Edgar Filing: INTEVAC INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 3, 2015

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-26946

INTEVAC, INC.

(Exact name of registrant as specified in its charter)

Delaware

94-3125814

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3560 Bassett Street

Santa Clara, California 95054

(Address of principal executive office, including Zip Code)

Registrant’s telephone number, including area code: (408) 986-9888

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock ($0.001 par value)		The Nasdaq Stock Market LLC (NASDAQ Global Select)

Securities registered pursuant to Section 12(g) of the Act:

None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No

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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of June 28, 2014, the aggregate market value of voting and non-voting stock held by non-affiliates of the Registrant, was approximately $ 105,633,087 (based on the closing price for shares of the Registrant’s Common Stock as reported by the Nasdaq Stock Market for the last trading day prior to that date). Shares of Common Stock held by each executive officer, director, and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

On February 12, 2015, 23,300,170 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the Registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders 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.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information in this Annual Report on Form 10-K (report or Form 10-K) of Intevac, Inc. and its subsidiaries (“Intevac” or the “Company”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, is forward-looking in nature. All statements in this report, including those made by the management of Intevac, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Intevac’s future financial results, operating results, cash flows and cash deployment strategies, business strategies, costs, products, working capital, competitive positions, management’s plans and objectives for future operations, research and development, acquisitions and joint ventures, growth opportunities, customer contracts, investments, liquidity, declaration of dividends, and legal proceedings, as well as market conditions and industry trends. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Item 1A, “Risk Factors,” below and elsewhere in this report. Other risks and uncertainties may be disclosed in Intevac’s prior Securities and Exchange Commission (“SEC”) filings. These and many other factors could affect Intevac’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this report or elsewhere by Intevac or on its behalf. Intevac undertakes no obligation to revise or update any forward-looking statements.

The following information should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this report.

PART I

Item 1.

Business

Overview

Intevac’s business consists of two reportable segments:

Equipment: Intevac is a leader in the design and development of high-productivity, thin-film processing systems. Our production-proven platforms are designed for high-volume manufacturing of substrates with precise thin-film properties. Intevac is the market and technology leader in the hard drive industry, with our systems processing approximately 60% of all magnetic disk media produced worldwide. Our high-performance, high-throughput technology solutions continue to expand into additional markets—including solar photovoltaic (“PV”) and adjacent thin-film deposition applications.

Photonics: Intevac is a leader in the development and manufacture of leading edge, high-sensitivity imaging products and vision systems. Our products primarily address the defense market.

Intevac was incorporated in California in October 1990 and was reincorporated in Delaware in 2007.

Equipment Segment

Hard Disk Drive Equipment Market

Intevac designs, manufactures, markets and services complex capital equipment used to deposit thin films and lubricants onto substrates to produce magnetic disks that are used in hard disk drives. Disk and disk drive manufacturers produce magnetic disks in a sophisticated manufacturing process involving many steps, including plating, annealing, polishing, texturing, sputtering, etching, stripping and lubrication. Intevac believes its systems represent approximately 60% of the installed capacity of disk sputtering systems worldwide. Intevac’s systems are used by manufacturers of magnetic media such as Seagate Technology, Western Digital, including its wholly-owned subsidiary, HGST, Fuji Electric, and Showa Denko.

Hard disk drives are a primary storage medium for digital data including on-line, “cloud” storage, and near-line applications and are used in products and applications such as personal computers, enterprise data storage, and video players and video game platforms. Intevac believes that hard disk drive media shipments will continue to grow over time, driven by growth in digital storage, by the slowing of areal density improvements, by the refresh of personal computers for new operating and application software, by the proliferation of personal computers into emerging economies, and by new and emerging applications. Continued growth in the amount of digital data stored and the slowing in areal density improvements are key factors in determining the demand for magnetic disks used in hard disk drives.

In recent years the hard drive business has been negatively impacted by the effects of the proliferation of tablets, the transition to centralized or “cloud” storage, and the effects of uncertain macro-economic environment conditions on demand for personal computers from consumers and corporations. Although the hard drive industry continues to expect growth in the enterprise data storage market segment, the transition to cloud storage has resulted in lower hard drive shipments in recent years. However, Intevac continues to believe that long-term demand for hard disk drives will increase, driven by growth in demand for digital storage, declining growth rate in areal density improvements, the need for corporations to replace and update employee computers, increased information technology spending to support the transition to cloud storage and the proliferation of personal computers into emerging economies. The number of disk manufacturing systems needed to support this growth as well as future technology transitions and improvements is expected to vary from year to year depending on the factors noted above.

Intevac expects that hard disk drive manufacturers will extend their utilization of planar perpendicular media with the introduction of thermal assisted magnetic recording (“TAMR”) expected within the next three to four years. Intevac believes that the transition to TAMR will require disk manufacturers to upgrade their installed base of equipment, which would result in increased demand for equipment technology upgrades to be performed by Intevac. The introduction of patterned media is expected to occur several years after the transition to TAMR. Intevac believes that the transition to patterned media by disk manufacturers, which introduces new processes and requires new equipment, is expected to result in increased demand for Intevac’s equipment. Intevac has developed equipment and technologies to support the development of both TAMR and patterned media by our customers.

Hard Disk Drive Equipment Products

Disk Sputtering Systems

Disk sputtering is the process of depositing a thin film of various materials on a substrate. Intevac equipment deposits magnetic films, non-magnetic films and protective carbon-based overcoats on disks that are to be used in hard disk drives using sputtering or chemical vapor deposition (“CVD”) technologies.

Intevac’s 200 Lean systems began shipping in 2003 with the installed base of 200 Lean systems reaching more than 150 systems by the end of 2014. Intevac estimates that approximately 90% of the installed base is used in production with the balance used for research and development.

In 2009, Intevac shipped the first 200 Lean etch and deposition system to be used for both TAMR and patterned media. Intevac provides a cost-effective solution for high-volume manufacturing by providing new etch and associated process modules on the high-productivity 200 Lean Gen II platform.

Disk Lubrication Systems

Disk lubrication is the manufacturing step that follows deposition of thin films. During lubrication, a microscopic layer of lubricant is applied to the disk’s surface to improve durability and reduce surface friction between the disk and the read/write head assembly.

The Intevac AccuLuber^TM lubricates disks by depositing a thin film of lubricant on the disk while it is under vacuum, thus eliminating the use of solvents, which are environmentally hazardous and expensive to procure, store and dispose.

Non-System Business

Intevac also provides technology upgrades, spare parts and consumables, installation, maintenance and repair services to Intevac’s system customers. Intevac continues to develop and market new upgrades to its installed base that support the continued growth in areal density or improve the manufacturing cost per disk. Non-system business as a percentage of Equipment revenues was 78% in 2012, 60% in 2013, and 49% in 2014.

Solar Market

Intevac designs, manufactures and markets capital equipment for the PV solar manufacturing industry.

The cost of electricity generated from solar energy, in most cases, remains higher than that of electricity generated from traditional energy sources. However in some markets, the cost of generating solar electricity is now on parity with that of traditional energy sources. In those countries or areas where the cost of solar energy generation remains higher than traditional electricity, some governments have implemented various tax credits and other financial incentives to promote the growth in alternative energy sources. As the cost of solar energy has declined many of these governments have reduced their incentives and this trend is expected to continue.

Energy generated from solar amounts to less than 1% of electricity generated in the world today. The market for solar energy is expected to grow from 48 gigawatts in 2014 to 58 gigawatts in 2015. Today the manufacturing capacity for the production of solar cells is approaching parity after several years of excess capacity.

The continued focus in the PV market is on the development of high-efficiency cell technologies aimed at simultaneously boosting efficiency and reducing production costs. New vacuum process technologies and integrated processing steps are expected to become increasingly important as companies search for lower cost manufacturing solutions.

A solar cell (also called a PV cell) is a solid state device that converts the energy of sunlight directly into electricity. Assemblies of cells are used to make solar modules, also known as solar panels. Solar panels have broad-based end market applications for solar farms, integrated building PV arrays, rooftop grids and portable devices.

Intevac offers products for wafer-based crystalline silicon (“c-Si”) solar cell manufacturing processes, the prevailing manufacturing process.

Solar Manufacturing Products

Solar Cell Processing Systems

Intevac offers vacuum process manufacturing solutions for c-Si applications. Intevac’s platform is a fully-automated high-productivity process equipment solution enabling low-cost solar cell manufacturing and high cell efficiency.

Intevac has developed two vacuum process application technologies for solar cell manufacturing: for deposition of thin films and for doping by ion implant. Intevac’s products include the INTEVAC MATRIX™ physical vapor deposition (“PVD”) system and the ENERGi™ ion implant system. Intevac’s ENERGi ion implantation system is based upon technology developed by Solar Implant Technologies, Inc. (“SIT”) which was acquired by Intevac in November 2010. These systems are designed to run at high throughput and can be integrated into new or existing solar processing lines.

INTEVAC MATRIX PVD

PVD is a process used in multiple steps in the manufacturing of solar cells such as for electrical contacts, conductor layers, reflective layers, and dielectric films all of which are critical to the efficiency of solar cells. The INTEVAC MATRIX PVD system can deposit all of these layers for a variety of c-Si PVD applications.

ENERGi

Ion implantation is a technique being introduced to solar cell lines as a means to increase overall cell efficiency. Ion implantation can replace existing diffusion processes and is also extendable to new advanced cell structures with fewer processing steps and therefore at lower cost. The ion implant process developed with Intevac’s ENERGi product enables precision engineering of the dopant elements such as Phosphorous and Boron to form the emitter in the solar cell.

Display Cover Panel Market

Intevac is developing equipment to deposit optical quality diamond-like carbon (“DLC”) protective coatings on touch screen display cover panels.

Touch panel displays are found in products including smartphones, tablets, wearable devices, notebook PCs, gaming systems, cameras, automotive navigation systems and digital signage. In 2014 approximately 1.3 billion mobile phones and 310 million tablet PCs were shipped. Product designers in these markets are increasingly looking to advanced surface coatings to improve display readability (anti-reflective coatings and anti-smudge coatings) as well as overall product durability.

Display Cover Panel Product

INTEVAC VERTEX™

VERTEX is Intevac’s vertical PVD system designed for deposition of such films as DLC, silicon oxide and niobium oxide on glass substrates. VERTEX provides single-substrate processing, semi-automated substrate load and unload, reduced footprint, high throughput and low cost of ownership. Intevac developed and introduced the VERTEX system to deposit optical grade DLC on display cover panels leveraging technology from its HDD 200 Lean deposition system. One of the most critical films in the HDD manufacturing process is the carbon overcoat film. Intevac shipped its first VERTEX development system in the third quarter of 2014.

Adjacent Markets Product

INTEVAC MATRIX

During 2014, Intevac introduced, MATRIX, a substrate-independent platform which can be used for multiple thin-film applications for the vacuum coating industry. MATRIX is a versatile platform which can accommodate multiple thin-film deposition technologies such as PVD and CVD. MATRIX features include: fully integrated automation for precise small substrate handling, high speed transport, carrier technology and unique vacuum loadlock system for high throughput, and an integrated substrate inverter system for double sided coating without breaking vacuum. Intevac shipped its first MATRIX system in the third quarter of 2014 to a solar customer for a PVD application.

Semiconductor Equipment Market

Prior to January 2012, Intevac designed, manufactured and marketed vacuum wafer-handling automation equipment to the semiconductor manufacturing industry. In January 2012, Intevac divested the semiconductor mainframe technology and sold certain assets comprising its semiconductor mainframe technology.

Photonics Segment

Photonics Market

Photonics develops, manufactures and sells compact, cost-effective, high-sensitivity digital-optical products for the capture and display of extreme low-light images. These products incorporate high resolution digital image sensors operating in the visible and near infrared (“NIR”) light spectrums and are based on Intevac’s proprietary EBAPS^® (Electron Bombarded Active Pixel Sensor) technology.

Photonics products primarily address the high performance military night-vision market. Key applications provide digital imagery in extremely low-light level conditions. Intevac provides these products for military aircraft including the U.S. Army AH-64 Apache Attack Helicopter and the F-35 Joint Strike Fighter. Additionally, the Company is developing applications to address ground vehicles, and soldier head-mounted and weapon-mounted applications.

Military Products

Intevac’s EBAPS sensors are incorporated into custom-designed products for high performance military applications. Intevac’s EBAPS sensors can be integrated at various levels with optics, electronics, software, and displays based upon customer specifications and requirements. Customization typically occurs in the areas of electronics, near-eye micro-displays, and mechanical packaging. Product configurations include sensors, cameras, and complete systems. Intevac’s products by application are:

Rifle Sight

Intevac offers low-light 1.3 mega-pixel EBAPS modules that are integrated by our customers into a weapon sight attached to weaponry including rifles for night time aiming and targeting.

Helicopter Pilotage

Intevac offers a night-vision camera with a 2.0 mega-pixel resolution EBAPS module which is gimbal-mounted on the Apache helicopter. The low-light level digital video is then viewable by the helicopter pilot on a head mounted display enabling the pilot to have enhanced night vision and allowing the aircrew to view multiple aircraft-mounted sensor information. In addition the U.S. Navy has funded a High Resolution Digital Night Vision Goggle development program incorporating the latest a 4.0 mega-pixel resolution EBAPS module for aviation applications.

Fixed Wing Aircraft Pilotage

Intevac offers night-vision cameras with a 2.0 mega-pixel resolution EBAPS module which is integrated with the F-35 fighter pilot’s helmet and enables the pilot to have enhanced night vision incorporating navigational and tactical information.

Long-Range Target Identification

Intevac offers the Laser Illuminated Viewing and Ranging (“LIVAR^®”) shortwave-infrared camera for long range military night time surveillance systems that can identify targets at distances of up to twenty kilometers. Photonics’ LIVAR camera is incorporated into long range target identification systems manufactured by major defense contractors.

Soldier Mobility

Both the U.S. Army and Special Operations Command sponsored programs to develop binocular night vision goggles incorporating digitally fused low-light level and thermal image sensors. Both head-mounted digital imaging systems will allow low-light level and thermal imagery to be viewed individually or to be overlaid.

Simulation and Training

Near-eye display systems are high-performance, micro-display products for near-eye, portable viewing of video in military and commercial markets. Intevac’s eyeglass and helmet-mounted display systems provide high definition and a wide field-of-view in miniaturized light-weight and portable designs. Intevac’s I-Port^TM helmet-mounted display provides solutions for such diverse markets as medical, industrial, commercial and military, including training and simulation.

Commercial Products

Low-Light Cameras

Photonics’ MicroVista^® product line of commercial compact and lightweight low-light Complementary Metal–Oxide–Semiconductor (“CMOS”) cameras provides high sensitivity in the ultraviolet, visible or NIR regions of the spectrum for use in industrial inspection, bio-medical and scientific applications. These cameras are primarily sold through distribution channels and to original equipment manufacturers.

Raman Materials Identification Instruments

Prior to March 2013, Intevac designed, manufactured and marketed Raman spectroscopy systems to the medical, scientific, pharmaceutical and other industrial markets. In March 2013, Intevac divested and sold certain assets comprising its Raman spectroscopy instruments product line, also known as DeltaNu.

Backlog

Intevac’s backlog of orders at January 3, 2015 was $48.4 million, as compared to $59.9 million at December 31, 2013. Backlog at January 3, 2015 consisted of $17.7 million of Equipment backlog and $30.7 million of Photonics backlog. Backlog at December 31, 2013 consisted of $13.6 million of Equipment backlog and $46.3 million of Photonics backlog. Backlog at January 3, 2015 includes one 200 Lean system, one PV deposition system, one PV implant system and one PVD display cover panel coating system. Backlog at December 31, 2013 included one 200 Lean system and one PV deposition system. Backlog includes only customer orders with scheduled delivery dates.

Customer Concentration

Historically, a significant portion of Intevac’s revenue in any particular period has been attributable to sales to a limited number of customers.

The following customers accounted for at least 10 percent of Intevac’s consolidated net revenues in fiscal 2014, 2013, and 2012.


	2014			2013			2012
U.S. Government		32	%		*			10	%
HGST		17	%		*			*
Seagate Technology		15	%		37	%		51	%
Northrop Grumman		*			11	%		*

*	Less than 10%

Intevac expects that sales of Intevac’s products to relatively few customers will continue to account for a high percentage of Intevac’s revenues in the foreseeable future.

Foreign sales accounted for 21% of revenue in fiscal 2014, 53% of revenue in fiscal 2013, and 63% of revenue in fiscal 2012. The majority of Intevac’s foreign sales are to companies in Asia or to U.S. companies for use in their Asian manufacturing or development operations. Intevac anticipates that foreign sales will continue to be a significant portion of Intevac’s Equipment revenues. Intevac’s disk sputtering equipment customers include magnetic disk manufacturers, such as Fuji Electric and Showa Denko, and vertically integrated hard disk drive manufacturers, such as Seagate, Western Digital and HGST. Intevac’s customers’ manufacturing facilities are primarily located in California, China, Taiwan, Japan, Malaysia and Singapore.

Competition

The principal competitive factors affecting the markets for Intevac Equipment products include price, product performance and functionality, ease of integration, customer support and service, reputation and reliability. Intevac has one major competitor, Canon Anelva, in the hard disk drive equipment market and has historically experienced intense worldwide competition for magnetic disk sputtering equipment. Intevac primarily faces competition from large established global competitors in the PV equipment market including Applied Materials, Centrotherm Photovoltaics, Amtech, Jusung and Von Ardenne. Intevac faces competition in the display cover panel market from glass manufacturers that may develop scratch resistant glass, from touchscreen manufacturers that may adopt harder substrate materials, or from other equipment companies, chemical companies or the display cover plate manufacturers themselves that may offer competing protective coatings including optical DLC. These competitors may have substantially greater financial, technical, marketing, manufacturing and other resources as compared to Intevac. Furthermore, any of Intevac’s competitors may develop enhancements to, or future generations of, competitive products that offer superior price or performance features. In addition, new competitors, with enhanced products may enter the markets that Intevac currently serves.

The principal competitive factors affecting Photonics products include price, extreme low-light level detection performance, power consumption, resolution, size, ease of integration, reliability, reputation and customer support and service. Intevac faces substantial competition for Photonics products, and many competitors have substantially greater resources and brand recognition. In the military market, Exelis and L-3 Communications are large and well-established defense contractors and are the primary U.S. manufacturers of analog image intensifier tubes used in Generation-III night vision devices and their derivative products. Intevac expects that other companies will develop digital night vision products and aggressively promote their sales. Furthermore, Intevac’s LIVAR target identification sensors and cameras face competition from CMC Electronics, DRS Technologies, FLIR Systems, Goodrich and Raytheon, established companies that manufacture

infrared sensors and cameras which are presently used in long-range target identification systems. Within the near-eye display market, Intevac also faces competition from Rockwell-Collins and Vuzix, both of which can offer cost-competitive products.

Marketing and Sales

Equipment sales are made primarily through Intevac’s direct sales force. Intevac also sells its products through distributors in Japan and China. The selling process for Intevac’s Equipment products is multi-level and lengthy, involving individuals from marketing, engineering, operations, customer service and senior management.

Installing and integrating new equipment requires a substantial investment by a customer. Sales of Intevac’s systems depend, in significant part, upon the decision of a prospective customer to replace obsolete equipment or to increase manufacturing capacity by upgrading or expanding existing manufacturing facilities or by constructing new manufacturing facilities, all of which typically involve a significant capital commitment. Intevac’s systems have a lengthy sales cycle, during which Intevac may expend substantial funds and management time and effort with no assurance that a sale will result.

The production of large complex systems requires Intevac to make significant investments in inventory both to fulfill customer orders and to maintain adequate supplies of spare parts to service previously shipped systems. Intevac maintains inventories of spare parts in the United States, Singapore, Malaysia and China to support its Equipment customers. Intevac often requires its Equipment 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 price billed upon shipment, and the balance of the price and any sales tax due upon completion of installation and acceptance of the system at the customer’s factory.

Intevac provides process and applications support, customer training, installation, start-up assistance and post-installation service support to Intevac’s Equipment customers. Intevac has field offices in Singapore, China, and Malaysia to support Intevac’s customers in Asia.

Warranties for Intevac’s Equipment products typically range between 12 and 24 months from customer acceptance. During the warranty period any necessary non-consumable parts are supplied and installed without charge.

Sales of Photonics products for military applications are primarily made to the end user through Intevac’s direct sales force. Intevac sells to the U.S. Government and to leading defense contractors such as Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon, DRS Technologies, BAE and Sagem.

Intevac is subject to long sales cycles in the Photonics segment because many of Intevac’s products, such as Intevac’s night vision systems, typically must be designed into Intevac’s customers’ products, which are often complex and state-of-the-art. These development cycles are generally multi-year, and Intevac’s sales are dependent on Intevac’s customer successfully integrating Intevac’s product into its product, completing development of its product and then obtaining production orders for its product. Sales of these products are also often dependent on ongoing funding of defense programs by the U.S. government and its allies. Additionally, sales to international customers are contingent on issuance of export licenses by the U.S. government.

Sales of Raman spectroscopy instruments were made through a combination of direct sales, distributors and value added resellers.

Photonics 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, Intevac invoices customers using estimated annual rates approved by the Defense Contracts Audit Agency (“DCAA”).

Research and Development and Intellectual Property

Intevac’s long-term growth strategy requires continued development of new products. Intevac works closely with Intevac’s customers to design products that meet their planned technical and production requirements. Product development and engineering organizations are located primarily in the United States and Singapore.

Intevac invested $15.8 million (24.2% of net revenue) in fiscal 2014, $21.0 million (30.2% of net revenues) in fiscal 2013, and $31.8 million (38.1% of net revenues) in fiscal 2012 for product development and engineering programs to create new products and to improve existing technologies and products. Intevac has spent an average of 26.0% of net revenues on product development and engineering over the last five years.

Intevac’s competitive position significantly depends on Intevac’s research, development, engineering, manufacturing and marketing capabilities, and not just on Intevac’s patent position. However, protection of Intevac’s technological assets by obtaining and enforcing intellectual property rights, including patents, is important. Therefore, Intevac’s practice is to file patent applications in the United States and other countries for inventions that Intevac considers important. Intevac has more than 250 patents in the United States and other countries, and additional applications are pending for new inventions. Although Intevac does not consider Intevac’s business materially dependent upon any one patent, the rights of Intevac and the products made and sold under Intevac’s patents along with other intellectual property, including trademarks, know-how, trade secrets and copyrights, taken as a whole, are a significant element of Intevac’s business.

Intevac enters into patent and technology licensing agreements with other companies when management determines that it is in Intevac’s best interest to do so. Intevac pays royalties under existing patent license agreements for use of certain patented technologies in several of Intevac’s products. Intevac also receives, from time to time, royalties from licenses granted to third parties. Royalties received from or paid to third parties have not been material to Intevac’s consolidated results of operations.

In the normal course of business, Intevac periodically receives and makes inquiries regarding possible patent infringements. In dealing with such inquiries, it may be necessary or useful for us to obtain or grant licenses or other rights. However, there can be no assurance that such licenses or rights will be available to us on commercially reasonable terms, or at all. If Intevac is not able to resolve or settle claims, obtain necessary licenses and/or successfully prosecute or defend Intevac’s position, Intevac’s business, financial condition and results of operations could be materially and adversely affected.

Manufacturing

Intevac manufactures its Equipment products at its facilities in California and Singapore. Intevac’s Equipment manufacturing operations include electromechanical assembly, vacuum processing, fabrication of sputter sources, and system assembly, alignment and testing.

Photonics products are manufactured at Intevac’s facilities in California. Photonics manufactures sensors, cameras, integrated camera systems, and near-eye display systems using advanced manufacturing techniques and equipment. Intevac’s operations include vacuum processing, and electromechanical and optical system assembly.

Employees

At January 3, 2015, Intevac had 271 employees, including 6 contract employees.

Compliance with Environmental Regulations

Intevac is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture, treatment and disposal of toxic or otherwise hazardous substances, chemicals,

materials or waste. Intevac treats the cost of complying with government regulations and operating a safe workplace as a normal cost of business and allocates the cost of these activities to all functions, except where the cost can be isolated and charged to a specific function. The environmental standards and regulations promulgated by government agencies in California and Singapore are rigorous and set a high standard of compliance. Intevac believes its costs of compliance with these regulations and standards are comparable to other companies operating similar facilities in these jurisdictions.

Executive Officers of the Registrant

Certain information about our executive officers as of February 17, 2015 is listed below:


Name	Age		Position
Executive Officers:
Norman H. Pond		76	Chairman of the Board
Wendell T. Blonigan		53	President and Chief Executive Officer
James Moniz		57	Executive Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary
Andres Brugal		57	Executive Vice President and General Manager, Photonics
Jay Cho		50	Executive Vice President and General Manager, Thin-Film Equipment
Christopher Smith		55	Vice President, Business Development
Michael Russak		68	Executive Advisor

Other Key Officers:
Babak Adibi		60	Vice President and General Manager, Solar Implant
Verle Aebi		60	Chief Technology Officer, Photonics
James Birt		50	Vice President, Manufacturing and Customer Support, Equipment Products
Terry Bluck		55	Vice President, Technology, Equipment Products
Kimberly Burk		49	Vice President, Human Resources
Timothy Justyn		52	Vice President of Operations, Photonics

Mr. Pond is a founder of Intevac and has served as Chairman of the Board since February 1991. He has also served as President and Chief Executive Officer of the Company. Before joining Intevac, from 1988 to 1990, Mr. Pond served as President and Chief Operating Officer of Varian Associates, Inc. (“Varian”), a publicly held manufacturer of semiconductor, communication, defense and medical products where he was responsible for overall management of Varian’s operations. From 1984 to 1988, Mr. Pond was President of Varian’s Electron Device and Systems Group and became a Director of Varian in 1986. Prior to joining Varian, Mr. Pond was employed by Teledyne, a diversified electronics company, from 1963 to 1984 where he served in various positions, including Group Executive. Mr. Pond holds a BS in Physics from the University of Missouri at Rolla and a MS in Physics from the University of California at Los Angeles.

Mr. Blonigan joined Intevac in July 2013 as President and Chief Executive Officer. Prior to joining Intevac, Mr. Blonigan co-founded Orbotech LT Solar in 2009 and served as the company’s Chief Executive Officer until 2013. From 2006 until 2009, he was the Chief Operating Officer at Photon Dynamics, Inc. In 1991, Mr. Blonigan joined Applied Materials’ AKT display subsidiary. During his tenure at AKT, he held various positions. In 2003, he was appointed President and served in this role until 2006; from 1999 through 2003 he was Vice President, and prior to that time he was Director of Engineering and New Product Development. Mr. Blonigan holds a BS in electronic engineering technology from DeVry University Missouri Institute of Technology.

Mr. Moniz joined Intevac as Executive Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary in November 2014. Mr. Moniz previously served as the Chief Financial Officer of Nanometrics, Inc. from 2009 until his retirement in 2011. During 2008, Mr. Moniz was the Chief Financial

Officer at Photon Dynamics, Inc. From 2000 until 2008, Mr. Moniz served as the Chief Financial Officer at Nextest Systems Corporation. Prior to Nextest, Mr. Moniz held senior financial management positions at Millennia Vision Corporation, Lockheed Martin Corporation, Loral Corporation and Varian Associates. Mr. Moniz holds an MBA, a BS in accounting and a BS in marketing from San Jose State University.

Mr. Brugal joined Intevac as Executive Vice President and General Manager, Photonics in January 2012. Before joining Intevac, Mr. Brugal was employed at Vision Systems International, a joint venture between Rockwell Collins and Elbit Systems of America, from 2006 to 2012, serving as President and Chief Executive Officer from April 2007 to January 2012. From 2005 to 2006, Mr. Brugal was employed as a consultant for DRS Technologies, a subsidiary of Finmeccanica SPA. Mr. Brugal retired from active service with the U.S. Navy in October 2005 with the rank of Captain. Mr. Brugal holds an MS in strategic studies and security affairs from the U.S. Naval War College; and a BS in general engineering from the U.S. Naval Academy.

Mr. Cho joined Intevac in January 2014 and currently serves as Executive Vice President and General Manager, Thin-Film Equipment. Prior to joining Intevac, Mr. Cho was President, Chief Executive Officer and Co-Founder of REEnewal Corporation. From 2006 to 2011, Mr. Cho served as Vice President / General Manager of the Tester and Repair Business Units of Orbotech LTD. From 2005 to 2006, Mr. Cho served as Vice President, Product Development at Metara Inc. From 1992 to 2005, Mr. Cho held various management positions at Novellus Systems, Inc. Prior to Novellus, Mr. Cho worked for Digital Equipment Corporation and Intermec Corporation. Mr. Cho holds a BS in electrical engineering from Washington State University and MBA from University of Phoenix.

Mr. Smith joined Intevac in August 2010 and currently serves as Vice President, Business Development. Prior to joining Intevac, Mr. Smith served as Senior Vice President Sales and Customer Support at Oerlikon Solar, from November 2007 to August 2010. From 2006 to 2007 he served as Senior Vice President of Sales and Service with Cymer. Previously, Mr. Smith was employed by Applied Materials from 1994 to 2006. While at Applied Materials he held a variety of executive-level customer support and operations positions. He also served as product business group general manager for Chemical Mechanical Polishing and was managing director of Global Business Development for the Dielectric and Physical Vapor Deposition Product Business Groups. Mr. Smith earned his BS in Business Administration / Material Management from San Jose State University.

Dr. Russak joined Intevac in July 2008 and currently serves as Executive Advisor. From 2008 to January 2014 he served as Executive Vice President and General Manager, Hard Disk Equipment Products. Before joining Intevac Dr. Russak served as President and Chief Technical Officer of Komag from 2000 to 2007. From 1993 to 2000, Dr. Russak served as Vice President of Research and Development at HMT Technology. Previously, Dr. Russak held management positions in the Research Division of IBM Corporation. Prior to IBM, Dr. Russak worked for Grumman Aerospace Corporation as a contributing scientist. Dr. Russak holds a BS in ceramic engineering and a PhD in materials science from Rutgers University.

Dr. Adibi joined Intevac in November 2010 as Vice President and General Manager, Solar Implant. Prior to joining Intevac, Dr. Adibi was President, Chief Technology Officer and Co-Founder of Solar Implant Technologies. Prior to founding Solar Implant Technologies, Dr. Adibi worked for Silicon Genesis Corporation from 2006 to 2008 as the General Manager of the Solar Equipment Division. From 2003 to 2006 he served as Vice President in the Laser Annealing Product Division of Ultratech. Previously, Dr. Adibi was employed by Applied Materials from 1985 to 2003. While at Applied Materials he held a variety of executive-level engineering positions. Dr. Adibi holds numerous patents in the area of ion implantation, a PhD in ion implantation and semiconductors and a MS in nuclear power from Surrey University in England and a BS in physics from the Imperial College of London.

Mr. Aebi has served as Chief Technology Officer of the Photonics business since August 2006. Previously, Mr. Aebi served as President of the Photonics Division from July 2000 to July 2006 and as General Manager of

the Photonics Division since May 1995. Mr. Aebi was elected as a Vice President of the Company in September 1995. From 1988 through 1994, Mr. Aebi was the Engineering Manager of the night vision business Intevac acquired from Varian Associates in 1991, 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. Birt joined Intevac in September 2004 and currently serves as Vice President, Manufacturing and Customer Support of the Equipment Products Division. Before joining Intevac, Mr. Birt was employed by Applied Materials from July 1992 to September 2004, most recently as Director, Field Operations/Quality North America. Mr. Birt holds a BS in electrical engineering from Texas A&M University.

Mr. Bluck rejoined Intevac as Vice President, Technology of the Equipment Products Division in August 2004. Mr. Bluck had previously worked at Intevac from December 1996 to November 2002 in various engineering positions. The business unit Mr. Bluck worked for was sold to Photon Dynamics in November 2002, and he was employed there as Vice President, Rapid Thermal Process Product Engineering until August 2004. Mr. Bluck holds a BS in physics from San Jose State University.

Ms. Burk joined Intevac in May 2000 and currently serves as Vice President of Human Resources. Prior to joining Intevac, Ms. Burk served as Human Resources Manager of Moen, Inc. from 1999 to 2000 and as Human Resources Manager of Lawson Mardon from 1994 to 1999. Ms. Burk holds a BS in sociology from Northern Illinois University.

Mr. Justyn has served as Vice President of Operations, Photonics from October 2008. Mr. Justyn served as Vice President, Equipment Manufacturing from April 1997 to October 2008. 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.

Available Information

Intevac’s website is http://www.intevac.com. Intevac makes available free of charge, on or through its website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. This website address is intended to be an inactive textual reference only and none of the information contained on Intevac’s website is part of this report or is incorporated by reference herein.

Trademarks

Intevac’s trademarks, include the following: “200 Lean^®,” “AccuLuber™,” “EBAPS^®,” “ENERGi™,” “I-Port™,” “LithoPrime™,” “LIVAR^®,” “INTEVAC MATRIX™,” “MicroVista^®,” “NightVista^®,” “Night Port™” and “INTEVAC VERTEX™”.

Item 1A.

Risk Factors

The following factors could materially affect Intevac’s business, financial condition or results of operations and should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.

The industries we serve are cyclical, volatile and unpredictable.

A significant portion of our revenue is derived from the sale of equipment used to manufacture commodity technology products such as disk drives, PV solar cells and cell phones. This subjects us to business cycles, the timing, length and volatility of which can be difficult to predict. When demand for commodity technology

products exceeds production capacity, then demand for new capital equipment such as ours tends to be amplified. Conversely, when supply of commodity technology products exceeds demand, then demand for new capital equipment such as ours tends to be depressed. For example, sales of systems for magnetic disk production were depressed from late 2007 through 2009. The number of new systems delivered increased in 2010 as customers increased their production capacity in response to increased demand for data storage, but decreased in 2011 through 2014 as the hard disk drive industry did not add the same level of capacity that it did in 2010. We cannot predict with any certainty when these cycles will begin or end. We believe that our sales will continue to be depressed through 2015.

Our equipment represents only a portion of the capital expenditure that our customers incur when they upgrade or add production capacity. Accordingly, our customers generally commit to making large capital expenditures far in excess of the cost of our systems alone when they decide to purchase our systems. The magnitude of these capital expenditures requires our customers to have access to large amounts of capital. Our customers generally reduce their level of capital investment during downturns in the overall economy or during a downturn in their industries.

We must effectively manage our resources and production capacity to meet rapidly changing demand. Our business experiences rapid growth and contraction, which stresses our infrastructure, internal systems and managerial resources. During periods of increasing demand for our products, we must have sufficient manufacturing capacity and inventory to meet customer demand; attract, retain and motivate a sufficient number of qualified individuals; and effectively manage our supply chain. During periods of decreasing demand for our products, we must be able to align our cost structure with prevailing market conditions; motivate and retain key employees and effectively manage our supply chain.

Sales of our equipment are primarily dependent on our customers’ upgrade and capacity expansion plans and whether our customers select our equipment.

We have no control over our customers’ upgrade and capacity expansion plans, and we cannot be sure they will select, or continue to select, our equipment when they upgrade or expand their capacity. The sales cycle for our equipment systems can be a year or longer, involving individuals from many different areas of Intevac and numerous product presentations and demonstrations for our prospective customers. Our sales process also commonly includes production of samples and customization of our products. We do not enter into long-term contracts with our customers, and until an order is actually submitted by a customer there is no binding commitment to purchase our systems.

Sales of new manufacturing systems are also dependent on obsolescence and replacement of the installed base of our customers’ existing equipment with newer, more capable equipment. If upgrades are developed that extend the useful life of the installed base of systems, then we tend to sell more upgrade products and fewer new systems, which can significantly reduce total revenue. For example, some of our 200 Lean customers continue to use legacy systems for the production of perpendicular media, which delayed the replacement of such systems with new 200 Lean systems.

Our 200 Lean customers also experience competition from companies that produce alternative storage technologies like flash memory, which offer smaller size, lower power consumption and more rugged designs. These storage technologies are being used increasingly in enterprise applications and smaller form factors such as tablets, smart-phones, ultra-books, and notebook personal computers instead of hard disk drives. Tablet computing devices and smart-phones have never contained, nor are they likely in the future to contain, a disk drive. Products using alternative technologies, such as flash memory, optical storage and other storage technologies are becoming increasingly common and could become a significant source of competition to particular applications of the products of our 200 Lean customers, which could adversely affect our results of operations. If alternative technologies, such as flash memory, replace hard disk drives as a significant method of digital storage, then demand for our hard disk manufacturing products would decrease.

The Photonics’ business is also subject to long sales cycles because many of its products, such as our military imaging products, often must be designed into the customers’ end products, which are often complex state-of-the-art products. These development cycles are typically multi-year, and our sales are contingent on our customers successfully integrating our product into their product, completing development of their product and then obtaining production orders for their product from the U.S. government or its allies.

We operate in an intensely competitive marketplace, and our competitors have greater resources than we do.

In the market for our disk sputtering systems, we experience competition primarily from Canon Anelva, which has sold a substantial number of systems worldwide. In the PV equipment market, Intevac faces competition from large established competitors including Eteris, Centrotherm Photovoltaics, Amtech, Jusung and Von Ardenne. In the market for our military imaging products we experience competition from companies such as Exelis and L-3 Communications. Some of our competitors have substantially greater financial, technical, marketing, manufacturing and other resources than we do, especially in the PV equipment market. Our competitors may develop enhancements to, or future generations of, competitive products that offer superior price or performance features, and new competitors may enter our markets and develop such enhanced products. Moreover, 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.

Our growth depends on development of technically advanced new products and processes.

We have invested heavily, and continue to invest, in the development of new products, such as our 200 Lean and other PVD systems, our solar systems for PV applications, our digital night-vision products and our near-eye display products. Our success in developing and selling new products depends upon a variety of factors, including our ability to: predict future customer requirements, make technological advances, achieve a low total cost of ownership for our products, introduce new products on schedule, manufacture products cost-effectively including transitioning production to volume manufacturing; commercialize and attain customer acceptance of our products; and achieve acceptable and reliable performance of our new products in the field. Our new product decisions and development commitments must anticipate continuously evolving industry requirements significantly in advance of sales. In addition, we are attempting to expand into new or related markets, including the PV and cell phone cover glass markets. Our expansion into the PV market is dependent upon the success of our customers’ development plans. To date we have not recognized material revenue from such products. Failure to correctly assess the size of the markets, to successfully develop cost effective products to address the markets or to establish effective sales and support of the new products would have a material adverse effect on future revenues and profits. In addition, if we invest in products for which the market does not develop as anticipated, we may incur significant charges related to such investments.

Rapid technological change in our served markets requires us to rapidly develop new technically advanced products. Our future success depends in part on our ability to develop and offer new products with improved capabilities and to continue to enhance our existing products. If new products have reliability or quality problems, our performance may be impacted by reduced orders, higher manufacturing costs, delays in acceptance and payment for new products and additional service and warranty expenses.

We are exposed to risks associated with a highly concentrated customer base.

Historically, a significant portion of our revenue in any particular period has been attributable to sales of our disk sputtering systems to a limited number of customers. This concentration of customers, when combined with changes in the customers’ specific capacity plans and market share shifts can lead to extreme variability in our revenue and financial results from period to period.

The concentration of our customer base may enable our customers to demand pricing and other terms unfavorable to Intevac, and makes us more vulnerable to changes in demand by a given customer. Orders from a

relatively limited number of manufacturers have accounted for, and will likely continue to account for, a substantial portion of our revenues. The loss of one of these large customers, or delays in purchasing by them, could have a material and adverse effect on our revenues.

Our operating results fluctuate significantly from quarter to quarter, which can lead to volatility in the price of our common stock.

Our quarterly revenues and common stock price have fluctuated significantly. We anticipate that our revenues, operating margins and common stock price will continue to fluctuate for a variety of reasons, including: (1) changes in the demand, due to seasonality, cyclicality and other factors in the markets for computer systems, storage subsystems and consumer electronics containing disks our customers produce with our systems; (2) delays or problems in the introduction and acceptance of our new products, or delivery of existing products; (3) timing of orders, acceptance of new systems by our customers or cancellation of those orders; (4) new products, services or technological innovations by our competitors or us; (5) changes in our manufacturing costs and operating expense; (6) changes in general economic, political, stock market and industry conditions; and (7) any failure of our operating results to meet the expectations of investment research analysts or investors.

Any of these, or other factors, could lead to volatility and/or a rapid change in the trading price of our common shares. 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 Intevac, could result in substantial costs and diversion of management time and attention.

Adverse economic conditions and volatility and disruption of the capital and credit markets may negatively impact our revenues and our ability to access financing.

Economic conditions worldwide have contributed to decreased spending by our customers and a slowdown in the hard disk drive industry. These factors have adversely impacted our operating results and have caused us to be cautious about our future outlook. Our customers also continue to remain cautious about the economy. Negative macroeconomic and global recessionary factors, further volatility or disruption in the capital and credit markets or further uncertainty or weakening in key markets could negatively impact spending for our products and may materially adversely affect our business, operating results and financial condition.

In addition, while we intend to finance operations with existing cash and cash flow from operations, if necessary, we may require financing to support our continued operations. Due to the existing uncertainty in the capital and credit markets, our access to capital may not be available on terms acceptable to us or at all.

We may not be able to obtain export licenses from the U.S. government permitting delivery of our products to international customers.

Many of our products, especially Photonics’ products, require export licenses from U.S. government agencies under the Export Administration Act, the Trading with the Enemy Act of 1917, the Arms Export Act of 1976 or the International Traffic in Arms Regulations. These regulations limit the potential market for some of our products. We can give no assurance that we will be successful in obtaining all the licenses necessary to export our products. Heightened government scrutiny of export licenses for defense related products has resulted in lengthened review periods for our license applications. Exports to countries that are not considered by the U.S. government to be allies are likely to be prohibited, and even sales to U.S. allies may be limited. Failure to comply with export control laws, including identification and reporting of all exports and re-exports of controlled technology or exports made without correct license approval or improper license use could result in severe penalties and revocation of licenses. Failure to obtain export licenses, delays in obtaining licenses, or revocation of previously issued licenses would prevent us from selling the affected products outside the United States and could negatively impact our results of operations.

The Photonics business is dependent on U.S. government contracts, which are subject to fixed pricing, immediate termination and a number of procurement rules and regulations.

We sell our Photonics products and services directly to the U.S. government, as well as to prime contractors for various U.S. government programs. The U.S government is considering significant changes in the level of existing, follow-on or replacement programs. We cannot predict the impact of potential changes in priorities due to military transformations and/or the nature of future war-related activities. A shift of government priorities to programs in which we do not participate and/or reductions in funding for or the termination of programs in which we do participate, unless offset by other programs and opportunities, could have a material adverse effect on our financial position, results of operations, or cash flows.

Funding of multi-year government programs is subject to congressional appropriations, and there is no guarantee that the U.S. government will make further appropriations, particularly given the U.S. government’s recent focus on spending in other areas and spending reductions. Sales to the U.S. government and its prime contractors may also be affected by changes in procurement policies, budget considerations and political developments in the United States or abroad. For example, if the U.S. government is less focused on defense spending or there is a decrease in hostilities, demand for our products could decrease. The loss of funding for a government program would result in a loss of future revenues attributable to that program. The influence of any of these factors, which are beyond our control, could negatively impact our results of operations.

A significant portion of our U.S. government revenue is derived from fixed-price development and production contracts. Under fixed-price contracts, unexpected increases in the cost to develop or manufacture a product, whether due to inaccurate estimates in the bidding process, unanticipated increases in material costs, reduced production volumes, inefficiencies or other factors, are borne by us. We have experienced cost overruns in the past that have resulted in losses on certain contracts, and may experience additional cost overruns in the future. We are required to recognize the total estimated impact of cost overruns in the period in which they are first identified. Such cost overruns could have a material adverse effect on our results of operations.

Generally, government contracts contain provisions permitting termination, in whole or in part, without prior notice at the government’s convenience upon the payment of compensation only for work done and commitments made at the time of termination. We cannot ensure 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 ensure 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 ensure that we, or our customers, will continue to remain in good standing as federal contractors.

As a U.S. government contractor we must comply with specific government rules and regulations and are subject to routine audits and investigations by U.S. government agencies. If we fail to comply with these rules and regulations, the results could include: (1) reductions in the value of our contracts; (2) reductions in amounts previously billed and recognized as revenue; (3) contract modifications or termination; (4) the assessment of penalties and fines; and (5) suspension or debarment from government contracting or subcontracting for a period of time or permanently.

Changes to our effective tax rate affect our results of operations.

As a global company, we are subject to taxation in the United States, Singapore and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future effective tax rate could be affected by: (1) changes in tax laws; (2) the allocation of earnings to countries with differing tax rates; (3) changes in worldwide projected annual earnings in current and future years: (4) accounting pronouncements; or (5) changes in the valuation of our deferred tax assets and liabilities. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be different from the treatment reflected in our historical income tax provisions and accruals, which could result in additional payments by Intevac.

We booked significant tax benefits in 2008, 2009, 2011 and 2013 based on our belief that we could both carry back losses and tax credits to years Intevac paid income taxes and carry forward losses and tax credits to future years where we believed we would generate taxable income. In fiscal 2012, the Company established a $23.4 million non-cash valuation allowance against certain of its U.S. deferred tax assets based upon an evaluation of all available objectively verifiable evidence, including but not limited to the cumulative loss incurred over the three-year period ended December 31, 2012 by the Company’s U.S. operations. The Company recorded valuation allowance increases for the U.S. federal deferred tax asset of $4.7 million and $7.2 million, respectively for the years ended January 3, 2015 and December 31, 2013. In fiscal 2014, based on a similar evaluation, the Company established a $9.4 million non-cash valuation allowance against certain of its Singapore deferred tax assets. The establishment of the non-cash valuation allowances on the Company’s U.S. and Singapore deferred tax assets did not have any impact on its cash, nor does such an allowance preclude the Company from utilizing its tax losses, tax credits or other deferred tax assets in future periods.

Beginning in 2007, Intevac benefitted from a tax holiday in Singapore which was scheduled to expire at the end of 2015. The tax holiday provided a lower income tax rate on income from certain technology, so long as certain thresholds of business investment and employment levels were met in Singapore. Intevac was granted an early termination of this tax holiday effective January 1, 2013 by the Singapore tax authority. The terms of the early termination include meeting certain agreed upon future annual business spending and staffing levels in Singapore. Failure to meet the terms of the early termination could result in a claw back by the Singapore government of tax benefits received in previous years. A claw back of all or part of these tax benefits would adversely affect our results of operations and cash flows.

Our success depends on international sales and the management of global operations.

In previous years, the majority of our revenues have come from regions outside the United States. Most of our international sales are to customers in Asia, which includes products shipped to overseas operations of U.S. companies. We currently have manufacturing facilities in California and Singapore and international customer support offices in Singapore, China, and Malaysia. We expect that international sales will continue to account for a significant portion of our total revenue in future years. Certain of our suppliers are also located outside the United States.

Managing our global operations presents challenges including, but not limited to, those arising from: (1) global trade issues; (2) variations in protection of intellectual property and other legal rights in different countries; (3) concerns of U.S. governmental agencies regarding possible national commercial and/or security issues posed by growing manufacturing business in Asia; (4) fluctuation of interest rates, raw material costs, labor and operating costs, and exchange rates; (5) variations in the ability to develop relationships with suppliers and other local businesses; (6) changes in the laws and regulations of the United States, including export restrictions, and other countries, as well as their interpretation and application; (7) the need to provide technical and spares support in different locations; (8) political and economic instability; (9) cultural differences; (10) varying government incentives to promote development; (11) shipping costs and delays; (12) adverse conditions in credit markets; (13) variations in tariffs, quotas, tax codes and other market barriers; and (14) barriers to movement of cash.

We must regularly assess the size, capability and location of our global infrastructure and make appropriate changes to address these issues.

We may be subject to additional impairment charges due to potential declines in the fair value of our assets.

As a result of our acquisitions, we have significant intangible assets and had significant goodwill on our balance sheet. We test these assets for impairment on a periodic basis as required, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The events or changes that could require us to test our intangible assets for impairment include: a significant reduction in our stock price,

and as a result market capitalization, changes in our estimated future cash flows, as well as changes in rates of growth in our industry or in any of our reporting units. In the fourth quarter of 2012, as a result of a decline in our market capitalization and a reduction in our revenue expectations we recorded a goodwill impairment charge in the amount of $18.4 million. We will continue to evaluate the carrying value of our intangible assets and if we determine in the future that there is a potential further impairment, we may be required to record additional charges to earnings which could materially adversely affect our financial results and could also materially adversely affect our business. See Note 6 “Goodwill and Purchased Intangible Assets, Net” in the Notes to the Consolidated Financial Statements for additional information related to impairment of goodwill and intangible assets.

Our success is dependent on recruiting and retaining a highly talented work force.

Our employees are vital to our success, and our key management, engineering and other employees are difficult to replace. We do not maintain key person life insurance on any of our employees. The expansion of high technology companies worldwide has increased demand and competition for qualified personnel, and has made companies increasingly protective of prior employees. It may be difficult for us to locate employees who are not subject to non-competition agreements and other restrictions.

The majority of our U.S. operations are located in California where the cost of living and of recruiting employees is high. Our operating results depend, in large part, upon our ability to retain and attract qualified management, engineering, marketing, manufacturing, customer support, sales and administrative personnel. Furthermore, we compete with industries such as the hard disk drive, semiconductor, and solar industries for skilled employees. Failure to retain existing key personnel, or to attract, assimilate or retain additional highly qualified employees to meet our needs in the future, could have a material and adverse effect on our business, financial condition and results of operations.

We are dependent on certain suppliers for parts used in our products.

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 subassemblies 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, increased costs to expedite deliveries or develop alternative suppliers, or require redesign of our products to accommodate alternative suppliers. Some of our suppliers are thinly capitalized and may be vulnerable to failure given recent economic conditions.

Our business depends on the integrity of our intellectual property rights.

The success of our business depends upon the integrity of our intellectual property rights, and we cannot ensure that: (1) any of our pending or future patent applications will be allowed or that any of the allowed applications will be issued as patents or will issue with claims of the scope we sought; (2) any of our patents will not be invalidated, deemed unenforceable, circumvented or challenged; (3) the rights granted under our patents will provide competitive advantages to us; (4) other parties will not develop similar products, duplicate our products or design around our patents; or (5) our patent rights, intellectual property laws or our agreements will adequately protect our intellectual property or competitive position.

From time to time, we have received claims that we are infringing third parties’ intellectual property rights or seeking to invalidate our rights. We cannot ensure 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.

We could be involved in litigation.

From time to time we may be involved in litigation of various types, including litigation alleging infringement of intellectual property rights and other claims. Litigation is expensive, subjects us to the risk of significant damages and requires significant management time and attention and could have a material and adverse effect on our business, financial condition and results of operations.

Difficulties in integrating past or future acquisitions could adversely affect our business.

We have completed a number of acquisitions and dispositions during our operating history. For example, in 2007, we acquired certain assets of DeltaNu, LLC and certain assets of Creative Display Systems, LLC, in 2008 we acquired certain assets of OC Oerlikon Balzers Ltd., in 2010 we acquired the outstanding shares of SIT, in 2012 we completed the sale of certain semiconductor mainframe technology assets and in 2013 we completed the sale of the assets of DeltaNu. We have spent and may continue to spend significant resources identifying and pursuing future acquisition opportunities. Acquisitions involve numerous risks including: (1) difficulties in integrating the operations, technologies and products of the acquired companies; (2) the diversion of our management’s attention from other business concerns; and (3) the potential loss of key employees of the acquired companies. Failure to achieve the anticipated benefits of the prior and any future acquisitions or to successfully integrate the operations of the companies we acquire could have a material and adverse effect on our business, financial condition and results of operations. Any future acquisitions could also result in potentially dilutive issuance of equity securities, acquisition or divestiture-related write-offs or the assumption of debt and contingent liabilities. In addition, we have made and will continue to consider making strategic divestitures. With any divestiture, there are risks that future operating results could be unfavorably impacted if targeted objectives, such as cost savings, are not achieved or if other business disruptions occur as a result of the divestiture or activities related to the divestiture.

We are subject to risks of non-compliance with environmental and other governmental 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, remediation costs 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.

We are also subject to a variety of other governmental regulations and may incur significant costs associated with the compliance with these regulations. For example rules adopted by the SEC to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act impose diligence and disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in the products we manufacture. Compliance with these regulations is likely to result in additional costs and expenses or may affect the sourcing and availability of the components used in the products we manufacture.

Business interruptions could adversely affect our operations.

Our operations are vulnerable to interruption by fire, earthquake, floods or other natural disaster, quarantines or other disruptions associated with infectious diseases, national catastrophe, terrorist activities, war, disruptions in our computing and communications infrastructure due to power loss, telecommunications failure, human error, physical or electronic security breaches and computer viruses, and other events beyond our control. We do not have a detailed disaster recovery plan. Despite our implementation of network security measures, our tools and servers may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems and tools located at customer sites. Political instability could cause us to incur increased costs in transportation, make such transportation unreliable, increase our insurance costs or cause international currency markets to fluctuate. All these unforeseen disruptions and instabilities could have the same

effects on our suppliers and their ability to timely deliver their products. In addition, we do not carry sufficient business interruption insurance to compensate us for all losses that may occur, and any losses or damages incurred by us could have a material adverse effect on our business and results of operations. For example, we self-insure earthquake risks because we believe this is the prudent financial decision based on the high cost of the limited coverage available in the earthquake insurance market. An earthquake could significantly disrupt our operations, most of which are conducted in California. It could also significantly delay our research and engineering effort on new products, most of which is also conducted in California. We take steps to minimize the damage that would be caused by business interruptions, but there is no certainty that our efforts will prove successful.

We could be negatively affected as a result of a proxy contest and the actions of activist stockholders.

A proxy contest with respect to election of our directors, or other activist stockholder activities, could adversely affect our business because: (i) responding to a proxy contest and other actions by activist stockholders can be costly and time-consuming, disruptive to our operations and divert the attention of management and our employees; (ii) perceived uncertainties as to our future direction caused by activist activities may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners; and (iii) if individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plans.

We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management must perform evaluations of our internal control over financial reporting. Beginning in 2004, our Form 10-K has included a report by management of their assessment of the adequacy of such internal control. Additionally, our independent registered public accounting firm must publicly attest to the effectiveness of our internal control over financial reporting.

We have completed the evaluation of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act. Although our assessment, testing, and evaluation resulted in our conclusion that as of January 3, 2015, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in future periods. Ongoing compliance with this requirement is complex, costly and time-consuming. If Intevac fails to maintain effective internal control over financial reporting; our management does not timely assess the adequacy of such internal control; or our independent registered public accounting firm does not deliver an unqualified opinion as to the effectiveness of our internal control over financial reporting, then we could be subject to restatement of previously reported financial results, regulatory sanctions and a decline in the public’s perception of Intevac, which could have a material and adverse effect on our business, financial condition and results of operations.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Intevac maintains its corporate headquarters in Santa Clara, California. The location, approximate size and type of facility of the principal properties are listed below. Intevac leases all of its properties and does not own any real estate.


Location	Square Footage		Principal Use
Santa Clara, CA		169,583	Corporate Headquarters; Equipment and Photonics Marketing, Manufacturing, Engineering and Customer Support
Fremont, CA		11,973	Photonics Sensor Fabrication
Carlsbad, CA		10,360	Photonics Micro Display Product Manufacturing
Singapore		31,947	Equipment Manufacturing and Customer Support
Malaysia		1,291	Equipment Customer Support
Shenzhen, China		2,568	Equipment Customer Support

Intevac considers these properties adequate to meet its current and future requirements. Intevac regularly assesses the size, capability and location of its global infrastructure and periodically makes adjustments based on these assessments.

Item 3.

Legal Proceedings

From time to time, Intevac is involved in claims and legal proceedings that arise in the ordinary course of business. Intevac expects that the number and significance of these matters will increase as Intevac’s business expands. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us or at all. Intevac is not presently a party to any lawsuit or proceeding that, in Intevac’s opinion, is likely to seriously harm Intevac’s business.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

Intevac common stock is traded on The Nasdaq Stock Market (NASDAQ Global Select) under the symbol “IVAC.” As of February 17, 2015, there were 96 holders of record. In fiscal years 2014 and 2013, Intevac did not declare or pay cash dividends to its stockholders. Intevac currently has no plans to declare or pay cash dividends.

The following table sets forth the high and low closing sale prices per share as reported on The Nasdaq Stock Market for the periods indicated.


	High		Low
Fiscal 2014:
First Quarter	$	8.83	$	7.26
Second Quarter		10.09		6.77
Third Quarter		8.17		6.00
Fourth Quarter		8.21		6.40
Fiscal 2013:
First Quarter	$	4.97	$	4.13
Second Quarter		5.66		4.30
Third Quarter		6.74		5.60
Fourth Quarter		7.95		4.97

Recent Sales of Unregistered Securities

None.

Performance Graph

The following graph compares the cumulative total stockholder return on Intevac’s Common Stock with that of the NASDAQ US Benchmark Total Return Index and the NASDAQ Computer Hardware (Subsector) Total Return Index. The comparison assumes $100 was invested on December 31, 2009 in Intevac Common Stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. The performance shown in the graph represents past performance and should not be considered an indication of future performance.

COMPARISON OF CUMULATIVE TOTAL RETURN SINCE DECEMBER 31, 2009 AMONG INTEVAC, NASDAQ US BENCHMARK TOTAL RETURN INDEX AND NASDAQ COMPUTER HARDWARE (SUBSECTOR) TOTAL RETURN INDEX

LOGO


	12/31/09		12/31/10		12/31/11		12/31/12		12/31/13		01/03/15
Intevac, Inc.	$	100	$	122	$	65	$	40	$	65	$	64
Nasdaq US Benchmark Total Return Index		100		118		118		137		183		206
Nasdaq Computer Hardware (Subsector) Total Return Index		100		124		130		155		183		248

Repurchases of Intevac Common Stock

The following table provides information as of January 3, 2015 with respect to the shares of common stock repurchased by Intevac during the fourth quarter of fiscal 2014.


	Total Number of Shares Purchased		Average Price Paid per Share		Aggregate Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Program*		Maximum Dollar Value of Shares That May Yet be Purchased Under the Program*
	(in thousands, except per share data)
Month #1
September 28, 2014 to October 25, 2014		121	$	6.73	$	815		121	$	20,020
Month #2
October 26, 2014 to November 22, 2014		1	$	7.00	$	10		1	$	20,010
Month #3
November 23, 2014 to January 3, 2015		—	$	—	$	—		—	$	—

*	On November 21, 2013, the Board of Directors approved a stock repurchase program authorizing up to $30 million in repurchases.

Item 6.

Selected Financial Data

The following selected financial information has been derived from Intevac’s historical audited consolidated financial statements and should be read in conjunction with the consolidated financial statements, the accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the corresponding fiscal years.


	Fiscal Year ⁽¹⁾
	2014			2013			2012			2011			2010
	(in thousands, except per share data)
Net revenues	$	65,550		$	69,632		$	83,424		$	82,974		$	202,526
Gross profit	$	17,433		$	21,973		$	34,158		$	30,431		$	87,672
Operating income (loss)	$	(19,354	)	$	(17,823	)	$	(42,533	)	$	(30,741	)	$	31,238
Net income (loss)	$	(27,445	)	$	(15,696	)	$	(55,319	)	$	(21,975	)	$	28,049
Earnings (loss) per share:
Basic	$	(1.16	)	$	(0.66	)	$	(2.37	)	$	(0.96	)	$	1.26
Diluted	$	(1.16	)	$	(0.66	)	$	(2.37	)	$	(0.96	)	$	1.22
At year end:
Total assets	$	120,275		$	148,276		$	172,503		$	225,821		$	251,771

On February 19, 2014, the Board of Directors of the Company approved the Company’s change to a 52-53 week fiscal year ending on the Saturday nearest to December 31 of each year in order to improve the alignment of financial and business processes and to streamline financial reporting. Each fiscal quarter consists of 13 weeks, with an occasional fourth quarter extending to 14 weeks, if necessary, for the fiscal year to end on the Saturday nearest to December 31. The Company’s fiscal 2014 year ended on January 3, 2015.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis (MD&A) is intended to facilitate an understanding of Intevac’s business and results of operations. This MD&A should be read in conjunction with Intevac’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. The following discussion contains forward-looking statements and should also be read in conjunction with the cautionary statement set forth at the beginning of this Form 10-K. MD&A includes the following sections:

•

Overview: a summary of Intevac’s business, measurements and opportunities.

•

Results of Operations: a discussion of operating results.

•

Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash, contractual obligations and financial position.

•

Critical Accounting Policies: a discussion of critical accounting policies that require the exercise of judgments and estimates.

Overview

Intevac provides process manufacturing equipment solutions to the hard disk drive industry and offers high-productivity, thin-film processing systems to the PV industry and to adjacent markets for thin-film deposition applications including the display cover panel market. Intevac also provides sensors, cameras and systems for government applications such as night vision and long-range target identification. Intevac’s customers include manufacturers of hard disk drives, PV cells and cell phones as well as the U.S. government and its agencies and contractors. Intevac reports two segments: Equipment and Photonics.

Product development and manufacturing activities occur in North America and Asia. Intevac has field offices in Asia to support its equipment customers. Intevac’s equipment and service products are highly technical and are sold primarily through Intevac’s direct sales force. Intevac also sells its products through distributors in Japan and China.

Intevac’s results are driven by worldwide demand for hard disk drives, which in turn depends on the growth in digital data creation and storage, the rate of areal density improvements, the end-user demand for personal computers, enterprise data storage, including on-line, cloud storage and near-line applications, personal audio and video players and video game platforms that include such drives. Demand for Intevac’s equipment is impacted by Intevac’s customers’ relative market share positions and production capacity needs. Intevac continues to execute its strategy of equipment diversification into new markets by introducing new products for PV solar cell manufacturing and most recently a thin-film PVD application for protective coating for display cover panel manufacturing. Intevac believes that expansion into these markets will result in incremental equipment revenues for Intevac and decrease Intevac’s dependence on the hard disk drive industry. Intevac’s equipment business is subject to cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for hard disk drives, PV cells, and cell phones as well as other factors such as global economic conditions and technological advances in fabrication processes.


Fiscal Year	2014			2013			2012			Change 2014 vs. 2013			Change 2013 vs. 2012
	(in thousands, except percentages and per share amounts)
Net revenues	$	65,550		$	69,632		$	83,424		$	(4,082	)	$	(13,792	)
Gross profit		17,433			21,973			34,158			(4,540	)		(12,185	)
Gross margin percent		26.6	%		31.6	%		40.9	%		(5.0) points			(9.3) points
Net loss		(27,445	)		(15,696	)		(55,319	)		(11,749	)		39,623
Loss per diluted share	$	(1.16	)	$	(0.66	)	$	(2.37	)	$	(0.50	)	$	1.71

Fiscal 2012 financial results reflected a challenging environment as the global economic slowdown resulted in lower sales of personal computers and consumer electronic applications and lower hard drive unit shipments by hard drive manufacturers. Personal computer sales were negatively impacted by changing consumer trends toward higher usage of mobile and tablet devices. The transition to “cloud” storage also resulted in lower hard drive shipments. With hard drive unit shipments down over 2011, the Company shipped only two 200 Lean systems for capacity during 2012. In fiscal 2012, Intevac completed a customer qualification on its PV etch manufacturing product as well as delivered two beta ion implant evaluation systems that underwent qualification. During the first quarter of 2012, Intevac discontinued offering products to the semiconductor industry and sold certain assets which comprised its semiconductor mainframe technology. In fiscal 2012, Photonics business levels grew driven primarily by the recovery of the contract research and development (“R&D”) business, as several key U.S. defense programs received budgetary funding in late 2011 and Intevac was awarded a major R&D contract with the U.S. Army to develop a pilot night-vision system for the Apache helicopter. The fiscal 2012 net loss reflected slightly higher net revenues, improved gross margins, increased operating expenses from the inclusion of the $18.4 million goodwill and intangibles impairment charge and the $3.0 million write-off of a promissory note receivable and higher income tax expenses from the establishment of a $23.4 million deferred tax valuation allowance. During fiscal 2012, the Company did not record compensation expense in association with its profit sharing and executive incentive variable compensation programs as a result of being in a loss position.

Fiscal 2013 financial results reflected a continued challenging environment as the hard drive business was negatively impacted by the effects of the proliferation of tablets, the transition to centralized or “cloud” storage, and the effects of uncertain macro-economic environment conditions on demand for personal computers from consumers and corporations. The Company shipped only two 200 Lean systems for capacity during 2013. In fiscal 2013, Intevac completed a customer qualification on its solar implant ENERGi system. In fiscal 2013, Photonics business levels reflected the continued proliferation of Intevac’s technology into major military programs and the U.S. Army awarded Photonics a multi-year contract to manufacture pilot night-vision systems for the Apache helicopter. During the first quarter of 2013, Intevac sold certain assets comprising its Raman spectroscopy instruments product line, also known as DeltaNu. The fiscal 2013 net loss reflected lower net revenues, lower gross margins, lower operating expenses and a small income tax benefit. Fiscal 2013 operating expenses reflected savings from cost reduction initiatives which were implemented in the first half of fiscal 2013. During fiscal 2013 the Company recorded a decrease in the liability for contingent consideration related to the SIT acquisition resulting in a gain of $3.7 million recognized in operating expenses. The adjustment in the liability was due to a change in the estimate of future product revenues in the earnout period. During fiscal 2013, the Company resumed its executive incentive variable compensation programs and recorded variable compensation expense. During fiscal 2013, the Company did not recognize an income tax benefit on the U.S. net operating loss.

Fiscal 2014 financial results reflected a continued challenging environment, although there were fundamental improvements in the markets our Equipment business serves which will affect the long-term demand for our equipment products. In the hard drive industry media unit shipments were fundamentally flat year over year, reversing a downward trend over the last few years and personal computer sales increased. These are primary drivers for demand for our hard disk drive manufacturing equipment. During fiscal 2014, our HDD customers’ media production capacity continued to exceed demand, which limited the near-term demand for our 200 Lean systems. The Company shipped only two 200 Lean systems to hard disk drive manufacturers during 2014. In 2014 the PV market also improved as increased consumer demand for solar panels began to offset a global oversupply of production capacity experienced by solar cell manufacturers in recent years. In 2014, Intevac continued to execute on its diversification strategy to enter into new and adjacent markets by introducing new products and shipped the first MATRIX™ PVD system for solar cell manufacturing and the first VERTEX™ development coating system for display cover panels. As of the end of fiscal 2014 these systems were undergoing installation and qualification activities. In fiscal 2014, Photonics business levels increased as Photonics delivered large scale production shipments of the pilot night vision systems for the Apache helicopter. The fiscal 2014 net loss reflected lower net revenues, lower gross margins, lower operating expenses and higher

income tax expenses from the establishment of a $9.4 million deferred tax valuation allowance on the deferred tax assets in Singapore. Fiscal 2014 operating expenses reflected savings from cost reduction initiatives which were implemented in the first half of fiscal 2014, offset in part by increased costs associated with a contested Board of Directors election. During fiscal 2014, as part of an effort to lower cash expenditures but to continue to reward employees for their hard work, the Company modified certain executive incentive variable compensation programs to be settled in restricted stock units with a one year vesting and as a result recorded lower variable compensation expense. During fiscal 2014, the Company did not recognize an income tax benefit on the U.S. and Singapore net operating losses.

In fiscal 2015, although Intevac expects positive growth for media unit shipments, Intevac expects that our hard disk drive customers’ media production capacity will continue to exceed demand and the Company therefore expects that shipments of Intevac equipment to hard disk drive manufacturers will be approximately at the same levels as 2014. In 2015, Intevac expects higher sales of new thin-film equipment products as Intevac delivers the initial production shipments of our coating system for display cover panels and as solar cell manufacturers begin to adopt new vacuum technologies in the manufacturing of solar cells. For fiscal 2015, Intevac expects that Photonics business levels will be about the same levels as 2014 as Photonics continues to deliver production shipments of the pilot night vision systems for the Apache helicopter.

Results of Operations

Net revenues


	Fiscal Year
	2014		2013		2012		Change 2014 vs. 2013			Change 2013 vs. 2012
	(in thousands)
Equipment	$	25,290	$	39,135	$	52,538	$	(13,845	)	$	(13,403	)
Photonics
Products		29,173		16,053		15,131		13,120			922
Contract R&D		11,087		14,444		15,755		(3,357	)		(1,311	)

		40,260		30,497		30,886		9,763			(389	)

Total net revenues	$	65,550	$	69,632	$	83,424	$	(4,082	)	$	(13,792	)

Net revenues consist primarily of sales of equipment used to manufacture thin-film disks and PV cells, and related equipment and system components; sales of low-light imaging products; and revenue from contract R&D related to the development of electro-optical sensors, cameras and systems.

The decrease in Equipment revenues in fiscal 2014 versus fiscal 2013 was due primarily to a decrease in revenue recognized on technology upgrades and spare parts. The decrease in Equipment revenues in fiscal 2013 versus fiscal 2012 was due primarily to a decrease in revenue recognized on disk lubrication systems, technology upgrades and spare parts. Intevac delivered two 200 Lean systems in each of fiscal 2014, 2013 and 2012.

During fiscal 2013 Intevac recognized revenue on its first solar implant ENERGi system. During fiscal 2012 Intevac recognized revenue on an etch system for PV applications. During the first quarter of 2012, Intevac discontinued offering products to the semiconductor industry and sold certain assets which comprised its semiconductor mainframe technology.

Photonics revenues increased by 32.0% to $40.3 million in fiscal 2014 versus fiscal 2013 and decreased by 1.3% to $30.5 million in fiscal 2013 versus fiscal 2012. Contract R&D revenue in fiscal 2014 and fiscal 2013 decreased sequentially as a result of a lower volume of contracts as Intevac completed its major contract with the U.S. Army to develop a pilot night vision system for the Apache helicopter. Contract R&D revenue in fiscal 2012 reflected a higher volume of contracts related to two large U.S. government defense programs and due to the continued expansion of Intevac’s low-light camera and sensor products in military applications.

Photonics product revenue increased in fiscal 2014 as a result of the transition to large scale production deliveries for the Apache pilot night vision camera at the end of 2013. Photonics product revenue increased in fiscal 2013 as a result of higher sales levels of low-light camera modules. Photonics product revenue in fiscal 2012 reflected lower sales of low-light camera modules and a lower level of shipment volumes for long-range imaging products. Fiscal 2013 and 2012 product revenues reflected lower sales of Raman spectroscopy products. On March 29, 2013, Intevac sold certain assets comprising its Raman spectroscopy instruments product line, also known as DeltaNu, and no longer offers Raman spectroscopy products. In 2015, Photonics revenue is expected to be about the same level as in 2014. Substantial growth in future Photonics revenues is dependent on the proliferation of Intevac’s technology into major military programs, continued defense spending, the ability to obtain export licenses for foreign customers and obtaining production subcontracts for these programs.

Backlog


	January 3, 2015		December 31, 2013
	(in thousands)
Equipment	$	17,743	$	13,565
Photonics		30,683		46,319

Total backlog	$	48,426	$	59,884

Equipment backlog at January 3, 2015 includes one 200 Lean system, one PV deposition system, one PVD coating system for display cover panels and one PV implant system. Equipment backlog at December 31, 2013 included one 200 Lean system and one PV deposition system.

Significant portions of Intevac’s revenues in any particular period have been attributable to sales to a limited number of customers. The following customers accounted for at least 10 percent of Intevac’s consolidated net revenues in fiscal 2014, 2013, and 2012.


	2014			2013			2012
U.S. Government		32	%		*			10	%
HGST		17	%		*			*
Seagate Technology		15	%		37	%		51	%
Northrop Grumman		*			11	%		*

*	Less than 10%

The magnetic disk manufacturing industry consists of a small number of large manufacturers.

Revenue by geographic region


	Fiscal Year
	2014		2013		2012		Change 2014 vs. 2013			Change 2013 vs. 2012
	(in thousands)
United States	$	51,584	$	32,534	$	30,845	$	19,050		$	1,689
Asia		9,931		31,907		47,712		(21,976	)		(15,805	)
Europe		4,035		5,191		3,795		(1,156	)		1,396
Rest of world		—		—		1,072		—			(1,072	)

Total net revenues	$	65,550	$	69,632	$	83,424	$	(4,082	)	$	(13,792	)

International sales include products shipped to overseas operations of U.S. companies. The increase in U.S. sales in fiscal 2014 versus fiscal 2013 was primarily due to the production shipments of the pilot night vision camera for the Apache helicopter, delivery of two 200 Lean systems to U.S. customers and higher camera sales.

The decrease in sales to the Asia region in fiscal 2014 versus fiscal 2013 was primarily due to no delivery of any 200 Lean systems to customer fabs in Asia and lower net revenues from solar implant systems, disk lubrication systems and technology upgrades. The decrease in sales to the Europe region in fiscal 2014 versus fiscal 2013 was primarily due to lower sales of Photonics’ digital night-vision cameras to a NATO customer. The increase in U.S. sales in fiscal 2013 versus fiscal 2012 was primarily due to higher camera sales to a U.S. customer. The decrease in sales to the Asia region in fiscal 2013 versus fiscal 2012 was primarily due to lower net revenues from disk sputtering systems, disk lubrication systems and technology upgrades. The increase in sales to the Europe region in fiscal 2013 versus fiscal 2012 was primarily due to higher sales of Photonics’ digital night-vision cameras to a NATO customer.

Gross margin


	Fiscal Year
	2014			2013			2012			Change 2014 vs. 2013			Change 2013 vs. 2012
	(in thousands, except percentages)
Equipment gross profit	$	167		$	12,116		$	23,594		$	(11,949	)	$	(11,478	)
% of Equipment net revenues		0.7	%		31.0	%		44.9	%
Photonics gross profit	$	17,266		$	9,857		$	10,564		$	7,409		$	(707	)
% of Photonics net revenues		42.9	%		32.3	%		34.2	%
Total gross profit	$	17,433		$	21,973		$	34,158		$	(4,540	)	$	(12,185	)
% of net revenues		26.6	%		31.6	%		40.9	%

Cost of net revenues consists primarily of purchased materials and costs attributable to contract R&D, and also includes assembly, test and installation labor and overhead, customer-specific engineering costs, warranty costs, royalties, provisions for inventory reserves and scrap.

Equipment gross margin was 0.7% in fiscal 2014 compared to 31.0% in fiscal 2013 and 44.9% in fiscal 2012. Fiscal 2014 gross margins declined over fiscal 2013 and fiscal 2013 gross margins declined over fiscal 2012 due primarily to lower sales of higher-margin upgrades, lower factory utilization and higher provisions for inventory reserves. Fiscal 2014 gross margins reflect a $3.1 million reserve against certain solar implant inventory, equivalent to 12.3 percentage points of margin. Fiscal 2012 higher gross margins reflected a higher mix of upgrades and spares shipments as well as higher system margins, offset in part by lower factory utilization and higher provisions for inventory reserves. Gross margins in the Equipment business vary depending on a number of factors, including product mix, product cost, system configuration and pricing, factory utilization, and provisions for excess and obsolete inventory.

Photonics gross margin was 42.9% in fiscal 2014 compared 32.3% in fiscal 2013 and 34.2% in fiscal 2012. Fiscal 2014 gross margins improved over fiscal 2013 due primarily from higher-margin product sales, cost reductions associated with digital night-vision products and warranty and higher margins on contract R&D. Fiscal 2013 gross margins declined over fiscal 2012 due primarily to lower margins on contract R&D, offset in part by higher-margin product sales and cost reductions associated with digital night-vision products and warranty. Manufacturing costs for digital night vision products decreased in fiscal 2014, 2013 and 2012 as a result of cost reductions and yield improvements.

Research and development


	Fiscal Year
	2014		2013		2012		Change 2014 vs. 2013			Change 2013 vs. 2012
	(in thousands)
Research and development expense	$	15,832	$	21,037	$	31,762	$	(5,205	)	$	(10,725	)

Research and development expense consists primarily of salaries and related costs of employees engaged in and prototype materials used in ongoing research, design and development activities for PV cell manufacturing equipment, disk sputtering equipment and Photonics products.

Research and development spending decreased for Equipment during fiscal 2014 as compared to fiscal 2013 due primarily to lower spending on PV development and savings from cost reduction initiatives. Equipment research and development expense in both fiscal 2014 and fiscal 2013 reflected lower spending due to costs recovered under NRE arrangements. Research and development spending decreased for Equipment during fiscal 2013 as compared to fiscal 2012 due primarily to lower spending on PV development, costs recovered under a NRE arrangement and savings from cost reduction initiatives.

Research and development spending decreased for Photonics during 2014 as compared to 2013 and during 2013 as compared to 2012 due to a lower volume of development efforts. Photonics research and development spending during the first quarter of fiscal 2013 and fiscal 2012 included costs from DeltaNu which did not re-occur in fiscal 2014 as DeltaNu was sold on March 29, 2013. Research and development expenses do not include costs of $7.8 million, $11.3 million, and $11.3 million, in 2014, 2013, and 2012, respectively, which are related to customer-funded contract R&D programs and therefore included in cost of net revenues.

Selling, general and administrative


	Fiscal Year
	2014		2013		2012		Change 2014 vs. 2013			Change 2013 vs. 2012
	(in thousands)
Selling, general and administrative expense	$	21,205	$	22,278	$	25,919	$	(1,073	)	$	(3,641	)

Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial and management costs. All domestic sales and the majority of international sales of disk sputtering products in Asia are made through Intevac’s direct sales force. Intevac also sells its equipment through distributors in Japan and China. Intevac has offices in Singapore, Malaysia and China to support Intevac’s equipment customers in Asia.

Selling, general and administrative expenses decreased in 2014 over the amount spent in 2013 due primarily to lower variable compensation program expense and savings from cost reduction initiatives, offset in part by increased costs associated with a contested Board of Directors election. Selling, general and administrative expenses decreased in 2013 over the amount spent in 2012 due primarily to lower equity compensation expense and savings from cost reduction initiatives offset in part, by increased accruals for variable compensation programs.

Acquisition-related (benefit), net


	Fiscal Year
	2014			2013			2012			Change 2014 vs. 2013		Change 2013 vs. 2012
	(in thousands)
Acquisition-related (benefit), net	$	(250	)	$	(3,727	)	$	(219	)	$	3,477	$	(3,508	)

Acquisition-related expense (benefit), net, represents the change in the fair value of contingent consideration arrangements related to the SIT acquisition; see Note 7 “Contingent Consideration.” Increases in the assessed likelihood of a higher payout under a contingent consideration arrangement contribute to increases in the fair value of the related liability. Conversely, decreases in the assessed likelihood of a higher payout under a contingent consideration arrangement contribute to decreases in the fair value of the related liability.

The benefits recognized during fiscal 2014 and fiscal 2013 are associated with changes in the fair value of the contingent consideration related to the revenue earnout obligation. We recorded liabilities on our consolidated balance sheet of $4.1 million as of the original acquisition date for this contingent consideration arrangement and subsequently remeasured the liability to fair value, with changes in fair value reported in earnings. As a result of this remeasurement, we recorded a net gain of $250,000 and of $3.7 million, respectively during fiscal 2014 and fiscal 2013.

Bad debt expense


	Fiscal Year
	2014		2013		2012		Change 2014 vs. 2013		Change 2013 vs. 2012
	(in thousands)
Bad debt expense	$	—	$	—	$	3,017	$	—	$	(3,017	)

During the third quarter of 2012 Intevac wrote off a promissory note receivable and the related deferred profit liability from the sale of certain thin-film PV equipment in a previous year and incurred bad debt expense of $3.0 million due to the insolvency of the customer.

Impairment of goodwill and intangibles

Intevac acquired in-process research and development (“IPR&D”) of $4.0 million in connection with the acquisition of SIT in November 2010. The fair value of the IPR&D was determined through estimates and valuation techniques based on the terms of the acquisition. This IPR&D was the initial development of Intevac’s ENERGi ion implantation process module for use in the manufacturing of PV solar cells. Intevac completed development on this process module during the second quarter of fiscal 2013. Upon completion of development and commercialization of the product, Intevac began amortization of the acquired IPR&D over its expected useful life of 7 years.

Immediately prior to the commencement of amortization, the Company assessed the valuation of the IPR&D from the SIT acquisition. The review involved determining the present value of future cash flows from the resulting product based on estimates, judgments, and assumptions that management believes are appropriate for the circumstances. Based upon updated management projections related to the IPR&D and on a discounted cash flow model, Intevac determined the fair value of the IPR&D exceeded its carrying value and no impairment existed.

Goodwill and Intevac’s indefinite life intangible assets were tested for impairment on an annual basis or more frequently upon the occurrence of circumstances that indicated that goodwill and indefinite life intangible assets may have been impaired. In the fourth quarter of 2012, Intevac performed its 2012 annual assessment of impairment. Intevac’s reporting units for goodwill impairment testing purposes are consistent with the reportable segments: Equipment and Photonics. Intevac tested goodwill for possible impairment by first determining the fair value of the related reporting unit and then comparing this value to the recorded net assets of the reporting unit.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. Intevac used two valuation methodologies, the market approach and the income approach, to determine the fair value for its reporting units. In the Equipment reporting unit the market approach was weighted at 75% and the income approach was weighted at 25% due to the uncertainty in the near term forecast. In the Photonics reporting unit, the income approach and the market approach were given equal weighting. Under the income approach, the fair value of each reporting unit was calculated based on the present value of estimated future cash flows, which were arrived at by evaluating historical trends, current budgets, operating plans and industry data. Estimates of the future cash flows associated with the businesses were critical to these assessments. The assumptions used in the fair value calculation included revenue growth rates, operating margins, risk

adjusted discount rates and future economic and market conditions. The market approach looked at the valuations of comparable public companies which Intevac selected based upon similar industries and products. Intevac then evaluated the reasonableness of the fair value calculations of the reporting units by reconciling the total of the fair values of the two reporting units to Intevac’s total market capitalization, taking into account an appropriate control premium. Intevac compared the carrying value of the reporting units to the fair value calculations.

The results of step one of the goodwill impairment analysis indicated that the fair values of both the Equipment and Photonics reporting units were less than their carrying values and potential impairment existed. Intevac completed the second step of the goodwill impairment analysis and determined that there would be no remaining implied value attributable to goodwill in either reporting unit and accordingly, Intevac wrote off all of the goodwill which amounted to $10.5 million in the Equipment reporting unit and $7.9 million in the Photonics reporting unit.

In the second half of 2012, the Company experienced a significant decline in its stock price which resulted in the Company’s market capitalization falling significantly below the recorded value of its consolidated net assets. The impairment charge in the Equipment reporting unit was primarily driven by lower projected results compared to prior forecasts. In the third quarter of fiscal 2012, hard drive shipments were below industry expectations and forecasted hard drive units were expected to be down year over year for the second consecutive year. Also the timing of Intevac’s penetration strategy for the PV market was impacted by the overcapacity of PV manufacturers and the oversupply of solar panels in the market. In light of these events, Intevac lowered its near term forecast for the Equipment reporting unit. The impairment charge in the Photonics reporting unit was primarily driven by adverse equity market conditions in the Photonics industry due to concerns over lower U.S. government military spending and budget constraints that caused a decrease in current market multiples compared with prior years testing.

Intevac also performed the annual impairment review of a tradename, an indefinite life intangible asset, during the fourth quarter of 2012 using a discounted cash flow model and the relief-from-royalty method. Based on this review, Intevac determined the carrying value of the tradename exceeded its fair value and recorded an impairment charge of $30,000. This tradename was subsequently sold as part of the sale of the Raman spectroscopy instruments product line.

Intevac will continue to evaluate the carrying value of intangible assets and if it is determined that there is a potential impairment; Intevac may record additional charges which would adversely affect its financial results. For further details, see note 6 in the notes to the consolidated financial statements.

Cost reduction plans

During the first half of fiscal 2014, Intevac substantially completed implementation of the 2014 cost reduction plan (the “Plan”), which was intended to reduce expenses and reduce its workforce by 6 percent. The total cost of implementing the Plan was $288,000 of which $43,000 was reported under cost of net revenues and $245,000 was reported under operating expenses. Substantially all cash outlays in connection with the Plan occurred in the first half of fiscal 2014. Implementation of the Plan is expected to reduce salary, wages and other employee-related expenses by approximately $2.1 million on an annual basis. As of January 3, 2015, activities related to the Plan were complete.

During the first quarter of fiscal 2013, Intevac announced the 2013 cost reduction plan (the “2013 Plan”) to reduce expenses including a reduction in its workforce. Implementation of the Plan was substantially completed in the first half of fiscal 2013 and the workforce was reduced by 18 percent. During the first half of 2013, Intevac recognized employee-related costs of $742,000 of which $315,000 was reported under cost of net revenues and $427,000 was reported under operating expenses in connection with the 2013 Plan. All cash outlays in connection with the 2013 Plan occurred in the first half of fiscal 2013. As of January 3, 2015, activities related to the 2013 Plan were complete.

Gain (loss) on divestitures

On March 29, 2013, the Company sold certain assets, including existing tangible and intangible assets, which comprised its Raman spectroscopy instruments product line, also known as DeltaNu, for consideration not to exceed $1.5 million, of which $500,000 was received in cash upon closing, and recorded a loss of $208,000. The first earnout payment in the amount of $75,000 was received in the second quarter of fiscal 2014 and was reported in other income (expense), net on the consolidated statement of operations. On January 6, 2012, the Company sold certain assets, including intellectual property and residual assets, which comprised its semiconductor mainframe technology for $3.0 million in cash and recorded a gain of $2.2 million. See Note 8 “Divestitures” in the notes to the consolidated financial statements for additional information related to the gain (loss) on divestitures.

Interest income and other, net


	Fiscal Year
	2014		2013		2012		Change 2014 vs. 2013			Change 2013 vs. 2012
	(in thousands)
Interest income and other, net	$	337	$	405	$	454	$	(68	)	$	(49	)

Interest income and other, net in fiscal 2014 included $179,000 of interest income on investments and $75,000 earnout income from a divestiture and $11,000 of foreign currency gains. Interest income and other, net in 2013 included $279,000 of interest income on investments and a gain of $153,000 related to the sale of fixed assets partially offset by $36,000 of foreign currency losses. Interest income and other, net in 2012 included $806,000 of interest income on investments partially offset by $381,000 in realized losses on the sale of Auction Rate Securities (“ARS”) and $78,000 of foreign currency losses. The decreases in interest income in 2014 and 2013 were driven by lower invested balances and lower interest rates on Intevac’s investments.

Provision for (benefit from) income taxes


	Fiscal Year
	2014		2013			2012		Change 2014 vs. 2013		Change 2013 vs. 2012
	(in thousands)
Provision for (benefit from) income taxes	$	8,428	$	(1,722	)	$	13,240	$	10,150	$	(14,962	)

Intevac’s effective income tax rate was (44.3%) for fiscal 2014, 9.9% for fiscal 2013, and (31.5%) for fiscal 2012. Intevac’s tax rate differs from the applicable statutory rates due primarily to establishment of a valuation allowance, the utilization of deferred and current credits and the effect of permanent differences and adjustments of prior permanent differences. Intevac’s future effective income tax rate depends on various factors including, the level of Intevac’s projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carry forwards, availability of tax credits and the effectiveness of Intevac’s tax planning strategies. Management carefully monitors these factors and timely adjusts the effective income tax rate accordingly.

Intevac benefitted from a tax holiday in Singapore which was scheduled to expire at the end of 2015. The tax holiday provided a lower income tax rate on certain classes of income so long as certain thresholds of business investment and employment levels were met in Singapore. Intevac was granted an early termination of this tax holiday effective January 1, 2013 by the Singapore tax authority. The terms of the early termination include meeting certain agreed upon future annual business spending and staffing levels in Singapore. Failure to meet the terms of the early termination could result in a claw back by the Singapore government of tax benefits received in previous years.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant element of objective negative evidence evaluated was the cumulative loss incurred over the three-year periods ended January 3, 2015, December 31, 2013 and December 31, 2012. Such objective evidence limits the ability to consider other subjective evidence such as Intevac’s projections for future growth. On the basis of this analysis and the significant negative objective evidence, for fiscal 2014, a valuation allowance of $9.4 million was added to record only the portion of the Singapore deferred tax asset that more likely than not will be realized.

In fiscal 2012, a valuation allowance of $23.4 million was added to record only the portion of the U.S. federal deferred tax asset that more likely than not will be realized. For fiscal 2014 and 2013, valuation allowance increases of $4.7 million and $7.2 million, respectively for the U.S. federal deferred tax asset were recorded.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

Liquidity and Capital Resources

At January 3, 2015, Intevac had $68.6 million in cash, cash equivalents, and investments compared to $81.4 million at December 31, 2013. During fiscal 2014, cash, cash equivalents and investments decreased by $12.8 million due primarily to cash used by operating activities, repurchases of common stock, purchases of fixed assets and increases in restricted cash partially offset by cash received from the sale of Intevac common stock to Intevac’s employees through Intevac’s employee benefit plans.

Cash, cash equivalents and investments consist of the following:


	January 3, 2015		December 31, 2013
	(in thousands)
Cash and cash equivalents	$	21,482	$	20,121
Short-term investments		29,598		48,975
Long-term investments		17,542		12,318

Total cash, cash-equivalents and investments	$	68,622	$	81,414

Cash used by operating activities totaled $2.8 million in 2014 and $9.0 million in 2013. Improved operating cash flow in 2014 was a result of lower levels of working capital, offset in part by a higher net loss adjusted to exclude the effect of non-cash charges including deferred taxes, depreciation, amortization, changes in the fair value of acquisition-related contingent consideration, and equity-based compensation. Intevac continues to carefully manage working capital.

Accounts receivable totaled $12.1 million at January 3, 2015 compared to $15.0 million at December 31, 2013. The number of days outstanding for Intevac’s accounts receivable was 56 at January 3, 2015 compared to 64 at December 31, 2013. Net inventories totaled $19.2 million at January 3, 2015 compared to $22.8 million at December 31, 2013. Inventory turns were 1.9 in both fiscal 2014 and fiscal 2013. Accounts payable totaled $4.6 million at January 3, 2015 compared to $4.0 million at December 31, 2013. Other accrued liabilities increased to $8.3 million at January 3, 2015 compared to $3.3 million at December 31, 2013. Other accrued liabilities at January 3, 2015 includes $4.3 million of deferred revenue associated with two completed systems at customer sites that are undergoing installation and acceptance testing and an accrual of $2.1 million for unsettled trades for purchases of investments at January 3, 2015. Customer advances decreased from $3.7 million at December 31, 2013 to $2.6 million at January 3, 2015.

Investing activities generated cash of $10.1 million in 2014, $4.6 million in 2013, and $21.9 million in 2012. Proceeds from sales and maturities of investments, net of purchases, totaled $15.5 million in 2014, $5.7 million in 2013, and $22.1 million in 2012. Intevac is required to maintain a standby letter of credit for $1.0 million for the Santa Clara, California campus lease. This standby letter of credit is secured with $1.0 million of restricted cash. Intevac pledged $780,000 of restricted cash as collateral for a banker’s guarantee on an advance payment made by a customer. On March 29, 2013, the Company sold certain assets which comprised its Raman spectroscopy instruments product line, also known as DeltaNu, and received $500,000 in cash upon closing. On January 6, 2012 the Company sold certain assets which comprised its semiconductor mainframe technology for $3.0 million in cash. Capital expenditures were $3.7 million in 2014, $1.8 million in 2013, and $3.3 million in 2012.

Financing activities used cash of $5.8 million in 2014 and of $1.5 million in 2012 and generated cash of $271,000 in 2013. Financing activities for 2014 and 2013 included repurchases of common stock. In November 2013, Intevac’s Board of Directors approved a stock repurchase program authorizing up to $30 million in repurchases. Cash used to repurchase shares totaled $8.4 million in 2014 and $1.6 million in 2013. The sale of Intevac common stock to Intevac’s employees through Intevac’s employee benefit plans provided $2.6 million in 2014, $1.9 million in 2013, and $1.9 million in 2012.

In connection with the acquisition of SIT, Intevac agreed to pay up to an aggregate of $7.0 million in cash to the selling shareholders if certain milestones were achieved over a specified period. Intevac made payments of $2.4 million in fiscal 2011 and $3.3 million in fiscal 2012 to the selling shareholders for achievement of the first, second and third milestones. The fourth and final milestone was not achieved on the targeted date outlined in the acquisition agreement and was not paid. There is no remaining contingent consideration obligation associated with the milestone agreement at January 3, 2015. In connection with the acquisition of SIT, Intevac also agreed to pay to the selling shareholders in cash a revenue earnout on Intevac’s net revenue from commercial sales of certain solar implant products over a specified period up to an aggregate of $9.0 million. As of January 3, 2015, payments made associated with the revenue earnout obligation have not been significant.

Intevac’s investment portfolio consists principally of investment grade money market mutual funds, U.S. treasury and agency securities, commercial paper, municipal bonds, corporate bonds and variable rate demand notes (“VRDNs”). Intevac regularly monitors the credit risk in its investment portfolio and takes measures, which may include the sale of certain securities, to manage such risks in accordance with its investment policies.

Intevac previously held ARS that, due to their lack of liquidity, were categorized as Level 3 securities. Intevac did not hold any ARS at January 3, 2015. During 2012 Intevac sold ARS with a par value of $4.9 million, collected $4.5 million and recognized realized losses on the sales of $381,000.

As of January 3, 2015, approximately $8.2 million of cash and cash equivalents and $780,000 of restricted cash were domiciled in foreign tax jurisdictions. Intevac expects a significant portion of these funds to remain off shore in the short term. If the Company chose to repatriate these funds to the United States, it would be required to accrue and pay additional taxes on any portion of the repatriation where no United States income tax had been previously provided.

Intevac believes that its existing cash, cash equivalents and investments will be sufficient to meet Intevac’s cash requirements for the next 12 months. Intevac intends to undertake approximately $6.0 million—$8.0 million in capital expenditures during the next 12 months.

Contractual Obligations

The following table summarizes Intevac’s contractual obligations as of January 3, 2015:


	Payments due by period
	Total		< 1 Year		1–3 Years		3-5 Years		> 5 Years
	(in thousands)
Operating lease obligations	$	26,700	$	3,206	$	5,715	$	5,339	$	12,440
Purchase obligations and commitments ¹		8,316		8,316		—		—		—
Other long-term liabilities ^{2, 4}		1,025		1,025		—		—		—

Total ^{3, 4}	$	36,041	$	12,547	$	5,715	$	5,339	$	12,440

Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Intevac and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. These purchase obligations are related principally to inventory and other items.

²	Intevac is unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, $100,000 of unrecognized tax benefits has been excluded from the table above.

³	Total excludes contractual obligations already recorded on the consolidated balance sheet as current liabilities (except other long-term liabilities) and certain purchase obligations.

⁴	Total excludes contingent consideration that may be paid pursuant to asset purchases or business combinations.

Off-Balance Sheet Arrangements

Off-balance sheet firm commitments relating to outstanding letters of credit amounted to approximately $1.8 million as of January 3, 2015. We do not maintain any other off-balance sheet arrangements, transactions, obligations, or other relationships that would be expected to have a material current or future effect on the consolidated financial statements.

Critical Accounting Policies

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 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.

A critical accounting policy is defined as one that is both material to the presentation of Intevac’s consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on Intevac’s financial condition or results of operations. Specifically, these policies have the following attributes: (1) Intevac is required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates Intevac could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on Intevac’s financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. Intevac bases its 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 Intevac’s operating environment changes. These changes have historically been minor and

have been included in the consolidated financial statements as soon as they became 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 section above entitled “Risk Factors.” Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Intevac’s consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and provide a meaningful presentation of Intevac’s financial condition and results of operations.

Management believes that the following are critical accounting policies:

Revenue Recognition

Intevac recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have passed to Intevac’s customer or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured. Intevac’s shipping terms are customarily FOB shipping point or equivalent terms. Intevac’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment, Intevac recognizes revenue upon shipment for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer acceptance; and (3) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred until delivery of the deferred elements. When a sales arrangement contains multiple elements, Intevac allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or best estimate of selling price (“ESP”) if neither VSOE nor TPE is available. Intevac generally utilizes the ESP due to the nature of its products. In certain cases, technology upgrade sales are accounted for as multiple-element arrangements, usually split between delivery of the parts and installation on the customer’s systems. In these cases, Intevac recognizes revenue for the relative sales price of the parts upon shipment and transfer of title, and recognizes revenue for the relative sales price of installation services when those services are completed. Revenue related to sales of spare parts is generally recognized upon shipment. Revenue related to services is generally recognized upon completion of the services. In addition, Intevac uses the installment method to record revenue based on cash receipts in situations where the account receivable is collected over an extended period of time and in management’s judgment the degree of collectibility is uncertain.

Intevac performs research and development work under various government-sponsored research contracts. Revenue on cost-plus-fee contracts is recognized to the extent of costs actually incurred plus a proportionate amount of the fee earned. Intevac considers fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable costs actually incurred in performance of the contract. Revenue on fixed-price contracts is recognized on a milestone method or percentage-of-completion method of contract accounting. For contracts structured as milestone agreements, revenue is recognized when a specified milestone is achieved, provided that (1) the milestone event is substantive in nature and there is substantial uncertainty about the achievement of the milestone at the inception of the agreement, (2) the milestone payment is non-refundable, and (3) there is no continuing performance obligations associated with the milestone payment. Any milestone payments received prior to satisfying these revenue recognition criteria are deferred. Intevac generally determines the percentage completed based on the percentage of costs incurred to date in relation to total estimated costs expected through completion of the contract. When estimates of total costs to be incurred on a contract exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period the loss is determined.

Inventories

Inventories are valued using average actual costs and are stated at the lower of cost or market. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated

market value based upon assumptions about future demand. Intevac evaluates 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 for excess or obsolete inventory might be required, which could have a material adverse effect on Intevac’s business, financial condition and results of operations.

Warranty

Intevac estimates the costs that may be incurred under the warranty it provides and records a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Intevac’s warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. As Intevac’s customer service engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.

Income Taxes

Intevac accounts for income taxes by recognizing deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carryforwards. Deferred tax assets are also reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Management has determined that it is more likely than not that its future taxable income will not be sufficient to realize its entire deferred tax assets.

The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, non-tax deductible expenses and availability of tax credits. Management carefully monitors the changes in many factors and adjusts the effective income tax rate as required. If actual results differ from these estimates, Intevac could be required to record additional valuation allowances on deferred tax assets or adjust its effective income tax rate, which could have a material adverse effect on Intevac’s business, financial condition and results of operations.

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Intevac’s expectations could have a material impact on Intevac’s results of operations and financial condition.

Valuation of IPR&D, Contingent Consideration, Goodwill and Other Intangible Assets

The purchase price of an acquired business is allocated, as applicable, between IPR&D, other identifiable intangible assets, net tangible assets and goodwill. IPR&D is defined as the value assigned to those projects for which the related products have no alternative future use. Determining the portion of the purchase price allocated to IPR&D and other intangible assets requires the Company to make significant estimates. The amount of the purchase price allocated to IPR&D and other intangible assets is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods. For IPR&D, these valuation methodologies include consideration of the risk of the project not achieving commercial feasibility.

Contingent consideration is recorded at the acquisition date at the estimated fair value of the contingent payments. The acquisition date fair value is measured based on the consideration expected to be transferred (probability-weighted), discounted back to present value. The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods. The fair value of the contingent consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense in the consolidated statements of operations.

Goodwill represents the excess of the aggregate purchase price over the fair value of net assets, including IPR&D, of acquired businesses. Intevac’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Intevac assigns assets acquired (including goodwill) and liabilities assumed to a reporting unit as of the date of acquisition.

Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but were reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicated that the carrying value of an asset may not have been recoverable. For goodwill, Intevac performed a two-step impairment test. In the first step, Intevac compared the fair value of each reporting unit to its carrying value. Intevac’s reporting units are consistent with the reportable segments identified in Note 14, based on the manner in which Intevac operates its business and the nature of those operations. Depending on the facts and circumstances Intevac determined the fair value of each of its reporting units based upon the most appropriate valuation technique using the income approach, the market approach or a combination thereof. The income and market approaches were selected as management believes these approaches generally provide the most reliable indications of fair value when the value of the operations is more dependent on the ability to generate earnings than on the value of the assets used in the production process. Under the income approach Intevac calculated the fair value of the reporting units based on the present value of estimated future cash flows. Under the market approach Intevac estimated the fair value based on market multiples of revenue or earnings for comparable companies. Each valuation technique has advantages and drawbacks, which must be considered when applying those techniques. The income approach closely correlates to management’s expectations of future results but requires significant assumptions which can be highly sensitive. The market approach is relatively straightforward to measure, but it may be difficult to find directly comparable companies in the marketplace. If the fair value of the reporting unit exceeded the carrying value of the net assets assigned to that unit, goodwill was not impaired and no further testing was performed. If the carrying value of the net assets assigned to the reporting unit exceeded the fair value of the reporting unit, then Intevac would perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeded its implied fair value, Intevac would record an impairment loss equal to the difference. In 2012, as a result of its impairment analysis, Intevac wrote off all of the goodwill in both its Equipment and Photonics reporting units.

Equity-Based Compensation

Intevac records compensation expense for equity-based awards using the Black-Scholes option pricing model. This model requires Intevac to estimate the expected volatility of the price of Intevac’s common stock and the expected life of the equity-based awards. Intevac also estimates the forfeiture of the equity-based awards. Estimating volatility, expected life and forfeitures requires significant judgment and an analysis of historical data. Intevac may have to increase or decrease compensation expense for equity-based awards if actual results differ significantly from Intevac’s estimates.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk. Intevac’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio. Intevac does not use derivative financial instruments in Intevac’s investment portfolio. The Company has adopted an investment policy and established guidelines relating to credit quality, diversification and maturities of its investments in order to preserve principal and maintain liquidity. All investment securities in Intevac’s portfolio have an investment grade credit rating. Investments typically consist of commercial paper, obligations of the U.S. government and its agencies, corporate debt securities, municipal bonds and VRDNs.

The table below presents principal amounts and related weighted-average interest rates by year of expected maturity for Intevac’s investment portfolio at January 3, 2015.


	2015			2016			Total		Fair Value
	(In thousands, except percentages)
Cash equivalents
Variable rate amounts	$	16,534		$	—		$	16,534	$	16,534
Weighted-average rate		0.04	%		—
Short-term investments
Fixed rate amounts	$	27,586		$	—		$	27,586	$	27,594
Weighted-average rate		2.58	%		—
Variable rate amounts	$	2,004		$	—		$	2,004	$	2,004
Weighted-average rate		0.54	%		—
Long-term investments
Fixed rate amounts	$	—		$	17,551		$	17,551	$	17,542
Weighted-average rate		—			1.00	%
Total investment portfolio	$	46,124		$	17,551		$	63,675	$	63,674

Foreign exchange risk. From time to time, Intevac enters into foreign currency forward exchange contracts to hedge certain of its anticipated foreign currency re-measurement exposures and to offset certain operational exposures from the impact of changes in foreign currency exchange rates. The objective of these contracts is to minimize the impact of foreign currency exchange rate movements on Intevac’s operating results. The derivatives have maturities of approximately 30, 60, 210 and 240 days. The notional amount of Company’s foreign currency derivatives was $2.6 million at January 3, 2015 and $894,000 at December 31, 2013.

Item 8. Financial Statements and Supplementary Data

INTEVAC, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Contents


	Page
Report of Independent Registered Public Accounting Firm		43
Consolidated Balance Sheets		44
Consolidated Statements of Operations		45
Consolidated Statements of Comprehensive Income (Loss)		46
Consolidated Statement of Stockholders’ Equity		47
Consolidated Statements of Cash Flows		48
Notes to Consolidated Financial Statements		49

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Intevac, Inc.

We have audited the accompanying consolidated balance sheets of Intevac, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of January 3, 2015 and December 31, 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended January 3, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 financial position of Intevac, Inc. and subsidiaries as of January 3, 2015 and December 31, 2013 and the results of their operations and their cash flows for each of the three years in the period ended January 3, 2015 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 3, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 17, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ GRANT THORNTON LLP

San Jose, California

February 17, 2015

INTEVAC, INC.

CONSOLIDATED BALANCE SHEETS


	January 3, 2015			December 31, 2013
	(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	21,482		$	20,121
Short-term investments		29,598			48,975
Trade and other accounts receivable, net of allowances of $0 at both January 3, 2015 and December 31, 2013 ..		12,087			15,037
Inventories		19,212			22,762
Prepaid expenses and other current assets		1,727			1,237

Total current assets		84,106			108,132
Property, plant and equipment, net		12,826			12,945
Long-term investments		17,542			12,318
Restricted cash		1,780			—
Intangible assets, net of amortization of $4,421 and $3,485 at January 3, 2015 and December 31, 2013, respectively		3,966			4,902
Deferred income taxes and other long-term assets		55			9,979

Total assets	$	120,275		$	148,276

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,640		$	4,011
Accrued payroll and related liabilities		3,977			5,034
Other accrued liabilities		8,272			3,263
Customer advances		2,551			3,743
Deferred income taxes		5			939

Total current liabilities		19,445			16,990
Other long-term liabilities		2,200			1,715
Commitments and contingencies
Stockholders’ equity:
Undesignated preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.001 par value :
Authorized shares — 50,000 issued and outstanding shares — 23,275 and 23,767 at January 3, 2015 and December 31, 2013, respectively		23			24
Additional paid-in-capital		161,271			156,359
Treasury stock, 1,426 and 241 shares at January 3, 2015 and December 31, 2013, respectively		(9,989	)		(1,688	)
Accumulated other comprehensive income		619			725
Accumulated deficit		(53,294	)		(25,849	)

Total stockholders’ equity		98,630			129,571

Total liabilities and stockholders’ equity	$	120,275		$	148,276

See accompanying notes.

INTEVAC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended,
	January 3, 2015			December 31, 2013			December 31, 2012
	(In thousands, except per share amounts)
Net revenues:
Systems and components	$	54,463		$	55,188		$	67,669
Technology development		11,087			14,444			15,755

Total net revenues		65,550			69,632			83,424
Cost of net revenues:
Systems and components		40,284			36,356			37,932
Technology development		7,833			11,303			11,334

Total cost of net revenues		48,117			47,659			49,266
Gross profit		17,433			21,973			34,158
Operating expenses:
Research and development		15,832			21,037			31,762
Selling, general and administrative		21,205			22,278			25,919
Acquisition-related (benefit), net		(250	)		(3,727	)		(219	)
Bad debt expense		—			—			3,017
Impairment of goodwill and intangible assets		—			—			18,419

Total operating expenses		36,787			39,588			78,898
Gain (loss) on divestitures		—			(208	)		2,207

Operating loss		(19,354	)		(17,823	)		(42,533	)
Interest income		179			279			806
Other income (expense), net		158			126			(352	)

Loss before income taxes		(19,017	)		(17,418	)		(42,079	)
Provision (benefit) for income taxes		8,428			(1,722	)		13,240

Net loss	$	(27,445	)	$	(15,696	)	$	(55,319	)

Net loss per share:
Basic and diluted	$	(1.16	)	$	(0.66	)	$	(2.37	)
Weighted average shares outstanding:
Basic and diluted		23,671			23,832			23,336

See accompanying notes.

INTEVAC, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Year Ended
	January 3, 2015			December 31, 2013			December 31, 2012
	(In thousands)
Net loss	$	(27,445	)	$	(15,696	)	$	(55,319	)
Other comprehensive income (loss), before tax
Change in unrealized net loss on available-for-sale investments		(35	)		(41	)		486
Foreign currency translation gains (losses)		(71	)		(3	)		13

		(106	)		(44	)		499
Income tax expense related to items in other comprehensive income		—			—			(144	)

Other comprehensive income (loss), net of tax		(106	)		(44	)		355

Comprehensive loss	$	(27,551	)	$	(15,740	)	$	(54,964	)

See accompanying notes.

INTEVAC, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)


	Common Stock						Additional Paid-In Capital			Treasury Stock					Accumulated Other Comprehensive Income			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
	Shares			Amount			Additional Paid-In Capital			Shares		Amount			Accumulated Other Comprehensive Income			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance at December 31, 2011		23,122		$	23		$	146,307			—	$	—		$	414		$	45,166		$	191,910
Shares issued in connection with:
Exercise of stock options		43			—			143			—		—			—			—			143
Employee stock purchase plan		301			—			1,726			—		—			—			—			1,726
Equity-based compensation expense		—			—			3,820			—		—			—			—			3,820
Net loss		—			—			—			—		—			—			(55,319	)		(55,319	)
Other comprehensive income		—			—			—			—		—			355			—			355

Balance at December 31, 2012		23,466		$	23		$	151,996			—	$	—		$	769		$	(10,153	)	$	142,635
Shares issued in connection with:
Exercise of stock options		71			—			276			—		—			—			—			276
Settlement of restricted stock units (RSUs)		23			—			—			—		—			—			—			—
Employee stock purchase plan		457			1			1,632			—		—			—			—			1,633
Shares withheld in connection with net share settlement of RSUs		(9	)		—			(39	)		—		—			—			—			(39	)
Equity-based compensation expense		—			—			2,494			—		—			—			—			2,494
Net loss		—			—			—			—		—			—			(15,696	)		(15,696	)
Other comprehensive loss		—			—			—			—		—			(44	)		—			(44	)
Common stock repurchases		(241	)		—			—			241		(1,688	)		—			—			(1,688	)

Balance at December 31, 2013		23,767		$	24		$	156,359			241	$	(1,688	)	$	725		$	(25,849	)	$	129,571
Shares issued in connection with:
Exercise of stock options		190			—			948			—		—			—			—			948
Settlement of RSUs		72			—			—			—		—			—			—			—
Employee stock purchase plan		444			—			1,611			—		—			—			—			1,611
Shares withheld in connection with net share settlement of RSUs		(13	)		—			(92	)		—		—			—			—			(92	)
Equity-based compensation expense		—			—			2,445			—		—			—			—			2,445
Net loss		—			—			—			—		—			—			(27,445	)		(27,445	)
Other comprehensive loss		—			—			—			—		—			(106	)		—			(106	)
Common stock repurchases		(1,185	)		(1	)		—			1,185		(8,301	)		—			—			(8,302	)

Balance at January 3, 2015		23,275		$	23		$	161,271			1,426	$	(9,989	)	$	619		$	(53,294	)	$	98,630

See accompanying notes.

INTEVAC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Year Ended
	January 3, 2015			December 31, 2013			December 31, 2012
Operating activities
Net loss	$	(27,445	)	$	(15,696	)	$	(55,319	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation & amortization		3,769			3,642			3,936
Net amortization (accretion) of investment premiums and discounts		655			900			1,316
Net loss on sale of investments		—			—			363
Impairment of goodwill and intangible assets		—			—			18,419
Amortization of intangible assets		936			876			543
Bad debt expense		—			—			3,017
Equity-based compensation		3,000			2,494			3,820
Deferred income taxes		(728	)		2,229			(10,099	)
Deferred income taxes valuation allowance		9,394			—			23,437
Loss (gain) on divestitures		—			208			(2,207	)
Change in the fair value of acquisition-related contingent consideration		(250	)		(3,727	)		(219	)
Loss (gain) on disposal of equipment		41			(153	)		190
Changes in assets and liabilities:
Accounts receivable		2,950			4,638			(3,531	)
Inventories		3,550			1,560			(8,738	)
Prepaid expenses and other assets		(166	)		1,211			6,089
Accounts payable		629			(439	)		(378	)
Accrued payroll and other accrued liabilities		2,071			(8,259	)		2,492
Customer advances		(1,192	)		1,550			(2,847	)

Total adjustments		24,659			6,730			35,603

Net cash and cash equivalents used in operating activities		(2,786	)		(8,966	)		(19,716	)
Investing activities
Purchase of investments		(35,703	)		(37,055	)		(47,199	)
Proceeds from sales and maturities of investments		51,225			42,729			69,360
Proceeds from sale of DeltaNu assets		—			500			—
Proceeds from sale of mainframe technology		—			—			3,000
Proceeds from sale of equipment		13			153			—
Increase in restricted cash		(1,780	)		—			—
Purchase of equipment		(3,705	)		(1,772	)		(3,280	)

Net cash and cash equivalents provided by investing activities		10,050			4,555			21,881
Financing activities
Proceeds from issuance of common stock		2,559			1,909			1,869
Common stock repurchases		(8,392	)		(1,598	)		—
Payment of acquisition-related contingent consideration		—			(40	)		(3,345	)

Net cash and cash equivalents provided by (used in) financing activities		(5,833	)		271			(1,476	)
Effect of exchange rate changes on cash		(70	)		—			12

Net increase (decrease) in cash and cash equivalents		1,361			(4,140	)		701
Cash and cash equivalents at beginning of period		20,121			24,261			23,560

Cash and cash equivalents at end of period	$	21,482		$	20,121		$	24,261

Cash paid (received) for:
Income taxes	$	378		$	108		$	24
Income tax refund	$	—		$	(912	)	$	(4,608	)
Non-cash investing activity
Finished goods inventory transferred to property, plant and equipment	$	—		$	1,551		$	—

See accompanying notes.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Intevac, Inc. and its subsidiaries (Intevac or the Company) after elimination of inter-company balances and transactions.

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 amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Change in Fiscal Year End Date

Cash, Cash Equivalents and Investments

Intevac considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Available-for-sale securities, comprised of commercial paper, obligations of the U.S. government and its agencies, corporate debt securities, municipal bonds, and VRDNs, are carried at fair value, with unrealized gains and losses recorded within other comprehensive income (loss) as a separate component of stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are included in earnings. Purchases and sales of investment securities are recognized on a trade date basis. The cost of investment securities sold is determined by the specific identification method.

Restricted Cash

Restricted cash of $1.0 million as of January 3, 2015 secures a standby letter of credit obligation associated with a lease obligation and the restriction on the cash will be removed when the letter of credit expires. In addition Intevac pledged $780,000 as collateral for a banker’s guarantee on an advance payment made by a customer.

Derivative Instruments and Hedging Arrangements

Foreign Exchange Exposure Management—Intevac enters into forward foreign currency contracts that economically hedge the gains and losses generated by the re-measurement of certain recorded assets and liabilities in a non-functional currency and to offset certain operational exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Singapore dollar. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally one year or less. Changes in the fair value of these undesignated hedges are recognized in other income (expense), net immediately as an offset to the changes in the fair value of the asset or liability being hedged.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Fair Value Measurement—Definition and Hierarchy

Intevac reports certain financial assets and liabilities at fair value. Intevac defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value measurements are classified and disclosed in one of the following three categories:

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations based on other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

Business Combinations

Intevac accounts for business combinations using the acquisition method of accounting. Transaction costs are expensed as incurred. IPR&D costs are capitalized as an intangible asset. Contingent consideration is recorded as a liability at the measurement date with subsequent re-measurements recorded as an operating expense. Costs for business restructuring and exit activities related to the acquired company are included in the post-combination financial results.

Trade Accounts and Notes Receivables and Doubtful Accounts

Intevac evaluates the collectibility of trade accounts receivables and notes receivable on an ongoing basis and provides reserves against potential losses when appropriate. Management analyzes historical bad debts, customer concentrations, customer creditworthiness, 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. Also, accounts determined to be uncollectible are put in nonaccrual status whereby interest is not accrued on those accounts.

Inventories

Inventories are generally stated at the lower of cost or market, with cost determined on an average cost basis.

Property, Plant and Equipment

Equipment and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: computers and software, 3 years; machinery and equipment, 5 years; furniture, 7 years; vehicles, 4 years; and leasehold improvements, remaining lease term.

Goodwill and Purchased Intangible Assets

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

which the related products have no alternative future use. Determining the portion of the purchase price allocated to IPR&D and other intangible assets requires the Company to make significant estimates. The amount of the purchase price allocated to IPR&D and other intangible assets is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods. For IPR&D, these valuation methodologies include consideration of the risk of the project not achieving commercial feasibility. The IPR&D will be subject to amortization upon commercialization. If the technology is abandoned, the IPR&D will be written-off.

Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally one to thirteen years using the straight line method.

Goodwill and purchased intangible assets with indefinite useful lives were not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicated that the carrying value of an asset may not have been recoverable. For goodwill, Intevac performed a two-step impairment test. In the first step, Intevac compared the fair value of each reporting unit to its carrying value. Intevac’s reporting units are consistent with the reportable segments identified in Note 14, based on the manner in which Intevac operates its business and the nature of those operations. Depending on the facts and circumstances Intevac determined the fair value of each of its reporting units based upon the most appropriate valuation technique using the income approach, the market approach or a combination thereof. The income and market approaches were selected as management believed these approaches generally provided the most reliable indications of fair value when the value of the operations was more dependent on the ability to generate earnings than on the value of the assets used in the production process. Under the income approach Intevac calculated the fair value of the reporting units based on the present value of estimated future cash flows. Under the market approach Intevac estimated the fair value based on market multiples of revenue or earnings for comparable companies. Each valuation technique has advantages and drawbacks, which must be considered when applying those techniques. The income approach closely correlates to management’s expectations of future results but requires significant assumptions which can be highly sensitive. The market approach is relatively straightforward to measure, but it may be difficult to find directly comparable companies in the marketplace. If the fair value of the reporting unit exceeded the carrying value of the net assets assigned to that unit, goodwill was not impaired and no further testing was performed. If the carrying value of the net assets assigned to the reporting unit exceeded the fair value of the reporting unit, then Intevac would perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

of a reporting unit’s goodwill exceeded its implied fair value, Intevac would record an impairment loss equal to the difference. In 2012, as a result of its impairment analysis, Intevac wrote off all of the goodwill in both its Equipment and Photonics reporting units.

Impairment of Long-Lived Assets

Long-lived assets and certain identifiable finite-lived intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value. No impairment charges were recognized in fiscal 2014, 2013 and 2012.

Income Taxes

Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.

On a quarterly basis, Intevac provides for income taxes based upon an annual effective income tax rate. The effective tax rate is highly dependent upon the level of Intevac’s projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carryforwards, availability of tax credits and the effectiveness of Intevac’s tax planning strategies. Intevac carefully monitors the changes in many factors and adjust its effective income tax rate on a timely basis. If actual results differ from the estimates, this could have a material effect on Intevac’s business, financial condition and results of operations.

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Intevac’s expectations could have a material effect on Intevac’s business, financial condition and results of operations.

Intevac recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes.

Sales and Value Added Taxes

Taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of operations.

Revenue Recognition

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

demonstrated to meet product specifications prior to shipment, revenue is recognized at customer acceptance; and (3) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred until delivery of the deferred elements. When a sales arrangement contains multiple elements, Intevac allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE if available, TPE if VSOE is not available, or best ESP if neither VSOE nor TPE is available. Intevac generally utilizes the ESP due to the nature of its products. In certain cases, technology upgrade sales are accounted for as multiple-element arrangements, usually split between delivery of the parts and installation on the customer’s systems. In these cases, Intevac recognizes revenue for the relative sales price of the parts upon shipment and transfer of title, and recognizes revenue for the relative sales price of installation services when those services are completed. Revenue related to sales of spare parts is generally recognized upon shipment. Revenue related to services is generally recognized upon completion of the services. In addition, Intevac uses the installment method to record revenue based on cash receipts in situations where the account receivable is collected over an extended period of time and in management’s judgment the degree of collectibility is uncertain.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs were not material for all periods presented.

Foreign Currency Translation

The functional currency of Intevac’s foreign subsidiaries in Singapore and Hong Kong and the Taiwan branch is the U.S. dollar. The functional currency of Intevac’s foreign subsidiaries in China, Malaysia and Korea is the local currency of the country in which the respective subsidiary operates. Assets and liabilities recorded in foreign currencies are translated at year-end exchange rates; revenues and expenses are translated at average exchange rates during the year. The effect of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets. The effects of foreign currency transactions are included in other income in the determination of net income. Net income (losses) from foreign currency transactions were $11,000, $(36,000), and $(78,000) in 2014, 2013 and 2012, respectively.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Comprehensive Income

The changes in accumulated other comprehensive income by component, were as follows for the years ended January 3, 2015 and December 31, 2013:


	Foreign currency			Unrealized holding gains (losses) on available- for-sale investments			Total
	(in thousands)
Balance at December 31, 2012	$	694		$	75		$	769
Other comprehensive loss before reclassification		(3	)		(41	)		(44	)
Amounts reclassified from other comprehensive income		—			—			—

Net current-period other comprehensive loss		(3	)		(41	)		(44	)

Balance at December 31, 2013	$	691		$	34		$	725

Other comprehensive loss before reclassification		(71	)		(35	)		(106	)
Amounts reclassified from other comprehensive income		—			—			—

Net current-period other comprehensive loss		(71	)		(35	)		(106	)

Balance at January 3, 2015	$	620		$	(1	)	$	619

Employee Stock Plans

Intevac has equity-based compensation plans that provide for the grant to employees of equity-based awards, including incentive or non-statutory stock options, restricted stock, stock appreciation rights, restricted stock units (“RSUs” also referred to as performance units) and performance shares. In addition, these plans provide for the grant of non-statutory stock options and RSUs to non-employee directors and consultants. Intevac also has an employee stock purchase plan, which provides Intevac’s employees with the opportunity to purchase Intevac common stock at a discount through payroll deductions. See Note 2 for a complete description of these plans and their accounting treatment.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This ASU is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this ASU will be effective for Intevac in the fourth quarter of fiscal 2016, with early adoption permitted. We are currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) which provides guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard will be effective for Intevac in the first quarter of fiscal 2017 using one of two retrospective application methods. Early adoption is not permitted. We are currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial statements.

In April 2014, the FASB issued authoritative guidance that raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. The authoritative guidance becomes effective prospectively for Intevac in the first quarter of fiscal 2015. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued.

2. Equity-Based Compensation

Intevac accounts for share-based awards in accordance with the provisions of the accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants and directors based upon the grant-date fair value of those awards. The estimated fair value of Intevac’s equity-based awards, less expected forfeitures, is amortized over the awards’ service periods using the graded vesting attribution method.

Descriptions of Plans

Equity Incentive Plans

At January 3, 2015, Intevac had equity-based awards outstanding under the 2012 Equity Incentive Plan and the 2004 Equity Incentive Plan (the “Plans”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s stockholders approved all of these plans.

The Plans are a broad-based, long-term retention program intended to attract and retain qualified management and employees, and align stockholder and employee interests. The Plans permit the grant of incentive or non-statutory stock options, restricted stock, stock appreciation rights, RSUs and performance shares. Option price, vesting period, and other terms are determined by the administrator of the Plans, but the option price shall generally not be less than 100% of the fair market value per share on the date of grant. As of January 3, 2015, 4.9 million shares of common stock were authorized for future issuance under the Plans. The 2012 Plan expires no later than May 8, 2022.

2003 Employee Stock Purchase Plan

In 2003, Intevac’s stockholders approved adoption of the ESPP, which serves as the successor to the Employee Stock Purchase Plan originally adopted in 1995. Upon adoption of the ESPP, all shares available for issuance under the prior plan were transferred to the ESPP. The ESPP provides that eligible employees may purchase Intevac common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the beginning of the applicable offering period or at the end of each applicable purchase interval. Offering periods are generally two years in length, and consist of a series of six-month purchase intervals. Eligible employees may join the ESPP at the beginning of any six-month purchase interval. Under the terms of the ESPP, employees can choose to have up to 15% of their base earnings withheld to purchase Intevac common stock. As of January 3, 2015, 400,000 shares remained available for issuance under the ESPP.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The effect of recording equity-based compensation for fiscal 2014, 2013 and 2012 was as follows (in thousands):


	2014		2013		2012
Equity-based compensation by type of award:
Stock options	$	1,094	$	984	$	2,302
RSUs		1,464		419		201
Employee stock purchase plan		442		1,091		1,317

Total equity-based compensation	$	3,000	$	2,494	$	3,820

Tax effect on equity-based compensation	$	—	$	27	$	870

Stock Options

The exercise price of each stock option equals the market price of Intevac’s stock on the date of grant. Most options are scheduled to vest over four years and expire no later than ten years after the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Intevac’s employee stock options have characteristics significantly different from those of publicly traded options. The weighted average assumptions used in the model are outlined in the following table:


	2014			2013			2012
Stock Options:
Weighted-average fair value of grants per share	$	3.15		$	2.49		$	3.82
Expected volatility		52.12	%		56.28	%		63.56	%
Risk free interest rate		1.39	%		1.09	%		0.73	%
Expected term of options (in years)		4.38			4.20			4.60
Dividend yield		None			None			None

The computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is based on historical volatility of Intevac’s stock price. The risk-free interest rate is based on the yield available on U.S. Treasury Strips with an equivalent remaining term. The expected life of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The dividend yield assumption is based on Intevac’s history of not paying dividends and the assumption of not paying dividends in the future.

A summary of the stock option activity is as follows:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2013		2,637,969		$	8.53		4.52	$	2,547,939
Options granted		534,985		$	7.35
Options cancelled and forfeited		(397,605	)	$	10.44
Options exercised		(190,414	)	$	4.98
Options outstanding at January 3, 2015		2,584,935		$	8.26		4.15	$	1,895,817
Vested and expected to vest at January 3, 2015		2,416,921		$	8.37		4.05	$	1,749,778
Options exercisable at January 3, 2015		1,470,523		$	9.41		3.18	$	945,484

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The total intrinsic value of options exercised during fiscal years 2014, 2013 and 2012 was $496,000, $49,000 and $194,000, respectively. At January 3, 2015, Intevac had $1.3 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over the weighted average period of 1.36 years.

The options outstanding and currently exercisable at January 3, 2015 were in the following exercise price ranges:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Shares Outstanding		Weighted Average Remaining Contractual Term (years)		Weighted Average Exercise Price		Number Vested and Exercisable		Weighted Average Exercise Price
$3.91 - $ 6.55		896,836		4.65	$	5.40		389,359	$	5.03
$6.63 - $8.24		876,474		4.71	$	7.42		359,924	$	7.60
$8.43 - $22.40		811,625		3.00	$	12.32		721,240	$	12.68

$3.91 - $22.40		2,584,935		4.15	$	8.26		1,470,523	$	9.41

Stock Option Exchange Program

During our Annual Stockholder’s Meeting held on May 9, 2013, our stockholders approved a one-time Employee Stock Option Exchange Program (the “Exchange Program”) pursuant to which eligible employees were provided an opportunity to exchange, on a grant-by-grant basis, eligible outstanding stock options for a lesser number of new options, to be granted under our 2012 Equity Incentive Plan. Options eligible for the Exchange Program are those that were granted prior to the 12-month period preceding the start of the Exchange Program offering period, and have exercise prices per share that are greater than $8.49, 50% above our closing per share stock price measured as of July 5, 2013 which is shortly before the start of the Exchange Program. The Exchange Program offering period commenced on July 6, 2013 and closed on August 6, 2013, at which time a total of 87 eligible option holder participants exchanged 766,000 outstanding stock options for 336,000 stock options.

The Exchange Program was launched to restore the intended retention and incentive value of employee equity awards, reduce the potential dilutive effect of our equity incentive program, and reduce pressure to grant additional equity awards to employees in the short term. Participation in the Exchange Program was made available to all employees in the United States and Singapore except for the Named Executive Officers. Non-employee members of our board of directors were also not eligible to participate. The exchange of options under the Exchange Program resulted in a total incremental charge to compensation expense of $126,000. This incremental charge is being recognized over the vesting periods of the new options. These vesting periods range from one to three years beginning on the first anniversary of the grant.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

RSUs

A summary of the RSU activity is as follows:


	Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Non-vested RSUs at December 31, 2013		237,859		$	5.34		1.80	$	1,767,293
Granted		277,498		$	7.30
Vested		(71,856	)	$	5.39
Cancelled		(93,072	)	$	6.31
Non-vested RSUs at January 3, 2015		350,429		$	6.62		1.56	$	2,586,166

RSUs are converted into shares of Intevac common stock upon vesting on a one-for-one basis. RSUs typically are scheduled to vest over four years. Vesting of RSUs is subject to the grantee’s continued service with Intevac. The compensation expense related to these awards is determined using the fair market value of Intevac common stock on the date of the grant, and the compensation expense is recognized over the vesting period. At January 3, 2015, Intevac had $1.1 million of total unrecognized compensation expense, net of estimated forfeitures, related to RSUs that will be recognized over the weighted average period of 1.56 years.

The annual bonus for participants in the Company’s annual incentive plan for fiscal 2014 will be settled with RSUs with one year vesting issued in 2015. The Company accrued for the payment of bonuses at the expected company-wide payout percentage amount at January 3, 2015, which amounts were less than the target bonus amounts for each participant. The bonus accrual is classified as a liability until the number of shares is determined on the date the awards are granted, at which time the Company classifies the awards into equity. The Company recorded equity-based compensation expense related to the annual incentive plan of $554,000 in fiscal 2014. At January 3, 2015, Intevac had $623,000 of total unrecognized compensation expense, net of estimated forfeitures, related to the annual incentive plan that will be recognized over the weighted average period of 0.69 years.

Performance-based RSUs (“performance-based awards”) granted to certain executive officers are also subject to the achievement of specified performance goals. These performance-based awards become eligible to vest only if performance goals are achieved and then actually will vest only if the grantee remains employed by Intevac through each applicable vesting date. The fair value of these performance-based awards is estimated on the date of grant and assumes that the specified performance goals will be achieved. If the goals are achieved, these awards vest over a specified remaining service period, provided that the grantee remains employed by Intevac through each scheduled vesting date. If the performance goals are not met, no future compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the service period and is reduced for estimated forfeitures. For performance-based awards granted during fiscal 2013, the performance goals require the achievement of targeted revenues and adjusted annual operating profit levels measured at the end of two and three-year periods.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

ESPP

The fair value of the employee stock purchase right is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:


	2014			2013			2012
Stock Purchase Rights:
Weighted-average fair value of grants per share	$	2.08		$	1.63		$	3.01
Expected volatility		44.00	%		51.54	%		62.36	%
Risk free interest rate		0.11	%		0.26	%		0.28	%
Expected term of purchase rights (in years)		0.69			1.77			1.68
Dividend yield		None			None			None

The expected life of purchase rights is the period of time remaining in the current offering period.

The ESPP activity during fiscal 2014, 2013 and 2012 is as follows:


	2014		2013		2012
	(in thousands, except per share amounts)
Shares purchased		444		457		301
Weighted average purchase price per share	$	3.63	$	3.58	$	5.73
Aggregate intrinsic value of purchase rights exercised	$	1,444	$	745	$	304

As of January 3, 2015, Intevac had $19,000 of total unrecognized compensation expense, net of estimated forfeitures related to purchase rights that will be recognized over the weighted average period of 0.25 years.

3. Earnings Per Share

Intevac calculates basic earnings per share (“EPS”) using net income (loss) and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock pursuant to the exercise of employee stock options and vesting of RSUs.

The following table sets forth the computation of basic and diluted loss per share:


	2014			2013			2012
	(in thousands, except per share amounts)
Net loss	$	(27,445	)	$	(15,696	)	$	(55,319	)

Weighted-average shares – basic		23,671			23,832			23,336
Effect of dilutive potential common shares		—			—			—

Weighted-average shares – diluted		23,671			23,832			23,336

Net loss per share – basic and diluted	$	(1.16	)	$	(0.66	)	$	(2.37	)

Antidilutive shares based on employee awards excluded		2,113			2,579			3,008

Potentially dilutive common shares consist of shares issuable upon exercise of employee stock options and vesting of RSUs and are excluded from the calculation of diluted EPS when their effect would be anti-dilutive.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

4. Concentrations

Credit Risk and Significant Customers

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash equivalents, short- and long-term investments, restricted cash, and accounts receivable. Intevac generally invests its excess cash in money market funds, commercial paper, obligations of the U.S. government and its agencies, corporate debt securities, municipal bonds and VRDNs. The Company has adopted an investment policy and established guidelines relating to credit quality, diversification and maturities of its investments in order to preserve principal and maintain liquidity. All investment securities in Intevac’s portfolio have an investment grade credit rating.

Intevac’s accounts receivable tend to be concentrated in a limited number of customers. The following customers accounted for at least 10 percent of Intevac’s accounts receivable at January 3, 2015 and December 31, 2013.


	2014			2013
Seagate Technology		46	%		40	%
U.S. Government		13	%		*
Northrop Grumman		*			11	%

*	Less than 10%

Intevac’s largest customers tend to change from period to period. Historically, a significant portion of Intevac’s revenues in any particular period have been attributable to sales to a limited number of customers. Intevac performs credit evaluations of its customers’ financial condition and generally requires deposits on system orders but does not generally require collateral or other security to support customer receivables.

The following customers accounted for at least 10 percent of Intevac’s consolidated net revenues in fiscal 2014, 2013, and 2012.


	2014			2013			2012
U.S. Government		32	%		*			10	%
HGST		17	%		*			*
Seagate Technology		15	%		37	%		51	%
Northrop Grumman		*			11	%		*

*	Less than 10%

Products

Disk manufacturing products contributed a significant portion of Intevac’s revenues in fiscal 2014, 2013, and 2012. Intevac expects that the ability to maintain or expand its current levels of revenues in the future will depend upon continuing market demand for its products; its success in enhancing its existing systems and developing and manufacturing competitive disk manufacturing equipment, such as the 200 Lean; Intevac’s success in developing both military and commercial products based on its low-light technology; and its success in utilizing Intevac’s expertise in complex manufacturing equipment to develop and sell new equipment products for PV and display cover panel manufacturing.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. Balance Sheet Details

Balance sheet details were as follows as of January 3, 2015 and December 31, 2013:

Trade and Other Accounts Receivable, Net

Receivables consisted of the following components:


	January 3, 2015		December 31, 2013
	(in thousands)
Trade receivables and other	$	10,548	$	12,043
Unbilled costs and accrued profits		1,539		2,994
Less: allowance for doubtful accounts		—		—

	$	12,087	$	15,037

Allowance for Doubtful Accounts

The following table represents a reconciliation of the allowance for doubtful accounts for fiscal 2014, 2013 and 2012:


	2014		2013		2012
	(in thousands)
Opening balance	$	—	$	—	$	41
Bad debt expense		—		—		3,017
Write-offs		—		—		(3,058	)

Closing balance	$	—	$	—	$	—

Inventories

Inventories are stated at the lower of average cost or market and consist of the following:


	January 3, 2015		December 31, 2013
	(in thousands)
Raw materials	$	10,684	$	13,005
Work-in-progress		2,299		8,196
Finished goods		6,229		1,561

	$	19,212	$	22,762

Finished goods inventory consists primarily of completed systems at customer sites that are undergoing installation and acceptance testing and evaluation inventory.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Property, Plant and Equipment


	January 3, 2015		December 31, 2013
	(in thousands)
Leasehold improvements	$	15,245	$	15,090
Machinery and equipment		43,141		39,938

		58,386		55,028
Less accumulated depreciation and amortization		45,560		42,083

Total property, plant and equipment, net	$	12,826	$	12,945

Customer Advances

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 $2.4 million at January 3, 2015 and $1.1 million at December 31, 2013.

Accounts Payable

Included in accounts payable is $254,000 and $325,000 of book overdraft at January 3, 2015 and December 31, 2013, respectively.

Other Accrued Liabilities


	January 3, 2015		December 31, 2013
	(in thousands)
Deferred revenue	$	4,260	$	496
Payable for pending purchase of available-for-sale marketable securities		2,059		—
Accrued product warranties		1,022		1,546
Other taxes payable		277		551
Acquisition-related contingent consideration		59		164
Other		595		506

Total other accrued liabilities	$	8,272	$	3,263

Other Long-Term Liabilities


	January 3, 2015		December 31, 2013
	(in thousands)
Acquisition-related contingent consideration	$	1,075	$	1,220
Deferred rent		861		—
Accrued product warranties		164		101
Accrued income taxes		100		394

Total other long-term liabilities	$	2,200	$	1,715

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

6. Goodwill and Purchased Intangible Assets, Net

Information regarding acquisition-related intangible assets is as follows:


	January 3, 2015						December 31, 2013
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in thousands)
Customer relationships	$	3,119	$	2,426	$	693	$	3,119	$	2,206	$	913
Purchased technology		5,148		1,875		3,273		5,148		1,159		3,989
Covenants not to compete		40		40		—		40		40		—
Backlog		80		80		—		80		80		—

Total amortizable intangible assets	$	8,387	$	4,421	$	3,966	$	8,387	$	3,485	$	4,902

Intangible assets by segment as of January 3, 2015 are as follows: Equipment; $3.5 million and Photonics; $429,000.

Total amortization expense of purchased intangibles for fiscal 2014, 2013 and 2012 was $936,000, $876,000, $543,000 respectively.

Estimated future amortization expense related to finite-lived purchased intangible assets as of January 3, 2015, is as follows.


(in thousands)
2015	$	853
2016		853
2017		756
2018		615
2019		615
Thereafter		274

	$	3,966

Goodwill and indefinite life intangible assets were tested for impairment on an annual basis or more frequently upon the occurrence of circumstances that indicated that goodwill and indefinite life intangible assets were impaired.

Intevac performed its annual goodwill impairment test in the fourth quarter of fiscal 2012, and, based on step one of the impairment analysis, Intevac determined that the fair values of both its Equipment and Photonics reporting units were less than their carrying value and potential impairment existed. Intevac completed the second step of the goodwill impairment analysis and determined that there would be no remaining implied value attributable to goodwill in either reporting unit and accordingly, Intevac wrote off all of the goodwill in both its Equipment and Photonics reporting units. In the second half of 2012, the Company experienced a significant decline in its stock price which resulted in the Company’s market capitalization falling significantly below the recorded value of its consolidated net assets.

Intevac’s indefinite-lived intangible asset consisted of IPR&D in the amount of $4.0 million in the Equipment segment. During the second quarter of fiscal 2013, the related development project was completed, the product achieved commercialization and Intevac began amortizing the intangible asset over its expected

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

useful life of 7 years. Immediately prior to commencement of amortization Intevac tested the intangible asset for impairment and determined that it was not impaired. Intevac performed its annual impairment tests on its indefinite life intangible assets in the fourth quarter of fiscal 2012, and, based on the impairment analysis, Intevac determined that the IPR&D was not impaired. Intevac’s indefinite life tradename was impaired and recorded an immaterial impairment charge. This tradename was subsequently sold in March 2013 as part of the sale of the Raman spectroscopy instruments product line.

7. Contingent Consideration

In connection with the acquisition of SIT, Intevac agreed to pay up to an aggregate of $7.0 million in cash to the selling shareholders if certain milestones were achieved over a specified period. Intevac has made payments to the selling shareholders for achievement of the first milestone in 2011, and for achievement of the second and third milestones in 2012. The fourth and final milestone was not achieved on the targeted date outlined in the acquisition agreement and will not be paid. There is no remaining contingent consideration obligation associated with the milestone agreement at January 3, 2015.

In connection with the acquisition of SIT, Intevac also agreed to pay to the selling shareholders in cash a revenue earnout on Intevac’s net revenue from commercial sales of certain products over a specified period up to an aggregate of $9.0 million. Intevac estimated the fair value of this contingent consideration on January 3, 2015 based on probability-based forecasted revenues reflecting Intevac’s own assumptions concerning future revenue from such products. As of January 3, 2015, payments made associated with the revenue earnout obligation have not been significant.

The fair value measurement of contingent consideration is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The following table represents the quantitative range of the significant unobservable inputs used in the calculation of fair value of the contingent consideration liability as of January 3, 2015. Significant increases or decreases in any of these inputs even in isolation would result in a significantly lower (higher) fair value measurement.


	Quantitative Information about Level 3 Fair Value Measurements at January 3, 2015
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(in thousands, except for percentages)
Revenue Earnout	$	1,134	Discounted cash flow	Weighted average cost of capital Probability weighting of achieving revenue forecasts	15.6% 20.0% - 55.0% (36.5%)

Any change in fair value of the contingent consideration subsequent to the acquisition date is recognized in operating income within the consolidated statement of operations. The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for fiscal 2014, 2013 and 2012:


	2014			2013			2012
	(in thousands)
Beginning balance	$	1,384		$	5,151		$	8,715
Changes in fair value		(250	)		(3,727	)		(219	)
Cash payments made		—			(40	)		(3,345	)

Ending balance	$	1,134		$	1,384		$	5,151

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. Divestitures

Sale of DeltaNu

On March 29, 2013, the Company sold certain assets, including existing tangible and intangible assets, which comprised its Raman spectroscopy instruments product line, also known as DeltaNu, for consideration not to exceed $1.5 million. Under the terms of the agreement, the acquirer also assumed certain liabilities related to the purchased assets. Payment terms included $500,000 which was paid on the closing date, with the remaining balance to be paid in the form of an earnout of 5% of the acquirer’s Raman spectroscopy instrument sales for 5 years following the closing date which will be due and payable on or before each anniversary of the closing date or a minimum earnout payment of $100,000 annually, whichever is higher. The maximum earnout payments during the payment period shall not exceed $1.0 million.

As the earnout is collected over an extended period of time and in management’s judgment the degree of collectibility is uncertain, Intevac did not recognize the minimum earnout payments upon closing, but instead will record income in the period when the minimum earnout payments can be reasonably estimated for that period and payment is assured. The first earnout payment in the amount of $75,000 was received in fiscal 2014 and was reported in other income (expense), net on the consolidated statement of operations.

The following table summarizes the components of the loss (in thousands):


Cash proceeds	$	500

Assets sold:
Accounts receivable		147
Inventories		320
Other current assets		27
Property, plant and equipment		159
Trade name		90

Total assets sold		743
Liabilities divested:
Accounts payable		59
Other accrued expenses		6

Total liabilities divested		65
Transaction and other costs		30

Loss on sale	$	(208	)

Sale of Mainframe Technology

On January 6, 2012, the Company sold certain assets including intellectual property and residual assets which comprised its semiconductor mainframe technology.

The following table summarizes the components of the gain (in thousands):


Cash proceeds	$	3,000

Assets sold:
Inventories		589
Property, plant and equipment		178
Transaction and other costs		26

Gain on sale	$	2,207

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9. Financial Instruments

Cash, Cash Equivalents and Investments

Cash and cash equivalents, short-term investments and long-term investments consist of:


	January 3, 2015
	Amortized Cost		Unrealized Holding Gains		Unrealized Holding Losses		Fair Value
	(in thousands)
Cash and cash equivalents:
Cash	$	4,948	$	—	$	—	$	4,948
Money market funds		16,534		—		—		16,534

Total cash and cash equivalents	$	21,482	$	—	$	—	$	21,482
Short-term investments:
Commercial paper	$	2,995	$	2	$	—	$	2,997
Corporate bonds and medium-term notes		21,203		2		6		21,199
Municipal bonds		5,392		11		1		5,402

Total short-term investments	$	29,590	$	15	$	7	$	29,598
Long-term investments:
Corporate bonds and medium-term notes	$	6,266	$	1	$	4	$	6,263
Municipal bonds		2,290		—		8		2,282
U.S. treasury and agency securities		8,995		3		1		8,997

Total long-term investments	$	17,551	$	4	$	13	$	17,542

Total cash, cash equivalents, and investments	$	68,623	$	19	$	20	$	68,622


	December 31, 2013
	Amortized Cost		Unrealized Holding Gains		Unrealized Holding Losses		Fair Value
	(in thousands)
Cash and cash equivalents:
Cash	$	5,819	$	—	$	—	$	5,819
Money market funds		14,302		—		—		14,302

Total cash and cash equivalents	$	20,121	$	—	$	—	$	20,121
Short-term investments:
Commercial paper	$	1,998	$	1	$	—	$	1,999
Corporate bonds and medium-term notes		27,181		13		3		27,191
Municipal bonds		6,108		4		—		6,112
U.S. treasury and agency securities		13,506		7		—		13,513
VRDNs		160		—		—		160

Total short-term investments	$	48,953	$	25	$	3	$	48,975
Long-term investments:
Corporate bonds and medium-term notes	$	8,811	$	12	$	—	$	8,823
Municipal bonds		3,495		2		2		3,495

Total long-term investments	$	12,306	$	14	$	2	$	12,318

Total cash, cash equivalents, and investments	$	81,380	$	39	$	5	$	81,414

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The contractual maturities of available-for-sale securities at January 3, 2015 are presented in the following table.


	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	45,121	$	45,129
Due after one through two years		18,554		18,545

	$	63,675	$	63,674

The following table provides the fair market value of Intevac’s investments with unrealized losses that are not deemed to be other-than temporarily impaired as of January 3, 2015.


	January 3, 2015
	In Loss Position for Less than 12 Months				In Loss Position for Greater than 12 Months
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
Corporate bonds and medium-term notes	$	15,869	$	10	$	—	$	—
Municipal bonds		3,281		9		—		—
U.S. treasury and agency securities		1,999		1		—		—

	$	21,149	$	20	$	—	$	—

All prices for the fixed maturity securities including U.S. treasury and agency securities, commercial paper, corporate bonds, VRDNs and municipal bonds are received from independent pricing services utilized by Intevac’s outside investment manager. This investment manager performs a review of the pricing methodologies and inputs utilized by the independent pricing services for each asset type priced by the vendor. In addition, on at least an annual basis, the investment manager conducts due diligence visits and interviews with each pricing vendor to verify the inputs utilized for each asset class. The due diligence visits include a review of the procedures performed by each vendor to ensure that pricing evaluations are representative of the price that would be received to sell a security in an orderly transaction. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price. Intevac uses the pricing data obtained from its outside investment manager as the primary input to make its assessments and determinations as to the ultimate valuation of the above-mentioned securities and has not made, during the periods presented, any material adjustments to such inputs.

The following table represents the fair value hierarchy of Intevac’s available-for-sale securities measured at fair value on a recurring basis as of January 3, 2015.


	Fair Value Measurements at January 3, 2015
	Total		Level 1		Level 2
	(in thousands)
Recurring fair value measurements:
Available-for-sale securities
Money market funds	$	16,534	$	16,534	$	—
U.S. treasury and agency securities		8,997		6,997		2,000
Commercial paper		2,997		—		2,997
Corporate bonds and medium-term notes		27,462		—		27,462
Municipal bonds		7,684		—		7,684

Total recurring fair value measurements	$	63,674	$	23,531	$	40,143

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the changes in Level 3 instruments which consisted of ARS which were classified as available-for-sale securities and which were measured on a recurring basis for the year ended December 31, 2012. The Company did not hold any ARS as of or during the year ended January 3, 2015.


	2012
	(in thousands)
Opening balance	$	4,490
Total gains (losses) for the period
Included in earnings		(381	)
Included in other comprehensive income		410
Proceeds from sales		(1,748	)
Proceeds from tender offers		(2,771	)

Closing balance	$	—

Derivatives

The Company uses foreign currency forward contracts to mitigate variability in gains and losses generated from the re-measurement of certain monetary assets and liabilities denominated in foreign currencies and to offset certain operational exposures from the impact of changes in foreign currency exchange rates. These derivatives are carried at fair value with changes recorded in interest income and other, net in the consolidated statements of operations. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. Cash flows from such derivatives are classified as operating activities. The derivatives have maturities of approximately 30, 60, 210 and 240 days.

The following table summarizes the Company’s outstanding derivative instruments on a gross basis as recorded in its consolidated balance sheets as of January 3, 2015 and December 31, 2013:


	Notional Amounts				Derivative Assets									Derivative Liabilities
Derivative Instrument	January 3, 2015		December 31, 2013		January 3, 2015					December 31, 2013				January 3, 2015					December 31, 2013
					Balance Sheet Line			Fair Value		Balance Sheet Line		Fair Value		Balance Sheet Line			Fair Value		Balance Sheet Line		Fair Value
	(in thousands)
Undesignated Hedges:
Forward Foreign Currency Contracts	$	2,647	$	894		^(a	⁾	$	10		—	$	—		^(b	⁾	$	4		—	$	—

Total Hedges	$	2,647	$	894				$	10			$	—				$	4			$	—

(a)	Prepaid expenses and other current assets

(b)	Other accrued liabilities

10. Equity

Stock Repurchase Program

On November 21, 2013, Intevac’s Board of Directors approved a stock repurchase program authorizing up to $30.0 million in repurchases. Under this authorization, Intevac purchases shares of its common stock under a

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

systematic stock repurchase program and may also make supplemental stock repurchases from time to time, depending on market conditions, stock price and other factors. At January 3, 2015, $20.0 million remains available for future stock repurchases under the repurchase program.

The following table summarizes Intevac’s stock repurchases for fiscal 2014, 2013 and 2012:


	2014		2013		2012
	(in thousands, except per share amounts)
Shares of common stock repurchased		1,185		241		—
Cost of stock repurchased	$	8,302	$	1,688	$	—
Average price paid per share	$	6.97	$	6.97	$	—

Intevac records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If Intevac reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings.

11. Income Taxes

The provision for (benefit from) income taxes on loss from continuing operations for fiscal 2014, 2013 and 2012 consists of the following (in thousands):


	2014			2013			2012
Federal:
Current	$	(324	)	$	(3,925	)	$	3
Deferred		—			3,387			17,160

		(324	)		(538	)		17,163
State:
Current		5			12			(13	)
Deferred		—			—			—

		5			12			(13	)
Foreign:
Current		81			(38	)		(150	)
Deferred		8,666			(1,158	)		(3,760	)

		8,747			(1,196	)		(3,910	)
Total	$	8,428		$	(1,722	)	$	13,240

Loss before income taxes (benefit) for fiscal 2014, 2013 and 2012 consisted of the following (in thousands):


	2014			2013			2012
U.S	$	(13,191	)	$	(11,478	)	$	(32,128	)
Foreign		(5,826	)		(5,940	)		(9,951	)

	$	(19,017	)	$	(17,418	)	$	(42,079	)

Effective tax rate		(44.3	)%		9.9	%		(31.5	)%

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of deferred tax assets are as follows (in thousands):


	January 3, 2015			December 31, 2013
	January 3, 2015			December 31, 2013
Deferred tax assets:
Vacation, warranty and other accruals	$	997		$	1,269
Depreciation and amortization		538			1,554
Intangible amortization		2,767			3,235
Inventory valuation		3,117			1,706
Deferred income		1,621			43
Equity-based compensation		5,920			6,242
Net operating loss, research and other tax credit carryforwards		47,044			43,470
Other		358			49

		62,362			57,568
Valuation allowance for deferred tax assets		(60,612	)		(46,126	)

Total deferred tax assets		1,750			11,442

Deferred tax liabilities:
Purchased technology		(1,195	)		(1,488	)
Unbilled revenue		(555	)		(1,004	)
Other		—			(284	)

Total deferred tax liabilities		(1,750	)		(2,776	)

Net deferred tax assets	$	—		$	8,666

As reported on the balance sheet:
Current deferred tax assets	$	—		$	103
Non-current deferred tax assets		5			9,502
Current deferred tax liability		(5	)		(939	)

	$	—		$	8,666

Intevac accounts for income taxes in accordance with accounting standards for such taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the financial reporting and tax bases of recorded assets and liabilities. Accounting standards also require that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of or all of the deferred tax asset will not be realized.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

$4.7 million and $7.2 million, respectively for the U.S. federal deferred tax asset were recorded. A valuation allowance is recorded against the entire state deferred tax asset which consists of state income tax temporary differences and deferred research and other tax credits that are not realizable in the foreseeable future.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

As of January 3, 2015, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately $51.6 million, $56.1 million and $61.3 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state tax laws. If not utilized, the federal net operating loss carryforwards will begin to expire in 2028 and the state net operating loss carryforwards will begin to expire in 2015. The foreign net operating loss carryforwards do not expire. As of January 3, 2015, our federal and state tax credit carryforwards for income tax purposes were approximately $11.3 million and $12.0 million, respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 2019 and the state tax credits carry forward indefinitely.

The difference between the tax provision (benefit) at the statutory federal income tax rate and the tax provision (benefit) for fiscal 2014, 2013 and 2012 was as follows (in thousands):


	2014			2013			2012
Income tax (benefit) at the federal statutory rate	$	(6,656	)	$	(6,096	)	$	(14,728	)
State income taxes, net of federal benefit		5			12			(15	)
Change in valuation allowance:
U.S		4,733			7,201			23,330
Foreign		9,394			—			—
Effect of foreign operations taxed at various rates		1,662			983			(428	)
Nondeductible goodwill impairment		—			—			3,670
Research tax credits		(569	)		(2,284	)		—
Effect of tax rate changes, permanent differences and adjustments of prior deferrals		153			(1,062	)		367
Unrecognized tax benefits		(294	)		(476	)		1,044

Total	$	8,428		$	(1,722	)	$	13,240

Intevac has not provided for U.S. federal income and foreign withholding taxes on approximately $11.8 million of undistributed earnings from non-U.S. operations as of January 3, 2015 because Intevac intends to reinvest such earnings indefinitely outside of the United States. If Intevac were to distribute these earnings, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. Intevac will remit the non-indefinitely reinvested earnings, if any, of Intevac’s non-U.S. subsidiaries where excess cash has accumulated and Intevac determines that it is advantageous for business operations, tax or cash reasons.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

include meeting certain agreed upon future annual business spending and staffing levels in Singapore. Failure to meet the terms of the early termination could result in a claw back by the Singapore government of tax benefits received in previous years. As a result of this incentive, the impact of the tax holiday decreased income taxes by $1.6 million in 2012. The benefit of the tax holiday on the net loss per share (diluted) was approximately $0.07 in 2012.

The total amount of gross unrecognized tax benefits was $6.6 million as of January 3, 2015, of which $250,000 would affect Intevac’s effective tax rate if realized. The aggregate changes in the balance of gross unrecognized tax benefits were as follows for fiscal 2014, 2013 and 2012:


	2014			2013			2012
	(in thousands)
Beginning balance	$	6,482		$	6,000		$	5,022
Additions based on tax positions related to the current year		57			597			978
Additions for tax positions of prior years		250			98			—
Settlements		—			—			—
Lapse of statute of limitations		(211	)		(213	)		—

Ending balance	$	6,578		$	6,482		$	6,000

The Company does not anticipate any changes in the amount of unrecognized tax benefits in the next twelve months. It is Intevac’s policy to include interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of operations. During fiscal 2014 and 2013, Intevac recognized a net tax benefit for interest of $110,000 and $13,000, respectively. As of January 3, 2015 Intevac had $7,000 of accrued interest related to unrecognized tax benefits, which was classified as a long-term liability in the consolidated balance sheets. Intevac did not accrue any penalties related to these unrecognized tax benefits because Intevac has other tax attributes which would offset any potential taxes due.

Intevac is subject to income taxes in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The material jurisdictions where Intevac is subject to potential examination by tax authorities for tax years after 2009 include the U.S. (Federal and California) and Singapore. The Singapore Inland Revenue Authority is currently conducting a review of the fiscal 2009 through 2012 tax returns of the Company’s wholly-owned subsidiary, Intevac Asia Pte. Ltd. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from this or other examinations. Presently, there are no other active income tax examinations in the jurisdictions where Intevac operates.

12. Employee Benefit Plans

Employee Savings and Retirement Plan

In 1991, Intevac 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. Intevac did not make any cash contributions for fiscal 2014. Intevac made cash contributions $422,000 and $501,000 for fiscal 2013, and 2012, respectively. Employees may choose among several investment options for their contributions and their share of Intevac’s contributions, and they are able to move funds between investment options at any time. Intevac’s common stock is not one of the investment options. Administrative expenses relating to the plan are insignificant.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Employee Bonus Plans

Intevac has various employee bonus plans. A profit-sharing plan provides for the distribution of a percentage of pre-tax profits to substantially all of Intevac’s employees not eligible for other performance-based incentive plans, up to a maximum percentage of compensation. Other plans award annual cash bonuses to Intevac’s executives and key contributors based on the achievement of profitability and other specific performance criteria. Charges to expense under these plans were $22,000, $1.7 million and $210,000, respectively for fiscal 2014, 2013 and 2012. In fiscal 2014, the annual bonus for certain participants in the Company’s annual incentive plan will be settled with RSUs with one year vesting. Charges for bonuses in the amount of $554,000 which will be settled in RSUs were reported as stock compensation expense. See Note 2 “Equity-Based Compensation.”

13. Commitments and Contingencies

Leases

Intevac leases certain facilities under non-cancelable operating leases that expire at various times up to March 2024 and has options to renew most leases, with rentals to be negotiated. Certain of Intevac’s leases contain provisions for rental adjustments. Included in other long-term liabilities on the consolidated balance sheets is $861,000 of deferred rent as of January 3, 2015 related to the effective rent on Intevac’s long-term lease for Intevac’s Santa Clara, California facility. The terms of the Company’s lease of its Santa Clara, California facility include a tenant improvement allowance of up to $1.7 million. Tenant improvement allowances are reimbursements received from the landlord for construction costs and are amortized on a straight-line basis over the lease term as a reduction in rent. The tenant improvement allowances are recorded when the Company has completed its obligations and the tenant improvement allowance is receivable. In addition, Intevac is required to maintain a standby letter of credit for $1.0 million for this lease. This standby letter of credit is secured with $1.0 million of restricted cash. The facility leases require Intevac to pay for all normal maintenance costs. Gross rental expense was approximately $3.8 million, $2.9 million and $3.0 million for fiscal 2014, 2013, and 2012, respectively.

As of January 3, 2015, future minimum lease payments are as follows.


(in thousands)
2015	$	3,206
2016		3,075
2017		2,640
2018		2,630
2019		2,709
Thereafter		12,440

	$	26,700

Guarantees

Officer and Director Indemnifications

As permitted or required under Delaware law and to the maximum extent allowable under that law, Intevac has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at Intevac’s request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments Intevac could be required to make under these indemnification obligations is unlimited; however, Intevac has a director and officer insurance policy that mitigates Intevac’s exposure and enables Intevac to recover a portion of any future amounts paid. As a result of Intevac’s insurance policy coverage, Intevac believes the estimated fair value of these indemnification obligations is not material.

Other Indemnifications

As is customary in Intevac’s industry, many of Intevac’s contracts provide remedies to certain third parties such as defense, settlement, or payment of judgment for intellectual property claims related to the use of its products. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.

Letters of Credit

As of January 3, 2015, we had letters of credit and bank guarantees outstanding totaling $1.8 million, including the standby letter of credit outstanding under the Santa Clara, California facility lease and a banker’s guarantee which guarantees customer advances under a customer contract.

Warranty

Intevac provides for the estimated cost of warranty when revenue is recognized. Intevac’s warranty is per contract terms and for its disk manufacturing, PV manufacturing and display cover panel manufacturing systems the warranty typically ranges between 12 and 24 months from customer acceptance. For systems sold through a distributor, Intevac offers a 3 month warranty. The remainder of any warranty period is the responsibility of the distributor. During this warranty period any defective non-consumable parts are replaced and installed at no charge to the customer. The warranty period on consumable parts is limited to their reasonable usable lives. Intevac uses estimated repair or replacement costs along with its historical warranty experience to determine its warranty obligation. Intevac generally provides a twelve month warranty on its Photonics’ products. The provision for the estimated future costs of warranty is based upon historical cost and product performance experience. Intevac exercises judgment in determining the underlying estimates.

On the consolidated balance sheets, the short-term portion of the warranty provision is included in other accrued liabilities, while the long-term portion is included in other long-term liabilities. The expense associated with product warranties issued or adjusted is included in cost of net revenues on the consolidated statements of operations.

The following table displays the activity in the warranty provision account for fiscal 2014 and 2013:


	2014			2013
	(in thousands)
Beginning balance	$	1,647		$	2,349
Expenditures incurred under warranties		(834	)		(1,033	)
Accruals for product warranties		931			1,091
Adjustments to previously existing warranty accruals		(558	)		(760	)

Ending balance	$	1,186		$	1,647

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Legal Matters

From time to time, Intevac receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions in connection with claims made against them. In addition, from time to time, Intevac receives notification from third parties claiming that Intevac may be or is infringing their intellectual property or other rights. Intevac also is subject to various other legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business. Although the outcome of these claims and proceedings cannot be predicted with certainty, Intevac does not believe that any of these other existing proceedings or claims will have a material adverse effect on its consolidated financial condition or results of operations.

14. Segment and Geographic Information

Intevac’s two reportable segments are: Equipment and Photonics. Intevac’s chief operating decision-maker has been identified as the President and CEO, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon Intevac’s management organization structure as of January 3, 2015 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the reportable segments disclosed.

Each reportable segment is separately managed and has separate financial results that are reviewed by Intevac’s chief operating decision-maker. Each reportable segment contains closely related products that are unique to the particular segment. Segment operating profit is determined based upon internal performance measures used by the chief operating decision-maker.

Intevac derives the segment results from its internal management reporting system. The accounting policies Intevac uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics, including orders, net revenues and operating income. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. Intevac manages certain operating expenses separately at the corporate level. Intevac allocates certain of these corporate expenses to the segments in an amount equal to 3% of net revenues. Segment operating income excludes interest income/expense and other financial charges and income taxes according to how a particular reportable segment’s management is measured. Management does not consider impairment charges, gains and losses on divestitures and sales of intellectual property, and unallocated costs in measuring the performance of the reportable segments.

The Equipment segment designs, develops and markets vacuum process equipment solutions for high-volume manufacturing of small substrates with precise thin-film properties for hard drive, solar cell and cell phone manufacturers as well as other adjacent thin-film deposition applications.

The Photonics segment develops compact, cost-effective, high-sensitivity digital-optical products for the capture and display of low-light images and the optical analysis of materials. Intevac provides sensors, cameras and systems for government applications such as night vision and long-range target identification.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Information for each reportable segment for fiscal 2014, 2013 and 2012 is as follows:


	2014			2013			2012
	(in thousands)
*Net Revenues*
Equipment	$	25,290		$	39,135		$	52,538
Photonics		40,260			30,497			30,886

Total segment net revenues	$	65,550		$	69,632		$	83,424


	2014			2013			2012
	(in thousands)
*Operating Profit (Loss)*
Equipment	$	(22,008	)	$	(12,951	)	$	(19,934	)
Photonics		8,932			1,058			(206	)

Total segment operating profit (loss)		(13,076	)		(11,893	)		(20,140	)

Unallocated costs		(6,278	)		(5,722	)		(6,181	)
Impairment of goodwill and intangible assets		—			—			(18,419	)
Gain (loss) on divestitures		—			(208	)		2,207

Operating loss		(19,354	)		(17,823	)		(42,533	)

Interest income		179			279			806
Other income (expense), net		158			126			(352	)

Loss before income taxes	$	(19,017	)	$	(17,418	)	$	(42,079	)


	2014		2013		2012
	(in thousands)
*Depreciation and Amortization*
Equipment	$	2,379	$	2,146	$	2,003
Photonics		1,834		1,900		1,806

Total segment depreciation and amortization		4,213		4,046		3,809

Unallocated costs		492		472		670

Total consolidated depreciation and amortization	$	4,705	$	4,518	$	4,479


	2014		2013		2012
	(in thousands)
*Capital Additions*
Equipment	$	2,230	$	1,857	$	1,260
Photonics		1,203		894		1,535

Total segment capital additions		3,433		2,751		2,795

Unallocated		272		572		485

Total consolidated capital additions	$	3,705	$	3,323	$	3,280

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	2014		2013
	(in thousands)
*Segment Assets*
Equipment	$	30,670	$	33,428
Photonics		17,126		21,120

Total segment assets		47,796		54,548

Cash and investments		68,622		81,414
Restricted cash		1,780		—
Deferred income taxes		5		9,605
Other current assets		989		982
Common property, plant and equipment		1,083		1,302
Other assets		—		425

Consolidated total assets	$	120,275	$	148,276

Geographic revenue information for fiscal 2014, 2013 and 2012 is based on the location of the customer. Revenue from unaffiliated customers by geographic region/country was as follows:


	2014		2013		2012
	(in thousands)
United States	$	51,584	$	32,534	$	30,845
Asia (*)		9,931		31,907		47,712
Europe		4,035		5,191		3,795
Rest of world		—		—		1,072

Total net revenues	$	65,550	$	69,632	$	83,424

(*)	Revenues are attributable to the geographic area in which Intevac’s customers are located. Net trade revenues in Asia include shipments to Singapore, China, Japan and Malaysia.

Net property, plant and equipment by geographic region at January 3, 2015 and December 31, 2013 was as follows:


	January 3, 2015		December 31, 2013
	January 3, 2015		December 31, 2013
	(in thousands)
United States	$	11,534	$	11,240
Asia		1,292		1,705

Net property, plant & equipment	$	12,826	$	12,945

15. Restructuring Charges

During the first half of fiscal 2014, Intevac substantially completed implementation of the 2014 cost reduction plan (the “Plan”), which was intended to reduce expenses and reduce its workforce by 6 percent. The cost of implementing the Plan was reported under cost of net revenues and operating expenses in the consolidated statements of operations. Substantially all cash outlays in connection with the Plan occurred in the first half of fiscal 2014. Implementation of the Plan is expected to reduce salary, wages and other employee-related expenses by approximately $2.1 million on an annual basis. As of January 3, 2015, activities related to the Plan were complete.

INTEVAC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

On February 1, 2013, Intevac announced the 2013 cost reduction plan (the “2013 Plan”) to reduce expenses including a reduction in its workforce. Implementation of the 2013 Plan was substantially completed in the first half of fiscal 2013 and the Company reduced its workforce by 18 percent. The cost of implementing the 2013 Plan was reported under cost of net revenues and operating expenses in the consolidated statement of operations. Substantially all cash outlays in connection with the 2013 Plan occurred in the first half of fiscal 2013. As of January 3, 2015, activities related to the 2013 Plan were complete.

The changes in restructuring reserves associated with the Plan for fiscal 2014 and 2013, are as follows.


	Severance and other employee- related costs
	2014			2013
	(in thousands)
Balance at the beginning of the year	$	—		$	—
Provision for restructuring charges		288			742
Cash payments made		(288	)		(742	)

Balance at the end of the year	$	—		$	—

16. Selected Quarterly Consolidated Financial Data (Unaudited)


	Three Months Ended
	March 29, 2014			June 28, 2014			Sept. 27, 2014			Jan. 03, 2015
	(in thousands, except per share data)
Net sales	$	17,015		$	14,715		$	14,757		$	19,062
Gross profit		4,810			5,211			4,815			2,596
Net loss		(4,521	)		(5,007	)		(3,559	)		(14,358	)
Basic and diluted loss per share	$	(0.19	)	$	(0.21	)	$	(0.15	)	$	(0.62	)


	Three Months Ended
	March 30, 2013			June 29, 2013			Sept. 28, 2013			Dec. 31, 2013
	(in thousands, except per share data)
Net sales	$	12,982		$	16,983		$	19,115		$	20,552
Gross profit		3,514			3,829			6,895			7,737
Net income (loss)		(8,264	)		(6,412	)		(2,745	)		1,725
Basic and diluted loss per share	$	(0.35	)	$	(0.27	)	$	(0.11	)	$	0.07

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Management’s Report on Assessment of Internal Controls Over Financial Reporting

Evaluation of Disclosure Controls and Procedures

Based on Intevac’s management’s evaluation (with the participation of Intevac’s chief executive officer and chief financial officer), as of the end of the period covered by this report, Intevac’s chief executive officer and chief financial officer have concluded that Intevac’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by Intevac in reports that Intevac files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to Intevac’s management, including Intevac’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for Intevac. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management (with the participation of the chief executive officer and chief financial officer) conducted an evaluation of the effectiveness of Intevac’s internal control over financial reporting based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Intevac’s internal control over financial reporting was effective as of January 3, 2015. Grant Thornton LLP, an independent registered public accounting firm, has audited the effectiveness of Intevac’s internal control over financial reporting and has issued a report on Intevac’s internal control over financial reporting, which is included in their report on the following page.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our fourth quarter of fiscal 2014 that has materially affected, or is reasonably likely to materially affect, Intevac’s internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Intevac, Inc.

We have audited the internal control over financial reporting of Intevac, Inc. (a Delaware corporation) and subsidiaries’ (the “Company”) as of January 3, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Assessment of Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, Intevac, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 3, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of January 3, 2015 and December 31, 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended January 3, 2015. Our report dated February 17, 2015 expressed an unqualified opinion on those consolidated financial statements.

/s/ GRANT THORNTON LLP

San Jose, California

February 17, 2015

Item 9B.

Other Information

None.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this item relating to the Company’s directors and nominees, disclosure relating to compliance with Section 16(a) of the Securities Exchange Act of 1934, and information regarding Intevac’s code of ethics, audit committee and stockholder recommendations for director nominees is included under the captions “Election of Directors,” “Nominees,” “Business Experience of Nominees for Election as Directors,” “Board Meetings and Committees,” “Corporate Governance Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Business Conduct and Ethics” in the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders and is incorporated herein by reference. The information required by this item relating to the Company’s executive officers and key employees is included under the caption “Executive Officers of the Registrant” under Item 1 in Part I of this Annual Report on Form 10-K.

Item 11.

Executive Compensation

The information required by this item is included under the caption “Executive Compensation and Related Information” in the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders and is incorporated herein by reference.

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 Intevac’s equity compensation plans at January 3, 2015.


	(a)		(b)		(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
					(1)
Equity compensation plans approved by security holders (2)		2,935,364	$	8.26		1,950,457
Equity compensation plans not approved by security holders		—		—		—

Total		2,935,364	$	8.26		1,950,457

(1)	Excludes securities reflected in column (a).

(2)	Included in the column (c) amount are 399,730 shares available for future issuance under Intevac’s 2003 Employee Stock Purchase Plan.

The other information required by this item is included under the caption “Ownership of Securities” in the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

The information required by this item is included under the captions “Certain Transactions” and “Corporate Governance Matters” in the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders 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 During 2014” in the Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders and is incorporated herein by reference.

PART IV

Item 15.

Exhibits and Financial Statements

(a) The following documents are filed as part of this Annual Report on Form 10-K:

1. Financial Statements:

See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K.

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.

2. Exhibits


Exhibit Number		Description

3.1 (1)		Certificate of Incorporation of the Registrant

3.2 (2)		Bylaws of the Registrant, as amended

10.1+ (4)		The Registrant’s 2004 Equity Incentive Plan, as amended

10.2+ (5)		The Registrant’s 2003 Employee Stock Purchase Plan, as amended

10.3+ (6)		The Registrant’s 2012 Equity Incentive Plan

10.4+ (6)		Form of Restricted Stock Unit Agreement for 2012 Equity Incentive Plan

10.5+ (6)		Form of Restricted Stock Agreement for 2012 Equity Incentive Plan

10.6+ (6)		Form of Stock Option Agreement for 2012 Equity Incentive Plan

10.7 (7)		Lease dated March 20, 2014 regarding the space located at 3544, 3560, 3570 and 3580 Bassett Street, Santa Clara, California

10.8+ (3)		The Registrant’s 401(k) Profit Sharing Plan

10.9 (8)		Director and Officer Indemnification Agreement

10.10+ (7)		The Registrant’s Executive Incentive Plan

10.11+ (9)		Separation Agreement and Release of Kevin Fairbairn dated November 30, 2012

10.12+ (10)		Form of Severance Agreement (Non-CFO)

10.13+ (11)		Offer Letter with Wendell Blonigan

10.14+ (11)		Severance Agreement with Wendell Blonigan

10.15 (12)		Agreement, dated as of December 9, 2013, by and among Intevac Inc., Steven R. Becker, Matthew A. Drapkin, Becker Drapkin Management, L.P., Becker Drapkin Partners (QP), L.P., Becker Drapkin Partners, L.P., BD Partners V, L.P. and BC Advisors, LLC

10.16+ (13)		Executive Transition Plan with Michael Russak dated January 6, 2014


Exhibit Number		Description

10.17+ (14)		Executive Transition Plan and Agreement with Christopher Smith dated January 27, 2014

10.18+ (15)		Change in Control Agreement with Jay Cho dated December 10, 2013

10.19+ (16)		Offer Letter with James Moniz

10.20+ (16)		Change in Control Agreement with James Moniz dated October 29, 2014

10.21(17)		Agreement, dated as of May 11, 2014, by and among Intevac, Inc., J. Daniel Plants, Marc T. Giles, Voce Catalyst Partners LP and Voce Capital Management LLC

21.1		Subsidiaries of the Registrant

23.1		Consent of Independent Registered Public Accounting Firm

24.1		Power of Attorney (see page 84)

31.1		Certification of 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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

(1)	Previously filed as an exhibit to the Company’s Report on Form 8-K filed July 23, 2007

(2)	Previously filed as an exhibit to the Company’s Report on Form 8-K filed March 15, 2012

(3)	Previously filed as an exhibit to the Registration Statement on Form S-1 (No. 33-97806)

(4)	Previously filed as an exhibit to the Company’s Form 10-Q filed May 3, 2011

(5)	Previously filed as an exhibit to the Company’s Form 10-Q filed July 30, 2013

(6)	Previously filed as an exhibit to the Company’s Form 10-Q filed May 1, 2012

(7)	Previously filed as an exhibit to the Company’s Form 10-Q filed April 29, 2014

(8)	Previously filed as an exhibit to the Company’s Form 10-K filed March 14, 2008

(9)	Previously filed as an exhibit to the Company’s Form 10-K filed February 22, 2013

(10)	Previously filed as an exhibit to the Company’s Report on Form 8-K filed December 26, 2012

(11)	Previously filed as an exhibit to the Company’s Report on Form 8-K filed July 9, 2013

(12)	Previously filed as an exhibit to the Company’s Report on Form 8-K filed December 10, 2013

(13)	Previously filed as an exhibit to the Company’s Report on Form 8-K filed January 7, 2014

(14)	Previously filed as an exhibit to the Company’s Report on Form 8-K filed January 31, 2014

(15)	Previously filed as an exhibit to the Company’s Form 10-Q filed October 28, 2014

(16)	Previously filed as an exhibit to the Company’s Report on Form 8-K filed October 31, 2014

(17)	Previously filed as an exhibit to the Company’s Report on Form 8-K filed May 15, 2014

+	Management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K

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 February 17, 2015.

INTEVAC, INC.

/s/ JAMES MONIZ

James Moniz

Executive Vice President, Finance and Administration Chief Financial Officer, Treasurer and Secretary

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Wendell T. Blonigan and James Moniz and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ WENDELL T. BLONIGAN	President,	February 17, 2015
(Wendell T. Blonigan)	Chief Executive Officer and Director (Principal Executive Officer)


/s/ JAMES MONIZ	Executive Vice President, Finance and	February 17, 2015
(James Moniz)	Administration, Chief Financial Officer Treasurer and Secretary (Principal Financial and Accounting Officer)

/s/ NORMAN H. POND	Chairman of Board	February 17, 2015
(Norman H. Pond)

/s/ MATTHEW A. DRAPKIN	Director	February 17, 2015
(Matthew A. Drapkin)

/s/ DAVID S. DURY	Director	February 17, 2015
(David S. Dury)

/s/ MARK T. GILES	Director	February 17, 2015
(Mark T. Giles)

/s/ STANLEY J. HILL	Director	February 17, 2015
(Stanley J. Hill)

/s/ THOMAS M. ROHRS	Director	February 17, 2015
(Thomas M. Rohrs)

/s/ JOHN F. SCHAEFER	Director	February 17, 2015
(John F. Schaefer)

/s/ PING YANG	Director	February 17, 2015
(Ping Yang)