10-K405 1 f70070e10-k405.txt FORM 10-K405 FISCAL YEAR ENDED DECEMBER 31, 2001 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3560 BASSETT STREET SANTA CLARA, CALIFORNIA 95054 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 986-9888 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- none none
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (NO PAR VALUE) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant, as of February 26, 2001 was approximately $20,087,000 (based on the closing price for shares of the Registrant's Common Stock as reported by the Nasdaq National Market System for the last trading day prior to that date). Shares of Common Stock held by each executive officer, director, and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. On February 26, 2001 approximately 11,934,668 shares of the Registrant's Common Stock, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 2001 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III. SUCH PROXY STATEMENT WILL BE FILED WITHIN 120 DAYS AFTER THE END OF THE FISCAL YEAR COVERED BY THIS ANNUAL REPORT ON FORM 10-K. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties. Words such as "believes," "expects," "anticipates" and the like indicate forward-looking statements. Intevac's actual results may differ materially from the results discussed in the forward-looking statements for a variety of reasons, including those set forth under "Risk Factors Affecting Intevac's Business." PART I ITEM 1. BUSINESS OVERVIEW Intevac, Inc.'s ("Intevac" or the "Company") businesses are the design, manufacture and sale of complex capital equipment used to manufacture products such as thin-film disks and flat panel displays (the "Equipment Division") and the development of highly sensitive electro-optical devices (the "Photonics Division"). The Equipment Division 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 Division also realizes revenues from the sales of disk lubrication equipment and flat panel display ("FPD") manufacturing equipment. Upgrades, spare parts and after-sale service are also sold to purchasers of Intevac's equipment, and sales of components are made to other manufacturers of vacuum equipment. The Equipment Division recorded sales of $28.8 million in 2000, down from $36.0 million in 1999. 2000 Equipment Division revenues resulted primarily from the sales of technology upgrades, spare parts and consumables for disk manufacturing equipment, rather than from the sale of new disk manufacturing systems. The Company expects this trend to continue in 2001 for its disk manufacturing products. However, the Company entered 2001 with a substantial backlog of orders for its FPD manufacturing equipment and expects substantial revenue growth in the Equipment Division during 2001, primarily as a result of increased sales of FPD manufacturing equipment. The Photonics Division develops electro-optical devices that permit 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 digital video cameras. This development work is aimed at creating new products for both military and industrial applications. Products under development include Intensified Digital Video Sensors, LIVAR(R) systems for positive target identification, and low-cost low-light-level cameras. Intevac's Intensified Digital Video Sensor offers both high sensitivity and high resolution. The output of this sensor is digital video. Systems using this sensor have capabilities and features not possible with the direct view night vision devices currently in use by the military. For example, these systems free the user from having to hold the device to the eye and permit remote viewing and image processing. Intevac integrated its Intensified Digital Video Sensor technology with a laser illuminator to create its LIVAR(R) ("Laser Illuminated Viewing and Ranging") system. The LIVAR(R) system is similar to RADAR, but with a number of improvements. The illuminator is an eye safe laser, rather than a microwave source, and the reflected signal is displayed as a digital video image. Photonics Division sales, which consisted primarily of contract research and development, increased to $7.3 million in 2000 from $7.0 million in 1999. The Photonics Division has completed approximately $23 million of government-sponsored research and development since 1994. EQUIPMENT Disk Sputtering Systems Intevac sputtering systems are typically offered at list prices ranging from $2.5 million to $3.5 million, depending upon configuration, to both captive and merchant thin-film disk manufacturers. There are approximately 110 Intevac MDP-250 disk sputtering systems installed worldwide at Fuji Electric, Fujitsu Limited, Hitachi, Komag, MMC Technology, Mitsubishi, Nippon Sheet Glass, Seagate Technology, Sony and Trace Storage Technology. 1 3 Intevac's sputtering systems are used by disk manufacturers to apply thin layers of undercoats, magnetic alloys and protective overcoats to thin-film disks used in the manufacture of computer hard disk drives. The MDP-250 system has the capability to sputter multi-layers (multiple magnetic layers with interspersed non-magnetic layers); to sputter onto alternative substrates (such as glass and ceramic), as well as conventional aluminum substrates; and to make media with the appropriate characteristics for use with magneto-resistive ("MR") heads and giant magneto-resistive ("GMR") heads. The mechanical design of the MDP-250 family has characteristics similar to the cluster tools widely used in semiconductor manufacturing in that each of the twelve process stations is separately vacuum pumped and vacuum isolated. The MDP-250 does not require a carrier or pallet to transport disks through the system. Rather, disks are automatically loaded into the system from cassettes, processed, and then automatically returned to the cassette. A number of process station options are offered, including multiple options for the deposition of thin films, heating stations, cooling stations and cleaning stations. Furthermore, these process stations can be moved from any machine process position to any other to easily accommodate process changes. Cluster Tool Add-On Module The rapid increase in areal density has caused the thin films deposited by our MDP-250 series of equipment to quickly become much more complex. This increased complexity is leading to the need for additional process stations and flexibility in the equipment to accommodate both an increased number of process steps and new processing requirements. To answer these needs, Intevac developed the MDP-200, a modular add-on system that allows manufacturers to seamlessly integrate any number of additional process stations onto their MDP-250 sputtering equipment in a vacuum environment. The MDP-200 provides the capability to process disks through process stations serially or in parallel giving manufacturers broad flexibility to integrate process steps with different process times. The MDP-200 can accommodate a variety of processes including heating, thin-film deposition, cooling, and vapor lubrication. This arrangement also improves vacuum isolation between process steps, which is of increasing importance for some new processes, such as advanced carbon and vapor lubrication, which utilize materials that are not compatible with the sputtering processes for the underlayers and magnetics. New Carbon Technology One method for increasing the areal density of disks is to reduce the thickness of the carbon overcoat that protects the underlying magnetic film from wear and corrosion. By reducing the thickness of the overcoat the disk drive head can fly closer to the magnetic film which increases signal strength. To achieve thinner carbon overcoats Intevac has developed its new carbon technology ("NCT") process station. The NCT process station is able to apply very hard, diamond-like carbon overcoats to disks that permit the carbon overcoats to be reduced in thickness to below 50 angstroms. Disk Lubrication Equipment Lubrication is the production step that follows disk sputtering in the manufacture of thin-film disks. Intevac, through its 1996 acquisition of San Jose Technology Corp. ("SJT"), is the leading supplier of gravity flow disk lubrication systems. During lubrication, a microscopic layer of lubricant is applied to the disk's surface to improve durability, reduce corrosion and reduce surface friction. This is accomplished by immersing the disks in a solvent that has been mixed with a small amount of lubricant. Intevac's gravity disk lubrication products allow thin-film disk manufacturers to uniformly lubricate disks in a temperature controlled, low vibration, contamination free environment with a minimal amount of solvent loss. Intevac's Vapor Lubrication System (the "VLS") is a new approach to disk lubrication that couples vacuum sputter coating with a vacuum lubrication process. The VLS is an alternative to the traditional gravity lubrication process and offers a number of process enhancements to disk manufacturers. Since the disks never leave vacuum after sputtering, the exposure of the disk to atmosphere between the sputtering and lubrication steps is eliminated. This improves process control, reduces the risk of contamination and improves the bonding of the lubricant to the disk. Additionally, more efficient use is made of clean room space and the process is environmentally friendly as large quantities of expensive solvents are eliminated from the lubrication process. 2 4 MDP-250 Upgrade Path Many of the new process and system technologies that Intevac has developed for its newest MDP-250 systems have been designed to be backwards compatible and field installable. The MDP-200, the Vapor Lubrication System, all process stations, and a number of the speed and vacuum enhancements can be retrofitted to Intevac's existing installed based of MDP-250 systems. Intevac's intent is to afford our customers a cost-effective solution that significantly upgrades and extends the capabilities of their installed base of equipment in a manner that is complementary to the latest generation MDP-250 systems. Flat Panel Display Sputtering Equipment FPD's are used for a variety of applications such as PCs, handheld communication devices, workstations and video displays. The manufacture of several types of flat panel displays, such as active matrix liquid crystal display ("AMLCD") and plasma display panel ("PDP"), requires the use of a sputtering process to deposit thin-film layers of different materials onto a glass substrate. Intevac believes that the skills and technologies that it has developed for the thin-film disk manufacturing industry are directly applicable to the FPD manufacturing industry. These skills and technologies include its expertise and experience in sputtering, rapid heating, high vacuum, isolated process chambers and substrate transport. In addition, as with the thin-film disk manufacturing industry, the FPD industry involves providing complex, expensive capital equipment to a small number of customers worldwide. Intevac developed its FPD sputtering system for this market under an agreement with its development partner, Ebara Corporation ("Ebara"). Under the agreement, as amended, Ebara agreed to pay one-half of the development costs of the flat panel sputtering system in exchange for joint ownership of the intellectual property rights and the exclusive right to manufacture and sell in Japan the flat panel sputtering systems developed under the agreement. Intevac has retained the exclusive right to manufacture and sell such flat panel sputtering systems outside of Japan. Each party is required to pay royalties to the other party on its flat panel sputtering system sales. Ebara has not yet exercised its right to manufacture FPD equipment. Intevac's D-STAR(R) flat panel sputtering systems are scalable and have been manufactured in sizes capable of sputtering glass substrates as small as 550 mm by 650 mm to as large as 1.2 meters by 1.6 meters. During 2000 Intevac manufactured a custom D-STAR(R) system for a customer with a multi-chip module application. That customer cancelled its order shortly before shipment of the system. The Company has a substantial inventory investment in the custom system and is in active dialog with the customer to resolve the cancellation. Depending on the results of the dialog with the customer, Intevac may have to establish a cost-to-market reserve for this system in the future. Flat Panel Display Rapid Thermal Processing Equipment Intevac's rapid thermal processing ("RTP") systems are used to rapidly modify the characteristics of thin films deposited on glass substrates such as are used in the manufacture of FPD's. Intevac's patented RTP technology enables manufacturers to change the properties of these thin films by thermally processing them at temperatures that would otherwise distort and destroy the underlying glass substrate. Processes that Intevac's RTP systems are suitable for include thin-film activation after ion implant, dehydrogenation, densification and crystallization. Intevac's RTP systems are in use at Sony, Sanyo and a joint manufacturing facility of Sony and Toyota. An arc lamp with a patented reflector that produces an intense and highly uniform spectral output is the core of the RTP system. The lamp/reflector system enables transient annealing rather than heating of the entire substrate. In transient annealing a uniform line of radiation is focused onto the moving substrate and a narrow band of the substrate is brought up to peak process temperature at any time. The substrate remains undistorted because at all times the majority of its area is at a relative cool temperature and can act to stabilize the small area, which is very hot. Exposure time is typically under one second. 3 5 Electron Beam Processing Equipment In December 1999, Intevac incurred a charge of $1.6 million related to a plan to terminate its electron beam product line. The plan included the delivery of the three electron beam systems on order and subsequent closure of the Hayward facility where the systems were manufactured. In March 2000, the Company sold the electron beam business to Quemex Technology, Ltd. ("Quemex") and Quemex assumed responsibility for Intevac's Hayward facility. Intevac retained rights to the three systems on order, which were completed and shipped. PHOTONICS History Intevac's Photonics products have been developed by a team that initially began working together in the 1980's in the Varian central research labs and night vision business unit. When Intevac was formed in 1991, it acquired Varian's night vision business, and the related Varian central research lab activities and technology. The central research lab group became part of the R&D department for Intevac's night vision business and continued to develop Intevac's photocathode technology. In 1995, Intevac sold its night vision business to Litton Industries. However, the technical team remained at Intevac and formed the Photonics Division. Since 1995 the Photonics Division has been further developing its technology, with the majority of its activities being funded by R&D contracts from the United States Government. During this period the Photonics Division has also worked collaboratively with other research organizations, including Stanford University, Lawrence Livermore National Laboratory and The Charles Stark Draper Laboratory. Technology Intevac's Intensified Digital Video Sensor exemplifies Intevac's Photonics technology. The Intensified Digital Video Sensor is a vacuum device about an inch in diameter and a quarter-inch thick. The Intensified Digital Video Sensor has a transparent glass window on one side through which photons are focused onto a photocathode on the vacuum side of the window. When a photon strikes the photocathode, an electron is emitted into the vacuum. The electron is then accelerated and strikes a Charge Coupled Device ("CCD"). The CCD then outputs a high-resolution video signal. The Intensified Digital Video Sensor offers both high sensitivity and high resolution. It works well in the visible as well as the near infrared range of the spectrum. The output is video, which frees the user from having to hold the device to the eye and permits remote viewing and image processing. The Company believes it has capability and features not possible with the direct view night vision devices currently in use by the military. LIVAR(R) Target Identification System Intevac integrated its Intensified Digital Video Sensor technology with a laser illuminator to create its Laser Illuminated Viewing and Ranging system ("LIVAR(R)"). The LIVAR(R) system is similar to RADAR, but with a number of improvements. The illuminator is an eye safe laser, rather than a longer wavelength microwave source, and the reflected signal is displayed as a digital video image, rather than as a blip. This enables real time, high-resolution imagery for target identification at much longer ranges than was previously possible. The potential benefit of the LIVAR(R) system is clear for military conflicts such as that which occurred in Kosovo. In the Kosovo conflict, casualties to US servicemen were politically unacceptable, which meant that aircraft could only operate at high altitudes where they were relatively safe from ground launched missile attacks. It was also unacceptable to inflict collateral damage to the other sides' civilians or to other untargeted assets. However, these goals are mutually exclusive unless capability exists for positively identifying targets from long ranges. Currently the military uses several means for target location and identification including forward-looking infrared ("FLIR") systems and RADAR. While these systems can sense targets at relatively long ranges, the 4 6 resolution is poor, and positive identification is difficult, or impossible. The LIVAR(R) system complements the existing FLIR and RADAR technology and enables target identification in addition to target sensing. Because of these advantages, LIVAR(R) is currently under consideration by the US military as a key capability to be deployed in a number of the US military's weapons systems including the Joint Strike Fighter, Unmanned Aerial Vehicles, Unmanned Ground Vehicles, and a man-portable system. Intevac is under contract from the U.S. Army for the development and demonstration of a low cost, man-portable targeting and surveillance system. The targeting and surveillance system will utilize LIVAR(R) technology, which will enable identification of targets at long ranges under day/night conditions, a significant improvement in both resolution and range over existing target identification systems. Intevac expects to deliver this unit during 2001. High Performance Cameras In September 1999, the first of seven highly sensitive short-wave infra-red cameras was accepted by Intevac's customer, Lockheed Martin Missiles & Space, for use in the U.S. Air Force's Airborne Laser ("ABL") program. The ABL system will be carried aboard a modified Boeing 747 and will be capable of shooting down theater ballistic missiles launched hundreds of kilometers away. The highly sensitive Intevac camera is an enabling technology for this program. The key technology in the ABL camera is a highly sensitive photocathode, which emits electrons that are detected by a CCD. The electron bombarded CCD ("EBCCD") was developed under a cost shared Technology Development Agreement with the Defense Advanced Research Projects Agency ("DARPA"). The ABL program was the first application using this technology. Low Cost Low Light Level Cameras Today's low light level cameras, derived from military night vision technology, are too expensive for most commercial applications. Intevac's objective is to reduce this cost to $500 per camera, a cost at which the Company believes that large available markets for commercial security cameras, law enforcement and traditional military night vision tubes could be addressed. Intevac is currently developing this low light level video camera with National Semiconductor under a $10 million cost-sharing program sponsored by the National Institute of Standards and Technology ("NIST"). The NIST program involves the development of a CMOS chip that integrates an active pixel imaging sensor with camera electronics by National Semiconductor; photocathode design, product integration and development of low cost manufacturing processes by Intevac's Photonics Division; and development of automated processing and assembly equipment by Intevac's Equipment Division. Unlike present low light level cameras, which work well only in darkness, these Electron Bombarded Active Pixel Sensor ("EBAPS(TM)") cameras should perform just as well in all types of lighting conditions, including bright daylight. Intevac plans to begin commercial sales in 2002. Negative Electron Affinity Electron Sources Development is also being done on negative electron affinity ("NEA") electron sources. NEA electron sources provide an enabling technology to be used in semiconductor test and photolithography equipment, which could significantly improve throughput and permit a significant reduction in the feature size of integrated circuits. RESEARCH AND DEVELOPMENT Intevac's products serve markets characterized by rapid technological change and evolving industry standards. As a result, Intevac routinely invests substantial amounts in research and development and expects to continue an active development program. Intevac's research and development expenses were $10.6 million, $14.1 million and $12.7 million, respectively, in 2000, 1999 and 1998. Research and development expenses represented 29%, 33% and 13%, respectively, of net revenues in 2000, 1999 and 1998. Research and 5 7 development expenses do not include costs of $0.7 million, $1.1 million and $1.8 million that were incurred by Intevac in 2000, 1999 and 1998, respectively, that were reimbursed under the terms of research and development cost sharing agreements related to development of disk and flat panel manufacturing equipment. Additional research and development expenses of $6.0 million, $5.9 million and $4.8 million in 2000, 1999 and 1998, respectively, were incurred under contract for the Company's Photonics customers. These costs are included in cost of goods sold. SALES CHANNEL, CUSTOMERS AND MARKETING Domestic equipment sales are made by the Equipment Division direct sales force. International equipment sales are made by the Company's exclusive distributor in Japan, Matsubo; the Company's subsidiary in Singapore; and by sales representatives in Korea and Taiwan. The Company's distributor and sales representatives typically provide sales, installation, warranty and ongoing customer support. Through the second quarter of 2000, Intevac marketed its flat panel manufacturing equipment to Far East customers through its Japanese joint venture, IMAT, after which Intevac and its joint venture partner, Matsubo, transferred IMAT's activities and employees to Matsubo and terminated the operations of IMAT. Photonics sales are made by the Photonics Division direct sales force. The selling process for Intevac's equipment products is often a multi-level and long-term process involving individuals from marketing, engineering, operations, customer service and senior management. The process is lengthy and involves making samples for the prospective customer and responding to individual needs for moderate levels of machine customization. Installing and integrating new equipment requires a substantial investment by a customer. Sales of Intevac's systems depend, in significant part, upon the decision of a prospective customer to replace obsolete equipment or to increase manufacturing capacity by upgrading or expanding existing manufacturing facilities or constructing new manufacturing facilities, all of which typically involve a significant capital commitment. Therefore, customers often require a significant number of product presentations and demonstrations before making a purchasing decision. Accordingly, Intevac's systems typically have a lengthy sales cycle, during which Intevac may expend substantial funds and management time and effort with no assurance that a sale will result. The selling process for Intevac's Photonics Division primarily involves the solicitation of contracts and subcontracts from government agencies and from government contractors and subcontractors. Some contracts are bid at a fixed cost, some contracts are bid at cost plus a fee and some contracts are bid on a cost-sharing basis. The sales process involves government procurement regulations and is dependant on the continuing availability of government funding for the Company's research programs. Future production orders for Intevac's military products are dependent on the government funding of the weapons systems that utilize Intevac products such as LIVAR(R). Historically, a significant portion of Intevac's revenues in any particular period has been attributable to sales to a limited number of customers. For example, 46%, 66% and 71% of Intevac's total revenues in 2000, 1999 and 1998, respectively, were accounted for by the three largest customers in each of the those years. Intevac's largest customers change from period to period and it is expected that sales of its products to relatively few customers will continue to account for a high percentage of its net revenues in the foreseeable future. Foreign sales accounted for 27% of revenues in 2000, 60% of revenues in 1999 and 53% of revenues in 1998. The majority of Intevac's foreign sales are to companies in the Far East and Intevac anticipates that sales to customers in the Far East will continue to be a significant portion of its revenues. CUSTOMER SUPPORT Intevac provides process and applications support, customer training, installation, start-up assistance and emergency service support to its customers. Process and applications support is provided by Intevac's equipment process engineers who also visit customers at their plants to assist in process development projects. Intevac conducts training classes for process engineers, machine operators and machine service personnel. Additional training is also given during the machine installation. Installation and start up support is generally 6 8 provided within the United States by the Intevac customer service organization. This group also assists with the installation and start up of systems in overseas locations as required. Intevac generally provides a one-year warranty on its equipment. During this warranty period any necessary non-consumable parts are supplied and installed. Intevac employees provide field service support primarily in the United States, Singapore and Malaysia. In other countries, field service support is provided by Intevac's distributors and sales representatives, supplemented by Intevac factory support. Intevac and its distributor stock consumables and spare parts to support the installed base of systems. These parts are available on a 24-hour per day basis. MANUFACTURING All of Intevac's manufacturing is conducted at its facility in Santa Clara, California. Intevac's Equipment manufacturing operations include electromechanical assembly, mechanical and vacuum assembly, fabrication of the sputter sources and system assembly, alignment and testing. Intevac's Photonics manufacturing operations include growth of advanced photocathodes and assembly of complex vacuum devices under clean room conditions utilizing a number of advanced processing techniques. Intevac makes extensive use of the infrastructure serving the semiconductor equipment business. Intevac purchases vacuum pumps, valves, instrumentation and fittings, power supplies, printed wiring board assemblies, computers and control circuitry and custom mechanical parts made by forging, machining and welding. Intevac has a well-equipped fabrication center that manufactures a portion of the fabricated parts used in Intevac products and also sells fabricated parts to commercial customers. Intevac's manufacturing strategy is to operate with low fixed costs, to produce high quality, cost-effective systems and low cost replacement parts and to be able to respond effectively to changes in volume. To do this, Intevac currently designs its products to use standard parts where possible. Intevac performs manufacturing activities that add value or that require unique technology or specialized knowledge and, taking advantage of its Silicon Valley location, utilizes subcontractors to perform other manufacturing activities. BACKLOG Intevac's backlog was $42.1 million and $24.6 million at December 31, 2000 and December 31, 1999, respectively. Intevac includes in its backlog only those customer orders for systems, component parts and contract research and development for which it has accepted signed purchase orders with assigned delivery dates. The equipment requirements of Intevac's customers cannot be determined with accuracy, and therefore Intevac's backlog at any certain date may not be indicative of future demand for Intevac's products. PATENTS AND LICENSING Intevac currently has 30 patents issued in the United States and 17 patents issued in foreign countries, and has patent applications pending in the United States and foreign countries. Of the 30 U.S. patents, 11 relate to sputtering, 7 relate to RTP, 10 relate to photonics, 1 relates to lubrication systems and 1 relates to CSS. Five foreign patents relate to sputtering, 11 relate to photonics and 1 relates to RTP. In addition, Intevac has the right to utilize certain patents under licensing arrangements with Litton Industries, Stanford University, Lawrence Livermore Laboratories and Alum Rock Technology. EMPLOYEES At December 31, 2000, Intevac had 190 employees, including 16 contract employees. 86 of these employees were in research and development, 72 in manufacturing, and 32 in administration, customer support and marketing. 7 9 RISK FACTORS AFFECTING INTEVAC'S BUSINESS Our products are complex, constantly evolving, and often manufactured to individual customer requirements. Intevac's Equipment Division 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. The Equipment Division 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 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. The Photonics Division does not yet generate a significant portion of its revenues from product sales. To date the activities of the Photonics Division have concentrated on the development of its technology and prototype products that demonstrate this technology. Revenues have been derived primarily from research and development contracts funded by the United States Government and its contractors. The Company plans to develop standard photonics products for sale to military and commercial customers. The Photonics Division will require substantial further investment in sales and marketing, in product development and in additional production facilities to support the planned transition to volume sales of photonics products to military and commercial customers. There can be no assurance that the Company will succeed in these activities and generate significant increases in sales of products based on its photonics technology. 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 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. Some of our customers, particularly those that purchase our disk manufacturing products, may not be willing, or able, to make the magnitude of capital investment required to purchase our products. 8 10 The disk drive industry has been severely impacted by excess capacity since 1997. 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 has experienced a long period 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. Some of these manufacturers have gone out of business. Some of these manufacturers have been acquired by their competitors. Accordingly, the number of potential customers for Intevac's disk equipment products has been reduced. As a result of these factors, 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 disk equipment sales will become more favorable. Demand for capital equipment is cyclical. Intevac's Equipment Division sells capital equipment to capital intensive industries, which sell commodity products such as disk drives and flat panel displays. These industries operate with high fixed costs. When demand for these commodity products exceeds capacity, then demand for new capital equipment such as Intevac's tends to be amplified. When supply of these commodity products exceeds capacity, then demand for new capital equipment such as Intevac's tends to be depressed. The cyclical nature of the capital equipment industry means that in some years, such as 1997, sales of new systems by the Company will be unusually high, and that in other years, such as 2000, sales of new systems by the Company will be severely depressed. 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 increase each year, the growth 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. Our competitors are large and well financed and competition is intense. Intevac experiences intense competition in the Equipment Division. For example, Intevac's equipment products experience competition worldwide from competitors including, Anelva Corporation, Applied Films Corporation, Ulvac Japan, Ltd. and Unaxis Holdings, Ltd., each of which have sold substantial numbers of systems worldwide. Anelva, Ulvac and Unaxis all 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. 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. 9 11 Competition in northern California for such personnel is intense. The cost of living in northern California is also extremely high, which further increases the cost and difficulty of recruiting new employees. There can be no assurance that Intevac will be successful in attracting new employees and retaining its staff. The failure to attract and retain such personnel could have an adverse effect on Intevac's business. Business interruptions could adversely affect our business. Intevac's operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. The Company's facility in California is currently subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event these blackouts continue or increase in severity, they could disrupt the operations of the facility. Additionally, the cost of electricity and natural gas has increased significantly. Such cost increases and any further cost increases will impact the Company's profitability. A 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 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 eight quarters Intevac's operating 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 $13.8 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 in valuation, and significant decreases in valuation, over short periods of time. Intevac believes that 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 10 12 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. 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 after two years initiated plans to close this business. 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. 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. 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. 11 13 $41 Million of convertible notes are outstanding and will mature in 2004. In connection with the sale of $57.5 million of its 6 1/2% 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 spent $9.7 million in cash to repurchase $16.3 million of the Convertible Notes. The $41.2 million of the Convertible Notes that remain outstanding as of December 31, 2000 commit Intevac to substantial principal and interest obligations. The degree to which Intevac is leveraged could have an adverse effect on Intevac'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. 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. 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. A majority of the Common Stock outstanding is controlled by the directors and executive officers of Intevac. Based on the shares outstanding on December 31, 2000, the present directors and their affiliates and executive officers, in the aggregate, beneficially own a majority of the 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. ITEM 2. PROPERTIES Intevac leases its 119,583 square feet facility in Santa Clara, California. The lease for this building expires in March 2007. Intevac has an option to extend the lease for an additional five-year period, with a monthly base rent to be negotiated by Intevac and the lessor. If Intevac and the lessor are unable to reach agreement with respect to such monthly base rent, an appraisal process set forth in the lease will determine the monthly base rent for the extension. Intevac also leases a facility of approximately 2,400 square feet in Singapore to house the Singapore customer support organization. This lease expires in December 2001. Intevac believes that its current facilities are suitable and adequate for its current and foreseeable operations. Intevac operates with one full manufacturing shift and one partial manufacturing shift. Intevac believes that it currently has sufficient productive capacity to meet its current needs. ITEM 3. 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 12 14 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 named RPC Technologies, Inc. and RPC Industries, Inc. as defendants. Included in the suits allegations were 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. The suit was settled in early 2001 by the Company's insurers without cost to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted to a vote of security-holders during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K. 13 15 EXECUTIVE OFFICERS AND DIRECTORS Certain information about Intevac's directors and executive officers is listed below:
NAME AGE POSITION ---- --- -------- Executive Officers and Directors: Norman H. Pond....................... 62 Chairman of the Board Ajit Rode............................ 48 Chief Executive Officer & President of Equipment Division Charles B. Eddy III.................. 50 Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary Verle Aebi........................... 46 President of Photonics Division Edward Durbin(1)..................... 73 Director Robert D. Hempstead.................. 57 Director David N. Lambeth(1)(2)............... 53 Director H. Joseph Smead(2)................... 75 Director
--------------- (1) Member of Audit Committee (2) Member of Compensation Committee Mr. Pond is a founder of Intevac and has served as Chairman of the Board since February 1991. Mr. Pond served as President and Chief Executive Officer from February 1991 until July 2000. Before joining Intevac, from 1988 to 1990, Mr. Pond served as President and Chief Operating Officer of Varian Associates, Inc., a publicly held manufacturer of semiconductor, communication, defense and medical products where he was responsible for overall management of Varian's operations. From 1984 to 1988, Mr. Pond was President of Varian's Electron Device and Systems Group and became a Director of Varian in 1986. Prior to joining Varian, Mr. Pond was employed by Teledyne, a diversified electronics company, from 1963 to 1984 where he served in various positions, including as Group Executive. Mr. Pond holds a BS in physics from the University of Missouri at Rolla and a MS in physics from the University of California at Los Angeles. Dr. Rode has served as Chief Executive Officer of the Company and President of the Equipment Division since July 2000. Before joining Intevac, Dr. Rode served as Senior Vice President & General Manager of Semiconductor Systems, Inc., a division of FSI International, a publicly held supplier of photoresist processing equipment to the semiconductor, thin-film head and multi-chip module markets. From 1997 to 1998, Dr. Rode was employed by Spectrian, where he served as Vice President of the Multi-Carrier Power Amplifier product group. From 1995 to 1997, Dr. Rode was employed by Novellus Systems as General Manager of the CVD Business Unit. Dr. Rode holds a Bachelor of Technology in electrical engineering from the Indian Institute of Technology, a MS and Ph.D. in electrical engineering from Oregon State University and a MBA from University of Portland. Mr. Eddy has served as Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary of Intevac since April 1991. Mr. Eddy served as Chief Financial Officer of Videonics, Inc., a manufacturer of consumer video editing equipment, from 1987 to 1991 and served as Chief Financial Officer of Parallel Computers, Inc., a startup computer company, from 1983 to 1987. Mr. Eddy was with Intel Corporation from 1974 to 1983 where he served in a variety of positions, including controller and plant manager. Mr. Eddy holds a BS in engineering science from the University of Virginia and a MBA from Dartmouth College. Mr. Aebi has served as President of the Photonics Division since July 2000. Mr. Aebi served as General Manager of the Photonics Division since May 1995 and was elected as a Vice President of the Company in September 1995. From 1988 through 1994, Mr. Aebi was the Engineering Manager of the Company's night vision business, where he was responsible for new product development in the areas of advanced photocathodes and image intensifiers. Mr. Aebi holds a BS in physics and an MS in electrical engineering from Stanford University. Mr. Durbin has served as a Director of Intevac since February 1991. Mr. Durbin joined Kaiser Aerospace and Electronics Corporation, a privately held manufacturer of electronic and electro-optical systems, in 1975 14 16 and served as Vice Chairman with responsibility for marketing and business development until January 2001. Mr. Durbin holds a BS in electrical engineering from The Cooper Union and a MS in electrical engineering from the Polytechnic Institute of Brooklyn. Dr. Hempstead has served as a Director of Intevac since March 1997 and served as Chief Operating Officer of Intevac from April 1996 through June 1999. Before joining Intevac, Dr. Hempstead served as Executive Vice President of Censtor Corp., a manufacturer of computer disk drive heads and disks, from November 1994 to February 1996. He was a self-employed consultant from 1989 to November 1994. Dr. Hempstead is currently Chief Technology Officer at Veeco Instruments. Dr. Hempstead holds a BS and MS in electrical engineering from Massachusetts Institute of Technology and a Ph.D. in physics from the University of Illinois. Dr. Lambeth has served as a Director of Intevac since May 1996. Dr. Lambeth has been Professor of both Electrical and Computer Engineering and Material Science Engineering at Carnegie Mellon University since 1989. Dr. Lambeth was Associate Director of the Data Storage Systems at Carnegie Mellon University from 1989 to 1999. Since 1988, Dr. Lambeth has been the owner of Lambeth Systems, an engineering consulting and research firm. From 1973 to 1988, Dr. Lambeth worked at Eastman Kodak Company's Research Laboratories, most recently as the head of the Magnetic Materials Laboratory. Dr. Lambeth holds a BS in electrical engineering from the University of Missouri and a Ph.D. in physics from the Massachusetts Institute of Technology. Dr. Smead has served as a Director of Intevac since February 1991. Dr. Smead joined Kaiser Aerospace and Electronics Corporation in 1974 and served as Kaiser's President from 1974 until October 1, 1997. Dr. Smead served as President and Chairman of the Board of Directors of K Systems, Inc., Kaiser's parent company, from 1977 until October 1, 1997. Dr. Smead served as Chairman of the Board of Directors of Kaiser until December 31, 1999. Dr. Smead resigned as a director of Kaiser and its subsidiaries on December 1, 2000. Dr. Smead holds a BS in electrical engineering from the University of Colorado, a MS in electrical engineering from the University of Washington and a Ph.D. in electrical engineering from Purdue University. 15 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Intevac's Common Stock commenced trading on the Nasdaq National Market on November 21, 1995 and is traded under the symbol "IVAC." As of December 31, 2000, there were approximately 2,000 holders of record of the Common Stock. The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock as reported on the Nasdaq National Market.
HIGH LOW ------- ------ Fiscal 1999 First Quarter........................................... $10.125 $5.625 Second Quarter.......................................... $ 6.250 $4.125 Third Quarter........................................... $ 6.125 $4.500 Fourth Quarter.......................................... $ 4.625 $2.750 Fiscal 2000 First Quarter........................................... $ 8.000 $3.500 Second Quarter.......................................... $ 4.625 $2.688 Third Quarter........................................... $ 7.090 $3.313 Fourth Quarter.......................................... $ 5.130 $3.130
DIVIDEND POLICY Intevac currently anticipates that it will retain its earnings, if any, for use in the operation of its business and does not expect to pay cash dividends on its capital stock in the foreseeable future. 16 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data of Intevac is qualified by reference to and should be read in conjunction with the consolidated financial statements of Intevac, including the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations, each appearing elsewhere in this report.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues................................. $ 36,049 $ 42,962 $ 95,975 $133,207 $88,232 Cost of net revenues......................... 34,059 40,410 71,717 91,255 55,652 -------- -------- -------- -------- ------- Gross profit................................. 1,990 2,552 24,258 41,952 32,580 Operating expenses: Research and development................... 10,576 14,136 12,743 10,716 8,425 Selling, general and administrative........ 4,415 7,226 10,879 11,399 8,391 Restructuring and other.................... (638) 3,069 1,088 -- -- Acquired in-process research and development............................. -- -- -- 299 5,835 -------- -------- -------- -------- ------- Total operating expenses........... 14,353 24,431 24,710 22,414 22,651 -------- -------- -------- -------- ------- Operating income (loss)...................... (12,363) (21,879) (452) 19,538 9,929 Interest expense............................. (3,033) (3,711) (4,187) (3,581) (175) Interest income and other income, net........ 3,072 3,632 3,176 3,268 1,569 -------- -------- -------- -------- ------- Income (loss) from continuing operations before income taxes........................ (12,324) (21,958) (1,463) 19,225 11,323 Provision for (benefit from) income taxes.... -- (8,344) (882) 6,728 6,350 -------- -------- -------- -------- ------- Income (loss) from continuing operations..... (12,324) (13,614) (581) 12,497 4,973 Income from discontinued operations.......... -- -- 1,005 -- -- Income from repurchase of convertible notes...................................... -- 3,844 -- -- -- -------- -------- -------- -------- ------- Net income (loss)............................ $(12,324) $ (9,770) $ 424 $ 12,497 $ 4,973 ======== ======== ======== ======== ======= Basic earnings per share: Income (loss) from continuing operations... $ (1.04) $ (1.16) $ (0.05) $ 1.00 $ 0.40 Net income (loss).......................... $ (1.04) $ (0.83) $ 0.04 $ 1.00 $ 0.40 Shares used in per share calculations...... 11,803 11,777 12,052 12,514 12,311 Diluted earnings per share: Income (loss) from continuing operations... $ (1.04) $ (1.16) $ (0.05) $ 0.94 $ 0.39 Net income (loss).......................... $ (1.04) $ (0.83) $ 0.03 $ 0.94 $ 0.39 Shares used in per share calculations...... 11,803 11,777 12,354 15,385 12,901 CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................................ $ 38,403 $ 40,895 $ 60,916 $ 71,142 $ 938 Working capital.............................. 41,093 51,579 77,774 78,025 15,847 Total assets................................. 86,670 94,382 122,976 147,794 68,085 Long-term debt............................... 41,245 43,188 59,461 59,480 730 Total shareholder's equity................... 17,804 29,623 40,436 42,435 33,736
17 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis contains forward-looking statements which involve risks and uncertainties. Words such as "believes," "expects," "anticipates" and the like indicate forward-looking statements. Intevac's actual results may differ materially from the results discussed in the forward-looking statements for a variety of reasons, including those set forth under "Risk Factors Affecting Intevac's Business" and should be read in conjunction with the Consolidated Financial Statements and related Notes contained elsewhere in this Annual Report on Form 10-K. RESULTS OF OPERATIONS Net revenues. Net revenues consist primarily of sales of equipment used to manufacture thin-film disks for computer hard disk drives and flat panel displays, related equipment and system 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 totaled $36.0 million, $43.0 million and $96.0 million in 2000, 1999 and 1998, respectively. Equipment revenues totaled $28.8 million, $36.0 million and $90.6 million in 2000, 1999 and 1998, respectively. Equipment revenues decreased in 2000 from 1999 primarily due to a decrease in sales of disk manufacturing systems, and to a lesser extent flat panel manufacturing systems, partially offset by increased sales of system upgrades and components. Equipment revenues decreased in 1999 from 1998 primarily due to a decrease in net revenues from disk sputtering systems and related equipment and to a lesser extent a decrease in net revenues from electron beam systems and flat panel display manufacturing equipment. Photonics revenues totaled $7.2 million, $7.0 million and $5.7 million in 2000, 1999 and 1998, respectively. Photonics revenues increased from 1999 to 2000 as the result of an increase in product shipments, which was partially offset by a lower level of revenues from contract research and development. Photonics revenues increased from 1998 to 1999 as the result of an increase in revenues from research and development contracts. Intevac's backlog of orders at December 31, 2000 was $42.1 million as compared to a December 31, 1999 order backlog of $24.6 million. In 2000, MMC Technology, Seagate, Westt and Matsubo (Intevac's Japanese distributor) each accounted for more than 10% of Intevac's consolidated revenues and in aggregate accounted for 56% of net revenues. In 1999, Matsubo, Seagate and Lockheed Martin each accounted for more than 10% of Intevac's consolidated revenues and in aggregate accounted for 66% of net revenues. In 1998, Matsubo, HMT Technology and MMC Technology each accounted for more than 10% of Intevac's consolidated revenues and in aggregate accounted for 71% of net revenues. International sales totaled $9.6 million, $25.7 million and $51.0 million in 2000, 1999 and 1998, respectively. International sales accounted for 27%, 60% and 53% of net revenues in 2000, 1999 and 1998, respectively. The decrease in international sales from 1999 to 2000 was primarily due to a decrease in net revenues from disk manufacturing equipment. The decrease in foreign sales from 1998 to 1999 was the result of decreased sales of equipment, primarily disk sputtering systems, and to a lesser extent, decreased sales of electron beam systems, which were offset partially by an increase in sales of rapid thermal processing systems used to produce flat panel displays. Substantially all of Intevac's international sales are to customers in the Far East. Gross margin. Cost of net revenues consists primarily of purchased materials, fabrication, assembly, test, installation, warranty costs, royalties, provisions for inventory reserves, scrap and costs attributable to contract research and development. Gross margin was 6%, 6% and 25% in 2000, 1999, and 1998, respectively. Gross margin in the Equipment Division was 12%, 7% and 28% in 2000, 1999 and 1998, respectively. Equipment Division gross margin during 2000 was negatively impacted by establishment of $5.1 million of reserves related to slow moving equipment inventory and a $0.8 million write-off of goodwill related to electronically swept source technology. 2000 Equipment Division gross margin excluding the effect of these 18 20 two items would have been 32%. Gross margin declined in 1999 from 1998 as the result of under-absorption of manufacturing overhead due to low manufacturing volume, the sale of four used disk sputtering systems at heavily discounted prices, high initial costs to complete Intevac's first MDP-250K disk sputtering system and first production rapid thermal processing system, write-down of RPC inventory related to the plan to discontinue operations, payment of $0.5M as part of the settlement of a patent claim, establishment of a $0.4 million cost to market reserve on a used MDP-250B disk sputtering system remaining in inventory and an increase in the percentage of total revenue derived from research and development contracts. Gross margin in the Photonics Division was (8%), 7% and 12% in 2000, 1999 and 1998, respectively. Photonics gross margin declined from 1998 to 2000 as the result of an increased proportion of Photonics revenue resulting from cost-sharing contracts, as opposed to, fully funded research and development contracts. 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 and flat panel display manufacturing equipment, and research by the Photonics Division. Company funded research and development expense totaled $10.6 million, $14.1 million and $12.7 million in 2000, 1999 and 1998, respectively. The decrease from 1999 to 2000 was primarily the result of lower expenses related to the development of disk manufacturing products. The increase from 1998 to 1999 was caused primarily by higher expenses related to development of flat panel manufacturing equipment and photonics products. Research and development expenses do not include costs of $6.0 million, $5.9 million and $4.8 million in 2000, 1999 and 1998, respectively, related to Photonics contract research and development. These expenses are included in cost of goods sold. Research and development expenses also do not include costs of $0.7 million, $1.1 million and $1.8 incurred by Intevac in 2000, 1999 and 1998, respectively, and reimbursed under the terms of research and development cost sharing agreements related to development of disk and flat panel manufacturing equipment. Selling, general and administrative. Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial, travel, management, legal and professional services and bad debt expense. Domestic equipment sales are made by the Equipment Division direct sales force. International equipment sales are made by the Company's exclusive distributor in Japan, Matsubo; the Company's subsidiary in Singapore; and by sales representatives in Korea and Taiwan. The Company's distributor and sales representatives typically provide sales, installation, warranty and ongoing customer support. Through the second quarter of 2000, Intevac marketed its flat panel manufacturing equipment to Far East customers through its Japanese joint venture, IMAT, after which Intevac and its joint venture partner, Matsubo, transferred IMAT's activities and employees to Matsubo and terminated the operations of IMAT. Photonics sales are made by the of the Photonics Division direct sales force. Selling, general and administrative expense totaled $4.4 million, $7.2 million and $10.9 million in 2000, 1999 and 1998, respectively, representing 12%, 17% and 11% of net revenues. The primary reasons for the decrease from 1999 to 2000 were a $1.5 million credit to bad debt expense and a $1.2 million reduction in expense related to elimination of the electron beam processing equipment product line. The primary reason for the decrease from 1998 to 1999 was a lower level of selling, general and administrative expense in the Equipment Division. The lower level of expense was primarily due to a decline in selling, general and administrative staff from 77 employees to 37 employees during 1999 as a result of a March 1999 reduction in force, attrition, and the reassignment of certain administrative employees to operations. Restructuring and other expense (gain). Restructuring and other expense (gain) was ($0.6) million, $3.1 million and $1.1 million in 2000, 1999 and 1998, respectively. During the fourth quarter of 1999, Intevac adopted a plan to discontinue operations at its RPC Technologies, Inc. electron beam processing equipment subsidiary and to close RPC's facility in Hayward, California. Twenty-six employees out of Intevac's staff of contract and regular personnel were terminated as a result. Intevac incurred a charge of $1,639,000 related to this plan. The significant components of this charge included $679,000 for inventory write-downs which were charged to cost of revenues, $264,000 for fixed asset 19 21 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 assumption of certain other liabilities. Excluded from the sale were two previously leased systems and three completed systems remaining in inventory. 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. During the third quarter of 1999, Intevac 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 Intevac's staff of contract and regular personnel. The reductions took place at Intevac's facilities in Santa Clara, California. Intevac 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 maintaining the building through May 2000 and $1,192,000 for the write-off of leasehold improvements and other costs associated with restructuring. 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 first quarter of 2000, the Company vacated approximately 47,000 square feet of its Santa Clara Headquarters and negotiated a lease termination 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 previously accrued restructuring expense relating to future rents on the vacated space. During the third quarter of 2000, the Company completed all activities related to closing the vacated portion of the building and reversed the remaining $23,000 of the restructuring reserve. During the first quarter of 1999, Intevac implemented a reduction in force of 17 employees out of Intevac's staff of contract and regular personnel. The reductions took place at Intevac's facilities in Santa Clara, California. Intevac incurred a charge of $115,000 related to severance costs for the affected employees. As of December 31, 1999, all of the severance had been paid. During the third quarter of 1998, Intevac implemented a reduction in force of 27 employees out of Intevac's staff of contract and regular personnel. The reductions took place at Intevac's facilities in Santa Clara, CA; Hayward, CA; Singapore; and Taiwan. Intevac incurred a charge of $71,000 related to severance costs for the affected employees. During the first quarter of 1998, Intevac adopted an expense reduction plan that included a reduction in force of 90 employees out of Intevac's staff of contract and regular personnel. The reductions took place at Intevac's facilities in Santa Clara, CA; Los Gatos, CA; Rocklin, CA; and Taiwan. Additionally, Intevac relocated its RTP Operation from Rocklin to Intevac's Santa Clara headquarters and closed the Rocklin facility. Intevac incurred a charge of $1,164,000 related to the expense reduction plan. The significant components of this charge included $290,000 for closure of the Rocklin facility, $462,000 for the balance of the rent due on the lease for such facility and $392,000 for employee severance costs. Closure of the facility was completed in the second quarter of 1998. In the fourth quarter of 1998, $147,000 of the restructuring reserve was reversed due to lower than expected costs incurred on the closure of the Rocklin facility. In the first quarter of 1999, Intevac negotiated an early termination of its lease commitment in Rocklin, CA, which resulted in Intevac reversing the remaining $132,000 of the restructuring reserve. Interest expense. Interest expense consists primarily of interest on the Convertible Notes issued in the first quarter of 1997, 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 totaled $3.0 million, $3.7 million and $4.2 million in 2000, 1999 and 1998, respectively. The decline in interest expense was primarily the result of the repurchase by Intevac of $16.3 million of its 6.5% Convertible Notes Due 2004 (the "Convertible Notes") during 1999. The repurchase reduced the balance outstanding of the Convertible Notes to $41.2 million. Interest income and other, net. Interest income and other, net totaled $3.1 million, $3.6 million and $3.2 million in 2000, 1999 and 1998, respectively. Interest income and other, net in 2000 consisted of 20 22 $2.3 million of interest income on investments, $0.4 million of dividends on Intevac's interest in 601 California Avenue LLC, $0.2 million of gains on foreign currency forward contracts and $0.2 million of early payment discounts and other income. Interest income and other, net in 1999 consisted of $2.1 million of interest income on Intevac's investments, $1.1 million of dividends on Intevac's interest in 601 California Avenue LLC, and $0.5 million of gains on foreign currency forward contracts. Interest income and other, net in 1998 consisted of $2.8 million of interest income on Intevac's investments, $0.7 million of dividends on Intevac's interest in the 601 California Avenue LLC, $0.4 million of deferred income related to the sale of Intevac's interest in Chorus Corporation, early payment discounts, and $0.9 million of losses on foreign currency forward contracts. Discontinued operations. In March 1995, Intevac adopted a formal plan to discontinue its night vision business and sold its night vision business to Litton Systems, Inc. in May 1995. In 1998, Intevac recognized net income from discontinued operations of $1.0 million, net of income taxes, from the reversal of reserves established at the time of the sale and from payment received from Litton for excess warranty reserves transferred during the sale of the night vision business. 6 1/2% Convertible Subordinated Notes Due 2004. In July 1998, Intevac's Board of Directors approved the repurchase in the open market of up to $19.0 million of the Convertible Notes. Intevac repurchased $16.3 million of its Convertible Notes during 1999 from which it recognized a gain of $3.8 million, net of applicable taxes. Provision for (benefit from) income taxes. The Company's estimated effective tax rate 2000 was 0%. The Company did not accrue a tax benefit during 2000 due to the inability to realize additional refunds from loss carry-backs. As of December 31, 2000 the Company's deferred tax assets totaled $7.7 million. The Company believes that it is more likely than not that it will earn sufficient taxable income in the future to realize the value of these deferred tax assets. If in the future the Company determines it is more likely that it will not earn taxable income in the future sufficient to realize the value of these deferred tax assets then the Company will expense the value of the deferred tax assets not likely to be realized. For the year ended December 31, 1999, Intevac realized a $8.3 million tax benefit provision, equivalent to a 38% annual tax rate, on a pretax loss from continuing operations of $22.0 million. Intevac's 1999 effective tax rate differed from the applicable statutory rates primarily due to benefits from tax-exempt interest income, which were partially offset by nondeductible goodwill amortization. A net deferred tax asset of $7.7 million is reflected in the financial statements at December 31, 1999. Management believes it is more likely than not that Intevac will realize the benefit of this asset. For the year ended December 31, 1998, Intevac realized a $0.9 million tax benefit provision, equivalent to a 60% annual tax rate, on a pretax loss from continuing operations of $1.5 million. Intevac's 1998 tax benefit was primarily due to tax-exempt interest income and benefits from Intevac's foreign sales corporation, partially offset by non-deductible goodwill amortization. LIQUIDITY AND CAPITAL RESOURCES Operating activities in 2000 provided cash of $22,000, primarily as a result of the net loss incurred being offset by an increase in customer advances, a refund of federal taxes paid in prior years, depreciation, amortization and an increase in accrued liabilities. Investing activities in 2000 provided cash of $0.8 million primarily due to the net sale of $3.8 million of investments, which was partially offset by the purchase of $3.0 million of property and equipment. Financing activities in 2000 provided cash of $0.5 million from the sale of Intevac's stock to employees under the employee stock option and employee stock purchase plans. At December 31, 2000, Intevac had $38.4 million of cash, cash equivalents and short-term investments. Intevac intends to undertake approximately $6 million in capital expenditures during the next 12 months and believes the existing cash and cash equivalent balances will be sufficient to meet its cash requirements for the next twelve months and for the foreseeable future. In January 2001, securities representing $6 million of the Company's portfolio of short-term investments were either downgraded or put on credit watch by Standard and Poors ("S&P"). $2 million of the $6 million is invested in commercial paper issued by Pacific Gas & Electric, whose financial condition has been 21 23 negatively impacted by the California energy crisis. The other $4 million is invested in securities guaranteed by ACA Financial Guaranty Corporation ("ACA"). ACA's credit rating was downgraded when it failed to raise additional equity capital. ACA recently announced that a group of investors has agreed to provide ACA with new equity capital. S&P announced that upon funding of this commitment, S&P will remove ACA from CreditWatch with negative implications and affirm the single "A" financial strength rating of ACA. The Company is closely monitoring the situation and will determine during the first quarter of 2001 if the establishment of any reserves is required related to these securities. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest rate risk. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high quality credit issuers and, by policy, limits the amount of credit exposure to any one issuer. Short-term investments typically consist of investments in commercial paper and market auction rate bonds. The table below presents principal amounts and related weighted-average interest rates by year of maturity for the Company's investment portfolio and debt obligations.
FAIR 2001 2002 2003 2004 2005 BEYOND TOTAL VALUE ------- ---- ---- ------- ---- ------ ------- ------- (IN THOUSANDS) Cash equivalents Variable rate............... $ 2,887 -- -- -- -- -- $ 2,887 $ 2,887 Average rate................ 6.58% -- -- -- -- -- Short-term investments Variable rate............... $33,787 -- -- -- -- -- $33,787 $33,787 Average rate................ 6.94% -- -- -- -- -- Total investments Securities.................. $36,674 -- -- -- -- -- $36,674 $36,674 Average rate................ 6.91% -- -- -- -- -- Long-term debt Fixed rate.................. -- -- -- $41,245 -- -- $41,245 $19,798 Average rate................ 6.50% 6.50% 6.50% 6.50% -- --
Foreign exchange risk. From time to time, the Company enters into foreign currency forward exchange contracts to economically hedge certain of its anticipated foreign currency transaction, translation and re-measurement exposures. The objective of these contracts is to minimize the impact of foreign currency exchange rate movements on the Company's operating results. At December 31, 2000, the Company did not have foreign currency forward exchange contracts. 22 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INTEVAC, INC. CONSOLIDATED FINANCIAL STATEMENTS CONTENTS
PAGE ---- Report of Grant Thornton LLP, Independent Auditors.......... 24 Report of Ernst & Young LLP, Independent Auditors........... 25 Consolidated Balance Sheets................................. 26 Consolidated Statements of Operations and Comprehensive Income.................................................... 27 Consolidated Statement of Shareholders' Equity.............. 28 Consolidated Statements of Cash Flows....................... 29 Notes to Consolidated Financial Statements.................. 30
23 25 REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Intevac, Inc. We have audited the accompanying consolidated balance sheet of Intevac, Inc. as of December 31, 2000 and the related consolidated statements of operations and comprehensive income, shareholders' equity and cash flows for the year then ended. Our audit also included the 2000 data in the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intevac, Inc. at December 31, 2000 and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2000 data in the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. GRANT THORNTON LLP San Jose, California January 26, 2001 24 26 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Intevac, Inc. We have audited the accompanying consolidated balance sheet of Intevac, Inc. as of December 31, 1999 and the related consolidated statements of operations and comprehensive income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1999. Our audits also included the 1998 and 1999 data in the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intevac, Inc. at December 31, 1999 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the 1998 and 1999 data in the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP San Jose, California January 21, 2000 25 27 INTEVAC, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------ 2000 1999 ------- ------- ASSETS Current assets: Cash and cash equivalents................................. $ 4,616 $ 3,295 Short-term investments.................................... 33,787 37,600 Trade and other accounts receivable, net of allowances of $114 and $1,713 at December 31, 2000 and 1999, respectively............................................ 9,593 5,744 Income taxes recoverable.................................. -- 5,463 Inventories, including $3,033 and $0 at customers at December 31, 2000 and 1999, respectively................ 15,833 15,965 Prepaid expenses and other current assets................. 844 512 Deferred tax assets....................................... 4,041 4,571 ------- ------- Total current assets................................ 68,714 73,150 Property, plant, and equipment, at cost: Leasehold improvements.................................... 5,705 6,441 Machinery and equipment................................... 19,836 18,017 ------- ------- 25,541 24,458 Less accumulated depreciation and amortization............ 14,481 12,083 ------- ------- 11,060 12,375 Investment in 601 California Avenue LLC..................... 2,431 2,431 Goodwill, net of amortization of $6,554 and $4,516 at December 31, 2000 and 1999, respectively.................. -- 2,038 Other intangibles, net of amortization of $2,434 and $2,374 at December 31, 2000 and 1999, respectively............... 7 67 Debt issuance costs, net of amortization of $1,529 and $1,285 at December 31, 2000 and 1999, respectively........ 774 1,018 Deferred tax assets and other long term assets.............. 3,684 3,303 ------- ------- Total assets........................................ $86,670 $94,382 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Book overdraft............................................ $ 814 $ 332 Notes payable............................................. 1,904 -- Accounts payable.......................................... 1,943 1,014 Accrued payroll and related liabilities................... 1,534 1,533 Other accrued liabilities................................. 5,109 8,841 Customer advances......................................... 16,317 9,851 ------- ------- Total current liabilities........................... 27,621 21,571 Convertible notes........................................... 41,245 41,245 Other long-term debt........................................ -- 1,943 Commitments................................................. -- -- Shareholders' equity: Undesignated preferred stock, no par value, 10,000 shares authorized, no shares issued and outstanding............ -- -- Common stock, no par value: Authorized shares -- 50,000 Issued and outstanding shares -- 11,844 and 11,715 at December 31, 2000 and 1999, respectively............... 18,675 18,170 Retained earnings (accumulated deficit)................... (871) 11,453 ------- ------- Total shareholders' equity.......................... 17,804 29,623 ------- ------- Total liabilities and shareholders' equity.......... $86,670 $94,382 ======= =======
See accompanying notes. 26 28 INTEVAC, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 -------- -------- ------- Net revenues................................................ $ 36,049 $ 42,962 $95,975 Cost of net revenues........................................ 34,059 40,410 71,717 -------- -------- ------- Gross profit................................................ 1,990 2,552 24,258 Operating expenses: Research and development.................................. 10,576 14,136 12,743 Selling, general, and administrative...................... 4,415 7,226 10,879 Restructuring and other................................... (638) 3,069 1,088 -------- -------- ------- Total operating expenses.......................... 14,353 24,431 24,710 -------- -------- ------- Operating income (loss)..................................... (12,363) (21,879) (452) Interest expense............................................ (3,033) (3,711) (4,187) Interest income............................................. 2,341 2,100 2,832 Other income and expense, net............................... 731 1,532 344 -------- -------- ------- Income (loss) from continuing operations before income taxes..................................................... (12,324) (21,958) (1,463) Provision for (benefit from) income taxes................... -- (8,344) (882) -------- -------- ------- Income (loss) from continuing operations.................... (12,324) (13,614) (581) Discontinued operations: Gain from discontinued operations, net of applicable income taxes of $495................................... -- -- 1,005 Extraordinary item: Gain from repurchase of convertible notes, net of applicable income taxes of $2,355...................... -- 3,844 -- -------- -------- ------- Net income (loss)........................................... $(12,324) $ (9,770) $ 424 -------- -------- ------- Other comprehensive income: Unrealized foreign currency translation adjustment........ -- -- 122 -------- -------- ------- Total comprehensive income (loss)................. $(12,324) $ (9,770) $ 546 ======== ======== ======= Basic earnings per share: Income (loss) from continuing operations.................. $ ( 1.04) $ (1.16) $ (0.05) Net income (loss)......................................... $ (1.04) $ (0.83) $ 0.04 Shares used in per share amounts.......................... 11,803 11,777 12,052 Diluted earnings per share: Income (loss) from continuing operations.................. $ (1.04) $ (1.16) $ (0.05) Net income (loss)......................................... $ (1.04) $ (0.83) $ 0.03 Shares used in per share amounts.......................... 11,803 11,777 12,354
See accompanying notes. 27 29 INTEVAC, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED RETAINED COMMON STOCK OTHER EARNINGS TOTAL ---------------- COMPREHENSIVE (ACCUM. STOCKHOLDER'S SHARES AMOUNT INCOME DEFICIT) EQUITY ------ ------- ------------- -------- ------------- Balance at December 31, 1997............... 12,154 $17,336 $ -- $ 25,099 $ 42,435 Sale of common stock under stock option plan.................................. 39 130 -- -- 130 Sale of common stock under employee stock purchase plan......................... 151 1,001 -- -- 1,001 Repurchase of common stock............... (457) (670) -- (3,126) (3,796) Income tax benefits realized from activity in employee stock plans...... -- 120 -- -- 120 Change in foreign currency translation adjustments........................... -- -- 122 -- 122 Net income............................... -- -- -- 424 424 ------ ------- ----- -------- -------- Balance at December 31, 1998............... 11,887 $17,917 $ 122 $ 22,397 $ 40,436 Sale of common stock under stock option plan.................................. 27 38 -- -- 38 Sale of common stock under employee stock purchase plan......................... 122 684 -- -- 684 Repurchase of common stock............... (321) (491) -- (1,174) (1,665) Income tax benefits realized from activity in employee stock plans...... -- 22 -- -- 22 Change in foreign currency translation adjustments........................... -- -- (122) -- (122) Net loss................................. -- -- -- (9,770) (9,770) ------ ------- ----- -------- -------- Balance at December 31, 1999............... 11,715 $18,170 $ -- $ 11,453 $ 29,623 Sale of common stock under stock option plan.................................. 20 58 -- -- 58 Sale of common stock under employee stock purchase plan......................... 109 418 -- -- 418 Income tax benefits realized from activity in employee stock plans...... -- 29 -- -- 29 Net loss................................. -- -- -- (12,324) (12,324) ------ ------- ----- -------- -------- Balance at December 31, 2000............... 11,844 $18,675 $ -- $ (871) $ 17,804 ====== ======= ===== ======== ========
See accompanying notes. 28 30 INTEVAC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDING DECEMBER 31, --------------------------------- 2000 1999 1998 --------- -------- -------- OPERATING ACTIVITIES Income (loss) from continuing operations.................... $ (12,324) $(13,614) $ (581) Gain from discontinued operations & extraordinary item...... -- 3,844 1,005 --------- -------- -------- Net income (loss)........................................... (12,324) (9,770) 424 Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by (used in) operating activities: Depreciation.............................................. 3,721 3,805 5,244 Amortization of intangibles............................... 2,342 1,578 2,130 Gain on sale of Chorus investment......................... -- -- (395) Gain on sale of discontinued operations................... -- -- (794) Gain on purchase of convertible notes..................... -- (6,199) -- (Gain)/loss on IMAT investment............................ 125 (39) 206 Restructuring and other charges -- non-cash portion....... 856 428 506 Loss on disposal of equipment............................. 2 336 206 Changes in assets and liabilities: Accounts receivable..................................... 1,614 (1,038) (535) Inventory............................................... (343) 4,147 11,818 Prepaid expenses and other assets....................... (332) 586 (1,651) Accounts payable........................................ 929 (1,020) (2,551) Accrued payroll and other accrued liabilities........... (3,034) 1,287 (3,049) Customer advances....................................... 6,466 (1,779) (16,617) --------- -------- -------- Total adjustments.................................. 12,346 2,092 (5,482) --------- -------- -------- Net cash and cash equivalents provided by (used in) operating activities............................. 22 (7,678) (5,058) INVESTING ACTIVITIES Purchase of investments..................................... (116,271) (50,880) (56,500) Proceeds from sales and maturities of investments........... 120,084 70,205 46,286 Purchase of equipment....................................... (2,990) (1,736) (2,898) Proceeds from sale of Chorus Investment..................... -- -- 395 --------- -------- -------- Net cash and cash equivalents provided by (used in) investing activities............................. 823 17,589 (12,717) FINANCING ACTIVITIES Proceeds from issuance of common stock...................... 476 722 1,131 Repurchase of common stock.................................. -- (1,665) (3,796) Repurchase of Intevac convertible notes..................... -- (9,664) -- --------- -------- -------- Net cash and cash equivalents provided by (used in) financing activities............................. 476 (10,607) (2,665) --------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 1,321 (696) (20,440) Cash and cash equivalents at beginning of period............ 3,295 3,991 24,431 --------- -------- -------- Cash and cash equivalents at end of period.................. $ 4,616 $ 3,295 $ 3,991 ========= ======== ======== Cash paid (received) for: Interest.................................................. $ 2,789 $ 3,555 $ 3,481 Income taxes.............................................. 2 -- 4,065 Income tax refund......................................... (5,803) (3,099) -- Other non-cash changes: Inventories transferred to (from) property, plant and equipment............................................... $ 304 $ 1,942 $ (767) Income tax benefit realized from activity in employee stock plans............................................. 29 22 120
See accompanying notes. 29 31 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND NATURE OF OPERATIONS Intevac, Inc.'s ("Intevac" or the "Company") Equipment Division 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 Division also realizes revenues from the sales of disk lubrication equipment and flat panel display ("FPD") manufacturing equipment. Upgrades, spare parts and after-sale service are also sold to purchasers of Intevac's equipment, and sales of components are made to other manufacturers of vacuum equipment. The Company sells and markets its products directly in the United States and Singapore, and through an exclusive distributor in Japan and sales representatives in Korea and Taiwan. The Company supports its customers in Southeast Asia through its wholly owned subsidiary in Singapore. The Company's Photonics Division develops 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. During the fourth quarter of 1999, the Company adopted a plan to discontinue its electron beam processing equipment product line and to close the facility in Hayward, California where that equipment was built. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Intevac and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated. Revenue Recognition Systems and components -- Revenues for disk sputtering systems, flat panel equipment and electron beam processing systems are recognized upon customer acceptance. Revenues for system component sales are recognized upon shipment. Service and Maintenance -- Service and maintenance contract revenue, which to date has been insignificant, is recognized ratably over applicable contract periods or as services are performed. Technology Development -- The Company performs best efforts research and development work under various research contracts. Revenue on these contracts is recognized in accordance with contract terms, typically as costs are incurred. Typically, for each contract, the Company commits to perform certain research and development efforts up to an agreed upon amount. In connection with these contracts, the Company receives funding on an incremental basis up to a ceiling. Upon completion of each contract, each party will typically receive certain rights to the technical and computer software data developed under the contract. Some of these contracts are cost sharing in nature, where Intevac is reimbursed for a portion of the total costs expended. In addition, the Company has, from time to time, negotiated with a third party to fund a portion of the Company's costs in return for a joint interest to the Company's rights at the end of the contract. Net revenues and related cost of net revenues associated with these contracts were $5,975,000 and $7,090,000 for 2000, respectively, $7,067,000 and $7,071,000 for 1999, respectively and $5,931,000 and $5,861,000 for 1998, respectively. 30 32 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Warranty The Company's standard warranty is twelve months from customer acceptance. During this warranty period any necessary non-consumable parts are supplied and installed. A provision for the estimated cost of warranty is recorded upon customer acceptance for systems and upon shipment for non-system products. International Distribution Costs The Company makes payments to agents and distributors under certain agreements related to international sales in return for obtaining orders and providing installation and warranty services. Certain of these payments to agents and distributors are included in cost of net revenues. These amounts totaled approximately $0, $0 and $72,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Advertising Expenses The Company accounts for advertising costs as expense in the period in which they are incurred. Advertising expenses for 2000, 1999 and 1998 were insignificant. Customer Advances Customer advances generally represent nonrefundable deposits invoiced by the Company in connection with receiving customer purchase orders and shipment of the systems. Customer advances related to systems that have not been shipped to customers, and included in accounts receivable were $2,719,000 and $930,000 at December 31, 2000 and 1999, respectively. Cash, Cash Equivalents and Short-term Investments The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments consist principally of high-quality debt instruments with maturities generally between one and twelve months and are carried at fair value. These investments are typically short-term in nature and therefore bear minimal risk. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. At December 31, 2000 and 1999, all debt securities were classified as available-for-sale under Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Securities classified as available-for-sale are reported at fair market value with the related unrealized gains and losses included in retained earnings. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income and expenses. The cost of securities sold is based on the specific identification method. Cash and cash equivalents represent cash accounts and money market funds. Short-term investments of $33,787,000 at December 31, 2000 consist primarily of investments in commercial paper and market auction rate bonds. Short-term investments of $37,600,000 at December 31, 1999 consist primarily of investments in tax-exempt market auction rate preferred municipal bonds. Fair values are based on quoted market prices. The amount of unrealized gain or loss was not significant for the years ended December 31, 2000, 1999 and 1998. Gross realized gains and losses for the years ended December 31, 2000, 1999 and 1998 were not significant. 31 33 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Long-lived Assets In accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of," the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances, both internal and external, that may suggest impairment. Intevac will determine if any impairment exists based on undiscounted expected future cash flows from the impaired assets. The cash flow estimates that will be used will contain management's best estimates, using assumptions and projections appropriate and customary at the time. Any adjustment to the carrying value of the long-lived assets would be based on the estimated fair value of the assets. In 2000, the Company determined that the intangible assets related to the purchase of Cathode Technology Corporation and Lotus Technologies, Inc. had become impaired. At December 31, 2000 the remaining goodwill related to those purchases, amounting to $1,056,000, was written off. Foreign Exchange Contracts The Company may enter into foreign currency forward exchange contracts to hedge certain of its foreign currency transaction, translation and re-measurement exposures. The Company's accounting policies for some of these instruments are based on the Company's designation of such instruments as hedging transactions. Instruments not designated as a hedge transaction will be "marked to market" at the end of each accounting period. The criteria the Company uses for designating an instrument as a hedge include effectiveness in exposure reduction and one-to-one matching of the derivative financial instrument to the underlying transaction being hedged. Gains and losses on foreign currency forward exchange contracts that are designated and effective as hedges of existing transactions are recognized in income in the same period as losses and gains on the underlying transactions are recognized and generally offset. During fiscal 2000, 1999 and 1998, the Company entered into yen denominated foreign currency forward exchange contracts to hedge anticipated yen denominated sales. The Company has not designated these foreign currency forward contracts as hedge transactions; therefore, the contracts have been "marked to market." As of December 31, 2000, the Company had no foreign currency forward exchange contracts outstanding. In fiscal 2000, the Company realized gains of $111,000 related to foreign currency forward exchange contracts. While the notional amounts of foreign exchange contracts are often used to express the volume of these transactions, the potential accounting loss on these transactions if all counterparties failed to perform is limited to the amounts, if any, by which the counterparties' obligations exceed the Company's obligation to the counterparties. Inventories Inventories for systems and components are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Inventories consist of the following:
DECEMBER 31, ------------------ 2000 1999 ------- ------- (IN THOUSANDS) Raw materials............................................ $ 4,591 $ 2,307 Work-in-progress......................................... 8,209 13,658 Finished goods........................................... 3,033 -- ------- ------- $15,833 $15,965 ======= =======
32 34 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Property, Plant and Equipment Equipment and leasehold improvements are carried at cost less allowances for accumulated depreciation and amortization. Gains and losses on dispositions are reflected in the statements of income. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are generally three to seven years for machinery and equipment. Amortization of leasehold improvements is computed using the shorter of the remaining terms of the leases or the estimated economic useful lives of the improvements. Intangible Assets The Company amortizes intangible assets on a straight-line basis over the estimated useful lives, which range from two to seven years. Comprehensive Income As of January 1, 1998, the Company adopted Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS 130 had no impact on the Company's net income or shareholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and the foreign currency translation adjustments, which prior to the adoption were reported separately in shareholders' equity, to be included in other comprehensive income. As of December 31, 1998, the $122,000 balance of accumulated other comprehensive income was comprised entirely of accumulated foreign currency translation adjustments. No income tax effect has been recorded related to the comprehensive income. There was no accumulated other comprehensive income as of December 31, 2000 or 1999. Employee Stock Plans The Company accounts for its stock option plans and its employee stock purchase plan in accordance with provisions of the Accounting Principles Board's Opinion No. 25 ("APB 25"), "Accounting For Stock Issued to Employees." In 1995, the Financial Accounting Standards Board ("FASB") released Statement of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation." SFAS 123 provides an alternative to APB 25 and is effective for fiscal years beginning after December 15, 1995. The Company is continuing to account for its employee stock plans in accordance with the provisions of APB 25. Under APB 25, because the exercise prices of the Company's stock options granted to employees equal the market prices of the underlying stock on the date of grant, no compensation expense is recognized. 33 35 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net income (loss) per share The following table sets forth the computation of basic and diluted earnings per share:
2000 1999 1998 -------- -------- ------- (IN THOUSANDS) Numerator: Income (loss) from continuing operations.......... $(12,324) $(13,614) $ (581) Gain from discontinued operations & extraordinary item, net of applicable income taxes........... -- 3,844 1,005 -------- -------- ------- Net income (loss)................................. $(12,324) $ (9,770) $ 424 ======== ======== ======= Numerator for basic earnings per share -- income (loss) available to common stockholders........ (12,324) (9,770) 424 Effect of dilutive securities: 6 1/2% convertible notes(1).................... -- -- -- -------- -------- ------- Numerator for diluted earnings per share -- income (loss) available to common stockholders after assumed conversions............................ $(12,324) $ (9,770) $ 424 ======== ======== ======= Denominator: Denominator for basic earnings per share -- weighted-average shares........................ 11,803 11,777 12,052 Effect of dilutive securities: Employee stock options(2)...................... -- -- 302 6 1/2% convertible notes(1).................... -- -- -- -------- -------- ------- Dilutive potential common shares.................. -- -- 302 -------- -------- ------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions.................................... 11,803 11,777 12,354 ======== ======== =======
--------------- (1) Diluted EPS for the twelve-month periods ended December 31, 2000, December 31, 1999 and December 31, 1998 excludes "as converted" treatment of the Convertible Notes as their inclusion would be anti-dilutive. The number of "as converted" shares excluded from the twelve-month periods ended December 31, 2000, 1999 and 1998 was 1,999,758, 2,345,273 and 2,787,879, respectively. (2) Diluted EPS for the twelve-month period ended either December 31, 2000 or December 31, 1999 excludes the effect of employee stock options as their inclusion would be anti-dilutive. The number of employee stock options excluded from the twelve-month periods ended December 31, 2000 and 1999 was 156,504 and 169,564, respectively. Use of Estimates The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. 34 36 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. CONCENTRATIONS Credit Risk and Significant Customers Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash equivalents, short-term investments, accounts receivable and foreign exchange forward contracts. The Company generally invests its excess cash in money market funds, in market auction rate preferred municipal bonds and in commercial paper, which have contracted maturities generally within one year. By policy, the Company's investments in commercial paper, certificates of deposit, Eurodollar time deposits, or banker's acceptances are rated A1/P1 or better. Investments in tax exempt or tax advantaged instruments, such as variable rate municipal bonds are rated A or better. To date, the Company has not incurred losses related to these investments. In January 2001, securities representing $6 million of the Company's portfolio of short-term investments were either downgraded or put on credit watch by Standard and Poors ("S&P"). $2 million of the $6 million is invested in commercial paper issued by Pacific Gas & Electric, whose financial condition has been negatively impacted by the California energy crisis. The other $4 million is invested in securities guaranteed by ACA Financial Guaranty Corporation ("ACA"). ACA's credit rating was downgraded when it failed to raise additional equity capital. ACA recently announced that a group of investors has agreed to provide ACA with new equity capital. S&P announced that upon funding of this commitment, S&P will remove ACA from CreditWatch with negative implications and affirm the single "A" financial strength rating of ACA. The Company is closely monitoring the situation and will determine during the first quarter of 2001 if the establishment of any reserves is required related to these securities. Historically, a significant portion of the Company's revenues in any particular period have been attributable to sales to a limited number of customers. The Company performs credit evaluations of its customers' financial conditions and requires deposits on system orders but does not generally require collateral or other security to support customer receivables. The Company's largest customers tend to change from period to period as a function of each customer's plans to renovate, or add to existing production capacity. Products Disk sputtering equipment contributed a significant portion of the Company's revenues in 2000, 1999 and 1998. The Company expects that its ability to maintain or expand its current levels of revenues and to return to profitability in the future will depend upon its success in enhancing its existing systems and developing and manufacturing competitive disk sputtering equipment and its success in developing other products such as flat panel display equipment and photonics devices. Markets The market for the Company's products is characterized by rapid technological developments, evolving industry standards, changes in customer requirements, new product introductions and enhancements. The market for capital equipment is dependent upon the decision of a prospective customer to replace obsolete equipment, or to increase manufacturing capacity by upgrading or expanding existing manufacturing facilities or constructing new manufacturing facilities, all of which typically involve a significant capital commitment. In addition, the business cycle and the individual industry cyclicality may cause prospective customers to postpone decisions regarding purchases of the Company's systems. Materials In certain instances, the Company is dependent upon a sole supplier or a limited number of suppliers, or has qualified only a single or limited number of suppliers, for certain complex components or sub-assemblies 35 37 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) utilized in its products. In addition, the Company makes extensive use of suppliers serving the semiconductor equipment business, and such suppliers may choose to give priority to their semiconductor equipment customers that are much larger than the Company. Any prolonged inability to obtain adequate deliveries could require the Company to pay more for inventory, parts and other supplies, seek alternative sources of supply, delay its ability to ship its products and damage relationships with current and prospective customers. Any such delay or damage could have a material adverse effect on the Company's business, financial condition and results of operations. Inventories The Company makes inventory provisions for potentially excess and obsolete inventory based on backlog and forecasted demand. However, such backlog demand is subject to revisions, cancellations, and rescheduling. Actual demand will inevitably differ from such anticipated demand, and such differences may have a material effect on the financial statements. Competition The Company experiences intense competition worldwide in the equipment business from competitors, most of which 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. Because of these competitive factors, there can be no assurance that the Company will be able to compete successfully in the future. Increased competitive pressure could cause the Company to lower prices for its products, thereby adversely affecting the Company's business, financial condition and results of operations. 4. DISCONTINUED OPERATIONS In the first quarter of 1995, the Company adopted a formal plan to discontinue the operations of its night vision business. Accordingly, the consolidated statements of operations and cash flows for all periods presented reflect the night vision operations as discontinued. In the second quarter of 1995, the Company sold its night vision business to Litton Systems, Inc. for cash of $7,546,000. The Company established a reserve of $2,622,000 for costs associated with the sale. The significant components of this charge included $795,000 for warranty costs, $680,000 for estimated environmental remediation costs associated with the site of the night vision operations, and $476,000 for write-offs of certain prepaid expenses and other assets. Remediation efforts were completed in 1997. Warranty on all products shipped by the business expired in November 1997. In the first quarter of 1998, the remaining reserve of $794,000 associated with closing the business was reversed. In the second quarter of 1998, Litton reimbursed the Company for $706,000 in excess warranty reserves transferred at the time of the sale. Both of these amounts are reflected as income from discontinued operations, net of applicable income taxes. 5. EQUITY INVESTMENTS 601 California Avenue LLC In 1995, the Company entered into a Limited Liability Company Operating Agreement (the "Operating Agreement"), which expires December 31, 2015, with 601 California Avenue LLC (the "LLC"), a California limited liability company formed and owned by the Company and certain shareholders of the Company at that time. Under the Operating Agreement, the Company transferred its leasehold interest in the site of the Company's discontinued night vision business (the "Site") in exchange for a preferred share in the LLC with a face value of $3,900,000. The Company is accounting for the investment under the cost method and has 36 38 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) recorded its investment in the LLC at $2,431,000, which represents the Company's historical carrying value of the leasehold interest in the Site. The preferred share in the LLC pays a 10% annual cumulative preferred dividend. During 1996, the LLC formed a joint venture with Stanford University (the "Stanford JV") to develop the property. The project was completed and leased in August 1998. The Company received dividends of $390,000, $1,077,000 and $650,000 from the LLC in 2000, 1999 and 1998, respectively. The dividends received during 1998 and 1999 consisted of the annual $390,000 dividend plus the cumulative dividends earned in prior years. As of December 31, 2000 all outstanding cumulative dividends on the preferred share had been paid. These dividends are included in other income and expense. IMAT Inc. On June 27, 1997, the Company entered into an agreement with Matsubo to form a joint venture responsible for the sales and service of Intevac's flat panel display equipment in Japan and other Asian countries. The Company invested $436,000 for 49% of the voting stock of the joint venture. The joint venture is being accounted for under the equity method. Gains and losses related to the Company's share of the joint venture are reflected in other income and expense, net on the consolidated statements of income. The Company's equity in the net income or (loss) of IMAT, Inc. was ($125,000), $15,000 and ($217,000) in 2000, 1999 and 1998, respectively. Revenues have been recognized for 2 system shipments to IMAT, which were accepted by the customer in 1999. In February of 1999, the Company entered into an agreement to guarantee up to 14,700,000 Yen of IMAT's debt. During the third quarter of 2000, the Company and its joint venture partner, Matsubo, transferred IMAT's activities and employees to Matsubo and terminated the operations of IMAT. 6. LINE OF CREDIT As of December 31, 2000, the Company had secured its $1,904,000 note related to the purchase of Cathode Technology Corporation ("Cathode") with a stand-by letter of credit through its bank. No additional lines of credit existed at December 31, 2000. 7. COMMITMENTS The Company leases certain facilities under non-cancelable operating leases that expire at various times up to 2007. The facility leases require the Company to pay for all normal maintenance costs. The lease for the primary facility in Santa Clara includes an option to extend the lease for an additional five-year period. Future minimum rental payments under these leases at December 31, 2000 are as follows (in thousands): 2001....................................................... $ 1,861 2002....................................................... 2,614 2003....................................................... 2,953 2004....................................................... 3,070 2005....................................................... 3,192 ------- Total............................................ $13,690 =======
Gross rental expense was approximately $1,596,000, $2,652,000 and $2,977,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Offsetting rental expense for the periods ending December 31, 2000, 1999 and 1998 was sublease income of $62,000, $238,000 and $238,000, respectively. 37 39 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. EMPLOYEE BENEFIT PLAN In 1991, the Company established a defined contribution retirement plan with 401(k) plan features. The plan covers all United States employees eighteen years and older. Employees may make contributions by a percentage reduction in their salaries, not to exceed the statutorily prescribed annual limit. The Company made contributions of $123,000, $170,000 and $204,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Administrative expenses relating to the plan are insignificant. 9. NOTES PAYABLE In 1996, the Company issued notes related to the purchase of Cathode. The notes bear interest at 5.58% compounded monthly and payable quarterly. Principal payments on the note are made quarterly based on unit sales of the Cathode sputter sources. The remaining balance on the notes was paid in full in January 2001. 10. CONVERTIBLE NOTES During the first quarter of 1997, the Company completed an offering of $57.5 million of its 6 1/2% Convertible Subordinated Notes (the "Convertible Notes"), which mature on March 1, 2004. Interest is payable to the note holders on each March 1st and September 1st. The notes are convertible into shares of the Company's common stock at $20.625 per share. Expenses associated with the offering of approximately $2.3 million have been deferred. Such expenses are being amortized to interest expense over the term of the notes. During 1999, the Company repurchased $16,255,000, face value, of its Convertible Notes. The repurchase resulted in a gain of $3,844,000 (net of income taxes). 11. SEGMENT REPORTING Segment Description Intevac, Inc. has two reportable operating segments: equipment and photonics. The Company's Equipment Division 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 Division 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 (see Note 5) and amortization expenses related to certain intangible assets. Assets of corporate activities include unallocated cash and short-term investments, deferred income taxes and certain intangibles and other assets. Segment Profit or Loss and Segment Assets The Company evaluates performance and allocates resources based on profit or loss from operations before interest, other income and expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. 38 40 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Business Segment Net Revenues
2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Equipment Trade............................................... $28,797 $36,008 $90,257 Inter-segment....................................... -- -- 354 ------- ------- ------- 28,797 36,008 90,611 Photonics Trade............................................... 7,252 6,954 5,718 Corporate activities................................ -- -- (354) ------- ------- ------- Total....................................... $36,049 $42,962 $95,975 ======= ======= =======
Business Segment Profit & Loss
2000 1999 1998 -------- -------- ------- (IN THOUSANDS) Equipment(1)........................................ $ (8,048) $(16,667) $ 2,257 Photonics........................................... (2,164) (935) (125) Corporate activities(2)............................. (2,151) (4,277) (2,584) -------- -------- ------- Operating income (loss)............................. (12,363) (21,879) (452) Interest expense.................................... (3,033) (3,711) (4,187) Interest income..................................... 2,341 2,100 2,832 Other income and expense, net....................... 731 1,532 344 -------- -------- ------- Income (loss) from continuing operations before income taxes...................................... $(12,324) $(21,958) $(1,463) ======== ======== =======
(1) Includes restructuring and other charge of $1,639 and $1,088 in 1999 and 1998, respectively. (2) Includes restructuring and other charge of $2,128 in 1999. Business Segment Assets
2000 1999 1998 ------- ------- -------- (IN THOUSANDS) Equipment............................................ $32,207 $29,871 $ 41,825 Photonics............................................ 4,404 4,483 5,032 Corporate activities................................. 50,059 60,028 76,119 ------- ------- -------- Total assets............................... $86,670 $94,382 $122,976 ======= ======= ========
39 41 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Business Segment Property, Plant & Equipment
ADDITIONS 2000 1999 1998 --------- ------ ------ ------ (IN THOUSANDS) Equipment(1)(2).......................................... $2,237 $4,230 $1,734 Photonics................................................ 656 794 1,015 Corporate activities..................................... 401 278 149 ------ ------ ------ Total additions................................ $3,294 $5,302 $2,898 ====== ====== ======
(1) Includes inventory transferred to fixed assets of $304 and $1,942 in 2000 and 1999, respectively.
DEPRECIATION 2000 1999 1998 ------------ ------ ------ ------ (IN THOUSANDS) Equipment(1)............................................. $2,387 $2,808 $3,364 Photonics................................................ 716 512 328 Corporate activities..................................... 618 485 308 ------ ------ ------ Total depreciation............................. $3,721 $3,805 $4,000 ====== ====== ======
(1) Excludes amortization related to assets leased to a third party of $1,244 in 1998. Geographic Area Net Trade Revenues
2000 1999 1998 ------- ------- ------- (IN THOUSANDS) United States......................................... $26,466 $17,254 $44,983 Far East.............................................. 9,414 25,372 49,050 Europe................................................ 49 234 391 Rest of World......................................... 120 102 1,551 ------- ------- ------- Total revenues.............................. $36,049 $42,962 $95,975 ======= ======= =======
Major Customers In 2000, MMC Technology, Seagate, Westt and Matsubo, the Company's Japanese distributor, each accounted for more than 10% of the Company's consolidated revenues and in aggregate accounted for 56% of net revenues. In 1999 Matsubo, Seagate and Lockheed Martin each accounted for more than 10% of the Company's consolidated revenues and in aggregate accounted for 66% of net revenues. In 1998 Matsubo, HMT Technology and MMC Technology each accounted for more than 10% of the Company's consolidated revenues and in aggregate accounted for 71% of net revenues. 12. SHAREHOLDERS' EQUITY The Company's Articles of Incorporation authorizes 10,000,000 shares of Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the shareholders. 40 42 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock Option/Stock Issuance Plans The Board of Directors approved the 1991 Stock Option/Stock Issuance Plan (the "1991 Plan") in 1991. The maximum number of shares that may be issued over the term of the 1991 Plan is 2,666,667 shares. The 1991 Plan is divided into two separate components: the Option Grant Program and the Stock Issuance Program. Under the Option Grant Program, the Company may grant either incentive stock options or nonqualified options or implement stock appreciation rights provisions at the discretion of the Board of Directors. Exercisability, option price, and other terms are determined by the Board of Directors, but the option price shall not be less than 85% and 100% of the fair market value for nonqualified options and incentive stock options, respectively, as determined by the Board of Directors. Options granted under the 1991 Stock Option/Stock Issuance Plan are immediately exercisable; however, unexercised options and shares purchased upon the exercise of the options are subject to vesting over a five-year period. The Company may repurchase shares that are not vested. Zero shares, one share and 7,169 shares were subject to repurchase at December 31, 2000, 1999 and 1998, respectively. In 1995, the Board of Directors approved adoption of (i) the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") under which employees, non-employee directors and consultants may be granted stock options to purchase stock or issued shares of stock at not less than 85% of fair market value on the grant/issuance date; and (ii) the Employee Stock Purchase Plan. The 1995 Plan, as amended in 2000, serves as the successor equity incentive program to the Company's 1991 Plan. Upon adoption of the 1995 Plan, all shares available for issuance under the 1991 Plan were transferred to the 1995 Plan. As of December 31, 2000, 2,120,400 shares of common stock are authorized for future issuance under the 1995 Plan. Options granted under the 1995 Plan are exercisable upon vesting and generally vest over a five-year period. Options currently expire no later than ten years from the date of grant. Options to purchase 878,157, 692,457 and 481,551 shares were vested at December 31, 2000, 1999 and 1998, respectively. In the third quarter of 1998, the Company approved an exchange program that offered to each employee that held stock options granted between August 19, 1996 and July 31, 1998, the opportunity to exchange their options for newly granted stock options. The new option would be for the same number of shares as originally granted, but the vesting period would start on the day the new option was granted. This offer was open for a two-week period of time. The exercise price of the new option was set at the fair market value of Intevac common stock on the date each employee notified the Company of their acceptance of the exchange offer during the period. New stock options were granted for a total of 500,700 shares of common stock. The new option prices ranged from $6.250 to $8.375. Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of this Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes multiple option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of 5.17%, 6.15% and 4.66%; dividend yields of 0.0%, 0.0% and 0.0%; volatility factors of the expected market price of the Company's common stock of 0.936, 0.855 and 0.800; and a weighted-average expected life of the option of 0.25, 0.25 and 0.25 years beyond each respective vesting period. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, 41 43 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Under the 1995 Employee Stock Purchase Plan, as amended in 1999, (the "ESPP"), the Company is authorized to issue up to 1,000,000 shares of common stock to participating employees. Under the terms of the ESPP, employees can choose to have up to 10% of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of the subscription date fair market value or the purchase date fair market value. Approximately 75% of eligible employees have participated in the ESPP. Under the ESPP, the Company sold 108,784, 122,325 and 150,819 shares to employees in 2000, 1999 and 1998, respectively. As of December 31, 2000, 412,870 shares remained reserved for issuance under the ESPP. The Company does not recognize compensation cost related to employee purchase rights under the Plan. To comply with the pro forma reporting requirements of FAS 123, compensation cost is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following assumptions for those rights granted in 2000, 1999 and 1998, respectively: risk-free interest rates of 5.36%, 5.78% and 4.68%; dividend yield of 0.0%, 0.0% and 0.0%; expected volatility of 0.936, 0.855 and 0.800; and an expected life of 2.00, 1.99 years and 1.98 years (the offering period ends July 31, 2002 for the subscription period that began in August 2000). The weighted average fair value of those purchase rights granted in 2000, 1999 and 1998 were $2.78, $2.94 and $5.37, respectively. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
2000 1999 1998 ---------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma net income (loss)......................... $(13,143) $(11,027) $(1,491) Pro forma earnings (loss) per share Basic............................................. $ (1.11) $ (0.94) $ (0.12) Diluted........................................... $ (1.11) $ (0.94) $ (0.12)
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
2000 1999 1998 ---------------------------- ---------------------------- ---------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE --------- ---------------- --------- ---------------- --------- ---------------- Outstanding -- beginning of year............... 1,496,370 $5.82 1,599,762 $6.92 1,573,713 $ 8.77 Granted............... 336,100 3.75 399,100 4.70 713,700 7.16 Exercised............. (20,261) 2.86 (26,497) 1.45 (39,350) 3.22 Forfeited............. (241,912) 5.99 (475,995) 8.82 (648,301) 11.90 Outstanding -- end of year.................. 1,570,297 5.39 1,496,370 5.82 1,599,762 6.92 Exercisable at end of year.................. 878,157 $5.84 797,470 $5.81 715,072 $ 5.98 Weighted-average fair value of options granted during the year.................. $2.20 $2.64 $ 3.86
42 44 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 2000
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- ---------------------------------- NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AS OF REMAINING AVERAGE AS OF AVERAGE RANGE OF EXERCISE PRICES DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE ------------------------ ----------------- ---------------- -------------- ----------------- -------------- $ 0.150 - $ 3.063 142,811 3.43 yrs $ 1.52 134,211 $ 1.42 $ 3.375 - $ 3.375 220,000 9.47 yrs $ 3.38 20,000 $ 3.38 $ 3.625 - $ 3.813 176,300 8.98 yrs $ 3.80 30,460 $ 3.81 $ 4.190 - $ 5.375 181,760 8.87 yrs $ 5.03 36,180 $ 5.37 $ 6.000 - $ 6.000 359,827 4.61 yrs $ 6.00 359,827 $ 6.00 $ 6.063 - $ 7.625 387,099 6.88 yrs $ 6.95 243,599 $ 7.16 $ 7.688 - $10.000 79,000 7.63 yrs $ 8.20 32,280 $ 8.30 $11.625 - $21.250 23,500 5.51 yrs $17.92 21,600 $18.41 --------- ------- $ 0.150 - $21.250 1,570,297 6.89 yrs $ 5.39 878,157 $ 5.84
13. INCOME TAXES The provision for income taxes on income from continuing operations consists of the following (in thousands):
YEARS ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- Federal: Current............................................. $ -- $(8,552) $ 630 Deferred............................................ -- 843 (1,420) ------- ------- ------- -- (7,709) (790) State: Current............................................. 2 2 124 Deferred............................................ (2) (637) (216) ------- ------- ------- -- (635) (92) ------- ------- ------- Total....................................... $ -- $(8,344) $ (882) ======= ======= =======
The tax benefits associated with exercises of nonqualified stock options and disqualifying dispositions of stock acquired through the incentive stock option and employee stock purchase plans reduce taxes currently payable for 2000, 1999 and 1998 as shown above by $29,000, $22,000 and $120,000, respectively. Such benefits are credited to additional paid-in capital when realized. 43 45 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets computed in accordance with SFAS 109 are as follows (in thousands):
DECEMBER 31, ----------------- 2000 1999 ------- ------ Deferred tax assets: Vacation accrual........................................ $ 389 $ 309 Warranty reserve........................................ 310 333 Bad debt reserve........................................ 47 713 Inventory valuation..................................... 3,959 1,981 Restructuring........................................... -- 1,001 AMT credit carry-forward................................ 520 1,641 Federal and State NOL carry-forward..................... 4,903 592 Other................................................... 1,401 1,581 ------- ------ 11,529 8,151 Valuation allowance for deferred tax assets............. (3,605) -- ------- ------ Total deferred tax assets....................... $ 7,924 $8,151 ------- ------ Deferred tax liabilities: Other................................................... $ 202 $ 429 ------- ------ Total deferred tax liabilities.................. $ 202 $ 429 ------- ------ Net deferred tax assets................................... $ 7,722 $7,722 ======= ======
A valuation allowance of $3,605,000 has been established due to the uncertainty of realizing certain tax credit and loss carry-forwards. The Federal and State NOL carry-forwards of $11,416,000 and $13,696,000 expire in 2020 and 2005, respectively, if not previously utilized. The AMT credit carry-forwards do not expire. A reconciliation of the income tax provision on income from continuing operations at the federal statutory rate of 35% to the income tax provision at the effective tax rate is as follows (in thousands):
YEARS ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------- ----- Income taxes computed at the federal statutory rate..... $(4,314) $(7,685) $(512) State taxes (net of federal benefit).................... (640) (413) (60) Foreign Sales Corporation benefit....................... -- -- (114) Tax exempt income....................................... (14) (467) (788) Goodwill amortization................................... 713 366 419 Effect of tax rate changes and other permanent differences........................................... 650 (145) 173 Valuation allowance..................................... 3,605 -- -- ------- ------- ----- Total......................................... $ -- $(8,344) $(882) ======= ======= =====
14. RESEARCH AND DEVELOPMENT COST SHARING AGREEMENTS The Company entered into an agreement with a Japanese company to perform best efforts joint research and development work. The nature of the project is to develop a glass-coating machine to be used in the production of flat panel displays. The Company was funded for one-half of the actual costs of the project up to a ceiling of $9,450,000. At December 31, 1999, the Company had received the entire amount under the contract. Qualifying costs of approximately $3,108,000, $1,467,000 and $1,706,000 for the years ended 44 46 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2000, 1999 and 1998, respectively, were incurred on this project, resulting in offsets against research and development costs of approximately $583,000, $736,000 and $1,410,000 in 2000, 1999 and 1998, respectively. As of December 31, 2000, the entire advance had been applied to qualifying costs. Upon completion of the research and development work, if successful, each party will receive certain manufacturing and marketing rights for separate regions of the world. The agreement also calls for certain royalty payments by each party to the other party, based on production and sales. The royalty rate will be 5% for each party. 15. RESTRUCTURING AND OTHER 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 RPC's 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 in 1999 related to this plan. The significant components of this charge included $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 recognized revenue in 2000 for two of the three completed systems and the remaining system is scheduled for customer acceptance in 2001 and is expected to 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. 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 in 1999 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 and $1,192,000 for the write-off of leasehold improvements and other costs associated with restructuring. 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 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 third quarter of 2000, the Company completed all activities related to closing the building. As a result, the Company reversed the remaining $23,000 of the restructuring reserve during the third quarter of 2000. During the first quarter of 1999, the Company implemented a reduction in force of 17 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 $115,000 in 1999 related to severance costs for the affected employees. As of December 31, 1999, all of the severance had been paid. During the third quarter of 1998, the Company implemented a reduction in force of 27 employees out of the Company's staff of contract and regular personnel. The reductions took place at the Company's facilities in Santa Clara, CA; Hayward, CA; Singapore; and Taiwan. The Company incurred a charge of $71,000 in 1998 related to severance costs for the affected employees. 45 47 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the first quarter of 1998, the Company adopted an expense reduction plan that included a reduction in force of 90 employees out of the Company's staff of contract and regular personnel. The reductions took place at the Company's facilities in Santa Clara, CA; Los Gatos, CA; Rocklin, CA; and Taiwan. Additionally, the Company relocated its RTP Operation from Rocklin to the Company's Santa Clara headquarters and closed the Rocklin facility. The Company incurred a charge of $1,164,000 in 1998 related to the expense reduction plan. The significant components of this charge included $290,000 for closure of the Rocklin facility, $462,000 for the balance of the rent due on the lease for such facility and $392,000 for employee severance costs. Closure of the facility was completed in the second quarter of 1998. In the fourth quarter of 1998, $147,000 of the restructuring reserve was reversed due to lower than expected costs incurred on the closure of the Rocklin facility. In the first quarter of 1999, the Company negotiated an early termination of its lease commitment in Rocklin, CA, which resulted in the Company reversing the remaining $132,000 of the restructuring reserve. The following table displays the activity in the building closure restructuring reserve, established in the third quarter of 1999, and in the RPC operation discontinuance restructuring reserve, established in the fourth quarter of 1999, through September 30, 2000.
BUILDING RPC OPERATION CLOSURE DISCONTINUANCE RESTRUCTURING RESTRUCTURING ------------- -------------- (IN THOUSANDS) Original restructuring charge..................... $2,225 $1,639 Actual expense incurred......................... (511) (851) Reversal of restructuring charge................ (97) -- ------ ------ Balance at December 31, 1999...................... 1,617 788 Actual expense incurred......................... (815) (365) Valuation reserve -- leased systems............. -- (361) Reversal of restructuring charge................ (615) -- ------ ------ Balance at April 1, 2000.......................... 187 62 Actual expense incurred......................... (162) (61) ------ ------ Balance at July 1, 2000........................... 25 1 Actual expense incurred......................... (2) (1) Reversal of restructuring charge................ (23) -- ------ ------ Balance at December 31, 2000...................... -- -- ====== ======
16. OTHER ACCRUED LIABILITIES
DECEMBER 31, ---------------- 2000 1999 ------ ------ (IN THOUSANDS) Accrued income taxes....................................... $3,085 $2,778 Accrued product warranties................................. 745 801 Restructuring accruals..................................... -- 2,405 Accrued interest expense................................... 894 894 Accrued rent expense....................................... 269 688 Other...................................................... 116 1,275 ------ ------ Total other accrued liabilities.................. $5,109 $8,841 ====== ======
46 48 INTEVAC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED ---------------------------------------------------- APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 31, 2000 2000 2000 2000 -------- ------- ------------- ------------ (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Net sales...................................... $ 5,892 $9,191 $11,036 $ 9,930 Gross profit................................... 651 1,808 604 (1,073) Net loss....................................... (2,861) (701) (3,409) (5,353) Basic earnings per share....................... $ (0.24) $(0.06) $ (0.29) $ (0.45) Diluted earnings per share..................... (0.24) (0.06) (0.29) (0.45)
THREE MONTHS ENDED ------------------------------------------------------ MARCH 27, JUNE 26, SEPTEMBER 25, DECEMBER 31, 1999 1999 1999 1999 --------- -------- ------------- ------------ (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Net sales.................................... $11,749 $10,270 $13,822 $ 7,121 Gross profit................................. 993 180 1,499 559 Net loss..................................... (2,985) (2,698) (376) (3,711) Basic earnings per share..................... $ (0.25) $ (0.23) $ (0.03) $ (0.32) Diluted earnings per share................... (0.25) (0.23) (0.03) (0.32)
47 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information required by this item is included under the caption "Ratification of Independent Public Auditors" in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders and is incorporated herein by reference. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The information required by this item relating to the Company's directors and nominees and disclosure relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by this item relating to the Company's executive officers and key employees is included under the caption "Executive Officers and Directors" under Item 4 in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under the caption "Executive Compensation and Related Information" in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under the caption "Ownership of Securities" in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included under the caption "Certain Transactions" in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of Documents filed as part of this Annual Report on Form 10-K. 1. The following consolidated financial statements of Intevac, Inc. are filed in Part II, Item 8 of this Report on Form 10-K: Report of Grant Thornton LLP, Independent Auditors Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheets -- December 31, 2000 and 1999 Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2000, 1999 and 1998 Consolidated Statement of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements -- Years Ended December 31, 2000, 1999 and 1998 48 50 2. Financial Statement Schedules. The following financial statement schedule of Intevac, Inc. is filed in Part IV, Item 14(a) of this Annual Report on Form 10-K: Schedule II -- Valuation and Qualifying Accounts All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or notes thereto. 3. Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- *3.1 Amended and Restated Articles of Incorporation of the Registrant *3.2 Bylaws of the Registrant ***4.2 Indenture, dated as of February 15, 1997, between the Company and State Street Bank and Trust Company of California, N.A. as Trustee, including the form of the Convertible Notes *10.1 The Registrant's 1991 Stock Option/Stock Issuance Plan *10.2 The Registrant's 1995 Stock Option/Stock Issuance Plan, as amended *10.3 The Registrant's Employee Stock Purchase Plan, as amended 10.5 Lease, dated February 5, 2001 regarding the space located at 3560, 3570 and 3580 Basset Street Santa Clara, California *10.8 601 California Avenue LLC Limited Liability Operating Agreement, dated July 28, 1995 *10.9 The Registrant's 401(k) Profit Sharing Plan *10.11 Stock Sale Agreement, Note Secured by Stock Pledge Agreement and Stock Pledge Agreement by and between Intevac, Inc. and Paul Colombo, dated August 24, 1994, as amended **10.13 Stock Purchase Agreement by and among Lotus Technologies, Inc., Lewis Lipton, Dennis Stark, Steve Romine and Intevac, Inc., dated June 6, 1996 21.1 Subsidiaries of the Registrant 23.1 Consent of Grant Thornton LLP, Independent Auditors 23.2 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (see page 46)
--------------- * Previously filed as an exhibit to the Registration Statement on Form S-1 (No. 33-97806) ** Previously filed as an exhibit to the Registration Statement on Form S-1 (No. 333-05531) *** Previously filed as an exhibit to the Registration Statement on Form S-3 (No. 333-24275) (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of the fiscal year covered by this Annual Report on Form 10-K. 49 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 8, 2001. INTEVAC, INC. By: /s/ CHARLES B. EDDY III ------------------------------------ Charles B. Eddy III Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Norman H. Pond and Charles B. Eddy III, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ NORMAN H. POND Chairman of the Board March 8, 2001 ------------------------------------------ (Principal Executive Officer) (Norman H. Pond) /s/ CHARLES B. EDDY III Vice President, Finance and March 8, 2001 ------------------------------------------ Administration, Chief Financial Officer (Charles B. Eddy III) Treasurer and Secretary (Principal Financial and Accounting Officer) /s/ EDWARD DURBIN Director March 8, 2001 ------------------------------------------ (Edward Durbin) /s/ ROBERT D. HEMPSTEAD Director March 8, 2001 ------------------------------------------ (Robert D. Hempstead) /s/ DAVID N. LAMBETH Director March 8, 2001 ------------------------------------------ (David N. Lambeth) /s/ H. JOSEPH SMEAD Director March 8, 2001 ------------------------------------------ (H. Joseph Smead)
50 52 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS INTEVAC, INC.
ADDITIONS ------------------------------------ BALANCE AT CHARGED TO BALANCE AT BEGINNING CHARGED TO COSTS OTHER ACCOUNTS -- DEDUCTIONS -- END DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE(1) OF PERIOD ----------- ---------- ---------------- ----------------- ------------- ---------- Year ended December 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts.............. $1,504,600 $ 246,038 $ 0 $121,290 $1,629,348 Year ended December 31, 1999: Deducted from asset accounts: Allowance for doubtful accounts.............. $1,629,348 $ 151,802 $ 0 $ 68,074 $1,713,076 Year ended December 31, 2000: Deducted from asset accounts: Allowance for doubtful accounts.............. $1,713,076 $(1,544,172) $(2,892) $ 52,500 $ 113,512 Valuation allowance against deferred tax assets................ 0 3,604,716 0 0 3,604,716
--------------- (1) Typically includes write-offs of amounts deemed uncollectible. 51 53 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- *3.1 Amended and Restated Articles of Incorporation of the Registrant *3.2 Bylaws of the Registrant ***4.2 Indenture, dated as of February 15, 1997, between the Company and State Street Bank and Trust Company of California, N.A. as Trustee, including the form of the Convertible Notes *10.1 The Registrant's 1991 Stock Option/Stock Issuance Plan *10.2 The Registrant's 1995 Stock Option/Stock Issuance Plan, as amended *10.3 The Registrant's Employee Stock Purchase Plan, as amended 10.5 Lease, dated February 5, 2001 regarding the space located at 3560, 3570 and 3580 Basset Street Santa Clara, California *10.8 601 California Avenue LLC Limited Liability Operating Agreement, dated July 28, 1995 *10.9 The Registrant's 401(k) Profit Sharing Plan *10.11 Stock Sale Agreement, Note Secured by Stock Pledge Agreement and Stock Pledge Agreement by and between Intevac, Inc. and Paul Colombo, dated August 24, 1994, as amended **10.13 Stock Purchase Agreement by and among Lotus Technologies, Inc., Lewis Lipton, Dennis Stark, Steve Romine and Intevac, Inc., dated June 6, 1996 21.1 Subsidiaries of the Registrant 23.1 Consent of Grant Thornton LLP, Independent Auditors 23.2 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (see page 46)
--------------- * Previously filed as an exhibit to the Registration Statement on Form S-1 (No. 33-97806) ** Previously filed as an exhibit to the Registration Statement on Form S-1 (No. 333-05531) *** Previously filed as an exhibit to the Registration Statement on Form S-3 (No. 333-24275)