SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31,
2003
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or
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-26946
INTEVAC, INC.
(Exact name of registrant as specified in its
charter)
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California
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94-3125814
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3560 Bassett Street
Santa Clara, California 95054
(Address of principal executive
office, including Zip Code)
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Registrants telephone number, including
area code:
(408) 986-9888
Securities registered pursuant to
Section 12(b) of the Act:
None
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Title of each class
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Name of each Exchange on which registered
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none
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none
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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
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No
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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 registrants 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.
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Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act). Yes
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No
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The aggregate market value of voting stock held
by non-affiliates of the Registrant, as of June 28, 2003
was approximately $15,690,000 (based on the closing price for
shares of the Registrants 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 March 3, 2004, 19,981,993 shares of
the Registrants Common Stock, no par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy
Statement for the 2004 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.
TABLE OF CONTENTS
This Annual Report on Form 10-K contains
forward-looking statements, which involve risks and
uncertainties. Words such as believes,
expects, plans, anticipates
and the like indicate forward-looking statements. These
forward-looking statements include comments related to hard disk
drive market dynamics, our leadership position in thin-film disk
manufacturing equipment, projected customer requirements for new
capacity and for technology upgrades to their installed base of
thin-film disk manufacturing equipment, as well as the ability
of our products to meet these requirements; the timing of
delivery and/or acceptance of our products for revenue; the
expected features, performance and competitive advantages of
products we are developing including LIVAR®, low light
level sensors and cameras and 200 Lean systems; and the cost of
complying with government regulations. Our actual results may
differ materially from the results discussed in the
forward-looking statements for a variety of reasons, including
those set forth under Certain Factors Which May Affect
Future Operating Results.
PART I
Overview
We are the worlds leading provider of
thin-film disk sputtering equipment for the thin-film disk
industry and a developer of leading technology for extreme low
light imaging sensors, cameras and systems. We operate two
businesses: Equipment and Imaging.
Our Equipment business designs, manufactures,
markets and services complex capital equipment which deposits,
or sputters, highly engineered thin-films onto disks used in
hard disk drives. We believe we are the leading provider of disk
sputtering systems. Our systems represent approximately half of
the installed base of disk sputtering systems and produced
approximately half of all thin-film disks made worldwide in
2003. Our customers include the worlds leading thin-film
disk manufacturers, such as Hitachi Global Storage Technologies,
or HGST, Komag, Maxtor and Seagate Technology. We believe the
rapid growth of digital data, the transition from video cassette
recorders to digital video recorders and the growth of new
consumer applications, such as personal video recorders, video
game consoles and MP3 players, along with new technology
advances in the industry, will provide us with a significant
growth opportunity.
Our Imaging business develops and manufactures
electro-optical sensors, cameras, and systems that permit highly
sensitive detection of photons in the visible and near infrared
portions of the spectrum, allowing vision in extreme low light
situations. We currently develop night-vision technology and
equipment for military and commercial applications. To date, our
revenues have been derived primarily from research and
development contracts funded by the U.S. government.
Applications for our imaging technology include systems for
positive identification of targets at long range and sensors and
cameras for use in extreme low light situations. More recently,
we began developing products for use in the commercial sector,
specifically the security, life science and physical science
markets.
Intevac was formed in 1990 and completed a
leveraged buyout of a number of divisions of Varian Associates
in February 1991. The technologies acquired from Varian formed
the foundation for our Equipment and Imaging businesses. We were
incorporated in October 1990 in California. Our principal
executive offices are located at 3560 Bassett Street,
Santa Clara, California 95054, and our phone number is
(408) 986-9888. Our Internet home page is located at
www.intevac.com
; however the information in, or that can
be accessed through, our home page is not part of this report.
Our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments
to such reports are available, free of charge, on or through our
Internet home page as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
Securities and Exchange Commission.
Intevac, Intevac® MDP
250, Intevac® 200 Lean,
LIVAR, D-STAR, EBAPS and
NightVista, among others, are our registered
trademarks.
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Equipment Business
Our Equipment business designs, manufactures,
markets and services complex capital equipment used in the
sputtering, or deposition, of highly engineered thin-films of
material onto thin-film disks which are used in hard disk
drives. Hard disk drives are the primary storage medium for
digital data and function by magnetically storing data on
thin-film disks. These thin-film disks are created in a
sophisticated manufacturing process involving a variation of
many steps, including plating, annealing, polishing, texturing,
sputtering and lubrication.
Storage
Market Growth Drivers
Data storage requirements have rapidly increased
from kilobytes for documents, to megabytes for audio and still
images, to gigabytes for video. Hard disk drives are the primary
devices used for storing and retrieving digital data. According
to IDC, the total storage capacity of hard disk drives shipped
grew from 5.2 billion gigabytes in 2001 to 8.8 billion
gigabytes in 2002. Additionally, capacity is expected to grow at
a 45.1% compounded annual growth rate from 2002 to 2007. We
believe there are a number of emerging trends and applications
that exploit these reduced storage costs and that require
storage intensive solutions.
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New consumer electronics applications, such as
digital video and audio recorders, video game platforms,
emerging HDTV applications and streaming video require
significant digital data storage capability.
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Personal computers have evolved from devices
operating simple applications such as word processing, to
powerful machines that are capable of playing, recording and
creating multimedia content, such as images, audio and video.
These capabilities have driven the demand for new personal
computers and increasing requirements for data storage. IDC
estimates personal computer growth of over 10.2% in 2004.
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Enterprise data storage requirements are
increasing, as regulations and other business factors require
companies to archive more information, such as documents and
email. Additionally, companies are transitioning from
paper-based storage to digital data-based storage and digital
backup.
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Certain traditional analog storage applications
are transitioning to digital hard disk-based storage. For
example, the video surveillance industry, including home
security, law enforcement, private security services, retail,
transportation and government agencies, is transitioning from
analog video tapes to digital hard disk storage.
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As a result of these and other storage
applications, IDC expects the total number of units of all
hard disk drives to be shipped between 2002 and 2007 to grow at
a compounded annual rate of approximately 10.7% from
219 million units to 365 million units.
Hard Disk
Drive Market Dynamics
Areal Density
Increasing.
Areal density, the density
of information stored on thin-film disks, continues to increase.
Areal density is a function of how closely spaced the
information bits are on the thin-film disk. Higher areal density
means more information can be stored on a thin-film disk of the
same size. Thin-film disk manufacturers compete by increasing
the areal density of a hard disk, which enables them to provide
more data storage capacity at a lower cost per gigabyte. As
areal densities have increased, hard disk drive manufacturers
have been able to reduce costs by reducing the number of disks
per drive. In 2003, desktop personal computers included an
average of 1.1 thin-film disks per drive whereas in 1998 there
was an average of 2.2 thin-film disks per drive.
Transition from Longitudinal to Perpendicular
Recording.
Historically, thin-film
disk manufacturers have been able to increase the areal density
of a thin-film disk by improving existing longitudinal recording
processes, a storage method where magnetized data bits lie flat
on the thin-film disk. However, the rate of increase in areal
density has slowed, as the magnetized data bits are packed
closer and closer together, which increases instability. In
order to increase the rate of areal density expansion, we
believe the thin-film disk
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industry will transition to perpendicular
recording. Perpendicular recording, as the name implies, results
in the data bits lying perpendicular to the plane of the
thin-film disk and also enables bits to be recorded at a higher
density than longitudinal recording.
New Equipment Required for Perpendicular
Recording.
The equipment that
thin-film disk manufacturers purchased in the mid to late 1990s
could generally accommodate up to 12 process steps, which
has been sufficient to enable improvements in areal density
using longitudinal recording. However, producing thin-film disks
capable of perpendicular recording may require up to 18 to 24
process steps. As a result, in order to transition to
perpendicular recording, thin-film disk manufacturers will most
likely need to replace or retool their existing thin-film disk
manufacturing equipment.
Consolidation of Equipment
Suppliers.
The supplier base of disk
sputtering equipment has consolidated. Beginning in 1995, many
thin-film disk manufacturers undertook aggressive expansion
plans. The reduction in thin-film disks per drive combined with
these capacity expansions resulted in substantial excess disk
production capacity in the late 1990s through 2002. As a result,
even as total storage capacity of all hard disk drives shipped
increased dramatically from 1997 to 2002, thin-film disk
manufacturers did not make significant investments in new disk
sputtering equipment. In fact, of the four leading providers of
disk sputtering equipment, only two have announced new equipment
platforms capable of perpendicular recording.
Industry
Consolidation.
Two types of companies
purchase disk sputtering equipment. Vertically integrated
companies manufacture both thin-film disks and the drives that
use the disks. Thin-film disk manufacturing companies
manufacture only thin-film disks and sell them to hard disk
drive manufacturers. These companies were also adversely
affected by the overcapacity of 1997 through 2002, and as a
result, the industry underwent significant consolidation. For
instance, in 2001 Maxtor acquired Quantums hard disk drive
operations, and IBM sold its hard disk drive business to Hitachi
in 2002. In 2001, Fujitsu ceased manufacturing hard disk drives
for the personal storage market. This consolidation has reduced
the number of thin-film hard disk manufacturers able to respond
to any increasing demand for digital data storage.
Return to Industry
Growth.
According to IDC, hard disk
drive demand will reach 365 million units by 2007. In 2003,
hard disk drive manufacturers were expected to produce
approximately 232 million units, according to IDC.
Recently, HGST, Maxtor and Seagate, have announced significant
thin-film disk manufacturing capacity expansions.
To meet increasing demands, thin-film disk
manufacturers are beginning to invest in new disk sputtering
equipment that can accommodate the additional process steps
required for perpendicular recording. To evaluate the
performance of competing disk sputtering equipment, thin-film
disk manufacturers consider the following criteria:
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Cost of Ownership.
The factors that affect the cost of ownership of disk sputtering
equipment include purchase price, yield, throughput, factory
floor footprint, uptime and material utilization efficiency. A
lower cost of ownership for disk sputtering equipment is a key
factor in lowering the manufacturers product cost.
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Extendibility and
Flexibility.
We believe thin-film disk
manufacturers need disk sputtering equipment that can address
the needs of their evolving technology roadmaps. This equipment
must be capable of incorporating new process steps and technical
capabilities, including the processes needed for producing
thin-film disks capable of perpendicular recording.
Additionally, these manufacturers are improving longitudinal
processes and further developing the processes necessary for
perpendicular recording, and as a result, they demand a modular,
flexible system that supports process reconfigurations and
expansions with a minimum of effort.
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Compatibility with Existing
Equipment.
We believe thin-film disk
manufacturers prefer to standardize their processes around one
or two disk sputtering equipment suppliers. Once a thin-film
disk manufacturer has selected a particular suppliers
equipment, that manufacturer generally relies upon that
suppliers equipment for much of its production capacity
and frequently will continue to purchase any additional
equipment from the same supplier. There are significant
economies of scale related to the use of a single platform in
product design, product qualification, manufacturing and support.
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Long-term Commitment of
Supplier.
We believe thin-film disk
manufacturers need disk sputtering equipment providers that are
committed to meeting current and future technology requirements
and to supporting this equipment throughout its useful life. As
a result, thin-film disk manufacturers increasingly demand a
supplier with the stability and capability to be a long-term
technology partner.
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Our
Competitive Strengths
We are the leading provider of sputtering
equipment to thin-film disk manufacturers. We believe that our
industry leadership is the result of the following key
competitive strengths:
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Broad Installed Base with Industry Leading
Customers.
Our MDP-250 disk sputtering
system gained wide acceptance in the thin-film disk
manufacturing industry and by the late 1990s was being used in
the manufacture of approximately half of the thin-film disks
used in hard disk drives worldwide. We believe that there are
approximately 90 MDP-250s currently in use in production and
research and development applications by customers such as HGST,
Komag, Maxtor, Seagate and Showa Denko. We believe the majority
of our active customers are now utilizing most of their capacity
and that there is significant potential for these customers to
both resume adding capacity and to upgrade the technical
capability of their installed base to permit production of
higher density disks capable of perpendicular recording. During
2003, we received orders for ten of our 200 Lean disk sputtering
systems and delivered our first system in December 2003. The
remaining systems are currently scheduled to be delivered in the
first half of 2004. We believe this is the first production
order from a major hard disk drive manufacturer for a new
equipment platform capable of perpendicular recording.
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Technology Leadership with Modular Next
Generation Advanced Platform.
In 2003,
we introduced our latest-generation disk sputtering system, the
200 Lean, which provides significantly enhanced capabilities
relative to our installed base of MDP-250 systems. The 200 Lean
provides higher throughput from a smaller footprint, which
enables more thin-film disks to be manufactured per square-foot
of factory. The flexible design of the 200 Lean allows rapid
reconfiguration to accommodate product changeovers and new
thin-film disk technology. The modular design of the 200 Lean
also allows thin-film disk manufacturers to add additional
process steps, as advanced thin-film disk technologies, such as
perpendicular recording, are introduced.
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Long-Term Commitment to Hard Disk Drive
Industry.
We have been a hard disk
drive equipment provider since 1991. We are one of only two
companies that have announced next-generation disk sputtering
equipment that can support perpendicular recording. We have
continued to develop new technologies and have introduced the
200 Lean disk sputtering system to meet the needs for additional
process steps needed to produce thin-film disks capable of
perpendicular recording. In addition, our headquarters are
strategically located in close proximity to our customers
hard disk drive development centers, and we are expanding our
support center in Singapore to provide greater service to our
customers manufacturing facilities located in Southeast
Asia.
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Based on these competitive strengths, we believe
that we are well positioned to maintain and enhance our market
leading position in the disk sputtering equipment market.
Our Equipment
Strategy
We believe we can leverage our leadership
position in disk sputtering equipment to increase our sales to
thin-film disk manufacturers and apply our technology to new
markets. The key elements of our strategy are as follows:
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Become Preferred Solutions Provider in the
Thin-Film Disk Industry.
Our goal is
to become a preferred solutions provider to thin-film disk
manufacturers. We believe that our 200 Lean provides our
customers with an advanced modular platform that can address
their future disk sputtering needs. By working in close
partnership with our customers, we believe we are well
positioned to provide new manufacturing solutions for other hard
disk drive components. We believe we can integrate additional
capabilities into the 200 Lean, enabling our customers to
eliminate other stand-alone disk manufactur-
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ing equipment and reduce thin-film disk
production time. We also believe we have an opportunity to
develop and supply other equipment related to the manufacture of
hard disk drives.
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Deliver Highest Customer Value
Proposition.
Our goal is to maintain
our leadership in advanced disk sputtering equipment by
providing equipment with the lowest cost of ownership. The 200
Leans modular design provides customers the ability to
reconfigure their disk manufacturing systems for rapid
technology shifts and evolving technology roadmaps.
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Expand Consumables, Spare Parts and Service
Offerings.
We plan to increase the
sale of disk sputtering equipment consumables, spare parts and
service in order to increase our revenue opportunity per
customer. In addition, growing these offerings will enable us to
deepen and enhance our customer relationships. We believe the
expected revenue from these offerings will help mitigate the
impact of cyclical downturns in the disk sputtering equipment
business. We believe that the close proximity of our service
center in Singapore to a large number of hard disk drive
manufacturers facilities gives us a competitive advantage.
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Leverage Existing Technology into New
Markets.
In addition to expansion
within our existing customer base, we intend to target other
markets where we can apply our expertise in complex
manufacturing equipment.
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Our Equipment
Products
200 Lean
Disk Sputtering System
The 200 Lean is our latest generation disk
sputtering system. The 200 Lean provides significantly
enhanced capabilities relative to the installed base of
approximately 90 MDP-250 systems. The 200 Lean
provides higher throughput from a smaller footprint in a
flexible modular system, which enables more thin-film disks to
be manufactured per square-foot of factory floor space and is
designed to lower overall cost of ownership.
The key features of the 200 Lean include:
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Modular Design.
The
200 Leans modular design allows our customers to
accommodate any number of thin-film disk manufacturing process
steps required by their evolving technology roadmaps. The
200 Lean consists of a front-end robotic module that loads
and unloads thin-film disks from the system, combined with any
number of four-station process modules. Typical configurations
of the 200 Lean have from three to six process modules,
which results in systems capable of 12 to 24 process steps.
Additional process modules can be easily added to already
installed systems. For example, a customer could buy a
12-station 200 Lean to manufacture longitudinal media and at a
later date upgrade the system to a 24-station system to
manufacture perpendicular media.
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Easy to Reconfigure.
Thin-film disk manufacturers produce many different designs that
have short product life cycles, leading to frequent
reconfiguration of disk sputtering equipment. The mechanical
design and software control system of the 200 Lean allows
rapid reconfiguration of systems by our customers. The
200 Lean is also easily reconfigured to process thin-film
disks with glass or aluminum substrates of varying diameters and
thicknesses.
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Higher Throughput with Smaller
Footprint.
The 200 Lean offers
higher throughput (over 700 thin-film disks per hour) and more
process stations in a more compact package than our industry-
leading MDP-250 system. We believe that the 200 Lean has
the highest disk throughput per square foot of factory space for
a system capable of manufacturing perpendicular media.
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High Availability.
The 200 Lean is designed to operate seven days a week,
24 hours a day with 95% availability.
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Single Disk
Processing.
The 200 Lean
processes each disk sequentially through a series of single-disk
process chambers. This eliminates interactions between adjacent
process stations, providing a higher level of process control
and thin-film uniformity.
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High-Vacuum
Capability.
The 200 Lean operates
at ten times the vacuum level of the installed base of MDP-250s.
Higher vacuum levels lead to lower contamination and higher
coating efficiency, as required to manufacture advanced media.
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Suite of Process Station
Options.
The 200 Lean offers a
wide range of process stations, providing capabilities such as
metal deposition, heating, cooling and carbon overcoating.
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MDP-250
Disk Sputtering System
We believe that the MDP-250 is used to
manufacture approximately half the thin-film disks used
worldwide to manufacture hard disk drives. The MDP-250 has
twelve process stations that are separately vacuum pumped and
vacuum isolated. The MDP-250 has a number of process station
options, including multiple options for the sputtering of
thin-films and carbon overcoats, heating stations, cooling
stations and cleaning stations. Furthermore, the MDP-250s
12 process stations can be reconfigured to accommodate
process changes.
Equipment
Business Sales and Marketing
Our Equipment business sales are made primarily
through our direct sales force, although in Japan, we sell our
products through a distributor, Matsubo. The selling process for
our equipment products is a multi-level and long-term process,
involving individuals from marketing, engineering, operations,
customer service and senior management. The process involves
making samples for the prospective customer and responding to
their needs for moderate levels of machine customization.
Installing and integrating new equipment requires a substantial
investment by a customer. Sales of our 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
by 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, our systems typically have a lengthy
sales cycle, during which we may expend substantial funds and
management time and effort with no assurance that a sale will
result.
The production of large complex systems requires
us to make significant investments in inventory both to fulfill
customer orders and to maintain adequate supplies of spare parts
to service previously shipped systems. We also maintain an
inventory of spare parts at our Singapore subsidiary to support
our customers in Singapore and Malaysia. We typically require
our customers to pay for systems in three installments, with a
portion of the system price billed upon receipt of an order, a
portion of the system price billed upon shipment, and the
balance of the system price and any sales tax due upon
completing installation and acceptance of the system at the
customers factory. All customer product payments are
recorded as customer advances pending revenue recognition.
Equipment
Business Customers
Our disk sputtering equipment customers include
thin-film disk manufacturers, such as Fuji Electric, Komag,
Showa Denko and Trace Storage Technology, and vertically
integrated hard disk drive manufacturers, such as HGST, Maxtor
and Seagate. The majority of our customers product
development programs are located in the United States. Our
customers manufacturing facilities are located in
California, Singapore, Malaysia, Japan and Taiwan. In addition,
HGST is developing a new media facility in China.
Equipment
Business Customer Support
We provide process and applications support,
customer training, installation, start-up assistance and
emergency service support to our equipment customers. Process
and applications support is provided by our equipment process
engineers, who also visit customers at their plants to assist in
process development projects. We conduct training classes for
our customers process engineers, machine operators and
machine service personnel. Additional training is also given to
our customers during the machine installation. We have a
subsidiary in Singapore to support our customers in Southeast
Asia.
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We generally provide a warranty of at least one
year on our equipment. During this warranty period any necessary
non-consumable parts are supplied and installed without charge.
Our employees provide field service support primarily in the
United States, Singapore and Malaysia. In Japan, field service
support is provided by our distributor, Matsubo, supplemented by
our factory support. We and Matsubo stock consumables and spare
parts to support the installed base of systems. These parts are
generally available on a 24-hour per day basis.
Equipment
Business Competition
The principal competitive factors affecting the
markets for our equipment products include price, product
performance and functionality, integration and manageability of
products, customer support and service, reputation and
reliability. We have historically experienced intense
competition worldwide from competitors including Anelva
Corporation, Ulvac and Unaxis Holdings, Ltd., each of which has
sold substantial numbers of systems worldwide. Anelva, Ulvac and
Unaxis all have substantially greater financial, technical,
marketing, manufacturing and other resources than we do.
Currently Anelva and Intevac are the only companies that are
offering products that address the sputtering requirements of
advanced perpendicular recording. However, there can be no
assurance that any of our competitors will not develop
enhancements to, or future generations of, competitive products
that offer superior price or performance features or that new
competitors will not enter our markets and develop such enhanced
products.
Given the lengthy sales cycle and the significant
investment required to integrate equipment into the
manufacturing process, we believe that once a thin-film disk
manufacturer has selected a particular suppliers equipment
for a specific application, that manufacturer generally relies
upon that suppliers 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.
Imaging Business
Our Imaging business develops and manufactures
electro-optical sensors, cameras, and systems that permit highly
sensitive detection of photons in the visible and near infrared
portions of the spectrum, allowing vision in extreme low light
situations.
Imaging
Industry Overview
Imaging is the capture and display of light or
heat, which is infrared radiation, emitted or reflected from an
object. A segment of the imaging market has evolved into
specialized technology for the capture of low light images. Low
light imaging involves the capture and display of light at
intensities of approximately one millionth, or less of, daytime
light levels.
The U.S. military has determined that low
light imaging technology that provides superiority in nighttime
combat creates a significant tactical strategic advantage.
Accordingly, the U.S. military has funded the development
of night vision technology, which has evolved through three
generations to todays widely deployed
Generation-III night vision tubes. Typically,
Generation-III night vision tubes are placed in front of a
users eyes, like a pair of binoculars, and produce a
direct-view, green glow image. However, the military
is now funding the development of next generation extreme low
light imaging technology that provides digital video output and
is more cost-effective and portable.
The commercial sector has taken a different
approach to extreme low light imaging than the military. The
initial extreme low light cameras for the commercial sector were
based on charged coupled device, or CCD, technology, which is
able to produce a digital output. CCD technology relies on long
exposure times for its sensitivity, and as a result the initial
cameras were used for static applications, like astronomy. Other
commercial markets, such as metrology, life sciences and
industrial process monitoring, adopted CCD technology. However,
cameras for these new markets compromised sensitivity for
dynamic applications with motion or short measurement times.
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As a result, two distinct forms of low light
level imaging have evolved: the Generation-III night vision tube
technology developed by the military, which provides direct-view
analog imagery; and CCD technology, which can provide digital
imagery, but is not well suited to dynamic applications.
Our Imaging
Solution
We have developed imaging technology that
combines the low light capability of Generation-III with
silicon-based digital video technology that we believe will
enable us to provide a family of portable, cost-effective low
light sensors and cameras. Our solution integrates three key
elements into a compact sensor:
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a semiconductor photocathode, which converts
incoming light into electrons,
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acceleration of those elections into a digital
imaging chip, and
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conversion of those electrons into a digital
signal.
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Elements of our proprietary solutions include:
Advanced Photocathode
Technology
A photocathode
is a semiconductor compound with the ability to convert light
into electrons. We are developing a family of photocathodes that
are engineered to optimize sensitivity at specific wavelengths
ranging from the visible (0.40 microns) to the near infrared
(1.65 microns). Our photocathodes have high quantum
efficiencies, the efficiency with which incoming light photons
are converted to electrons, and are extremely sensitive to
incoming light. Some of our detectors, incorporating such
photocathodes, can detect incoming light at levels as low as a
single photon, which is the ultimate level of sensitivity.
Use of Low Power CMOS Imaging
Chips
Historically, CCD
sensors were the primary technology used in digital imaging.
Recently, Complementary Metal Oxide Semiconductor, or CMOS
sensors, which are generally lower cost and require less power
than comparable CCD sensors, have been developed for consumer
imaging applications. CMOS imaging chips are rapidly improving
in power consumption, resolution and dynamic range. We have
developed proprietary technologies and capabilities to
incorporate CMOS sensors into our products to take advantage of
these improvements. As a result, we believe we will be able to
offer low cost, low power, extreme low light imaging sensors for
portable applications in price sensitive markets.
Increased Silicon Sensor
Sensitivity
We have
developed proprietary technology to enable CMOS and CCD sensors
to capture the accelerated electrons emitted from the
photocathode more efficiently. Increasing the electron capture
efficiency directly increases extreme low light imaging
performance.
Compact Ultra-High Vacuum Sensor
Packaging
Our compact
ultra-high vacuum sensor package enables us to combine a
megapixel imaging chip with our photocathodes in a package
approximately one inch square and one quarter inch thick. Our
proprietary design maintains close spacing between the
photocathode and the silicon sensor to further enhance
resolution. Our small package is particularly well suited for
portable applications where size and weight are critical.
Low Light
Imaging Market Opportunity
We are designing our imaging solutions to address
next generation military requirements and the dynamic
applications of the commercial markets. Forecast International
estimated the military market for legacy night vision systems
and research programs to be $347 million in 2003.
Military Long Range Target
Identification
Current
long-range nighttime surveillance systems are based on expensive
thermal imaging camera systems, which image the thermal profile
of a target. Thermal imaging systems become larger with
increased range, which is problematic for aircraft and portable
applications. Additionally, these systems only measure emitted
heat and as a result produce relatively poor resolution images.
Moreover, long range infrared imaging systems deployed by the
U.S. military are not significantly superior to infrared
imaging systems available to potential adversaries. The rules of
engagement for U.S. military forces require positive
identification prior to attack. This puts U.S. forces at a
disadvantage to
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adversaries who are willing to attack targets
that have been detected, but not positively identified.
Accordingly, there is a need for a cost effective, compact,
long-range imaging solution for target identification.
Head Mounted Night Vision
Systems
Generation-III
based night vision goggles, which have excellent extreme low
light imaging performance, were widely deployed by the
U.S. military for use by soldiers during the 1990s.
However, these goggles are relatively large, heavy and lack
video output. Additionally, potential adversaries are now
deploying Generation-II+ goggles manufactured outside the United
States with performance levels approaching that of
Generation-III. Accordingly, the U.S. Army has developed a
roadmap to maintain extreme low light imaging dominance for the
individual soldier. A key element of this roadmap includes a
transition from bulky direct-view night vision goggles to a
miniature head mounted imaging system, including an extreme low
light camera and video display. This approach addresses size and
weight issues and enables connectivity to a wireless network for
distribution of the imagery and other information. These
improvements need to be realized while minimizing the cost of
each soldiers system. The U.S. Army plans to begin
deployment of this type of system by 2006.
Security
Cameras
The world is
becoming more security-conscious and increasingly relies on
cameras for surveillance. The majority of the security market is
served by closed circuit television cameras, which work well
when sufficient light is available. However, extreme low light
cameras are needed when sufficient light is not available, when
it is not economical to provide lighting or when stealth is
required. Markets for this capability include surveillance of
international borders, airport perimeters, military bases,
pipelines and nuclear power plants.
Physical
Sciences
Companies in the
physical sciences use extreme low light imaging to investigate
the chemistry and physics of a wide variety of substances such
as foods, medicines, materials and biological compounds. They
need high sensitivity and increased speed and resolution to
increase the accuracy of their measurements and the productivity
of their measurement tools. For example, defects on
semiconductor wafers are getting increasingly smaller and
require improved measurement accuracy. An example in the
pharmaceutical industry is the growing need for near infrared
spectrometer imaging to determine the composition of medicines
in real time.
Life
Sciences
The life sciences
market focuses on increasing the understanding of biology at the
cellular level to improve health and quality of life. To image
single living cells this market needs extreme low light cameras
that operate at speeds significantly higher than cameras that
are available today. Extreme low light cameras are required,
because light can change the cells that are being imaged. High
speed cameras are required, because changes happen very rapidly
at the cellular level. Medical labs, hospitals and health
research institutes also utilize these cameras for applications
ranging from routine lab tests to advanced research.
Our Imaging Strategy
Collaborate with Leading Development
Organizations
We
collaborate with, and receive significant funding from, leading
government research organizations on the development of our
extreme low light technology. These organizations strongly
influence development and procurement of advanced technologies
by the U.S. military. For example, we have collaborated
with the U.S. Army Night Vision Labs, the world leader in
night vision technology, to facilitate the development and
adoption of our night vision technology. We initially developed
some of our sensors under a cost sharing agreement with the
National Institute of Standards and Technology. More recently,
we began working on a program with The Los Alamos National
Laboratory to develop three-dimensional sensor technology.
Become Leading Provider of Extreme Low Light
Imaging Technology for the
Military
We are actively
marketing our extreme low light imaging technology to the
military. Our technology has been incorporated into weapons
development programs such as the Airborne Laser (ABL), the Cost
Effective Targeting System (CETS), and the Long-Range
Identification System (LRID) programs. Our objective is for
our LIVAR technology to become the standard for long-range
target identification and for our extreme low light sensors to
become the standard for head-mounted displays.
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Leverage Proprietary Sensor Technology to
Address Emerging Commercial
Markets
We are using our
extreme low light imaging expertise to develop products for
commercial markets. For example, in 2003 we completed
development of our NightVista camera to address the
security market. We believe the modular design of our NightVista
platform, coupled with our use of standard silicon chips in our
configurable sensors, will help to decrease our development time
and cost to enter the physical and life sciences markets.
Lower Manufacturing
Costs
The market for our
cameras and sensors is price elastic, and low cost manufacturing
will be critical to the rapid proliferation of our products. Our
use of commercially available sensors and development of wafer
die level manufacturing, as opposed to single die level
manufacturing, are elements of our strategy to reduce product
cost. Additionally, we have developed proprietary ultra-high
vacuum assembly equipment to automate the assembly of the
photocathode and the imaging chip. In developing this system, we
utilized our expertise in the design and manufacture of complex,
high throughput production equipment. This system is designed to
decrease unit costs by increasing throughput and improving
process controls and yields.
Build Relationships with Strategic Sales
Partners to Accelerate Access to End
Markets
We are focusing on
the development and manufacture of extreme low light sensors and
cameras. Our products are designed to be enabling technology for
larger systems. As a result, we are developing relationships
with leading systems manufacturers such as Boeing, Lockheed
Martin Corporation and Northrop Grumman Corporation, in the
military market, to provide us with the scale and scope
necessary to become a leading provider of imaging solutions in
our target markets.
Our Imaging
Products
LIVAR Camera and System
Products
Our Laser
Illuminated Viewing and Ranging, or LIVAR, target identification
system consists of a near infrared extreme low light camera
integrated with an eye-safe laser illuminator. LIVAR uses a
laser to illuminate a target and a camera to capture the
reflected light and display an image. Currently the military
uses systems such as forward-looking infrared systems and radar
to detect targets. While these systems can detect targets at
relatively long ranges, the resolution is relatively poor, and
positive identification is often difficult or impossible. Our
LIVAR system is designed to identify targets initially detected
by forward-looking infrared or radar technology. Depending on
the application, LIVAR can be used to identify targets at
distances of up to 20 kilometers. We anticipate offering our
LIVAR cameras and systems at prices that range from
approximately $50,000 to $400,000. We do not expect significant
revenues from deployment of LIVAR systems until 2006.
Current LIVAR programs and products include:
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Cost Effective Targeting
System
We are working
under subcontract to DRS Sensor Systems to develop a LIVAR
system for use on an unmanned surveillance vehicle being
developed for the U.S. Army.
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Airborne
Laser
LIVAR cameras are an
enabling technology for the laser targeting in Lockheed
Martins Airborne Laser program, in which a jumbo jet will
use high-powered lasers to destroy ballistic missiles in flight.
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Classified
Program
The first weapons
platform slated for deployment of LIVAR is nearing the end of
its product development. We expect prototypes to be fielded in
2004 and volume production to follow approximately two years
later.
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SALSA
Program
In the Systems for
Airborne Laser Sensing and Analysis, or SALSA, program, we are
working with the Air Force Research Laboratory and Kirkland Air
Force Base to develop wafer level manufacturing to enable lower
cost LIVAR sensors.
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Long Range
Identification
We are
working with Northrop Grumman to integrate a LIVAR camera into
an existing laser illuminator used by Special Operations Forces
to designate targets for laser-guided bombs. The integration of
LIVAR into this system is designed to allow the Special
Operations Forces to complete their missions at much longer
ranges from the target.
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LIVAR 2200 Portable
System
The LIVAR 2200 is a
prototype portable target identification system we developed for
military use.
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LIVAR 120
Camera
The model 120 is a
standalone LIVAR camera that we sell to developers of long-range
imaging systems.
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NightVista
Cameras
The NightVista
camera is an extreme low light CMOS-based day/night video camera
for security applications that currently offers up to
1.3 mega-pixel resolution. Its camera body is small enough
to fit into a two-inch cube, and its power consumption is less
than 1500 milliwatts. As a result, the NightVista is well suited
for portable battery-powered applications. The NightVista
outputs digital video in several standard formats and is easily
integrated with other digital technologies. The NightVista
reprocesses and optimizes extreme low light images and is
configurable to end user requirements. We offer the NightVista
at a list price of $5,000, less than the price of a
Generation-III based security camera.
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Our Imaging business generally invoices its
research and development customers either as costs are incurred,
or as program milestones are achieved, depending upon the
particular contract terms. As a government contractor, we
invoice customers using estimated annual rates approved by the
Defense Contracts Audit Agency (DCAA). A majority of
our contracts are Cost Plus Fixed Fee (CPFF)
contracts. On any CPFF contract, 15% of the fee is withheld
pending completion of the program and DCAAs annual audit
of our actual rates. The withheld portion of the fee is included
in accounts receivable until paid.
Our Imaging
Competition
The principal competitive factors affecting our
products include price, extreme low light sensitivity, signal to
noise ratio, power consumption, resolution, size,
integratability, reliability, reputation and customer support
and service. We face substantial competition for our imaging
products and many of our competitors have greater resources than
we do.
In the military market, ITT Industries and
Northrop Grumman, who are large and well-established defense
contractors, are the primary U.S. manufacturers of image
intensifier tubes used in Generation-III night vision devices
and their derivative products. Our extreme low light cameras are
intended to displace Generation-III night vision based products
and we expect that ITT and Northrop Grumman will continue to
enhance the performance of their products and aggressively
promote their sales. Furthermore, CMC Electronics, DRS, FLIR
Systems and Raytheon manufacture cooled infrared sensors and
cameras which are presently used in long-range target
identification systems, with which our LIVAR target
identification sensors and cameras compete.
In the security market, we face competition from
companies such as ElectroPhysics, ITT and Texas
Instruments. These competitors products are based on image
intensifier tubes manufactured by ITT and Northrop Grumman and
by foreign suppliers. Electron multiplying CCDs manufactured by
Texas Instruments and E2V also are used in cameras that compete
with our low light level security products. In the physical and
life sciences market, companies such as Andor, E2V, Hamamatsu
and Roper Scientific offer competitive products. In the security
product area, competitive products to our NightVista camera
based on electron multiplying CCDs and image intensifier tubes
are offered by a number of companies.
Manufacturing
We conduct all of our Equipment business
manufacturing at our facility in Santa Clara, California.
Our equipment manufacturing operations include electromechanical
assembly, mechanical and vacuum assembly, fabrication of sputter
sources, and system assembly, alignment and testing. We make
extensive use of the local supplier infrastructure serving the
semiconductor equipment business. We purchase 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.
We also have our own small fabrication center that supports our
engineering departments and makes some of the machined parts
used in our products.
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Our Imaging business manufacturing includes the
manufacture of advanced photocathodes and sensors, lasers,
cameras and integrated camera systems. We make extensive use of
advanced manufacturing techniques and equipment, and our
operations include vacuum, electromechanical and optical system
assembly. As with our Equipment business, we make use of the
supplier infrastructure serving the semiconductor, camera and
optics manufacturing industries for our Imaging business. In
manufacturing our sensors, we purchase wafers, components,
processing supplies and chemicals. In manufacturing our camera
systems, we purchase printed circuit boards, electromechanical
components and assemblies, mechanical components and enclosures,
optical components and computers.
Intellectual Property
We currently hold 28 patents issued in the United
States and 34 patents issued in foreign countries, and have
patent applications pending in the United States and foreign
countries. Of the 28 U.S. patents, 15 relate to our
Equipment business, and 13 relate to our Imaging business. Of
the foreign patents, 13 relate to our Equipment business, and 21
relate to our Imaging business. In addition, we have the right
to utilize certain patents under licensing arrangements with
Litton Industries, Stanford University and Alum Rock Technology.
We hold substantial trade secrets in the imaging area related to
photocathode fabrication and processing and to silicon chip
packaging for vacuum compatibility and high electron
sensitivity. We also have significant process integration
intellectual property related to vacuum packaging of a
photocathode and a silicon semiconductor chip.
We have executed a strategy to protect our
intellectual property investment by using internal company funds
for development of new concepts and inventions. This minimizes
customer ownership of new intellectual property that we develop.
This is particularly important due to the large amount of
government-funded research and development in our Imaging
business.
Customer Concentration
Historically, a significant portion of our
revenue in any particular period has been attributable to sales
to a limited number of customers. In 2003, Komag, Seagate,
Lockheed Martin and equipment sales through Matsubo, our
Japanese distributor, each accounted for more than 10% of our
revenues, and in aggregate accounted for 66% of revenues. In
2002, Seagate, Toppoly and the U.S. Army
Communications-Electronics Command each accounted for more than
10% of our revenues, and in aggregate accounted for 74% of
revenues. In 2001, equipment sales through Matsubo, our Japanese
distributor, accounted for 49% of revenues. Our largest
customers change from period to period, and it is expected that
sales of our products to relatively few customers will continue
to account for a high percentage of our revenues in the
foreseeable future.
Foreign sales accounted for 64% of revenues in
2003, 52% of revenues in 2002 and 73% of revenues in 2001. The
majority of our foreign sales are to companies in the Far East,
and we anticipate that sales to customers in the Far East will
continue to be a significant portion of our equipment revenues.
Employees
At December 31, 2003, we had 180 employees,
including 29 contract employees. Of these 180 employees, 85 were
in research and development, 58 in manufacturing, and 37 in
administration, customer support and marketing. Of the 180
employees, 106 were in the Equipment business, 49 were in the
Imaging business, and 25 were in corporate.
Compliance with Environmental
Regulations
We are subject to a variety of governmental
regulations relating to the use, storage, discharge, handling,
emission, generation, manufacture, treatment and disposal of
toxic or otherwise hazardous substances, chemicals, materials or
waste. We treat the cost of complying with government
regulations and operating a safe workplace as a normal cost of
business and allocate the cost of these activities to all
functions, except where the cost of those activities can be
isolated and charged to a specific function. The environmental
standards and regulations promulgated by government agencies in
Santa Clara, California are rigorous and set
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a high standard of compliance. We believe our
costs of compliance with these regulations and standards are
comparable to other companies operating similar facilities in
Santa Clara, California.
Certain Factors Which May Affect Future
Operating Results
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We have a recent history of significant
losses and may not regain profitability. If we do not establish
profitable operations in the future, then our share price is
likely to decline.
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The majority of our revenues and gross profit has
historically been derived from sales of disk sputtering
equipment. Sales of our disk sputtering equipment have been
severely depressed since the middle of 1998. Also, our Imaging
business has yet to earn an annual profit. We have experienced
an operating loss in each of the last five fiscal years. For
fiscal 2003, our operating loss was $10.7 million, and as
of December 31, 2003, we had an accumulated deficit of
$21.3 million. To regain profitability, we will need to
generate and sustain substantially higher revenue while
maintaining reasonable cost and expense levels. We cannot assure
you that we will regain profitability in the near future, or at
all, and if we do regain profitability we cannot assure you that
we will be able to sustain profitability on a going-forward
basis. If we fail to regain profitability within the time frame
expected by securities analysts or investors, then the market
price of our common stock will likely decline.
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If the projected growth in demand for hard
disk drives does not materialize and our customers do not
replace or upgrade their installed base of disk sputtering
systems, then future sales of our disk sputtering systems will
suffer.
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Since the middle of 1998, there has been
virtually no demand for new disk sputtering systems, as
thin-film disk manufacturers have been burdened with
overcapacity and have not been investing in new disk sputtering
equipment. Recently, however, overcapacity has diminished, and
three of our customers have announced plans for major capacity
expansions. Sales of our equipment for capacity expansions are
dependent on the capacity expansion plans of our customers and
upon whether our customers select our equipment for their
capacity expansions. We have no control over our customers
expansion plans, and we cannot assure you that they will select
our equipment if they do expand their capacity. Our customers
may not implement capacity expansion plans, or we may fail to
win orders for equipment for those capacity expansions, which
could have a material adverse effect on our business and our
operating results. In addition, some manufacturers may choose to
purchase used systems from other manufacturers rather than
purchasing new systems from us. Furthermore, if hard disk drives
were to be replaced by an alternative technology as a primary
method of digital storage, demand for our products would
decrease.
Sales of our new 200 Lean disk sputtering
systems are also dependent on obsolescence and replacement of
the installed base of disk sputtering equipment. If
technological advancements are developed that extend the useful
life of the installed base of systems, then any sales of our
200 Lean will be limited to the capacity expansion needs of
our customers, which would have a material adverse effect on our
operating results.
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Our operating results fluctuate
significantly from quarter to quarter, which may cause the price
of our stock to decline.
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Over the last 8 quarters, our revenues per
quarter have fluctuated between $12.1 million and
$4.6 million. Over the same period our operating loss as a
percentage of revenues has fluctuated between approximately 90%
and 5% of revenues. We anticipate that our revenues and
operating margins will continue to fluctuate. We expect this
fluctuation to continue for a variety of reasons, including:
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changes in the demand, due to seasonality and
other factors, for the computer systems, storage subsystems and
consumer electronics that contain the thin-film disks that our
customers produce using our systems;
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delays or problems in the introduction of our new
products; and
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announcements of new products, services or
technological innovations by us or our competitors.
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Additionally, because our systems are priced in
the millions of dollars and we sell a relatively small number of
systems, our business is inherently subject to fluctuations in
revenue from quarter to quarter due to factors such as timing of
orders, acceptance of new systems by our customers or
cancellation of those orders. As a result, we believe that
quarter-to-quarter comparisons of our revenues and operating
results may not be meaningful and that these comparisons may not
be an accurate indicator of our future performance. Our
operating results in one or more future quarters may fail to
meet the expectations of investment research analysts or
investors, which could cause an immediate and significant
decline in the trading price of our common shares.
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We sell our equipment products to a small
number of large customers.
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Historically, a significant portion of our
revenue in any particular period has been attributable to sales
to a limited number of customers. In 2003, three of our
customers, in the aggregate, accounted for 75% of our equipment
revenues. In addition, our backlog of 200 Lean systems at
December 31, 2003 is from a single customer. Orders from a
relatively limited number of thin-film disk manufacturers have
accounted for, and likely will continue to account for, a
substantial portion of our revenues. The loss of, or delays in
purchasing by, any one of our large customers would
significantly reduce potential future revenues. Furthermore, the
concentration of our customer base may lead customers to demand
pricing and other terms unfavorable to us.
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We operate in an intensely competitive
marketplace, and our competitors have greater resources than
we do.
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In the market for our disk sputtering systems, we
have experienced competition from competitors such as Anelva
Corporation, a subsidiary of NEC Corporation, Ulvac
Technologies, Inc. and Unaxis Holdings, Ltd, each of which
has sold substantial numbers of systems worldwide. In the market
for our imaging products, we experience competition from
companies such as ITT Industries, Inc. and Northrop Grumman
Corporation, the primary U.S. manufacturers of
Generation-III night vision devices and their derivative
products. Our competitors have substantially greater financial,
technical, marketing, manufacturing and other resources than we
do. We cannot assure you that our competitors will not develop
enhancements to, or future generations of, competitive products
that will offer superior price or performance features.
Likewise, we cannot assure you that new competitors will not
enter our markets and develop such enhanced products.
Accordingly, competition for our customers is intense, and our
competitors have historically offered substantial pricing
concessions and incentives to attract our customers or retain
their existing customers.
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The majority of our future revenues is
dependent on new products. If these new products are not
successful, then our results of operations will be adversely
affected.
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Our success in developing and selling new
products depends upon a variety of factors, including our
ability to predict future customer requirements accurately,
technological advances, total cost of ownership of our systems,
our introduction of new products on schedule, our ability to
manufacture our systems cost-effectively and the performance of
our systems in the field. Our new product decisions and
development commitments must anticipate continuously evolving
industry requirements significantly in advance of sales. We have
invested heavily, and continue to invest, in the development of
new products. Our 200 Lean disk sputtering system is
designed to address the demand for increased areal density in
hard disk drives and our customers concurrent need to
produce more complex thin-film disks. Our future revenues depend
on the industry recognizing the need for improved recording
methodologies and the need for disk sputtering systems that
facilitate manufacturing of advanced media with technologies
such as perpendicular recording. Our future revenues also depend
significantly on the market acceptance of our 200 Lean disk
sputtering system, which we have only recently introduced and
which competes against a product that has been on the market
longer. Our new products will typically bear higher production
and warranty costs in comparison to our more established product
lines. Additionally, our gross margins on our new products may
be lower and more difficult to predict. We continue to invest
heavily to develop products for the thin-film disk manufacturing
industry. In addition, our LIVAR target identification and low
light level camera technologies are designed to offer
significantly improved capability to military customers. We are
also developing commercial products based on the
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technology we have developed in our Imaging
business. None of our imaging products is currently being
manufactured in commercial volumes or available for general
sale, and we may encounter unforeseen difficulties when we
commence general production of these products. Our Imaging
business will require substantial further investment in sales
and marketing, in product development and in additional
production facilities, and in particular we need to acquire
sensor fabrication facilities in order to expand our operations.
We cannot assure you that we will succeed in these activities or
generate significant sales of new products. Failure of any of
these products to perform as intended, or failure to penetrate
their markets and develop into profitable product lines, would
have a material adverse effect on our business.
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Demand for capital equipment is cyclical,
which subjects our business to long periods of depressed
revenues interspersed with periods of unusually high
revenues.
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Our Equipment business sells equipment to capital
intensive industries, which sell commodity products such as disk
drives. When demand for these commodity products exceeds
capacity, demand for new capital equipment such as ours tends to
be amplified. Conversely, when supply of these commodity
products exceeds demand, the demand for new capital equipment
such as ours tends to be depressed. The hard disk drive industry
has historically been subject to multi-year cycles because of
the long lead times and high costs involved in adding capacity.
The cyclical nature of the capital equipment
industry means that in some years we will have unusually high
sales of new systems, and that in other years our sales of new
systems will be severely depressed. The timing, length and
volatility of these cycles are difficult to predict. These
changes have affected the timing and amounts of our
customers capital equipment purchases and investments in
new technology. For example, sales of systems for thin-film disk
production have been severely depressed since the middle of
1998. In addition, our thin-film disk manufacturing customers
are generally more sensitive to the cyclical nature of the hard
disk drive industry, because many of their customers have
internal thin-film disk manufacturing operations and will cut
back their purchases of disks from outside suppliers first in an
industry downturn. If we fail to anticipate or respond quickly
to the industry business cycle, it could have a material adverse
effect on our business.
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Our sales cycle is long and unpredictable,
which requires us to incur high sales and marketing expenses
with no assurance that a sale will result.
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The sales cycle for our equipment systems can be
a year or longer, involving individuals from many different
areas of our company and numerous product presentations and
demonstrations for our prospective customers. Our sales process
for these systems also includes the production of samples and
customization of products for our prospective customers.
Additionally, our Imaging business is subject to long sales
cycles as a result of government procurement cycles. As a
result, we may not recognize revenue from efforts to sell
particular products for extended periods of time, during which
we may expend substantial funds and management time and effort
with no assurance that a sale will result.
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Our products are complex, constantly
evolving and often must be customized to individual customer
requirements.
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The systems we manufacture and sell in our
Equipment business have a large number of components and are
highly complex, which require us to make substantial investments
in research and development. If we were to fail to develop,
manufacture and market new systems or to enhance existing
systems, that failure would have an adverse effect on our
business. We may experience delays and technical and
manufacturing difficulties in future introduction or volume
production of new systems or enhancements. In addition, some of
the systems that we manufacture must be customized to meet
individual customer site or operating requirements. In some
cases, we market and commit to deliver new systems, modules and
components with advanced features and capabilities that we are
still in the process of designing. We have limited manufacturing
capacity and engineering resources and may be unable to complete
the development, manufacture and shipment of these products, or
to meet the required technical specifications for these
products, in a timely manner. Failure to deliver these products
on time, or failure to deliver products that perform to all
contractually committed
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specifications, could have adverse effects on our
business, including rescheduling of backlog, failure to achieve
customer acceptance as anticipated, unanticipated rework and
warranty costs, penalties for non-performance, cancellation of
orders, or return of products for credit. In addition, we may
incur substantial unanticipated costs early in a products
life cycle, such as increased engineering, manufacturing,
installation and support costs, that we may be unable to pass on
to the customer. Sometimes we work closely with our customers to
develop new features and products. In connection with these
transactions, we sometimes offer a period of exclusivity to
these customers. Any of these factors could have a material
adverse effect on our business.
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Our Imaging business depends heavily on
government contracts, which are subject to immediate termination
and funded in increments. The termination of or failure to fund
one or more of these contracts could have a negative impact on
our operations.
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We sell our products directly to the
U.S. government, as well as to prime contractors for
various U.S. government programs. Generally, government
contracts are subject to oversight audits by government
representatives and contain provisions permitting termination,
in whole or in part, without prior notice at the
governments convenience upon the payment of compensation
only for work done and commitments made at the time of
termination. We cannot assure you that one or more of the
government contracts under which we or our customers operate
will not be terminated under these circumstances. Also, we
cannot assure you that we or our customers would be able to
procure new government contracts to offset the revenues lost as
a result of any termination of existing contracts, nor can we
assure you that we or our customers will continue to remain in
good standing as federal contractors. The loss of one or more
government contracts by us or our customers could have a
material adverse effect on our operating results.
Furthermore, the funding of multi-year government
programs is subject to congressional appropriations, and there
is no guarantee that Congress will make further appropriations.
The loss of funding for a government program would result in a
loss of anticipated future revenues attributable to that
program. That could increase our overall costs of doing business
and have a material adverse effect on our operating results.
In addition, sales to the U.S. government
and its prime contractors may be affected by changes in
procurement policies, budget considerations and political
developments in the United States or abroad. The influence of
any of these factors, which are beyond our control, could also
negatively impact our financial condition. We also may
experience problems associated with advanced designs required by
the government which may result in unforeseen technological
difficulties and cost overruns. Failure to overcome these
technological difficulties and the occurrence of cost overruns
would have a material adverse effect on our business.
|
|
|
Our sales of disk sputtering systems are
dependent on substantial capital investment by our customers,
far in excess of the cost of our products.
|
Our customers must make extremely large capital
expenditures in order to purchase our systems and other related
equipment and facilities. These costs are far in excess of the
cost of our systems alone. The magnitude of such capital
expenditures requires that our customers have access to large
amounts of capital and that they be willing to invest that
capital over long periods of time to be able to purchase our
equipment. The thin-film disk manufacturing industry has not
made significant additions to its production capacity until
recently. Some of our potential customers may not be willing or
able to make the magnitude of capital investment required,
especially during a downturn in either the overall economy or
the hard disk drive industry.
|
|
|
Our stock price is volatile.
|
The market price and trading volume of our common
stock has been subject to significant volatility, and this trend
may continue. In particular, our historical trading volume has
been low, and the market price of our common stock has increased
dramatically in recent months. Over the past 12 months, the
closing price of our common stock, as traded on The Nasdaq
National Market, has fluctuated from a low of $3.52 to a high of
$17.92 per share. Our stock price is currently trading at
or near its seven-year high. The value of our common
16
stock may decline regardless of our operating
performance or prospects. Factors affecting our market price
include:
|
|
|
|
|
our perceived prospects;
|
|
|
|
variations in our operating results and whether
we achieve our key business targets;
|
|
|
|
the limited number of shares of our common stock
available for purchase or sale in the public markets;
|
|
|
|
sales or purchases of large blocks of our stock;
|
|
|
|
changes in, or our failure to meet, our earnings
estimates;
|
|
|
|
changes in securities analysts buy or sell
recommendations;
|
|
|
|
differences between our reported results and
those expected by investors and securities analysts;
|
|
|
|
announcements of new contracts, products or
technological innovations by us or our competitors;
|
|
|
|
market reaction to any acquisitions, joint
ventures or strategic investments announced by us or our
competitors;
|
|
|
|
our high fixed operating expenses, including
research and development expenses;
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|
|
|
developments in the financial markets; and
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|
|
general economic, political or stock market
conditions in the United States and other major regions in which
we do business.
|
Recent events have caused stock prices for many
companies, including ours, to fluctuate in ways unrelated or
disproportionate to their operating performance. The general
economic, political and stock market conditions that may affect
the market price of our common stock are beyond our control. The
market price of our common stock at any particular time may not
remain the market price in the future. In the past, securities
class action litigation has been instituted against companies
following periods of volatility in the market price of their
securities. Any such litigation, if instituted against us, could
result in substantial costs and a diversion of managements
attention and resources.
|
|
|
Our dependence on suppliers for certain
parts, some of them sole-sourced, makes us vulnerable to
manufacturing interruptions and delays, which could affect our
ability to meet customer demand.
|
We are a manufacturing business. Purchased parts
constitute the largest component of our product cost. Our
ability to manufacture depends on the timely delivery of parts,
components, and subassemblies from suppliers. We obtain some of
the key components and sub-assemblies used in our products from
a single supplier or a limited group of suppliers. If any of our
suppliers fail to deliver quality parts on a timely basis, we
may experience delays in manufacturing, which could result in
delayed product deliveries or increased costs to expedite
deliveries or develop alternative suppliers. Development of
alternative suppliers could require redesign of our products.
Any or all of these factors could have a material adverse effect
on our business and operating results.
|
|
|
Our business depends on the integrity of
our intellectual property rights.
|
The success of our business depends upon
integrity of our intellectual property rights and we cannot
assure you that:
|
|
|
|
|
any of our pending or future patent applications
will be allowed or that any of the allowed applications will be
issued as patents;
|
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|
|
any of our patents will not be invalidated,
deemed unenforceable, circumvented or challenged;
|
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|
|
the rights granted under our patents will provide
competitive advantages to us;
|
17
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|
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|
|
any of our pending or future patent applications
will issue with claims of the scope that we sought, if at all;
|
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|
|
other parties will not develop similar products,
duplicate our products or design around our patents; or
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|
|
our patent rights, intellectual property laws or
our agreements will adequately protect our intellectual property
or competitive position.
|
Failure to protect our intellectual property
rights adequately could have a material adverse effect on our
business.
We provide products that are expected to have
long useful lives and that are critical to our customers
operations. From time to time, as part of business agreements,
we place portions of our intellectual property into escrow to
provide assurance to our customers that our technology will be
available to them in the event that we are unable to support
them at some point in the future.
From time to time, we have received claims that
we are infringing third parties intellectual property
rights. We cannot assure you that third parties will not in the
future claim that we have infringed current or future patents,
trademarks or other proprietary rights relating to our products.
Any claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be
available on terms acceptable to us. Any of the foregoing could
have a material adverse effect on our business.
|
|
|
Our business is based in Northern
California, where operating costs are high and competition for
employees is intense.
|
Our U.S. operations are located in
Santa Clara, California, where the cost of doing business
is extremely high. Failure to manage these costs well could have
a material adverse effect on our operating results.
Additionally, our operating results depend, in part, upon our
ability to retain and attract qualified management, engineering,
marketing, manufacturing, customer support, sales and
administrative personnel. The cost of living in Northern
California is also extremely high, which increases the cost and
difficulty of recruiting new employees. Furthermore, we compete
with various similar industries, such as the semiconductor
industry, for the same pool of skilled employees. Failure to
attract and retain qualified personnel could have a material
adverse effect on our business.
|
|
|
Business interruptions, such as earthquakes
or other natural or man-made disasters, could disrupt our
operations and adversely affect our business.
|
Our U.S. facilities are located in an area
of California that has experienced power outages and earthquakes
and is considered seismically active. Our operations are
vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure, unauthorized intrusion and other
catastrophic events beyond our control. Our contingency plans
for addressing these kinds of events may not be sufficient to
prevent system failures and other interruptions in our
operations that have a material adverse effect on our business.
Additionally, our suppliers suffering similar business
interruptions could have an adverse effect on our manufacturing
ability. If any natural or man-made disasters do occur, our
operations could be disrupted for prolonged periods, which could
have a material adverse effect on our business.
|
|
|
Changes in demand caused by fluctuations in
interest and currency exchange rates may reduce our
international sales.
|
Sales and operating activities outside of the
United States are subject to inherent risks, including
fluctuations in the value of the U.S. 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. We earn a significant portion of our revenue from
international sales, and there can be no assurance that any of
these factors will not have an adverse effect on our ability to
sell our products or operate outside the United States.
18
We currently quote and sell the majority of our
products in U.S. dollars. From time to time, we may enter
into foreign currency contracts in an effort to reduce the
overall risk of currency fluctuations to our business. However,
there can be no assurance that the offer and sale of products
denominated in foreign currencies, and the related foreign
currency hedging activities, will not adversely affect our
business.
Our principal competitor for disk sputtering
equipment is based in Japan and has a cost structure based on
the Japanese yen. Accordingly, currency fluctuations could cause
the price of our products to be more or less competitive than
our principal competitors products. Currency fluctuations
will decrease or increase our cost structure relative to those
of our competitors, which could lessen the demand for our
products and affect our competitive position.
|
|
|
We routinely evaluate acquisition
candidates and other diversification strategies.
|
We have completed a number of acquisitions as
part of our efforts to expand and diversify our business. For
example, our business was initially acquired from Varian
Associates in 1991. We acquired our gravity lubrication and
rapid thermal processing product lines in two acquisitions. We
sold the rapid thermal processing product line in November 2002.
We also acquired our RPC electron beam processing business in
late 1997, and subsequently closed this business. We intend to
continue to evaluate new acquisition candidates, divestiture and
diversification strategies. Any acquisition involves numerous
risks, including difficulties in the assimilation of the
acquired companys employees, operations and products,
uncertainties associated with operating in new markets and
working with new customers, and the potential loss of the
acquired companys key employees. Additionally,
unanticipated expenses, difficulties and consequences may be
incurred relating to the integration of technologies, research
and development, and administrative and other functions. Any
future acquisitions may also result in potentially dilutive
issuance of equity securities, acquisition- or
divestiture-related write-offs or the assumption of debt and
contingent liabilities. Any of the above factors could have a
material adverse effect on our business.
|
|
|
We use hazardous materials and are subject
to risks of non-compliance with environmental and safety
regulations.
|
We are subject to a variety of governmental
regulations relating to the use, storage, discharge, handling,
emission, generation, manufacture, treatment and disposal of
toxic or otherwise hazardous substances, chemicals, materials or
waste. If we fail to comply with current or future regulations,
such failure could result in suspension of our operations,
alteration of our manufacturing process, or substantial civil
penalties or criminal fines against us or our officers,
directors or employees. Additionally, these regulations could
require us to acquire expensive remediation or abatement
equipment or to incur substantial expenses to comply with them.
Failure to properly manage the use, disposal or storage of, or
adequately restrict the release of, hazardous or toxic
substances could subject us to significant liabilities.
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|
|
Our directors, executive officers and
affiliates control a significant portion of our outstanding
common stock.
|
Based on the shares outstanding on
December 31, 2003, our current directors, executive
officers and affiliates, in the aggregate, beneficially owned
41.2% of our outstanding shares of common stock (26.4% after
completion of our secondary offering in February 2004). These
shareholders, acting together, are able to exert significant
control on matters requiring approval by our shareholders,
including the election of directors and approval of significant
corporate transactions.
|
|
|
Future sales of shares of our common stock
by our officers, directors and affiliates could cause our stock
price to decline.
|
Substantially all of our common stock may be sold
without restriction in the public markets. Shares held by our
directors, executive officers and affiliates are subject to
volume and manner of sale restrictions, and as otherwise
described in the following sentence. We have an agreement with
Foster City LLC and Redemco, LLC, that gives Foster City and
Redemco the right to require us, after the end of the 180-day
period following
19
February 5, 2004, to file a registration
statement on Form S-3, registering the resale of all shares
of our common stock held by Foster City and Redemco. Sales of a
substantial number of shares of common stock in the public
market or the perception that these sales could occur could
materially and adversely affect our stock price and make it more
difficult for us to sell equity securities in the future at a
time and price we deem appropriate.
|
|
|
Anti-takeover provisions in our charter
documents and under California law could prevent or delay a
change in control, which could negatively impact the value of
our common stock by discouraging a favorable merger or
acquisition of us.
|
Our articles of incorporation authorize our board
of directors to issue up to 10,000,000 shares of preferred
stock and to determine the powers, preferences, privileges,
rights, including voting rights, qualifications, limitations and
restrictions of those shares, without any further vote or action
by the shareholders. The rights of the holders of our common
stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that we may issue
in the future. The issuance of preferred stock could have the
effect of delaying, deterring or preventing a change in control
and could adversely affect the voting power of your shares. In
addition, provisions of California law could make it more
difficult for a third party to acquire a majority of our
outstanding voting stock by discouraging a hostile bid, or
delaying or deterring a merger, acquisition or tender offer in
which our shareholders could receive a premium for their shares
or a proxy contest for control of our company or other changes
in our management.
We lease a 119,583 square foot facility in
Santa Clara, California. The two-story facility includes
offices, manufacturing, engineering labs and clean rooms. All of
our operations, with the exception of our Singapore customer
support office and a sensor fabrication facility, are housed at
the Santa Clara facility. In February 2004, we executed an
amendment to the lease for the Santa Clara facility which
extended the lease for five years. The lease for the
Santa Clara facility now expires in March 2012. We also
lease a facility of approximately 2,400 square feet in
Singapore to house the Singapore customer support organization.
This lease expires in June 2004. Although we believe that our
current facilities are suitable and adequate for our current
operations, we plan to acquire larger facilities in Singapore.
In January 2004, we entered into a lease for a sensor
fabrication facility. This 9,505 square foot facility is
located in Fremont, California. We operate with two full
manufacturing shifts. We believe that we have sufficient
productive capacity to meet our current needs.
|
|
Item 3.
|
Legal Proceedings
|
From time to time we are involved in litigation
incidental to the conduct of our business. We are not party to
any lawsuit or proceeding that, in our opinion, is likely to
seriously harm our business.
|
|
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.
20
EXECUTIVE OFFICERS AND DIRECTORS
Certain information about Intevacs
directors and executive officers as of March 5, 2004 is
listed below:
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|
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|
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|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Executive Officers and Directors:
|
|
|
|
|
|
|
Norman H. Pond
|
|
|
65
|
|
|
Chairman of the Board
|
Kevin Fairbairn
|
|
|
50
|
|
|
President, Chief Executive Officer and Director
|
Verle Aebi
|
|
|
49
|
|
|
President of Photonics Technology Division
|
Charles B. Eddy III
|
|
|
53
|
|
|
Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary
|
David Dury(1)
|
|
|
55
|
|
|
Director
|
Stanley J. Hill
|
|
|
62
|
|
|
Director
|
David N. Lambeth(2)
|
|
|
56
|
|
|
Director
|
Robert Lemos (1)(2)
|
|
|
63
|
|
|
Director
|
Arthur L. Money(1)
|
|
|
64
|
|
|
Director
|
|
Other Key Officers:
|
|
|
|
|
|
|
Kimberly Burk
|
|
|
38
|
|
|
Human Resources Director
|
Stephen Gustafson
|
|
|
32
|
|
|
Director, Imaging Operations
|
Timothy Justyn
|
|
|
41
|
|
|
Vice President, Equipment Operations
|
Christopher Lane
|
|
|
37
|
|
|
Vice President and General Manager, Commercial
Imaging Division
|
|
|
(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 and again
from September 2001 through January 2002. Mr. Pond holds a
BS in physics from the University of Missouri at Rolla and an MS
in physics from the University of California at Los Angeles.
Mr. Fairbairn
joined Intevac as President and Chief
Executive Officer in January 2002 and was appointed a director
in February 2002. Before joining Intevac, Mr. Fairbairn was
employed by Applied Materials from July 1985 to January 2002,
most recently as Vice-President and General Manager of the
Conductor Etch Organization with responsibility for the Silicon
and Metal Etch Divisions. From 1996 to 1999, Mr. Fairbairn
was General Manager of Applied Materials Plasma Enhanced
Chemical Vapor Deposition Business Unit and from 1993 to 1996,
he was General Manager of Applied Materials Plasma Silane
CVD Product Business Unit. Mr. Fairbairn holds an MA in
Engineering Sciences from Cambridge University.
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 our 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. Eddy
has
served as Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary since April 1991.
Mr. Eddy holds a BS in engineering science from the
University of Virginia and an MBA from Dartmouth College.
Mr. Dury
has
served as a director of Intevac since July 2002. Mr. Dury
is a co-founder of Mentor Capital Group, a venture capital firm.
From 1996 to 2000, Mr. Dury served as Senior Vice-President
and Chief Financial Officer of Aspect Development, a software
development firm. Mr. Dury holds a BA in psychology
21
from Duke University and an MBA from Cornell
University. He is also a director of Phoenix Technologies Ltd.
Mr. Hill
was
appointed as a director of Intevac in March 2004. Mr. Hill
joined Kaiser Aerospace and Electronics Corporation
(Kaiser), a privately held manufacturer of
electronics and electro-optical systems, in 1969 and served as
Chief Executive Officer and Chairman of both Kaiser and K
Systems, Inc., Kaisers parent company, from 1997 to
2000. Prior to his appointment as Chief Executive Officer,
Mr. Hill served in a number of executive positions at
Kaiser. Mr. Hill holds a BS in Mechanical Engineering from
the University of Maine and a Master of Engineering from the
University of Connecticut and has completed post graduate
studies at the University of Santa Clara business school.
He is also a director of First Aviation Services, Inc.
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.
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.
Mr. Lemos
has
served as a director of Intevac since August 2002.
Mr. Lemos retired from Varian Associates, Inc. in 1999
after 23 years, including serving as Vice-President and
Chief Financial Officer from 1988 to 1999. Mr. Lemos has a
BS in Business from the University of San Francisco, a JD
in law from Hastings College and an LLM in law from
New York University.
Mr. Money
has
served as a director of Intevac since October 2003.
Mr. Money served as the Assistant Secretary of Defense for
Command, Control, Communication and Intelligence (C3I) from
October 1999 to April 2001. Prior to his Senate confirmation in
that role, he was the Senior Civilian Official, Office of the
Assistant Secretary of Defense (C3I) from February 1998.
Mr. Money also served as the Chief Information Officer for
the Department of Defense from 1998 to 2001. From 1996 to 1998,
he served as Assistant Secretary of the Air Force for Research,
Development and Acquisition. Prior to his government service,
Mr. Money held senior management positions with ESL Inc., a
subsidiary of TRW, and the TRW Avionics and Surveillance Group.
He is also a director of CACI International, Essex
Corporation, Intelli-Check, Rainbow
Technologies, Inc., Silicon Graphics, Inc. and
Terremark Worldwide, Inc. Mr. Money holds an MS in
Mechanical Engineering from the University of Santa Clara
and a BS in Mechanical Engineering from San Jose State
University.
Ms. Burk
has
served as Human Resources Director since May 2000. Prior to
joining Intevac, Ms. Burk served as Human Resources Manager
of Moen, Inc. from 1999 to 2000 and served as Human
Resources Manager of Lawson Mardon from 1994 to 1999.
Ms. Burk holds a BS in Sociology from Northern Illinois
University.
Mr. Gustafson
has served as Director of Imaging
Operations since February 2003. Before joining Intevac in May
2002, Mr. Gustafson was employed by Applied Materials as a
Sr. Operations Manager in the Conductor Etch Organization.
Mr. Gustafson holds a BA in Humanities and an MS in
Industrial Engineering from San Jose State University.
Mr. Justyn
has
served as Vice President, Equipment Operations since April 1997.
Mr. Justyn joined Intevac in February 1991 and has served
in various roles in our Equipment Products Division and our
former night vision business. Mr. Justyn holds a BS in
Chemical Engineering from the University of California,
Santa Barbara.
Mr. Lane
has
served as General Manager of the Commercial Imaging Division
since he joined Intevac in July 2002 and was elected a
Vice-President in February 2003. Before joining Intevac, from
1990 to July 2002, Mr. Lane was employed by Applied
Materials, most recently as Director of Engineering, CVD and
Etch, in the Conductor Etch Organization. Mr. Lane holds a
BS in Mechanical Engineering, a MS in Engineering Management and
a MBA, all from California Polytechnic State University at
San Luis Obispo.
22
PART II
|
|
Item 5.
|
Market for Registrants Common Equity
and Related Shareholder Matters
|
Our common stock is listed on The Nasdaq National
Market under the symbol IVAC. As of
December 31, 2003, there were approximately 117 holders of
record of our common stock. Because many of our shares of common
stock are held by brokers and other institutions on behalf of
shareholders, we are unable to estimate the total number of
shareholders represented by these record holders.
The following table sets forth the high and low
closing sale prices per share as reported on The Nasdaq National
Market for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
|
|
|
|
Fiscal 2002
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4.39
|
|
|
$
|
2.38
|
|
|
Second Quarter
|
|
|
5.11
|
|
|
|
2.50
|
|
|
Third Quarter
|
|
|
4.25
|
|
|
|
2.06
|
|
|
Fourth Quarter
|
|
|
4.00
|
|
|
|
3.49
|
|
Fiscal 2003:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
5.07
|
|
|
$
|
3.52
|
|
|
Second Quarter
|
|
|
6.87
|
|
|
|
3.75
|
|
|
Third Quarter
|
|
|
9.95
|
|
|
|
6.72
|
|
|
Fourth Quarter
|
|
|
17.35
|
|
|
|
9.70
|
|
Dividend Policy
We currently anticipate that we will retain our
earnings, if any, for use in the operation of our business and
do not expect to pay cash dividends on our capital stock in the
foreseeable future.
Recent Sales of Unregistered
Securities
In the fourth quarter of 2003, $29,542,000 in
aggregate principle amount of our 6 1/2% convertible
subordinated notes due 2009 was converted either voluntarily or
automatically pursuant to its terms into 4,220,283 shares
of Intevac Common Stock. The conversions occurred pursuant to
Rule 3(a)(9) of the Securities Act of 1933, as amended.
23
|
|
Item 6.
|
Selected Consolidated Financial
Data
|
The following table presents our selected
financial data and is qualified by reference to, and should be
read in conjunction with, the consolidated financial statements
of Intevac, including the notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations, each appearing elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
Consolidated Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems and components
|
|
$
|
27,738
|
|
|
$
|
27,625
|
|
|
$
|
43,599
|
|
|
$
|
30,074
|
|
|
$
|
35,895
|
|
|
Technology development
|
|
|
8,556
|
|
|
|
6,159
|
|
|
|
7,885
|
|
|
|
5,975
|
|
|
|
7,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
36,294
|
|
|
|
33,784
|
|
|
|
51,484
|
|
|
|
36,049
|
|
|
|
42,962
|
|
Cost of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems and components
|
|
|
19,689
|
|
|
|
20,009
|
|
|
|
30,025
|
|
|
|
20,658
|
|
|
|
32,511
|
|
|
Technology development
|
|
|
6,032
|
|
|
|
5,150
|
|
|
|
7,988
|
|
|
|
6,022
|
|
|
|
5,907
|
|
|
Goodwill write-off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,056
|
|
|
|
|
|
|
Inventory provisions
|
|
|
743
|
|
|
|
1,316
|
|
|
|
3,716
|
|
|
|
6,323
|
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenues
|
|
|
26,464
|
|
|
|
26,475
|
|
|
|
41,729
|
|
|
|
34,059
|
|
|
|
40,410
|
|
Gross profit
|
|
|
9,830
|
|
|
|
7,309
|
|
|
|
9,755
|
|
|
|
1,990
|
|
|
|
2,552
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,037
|
|
|
|
10,846
|
|
|
|
14,478
|
|
|
|
10,576
|
|
|
|
14,136
|
|
|
Selling, general and administrative
|
|
|
8,448
|
|
|
|
7,752
|
|
|
|
6,745
|
|
|
|
4,415
|
|
|
|
7,226
|
|
|
Restructuring and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(638
|
)
|
|
|
3,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,485
|
|
|
|
18,598
|
|
|
|
21,223
|
|
|
|
14,353
|
|
|
|
24,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,655
|
)
|
|
|
(11,289
|
)
|
|
|
(11,468
|
)
|
|
|
(12,363
|
)
|
|
|
(21,879
|
)
|
Interest expense
|
|
|
(1,787
|
)
|
|
|
(2,981
|
)
|
|
|
(2,912
|
)
|
|
|
(3,033
|
)
|
|
|
(3,711
|
)
|
Interest income and other income, net
|
|
|
177
|
|
|
|
16,452
|
|
|
|
2,473
|
|
|
|
3,072
|
|
|
|
9,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(12,265
|
)
|
|
|
2,182
|
|
|
|
(11,907
|
)
|
|
|
(12,324
|
)
|
|
|
(15,759
|
)
|
Provision for (benefit from) income taxes
|
|
|
38
|
|
|
|
(6,592
|
)
|
|
|
5,029
|
|
|
|
|
|
|
|
(5,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(12,303
|
)
|
|
$
|
8,774
|
|
|
$
|
(16,936
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(9,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.95
|
)
|
|
$
|
0.73
|
|
|
$
|
(1.42
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(0.83
|
)
|
|
Shares used in per share calculations
|
|
|
12,948
|
|
|
|
12,077
|
|
|
|
11,955
|
|
|
|
11,803
|
|
|
|
11,777
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.95
|
)
|
|
$
|
0.66
|
|
|
$
|
(1.42
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(0.83
|
)
|
|
Shares used in per share calculations
|
|
|
12,948
|
|
|
|
15,262
|
|
|
|
11,955
|
|
|
|
11,803
|
|
|
|
11,777
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
19,507
|
|
|
$
|
28,457
|
|
|
$
|
18,157
|
|
|
$
|
38,403
|
|
|
$
|
40,895
|
|
Working capital
|
|
|
22,638
|
|
|
|
31,309
|
|
|
|
27,160
|
|
|
|
41,093
|
|
|
|
51,579
|
|
Total assets
|
|
|
55,975
|
|
|
|
60,298
|
|
|
|
60,165
|
|
|
|
83,936
|
|
|
|
94,382
|
|
Long-term debt
|
|
|
|
|
|
|
30,568
|
|
|
|
37,545
|
|
|
|
41,245
|
|
|
|
43,188
|
|
Total shareholders equity
|
|
|
30,869
|
|
|
|
10,545
|
|
|
|
1,408
|
|
|
|
17,804
|
|
|
|
29,623
|
|
24
|
|
Item 7.
|
Managements 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. These forward looking
statements include comments related to our projected revenue,
gross margin, operating expense, income tax expense, effective
tax rate and cash balances; our projected customer requirements
for new capacity and technology upgrades for our installed base
of thin-film disk manufacturing equipment and when, and if, our
customers will place orders for these products, PTDs
ability to proliferate its technology into major military
weapons programs; CIDs ability to develop and introduce
commercial imaging products; and the timing of delivery and/or
acceptance of our backlog for revenue. Our actual results may
differ materially from the results discussed in the
forward-looking statements for a variety of reasons, including
those set forth under Certain Factors Which May Affect
Future Operating Results and should be read in conjunction
with the Consolidated Financial Statements and related Notes
contained elsewhere in this Annual Report on
Form 10-K.
Overview
Our operations include two businesses, an
Equipment business and an Imaging business. Our Equipment
business consists of the Equipment Products Division, which we
refer to as EPD, and our Imaging business consists of two
divisions, the Photonics Technology Division, which we refer to
as PTD, and the Commercial Imaging Division, which we refer to
as CID. The Equipment Products Division designs, manufactures,
markets and services complex capital equipment that deposits
highly engineered thin films of material onto disks used in hard
disk drives; the Photonics Technology Division is developing
extreme low light sensors, cameras and systems for sale to
military and government markets; and the Commercial Imaging
Division is developing commercial extreme low light sensors and
cameras based on our technology.
Equipment Business
In the early 1990s we developed a system to
deposit magnetic films and protective overcoats onto thin-film
disks used in hard disk drives. This system gained wide
acceptance and by the late 1990s was being used to manufacture
approximately half of the thin-film disks used in hard disk
drives worldwide. We believe that there are approximately 90
Intevac systems currently in use in production and research and
development applications. Also in the late 1990s, the hard disk
drive industry went through significant consolidation, and there
are now only eight significant manufacturers of thin-film disks,
some of whom also manufacture hard disk drives. As a result of
an increasingly smaller number of customers and the high average
selling price of our products, our equipment revenues tend to be
volatile from quarter to quarter. In addition, our Equipment
business has historically been subject to capital spending
cycles. For example, in the period from 1995 through the middle
of 1998, we sold $300 million of disk manufacturing
equipment. Since then, our disk equipment revenues have averaged
approximately $20 million per year and have consisted
primarily of the sale of a limited number of systems, technology
upgrades, parts and service for the installed base of our
systems.
We believe the majority of thin-film disk
manufacturers are now utilizing most of their capacity. During
2003, three of these manufacturers announced plans for major
thin-film disk manufacturing capacity expansions. Also during
2003, we received orders from one customer for ten of our 200
Lean disk sputtering systems. We believe that the expected
introduction in 2005 of high density thin-film disks based on
perpendicular recording techniques will also require thin-film
disk manufacturers to significantly upgrade the technical
capability of their installed base of manufacturing equipment to
accommodate the additional number of process steps predicted to
be required by perpendicular recording technology roadmaps.
We have also manufactured both deposition and
rapid thermal processing equipment used in the manufacture of
flat panel displays. Since 2000, revenues from sales of flat
panel display manufacturing systems totaled $36.5 million.
In late 2002 we sold our rapid thermal processing product line
to Photon Dynamics of San Jose, California. Since then, we
have focused our sputtering equipment efforts on disk
manufacturing and have not taken orders for any new flat panel
display manufacturing systems.
25
Imaging Business
Our Imaging business develops and manufactures
electro-optical sensors, cameras and systems that permit highly
sensitive detection of photons in the visible and near infrared
portions of the spectrum, allowing imaging in extreme low light
situations. The majority of the funding for our Photonics
Technology Divisions activities has come from research and
development contracts with the United States Government and its
contractors, with the balance being funded internally. Our
military products include LIVAR systems for positive target
identification at long range and extreme low light sensors and
cameras for use in short- to medium-range military applications.
Developing advanced products for the military
involves long development cycles, as products move through
successive multi-year stages of technology demonstration,
engineering and manufacturing product development, prototype
production and then product deployment. Each stage in this
process requires ongoing government funding. To date, the
majority of our Imaging business revenues has been derived from
contract research and development, rather than product sales. In
July 2002, in order to shorten the time to market and to
increase the number of markets for our imaging products, we
began to develop imaging products for commercial markets. We
have developed a NightVista security camera and are planning to
develop and introduce products that address other commercial
markets. Revenues from these activities have not yet been
material, and we have funded the development of the products in
our Commercial Imaging Division internally.
Critical Accounting Policies
The preparation of financial statements and
related disclosures in conformity with accounting principles
generally accepted in the United States of America (US
GAAP) requires management to make judgments, assumptions
and estimates that affect the amounts reported. Note 2 of
Notes to Consolidated Financial Statements describes the
significant accounting policies used in the preparation of the
consolidated financial statements. Certain of these significant
accounting policies are considered to be critical accounting
policies, as defined below.
A critical accounting policy is defined as one
that is both material to the presentation of our financial
statements and requires management to make difficult, subjective
or complex judgments that could have a material effect on our
financial conditions and results of operations. Specifically,
critical accounting estimates have the following attributes:
1) We are required to make assumptions about matters that
are highly uncertain at the time of the estimate; and
2) different estimates we could reasonably have used, or
changes in the estimate that are reasonably likely to occur,
would have a material effect on our financial condition or
results of operations.
Estimates and assumptions about future events and
their effects cannot be determined with certainty. We base our
estimates on historical experience and on various other
assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur,
as additional information is obtained and as our operating
environment changes. These changes have historically been minor
and have been included in the consolidated financial statements
as soon as they become known. In addition, management is
periodically faced with uncertainties, the outcomes of which are
not within its control and will not be known for prolonged
periods of time. These uncertainties are discussed in the prior
section entitled Certain Factors Which May Affect Future
Operating Results. Based on a critical assessment of our
accounting policies and the underlying judgments and
uncertainties affecting the application of those policies,
management believes that our consolidated financial statements
are fairly stated in accordance with US GAAP, and provide a
meaningful presentation of our financial condition and results
of operation.
We believe the following critical accounting
policies affect the more significant judgments and estimates we
make in preparing our consolidated financial statements. We also
have other key accounting policies and accounting estimates
related to the collectibility of trade receivables, valuation of
deferred tax assets and prototype product costs. We believe that
these other accounting policies and other accounting estimates
either do not generally require us to make estimates and
judgments that are as difficult or subjective, or it is less
likely that they would have a material impact on our reported
results of operation for a given period.
26
Certain of our system sales with customer
acceptance provisions are accounted for as multiple-element
arrangements. If we have previously met defined customer
acceptance levels with the specific type of system, then we
recognize revenue for the fair market value of the system upon
shipment and transfer of title, and recognize revenue for the
fair market value of installation and acceptance services when
those services are completed. We estimate the fair market value
of the installation and acceptance services based on our actual
historical experience. For systems that have generally not been
demonstrated to meet product specifications prior to shipment,
revenue recognition is usually deferred until customer
acceptance.
Inventories are generally stated at the lower of
cost or market. The carrying value of inventory is reduced for
estimated excess and obsolescence by the difference between its
costs and the estimated market value based on assumptions about
future demand. We evaluate the inventory carrying value for
potential excess and obsolete inventory exposures by analyzing
historical and anticipated demand. In addition, inventories are
evaluated for potential obsolescence due to the effect of known
and anticipated engineering change orders and new products. If
actual demand were to be substantially lower than estimated,
additional inventory adjustments would be required, which could
have a material adverse effect on our business, financial
condition and results of operation.
We provide for the estimated cost of warranty
when revenue is recognized. Our warranty is per contract terms
and is typically 12 months from customer acceptance. In
some cases we market extended warranty periods beyond
12 months to our customers. We use estimated repair or
replacement costs along with our actual warranty experience to
determine our warranty obligation. We exercise judgment in
determining the underlying estimates. Should actual warranty
costs differ substantially from our estimates, revisions to the
estimated warranty liability would be required, which could have
a material adverse effect on our business, financial condition
and results of operations.
Results of Operations
Net revenues.
Net
revenues consist primarily of sales of equipment used to
manufacture thin-film disks, equipment used to manufacture flat
panel displays, related equipment and system components, and
contract research and development related to the development of
electro-optical devices and systems. Net revenues totaled
$36.3 million, $33.8 million and $51.5 million in
2003, 2002 and 2001, respectively.
Equipment revenues totaled $26.7 million,
$27.1 million and $42.7 million in 2003, 2002 and
2001, respectively. Equipment revenues declined slightly between
2003 and 2002 as a result of the closure of the fabrication
center in 2002. Equipment revenues decreased in 2002 due to a
decrease in sales of flat panel manufacturing systems and disk
system upgrades and components, partially offset by an increase
in sales of disk manufacturing systems. We delivered, and
recognized revenue on, five of our D-STAR deposition systems
during 2001. During 2002 we delivered upgrades to the five
systems and one new D-STAR system. Revenue was recognized on the
five upgrades during 2003 while the new system remained pending
final customer acceptance at December 31, 2003. Net
revenues for 2002 and 2001 include $7.1 million and
$6.8 million, respectively, of sales of rapid thermal
processing equipment, a product line we sold in November 2002.
Our fabrication center, which manufactured machined parts,
contributed sales to outside customers of $604,000 and
$1.8 million in 2002 and 2001, respectively. The
fabrication center was closed in September 2002. We replaced the
fabrication center with a smaller model shop during 2003. The
model shop manufactures engineering prototypes and parts for use
in our products.
The thin-film disk manufacturing industry has now
consolidated into a small number of large manufacturers. We
believe that the majority of our active customers now utilize
most of their capacity and that there is significant potential
for these customers to both resume adding capacity and to
upgrade the technical capability of their installed base to
permit production of high density disks for perpendicular
recording rather
27
than the current longitudinal technology. While
we have received orders for ten of our 200 Lean disk sputtering
systems from one customer, we are not able to accurately predict
when other of our customers will begin placing significant
equipment orders again, or if they will place those orders with
us. This subjects us to a high degree of uncertainty in
projecting our 2004 revenue.
Imaging revenues totaled $9.5 million,
$6.7 million and $8.8 million in 2003, 2002 and 2001,
respectively. Imaging revenues increased in 2003 due primarily
to an increase in revenues from contract research and
development and, to a lesser extent, increased revenue from the
sale of prototype products. Imaging revenues decreased in 2002
as a result of a decrease in revenues from contract research and
development. Imaging revenues in 2004 are expected to be
primarily derived from contract research and development, but we
also expect increased product revenue late in 2004, both from
LIVAR target identification systems and from the introduction of
commercial imaging products. Substantial growth in future
Imaging revenues is dependent on proliferation of our technology
into major military weapons programs, obtaining production
subcontracts for these programs and the successful launch of our
commercial products.
Our backlog of orders at December 31, 2003
was $43.3 million, as compared to a December 31, 2002
backlog of $18.2 million. The $43.3 million of backlog
at December 31, 2003 consisted of $40.5 million of
Equipment backlog and $2.8 million of Imaging backlog. The
$18.2 million of backlog at December 31, 2002
consisted of $15.0 million of Equipment backlog and
$3.2 million of Imaging backlog. The increase in Equipment
backlog was primarily the result of orders for ten Intevac 200
Lean disk sputtering systems. Most of our backlog at
December 31, 2003 is scheduled for either customer
acceptance or delivery during the first half of 2004.
Significant portions of our revenues in any
particular period have been attributable to sales to a limited
number of customers. In 2003, Komag, Seagate, Lockheed Martin
and equipment sales through Matsubo, our Japanese distributor,
each accounted for more than 10% of our revenues, and in
aggregate accounted for 66% of revenues. In 2002, Seagate,
Toppoly and the U.S. Army Communications-Electronics
Command each accounted for more than 10% of our consolidated net
revenues and in aggregate accounted for 74% of consolidated net
revenues. In 2001, equipment sales through Matsubo accounted for
49% of consolidated net revenues. Our largest customers tend to
change from period to period.
International sales totaled $23.2 million,
$17.5 million and $37.3 million in 2003, 2002 and
2001, respectively, accounting for 64%, 52% and 73% of net
revenues. The increase in international sales in 2003 over 2002
was primarily due to an increase in net revenues from disk
system upgrades and components. The decrease in international
sales in 2002 compared to 2001 was primarily due to a decrease
in net revenues from flat panel manufacturing systems and, to a
lesser extent, to a decrease in net revenues from disk system
upgrades and components. Substantially all of our international
sales are to customers in the Far East. Our mix of domestic
versus international sales will change from period to period
depending on the location of our largest customers in each
period.
Gross margin.
Cost
of net revenues consists primarily of purchased materials and
costs attributable to contract research and development, and
also includes fabrication, assembly, test and installation labor
and overhead, customer-specific engineering costs, warranty
costs, royalties, provisions for inventory reserves and scrap.
Gross margin was 27%, 22% and 19% in 2003, 2002 and 2001,
respectively.
Gross margin in Equipment was 27%, 24% and 23% in
2003, 2002 and 2001, respectively. Equipment gross margin in
2003 improved over 2002 due primarily to a reduction in
inventory provisions and improved absorption of manufacturing
overhead due to an increase in manufacturing volume late in the
year. 2003 gross margin was negatively impacted by poor
margins achieved on the five D-Star deposition system upgrades
recognized for revenue and the sale of one used disk sputtering
system at a reduced price. Equipment gross margin in 2002
improved slightly over 2001 due primarily to lower production
costs and by a reduction in inventory provisions, partially
offset by the under-absorption of manufacturing overhead due to
low manufacturing volume. Equipment gross margin in 2001 was
reduced by high initial costs to manufacture our redesigned flat
panel manufacturing systems and establishment of
$2.4 million of inventory reserves related to a cancelled
order for a custom flat panel system. The 2004 gross margin
for the Equipment business will vary
28
depending on a number of factors, including costs
to manufacture the initial 200 Lean systems, pricing offered the
initial purchaser of 200 Lean systems, factory utilization and
pricing achieved on future orders.
Gross margin in Imaging was 26%, 11% and (2%) in
2003, 2002 and 2001, respectively. Imaging gross margin improved
in 2003 due to most of the revenue being derived from fully
funded, rather than cost-shared, research and development
contracts and from the sale of prototype products. Imaging gross
margins improved in 2002 over 2001 due to a higher portion of
the revenue being derived from fully funded research and
development contracts versus cost-sharing research and
development contracts. Imaging gross margins in 2001 were
negatively impacted by a significant portion of revenue being
derived from cost-sharing research and development contracts
versus 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,
flat panel manufacturing equipment and imaging products.
Research and development expense totaled $12.0 million,
$10.8 million and $14.5 million in 2003, 2002 and
2001, respectively, representing 33%, 32% and 28% of net
revenue. The increase in research and development expense in
2003 was primarily the result of higher spending for the 200
Lean disk sputtering system and for commercial imaging products,
partially offset by decreased spending for flat panel products.
The decrease in spending from 2001 to 2002 was the result of the
completion during 2001 of the design activities related to
development of the D-STAR, RTP and MDP-200 platforms, partially
offset by increased expenses related to the development of
imaging technology and products. We expect that research and
development spending in 2004 will be comparable to 2003 as a
result of projected decreases in Imaging, partially offset by
projected increases in Equipment.
Research and development expenses do not include
costs of $6.0 million, $5.2 million and
$8.0 million in 2003, 2002 and 2001, respectively, related
to contract research and development, which are included in cost
of net revenues. Research and development expenses also do not
include costs of $248,000, $309,000 and $508,000 incurred by us
in 2003, 2002 and 2001, respectively, and reimbursed under the
terms of research and development cost sharing agreements
related to development of disk manufacturing equipment.
Selling, general and
administrative.
Selling, general and
administrative expense consists primarily of selling, marketing,
customer support, financial and management costs and also
includes production of customer samples, travel, liability
insurance, legal and professional services and bad debt expense.
Domestic sales and international sales of disk manufacturing
products in Singapore, Malaysia and Taiwan are made by our
direct sales force, whereas other international sales of disk
manufacturing and other products are made by distributors and
representatives that provide services such as sales,
installation, warranty and customer support. We also have a
subsidiary in Singapore to support customers in Southeast Asia.
Selling, general and administrative expense
totaled $8.4 million, $7.8 million and
$6.7 million in 2003, 2002, and 2001, respectively,
representing 23%, 23% and 13% of net revenue. The increase in
2003 over 2002 was primarily the result of $1.1 million of
surplus facility costs being recorded in selling, general and
administrative expense, partially offset by a reduction in
representative commissions paid. The increase in 2002 over 2001
was primarily the result of representative commissions paid on
the sale of flat panel manufacturing systems, an increase in
selling, general and administrative personnel in PTD and
$198,000 of surplus facility costs being recorded in selling,
general and administrative expenses. We expect that selling,
general and administrative expenses will increase in 2004 over
the amount spent in 2003 due primarily to a projected increase
in headcount, travel and employee benefit costs.
Interest expense.
Interest expense consists primarily of interest on our
convertible notes and amortization of debt issuance costs.
Interest expense totaled $1.8 million, $3.0 million
and $2.9 million in 2003, 2002 and 2001, respectively. The
decrease in interest expense in 2003 was due to a reduction in
the convertible notes outstanding, as a result of both the
exchange offer completed in 2002 and the conversion of our 2009
notes in the fourth quarter of 2003. The increase in interest
expense in 2002 over 2001 was due primarily to the write-off of
$0.5 million of debt offering costs from the original
convertible note offering in 1997 as a result of the exchange of
these notes for our 2009 convertible notes. The remaining
$1.0 million of our 2004 convertible notes will be redeemed
in March 2004.
29
Interest income and other,
net.
Interest income and other, net
totaled $177,000, $16.5 million and $2.5 million in
2003, 2002 and 2001, respectively. Interest income and other,
net in 2003 consisted of $390,000 of dividends from 601
California Avenue LLC, a $287,000 gain on the sale of the rapid
thermal processing product line, $269,000 of interest income on
investments and $72,000 of early payment discounts and other
income, partially offset by $841,000 of expense related to the
disposition of fixed assets. Interest income and other, net in
2002 consisted of $284,000 of interest income on investments, a
$15.4 million gain on the sale of the rapid thermal
processing product line, a $324,000 gain on the sale of fixed
assets, $390,000 of dividends from 601 California Avenue LLC and
$26,000 of early payment discounts and other income. Interest
income and other, net in 2001 consisted of $1.2 million of
interest income on investments, a $1.4 million gain from
the repurchase of our convertible notes, $390,000 of dividends
from 601 California Avenue LLC, a $803,000 loss on the
disposition of Pacific Gas and Electric commercial paper and
$233,000 of early payment discounts and other income.
Provision for (benefit from) income
taxes.
In 2003, we recorded income tax
expense of $38,000, due primarily to foreign tax expense on
income earned by our Singapore subsidiary. Our net deferred tax
asset totaled zero at December 31, 2003, net of a
$16.7 million valuation allowance. We have substantial net
operating loss carry-forwards which can be used to limit the
taxes paid in the future and to reduce our effective tax rate to
less than the statutory income tax rates in effect.
In 2002, we recorded an income tax benefit of
$6.6 million. This resulted from the enactment of the Job
Creation and Worker Assistance Act of 2002 which increased the
length of time, from two years to five years, over which losses
incurred in 2001 and 2002 could be carried back against taxes
paid in prior years. We paid federal income taxes of
approximately $5.2 million for 1996, $0.9 million for
1997 and $0.5 million for 1998. Our federal tax returns,
and any refunds resulting from them, are subject to audit for
three years from the date filed. Our net deferred tax asset
totaled zero at December 31, 2002, net of a
$12.1 million valuation allowance.
In 2001, we recorded $5.0 million of income
tax expense to provide additional valuation allowance against
deferred tax assets. Our net deferred tax assets totaled zero at
December 31, 2001, net of a $19.2 million valuation
allowance established due to the uncertainty of realizing
certain tax credits, loss carry-forwards and other deferred tax
assets.
Liquidity and Capital Resources
Our operating activities used cash of
$10.3 million in 2003. The cash used was primarily the
result of the net loss incurred and an increase in accounts
receivable, partially offset by an increase in customer
advances, a decrease in inventory and by depreciation. Operating
activities provided cash of $820,000 in 2002. The cash provided
was primarily a result of the refund of federal income taxes
paid in prior years, decreases in accounts receivable and
inventory, depreciation and amortization, partially offset by
the operating loss. Operating activities in 2001 used cash of
$11.8 million, primarily due to the net loss incurred,
which was partially offset by depreciation, amortization and an
increase in the valuation allowance against deferred tax assets.
Our investing activities in 2003 used cash of
$1.9 million as the result of the purchase of fixed assets,
which was partially offset by additional proceeds from the sale
of the rapid thermal processing product line. Investing
activities in 2002 provided cash of $16.8 million as a
result of the sale of the rapid thermal processing product line
and the sale of equipment, which was partially offset by the
purchase of fixed assets. Investing activities in 2001 provided
cash of $28.9 million as a result of the net sale of
investments, which was partially offset by the purchase of fixed
assets.
Our financing activities provided cash of
$3.2 million in 2003 due primarily to the sale of Intevac
common stock to our employees through our employee benefit
plans. Financing activities used cash of $7.4 million in
2002, primarily as a result of the exchange of most of our
convertible notes due 2004 for new convertible notes due 2009
and cash. On July 12, 2002 we completed the exchange of
$36.3 million in aggregate principal amount of our
convertible notes due 2004 for $29.5 million of our new
6 1/2% Convertible Subordinated Notes due 2009 and
$7.6 million in cash, including $0.9 million for
accrued interest. Sales of Intevac common stock to our employees
through our employee benefit plans provided cash of
$0.3 million in 2002. Financing activities in 2001 used
cash of $3.7 million, due to the repurchase of a portion of
the convertible notes and the
30
repayment of the Cathode Technology debt,
partially offset by the sale of Intevac stock to employees under
our employee benefit plans.
At December 31, 2003, we had
$19.5 million of cash and cash equivalents. Subsequent to
December 31, 2003, we completed the public offering of
4,750,000 shares of common stock at a price of
$15.00 per share. Of the shares offered, 2,969,000 newly
issued and outstanding shares were sold by us and
1,781,000 shares were sold by a selling shareholder. The
net proceeds to us were approximately $41.6 million after
deducting underwriting discounts and offering expenses. We
intend to undertake approximately $3.0 to $4.0 million in
capital expenditures during the next 12 months, and we
believe our existing cash and cash equivalent balances will be
sufficient to meet our cash requirements for the next twelve
months.
We have incurred operating losses each year since
1998 and cannot predict with certainty when we will return to
operating profitability. We believe an upturn in demand for the
type of disk manufacturing equipment we produce is occurring,
and we had orders for ten disk manufacturing systems in our
backlog at December 31, 2003, with the revenue from those
orders all expected in 2004. This backlog leads us to believe
that our financial results in 2004 will be significantly
improved.
Contractual Obligations
In the normal course of business, we enter into
various contractual obligations that will be settled in cash.
These obligations consist primarily of operating lease
obligations. The expected future cash flows required to meet
these obligations as of December 31, 2003 are shown in the
table below. More information on these contractual obligations
is available in Part II, Item 8, Financial
Statements and Supplementary Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
Total
|
|
<1 Year
|
|
13 Years
|
|
35 Years
|
|
>5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Operating lease obligations
|
|
$
|
10,427
|
|
|
$
|
3,079
|
|
|
$
|
6,510
|
|
|
$
|
838
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,427
|
|
|
$
|
3,079
|
|
|
$
|
6,510
|
|
|
$
|
838
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures
About Market Risk
|
Interest rate risk.
The table below presents principal amounts and related
weighted-average interest rates by year of maturity for our debt
obligations as of December 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
Beyond
|
|
Total
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
1,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,025
|
|
|
$
|
1,025
|
|
|
Average rate
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
risk.
From time to time, we enter into
foreign currency forward exchange contracts to economically
hedge certain of our 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 our operating results. At December 31,
2003, we had no foreign currency forward exchange contracts.
31
|
|
Item 8.
|
Financial Statements and Supplementary
Data
|
INTEVAC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Contents
|
|
|
|
|
|
|
Page
|
|
|
|
Report of Grant Thornton LLP, Independent
Auditors
|
|
|
33
|
|
Consolidated Balance Sheets
|
|
|
34
|
|
Consolidated Statements of Operations and
Comprehensive Income
|
|
|
35
|
|
Consolidated Statement of Shareholders
Equity
|
|
|
36
|
|
Consolidated Statements of Cash Flows
|
|
|
37
|
|
Notes to Consolidated Financial Statements
|
|
|
38
|
|
32
REPORT OF GRANT THORNTON LLP, INDEPENDENT
AUDITORS
The Board of Directors and Shareholders
Intevac, Inc.
We have audited the accompanying consolidated
balance sheets of Intevac, Inc. as of December 31,
2003 and 2002 and the related consolidated statements of
operations and comprehensive income, shareholders equity
and cash flows for each of the three years in the period ended
December 31, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 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, 2003 and 2002, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally
accepted in the United States of America.
Also, in our opinion, the 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 30, 2004
33
INTEVAC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,507
|
|
|
$
|
28,457
|
|
|
Trade and other accounts receivable, net of
allowances of $22 and $269 at December 31, 2003
and 2002
|
|
|
14,016
|
|
|
|
4,991
|
|
|
Income taxes recoverable
|
|
|
|
|
|
|
214
|
|
|
Inventories, including $5,431 and $9,914 held at
customer locations at December 31, 2003 and 2002
|
|
|
13,108
|
|
|
|
15,871
|
|
|
Prepaid expenses and other current assets
|
|
|
1,113
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
47,744
|
|
|
|
50,494
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
6,225
|
|
|
|
5,751
|
|
|
Machinery and equipment
|
|
|
16,529
|
|
|
|
16,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,754
|
|
|
|
21,967
|
|
|
Less accumulated depreciation and amortization
|
|
|
16,958
|
|
|
|
15,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,796
|
|
|
|
6,793
|
|
Investment in 601 California Avenue LLC
|
|
|
2,431
|
|
|
|
2,431
|
|
Debt issuance costs, net of amortization of
$3,058 and $2,482 at December 31, 2003 and 2002
|
|
|
1
|
|
|
|
577
|
|
Other long term assets
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
55,975
|
|
|
$
|
60,298
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
$
|
1,025
|
|
|
$
|
|
|
|
Accounts payable
|
|
|
3,396
|
|
|
|
1,739
|
|
|
Accrued payroll and related liabilities
|
|
|
1,610
|
|
|
|
1,379
|
|
|
Other accrued liabilities
|
|
|
2,643
|
|
|
|
3,723
|
|
|
Customer advances
|
|
|
16,432
|
|
|
|
12,344
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
25,106
|
|
|
|
19,185
|
|
Convertible notes
|
|
|
|
|
|
|
30,568
|
|
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 16,953
and 12,125 at December 31, 2003 and 2002, respectively
|
|
|
51,982
|
|
|
|
19,389
|
|
|
Accumulated other comprehensive income
|
|
|
223
|
|
|
|
189
|
|
|
Accumulated deficit
|
|
|
(21,336
|
)
|
|
|
(9,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
30,869
|
|
|
|
10,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
55,975
|
|
|
$
|
60,298
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
34
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems and components
|
|
$
|
27,738
|
|
|
$
|
27,625
|
|
|
$
|
43,599
|
|
|
Technology development
|
|
|
8,556
|
|
|
|
6,159
|
|
|
|
7,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
36,294
|
|
|
|
33,784
|
|
|
|
51,484
|
|
Cost of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems and components
|
|
|
19,689
|
|
|
|
20,009
|
|
|
|
30,025
|
|
|
Technology development
|
|
|
6,032
|
|
|
|
5,150
|
|
|
|
7,988
|
|
|
Inventory provisions
|
|
|
743
|
|
|
|
1,316
|
|
|
|
3,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenues
|
|
|
26,464
|
|
|
|
26,475
|
|
|
|
41,729
|
|
Gross profit
|
|
|
9,830
|
|
|
|
7,309
|
|
|
|
9,755
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,037
|
|
|
|
10,846
|
|
|
|
14,478
|
|
|
Selling, general and administrative
|
|
|
8,448
|
|
|
|
7,752
|
|
|
|
6,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,485
|
|
|
|
18,598
|
|
|
|
21,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,655
|
)
|
|
|
(11,289
|
)
|
|
|
(11,468
|
)
|
Interest expense
|
|
|
(1,787
|
)
|
|
|
(2,981
|
)
|
|
|
(2,912
|
)
|
Interest income
|
|
|
269
|
|
|
|
284
|
|
|
|
1,245
|
|
Other income and expense, net
|
|
|
(92
|
)
|
|
|
16,168
|
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(12,265
|
)
|
|
|
2,182
|
|
|
|
(11,907
|
)
|
Provision for (benefit from) income taxes
|
|
|
38
|
|
|
|
(6,592
|
)
|
|
|
5,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(12,303
|
)
|
|
$
|
8,774
|
|
|
$
|
(16,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
34
|
|
|
|
67
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
34
|
|
|
|
67
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
(12,269
|
)
|
|
$
|
8,841
|
|
|
$
|
(16,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.95
|
)
|
|
$
|
0.73
|
|
|
$
|
(1.42
|
)
|
|
Shares used in per share amounts
|
|
|
12,948
|
|
|
|
12,077
|
|
|
|
11,955
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.95
|
)
|
|
$
|
0.66
|
|
|
$
|
(1.42
|
)
|
|
Shares used in per share amounts
|
|
|
12,948
|
|
|
|
15,262
|
|
|
|
11,955
|
|
See accompanying notes.
35
INTEVAC, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Retained
|
|
|
|
|
Common Stock
|
|
Other
|
|
Earnings
|
|
Total
|
|
|
|
|
Comprehensive
|
|
(Accum.
|
|
Shareholders
|
|
|
Shares
|
|
Amount
|
|
Income
|
|
Deficit)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2001
|
|
|
11,844
|
|
|
$
|
18,675
|
|
|
$
|
|
|
|
$
|
(871
|
)
|
|
$
|
17,804
|
|
|
Shares issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
41
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
Employee stock purchase plan
|
|
|
119
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
122
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,936
|
)
|
|
|
(16,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2001
|
|
|
12,004
|
|
|
$
|
19,093
|
|
|
$
|
122
|
|
|
$
|
(17,807
|
)
|
|
$
|
1,408
|
|
|
Shares issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
13
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
Employee stock purchase plan
|
|
|
108
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
273
|
|
|
Compensation expense in the form of stock options
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
67
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,774
|
|
|
|
8,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
12,125
|
|
|
$
|
19,389
|
|
|
$
|
189
|
|
|
$
|
(9,033
|
)
|
|
$
|
10,545
|
|
|
Shares issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
530
|
|
|
|
2,988
|
|
|
|
|
|
|
|
|
|
|
|
2,988
|
|
|
|
Employee stock purchase plan
|
|
|
78
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
Conversion of convertible notes due 2009
|
|
|
4,220
|
|
|
|
29,375
|
|
|
|
|
|
|
|
|
|
|
|
29,375
|
|
|
Compensation expense in the form of stock options
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
34
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,303
|
)
|
|
|
(12,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
16,953
|
|
|
$
|
51,982
|
|
|
$
|
223
|
|
|
$
|
(21,336
|
)
|
|
$
|
30,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
36
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(12,303
|
)
|
|
$
|
8,774
|
|
|
$
|
(16,936
|
)
|
Adjustments to reconcile net income (loss) to net
cash and cash equivalents provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,963
|
|
|
|
2,577
|
|
|
|
3,916
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
4,988
|
|
|
Amortization of intangibles
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
Amortization of debt offering costs
|
|
|
87
|
|
|
|
672
|
|
|
|
244
|
|
|
Inventory provisions
|
|
|
743
|
|
|
|
1,316
|
|
|
|
3,716
|
|
|
Gain on sale of Rapid Thermal Processing product
line
|
|
|
(287
|
)
|
|
|
(15,428
|
)
|
|
|
|
|
|
Gain on sale of equipment
|
|
|
|
|
|
|
(324
|
)
|
|
|
|
|
|
Gain on purchase of convertible notes
|
|
|
|
|
|
|
(23
|
)
|
|
|
(1,408
|
)
|
|
Compensation expense in the form of common stock
|
|
|
30
|
|
|
|
4
|
|
|
|
|
|
|
Loss on disposal of investment
|
|
|
|
|
|
|
|
|
|
|
803
|
|
|
Loss on disposal of equipment
|
|
|
841
|
|
|
|
13
|
|
|
|
8
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,804
|
)
|
|
|
2,264
|
|
|
|
1,547
|
|
|
|
Inventory
|
|
|
2,028
|
|
|
|
3,359
|
|
|
|
(7,252
|
)
|
|
|
Prepaid expenses and other assets
|
|
|
(152
|
)
|
|
|
(492
|
)
|
|
|
366
|
|
|
|
Accounts payable
|
|
|
1,657
|
|
|
|
(890
|
)
|
|
|
(129
|
)
|
|
|
Accrued payroll and other accrued liabilities
|
|
|
(526
|
)
|
|
|
118
|
|
|
|
1,211
|
|
|
|
Customer advances
|
|
|
4,473
|
|
|
|
(1,120
|
)
|
|
|
(2,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
2,053
|
|
|
|
(7,954
|
)
|
|
|
5,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents provided by (used
in) operating activities
|
|
|
(10,250
|
)
|
|
|
820
|
|
|
|
(11,772
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
|
|
|
|
|
|
|
|
(5,463
|
)
|
Proceeds from sales and maturities of investments
|
|
|
|
|
|
|
|
|
|
|
38,447
|
|
Net proceeds from sale of Rapid Thermal
Processing product line
|
|
|
287
|
|
|
|
17,780
|
|
|
|
|
|
Proceeds from sale of equipment
|
|
|
7
|
|
|
|
535
|
|
|
|
|
|
Purchase of equipment
|
|
|
(2,199
|
)
|
|
|
(1,480
|
)
|
|
|
(4,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents provided by (used
in) investing activities
|
|
|
(1,905
|
)
|
|
|
16,835
|
|
|
|
28,934
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
3,188
|
|
|
|
292
|
|
|
|
418
|
|
Repurchase of Intevac convertible notes
|
|
|
|
|
|
|
(225
|
)
|
|
|
(2,257
|
)
|
Exchange of Intevac convertible notes due 2004
|
|
|
|
|
|
|
(7,483
|
)
|
|
|
|
|
Repayment of notes payable
|
|
|
|
|
|
|
|
|
|
|
(1,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents provided by (used
in) financing activities
|
|
|
3,188
|
|
|
|
(7,416
|
)
|
|
|
(3,743
|
)
|
Effect of exchange rate changes on cash
|
|
|
17
|
|
|
|
61
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
(8,950
|
)
|
|
|
10,300
|
|
|
|
13,541
|
|
Cash and cash equivalents at beginning of period
|
|
|
28,457
|
|
|
|
18,157
|
|
|
|
4,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
19,507
|
|
|
$
|
28,457
|
|
|
$
|
18,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,987
|
|
|
$
|
2,456
|
|
|
$
|
2,715
|
|
|
Income taxes
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
Income tax refund
|
|
|
(214
|
)
|
|
|
(6,369
|
)
|
|
|
|
|
Other non-cash changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories transferred to (from) property,
plant and equipment
|
|
$
|
|
|
|
$
|
(514
|
)
|
|
$
|
(2,322
|
)
|
|
Exchange of $36.3M of convertible notes due 2004
for $29.5M of convertible notes 2009 (exchange completed
July 2002)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes due 2009 into
common stock
|
|
|
29,375
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
37
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
1.
|
Business and Nature of Operations
|
We are the worlds leading provider of
thin-film disk sputtering equipment for the thin-film disk
industry and a developer of leading technology for extreme low
light imaging sensors, cameras and systems. We operate two
businesses: Equipment and Imaging.
Our Equipment business designs, manufactures,
markets and services complex capital equipment used in the
sputtering, or deposition, of highly engineered thin-films of
material onto thin-film disks which are used in hard disk
drives. Hard disk drives are the primary storage medium for
digital data and function by magnetically storing data on
thin-film disks. These thin-film disks are created in a
sophisticated manufacturing process involving a variation of
many steps, including plating, annealing, polishing, texturing,
sputtering and lubrication.
Our Imaging business develops and manufactures
electro-optical sensors, cameras, and systems that permit highly
sensitive detection of photons in the visible and near infrared
portions of the spectrum, allowing vision in extreme low light
situations.
|
|
2.
|
Summary of Significant Accounting
Policies
|
The consolidated financial statements include the
accounts of Intevac and its wholly owned subsidiaries. All
inter-company transactions and balances have been eliminated.
We recognize revenue using guidance from SEC
Staff Accounting Bulletin No. 104, Revenue
Recognition. Our policy allows revenue recognition when
persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price is fixed or
determinable, and collectibility is reasonably assured. On
January 1, 2003, we changed our revenue recognition policy
for system orders received after December 31, 2002.
System Revenue Recognition for Orders Received
After December 31, 2002.
Certain
of our system sales with customer acceptance provisions are
accounted for as multiple-element arrangements. If we have
previously met defined customer acceptance levels with the
specific type of system, then we recognize revenue for the fair
market value of the system upon shipment and transfer of title,
and recognize revenue for the fair market value of installation
and acceptance services when those services are completed. For
systems that have generally not been demonstrated to meet
product specifications prior to shipment, revenue recognition is
usually deferred until customer acceptance. In the event that
our customer chooses not to complete installation and
acceptance, and our obligations under the contract to complete
installation, acceptance or any other tasks, with the exception
of warranty obligations, have been fully discharged, then we
recognize any remaining revenue to the extent that
collectibility under the contract is reasonably assured.
The revenue recognition policy outlined above and
implemented for system orders received after December 31,
2002 was adopted to better conform our revenue recognition
policies to industry accounting practice for companies selling
similar equipment. The effect of adopting this policy in years
prior to 2003 would have been no change in 2002 revenues and a
decrease in 2001 revenues of $1.5 million. The effect on
net income (loss) of adopting this policy in years prior to 2003
would have been no effect on 2002 net income and an
increase in 2001 net loss of $33,000. There would have been
no effect on earnings (loss) per share in any of the three
years. The adoption of this policy had no effect on revenues or
net loss in 2003.
System Revenue Recognition for Orders Received
Before December 31, 2002.
Revenues for systems that were ordered
prior to December 31, 2002 are recognized upon customer
acceptance. For memory and flat
38
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
panel systems shipped through a distributor,
revenue is typically recognized after the distributor has
accepted the system at our factory and the system has been
shipped. For memory and flat panel systems sold directly to end
customers, revenue is recognized after installation and
acceptance of the system at the customer site. When we believe
that there may be higher than normal end user installation and
acceptance issues for systems shipped through a distributor,
such as when the first unit of a newly designed system is
delivered, we defer revenue recognition until the
distributors customer has also accepted the system.
Accounting Treatment for
Systems.
For periods both before and
after December 31, 2002, during the period that a system is
undergoing customer acceptance (either distributor or end user),
the value of the system remains in inventory, and any payments
received, or amounts invoiced, related to the system are
included in customer advances. When revenue is recognized on the
system, the inventory is charged to cost of net revenues, the
customer advance is liquidated, and the customer is billed for
the unpaid balance of the system revenue.
Other Systems and Non-System Revenue
Recognition.
Revenues for systems
without installation and acceptance provisions, as well as
revenues from technology upgrades, spare parts, consumables and
prototype products built by the Imaging business are generally
recognized upon shipment. Service and maintenance contract
revenue, which to date has been insignificant, is recognized
ratably over applicable contract periods or as the service is
performed.
Obligations After
Shipment.
Our shipping terms are
generally FOB shipping point, but in some cases are FOB
destination. For systems sold directly to the end user, our
obligations remaining after shipment typically include
installation, end user factory acceptance and warranty. For
systems sold to distributors, typically the distributor assumes
responsibility for installation and end user customer
acceptance. In some cases, the distributor will assume some or
all of the warranty liability. For products other than systems
and system upgrades, warranty is the only obligation we have
after shipment.
Technology Development Revenue
Recognition.
We perform best efforts
research and development work under various government-sponsored
research contracts. Typically, for each contract, we commit to
perform certain research and development efforts up to an agreed
upon amount. In connection with these contracts, we receive
funding on an incremental basis up to a ceiling. Some of these
contracts are cost sharing in nature, where we are reimbursed
for a portion of the total costs expended. Revenue on these
contracts is recognized in accordance with contract terms,
typically as costs are incurred. In the event that total cost
incurred under a particular contract over-runs its agreed upon
amount, we may be liable for the additional costs.
These contracts are accounted for under ARB
No. 43, Chapter 11, Section A, which addresses
Cost-Plus-Fixed-Fee Contracts. The contracts are all cost-type,
with financial terms that are a mixture of fixed fee, no fee and
cost sharing. The deliverables under each contract range from
providing reports to providing prototype hardware. In none of
the contracts is there an obligation for either party to
continue the program once the funds have been expended. The
efforts can be terminated at any time for convenience, in which
case we would be reimbursed for our actual incurred costs, plus
fee, if applicable, for the completed effort. We own the entire
right, title and interest to each invention discovered under the
contract, unless we specifically give up that right. The
U.S. Government has a paid-up license to use any
invention/intellectual property developed under these contracts
for government purposes only. In addition, we have, from time to
time, negotiated with third parties to fund a portion of our
costs in return for granting them a joint interest in the
technology rights developed pursuant to the contract.
|
|
|
Trade Receivables and Doubtful
Accounts
|
We evaluate the collectibility of trade
receivables on an ongoing basis and provides reserves against
potential losses when appropriate. Management analyzes
historical bad debts, customer concentrations,
39
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
customer credit worthiness, changes in customer
payment tendencies and current economic trends when evaluating
the adequacy of the allowance for doubtful accounts. Customer
accounts are written off against the allowance when the amount
is deemed uncollectible.
Included in trade receivables are unbilled
receivables of $1,065,000 and $614,000 at December 31, 2003
and December 31, 2002, respectively.
Our typical warranty is 12 months from
customer acceptance. In some cases we market extended warranty
periods beyond 12 months to our customers. The warranty
period on used systems is generally shorter than 12 months.
During this warranty period any necessary non-consumable parts
are supplied and installed. The warranty period on consumable
parts is limited to their reasonable usable life. A provision
for the estimated warranty cost is recorded at the time revenue
is recognized.
The following table displays the activity in the
warranty provision account for 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Beginning balance
|
|
$
|
845
|
|
|
$
|
906
|
|
Expenditures incurred under warranties
|
|
|
(909
|
)
|
|
|
(794
|
)
|
Accruals for product warranties issued during the
reporting period
|
|
|
474
|
|
|
|
410
|
|
Adjustments to previously existing warranty
accruals
|
|
|
124
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
534
|
|
|
$
|
845
|
|
|
|
|
|
|
|
|
|
|
We have entered into agreements with customers
and suppliers that include limited intellectual property
indemnification obligations that are customary in the industry.
These guarantees generally require us to compensate the other
party for certain damages and costs incurred as a result of
third party intellectual property claims arising from these
transactions. The nature of the intellectual property
indemnification obligations prevents us from making a reasonable
estimate of the maximum potential amount we could be required to
pay our customers and suppliers. Historically, we have not made
any significant indemnification payments under such agreements
and no amount has been accrued in the accompanying consolidated
financial statements with respect to these indemnification
obligations.
|
|
|
International Distribution Costs
|
We make payments to agents and representatives
under agreements related to international sales in return for
obtaining orders and providing installation and warranty
services. These payments to agents and representatives are
included in selling, general and administrative expenses. These
amounts totaled approximately $119,000, $300,000 and $141,000
for the years ended December 31, 2003, 2002 and 2001,
respectively.
Customer advances generally represent
nonrefundable deposits invoiced by the Company in connection
with receiving customer purchase orders and other events
preceding acceptance of systems. Customer advances related to
products that have not been shipped to customers and included in
accounts receivable were $4.7 million and $0 at
December 31, 2003 and 2002, respectively.
40
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
Cash, Cash Equivalents and Short-term
Investments
|
We consider all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Short-term investments consist principally of
highly rated 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 interest rate risk.
Management determines the appropriate
classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. All
debt securities are classified as available-for-sale under
Statement of Financial Accounting Standards (SFAS)
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. Included in accounts payable is $635,000
and $459,000 of book overdraft at December 31, 2003 and
December 31, 2002, respectively.
|
|
|
Valuation of Long-lived and Intangible Assets
and Goodwill
|
We assess the impairment of identifiable
intangibles, long-lived assets and goodwill whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could
trigger an impairment review include the following:
|
|
|
|
|
significant underperformance relative to expected
historical or projected future operating results;
|
|
|
|
significant changes in the manner of our use of
the acquired assets or the strategy for our overall
business; and
|
|
|
|
significant negative industry or economic trends.
|
When we determine that the carrying value of
long-lived assets, intangibles or goodwill may not be
recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any impairment based on a
projected discounted cash flow method using a discount rate
determined by our management to be commensurate with the risk
inherent in our current business model.
Prototype product costs that are not paid for
under research and development contracts and are in excess of
fair market value are charged to research and development
expense.
|
|
|
Foreign Exchange Contracts
|
We may enter into foreign currency forward
exchange contracts to hedge certain of its foreign currency
transaction, translation and re-measurement exposures. Our
accounting policies for some of these instruments are based on
our 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 we use 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.
41
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
As of December 31, 2003 and
2002, Intevac had no foreign currency forward exchange
contracts outstanding.
The carrying amount of the short-term financial
instruments (cash and cash equivalents, short-term investments,
accounts receivable and certain other liabilities) approximates
fair value due to the short-term maturity of those instruments.
Based on the quoted market prices for the same or similar issues
or on the current rates offered for debt of the same remaining
maturities, the fair value of the $1.0 million of
outstanding convertible notes as of December 31, 2003 is
$1.0 million.
Inventories for systems and components are stated
at the lower of cost or market. Inventories consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Raw materials
|
|
$
|
3,306
|
|
|
$
|
3,329
|
|
Work-in-progress
|
|
|
4,371
|
|
|
|
2,628
|
|
Finished goods
|
|
|
5,431
|
|
|
|
9,914
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,108
|
|
|
$
|
15,871
|
|
|
|
|
|
|
|
|
|
|
Finished goods inventory consists primarily of
completed systems at customer sites that are undergoing
installation and acceptance testing.
Inventory reserves included in the above numbers
were $10.2 million and $9.6 million at
December 31, 2003 and December 31, 2002, respectively.
Each quarter, we analyze our inventory (raw materials, WIP and
finished goods) against the forecast demand for the next
12 months. Parts with no forecast requirements in that
period are considered excess and inventory provisions are
established to write those parts down to zero net book value.
During this process, some inventory is identified as having no
future use or value to us and is disposed of against the
reserves.
During the year ended December 31, 2003,
$743,000 was added to inventory reserves based on the quarterly
analysis and $698,000 of inventory was disposed of and charged
to the reserve. Inventory reserves increased by an additional
$588,000 due primarily to reserves charged against
research & development for prototype systems built in
inventory.
During the year ended December 31, 2002,
$1.3 million was added to inventory reserves based on the
quarterly analysis and $4.2 million of inventory was
disposed of and charged to the reserve. Most of the disposed
inventory related to two MDP 250K Disk Sputtering systems that
had been written down to estimated salvage value in 2000.
Inventory reserves were further reduced by $0.2 million due
to the sale of the rapid thermal processing product line.
|
|
|
Property, Plant and Equipment
|
Equipment and leasehold improvements are carried
at cost less accumulated depreciation and amortization. Gains
and losses on dispositions are reflected in the Consolidated
Statements of Operations and Comprehensive Income.
Depreciation for machinery and equipment is
computed using the straight-line method over the estimated
useful lives of the assets, which are generally three to seven
years. Amortization of leasehold improvements is
42
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
computed using the shorter of the remaining terms
of the leases or the estimated economic useful lives of the
improvements.
We amortize intangible assets on a straight-line
basis over the estimated useful lives, which range from two to
seven years.
SFAS No. 130, Reporting
Comprehensive Income requires unrealized gains or losses
on our 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, 2003, the
$223,000 balance of accumulated other comprehensive income is
comprised entirely of accumulated foreign currency translation
adjustments.
At December 31, 2003, we had two stock-based
employee compensation plans, which are described more fully in
Note 10. We account for those plans under the recognition
and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. Intevac does
not have any plans to adopt the fair value requirements of
SFAS No. 123 for reporting purposes, unless mandated
by GAAP.
Pro forma information regarding net income (loss)
and earnings (loss) per share is required by
SFAS No. 123, which also requires that the information
be determined as if we had accounted for our 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 2003, 2002 and 2001, respectively:
risk-free interest rates of 1.62%, 1.64% and 3.03%; dividend
yields of 0.0%, 0.0% and 0.0%; volatility factors of the
expected market price of Intevacs common stock of 0.943,
0.933 and 0.946; and a weighted-average expected life of the
option of 2.22, 2.68 and 2.63 years.
The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
that 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 Intevacs 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 managements
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
Under the 2003 Employee Stock Purchase Plan (the
ESPP), we are authorized to issue up to
358,197 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
Intevacs 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. Under the ESPP, we sold
77,749, 108,020 and 118,904 shares to employees in 2003,
2002 and 2001, respectively. As of December 31, 2003,
358,197 shares remained reserved for issuance under the
ESPP. We do not recognize compensation cost related to employee
purchase rights under the plan. To comply with the pro forma
reporting requirements of SFAS No. 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 2003, 2002 and 2001,
respectively: risk-free interest rates of 1.43%, 1.12% and 1.93%
dividend
43
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
yield of 0.0%, 0.0% and 0.0%; expected volatility
of 0.940, 0.933 and 0.946; and an expected life of 2.00, 1.50
and 2.00 years (the offering period ended July 31,
2003 for the subscription period that began in February 2002).
The weighted average fair value of those purchase rights granted
in 2003, 2002 and 2001 were $5.24, $2.47 and $2.78, respectively
per share.
The following table illustrates the effect on net
income (loss) and earnings (loss) per share if we had applied
the fair value-recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to
stock-based employee compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
Net income (loss), as reported
|
|
$
|
(12,303
|
)
|
|
$
|
8,774
|
|
|
$
|
(16,936
|
)
|
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all awards,
net of related tax effects
|
|
|
(683
|
)
|
|
|
(157
|
)
|
|
|
(895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
(12,986
|
)
|
|
$
|
8,617
|
|
|
$
|
(17,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
(0.95
|
)
|
|
$
|
0.73
|
|
|
$
|
(1.42
|
)
|
|
Basic pro forma
|
|
$
|
(1.00
|
)
|
|
$
|
0.71
|
|
|
$
|
(1.49
|
)
|
|
Diluted as reported
|
|
$
|
(0.95
|
)
|
|
$
|
0.66
|
|
|
$
|
(1.42
|
)
|
|
Diluted pro forma
|
|
$
|
(1.00
|
)
|
|
$
|
0.65
|
|
|
$
|
(1.49
|
)
|
Certain prior year amounts in the Consolidated
Financial Statements have been reclassified to conform to 2003
presentation.
44
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
Net income (loss) per share
|
The following table sets forth the computation of
basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic income (loss) per
share income (loss) available to common stockholders
|
|
$
|
(12,303
|
)
|
|
$
|
8,774
|
|
|
$
|
(16,936
|
)
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 1/2% convertible notes(1)
|
|
|
|
|
|
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings (loss) per
share income (loss) available to common stockholders
after assumed conversions
|
|
$
|
(12,303
|
)
|
|
$
|
10,112
|
|
|
$
|
(16,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per
share weighted-average shares
|
|
|
12,948
|
|
|
|
12,077
|
|
|
|
11,955
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options(2)
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
6 1/2% convertible notes(1)
|
|
|
|
|
|
|
3,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
3,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per
share adjusted weighted-average shares and assumed
conversions
|
|
|
12,948
|
|
|
|
15,262
|
|
|
|
11,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Diluted EPS for the twelve-month periods ended
December 31, 2003 and 2001 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, 2003 and 2001 was 3,619,134 and
1,954,910, respectively.
|
|
(2)
|
Potentially dilutive securities, consisting of
shares issuable upon exercise of employee stock options, are
excluded from the calculation of diluted EPS as their effect
would be anti-dilutive. The weighted average number of employee
stock options excluded from the twelve-month periods ended
December 31, 2003, 2002 and 2001 was 1,731,305, 1,328,278
and 1,637,268, respectively.
|
The preparation of financial statements in
conformity with accounting principles 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.
|
|
|
New Accounting Pronouncements
|
In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations.
SFAS 143 requires that asset retirement obligations that
are identifiable upon acquisition and construction, and during
the operating life of a long-lived asset be recorded as a
liability using the present value of the estimated cash flows. A
corresponding amount would be capitalized as part of
45
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
the assets carrying amount and amortized to
expense over the assets useful life. We adopted the
provisions of SFAS 143 effective January 1, 2003. The
adoption of this statement did not have a material impact on our
financial statements.
In July 2002, FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities which supercedes EITF No. 94-3,
Liability Recognition for Certain Employment Termination
Benefits and Other Costs to Exit an Activity.
SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when
the liability is incurred, whereas EITF No. 94-3 had
recognized the liability at the commitment date to an exit plan.
Adoption of this standard is effective for exit or disposal
activities that are initiated after December 31, 2002. The
adoption of this statement did not have a material impact on our
financial statements.
In November 2002, the Emerging Issues Task Force
(EITF) issued EITF 00-21 Revenue
Arrangements with Multiple Deliverables. EITF 00-21
prescribes a method to account for contracts that have multiple
elements or deliverables. It provides guidance on how to
allocate the value of a contract to its different deliverables,
as well as guidance on when to recognize revenue allocated to
each deliverable over its performance period. The provisions of
EITF 00-21 apply to revenue arrangements entered into in
the fiscal periods beginning after June 15, 2003. The
adoption of EITF No. 00-21 did not have a material impact
on our financial statements.
In May 2003, FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS No. 150 requires certain financial instruments
that have both equity and liability characteristics to be
classified as a liability on the balance sheet. SFAS No.
150 is effective for the first interim period beginning after
June 15, 2003. The adoption of this statement did not have
a material impact on our financial statements.
|
|
|
Credit Risk and Significant
Customers
|
Financial instruments that potentially subject us
to significant concentrations of credit risk consist of cash
equivalents, short-term investments, accounts receivable and
foreign exchange forward contracts. We generally invest our
excess cash in money market funds and in commercial paper, which
have contracted maturities generally within one year. By policy,
our investments in commercial paper, certificates of deposit,
Eurodollar time deposits, or bankers acceptances are rated
A1/P1 or better. In 2001, we recorded a loss of $803,000 on our
investment in commercial paper issued by Pacific Gas &
Electric. Our accounts receivables tend to be concentrated in a
limited number of customers. At December 31, 2003, two
customers accounted for 18% and 44%, respectively of our
accounts receivables and in aggregate accounted for 62% of net
accounts receivable.
Our largest customers tend to change from period
to period. Historically, a significant portion of our revenues
in any particular period have been attributable to sales to a
limited number of customers. In 2003, four customers accounted
for 25%, 18%, 13% and 10%, respectively, of our consolidated
revenues and in aggregate accounted for 66% of net revenues. In
2002, three customers accounted for 42%, 21%, and 11%,
respectively, of our consolidated revenues and in aggregate
accounted for 74% of net revenues. In 2001, one customer
accounted for 49% of our consolidated net revenues. Intevac
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.
Disk manufacturing and flat panel manufacturing
equipment together contributed a significant portion of our
revenues in 2003, 2002 and 2001. We expect that our ability to
maintain or expand our current levels of
46
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
revenues and to return to operating profitability
in the future will depend upon our success in enhancing our
existing systems and developing and manufacturing competitive
disk manufacturing equipment, such as our 200 Lean, and our
success in developing both military and commercial products
based on our LIVAR and low light technology.
|
|
4.
|
Sale of Rapid Thermal Processing Product
Line
|
In the fourth quarter of 2002, we sold our Rapid
Thermal Processing product line to Photon Dynamics, Inc.
(PDI) for $20 million in cash and the
assumption of certain liabilities. $2 million of the cash
payment was held in escrow and was not included in total assets
on the consolidated balance sheet as of December 31, 2002,
due to the contingencies related to the release of these funds
from escrow. In connection with this sale, we recorded a gain in
2002 of $15.4 million, which is included in other income
and expense, net on the Consolidated Statement of Operations and
Comprehensive Income. The following table recaps the gain from
the sale and the effect on Intevacs balance sheet for the
year ended December 31, 2002 (in thousands):
|
|
|
|
|
|
Cash received from PDI (excluding the
$2 million in escrow)
|
|
$
|
18,000
|
|
Less: Accounts receivable transferred to PDI
|
|
|
(594
|
)
|
Inventory
transferred to PDI
|
|
|
(1,911
|
)
|
Warranty
and retrofit liability transferred to PDI
|
|
|
163
|
|
Other
assets and liabilities transferred to PDI
|
|
|
(10
|
)
|
Expenses
associated with the transaction
|
|
|
(220
|
)
|
|
|
|
|
|
|
Net gain on sale
|
|
$
|
15,428
|
|
|
|
|
|
|
In the fourth quarter of 2003, we received
$287,000, net of expenses, from the escrow. This amount is
included in other income and expense, net on the Consolidated
Statement of Operations and Comprehensive Income. The remainder
of the funds in escrow were returned to PDI.
|
|
|
601 California Avenue LLC
|
In 1995, we 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 Intevac
and certain shareholders of Intevac at that time. Under the
Operating Agreement we transferred our leasehold interest in the
site of our discontinued night vision business (the
Site) in exchange for a preferred share in the LLC
with a face value of $3,900,000. We are accounting for the
investment under the cost method and have recorded our
investment in the LLC at $2,431,000, which represents our
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). The Stanford
JV developed the property and has leased the property through
August 2009. The LLC is a profitable enterprise whose primary
asset is its interest in the Stanford JV. The Company received
dividends of $390,000 from the LLC in each of the last three
years. As of December 31, 2003 all outstanding cumulative
dividends on the preferred share had been paid. These dividends
are included in other income and expense.
We lease certain facilities under non-cancelable
operating leases that expire at various times up to March 2007.
The facility leases require Intevac 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.
47
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Future minimum rental payments under these leases
at December 31, 2003 are as follows (in thousands):
|
|
|
|
|
2004
|
|
$
|
3,079
|
|
2005
|
|
|
3,192
|
|
2006
|
|
|
3,318
|
|
2007
|
|
|
838
|
|
|
|
|
|
|
Total
|
|
$
|
10,427
|
|
|
|
|
|
|
Gross rental expense was approximately
$2,940,000, $2,873,000 and $2,993,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
Subsequent to December 31, 2003, we executed
a lease amendment for our Santa Clara facility which
extended the lease term to March 2012.
In 1991, we 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. We made
cash contributions of $234,000, $276,000 and $301,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
Employees may choose among twelve investment options for their
contributions and their share of Intevacs contributions,
and they are able to move funds between investment options at
any time. Intevacs common stock is not one of the
investment options. Administrative expenses relating to the plan
are insignificant.
During the first quarter of 1997, we completed an
offering of $57.5 million of our
6 1/2% Convertible Subordinated Notes (the 2004
Notes), which mature March 1, 2004. Interest is
payable each March 1st and September 1st. The notes are
convertible into shares of Intevacs common stock at
$20.625 per share. Expenses associated with the offering of
approximately $2.3 million were deferred. Such expenses are
being amortized to interest expense over the term of the notes.
On July 12, 2002 we completed the exchange
of $36.3 million in aggregate principal amount of our 2004
Notes for $29.5 million of our new
6 1/2% Convertible Subordinated Notes due 2009 (the
2009 Notes) and $7.6 million in cash, including
$0.9 million for accrued interest. The 2009 Notes were
convertible, at the holders option, into Intevac common
shares at a conversion price of $7.00 per share.
$1.3 million in aggregate principal amount of the 2004
Notes remained outstanding after the closing of the exchange
offer.
In accounting for the exchange of the convertible
notes, we wrote off $0.4 million of debt issuance costs
related to the 2004 Notes, reflecting the portion of such costs
attributable to the convertible notes exchanged. The remaining
debt issuance costs will be amortized to interest expense over
the remaining life of the 2004 Notes. In connection with the
exchange offer, we incurred $0.8 million of offering costs.
Of this amount, $0.2 million represented the cash portion
of the exchange offer and was expensed during the 3 months
ended September 28, 2002. The $0.6 million balance of
the exchange offering costs were amortized to interest expense
over the life of the 2009 Notes. There was no gain or loss
associated with this transaction, as $36.3 million of 2004
Notes were exchanged for $36.3 million of cash and new
securities.
During 2002, in addition to the note exchange
described above, we repurchased $0.3 million, face value,
of our 2004 Notes. The repurchase resulted in a gain of $23,000.
During 2001, we repurchased $3.7 million, face value, of
our 2004 Notes. The repurchase resulted in a gain of
$1.4 million. In accordance with adoption of
SFAS No. 145, the gain on the note repurchase is
included in Other income and expense, net on the Consolidated
Statement of Operations and Comprehensive Income.
48
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
On October 31, 2003, we issued a notice of
automatic conversion of our 2009 Notes pursuant to their terms.
$20.1 million in aggregate principal amount of these notes
was outstanding, which converted into an aggregate of
approximately 2,871,857 shares of Intevac common stock at a
conversion price of $7.00 per share. The automatic
conversion occurred on November 10, 2003. Prior to the
issuance of the notice of automatic conversion,
$9.4 million in aggregate principal amount of these notes
had been tendered for conversion by the holders, resulting in
the issuance of 1,348,426 shares of Intevac common stock.
We have two reportable operating segments:
Equipment and Imaging. Our Equipment business designs,
manufactures, markets and services complex capital equipment
used in the sputtering, or deposition, of highly engineered
thin-films of material onto thin-film disks which are used in
hard disk drives. Our Imaging business develops and manufactures
electro-optical sensors, cameras and systems that permit highly
sensitive detection of photons in the visible and near infrared
portions of the spectrum, allowing vision in extreme low light
situations.
Included in corporate activities are general
corporate expenses, less an allocation of corporate expenses to
operating units equal to 3%, 1% and 1% of net revenues in 2003,
2002 and 2001, respectively. Assets of corporate activities
include unallocated cash and short-term investments, deferred
income tax assets (which were written off in 2001) and certain
intangibles and other assets.
|
|
|
Segment Profit or Loss and Segment
Assets
|
We evaluate performance and allocate resources
based on a number of factors including, profit or loss from
operations and future revenue potential. The accounting policies
of the reportable segments are the same as those described in
the summary of significant accounting policies.
|
|
|
Business Segment Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Equipment
|
|
$
|
26,748
|
|
|
$
|
27,100
|
|
|
$
|
42,723
|
|
Imaging
|
|
|
9,546
|
|
|
|
6,684
|
|
|
|
8,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,294
|
|
|
$
|
33,784
|
|
|
$
|
51,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
Business Segment Profit &
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Equipment(1)
|
|
$
|
(3,993
|
)
|
|
$
|
(5,139
|
)
|
|
$
|
(7,234
|
)
|
Imaging(2)
|
|
|
(4,155
|
)
|
|
|
(3,829
|
)
|
|
|
(2,595
|
)
|
Corporate activities
|
|
|
(2,507
|
)
|
|
|
(2,321
|
)
|
|
|
(1,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,655
|
)
|
|
|
(11,289
|
)
|
|
|
(11,468
|
)
|
Interest expense
|
|
|
(1,787
|
)
|
|
|
(2,981
|
)
|
|
|
(2,912
|
)
|
Interest income
|
|
|
269
|
|
|
|
284
|
|
|
|
1,245
|
|
Other income and expense, net
|
|
|
(92
|
)
|
|
|
16,168
|
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
(12,265
|
)
|
|
$
|
2,182
|
|
|
$
|
(11,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes inventory provisions of $451,000,
$847,000 and $3,830,000 in 2003, 2002 and 2001, respectively.
|
|
(2)
|
Includes inventory provisions of $292,000,
$469,000 and ($114,000) in 2003, 2002 and 2001, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Equipment
|
|
$
|
25,462
|
|
|
$
|
20,162
|
|
Imaging
|
|
|
7,702
|
|
|
|
7,719
|
|
Corporate activities
|
|
|
22,811
|
|
|
|
32,417
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
55,975
|
|
|
$
|
60,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment Property, Plant &
Equipment
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Equipment
|
|
$
|
1,196
|
|
|
$
|
89
|
|
Imaging
|
|
|
788
|
|
|
|
1,203
|
|
Corporate activities
|
|
|
310
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
2,294
|
|
|
$
|
1,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Equipment
|
|
$
|
456
|
|
|
$
|
1,346
|
|
|
$
|
2,559
|
|
Imaging
|
|
|
1,240
|
|
|
|
860
|
|
|
|
799
|
|
Corporate activities
|
|
|
267
|
|
|
|
371
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation
|
|
$
|
1,963
|
|
|
$
|
2,577
|
|
|
$
|
3,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
Geographic Area Net Trade Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
United States
|
|
$
|
13,133
|
|
|
$
|
16,332
|
|
|
$
|
14,154
|
|
Far East
|
|
|
23,155
|
|
|
|
17,150
|
|
|
|
36,363
|
|
Europe
|
|
|
|
|
|
|
301
|
|
|
|
827
|
|
Rest of World
|
|
|
6
|
|
|
|
1
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
36,294
|
|
|
$
|
33,784
|
|
|
$
|
51,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intevacs Articles of Incorporation
authorize 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.
|
|
|
Stock Option/ Stock Issuance Plans
|
The Board of Directors approved adoption of the
1995 Stock Option/ Stock Issuance Plan (the 1995
Plan) in 1995. The 1995 Plan, as amended in 2000, serves
as the successor equity incentive program to our 1991 Stock
Option/ Stock Issuance Plan (the 1991 Plan). Upon
adoption of the 1995 Plan, all shares available for issuance
under the 1991 Plan were transferred to the 1995 Plan. The 1995
Plan is divided into two separate components: the Discretionary
Option Grant Program and the Stock Issuance Program. Under the
Option Grant Program, Intevac 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. As of December 31,
2003, 1,535,606 shares of common stock are authorized for
future issuance under the 1995 Plan. Options granted under the
1995 Plan are exercisable upon vesting and vest over periods of
up to five years. Options currently expire no later than ten
years from the date of grant. The 1995 Plan expires no later
than September 30, 2005.
In 1995, the Board of Directors approved adoption
of the Employee Stock Purchase Plan (the ESPP). In
2003, our shareholders approved adoption of the 2003 Employee
Stock Purchase Plan which serves as the successor to the ESPP.
51
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
A summary of our stock option activity and
related information for the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Weighted-Average
|
|
|
|
Weighted-Average
|
|
|
Options
|
|
Exercise Price
|
|
Options
|
|
Exercise Price
|
|
Options
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding beginning of year
|
|
|
1,850,082
|
|
|
$
|
5.02
|
|
|
|
1,802,022
|
|
|
$
|
5.22
|
|
|
|
1,570,297
|
|
|
$
|
5.39
|
|
|
Granted
|
|
|
259,000
|
|
|
|
8.03
|
|
|
|
429,800
|
|
|
|
3.19
|
|
|
|
341,900
|
|
|
|
3.90
|
|
|
Exercised
|
|
|
(530,248
|
)
|
|
|
5.64
|
|
|
|
(13,400
|
)
|
|
|
1.46
|
|
|
|
(41,149
|
)
|
|
|
0.30
|
|
|
Forfeited
|
|
|
(152,549
|
)
|
|
|
5.73
|
|
|
|
(368,340
|
)
|
|
|
4.00
|
|
|
|
(69,026
|
)
|
|
|
5.32
|
|
Outstanding end of year
|
|
|
1,426,285
|
|
|
|
5.26
|
|
|
|
1,850,082
|
|
|
|
5.02
|
|
|
|
1,802,022
|
|
|
|
5.22
|
|
Exercisable at end of year
|
|
|
840,518
|
|
|
$
|
5.67
|
|
|
|
1,188,382
|
|
|
$
|
5.81
|
|
|
|
1,062,242
|
|
|
$
|
5.89
|
|
Weighted-average per share fair value of options
granted during the year
|
|
|
|
|
|
$
|
3.64
|
|
|
|
|
|
|
$
|
1.58
|
|
|
|
|
|
|
$
|
1.93
|
|
Outstanding and Exercisable by Price Range as
of December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Number
|
|
|
|
Number
|
|
|
|
|
Outstanding As of
|
|
Weighted Average
|
|
Weighted
|
|
Exercisable As of
|
|
Weighted
|
Range of
|
|
December 31,
|
|
Remaining
|
|
Average
|
|
December 31,
|
|
Average
|
Exercise Prices
|
|
2003
|
|
Contractual Life
|
|
Exercise Price
|
|
2003
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.175 $ 2.630
|
|
|
273,666
|
|
|
|
7.50 yrs
|
|
|
$
|
2.59
|
|
|
|
119,499
|
|
|
$
|
2.54
|
|
$ 3.063 $ 4.750
|
|
|
529,550
|
|
|
|
7.84 yrs
|
|
|
$
|
3.74
|
|
|
|
227,900
|
|
|
$
|
3.77
|
|
$ 5.000 $ 7.500
|
|
|
418,469
|
|
|
|
3.99 yrs
|
|
|
$
|
5.99
|
|
|
|
396,929
|
|
|
$
|
6.02
|
|
$ 7.625 $10.000
|
|
|
118,100
|
|
|
|
7.57 yrs
|
|
|
$
|
7.95
|
|
|
|
48,100
|
|
|
$
|
8.10
|
|
$11.625 $15.500
|
|
|
71,500
|
|
|
|
9.59 yrs
|
|
|
$
|
14.73
|
|
|
|
33,000
|
|
|
$
|
15.16
|
|
$21.250 $21.250
|
|
|
15,000
|
|
|
|
2.37 yrs
|
|
|
$
|
21.25
|
|
|
|
15,000
|
|
|
$
|
21.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.175 $21.250
|
|
|
1,426,285
|
|
|
|
6.65 yrs
|
|
|
$
|
5.26
|
|
|
|
840,518
|
|
|
$
|
5.67
|
|
52
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The provision for (benefit from) income taxes on
income from continuing operations consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
(6,585
|
)
|
|
$
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
3,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,585
|
)
|
|
|
3,771
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
1,217
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
36
|
|
|
|
(9
|
)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38
|
|
|
$
|
(6,592
|
)
|
|
$
|
5,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 reduced taxes currently payable for 2003,
2002 and 2001 as shown above by $0, $0 and $0, respectively.
Such benefits are credited to additional paid-in capital when
realized.
Deferred income taxes reflect the net tax effects
of temporary differences between losses reported and the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets computed in
accordance with SFAS No. 109 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Vacation accrual, rent accrual and warranty
reserve
|
|
$
|
1,041
|
|
|
$
|
1,167
|
|
|
Depreciation
|
|
|
1,431
|
|
|
|
1,370
|
|
|
Inventory valuation
|
|
|
3,803
|
|
|
|
3,534
|
|
|
Research and other tax credit carry-forwards
|
|
|
557
|
|
|
|
513
|
|
|
Federal and State NOL carry-forward
|
|
|
9,046
|
|
|
|
4,962
|
|
|
Other
|
|
|
857
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,735
|
|
|
|
12,133
|
|
Valuation allowance for deferred tax assets
|
|
|
(16,685
|
)
|
|
|
(12,083
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
50
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Other
|
|
$
|
50
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
50
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
53
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The valuation allowance increased by
$4.6 million during 2003 due to the uncertainty of
realizing certain tax credit and loss carry-forwards, and other
deferred tax assets. The Federal and State net operating loss
carry-forwards of $24.7 million and $10.7 million
expire at various dates through 2023 and 2014, respectively, if
not previously utilized.
A reconciliation of the income tax provision on
income from continuing operations at the federal statutory rate
of 34% to the income tax provision at the effective tax rate is
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
Income taxes (benefit) computed at the federal
statutory rate
|
|
$
|
(4,159
|
)
|
|
$
|
766
|
|
|
$
|
(4,125
|
)
|
State taxes (net of federal benefit)
|
|
|
(434
|
)
|
|
|
109
|
|
|
|
(408
|
)
|
Research and other tax credits
|
|
|
(44
|
)
|
|
|
(142
|
)
|
|
|
(1,033
|
)
|
Effect of tax rate changes and other permanent
differences
|
|
|
73
|
|
|
|
(181
|
)
|
|
|
44
|
|
Valuation allowance
|
|
|
4,602
|
|
|
|
(7,144
|
)
|
|
|
10,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38
|
|
|
$
|
(6,592
|
)
|
|
$
|
5,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Other Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Accrued product warranties
|
|
$
|
534
|
|
|
$
|
845
|
|
Accrued interest expense
|
|
|
22
|
|
|
|
662
|
|
Accrued rent expense
|
|
|
1,290
|
|
|
|
1,435
|
|
Accrued sales & use tax
|
|
|
142
|
|
|
|
559
|
|
Other
|
|
|
655
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
2,643
|
|
|
$
|
3,723
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Quarterly Consolidated Results of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 29,
|
|
June 28,
|
|
Sept. 27,
|
|
Dec. 31,
|
|
|
2003
|
|
2003
|
|
2003
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
Net sales
|
|
$
|
12,015
|
|
|
$
|
4,587
|
|
|
$
|
7,616
|
|
|
$
|
12,076
|
|
Gross profit
|
|
|
1,160
|
|
|
|
1,119
|
|
|
|
2,880
|
|
|
|
4,671
|
|
Net income (loss)(1)
|
|
|
(4,006
|
)
|
|
|
(4,797
|
)
|
|
|
(2,899
|
)
|
|
|
(601
|
)
|
Basic earnings per share
|
|
$
|
(0.33
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.04
|
)
|
Diluted earnings per share
|
|
|
(0.33
|
)
|
|
|
(0.39
|
)
|
|
|
(0.24
|
)
|
|
|
(0.04
|
)
|
54
INTEVAC, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 30,
|
|
June 29,
|
|
Sept. 28,
|
|
Dec. 31,
|
|
|
2002
|
|
2002
|
|
2002
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
Net sales
|
|
$
|
6,670
|
|
|
$
|
8,385
|
|
|
$
|
6,737
|
|
|
$
|
11,992
|
|
Gross profit
|
|
|
963
|
|
|
|
2,003
|
|
|
|
1,342
|
|
|
|
3,001
|
|
Net income (loss)(1)(2)(3)
|
|
|
(2,142
|
)
|
|
|
852
|
|
|
|
(3,878
|
)
|
|
|
13,942
|
|
Basic earnings per share
|
|
$
|
(0.18
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.32
|
)
|
|
$
|
1.15
|
|
Diluted earnings per share
|
|
|
(0.18
|
)
|
|
|
0.07
|
|
|
|
(0.32
|
)
|
|
|
0.86
|
|
|
|
(1)
|
Net income (loss) for the three months ended
December 31, 2003 and December 31, 2002 includes a
gain of $287,000 and $15.4 million, respectively, from the
sale of the rapid thermal processing product line.
|
|
(2)
|
Net income (loss) for the three months ended
March 30, 2002, June 29, 2002 and December 31,
2002 include tax benefits of $2.2 million,
$4.2 million and $223,000, respectively, booked as a result
of the enactment of the Job Creation and Worker Assistance Act
of 2002.
|
|
(3)
|
Net income (loss) for the three months ended
December 31, 2002 includes a gain of $324,000 from the sale
of fabrication shop fixed assets.
|
On February 10, 2004, we completed the
public offering of 4,750,000 shares of common stock at a price
of $15.00 per share. Of the shares offered, 2,969,000 newly
issued and outstanding shares were sold by us and 1,781,000
shares were sold by a selling shareholder. The net proceeds to
us are approximately $41.6 million after deducting
underwriting discounts and offering expenses.
55
|
|
Item 9.
|
Changes In and Disagreements With
Accountants on Accounting and Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls and Procedures
|
Evaluation of disclosure controls and
procedures.
An evaluation was carried
out under the supervision and with the participation of
Intevacs management, including our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934, as amended, the Exchange Act) as of the
end of the period covered by this annual report. Based on that
evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are
required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms.
Changes in internal
controls.
No change in Intevacs
internal controls over financial reporting was identified in
connection with the evaluation required by Rule 13a-15(d)
of the Exchange Act that occurred during our fourth quarter
ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, Intevacs
internal controls over financial reporting.
PART III
|
|
Item 10.
|
Directors and Executive Officers of the
Registrant
|
The information required by this item relating to
the Companys directors and nominees, disclosure relating
to compliance with Section 16(a) of the Securities Exchange
Act of 1934, and information regarding our code of ethics is
included under the captions Election of Directors,
Section 16(a) Beneficial Ownership Reporting
Compliance, and Code of Ethics in the
Companys Proxy Statement for the 2004 Annual Meeting of
Shareholders and is incorporated herein by reference. The
information required by this item relating to the Companys
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 Companys Proxy Statement for the
2004 Annual Meeting of Shareholders and is incorporated herein
by reference.
56
|
|
Item 12.
|
Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters
|
Securities authorized for issuance under
equity compensation plans.
The
following table summarizes the number of outstanding options
granted to employees and directors, as well as the number of
securities remaining available for future issuance, under our
equity compensation plans at December 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
|
(c)
|
|
|
Number of securities
|
|
(b)
|
|
Number of securities
|
|
|
to be issued upon
|
|
Weighted-average
|
|
remaining available for
|
|
|
exercise of
|
|
exercise price of
|
|
future issuance
|
|
|
outstanding options,
|
|
outstanding options,
|
|
under equity
|
Plan Category
|
|
warrants and rights
|
|
warrants and rights
|
|
compensation plans(1)
|
|
|
|
|
|
|
|
Equity compensation plans approved by security
holders(2)
|
|
|
1,426,285
|
|
|
$
|
5.26
|
|
|
|
467,515
|
|
Equity compensation plans not approved by
security holders
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,426,285
|
|
|
$
|
5.26
|
|
|
|
467,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes securities reflected in column (a).
|
|
(2)
|
Included in the column (c) amount are
358,197 shares available for future issuance under
Intevacs 2003 Employee Stock Purchase Plan.
|
The other information required by this item is
included under the caption Ownership of Securities
in the Companys Proxy Statement for the 2004 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
Companys Proxy Statement for the 2004 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
Item 14.
|
Principal Accountant Fees and
Services
|
The information required by this item is included
under the caption Fees Paid To Accountants For Services
Rendered in the Companys Proxy Statement for the
2004 Annual Meeting of Shareholders and is incorporated herein
by reference.
PART IV
|
|
Item 15.
|
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
|
|
|
Consolidated Balance Sheets
December 31, 2003 and 2002
|
|
|
Consolidated Statements of Operations and
Comprehensive Income for the years ended December 31, 2003,
2002 and 2001
|
|
|
Consolidated Statement of Shareholders
Equity for the years ended December 31, 2003, 2002 and 2001
|
|
|
Consolidated Statements of Cash Flows for the
years ended December 31, 2003, 2002 and 2001
|
|
|
Notes to Consolidated Financial
Statements Years Ended December 31, 2003, 2002
and 2001
|
57
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
|
|
|
|
|
*****2
|
.1
|
|
Asset Purchase Agreement between
Intevac, Inc. and Photon Dynamics, Inc. dated as of
October 22, 2002
|
|
*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
|
|
******4
|
.3
|
|
Indenture, dated as of July 12, 2002,
between the Company and State Street Bank and Trust Company of
California, N.A. as Trustee, including the form of the
Convertible Notes
|
|
4
|
.4
|
|
Registration Rights Agreement, dated
January 16, 2004, between the Company, Redemco, LLC and
Foster City LLC
|
|
*10
|
.1
|
|
The Registrants 1991 Stock Option/ Stock
Issuance Plan
|
|
*10
|
.2
|
|
The Registrants 1995 Stock Option/ Stock
Issuance Plan, as amended
|
|
*10
|
.3
|
|
The Registrants Employee Stock Purchase
Plan, as amended
|
|
****10
|
.5
|
|
Lease, dated February 5, 2001 regarding the
space located at 3560, 3570 and 3580 Bassett Street,
Santa Clara, California
|
|
*10
|
.8
|
|
601 California Avenue LLC Limited Liability
Operating Agreement, dated July 28, 1995
|
|
*10
|
.9
|
|
The Registrants 401(k) Profit Sharing Plan
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP, Independent
Auditors
|
|
24
|
.1
|
|
Power of Attorney (see page 60)
|
|
31
|
.1
|
|
Certification of President and Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
31
|
.2
|
|
Certification of Vice-President, Finance and
Administration, Chief Financial Officer, Treasurer and Secretary
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certifications Pursuant to U.S.C. 1350, adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
*
|
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)
|
|
|
|
|
****
|
Previously filed as an exhibit to the
Companys Annual Report on Form 10-K for the year
ended December 31, 2000
|
|
|
|
|
*****
|
Previously filed as an exhibit to the
Companys Report on Form 8-K filed November 14,
2002
|
|
|
******
|
Previously filed as an exhibit to the
Companys Annual Report on Form 10-K for the year
ended December 31, 2002
|
|
|
|
|
|
Management compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 15(c)
of Form 10-K
|
58
|
|
|
|
(1)
|
On October 21, 2003, the registrant filed a
report on Form 8-K regarding the issuance of a press
release announcing its results for the three months ended
September 27, 2003.
|
|
|
(2)
|
On December 23, 2003, the registrant filed a
report on Form 8-K regarding the issuance of two press
releases, one announcing the shipment of the first 200 Lean and
the second announcing the death of director H. Joseph Smead.
|
|
|
(3)
|
On January 5, 2004, the registrant filed a
report on Form 8-K regarding the issuance of a press
release announcing its preliminary results for the three months
ended December 31, 2003.
|
|
|
(4)
|
On January 30, 2004, the registrant filed a
report on Form 8-K regarding the issuance of a press
release announcing its results for the three months ended
December 31, 2003.
|
59
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 16, 2004.
|
|
|
|
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
Kevin Fairbairn 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.
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|
|
|
|
|
|
|
|
|
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Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ KEVIN FAIRBAIRN
Kevin Fairbairn
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
March 16, 2004
|
|
/s/ NORMAN H. POND
Norman H. Pond
|
|
Chairman of the Board
|
|
March 16, 2004
|
|
/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)
|
|
March 16, 2004
|
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/s/ DAVID DURY
David Dury
|
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Director
|
|
March 16, 2004
|
|
Stanley J. Hill
|
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Director
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|
60
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Signature
|
|
Title
|
|
Date
|
|
|
|
|
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/s/ DAVID N. LAMBETH
David N. Lambeth
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Director
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March 16, 2004
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/s/ ROBERT LEMOS
Robert Lemos
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Director
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|
March 16, 2004
|
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/s/ ARTHUR L. MONEY
Arthur L. Money
|
|
Director
|
|
March 16, 2004
|
61
SCHEDULE II VALUATION AND
QUALIFYING ACCOUNTS
INTEVAC, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions (Reductions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged (Credited)
|
|
|
|
|
|
Balance at
|
|
|
Beginning
|
|
to Costs and
|
|
Charged (Credited)
|
|
|
|
End of
|
Description
|
|
of Period
|
|
Expenses
|
|
to Other Accounts
|
|
Deductions - Describe
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year ended December 31, 2001:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
113
|
|
|
$
|
41
|
|
|
$
|
71
|
|
|
$
|
|
|
|
$
|
225
|
|
|
|
Inventory provisions
|
|
|
8,747
|
|
|
|
3,716
|
|
|
|
896
|
|
|
|
698
|
(2)
|
|
|
12,661
|
|
Year ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
225
|
|
|
$
|
73
|
|
|
$
|
|
|
|
$
|
29
|
(1)
|
|
$
|
269
|
|
|
|
Inventory provisions
|
|
|
12,661
|
|
|
|
1,316
|
|
|
|
(229
|
)
|
|
|
4,189
|
(2)
|
|
|
9,559
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
269
|
|
|
$
|
(143
|
)
|
|
$
|
6
|
|
|
$
|
110
|
(1)
|
|
$
|
22
|
|
|
|
Inventory provisions
|
|
|
9,559
|
|
|
|
743
|
|
|
|
588
|
|
|
|
698
|
(2)
|
|
|
10,192
|
|
|
|
(1)
|
Write-offs of amounts deemed uncollectible.
|
|
(2)
|
Write-off of inventory having no future use or
value to the Company
|
62
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
|
|
*****2
|
.1
|
|
Asset Purchase Agreement between
Intevac, Inc. and Photon Dynamics, Inc. dated as of
October 22, 2002
|
|
*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
|
|
******4
|
.3
|
|
Indenture, dated as of July 12, 2002,
between the Company and State Street Bank and Trust Company of
California, N.A. as Trustee, including the form of the
Convertible Notes
|
|
4
|
.4
|
|
Registration Rights Agreement, dated
January 16, 2004, between the Company, Redemco, LLC and
Foster City LLC
|
|
*10
|
.1
|
|
The Registrants 1991 Stock Option/ Stock
Issuance Plan
|
|
*10
|
.2
|
|
The Registrants 1995 Stock Option/ Stock
Issuance Plan, as amended
|
|
*10
|
.3
|
|
The Registrants Employee Stock Purchase
Plan, as amended
|
|
****10
|
.5
|
|
Lease, dated February 5, 2001 regarding the
space located at 3560, 3570 and 3580 Bassett Street,
Santa Clara, California
|
|
*10
|
.8
|
|
601 California Avenue LLC Limited Liability
Operating Agreement, dated July 28, 1995
|
|
*10
|
.9
|
|
The Registrants 401(k) Profit Sharing Plan
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP, Independent
Auditors
|
|
24
|
.1
|
|
Power of Attorney (see page 60)
|
|
31
|
.1
|
|
Certification of President and Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
31
|
.2
|
|
Certification of Vice-President, Finance and
Administration, Chief Financial Officer, Treasurer and Secretary
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certifications Pursuant to U.S.C. 1350, adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
*
|
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)
|
|
|
|
|
****
|
Previously filed as an exhibit to the
Companys Annual Report on Form 10-K for the year
ended December 31, 2000
|
|
|
|
|
*****
|
Previously filed as an exhibit to the
Companys Report on Form 8-K filed November 14,
2002
|
|
|
******
|
Previously filed as an exhibit to the
Companys Annual Report on Form 10-K for the year
ended December 31, 2002
|
|
|
Management compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 15(c)
of Form 10-K
|
63
(b) Reports on Form 8-K
|
|
|
|
(1)
|
On October 21, 2003, the registrant filed a
report on Form 8-K regarding the issuance of a press
release announcing its results for the three months ended
September 27, 2003.
|
|
|
(2)
|
On December 23, 2003, the registrant filed a
report on Form 8-K regarding the issuance of two press
releases, one announcing the shipment of the first 200 Lean and
the second announcing the death of director H. Joseph Smead.
|
|
|
(3)
|
On January 5, 2004, the registrant filed a
report on Form 8-K regarding the issuance of a press
release announcing its preliminary results for the three months
ended December 31, 2003.
|
|
|
(4)
|
On January 30, 2004, the registrant filed a
report on Form 8-K regarding the issuance of a press
release announcing its results for the three months ended
December 31, 2003.
|
64