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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (I.R.S. 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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none none
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock (no
par value)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of February 6, 1997 was approximately $54,057,000 (based on the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
Common Stock held by each executive officer, director, and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On February 6, 1997 approximately 12,530,084 shares of the Registrant's
Common Stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III. SUCH PROXY STATEMENT
WILL BE FILED WITHIN 120 DAYS AFTER THE END OF THE FISCAL YEAR COVERED BY THIS
ANNUAL REPORT ON FORM 10-K.
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This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
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. Additionally, the Company's
static systems allow disk manufacturers to achieve low production costs through
high yield, high uptime, and low acquisition, operating and facilities costs.
To leverage its expertise in thin-film disk production, the Company has
acquired and intends to acquire or develop related businesses, products and
technologies that enable it to expand its current product offerings. For
example, in 1996 the Company completed three acquisitions including a company
that manufactures disk lubrication equipment and a company that manufactures
contact stop/start test equipment for hard disk drives and components, and the
Company initiated development of a disk laser-texturing product. In addition,
the Company believes that its expertise and technology may have applications
other than for thin-film disk manufacturing and is in the process of expanding
its product offerings to other areas, such as flat panel display manufacturing
equipment and electro-optical products.
Market demand for disk drives is growing rapidly, stimulated by demand for
new and more powerful computers, the growing use of sophisticated network
servers and the development of more memory intensive software, such as Windows
NT and multimedia applications. The strong growth in unit shipments of disk
drives has in turn stimulated the growth of the thin-film disk market. With the
increasing demand for reliable, rapid access storage and the intense
competitiveness in the disk drive industry, thin-film disk manufacturers
continually seek to produce higher capacity thin-film disks at a lower cost per
megabyte of storage. Traditionally, thin-film disk manufacturers used in-line
systems for disk sputtering. In 1982, Varian formed a business unit to design a
disk sputtering system to address certain inherent limitations of the in-line
sputtering architecture. That business, acquired by the Company in 1991,
developed a single disk, multiple chamber static sputtering system, similar in
concept to the single wafer processing machines used by the semiconductor
industry. The Company's static systems differ from in-line systems in that
static sputtering provides for deposition with no relative movement between the
sputtering source and the disk being coated. This provides advantages in disk
uniformity and precise control of process parameters. The benefits of the static
approach have caused a number of leading disk manufacturers to purchase the
Company's static systems. Additionally, changing requirements in thin-film disk
technology, such as the trend towards higher disk coercivity, lower flying
heights, reduced stiction and the use of MR heads, as well as the production of
disks in new locations has created a need for the purchase of new sputtering
systems.
The Company typically offers its static sputtering systems to both captive
and merchant thin-film disk manufacturers at list prices ranging from $2.0
million to $3.5 million depending on configuration. Since 1991, Intevac systems
have been installed for or ordered by the following customers: Akashic Memories,
Fuji Electric, Hitachi, HMT Technology, IBM, Komag, MaxMedia, Mitsubishi,
Seagate Technology, Sony, Stormedia, Tae Il Media Co., Trace Storage Technology
and Western Digital. Based on data published by TrendFOCUS in March 1996, an
independent market research firm, the Company believes it has the largest number
of installed static sputtering systems worldwide. Based upon MDP shipments, the
Company believes it had 99 systems installed as of December 31, 1996. 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 customers in
Southeast Asia. The Company's backlog was $63.7 million at December 31, 1996.
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DISK MEDIA TECHNOLOGY
The disks in a hard disk drive are substrates that have been coated with
several thin-film layers and are used as a storage medium for digital data. A
thin magnetic film on the disk is capable of storing information in the form of
magnetic patterns written and read by the disk drive recording head. The
production of thin-film disks involves several complex process steps requiring
specialized and expensive manufacturing equipment and facilities. The following
briefly summarizes the steps in this manufacturing process:
- Plating, polishing and texturing. The disk substrate (typically
aluminum), which must be flat, smooth and free of surface defects, is
plated with a non-magnetic layer for strength and durability. The
substrate is then polished and textured to produce a controlled roughness
on the disk's surface. This improves the friction characteristics so that
the disk drive head will not stick to the disk when the drive is turned
off.
- Sputtering. Sputtering is a complex vacuum deposition process used to
deposit multiple thin-films on the disk. The initial thin-film layers are
various alloys that produce the magnetic qualities of a disk. The final
thin-film layer is a protective carbon overcoat. The layers vary in
thickness but are all very thin, typically less than 1/2,000th the
thickness of a piece of paper.
- Lubrication. After thin-film sputtering, a microscopic layer of
lubricant is applied to the disk's surface to improve durability and
reduce surface friction.
- Test and certification. In the test and certification process, each disk
is electronically scanned for both film integrity and asperity control
and to ensure that the disk operates to the customer's specifications.
Improvements in the disk sputtering process have contributed significantly
to increases in disk storage capacity through increasing areal density (the
number of bits of data stored per unit of area). The most significant advances
in disk media technology have been the achievement of better magnetic
characteristics and improved mechanical properties permitting lower flying
heights. Flying height, the distance between the head and the disk while the
disk drive is operating, depends on the smoothness and flatness of the disk
surface.
CHALLENGES FACING THIN-FILM DISK MANUFACTURERS
Disk drive manufacturers continually seek to produce higher capacity disk
drives at a lower cost per megabyte of storage. Because of the increasing demand
for reliable, rapid access storage and the intense competitiveness in the disk
drive industry, many thin-film disk manufacturers address this requirement by
producing higher capacity disks capable of higher areal densities. As thin-film
disk manufacturers do this, they face technical and operational challenges that
fall into two principal categories: the production of high performance disks and
the control of disk production costs.
Production of high performance disks.
The ability of thin-film disk manufacturers to produce disks capable of
high areal density is directly related to the manufacturer's ability to
consistently control disk attributes that are largely determined in the
sputtering process. The disk attributes include the following:
- Coercivity. Coercivity, a measure of the magnetic strength of the disk,
is expressed in Oersted ("Oe"). The magnetic strength of the disk is
determined by the types of disk substrate and thin-film materials used;
substrate surface conditions before disk sputtering; and the conditions
that exist during the sputtering process, including temperature, vacuum
and possible sources of disk contamination. Coercivity is increasingly
important as areal density increases because higher coercivity permits
sharper transitions between magnetized regions, essentially allowing bits
of data to be closer together and therefore more data to be stored in the
same disk area. Advanced drive designs today require coercivities in the
range of 2,000 to 2,200 Oes compared to a range of 950 to 1,200 Oes
required five years ago. The Company believes coercivity requirements
will continue to increase significantly over the next several years.
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- Signal-to-noise ratio. The proper choice of magnetic alloy material and
the uniform deposition of this material on the disk help to reduce
"noise" (unwanted signals), thereby improving the signal-to-noise ratio
of the data that is read from the disk. Higher signal-to-noise ratios
permit higher recording density and better data rates.
- Defects. Suitability of the disks for use in disk drives with high areal
density is dependent upon both the number and the size of surface
imperfections on the disk. Surface imperfections result from a variety of
factors, including preexisting substrate surface imperfections, minor
damage, contaminants trapped in the sputtered film and non-uniform
sputtering of the thin-film layers. As more data is stored in the same
disk space, the number and size of disk defects that can be tolerated
must be reduced.
- Smoothness and flatness. As areal density increases, a smaller
magnetized region stores each bit of data. The lower the disk head flying
height, the more accurately the head can read the magnetic signal. The
smoother and flatter the disks, the lower the flying height that can be
achieved without the head contacting the disk.
- Durability. Because the head and disk come into physical contact when
the disk drive is turned off, a protective carbon overcoat is sputtered
over the magnetic layer to minimize wear on the disk, to protect the
information stored on the disk and to increase the useful life of the
disk drive. The thickness of this overcoat must nevertheless be minimized
in order to allow the head to fly as close as possible to the magnetic
layer.
- Uniformity. The performance of a disk is affected by the uniformity of
all of the above characteristics across the entire surface of the disk.
Such uniformity is substantially affected by the quality of the disk
sputtering process.
Control of disk production costs
It is important for thin-film disk manufacturers to control disk production
costs in order to be competitive. Some of the most significant costs in the disk
manufacturing process are influenced by the disk sputtering equipment. Disk
manufacturers seek to lower their per disk manufacturing costs as part of the
sputtering process by attention to:
- Yield. Overall yield significantly affects per disk manufacturing costs.
The capability and performance of the sputtering equipment can
significantly affect overall yield.
- Equipment acquisition and operating costs. Although acquisition costs
are substantial, the cost of using the sputtering equipment, including
operators, maintenance, spare parts and consumables over the life of the
equipment is more significant.
- Increasing uptime and throughput. Operating cost per disk produced is
directly related to the uptime and throughput realized from the
equipment.
- Facilities costs. The loading and unloading portions of the sputtering
machine must be in a clean room. Clean room space is very expensive to
build, operate and maintain. Both the size and footprint of sputtering
systems affect the amount of clean room space required to house them and
the degree to which the manufacturing facility must be customized to
accommodate the sputtering equipment.
- Time and cost of making process adjustments. At times during the
production of disks it is necessary or desirable to add, remove or make
adjustments to certain process steps. To the extent that process
engineers are able to do so quickly and efficiently, the disk
manufacturer is able to reduce equipment and line downtime and therefore
reduce its per disk manufacturing cost.
- Flexible production scheduling. OEM customer specifications for disks
and the mix of different disks produced by thin-film disk manufacturers
vary. To the extent that the disk manufacturer has the flexibility to
quickly and efficiently alter the product mix and volume of disks
produced through its production lines, the disk manufacturer is able to
rapidly respond to changing customer requirements.
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INTEVAC'S STATIC MANUFACTURING APPROACH
The Company's static systems differ from in-line systems in that static
sputtering provides for deposition with no relative movement between the
sputtering source and the disk being coated. Each disk is placed sequentially in
fully isolated chambers in which various process steps are performed. The
initial, first-generation static system, introduced by Varian in 1985, produced
high performance disks but had low throughput compared with in-line systems. The
Company's current, fourth-generation static system has a throughput of
approximately 450 disks per hour, more than three times the throughput of the
first-generation system. The Company believes this system is competitive with
in-line systems on a cost per disk basis. The capability for making high
performance disks has also been improved. For example, the current system has
twelve process chambers compared to six chambers for the initial model. These
improvements have led to a number of thin-film disk manufacturers adopting the
static sputtering approach much as semiconductor manufacturers have moved away
from batch processing systems to single wafer multiple chamber processing
systems.
The Company's static sputtering system enables manufacturers to achieve
high coercivities, high signal-to-noise ratios, minimal defects, high durability
and high uniformity, all of which are necessary in the production of high
performance, high areal density disks. Additionally, Intevac's static system
allows the disk manufacturer to achieve low production costs through high yield,
low equipment acquisition and operating costs, high uptime and low facilities
costs.
The key features and benefits of the Intevac static sputtering approach
are:
- Isolated process chambers. The Company's sputtering systems have
isolated vacuum process chambers which can be separately controlled and
optimized for each process step, enabling manufacturers to more
efficiently achieve high levels of coercivity.
- Single disk processing. Each disk substrate is individually processed
under the same process parameters in the Company's system. Disk to disk
repeatability is high in the Company's sputtering systems because every
disk is subjected to nearly identical static process conditions, and the
thin-film coating is uniform due to the cylindrical shape and other
design features of the sputter sources.
- Reduced contamination. In an Intevac system there is no pallet that is
exposed to the atmosphere and then introduced into the process chambers;
thus no absorbed gas on a pallet from outside the vacuum system can
contaminate the sputtering process. The short time intervals between
process steps further minimizes contamination of the disk surface and
makes it possible for the Company's disk sputtering systems to produce
thin-film disks with high coercivity.
- Precise temperature control. Intevac's sputtering systems afford precise
temperature control and rapid changes in substrate temperature. This
permits optimization of the conditions for deposition of the magnetic
film in order to achieve high coercivity, while creating different
process conditions for the top coat deposition in order to maximize
durability.
- Rapid process development. The Company's systems permit rapid and
precise change in process parameters. Stability of process conditions is
achieved quickly, which significantly shortens process development time
and new product qualification as well as disk production ramp up.
- Cost-effective, high throughput. The Company's systems have short
transport time intervals and high sputtering rates, which enable high
disk production throughput. Intevac has designed its sputter sources for
high target utilization; this feature, together with the ability to use
either platinum or non-platinum alloy targets to produce high coercivity
disks, significantly reduces operating costs.
- Flexible manufacturing. The Company's multi-chamber, static systems fit
well into relatively small scale production lines that can be installed,
modified or expanded relatively quickly and comparatively inexpensively.
This allows the disk manufacturer to incrementally change production
levels and mix, to rapidly adapt manufacturing equipment to new product
technology and to achieve fast production ramp up. The Company's static
manufacturing systems thus allow the thin-film disk manufacturer to meet
its customers' increasingly rapid time-to-market demands.
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- Reduced facilities costs. The Company's system occupies approximately
370 square feet of factory floor space, including less than 30 square
feet of clean room space. A critical cost factor for disk manufacturers
is clean room facilities, which can cost several hundred dollars per
square foot for initial construction and are very expensive to operate.
The size of the Company's systems therefore reduces the cost of building
and operating the manufacturing facilities.
The Company has continuously introduced static sputtering systems that give
manufacturers more control of the disk manufacturing process thereby allowing
manufacturers to produce high performance, high density disks. The advanced
technology incorporated in the static system design has allowed Intevac to meet
the rapidly changing needs of the disk drive industry. For instance, the design
of the Intevac system allows the manufacture of disks that can be used with
pseudo-contact recording and with magneto-resistive disk drive heads as well as
the sputtering of thin-films onto alternative substrates.
PRODUCTS
The MDP-250B Disk Sputtering System
The Company's principal product, the MDP-250B, which is the fourth
generation of the Company's "Magnetic Disk Processing" system, is fully
automated, has 12 independent process stations and achieves throughput of
approximately 450 disks per hour. The Company offers its static sputtering
systems for list prices ranging from $2.0 million to $3.5 million, depending
upon configuration, to both captive and merchant thin-film disk manufacturers.
The MDP-250B was designed by the Company to meet current requirements for
the production of media and to provide the capability to meet future
requirements. The MDP-250B is capable of producing disks with coercivity in
excess of 2,500 Oe with or without a costly platinum based magnetic layer. In
addition, the MDP-250B has the capability to sputter multi-layers (multiple
magnetic layers with interspersed non-magnetic layers) onto alternative
substrates (such as glass and ceramic), as well as conventional aluminum
substrates, and also to make media with the appropriate characteristics for use
with MR heads.
The mechanical design of the MDP-250B has characteristics which are similar
to the cluster tools which are widely used in semiconductor manufacturing since
each process station is separately vacuum pumped and is vacuum isolated during
processing. The MDP-250B does not require a carrier or pallet to transport disks
through the system. Cassettes containing 25 substrates are automatically moved
one at a time to pedestals located on the rim of the disk transfer wheel. This
wheel moves up and down and rotates, moving the disks sequentially into and out
of the process chambers. When the wheel is in its up position, each process
chamber is vacuum isolated from the transport chamber and from other process
stations. The disks pass through up to 12 process stations, and are then placed
in a cassette, which when full, moves into the exit load lock, from which it
moves onto the exit conveyor.
Any number of process steps, up to 12, can be outfitted as the customer
requires. The process station options include the direct current ("DC") or radio
frequency ("RF") sputter process stations, an infrared substrate heating
station, a gas conduction substrate cooling station and a sputter etch cleaning
station. The Company designed its MDP-250B with twelve stations, more than
current needs require, in order to support future, more complex manufacturing
processes. The 12 independent process stations make it possible to produce disks
with multi-layers, which reduce noise and thereby increase the signal to noise
level of the data stream that is read from the disk. This permits higher
recording density and data rates. Furthermore, process stations can be moved
from any machine process position to any other to easily accommodate process
changes.
The sputtering sources have been designed to provide for high utilization
of the target material thus reducing the cost of depositing the various thin
films. The Company has redesigned its CM-GUN, the sputtering source currently
used in the MDP-250B, to provide for greater target utilization and longer
target life. The Company is planning to offer the ES-GUN sputtering source
acquired from Cathode Technology Company for use in the MDP-250B. The ES-GUN
electrically sweeps plasma radially at the target which results in greater
target utilization and longer target life and permits the deposition of two
different materials
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sequentially in the same chamber. In addition, the Company has introduced the
RM-GUN sputtering source which uses a special rotating magnet assembly designed
to achieve greater target utilization and longer target life for both magnetic
and non-magnetic targets.
MDP-250B operation is controlled by a computer program which displays
commands and process information on a color monitor. A user interface is
provided which allows an operator to monitor process and to access the
programmable controller. A color display unit and a keyboard located in the
clean room enable an operator or engineer to access the computer program to
control deposition or other processes through appropriate menu choices, to
monitor deposition data, or to call up certain access-protected service mode
subroutines. A data logging feature of the system enables users to transmit to a
host computer the values of the parameters existing at each process station,
providing valuable quality control information.
A "top coat" is sputtered onto the disk immediately over the magnetic
recording layer to protect the recording layer from corrosion and mechanical
damage due to head contact and to provide a surface condition that in
conjunction with the lubrication layer minimizes "stiction," the tendency of the
head to stick to the disk surface. The top coat is typically carbon or a carbon
based substance. The Company believes that optimum deposition of carbon occurs
at a lower temperature than is required for the magnetic layer. The MDP-250B
incorporates a patented cooling station which permits the required reduction of
disk temperature to be achieved within a few seconds. The Company believes that
this feature plus the capability to sputter carbon in conjunction with hydrogen
or nitrogen makes it possible for the MDP-250B to produce disks that are highly
durable.
Related Disk Manufacturing and Test Equipment
In 1996, the Company acquired two companies with product lines that
complement the MDP-250B. In May, the Company acquired San Jose Technology Corp.
("SJT"), a leading supplier of systems used to lubricate thin-film disks.
Lubrication is the production step that typically follows disk sputtering in the
manufacture of thin-film disks. During lubrication, a microscopic layer of
lubricant is applied to the disk's surface to improve durability and reduce
surface friction. SJT's products allow thin-film disk manufacturers to uniformly
lubricate disks in a temperature controlled, low vibration, contamination free
environment with a minimal amount of solvent loss. In June, the Company acquired
Lotus Technologies, Inc. ("Lotus"), a leading manufacturer of contact stop/start
("CSS") test equipment for hard disk drives and components. The Lotus family of
PC-based CSS test equipment performs precise measurements of disk wear,
friction, stiction and start-stop torques related to the interface of the
read-write head with the thin-film disk. The Company intends to use the Lotus
expertise in head-disk interface and CSS testing to further improve the
Company's disk sputtering and disk lubrication equipment.
FPD MANUFACTURING EQUIPMENT DEVELOPMENT PROJECTS
In recent years, flat panel displays ("FPDs") have emerged as a display
technology for a variety of applications such as PCs, workstations and video
displays. The manufacture of several types of flat panel displays such as STN,
AMLCD and FED require the use of a sputtering process to deposit thin-film
layers of different materials onto a glass substrate.
In 1992, after evaluating the dynamics of the flat panel display market and
the technical requirements of meeting that market need, the Company initiated a
program to develop a sputtering system for this market as the first step to
enter this business area. The Company believes that the skills and technologies
that it has developed for the thin-film disk manufacturing industry are directly
applicable to the FPD manufacturing industry. These skills and technologies
include its expertise and experience in sputtering, rapid heating, high vacuum,
isolated process chambers and material handling. In addition, as with the
thin-film disk manufacturing industry, the FPD industry involves providing
complex, expensive capital equipment to a small number of customers worldwide.
Since inception, the Company has invested approximately $11.5 million in
the flat panel sputtering development effort, of which approximately half has
been paid by Ebara Corporation ("Ebara"). The Company entered into its agreement
with Ebara in September 1992. Under the agreement, as amended, Ebara has agreed
to pay one-half of the development costs of the flat panel sputtering system, up
to a maximum
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amount of $5.5 million, in exchange for joint ownership of the intellectual
property rights and the exclusive right to manufacture and sell in Japan the
flat panel sputtering systems developed under the agreement. The Company has
retained the exclusive right to manufacture and sell such flat panel sputtering
systems outside of Japan. Each party is required to pay royalties to the other
party on its flat panel sputtering system sales. The agreement expires five
years following completion of the joint development project. The Company has not
yet completed development of its flat panel sputtering systems.
In 1994, the Company identified an additional opportunity in the FPD
market. Certain advanced FPDs require amorphous silicon deposited on the
substrate to be converted into poly-silicon. An effective way to accomplish this
is to rapidly heat the amorphous silicon to a high temperature. In 1994, the
Company acquired certain assets of Aktis Corporation and certain patents from
Baccarat Electronics, Inc. and continued a project to develop a rapid thermal
processing ("RTP") system for converting amorphous silicon into poly-silicon.
The Company has sold two RTP systems. Also in 1994, the government's Advanced
Research Project Agency ("ARPA") awarded the Company a contract to develop an
"All Sputtered Thin Film Transistor".
The Company currently has contracts with ARPA providing for maximum funding
over the lives of the contracts of approximately $3.3 million. As of December
31, 1996, the cumulative billings were approximately $2.1 million, unspent
backlog under these contracts was approximately $0.3 million and approximately
$0.9 million had not yet been funded under the contracts. In 1996, the Company
spent $12.8 million on research and development funded internally and through
customer sponsored research and development, which included $5.3 million that
was spent on research and development related to the Company's FPD efforts. Of
the amounts spent on FPD projects during 1996, approximately 59% of the funding
was provided by customer sponsored research and development contracts and/or
cost sharing agreements.
The Company has limited experience in the development, manufacture, sale
and marketing of flat panel display manufacturing equipment, having sold only
two RTP systems to date and having not yet completed development of its FPD
sputtering system. There can be no assurance that the market for flat panel
display manufacturing equipment targeted by the Company will develop as quickly
or to the degree the Company currently anticipates, or that the Company's
proposed 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 will continue
to fund research and development in the FPD area.
INTEVAC TECHNOLOGY AND SKILLS
The design and fabrication of sputtering systems for thin film disk
production requires a broad range of technologies and skills, including:
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- Sputtering processes - Thermal systems design
- Sputter source design - Design of complex electromechanical systems
- Thin-film characterization - Material transport systems and robotics
- Vacuum system design - Computer based control systems
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The Company's scientists and engineers are knowledgeable about disk
manufacturing processes and work with the Company's customers to design hardware
and software systems to meet the customers' requirements. The Company has a
MDP-250B in its laboratories to run various process tests for customers to
determine the suitability of the machine for their production process, and also
for the Company's design engineering department to test newly designed process
capabilities. The Company believes that its process expertise, and the ability
to communicate with its customer's process scientists, gives it an important
competitive advantage.
The Company has the expertise to design apparatus for rapid, uniform
substrate heating and cooling, substrate cleaning using glow discharge and
sputter etch techniques, as well as both DC and RF sputtering. A
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particular area of Company expertise is computer modeling, as well as practical
design of the electromagnetic magnetron sputtering sources which are at the
heart of the system. The Company believes that the ability to control magnetic
field strength using electromagnetic magnetrons is an advantage in maintaining
tight process control. The Company's computer programs also are used to
calculate the uniformity of sputtered film thickness and magnetic
characteristics and the overall utilization of target materials.
SALES CHANNEL, CUSTOMERS AND MARKETING
The selling process for the Company's products is often a multi-level and
long-term process involving individuals from marketing, engineering, operations,
customer service and senior management. The process is lengthy and involves
making sample thin-film disks for the prospective customer and responding to
individual needs for moderate levels of machine customization. Intevac sells
static sputtering systems to both captive and merchant thin-film disk
manufacturers. Captive thin-film disk manufacturers produce disks to be used in
disk drives they manufacture, and merchant thin-film disk manufacturers produce
disks to be included in disk drives manufactured by third parties. The Company
sells and markets its products directly in the United States, and through
exclusive distributors in Japan (Matsubo) and Korea (Chung Song). The Company
has established a wholly-owned subsidiary in Singapore and a branch office in
Taiwan to support its customers in Southeast Asia.
Historically, a significant portion of the Company's revenues in any
particular period have been attributable to sales to a limited number of
customers. For example, Matsubo, Seagate and HMT Technology accounted for 32%,
32% and 13%, respectively, of the Company's total net revenues in 1996, and
Seagate, HMT Technology, and Matsubo accounted for 40%, 20% and 17%,
respectively, of the Company's total net revenues in 1995. 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. Historically, a significant portion of the Company's revenues in any
particular period have been attributable to sales to a limited number of
customers. The Company's largest customers change from period to period as large
thin-film disk fabrication facilities are completed and new projects are
initiated. The Company expects that sales of its products to relatively few
customers will continue to account for a high percentage of its net revenues in
the foreseeable future. For example, 64% of the Company's backlog at December
31, 1996 was represented by three customers for disk sputtering systems, with
each representing 10% or more of the Company's backlog at December 31, 1996.
None of the Company's customers has entered into a long-term agreement requiring
it to purchase the Company's products. As purchases related to a particular new
or expanded fabrication facility are completed, sales to that customer may
decrease sharply or cease altogether. If completed contracts are not replaced on
a timely basis by new orders from the same or other customers, the Company's net
revenues could be adversely affected. The loss of a significant customer, any
reduction in orders from any significant customer or the cancellation of a
significant order from a customer, including reductions or cancellations due to
customer departures from recent buying patterns, financial difficulties of a
customer or market, economic or competitive conditions in the disk drive
industry, could materially adversely affect the Company's business, financial
condition and results of operations.
Foreign sales accounted for 41% of revenues in 1996, 20% in 1995 and 40% in
1994. The Company anticipates that foreign sales will continue to be a
significant portion of its revenues in the foreseeable future. In order to
effectively service customers located in Southeast Asia, the Company has
established sales and service operations in Singapore and in 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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<PAGE> 10
Installing and integrating new sputtering systems into the thin-film disk
manufacturing process requires a substantial investment by a customer. Sales of
the Company's systems depend, in significant part, upon the decision of a
prospective customer to replace obsolete equipment or to increase manufacturing
capacity by upgrading or expanding existing manufacturing facilities or
constructing new manufacturing facilities, all of which typically involve a
significant capital commitment. Therefore, customers often require a significant
number of product presentations and demonstrations, as well as substantial
interaction with the Company's senior management, before making a purchasing
decision. Accordingly, the Company's systems typically have a lengthy sales
cycle during which the Company may expend substantial funds and management time
and effort with no assurance that a sale will result. Furthermore, the Company's
expense levels are based, in part, on its expectations as to future net
revenues. If revenue levels are below expectations, operating results are likely
to be adversely affected. Net income, if any, may be disproportionately affected
by a reduction in net revenues because a proportionately smaller amount of the
Company's expenses varies with its net revenues. The impact of these and other
factors on the Company's sales and operating results in any future period cannot
be forecasted with certainty.
CUSTOMER SUPPORT
Since media production lines are often operated 24 hours per day, seven
days per week, continuing service support is of vital importance and thus the
Company provides process and applications support, customer training,
installation and start-up assistance and emergency service support to its
customers. Over the past two years, the Company has taken several steps to
substantially improve customer support including expanding the training program,
increasing the number of service engineers, adding product support engineering
capability, reducing delivery times for spare parts and providing 24 hour per
day response.
Process and applications support is provided by equipment process
scientists who have access to a dedicated MDP-250B in the Company's applications
laboratory, and who also visit customers at their plants to assist in process
development projects.
The Company conducts training classes for process scientists, machine
operators and machine service personnel. Additional training is also given
during machine installation.
Installation and start up of the sputtering systems are provided within the
United States by the Intevac customer service organization. This group also
assists with the installation and start up of sputtering systems in overseas
locations as required.
The Company provides a standard warranty for up to twelve months from
customer acceptance or 2,000 hours of operation, whichever occurs first. During
this warranty period any necessary non-consumable parts are supplied and
installed. Currently, the Company has trained field service technicians located
in the United States, Singapore and Taiwan. In addition, service in Japan and
Korea is provided by the Company's distributors and representatives using
personnel who have received training at Intevac. Intevac and its distributors
stock consumables and spare parts to support the installed base of systems.
These parts are available on a 24 hour per day basis.
Consistent with the Company's strategy to provide the industry's highest
level of service to its customers, the Company has established operations in
Singapore and in Taiwan to provide customer training, installation, start-up
assistance, spare parts and service support to customers in Southeast Asia.
RESEARCH AND DEVELOPMENT
The disk drive industry in general, and the thin film disk manufacturing
industry in particular, are characterized by rapid technological change and
evolving industry standards. The Company has invested substantial amounts in
research and development for its disk sputtering systems and flat panel display
manufacturing equipment. The Company's research and development expenses in
1996, 1995 and 1994 were $8.4 million, $2.6 million and $3.5 million,
respectively, and represented 9.5%, 6.1% and 17.2%, respectively, of net
revenues. Research and development expenses do not include costs of $1.3
million, $1.1 million and
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<PAGE> 11
$2.0 million that were incurred by the Company in 1996, 1995 and 1994
respectively, and were reimbursed under the terms of a cost sharing agreement.
The Company expects to continue an active development program to make
sputter system improvements to increase machine throughput, add additional
capabilities that will improve disk performance, permit optimum utilization of
alternative substrates, lower cost of ownership and respond to future market
requirements. The Company's ability to remain competitive has required and will
continue to require substantial investments in research and development to
advance its technologies. The failure to develop, manufacture and market new
systems, or to enhance existing systems, would have a material adverse effect on
the Company's business, financial condition and results of operations. In the
past, the Company has experienced delays from time to time in the introduction
of, and certain technical difficulties with, certain of its systems and
enhancements. In addition, the Company's competitors can be expected to continue
to develop and introduce new and enhanced products, any of which could cause a
decline in market demand for the Company's systems or a reduction in the
Company's margins as a result of intensified price competition.
Changes in the manufacturing processes for thin-film disks could also have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company anticipates continued changes in the
requirements of the disk drive industry and thin-film disk manufacturing
technologies. There can be no assurance that the Company will be able to
develop, manufacture and sell systems that respond adequately to such changes.
In addition, the data storage industry is subject to constantly evolving
technological standards. There can be no assurance that future technological
innovations will not reduce demand for thin-film disks. The Company's business,
financial condition and results of operations could be materially adversely
affected by any trend toward technology that would replace thin-film disks as a
storage medium.
The Company has expended significant amounts for research and development
for its disk sputtering systems, FPD manufacturing equipment and other new
products under development, such as disk laser-texturing equipment and
electro-optical products.
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.
MANUFACTURING
Substantially all of the Company's manufacturing is conducted at its
headquarters facility in Santa Clara, California. The Company's manufacturing
operations include electromechanical assembly, mechanical and vacuum assembly,
fabrication of the sputter sources, and system assembly, alignment and testing.
The Company makes extensive use of the infrastructure serving the semiconductor
equipment business. The Company purchases vacuum pumps, valves, instrumentation
and fittings, power supplies, printed wiring board assemblies, computers and
control circuitry and specialized mechanical parts made by forging, machining
and welding. The Company has a well-equipped fabrication center that is capable
of producing most of the fabricated metal parts. This capability is used
primarily for quick reaction requirements for design work or to cover shortages
and most of the parts required for production are purchased from outside
suppliers.
The Company's manufacturing strategy is to produce high quality,
cost-effective systems and low cost replacement parts and to be able to respond
effectively to changes in volume. To do this, the Company
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<PAGE> 12
currently designs its products to use standard parts where possible. The Company
performs manufacturing activities that add value or that require unique
technology or specialized knowledge and, taking advantage of its Silicon Valley
location, utilizes subcontractors to perform other manufacturing activities.
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 more for inventory, parts
and other supplies, seek alternative sources of supply, delay its ability to
ship its products and damage relationships with current and prospective
customers. Any such delay or damage could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's 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.
BACKLOG
The Company's backlog was $63.7 million and $42.8 million at December 31,
1996 and December 31, 1995, respectively. The Company includes in its backlog
only those customer orders for systems, component parts and contract research
and development for which it has accepted signed purchase orders with assigned
delivery dates. In the case of a cancellation of a system order, the Company's
system sales contracts generally provide for a non-refundable deposit, depending
upon when the order is canceled. The equipment requirements for thin-film disk
manufacturers cannot be determined with accuracy, and therefore the Company's
backlog at any certain date may not be indicative of future demand for the
Company's manufacturing systems.
Due to possible delays in obtaining materials, the average time between
order and shipment of the Company's systems may increase substantially in the
future. The Company's ability to quickly increase its manufacturing capacity in
response to short-term increases in demand could be limited given the complexity
of the manufacturing process, the lengthy lead times necessary to obtain
critical components and the need for highly skilled personnel. The failure of
the Company to satisfy any such short-term increases in demand and to keep pace
with customer demand would lead to further extensions of delivery times, which
could deter customers from placing additional orders. There can be no assurance
that the Company will be successful in increasing its manufacturing capacity.
Orders in backlog are subject to cancellation, and although the Company
generally requires a deposit on orders for its systems, such deposits may not be
sufficient to cover the expenses incurred by the Company for the manufacture of
the canceled systems or fixed operating expenses associated with such systems to
the date of cancellation. The Company may from time to time manufacture a system
in anticipation of an order that may not be placed during the period or at all.
In any given quarter in which such system is manufactured, the Company will not
receive funds to cover the manufacturing costs. Orders may be subject to delay,
deferral or rescheduling by a customer. From the date the Company receives an
order, it often takes more than six
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<PAGE> 13
months before the net revenues from such order are recognized and even longer
before final payment is received. The relatively long manufacturing cycles of
many of the Company's products has caused and could cause shipments of such
products to be delayed from one quarter to the next, 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.
COMPETITION
The Company believes that the principal competitive factors are system
performance and features, reliability and uptime, overall cost of ownership and
customer support. The Company believes that it competes favorably with respect
to each of these factors. The Company believes it is the principal United
States-based supplier of sputtering systems for thin-film disks.
The Company experiences intense competition worldwide from three principal
competitors, Ulvac 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 new
customers, which could adversely affect the Company's business, financial
condition and results of operations. Because of these competitive factors, there
can be no assurance that the Company will be able to compete successfully in the
future.
PATENTS, INTELLECTUAL PROPERTY AND LICENSING
The Company places a high value on intellectual property and has an active
program to seek patent coverage for discoveries and designs that are believed to
have significant value. The Company recognizes patentable inventions by
employees through incentive payments to inventors. The Company currently has 23
patents issued in the United States, and has patent applications in the United
States and foreign countries. Of the 23 patents, seven relate to sputtering, 10
relate to RTP, one relates to lubrication systems and five relate
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to other areas not in Intevac's mainstream business. The Company has the right
to utilize certain patents under licensing arrangements with Litton Industries,
Varian Associates, Stanford University, Lawerence 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 have also been substantial amounts of litigation in the technology
industry regarding intellectual property rights. The Company has from time to
time received claims that it is infringing third parties' intellectual property
rights. In August 1993, Rockwell International Corporation ("Rockwell") sued the
Federal government alleging infringement of certain patent rights with respect
to the contracts the Federal government has had with a number of companies,
including Intevac. The Federal government has notified Intevac that it may be
liable 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 addition, a third party has sent correspondence to a
consortium, of which the Company is a party, in a government sponsored research
and development program claiming that the work to be done under this program may
infringe patents owned by this third party. The Company and its subcontractors
have reviewed the correspondence and patents and believe these claims are
without merit; however, there can be no assurance that litigation will not
result from such development program. There can be no assurance that 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.
EMPLOYEES
At December 31, 1996, the Company had 292 employees, 39 of whom are
contract employees. 282 of these employees are located in California, with 82 in
research and development, 135 in manufacturing, and 65 in administration,
customer support and marketing. The Company has 8 employees at its operation in
Singapore and 2 employees at its operation in Taiwan.
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The Company believes that it has good relations with its employees. None of
the Company's employees is represented by a labor union, and the Company has
never experienced a work stoppage. The Company believes that attracting and
motivating skilled technical talent is vital to its success.
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.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
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
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.
Potential Acquisitions
The Company's business strategy includes acquiring related businesses,
products or technologies. The Company completed three acquisitions in 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 quarter
ended June 29, 1996, to reflect the purchase of in-process research and
development pursuant to the two acquisitions completed in the second quarter. In
addition, the Company 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 will be over the useful lives, which range
from two years to seven years. Additional, unanticipated expenses may be
incurred relating to the integration of technologies and research and
development and administrative functions. Any acquisition will involve numerous
risks, including difficulties in the assimilation of the acquired company's
employees, operations and products, uncertainties associated with operating in
new markets and working with new customers, and the potential loss of the
acquired company's key employees.
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Possible Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, failure to meet securities analysts' expectations, general conditions
in the disk drive and thin-film media manufacturing industries and the worldwide
economy, announcements of technological innovations, new systems or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in the Company's relationships with customers and suppliers could cause
the price of the Company's Common Stock to fluctuate substantially. In addition,
in recent years the stock market in general, and the market for small
capitalization and high technology stocks in particular, has experienced extreme
price fluctuations which have often been unrelated to the operating performance
of affected companies. Such fluctuations could adversely affect the market price
of the Company's Common Stock.
Concentration of Stock Ownership
Based on shares outstanding on December 31, 1996, the present directors and
their affiliates and executive officers, in the aggregate, own beneficially
approximately 76% of the Company's outstanding shares of Common Stock. As a
result, these shareholders, acting together, are able to effectively control all
matters requiring approval by the shareholders of the Company, including the
election of a majority of the directors and approval of significant corporate
transactions.
ITEM 2. PROPERTIES
The Company leases all of its facilities, including approximately 101,900
square feet in Santa Clara, California. These buildings house the manufacturing,
research and development, marketing and administration, and the Company's
headquarters offices. The leases for these buildings expire in June 1999 (93,600
square feet) and October 1999 (8,300 square feet). The Company has an option to
extend the lease with respect to 44,000 square feet for an additional five-year
period, with a monthly base rent to be negotiated by the Company and the lessor.
If the Company and the lessor are unable to reach agreement with respect to such
monthly base rent, the monthly base rent for the extension will be determined by
an appraisal process set forth in the lease.
The Company leases a 5,000 square-foot building in Rocklin, California.
This building houses the RTP Business. This lease expires in April 1997. The
Company has an option to extend the lease on a month by month basis. The Company
is currently evaluating the extension of this lease while also reviewing
alternate sites for its RTP Business.
The Company leases approximately 8,400 square feet in San Jose, California
to house its San Jose Technology Division. The lease expires in November 1997.
The Company leases a facility of approximately 4,800 square feet in Los
Gatos, California to house the Lotus Technology Division. The lease expires in
December 1997.
The Company leases a facility of approximately 2,400 square feet in
Singapore to house the Singapore customer support organization. This leases
expires in December 1997. The Company has an option to extend the lease for an
additional two years at market rates.
The Company leases approximately 1,400 square feet in Taiwan to house the
Taiwan customer support organization. The lease expires in October 1999.
The Company believes that its current facilities are suitable and adequate
for its current and foreseeable operations. The Company currently operates with
one full manufacturing shift and one partial manufacturing shift and has
sufficient manufacturing capacity to produce 4-5 static sputtering systems per
month. The Company believes that it has sufficient productive capacity to meet
its current needs. Further increases in demand for the Company's products may
require the Company to further expand its facilities during 1997. There can be
no assurance that the Company will be able to secure suitable expansion space if
necessary.
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ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of securityholders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS AND DIRECTORS
Certain information about the Company's directors and executive officers is
listed below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- -------------------------------------------------------------
<S> <C> <C>
Executive Officers and
Directors:
Norman H. Pond.................. 58 Chairman of the Board, President and Chief Executive Officer
Charles B. Eddy III............. 46 Vice President, Finance and Administration, Chief Financial
Officer, Treasurer and Secretary
Robert D. Hempstead............. 53 Chief Operating Officer and General Manager of the Vacuum
Systems Division
John R. Dougery(1)(2)........... 56 Director
Edward Durbin(1)................ 69 Director
David N. Lambeth(1)............. 49 Director
H. Joseph Smead(2).............. 71 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Pond is a founder of the Company and has served as Chairman of the
Board, President and Chief Executive Officer since February 1991. Before joining
the Company, from 1988 to 1990, Mr. Pond served as President and Chief Operating
Officer of Varian, a publicly held manufacturer of semiconductor, communication,
defense and medical products where he was responsible for overall management of
Varian's operations. From 1984 to 1988, Mr. Pond was President of Varian's
Electron Device and Systems Group and became a Director of Varian in 1986. Prior
to joining Varian, Mr. Pond was employed by Teledyne, a diversified electronics
company, from 1963 to 1984 where he served in various positions, including as
Group Executive. Mr. Pond holds a B.S. in physics from the University of
Missouri at Rolla and an M.S. in physics from the University of California at
Los Angeles.
Mr. Eddy has served as Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary of the Company since April 1991. Mr.
Eddy served as Chief Financial Officer of Videonics, Inc., a manufacturer of
consumer video editing equipment, from 1987 to 1991 and served as Chief
Financial Officer of Parallel Computers, Inc., a startup computer company, from
1983 to 1987. Mr. Eddy was with Intel Corporation from 1974 to 1983 where he
served in a variety of positions, including controller and plant manager. Mr.
Eddy holds a B.S. in engineering science from the University of Virginia and an
M.B.A. from Dartmouth College.
Dr. Hempstead has served as Chief Operating Officer and General Manager of
the Vacuum Systems Division of the Company since April 1996. Before joining the
Company, Dr. Hempstead served as Executive Vice President of Censtor Corp., a
manufacturer of computer disk drive heads and disks, from November 1994 to
February 1996. He was a self-employed consultant from 1989 to November 1994. Dr.
Hempstead holds a B.S. and M.S. in electrical engineering from Massachusetts
Institute of Technology and a Ph.D. in physics from the University of Illinois.
16
<PAGE> 18
Mr. Dougery has served as a Director of the Company since February 1991.
Mr. Dougery has been a general partner of Dougery & Wilder, a venture capital
firm, since 1981. Mr. Dougery currently serves as a director of Printronix and
In Focus Systems, both publicly held companies, as well as several privately
held technology companies. Mr. Dougery holds an A.B. in Mathematics from the
University of California, Berkeley and an M.B.A. from Stanford University
Graduate School of Business.
Mr. Durbin has served as a Director of the Company since February 1991. Mr.
Durbin has been a Senior Vice President of Kaiser Aerospace and Electronics
Corporation ("Kaiser"), a privately held manufacturer of electronic and
electro-optical systems, responsible for marketing and business development
since joining Kaiser in 1975. Mr. Durbin currently serves as a director for all
of Kaiser's subsidiaries. Mr. Durbin holds a B.S. in electrical engineering from
The Cooper Union and an M.S. in electrical engineering from the Polytechnic
Institute of Brooklyn.
Dr. Lambeth has served as a Director of the Company since May 1996. Dr.
Lambeth has been Professor of electrical and computer engineering and Associate
Director of the Data Storage Systems at Carnegie Mellon University since 1989.
Since 1988, Dr. Lambeth has been the owner of Lambeth Systems, an engineering
consulting firm. From 1973 to 1988, Dr. Lambeth worked at Eastman Kodak
Company's Research Laboratories, most recently as the head of the Magnetic
Material Laboratory. Dr. Lambeth holds a B.S. in electrical engineering from the
University of Missouri and a Ph.D. in physics from the Massachusetts Institute
of Technology.
Dr. Smead has served as a Director of the Company since February 1991. Dr.
Smead has been President of Kaiser since joining Kaiser in 1974. Since 1977, Dr.
Smead has been President and Chairman of the Board of Directors of K Systems,
Inc., Kaiser's parent company. Dr. Smead currently serves as Chairman of the
Board of Directors of Kaiser and as a director for all of Kaiser's subsidiaries.
Dr. Smead holds a B.S. in electrical engineering from the University of
Colorado, an M.S. in electrical engineering from the University of Washington
and a Ph.D. in electrical engineering from Purdue University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
on November 21, 1995 and is traded under the symbol "IVAC." As of December 31,
1996, there were approximately 700 holders of record of the Common Stock. The
following table sets forth for the periods indicted the high and low closing
sale prices for the Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Year Ended December 31, 1995
Fourth Quarter (from November 21, 1995)................ $ 7.000 $ 6.250
Fiscal 1996
First Quarter.......................................... $ 8.250 $ 6.125
Second Quarter......................................... $26.000 $ 6.625
Third Quarter.......................................... $17.500 $11.250
Fourth Quarter......................................... $19.500 $11.000
Fiscal 1997
First Quarter (through February 5, 1997)............... $22.500 $16.000
</TABLE>
DIVIDEND POLICY
In August 1995, the Company paid a cash dividend of $0.495 on each share of
Common Stock outstanding as of the August 25, 1995 record date. The Company
currently anticipates that it will retain its earnings, if any, for use in the
operation of its business and does not expect to pay cash dividends on its
capital stock in the foreseeable future. The Company's line of credit prohibits
the payment of cash dividends on the Company's capital stock.
17
<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995(3) 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net Revenues:
Disk, flat panel and other..................... $88,232 $42,187 $18,266 $16,026 $17,744
MBE(1)......................................... -- 695 2,185 6,370 9,606
------- ------- ------- ------- -------
Total net revenues..................... 88,232 42,882 20,451 22,396 27,350
Cost of net revenues:
Disk, flat panel and other..................... 55,652 27,280 11,799 9,749 10,946
MBE(1)......................................... -- 434 858 5,417 6,564
------- ------- ------- ------- -------
Total cost of net revenues............. 55,652 27,714 12,657 15,166 17,510
------- ------- ------- ------- -------
Gross profit..................................... 32,580 15,168 7,794 7,230 9,840
Operating expenses:
Research and development....................... 8,425 2,603 3,515 3,142 2,887
Selling, general and administrative............ 8,391 4,550 2,248 3,896 3,743
Acquired in-process research and development... 5,835 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses............... 22,651 7,153 5,763 7,038 6,630
------- ------- ------- ------- -------
Operating income................................. 9,929 8,015 2,031 192 3,210
Interest expense................................. (175) (13) (63) (113) (216)
Interest income and other income (expense), 1,569 942 533 (88) 1,042
net............................................
------- ------- ------- ------- -------
Income (loss) from continuing operations before 11,323 8,944 2,501 (9) 4,036
income taxes...................................
Provision for (benefit from) income taxes........ 6,350 3,179 826 (75) 1,655
------- ------- ------- ------- -------
Income from continuing operations................ 4,973 5,765 1,675 66 2,381
Income (loss) from discontinued operations....... -- 1,335 (267) 1,457 2,610
------- ------- ------- ------- -------
Net income....................................... $ 4,973 $ 7,100 $ 1,408 $ 1,523 $ 4,991
======= ======= ======= ======= =======
PER SHARE:
Income from continuing operations.............. $ 0.39 $ 0.54 $ 0.16 $ 0.01 $ 0.24
======= ======= ======= ======= =======
Net income..................................... $ 0.39 $ 0.67 $ 0.14 $ 0.15 $ 0.50
======= ======= ======= ======= =======
Shares used in per share calculations(2)......... 12,901 10,606 10,285 10,305 10,056
======= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term $ 938 $20,422 $13,347 $19,877 $ 6,114
investments....................................
Working capital.................................. 15,847 21,327 23,229 21,792 16,021
Total assets..................................... 68,085 51,160 42,749 44,233 45,624
Long-term debt................................... 730 -- -- -- 1,375
Redeemable Series 1 Preferred Stock.............. -- -- 6,100 6,100 6,100
Total shareholders' equity....................... 33,736 27,320 22,987 21,588 20,051
Cash dividends declared per common share......... -- 0.495 -- -- --
</TABLE>
- ---------------
(1) In the fourth quarter of 1993, the Company sold its MBE operations and
acquired 20% of the outstanding capital stock of Chorus, a manufacturer of
MBE products. The Company retained rights to sell certain other residual
used systems of the MBE business that were not exchanged with Chorus. The
sale of these used systems was completed during the first quarter of 1995.
(2) See Note 2 of Notes to Consolidated Financial Statements.
18
<PAGE> 20
(3) During 1995, the Company (a) effected a recapitalization in which each
outstanding share of Series A Preferred Stock was exchanged for two thirds
of a share of Common Stock and $0.76 ($9.9 million in aggregate), (b) paid
$4.9 million of dividends to the common shareholders, (c) paid $6.1 million
to redeem the Series 1 Preferred Stock, and (d) received approximately $12.0
million from the sale of common stock during the Initial Public Offering.
See Notes 10 and 11 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements and
should be read in conjunction with the Consolidated Financial Statements and
related Notes contained elsewhere in this Annual Report on Form 10-K.
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. The Company's disk sputtering systems, which represent the majority
of the Company's revenue, are sold to vertically integrated disk drive
manufacturers and to original equipment manufacturers that sell disk media to
disk drive manufacturers. Intevac's 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 ARPA for development projects for the flat
panel display industry.
Through the first quarter of 1995, the Company also received revenues from
sales of molecular beam epitaxy ("MBE") systems. MBE systems are used for the
design and manufacture of materials having the characteristics of a
semiconductor that are used to produce transistors, opto-electronic devices and
integrated circuits. The Company acquired the MBE business from Varian in 1991
and sold the business to a third party in October 1993. MBE revenues in 1994 and
through the first quarter of 1995 were derived from sales of used MBE equipment
that had not been sold in the acquisition and from other activities in
connection with the winding down of the MBE business. The Company does not
expect any MBE revenues in future periods.
Income (loss) from discontinued operations represents results from the
Company's sales of night vision products, primarily sales of night vision
goggles and devices. The Company sold the night vision business to a third party
in May 1995.
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company believes that its
operating results will continue to fluctuate on a quarterly and annual basis due
to a variety of factors. These factors include the cyclicality of the thin-film
disk manufacturing and disk drive industries, patterns of capital spending by
customers, the timing of significant orders, order cancellations and shipment
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, the
mix of systems sold, the relative proportions of sputtering systems, system
components and subassemblies, changes in product development costs, expenses
associated with acquisitions and exchange rate fluctuations. Over the last eight
quarters the Company's operating income (loss) as a percentage of net revenues
has fluctuated from approximately (9)% to 21% of net revenues. The Company
anticipates that its operating margin will continue to fluctuate. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
19
<PAGE> 21
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. According to a
March 1996 report by TrendFOCUS, an independent market research firm, as of
December 31, 1995 there were 187 installed disk sputtering lines worldwide and
only 14 companies in the world with five or more installed disk sputtering
lines. Therefore, winning or losing an order from any particular customer can
significantly affect the Company's operating results. In addition, the Company's
opportunities to sell its systems are further limited by the fact that a
substantial majority of the manufacturers of thin-film disks have adopted an
in-line approach as opposed to the Company's static approach to thin-film disk
manufacturing. Many of these manufacturers have invested significant amounts of
capital in their in-line systems, and as such there may be significant
resistance to change to a static approach in the future.
The disk drive industry is cyclical and historically has experienced
periods of oversupply, resulting in significantly reduced demand for thin-film
disks and for the capital equipment used to manufacture such disks, including
the systems manufactured and marketed by the Company. In recent years, the disk
drive industry has experienced significant growth, which, in turn, has caused
significant growth in the capital equipment industry supplying manufacturers of
thin-film disks. There can be no assurance that such growth will continue. The
Company anticipates that a significant portion of new orders will depend upon
demand from thin-film disk manufacturers building or expanding fabrication
facilities, and there can be no assurance that such demand will exist. The
Company's business, financial condition and results of operations could be
materially adversely affected by downturns or slowdowns in the disk drive
market.
Due to all of the foregoing factors, the Company expects its quarterly
operating results to fluctuate significantly and may in certain quarters be
below the expectations of public market analysts and investors. In such event it
is likely the price of the Company's Common Stock would be materially adversely
affected.
RESULTS OF OPERATIONS
Net revenues. Net revenues totaled $88.2 million, $42.9 million, and $20.5
million in 1996, 1995 and 1994, respectively. Net revenues increased from 1995
to 1996 primarily due to an increase in net revenues from disk sputtering
systems and to a lesser extent as the result of the acquisition of SJT in May
1996 and Lotus in June 1996. Net revenues increased from 1994 to 1995 primarily
due to a $23.9 million increase in net revenues from disk sputtering systems and
other components partially offset by a $1.5 million decline in MBE sales.
Matsubo, Seagate and HMT Technology accounted for 32%, 32% and 13% respectively,
of the Company's total net revenues during 1996. Seagate, HMT Technology and
Matsubo accounted for 40%, 20% and 17%, respectively, of the Company's total net
revenues during 1995. 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.
MBE accounted for $0.7 million and $2.2 million of net revenues in 1995 and
1994, respectively. The Company sold substantially all of the assets related to
its MBE operation in October 1993 in exchange for 20% of the outstanding stock
of Chorus Corporation. This investment is accounted for under the equity method.
The Company continued to dispose of residual assets of the MBE business through
the first quarter of 1995. In the third quarter of 1995, the Company sold its
investment interest in Chorus.
Foreign sales totaled $36.4 million, $8.7 million and $8.2 million in 1996,
1995 and 1994, respectively. Foreign sales accounted for 41%, 20% and 40% of net
revenues in 1996, 1995 and 1994, respectively. Substantially all of the
Company's sales were denominated in US dollars.
20
<PAGE> 22
Gross margin. Gross margin for disk, flat panel and other was 36.9%,
35.3%, and 35.4% in 1996, 1995 and 1994, respectively. Gross margin increased in
1996 as the result of higher margins on disk sputtering systems during the first
two quarters of 1996. The Company believes the historical margins experienced in
1994, 1995 and last two quarters of 1996 are more indicative of future margins
than the gross margins attained in the first two quarters of 1996. Gross margin
for MBE was 37.6% and 60.7% in 1995 and 1994, respectively. MBE gross margin was
above historical levels at 60.7% in 1994 and 37.6% in 1995 due to the resale at
high margins of used MBE machines that the Company retained after the sale of
the MBE business.
Research and development. Company funded research and development expense
increased from $2.6 million in 1995 to $8.4 million in 1996. The $5.8 million
increase was caused primarily by an increase in expenses related to the
development of disk sputtering equipment and to a lesser extent increases in net
expenses related to development of flat panel manufacturing equipment, laser
texturing equipment and contact stop/start test equipment. Company funded
research and development expense decreased from $3.5 million in 1994 to $2.6
million in 1995. The $0.9 million decrease was caused by a $1.1 million decrease
in expenses related to the development of a flat panel display machine and a
$0.2 million decrease in MBE research and development expenses, which were
partially offset by a $0.4 million increase in research and development spending
on disk sputtering equipment and the advanced technology division.
Research and development expenses do not include costs of $1.3 million,
$1.1 million, and $2.0 million that were incurred by the Company in 1996, 1995
and 1994, respectively, and reimbursed under the terms of a research and
development cost sharing agreement with the Company's Japanese development
partner. At December 31, 1996, all of the $5.5 million of funds available under
this cost sharing agreement had been used. Future joint development under this
agreement is contingent upon the Company's ability to negotiate further
amendments to the development agreement. There can be no assurance that the
Company will obtain further amendments to the development agreement.
Selling, general and administrative. Selling, general and administrative
expense totaled $8.4 million, $4.6 million and $2.2 million in 1996, 1995 and
1994, respectively, representing 9.5%, 10.6% and 11.0% of revenue. The $3.8
million increase in selling, general and administrative expenses from 1995 to
1996 was primarily the result of an increase in marketing and administrative
costs related to increased sales of disk sputtering systems and, to a lesser
extent, increased marketing and administrative costs at the Company's Lotus
Technology Division, Advanced Technology Division, and San Jose Technology
Division, approximately $282,000 of costs related to the cancellation of its
proposed secondary stock offering in August 1996, and the increased costs of
administering and insuring a public company as a result of the Company's
November 21, 1995 initial public offering. The $2.4 million increase in selling,
general and administrative expenses from 1994 to 1995 was primarily the result
of increased marketing and administrative expenses related to increased sales of
disk sputtering systems and, to a lesser extent, the increased costs of
administering and insuring a public company as a result of the Company's
November 21, 1995 initial public offering. These costs were driven by an
increase in administrative headcount to support the Company's increased level of
business and administrative activities.
Other income (expense), net. Other income (expense), net totaled $1.4
million, $0.9 million, and $0.5 million, in 1996, 1995 and 1994, respectively.
Other income during 1996 consisted primarily of deferred income recognized on
the sale of the Company's interest in Chorus Corporation and interest income,
and to a lesser extent early payment discounts, which were partially offset by
interest expense. Other income during 1995 consisted primarily of interest
income and, to a lesser extent, deferred income recognized on the sale of the
Company's interest in Chorus Corporation. Other income during 1994 resulted
primarily from interest income.
Discontinued operations. In March 1995, the Company adopted a formal plan
to discontinue the night vision business. The Company sold its night vision
business to Litton Systems, Inc. in May 1995. Accordingly, the results of
operations data for the years ended December 31, 1996, 1995 and 1994 reflects
the night vision business as a discontinued operation. Net revenues included in
discontinued operations for the years ended December 31, 1995 and 1994 were $4.2
million and $18.4 million, respectively.
21
<PAGE> 23
Provision for (benefit from) income taxes. Income tax expense as a
percentage of pretax income was 56%, 36% and 33% in 1996, 1995 and 1994,
respectively. The Company's tax rate differs from the applicable statutory rates
primarily due to non deductible expenses for acquired in-process research and
development and goodwill amortization, state income taxes, the utilization of
research and development tax credits, benefits from the Company's foreign sales
corporation and tax exempt interest income.
A net deferred tax asset of $4.0 million is reflected in the financial
statements at December 31, 1996. Based on the Company's historical taxable
income and projected future earnings, management believes that it is more likely
than not that the Company will realize the benefit of this asset.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities in 1996 used cash of $5.7 million
primarily due to aggregate increases in accounts receivable and inventories of
$23.7 million, which were partially offset by net income of $5.0 million, $5.8
million non-cash expense for the write-off of acquired in-process research and
development, $2.8 million of depreciation and amortization and a $5.3 million
increase in customer advances.
Investing activities in 1996 used cash of $14.6 million due to the net
investment of $11.5 million of cash in the acquisitions of Cathode Technology
Corporation, San Jose Technology Corporation, and Lotus Technologies, Inc. and
the purchase of $3.9 million of property and equipment which was partially
offset by $0.8 million of proceeds from the sale of the Company's Chorus
Investment.
Financing activities in 1996 generated $0.8 million of cash from the
proceeds of the sale of the Company's common stock under its employee stock
option and employee stock purchase plans.
At December 31, 1996, the Company had $0.9 million of cash and cash
equivalents. In addition, the Company has a $20.0 million revolving line of
credit which expires May 1, 1997. Borrowings under the agreement are based on
eligible receivables and inventory. Borrowings based on receivables bear
interest at prime rate or the LIBOR rate plus 250 basis points and borrowings
based on inventory bear interest at Prime rate plus 1% or the LIBOR rate plus
350 basis points. Borrowings under the line of credit are secured by
substantially all the Company's assets. The line of credit agreement requires
the Company to maintain certain financial ratios and other financial conditions.
The Company intends to undertake approximately $4 million in capital
expenditures during the next 12 months. The Company believes the existing cash
and cash equivalent balances and credit facilities will be sufficient to meets
its cash requirements for at least the next twelve months. While operating
activities may provide cash in certain periods, to the extent the Company may
experience growth in the future, the Company anticipates that its operating and
investing activities may use cash and, consequently, such growth may require the
Company to obtain additional sources of financing. The Company may also from
time to time consider the acquisition of related businesses, products or
technologies, which may require additional financing.
22
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEVAC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... 24
Consolidated Balance Sheets........................................................... 25
Consolidated Statements of Income..................................................... 26
Consolidated Statements of Shareholders' Equity....................................... 27
Consolidated Statements of Cash Flows................................................. 28
Notes to Consolidated Financial Statements............................................ 29
</TABLE>
23
<PAGE> 25
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Intevac, Inc.
We have audited the accompanying consolidated balance sheets of Intevac,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Intevac, Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
San Jose, California
January 20, 1997
24
<PAGE> 26
INTEVAC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 938 $20,422
Accounts receivable, net of allowances of $1,024 and $461 at December
31, 1996 and 1995, respectively, and includes related party
receivables of $199 at
December 31, 1995................................................... 17,570 4,439
Inventories, including $6,735 and $2,579 at customers at December 31,
1996
and 1995, respectively.............................................. 25,666 16,468
Short-term note receivable, arising from the sale of the investment in
Chorus Corporation, net of allowance of $1,180 and $593 at December
31, 1996
and 1995, respectively.............................................. -- 177
Prepaid expenses and other current assets.............................. 507 503
Deferred tax assets.................................................... 4,397 3,158
------- -------
Total current assets..................................................... 49,078 45,167
Equipment and leasehold improvements, at cost:
Leasehold improvements................................................. 2,872 1,416
Machinery and equipment................................................ 10,269 3,909
------- -------
13,141 5,325
Accumulated depreciation and amortization.............................. 3,868 1,846
------- -------
9,273 3,479
Long-term note receivable, arising from sale of the investment in Chorus
Corporation, net of allowance of $0 and $1,180 at December 31, 1996
and 1995, respectively................................................. -- --
Investment in 601 California Avenue LLC.................................. 2,431 2,431
Goodwill, net of amortization of $951.................................... 5,603 --
Other intangibles, net of amortization of $539........................... 1,698 --
Deferred tax assets and other assets..................................... 2 83
------- -------
Total assets................................................... $68,085 $51,160
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable.......................................................... $ 1,252 $ --
Accounts payable....................................................... 4,465 2,681
Accrued payroll and related liabilities................................ 1,937 1,075
Accrued income taxes................................................... 799 2,616
Accrued product warranties............................................. 2,266 1,190
Other accrued liabilities.............................................. 1,210 862
Customer advances...................................................... 20,702 14,436
Net liabilities of discontinued operations............................. 600 980
------- -------
Total current liabilities................................................ 33,231 23,840
Long-term debt........................................................... 730 --
Deferred tax liability................................................... 388 --
Commitments and contingencies............................................
Shareholders' equity:
Undesignated Preferred Stock, no par value, 10,000 shares authorized,
no shares issued and outstanding.................................... -- --
Common stock, no par value:
Authorized shares -- 50,000
Issued and outstanding shares -- 12,449 and 12,248 at December 31,
1996 and 1995, respectively........................................ 16,747 15,304
Retained earnings...................................................... 16,989 12,016
------- -------
Total shareholders' equity..................................... 33,736 27,320
------- -------
Total liabilities and shareholders' equity..................... $68,085 $51,160
======= =======
</TABLE>
See accompanying notes.
25
<PAGE> 27
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net revenues:
Disk, flat panel, and other................................. $88,232 $42,187 $18,266
MBE......................................................... -- 695 2,185
------- ------- -------
Total net revenues (includes related party revenues of $1,856
and $2,897 for the years ended December 31, 1995 and 1994,
respectively)............................................... 88,232 42,882 20,451
Cost of net revenues:
Disk, flat panel, and other................................. 55,652 27,280 11,799
MBE......................................................... -- 434 858
------- ------- -------
Total cost of net revenues.................................... 55,652 27,714 12,657
------- ------- -------
Gross profit.................................................. 32,580 15,168 7,794
Operating expenses:
Research and development.................................... 8,425 2,603 3,515
Selling, general, and administrative........................ 8,391 4,550 2,248
Acquired in-process research and development................ 5,835 -- --
------- ------- -------
Total operating expenses...................................... 22,651 7,153 5,763
------- ------- -------
Operating income.............................................. 9,929 8,015 2,031
Interest expense.............................................. (175) (13) (63)
Interest income and other, net................................ 1,569 942 533
------- ------- -------
Income from continuing operations before income taxes......... 11,323 8,944 2,501
Provision for income taxes.................................... 6,350 3,179 826
------- ------- -------
Income from continuing operations............................. 4,973 5,765 1,675
Discontinued operations:
(Loss) from discontinued operations, net of applicable
income taxes............................................. -- (63) (267)
Gain on disposal of discontinued operations including
provision of $2,622 for estimated closing, environmental
remediation and warranty costs, net of applicable income
taxes.................................................... -- 1,398 --
------- ------- -------
Income (loss) from discontinued operations.................... -- 1,335 (267)
------- ------- -------
Net income.................................................... $ 4,973 $ 7,100 $ 1,408
======= ======= =======
Per share:
Income from continuing operations........................... $ 0.39 $ 0.54 $ 0.16
Net income.................................................. $ 0.39 $ 0.67 $ 0.14
Shares used in per share amounts.............................. 12,901 10,606 10,285
</TABLE>
See accompanying notes.
26
<PAGE> 28
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
----------------- ---------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------- ------- ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994.............. 13,020 $13,020 706 $ 113 $ 8,455 $21,588
Sale of common stock under stock
option plan........................ -- -- 37 14 -- 14
Repurchase of common stock under stock
option plan........................ -- -- (29) (23) -- (23)
Net income............................ -- -- -- -- 1,408 1,408
------- ------- ------ ------- ------- -------
Balance at December 31, 1994............ 13,020 13,020 714 104 9,863 22,987
Exchange of Series A Preferred Stock
for common stock................... (13,020) (13,020) 8,680 3,125 -- (9,895)
Common stock dividend................. -- -- -- -- (4,922) (4,922)
Redeemable Series 1 Preferred Stock
dividend........................... -- -- -- -- (25) (25)
Sale of common stock under stock
option plan........................ -- -- 557 174 -- 174
Repurchase of common stock under stock
option plan........................ -- -- (3) (4) -- (4)
Sale of common stock through initial
public offering.................... -- -- 2,300 11,905 -- 11,905
Net income............................ -- -- -- -- 7,100 7,100
------- ------- ------ ------- ------- -------
Balance at December 31, 1995............ -- -- 12,248 15,304 12,016 27,320
Initial public offering costs......... -- -- -- (7) -- (7)
Sale of common stock under stock
option plan........................ -- -- 139 438 -- 438
Sale of common stock under employee
stock purchase plan................ -- -- 62 322 -- 322
Income tax benefits realized from
activity in employee stock plans... -- -- -- 690 -- 690
Net income............................ -- -- -- -- 4,973 4,973
------- ------- ------ ------- ------- -------
Balance at December 31, 1996............ -- $ -- 12,449 $16,747 $ 16,989 $33,736
======= ======= ====== ======= ======= =======
</TABLE>
See accompanying notes.
27
<PAGE> 29
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations....................................... $ 4,973 $ 5,765 $ 1,675
Income (loss) from discontinued operations.............................. -- 1,335 (267)
-------- -------- -------
Net income.............................................................. 4,973 7,100 1,408
Adjustments to reconcile net income to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation.......................................................... 1,354 883 1,663
Amortization of intangibles........................................... 1,490 -- --
Acquired in-process research and development.......................... 5,835 -- --
Gain on sale of Chorus Investment..................................... (593) -- --
Gain on disposition of discontinued operations........................ -- (1,398) --
Loss on disposal of equipment......................................... 5 219 --
Changes in assets and liabilities:
Accounts receivable................................................. (12,344) 5,055 (3,829)
Inventories......................................................... (11,313) (9,116) (3,827)
Prepaid expenses and other assets................................... (1,132) 942 1,900
Accounts payable.................................................... 1,464 1,276 (953)
Accrued payroll and other accrued liabilities....................... (284) 676 (3,586)
Customer advances................................................... 5,251 7,641 1,961
Discontinued operations -- noncash changes and working capital
changes........................................................... (380) (2,770) --
-------- -------- -------
Total adjustments....................................................... (10,647) 3,408 (6,671)
-------- -------- -------
Net cash and cash equivalents provided by (used in) operating
activities............................................................ (5,674) 10,508 (5,263)
INVESTING ACTIVITIES
Purchase of short-term investments...................................... (2,571) (3,001) (9,084)
Proceeds from maturities of short-term investments...................... 2,571 7,080 6,006
Purchase of equipment................................................... (3,854) (3,042) (953)
Investment in Cathode Technology Corporation............................ (1,074) -- --
Investment in San Jose Technology Corporation........................... (2,270) -- --
Investment in Lotus Technologies, Inc................................... (8,135) -- --
Payment for non-compete covenant........................................ -- -- (305)
Proceeds from sale of discontinued operations........................... -- 7,546 --
Proceeds from sale of Chorus Investment................................. 770 930 --
-------- -------- -------
Net cash and cash equivalents provided by (used in) investing
activities............................................................ (14,563) 9,513 (4,336)
FINANCING ACTIVITIES
Proceeds from issuance of common stock.................................. 753 12,079 14
Repurchase of common stock.............................................. -- (4) (23)
Dividends on common stock............................................... -- (4,922) --
Dividends on redeemable Series 1 Preferred Stock........................ -- (25) --
Exchange of Series A Preferred Stock for common stock................... -- (9,895) --
Redemption of redeemable Series 1 Preferred Stock....................... -- (6,100) --
-------- -------- -------
Net cash and cash equivalents provided by (used in) financing
activities............................................................ 753 (8,867) (9)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents.................... (19,484) 11,154 (9,608)
Cash and cash equivalents at beginning of period........................ 20,422 9,268 18,876
-------- -------- -------
Cash and cash equivalents at end of period.............................. $ 938 $ 20,422 $ 9,268
======== ======== =======
Cash paid (received) for:
Interest.............................................................. $ 149 $ -- $ 12
Income taxes.......................................................... 9,321 3,487 52
Income tax refund..................................................... (250) (727) (1,120)
Other noncash changes:
Investment in Cathode Technology Corporation through assumption of
notes payable....................................................... $ 1,980 $ -- $ --
Inventories capitalized for internal use.............................. 3,094 -- --
Income tax benefit realized from activity in employee stock plans..... 690 -- --
</TABLE>
See accompanying notes.
28
<PAGE> 30
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND NATURE OF OPERATIONS
Intevac, Inc. ("Intevac" or the "Company") was formed in October 1990 for
the purpose of acquiring certain business assets and liabilities from Varian
Associates, Inc. ("Varian"). In February 1991, certain agreements were entered
into between Varian and the Company which provided for the transfer of the
assets and business of Varian's disk sputtering equipment business, night vision
device business and molecular beam epitaxy ("MBE") equipment business to
Intevac.
In October 1993, certain assets of the MBE business were exchanged for a
20% ownership in the outstanding stock of Chorus Corporation ("Chorus"), a
manufacturer of MBE products. The Company retained the rights to sell certain
residual assets of the MBE business not exchanged with Chorus Corporation.
Disposition of these assets was completed during the first quarter of 1995. In
the third quarter of 1995, the Company sold its investment interest in Chorus.
In 1994, the Company purchased certain assets from Aktis Corporation and
purchased certain patents from Baccarat Electronics, Inc. for $182,000 which
formed the genesis of its Rapid Thermal Processing Operation ("RTP"). RTP
developed a rapid thermal system for use in the production of flat panel
displays under Advanced Research Project Agency ("ARPA") contracts. RTP
delivered and sold its first RTP system in the first quarter of 1995 and a
second RTP system in the first quarter of 1996.
In the second quarter of 1995, the Company completed the sale of its night
vision business to Litton Systems, Inc. for cash. The Company retained certain
engineering personnel from the night vision business as well as some government
contracts for research and development work in photocathodes, various
applications of that technology, and development of processes for making
thin-film transistors with sputtered materials. This activity was organized with
the RTP business to form the Advanced Technology Division ("ATD"). ATD expects
to continue this type of work and will seek continued customer support for
research and development activities.
In the first quarter of 1996, the Company purchased all of the outstanding
stock of Cathode Technology Corporation ("Cathode"). Cathode designs and
manufactures magnetron sputter sources for use in the Company's disk sputtering
systems. This acquisition was accounted for under the purchase method. See Note
16 of Notes to Consolidated Financial Statements.
In the second quarter of 1996, the Company purchased all of the outstanding
stock of San Jose Technology Corp. ("SJT"). SJT is a manufacturer of systems
used to lubricate thin-film disks. This acquisition was accounted for under the
purchase method. See Note 16 of Notes to Consolidated Financial Statements.
In the second quarter of 1996, the Company purchased all of the outstanding
stock of Lotus Technologies, Inc. ("Lotus"). Lotus is a manufacturer of contact
stop/start test equipment for disk drives and drive components. This acquisition
was accounted for under the purchase method. See Note 16 of Notes to
Consolidated Financial Statements.
The Company is a leading supplier of static sputtering systems and related
manufacturing equipment used to manufacture thin-film disks for computer hard
disk drives. The Company's principal product, the MDP-250B system, enables disk
manufacturers to achieve high coercivities, high signal-to-noise ratios, minimal
disk defects, durability and uniformity, all of which are necessary in the
production of high performance, high capacity disks. The Company sells its
static sputtering systems to both captive and merchant thin-film disk
manufacturers. The Company sells and markets its products directly in the United
States, and through exclusive distributors in Japan and Korea. The Company
supports its customers in Southeast Asia through its wholly owned subsidiary in
Singapore and a branch office in Taiwan.
29
<PAGE> 31
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Intevac and
its subsidiaries. All intercompany transactions and balances have been
eliminated.
Revenue Recognition
Systems and Components -- Revenue for disk sputtering system sales is
recognized upon customer acceptance. Revenue for other systems and for system
component sales is recognized upon shipment.
Service and Maintenance -- Service and maintenance contract revenue, which
to date has been insignificant, is recognized ratably over applicable contract
periods or as services are performed.
Technology Development -- The Company performs best efforts research and
development work under various research contracts. Revenue on these contracts is
recognized in accordance with contract terms, typically as costs are incurred.
These contracts cover such projects as developing a sputtering process for
thin-film transistors, developing technology for rapid thermal processing of
glass substrates and developing of technology in the areas of EBCCD's, TE
photocathodes and Electron Beam Sources. Typically, for each contract, the
Company commits to perform certain research and development efforts up to an
agreed upon amount. In connection with these contracts, the Company receives
funding on an incremental basis up to a ceiling. Upon completion of each
contract, each party will typically receive certain rights to the technical and
computer software data developed under the contract. Some of these contracts are
cost-sharing in nature, where Intevac is reimbursed for a portion of the total
costs expended. In addition, the Company has, from time to time, negotiated with
a third party to fund a portion of the Company's costs in return for a joint
interest to the Company's rights at the end of the contract.
Net revenues and related cost of net revenues associated with these
contracts were $3,265,000 and $3,758,000 for 1996, respectively, $1,210,000 and
$1,358,000 for 1995, respectively, and $258,000 and $373,000 for 1994,
respectively.
Warranty
The Company's standard warranty provides for warranty for 2,000 hours of
operation or up to twelve months from customer acceptance, whichever occurs
first. During this warranty period any necessary non-consumable parts are
supplied and installed. Non-system products are warranted for a period of up to
twenty-four months from shipment. A provision for the estimated cost of warranty
is recorded upon customer acceptance for systems and upon shipment for
non-system products.
International Distribution Costs
The Company makes payments to agents and distributors under certain
agreements related to international sales in return for obtaining orders and
providing installation and warranty services. Payments to these agents and
distributors are included in cost of net revenues. These amounts totaled
approximately $3,743,000, $1,866,000 and $1,289,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
Advertising Expenses
The Company accounts for advertising costs as expense in the period in
which they are incurred. Advertising expense for 1996, 1995 and 1994 were
insignificant.
30
<PAGE> 32
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Customer Advances
Customer advances generally represent nonrefundable deposits invoiced by
the Company in connection with receiving customer purchase orders and shipment
of the systems. Customer advances related to systems that have not been shipped
to customers included in accounts receivable represent $804,000 and $806,000 at
December 31, 1996 and 1995, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Short-Term Investments
Short-term investments consist principally of debt instruments with
maturities between three and twelve months and are carried at fair value. These
investments are typically short-term in nature and therefore bear minimal risk.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date.
Cash and cash equivalents represent cash accounts and money market funds.
Inventories
Inventories for systems and components are stated at the lower of standard
cost (which approximates actual cost on a first-in, first-out basis) or market.
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.................................................... $ 6,953 $ 2,900
Work-in-progress................................................. 11,728 10,818
Finished goods................................................... 6,985 2,750
------- -------
$25,666 $16,468
======= =======
</TABLE>
Equipment and Leasehold Improvements
Equipment and leasehold improvements are carried at cost less allowances
for accumulated depreciation. Profits and losses on dispositions are reflected
in current operations.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which are generally five to seven years for
machinery and equipment. Amortization of leasehold improvements is computed
using the shorter of the remaining terms of the leases or the estimated economic
useful lives of the improvements.
Intangible Assets
The Company amortizes intangible assets on a straight-line basis over the
estimated useful lives, which range from 2 to 7 years.
31
<PAGE> 33
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109 ("SFAS 109").
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 preferred stock (using the as-if-converted method) and from stock
options (using the treasury stock method). Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued by the Company at prices below the initial public offering price
during the twelve-month period prior to the offering have been included in the
calculation as if they were outstanding for all periods presented. Dividends
paid to Series 1 preferred stockholders through the redemption of the Series 1
Preferred Stock in the third quarter of 1995 were $25,000. The impact on net
income per share and net income applicable to common stock was not material.
Employee Stock Plans
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with provisions of the Accounting Principles Board's
Opinion No. 25 ("APB 25"), "Accounting For Stock Issued to Employees." In 1995,
the Financial Accounting Standards Board released the Statement of Financial
Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company is continuing to
account for its employee stock plans in accordance with the provisions of APB
25.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
Financial Presentation
Certain prior year amounts on the Consolidated Financial Statements have
been reclassified to conform to the 1996 presentation.
3. CONCENTRATIONS
Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash equivalents and accounts
receivable. The Company generally invests its excess cash in money market funds
and in variable rate municipal bonds, which have contracted maturities within
one year. By policy, the Company's investments in commercial paper, certificates
of deposit, Eurodollar time deposits, or bankers acceptances are rated A1/P1, or
better. Investments in tax exempt or tax advantaged instruments, such as
variable rate municipal bonds are rated A, or better. To date, the Company has
not incurred losses related to these investments.
32
<PAGE> 34
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company operates primarily in one business segment (subsequent to the
discontinuance of the night vision business), which is to design, manufacture,
and sell capital equipment used in high technology manufacturing and research
activities. Historically, a significant portion of the Company's revenues in any
particular period have been attributable to sales to a limited number of
customers. The Company performs credit evaluations of its customers' financial
conditions and requires deposits on system orders but does not generally require
collateral or other security to support customer receivables. Matsubo, Seagate
and HMT Technology accounted for 32%, 32% and 13% respectively, of the Company's
total net revenues during 1996. Seagate, HMT Technology and Matsubo accounted
for 40%, 20% and 17%, respectively, of the Company's total net revenues during
1995. 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's largest customers purchase
disk-sputtering systems and change from period to period as thin-film disk
fabrication facilities are built or expanded.
Products
Disk sputtering equipment contributed a significant portion of the
Company's revenues and profits in 1996. The Company expects that its ability to
maintain or expand its current levels of revenues and profits in the future will
depend upon its success in enhancing its existing systems and developing and
manufacturing competitive disk sputtering equipment.
Markets
The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, changes in customer
requirements, new product introductions and enhancements. The market for disk
sputtering systems is primarily dependent upon the decision of a prospective
customer to replace obsolete equipment or to increase manufacturing capacity by
upgrading or expanding existing manufacturing facilities or constructing new
manufacturing facilities, all of which typically involve a significant capital
commitment. In addition, the 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.
Materials
In certain instances, the Company is dependent upon a sole supplier or a
limited number of suppliers, or has qualified only a single or limited number of
suppliers, for certain complex components or sub-assemblies 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.
Inventories
Given the volatility of the market, the Company makes inventory provisions
for potentially excess and obsolete inventory based on backlog and forecasted
demand. However, such backlog demand is subject to revisions, cancellations, and
rescheduling. Actual demand will inevitably differ from such anticipated demand,
and such differences may have a material effect on the financial statements.
33
<PAGE> 35
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Competition
The Company experiences intense competition worldwide from three principal
competitors, each of which has substantially greater financial, technical,
marketing, manufacturing and other resources than the Company. There can be no
assurance that the Company's competitors will not develop enhancements to, or
future generations of, competitive products that will offer superior price or
performance features or that new competitors will not enter the Company's
markets and develop such enhanced products. Because of these competitive
factors, there can be no assurance that the Company will be able to compete
successfully in the future. Increased competitive pressure could cause the
Company to lower prices for its products, thereby adversely affecting the
Company's business, financial condition and results of operations.
Export Net Revenues
Export net revenues by geographic region were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED FAR REST OF
DECEMBER 31, EAST WORLD TOTAL
--------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
1996................................................... $36,315 $ 57 $36,372
1995................................................... 7,954 723 8,677
1994................................................... 8,231 13 8,244
</TABLE>
Export sales do not include systems purchased by domestic corporations, but
delivered to international locations. Those shipments accounted for
approximately 28% of revenue in 1996. Export sales are likely to continue to
account for a substantial portion of net revenues in the future. 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 export
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.
4. DISCONTINUED OPERATIONS
In 1992, the Company was notified by the U.S. Army that the night vision
business had not been awarded the next phase of a significant production
contract that was critical to the business.
In the first quarter of 1995, the Company adopted a formal plan to
discontinue the operations of its night vision business. Accordingly, the
consolidated statements of operations and cash flows for all periods presented
reflect the night vision operations as discontinued. In the second quarter of
1995, the Company sold its night vision business to Litton Systems, Inc. for
cash of $7,546,000. The terms of the sale of the night vision business required
the Company to indemnify Litton Systems, Inc. for certain potential warranty and
environmental claims. In connection with this sale, the Company recorded a net
gain on disposal of $2,254,000 ($1,398,000 after tax, or $0.13 per share) as
follows:
<TABLE>
<S> <C>
Gain on sale, less applicable income taxes of $1,007,000............... $1,645,000
Operating losses from April 1, 1995 to May 5, 1995, net of applicable
benefit from income taxes of $151,000................................ (247,000)
----------
$1,398,000
==========
</TABLE>
34
<PAGE> 36
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with this sale, the Company reduced the gain by a charge of
$2,622,000 ($1,626,000 after tax, or $0.15 per share) for costs associated with
the sale. The significant components of this charge included $795,000 for
warranty costs, $680,000 for estimated environmental remediation costs
associated with the site of the night vision operations, and $476,000 for
write-offs of certain prepaid expenses and other assets. Remediation efforts
were largely completed in 1996. Warranty on all products shipped by the business
will expire in November 1997. The remaining accrual associated with closing the
business is $745,000 at December 31, 1996. Although management believes that the
reserves remaining will cover any obligations the Company may have, with respect
to the night vision operations and its occupancy of the Palo Alto site, there
can be no assurance that such reserves will be adequate, or that there will not
be a material impact in the near term on the financial statements presented.
Net revenues of the night vision business included in discontinued
operations were $4,221,000 and $18,356,000 for the years ended December 31, 1995
and 1994, respectively. The income (loss) from discontinued operations were net
of a provision (benefit) for income taxes of $(163,000) and $893,000 for the
years ended December 31, 1995 and 1994, respectively.
5. INVESTMENT IN 601 CALIFORNIA AVENUE LLC
In the third quarter of 1995, the Company entered into a Limited Liability
Company Operating Agreement ("the Operating Agreement") which expires December
31, 2015 with 601 California Avenue LLC (the "LLC"), a California limited
liability company formed and owned by the Company and certain shareholders of
the Company. The LLC was formed for the purpose of removing the buildings,
remediation and the development of an office building at the site of the
Company's discontinued night vision business (the "Site"). Under the Operating
Agreement, the Company transferred its leasehold interest in the Site in
exchange for a preferred share in the LLC, having an aggregate liquidation
preference equal to $3,900,000 (unaudited), and the remaining shareholders of
the LLC contributed cash of approximately $1,053,000 (unaudited). The Company's
preferred share votes with the common shares and has one vote out of 1,001,
except for votes on the sale, transfer or lease of the Site, the LLC or changes
to the rights of the preferred share as to which approval of the holder of the
preferred share is required. The leasehold interest in the Site is with the
Board of Trustees of the Leland Stanford Junior University ("Stanford"). The
leasehold interest is fully paid and expires in the year 2053. The fair market
value of the leasehold interest in the Site was determined by an independent
appraiser to be $3,900,000 (unaudited). The Company is accounting for the
investment under the cost recovery method and has recorded its investment in the
LLC at approximately $2,431,000, which represents the Company's historical
carrying value of the leasehold interest in the Site which the Company believes
is less than the net realizable value. The Company and the LLC have cross-
indemnified each other for potential environmental claims relating to acts prior
to and subsequent to the transfer of the Site, respectively. Per the Operating
Agreement, the Company is not required to contribute additional capital to the
LLC. The preferred share in the LLC accrues an annual 10% cumulative preferred
return. The cumulative preferred return is not payable until the property is
developed and generating positive operating cash flow, which among other
factors, is dependent on the LLC obtaining additional financing, performing site
environmental remediation for which Varian has made certain indemnifications,
developing the Site, and negotiating a favorable lease(s).
During 1996, the buildings on the Site were remediated, closed and
demolished, the LLC formed a joint venture with Stanford ("Stanford JV") to
develop the property, the Stanford JV received approval from the City of Palo
Alto for its redevelopment plans, and the Stanford JV signed an 11 year lease
with a tenant for 75% of the proposed redevelopment (unaudited).
35
<PAGE> 37
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENT IN CHORUS CORPORATION
In 1993, the Company sold its MBE operations and acquired 20% of the
outstanding capital stock of Chorus, a manufacturer of MBE products. The
investment is accounted for under the equity method. The net effect of the
Company's share of Chorus' net income (loss) is included in other income
(expense), net and was $165,000 and $(2,000) for the years ended December 31,
1995 and 1994, respectively.
Certain MBE inventory, sufficient to fill MBE's backlog, was not sold to
Chorus. However, Chorus used this inventory to complete the backlog sales and
reimbursed the Company for the cost of this inventory upon completion of the
sale. A receivable of $249,000 was recorded in the Company's financial
statements at December 31, 1994 for the cost of such inventory. In addition, the
Company retained the rights to sell certain other residual used systems of the
MBE business that were not exchanged with Chorus. The sale of these used systems
was completed during the first quarter of 1995.
In the third quarter of 1995, the Company sold its 20% investment interest
in Chorus, which represented 1,250,000 shares of Chorus stock to an individual
for $500,000 in cash and a note for $2,380,000. This note bears interest at
12.5% per year with principal and interest payable in installments through
August 1997. The note is secured by 1,033,000 shares of Chorus stock. The sales
price of the Chorus stock exceeded the net carrying value of the Company's
investment in Chorus by approximately $1,800,000. Due to the inherent
uncertainties regarding the performance of an individual making the remaining
installment payments on the note, the Company deferred the gain on the sale and
is recognizing it under the cost recovery method. Under the cost-recovery
method, no profit is recognized until cash payments by the individual buyer,
including principal and interest on debt due to the Company, exceed the
Company's net carrying value of its investment. The December 31, 1996 note
receivable reserve of approximately $1,180,000 represents the deferred gain
under the cost-recovery method.
7. LINE OF CREDIT
In September 1996, the Company entered into a Business Loan Agreement with
two banks which provides for a total of $20.0 million in available borrowings
based on eligible receivables and inventory. This agreement replaces the
Company's prior line of credit. The agreement is for a revolving line of credit,
which is available until May 1, 1997, when the outstanding principal will be
payable. The line of credit bears interest, at the option of the Company, at the
prime rate, or the London Interbank Offering Rate (LIBOR) plus 250 basis points
for receivable advances and at the prime rate plus one percent, or the LIBOR
plus 350 basis points for inventory advances. Interest on outstanding Prime Rate
Advances is due monthly and interest on LIBOR Advances is due at the end of the
Interest Period as elected by the borrower. The Interest Period can be one,
three or six months. In the event of default, interest on the outstanding loan
increases to 5.00% above the interest rate applicable immediately prior to the
default.
As of December 31, 1996, the Company had secured its $2,000,000 note
related to the purchase of Cathode with a stand-by letter of credit under its
Business Loan Agreement. No additional amounts were outstanding under the
agreement. The Company is required to maintain certain financial ratios and
other financial conditions including restrictions on its ability to pay any
dividends. Borrowings under the line of credit are secured by substantially all
of the Company's assets.
8. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases certain facilities under non-cancelable operating leases
that expire at various times up to 1999. The facility leases require the Company
to pay for all normal maintenance costs.
36
<PAGE> 38
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments under these leases at December 31, 1996 are
as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................. $1,195
1998.............................................. 1,074
1999.............................................. 519
</TABLE>
Gross rental expense was approximately $1,166,000, $675,000 and $1,212,000
for the years ended December 31, 1996, 1995, and 1994, respectively. Offsetting
rental expense for the periods ending December 31, 1995 and 1994 was sublease
income of $14,000 and $739,000, respectively.
Contingencies
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 the Company that it may
be liable in connection with contracts for certain products from the Company's
discontinued night vision business. 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 financial position or results of
operations. However, the Company believes that the ultimate resolution of this
matter will not have a material adverse effect on its financial position,
results of operations or cash flows.
9. EMPLOYEE BENEFIT PLAN
In 1991, the Company established a defined contribution retirement plan
with 401(k) plan features. The plan covers all United States employees eighteen
years and older. Employees may make contributions by a percentage reduction in
their salaries, not to exceed the statutorily prescribed annual limit. The
Company made contributions of $109,000, $112,000 and $134,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Administrative expenses
relating to the plan are insignificant.
10. REDEEMABLE PREFERRED STOCK
On February 15, 1991, Intevac issued 610,000 shares of nonvoting redeemable
Series 1 Preferred Stock to Varian. In 1995, the Company redeemed the shares of
nonvoting redeemable Series 1 Preferred Stock held by Varian for $6,100,000 and
paid dividends of $25,000 prior to the redemption.
11. SHAREHOLDERS' EQUITY
The Company's Articles of Incorporation authorizes 10,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the shareholders.
Convertible Preferred Stock
In the third quarter of 1995, the Series A convertible preferred
shareholders of the Company exchanged all of the outstanding shares of Series A
convertible preferred stock of the Company for common stock and cash. Each share
of preferred stock was exchanged for two-thirds of a share of common stock and a
cash payment of $0.76 which was based on a valuation from an independent
appraiser. As a result of the exchange, 13,020,000 shares of convertible
preferred stock were exchanged for 8,680,000 shares of common stock, and the
Company's total cash payment was approximately $9,895,000 to the Series A
convertible preferred shareholders. The Series A and B preferred stock were
convertible into two-thirds of a share of common stock, at the option of the
holder, subject to certain antidilution adjustments.
37
<PAGE> 39
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock Dividend
In 1995, subsequent to the convertible preferred stock exchange described
above, the Company paid a one time dividend of $0.495 per outstanding share of
common stock. The Company paid a cash dividend on 9,929,303 shares of
approximately $4,922,000 to the common shareholders. The Company has no plans to
pay dividends in the future.
Stock Option/Stock Issuance Plans
The Board of Directors approved the 1991 Stock Option/Stock Issuance Plan
(the "1991 Plan") in 1991. The maximum number of shares that may be issued over
the term of the 1991 Plan is 2,666,667 shares.
The 1991 Plan is divided into two separate components: the Option Grant
Program and the Stock Issuance Program. Under the Option Grant Program, the
Company may grant either incentive stock options or nonqualified options or
implement stock appreciation rights provisions at the discretion of the Board of
Directors. Exercisability, option price, and other terms are determined by the
Board of Directors, but the option price shall not be less than 85% and 100% of
the fair market value for nonqualified options and incentive stock options,
respectively, as determined by the Board of Directors.
In 1995, the Board of Directors approved adoption of (i) the 1995 Stock
Option/Stock Issuance Plan under which employees, nonemployee directors, and
consultants may be granted stock options to purchase stock or issued shares of
stock at not less than 85% of fair market value on the grant/issuance date, and
(ii) the 1995 Employee Stock Purchase Plan. The 1995 Stock Option/Stock Issuance
Plan is intended to serve as the successor equity incentive program to the
Company's 1991 Stock Option/Stock Issuance Plan. 1,882,013 shares of common
stock have been authorized for issuance, comprised of the shares which remain
available for issuance under the 1991 Stock Option/Stock Issuance Plan,
including the shares subject to outstanding options and an additional increase
of approximately 515,000 shares. Options granted under the 1995 Stock
Option/Stock Issuance Plan are exercisable upon vesting and generally vest over
a five-year period. Options currently expire no later than ten years from the
date of grant.
Options granted under the 1991 Stock Option/Stock Issuance Plan are
immediately exercisable, however, unexercised options and shares purchased upon
the exercise of the options are subject to vesting over a five-year period.
Shares that are not vested may be repurchased by the Company. Options to
purchase 167,438, 129,135 and 578,457 shares were vested at December 31, 1996,
1995 and 1994, respectively. Shares totaling 21,750, 50,667 and 212,043 were
subject to repurchase at December 31, 1996, 1995 and 1994, respectively.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of this Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
multiple option pricing model with the following weighted average assumptions:
risk-free interest rates ranging from 5.32% to 6.25% and from 5.26% to 6.37% for
1995 and 1996, respectively; a dividend yield of 0.0%, a volatility factor of
the expected market price of the Company's common stock of 0.67, and a
weighted-average expected life of the option of 0.25 years beyond each
respective vesting period. Options granted prior to the Company's Initial Public
Offering in November 1995 have a volatility factor of 0.0.
38
<PAGE> 40
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Under the 1995 Employee Stock Purchase Plan, the Company is authorized to
issue up to 250,000 shares of common stock to participating employees. Under the
terms of the Plan, employees can choose to have up to 10% of their annual base
earnings withheld to purchase the Company's common stock. The purchase price of
the stock is 85% of the lower of the subscription date fair market value and the
purchase date fair market value. Approximately 80% of eligible employees have
participated in the Plan in 1995 and 1996. Under the Plan, the Company sold
62,467 shares to employees in 1996. The Company does not recognize compensation
cost related to employee purchase rights under the Plan. To comply with the pro
forma reporting requirements of SFAS 123, compensation cost is estimated for the
fair value of the employees' purchase rights using the Black-Scholes model with
the following assumptions for those rights granted in 1995 and 1996: dividend
yield of 0.0%; an expected life ranging up to 2.2 years (the offering period
ends January 31, 1998 for all subscription periods); expected volatility factor
of 0.67; and a risk free interest rate of 5.77%. The weighted average fair value
of those purchase rights granted in November 1995, February 1996 and August 1996
were $3.04, $3.80 and $5.57, respectively.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Pro forma net income............................... $3,878 $6,985
Pro forma earnings per share....................... $ 0.30 $ 0.66
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- -------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- -------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of year............... 931,637 $ 4.25 797,144 $ 0.53 741,151 $ 0.30
Granted............... 585,000 12.13 707,980 5.28 99,992 2.18
Exercised............. (138,444) 3.16 (556,822) 0.31 (37,333) 0.36
Forfeited............. (112,251) 5.43 (16,665) 1.28 (6,666) 0.75
Outstanding -- end of
year.................. 1,265,942 7.91 931,637 4.25 797,144 0.53
Exercisable at end of
year.................. 667,942 $ 4.40 888,637 $ 4.16 797,144 $ 0.53
Weighted-average fair
value of options
granted during the
year.................. $ 5.87 $ 1.01
</TABLE>
39
<PAGE> 41
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ------------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AS OF REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- ------------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.150 -- $ 2.175 239,120 7.09 $ 1.47 239,120 $ 1.47
$ 6.000 -- $ 6.000 441,322 8.62 $ 6.00 418,822 $ 6.00
$ 7.500 -- $ 7.625 260,000 9.25 $ 7.62 10,000 $ 7.50
$11.000 -- $16.000 155,500 9.70 $12.04 -- --
$17.750 -- $21.250 170,000 9.42 $18.58 -- --
-------- ---- -------- ------- --------
$ 0.150 -- $21.250 1,265,942 8.70 $ 7.91 667,942 $ 4.40
</TABLE>
12. RELATED PARTY TRANSACTIONS
Kaiser Aerospace & Electronics Corporation ("Kaiser") is a related party
resulting from their stock interest in the Company. Kaiser owned approximately
45% and 46% of the outstanding common stock at December 31, 1996 and December
31, 1995, respectively. Varian was a related party until August 1995 when the
nonvoting preferred stock was redeemed.
The Company had system and product sales to Varian of $1,844,000 and
$2,491,000 for the years ended December 31, 1995 and 1994, respectively. The
Company paid rent to Varian of approximately $1,056,000 during the year ended
December 31, 1994. No rent was paid to Varian in 1995. At December 31, 1995,
$199,000 was due from Varian. The Company has been a subcontractor to Kaiser on
certain government contracts and recognized revenues of approximately $12,000
and $406,000 for the years ended December 31, 1995 and 1994, respectively. Gross
margins on these contracts for the years ended December 31, 1995 and 1994 were
insignificant. In 1995, final settlement was reached on a cost-type contract,
which resulted in the Company receiving $12,000 from Kaiser. The Company has not
been a subcontractor to Kaiser during 1996.
Gross margins realized on related party transactions have not been
materially different from the gross margins realized on similar types of
transactions with unaffiliated customers. Management believes rent paid to
Varian was made on terms no more favorable to the Company than could have been
obtained from an unaffiliated third party.
13. INCOME TAXES
The provision for income taxes attributable to continuing operations
consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ----
<S> <C> <C> <C>
Federal:
Current.................................................. $5,761 $2,853 $ 76
Deferred................................................. (292) (109) 633
------ ------ ----
5,469 2,744 709
State:
Current.................................................. 1,362 99 --
Deferred................................................. (481) 336 117
------ ------ ----
881 435 117
------ ------ ----
Total............................................ $6,350 $3,179 $826
====== ====== ====
</TABLE>
40
<PAGE> 42
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax benefits associated with exercises of nonqualified stock options
and disqualifying dispositions of stock acquired through the incentive stock
option and employee stock purchase plans reduce taxes currently payable for 1996
as shown above by $690,000. Such benefits are credited to shareholders' equity
when realized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets computed in accordance with SFAS 109 are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Discontinued operations reserve.................................. $ 316 $ 809
Vacation accrual................................................. 333 264
Warranty reserve................................................. 1,011 454
Deferred investment gain......................................... 168 202
Bad debt reserve................................................. 447 235
Inventory valuation.............................................. 2,110 1,051
Other............................................................ 344 683
------ ------
4,729 3,698
Valuation allowance for deferred tax assets........................ -- (462)
------ ------
Total deferred tax assets.......................................... $4,729 $3,236
------ ------
Deferred tax liabilities:
Purchased technology............................................. $ 569 $ --
Other............................................................ 151 --
------ ------
Total deferred tax liabilities..................................... $ 720 $ --
------ ------
Net deferred tax assets............................................ $4,009 $3,236
====== ======
</TABLE>
The valuation allowance of $462,000 at December 31, 1995 relates to certain
future state income tax deductions. The valuation allowance for the years ended
December 31, 1996 and 1995 decreased by $462,000 and $400,000, respectively.
A reconciliation of the income tax provision at the federal statutory rate
of 35% in 1996 and 1995 and 34% in 1994 to the income tax provision at the
effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ----
<S> <C> <C> <C>
Income taxes computed at the federal statutory rate........ $3,963 $3,130 $850
State taxes (net of federal benefit)....................... 573 283 90
Acquired in-process research and development............... 2,042 -- --
Foreign Sales Corporation benefit.......................... (525) (140) --
Tax exempt income.......................................... (56) (92) (125)
Goodwill amortization...................................... 335 -- --
Research credit............................................ -- -- (51)
Other...................................................... 18 (2) 62
------ ------ ----
Total............................................ $6,350 $3,179 $826
====== ====== ====
</TABLE>
41
<PAGE> 43
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rates for the years ended December 31, 1996,
1995 and 1994 were 56.1%, 35.5% and 33.0%, respectively.
14. 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. At December 31, 1996, the Company had received
$5,450,000 under the contract. Qualifying costs of approximately $3,283,000,
$1,958,000 and $3,994,000 for the years ended December 31, 1996, 1995, and 1994,
respectively, were incurred on this project, resulting in offsets against
research and development costs of approximately $1,347,000, $1,130,000 and
$1,997,000 in 1996, 1995 and 1994, respectively.
As of December 31, 1996, all of the $5,450,000 advance had been applied to
qualifying costs. The Company and its Japanese partner are discussing further
joint development work on the project. There can be no assurance that the
Company and its development partner will reach agreement on further joint
funding or cooperation.
Upon completion of the research and development work, if successful, each
party will receive certain manufacturing and marketing rights for separate
regions of the world. The agreement also calls for certain royalty payments by
each party to the other party, based on production and sales. The royalty rate
will be 5% for each party.
15. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................................ $15,126 $ 20,235 $24,603 $ 28,268
Gross profit............................. 5,923 8,007 8,560 10,090
Net income (loss)........................ 1,897 (3,225) 2,799 3,502
Net income (loss) per share.............. $ 0.15 $ (0.26) $ 0.22 $ 0.27
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................................ $ 5,369 $ 11,105 $12,071 $ 14,337
Gross profit............................. 1,691 3,989 4,369 5,119
Net income............................... 1,802 1,637 1,730 1,931
Net income per share..................... $ 0.18 $ 0.16 $ 0.16 $ 0.17
</TABLE>
16. ACQUISITIONS
In January, 1996, the Company acquired Cathode for $1,060,000 cash and
notes in the aggregate amount of $2,000,000, secured by a $2,000,000 standby
letter of credit payable upon default of the note, and acquisitions costs of
$14,000. The notes bear interest at 5.58% compounded monthly and payable
quarterly. Principal payments on the note are made quarterly based on unit sales
of the Cathode sputter sources. Any remaining balance on the notes on January
24, 2001 is due in full regardless of sputter source sales. Cathode licenses its
patented magnetron sputter source technology from Alum Rock Technology, Inc.
("Alum Rock") for a royalty of 2.5% of sales of Cathode sputter sources. As part
of the transaction the Company received from
42
<PAGE> 44
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Alum Rock: (1) an exclusive license to use Alum Rock's technology in the disk
sputtering business, (2) a non-exclusive license to use Alum Rock's technology
in other business, and (3) an option to purchase Alum Rock's patents for
$1,000,000. The Company has also entered into five year non-compete agreements
with the principals of Cathode and Alum Rock.
Goodwill of $2,855,000 related to the Cathode acquisition is being
amortized over seven years and $200,000 assigned to a non-compete agreement will
be amortized over 5 years. Accumulated amortization at December 31, 1996 is
$442,000 for these intangible assets.
On May 3, 1996, the Company completed the acquisition of the outstanding
stock of SJT. The total purchase price was $3,700,000 and acquisition costs were
$15,000. Current technology of $786,000 related to the SJT acquisition is being
amortized over 2 years and $100,000 assigned to a non-compete agreement will be
amortized over 5 years. Goodwill of $375,000 created by the deferred tax
liability on the SJT acquisition is being amortized over 2 years. Accumulated
amortization at December 31, 1996 is $400,000 for these intangible assets.
On June 6, 1996, the Company completed the acquisition of the outstanding
stock of Lotus. The total purchase price was $8,320,000 and acquisition costs
were $15,000. Goodwill of $2,863,000 related to the Lotus acquisition is being
amortized over 5 years while $1,015,000 assigned to current technology and
$136,000 assigned to a non-compete agreement will be amortized over 3 years.
Goodwill of $461,000 created by the deferred tax liability on the Lotus
acquisition is being amortized over 3 years. Accumulated amortization at
December 31, 1996 is $648,000 for these intangible assets.
Results for SJT and Lotus are included in the Consolidated Statements of
Income beginning in May 1996 and June 1996, respectively. The following
unaudited pro forma information assumes the acquisitions occurred at the
beginning of each year presented:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net sales................................................................ $91,938 $48,290
Income from continuing operations........................................ 10,608 4,656
Net income............................................................... 10,608 5,991
Per share:
Income from continuing operations...................................... $ 0.82 $ 0.44
Net income............................................................. $ 0.82 $ 0.56
</TABLE>
The pro forma information excludes the $5.8 million write-off of acquired
in process research and development.
43
<PAGE> 45
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by this item relating to the Company's directors
and nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers and key employees is
included under the caption "Executive Officers and Directors" under Item 4 in
Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"Ownership of Securities" in the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"Certain Transactions" in the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Annual Report on Form 10-K.
1. The following consolidated financial statements of Intevac, Inc. are
filed in Part II, Item 8 of this Report on Form 10-K:
Report of Ernst & Young, LLP, Independent Auditors
Consolidated Balance Sheets -- December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements -- Years Ended December 31,
1996, 1995 and 1994
44
<PAGE> 46
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. Financial Statement Schedules.
The following financial statement schedule of Intevac, Inc. is filed
pursuant to Part IV, Item 14(a) of this Annual Report on Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the consolidated financial statements or
notes thereto.
3. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.1 Stock Purchase Agreement by and among Lotus Technologies, Inc., Lewis Lipton, Dennis
Stork, Steve Romine & Intevac, Inc., dated June 6, 1996
11.1 Computation of Net Income Per Share
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 46)
27.1 Financial Data Schedule
</TABLE>
- ---------------
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K.
45
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on February 6, 1997.
INTEVAC, INC.
By: /s/ CHARLES B. EDDY III
------------------------------------
Charles B. Eddy III
Vice President, Finance and
Administration,
Chief Financial Officer, Treasurer
and Secretary
(Principal Financial and Accounting
Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Norman H. Pond and Charles B. Eddy III,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- --------------------------------------- ------------------
<C> <S> <C>
/s/ NORMAN H. POND Chairman of the Board, President and February 6, 1997
- ----------------------------------- Chief Executive Officer (Principal
(Norman H. Pond) Executive Officer)
/s/ CHARLES B. EDDY III Vice President, Finance and February 6, 1997
- ----------------------------------- Administration, Chief Financial
(Charles B. Eddy III) Officer Treasurer and Secretary
(Principal Financial and Accounting
Officer)
/s/ JOHN R. DOUGERY Director February 6, 1997
- -----------------------------------
(John R. Dougery)
/s/ EDWARD DURBIN Director February 6, 1997
- -----------------------------------
(Edward Durbin)
/s/ DAVID N. LAMBETH Director February 6, 1997
- -----------------------------------
(David N. Lambeth)
/s/ H. JOSEPH SMEAD Director February 6, 1997
- -----------------------------------
(H. Joseph Smead)
</TABLE>
46
<PAGE> 48
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
INTEVAC, INC.
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT ------------------------------------ BALANCE AT
BEGINNING CHARGED TO COSTS CHARGED TO OTHER END
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DEDUCTIONS-DESCRIBE OF PERIOD
- ------------------------------- --------- ---------------- ----------------- ------------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful
accounts................ $ 193,762 $ 13,689 $ 0 $ 101,866 $ 105,585
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful
accounts................ $ 105,585 $524,953 $ 0 $ 169,909(1) $ 460,629
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts................ $ 460,629 $589,712 $ 0 $ 25,900 $1,024,441
</TABLE>
- ---------------
(1) Includes $95,000 transferred to net assets of discontinued operations.
49
<PAGE> 1
STOCK PURCHASE AGREEMENT
DATED JUNE 6, 1996
BY AND AMONG
LOTUS TECHNOLOGIES, INC.,
LEWIS T. LIPTON, TRUSTEE FOR THE LIPTON SEPARATE PROPERTY TRUST
DATED JANUARY 12, 1993,
DENNIS C. STARK, STEVEN ROMINE
AND
INTEVAC, INC.
<PAGE> 2
TABLE OF CONTENTS
Page
1. Purchase and Sale of Stock.................................... 1
1.1 Purchase and Sale.................................... 1
1.2 Closing.............................................. 1
2. Representations and Warranties of the Company and the Selling
Shareholders.................................................. 1
2.1 Organization, Good Standing and Qualification........ 2
2.2 Capitalization....................................... 2
2.3 Subsidiaries......................................... 2
2.4 Authorization........................................ 2
2.5 Common Stock......................................... 2
2.6 Governmental Consents................................ 3
2.7 Returns.............................................. 3
2.8 Litigation........................................... 3
2.9 Intellectual Property................................ 3
2.10 Proprietary Information and Inventions Agreements.... 5
2.11 Compliance With Other Instruments.................... 5
2.12 Agreements; Action................................... 5
2.13 Disclosure........................................... 6
2.14 Title to Property and Assets......................... 6
2.15 Financial Statements................................. 6
2.16 Changes.............................................. 6
2.17 Employee Benefit Plans............................... 8
2.18 Taxes................................................ 8
2.19 Bank Accounts........................................ 8
2.20 Insurance............................................ 8
2.21 Minute Books......................................... 8
2.22 Labor Agreements and Actions......................... 8
2.23 Brokers' or Finders' Fees............................ 9
2.24 Accounts Receivable.................................. 9
2.25 Related Party Transactions........................... 9
2.26 Manufacturing and Marketing.......................... 9
2.27 Inventory............................................ 9
2.28 Customers and Suppliers.............................. 10
2.29 Employee Matters..................................... 10
3. Representations and Warranties of the Selling Shareholders.... 10
3.1 Authorization........................................ 10
3.2 Compliance With Other Instruments.................... 10
3.3 Governmental Consents................................ 11
i.
<PAGE> 3
3.4 Litigation............................................... 11
3.5 Title to Stock........................................... 11
3.6 Disclosure............................................... 11
3.7 Intellectual Property of the Selling Shareholders........ 11
4. Representations and Warranties of the Purchaser................... 12
4.1 Organization, Good Standing and Qualification............ 12
4.2 Authorization............................................ 12
4.3 Purchase for Investment.................................. 12
4.4 Disclosure of Information; Due Diligence................. 12
4.5 Investment Experience; Accredited Investor Status........ 13
4.6 Governmental Consents.................................... 13
4.7 Insolvency............................................... 13
5. Conditions of the Purchaser's Obligations at the Closing.......... 13
5.1 Representations and Warranties........................... 13
5.2 Performance.............................................. 13
5.3 Compliance Certificate................................... 14
5.4 Securities Laws Qualifications........................... 14
5.5 Proceedings and Documents................................ 14
5.6 Share Certificate........................................ 15
5.7 Government and Third-Party Consents...................... 15
5.8 Company Options.......................................... 15
5.9 Company Warrants......................................... 15
5.10 Selling Shareholder Non-Competition and Non-Disclosure
Agreement................................................ 14
5.11 Opinion of Company Counsel............................... 15
5.12 Opinion of Selling Shareholder Counsel................... 15
6. Conditions of the Company's and Selling Shareholder's Obligations
at Closing........................................................ 15
6.1 Representations and Warranties........................... 15
6.2 Performance.............................................. 15
6.3 Compliance Certificate................................... 15
6.4 Securities Laws Qualification............................ 15
6.5 Proceedings and Documents................................ 15
6.6 Government Consents............................................... 15
6.7 Payment of Purchase Price................................ 15
6.8 Payment of Finder's Fee.................................. 16
6.9 Opinion of Purchaser Counsel............................. 16
7. Indemnification................................................... 16
7.1 Right to Indemnification..................................16
7.2 Limitation................................................16
7.3 Notification, Etc.........................................17
ii.
<PAGE> 4
Miscellaneous........................................................17
8.1 Survival of Warranties......................................17
8.2 Successors and Assigns......................................17
8.3 Governing Law...............................................18
8.4 Counterparts................................................18
8.5 Titles and Subtitles........................................18
8.6 Notices.....................................................18
8.7 Cost and Expense............................................18
8.8 Amendments and Waivers......................................18
8.9 Severability................................................18
8.10 Entire Agreement............................................18
8.11 California Corporate Securities Law.........................19
8.12 Publicity...................................................19
8.13 Expenses; Attorneys' Fees...................................19
SCHEDULES AND EXHIBITS
Schedules:
Schedule A Schedule of Selling Shareholders
Schedule B Schedule of Exceptions
Schedule C Schedule of Material Contracts
Exhibits:
Exhibit A Selling Shareholder Non-Competition and Non-Disclosure
Agreement
Exhibit B Opinion of Company Counsel
Exhibit C Opinion of Selling Shareholder Counsel
Exhibit D Opinion of Purchaser Counsel
iii.
<PAGE> 5
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of
June 6, 1996, by and among Lotus Technologies, Inc., a California corporation
(the "Company"), Lewis T. Lipton, Trustee for the Lipton Separate Property Trust
dated January 12, 1993 ("Mr. Lipton"), Dennis C. Stark, an individual ("Mr.
Stark"), Steven Romine, an individual ("Mr. Romine") and Intevac, Inc., a
California corporation (the "Purchaser").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Purchase and Sale. Subject to the terms and conditions of
this Agreement, at the Closing (as defined below) the Purchaser shall purchase
from each of Mr. Lipton, Mr. Stark and Mr. Romine (collectively, the "Selling
Shareholders" and each, individually, a "Selling Shareholder") that number of
shares of Lotus Technologies, Inc. common stock, without par value (the "Common
Stock"), set forth opposite each Selling Shareholder's name on Schedule A hereto
for an aggregate price of $8,025,000 (the "Purchase Price").
1.2 Closing. The purchase and sale of the Common Stock shall
take place at the offices of Brobeck, Phleger & Harrison LLP, Two Embarcadero
Place, 2200 Geng Road, Palo Alto, California 94303, at 11:00 a.m., on June 6,
1996 or at such other location and time as the Company, the Selling Shareholders
and the Purchaser mutually agree upon (which time and place are designated as
the "Closing"). At the Closing, each Selling Shareholder shall deliver to the
Purchaser a certificate representing the Common Stock that the Purchaser is
purchasing from such Selling Shareholder, properly endorsed in blank for
transfer and accompanied by a duly executed stock power in proper form, against
delivery to such Selling Shareholder by the Purchaser of a check or a bank wire
transfer in the amount of the purchase price therefor.
2. Representations and Warranties of the Company and the
Selling Shareholders. In this Agreement, any reference to a "Material Adverse
Effect" with respect to any entity means any event, change or effect that is
materially adverse to the condition (financial or otherwise), properties,
assets, liabilities, business, operations, results of operations or prospects of
such entity, taken as a whole. Each of the Company and the Selling Shareholders
hereby represents and warrants to the Purchaser that, except as set forth on a
Schedule of Exceptions attached hereto as Schedule B specifically identifying
the relevant Section or subsection hereof:
1.
<PAGE> 6
2.1 Organization, Good Standing and Qualification. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to carry on its business as now conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a Material Adverse Effect on the
Company.
2.2 Capitalization.
(a) Common Stock. The authorized capital of the
Company consists of 10,000,000 shares of Common Stock, 3,780,000 shares of which
are issued and outstanding.
(b) Rights. There are no outstanding options,
warrants, subscriptions, rights (including conversion or preemptive rights or
first refusal rights) or agreements for the purchase or acquisition from the
Company, or from any shareholder, of any shares of the Company's capital stock
or securities convertible into its capital stock. Neither the Company nor any
Selling Shareholder is a party or subject to any agreement or understanding, and
there is no agreement or understanding between any persons and/or entities, that
affects or relates to the voting or giving of written consents with respect to
any security or by a director of the Company.
(c) Holders. All holders of securities of the Company
and all persons who have a right to hold securities of the Company are set forth
by name and the type and amount of securities and/or other rights so held in
Schedule A.
2.3 Subsidiaries. The Company does not presently own or
control, and has never owned or controlled, directly or indirectly, any interest
in any other corporation, association, partnership or other business or
investment entity.
2.4 Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement and the transactions
contemplated herein, and the performance of all obligations of the Company
hereunder, has been taken or will be taken prior to the Closing. This Agreement
has been duly executed and delivered by the Company and constitutes a valid and
legally binding obligation of the Company, enforceable in accordance with its
terms, subject, as to the enforcement of remedies, to applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting creditors'
rights generally, to general equitable principles and to limitations on the
enforceability of indemnification provisions as applied to certain types of
claims arising hereafter, if any, under the federal securities law.
2.5 Common Stock. The outstanding shares of Common Stock are
duly and validly authorized and issued, are fully paid and nonassessable, and
were issued in compliance with all applicable federal and state securities laws.
2.
<PAGE> 7
2.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, regional, state or local governmental authority on the
part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement. Based in part on the
representations of the Purchaser in Sections 4.3 and 4.5 of this Agreement, the
offer and sale of the Common Stock pursuant to the terms of this Agreement are
exempt from the registration requirements of Section 5 of the Securities Act of
1933, as amended (the "Act").
2.7 Returns. The Company has not had any of its products
returned by a purchaser or user thereof, other than for minor, nonrecurring
warranty problems. The Company is not aware of any pending warranty claims other
than those that arise in the ordinary course of business and which will not
require a bulk recall or modification of products currently sold to customers.
2.8 Litigation. There are no actions, suits, proceedings and
investigations pending or, to the Company's or the Selling Shareholders'
knowledge, currently threatened against the Company. There is no action, suit,
proceeding, or investigation pending or, to the Company's or the Selling
Shareholders' knowledge, currently threatened against the Company which
questions the validity of this Agreement or the right of the Company to enter
into such Agreement, or to consummate the transactions contemplated hereby, or
which might result, either individually or in the aggregate, in a Material
Adverse Effect on the Company, or any change in the current equity ownership of
the Company. The Company is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no legal action, lawsuit, legal proceeding or
investigation related to any of the foregoing by the Company currently pending
or which the Company intends to initiate.
2.9 Intellectual Property.
(a) The Company owns, or licenses or otherwise
possesses legally enforceable rights to use all patents, trademarks, trade
names, service marks, copyrights, and any applications therefor, schematics,
technology, know-how, trade secrets, inventory, ideas, algorithms, processes,
computer software programs or applications (in both source code and object code
form), and tangible or intangible proprietary information or material
("Intellectual Property") that are used in the business of the Company as
currently conducted, except to the extent that the failure to have such rights
have not had and would not reasonably be expected to have a Material Adverse
Effect on the Company.
(b) The Schedule of Exceptions lists (i) all patents
and patent applications and all registered and unregistered trademarks, trade
names, service marks, and copyrights, which the Company considers to be material
its business and included in the Intellectual Property, including the
jurisdictions in which each such Intellectual Property right has been issued or
registered or in which any application for such issuance and registration has
been filed, (ii) all material licenses, sublicenses and other agreements as to
which the
3.
<PAGE> 8
Company is a party and pursuant to which any person is authorized to use any
Intellectual Property, and (iii) all material licenses, sublicenses and other
agreements as to which the Company is a party and pursuant to which the Company
is authorized to use any third party patents, trademarks or registered
copyrights, including software ("Third Party Intellectual Property Rights")
which are incorporated in, are, or form a part of any Company product that is
material to its business.
(c) To the best of the Company's knowledge, there is
no material unauthorized use, disclosure, infringement or misappropriation of
any Intellectual Property rights of the Company, any trade secret material to
the Company, or any Intellectual Property right of any third party to the extent
licensed by or through the Company, by any third party, including any employee
or former employee of the Company. The Company has not entered into any
agreement to indemnify any other person against any charge of infringement of
any Intellectual Property, other than indemnification provisions contained in
purchase orders arising in the ordinary course of business.
(d) The Company is not, nor will it as a result of
the execution and delivery of this Agreement or the performance of its
obligations under this Agreement, be in breach of any license, sublicense or
other agreement relating to the Intellectual Property or Third Party
Intellectual Property Rights, the breach of which would have a Material Adverse
Effect on the Company.
(e) All patents and registered trademarks, service
marks and copyrights held by the Company and listed on the Schedule of
Exceptions are valid and existing. The Company (i) has not been sued in any
suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other proprietary right of any third party and (ii) has not brought any
action, suit or proceeding for infringement of Intellectual Property or breach
of any license or agreement involving Intellectual Property against any third
party. To the best of the Company's knowledge, the manufacture, marketing,
licensing or sale of the Company 's products does not infringe any patent,
trademark, service mark, copyright, trade secret or other proprietary right of
any third party, except where such infringement would not have a Material
Adverse Effect on the Company.
(f) The Company has secured valid written assignments
from all consultants and employees who contributed to the creation or
development of Intellectual Property of the rights to such contributions that
the Company does not already own by operation of law.
(g) The Company has taken reasonable and appropriate
steps to protect and preserve the confidentiality of all Intellectual Property
not otherwise protected by patents or copyright ("Confidential Information").
All use,
4.
<PAGE> 9
disclosure or appropriation of Confidential Information owned by the Company by
or to a third party has been pursuant to the terms of a written agreement
between the Company and such third party. All use, disclosure or appropriation
of Confidential Information not owned by the Company has been pursuant to the
terms of a written agreement between the Company and the owner of such
Confidential Information, or is otherwise lawful.
2.10 Proprietary Information and Inventions Agreements. Each
employee, officer, director and consultant of the Company has executed a
non-disclosure agreement in the form provided to counsel to the Purchaser. The
Company is not aware that any of such employees, officers, directors or
consultants are in material violation thereof, and the Company will use its best
efforts to prevent any such violation.
2.11 Compliance With Other Instruments. The Company is not in
violation of any provision of its Articles of Incorporation or Bylaws or in
violation or default of any provision of any instrument, judgment, order, writ,
decree or contract to which it is a party or by which it is bound or any
provision of any federal or state statute, rule or regulation applicable to the
Company, which violation or default would have a Material Adverse Effect on the
Company. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in any such
violation or default or require any consent under or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
violation or default under any such provision, instrument, judgment, order,
writ, decree or contract, or an event which results in the creation of any lien,
charge or encumbrance upon any assets of the Company where any such event would
have a Material Adverse Effect on the Company.
2.12 Agreements; Action.
(a) Any agreements, understandings, instruments,
contracts or proposed transactions to which the Company is a party or by which
it is bound which involve obligations of or payments to the Company in excess of
$5,000 are listed on Schedule C hereto.
(b) No defaults exist with respect to the Company
(or, to the Company's knowledge, any other party) under any contract or
agreement to which the Company is a party that would have a Material Adverse
Effect on the Company, either individually or in the aggregate.
(c) Since May 17, 1996, dividends and distributions
made by the Company to its shareholders and bonuses paid by the Company to its
employees have not exceeded, in the aggregate $350,000.
(d) The Company has no obligation and is not a party
to a contract, oral or written, which would result in the payment of a bonus to
any employee or shareholder subsequent to the date hereof.
5.
<PAGE> 10
2.13 Disclosure. The Company has fully provided the Purchaser
and the Purchaser's legal counsel with all the information in the Company's
possession that the Purchaser has requested in determining whether to purchase
the Common Stock offered by the Selling Shareholders. Neither Section 2 of this
Agreement nor any schedule or exhibit attached to this Agreement nor any
certificate delivered pursuant hereto that, in any such case, has been or will
be provided by or on behalf of the Company contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
made herein or therein not misleading in light of the circumstances under which
they were made.
2.14 Title to Property and Assets. The Company owns its
property and assets free and clear of all mortgages, liens, loans and
encumbrances, except such encumbrances and liens which arise in the ordinary
course of business and do not materially impair the Company's ownership or use
of such property or assets. With respect to the property and assets it leases,
the Company is in compliance with such leases in all material respects and holds
a valid leasehold interest free of any material liens, claims or encumbrances.
The property and assets of the Company that are used in the operation of its
business are in good operating condition and repair.
2.15 Financial Statements. The Company has delivered to
Purchaser its audited financial statements for the fiscal year ended January 31,
1996, and its unaudited financial statements (balance sheet, statement of
operations and statement of cash flows) at, and for the two-month period ended
March 31, 1996 (collectively, the "Financial Statements"). The Financial
Statements have been prepared in accordance with generally accepted accounting
principles (except that the unaudited financial statements do not have notes
thereto) applied on a consistent basis throughout the periods indicated and with
each other. The Financial Statements are complete and correct in all material
respects and accurately set out and describe the financial condition and
operating results of the Company as of the dates, and for the periods, indicated
therein, subject to normal year-end audit adjustments. The Company's net book
value (total assets minus total liabilities) as of the date hereof is not less
than $0.
2.16 Changes. Since March 31, 1996, except as permitted by
Section 2.12(c), there has not been:
(a) any change in the financial condition or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business which have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not
covered by insurance, which would have a Material Adverse Effect on the Company
(as its business is currently conducted);
6.
<PAGE> 11
(c) any sale, exchange, or other disposition of the
Company's assets or rights, other than in the ordinary course of business, or
any waiver by the Company of a valuable right or of a material debt owed to it,
or any material change or amendment to or default under a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject;
(d) any declaration, authorization or payment of any
dividend or other distribution of the assets of the Company, or any agreement to
declare, authorize or pay any such dividend or distribution;
(e) any satisfaction or discharge of any lien, claim
or encumbrance or payment of any obligation by the Company, except in the
ordinary course of business and which is not material to the assets, properties,
financial condition, operating results or business of the Company;
(f) any commitments entered into by the Company
involving capital expenditures in excess of $5,000, or any debt obligation or
liability (whether absolute or contingent), incurred by the Company in excess of
$5,000 or that would be required under generally accepted accounting principles
to be reflected in the Company's financial statements (whether or not presently
outstanding) except current liabilities incurred, and obligations under
agreements entered into, in the ordinary course of business;
(g) any increase in the compensation or rate of
compensation or commissions payable or to become payable by the Company to any
of its directors or officers, or any payment of any bonus, profit-sharing amount
or other extraordinary compensation to any such person or any change in any then
existing bonus, profit-sharing, retirement or other similar plan, agreement or
arrangement or any adoption of or entry into any new bonus, profit-sharing,
group life or health insurance, or other similar plan, agreement or arrangement;
(h) any loans made by the Company to any of the
Company's directors, officers or employees, or any of their affiliates, other
than travel advances made in the ordinary course of business;
(i) to the Company's and the Selling Shareholders'
knowledge, any other event or condition internal to the Company (e.g., other
than external events or conditions, including without limitation, market
conditions and trends, competitive product announcements, etc.) of any character
which might have a Material Adverse Effect on the Company (as its business is
currently conducted);
(j) any material increase in the returns or rates of
returns by consumers or distributors of any products of the Company, any
termination or failure to renew by a distributor of any material contract or
arrangement for the sale or distribution of
7.
<PAGE> 12
the Company's products or any material and adverse change in the terms of any
such contracts or arrangements; or
(k) any termination or failure to renew by a supplier
of any material contract or arrangement for the sale or supply of parts
necessary for the manufacture of the Company's products or any material and
adverse change in the terms of any such contract.
2.17 Employee Benefit Plans. The Company does not have any
Employee Benefit Plan as defined in the Employee Retirement Income Security Act
of 1974, as amended.
2.18 Taxes. The Company has filed all income tax returns
(federal, state, foreign and local) required to be filed by it, and all income
taxes shown to be due and payable on such returns or on any assessments received
by the Company and all other taxes (federal, state, foreign and local) due and
payable by the Company on or before the date hereof have been paid. The income
tax returns filed by the Company are true and correct in all material respects.
There are no agreements, waivers or other arrangements providing for an
extension of time with respect to the assessment of any tax or deficiency
against the Company, nor are there any actions, suits, proceedings,
investigations or claims now pending against the Company in respect of any tax
or assessment, or, to the Company's knowledge, any matters under discussion with
any federal, state, foreign or local authority relating to any taxes or
assessments, or any claims for additional taxes or assessments asserted by any
such authority. The provisions made for income taxes on the Financial Statements
are expected to be sufficient for the payment of all unpaid federal, state,
foreign and local income taxes of the Company for all periods prior to such
date.
2.19 Bank Accounts. The Schedule of Exceptions sets forth the
names and locations of all banks, trust companies, savings and loan associations
and other financial institutions at which the Company maintains accounts of any
nature and the names of all persons authorized to draw thereon or make
withdrawals therefrom.
2.20 Insurance. The Company has in full force and effect fire
and casualty insurance policies as listed in the Schedule of Exceptions. The
Company has in full force and effect products liability and errors and omissions
insurance in amounts set forth in the Schedule of Exceptions.
2.21 Minute Books. The minute books of the Company contain a
record of all meetings of directors and shareholders since the time of
incorporation and reflect all material transactions referred to in such minutes
accurately in all material respects.
2.22 Labor Agreements and Actions. The Company is not bound by
or subject to any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or has sought
to represent any of the employees, representatives or agents of the Company.
8.
<PAGE> 13
2.23 Brokers' or Finders' Fees. The Company has not incurred
and will not incur, directly or indirectly, any liability for brokers' or
finders' fees, agents' commissions or other similar charges in connection with
this Agreement or the transactions contemplated hereby other than the fee to be
paid by the Purchaser to Broadview Associates, L.P. ("Broadview") in connection
with the transactions contemplated by this Agreement.
2.24 Accounts Receivable. Subject to any reserves set forth in
the Financial Statements, the accounts receivable shown on the Financial
Statements represent and will represent bona fide claims against debtors for
sales and other charges, and are not subject to discount except for normal cash
and immaterial trade discounts. The amount carried for doubtful accounts and
allowances disclosed in the Financial Statements is sufficient to provide for
any losses which may be sustained on realization of the receivables.
2.25 Related Party Transactions. No employee, officer or
director of the Company or member of his or her immediate family is indebted to
the Company, nor is the Company indebted (or committed to make loans or extend
or guarantee credit) to any of such persons. None of such persons has any direct
or indirect ownership interest in any firm or corporation with which the Company
is affiliated or with which the Company has a business relationship, or any firm
or corporation that competes with the Company, except that the employees,
officers or directors of the Company and members of their immediate families may
own stock in publicly traded companies that may compete with the Company. No
member of the immediate family of any officer or director of the Company is
directly interested in any material contract with the Company.
2.26 Manufacturing and Marketing. The Company has not granted
rights to manufacture, produce, assemble, license, market or to sell its
products to any other person and is not bound by any agreement that affects the
Company's exclusive right to develop, manufacture, assemble, distribute, market
or sell its products.
2.27 Inventory. The inventories shown on the Financial
Statements or thereafter acquired by the Company consisted of items of a
quantity and quality usable or salable in the ordinary course of business. Since
March 31, 1996, the Company has continued to replenish inventories in a normal
and customary manner consistent with past practices. The Company has not
received written or oral notice that it will experience in the foreseeable
future any difficulty in obtaining, in the desired quantity and quality and at a
reasonable price and upon reasonable terms and conditions, the raw materials,
supplies or component products required for the manufacture, assembly or
production of its products. The values at which inventories are carried reflect
the inventory valuation policy of the Company, which is consistent with its past
practice and in accordance with generally accepted accounting principles applied
on a consistent basis. Since March 31, 1996, due provision was made on the books
of the Company in the ordinary course of business consistent with past practices
to provide for all slow-moving, obsolete, or unusable inventories to their
estimated useful or scrap values and such inventory reserves are adequate to
provide for such slow-moving, obsolete or unusable inventory and inventory
shrinkage.
9.
<PAGE> 14
2.28 Customers and Suppliers. As of the date hereof, no
customer which individually accounted for more than 5% of the Company's gross
revenues during the 12 month period preceding the date hereof, and no supplier
of the Company, has canceled or otherwise terminated, or made any written threat
to the Company to cancel or otherwise terminate its relationship with the
Company, or has at any time on or after March 31, 1996 decreased materially its
services or supplies to the Company in the case of any such supplier, or its
usage of the services or products of the Company in the case of such customer,
and to the Company's knowledge, no such supplier or customer intends to cancel
or otherwise terminate its relationship with the Company or to decrease
materially its services or supplies to the Company or its usage of the services
or products of the Company, as the case may be. The Company has not engaged in
any fraudulent conduct with respect to any customer or supplier of the Company.
2.29 Employee Matters. There are no claims pending, or to the
Company's or Selling Shareholder's knowledge, currently threatened, resulting
from the Company's violation of any employment, labor or wage laws. All payments
due from the Company on account of employee health and welfare insurance have
been paid and all severance, sick or vacation payments by the Company which are
or were due under the terms of any agreement or otherwise have been paid. All
employees of the Company have been hired on an "at will" basis.
3. Representations and Warranties of the Selling Shareholders.
Each of the Selling Shareholders hereby represents and warrants to the Purchaser
for himself and not for the other Selling Shareholders, that:
3.1 Authorization. All acts and conditions required by law on
the part of the Selling Shareholder to authorize the execution and delivery of
this Agreement by such Selling Shareholder and the transactions contemplated
herein and the performance of all obligations of such Selling Shareholder
hereunder have been duly performed and obtained, and this Agreement constitutes
a valid and legally binding obligation of the Selling Shareholder, enforceable
in accordance with its terms, subject, as to the enforcement of remedies, to
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting creditors' rights generally, to general equitable principles and to
limitations on the enforceability of indemnification provisions as applied to
certain types of claims arising hereafter, if any, under the federal securities
laws.
3.2 Compliance With Other Instruments. The execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in any violation or default of any provision
of any instrument, judgment, order, writ, decree or contract to which such
Selling Shareholder is a party or by which he or she is bound, or require any
consent under or be in conflict with or constitute, with or without the passage
of time and giving of notice, either a violation or default under any such
provision.
10.
<PAGE> 15
3.3 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, regional, state or local governmental authority of the
United States on the part of such Selling Shareholder is required in connection
with the consummation of the transactions contemplated by this Agreement, except
for filings, if any, required pursuant to applicable federal and state
securities laws, which filings will be made within the required statutory
period.
3.4 Litigation. There is no action, suit, proceeding, or
investigation pending or, to such Selling Shareholders' knowledge, currently
threatened against such Selling Shareholder which questions the validity of this
Agreement or the right of such Selling Shareholder to enter into this Agreement
or to consummate the transactions contemplated hereby.
3.5 Title to Stock. Such Selling Shareholder has good title to
the Common Stock to be transferred by such Selling Shareholder to the Purchaser
under this Agreement, free and clear of any lien, pledge, security interest or
other encumbrance (other than restrictions on transfer arising under applicable
securities laws) and, upon delivery of the shares of Common Stock at the Closing
as provided for in this Agreement, and assuming the Purchaser is acquiring the
Common Stock in good faith and without notice of any adverse claim, the
Purchaser will acquire good title thereto, free and clear of any lien, pledge,
security interest or encumbrance (other than restrictions on transfer arising
under applicable securities laws).
3.6 Disclosure. Such Selling Shareholder has fully provided
the Purchaser and the Purchaser's legal counsel with all the information in such
Selling Shareholders' possession that the Purchaser has requested in determining
whether to purchase the Common Stock offered by such Selling Shareholder.
Neither Section 3 of this Agreement nor any schedule or exhibit attached to this
Agreement nor any certificate delivered pursuant hereto that, in any such case,
has been or will be provided by or on behalf of such Selling Shareholder
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements made herein or therein not misleading in
light of the circumstances under which they were made.
3.7 Intellectual Property of the Selling Shareholders. Each of
the Selling Shareholders individually represents and warrants to the Purchaser
as follows:
(a) The conduct of the Company's business as now
conducted and as now proposed to be conducted does not violate, conflict with or
infringe any Intellectual Property of the Selling Shareholder or any affiliate
of the Selling Shareholder.
(b) The Selling Shareholder does not now conduct any
business that violates, conflicts with or infringes any Intellectual Property of
the Company and does not now propose to conduct any such business, directly or
through an affiliate.
11.
<PAGE> 16
(c) Neither the Selling Shareholder nor any affiliate
of the Selling Shareholder (other than the Company) is a party to or otherwise
bound by any option, license or agreement of any kind (whether formal or
informal) to which the Company is a party or by which the Company is bound,
which, in any such case (i) conflicts with the Company's representation in
Section 2.9 hereof or (ii) would give the Selling Shareholder any continuing
interest in, or would give the Company any continuing payment obligation to the
Selling Shareholder with respect to, any Intellectual Property formerly owned by
the Selling Shareholder and currently used by the Company.
(d) The non-disclosure agreement between the Selling
Shareholder and the Company is in full force and effect, has not been amended or
modified in any respect and no provision of such agreement has been waived.
4. Representations and Warranties of the Purchaser. The
Purchaser hereby represents and warrants to the Company and the Selling
Shareholders that:
4.1 Organization, Good Standing and Qualification. The
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of the State of California and has all requisite corporate power
and authority to carry on its business as now conducted. The Purchaser is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a Material Adverse Effect on the
Purchaser.
4.2 Authorization. All corporate action on the part of the
Purchaser, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement and the transactions
contemplated herein, and the performance of all obligations of the Purchaser
hereunder, has been taken or will be taken prior to the Closing. This Agreement
has been duly executed and delivered by the Purchaser and constitutes a valid
and legally binding obligation of the Purchaser, enforceable in accordance with
its terms, subject, as to the enforcement of remedies, to applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting creditors'
rights generally, to general equitable principles and to limitations on the
enforceability of indemnification provisions as applied to certain types of
claims arising hereafter, if any, under the federal securities law.
4.3 Purchase for Investment. This Agreement is made with the
Purchaser in reliance upon the Purchaser's representation which, by the
Purchaser's execution of this Agreement, the Purchaser hereby confirms, that the
Common Stock to be received by the Purchaser will be acquired for investment and
not with a view to the distribution of any part thereof, and that the Purchaser
has no present intention of selling, granting any participation in, or otherwise
distributing the same in a manner contrary to the Act or applicable state
securities laws.
4.4 Disclosure of Information; Due Diligence. The Purchaser
represents that it has made an independent investigation and has had an
opportunity to ask questions of
12.
<PAGE> 17
and receive answers from the Company and the Selling Shareholders regarding the
Company and the terms and conditions of the offering of the Common Stock offered
hereby and to obtain additional information necessary to verify the accuracy of
the information supplied or to which it had access. The foregoing, however, does
not limit or modify the representations and warranties of the Company or the
Selling Shareholders contained herein.
4.5 Investment Experience; Accredited Investor Status. The
Purchaser is able to fend for itself in the transactions contemplated by this
Agreement, can bear the economic risk of its investment (including possible
complete loss of such investment) for an indefinite period of time and has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment in the Common Stock. The
Purchaser represents it has not been organized for the purpose of acquiring the
Common Stock. The Purchaser understands that the Common Stock has not been
registered under the Act, or under the securities laws of any jurisdiction by
reason of reliance upon certain exemptions, and that the reliance of the Company
and the Selling Shareholders on such exemptions is predicated upon the accuracy
of the Purchaser's representations and warranties in this Section 4. The
Purchaser is an "accredited investor" as defined in Rule 501(a) of Regulation D.
The Purchaser acknowledges that the certificates representing the stock to be
received by Purchaser will bear legends repeating the restrictions on resale
contained in applicable securities laws.
4.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, regional, state or local governmental authority on the
part of the Purchaser is required in connection with the consummation of the
transactions contemplated by this Agreement.
4.7 Insolvency. The consummation of the transactions
contemplated by this Agreement will not render the Purchaser insolvent or
bankrupt under any federal or state insolvency or bankruptcy law.
5. Conditions of the Purchaser's Obligations at the Closing.
The obligations of the Purchaser under Section 1.1 of this Agreement are subject
to the fulfillment at or before the Closing of each of the following conditions,
unless waived by the Purchaser.
5.1 Representations and Warranties. The representations and
warranties of (i) the Company and the Selling Shareholders contained in Section
2 hereof and (ii) each of the Selling Shareholders contained in Section 3
hereof, shall be true and correct on and as of the Closing with the same effect
as though such representations and warranties had been made as of the date of
the Closing.
5.2 Performance. The Company and the Selling Shareholders
shall have performed and complied with all agreements, obligations and
conditions contained in this
13.
<PAGE> 18
Agreement that are required to be performed or complied with by them on or
before the Closing.
5.3 Compliance Certificate. The President of the Company shall
have delivered to the Purchaser at the Closing a certificate certifying that the
conditions specified in Sections 5.1 and 5.2, as those conditions relate to the
Company, have been fulfilled and stating that there has been no material adverse
change in the assets, condition, prospects or business of the Company, financial
or otherwise, since March 31, 1996. Each of the Selling Shareholders shall have
delivered to the Purchaser at the Closing a certificate certifying that the
conditions specified in Sections 5.1 and 5.2, as those conditions relate to the
Selling Shareholders, respectively, have been fulfilled.
5.4 Securities Laws Qualifications. The offer and sale of the
Common Stock to the Purchaser pursuant to this Agreement shall be registered or
qualified or exempt from registration or qualification under all applicable
securities laws.
5.5 Proceedings and Documents. All corporate and other
proceedings of the Company in connection with the transactions contemplated at
the Closing and all documents incident thereto, shall be reasonably satisfactory
in form and substance to the Purchaser's counsel, and the Purchaser and its
counsel shall have received all such counterpart original and certified or other
copies of such documents as they may reasonably request.
5.6 Share Certificates. The Selling Shareholders shall have
delivered to the Purchaser share certificates representing the shares of Common
Stock to be purchased hereunder by the Purchaser, properly endorsed in blank for
transfer and accompanied by a duly executed stock power in proper form.
5.7 Government and Third-Party Consents. The Company shall
deliver to the Purchaser at or prior to the Closing all government and
third-party consents, releases, authorizations and approvals necessary for the
consummation of the transactions contemplated by this Agreement.
5.8 Company Options. As of the date of the Closing, there will
not be outstanding any options to purchase shares of the Company's stock.
5.9 Company Warrants. As of the date of the Closing, there
will not be outstanding any warrants to purchase shares of the Company's stock.
5.10 Selling Shareholder Non-Competition and Non-Disclosure
Agreement. Mr. Lipton, Mr. Stark and Mr. Romine shall have entered into a non-
competition and non-disclosure agreement with Purchaser in the form attached
hereto as of Exhibit A.
14.
<PAGE> 19
5.11 Opinion of Company Counsel. The Purchaser shall have
received from Graham & James LLP, counsel for the Company, an opinion, dated as
of the date of the Closing, substantially in the form attached hereto as Exhibit
B.
5.12 Opinion of Selling Shareholder Counsel. The Purchaser
shall have received from Graham & James LLP, counsel to the Selling
Shareholders, an opinion, dated as of the date of the Closing, substantially in
the form attached hereto as Exhibit C.
6. Conditions of the Company's and Selling Shareholder's
Obligations at Closing. The obligations of the Company and the Selling
Shareholders under this Agreement are subject to the fulfillment on or before
the Closing of each of the following conditions:
6.1 Representations and Warranties. The representations and
warranties of the Purchaser contained in Section 4 hereof, shall be true and
correct on and as of the Closing with the same effect as though such
representations and warranties had been made as of the date of the Closing.
6.2 Performance. The Purchaser shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
6.3 Compliance Certificate. The President or Chief Financial
Officer of the Purchaser shall have delivered to the Company at the Closing a
certificate stating that the conditions specified in Sections 6.1 and 6.2 have
been fulfilled.
6.4 Securities Laws Qualification. The offer and sale to the
Purchaser of the Common Stock shall be registered, qualified or exempt from
registration or qualification under all applicable securities laws.
6.5 Proceedings and Documents. All corporate and other
proceedings of the Purchaser in connection with the transactions contemplated at
the Closing and all documents incident thereto, shall be reasonably satisfactory
in form and substance to the Company's and Selling Shareholders' counsel, and
the Company, the Selling Shareholders and their counsel shall have received all
such counterpart original and certified or other copies of such documents as
they may reasonably request.
6.6 Government Consents. The Purchaser shall deliver to the
Company and the Selling Shareholders at or prior to the Closing all government
consents, releases, authorizations and approvals necessary for the consummation
of the transactions contemplated by this Agreement.
6.7 Payment of Purchase Price. The Purchaser shall have
delivered to each Selling Shareholder the purchase price with respect to the
Common Stock to be purchased
15.
<PAGE> 20
from such Selling Shareholder in the form of a check or bank wire transfer of
immediately available funds.
6.8 Payment of Finder's Fee. As soon as practicable following
the Closing, Purchaser shall pay to Broadview a finder's fee of $295,000 in
connection with the transactions contemplated pursuant to this Agreement.
6.9 Opinion of Purchaser Counsel. The Company and the Selling
Shareholders shall have received from Brobeck, Phleger & Harrison LLP, counsel
to the Purchaser, an opinion dated as of the Closing, substantially in the form
attached hereto as Exhibit D.
7. Indemnification.
7.1 Right to Indemnification. Each of the Selling
Shareholders, jointly and severally, agrees to indemnify and hold harmless the
Purchaser (for purposes of Sections 7.1, 7.2 and 7.3 hereof, the "Indemnified
Party") from the date of the Closing until the date three (3) months after the
date of the Closing and each of the Selling Shareholders, severally, agrees to
indemnify and hold harmless the Indemified Party from the date three (3) months
after the date of the Closing until the first anniversary of the date of the
Closing from and against and shall reimburse the Indemnified Party against and
in respect of any and all losses, claims, damages, costs, expenses, obligations,
liabilities, remedies or penalties (collectively, "Losses") that the Indemnified
Party shall suffer or incur relating to, arising out of or in connection with
any breach or inaccuracy of the representations and warranties made by the
Company and Selling Shareholders in Sections 2 and 3 of this Agreement;
including any expenses reasonably incurred by the Indemnified Party in
connection with defending any such action or claim (including, without
limitation, reasonable fees and disbursements of counsel) in litigation to which
the Indemnified Party is a party. With respect to the foregoing, the Selling
Shareholders will not, however, be responsible for any Losses that are finally
judicially determined to have resulted from the bad faith or gross negligence of
the Indemnified Party.
7.2 Limitation. The liability of each Selling Shareholder
under this Section 7 and for any other Losses relating to, arising out of or in
connection with this Agreement or other transactions contemplated hereby shall
be limited to the Purchase Price set forth opposite each Selling Shareholder's
name on Schedule A hereto and no claim for indemnification hereunder shall be
asserted until Losses exceed $100,000 in the aggregate and such Losses exceed
$100,000, a claim by the Indemnified Party may be made for all additional Losses
above $100,000. A written notice specifying the specific basis for such claim
must be delivered to the Selling Shareholders before the first anniversary of
the date of the Closing. Section 7 is the exclusive remedy of the Purchaser with
respect to any Losses incurred as a result of the matters specified in Section
7.1, provided, however, nothing in this Section 7 shall limit, in any manner,
any remedy at law or in equity to which the
16.
<PAGE> 21
Purchaser shall be entitled against the Selling Shareholders as a result of
wilful fraud or intentional misrepresentation by any Selling Shareholders.
In any case in which claims have been asserted as and when
required hereunder, the Selling Shareholders and the Indemnified Party agree
that the indemnity obligations of the Selling Shareholders with respect to such
matters shall continue in full force and effect until such matters have been
settled by agreement of the Selling Shareholders and the Indemnified Party.
7.3 Notification, Etc. In case any proceeding (including any
governmental investigation) shall be instituted involving the Indemnified Party,
the Indemnified Party shall promptly notify the Selling Shareholders in writing
and the Selling Shareholders, upon request of the Indemnified Party, shall
retain counsel reasonably satisfactory to the Indemnified Party to represent the
Indemnified Party and any others the Selling Shareholders may designate in such
proceeding and the fees and disbursements of such counsel related to such
proceeding shall be paid by the Selling Shareholders which shall thereupon
reduce the obligations of the Selling Shareholders in Section 7.2 hereof. In any
such proceeding, the Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party. It is understood that the Selling Shareholders shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm (in addition to any local counsel) for the Indemnified Party. The
Selling Shareholders shall not be liable for any settlement of any proceeding
effected without the written consent of all of them, but if settled with such
consent or if there be a final judgment for the plaintiff, the Selling
Shareholders agree to indemnify the Indemnified Party from and against any loss
or liability by reason of such settlement or judgment. The rights of the
Indemnified Party to indemnification under this Section 7 are exclusive;
provided, however, that any rights or remedies asserted against the Selling
Shareholder shall be subject to the limitation set forth in Section 7.2 hereof.
8. Miscellaneous.
8.1 Survival of Warranties. The warranties, representations
and covenants contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing until the first
anniversary of the date of the Closing, notwithstanding any investigation by the
Purchaser.
8.2 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
17.
<PAGE> 22
8.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within the
State of California.
8.4 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.5 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
8.6 Notices. Unless otherwise provided, any notice required
or permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon (i) personal delivery to the party to be notified, or
(ii) upon deposit with the United States Post Office, postage prepaid,
registered or certified with return receipt requested and addressed to the party
to be notified at the address indicated for such party on the signature page
hereof, or (iii) upon confirmation of facsimile transmission at the facsimile
number indicated for such party on the signature page hereof, or (iv) at such
other address as such party may designate by 10 days' advance written notice to
the other parties given in the foregoing manner.
8.7 Cost and Expense. Each of the Purchaser, Company and
Selling Shareholders will be responsible for its own costs and expenses in
connection with the negotiation and consummation of the transactions
contemplated hereby. All legal expenses of the Company in excess of $15,000
related to the transactions contemplated pursuant to this Agreement will be the
responsibility of the Selling Shareholders.
8.8 Amendments and Waivers. After the Closing, any term of
this Agreement may be amended and the observance of any term may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only with the written consent of a majority in interest of the
Selling Shareholders and the Purchaser, provided that no such amendment would
affect any Shareholder in a manner different than the other Shareholders will be
treated.
8.9 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement, and the balance of this Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
8.10 Entire Agreement. This Agreement and the other documents
delivered at the Closing constitute the full and entire understanding and
agreement between the parties with respect to the subject matter hereof and
supersede all prior agreements with respect to
18.
<PAGE> 23
the subject matter hereof,including without limitation the letter of intent
dated May 16, 1996 among the Purchaser, the Company and the Selling
Shareholders.
8.11 California Corporate Securities Law. THE SALE OF THE
SECURITIES THAT IS THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AND IN THE ABSENCE OF
AN EXEMPTION FROM SUCH QUALIFICATION REQUIREMENT, THE SALE OF SUCH SECURITIES OR
THE PAYMENT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH
QUALIFICATION IS UNLAWFUL. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH EXEMPTION BEING APPLICABLE.
8.12 Publicity. Purchaser and the Company will not make any
press release or other public announcement concerning this Agreement or the
transactions contemplated hereby except with the prior approval of the other,
except for such disclosures as may be required by applicable law or securities
exchange rules and regulations. A Selling Shareholder will not make any press
release or other public announcement concerning this Agreement or the
transactions contemplated hereby except with the prior approval of the
Purchaser.
8.13 Expenses; Attorneys' Fees. If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
19.
<PAGE> 24
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
COMPANY
LOTUS TECHNOLOGIES, INC.
-----------------------------------------
Lewis T. Lipton, President
Address: 130-C Knolls Drive
Los Gatos, CA 95030
SELLING SHAREHOLDERS
-------------------------------------------------
Lewis T. Lipton, Trustee for the Lipton Separate
Property Trust dated January 12, 1993
Address: 17660 Vista Avenue
Monte Sereno, CA 95030
-------------------------------------------------
Dennis C. Stark
Address: #5 No Name Road
Los Gatos, CA 95030
-------------------------------------------------
Steven Romine
Address: 671 Cresci Road
Los Gatos, CA 95030
<PAGE> 25
PURCHASER
INTEVAC, INC.
------------------------------------------------
Norman H. Pond, President
Address: 3550 Bassett Street
Santa Clara, CA 95054
<PAGE> 26
<TABLE>
<CAPTION>
SCHEDULE A
SCHEDULE OF SELLING SHAREHOLDERS
Number of Shares
Selling Shareholder of Common Stock Purchase Price
- ------------------- ---------------- --------------
<S> <C> <C>
Lewis T. Lipton, Trustee for
the Lipton Separate Property
Trust dated January 12, 1993 1,260,000 $2,675,000.00
Dennis C. Stark 1,260,000 $2,675,000.00
Steven Romine 1,260,000 $2,675,000.00
Total 3,780,000 $8,025,000.00
========= =============
</TABLE>
<PAGE> 27
SCHEDULE B
SCHEDULE OF EXCEPTIONS
<PAGE> 28
SCHEDULE C
SCHEDULE OF MATERIAL CONTRACTS
<PAGE> 29
EXHIBIT A
SELLING SHAREHOLDER
NON-COMPETITION AND NON-DISCLOSURE AGREEMENT
This SELLING SHAREHOLDER NON-COMPETITION AND NON-DISCLOSURE
AGREEMENT (this "Agreement"), is entered into as of this 6th day of June, 1996
("Effective Date") by and among Intevac, Inc., a California corporation
("Intevac"), and 1~.
WHEREAS, Intevac, Mr. 2~ and certain other parties have
entered into that certain Stock Purchase Agreement dated as of June 6, 1996 (the
"Purchase Agreement"), pursuant to which Intevac is acquiring all of the
outstanding stock of Lotus Technologies, Inc. (the "Stock Purchase");
WHEREAS, in order to induce Intevac to enter into the
Purchase Agreement, the parties hereto have agreed that this Agreement shall
govern their respective rights with respect to the matters set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Non-Competition:
1.1 Covenant Not to Compete. The parties understand and agree
that this Agreement is entered into in connection with the acquisition by
Intevac of all of the issued and outstanding capital stock of Lotus
Technologies, Inc. ("LTI") from the shareholders of LTI. The parties further
understand and agree that Mr. 2~ was a key and significant shareholder of LTI.
Commencing upon the Effective Date and continuing for a period up to and
including the date that is three (3) years after the Effective Date, in
consideration of the performance by Intevac of its respective obligations under
the Purchase Agreement, Mr. 2~ agrees that he shall not engage in any of the
following activities outside of his employment with Intevac:
(a) Enter into or engage in the business of designing,
developing, manufacturing, marketing and selling of equipment for contact
stop/start ("CSS") testing, including stiction, friction, torque and lifetime
aspects related to those characteristics, and track average amplitude and pulse
width 50 measurements as done on hard disks, heads used in hard disk drives and
completed hard disk drives; or
<PAGE> 30
(b) In any way interfere or compete with Intevac in its
operation of the present business of LTI, including projects currently under
development that relate to CSS testing, track average amplitude and pulse width
50 measurements done on hard disks, heads used in hard disk drives and completed
hard disk drives; or
(c) Enter into or engage in any business or activity
which would use LTI technology, trade secrets or know-how; or
(d) Assist any person or entity, in any manner, in the
use of LTI patented technology, trade secrets or know-how.
However, Section 1.1 of this Agreement in no way shall
restrict Mr. 2~ from working for any entity that does not commercially compete
with Intevac.
1.2 Covenant Not to Solicit. Commencing upon the Effective
Date and continuing for a period that is three (3) years after the Effective
Date, Mr. 2~ agrees (i) not to solicit any employee, consultant or other service
provider of Intevac or any of its respective affiliates to terminate his, her or
its employment, consulting or other service arrangement with Intevac or such
affiliate and (ii) not to solicit any business partner of Intevac or any of its
respective affiliates to terminate its relationship with Intevac or such
affiliate or otherwise interfere with such relationship.
1.3 Covenants Not Unduly Restrictive. Mr. 2~ acknowledges,
represents and warrants to Intevac that the covenants of Mr. 2~ in Sections 1.1
and 1.2 hereof are reasonably necessary for the protection of Intevac's
interests under this Agreement and are not unduly restrictive upon Mr. 2~. In
any event, if any restriction set forth in Sections 1.1 and 1.2 hereof is held
to be unreasonable, then Mr. 2~ agrees, and hereby submits, to the reduction and
limitation of such prohibition to such area or period as shall be deemed
reasonable.
2. Non-Disclosure.
2.1 Proprietary Information. Mr. 2~ has in his possession or
may come into his possession in the future information relating to LTI's
business (including, without limitation, trade secrets, computer programs, names
and expertise of employees and consultants, designs, technology, know-how,
ideas, compositions, data, techniques, improvements, inventions (whether
patentable or not), schematics and other technical, business, financial,
customer and product development plans, forecasts, strategies and information),
which to the extent previously, presently or subsequently disclosed to Mr. 2~ is
hereinafter referred to as "Proprietary Information."
2.2 Non-Disclosure of Proprietary Information. Mr. 2~ hereby
agrees, except as Intevac may otherwise consent in writing, (i) to hold the
Proprietary Information in strict confidence and to take all reasonable
precautions to protect such Proprietary
<PAGE> 31
Information, (ii) not to divulge any such Proprietary Information or
any information derived therefrom to any third person, (iii) not to make any use
whatsoever at any time of such Proprietary Information, except when providing
services to Intevac, and (iv) not to copy any such Proprietary Information
except in the performance of his duties to Intevac and its affiliates. Without
granting any right or license, Intevac agrees that the foregoing clauses (i),
(ii), (iii) and (iv) shall not apply with respect to any Proprietary Information
after three (3) years from the date hereof or any information that Mr. 2~ can
document is, through no improper action or inaction by Mr. 2~ or any affiliate,
agent, consultant or employee of Mr. 2~, generally available to the public. Mr.
2~ may make disclosures required by court order, provided Mr. 2~ uses reasonable
efforts to limit such disclosure and to obtain confidential treatment or a
protective order, and has allowed Intevac to participate in the proceeding.
3. REMEDIES.
3.1 Injunctive Relief. The parties hereto further agree that
the covenants and obligations contained in this Agreement relate to special,
unique and extraordinary matters and that a violation of any of such covenants
or obligations may cause Intevac irreparable injury for which adequate remedy at
law will not be available; and, therefore, that upon any such breach of any such
covenant or obligation, or any threat thereof, Intevac shall be entitled to the
immediate remedy of a temporary restraining order, preliminary injunction or
such other form of injunctive or equitable relief in addition to whatever
remedies they might have at law.
3.2 Remedies Cumulative. Intevac's rights and remedies under
this Agreement are cumulative and are in addition to any other rights and
remedies Intevac may have at law or in equity.
4. MISCELLANEOUS.
4.1 Notices. All notices and other communications required or
permitted under this Agreement shall be delivered to the parties at the address
set forth below their respective signature blocks, or at such other address that
they designate by notice to the other party in accordance with this Section 4.1.
All notices and communications must be sent by one of the methods specified
below and shall be deemed to have been received unless otherwise set forth
herein: (i) in the case of personal delivery, on the date of such delivery; (ii)
in the case of telex or facsimile transmission, on the date on which the sender
receives confirmation by telex or facsimile transmission that such notice was
received by the addressee, provided that a copy of such transmission is
additionally sent by mail as set forth in (iv) below; (iii) in the case of
overnight air courier, on the second business day following the day sent, with
receipt confirmed by the courier; and (iv) in the case of mailing by first class
certified or registered mail, postage prepaid, return receipt requested, on the
fifth business day following such mailing. All notices in (i), (ii) and (iii)
must be followed by certified mail, return receipt requested within five (5)
days.
<PAGE> 32
4.2 Assignment. This Agreement shall be binding on, and shall
inure to the benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns; provided, however, that Mr. 2~ may not
assign, transfer or delegate his rights or obligations hereunder and any attempt
to do so shall be null and void.
4.3 Entire Agreement. This Agreement contains the entire
agreement of the parties with respect to the subject matter hereof, and all
prior agreements, written or oral, are merged herein and are of no further force
or effect.
4.4 Amendment. This Agreement may be modified or amended only
by a written agreement signed by the President of Intevac and Mr. 2~.
4.5 Waivers. No waiver of any term or provision of this
Agreement will be valid unless such waiver is in writing signed by the party
against whom enforcement of the waiver is sought. The waiver of any term or
provision of this Agreement shall not apply to any subsequent breach of this
Agreement.
4.6 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
4.7 Severability. The provisions of this Agreement shall be
deemed severable, and if any part of any provision is held illegal, void or
invalid under applicable law, such provision may be changed to the extent
reasonably necessary to make the provision, as so changed, legal, valid and
binding. If any provision of this Agreement is held illegal, void or invalid in
its entirety, the remaining provisions of this Agreement shall not in any way be
affected or impaired but shall remain binding in accordance with their terms.
4.8 Governing Law. The terms of this Agreement shall be
governed by the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within the State
of California.
4.9 Attorneys' Fees. In the event of any proceeding, claim or
action being filed or instituted between the parties with respect to this
Agreement, the prevailing party will be entitled to receive from the other party
all costs, damages and expenses, including reasonable attorneys' fees, incurred
by the prevailing party in connection with that action or proceeding whether or
not the controversy is reduced to judgment or award. The prevailing party will
be that party who may be fairly said by the trier of fact to have prevailed on
the major disputed issues.
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
INTEVAC, INC.
-------------------------------------------------
Norman H. Pond, President
Address: 3550 Bassett Street
Santa Clara, CA 95054
-------------------------------------------------
1~
Address:
--------------------------------------------------
--------------------------------------------------
<PAGE> 34
EXHIBIT B
MATTERS TO BE COVERED IN THE OPINION OF COUNSEL
TO LOTUS TECHNOLOGIES, INC.
1. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, and the
Company has the requisite corporate power and authority to own its properties
and to conduct its business as presently conducted.
2. The Company is qualified to do business as a foreign
corporation in each jurisdiction of the United States where its failure to do so
would have a material adverse effect on its business or properties.
3. The Company has the requisite corporate power and
authority to execute, deliver and perform the Stock Purchase Agreement. The
foregoing has been duly and validly authorized by the Company, duly executed and
delivered by an authorized officer of the Company and constitutes a legal, valid
and binding obligation of the Company, enforceable against the Company according
to its terms.
4. To our knowledge, the capitalization of the Company
immediately prior to the Closing is as follows:
a. Common Stock. 10,000,000 shares of common stock
("Common Stock"), no par value, 3,780,000 shares of which have been duly
authorized and validly issued, are nonassessable, and to our knowledge, fully
paid.
b. There are no preemptive rights or options, warrants,
conversion privileges or other rights (or agreements for any such rights)
outstanding to purchase or otherwise obtain from the Company any of the
Company's securities.
5. The execution, delivery, performance and compliance with
the terms of the Stock Purchase Agreement do not violate any provision of any
applicable federal or California corporate law or any provision of the Company's
Articles of Incorporation or Bylaws and, to our knowledge, do not conflict with
or constitute a default under the provisions of any judgment, writ, decree or
order or the material provisions of any material agreement to which the Company
is a party or by which it is bound.
6. All consents, approvals, permits, orders or authorizations
of, and all qualifications, registrations, designations, declarations or filings
with, any federal, or California state governmental authority on the part of the
Company required in connection with the execution, delivery and performance of
the Stock Purchase Agreement have been
<PAGE> 35
obtained, and are effective, and we are not aware of any proceedings, or threat
thereof, which question the validity thereof.
7. Based in part upon the representations of Purchaser in the
Stock Purchase Agreement, the offer and sale of the Common Stock to Purchaser
pursuant to the terms of the Stock Purchase Agreement are exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended.
8. We are not aware that there is any action, proceeding or
governmental investigation pending against the Company, which questions the
validity of the Stock Purchase Agreement or the right of the Company or its
officers, directors and employees to enter into the Stock Purchase Agreement, or
which is not referred to in the Schedule of Exceptions.
<PAGE> 36
EXHIBIT C
MATTERS TO BE COVERED IN THE OPINION OF
COUNSEL FOR EACH OF THE SELLING SHAREHOLDERS
(i) The Stock Purchase Agreement has been duly executed and delivered on
behalf of the Selling Shareholder.
(ii) The Selling Shareholder has full power and authority, and any approval
required by law (other than as required by State securities and blue
sky laws as to which such counsel need express no opinion), to sell,
assign, transfer and deliver the portion of the Stock to be sold by
such Selling Shareholder.
(iii) The stock power executed and delivered by the Selling Shareholder is a
valid and binding instrument.
(iv) Upon payment for and delivery of the Common Stock with all necessary
endorsements in accordance with the terms of the Agreement, and
assuming the Purchaser is acquiring the shares of Common Stock in good
faith without notice of any adverse claim, the Purchaser will be the
owner of the shares of Common Stock, free and clear of any adverse
claim.
In rendering such opinion such counsel for the Selling
Shareholders may rely, as to matters governed other than by the laws of the
State of California or Federal law on local counsel in such jurisdictions and,
as to the matters set forth in subparagraphs (ii), (iii) and (iv), on other
counsel representing the respective Selling Shareholder provided that in each
case counsel for the Selling Shareholder shall state that they believe that they
and Intevac, Inc. are justified in relying on such other counsel.
<PAGE> 37
EXHIBIT D
MATTERS TO BE COVERED IN THE OPINION OF COUNSEL
TO INTEVAC, INC. (THE "PURCHASER")
1. The Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, and the
Purchaser has the requisite corporate power and authority to own its properties
and to conduct its business as presently conducted.
2. The Purchaser has the requisite corporate power and
authority to execute, deliver and perform the Stock Purchase Agreement. The
Stock Purchase Agreement has been duly and validly authorized by the Purchaser,
duly executed and delivered by an authorized officer of the Purchaser and
constitutes a legal, valid and binding obligation of the Purchaser, enforceable
against the Purchaser according to its terms.
3. The execution, delivery, performance and compliance with
the terms of the Stock Purchase Agreement do not violate any provision of any
applicable federal or California corporate law or any provision of the Articles
of Incorporation or Bylaws and, to our knowledge, do not conflict with or
constitute a default under the provisions of any judgment, writ, decree or
order.
4. All consents, approvals, permits, orders or authorizations
of, and all qualifications, registrations, designations, declarations or filings
with any federal or California state governmental authority on the part of the
Purchaser required in connection with the execution, delivery and performance of
the Stock Purchase Agreement have been obtained, and are effective, and we are
not aware of any proceedings, or threat thereof, which question the validity
thereof.
5. We are not aware that there is any action, proceeding or
governmental investigation pending against the Purchaser, which questions the
validity of the Stock Purchase Agreement or the right of the Purchaser or its
officers, directors and employees to enter into the Stock Purchase Agreement.
<PAGE> 1
EXHIBIT 11.1
INTEVAC, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Shares used in Calculation of Net Income Per Share:
Average Common Shares outstanding............................... 12,311 3,653 700
Net effect of dilutive stock options............................ 590 152 109
Shares related to SAB Nos. 55, 64 and 83:
Stock options................................................ -- 198 217
Ordinary Shares issued....................................... -- 527 579
Series A convertible preferred shares as-if-converted........... -- 6,076 8,680
------- ------- -------
12,901 10,606 10,285
======= ======= =======
Income from continuing operations................................. $ 4,973 $ 5,765 $ 1,675
======= ======= =======
Net income........................................................ $ 4,973 $ 7,100 $ 1,408
======= ======= =======
Income per share from continuing operations....................... $ 0.39 $ 0.54 $ 0.16
======= ======= =======
Net income per share.............................................. $ 0.39 $ 0.67 $ 0.14
======= ======= =======
</TABLE>
47
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Lotus Technologies, Inc. -- California
2. Intevac Foreign Sales Corporation -- Barbados
3. Intevac Asia Private Limited -- Singapore
4. Intevac GmbH -- Germany
50
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST AND YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-99648) pertaining to 1995 Stock Option/Stock Issuance Plan and
Employee Stock Purchase Plan of Intevac, Inc. of our report dated January 20,
1997, with respect to the consolidated financial statements and schedule of
Intevac, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
/s/ ERNST & YOUNG LLP
San Jose, California
February 5, 1997
48
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) the
Consolidated Balance Sheet at December 31, 1996 and the Consolidated Statement
of Income for the year ended December 31, 1996 and is qualified in its entirety
by reference to such (b) financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 938
<SECURITIES> 0
<RECEIVABLES> 18,594
<ALLOWANCES> 1,024
<INVENTORY> 25,666
<CURRENT-ASSETS> 49,078
<PP&E> 13,141
<DEPRECIATION> 3,868
<TOTAL-ASSETS> 68,085
<CURRENT-LIABILITIES> 33,231
<BONDS> 730
0
0
<COMMON> 16,747
<OTHER-SE> 16,989
<TOTAL-LIABILITY-AND-EQUITY> 68,085
<SALES> 88,232
<TOTAL-REVENUES> 88,232
<CGS> 55,652
<TOTAL-COSTS> 55,652
<OTHER-EXPENSES> 22,061
<LOSS-PROVISION> 590
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> 11,323
<INCOME-TAX> 6,350
<INCOME-CONTINUING> 4,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,973
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
