<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 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)
<TABLE>
<S> <C>
CALIFORNIA
(STATE OR OTHER JURISDICTION OF INCORPORATION 94-3125814
OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
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 report(s), 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 June 28, 1997 approximately 12,533,916 shares of the Registrant's Common
Stock, no par value, were outstanding.
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<PAGE> 2
INTEVAC, INC.
INDEX
<TABLE>
<CAPTION>
NO. PAGE
--------- ----
<S> <C> <C>
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
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
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........................................................................... 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 456 $ 938
Short-term investments............................................ 66,888 --
Accounts receivable, net of allowances of $1,303 and $1,024 at
June 28, 1997 and December 31, 1996, respectively.............. 15,394 17,570
Inventories....................................................... 26,207 25,666
Short-term note receivable, net of allowance of $395 and $1,180 at
June 28, 1997 and December 31, 1996, respectively.............. -- --
Prepaid expenses and other current assets......................... 660 507
Deferred tax asset................................................ 4,397 4,397
-------- -------
Total current assets........................................... 114,002 49,078
Property, plant, and equipment, net................................. 11,729 9,273
Long-term investments............................................... 2,561 --
Investment in 601 California Avenue LLC............................. 2,431 2,431
Goodwill and other intangibles...................................... 6,222 7,301
Debt issuance costs................................................. 2,184 --
Deferred tax assets and other assets................................ 2 2
-------- -------
Total assets.............................................. $ 139,131 $ 68,085
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable..................................................... $ -- $ 1,252
Accounts payable.................................................. 4,078 4,465
Accrued payroll and related liabilities........................... 2,154 1,937
Other accrued liabilities......................................... 9,600 4,275
Customer advances................................................. 21,701 20,702
Net liabilities of discontinued operations........................ 583 600
-------- -------
Total current liabilities...................................... 38,116 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........................................ 17,172 16,747
Retained earnings................................................. 23,982 16,989
-------- -------
Total shareholders' equity..................................... 41,154 33,736
-------- -------
Total liabilities and shareholders' equity................ $ 139,131 $ 68,085
======== =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues........................................ $ 33,763 $ 20,235 $ 64,904 $ 35,361
Cost of net revenues................................ 23,622 12,228 44,619 21,431
------- ------- ------- -------
Gross profit........................................ 10,141 8,007 20,285 13,930
Operating expenses:
Research and development.......................... 1,902 2,006 4,462 3,385
Selling, general and administrative............... 2,821 1,958 5,421 3,845
Acquired in-process research and development...... -- 5,835 -- 5,835
------- ------- ------- -------
Total operating expenses.................. 4,723 9,799 9,883 13,065
------- ------- ------- -------
Operating income (loss)............................. 5,418 (1,792) 10,402 865
Interest expense.................................... (1,048) (29) (1,448) (55)
Interest income and other, net...................... 1,218 222 1,973 509
------- ------- ------- -------
Income (loss) from continuing operations before
income taxes...................................... 5,588 (1,599) 10,927 1,319
Provision for income taxes.......................... 2,011 1,626 3,934 2,647
------- ------- ------- -------
Net income (loss)................................... $ 3,577 $ (3,225) $ 6,993 $ (1,328)
======= ======= ======= =======
Primary earnings per share.......................... $ 0.27 $ (0.26) $ 0.53 $ (0.11)
Shares used in per share amounts.................... 13,074 12,256 13,094 12,252
Fully diluted earnings per share.................... $ 0.26 $ (0.26) $ 0.52 $ (0.11)
Shares used in per share amounts.................... 15,862 12,256 14,995 12,252
</TABLE>
See accompanying notes.
4
<PAGE> 5
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 28, JUNE 29,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................................... $ 6,993 $ (1,328)
Adjustments to reconcile net income (loss) to net cash and cash
equivalents provided by operating activities:
Depreciation and amortization........................................ 2,337 953
Acquired in-process research and development......................... -- 5,835
Gain on sale of Chorus Investment.................................... (785) --
Loss on disposal of equipment........................................ 21 --
Changes in assets and liabilities.................................... 7,637 (4,433)
-------- --------
Total adjustments...................................................... 9,210 2,355
-------- --------
Net cash and cash equivalents provided by operating activities......... 16,203 1,027
INVESTING ACTIVITIES
Purchase of investments................................................ (82,570) (2,571)
Proceeds from sale of investments...................................... 13,557 1,571
Proceeds from sale of Chorus Investment................................ 785 --
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....................... (3,626) (2,297)
-------- --------
Net cash and cash equivalents used in investing activities............. (72,290) (14,776)
FINANCING ACTIVITIES
Net borrowings under line of credit agreement.......................... (2) --
Notes payable repayments............................................... (25) --
Proceeds from issuance of common stock................................. 425 23
Proceeds from convertible bond offering................................ 55,207 --
-------- --------
Net cash and cash equivalents provided by financing activities......... 55,605 23
-------- --------
Net decrease in cash and cash equivalents.............................. (482) (13,726)
Cash and cash equivalents at beginning of period....................... 938 20,422
-------- --------
Cash and cash equivalents at end of period............................. $ 456 $ 6,696
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid (received) for:
Interest............................................................. $ 53 $ --
Income taxes......................................................... 3,750 3,095
Income tax refund.................................................... -- (250)
Other non-cash changes:
Investment in Cathode Technology Corporation through assumption of
notes payable..................................................... $ -- $ 1,980
</TABLE>
See accompanying notes.
5
<PAGE> 6
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, which is the fourth generation of
the Company's Magnetic Disk Processing ("MDP") system, enables disk
manufacturers to achieve high coercivities, high signal-to-noise ratios, minimal
disk defects, durability and uniformity, all of which are necessary in the
production of high performance, high capacity disks. The Company sells its
static sputtering systems 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 a subsidiary in Singapore and a
branch office in Taiwan to support its customers in Southeast Asia.
The Company also realizes revenues from the sales of system components and
from contract research and development activities. 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 primarily derived from contracts with the Defense
Advanced Research Projects Agency ("DARPA") for development projects for the
flat panel display ("FPD") industry.
The financial information at June 28, 1997 and for the three- and six-month
periods ended June 28, 1997 and June 29, 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 six-month periods ended June 28, 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 June 28, 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 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.
6
<PAGE> 7
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the Company's available-for-sale securities:
<TABLE>
<CAPTION>
JUNE 28,
1997
--------------
(IN THOUSANDS)
<S> <C>
Tax-exempt municipal bonds..................................... $ 69,013
Amounts included in short-term investments..................... $ 66,888
Amounts included in long-term investments...................... 2,125
-------
$ 69,013
=======
</TABLE>
At June 28, 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 half of 1997 were not
significant. The long-term investments are due within one year to fourteen
months.
3. INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 31,
1997 1996
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials......................................... $ 7,905 $ 6,953
Work-in-progress...................................... 16,601 11,728
Finished goods........................................ 1,701 6,985
------- -------
$ 26,207 $ 25,666
======= =======
</TABLE>
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 note.
5. INCOME TAXES
The effective tax rate used for the six-month periods ending June 28, 1997
and June 29, 1996 were 36% and 37% (after excluding the $5.8 million of non-tax
deductible acquisition related in-process research and development expense) of
pretax income, respectively. This rate is 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 in fully
diluted earnings per share computations for the period outstanding under the "if
converted" method.
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
7
<PAGE> 8
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
will be required to change the method currently used to compute earnings per
share and to restate all prior 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic earnings per share....................... $ 0.29 $(0.26) $ 0.56 $(0.11)
</TABLE>
The impact of SFAS 128 on the calculation of fully 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 second quarter of
1997 the Company received an additional $1,000,000 advance under the amended
agreement, bringing the total advances received under the contract to
$6,450,000. Offsets against research and development expense of $1,000,000 were
recognized under the amended agreement during the second 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
<PAGE> 9
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 primarily derived from contracts with DARPA for
development projects for the FPD industry. 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 $77.9 million and $68.2 million at June 28, 1997
and June 29, 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 28, 1997 AND JUNE 29, 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 and
contract research and development. Net revenues from the sales of systems are
recognized upon customer acceptance. System component sales are recognized upon
product shipment, and contract research and development is recognized in
accordance with contract terms, typically as costs are incurred. Net revenues
increased by 67% to $33.8 million for the three months ended June 28, 1997 from
$20.2 million for the three months ended June 29, 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 increased
contract research and development and higher sales of new products acquired in
the acquisitions of SJT and Lotus. Based upon the scheduled shipment dates of
the current backlog of orders, the Company expects that its net revenues for the
three months ending September 27, 1997 will decline substantially from net
revenues for the three months ended June 28, 1997.
9
<PAGE> 10
International sales increased by 136% to $16.5 million for the three months
ended June 28, 1997 from $7.0 million for the three months ended June 29, 1996.
The increase in revenues from international sales was primarily due to an
increase in the sales of disk sputtering systems. International sales
constituted 49% of net revenues for the three months ended June 28, 1997 and 35%
of net revenues for the three months ended June 29, 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 30.0%
for the three months ended June 28, 1997 as compared to 39.6% for the three
months ended June 29, 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 three
months ended June 28, 1997. The Company believes that gross margins will
continue to decline during the three months ending September 27, 1997 as the
result of decreased sales and manufacturing volume.
Research and development. Research and development expense consists
primarily of prototype materials, salaries and related costs of employees
engaged in ongoing research, design and development activities for disk
sputtering equipment, flat panel manufacturing equipment, and research by the
Company's Advanced Technology Division. Research and development expense
declined to $1.9 million for the three months ended June 28, 1997 from $2.0
million for the three months ended June 29, 1996, representing 5.6% and 9.9%,
respectively, of net revenues. The decrease was primarily the result of
increased development expense in disk manufacturing products and flat panel
display manufacturing products which were more than offset by cost sharing from
the Company's D-STAR development partner and research and development expense
transferred to cost of sales under a DARPA development contract. 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 $1.0 million and
$0.4 million in the three months ended June 28, 1997 and June 29, 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 $1.0 million in the three
months ended June 28, 1997 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 other expenditures in
connection with contract research and development activities as these are
charged to cost of sales.
Selling, general and administrative. Selling, general and administrative
expense consists primarily of selling, marketing, financial, travel, management,
legal and professional services 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 44% to $2.8 million for
the three months ended June 28, 1997 from $2.0 million for the three months
ended June 29, 1996 representing 8.4% and 9.7%, 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 contact stop-start systems and disk lubrication
systems. Administrative headcount grew to 87 employees at June 28, 1997 from 69
employees at June 29, 1996.
Acquired in-process research and development. The Company recognized a $5.8
million charge to earnings for the three months ended June 29, 1996 as the
result of a write-off of acquired in-process research and development related to
the acquisitions of SJT and Lotus. No similar charge was incurred during the
second quarter of 1997.
Interest expense. Interest expense consists primarily of interest on the
Company's 6 1/2% Convertible Notes issued in the first quarter of 1997.
10
<PAGE> 11
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, and early
payment discounts on the purchase of inventories, goods and services. Interest
and other income, net increased to $1.2 million for the three months ended June
28, 1997 from $0.2 million for the three months ended June 29, 1996 as the
result of an increase in interest income and in 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 three months ended June 28, 1997 and June 29, 1996, was 36% and
38% (after excluding the $5.8 million of non-tax deductible acquisition related
inprocess research and development expense), respectively. The Company's tax
rate for these periods differs from the applicable statutory rates primarily due
to tax exempt interest income and state income taxes.
SIX MONTHS ENDED JUNE 28, 1997 AND JUNE 29, 1996
Net revenues. Net revenues increased by 84% to $64.9 million for the six
months ended June 28, 1997 from $35.4 million the six months ended June 29,
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. Based upon its current backlog of orders and
the scheduled shipment dates, the Company expects that net revenues during the
six months ended December 31, 1997 will approximate the net revenues experienced
during the six months ended June 28, 1997.
International sales increased by 126% to $31.2 million for the six months
ended June 28, 1997 from $13.8 million for the six months ended June 29, 1996.
The increase in revenues from international sales was primarily due to an
increase in the sales of disk sputtering systems. International sales
constituted 48% of net revenues for the six months ended June 28, 1997 and 39%
of net revenues for the six months ended June 29, 1996.
Gross margin. Gross margin was 31.3% for the six months ended June 28, 1997
as compared to 39.4% for the six months ended June 29, 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 six months ended June 28, 1997. The Company believes that
gross margins experienced during the six months ended June 28, 1997 are
indicative of margins anticipated for the six month period ending December 31,
1997.
Research and development. Research and development expense increased to
$4.5 million for the six months ended June 28, 1997 from $3.4 million for the
six months ended June 29, 1996, representing 6.9% and 9.6%, 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 were partially offset by cost sharing from the Company's D-STAR
development partner and by research and development expense transferred to cost
of sales under a DARPA development contract.
Research and development expenses do not include costs of $1.0 million and
$0.8 million in the six months ended June 28, 1997 and June 29, 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 in the six months
ended June 28, 1997 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 other expenditures in
connection with contract research and development activities as these are
charged to cost of sales.
Selling, General and Administrative. Selling, general and administrative
expense increased by 41% to $5.4 million for the six months ended June 28, 1997
from $3.8 million for the six months ended June 29, 1996 representing 8.4% and
10.9%, 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
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sputtering systems, and to a lesser extent, increased costs of marketing and
support of the Company's contact stop-start systems and disk lubrication
systems.
Acquired in-process research and development. The Company recognized a
charge for acquired in-process research and development of $5.8 million for the
six months ended June 29, 1996, as a result of the acquisitions of SJT and
Lotus. No similar charge was incurred during the six months ended June 28, 1997.
Interest expense. 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 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, and early
payment discounts on the purchase of inventories, goods and services. Interest
and other income, net increased to $2.0 million for the six months ended June
28, 1997 from $0.5 million for the six months ended June 29, 1996 as the result
of increased income related to the sale of the Company's 20% interest in the
capital stock of Chorus and increased interest income.
Provision for income taxes. Income tax expense as a percentage of pretax
income for the six months ended June 28, 1997 and June 29, 1996 was 36% and 37%
(after excluding the $5.8 million of non-tax deductible acquisition related
in-process research and development expense), respectively. The Company's tax
rate for these periods differs from the applicable statutory rates primarily due
to tax exempt interest income and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $16.2 million for the
six months ended June 28, 1997. The cash provided was due primarily to net
income, increased accrued expenses, decreased accounts receivable, depreciation
and amortization which was partially offset by an increase in inventory and a
decrease in accounts payable.
The Company's investing activities used cash of $72.3 million for the six
months ended June 28, 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 $55.6 million for the
six months ended June 28, 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.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
Fluctuations of Results of Operations
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company derives most of its
net revenues from the sale of a 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. The scheduled shipment dates
of the Company's backlog as of June 28, 1997 indicate that the Company will
likely recognize a substantial decline in revenue during the third quarter of
1997 from the level experienced during the first two quarters of 1997.
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
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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 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 ten 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
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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 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 is a manufacturer of in-line and static sputtering systems, and each
has substantially greater financial, technical, marketing, manufacturing and
other resources than the Company. The Company also experiences competition from
other manufacturers of in-line sputtering systems used in thin-film disk
fabrication facilities as well as the manufacturers of thin-film disks that have
developed the capability to manufacture their own sputtering systems. There can
be no assurance that the Company's competitors will not develop enhancements to,
or future generations of, competitive products that will offer superior price or
performance features or that new competitors will not enter the Company's
markets and develop such enhanced products. Furthermore, the failure of
manufacturers of thin-film disks currently using in-line machines and
manufacturers using internally developed sputtering systems to switch to static
sputtering systems in the future could adversely affect the Company's ability to
increase its sputtering system market share.
In addition, the Company's three principal competitors are based in foreign
countries and have cost structures and system prices based on foreign
currencies. Accordingly, currency fluctuations could cause the Company's
dollar-priced products to be less competitive than its competitors' products
priced in other currencies. Currency fluctuations could also increase the
Company's cost structure relative to those of its competitors, which could make
it more difficult for the Company to maintain its competitiveness.
Given the lengthy sales cycle and the significant investment required to
integrate a disk sputtering system into the manufacturing process, the Company
believes that once a thin-film disk manufacturer has selected a particular
supplier's disk sputtering equipment, the manufacturer generally relies upon
that equipment for the specific production line application and frequently will
continue to purchase its other disk sputtering equipment from the same supplier.
The Company expects to experience difficulty in selling to a particular customer
for a significant period of time if that customer selects a competitor's disk
sputtering equipment. Accordingly, competition for customers in the disk
sputtering equipment industry is particularly intense, and suppliers of disk
sputtering equipment may offer pricing concessions and incentives to attract
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.
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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 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, 60% of the Company's backlog at June 28, 1997
was represented by orders from three customers for disk sputtering systems, with
each representing 10% or more of the Company's backlog at June 28, 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 in-line approach as opposed
to the Company's static approach to thin-film disk manufacturing. These
manufacturers have invested significant amounts of capital in their in-line
systems, and there may be significant resistance to change to a static approach
in the future. At times the Company has derived a significant proportion of its
net revenues from sales of its systems to manufacturers constructing new
thin-film disk fabrication facilities. The construction of new thin-film disk
fabrication facilities involves extremely large capital expenditures, resulting
in few thin-film disk fabrication facilities being constructed worldwide at any
particular time. A substantial investment is also required by disk manufacturers
to install and integrate additional thin-film disk manufacturing equipment in
connection with upgrading or expanding their existing fabrication facilities.
These costs are far in excess of the cost of purchasing the Company's system.
The magnitude of such capital expenditures has caused certain thin-film disk
manufacturers to forego purchasing significant additional thin-film disk
manufacturing equipment. Consequently, only a limited number of opportunities
for the Company to sell its systems may exist at any given time.
Rapid Technological Change; 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
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condition and results of operations. In the past, the Company has experienced
delays from time to time in the introduction of, and certain technical
difficulties with, certain of its systems and enhancements. In addition, the
Company's competitors can be expected to continue to develop and introduce new
and enhanced products, any of which could cause a decline in market demand for
the Company's systems or a reduction in the Company's margins as a result of
intensified price competition.
Changes in the manufacturing processes for thin-film disks could also have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company anticipates continued changes in the
requirements of the disk drive industry and thin-film disk manufacturing
technologies. There can be no assurance that the Company will be able to
develop, manufacture and sell systems that respond adequately to such changes.
In addition, the data storage industry is subject to constantly evolving
technological standards. There can be no assurance that future technological
innovations will not reduce demand for thin-film disks. The Company's business,
financial condition and results of operations could be materially adversely
affected by any trend toward technology that would replace 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, approximately
59% of which was paid for by the Company's development partners. In exchange for
certain development funding, the Company has granted to one of its development
partners the exclusive rights to manufacture and market the Company's FPD
sputtering systems in Japan. 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 two
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.
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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 June 28, 1997 and
December 31, 1996 was approximately 59.1% 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
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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 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 and Los Gatos, 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 and research and development and administrative
functions. Any acquisition will involve numerous risks, including difficulties
in the assimilation of the acquired company's employees, operations and
products, uncertainties associated with operating in new markets and 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 and Taiwan. 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.
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Patents and Other Intellectual Property
The Company currently has 23 patents issued in the United States and 1
patent issued in Japan, and has pending patent applications in the United States
and foreign countries. Of the 23 US patents, 7 relate to sputtering, 10 relate
to RTP, 1 relates to lubrication systems and 5 relate to other areas not in
Intevac's mainstream business. 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 amounts of litigation in the technology industry
regarding intellectual property rights. The Company has from time to time
received claims that it is infringing third parties' intellectual property
rights. In August 1993, Rockwell International Corporation ("Rockwell") sued the
Federal government alleging infringement of certain patent rights with respect
to the contracts the Federal government has had with a number of companies,
including Intevac. The Federal government has notified Intevac that it may be
liable 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. The issues are currently
being briefed 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 manufacturing equipment or other products. Any
present or future claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. Any of the foregoing could have a material adverse effect
upon the Company's business, operating results and financial condition.
In addition, the Company believes that one of its competitors may be
infringing the Company's patent rights in connection with products currently
being offered by this competitor. Although the Company has not undertaken formal
legal proceedings, the Company has informed this competitor that the Company
believes its patent rights are being infringed and that the Company may
undertake litigation to protect its patent rights if necessary. If undertaken,
such litigation could be costly, time-consuming and result in legal claims being
made against the Company. This could have a material adverse effect on the
Company's business, operating results and financial condition, and, in addition,
there could be no assurance that the Company would ultimately prevail in any
such litigation.
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
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<PAGE> 20
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.
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
The Company's annual meeting of shareholders was held on May 15, 1997. The
following actions were taken at this meeting:
<TABLE>
<CAPTION>
ABSTENTIONS
AFFIRMATIVE NEGATIVE VOTES AND BROKER
VOTES VOTES WITHHELD VOTES
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
(a) Election of Directors
Norman H. Pond.................................. 9,338,884 11,559 -- 3,182,141
Edward Durbin................................... 9,336,384 14,059 -- 3,182,141
Robert D. Hempstead............................. 9,338,884 11,559 -- 3,182,141
David N. Lambeth................................ 9,336,884 13,559 -- 3,182,141
H. Joseph Smead................................. 9,338,264 12,179 -- 3,182,141
(b) Approval of an amendment to the Company's Employee
Stock Purchase Plan................................ 8,926,624 372,980 -- 3,232,980
(c) Ratification of Ernst & Young as independent
auditors........................................... 9,348,893 100 -- 3,183,591
</TABLE>
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>
**2.1 Stock Purchase Agreement by and among Lotus Technologies, Inc., Lewis Lipton,
Dennis Stark, Steve Romine and Intevac, Inc., dated June 6, 1996
*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
***4.3 Registration Agreement, dated as of February 15, 1997, among the Company,
Salomon Brothers Inc., Robertson, Stephens & Company LLC and Hambrecht &
Quist LLC
10.1 Amendment to Line of Credit Agreement dated May 15, 1997
10.2 Amendment to Line of Credit Agreement dated July 17, 1997
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
21
<PAGE> 22
- ---------------
* 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:
None.
22
<PAGE> 23
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: August 12, 1997 By: /s/ NORMAN H. POND
------------------------------------
Norman H. Pond
Chairman of the Board, President and
Chief Executive Officer (Principal
Executive Officer)
Date: August 12, 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)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S>
10.1 Amendment to Line of Credit Agreement dated May 15, 1997
10.2 Amendment to Line of Credit Agreement dated July 17, 1997
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
24
<PAGE> 1
EXHIBIT 10.1
[WELLS FARGO LETTERHEAD]
May 15, 1997
Intevac, Inc.
3560 Bassett Street
Santa Clara CA 95054
Gentlemen:
This letter is to confirm the changes agreed upon between Wells Fargo
Bank, National Association ("Bank") and Intevac, Inc. ("Borrower") to the terms
and conditions of that certain letter agreement between Bank and Borrower dated
as of April 30, 1997, as amended from time to time (the "Agreement"). For
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Bank and Borrower hereby agree that the Agreement shall be amended
as follows to reflect said changes.
1. Paragraph I.1(b) shall be renumbered to Paragraph I.1(c).
2. The following is hereby added to the Agreement as new Paragraph
1.1(b):
"(b) Letter of Credit Subfeature. As a subfeature under the
Line of Credit, Bank agrees from time to time during the term thereof
to issue standby letters of credit for the account of Borrower to
finance Borrower's acquisitions of business operations (each, a "Letter
of Credit" and collectively, "Letters of Credit"); provided however,
that the form and substance of each Letter of Credit shall be subject
to approval by Bank, in its sole discretion; and provided further, that
the aggregate undrawn amount of all outstanding Letters of Credit shall
not at any time exceed Ten Million Dollars ($10,000,000.00). No Letter
of Credit shall have an expiration date subsequent to the maturity date
of the Line of Credit. The undrawn amount of all Letters of Credit
shall be reserved under the Line of Credit and shall not be available
for borrowings thereunder. Each Letter of Credit shall be
<PAGE> 2
Intevac, Inc.
May 15, 1997
Page 2
subject to the additional terms and conditions of the Letter of Credit
Agreement and related documents, if any, required by Bank in connection
with the issuance thereof. Each draft paid by Bank under a Letter of
Credit shall be deemed an advance under the Line of Credit and shall be
repaid by Borrower in accordance with the terms and conditions of this
letter applicable to such advances; provided however, that if advances
under the Line of Credit are not available, for any reason, at the time
any draft is paid by Bank, then Borrower shall immediately pay to Bank
the full amount of such draft, together with interest thereon from the
date such amount is paid by Bank to the date such amount is fully
repaid by Borrower, at the rate of interest applicable to advances
under the Line of Credit. In such event Borrower agrees that Bank, in
its sole discretion, may debit any demand deposit account maintained by
Borrower with Bank for the amount of any such draft."
3. The following is hereby added to the Agreement as Paragraph II.4:
"4. Letter of Credit Fees. Borrower shall pay to Bank fees
upon the issuance of each Letter of Credit, upon the payment or
negotiation by Bank of each draft under any Letter of Credit and upon
the occurrence of any other activity with respect to any Letter of
Credit (including without limitation, the transfer, amendment or
cancellation of any Letter of Credit) determined in accordance with
Bank's standard fees and charges then in effect for such activity."
4. Except as specifically provided herein, all terms and conditions of
the Agreement remain in full force and effect, without waiver or modification.
All terms defined in the Agreement shall have the same meaning when used herein.
This letter and the Agreement shall be read together, as one document.
5. Borrower hereby remakes all representations and warranties contained
in the Agreement and reaffirms all covenants set forth therein. Borrower further
certifies that as of the date of Borrower's acknowledgment set forth below there
exists no default or defined event of default under the Agreement or any
promissory note or other contract, instrument or document executed in connection
therewith, nor any condition, act or event
<PAGE> 3
Intevac, Inc.
May 15, 1997
Page 3
which with the giving of notice or the passage of time or both would constitute
such a default or defined event of default.
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By:
-----------------------------------
John Adams
Vice President
Acknowledged and accepted as of 5-27-97:
INTEVAC, INC.
By: /s/ CHARLES B. EDDY III
--------------------------------
Charles B. Eddy III
Chief Financial Officer
<PAGE> 1
EXHIBIT 10.2
[WELLS FARGO BANK LETTERHEAD]
July 17, 1997
INTEVAC, INC.
3560 Bassett Street
Santa Clara, CA 95054
Gentlemen:
This letter is to confirm the changes agreed upon between Wells Fargo
Bank, National Association ("Bank") and INTEVAC, INC. ("Borrower") to the terms
and conditions of that certain letter agreement between Bank and Borrower dated
as of April 30, 1997, as amended from time to time (the "Agreement"). For
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Bank and Borrower hereby agree that the Agreement shall be amended
as follows to reflect said changes.
1. Paragraph V.13. Is hereby deleted in its entirety, and the following
substituted therefor:
"Not declare or pay any dividend or distribution either in
cash, stock or any other property on Borrower's stock now or hereafter
outstanding, nor redeem, retire, repurchase or otherwise acquire any
shares of any class of Borrower's stock now or hereafter outstanding,
except that Borrower may repurchase up to 350,000 shares of Borrower's
common stock not to exceed $10,000,000.00 in aggregate purchase price."
2. Except as specifically provided herein, all terms and conditions of
the Agreement remain in full force and effect, without waiver or modification.
All terms defined in the Agreement shall have the same meaning when used herein.
This letter and the Agreement shall be read together, as one document.
<PAGE> 2
INTEVAC, INC.
July 17, 1997
Page 2
3. Borrower hereby remakes all representations and warranties contained
in the Agreement and reaffirms all covenants set forth therein. Borrower further
certifies that as of the date of Borrower's acknowledgment set forth below there
exists no default or defined event of default under the Agreement or any
promissory note or other contract, instrument or document executed in connection
therewith, nor any condition, act or event which with the giving of notice or
the passage of time or both would constitute such a default or defined event of
default.
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ JOHN ADAM
------------------------
John Adam
Vice President
Acknowledged and accepted as of _____________________, 1997:
INTEVAC, INC.
By: /s/ CHARLES B. EDDY III
--------------------------------
Title: Chief Financial Officer
<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 SIX MONTHS ENDED
------------------- -------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
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....................... 12,534 12,256 12,519 12,252
Net effect of dilutive stock options.................... 540 -- 575 --
------- ------- ------- -------
Total equivalent common shares.................. 13,074 12,256 13,094 12,252
======= ======= ======= =======
Net income (loss)......................................... $ 3,577 $ (3,225) $ 6,993 $ (1,328)
======= ======= ======= =======
Net income (loss) per share............................... $ 0.27 $ (0.26) $ 0.53 $ (0.11)
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE:
Shares used in Calculation of Net Income Per Share:
Average common shares outstanding....................... 12,534 12,256 12,519 12,252
Net effect of dilutive stock options.................... 540 -- 575 --
Conversion of convertible debt.......................... 2,788 -- 1,901 --
------- ------- ------- -------
Total equivalent common shares.................. 15,862 12,256 14,995 12,252
======= ======= ======= =======
Net income (loss)......................................... $ 3,577 $ (3,225) $ 6,993 $ (1,328)
Add interest expense, net of tax effect on convertible 563 -- 761 --
debt....................................................
------- ------- ------- -------
Adjusted net income (loss)................................ $ 4,140 $ (3,225) $ 7,754 $ (1,328)
======= ======= ======= =======
Net income (loss) per share............................... $ 0.26 $ (0.26) $ 0.52 $ (0.11)
======= ======= ======= =======
</TABLE>
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 28, 1997 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE 6 MONTHS ENDED
JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-28-1997
<CASH> 456
<SECURITIES> 69,013
<RECEIVABLES> 16,697
<ALLOWANCES> 1,303
<INVENTORY> 26,207
<CURRENT-ASSETS> 114,002
<PP&E> 16,706
<DEPRECIATION> 4,977
<TOTAL-ASSETS> 139,131
<CURRENT-LIABILITIES> 38,116
<BONDS> 59,455
0
0
<COMMON> 17,172
<OTHER-SE> 23,982
<TOTAL-LIABILITY-AND-EQUITY> 139,131
<SALES> 64,904
<TOTAL-REVENUES> 64,904
<CGS> 44,619
<TOTAL-COSTS> 44,619
<OTHER-EXPENSES> 9,559
<LOSS-PROVISION> 324
<INTEREST-EXPENSE> 1,448
<INCOME-PRETAX> 10,927
<INCOME-TAX> 3,934
<INCOME-CONTINUING> 6,993
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,993
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.52
</TABLE>
