily of sales of spare parts and after-sale
service to purchasers of the Company's disk sputtering systems, as well as sales
of components to other manufacturers of vacuum equipment. Contract research and
development revenues have been derived primarily from prime contracts awarded by
and subcontracts awarded under various Department of Defense ("DOD") and NASA
development projects for the FPD industry and various electro-optical products.
During the first quarter of 1997 the Company received its first order for the
design and delivery of a scaled up version of its D-STAR FPD sputtering machine.
The financial information at September 27, 1997 and for the three- and
nine-month periods ended September 27, 1997 and September 28, 1996 is unaudited,
but includes all adjustments (consisting only of normal recurring accruals) that
the Company considers necessary for a fair presentation of the financial
information set forth herein, in accordance with generally accepted accounting
principles for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statements. For further information, refer to the
Consolidated Financial Statements and footnotes thereto included or incorporated
by reference in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
The results for the three- and nine-month periods ended September 27, 1997
are not considered indicative of the results to be expected for any future
period or for the entire year.
2. INVESTMENTS
The Company invests its excess cash in high-quality debt instruments.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
At September 27, 1997 all of the Company's marketable investments were
designated 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
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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Interest
and dividends on the investments are included in interest income. At September
27, 1997 the Company's available-for-sale short-term securities consisted of
$63,669 million of tax-exempt municipal bonds.
At September 27, 1997, the carrying amount of securities approximated the
fair value (quoted market price), and the amount of unrealized gain or loss was
not significant. Gross realized gains and losses for the first nine months of
1997 were not significant.
3. INVENTORIES
The components of inventory consist of the following:
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SEPTEMBER 27, DECEMBER 31,
1997 1996
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(IN THOUSANDS)
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Raw materials...................................... $ 8,893 $ 6,953
Work-in-progress................................... 23,735 11,728
Finished goods..................................... 1,557 6,985
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$34,185 $ 25,666
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A significant portion of the finished goods inventory is represented by
completed units at customer sites undergoing installation and acceptance
testing.
4. 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, which mature on
March 1, 2004. 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 are deferred. Such expenses are being amortized to
interest expense over the term of the notes.
5. INCOME TAXES
The effective tax rates used for the nine-month periods ending September
27, 1997 and September 28, 1996 were 35% and 37% (after excluding the $5.8
million of non-tax deductible acquisition related in-process research and
development expense) of pretax income, respectively. These rates are based on
the estimated annual tax rate complying with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
6. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock and common equivalent shares, when dilutive, from
convertible notes (using the as-if-converted method) and from stock options
(using the treasury stock method). During the first quarter of 1997, the Company
issued subordinated convertible notes. These securities are included, if
dilutive, in fully diluted earnings per share computations for the period
outstanding under the "if converted" method. For the three months ended
September 27, 1997, the subordinated convertible note was antidilutive, and
therefore, was not considered in the computation of fully diluted earnings per
share.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
periods. Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in basic earnings per share as follows:
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THREE MONTHS ENDED NINE MONTHS ENDED
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SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
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Basic earnings per share............... $0.15 $0.23 $0.71 $0.12
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The impact of SFAS 128 on the calculation of diluted earnings per share for
these periods is not expected to be material.
7. RESEARCH AND DEVELOPMENT COST SHARING AGREEMENT
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 $5,450,000. During the second quarter of 1997 the Company
amended this agreement with its Japanese development partner to provide further
funding of the joint research and development work. During the third quarter of
1997 the Company received an additional $300,000 advance under the amended
agreement, bringing the total advances received under the agreement to
$6,750,000. Offsets against research and development expense of $300,000 were
recognized under the amended agreement during the third quarter of 1997. The
Company does not expect to recognize significant additional credits against
research and development expense under the amended agreement until 1998.
8. SUBSEQUENT EVENTS
On October 20, 1997 the Company announced the implementation of an employee
profit sharing plan. The profit sharing plan will allocate a percentage of
Intevac's annual pretax profits to annual cash bonuses and annual 401(k)
retirement plan contributions. All full-time regular U.S. employees will be
eligible to participate in the plan. The plan will be implemented for 1998
results.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
materially from those discussed in the forward-looking statements. Factors that
might cause such a difference, include but are not limited to, the risk factors
set forth elsewhere in this Quarterly Report on Form 10-Q under "Certain Factors
Which May Affect Future Operating Results" and in other documents the Company
files from time to time with the Securities and Exchange Commission, including
the Company's Annual Report on Form 10-K filed in February 1997, Form 10-Q's and
Form 8-K's.
OVERVIEW
Intevac is a leading supplier of static sputtering systems and related
manufacturing equipment used to manufacture thin film disks for computer hard
disk drives. Sputtering is a complex vacuum deposition process used to deposit
multiple thin-film layers on a disk. The Company has three primary sources of
net revenues: sales of disk sputtering systems and related disk manufacturing
equipment; sales of system components; and contract research and development
activities. Disk sputtering systems and related disk manufacturing equipment
generally represent the majority of the Company's revenue and are sold to
vertically integrated disk drive manufacturers and to original equipment
manufacturers that sell disk media to disk drive manufacturers. Intevac's system
component business consists primarily of sales of spare parts and aftersale
service to purchasers of the Company's disk sputtering systems, as well as sales
of components to other manufacturers of vacuum equipment. Contract research and
development revenues have been derived primarily from prime contracts awarded by
and subcontracts awarded under various DOD and NASA development projects for the
FPD industry and various electro-optical products. During the first quarter of
1997 the Company received its first order for the design and delivery of a
scaled up version of its D-STAR FPD sputtering machine. To date, revenue from
the sale of FPD sputtering equipment has not been material.
In the first quarter of 1996, the Company acquired Cathode Technology
Corporation ("CTC"), a designer and manufacturer of magnetron sputter sources
for use in the Company's disk sputtering systems. In the second quarter of 1996,
the Company acquired San Jose Technology Corp. ("SJT") and Lotus Technologies,
Inc. ("Lotus"). SJT is a manufacturer of systems used to lubricate thin film
disks. Lotus is a manufacturer of contact stop/start test equipment for disk
drives and drive components.
In the first quarter of 1997, the Company completed the sale of $57.5
million of its 6 1/2% Convertible Subordinated Notes Due 2004 (the "Convertible
Notes").
The Company's backlog was $71.1 million and $66.1 million at September 27,
1997 and September 28, 1996, respectively. The Company includes in backlog the
value of purchase orders for its products with scheduled delivery dates.
Delivery dates may be rescheduled from time to time. The Company's backlog at
the beginning of a quarter may not include all system orders needed to achieve
the Company's revenue objectives for that quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
Net revenues. Net revenues consist primarily of sales of the Company's disk
sputtering systems and related equipment used to manufacture thin-film disks for
computer hard disk drives, and to a lesser extent, system components, contract
research and development and rapid thermal processing systems for flat panel
display manufacturing. Net revenues from the sales of sputtering systems are
recognized upon customer acceptance. System component and other system sales are
recognized upon product shipment, and contract research and development is
recognized in accordance with contract terms, typically as costs are incurred.
Net revenues increased by 23% to $30.4 million for the three months ended
September 27, 1997 from $24.6 million for the three months ended September 28,
1996. The increase in net revenues was primarily due to an increase in the sales
of disk sputtering systems, and to a lesser extent from the sale of a rapid
thermal processing system.
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International sales increased by 197% to $22.0 million for the three months
ended September 27, 1997 from $7.4 million for the three months ended September
28, 1996. The increase in revenues from international sales was primarily due to
an increase in the sales of disk sputtering systems, and to a lesser extent from
the sale of a rapid thermal processing system. International sales constituted
72% of net revenues for the three months ended September 27, 1997 and 30% of net
revenues for the three months ended September 28, 1996.
Gross margin. Cost of net revenues consists primarily of purchased
materials, fabrication, assembly, test, installation, international distributor
costs, warranty costs and, to a lesser extent, costs attributable to contract
research and development. Gross margin as a percentage of net revenues was 30.2%
for the three months ended September 27, 1997 as compared to 34.8% for the three
months ended September 28, 1996. The reduction in gross margins was primarily
due to reduced margins on disk sputtering systems for which product costs
increased more than the Company's ability to increase prices.
Research and development. Research and development expense consists
primarily of prototype materials, salaries and related costs of employees
engaged in ongoing research, design and development activities for disk
sputtering equipment, flat panel display manufacturing equipment, and research
by the Company's Advanced Technology Division. Research and development expense
increased to $3.2 million for the three months ended September 27, 1997 from
$2.4 million for the three months ended September 28, 1996, representing 10.6%
and 9.8%, respectively, of net revenues. The increase was primarily the result
of reduced transfers of D-STAR research and development expense to cost of sales
under a Defense Advanced Research Project Agency ("DARPA") development contract
and reduced cost sharing from the Company's D-STAR development partner. The
Company does not expect significant additional credits to research and
development expense under either of these programs during 1997.
Research and development expenses do not include costs of $0.3 million and
$0.6 million in the three months ended September 27, 1997 and September 28,
1996, respectively, reimbursed to the Company under the terms of a research and
development cost sharing agreement with the Company's Japanese flat panel
display manufacturing equipment ("D-STAR") development partner, nor do they
include costs of $0.7 million in the three months ended September 28, 1996
reimbursed to the Company under a DARPA development contract funding development
of the D-STAR and delivery of a beta-site unit. In addition, research and
development expenses do not include costs of $0.9 million and $0.6 million in
the three months ended September 27, 1997 and September 28, 1996, respectively,
in connection with contract research and development activities that are charged
to cost of sales.
Selling, general and administrative. Selling, general and administrative
expense consists primarily of selling, marketing, financial, travel, management,
legal and professional services costs. Domestic sales are made by the Company's
direct sales force, whereas international sales are made by distributors that
typically provide sales, installation, warranty and ongoing customer support.
Selling, general and administrative expense increased by 30% to $2.9 million for
the three months ended September 27, 1997 from $2.2 million for the three months
ended September 28, 1996 representing 9.6% and 9.1%, respectively, of net
revenues. The increase in selling, general and administrative expense was
primarily the result of increased expense associated with the marketing and
support of disk sputtering systems. Administrative headcount grew to 89
employees at September 27, 1997 from 71 employees at September 28, 1996.
Interest expense. Interest expense increased to $1.0 million for the three
months ended September 27, 1997 from $35,000 for the three months ended
September 28, 1996. Interest expense consists primarily of interest on the
Convertible Notes issued in the first quarter of 1997.
Interest and other income, net. Interest and other income consists
primarily of interest income on the Company's investments, income related to the
sale of the Company's 20% interest in the capital stock of Chorus, early payment
discounts on the purchase of inventories, goods and services and the Company's
49% share of operating losses in its Japanese joint venture, IMAT. Interest and
other income, net increased to $0.8 million for the three months ended September
27, 1997 from $0.6 million for the three months ended September 28, 1996 as the
result of an increase in interest income which was partially offset by a
reduction in income related to the sale of the Company's 20% interest in the
capital stock of Chorus. The sale of Chorus
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stock represented $0.4 million for the three months ended September 28, 1996 and
the Company did not recognize any gain on the sale of the Chorus stock in the
corresponding quarter of 1997.
Provision for income taxes. Income tax expense as a percentage of pretax
income decreased to 31% for the three months ended September 27, 1997 from 37%
for the three months ended September 28, 1996. The 31% rate during the three
months ended September 27, 1997 resulted from a reduction in the Company's 1997
year-to-date tax rate to 35% from the 36% rate used during the six months ended
June 28, 1997. The decrease in the tax rate was the result of increased
international sales and increased tax exempt interest income. The Company's tax
rate for these periods differs from the applicable statutory rates primarily due
to tax exempt interest income and state income taxes.
NINE MONTHS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
Net revenues. Net revenues increased by 59% to $95.3 million for the nine
months ended September 27, 1997 from $60.0 million for the nine months ended
September 28, 1996. The increase in net revenues was primarily due to an
increase in the sales of disk sputtering systems. To a lesser extent, revenues
increased as a result of new products acquired in the acquisitions of SJT and
Lotus and increased contract research and development.
International sales increased by 150% to $53.2 million for the nine months
ended September 27, 1997 from $21.3 million for the nine months ended September
28, 1996. The increase in revenues from international sales was primarily due to
an increase in the sales of disk sputtering systems, and to a lesser extent from
increased sales of disk lubrication equipment, contact stop/start test equipment
and rapid thermal processing systems. International sales constituted 56% of net
revenues for the nine months ended September 27, 1997 and 36% of net revenues
for the nine months ended September 28, 1996.
Gross margin. Gross margin was 30.9% for the nine months ended September
27, 1997 as compared to 37.5% for the nine months ended September 28, 1996. The
reduction in gross margins was primarily due to reduced margins on disk
sputtering systems for which product costs increased more than the Company's
ability to increase prices. To a lesser extent, margins decreased as the result
of lower margin contract research and development activities representing a
larger percentage of total revenue for the nine months ended September 27, 1997.
Research and development. Research and development expense increased to
$7.7 million for the nine months ended September 27, 1997 from $5.8 million for
the nine months ended September 28, 1996, representing 8.1% and 9.7%,
respectively, of net revenues. The increase was primarily the result of
increased development expense in disk manufacturing products and flat panel
display manufacturing products which was partially offset by increased
reimbursements to the Company under a DARPA development contract funding
development of the D-STAR and delivery of a beta-site unit.
Research and development expenses do not include costs of $1.3 million and
$1.3 million in the nine months ended September 27, 1997 and September 28, 1996,
respectively, reimbursed to the Company under the terms of a research and
development cost sharing agreement with the Company's Japanese D-STAR
development partner, nor do they include costs of $1.5 million and $0.7 million
in the nine months ended September 27, 1997 and September 28, 1996,
respectively, reimbursed to the Company under a DARPA development contract
funding development of the D-STAR and delivery of a beta-site unit. In addition,
research and development expenses do not include costs of $2.4 million and $1.5
million in the nine months ended September 27, 1997 and September 28, 1996,
respectively, in connection with contract research and development activities
charged to cost of sales.
Selling, general and administrative. Selling, general and administrative
expense increased by 37% to $8.3 million for the nine months ended September 27,
1997 from $6.1 million for the nine months ended September 28, 1996 representing
8.7% and 10.1%, respectively, of net revenues. The increase in selling, general
and administrative expense was primarily the result of increased expense
associated with the marketing and support of disk sputtering systems, and to a
lesser extent, increased costs of marketing and support of the Company's other
products.
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Acquired in-process research and development. The Company recognized a
charge for acquired in-process research and development of $5.8 million for the
nine months ended September 28, 1996, as a result of the acquisitions of SJT and
Lotus. No similar charge was incurred during the nine months ended September 27,
1997.
Interest expense. Interest expense increased to $2.5 million for the nine
months ended September 27, 1997 from $0.1 million for the nine months ended
September 28, 1996. Interest expense consists primarily of interest on the
Company's 6 1/2% Convertible Notes issued in the first quarter of 1997.
Interest and other income, net. Interest and other income, net increased to
$2.8 million for the nine months ended September 27, 1997 from $1.1 million for
the nine months ended September 28, 1996 as the result of increased interest
income and increased income related to the sale of the Company's 20% interest in
the capital stock of Chorus.
Provision for income taxes. Income tax expense as a percentage of pretax
income for the nine months ended September 27, 1997 and September 28, 1996 was
35% and 37% (after excluding the $5.8 million of non-tax deductible acquisition
related in-process research and development expense), respectively. The decrease
in the tax rate was the result of increased international sales and increased
tax exempt interest income. The Company's tax rate for these periods differs
from the applicable statutory rates primarily due to tax exempt interest income
and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $13.1 million for the
nine months ended September 27, 1997. The cash provided was due primarily to net
income, adjusted for non-cash items, primarily amortization and depreciation.
The Company's investing activities used cash of $68.3 million for the nine
months ended September 27, 1997 due primarily to the net purchase of
investments, and to a lesser extent, the purchase of capital equipment and
leasehold improvements.
The Company's financing activities provided cash of $56.1 million for the
nine months ended September 27, 1997, primarily due to the sale by the Company
of its Convertible Notes.
In July 1997, the Company announced a common stock repurchase plan. The
repurchased shares will be used to meet the Company's current and near-term
stock requirements for its employee stock issuance plans. The Company did not
repurchase any shares during the three-month period ended September 27, 1997.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
FLUCTUATIONS OF RESULTS OF OPERATIONS
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company derives the majority
of its net revenues from the sale of a relatively small number of sputtering
systems. The number of systems accepted by customers in any particular quarter
has varied from zero to eleven and, as a result, the Company's net revenues and
operating results for a particular period could be materially adversely affected
if an anticipated order for even one system is not received in time to permit
shipment and customer acceptance during that accounting period. The Company's
backlog at the beginning of a quarter may not include all system orders needed
to achieve the Company's revenue objectives for that quarter.
In addition, orders in backlog are subject to cancellation, and although in
some cases the Company requires a deposit on orders for its systems, such
deposits may not be sufficient to cover the expenses incurred by the Company for
the manufacture of the canceled systems or fixed operating expenses associated
with such systems to the date of cancellation. From time to time, in order to
meet anticipated customer demand, the Company has manufactured disk sputtering
systems in advance of the receipt of orders for such systems. The Company
expects to continue this practice in the future. In the event that anticipated
orders are not received as expected, the Company could be materially adversely
affected by higher inventory levels and increased
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exposure to surplus and obsolete inventory write-offs. Orders may be subject to
cancellation, delay, deferral or rescheduling by a customer. From the date the
Company receives an order, it often takes more than six months before the net
revenues from such order are recognized and even longer before final payment is
received. The relatively long manufacturing cycles of many of the Company's
products have caused and could cause shipments of such products to be delayed
from one quarter to the next, which could materially adversely affect the
Company's business, financial condition and results of operations for a
particular quarter. Announcements by the Company or its competitors of new
products and technologies could cause customers to defer purchases of the
Company's existing systems, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Installing and integrating new sputtering systems into the thin-film disk
manufacturing process requires a substantial investment by a customer.
Therefore, customers often require a significant number of product presentations
and demonstrations, as well as substantial interaction with the Company's senior
management, before making a purchasing decision. Accordingly, the Company's
systems typically have a lengthy sales cycle during which the Company may expend
substantial funds and management time and effort with no assurance that a sale
will result. Furthermore, the Company's expense levels are based, in part, on
its expectations as to future net revenues. If revenue levels are below
expectations, operating results are likely to be adversely affected. Net income,
if any, may be disproportionately affected by a reduction in net revenues
because a proportionately smaller amount of the Company's expenses varies with
its net revenues. The impact of these and other factors on the Company's
revenues and operating results in any future period cannot be forecasted with
certainty. Due to all of the foregoing factors, the Company expects its
quarterly operating results to fluctuate significantly and may in certain
quarters be below the expectations of securities analysts and investors. In such
event it is likely the price of the Company's Common Stock would be materially
adversely affected.
The Company believes that its operating results will continue to fluctuate
on a quarterly and annual basis due to a variety of factors. These factors
include the cyclicality of the thin-film disk manufacturing and disk drive
industries, patterns of capital spending by customers, the timing of significant
orders, order cancellations and shipment reschedulings, market acceptance of the
Company's products, unanticipated delays in design, engineering or production or
in customer acceptance of product shipments, changes in pricing by the Company
or its competitors, the timing of product announcements or introductions by the
Company or its competitors, discounts offered by the Company to sell
demonstration units, the mix of systems sold, the relative proportions of
sputtering systems, system components and subassemblies, and contract research
and development net revenues, the availability and cost of components and
subassemblies, changes in product development costs, expenses associated with
acquisitions and exchange rate fluctuations. Over the last eleven quarters the
Company's gross margin and operating income (loss) as a percentage of net
revenues has fluctuated from approximately 30% to 40% of net revenues and (9)%
to 21% of net revenues, respectively. The Company anticipates that its gross and
operating margins will continue to fluctuate. As a result, the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
CYCLICALITY OF THE MEDIA INDUSTRY
The Company's business depends upon capital expenditures by manufacturers
of thin-film disks, including manufacturers that are opening new fabrication
facilities, expanding or upgrading existing facilities or replacing obsolete
equipment, which in turn depend upon the current and anticipated market demand
for hard disk drives. The disk drive industry is cyclical and historically has
experienced periods of oversupply. Within the past year, many media
manufacturers have increased capacity. In addition, Hyundai has announced plans
to commence media manufacturing. This industry-wide increase in capacity may
lead to a period of oversupply of thin-film disks, resulting in significantly
reduced demand for thin-film disk production and for the capital equipment used
in such production, including the systems manufactured and marketed by the
Company. In recent years, particularly in very recent periods, the disk drive
industry has experienced significant growth, which, in turn, has caused
significant growth in the capital equipment industry supplying manufacturers of
thin-film disks. There can be no assurance that such growth will continue. The
Company
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anticipates that a significant portion of new orders will depend upon demand
from thin-film disk manufacturers building or expanding fabrication facilities,
and there can be no assurance that such demand will exist. The Company's
business, financial condition and results of operations could be materially
adversely affected by downturns or slowdowns in the disk drive market.
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to replace obsolete equipment or to increase
manufacturing capacity by upgrading or expanding existing manufacturing
facilities or constructing new manufacturing facilities, all of which typically
involve a significant capital commitment. In addition, the cyclicality of the
disk drive industry, among other factors, may cause prospective customers to
postpone decisions regarding major capital expenditures, including purchases of
the Company's systems. In the event customers delay the purchase of the
Company's systems, the Company's business, financial condition and results of
operations could be materially adversely affected.
INTENSE COMPETITION
The Company experiences intense competition worldwide from three principal
competitors, Ulvac Japan, Ltd. ("Ulvac"), Balzars A.G. ("Balzars") and Anelva
Corporation ("Anelva"), each of which is a large manufacturer of complex vacuum
equipment and thin-film disk manufacturing systems and has sold a substantial
number of thin-film disk sputtering machines worldwide. Each of Ulvac, Balzars
and Anelva has substantially greater financial, technical, marketing,
manufacturing and other resources than the Company. The Company also experiences
competition from other manufacturers of in-line sputtering systems used in
thin-film disk fabrication facilities as well as from the manufacturers of
thin-film disks that have developed the capability to manufacture their own
sputtering systems. There can be no assurance that the Company's competitors
will not develop enhancements to, or future generations of, competitive products
that will offer superior price or performance features or that new competitors
will not enter the Company's markets and develop such enhanced products.
Furthermore, the failure of manufacturers of thin-film disks currently using
in-line machines and manufacturers using internally developed sputtering systems
to switch to static sputtering systems in the future could adversely affect the
Company's ability to increase its sputtering system market share.
In addition, the Company's three principal competitors are based in foreign
countries and have cost structures and system prices based on foreign
currencies. Accordingly, currency fluctuations could cause the Company's
dollar-priced products to be less competitive than its competitors' products
priced in other currencies. Currency fluctuations could also increase the
Company's cost structure relative to those of its competitors, which could make
it more difficult for the Company to maintain its competitiveness.
Given the lengthy sales cycle and the significant investment required to
integrate a disk sputtering system into the manufacturing process, the Company
believes that once a thin-film disk manufacturer has selected a particular
supplier's disk sputtering equipment, the manufacturer generally relies upon
that equipment for the specific production line application and frequently will
continue to purchase its other disk sputtering equipment from the same supplier.
The Company expects to experience difficulty in selling to a particular customer
for a significant period of time if that customer selects a competitor's disk
sputtering equipment. Accordingly, competition for customers in the disk
sputtering equipment industry is particularly intense, and suppliers of disk
sputtering equipment may offer pricing concessions and incentives to attract
customers, which could adversely affect the Company's business, financial
condition, gross margins and results of operations. Because of these competitive
factors, there can be no assurance that the Company will be able to compete
successfully in the future.
CUSTOMER CONCENTRATION
Historically, a significant portion of the Company's revenues in any
particular period have been attributable to sales to a limited number of
customers. The Company's largest customers change from period to period as large
thin-film disk production facilities are completed and new projects are
initiated. Matsubo, the Company's Japanese distributor, Seagate Technology
("Seagate") and HMT Technology accounted for 32%, 32% and 13%, respectively, of
the Company's total net revenues in 1996; Seagate, HMT Technology, and
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Matsubo accounted for 40%, 20% and 17%, respectively, of the Company's total net
revenues in 1995; and Trace Storage Technology, Matsubo, Seagate, Varian
Associates and Komag accounted for 25%, 15%, 13%, 12% and 10%, respectively, of
the Company's total net revenues during 1994.
The Company expects that sales of its products to relatively few customers
will continue to account for a high percentage of its net revenues in the
foreseeable future. For example, nearly 63% of the Company's backlog at
September 27, 1997 was represented by orders from three customers for disk
sputtering systems, with each representing 10% or more of the Company's backlog
at September 27, 1997. None of the Company's customers has entered into a
long-term agreement requiring it to purchase the Company's products. As
purchases related to a particular new or expanded fabrication facility are
completed, sales to that customer may decrease sharply or cease altogether. If
completed contracts are not replaced on a timely basis by new orders from the
same or other customers, the Company's net revenues could be adversely affected.
The loss of a significant customer, any reduction in orders from any significant
customer or the cancellation of a significant order from a customer, including
reductions or cancellations due to customer departures from recent buying
patterns, financial difficulties of a customer or market, economic or
competitive conditions in the disk drive industry, could materially adversely
affect the Company's business, financial condition and results of operations.
LIMITED NUMBER OF OPPORTUNITIES
The Company's business depends upon capital expenditures by manufacturers
of thin-film disks, of which there are a limited number worldwide. According to
a April 1997 report by TrendFocus, an independent market research firm, as of
the end of 1996 there were 231 installed disk sputtering lines (sputtering
systems and related equipment such as plating, polishing, texturing, lubrication
and test equipment as well as related handling equipment) worldwide and only 15
companies in the world with five or more installed disk sputtering lines.
Therefore, winning or losing an order from any particular customer could
significantly affect the Company's operating results. In addition, the Company's
opportunities to sell its systems are further limited by the fact that some of
the manufacturers of thin-film disks have adopted an inline approach as opposed
to the Company's static approach to thin-film disk manufacturing. These
manufacturers have invested significant amounts of capital in their in-line
systems, and there may be significant resistance to change to a static approach
in the future. At times the Company has derived a significant proportion of its
net revenues from sales of its systems to manufacturers constructing new
thin-film disk fabrication facilities. The construction of new thinfilm disk
fabrication facilities involves extremely large capital expenditures, resulting
in few thin-film disk fabrication facilities being constructed worldwide at any
particular time. A substantial investment is also required by disk manufacturers
to install and integrate additional thin-film disk manufacturing equipment in
connection with upgrading or expanding their existing fabrication facilities.
These costs are far in excess of the cost of purchasing the Company's system.
The magnitude of such capital expenditures has caused certain thin-film disk
manufacturers to forego purchasing significant additional thin-film disk
manufacturing equipment. Consequently, only a limited number of opportunities
for the Company to sell its systems may exist at any given time.
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCTS
The disk drive industry in general, and the thin-film disk manufacturing
industry in particular, are characterized by rapid technological change and
evolving industry standards. As a result, the Company must continue to enhance
its existing systems and to develop and manufacture new systems with improved
capabilities. This has required and will continue to require substantial
investments by the Company in research and development to advance its
technologies. The failure to develop, manufacture and market new systems, or to
enhance existing systems, would have a material adverse effect on the Company's
business, financial condition and results of operations. In the past, the
Company has experienced delays from time to time in the introduction of, and
certain technical difficulties with, certain of its systems and enhancements. In
addition, the Company's competitors can be expected to continue to develop and
introduce new and enhanced products, any of which could cause a decline in
market demand for the Company's systems or a reduction in the Company's margins
as a result of intensified price competition.
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Changes in the manufacturing processes for thin-film disks could also have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company anticipates continued changes in the
requirements of the disk drive industry and thin-film disk manufacturing
technologies. There can be no assurance that the Company will be able to
develop, manufacture and sell systems that respond adequately to such changes.
In addition, the data storage industry is subject to constantly evolving
technological standards. There can be no assurance that future technological
innovations will not reduce demand for thin-film disks. The Company's business,
financial condition and results of operations could be materially adversely
affected by any trend toward technology that would replace thinfilm disks as a
storage medium.
The Company has expended significant amounts for research and development
for its disk sputtering systems, flat panel display manufacturing equipment and
other new products under development, such as laser-texturing equipment and
electro-optical products. In July of 1997 the Company terminated its program to
develop a laser-texturing system for thin-film disks for disk drives.
The Company's success in developing and selling enhanced disk sputtering
systems and other new products depends upon a variety of factors, including
accurate prediction of future customer requirements, technology advances, cost
of ownership, introduction of new products on schedule, cost-effective
manufacturing and product performance in the field. The Company's new product
decisions and development commitments must anticipate the requirements for the
continuously evolving disk drive industry approximately two or more years in
advance of sales. Any failure to accurately predict customer requirements and to
develop new generations of products to meet those requirements would have a
sustained material adverse effect on the Company's business, financial condition
and results of operations. New product transitions could adversely affect sales
of existing systems, and product introductions could contribute to quarterly
fluctuations in operating results as orders for new products commence and orders
for existing products decline. There can be no assurance that the Company will
be successful in selecting, developing, manufacturing and marketing new products
or enhancements of existing products.
FLAT PANEL DISPLAY MANUFACTURING EQUIPMENT RISKS
In 1996, the Company spent approximately $5.3 million on various programs
to fund the development of equipment for use in the FPD industry, of which
approximately 59% was paid for by the Company's development partners. In
exchange for certain development funding, the Company has granted to one of its
development partners the exclusive rights to manufacture and market the
Company's FPD sputtering systems in Japan. As of December 31, 1996, all of the
approximately $5.5 million advanced by the Company's development partner had
been applied to qualifying costs. The Company has limited experience in the
development, manufacture, sale and marketing of FPD manufacturing equipment,
having sold three rapid thermal processing ("RTP") systems to date and having
not yet completed development of its FPD sputtering system. Although during the
first quarter of 1997 the Company received its first order for the design and
delivery of a scaled up version of its D-STAR FPD sputtering machine, there can
be no assurance that the market for FPD manufacturing equipment targeted by the
Company will develop as quickly or to the degree the Company currently
anticipates, or that the Company's proposed FPD manufacturing equipment will
achieve customer acceptance or that the Company will achieve any net revenues
from the sale of its proposed FPD manufacturing equipment. There can be no
assurance the Company will receive additional customer sponsored research and
development funding in the future. The failure to receive additional customer
sponsored research and development funds could result in the Company internally
funding the development of such FPD manufacturing equipment, and the costs of
such research and development may have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company in any event will continue to fund research and
development in the FPD area.
LEVERAGE
In connection with the sale of the Convertible Notes, the Company incurred
approximately $57.5 million in indebtedness which resulted in a substantial
increase in the Company's ratio of long-term debt to total capitalization
(shareholders' equity plus long-term debt). The ratio at September 27, 1997 and
December 31,
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1996 was approximately 57.7% and 2.1%, respectively. As a result of this
indebtedness, the Company incurred substantial principal and interest
obligations. The degree to which the Company is leveraged could have a material
adverse effect on the Company'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. The Company's
ability to meet its debt service obligations will be dependent on the Company's
future performance, which will be subject to financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control.
MANAGEMENT OF EXPANDING OPERATIONS
The Company has recently experienced a period of rapid expansion in its
operations that has placed, and could continue to place, a significant strain on
the Company's management and other resources. The Company's ability to manage
its expanding operations effectively will require it to continue to improve its
operational, financial, and management information systems, and to train,
motivate and manage its employees. If the Company's management is unable to
manage its expanding operations effectively, the Company's results of operations
could be adversely affected.
The Company's operating results will depend in significant part upon its
ability to retain and attract qualified management, engineering, marketing,
customer support and sales personnel. Competition for such personnel is intense
and the Company has difficulties attracting such personnel, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The failure to attract and retain such personnel could make it
difficult to undertake or could significantly delay the Company's research and
development efforts and the expansion of its manufacturing capabilities or other
activities, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
MANUFACTURING RISKS
The Company's systems have a large number of components and are highly
complex. The Company may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. In addition, some of the systems built by the Company must be
customized to meet individual customer site or operating requirements. The
Company has limited manufacturing capacity and may be unable to complete the
development or meet the technical specifications of its new systems or
enhancements or to manufacture and ship these systems or enhancements in a
timely manner. Such an occurrence would materially adversely affect the
Company's business, financial condition and results of operations as well as its
relationships with customers. In addition, the Company may incur substantial
unanticipated costs early in a product's life cycle, such as increased cost of
materials due to expediting charges, other purchasing inefficiencies and greater
than expected installation and support costs which cannot be passed on to the
customer. Any of such events could materially adversely affect the Company's
business, financial condition and results of operations. Due to recent increases
in demand, the average time between order and shipment of the Company's systems
may increase substantially in the future. The Company's ability to quickly
increase its manufacturing capacity in response to short-term increases in
demand could be limited given the complexity of the manufacturing process, the
lengthy lead times necessary to obtain critical components and manufacturing
space and the need for highly skilled personnel. The failure of the Company to
satisfy any such short-term increases in demand and to keep pace with customer
demand would lead to further extensions of delivery times, which could deter
customers from placing additional orders, and could adversely affect product
quality, which could have a materially adverse effect on the Company's business,
financial condition and results of operations.
In certain instances, the Company is dependent upon a sole supplier or a
limited number of suppliers, or has qualified only a single or limited number of
suppliers, for certain complex components or sub-assemblies utilized in its
products. The Company has implemented a key supplier program in which it
appoints certain key vendors as sole suppliers for certain parts with the goal
of improving response time and reducing costs. 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
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more for inventory, parts and other supplies, seek alternative sources of
supply, delay its ability to ship its products and damage relationships with
current and prospective customers. Any such delay or damage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company conducts substantially all of its manufacturing activities at
its leased facilities in Santa Clara, Los Gatos and Rocklin, California. The
Company's Santa Clara and Los Gatos facilities are located in a seismically
active area. A major catastrophe (such as an earthquake or other natural
disaster) could result in a prolonged interruption of the Company's business.
ACQUISITIONS
The Company's business strategy includes acquiring related businesses,
products or technologies. The Company completed three acquisitions during 1996
and expects that it may pursue additional acquisitions in the future. Any future
acquisition may result in potentially dilutive issuance of equity securities,
the write-off of in-process research and development, the incurrence of debt and
contingent liabilities and amortization expense related to intangible assets
acquired, any of which could materially adversely affect the Company's business,
financial condition and results of operations. In particular, the Company will
not be able to use the "pooling of interests" method of accounting, due to a
shareholder being greater than a 50% holder of the Company's Common Stock prior
to the Company's initial public offering, in connection with any acquisition
consummated prior to November 21, 1997 and the Company will therefore be
required to amortize any intangible assets acquired in connection with any
acquisition consummated during that period.
The Company incurred a charge to operations of $5.8 million in the second
quarter of 1996 to reflect the purchase of in-process research and development
related to the two acquisitions completed in that quarter. In addition, the
Company is amortizing intangible assets of approximately $8.8 million of costs
relating to the three acquisitions completed in 1996. The amortization period
for such costs is over the useful lives, which range from two years to seven
years. Additionally, unanticipated expenses may be incurred relating to the
integration of technologies, research and development and administrative
functions. Any acquisition will involve numerous risks, including difficulties
in the assimilation of the acquired company's employees, operations and
products, uncertainties associated with operating in new markets and working
with new customers, the potential loss of the acquired company's key employees
as well as the costs associated with completing the acquisition and integrating
the acquired company.
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
Sales to customers in countries other than the United States accounted for
41%, 20% and 40% of revenues in 1996, 1995 and 1994, respectively. The Company
anticipates that international sales will continue to account for a substantial
portion of net revenues in the future. In order to effectively service customers
located in Singapore and the surrounding region, the Company has established
sales and service operations in Singapore, Taiwan and Malaysia. 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. There can be no assurance that any of these factors
will not have a material adverse effect on the Company's business, financial
condition or results of operations. In particular, although the Company's
international sales have been denominated in United States dollars, such sales
and expenses may not be denominated in dollars in the future, and currency
exchange fluctuations in countries where the Company does business could
materially adversely affect the Company's business, financial condition and
results of operations.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company currently has 23 patents issued in the United States and 2
patents issued in Japan, and has pending patent applications in the United
States and foreign countries. Of the 23 U.S. patents, 7 relate to sputtering, 10
relate to RTP, 1 relates to lubrication systems and 5 relate to other areas not
in Intevac's
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mainstream business. The 2 Japanese patents relate to sputtering. In addition,
the Company has the right to utilize certain patents under licensing
arrangements with Litton Industries, Varian Associates, Stanford University,
Lawrence Livermore Laboratories and Alum Rock Technology. There can be no
assurance that any of the Company's patent applications will be allowed or that
any of the allowed applications will be issued as patents. There can be no
assurance that any patent owned by the Company will not be invalidated, deemed
unenforceable, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with claims of the scope
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop similar products, duplicate the Company's products or
design around the patents owned by the Company. In addition, there can be no
assurance that foreign patent rights, intellectual property laws or the
Company's agreements will protect the Company's intellectual property rights.
Failure to protect the Company's intellectual property rights could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
There has been substantial litigation in the technology industry regarding
intellectual property rights. The Company has from time to time received claims
that it is infringing third parties' intellectual property rights. In August
1993, Rockwell International Corporation ("Rockwell") sued the Federal
government alleging infringement of certain patent rights with respect to the
contracts the Federal government has had with a number of companies, including
Intevac. The Federal government has notified Intevac that it may be liable in
connection with contracts for certain products from the Company's discontinued
night vision business. Although the Company believes it will have no material
liability under these contracts, there can be no assurance that the resolution
of the claims by Rockwell with the Federal government will not have a material
adverse effect on the Company's business, operating results and financial
condition. In the first quarter of 1997, Rockwell's patent in suit was held
invalid. Rockwell has appealed that decision. These issues are now pending
before the appellate court.
There can be no assurance that other third parties will not in the future
claim infringement by the Company with respect to current or future patents,
trademarks, or other proprietary rights relating to the Company's disk
sputtering systems, flat panel display manufacturing equipment or other
products. Any present or future claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company, or at all. Any of the foregoing could have a material adverse
effect upon the Company's business, operating results and financial condition.
In addition, the Company believes that one of its competitors may be
infringing the Company's patent rights in connection with products currently
being offered by this competitor. Although the Company has not undertaken formal
legal proceedings, the Company has informed this competitor that the Company
believes its patent rights are being infringed and that the Company may
undertake litigation to protect its patent rights if necessary. If undertaken,
such litigation could be costly, time-consuming and result in legal claims being
made against the Company. This could have a material adverse effect on the
Company's business, operating results and financial condition, and, in addition,
there can be no assurance that the Company would ultimately prevail in any such
litigation.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture,
treatment and disposal of toxic or other hazardous substances, chemicals,
materials or waste. Any failure to comply with current or future regulations
could result in substantial civil penalties or criminal fines being imposed on
the Company, or its officers, directors or employees, suspension of production,
alteration of its manufacturing process or cessation of operations. Such
regulations could require the Company to acquire expensive remediation or
abatement equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to properly manage the
use, disposal or storage of, or adequately restrict the release of, hazardous or
toxic substances could subject the Company to significant liabilities.
19
<PAGE> 20
DEPENDENCE ON KEY EMPLOYEES
The Company's operating results will depend significantly upon the
continued contributions of its officers and key management, engineering,
marketing, customer support and sales personnel, many of whom would be difficult
to replace. The Company does not have an employment agreement with any of its
employees or maintain key person life insurance with respect to any employee.
The loss of any key employee could have a material adverse effect on the
Company's business, financial condition and results of operations. Employees of
the Company are currently required to enter into a confidentiality agreement as
a condition of their employment. However, these agreements do not expressly
prohibit the employees from competing with the Company after leaving its employ.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------
<C> <S>
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEVAC, INC.
Date: November 10, 1997 By: /s/ NORMAN H. POND
------------------------------------
Norman H. Pond
Chairman of the Board, President and
Chief
Executive Officer (Principal
Executive Officer)
Date: November 10, 1997 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)
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<C> <S> <C>
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
23
<PAGE> 1
EXHIBIT 11.1
INTEVAC, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Shares used in Calculation of Net
Income Per Share:
Average common shares outstanding.... 12,586 12,314 12,541 12,273
Net effect of dilutive stock
options........................... 518 642 556 585
------- ------- ------- -------
Total equivalent common shares....... 13,104 12,956 13,097 12,858
======= ======= ======= =======
Net income (loss)...................... $ 1,931 $ 2,799 $ 8,924 $ 1,471
======= ======= ======= =======
Net income (loss) per share............ $ 0.15 $ 0.22 $ 0.68 $ 0.11
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE:
Shares used in Calculation of Net
Income Per Share:
Average common shares outstanding.... 12,586 12,315 12,541 12,273
Net effect of dilutive stock
options........................... 552 712 568 608
Conversion of convertible debt....... -- -- 2,196 --
------- ------- ------- -------
Total equivalent common
shares..................... 13,138 13,027 15,305 12,881
======= ======= ======= =======
Net income (loss)...................... $ 1,931 $ 2,799 $ 8,924 $ 1,471
Add interest expense, net of tax effect
on convertible debt.................. -- -- 1,324 --
------- ------- ------- -------
Adjusted net income (loss)............. $ 1,931 $ 2,799 $10,248 $ 1,471
======= ======= ======= =======
Net income (loss) per share............ $ 0.15 $ 0.21 $ 0.67 $ 0.11
======= ======= ======= =======
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF SEP. 27, 1997 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE 9 MONTHS ENDED
SEP 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-27-1997
<CASH> 1,813
<SECURITIES> 63,669
<RECEIVABLES> 15,785
<ALLOWANCES> 1,384
<INVENTORY> 34,185
<CURRENT-ASSETS> 120,093
<PP&E> 18,627
<DEPRECIATION> 5,632
<TOTAL-ASSETS> 143,711
<CURRENT-LIABILITIES> 40,289
<BONDS> 59,455
0
0
<COMMON> 17,648
<OTHER-SE> 25,913
<TOTAL-LIABILITY-AND-EQUITY> 143,711
<SALES> 95,254
<TOTAL-REVENUES> 95,254
<CGS> 65,805
<TOTAL-COSTS> 65,805
<OTHER-EXPENSES> 15,606
<LOSS-PROVISION> 409
<INTEREST-EXPENSE> 2,494
<INCOME-PRETAX> 13,729
<INCOME-TAX> 4,805
<INCOME-CONTINUING> 8,924
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,924
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.67
</TABLE>
