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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-26946
-----------------------------
INTEVAC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
CALIFORNIA 94-3125814
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
3550 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 986-9888
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 September 25, 1999 approximately 11,708,525 shares of the Registrant's
Common Stock, no par value, were outstanding.
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INTEVAC, INC.
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets....................... 3
Condensed Consolidated Statements of Income and
Comprehensive 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................................... 10
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
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)
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,899 $ 3,991
Short-term investments.................................... 38,490 56,925
Accounts receivable, net of allowances of $1,698 and
$1,629 at September 25, 1999 and December 31, 1998,
respectively........................................... 8,808 10,169
Inventories............................................... 19,695 22,102
Prepaid expenses and other current assets................. 533 658
Deferred tax asset........................................ 7,008 7,008
------- --------
Total current assets.............................. 78,433 100,853
Property, plant, and equipment, net......................... 9,699 13,131
Investment in 601 California Avenue LLC..................... 2,431 2,431
Goodwill and other intangibles.............................. 2,522 3,543
Debt issuance costs......................................... 1,076 1,700
Deferred tax assets and other assets........................ 1,352 1,318
------- --------
Total assets...................................... $95,513 $122,976
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,320 $ 2,034
Accrued payroll and related liabilities................... 1,457 1,880
Other accrued liabilities................................. 8,013 7,535
Customer advances......................................... 8,147 11,630
------- --------
Total current liabilities......................... 18,937 23,079
Convertible notes........................................... 41,245 57,500
Long-term notes payable..................................... 1,943 1,961
Shareholders' equity:
Common stock, no par value................................ 17,050 17,917
Accumulated other comprehensive income.................... -- 122
Retained earnings......................................... 16,338 22,397
------- --------
Total shareholders' equity............................. 33,388 40,436
------- --------
Total liabilities and shareholders' equity........ $95,513 $122,976
======= ========
</TABLE>
See accompanying notes.
3
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues.............................. $13,822 $14,657 $ 35,841 $84,693
Cost of net revenues...................... 12,323 10,693 33,169 61,025
------- ------- -------- -------
Gross profit.............................. 1,499 3,964 2,672 23,668
Operating expenses:
Research and development................ 3,283 2,157 11,135 9,117
Selling, general and administrative..... 1,615 2,458 5,602 8,509
Restructuring........................... 2,224 71 2,202 1,235
------- ------- -------- -------
Total operating expenses........ 7,122 4,686 18,939 18,861
------- ------- -------- -------
Operating income (loss)................... (5,623) (722) (16,267) 4,807
Interest expense.......................... (911) (1,027) (2,919) (3,100)
Interest income and other, net............ 1,281 1,059 3,213 2,789
------- ------- -------- -------
Income (loss) from continuing operations
before income taxes..................... (5,253) (690) (15,973) 4,496
Provision for (benefit from) income
taxes................................... (1,996) (227) (6,070) 1,485
------- ------- -------- -------
Income (loss) from continuing
operations.............................. (3,257) (463) (9,903) 3,011
Gain from discontinued operations, net of
applicable income taxes................. -- -- -- 1,005
Gain from repurchase of convertible notes,
net of applicable income taxes.......... 2,881 -- 3,844 --
------- ------- -------- -------
Net income (loss)......................... $ (376) $ (463) $ (6,059) $ 4,016
======= ======= ======== =======
Other comprehensive income (loss):
Unrealized foreign currency translation
adjustment........................... -- 66 (122) 66
------- ------- -------- -------
Total adjustments......................... -- 66 (122) 66
------- ------- -------- -------
Total comprehensive income (loss)......... $ (376) $ (397) $ (6,181) $ 4,082
======= ======= ======== =======
Basic earnings per share:
Income (loss) from continuing
operations........................... $ (0.28) $ (0.04) $ (0.84) $ 0.25
Net income (loss)....................... $ (0.03) $ (0.04) $ (0.51) $ 0.33
Shares used in per share amounts........ 11,706 11,994 11,799 12,098
Diluted earnings per share:
Income (loss) from continuing
operations........................... $ (0.28) $ (0.04) $ (0.84) $ 0.24
Net income (loss)....................... $ (0.03) $ (0.04) $ (0.51) $ 0.32
Shares used in per share amounts........ 11,706 11,994 11,799 12,414
</TABLE>
See accompanying notes.
4
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 25, SEPTEMBER 26,
1999 1998
------------- -------------
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OPERATING ACTIVITIES
Net income (loss)........................................... $ (6,059) $ 4,016
Adjustments to reconcile net income to net cash and cash
equivalents used in operating activities:
Depreciation and amortization.......................... 4,079 5,865
Gain on foreign exchange contracts..................... (659) --
Gain on sale of Chorus investment...................... -- (395)
Gain on sale of discontinued operations................ -- (794)
Gain on purchase of convertible notes.................. (6,201) --
Foreign currency loss.................................. 4 71
(Gain) loss on IMAT investment......................... (35) 132
Restructuring charge -- non-cash portion............... -- 194
Loss on disposal of equipment.......................... 107 95
Changes in assets and liabilities...................... 1,997 (14,437)
-------- --------
Total adjustments................................. (708) (9,269)
-------- --------
Net cash and cash equivalents used in operating
activities................................................ (6,767) (5,253)
INVESTING ACTIVITIES
Purchase of investments..................................... (28,291) (54,211)
Proceeds from sale of investments........................... 46,726 42,331
Proceeds from sale of Chorus investment..................... -- 395
Purchase of leasehold improvements and equipment............ (1,143) (2,482)
-------- --------
Net cash and cash equivalents provided by (used in)
investing activities...................................... 17,292 (13,967)
FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 712 1,118
Repurchase of convertible notes............................. (9,664) --
Repurchase of common stock.................................. (1,665) (3,000)
-------- --------
Net cash and cash equivalents used in financing
activities................................................ (10,617) (1,882)
-------- --------
Net decrease in cash and cash equivalents................... (92) (21,102)
Cash and cash equivalents at beginning of period............ 3,991 24,431
-------- --------
Cash and cash equivalents at end of period.................. $ 3,899 $ 3,329
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid (received) for:
Interest.................................................. $ 3,474 $ 3,838
Income taxes.............................................. -- 4,065
Income tax refund......................................... (1,382) --
Other non-cash changes:
Inventories transferred from property, plant and
equipment.............................................. $ (1,641) $ --
</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.'s ("Intevac" or the "Company") primary business is the
design, manufacture and sale of complex capital equipment that is used to
manufacture products such as thin-film disks for computer disk drives and flat
panel displays (the "Equipment Business"). The Company also develops highly
sensitive electro-optical devices under government sponsored R&D contracts (the
"Photonics Business").
The Equipment Business is a leading supplier of sputtering systems used to
manufacture thin-film disks for computer hard disk drives. Sputtering is a
vacuum deposition process used to deposit multiple thin-film layers on a disk.
The Equipment Business also realizes revenues from the sales of disk lubrication
equipment, contact stop-start ("CSS") test equipment, flat panel display ("FPD")
manufacturing equipment and electron beam processing equipment. Spare parts and
after-sale service are also sold to purchasers of the Company's equipment, and
sales of components are made to other manufacturers of vacuum equipment.
The Photonics Business began in 1995 when the Company's night vision
business was sold. The terms of the sale permitted Intevac to utilize the night
vision technology for non-competitive products. The majority of Photonics
Business revenues are from government sponsored R&D contracts. The Photonics
Business has been developing technology that permits highly sensitive detection
in the short-wave infrared spectrum in electron sources with very precise
characteristics. This development work is aimed at creating new products for
both military and industrial applications.
The financial information at September 25, 1999 and for the three- and
nine-month periods ended September 25, 1999 and September 26, 1998 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, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
The results for the three- and nine-month periods ended September 25, 1999
are not considered indicative of the results to be expected for any future
period or for the entire year.
2. INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 31,
1999 1998
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(IN THOUSANDS)
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Raw materials........................................ $ 3,675 $ 6,907
Work-in-progress..................................... 14,504 11,653
Finished goods....................................... 1,516 3,542
------- -------
$19,695 $22,102
======= =======
</TABLE>
A significant portion of the finished goods is represented by inventory at
customer sites undergoing installation and acceptance testing.
6
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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
The effective tax rates used for the three- and nine-month periods ending
September 25, 1999 and September 26, 1998 were 38% and 33% of pretax income
(loss), respectively. These rates are based on the estimated annual tax rate
complying with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".
4. REPURCHASE OF CONVERTIBLE NOTES
During the quarter, the Company repurchased $12,250,000, face value, of its
outstanding 6 1/2% Convertible Subordinated Notes (the "Convertible Notes"). The
repurchase resulted in a gain of $2,881,000 (net of income taxes).
During the nine-month period ended September 25, 1999, the Company
repurchased $16,255,000, face value, of its Convertible Notes. The repurchase
resulted in a gain of $3,844,000 (net of income taxes).
5. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
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THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(IN THOUSANDS)
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Numerator:
Income (loss) from continuing
operations........................... $(3,257) $ (463) $(9,903) $ 3,011
======= ======= ======= =======
Net income (loss).................. $ (376) $ (463) $(6,059) $ 4,016
======= ======= ======= =======
Numerator for basic earnings per
share -- income (loss) available
to common stockholders.......... (376) (463) (6,059) 4,016
Effect of dilutive securities:
6 1/2% convertible notes(1)..... -- -- -- --
------- ------- ------- -------
Numerator for diluted earnings per
share -- income available to
common stockholders after
assumed conversions............. $ (376) $ (463) $(6,059) $ 4,016
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share -- weighted-average
shares.......................... 11,706 11,994 11,799 12,098
Effect of dilutive securities:
Employee stock options(2)....... -- -- -- 316
6 1/2% convertible notes(1)..... -- -- -- --
------- ------- ------- -------
Dilutive potential common shares... -- -- -- 316
------- ------- ------- -------
Denominator for diluted earnings
per share -- adjusted
weighted-average shares and
assumed conversions............. 11,706 11,994 11,799 12,414
======= ======= ======= =======
</TABLE>
- ---------------
(1) Diluted EPS for the three- and nine-month periods ended September 25, 1999
and September 26, 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)
(2) Diluted EPS for the three- and nine-month periods ended September 25, 1999
and for the three-month period ended September 26, 1998 excludes the effect
of employee stock options as their inclusion would be anti-dilutive.
6. SEGMENT REPORTING
Segment Description
Intevac, Inc. has two reportable segments: equipment and photonics. The
Company's equipment business sells complex capital equipment used in the
manufacturing of thin-film disks, flat panel displays, shrink-wrap films and for
in-line sterilization. The Company's photonics business is developing products
utilizing electron sources that permit highly sensitive detection in the
short-wave infrared spectrum.
Included in corporate activities are general corporate expenses,
elimination of inter-segment revenues, the equity in net loss of equity
investee, amortization expenses related to certain intangible assets and a
restructuring reserve established in September 1999, less an allocation of
corporate expenses to operating units equal to 1% of net revenues.
Business Segment Net Revenues
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equipment
Trade.......................... $11,751 $13,117 $ 30,205 $80,711
Inter-Segment................ -- 11 -- 39
------- ------- -------- -------
11,751 13,128 30,205 80,750
Photonics
Trade........................ 2,071 1,540 5,636 3,982
Corporate Activities........... -- (11) -- (39)
------- ------- -------- -------
Total................ $13,822 $14,657 $ 35,841 $84,693
======= ======= ======== =======
</TABLE>
Business Segment Profit & Loss
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equipment...................... $(2,658) $ 229 $(11,824) $ 6,321
Photonics...................... (221) (7) (481) 51
Corporate activities........... (2,744) (944) (3,962) (1,565)
------- ------- -------- -------
Operating income (loss)........ $(5,623) $ (722) $(16,267) $ 4,807
Interest expense............... (911) (1,027) (2,919) (3,100)
Interest income................ 582 656 1,650 2,189
Other income and expense,
net.......................... 699 403 1,563 600
------- ------- -------- -------
Income (loss) from continuing
operations before income
taxes........................ $(5,253) $ (690) $(15,973) $ 4,496
======= ======= ======== =======
</TABLE>
8
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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RESTRUCTURING
On September 24, 1999, as a result of continued weak demand for its disk
equipment, the Company's management adopted a plan to reduce expenses. The
expense reduction plan includes closing one of the buildings at its Santa Clara
facility and a reduction in force of 7 employees out of the Company's staff of
contract and regular personnel. The reductions took place at the Company's
facilities in Santa Clara, CA.
In the third quarter of 1999, the Company incurred a restructuring charge
of $2,225,000 related to the expense reduction plan. The significant components
of this charge include $873,000 for future rent due on the lease of the building
(net of expected sublease income), $160,000 for costs associated with operating
the building through May 2000, $580,000 for the write-off of leasehold
improvements and $584,000 for moving out of the building. Closure of the
facility is expected to be complete by May 31, 2000.
9
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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. Words such as "believes", "expects",
"anticipates" and the like indicate forward-looking statements. 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 1999, Form 10-Q's and Form 8-K's.
RESULTS OF OPERATIONS
Three Months Ended September 25, 1999 and September 26, 1998
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, system components, electron beam processing
equipment, flat panel display manufacturing equipment and related equipment and
components ("Equipment") and contract research and development related to the
development of highly sensitive electro-optical devices under government
sponsored R&D contracts and sales of derivative products ("Photonics"). Net
revenues from system sales are recognized upon customer acceptance. Net revenues
from sales of related equipment and system components are recognized upon
product shipment. Contract research and development revenue is recognized in
accordance with contract terms, typically as costs are incurred. Net revenues
decreased by 6% to $13.8 million for the three months ended September 25, 1999
from $14.7 million for the three months ended September 26, 1998. Net revenues
from Equipment sales declined to $11.8 million for the three months ended
September 25, 1999 from $13.1 million for the three months ended September 26,
1998. The decrease in net revenues from Equipment was due to decreases in sales
of disk manufacturing equipment and electron beam processing equipment, which
was partially offset by an increase in sales of flat panel manufacturing
equipment. Net revenues from Photonics increased to $2.1 million for the three
months ended September 25, 1999 from $1.5 million for the three months ended
September 26, 1998. The increase in net revenues from Photonics was due
primarily to an increase in revenue from contract research and development. The
Company expects that total revenues will continue in the $5 million to $10
million range for each of the next two quarters.
International sales increased by 326% to $9.0 million for the three months
ended September 25, 1999 from $2.1 million for the three months ended September
26, 1998. The increase in international sales was primarily due to an increase
in net revenues from disk manufacturing equipment and to a lesser extent from an
increase in flat panel manufacturing equipment. International sales constituted
65% of net revenues for the three months ended September 25, 1999 and 14% of net
revenues for the three months ended September 26, 1998.
Backlog. The Company's backlog of orders for its products was $17.9 million
at September 25, 1999 and $26.1 million at September 26, 1998. The reduction in
backlog was primarily the result of a lower backlog of orders for disk and flat
panel manufacturing equipment, which was partially offset by an higher backlog
of orders for electron beam processing equipment. The Company includes in
backlog the value of purchase orders for its products that have scheduled
delivery dates.
Gross margin. Cost of net revenues consists primarily of purchased
materials, royalties, fabrication, assembly, test, installation, warranty costs,
scrap and costs attributable to contract research and development. Gross margin
was 10.9% for the three months ended September 25, 1999 as compared to 27.1% for
the three months ended September 26, 1998. Gross margin declined as the result
of a high costs incurred on the delivery of the first MDP-250K disk sputtering
system and from under-absorption of manufacturing overhead due to low
manufacturing volume.
Research and development. Research and development expense consists
primarily of prototype materials, salaries and related costs of employees
engaged in ongoing research, design and development activities for
10
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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 52% to $3.3 million for the three
months ended September 25, 1999 from $2.2 million for the three months ended
September 26, 1998, representing 23.8% and 14.7%, respectively, of net revenue.
This increase was primarily the result of a lower level of cost sharing
reimbursements from the Company's flat panel equipment development partner in
the three month period ended September 25, 1999 relative to the prior year
period. The reimbursements were unusually high in the three months ended
September 26, 1998 because they represented a catch up of cost sharing credits
related to approximately one year of flat panel development expense.
Research and development expenses do not include costs of $1.8 million and
$1.4 million for the three-month periods ended September 25, 1999 and September
26, 1998 related to contract research and development. These expenses are
included in cost of goods sold.
Research and development expenses also do not include costs of $0.4 million
and $1.2 million for the three month periods ended September 25, 1999 and
September 26, 1998, reimbursed under the terms of a research and development
cost sharing agreement with the Company's Japanese flat panel manufacturing
equipment development partner. Since 1993 the Company has received $9.5 million
of funds under this cost sharing agreement.
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 a subsidiary in Singapore to support
customers in Southeast Asia. The Company markets its flat panel manufacturing
equipment to the Far East through its Japanese joint venture, IMAT. Selling,
general and administrative expense decreased by 34% to $1.6 million for the
three months ended September 25, 1999 from $2.5 million for the three months
ended September 26, 1998, representing 11.7% and 16.8%, respectively, of net
revenue. The lower level of expense was primarily due to a decline in selling,
general and administrative headcount to 39 employees at September 25, 1999 from
84 employees at September 26, 1998 as the result of reductions in force in the
Company's staff of contract and regular employees implemented in August 1998 and
March 1999, attrition and the reallocation of certain administrative employees
to operations.
Restructuring expense. In September 1999 the Company adopted a plan to
reduce expenses. The expense reduction plan included closure of one of the
buildings at its Santa Clara facility and a reduction in force of seven
employees at the Company's facilities in Santa Clara, CA. The Company incurred a
restructuring charge of $2.2 million related to the expense reduction plan. The
significant components of this charge include $0.9 million for future rent due
on the lease of the building (net of expected sublease income), $0.1 million for
costs associated with operating the building through May 2000, $0.6 million for
the write-off of leasehold improvements and $0.6 million for moving out of the
building. Closure of the facility is expected to be complete by May 31, 2000.
Interest expense. Interest expense consists primarily of interest on the
Company's 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 declined to $0.9 million in the three-month period ended
September 25, 1999 from $1.0 million in the three month period ended September
26, 1998. The decline in interest expense was primarily the result of the
repurchase by the Company of $16.3 million of its 6.5% Convertible Notes Due
2004 (the "Convertible Notes") during 1999. The repurchase reduced the balance
of 6 1/2% Convertible Subordinated Notes Due 2004 outstanding to $41.2 million
at September 25, 1999 from $57.5 million at September 26, 1998.
Interest income and other, net. Interest income and other, net consists
primarily of interest income on the Company's investments, foreign currency
hedging gains and losses, early payment discounts on the purchase of
inventories, goods and services and the Company's 49% share of the loss incurred
by IMAT. Interest income and other, net increased by 21% to $1.3 million for the
three months ended September 25, 1999 from $1.1 million for the three months
ended September 26, 1998. Interest income and other, net for the
11
<PAGE> 12
three months ended September 25, 1999 included approximately $1.0 million of
dividend income on the Preferred Share the Company owns in 601 California Avenue
LLC and approximately $0.6 million of interest income which was partially offset
by approximately $0.3 million of foreign currency hedging losses. The $1.0
million payment from 601 California Avenue LLC was equivalent to approximately
two and one half years of accumulated dividends in arrears. Dividends on the
Preferred Share are now current. Interest income and other, net for the three
months ended September 26, 1998 included approximately $0.6 million of interest
income and approximately $0.4 million of income related to the Company's
interest in the capital stock of Chorus Corporation.
6 1/2% Convertible Subordinated Notes Due 2004. In July 1998, the Company's
Board of Directors approved the repurchase in the open market of up to $19.0 of
the Convertible Notes. The Company repurchased $12.3 million of these notes
during the three months ended September 25, 1999 from which it recognized a gain
of $2.9 million, net of applicable taxes.
Provision for (benefit from) income taxes. The Company's estimated
effective tax rate for the three months ended September 25, 1999 was a benefit
rate of 38% compared to a 33% effective tax rate for the three months ended
September 26, 1998. The Company's estimated effective tax rates are based on
estimated effective tax rates for the respective years. The Company's projected
annual effective tax rates for 1999 and 1998 differ 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.
Nine Months Ended September 25, 1999 and September 26, 1998
Net revenues. Net revenues decreased by 58% to $35.8 million for the nine
months ended September 25, 1999 from $84.7 million for the nine months ended
September 26, 1998. Net revenues from Equipment sales declined to $30.2 million
for the nine months ended September 25, 1999 from $80.8 million for the nine
months ended September 26, 1998. The decrease in net revenues from Equipment was
due primarily to a decrease in sales of disk manufacturing equipment, and to a
lesser extent, a decrease in sales of flat panel manufacturing equipment and
electron beam processing equipment. Net revenues from Photonics increased to
$5.6 million for the nine months ended September 25, 1999 from $4.0 million for
the nine months ended September 26, 1998. The increase in net revenues from
Photonics was due primarily to a increase in revenue from contract research and
development, and to a lesser extent, sales of prototype LIVAR camera systems.
International sales decreased by 50% to $23.3 million for the nine months
ended September 25, 1999 from $46.3 million for the nine months ended September
26, 1998. The decrease in international sales was primarily due to a decrease in
net revenues from disk manufacturing equipment, and to a lesser extent, a
decrease in net revenues from the sale of electron beam processing equipment.
International sales constituted 65% of net revenues for the nine months ended
September 25, 1999 and 55% of net revenues for the nine months ended September
26, 1998.
Gross margin. Gross margin was 7.5% for the nine months ended September 25,
1999 as compared to 27.9% for the nine months ended September 26, 1998. Gross
margin declined as the result of the sale of three used disk sputtering systems
at heavily discounted prices, establishment of a $0.4 million cost to market
reserve on a used MDP-250B disk sputtering system remaining in inventory, high
initial costs to complete the Company's first production rapid thermal
processing system and first MDP-250K disk sputtering system, payment of $0.5M as
part of the settlement of the patent claim with CVC Products, Inc. and
under-absorption of manufacturing overhead due to low manufacturing volume.
Research and development. Company funded research and development expense
increased by 22% to $11.1 million for the nine months ended September 25, 1999
from $9.1 million for the nine months ended September 26, 1998, representing
31.1% and 10.8%, respectively, of net revenue. This increase was primarily the
result of increased expense for the development of rapid thermal processing flat
panel manufacturing equipment, Photonics products and disk sputtering equipment.
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Research and development expenses do not include costs of $4.5 million and
$3.3 million for the nine-month periods ended September 25, 1999 and September
26, 1998 related to contract research and development. These expenses are
included in cost of goods sold.
Research and development expenses also do not include costs of $0.7 million
and $1.2 million in the nine month periods ended September 25, 1999 and
September 26, 1998, reimbursed under the terms of a research and development
cost sharing agreement with the Company's Japanese flat panel manufacturing
equipment development partner.
Selling, general and administrative. Selling, general and administrative
expense decreased by 34% to $5.6 million for the nine months ended September 25,
1999 from $8.5 million for the nine months ended September 26, 1998,
representing 15.6% and 10.0%, respectively, of net revenue. The primary reason
for the decrease was a lower level of selling, general and administrative
expense in the Equipment Business. The lower level of expense was primarily due
to a decline in selling, general and administrative headcount to 39 employees at
September 25, 1999 from 84 employees at September 26, 1998 as the result of
reductions in force in the Company's staff of contract and regular employees
implemented in March 1998, August 1998 and March 1999 and the reallocation of
certain administrative employees to operations.
Restructuring expense. Restructuring expense was $2.2 million and $1.2
million in the nine-month periods ended September 25, 1999 and September 26,
1998, respectively.
In September 1999 the Company adopted a plan to reduce expenses. The
expense reduction plan included closure of one of the buildings at it's Santa
Clara facility and a reduction in force of seven employees at the Company's
facilities in Santa Clara, CA. The Company incurred a restructuring charge of
$2.2 million related to the expense reduction plan. The significant components
of this charge include $0.9 million for future rent due on the lease of the
building (net of expected sublease income), $0.1 million for costs associated
with operating the building through May 2000, $0.6 million for the write-off of
leasehold improvements and $0.6 million for moving out of the building. Closure
of the facility is expected to be complete by May 31, 2000.
In March 1999 the Company completed a reduction in force of approximately
10% of its worldwide staff and incurred employee severance costs of
approximately $0.1 million. In March 1999 the Company also negotiated an early
termination to its lease commitment in Rocklin, California which resulted in a
$0.1 million reduction to previously expensed closure costs. This $0.1 million
credit to restructuring costs was partially offset by the $0.1 million of
restructuring costs related to the Company's March 1999 reduction in force.
In March 1998, the Company's management adopted a restructuring plan to
relocate its Rapid Thermal Processing Operation from Rocklin 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
nine months ended September 26, 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 declined to $2.9 million in the nine
months ended September 25, 1999 from $3.1 million in the nine months ended
September 26, 1998. The decline in interest expense was primarily the result of
the repurchase by the Company of $16.3 million of its Convertible Notes during
1999.
Interest income and other, net. Interest income and other, net increased to
$3.2 million for the nine months ended September 25, 1999 from $2.8 million for
the nine months ended September 26, 1998.
Interest income and other, net for the nine months ended September 25, 1999
included approximately $1.0 million of dividend income on the Preferred Share
the Company owns in 601 California Avenue LLC, approximately $1.7 million of
interest income and approximately $0.5 million of foreign currency hedging
gains.
Interest income and other, net for the nine months ended September 26, 1998
included approximately $2.2 million of interest income and approximately $0.4
million of income related to the Company's interest in the capital stock of
Chorus Corporation
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Discontinued operations. In the nine months ended September 26, 1998 the
Company recorded a gain from discontinued operations of $1.0 million, net of
applicable taxes, resulting from the reimbursement and reversal of excess
warranty reserves related to the sale of the Company's night vision business in
1995.
6 1/2% Convertible Subordinated Notes Due 2004. The Company repurchased
$16.3 million of its Convertible Notes during the nine months ended September
25, 1999 from which it recognized a gain of $3.8 million, net of applicable
taxes.
Provision for (benefit from) income taxes. The Company's estimated
effective tax rate for the nine months ended September 25, 1999 was a benefit
rate of 38% compared to a 33% effective tax rate for the nine months ended
September 26, 1998. The Company's estimated effective tax rates are based on
estimated effective tax rates for the respective years. The Company's projected
annual effective tax rates for 1999 and 1998 differ 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 used cash of $6.8 million for the nine
months ended September 25, 1999. The cash used was due primarily to the net loss
incurred by the Company, the non-cash gain on the purchase of Convertible Notes
and a reduction in customer advances which were partially offset by a reduction
in inventory and depreciation and amortization
The Company's investing activities provided cash of $17.3 million for the
nine months ended September 25, 1999 as a result of the net sale of investments,
which was partially offset by the purchase of fixed assets.
The Company's financing activities used cash of $10.6 million for the nine
months ended September 25, 1999 as the result of the repurchase of the Company's
Convertible Notes and the Company's common stock which was partially offset by
the sale of the Company's common stock to its employees through the Company's
employee benefit plans.
YEAR 2000
The Company is preparing for the impact of the arrival of the Year 2000 on
its business, as well as on the business of its customers, suppliers and
business partners. The "Year 2000 Issue" is a term used to describe the problems
created by systems that are unable to accurately interpret dates after December
31, 1999. These problems are derived predominately from the fact that many
software programs have historically categorized "years" in a two-digit format.
The Year 2000 Issue creates potential risks for the Company, including potential
problems in the Company's products as well as in the Information Technology
("IT") and non-IT systems that the Company uses in its business operations. The
Company may also be exposed to risks from third parties with which the Company
interacts who fail to adequately address their own Year 2000 Issues.
Intevac has nearly completed its efforts to address Year 2000 Issues both
within and outside the Company. In addressing the Year 2000 issues and risks,
the Company has focused its efforts on the Company's enterprise-wide and
departmental operations, products, critical suppliers (including service
providers) and key customers. Within Intevac, these efforts encompassed all
major categories of computer systems in use by the Company, including those
utilized in manufacturing, engineering, sales, finance and human resources. The
Company's risk assessment includes understanding the Year 2000 readiness of its
critical suppliers. The Company's risk assessment process associated with
critical suppliers includes soliciting and analyzing responses to
questionnaires, and, where necessary, follow-up with the supplier.
The Company has utilized a phased approach to identifying and remediating
Year 2000 Issues. The first phase, compiling an inventory of all systems that
face risks from Year 2000 Issues, was substantially completed by year-end 1998.
The evaluation and remediation phases have been essentially completed. The
majority of the validation and implementation work is now complete. The Company
has acted to remedy issues as they are identified, while simultaneously
completing its assessment of Year 2000 risks.
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Corrective actions completed to internal systems include the implementation
of system upgrades to the Company's materials and financial software, upgrades
to file server operating systems, replacement of payroll and human resource
software, patching of all major desktop software applications and testing of all
desktop hardware. The Company has issued Product Information Bulletins and has
sent other correspondence to its customers outlining the Year 2000 Issues faced
by the Company's products and, where necessary, proposed fixes. The Company has
received notice from most of its major suppliers and service providers that they
are fully compliant.
Cost incurred to date in addressing Year 2000 Issues have not been, and are
not expected to be, material. As the Company's risk assessment and correction
activities continue, these cost estimates may change. In addition, the Company's
total cost estimate does not include potential costs related to any customer or
other claims resulting from the Company's failure to adequately correct Year
2000 issues.
The Company is taking all steps it believes are appropriate to identify and
resolve any Year 2000 Issues. Although the Company does not expect any
significant disruption to its operations or operating results as a result of
Year 2000 Issues, there can be no assurance that the Company will be able to
identify, assess and correct all Year 2000 Issues in a timely or successful
manner. The Company's failure to identify, assess and correct Year 2000 Issues
in a timely manner could have a material, adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that its most reasonably likely worst case Year 2000
scenario would relate to problems with systems of third parties which would
create the greatest risks with infrastructure, including water and sewer
services, electricity, transportation, telecommunications and critical suppliers
of materials and supplies. The Company is assessing various scenarios and is
preparing any necessary contingency plans.
The foregoing statements regarding the Company's Year 2000 plans and the
Company's expectation for resolving these issues and costs associated therewith
are forward-looking statements and actual results could vary. The Company's
success in addressing Year 2000 Issues could be impacted by the severity of the
problems to be resolved within the Company, by Year 2000 Issues affecting its
suppliers and service providers and by the costs associated with third party
consultants and software necessary to address these issues.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
Prolonged Downturn in the Disk Drive Industry
The disk drive industry has historically been cyclical and experienced
periods of under- and over-supply of product. The industry's current downturn
began in 1997 and has been particularly severe and long-lived. Most
manufacturers of hard disk drives and their suppliers have reported substantial
losses during this period. Many of these manufacturers attribute 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
extremely competitive pricing.
The rapid increase in areal density of thin-film disks used in hard disk
drives, combined with the increasing shift to low cost computers, has resulted
in a rapid reduction in both the average selling price of hard disk drives and
in the average number of disks required per hard disk drive. The result is that
the overall unit demand for thin-film disks has been approximately flat since
1997 despite the continuing growth in unit shipments of personal computers and
hard disk drives. This prolonged period of relatively flat demand for thin-film
disks, combined with poor industry financial performance and the high cost of
adding new capacity, has significantly reduced demand for new capital equipment
used to manufacture thin-film disks used in disk drives, including the systems
manufactured and marketed by the Company. The Company is not able to accurately
predict when industry conditions will become more favorable to the sale of the
Company's equipment.
Rapid Technical Change
The Company's ability to remain competitive requires substantial
investments in research and development to advance its technologies. The failure
to develop, manufacture and market new systems, or to enhance
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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.
The Company's success in developing and selling equipment depends upon a
variety of factors, including accurate prediction of future customer
requirements, technology advances, cost of ownership, introduction of new
products on schedule, cost-effective manufacturing and product performance in
the field. The Company's new product decisions and development commitments must
anticipate continuously evolving industry requirements significantly in advance
of sales. Any failure to accurately predict customer requirements and to develop
new generations of products to meet those requirements would have a sustained
material adverse effect on the Company's business, financial condition and
results of operations. New product transitions could adversely affect sales of
existing systems, and product introductions could contribute to quarterly
fluctuations in operating results as orders for new products commence and orders
for existing products decline. There can be no assurance that the Company will
be successful in selecting, developing, manufacturing and marketing new products
or enhancements of existing products.
For example, changes in the manufacturing processes for thin-film disks
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company anticipates continued rapid
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 computer disk drive 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.
Competition
The Company experiences intense competition in the Equipment Business. For
example, the Company's disk sputtering business experiences competition
worldwide from two principal competitors, Balzers A.G. ("Balzers") and Anelva
Corporation ("Anelva"), each of which is a large manufacturer of complex vacuum
equipment and thin-film disk manufacturing systems and has sold a substantial
number of thin-film disk sputtering machines worldwide. Both Balzers and Anelva
have substantially greater financial, technical, marketing, manufacturing and
other resources than the Company. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products that will offer superior price or performance features or
that new competitors will not enter the Company's markets and develop such
enhanced products.
Given the lengthy sales cycle and the significant investment required to
integrate equipment into the manufacturing process, the Company believes that
once a manufacturer has selected a particular supplier's equipment for a
specific application, that manufacturer generally relies upon that supplier's
equipment and frequently will continue to purchase any additional equipment for
that application from the same supplier. Accordingly, competition for customers
in the equipment industry is intense, and suppliers of equipment may offer
substantial pricing concessions and incentives to attract new customers or
retain existing customers.
International Operations and Foreign Exchange Exposure
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 earns a significant portion of its revenue
from
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international sales, and these sales have included the installation of the
Company's products in European countries and Far Eastern countries such as
Japan, Singapore, Malaysia, Korea, Thailand, and Taiwan. All of the Far Eastern
countries with which the Company does business have banking systems and foreign
currencies that have experienced serious troubles 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 historically been denominated in
United States dollars, such sales will not all be denominated in dollars in the
future, and currency exchange fluctuations in countries where the Company does
business could materially adversely the Company's business, financial condition
and results of operations.
The Company's two principal competitors for disk sputtering equipment are
based in foreign countries and have cost structures based on foreign currencies.
Accordingly, currency fluctuations could cause the Company's products to be
more, or less, competitive than its competitors' products. Currency fluctuations
will decrease, or increase, the Company's cost structure relative to those of
its competitors, which could impact the Company's gross margins. For example,
during 1998 the exchange rate for Japanese Yen fluctuated between approximately
113 Yen/$ and 147 Yen/$. The Company generally quotes and sells its products in
US dollars. However, for certain Japanese customers, the Company quotes and
sells its products in Japanese Yen. The Company, from time to time, enters into
foreign currency contracts in an effort to reduce the overall risk of currency
fluctuations to the Company's business. However, there can be no assurance that
the offer and sale of products in foreign denominated currencies, and the
related foreign currency hedging activities will not materially adversely affect
the Company's financial condition and results of operations.
Fluctuation in Operating Results
Over the last eleven quarters the Company's operating income or (loss) as a
percentage of net revenues has fluctuated between approximately (55%) to 16% of
net revenues. The Company anticipates that its operating margin will continue to
fluctuate. As a result, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
Diversification and Potential Acquisitions
The Company routinely evaluates acquisition candidates and other
diversification strategies. There can be no assurance that the Company's efforts
in these areas will be successful. The Company completed one acquisition in 1997
and three acquisitions in 1996. 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.
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.
Manufacturing
The Company's Equipment products have a large number of components and are
highly complex systems. The Company's Photonics products are complex devices
that require highly sophisticated manufacturing techniques utilizing advanced
materials science and vacuum processing. The Company may experience delays and
technical and manufacturing difficulties in future introductions or volume
production of new systems and devices. In addition, some of the systems built by
the Company must be customized to meet
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individual customer site or operating requirements. The Company has limited
manufacturing capacity and may be unable to complete the development or meet the
technical specifications of its new systems and devices or to manufacture and
ship these systems and devices 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. 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. Any of such events could
materially adversely affect the Company's business, financial condition and
results of operations.
Intellectual Property
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 in the Company's discontinued
night vision business. In January 1999, a settlement was negotiated between the
Federal government and Rockwell and approved by the court. Under the settlement,
all of Intevac's exposure related to government sales is eliminated. Rockwell
has not pursued any claims related to non-governmental sales of the products in
question.
There can be no assurance that third parties will not in the future claim
infringement by the Company with respect to current or future patents,
trademarks, or other proprietary rights relating to the Company's disk
sputtering systems, flat panel manufacturing equipment or other products. Any
present or future claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. Any of the foregoing could have a material adverse effect
upon the Company's business, operating results and financial condition.
In addition, the Company believes that one of its competitors may be
infringing the Company's patent rights in connection with products currently
being offered by this competitor. Although the Company has not undertaken formal
legal proceedings, the Company has informed this competitor that the Company
believes its patent rights are being infringed and that the Company may
undertake litigation to protect its patent rights if necessary. If undertaken,
such litigation could be costly, time-consuming and result in legal claims being
made against the Company. This could have a material adverse effect on the
Company's business, operating results and financial condition, and, in addition,
there could be no assurance that the Company would ultimately prevail in any
such litigation.
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Leverage
In connection with the sale of $57.5 million of its 6 1/2% Convertible
Subordinated Notes Due 2004 in February 1997, the Company incurred a substantial
increase in the ratio of long-term debt to total capitalization (shareholders'
equity plus long-term debt). The ratio at December 31, 1998 and 1997 was
approximately 59.5% 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.
Retention of Employees
The Company believes that it has good relations with its employees. None of
the Company's employees is represented by a labor union, and the Company has
never experienced a work stoppage. The Company's operating results will depend
in significant part upon its ability to retain and attract qualified management,
engineering, marketing, manufacturing, customer support, sales and
administrative personnel. Competition in northern California 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 any necessary 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.
Possible Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, failure to meet securities analysts' expectations, general conditions
in the disk drive and thin-film media manufacturing industries and the worldwide
economy, announcements of technological innovations, new systems or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in the Company's relationships with customers and suppliers could cause
the price of the Company's Common Stock to fluctuate substantially. In addition,
in recent years the stock market in general, and the market for small
capitalization and high technology stocks in particular, has experienced extreme
price fluctuations which have often been unrelated to the operating performance
of affected companies. Such fluctuations could adversely affect the market price
of the Company's Common Stock.
Concentration of Stock Ownership
Based on the shares outstanding on December 31, 1998, the present directors
and their affiliates and executive officers, in the aggregate, own beneficially
approximately 56.7% of the Company's outstanding shares of Common Stock. As a
result, these shareholders, acting together, are able to effectively control all
matters requiring approval by the shareholders of the Company, including the
election of a majority of the directors and approval of significant corporate
transactions.
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
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part III, Item 7, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 12, 1996 two Australian Army Black Hawk Helicopters collided in
midair during nighttime maneuvers. Eighteen Australian servicemen perished and
twelve were injured. The Company was named as a defendant in a lawsuit related
to this crash. The lawsuit was filed in Stamford, Connecticut Superior Court on
June 10, 1999 by Mark Durkin, the administrator of the estates of the deceased
crew members, the injured crew members and the spouses of the deceased and/or
injured crew members. Included in the suit's allegations are assertions that the
crash was caused by defective night vision goggles. The suit names three US
manufacturers of military night vision goggles, of which Intevac was one. The
suit also names the manufacturer of the pilot's helmets, two manufacturers of
night vision system test equipment and the manufacturer of the helicopter. The
suit claims damages for 13 personnel killed in the crash, 5 personnel injured in
the crash and spouses of those killed or injured.
It is known that the Australian Army established a Board of Inquiry to
investigate the accident and that the Board of Inquiry concluded that the
accident was not caused by defective night vision goggles. Preliminary
investigations lead the Company to believe that it has meritorious defenses
against the Durkin suit. However, there can be no assurance that the resolution
of the suit will not have a material adverse effect on the Company's business,
operating results and financial condition.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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: November 3, 1999 By: /s/ NORMAN H. POND
------------------------------------
Norman H. Pond
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 3, 1999 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>
27.1.. Financial Data Schedule
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 25, 1999 (UNAUDITED) AND THE
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) FOR THE
NINE MONTHS ENDED SEPTEMBER 25, 1999 AND QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-25-1999
<CASH> 3,899
<SECURITIES> 38,490
<RECEIVABLES> 10,506
<ALLOWANCES> 1,698
<INVENTORY> 19,695
<CURRENT-ASSETS> 78,433
<PP&E> 22,009
<DEPRECIATION> 12,310
<TOTAL-ASSETS> 95,513
<CURRENT-LIABILITIES> 18,937
<BONDS> 43,163
0
0
<COMMON> 17,050
<OTHER-SE> 16,338
<TOTAL-LIABILITY-AND-EQUITY> 95,513
<SALES> 35,841
<TOTAL-REVENUES> 35,841
<CGS> 33,169
<TOTAL-COSTS> 33,169
<OTHER-EXPENSES> 18,812
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 2,919
<INCOME-PRETAX> (15,973)
<INCOME-TAX> (6,070)
<INCOME-CONTINUING> (9,903)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,844
<CHANGES> 0
<NET-INCOME> (6,059)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
