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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-26946
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INTEVAC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 94-3125814
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
3550 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 986-9888
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
On June 27, 1998 approximately 11,960,024 shares of the Registrant's Common
Stock, no par value, were outstanding.
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INTEVAC, INC.
INDEX
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NO. PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets....................... 3
Condensed Consolidated Statements of Income................. 4
Condensed Consolidated Statements of Cash Flows............. 5
Notes to Condensed Consolidated Financial Statements........ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 21
ITEM 2. Changes in Securities....................................... 21
ITEM 3. Defaults Upon Senior Securities............................. 21
ITEM 4. Submission of Matters to a Vote of Security-Holders......... 21
ITEM 5. Other Information........................................... 21
ITEM 6. Exhibits and Reports on Form 8-K............................ 21
SIGNATURES............................................................ 22
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
JUNE 27, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 765 $ 3,338
Short-term investments.................................... 66,272 67,804
Accounts receivable, net of allowances of $1,746 and
$1,505 at June 27, 1998 and December 31, 1997,
respectively........................................... 8,714 9,634
Inventories............................................... 24,837 35,915
Short-term note receivable, net of allowance of $395 at
June 27, 1998 and December 31, 1997.................... -- --
Prepaid expenses and other current assets................. 680 641
Deferred tax asset........................................ 6,572 6,572
-------- --------
Total current assets.............................. 107,840 123,904
Property, plant, and equipment, net......................... 14,137 13,760
Investment in 601 California Avenue LLC..................... 2,431 2,431
Goodwill and other intangibles.............................. 4,347 5,344
Debt issuance costs......................................... 1,864 2,029
Deferred tax assets and other assets........................ 2,434 326
-------- --------
Total assets...................................... $133,053 $147,794
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,414 $ 4,585
Accrued payroll and related liabilities................... 2,729 1,949
Other accrued liabilities................................. 10,788 10,304
Customer advances......................................... 10,847 28,247
Net liabilities of discontinued operations................ -- 794
-------- --------
Total current liabilities......................... 28,778 45,879
Convertible notes........................................... 57,500 57,500
Long-term notes payable & other long-term liabilities....... 1,960 1,980
Shareholders' equity:
Common stock, no par value................................ 15,237 17,336
Retained earnings......................................... 29,578 25,099
-------- --------
Total shareholders' equity............................. 44,815 42,435
-------- --------
Total liabilities and shareholders' equity........ $133,053 $147,794
======== ========
</TABLE>
See accompanying notes.
3
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
-------- -------- -------- --------
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Net revenues........................................ $35,801 $33,763 $70,036 $64,904
Cost of net revenues................................ 26,758 23,622 50,332 44,619
------- ------- ------- -------
Gross profit........................................ 9,043 10,141 19,704 20,285
Operating expenses:
Research and development.......................... 3,398 1,902 6,960 4,462
Selling, general and administrative............... 2,946 2,821 6,051 5,421
Restructuring..................................... -- -- 1,164 --
------- ------- ------- -------
Total operating expenses.................. 6,344 4,723 14,175 9,883
------- ------- ------- -------
Operating income.................................... 2,699 5,418 5,529 10,402
Interest expense.................................... (1,057) (1,048) (2,073) (1,448)
Interest income and other, net...................... 959 1,218 1,730 1,973
------- ------- ------- -------
Income from continuing operations before income
taxes............................................. 2,601 5,588 5,186 10,927
Provision for income taxes.......................... 857 2,011 1,712 3,934
------- ------- ------- -------
Income from continuing operations................... 1,744 3,577 3,474 6,993
Gain from discontinued operations, net of applicable
income taxes...................................... 473 -- 1,005 --
------- ------- ------- -------
Net income.......................................... $ 2,217 $ 3,577 $ 4,479 $ 6,993
======= ======= ======= =======
Basic earnings per share:
Income from continuing operations................. $ 0.14 $ 0.29 $ 0.29 $ 0.56
Net income........................................ $ 0.18 $ 0.29 $ 0.37 $ 0.56
Shares used in per share amounts.................. 12,111 12,533 12,151 12,519
Diluted earnings per share:
Income from continuing operations................. $ 0.14 $ 0.26 $ 0.28 $ 0.52
Net income........................................ $ 0.18 $ 0.26 $ 0.36 $ 0.52
Shares used in per share amounts.................. 12,440 15,861 12,476 14,995
</TABLE>
See accompanying notes.
4
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 27, JUNE 28,
1998 1997
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OPERATING ACTIVITIES
Net income.................................................. $ 4,479 $ 6,993
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities:
Depreciation and amortization............................. 3,873 2,337
Gain on sale of Chorus Investment......................... -- (785)
Gain on sale of discontinued operations................... (794) --
Foreign currency loss..................................... 6 --
Loss on IMAT investment................................... 66 --
Restructuring charge -- non-cash portion.................. 194 --
Loss on disposal of equipment............................. 95 21
Changes in assets and liabilities......................... (5,930) 7,637
-------- --------
Total adjustments........................................... (2,490) 9,210
-------- --------
Net cash and cash equivalents provided by operating
activities................................................ 1,989 16,203
INVESTING ACTIVITIES
Purchase of investments..................................... (72,583) (82,570)
Proceeds from sale of investments........................... 71,939 13,557
Proceeds from sale of Chorus Investment..................... -- 785
Investment in IMAT.......................................... -- (436)
Purchase of leasehold improvements and equipment............ (1,819) (3,626)
-------- --------
Net cash and cash equivalents used in investing
activities................................................ (2,463) (72,290)
FINANCING ACTIVITIES
Net borrowings under line of credit agreement............... -- (2)
Notes payable repayments.................................... -- (25)
Proceeds from issuance of common stock...................... 561 425
Repurchase of common stock.................................. (2,660) --
Proceeds from convertible bond offering..................... -- 55,207
-------- --------
Net cash and cash equivalents provided by (used in)
financing activities...................................... (2,099) 55,605
-------- --------
Net decrease in cash and cash equivalents................... (2,573) (482)
Cash and cash equivalents at beginning of period............ 3,338 938
-------- --------
Cash and cash equivalents at end of period.................. $ 765 $ 456
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for:
Interest............................................... $ 1,930 $ 53
Income taxes........................................... 4,065 3,750
</TABLE>
See accompanying notes.
5
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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
Intevac, Inc. ("Intevac" or the "Company") is a leading supplier of static
sputtering systems and related manufacturing equipment used to manufacture
thin-film disks for computer hard disk drives. Sputtering is a complex vacuum
deposition process used to deposit multiple thin-film layers on a disk. The
Company's primary objective is to be the industry leader in supplying disk
sputtering equipment by providing disk sputtering systems which have both the
highest overall performance and the lowest cost of ownership in the industry.
The Company's principal product, the MDP-250 disk sputtering system, enables
disk manufacturers to produce high performance, high capacity disks. The Company
sells its static sputtering systems and related manufacturing equipment to both
captive and merchant thin-film disk manufacturers. The Company sells and markets
its products directly in the United States, and through exclusive distributors
in Japan and Korea. The Company has established subsidiaries in Singapore and
Malaysia and a branch office in Taiwan to support its customers in Southeast
Asia.
The Company also realizes revenues from the sales of system components,
contract research and development activities, flat panel display ("FPD")
manufacturing equipment and electron beam processing equipment. Intevac's system
component business consists primarily of sales of spare parts and after-sale
service to purchasers of the Company's disk sputtering systems, as well as sales
of components to other manufacturers of vacuum equipment. Contract research and
development revenues have been derived primarily from prime contracts awarded by
and subcontracts awarded under various Department of Defense ("DOD") and NASA
development projects for the FPD industry and various photonics products. FPD
manufacturing equipment consists of sputtering and rapid thermal processing
equipment for the manufacture of FPD's. Electron beam processing equipment is
used for curing inks, coatings and adhesives, in the manufacture of shrink wrap
films and for in-line sterilization.
The financial information at June 27, 1998 and for the three- and six-month
periods ended June 27, 1998 and June 28, 1997 is unaudited, but includes all
adjustments (consisting only of normal recurring accruals) that the Company
considers necessary for a fair presentation of the financial information set
forth herein, in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, it does not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. For further information, refer to the Consolidated
Financial Statements and footnotes thereto included or incorporated by reference
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
The results for the three- and six-month periods ended June 27, 1998 are
not considered indicative of the results to be expected for any future period or
for the entire year.
2. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this statement has no impact
on the Company's net income or shareholders' equity. The Company's total
comprehensive income was the same as its net income for all periods presented.
6
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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 27, DECEMBER 31,
1998 1997
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(IN THOUSANDS)
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Raw materials............................................... $ 9,450 $ 8,784
Work-in-progress............................................ 9,998 18,756
Finished goods.............................................. 5,389 8,375
------- -------
$24,837 $35,915
======= =======
</TABLE>
A significant portion of the finished goods inventory is represented by
completed units at customer sites undergoing installation and acceptance
testing.
4. DISCONTINUED OPERATIONS
During the quarter, the Company recognized a gain of $473,000 (net of
income taxes) resulting from the reimbursement of excess warranty reserves
related to the sale of the Company's night vision business in 1995. Basic and
diluted earnings per share on the gain from discontinued operations were both
$0.04.
5. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
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(IN THOUSANDS)
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Numerator:
Income from continuing operations............ $1,744 $3,577 $3,474 $6,993
====== ====== ====== ======
Net income................................... $2,217 $3,577 $4,479 $6,993
====== ====== ====== ======
Numerator for basic earnings per
share -- income available to common
stockholders.............................. 2,217 3,577 4,479 6,993
Effect of dilutive securities:
6 1/2% convertible notes(1)............... -- 563 -- 761
------ ------ ------ ------
Numerator for diluted earnings per
share -- income available to common
stockholders after assumed conversions.... $2,217 $4,140 $4,479 $7,754
====== ====== ====== ======
Denominator:
Denominator for basic earnings per share --
weighted-average shares................... 12,111 12,533 12,151 12,519
Effect of dilutive securities:
Employee stock options.................... 329 540 325 575
6 1/2% convertible notes(1)............... -- 2,788 -- 1,901
------ ------ ------ ------
Dilutive potential common shares............. 329 3,328 325 2,476
------ ------ ------ ------
Denominator for diluted earnings per share --
adjusted weighted-average shares and
assumed conversions....................... 12,440 15,861 12,476 14,995
====== ====== ====== ======
</TABLE>
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(1) Diluted EPS for the three-and six-month periods ended June 27, 1998 excludes
"as converted" treatment of the Convertible Notes as their inclusion would
be anti-dilutive.
7
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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. 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. As of June 27, 1998, the Company was funded for one-half of the actual
costs of the project up to a ceiling of $6,750,000. Discussions with the
Company's development partner have led to an increase of $1,150,000 in the
ceiling. This additional amount has been invoiced to the Company's development
partner and the Company will recognize this funding during the second half of
1998.
7. RESTRUCTURING
On March 2, 1998, as a result of weak demand for its disk sputtering
systems, the Company's management adopted a plan to reduce expenses. The expense
reduction plan included a reduction in force of approximately 90 employees out
of the Company's staff of contract and regular personnel. The reductions took
place at the Company's facilities in Santa Clara, CA; Los Gatos, CA; Rocklin,
CA; and Taiwan. Additionally, the Company relocated its Rapid Thermal Processing
("RTP") Operation from Rocklin to the Company's Santa Clara headquarters and
closed the Rocklin facility.
In the first quarter of 1998, the Company incurred a restructuring charge
of $1,164,000 related to the expense reduction plan. The significant components
of this charge include $290,000 for closure of the Rocklin facility, $462,000
for the balance of the rent due on the lease for such facility and $392,000 for
employee severance costs. Closure of the facility was complete at June 27, 1998.
As of June 27, 1998, of the foregoing amounts, approximately $370,000 in
termination benefits had been paid out to affected employees and $265,000 had
been spent related to the relocation of the RTP Operation and the closure of the
Rocklin facility.
8
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
materially from those discussed in the forward-looking statements. Factors that
might cause such a difference, include but are not limited to, the risk factors
set forth elsewhere in this Quarterly Report on Form 10-Q under "Certain Factors
Which May Affect Future Operating Results" and in other documents the Company
files from time to time with the Securities and Exchange Commission, including
the Company's Annual Report on Form 10-K filed in March 1998, Form 10-Q's and
Form 8-K's.
OVERVIEW
The Company's revenues are generated by the sale of disk sputtering systems
and related disk manufacturing equipment; system components; contract research
and development activities; flat panel display manufacturing equipment; and
electron beam processing equipment. Disk sputtering systems and related disk
manufacturing equipment generally represent the majority of the Company's
revenue, and Intevac is a leading supplier of this equipment. Sputtering is a
complex vacuum deposition process used to deposit multiple thin-film layers on a
disk. Intevac's system component business consists primarily of sales of spare
parts and after-sale service to purchasers of the Company's disk sputtering
systems, as well as sales of components to other manufacturers of vacuum
equipment. Contract research and development revenues have been derived
primarily from prime contracts awarded by and subcontracts awarded under various
DOD and NASA development projects for the FPD industry and various photonics
products. Flat panel display manufacturing equipment consists of sputtering and
rapid thermal processing equipment for the manufacture of FPD's. Electron beam
processing equipment is used for curing inks, coatings and adhesives, in the
manufacture of shrink-wrap films and for sterilization.
In the first quarter of 1997, the Company completed the sale of $57.5
million of its 6 1/2% Convertible Subordinated Notes Due 2004 (the "Convertible
Notes"). In the second quarter of 1997, the Company paid $0.4 million for a 49%
interest in IMAT Inc. ("IMAT"), a joint venture formed with its Japanese
distributor, Matsubo, to market the Company's flat panel manufacturing equipment
in the Far East. In the fourth quarter of 1997, the Company purchased all of the
assets of RPC Industries ("RPC"). RPC is a manufacturer of electron beam
processing systems. This acquisition was accounted for under the purchase
method. The total purchase price was approximately $1.0 million plus contingent
payments equal to 25% of the future earnings of RPC. The total of these
contingent payments is limited to approximately $7.7 million.
In March 1998, as a result of weak orders for its disk sputtering systems
and an expectation that revenues would decline significantly in the third
quarter of 1998, the Company implemented an expense reduction plan that involved
the termination of approximately 20% of the Company's work force. As part of the
expense reduction plan, the Company also decided to close its Rocklin,
California facility and transfer its Rapid Thermal Processing Operation from
Rocklin to the Company's headquarters in Santa Clara. The Company is continuing
to investigate its options for the further reduction of expenses.
During the first quarter of 1998, the Company incurred a restructuring
charge of approximately $1.2 million related to the expense reduction plan. As
of June 27, 1998, approximately $370,000 in termination benefits had been paid
out to affected employees and $265,000 had been spent related to the relocation
of the RTP Operation and the closure of the Rocklin facility.
The Company's backlog was $28.1 million and $77.9 million at June 27, 1998
and June 28, 1997, respectively. The Company includes in backlog the value of
purchase orders for its products with scheduled delivery dates. Delivery dates
may be rescheduled from time to time. The Company's backlog at the beginning of
a quarter may not include all system orders needed to achieve the Company's
revenue objectives for that quarter. The Company expects that the reduction in
backlog from prior periods will result in a substantial decline in revenue in
the second half of fiscal 1998 relative to the first half of fiscal 1988.
9
<PAGE> 10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 27, 1998 AND JUNE 28, 1997
Net revenues. Net revenues consist primarily of sales of the Company's disk
sputtering systems and related equipment used to manufacture thin-film disks for
computer hard disk drives, and, to a lesser extent, flat panel display
manufacturing equipment, system components, and contract research and
development. Net revenues from the sales of sputtering systems and electron beam
processing equipment are recognized upon customer acceptance. Sales of related
equipment and system components are recognized upon product shipment, and
contract research and development is recognized in accordance with contract
terms, typically as costs are incurred. Net revenues increased by 6% to $35.8
million for the three months ended June 27, 1998 from $33.8 million for the
three months ended June 28, 1997. The increase in net revenues was due to an
increase in the net revenues from flat panel display manufacturing equipment,
system components and electron beam processing equipment, which was partially
offset by a reduction in net revenues from disk sputtering systems. Based upon
its current backlog of orders and the scheduled shipment dates, the Company
expects that net revenues during the three months ended September 26, 1998 will
decline substantially from the net revenues experienced during the three months
ended June 27, 1998.
International sales increased by 55% to $25.6 million for the three months
ended June 27, 1998 from $16.5 million for the three months ended June 28, 1997.
The increase in international sales was primarily due to an increase in the
percentage of sales of disk sputtering systems to international customers.
International sales constituted 72% of net revenues for the three months ended
June 27, 1998 and 49% of net revenues for the three months ended June 28, 1997.
Gross margin. Cost of net revenues consists primarily of purchased
materials, fabrication, assembly, test, installation, warranty costs, scrap and
costs attributable to contract research and development. Gross margin was 25.3%
for the three months ended June 27, 1998 as compared to 30.0% for the three
months ended June 28, 1997. Gross margins declined primarily as the result of a
negative gross margin realized on the RIGEL flat panel sputtering system
accepted for revenue during the quarter. The Company believes that the ongoing
cost of producing additional RIGEL systems will be significantly lower than the
cost of the first system. The Company also believes that lower sales volumes
expected in the third quarter of 1998 will cause lower absorption of factory
overhead, which will negatively impact gross margins.
Research and development. Research and development expense consists
primarily of prototype materials, salaries and related costs of employees
engaged in ongoing research, design and development activities for disk
manufacturing equipment, flat panel manufacturing equipment, electron beam
processing equipment and research by the Photonics Division. Company funded
research and development expense increased by 79% to $3.4 million for the three
months ended June 27, 1998 from $1.9 million for the three months ended June 28,
1997, representing 9.5% and 5.6%, respectively, of net revenue. This increase
was primarily the result of the absence in the three months ended June 27, 1998
of cost sharing from the Company's D-STAR development partner, and research and
development expense transferred to cost of sales under a DARPA development
contract, both of which occurred in the three months ended June, 28, 1997.
Research and development expenses do not include costs of $1.0 million in
the three months ended June 28, 1997, reimbursed under the terms of a research
and development cost sharing agreement with the Company's D-STAR development
partner, nor do they include costs of $1.0 million in the three months ended
June 28, 1997 reimbursed to the Company under a DARPA development contract
funding development of the D-STAR and delivery of a beta-site unit.
Selling, general and administrative. Selling, general and administrative
expense consists primarily of selling, marketing, customer support, financial,
travel, management, legal and professional services. Domestic sales are made by
the Company's direct sales force, whereas international sales are made by
distributors that typically provide sales, installation, warranty and ongoing
customer support. The Company also has subsidiaries in Singapore and Malaysia
and a branch office in Taiwan to support customers in Southeast Asia and markets
its flat panel manufacturing equipment to the Far East through its Japanese
joint venture, IMAT. Selling, general and administrative expense increased by 4%
to $2.9 million for the three months ended
10
<PAGE> 11
June 27, 1998 from $2.8 million for the three months ended June 28, 1997,
representing 8.2% and 8.4%, respectively, of net revenue. The increase in
expense was primarily the result of additional selling, general and
administrative expenses associated with the electron beam equipment business
which was acquired during the fourth quarter of 1997. Selling, general and
administrative headcount grew to 90 employees at June 27, 1998 from 87 employees
at June 28, 1997.
Interest expense. Interest expense consists primarily of interest on the
Convertible Notes, and, to a lesser extent, interest on approximately $2.0
million of long term debt related to the purchase of Cathode Technology in 1996.
Interest expense for the three months ended June 27, 1998 was essentially
unchanged when compared to the three months ended June 28, 1997.
Interest and other income, net. Interest and other income, net consists
primarily of interest income on the Company's investments, income related to the
sale of the Company's 20% interest in the capital stock of Chorus and early
payment discounts on the purchase of inventories, goods and services, partially
offset by the Company's 49% share of the loss incurred by IMAT. Interest and
other income, net decreased by 21% to $1.0 million for the three months ended
June 27, 1998 from $1.2 million for the three months ended June 28, 1997 as the
result of increased interest income on funds raised from the sale of the
Company's 6 1/2% Convertible Subordinated Notes due 2004, which was largely
offset by decreased income related to the sale of the Company's 20% interest in
the capital stock of Chorus and to a lesser extent the Company's 49% share of
the loss incurred by IMAT.
Discontinued operations. The Company recorded a gain from discontinued
operations of $0.5 million resulting from the reimbursement of excess warranty
reserves related to the sale of the Company's night vision business in 1995.
Provision for income taxes. Income tax expense as a percentage of pretax
income for the three months ended June 27, 1998 and June 28, 1997, was 33% and
36%, respectively. The Company's tax rate differs from the applicable statutory
rates primarily due to benefits from the Company's foreign sales corporation and
tax-exempt interest income partially offset by nondeductible goodwill
amortization. The tax rate declined in 1998 because a larger percentage of 1998
income is expected to be derived through the Company's foreign sales corporation
and from tax-exempt interest income.
SIX MONTHS ENDED JUNE 27, 1998 AND JUNE 28, 1997
Net revenues. Net revenues increased by 8% to $70.0 million for the six
months ended June 27, 1998 from $64.9 million the six months ended June 28,
1997. The increase in net revenues was due to an increase in the net revenues
from flat panel display manufacturing equipment, system components and electron
beam processing equipment which was partially offset by a reduction in net
revenues from disk sputtering systems. Based upon its current backlog of orders
and the scheduled shipment dates, the Company expects that net revenues during
the six months ended December 31, 1998 will decline substantially from the net
revenues experienced during the six months ended June 27, 1998.
International sales increased by 42% to $44.2 million for the six months
ended June 27, 1998 from $31.2 million for the six months ended June 28, 1997.
The increase in revenues from international sales was primarily due to an
increase in the percentage of sales of disk sputtering systems to international
customers and to a lesser extent the sales of electron beam processing
equipment. International sales constituted 63% of net revenues for the six
months ended June 27, 1998 and 48% of net revenues for the six months ended June
28, 1997.
Gross margin. Gross margin was 28.1% for the six months ended June 27, 1998
as compared to 31.3% for the six months ended June 28, 1997. The reduction in
gross margins was primarily due to the negative gross margin incurred on the
RIGEL system acceptance.
Research and development. Research and development expense increased to
$7.0 million for the six months ended June 27, 1998 from $4.5 million for the
six months ended June 28, 1997, representing 9.9% and 6.9%, respectively, of net
revenues. The increase was primarily the result of increased development expense
in disk manufacturing products, and the absence in the six months ended June 27,
1998 of cost sharing from the
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Company's D-STAR development partner, and research and development expense
transferred to cost of sales under a DARPA development contract, which both
occurred in the six months ended June, 28, 1997.
Research and development expenses in the six months ended June 28, 1997 do
not include costs of $1.0 million reimbursed to the Company under the terms of a
research and development cost sharing agreement with the Company's D-STAR
development partner, nor do they include costs of $1.5 million reimbursed to the
Company under a DARPA development contract funding development of the D-STAR and
delivery of a beta-site unit. In addition, research and development expenses do
not include other expenditures in connection with contract research and
development activities as these are charged to cost of sales.
Selling, general and administrative. Selling, general and administrative
expense increased by 12% to $6.1 million for the six months ended June 27, 1998
from $5.4 million for the six months ended June 28, 1997, representing 8.6% and
8.4%, respectively, of net revenues. The increase in selling, general and
administrative expense was the result of additional selling, general and
administration expenses associated with the electron beam equipment business
which was acquired during the fourth quarter of 1997, partially offset by
decreased expenses elsewhere.
Restructuring expense. In March 1998, the Company's management adopted a
restructuring plan to relocate its Rapid Thermal Processing Operation from
Rocklin, California to the Company's Santa Clara, California headquarters and to
close the Rocklin facility. The restructuring plan also included an approximate
20% reduction in the worldwide staff of the Company's contract and regular
employees. As a result of this plan, the Company expensed approximately $1.2
million of restructuring expense in the six months ended June 27, 1998. The
restructuring expense included approximately $0.8 million related to closure of
the Rocklin facility and approximately $0.4 million of severance pay for
terminated employees.
Interest expense. Interest expense consists primarily of interest on the
Company's 6 1/2% Convertible Notes issued in the first quarter of 1997.
Interest and other income, net. Interest and other income consists
primarily of interest income on the Company's investments, income related to the
sale of the Company's 20% interest in the capital stock of Chorus, and early
payment discounts on the purchase of inventories, goods and services. Interest
and other income, net decreased to $1.7 million for the six months ended June
27, 1998 from $2.0 million for the six months ended June 28, 1997 as the result
of increased interest income on funds raised from the sale of the Company's
6 1/2% Convertible Subordinated Notes due 2004, which was more than offset by
decreased income related to the sale of the Company's 20% interest in the
capital stock of Chorus and an increase in the Company's 49% share of the loss
incurred by IMAT.
Provision for income taxes. Income tax expense as a percentage of pretax
income for the six months ended June 27, 1998 and June 28, 1997 was 33% and 36%,
respectively. The Company's tax rate for these periods differs from the
applicable statutory rates primarily due to benefits from the Company's foreign
sales corporation and tax-exempt interest income, partially offset by
nondeductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $2.0 million for the
six months ended June 27, 1998. The cash generated in 1998 was due primarily to
net income, reductions in accounts receivable and inventory and increased
depreciation and amortization, which were partially offset by a decrease in
customer advances.
The Company's investing activities used cash of $2.5 million for the six
months ended June 27, 1998 due to the purchase of fixed assets and the net
purchase of investments.
The Company's financing activities used cash of $2.1 million for the six
months ended June 27, 1998, primarily due to the repurchase of 297,500 shares of
the Company's stock for $2.7 million, which was partially offset by the sale of
the Company's stock to its employees through the Company's employee benefit
plans.
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YEAR 2000
The Company is currently evaluating the software and computer systems it
uses in order to ensure compliance with Year 2000 issues. This evaluation, and
any corrective actions required, is estimated to be largely completed no later
than December 31, 1998. The Company does not expect to encounter significant
problems or that material expenditures will be required to comply with Year 2000
issues. These expectations are based primarily on the fact that the Company
purchases all business software from third party vendors.
Specific actions to be taken include: reviewing all software used and
assessing the vendor's plans to comply with Year 2000; testing of all hardware
to ensure its ability to recognize dates after 1999; and contacting significant
suppliers to determine their ability to comply with Year 2000.
The expectations of the findings of this project and the date on which the
Company believes it will be completed are based on management's best estimates.
However, there can be no guarantee that these expectations will be achieved, and
actual results could differ materially.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
Fluctuations of Results of Operations
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company 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 or
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, electron beam processing systems, and contract
research and development net revenues, the availability and cost of components
and subassemblies, changes in product development costs, expenses associated
with acquisitions and exchange rate fluctuations.
The Company derives the majority of its net revenues from the sale of a
relatively small number of sputtering systems. Over the last ten quarters, the
number of systems accepted by customers in any particular quarter has varied
from four to thirteen and, as a result, the Company's net revenues and operating
results for a particular period could be materially adversely affected if an
anticipated order for even one system is not received in time to permit shipment
and customer acceptance during that accounting period. Over the last ten
quarters the Company's gross margin and operating income (loss) as a percentage
of net revenues has fluctuated from approximately 25% to 40% of net revenues and
from (9)% to 18% of net revenues, respectively. The Company anticipates that its
unit shipments, revenues, gross and operating margins will continue to
fluctuate. As a result, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
The Company's backlog at the beginning of a quarter may not include all
system orders needed to achieve the Company's revenue objectives for that
quarter. In addition, orders in backlog are subject to cancellation, and
although 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. 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 a system is manufactured, the Company
may not receive funds to cover its 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 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
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could cause customers to defer purchases of the Company's existing systems,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
Installing and integrating new sputtering systems into the thin-film disk
manufacturing process requires a substantial investment by a customer. 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.
Due to all of the foregoing factors, the Company expects its quarterly
operating results to fluctuate significantly and may in certain quarters be
below the expectations of securities analysts and investors. In such event it is
likely the price of the Company's Common Stock would be materially adversely
affected.
Cyclicality of the Media Industry
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. The Company recently
received a request for a two quarter push-out of deliveries by one of its
customers. The Company's business depends upon capital expenditures by
manufacturers of thin-film disks, including manufacturers that are opening new
fabrication facilities or entering the market, expanding or upgrading existing
facilities, or replacing obsolete equipment, which in turn depend upon the
current and anticipated market demand for hard disk drives. 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. However, 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.
A number of manufacturers of hard disk drives and hard disk drive component
suppliers have recently reported both substantial reductions in revenues and
substantial financial losses. Many of these manufacturers attributed their
problems to an excess supply of hard drives, or, in the case of component
suppliers, an excess supply of components for hard drives (including thin-film
disks) and the rapid change of technology which caused a number of products to
become obsolete. This industry-wide over-capacity has led to a period of reduced
demand for thin-film disk production and for the capital equipment used in such
production. In March of 1998, as a result of weak orders for its disk sputtering
systems, the Company implemented an expense reduction plan that involved the
termination of approximately 20% of the Company's work force. Based upon its
current backlog of orders and the scheduled shipment dates, the Company expects
that net revenues during the six months ended December 31, 1998 will decline
substantially from the net revenues experienced during the six months ended June
27, 1998.
Cyclical downturns in the hard disk drive industry are likely to materially
adversely affect the Company's business, financial condition and results of
operations.
Intense Competition
The Company's disk sputtering business experiences intense competition
worldwide from two principal competitors, 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
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substantial number of thin-film disk sputtering machines worldwide. Both Balzars
and Anelva are manufacturers of static sputtering systems, and each has
substantially greater financial, technical, marketing, manufacturing and other
resources than the Company. The Company also experiences competition from two
other manufacturers of static sputtering systems as well as from the
manufacturers of thin-film disks that have developed the capability to
manufacture their own sputtering systems. There can be no assurance that the
Company's competitors will not develop enhancements to, or future generations
of, competitive products that 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 two 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 gross margins. For example,
between 12/31/97 and 8/4/98, the exchange rate for Japanese Yen has increased
from 130.15 Yen/$ to 144.80 Yen/$, which all else equal, increases the cost of
Intevac's products by approximately 11.3% compared to Japanese manufacturers.
Given the lengthy sales cycle and the significant investment required to
integrate a disk sputtering system into the manufacturing process, the Company
believes that once a thin-film disk manufacturer has selected a particular
supplier's disk sputtering equipment, the manufacturer generally relies upon
that equipment for the specific production line application and frequently will
continue to purchase its other disk sputtering equipment from the same supplier.
The Company expects to experience difficulty in selling to a particular customer
for a significant period of time if that customer selects a competitor's disk
sputtering equipment. Accordingly, competition for customers in the disk
sputtering equipment industry is particularly intense, and suppliers of disk
sputtering equipment may offer pricing concessions and incentives to attract
customers, which could adversely affect the Company's business, financial
condition, gross margins and results of operations. Because of these competitive
factors, there can be no assurance that the Company will be able to compete
successfully in the future.
Customer Concentration
Historically, a significant portion of the Company's revenues in any
particular period have been attributable to sales to a limited number of
customers. For example, Matsubo, HMT Technology and Trace Storage Technology
accounted for 37%, 17% and 15%, respectively of the Company's total net revenues
in 1997, and Matsubo, Seagate and HMT Technology accounted for 32%, 32% and 13%,
respectively, of the Company's total net revenues in 1996. Seagate, HMT
Technology, and Matsubo accounted for 40%, 20% and 17%, respectively, of the
Company's total net revenues in 1995. 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, 68% of
the Company's backlog at December 31, 1997 was represented by two customers for
disk sputtering systems, with each representing 10% or more of the Company's
backlog at December 31, 1997. None of the Company's customers has entered into a
long-term agreement requiring it to purchase the Company's products. As
purchases related to a particular new or expanded fabrication facility are
completed, sales to that customer may decrease sharply or cease altogether. If
completed contracts are not replaced on a timely basis by new orders from the
same or other customers, the Company's net revenues could be adversely affected.
The loss of a significant customer, any reduction in orders from any significant
customer or the cancellation of a significant order from a customer, including
reductions or cancellations due to customer departures from recent buying
patterns, financial difficulties of a customer or market, economic or
competitive conditions in the disk drive industry, could materially adversely
affect the Company's business, financial condition and results of operations.
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Limited Number of Opportunities
The Company's business depends upon capital expenditures by manufacturers
of thin-film disks, of which there are a limited number worldwide. According to
a April 1997 report by TrendFocus, an independent market research firm, as of
the end of 1996 there were 231 installed disk sputtering lines (sputtering
systems and related equipment such as plating, polishing, texturing, lubrication
and test equipment as well as related handling equipment) worldwide and only 15
companies in the world with five or more installed disk sputtering lines.
Therefore, winning or losing an order from any particular customer could
significantly affect the Company's operating results. In addition, the Company's
opportunities to sell its systems are further limited by the fact that some of
the manufacturers of thin-film disks have adopted an in-line approach as opposed
to the Company's static approach to thin-film disk manufacturing. These
manufacturers have invested significant amounts of capital in their in-line
systems, and there may be significant resistance to change to a static approach
in the future. The construction of new thin-film disk fabrication facilities
involves extremely large capital expenditures, resulting in few thin-film disk
fabrication facilities being constructed worldwide at any particular time. A
substantial investment is also required by disk manufacturers to install and
integrate additional thin-film disk manufacturing equipment in connection with
upgrading or expanding their existing fabrication facilities. These costs are
far in excess of the cost of purchasing the Company's system. The magnitude of
such capital expenditures has caused certain thin-film disk manufacturers to
forego purchasing significant additional thin-film disk manufacturing equipment.
Consequently, only a limited number of opportunities for the Company to sell its
systems may exist at any given time.
Rapid Technological Change; New Products
The disk drive industry in general, and the thin-film disk manufacturing
industry in particular, is characterized by rapid technological change and
evolving industry standards. The Company maintains an active development program
to make sputter system improvements, to add additional capabilities that will
improve disk performance, increase machine throughput, 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'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
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affect sales of existing systems, and product introductions could contribute to
quarterly fluctuations in operating results as orders for new products commence
and orders for existing products decline. There can be no assurance that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or enhancements of existing products.
Flat Panel Display Manufacturing Equipment Risks
In 1997, the Company spent approximately $4.9 million on various programs
to fund the development of equipment for use in the FPD industry, of which
approximately 54% was paid for by the Company's development partners. In
exchange for certain development funding, the Company has granted to one of its
development partners the exclusive rights to manufacture and market the
Company's FPD sputtering systems in Japan. As of June 27, 1998 all of the
approximately $6.75 million advanced by the Company's development partner had
been applied to qualifying costs. The Company has limited experience in the
development, manufacture, sale and marketing of FPD manufacturing equipment,
having sold only three rapid thermal processing ("RTP") systems to date and two
of its FPD sputtering systems. Although during the first half of 1998 the
Company delivered and the customer accepted a larger version of its FPD
sputtering machine, there can be no assurance that the market for FPD
manufacturing equipment targeted by the Company will develop as quickly or to
the degree the Company currently anticipates, or that the Company's proposed FPD
manufacturing equipment will achieve market acceptance. There can be no
assurance the Company will receive additional customer sponsored research and
development funding in the future. The failure to receive additional customer
sponsored research and development funds could result in the Company internally
funding the development of such FPD manufacturing equipment, and the costs of
such research and development may have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company in any event will continue to fund research and
development in the FPD area.
Risks Associated With International Sales and Operations
Foreign sales accounted for 64%, 41% and 20% of revenues in 1997, 1996 and
1995, respectively. Substantially all of the Company's Disk Equipment foreign
sales are to companies in the Far East. The Company anticipates that sales to
customers in the Far East 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, Taiwan and Malaysia and a joint venture in Japan. 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. The Company's products have been sold to companies
headquartered in the United States, Japan, Taiwan and Korea and have been
installed in factories in the United States, Japan, Singapore, Malaysia, Korea
and Taiwan. All of the Far Eastern countries with which the Company does
business have banking systems and foreign currency exposures that have
experienced serious troubles recently and therefore subject the Company's
customers to substantial business risks. 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.
Dependence on Key Employees
The Company's operating results will depend significantly upon the
continued contributions of its officers and key management, engineering,
marketing, customer support and sales personnel, many of whom would be difficult
to replace. The Company does not have an employment agreement with any of its
employees or
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maintain key person life insurance with respect to any employee. The loss of any
key employee could have a material adverse effect on the Company's business,
financial condition and results of operations. Employees of the Company are
currently required to enter into a confidentiality agreement as a condition of
their employment. However, these agreements do not expressly prohibit the
employees from competing with the Company after leaving its employ.
Ability to Attract Qualified Personnel
The Company's operating results depend in significant part upon its ability
to retain and attract qualified management, engineering, marketing, customer
support and sales personnel. Competition for such personnel is intense and 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.
Leverage
In connection with the sale of the Convertible Notes, the Company incurred
a substantial increase in the Company's ratio of long-term debt to total
capitalization (shareholders' equity plus long-term debt). The ratio at June 27,
1998 and December 31, 1997 was approximately 57.0% and 58.4%, respectively. As a
result of this indebtedness, the Company incurred substantial principal and
interest obligations. The degree to which the Company is leveraged could have a
material adverse effect on the Company's ability to obtain additional financing
for working capital, acquisitions or other purposes and could make it more
vulnerable to industry downturns and competitive pressures. The Company's
ability to meet its debt service obligations will be dependent on the Company's
future performance, which will be subject to financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control.
Manufacturing Risks
The Company's systems have a large number of components and are highly
complex. The Company may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. In addition, some of the systems built by the Company must be
customized to meet individual customer site or operating requirements. The
Company 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.
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 a key supplier program in which it appoints certain
key vendors as sole suppliers for certain parts with the goal of improving
response time and reducing costs. In addition, the Company makes extensive use
of suppliers serving the semiconductor equipment business and such suppliers may
choose to give priority to their semiconductor equipment customers that are much
larger than the Company. Any prolonged inability to obtain adequate deliveries
could require the Company to pay more for inventory, parts and other supplies,
seek alternative sources of supply, delay its ability to ship its products and
damage relationships with current and prospective customers. Any such delay or
damage could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company conducts substantially all of its manufacturing activities at
its leased facilities in Santa Clara and Los Gatos, California. The Company's
Santa Clara and Los Gatos facilities are located in a
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seismically active area. A major catastrophe (such as an earthquake or other
natural disaster) could result in a prolonged interruption of the Company's
business.
Acquisitions
The Company's business strategy includes acquiring related businesses,
products or technologies. The Company completed one acquisition during 1997 and
three acquisitions during 1996 and expects that it may pursue additional
acquisitions in the future. Any future acquisition may result in potentially
dilutive issuance of equity securities, the write-off of in-process research and
development and the assumption of debt and contingent liabilities, any of which
could materially adversely affect the Company's business, financial condition
and results of operations. Additionally, as a result of the Company's ongoing
repurchase of its stock in the open market, the Company may not be able to use
the "pooling of interests" method of accounting in some acquisitions, and the
Company may therefore be required to amortize any intangible assets acquired in
connection with any acquisition.
The Company incurred a charge to operations of $0.3 million in the fourth
quarter of 1997 and $5.8 million in the second quarter of 1996 to reflect the
purchase of in-process research and development related to the acquisitions
completed in those quarters. In addition, the Company is amortizing intangible
assets of approximately $9.0 million gross, and $4.2 million net at June 27,
1998, relating to the four acquisitions. The amortization period for such costs
is over the useful lives, which range from two years to seven years.
Additionally, unanticipated expenses may be incurred relating to the integration
of technologies, research and development and administrative functions. Any
acquisition will involve numerous risks, including difficulties in the
assimilation of the acquired company's employees, operations and products,
uncertainties associated with operating in new markets and working with new
customers, and the potential loss of the acquired company's key employees.
Patents and Other Intellectual Property
The Company currently has 25 patents issued in the United States and 3
patents issued in foreign countries, and has pending patent applications in the
United States and foreign countries. Of the 25 U.S. patents, 8 relate to
sputtering, 10 relate to RTP, 1 relates to lubrication systems and 6 relate to
photonics. Two foreign patent relates to sputtering and one relates to
photonics. In addition, the Company has the right to utilize certain patents
under licensing arrangements with Litton Industries, Varian Associates, Stanford
University, Lawrence Livermore Laboratories and Alum Rock Technology.
There can be no assurance that any of the Company's patent applications
will be allowed or that any of the allowed applications will be issued as
patents. There can be no assurance that any patent owned by the Company will not
be invalidated, deemed unenforceable, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to the Company or
that any of the Company's pending or future patent applications will be issued
with claims of the scope sought by the Company, if at all. Furthermore, there
can be no assurance that others will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company. In
addition, there can be no assurance that foreign patent rights, intellectual
property laws or the Company's agreements will protect the Company's
intellectual property rights. Failure to protect the Company's intellectual
property rights could have a material adverse effect upon the Company's
business, financial condition and results of operations.
There has been substantial litigation in the technology industry regarding
intellectual property rights. The Company has from time to time received claims
that it is infringing third parties' intellectual property rights. In August
1993, Rockwell International Corporation ("Rockwell") sued the Federal
government alleging infringement of certain patent rights with respect to the
contracts the Federal government has had with a number of companies, including
Intevac. The Federal government has notified Intevac that it may be liable in
connection with contracts for certain products from the Company's discontinued
night vision business. Although the Company believes it will have no material
liability under these contracts, there can be no assurance that the resolution
of the claims by Rockwell with the Federal government will not have a material
adverse effect on the Company's business, operating results and financial
condition. In the first quarter of
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1997, Rockwell's patent in suit was held invalid. Rockwell appealed that
decision, and in the second quarter of 1998, the appellate court ruled that the
patent was not invalid and referred the case back to the court of origin.
There can be no assurance that other third parties will not in the future
claim infringement by the Company with respect to current or future patents,
trademarks, or other proprietary rights relating to the Company's disk
sputtering systems, flat panel display manufacturing equipment or other
products. Any present or future claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company, or at all. Any of the foregoing could have a material adverse
effect upon the Company's business, operating results and financial condition.
In addition, the Company believes that one of its competitors may be
infringing the Company's patent rights in connection with products currently
being offered by this competitor. Although the Company has not undertaken formal
legal proceedings, the Company has informed this competitor that the Company
believes its patent rights are being infringed and that the Company may
undertake litigation to protect its patent rights if necessary. If undertaken,
such litigation could be costly, time-consuming and result in legal claims being
made against the Company, which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
there can be no assurance that the Company would ultimately prevail in any such
litigation.
Environmental Regulations
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture,
treatment and disposal of toxic or other hazardous substances, chemicals,
materials or waste. Any failure to comply with current or future regulations
could result in substantial civil penalties or criminal fines being imposed on
the Company, or its officers, directors or employees, suspension of production,
alteration of its manufacturing process or cessation of operations. Such
regulations could require the Company to acquire expensive remediation or
abatement equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to properly manage the
use, disposal or storage of, or adequately restrict the release of, hazardous or
toxic substances could subject the Company to significant liabilities.
20
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company's annual meeting of shareholders was held on May 14, 1998. The
following actions were taken at this meeting:
<TABLE>
<CAPTION>
ABSTENTIONS
AFFIRMATIVE NEGATIVE VOTES AND BROKER
VOTES VOTES WITHHELD NON-VOTES
----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
(a) Election of Directors
Norman H. Pond.................................... 11,649,398 279,213 -- 319,914
Edward Durbin..................................... 11,648,898 279,713 -- 319,914
Robert D. Hempstead............................... 11,648,398 280,213 -- 319,914
David N. Lambeth.................................. 11,648,398 280,213 -- 319,914
H. Joseph Smead................................... 11,648,698 279,913 -- 319,914
(b) Approval of an amendment to the Company's 1995
Stock Option/Stock Issuance Plan.................. 11,036,320 862,593 -- 349,612
(c) Ratification of Ernst & Young as independent
auditors.......................................... 11,907,622 8,082 -- 332,821
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 Amendment to Line of Credit Agreement dated May 1, 1998
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements 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.
INTEVAC, INC.
Date: August 10, 1998 By: /s/ NORMAN H. POND
------------------------------------
Norman H. Pond
Chairman of the Board, President and
Chief
Executive Officer (Principal
Executive Officer)
Date: August 10, 1998 By: /s/ CHARLES B. EDDY III
------------------------------------
Charles B. Eddy III
Vice President, Finance and
Administration, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.1 Amendment to Line of Credit Agreement dated May 1, 1998
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.1
[WELLS FARGO BANK LETTERHEAD]
May 1, 1998
Intevac, Inc.
3560 Bassett Street
Santa Clara, CA 95054
Gentlemen:
This letter is to confirm the changes agreed upon between Wells Fargo
Bank, National Association ("Bank") and Intevac, Inc. ("Borrower") to the terms
and conditions of that certain letter agreement between Bank and Borrower dated
as of April 30, 1997, as amended from time to time (the "Agreement"). For
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Bank and Borrower hereby agree that the Agreement shall be
amended as follows to reflect said changes.
1. The Agreement is hereby amended by deleting "May 1, 1998" as the last
day on which Bank will make advances under the Line of Credit, and by
substituting for said date "May 1, 1999," with such change to be effective upon
the execution and delivery to Bank of a promissory note substantially in the
form of Exhibit A attached hereto (which promissory note shall replace and be
deemed the Line of Credit Note defined in and made pursuant to the Agreement)
and all other contracts, instruments and documents required by Bank to evidence
such change.
2. Paragraphs V.3.(c) and (d) are hereby deleted in their entirety,
without substitution.
3. Paragraph V.3.(e) shall be renumbered to Paragraph V.3.(c).
4. Paragraph V.8.(a) is hereby deleted in its entirety, and the
following substituted therefor:
"(a) Tangible Net Worth not at any time less than $90,000,000.00,
with "Tangible Net Worth" defined as the sum of the capital stock and
additional paid in capital, plus retained earnings, plus subordinated debt
of the Borrower and its subsidiaries, minus intangible assets on a
consolidated basis and minus any permitted stock repurchase."
<PAGE> 2
Intevac, Inc.
May 1, 1998
Page 2
5. The following is hereby added to the Agreement as Paragraph V.15.:
"15. Year 2000 Compliance. Perform all acts reasonably necessary
to ensure that (a) Borrower and any business in which Borrower holds a
substantial interest, and (b) all customers, suppliers and vendors that
are material to Borrower's business, become Year 2000 Compliant in a
timely manner. Such acts shall include, without limitation, performing a
comprehensive review and assessment of all of Borrower's systems and
adopting a detailed plan, with itemized budget, for the remediation,
monitoring and testing of such systems. As used herein, "Year 2000
Compliant" shall mean, in regard to any entity, that all software,
hardware, firmware, equipment, goods or systems utilized by or material to
the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the
year 2000. Borrower shall, immediately upon request, provide to Bank such
certifications or other evidence of Borrower's compliance with the terms
hereof as Bank may from time to time require."
6. Except as specifically provided herein, all terms and conditions of
the Agreement remain in full force and effect, without waiver or modification.
All terms defined in the Agreement shall have the same meaning when used
herein. This letter and the Agreement shall be read together, as one document.
7. Borrower hereby remakes all representations and warranties contained
in the Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of Borrower's acknowledgement set forth
below there exists no default or defined event of default under the Agreement
or any promissory note or other contract, instrument or document executed in
connection therewith, nor any condition, act or event which with the giving of
notice or the passage of time or both would constitute such a default or
defined event of default.
<PAGE> 3
Intevac, Inc.
May 1, 1998
Page 3
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ Gus Martin
-----------------------
Gus Martin
Vice President
Acknowledged and accepted as of ___________________:
INTEVAC, INC.
By: /s/
----------------------
Title: CFO
--------------------
<PAGE> 4
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
- --------------------------------------------------------------------------------
$10,000,000.00 San Jose, California
May 1, 1998
FOR VALUE RECEIVED, the undersigned INTEVAC, INC. ("Borrower") promises to
pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its
office at Santa Clara Valley RCBO, 121 Park Center Plaza 3rd Flr, San Jose, CA
98115, or at such other place as the holder hereof may designate, in lawful
money of the United States of America and in immediately available funds, the
principal sum of $10,000,000.00, or so much thereof as may be advanced and be
outstanding, with interest thereon, to be computed on each advance from the
date of its disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in California are authorized or required by law
to close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for 1, 2 or 3 months, as designated by Borrower, during which all or
a portion of the outstanding principal balance of this Note bears interest
determined in relation to LIBOR; provided however, that no Fixed Rate Term may
be selected for a principal amount less than $500,000.00; and provided further,
that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof.
If any Fixed Rate Term would end on a day which is not a Business Day, then
such Fixed Rate Term shall be extended to the next succeeding Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to
the nearest whole 1/8 of 1%) determined by dividing Base LIBOR by a percentage
equal to 100% less any LIBOR Reserve Percentage.
(i) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans making reference thereto, on the first
day of a Fixed Rate Term for delivery of funds on said date for a period of
time approximately equal to the number of days in such Fixed Rate Term and in
an amount approximately equal to the principal amount to which such Fixed Rate
Term applies. Borrower understands and agrees that Bank may base its quotation
of the Inter-Bank Market Offered Rate upon such offers or other market
indicators of the Inter-Bank Market as Bank in its discretion deems appropriate
including, but not limited to, the rate offered for U.S. dollar deposits on the
London Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the
Federal Reserve Board, as amended), adjusted by Bank for expected changes in
such reserve percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum equal to the Prime Rate in effect from time
to time, or (ii) at a fixed rate per annum determined by Bank to be 1.78000%
above LIBOR in effect on the first day of the applicable Fixed Rate Term. When
interest is determined in relation to the Prime Rate, each change in the rate of
interest hereunder shall become effective on the date each Prime Rate change is
announced within Bank. With respect to each LIBOR selection option selected
hereunder, Bank is hereby authorized to not the date, principal amount, interest
rate and Fixed Rate Term applicable thereto and any payments made thereon on
Bank's books and records (either manually or by electronic entry) and/or on any
schedule attached to this Note, which notations shall be prima facie evidence of
the accuracy of the information noted.
(b) Selection of Interest Rate Options. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the
interest rate option selected by Borrower; (ii) the
Revolving Line of Credit Note (02/98), Page 1
<PAGE> 5
principal amount subject thereto, and (iii) each LIBOR selection, the length of
the applicable Fixed Rate Term. Any such notice may be given by telephone so
long as, with respect to each LIBOR selection, (A) Bank receives written
confirmation from Borrower not later than 3 Business Days after such telephone
notice is given, and (B) such notice is given to Bank prior to 10:00 a.m.,
California time, on the first day of the Fixed Rate Term. For each LIBOR option
requested hereunder, Bank will quote the applicable fixed rate to Borrower at
approximately 10:00 a.m., California time, on the first day of the Fixed Rate
Term. If Borrower does not immediately accept the rate quoted by Bank, any
subsequent acceptance by Borrower shall be subject to a redetermination by Bank
of the applicable fixed rate; provided however, that if Borrower fails to accept
any such rate by 11:00 a.m., California time, on the Business Day such quotation
is given, then the quoted rate shall expire and Bank shall have no obligation to
permit a LIBOR option to be selected on such day. If no specific designation of
interest is made at the time any advance is requested hereunder or at the end of
any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate Interest
selection for such advance or the principal amount to which such Fixed Rate Term
applied.
(c) Additional LIBOR Provisions
(i) If Bank at any time shall determine that for any reason
adequate and reasonable means do not exist for ascertaining LIBOR, then Bank
shall promptly give notice thereof to Borrower. If such notice is given and
until such notice has been withdrawn by Bank, then (A) no new LIBOR option may
be selected by Borrower, and (B) any portion of the outstanding principal
balance hereof which bears interest determined in relation to LIBOR, subsequent
to the end of the Fixed Rate Term applicable thereto, shall bear interest
determined in relation to the Prime Rate.
(ii) If any law, treaty, rule, regulation or determination of a
court or governmental authority or any change therein or in the interpretation
or application thereof (each, a "Change in Law") shall make it unlawful for Bank
(A) to make LIBOR options available hereunder, or (B) to maintain interest
rates based on LIBOR, then in the former event, any obligation of Bank to make
available such unlawful LIBOR options shall immediately be cancelled, and in
the latter event, any such unlawful LIBOR-based interest rates then outstanding
shall be converted, at Bank's option, so that interest on the portion of the
outstanding principal balance subject thereto is determined in relation to the
Prime Rate; provided however, that if any such Change in Law shall permit any
LIBOR-based interest rates to remain in effect until the expiration of the
Fixed Rate Term applicable thereto, then such permitted LIBOR-based interest
rates shall continue in effect until the expiration of such Fixed Rate Term.
Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank for
any fines, fees, charges, penalties or other costs incurred or payable by Bank
as a result thereof and which are attributable to any LIBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other change with respect to
any LIBOR options, or change the basis of taxation of payments to Bank of
principal, interests, fees or any other amount payable hereunder (except for
changes in the rate of tax on the overall net income of Bank); or
(B) impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances or loans by, or
any other acquisition of funds by any office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available to
Borrower hereunder, any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrower.
(d) Payment of Interest. Interest accrued on this Note shall be payable
on the 1st day of each month, commencing June 1, 1998.
(e) DEFAULT INTEREST. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on
the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of
interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made
hereon by or for any Borrower, which balance may be endorsed hereon
Revolving Line of Credit Note (02/98), Page 2
<PAGE> 6
from time to time by the holder. The outstanding principal balance of this Note
shall be due and payable in full on May 1, 1999.
(b) Advances. Advances hereunder, to the total amount of the principal
sum available hereunder, may be made by the holder at the oral or written
request of (i) RUTH UPDAGRAFF or CHARLES EDDY or KEVIN SOULSBY or NORMAN POND,
any one acting alone, who are authorized to request advances and direct the
disposition of any advances until written notice of the revocation of such
authority is received by the holder at the office designated above, or (ii) any
person, with respect to advances deposited to the credit of any account of any
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of each Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have
no obligation to determine whether any person requesting an advance is or has
been authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the
outstanding principal balance of this Note which bears interest determined in
relation to LIBOR, with such payments applied to the oldest Fixed Rate Term
first.
PREPAYMENT:
(a) Prime Rate. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to the Prime Rate at any time, in
any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at any time and in the
minimum amount of $10,000.000; provided however, that if the outstanding
principal balance of such portion of this Note is less than said amount, the
minimum prepayment amount shall be the entire outstanding principal balance
thereof. In consideration of Bank providing this prepayment option to Borrower,
or if any such portion of this Note shall become due and payable at any time
prior to the last day of the Fixed Rate Term applicable thereto by acceleration
or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is
the sum of the discounted monthly differences for each month from the month of
prepayment through the month in which such Fixed Rate Term matures, calculated
as follows for each such month;
(i) Determine the amount of interest which would have accrued each
month on the amount prepaid at the interest rate applicable to such amount had
it remained outstanding until the last day of the Fixed Rate Term applicable
thereto.
(ii) Subtract from the amount determined in (i) above the amount of
interest which would have accrued for the same month on the amount prepaid for
the remaining term of such Fixed Rate Term at LIBOR in effect on the date of
prepayment for new loans made for such term and in a principal amount equal to
the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than
zero, discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to
pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum 2.000% above the Prime
Rate in effect from time to time (computed on the basis of a 360-day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges
when due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor of
this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner
and/or joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any Borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debts as they
become due; or any attachment or like levy on any property of any Borrower or
Third Party Obligor.
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.
Revolving Line of Credit Note (02/98), Page 3
<PAGE> 7
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.
(f) Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.
(g) Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protect, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel),
expended or incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
INTEVAC, INC.
By: [SIG]
---------------------------------
Title: CFO
------------------------------
Revolving Line of Credit Note (02/98), Page 4
<PAGE> 8
WELLS FARGO BANK, N.A.
ACCOUNT OF:
Intevac, Inc. Santa Clara RCBO #2690
--------------------------------------
Office
Documentation
--------------------------------------
Department
121 Park Center Plaza,
--------------------------------------
San Jose, CA 95115
--------------------------------------
Address
May 1, 1998
--------------------------------------
Date
Customer Obligation No. 4401788691
- --------------------------------------------------------------------------------
Fee for renewing Line of Credit in the $13,000.0
amount of $10,000,000.00
Total $13,000.00
[ ] Check is attached for payment in
full of the above amount.
[X] Wells Fargo Bank is authorized to
charge account #4584-704118 for the
above amount.
- --------------------------------------------------------------------------------
<PAGE> 9
WELLS FARGO BANK CORPORATE RESOLUTION:BORROWING
- -------------------------------------------------------------------------------
TO: WELLS FARGO BANK, NATIONAL ASSOCIATION
RESOLVED: That this corporation, INTEVAC, INC., proposes to obtain credit
from time to time, or has obtained credit, from Wells Fargo Bank, National
Association ("Bank").
BE IT FURTHER RESOLVED, that any one of the following officers:
CHIEF FINANCIAL OFFICER OR PRESIDENT
together with any ONE of the following officers:
NONE
of this corporation be and they are hereby authorized and empowered for and on
behalf of and in the name of this corporation and as its corporate act and deed:
(a) To borrow money from Bank and to assume any liabilities of any other
person or entity to Bank, in such form and on such terms and conditions as shall
be agreed upon by those authorized above and Bank, and to sign and deliver to
Bank such promissory notes and other evidences of indebtedness for money
borrowed or advanced and/or for indebtedness assumed as Bank shall require; such
promissory notes or other evidences of indebtedness may provide that advances be
requested by telephone communication and by any officer, employee or agent of
this corporation so long as the advances are deposited into any deposit account
of this corporation with Bank; this corporation shall be bound to Bank by, and
Bank may rely upon, any communication or act, including telephone
communications, purporting to be done by any officer, employee or agent of this
corporation provided that Bank believes, in good faith, that the same is done by
such person.
(b) To contract for the issuance by Bank of letters of credit, to discount
with Bank notes, acceptances and evidences of indebtedness payable to or due
this corporation, to endorse the same and execute such contracts and instruments
for repayment thereof to Bank as Bank shall require, and to enter into foreign
exchange transactions with or through Bank.
(c) To mortgage, encumber, pledge, convey, grant, assign or otherwise
transfer all or any part of this corporation's real or personal property for
the purpose of securing the payment of any of the promissory notes, contracts,
instruments and other evidences of indebtedness authorized hereby, and to
execute and deliver to Bank such deeds of trust, mortgages, pledge agreements,
security agreements and/or other related documents as Bank shall require.
(d) To perform all acts and to execute and deliver all documents described
above and all other contracts and instruments which Bank deems necessary or
convenient to accomplish the purposes of this resolution and/or to perfect or
continue the rights, remedies and security interests to be given to Bank
pursuant hereto, including without limitation, any modifications, renewals
and/or extensions of any of this corporation's obligations to Bank, however
evidenced; provided that the aggregate principal amount of all sums borrowed and
credits established pursuant to this resolution shall not at any time exceed the
sum of $10,200,000.00 outstanding and unpaid.
Loans made pursuant to a special resolution and loans made by offices of
Bank other than the office to which this resolution is delivered shall be in
addition to foregoing limitation.
BE IT FURTHER RESOLVED, that the authority hereby conferred is in addition
to that conferred by any other resolution heretofore or hereafter delivered by
this corporation to Bank and shall continue in full force and effect until Bank
shall have received notice in writing, certified by the Secretary of this
corporation, of the revocation hereof by a resolution duly adopted by the Board
of Directors of this corporation. Any such revocation shall be effective only as
to credit which is extended or committed by Bank, or actions which are taken by
this corporation
CORPORATE RESOLUTION:BORROWING (08/96), PAGE 1
<PAGE> 10
pursuant to the resolutions contained herein, subsequent to Bank's receipt of
such notice. The authority hereby conferred shall be deemed retroactive, and
any and all acts authorized herein which were performed prior to the passage of
this resolution are hereby approved and ratified.
CERTIFICATION
I, CHARLES B. EDDY III, Secretary of INTEVAC, INC., a corporation created
and existing under the laws of the state of CALIFORNIA, do hereby certify and
declare that the foregoing is a full, true and correct copy of the resolutions
duly passed and adopted by the Board of Directors of said corporation, by
written consent of all Directors of said corporation or at a meeting of said
Board duly and regularly called, noticed and held on 4/30/98, at which meeting
a quorum of the Board of Directors was present and voted in favor of said
resolutions; that said resolutions are now in full force and effect; that there
is no provision in the Articles of Incorporation or Bylaws of said corporation,
or any shareholder agreement, limiting the power of the Board of Directors of
said corporation to pass the foregoing resolutions and that such resolutions
are in conformity with the provisions of such Articles of Incorporation and
Bylaws; and that no approval by the shareholders of, or of the outstanding
shares of, said corporation is required with respect to the matters which are
the subject of the foregoing resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand and if required by Bank
affixed the corporate seal of said corporation, as of 4/30/98.
[sig]
--------------------------------------
CHARLES B. EDDY III, Secretary
[SEAL]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
THE CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 27, 1998 (UNAUDITED)
AND THE CONDENSED CONSOLIDATED STATEMENT INCOME (UNAUDITED) FOR THE
SIX MONTHS ENDED JUNE 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-27-1998
<CASH> 765
<SECURITIES> 66,272
<RECEIVABLES> 10,460
<ALLOWANCES> 1,746
<INVENTORY> 24,837
<CURRENT-ASSETS> 107,840
<PP&E> 23,097
<DEPRECIATION> 8,960
<TOTAL-ASSETS> 133,053
<CURRENT-LIABILITIES> 28,778
<BONDS> 59,460
0
0
<COMMON> 15,237
<OTHER-SE> 29,578
<TOTAL-LIABILITY-AND-EQUITY> 133,053
<SALES> 70,036
<TOTAL-REVENUES> 70,036
<CGS> 50,332
<TOTAL-COSTS> 50,332
<OTHER-EXPENSES> 13,925
<LOSS-PROVISION> 250
<INTEREST-EXPENSE> 2,073
<INCOME-PRETAX> 5,186
<INCOME-TAX> 1,712
<INCOME-CONTINUING> 3,474
<DISCONTINUED> 1,005
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,479
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
</TABLE>
