<PAGE> 1
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 APRIL 1, 2000
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)
CALIFORNIA 94-3125814
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 April 1, 2000 approximately 11,786,220 shares of the Registrant's
Common Stock, no par value, were outstanding.
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INTEVAC, INC.
INDEX
<TABLE>
<CAPTION>
NO. PAGE
- --- ----
<S> <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................................................. 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................ 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings......................................................... 17
ITEM 2. Changes in Securities..................................................... 17
ITEM 3. Defaults Upon Senior Securities........................................... 17
ITEM 4. Submission of Matters to a Vote of Security-Holders....................... 17
ITEM 5. Other Information......................................................... 17
ITEM 6. Exhibits and Reports on Form 8-K.......................................... 17
SIGNATURES......................................................................... 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................................ $ 3,351 $ 3,295
Short-term investments ................................................................... 35,305 37,600
Accounts receivable, net of allowances of $1,699 and $ 1,713 at April 1, 2000 and
December 31, 1999, respectively ........................................................ 2,991 5,744
Income taxes recoverable ................................................................. 5,463 5,463
Inventories .............................................................................. 18,884 15,965
Prepaid expenses and other current assets ................................................ 599 512
Deferred tax asset ....................................................................... 4,571 4,571
------------ ------------
Total current assets ................................................................... 71,164 73,150
Property, plant, and equipment, net ........................................................ 11,521 12,375
Investment in 601 California Avenue LLC .................................................... 2,431 2,431
Goodwill and other intangibles ............................................................. 1,844 2,105
Debt issuance costs ........................................................................ 957 1,018
Deferred tax assets and other assets ....................................................... 3,232 3,303
------------ ------------
Total assets ....................................................................... $ 91,149 $ 94,382
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................................................ $ 1,918 $ --
Accounts payable ......................................................................... 1,881 1,014
Accrued payroll and related liabilities .................................................. 1,718 1,533
Other accrued liabilities ................................................................ 6,304 9,173
Customer advances ........................................................................ 10,977 9,851
------------ ------------
Total current liabilities .............................................................. 22,798 21,571
Convertible notes .......................................................................... 41,245 41,245
Long-term notes payable .................................................................... -- 1,943
Shareholders' equity:
Common stock, no par value ............................................................... 18,514 18,170
Retained earnings ........................................................................ 8,592 11,453
------------ ------------
Total shareholders' equity ............................................................. 27,106 29,623
------------ ------------
Total liabilities and shareholders' equity ......................................... $ 91,149 $ 94,382
============ ============
</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
-------------------------
APRIL 1, MARCH 27,
2000 1999
--------- ---------
<S> <C> <C>
Net revenues ......................................................... $ 5,892 $ 11,749
Cost of net revenues ................................................. 5,241 10,756
--------- ---------
Gross profit ......................................................... 651 993
Operating expenses:
Research and development .......................................... 2,461 4,067
Selling, general and administrative ............................... 1,585 1,905
Restructuring expense (gain) ...................................... (615) (17)
--------- ---------
Total operating expenses ........................................ 3,431 5,955
--------- ---------
Operating income (loss) .............................................. (2,780) (4,962)
Interest expense ..................................................... (758) (1,015)
Interest income and other, net ....................................... 677 1,162
--------- ---------
Income (loss) from continuing operations before income taxes ......... (2,861) (4,815)
Provision for (benefit from) income taxes ............................ -- (1,830)
--------- ---------
Income (loss) from continuing operations ............................. (2,861) (2,985)
Gain from discontinued operations, net of applicable income taxes .... -- --
--------- ---------
Net income (loss) .................................................... $ (2,861) $ (2,985)
========= =========
Other comprehensive income:
Unrealized foreign currency translation adjustment ................ -- (48)
--------- ---------
Total adjustments .................................................... -- (48)
--------- ---------
Total comprehensive income ........................................... $ (2,861) $ (3,033)
========= =========
Basic earnings per share:
Income (loss) from continuing operations .......................... $ (0.24) $ (0.25)
Net income (loss) ................................................. $ (0.24) $ (0.25)
Shares used in per share amounts .................................. 11,759 11,924
Diluted earnings per share:
Income (loss) from continuing operations .......................... $ (0.24) $ (0.25)
Net income (loss) ................................................. $ (0.24) $ (0.25)
Shares used in per share amounts .................................. 11,759 11,924
</TABLE>
See accompanying notes.
4
<PAGE> 5
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
APRIL 1, MARCH 27,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................................................... $ (2,861) $ (2,985)
Adjustments to reconcile net income to net cash and cash equivalents provided by
(used in) operating activities:
Depreciation and amortization ....................................................... 1,246 1,423
Gain on foreign exchange contracts .................................................. -- (641)
Foreign currency (gain) loss ........................................................ -- 5
Loss on IMAT investment ............................................................. 47 57
Restructuring charge - non-cash portion ............................................. 856 --
Loss on disposal of equipment ....................................................... -- 14
Changes in assets and liabilities ................................................... (829) (331)
--------- ---------
Total adjustments ...................................................................... 1,320 527
--------- ---------
Net cash and cash equivalents used in operating activities ............................. (1,541) (2,458)
INVESTING ACTIVITIES
Purchase of investments ................................................................ (44,846) (968)
Proceeds from sale of investments ...................................................... 47,141 3,000
Purchase of leasehold improvements and equipment ....................................... (956) (373)
--------- ---------
Net cash and cash equivalents provided by (used in) investing activities ............... 1,339 1,659
FINANCING ACTIVITIES
Proceeds from issuance of common stock ................................................. 258 418
--------- ---------
Net cash and cash equivalents provided by financing activities ......................... 258 418
--------- ---------
Net increase (decrease) in cash and cash equivalents ................................... 56 (381)
Cash and cash equivalents at beginning of period ....................................... 3,295 3,991
--------- ---------
Cash and cash equivalents at end of period ............................................. $ 3,351 $ 3,610
========= =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid (received) for:
Interest ............................................................................. $ 1,394 $ 1,869
Income taxes ......................................................................... -- --
Income tax refund .................................................................... -- (432)
Other non-cash changes:
Inventories transferred to (from) property, plant and equipment ...................... $ -- $ (1,641)
</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 and flat panel
display ("FPD") manufacturing 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 has developed technology that permits highly
sensitive detection of photons in the visible and short wave infrared portions
of the spectrum. This technology when combined with advanced silicon integrated
circuits makes it possible to produce highly sensitive video cameras. This
development work is creating new products for both military and industrial
applications. Products include Intensified Digital Video Sensors, cameras
incorporating those sensors and Laser Illuminated Viewing and Ranging systems
for positive target identification.
The financial information at April 1, 2000 and for the three-month periods
ended April 1, 2000 and March 27, 1999 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, 1999.
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-month period ended April 1, 2000 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>
APRIL 1, DECEMBER 31,
2000 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials ....................... $ 4,220 $ 2,307
Work-in-progress .................... 13,021 13,658
Finished goods ...................... 1,643 --
-------------- --------------
$ 18,884 $ 15,965
============== ==============
</TABLE>
6
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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The finished goods inventory is represented by completed units at customer
sites undergoing installation and acceptance testing.
3. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
APRIL 1, MARCH 27,
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Numerator:
Loss from continuing operations ................................................ $ (2,861) $ (2,985)
========= =========
Net loss ....................................................................... $ (2,861) $ (2,985)
========= =========
Numerator for basic earnings per share - loss available to common
stockholders ................................................................. (2,861) (2,985)
Effect of dilutive securities:
6 1/2% convertible notes (1) ................................................. -- --
--------- ---------
Numerator for diluted earnings per share - loss available to common
stockholders after assumed conversions ....................................... $ (2,861) $ (2,985)
========= =========
Denominator:
Denominator for basic earnings per share -
weighted-average shares ...................................................... 11,759 11,924
Effect of dilutive securities:
Employee stock options (2) ................................................... -- --
6 1/2% convertible notes (1) ................................................. -- --
--------- ---------
Dilutive potential common shares ............................................... -- --
--------- ---------
Denominator for diluted earnings per share - adjusted weighted-average
shares and assumed conversions ............................................... 11,759 11,924
========= =========
</TABLE>
- ------------
(1) Diluted EPS for the three-month periods ended April 1, 2000 and March
27, 1999 excludes "as converted" treatment of the Convertible Notes as
their inclusion would be anti-dilutive.
(2) Diluted EPS for the three-month periods ended April 1, 2000 and March
27, 1999 excludes the effect of employee stock options as their
inclusion would be anti-dilutive.
7
<PAGE> 8
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. 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 of photons in
the visible and short-wave infrared portions of the spectrum.
Included in corporate activities are general corporate expenses, 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
------------------------
APRIL 1, MARCH 27,
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Equipment ............................................. $ 4,859 $ 10,309
Photonics ............................................. 1,033 1,440
--------- ---------
Total ............................................. $ 5,892 $ 11,749
========= =========
</TABLE>
Business Segment Profit & Loss
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
APRIL 1, MARCH 27,
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Equipment .................................................. $ (1,769) $ (4,267)
Photonics .................................................. (884) (101)
Corporate activities ....................................... (127) (594)
--------- ---------
Operating loss ............................................. $ (2,780) $ (4,962)
Interest expense ........................................... (758) (1,015)
Interest income ............................................ 551 591
Other income and expense, net .............................. 126 571
--------- ---------
Loss from continuing operations before income taxes ........ $ (2,861) $ (4,815)
========= =========
</TABLE>
5. RESTRUCTURING
During the third quarter of 1999, the Company adopted an expense reduction
plan that included 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, California. The Company incurred a charge of $2,225,000 related to
the expense reduction plan. The significant components of this charge included
$873,000 for future rent due on 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.
In the fourth quarter of 1999, $97,000 of the restructuring reserve was
reversed due to lower than expected costs on the closure of the facility. During
the first quarter of 2000, the Company vacated the building and negotiated a
lease
8
<PAGE> 9
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
termination for that space with its landlord, which released the Company
from the obligation to pay any rent after April 30, 2000. As a result, the
Company reversed $615,000 of the restructuring reserve during the first quarter
of 2000.
During the fourth quarter of 1999, the Company adopted a plan to discontinue
operations at its RPC Technologies, Inc. electron beam processing equipment
subsidiary and to close the RPC facility in Hayward, California. Twenty-six
employees out of the Company's staff of contract and regular personnel were
terminated as a result. The Company incurred a charge of $1,639,000 related to
this plan. The significant components of this charge include $679,000 for
inventory write-downs which were charged to cost of sales, $264,000 for fixed
asset write-offs, $200,000 for closure of the facility, $163,000 for employee
severance costs, $161,000 for future rent due on the facility and $152,000 for
write-off of intangibles.
In the first quarter of 2000, Intevac sold certain assets of the RPC
Technologies, Inc. subsidiary to Quemex Technology. Proceeds from the sale
included a cash payment, assumption of the Hayward facility lease and the
assumption of certain other liabilities. Excluded from the sale were two
previously leased systems and three completed systems remaining in inventory.
The Company has orders for the three systems and they are scheduled for shipment
and customer acceptance during 2000 and will be included in future Intevac
revenues. The Company was able to reverse the portions of the restructuring
reserve established to provide for future rents due on the facility and for the
closure of the facility. However, since Intevac retained ownership of the two
leased systems, the Company established an equivalent reserve to provide for any
residual value at the end of the leases.
9
<PAGE> 10
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 2000, Form 10-Q's and Form 8-K's.
RESULTS OF OPERATIONS
Three Months Ended April 1, 2000 and March 27, 1999
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 50% to $5.9 million for the three months ended April 1, 2000 from
$11.7 million for the three months ended March 27, 1999. Net revenues from
Equipment sales declined to $4.9 million for the three months ended April 1,
2000 from $10.3 million for the three months ended March 27, 1999. The decrease
in Equipment sales was primarily the result of a decrease in international sales
of disk manufacturing equipment. Net revenues from Photonics sales decreased to
$1.0 million for the three months ended April 1, 2000 from $1.4 million for the
three months ended March 27, 1999. The decrease in Photonics sales was primarily
the result of a research and development contract that was on hold until late in
the three-month period ended April 1, 2000. The Company expects that both
Equipment and Photonics revenues will increase in the second quarter of 2000
relative to the first quarter of 2000.
International sales decreased by 73% to $2.0 million for the three months
ended April 1, 2000 from $7.5 million for the three months ended March 27, 1999.
The decrease in international sales was primarily due to a decrease in net
revenues from disk manufacturing equipment. International sales constituted 34%
of net revenues for the three months ended April 1, 2000 and 64% of net revenues
for the three months ended March 27, 1999.
Backlog. The Company's backlog of orders for its products was $29.1 million
at April 1, 2000 and $26.1 million at March 27, 1999. 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 11.0%
for the three months ended April 1, 2000 as compared to 8.5% for the three
months ended March 27, 1999. The increase in gross margins was the result of
increased Equipment gross margins which were partially offset by lower Photonics
gross margins. Equipment gross margins were depressed in the first quarter of
1999 as the result of under-absorption of manufacturing overhead due to low
manufacturing volume, establishment of a $0.4 million cost to market reserve on
a used MDP-250B disk sputtering system and establishment of a $0.4 million cost
to market reserve related to higher than expected costs to install and integrate
the Company's first production rapid thermal processing system into its
customer's production environment. Equipment gross margins also increased in the
three-month period ended April 1, 2000 as the result of reduced manufacturing
expenses. Photonics gross margins declined during the three months ended April
1, 2000 as a result of the establishment of approximately $0.2 million of
inventory reserves and lower revenues resulting from a research and development
contract being on hold for the majority of the period.
10
<PAGE> 11
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 and research by the
Photonics Division. Company funded research and development expense decreased to
$2.5 million for the three months ended April 1, 2000 from $4.1 million for the
three months ended March 27, 1999, representing 41.8% and 34.6%, respectively,
of net revenue. This decrease was the result of reduced spending for development
of disk manufacturing equipment and flat panel manufacturing equipment,
partially offset by increased spending for development of Photonics products.
Research and development expenses do not include costs of $0.8 million and
$1.2 million, respectively, for the three-month periods ended April 1, 2000 and
March 27, 1999 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
and $0.1 million, respectively, in the three-month periods ended April 1, 2000
and March 27, 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 to $1.6 million for the three
months ended April 1, 2000 from $1.9 million for the three months ended March
27, 1999, representing 26.9% and 16.2%, 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 and the discontinuation of the Company's electron beam
equipment product line. This lower level of expense was driven by a decline in
selling, general and administrative headcount to 29 employees at April 1, 2000
from 45 employees at March 27, 1999 and lower facilities overhead resulting from
the consolidation of the Company's northern California operations into less
space.
Restructuring and other expense. Restructuring expense was ($0.6) million
and ($17,000) in the three-month periods ended April 1, 2000 and March 27, 1999,
respectively. During the three months ended April 1, 2000 the Company vacated
approximately 47,000 square feet of its Santa Clara Headquarters and negotiated
an early lease termination for the space. As a result the Company reversed
approximately $0.6 million of previously accrued restructuring expense relating
to future rents on the vacated space.
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 consists primarily of interest on the
Company's convertible notes, and, to a lesser extent, interest on approximately
$2.0 million of short-term debt related to the purchase of Cathode Technology in
1996. Interest expense was $0.8 million and $1.0 million, respectively, in the
three-month periods ended April 1, 2000 and March 27, 1999. Interest expense
declined due to a reduction in the balance outstanding of the Company's
Convertible Notes due 2004.
11
<PAGE> 12
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 to $0.7 million for the three
months ended April 1, 2000 from $1.2 million for the three months ended March
27, 1999 primarily as the result of lower gains on foreign currency hedging and
to a lesser extent the result of lower interest income.
Provision for (benefit from) income taxes. The Company's estimated effective
tax rates for the three-month periods ended April 1, 2000 and March 27, 1999
were 0% and a benefit rate of 38%, respectively. The Company did not accrue a
tax benefit during the three-month period ended April 1, 2000 due to the
inability to realize additional tax refunds from loss carry-backs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of $1.5 million for the three
months ended April 1, 2000. The cash used was due primarily to increased
inventory, the net loss incurred by the Company and a reduction in accrued
liabilities, which were partially offset by lower accounts receivable, increased
customer advances, increased accounts payable, depreciation and amortization.
The Company's investing activities provided cash of $1.3 million for the
three months ended April 1, 2000 as a result of the net sale of investments,
which was partially offset by the purchase of fixed assets.
The Company's financing activities provided cash of $0.3 million for the
three months ended April 1, 2000 as the result of the sale of the Company's
stock to its employees through the Company's employee benefit plans.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
The disk drive industry is cyclical and subject to prolonged down-cycles.
Intevac derives a significant proportion of its revenues from sales of
equipment to manufacturers of computer disk drives and disk drive components.
The disk drive industry is cyclical and has experienced long periods of
over-supply and intensely competitive pricing. Since 1997, many of the
manufacturers of hard disk drives and their component suppliers have reported
substantial losses. These down-cycles reduce the demand for the disk
manufacturing equipment we sell. As a result Intevac has experienced significant
reductions in its quarterly revenues, and has incurred quarterly losses, since
the third quarter of 1998. Intevac is not able to accurately predict when the
industry conditions that have depressed our sales will become more favorable.
Rapid increases in areal density are reducing the number of thin-film disks
required per disk drive.
Over the past few years the amount of data that can be stored on a single
thin-film computer disk has been growing at approximately 100% per year.
Although the number of disk drives produced has continued to significantly
increase each year, the increase in areal density has resulted in a reduction in
the number of disks required per disk drive. The result has been that the number
of thin-film disks used worldwide has not grown significantly since 1997.
Without an increase in the number of disks required, Intevac's disk equipment
sales are largely limited to upgrades of existing capacity, rather than capacity
expansion. While the rapidly falling cost of storage per gigabyte is leading to
new applications for disk drives beyond the traditional computer market, it is
not clear to what extent the demand from these new applications will be offset
by further declines in the average number of disks required per disk drive.
Intevac's business is subject to rapid technical change.
Intevac's ability to remain competitive requires substantial investments in
research and development. The failure to develop, manufacture and market new
systems, or to enhance existing systems, would have an adverse effect on
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<PAGE> 13
Intevac's business. In the past, Intevac has experienced delays from time to
time in the introduction of, and technical difficulties with, some of its
systems and enhancements. Intevac'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. Intevac'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 an adverse
effect on Intevac's business.
Competition is intense and our competitors are large and well financed.
Intevac experiences intense competition in the Equipment Business. For
example, Intevac's disk sputtering products experience 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 Intevac. There can be no assurance that Intevac'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 Intevac's markets and develop such enhanced products.
Given the lengthy sales cycle and the significant investment required to
integrate equipment into the manufacturing process, Intevac 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.
The sales of our equipment products are dependent on substantial capital
investment by our customers.
The majority of our Equipment revenues have historically come from the sale
of equipment used to manufacture thin-film disks and to a lesser extent from the
sale of equipment used to manufacture flat panel displays. The systems Intevac
sells typically cost between $1 and $3 million each. Flat Panel sputtering
systems tend to sell for substantially more than $3 million each. The purchase
of Intevac's systems, along with the purchase of other related equipment and
facilities, requires extremely large capital expenditures by our customers.
These costs are far in excess of the cost of the Intevac systems. The magnitude
of such capital expenditures requires that our customers have access to large
amounts of capital and that they are willing to invest that capital over long
periods of time in order to be able to purchase our equipment. Because of the
prolonged industry downturn, some of our customers may not be willing, or able,
to make the magnitude of capital investment required to purchase our products.
A large portion of our sales are to international customers.
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. Intevac earns a significant portion of its revenue
from international sales, and there can be no assurance that any of these
factors will not have an adverse effect on Intevac's business.
Intevac generally quotes and sells its products in US dollars. However, for
some Japanese customers, Intevac quotes and sells its products in Japanese Yen.
Intevac, from time to time, enters into foreign currency contracts in an effort
to reduce the overall risk of currency fluctuations to Intevac's business.
However, there can be no assurance that
13
<PAGE> 14
the offer and sale of products in foreign denominated currencies, and the
related foreign currency hedging activities will not adversely affect Intevac's
business.
Intevac'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 Intevac's products to be more, or
less, competitive than its competitors' products. Currency fluctuations will
decrease, or increase, Intevac's cost structure relative to those of its
competitors, which could impact Intevac's gross margins.
Our operating results fluctuate significantly.
Over the last nine quarters Intevac's operating income or loss as a
percentage of net revenues has fluctuated from approximately (79%) to 8% of net
revenues. Over the same period sales per quarter have fluctuated between $35.8
million and $5.9 million. Intevac anticipates that its sales and operating
margins will continue to fluctuate. As a result, period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
Intevac's stock price is volatile.
Intevac's stock price has experienced both significant increases and
decreases in valuation over short periods of time. Factors such as announcements
of developments related to Intevac's business, fluctuations in Intevac'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 Intevac 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 Intevac's relationships with customers and suppliers could cause the
price of Intevac's Common Stock to continue 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. Any of these factors could adversely affect the market
price of Intevac's Common Stock.
Competition is intense for employees in northern California.
Intevac's operating results 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
Intevac will be successful in attracting and retaining such personnel. The
failure to attract and retain such personnel could have an adverse effect on
Intevac's business.
Intevac routinely evaluates acquisition candidates and other diversification
strategies.
Intevac has completed multiple acquisitions as part of its efforts to grow
and diversify its business. For example, Intevac's business was initially
acquired from Varian Associates in 1991. Additionally, Intevac acquired its
current gravity lubrication, CSS test equipment and rapid thermal processing
product lines in three separate acquisitions. Intevac also acquired its RPC
electron beam processing business in late 1997, and closed this business in
early 2000. Intevac intends to continue to evaluate new acquisition candidates
and diversification strategies. 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. Additionally, unanticipated expenses may be incurred relating to
the integration of technologies, research and development, and administrative
functions. Any future acquisitions may result in potentially dilutive issuance
of equity securities, acquisition related write-offs and the assumption of debt
and contingent liabilities. Any of the above factors could adversely affect
Intevac's business.
14
<PAGE> 15
Thin-film disks could be replaced by a new technology.
Intevac believes that thin-film disks will continue to be the dominant
medium for data storage for the foreseeable future. However, it is possible that
competing technologies may at some time reduce the demand for thin-film disks,
which would adversely affect Intevac's disk equipment business.
Our products are complex, constantly evolving, and often manufactured to
individual customer requirements.
Intevac's Equipment products have a large number of components and are
highly complex. Intevac may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. In addition, some of the systems built by Intevac must be
customized to meet individual customer site or operating requirements. Intevac
has limited manufacturing capacity and may be unable to complete the development
or meet the technical specifications of its new systems or enhancements or to
manufacture and ship these systems or enhancements in a timely manner. In
addition, Intevac 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, Intevac
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 these factors
could adversely affect Intevac's business.
Intevac's business is dependent on its intellectual property.
There can be no assurance that:
- any of Intevac's patent applications will be allowed or that any of the
allowed applications will be issued as patents, or
- any patent owned by Intevac will not be invalidated, deemed
unenforceable, circumvented or challenged, or
- the rights granted under our patents will provide competitive advantages
to Intevac, or
- any of Intevac's pending or future patent applications will be issued
with claims of the scope sought by Intevac, if at all, or
- others will not develop similar products, duplicate Intevac's products
or design around the patents owned by Intevac, or
- foreign patent rights, intellectual property laws or Intevac's
agreements will protect Intevac's intellectual property rights.
Failure to protect Intevac's intellectual property rights could have an
adverse effect upon Intevac's business.
From time to time Intevac has received claims that it is infringing third
parties' intellectual property rights. There can be no assurance that third
parties will not in the future claim infringement by Intevac with respect to
current or future patents, trademarks, or other proprietary rights relating to
Intevac'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 Intevac to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
Intevac, or at all. Any of the foregoing could have an adverse effect upon
Intevac's business.
$41 Million of convertible notes are outstanding and will mature in 2004.
In connection with the sale of $57.5 million of its 6_% Convertible
Subordinated Notes Due 2004 (the "Convertible Notes") in February 1997, Intevac
incurred a substantial increase in the ratio of long-term debt to total
capitalization (shareholders' equity plus long-term debt). During 1999 Intevac
repurchased $16.3 million of the Convertible Notes. The $41.2 million of the
Convertible Notes that remain outstanding commit Intevac to substantial
principal and interest obligations. The degree to which Intevac is leveraged
could have an adverse effect on Intevac's
15
<PAGE> 16
ability to obtain additional financing for working capital, acquisitions or
other purposes and could make it more vulnerable to industry downturns and
competitive pressures. Intevac's ability to meet its debt service obligations
will be dependent on Intevac's future performance, which will be subject to
financial, business and other factors affecting the operations of Intevac, many
of which are beyond its control.
A majority of the Common Stock outstanding is controlled by the directors and
executive officers of Intevac.
The present directors and their affiliates and executive officers, in the
aggregate, beneficially own a majority of Intevac'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 Intevac, including
the election of a majority of the directors and approval of significant
corporate transactions.
Intevac uses hazardous materials.
Intevac 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 Intevac or its
officers, directors or employees, suspension of production, alteration of its
manufacturing process or cessation of operations. Such regulations could require
Intevac to acquire expensive remediation or abatement equipment or to incur
substantial expenses to comply with environmental regulations. Any failure by
Intevac to properly manage the use, disposal or storage of, or adequately
restrict the release of, hazardous or toxic substances could subject Intevac 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, 1999.
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<PAGE> 17
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
crewmembers, the injured crewmembers and the spouses of the deceased and/or
injured crewmembers. 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.
On January 5, 2000, the Company's RPC Technologies, Inc. subsidiary was
named as a defendant in a lawsuit filed in United States District Court in
Texas. The lawsuit was filed by Reita Miller, Executrix of the estate of Thomas
O. Miller, and family members of Mrs. Miller. The suit names RPC Technologies,
Inc. and RPC Industries, Inc. as defendants. Included in the suits allegations
are assertions that Thomas O. Miller protracted leukemia and died as the result
of working in and around Broad Beam accelerators manufactured by RPC Industries,
Inc and installed at Mr. Miller's employer, Tetra Pak. Preliminary
investigations lead the Company to believe that it has meritorious defenses
against the Miller 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.
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:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule
17
<PAGE> 18
(b) Reports on Form 8-K:
None.
18
<PAGE> 19
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: May 15, 2000 By: /s/ NORMAN H. POND
------------------------------------------------
Norman H. Pond
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
Date: May 15, 2000 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)
19
<PAGE> 20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT APRIL 1, 2000 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 1, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> APR-01-2000
<CASH> 3,351
<SECURITIES> 35,305
<RECEIVABLES> 4,690
<ALLOWANCES> 1,699
<INVENTORY> 18,884
<CURRENT-ASSETS> 71,164
<PP&E> 23,882
<DEPRECIATION> 12,361
<TOTAL-ASSETS> 91,149
<CURRENT-LIABILITIES> 22,798
<BONDS> 41,245
0
0
<COMMON> 18,514
<OTHER-SE> 8,592
<TOTAL-LIABILITY-AND-EQUITY> 91,149
<SALES> 5,892
<TOTAL-REVENUES> 5,892
<CGS> 5,241
<TOTAL-COSTS> 5,241
<OTHER-EXPENSES> 3,428
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 758
<INCOME-PRETAX> (2,861)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,861)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
