<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 26, 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)
<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
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 26, 1999 approximately 11,698,478 shares of the Registrant's Common
Stock, no par value, were outstanding.
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INTEVAC, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
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................................... 9
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 19
ITEM 2. Changes in Securities....................................... 19
ITEM 3. Defaults Upon Senior Securities............................. 19
ITEM 4. Submission of Matters to a Vote of Security-Holders......... 19
ITEM 5. Other Information........................................... 19
ITEM 6. Exhibits and Reports on Form 8-K............................ 20
SIGNATURES........................................................... 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 26, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,987 $ 3,991
Short-term investments.................................... 48,736 56,925
Accounts receivable, net of allowances of $1,703 and
$1,629 at June 26, 1999 and December 31, 1998,
respectively........................................... 6,941 10,169
Inventories............................................... 24,026 22,102
Prepaid expenses and other current assets................. 672 658
Deferred tax asset........................................ 7,008 7,008
-------- --------
Total current assets................................... 91,730 100,853
Property, plant, and equipment, net......................... 10,353 13,131
Investment in 601 California Avenue LLC..................... 2,431 2,431
Goodwill and other intangibles.............................. 2,789 3,543
Debt issuance costs......................................... 1,431 1,700
Deferred tax assets and other assets........................ 1,386 1,318
-------- --------
Total assets...................................... $109,760 $122,976
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,903 $ 2,034
Accrued payroll and related liabilities................... 2,340 1,880
Other accrued liabilities................................. 7,447 7,535
Customer advances......................................... 8,850 11,630
-------- --------
Total current liabilities.............................. 20,540 23,079
Convertible notes........................................... 53,495 57,500
Long-term notes payable..................................... 1,943 1,961
Shareholders' equity:
Common stock, no par value................................ 17,068 17,917
Accumulated other comprehensive income.................... -- 122
Retained earnings......................................... 16,714 22,397
-------- --------
Total shareholders' equity............................. 33,782 40,436
-------- --------
Total liabilities and shareholders' equity........ $109,760 $122,976
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues....................................... $10,270 $35,801 $ 22,019 $70,036
Cost of net revenues............................... 10,090 26,758 20,846 50,332
------- ------- -------- -------
Gross profit....................................... 180 9,043 1,173 19,704
Operating expenses:
Research and development......................... 3,785 3,398 7,852 6,960
Selling, general and administrative.............. 2,082 2,946 3,987 6,051
Restructuring.................................... (5) -- (22) 1,164
------- ------- -------- -------
Total operating expenses................. 5,862 6,344 11,817 14,175
------- ------- -------- -------
Operating income (loss)............................ (5,682) 2,699 (10,644) 5,529
Interest expense................................... (993) (1,057) (2,008) (2,073)
Interest income and other, net..................... 770 959 1,932 1,730
------- ------- -------- -------
Income (loss) from continuing operations before
income taxes..................................... (5,905) 2,601 (10,720) 5,186
Provision for (benefit from) income taxes.......... (2,244) 857 (4,074) 1,712
------- ------- -------- -------
Income (loss) from continuing operations........... (3,661) 1,744 (6,646) 3,474
Gain from discontinued operations, net of
applicable income taxes.......................... -- 473 -- 1,005
Gain from repurchase of convertible notes, net of
applicable income taxes.......................... 963 -- 963 --
------- ------- -------- -------
Net income (loss).................................. $(2,698) $ 2,217 $ (5,683) $ 4,479
======= ======= ======== =======
Other comprehensive income (loss):
Unrealized foreign currency translation
adjustment.................................... (74) 10 (122) --
------- ------- -------- -------
Total adjustments.................................. (74) 10 (122) --
------- ------- -------- -------
Total comprehensive income (loss).................. $(2,772) $ 2,237 $ (5,805) $ 4,479
======= ======= ======== =======
Basic earnings per share:
Income (loss) from continuing operations......... $ (0.31) $ 0.14 $ (0.56) $ 0.29
Net income (loss)................................ $ (0.23) $ 0.18 $ (0.48) $ 0.37
Shares used in per share amounts................. 11,767 12,111 11,846 12,151
Diluted earnings per share:
Income (loss) from continuing operations......... $ (0.31) $ 0.14 $ (0.56) $ 0.28
Net income (loss)................................ $ (0.23) $ 0.18 $ (0.48) $ 0.36
Shares used in per share amounts................. 11,767 12,440 11,846 12,476
</TABLE>
See accompanying notes.
4
<PAGE> 5
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 26, JUNE 27,
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(5,683) $ 4,479
Adjustments to reconcile net income to net cash and cash
equivalents provided by (used in) operating activities:
Depreciation and amortization.......................... 2,756 3,873
Gain on foreign exchange contracts..................... (751) --
Gain on sale of discontinued operations................ -- (794)
Gain on purchase of convertible notes.................. (1,554) --
Foreign currency loss.................................. 4 6
(Gain) loss on IMAT investment......................... (68) 66
Restructuring charge -- non-cash portion............... -- 194
Loss on disposal of equipment.......................... 97 95
Changes in assets and liabilities...................... 1,088 (5,930)
------- --------
Total adjustments................................. 1,572 (2,490)
------- --------
Net cash and cash equivalents provided by (used in)
operating activities...................................... (4,111) 1,989
INVESTING ACTIVITIES
Purchase of investments..................................... (1,941) (35,582)
Proceeds from sale of investments........................... 10,130 20,045
Purchase of leasehold improvements and equipment............ (806) (1,819)
------- --------
Net cash and cash equivalents provided by (used in)
investing activities...................................... 7,383 (17,356)
FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 431 561
Repurchase of convertible notes............................. (2,342) --
Repurchase of common stock.................................. (1,365) (2,660)
------- --------
Net cash and cash equivalents used in financing
activities................................................ (3,276) (2,099)
------- --------
Net decrease in cash and cash equivalents................... (4) (17,466)
Cash and cash equivalents at beginning of period............ 3,991 24,431
------- --------
Cash and cash equivalents at end of period.................. $ 3,987 $ 6,965
======= ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid (received) for:
Interest.................................................. $ 1,869 $ 1,930
Income taxes.............................................. 0 4,065
Income tax refund......................................... (1,382) --
Other non-cash changes:
Inventories transferred to (from) property, plant and
equipment.............................................. $(1,649) $ 1,159
</TABLE>
See accompanying notes.
5
<PAGE> 6
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
complex 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 June 26, 1999 and for the three- and six-month
periods ended June 26, 1999 and June 27, 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 six-month periods ended June 26, 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>
JUNE 26, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 4,095 $ 6,907
Work-in-progress............................................ 18,465 11,653
Finished goods.............................................. 1,466 3,542
------- -------
$24,026 $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 six-month periods ending
June 26, 1999 and June 27, 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 $4,005,000 face value, of its
outstanding 6 1/2% Convertible Subordinated Notes. The repurchase resulted in a
gain of $963,000 (net of income taxes). Basic and diluted earnings per share on
the gain were both $0.08.
5. NET INCOME (LOSS) 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 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations....... $(3,661) $ 1,744 $(6,646) $ 3,474
======= ======= ======= =======
Net income (loss).............................. $(2,698) $ 2,217 $(5,683) $ 4,479
======= ======= ======= =======
Numerator for basic earnings per share --
income (loss) available to common
stockholders................................. (2,698) 2,217 (5,683) 4,479
Effect of dilutive securities:
6 1/2% convertible notes(1).................. -- -- -- --
------- ------- ------- -------
Numerator for diluted earnings per share --
income available to common stockholders after
assumed conversions.......................... $(2,698) $ 2,217 $(5,683) $ 4,479
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares............. 11,767 12,111 11,846 12,151
Effect of dilutive securities:
Employee stock options(2).................... -- 329 -- 325
6 1/2% convertible notes(1).................... -- -- -- --
------- ------- ------- -------
Dilutive potential common shares............... -- 329 -- 325
------- ------- ------- -------
Denominator for diluted earnings per
share -- adjusted weighted-average shares and
assumed conversions.......................... 11,767 12,440 11,846 12,476
======= ======= ======= =======
</TABLE>
- ---------------
(1) Diluted EPS for the three- and six-month periods ended June 26, 1999 and
June 27, 1998 excludes "as converted" treatment of the Convertible Notes as
their inclusion would be anti-dilutive.
(2) Diluted EPS for the three- and six-month periods ended June 26, 1999
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
7
<PAGE> 8
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
and amortization expenses related to certain intangible assets, less an
allocation of corporate expenses to operating units equal to 1% of net revenues
Business Segment Net Revenues
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equipment
Trade.......................................... $ 8,145 $34,768 $18,454 $67,594
Inter-Segment.................................. -- 15 -- 28
------- ------- ------- -------
8,145 34,783 18,454 67,622
Photonics
Trade.......................................... 2,125 1,033 3,565 2,442
Corporate Activities.............................. -- (15) -- (28)
------- ------- ------- -------
Total..................................... $10,270 $35,801 $22,019 $70,036
======= ======= ======= =======
</TABLE>
Business Segment Profit & Loss
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equipment........................................ $(4,899) $ 2,988 $ (9,166) $ 6,092
Photonics........................................ (159) (99) (260) 58
Corporate activities............................. (624) (190) (1,218) (621)
------- ------- -------- -------
Operating income (loss).......................... $(5,682) $ 2,699 $(10,644) $ 5,529
Interest expense................................. (993) (1,057) (2,008) (2,073)
Interest income.................................. 477 828 1,068 1,533
Other income and expense, net.................... 293 131 864 197
------- ------- -------- -------
Income (loss) from continuing operations before
income taxes.................................. $(5,905) $ 2,601 $(10,720) $ 5,186
======= ======= ======== =======
</TABLE>
7. SUBSEQUENT EVENT
On July 28, 1999, the Company and CVC Products, Inc. ("CVC") agreed to a
settlement of CVC's patent infringement claim. Under the terms of the
settlement, Intevac paid $525,000 to CVC and agreed to future royalty payments
on sales of sputter sources covered by the CVC patent. An accrual of the payment
to CVC is included in the results for the three- and six-month periods ended
June 26, 1999.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements,
which involve risks and uncertainties. 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 June 26, 1999 and June 27, 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 71% to $10.3 million for the three months ended June 26, 1999 from
$35.8 million for the three months ended June 27, 1998. Net revenues from
Equipment sales declined to $8.1 million for the three months ended June 26,
1999 from $34.8 million for the three months ended June 27, 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. Net revenues from Photonics increased to $2.1
million for the three months ended June 26, 1999 from $1.0 million for the three
months ended June 27, 1998. The increase in net revenues from Photonics was due
primarily to an increase in sales of contract research and development, and to a
lesser extent, sales of prototype Laser Illuminated Viewing and Ranging
("LIVAR") camera systems. The Company expects that total revenues will continue
in the $10 million to $15 million range for each of the next two quarters.
International sales decreased by 73% to $6.9 million for the three months
ended June 26, 1999 from $25.6 million for the three months ended June 27, 1998.
The decrease in international sales was primarily due to a decrease in net
revenues from disk manufacturing equipment. International sales constituted 67%
of net revenues for the three months ended June 26, 1999 and 72% of net revenues
for the three months ended June 27, 1998.
Backlog. The Company's backlog of orders for its products was $22.9 million
at June 26, 1999 and $28.1 million at June 27, 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 in Photonics. 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, fabrication, assembly, test, installation, warranty costs, scrap and
costs attributable to contract research and development. Gross margin was 1.8%
for the three months ended June 26, 1999 as compared to 25.3% for the three
months ended June 27, 1998. Gross margins declined as the result of the sale of
three used disk sputtering systems at heavily discounted prices, recognition of
the sale of the Company's first production rapid thermal processing system which
incurred high initial costs to complete and then integrate into its customer's
production environment, payment of $0.5M as part of the settlement of the CVC
patent claim and from underabsorbtion of manufacturing overhead due to low
manufacturing volume. The Company expects that gross margins will continue to be
depressed for the next two quarters as the result of low manufacturing volume.
9
<PAGE> 10
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 11% to $3.8 million for the three
months ended June 26, 1999 from $3.4 million for the three months ended June 27,
1998, representing 36.9% and 9.5%, respectively, of net revenue. This increase
was primarily the result of increased expense for the development of Photonics
products.
Research and development expenses do not include costs of $1.5 million and
$0.9 million for the three-month periods ended June 26, 1999 and June 27, 1998
related to contract research and development performed by the Company's
Photonics business. These expenses are included in cost of goods sold.
Research and development expenses also do not include costs of $0.1 million
in the three months ended June 26, 1999, 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 29% to $2.1 million for the
three months ended June 26, 1999 from $2.9 million for the three months ended
June 27, 1998, representing 20.3% and 8.2%, respectively, of net revenue. The
primary reason for the decrease was a lower level of selling, general and
administrative expense in the Equipment Business implemented as a result of
reduced revenues. The lower level of expense was primarily due to a decline in
selling, general and administrative headcount to 41 employees at June 26, 1999
from 90 employees at June 27, 1998 as the result of reductions in force in the
Company's staff of contract and regular employees implemented in August of 1998
and March of 1999 and the reallocation of certain administrative employees to
operations.
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 $1.0 million in the three-month period ended
June 26, 1999 from $1.1 million in the three month period ended June 27, 1998.
The decline in interest expense was primarily the result of the repurchase by
the Company of $4.0 million of its 6.5% Convertible Notes Due 2004 (the
"Convertible Notes") during the three month period ended June 26, 1999. The
repurchase reduced the balance of Convertible Notes outstanding to $53.5 million
at June 26, 1999 from $57.5 million at June 27, 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 decreased by 20% to $0.8 million for the
three months ended June 26, 1999 from $1.0 million for the three months ended
June 27, 1998 primarily as the result of decreases in interest income and
foreign currency hedging gains which were partially offset by improved results
at the Company's joint venture, IMAT.
Discontinued operations. In the three month period ended June 27, 1998 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.
6 1/2% Convertible Subordinated Notes Due 2004. In July of 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
10
<PAGE> 11
repurchased $4.0 million of these notes during the three months ended June 26,
1999 from which it recognized a gain of $1.0 million, net of applicable taxes.
Provision for (benefit from) income taxes. The Company's estimated
effective tax rate for the three months ended June 26, 1999 was a benefit rate
of 38% compared to a 33% effective tax rate for the three months ended June 27,
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.
Six Months Ended June 26, 1999 and June 27, 1998
Net revenues. Net revenues decreased by 69% to $22.0 million for the six
months ended June 26, 1999 from $70.0 million for the six months ended June 27,
1998. Net revenues from Equipment sales declined to $18.4 million for the six
months ended June 26, 1999 from $67.6 million for the six months ended June 27,
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 $3.6 million for
the six months ended June 26, 1999 from $2.4 million for the six months ended
June 27, 1998. The increase in net revenues from Photonics was due primarily to
a increase in sales of contract research and development, and to a lesser
extent, sales of prototype LIVAR camera systems.
International sales decreased by 68% to $14.3 million for the six months
ended June 26, 1999 from $44.2 million for the six months ended June 27, 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 six months ended
June 26, 1999 and 63% of net revenues for the six months ended June 27, 1998.
Gross margin. Gross margin was 5.3% for the six months ended June 26, 1999
as compared to 28.1% for the six months ended June 27, 1998. Gross margins
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 and then integrate into its customer's production
environment the Company's first production rapid thermal processing system
environment, payment of $0.5M as part of the settlement of the CVC patent claim
and underabsorbtion of manufacturing overhead due to low manufacturing volume.
Research and development. Company funded research and development expense
increased by 13% to $7.9 million for the six months ended June 26, 1999 from
$7.0 million for the six months ended June 27, 1998, representing 35.7% and
9.9%, respectively, of net revenue. This increase was primarily the result of
increased expense for the development of disk manufacturing equipment and
Photonics products, which was partially offset by decreased expense for the
development of flat panel manufacturing equipment.
Research and development expenses do not include costs of $2.7 million and
$1.9 million for the six-month periods ended June 26, 1999 and June 27, 1998
related to contract research and development performed by the Company's
Photonics business. These expenses are included in cost of goods sold.
Research and development expenses also do not include costs of $0.2 million
in the six months ended June 26, 1999, 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 $4.0 million for the six months ended June 26, 1999
from $6.1 million for the six months ended June 27, 1998, representing 18.1% and
8.6%, respectively, of net revenue. The primary reason for the decrease was a
lower level of selling, general and administrative expense in the Equipment
Business implemented as a result of reduced revenues. The lower level of expense
was primarily due to a decline in selling, general and administrative headcount
to 45 employees at June 26, 1999 from 91 employees at June 27, 1998 as the
result
11
<PAGE> 12
of reductions in force in the Company's staff of contract and regular employees
implemented in March of 1998, August of 1998 and March of 1999 and the
reallocation of certain administrative employees to operations.
Restructuring expense (gain). Restructuring expense (gain) was ($22,000)
and $1.2 million in the six-month periods ended June 26, 1999 and June 27, 1998,
respectively. 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. In
March 1999 the Company completed a reduction in force of approximately 10% of
its worldwide staff and incurred employee severance costs of approximately
$115,000. In March 1999 the Company also negotiated an early termination to its
lease commitment in Rocklin which resulted in a $132,000 reduction to previously
expensed closure costs. This $132,000 credit to restructuring costs was
partially offset by the $115,000 of restructuring costs related to the Company's
March 1999 reduction in force.
Interest expense. Interest expense declined to $2.0 million in the six
months ended June 26, 1999 from $2.1 million in the six months ended June 27,
1998. The decline in interest expense was primarily the result of the repurchase
by the Company of $4.0 million of its Convertible Notes during the six months
ended June 26, 1999.
Interest income and other, net. Interest income and other, net increased by
12% to $1.9 million for the six months ended June 26, 1999 from $1.7 million for
the six months ended June 27, 1998. The increase was primarily the result of
gains on foreign currency hedging which were partially offset by lower interest
income.
Discontinued operations. In the six months ended June 27, 1998 the Company
recorded a gain from discontinued operations of $1.0 million 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
$4.0 million of its Convertible Notes during the six months ended June 26, 1999
from which it recognized a gain of $1.0 million, net of applicable taxes.
Provision for(benefit from) income taxes. The Company's estimated effective
tax rate for the six months ended June 26, 1999 was a benefit rate of 38%
compared to a 33% effective tax rate for the six months ended June 27, 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 $4.1 million for the six
months ended June 26, 1999. The cash used was due primarily to the net loss
incurred by the Company, which was partially offset by depreciation and
amortization and the non-cash gain resulting from the repurchase of $4.0 million
of the Company's Convertible Notes.
The Company's investing activities provided cash of $7.4 million for the
six months ended June 26, 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 $3.3 million for the six
months ended June 26, 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.
12
<PAGE> 13
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 is in the process of implementing plans to address Year 2000 Issues
both within and outside the Company. In addressing the Year 2000 issues and
risks, the Company has focused, and will continue to focus, its efforts on the
Company's enterprise-wide and departmental operations, products, critical
suppliers (including service providers) and key customers. Within Intevac, these
efforts are intended to encompass 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 is utilizing 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 are now essentially complete. The
validation and implementation phases are targeted for completion in the third
quarter of 1999. The Company is acting to remedy issues as they are revealed,
while it simultaneously completes its assessment of Year 2000 risks.
Corrective actions completed to date 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,
and patching of all major desktop software applications. The Company issued a
Product Information Bulletin to customers outlining the Year 2000 Issues faced
by the Company's principal product, the MDP-250 sputtering system, and proposed
fixes.
Cost incurred to date in addressing Year 2000 Issues have not been
material. Based on assessment and correction projects underway, the Company does
not expect the total cost of addressing the Year 2000 Issue 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 currently 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 has not yet prepared a contingency plan
for dealing with these potential problems. The Company will be assessing various
scenarios and will prepare the necessary contingency plan over the course of
1999.
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
13
<PAGE> 14
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 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
14
<PAGE> 15
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 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 ten 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
15
<PAGE> 16
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 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.
16
<PAGE> 17
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.
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.
17
<PAGE> 18
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 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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<PAGE> 19
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
The Company's annual meeting of shareholders was held on May 13, 1999. 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>
(a) Election of Directors
Norman H. Pond............................... 11,561,709 22,723 -- 358,713
Edward Durbin................................ 11,560,409 24,023 -- 358,713
Robert D. Hempstead.......................... 11,551,502 32,930 -- 358,713
David N. Lambeth............................. 11,561,109 23,323 -- 358,713
H. Joseph Smead.............................. 11,560,409 24,023 -- 358,713
(b) Approval of an amendment to the Company's
Employee Stock Purchase Plan................... 10,173,427 1,083,748 -- 685,970
(c) Ratification of Ernst & Young as independent
auditors....................................... 11,575,832 4,100 -- 363,213
</TABLE>
ITEM 5. OTHER INFORMATION
None.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None.
20
<PAGE> 21
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, 1999 By: /s/ NORMAN H. POND
------------------------------------
Norman H. Pond
Chairman of the Board, President and
Chief
Executive Officer (Principal
Executive Officer)
Date: August 10, 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)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 26, 1999 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 26, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-26-1999
<CASH> 3,987
<SECURITIES> 48,736
<RECEIVABLES> 8,644
<ALLOWANCES> 1,703
<INVENTORY> 24,026
<CURRENT-ASSETS> 91,730
<PP&E> 21,745
<DEPRECIATION> 11,392
<TOTAL-ASSETS> 109,760
<CURRENT-LIABILITIES> 20,540
<BONDS> 55,413
0
0
<COMMON> 17,068
<OTHER-SE> 17,039
<TOTAL-LIABILITY-AND-EQUITY> 109,760
<SALES> 22,019
<TOTAL-REVENUES> 22,019
<CGS> 20,846
<TOTAL-COSTS> 20,846
<OTHER-EXPENSES> 11,725
<LOSS-PROVISION> 92
<INTEREST-EXPENSE> 2,008
<INCOME-PRETAX> (10,720)
<INCOME-TAX> (4,074)
<INCOME-CONTINUING> (6,646)
<DISCONTINUED> 0
<EXTRAORDINARY> 963
<CHANGES> 0
<NET-INCOME> (5,683)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
