FORM 10-Q

For the transition period from  to                        

Commission file number 0-26946

INTEVAC, INC.

3560 Bassett Street

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x          No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

     On March 30,June 29, 2002 12,060,003 shares of the Registrant’s Common Stock, no par value, were outstanding.

INTEVAC, INC.

INDEX

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PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements

INTEVAC, INC.

See accompanying notes.

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INTEVAC, INC.

See accompanying notes.

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INTEVAC, INC.

See accompanying notes.

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INTEVAC, INC.

1.     Business Activities and Basis of Presentation

     Intevac, Inc.’s businesses are the design, manufacture and sale of complex capital equipment used to manufacture products such as flat panel displays and thin-film disks (“Equipment”and the design, manufacture and sale of commercial products based on technology developed by the Photonics Technology Division (the “Products Group”) and the development of highly sensitive electro-optical devices and systems (“Photonics”for the US military and its allies (the “Photonics Technology Division”).

     Systems sold by the Products Group’s (formerly the Equipment DivisionDivision) Memory and Flat Panel Display Divisions are typically used to deposit highly engineered thin-films of material on a substrate, or to modify the characteristics and properties of thin-films already deposited on a substrate. Systems manufactured by the Equipment DivisionThese systems generally utilize proprietary manufacturing techniques and processes, and operate under high levels of vacuum. The systemsvacuum, are designed for high-volume continuous operation and use precision robotics, computerized controls and complex software programs to fully automate and control the production process. Products manufactured with these systems include cell phone color displays, automotive displays, computer monitors and disks for computer hard disk drives. The EquipmentProducts Group’s Intensified Imaging Division has also designed ultra high vacuum automated equipmentwas formed during the second quarter of 2002 to design, manufacture and sell commercial products based on technology developed by the Photonics Technology Division. Products include low-cost extreme low-light-level cameras for Photonics to be usedcommercial applications and photodiodes for the future manufacture of low-cost low-light-level cameras.use in high-speed fiber optic networks.

     The Photonics Technology Division is developing electro-optical devices and systems that permit highly sensitive detection of photons in the visible and short wave infrared portions of the spectrum. This development work is aimed at creating new products for both military and industrial applications. Products include Laser Illuminated Viewing and Ranging (“LIVAR®”) systems for positive target identification at long range, low-cost extreme low-light-level cameras for use in security and military applications and photodiodes for use in high-speed fiber optic systems.applications.

     The financial information at March 30,June 29, 2002 and for the three-monththree- and six-month periods ended March 30,June 29, 2002 and March 31,June 30, 2001 is unaudited, but includes all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, it does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

     The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

     The Company evaluates the collectibility of trade receivables on an ongoing basis and provides reserves against potential losses when appropriate.

     The results for the three-month periodthree- and six-month periods ended March 30,June 29, 2002 are not considered indicative of the results to be expected for any future period or for the entire year.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.     Inventories

     The components of inventory consist of the following:

     Finished goods inventory consists of completed units at customer sites undergoing installation and acceptance testing.

3.     Net Income (Loss) Per Share

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

(1)	Diluted EPS for the three-monththree- and six-month periods ended March 30,June 29, 2002 and March 31,June 30, 2001 excludeexcludes “as converted” treatment of the convertible notesConvertible Notes as their inclusion would be anti-dilutive. The number of “as converted” shares excluded for the three-monththree- and six-month periods ended March 30,June 29, 2002 and March 31,June 30, 2001 was 1,820,364 and 1,999,758, respectively.
(2)	Diluted EPS for the three-month period ended June 30, 2001 and for the six-month periods ended March 30,June 29, 2002 and March 31,June 30, 2001 excludeexcludes the effect of employee stock options as their inclusion would be anti-dilutive. The number of employee stock option sharesoptions excluded for the three-month periodsperiod ended MarchJune 30, 2002 and March 31, 2001 was 59,882 and 173,590, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.     Segment Reporting

4.     Segment Reporting

Segment Description

     Intevac, Inc. has two reportable operating segments: Equipmentthe Products Group and Photonics.the Photonics Technology Division. The Company’s Equipment DivisionProducts Group sells complex capital equipment primarily used in the manufacturing of thin-film disks and flat panel displays and thin-film disks.commercial products based on technology developed by the Photonics Technology Division. The Company’s Photonics Technology Division is developing devices and systemsmilitary products utilizing electron sources that permit highly sensitive detection of photons in the visible and the short-wave infrared spectrum.

     Included in corporate activities are general corporate expenses less an allocation of corporate expenses to operating units equal to 1% of net revenues.

     Business Segment Net Revenues

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.     Income Taxes

     The Company accrued a $2.2 million tax benefit of $4.2 million and $6.4 million, respectively, for the three-month periodthree- and six-month periods ended March 30,June 29, 2002. This resulted from recent federal tax law changes that allow losses incurred in 2001 and 2002 to be carried back 5 years. The Company paid federal income taxes of approximately $5.1$5.2 million for 1996, and $0.9 million for 1997.1997 and $0.5 million for 1998. The Company believes that at least $2.2filed a Corporate Application for Tentative Refund in the amount of $6.4 million of taxes paid are recoverableon June 6, 2002, based on the taxable loss incurred in 2001 and that additional taxes may also be recoverable, but the amount will not be determined and recorded until the Company files its 2001 federal income tax return eitherincluded in the second orCompany’s 2001 Federal Tax Return. The Company received the $6.4 million refund early in the third quarter of 2002. The Company’s Federal Tax Returns, and any refunds resulting from them, are subject to audit for 3 years from the date filed. For the three monthsthree-and six-month periods ended March 31,June 30, 2001, the Company did not accrue a tax benefit due to the inability at that time to realize additional refunds from loss carry-backs. The Company’s $16.5$17.7 million deferred tax asset is fully offset by a $16.5$17.7 million valuation allowance, resulting in a net deferred tax asset of zero at March 30,June 29, 2002.

6.     Capital Transactions

     During the three-monthsix-month period ending March 30,June 29, 2002, Intevac sold stock to its employees under the Company’s Stock Option and Employee Stock Purchase Plan.Plans. A total of 56,381 shares were issued for which the Company received $144,000.

7.     Subsequent Event

     On July 12, 2002 the Company completed the exchange of $36,270,000 in aggregate principal amount of its 6 1/2% convertible notes due 2004 for $29,543,000 of its new 6 1/2% convertible subordinated notes due 2009 and $7,585,000 in cash, including accrued interest. The new 6 1/2% convertible subordinated notes due 2009 are convertible, at the holders option, into Intevac common shares at a conversion price of $7.00 per share. $1,275,000 in aggregate principal amount of the 6 1/2% convertible subordinated notes due 2004 remained outstanding after the closing of the exchange offer.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This Quarterly Report on Form 10-Q contains forward-looking statements, which involve risks and uncertainties. Words such as “believes,” “expects,”“believes”, “expects”, “anticipates” and the like indicate forward-looking statements. The Company’s actual results may differ materially from those discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the risk factors set forth elsewhere in this Quarterly Report on Form 10-Q under “Certain Factors Which May Affect Future Operating Results” and in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K filed in March 2002, Form 10-Q’s and Form 8-K’s.

Critical Accounting Policies and Estimates

     Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, income taxes, warranty obligations, long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis. The Audit Committee and our auditors review significant estimates and judgements prior to the public release of our financial results.

     Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K. We believe the following critical accounting policies affect the more significant judgments and estimates made in the preparation of our consolidated financial statements.

     Revenue Recognition — — Intevac recognizesWe recognize revenue using the guidance from SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements.” Intevac’sOur revenue recognition policy requires that there be persuasive evidence of a sales contract, that the price is fixed, that product title has transferred, that product payment is not contingent on any factors and is reasonably assured, and that the Company haswe have completed all the material tasks and deliverables required by the contract.

     Revenues for systems are recognized upon customer acceptance. For large deposition and RTP systems shipped through a distributor, revenue is typically recognized after the distributor has accepted the system at Intevac’sour factory and the system has been shipped. For large deposition and RTP systems sold direct to end customers, revenue is recognized after installation and acceptance of the system at the customer site. When the Company believeswe believe that there may be higher than normal end-user installation and acceptance issues for systems shipped through a distributor, such as when the first unit of a newly designed system is delivered, then the Company deferswe defer revenue recognition until the distributor’s customer has also accepted the system. Revenues for technology upgrades, spare parts, consumableconsumables and prototype products built by the Photonics Technology Division are generally recognized upon shipment. Service and maintenance contract revenue, which to date has been insignificant, is recognized ratably over applicable contract periods or as the service is performed.

     The Company performsWe perform best efforts research and development work under various research contracts. Revenue on these contracts is recognized in accordance with contract terms, typically as costs are incurred. Typically, for each contract, the Company commitswe commit to perform certain research and development efforts up to an agreed upon amount. In connection with these contracts, the Company receiveswe receive funding on an incremental basis up to a ceiling. Some of these contracts are cost sharing in nature, where Intevac is reimbursed for a portion of the total costs expended. In addition, the Company has,we have, from time to time, negotiated with a third party to fund a portion of the Company’sour costs in return for a joint interest to the Company’s rights at the end

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     Inventories — — Intevac makesWe make provisions for potentially excess and obsolete inventory based on backlog and forecasted demand. However, order backlog is subject to revisions, cancellations, and rescheduling. Actual demand will inevitably differ from forecasted demand due to a number of factors. For example, the thin-film disk industry has suffered from over-capacity and poor financial results, which has led to industry consolidation. Consolidation can lead to the availability of used equipment that competes at very low prices with the Company’sour products. Financial stress and consolidation in the Company’s customer base can also lead to the cancellation of orders for products after the Company haswe have incurred substantial costs related to those orders. Such problems have resulted, and may continue to result, in excess and obsolete inventory, and the provision of related reserves.

     Warranty — — The Company’s standard warranty is twelve months from customer acceptance. During this warranty period any necessary non-consumable parts are supplied and installed. A provision for the estimated warranty cost is recorded at the time revenue is recognized.

Results of Operations

  Three Months Ended March

     Net revenues.Net revenues consist primarily of sales of equipment used to manufacture flat panel displays, equipment used to manufacture thin-film disks, related equipment and system components and contract research and development related to the development of electro-optical devices and systems. Net revenues decreased by 33%12% to $6.7$8.4 million for the three months ended March 30,June 29, 2002 from $10.0$9.5 million for the three months ended March 31,June 30, 2001. Net revenues from Equipment decreasedthe Products Group increased to $4.9$6.6 million for the three months ended March 30,June 29, 2002 from $7.9$6.2 million for the three months ended March 31,June 30, 2001. The decreaseincrease in EquipmentProducts Group revenue was primarily the result of decreased shipmentsan increase in sales of disk and flat panel manufacturing equipmentsystems partially offset by a decrease in sales of technology upgrades and of disk equipment spare parts. Equipment revenues includedparts and by the sale of a MDP 200 modular add-onthe last system that was integrated with a previously delivered MDP 250 disk manufacturing system.in inventory from our discontinued electron beam product line in the three months ended June 30, 2001. Net revenues from the Photonics Technology Division decreased 46% to $1.7$1.8 million for the three months ended March 30,June 29, 2002 from $2.1$3.3 million for the three months ended March 31, 2001. The decrease in Photonics net revenues was theJune 30, 2001 primarily as a result of lower research and developmentdecreased contract revenues in the three-month periodR&D revenue.

     The three months ended March 30,June 29, 2002 partially offset bydid not include any revenue from five flat panel deposition system upgrades delivered during the salefirst quarter of two Model 120 LIVAR Cameras.2002. These upgrades, which represent over $7 million in revenue, have all been installed at the customer site. The hardware portion of the order, which represents 90% of the order value, has been accepted and has been paid for by our distributor. However, our distributor’s customer is operating the base systems at full capacity and is not willing to take the systems off line for sufficient time to permit us to complete the balance of our acceptance and test procedures for these upgrades. Without this final acceptance by the end user, our internal policies prohibit revenue recognition. We are unable to predict with any certainty when the customer will grant us access to complete the final acceptance tests. We expect that there will be minimal effect on net income at the time we recognize revenue for these five upgrades.

     International sales decreased by 65%increased 67% to $2.4$5.9 million for the three months ended March 30,June 29, 2002 from $6.9$3.5 million for the three months ended March 31,June 30, 2001. The decreaseincrease in international sales was primarily due to a reductionan increase in net revenues from disk manufacturing equipment and from flat panel manufacturing equipment.systems. International sales constituted 70% of net revenues for the three months ended June 29, 2002 and 37% of net revenues for the three months ended MarchJune 30, 2002 and 69% of net revenues for the three months ended March 31, 2001.

     Backlog.The Company’s backlog of orders for its products was $27.3$27.8 million at March 30,June 29, 2002 and $46.0$52.9 million at March 31,June 30, 2001. The reduction was primarily due to a lower backlog of flat panel deposition systems, five of which were taken to revenue in the fourth quarter of 2001. The Company includes in backlog the value of purchase orders for its products that have scheduled delivery dates.

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     Gross margin.Cost of net revenues consists primarily of purchased materials, fabrication, assembly, test and installation labor and overhead, customer-specific engineering costs, warranty costs, royalties, provisions for inventory reserves, scrap and costs attributable to contract research and development. Gross margin decreasedincreased to 14.4%24% for the three months ended March 30,June 29, 2002 from 34.0%(2%) for the three months ended March 31,June 30, 2001.

     EquipmentProducts Group gross margins decreasedincreased to 15.5%29% for the three-month period ended March 30,June 29, 2002 from 45.0%(6%) for the three-month period ended March 31,June 30, 2001. EquipmentProducts Group margins decreased primarily duein the second quarter of 2001 were negatively impacted by the provision of a $2.4 million inventory reserve related to a custom multi-chip module system manufactured for a customer that ceased operations and by the sale of an electron beam processing system at a gross margin of less than 10%. Products Group margin during the second quarter of 2001 without the effect of these two items would have been 42%, higher than the margin reported for the second quarter of 2002. The reduction in gross margin was due primarily to lower shipments of technology upgrades and high initial costs to complete Intevac’s first MDP 200 system. Photonics gross margins increased to 11.3% duringthe sale of a used disk manufacturing system at a discounted price in the three months ended MarchJune 29, 2002.

     Photonics Technology Division gross margins were 6% for both the three-month periods ended June 29, 2002 and June 30, 2002 from (8.1%) during the three months ended March 31, 2001. The Company expects that Photonics gross margins inmargin will fluctuate from quarter to quarter based on the first quarter of 2002

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     Research and development.Research and development expense consists primarily of prototype materials, salaries and related costs of employees engaged in ongoing research, design and development activities for flat panel manufacturing equipment, disk manufacturing equipment, and research by the Photonics Technology Division. Company funded research and development expense decreased to $3.1$3.0 million for the three months ended March 30,June 29, 2002 from $3.5$3.6 million for the three months ended March 31,June 30, 2001, representing 46.9%36% and 34.9%38%, respectively, of net revenue. ThisThe decrease was primarily the result of reducedlower spending for the development of flat panel and disk manufacturing equipment, partially offset by increased spending for photonics.accelerated depreciation of $0.5 million on a disk manufacturing system that was disposed of during the 2nd quarter of 2002.

     Research and development expenses do not include costs of $1.3$1.4 million and $2.1$3.5 million, respectively, for the three-month periods ended March 30,June 29, 2002 and March 31,June 30, 2001 related to contract research and development performed by the Company’s Photonics business.Technology Division. These expenses are included in cost of net revenues.

     Research and development expenses also do not include costs of $0.1 million and $0.3 million, respectively in each of the three-month periods ended MarchJune 30, 2002 and March 31,June 30, 2001, reimbursed under the terms of various research and development cost sharing agreements.

     Selling, general and administrative.Selling, general and administrative expense consists primarily of selling, marketing, customer support, production of customer samples, financial, travel, management, legal and professional services, and bad debt expense. Domestic sales are made by the Company’s direct sales force, whereas international sales are made by distributors and representatives that provide services such as sales, installation, warranty and customer support. The Company also has a subsidiary in Singapore to support customers in Southeast Asia.

     Selling, general and administrative expense was $1.7$1.8 million for the both the three-month periods ended March 30,June 29, 2002 and March 31,June 30, 2001, representing 25.6%22% and 16.7%19%, respectively, of net revenue.

     Interest expense.Interest expense consists primarily of interest on the Company’s convertible notes. Interest expense was $0.7 million infor both of the three-month periods ended March 30,June 29, 2002 and March 31,June 30, 2001.

     Interest income and other, net.Interest income and other, net totaled $0.2 million and ($1.3)$1.8 million for the three months ended March 30,June 29, 2002 and March 31,June 30, 2001, respectively. Interest income and other, net in 2002 consisted of $0.2 millionprimarily of interest and dividend income on investments. Interest income and other income, net in 2001

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     Provision for (benefit from) income taxes.The Company accrued a $2.2 million tax benefit of $4.2 million for the three-month period ended March 30,June 29, 2002. This resulted from recent federal tax law changes that allowincreased the length of time over which losses incurred in 2001 and 2002 tocould be carried back from 2 years to 5 years. The Company paid federal income taxes of approximately $5.1$5.2 million for 1996, and $0.9 million for 1997.1997 and $0.5 million for 1998. The Company believes that at least $2.2filed a Corporate Application for Tentative Refund in the amount of $6.4 million of taxes paid are recoverableon June 6, 2002, based on the taxable loss incurred in 2001 and that additional taxes may also be recoverable, but the amount will not be determined and recorded until the Company files its 2001 federal income tax return eitherincluded in the second or third quarter of 2002.Company’s 2001 Federal Tax Return. For the three months ended March 31,June 30, 2001, the Company did not accrue a tax benefit due to the inability at that time to realize additional refunds from loss carry-backs. The Company’s $17.7 million deferred tax asset is fully offset by a $17.7 million valuation allowance, resulting in a net deferred tax asset of zero at June 29, 2002.

Net revenues.Net revenues decreased 23% to $15.1 million for the six months ended June 29, 2002 from $19.5 million for the six months ended June 30, 2001. Net revenues from the Products Group decreased to $11.6 million for the six months ended June 29, 2002 from $14.1 million for the six months ended June 30, 2001. The decrease in net revenues from the Products Group was due primarily to the sale of an electron beam manufacturing system during the second quarter of 2001, and, to a lesser extent, lower revenues in 2002 from technology upgrades and spare parts, partially offset by the sale of a disk manufacturing system in 2002. Net revenues from the Photonics Technology Division decreased to $3.5 million for the six months ended June 29, 2002 from $5.4 million for the six months ended June 30, 2001. The decrease in Photonics sales was primarily the result of decreased contract R&D activities during 2002.

     International sales decreased 20% to $8.3 million for the six months ended June 29, 2002 from $10.4 million for the six months ended June 30, 2001. The decrease in international sales during the six months ended June 29, 2002 was primarily due to a decrease in net revenues from disk manufacturing equipment. International sales constituted 55% of net revenues for the six months ended June 29, 2002 and 53% of net revenues for the six months ended June 30, 2001.

Gross margin.Gross margin was 20% for the six months ended June 29, 2002 as compared to 17% for the six months ended June 30, 2001. Gross margin in the Products Group was 23% for both the six-month periods ended June 29, 2002 and June 30, 2001. Products Group gross margin in the six months ended June 29, 2002 was negatively impacted by the high initial costs to complete Intevac’s first MDP 200 system and by under-utilization of the factory. Products Group gross margin in the six months ended June 30, 2001 was negatively impacted by the previously mentioned provision of a $2.4 million inventory reserve related to the custom multi-chip module system and by the sale of an electron beam processing system at low gross margin. Photonics Technology Division gross margin increased to 9% for the six months ended June 29, 2002 from 0% for the six months ended June 30, 2001. The Company expects that gross margins in the Photonics Technology Division will fluctuate from quarter to quarter based on the relative mix of revenues derived from sales of prototype products, from fully funded research and development contracts and from cost shared research and development contracts.

Research and development.Company funded research and development expense decreased 14% to $6.1 million for the six months ended June 29, 2002 from $7.1 million for the six months ended June 30, 2001, representing 41% and 36%, respectively, of net revenue. The decrease was primarily the result of lower spending for the development of flat panel and disk manufacturing equipment, partially offset by accelerated depreciation of $0.5 million on a disk manufacturing system that was disposed of during the 2nd quarter of 2002.

     Research and development expenses do not include costs of $2.8 million and $5.6 million, respectively, for the six-month periods ended June 29, 2002 and June 30, 2001 related to contract research and development performed by the Company’s Photonics Technology Division. These expenses are included in cost of net revenues.

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     Research and development expenses also do not include costs of $0.2 million and $0.4 million, respectively, in the six-month periods ended June 29, 2002 and June 30, 2001, reimbursed under the terms of various research and development cost sharing agreements.

Selling, general and administrative.Selling, general and administrative expense was $3.5 million for both the six month-periods ended June 29, 2002 and June 30, 2001, representing 24% and 18%, respectively, of net revenue.

Interest expense.Interest expense decreased to $1.3 million for the six months ended June 29, 2002 from $1.5 million in the six months ended June 30, 2001. The decrease in interest expense was due primarily to the Company’s repurchase of a portion of its convertible notes in the 4th quarter of 2001.

Interest income and other, net.Interest income and other, net totaled $0.4 million and $0.5 million for the six months ended June 29, 2002 and June 30, 2001, respectively. Interest income and other, net in 2002 consisted primarily of interest and dividend income on investments. Interest and other income, net in 2001 consisted of a $0.8 million loss on the disposition of Pacific Gas & Electric commercial paper, which was offset primarily by interest and dividend income on other investments.

Provision for (benefit from) income taxes.The Company accrued a tax benefit of $6.4 million for the six-month period ended June 29, 2002. This resulted from recent federal tax law changes that increased the length of time over which losses incurred in 2001 and 2002 could be carried back from 2 years to 5 years. The Company paid federal income taxes of approximately $5.2 million for 1996, $0.9 million for 1997 and $0.5 million for 1998. The Company filed a Corporate Application for Tentative Refund in the amount of $6.4 million on June 6, 2002, based on the taxable loss included in the Company’s 2001 Federal Tax Return. For the six months ended June 30, 2001, the Company did not accrue a tax benefit due to the inability at that time to realize additional refunds from loss carry-backs. The Company’s $17.7 million deferred tax asset is fully offset by a $17.7 million valuation allowance, resulting in a net deferred tax asset of zero at June 29, 2002.

Liquidity and Capital Resources

     The Company’s operating activities used cash of $3.7$1.1 million duringfor the threesix months ended March 30,June 29, 2002. The cash used was due primarily to the net loss incurred and increases in receivables and inventory,by the Company, which werewas partially offset by increasedincreases in customer advances, and by depreciation and amortization. In the three

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     The Company’s investing activities used cash of $0.2$0.6 million for the threesix months ended March 30,June 29, 2002 as a result of the purchase of fixed assets. In the threesix months ended March 31,June 30, 2001, the Company’s investing activities provided cash of $26.2$30.8 million as a result of the net sale of investments.investments, which was partially offset by the purchase of fixed assets. During the threesix months ended March 31,June 30, 2001, the Company converted the majorityall of its short-term investments into cash or cash equivalents.

     The Company’s financing activities provided cash of $0.1 million and $0.2 million for the three-monthsix-month periods ended March 30,June 29, 2002 and March 31,June 30, 2001 respectively, as the result of the sale of the Company’s common stock to its employees through the Company’s employee benefit plans.

     Intevac has incurred operating losses each year since 1998 andOn July 12, 2002 the Company cannot predict with certainty when it will return to profitability. We anticipate generating positivecompleted the exchange of $36,270,000 in aggregate principal amount of its 6 1/2% convertible notes due 2004 for $29,543,000 of its new 6 1/2% convertible subordinated notes due 2009 and $7,585,000 in cash, flow duringincluding accrued interest. The new 6 1/2% convertible subordinated notes due 2009 are convertible, at the 2002 fiscal year, but that is dependent on continued growth in the business and our continued ability to obtain advances from our customers. Additionally, as of March 30, 2002 we had $37.5 million of outstanding Convertible Notes, which mature in March 2004. We do not currently have the funds available to repay the debt and there can be no assurance that the Company will be able to restructure the debt or secure additional equity and/or debt financing to redeem the Convertible Notes on terms favorable to the Company and its shareholders, if the Convertible Notes are not converted by their holders option, into Intevac common stock prior to their maturity.shares at a conversion price of $7.00 per share. $1,275,000 in aggregate principal amount of the 6 1/2% convertible subordinated notes due 2004 remained outstanding after the closing of the exchange offer.

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Certain Factors Which May Affect Future Operating Results

     $37.5 MillionOur significant amount of debt could have a negative effect on us and on our security holders.

     After completing the exchange of our convertible notes early in quarter 3, we have $1.3 million of convertible notes are outstandingdue in 2004 (the “existing notes”) and will mature in 2004.

     In connection with the sale of $57.5$29.5 million of its 6 1/2% Convertible Subordinated Notes Due 2004convertible notes due 2009 (the “Convertible Notes”“exchange notes”) in February 1997, Intevac incurred a substantial increase in the ratio of long-term debt to total capitalization (shareholders’ equity plus long-term debt). At each noteholder’s option, the Convertible Notes may be exchanged, prior to maturity, into Intevac common shares at a price of $20.625 per share, which is substantially above current market price. During 2001 and 1999 Intevac spent a total of $11.9 million to repurchase $20.0outstanding. The aggregate $30.8 million of the Convertible Notes. The $37.5 million of the Convertible Notes that remain outstanding as of March 30, 2002notes commit Intevacus to substantial principal and interest obligations that are significantlyobligations. Our significant amount of debt could harm Intevac and holders of our common stock and convertible notes in excess of the Company’s $14.5 million cash balance at March 30, 2002. Intevac may, from time to time, repurchase and retire additional Convertible Notes prior to their maturity date.many ways, including:

	•	reducing the funds available to finance our business operations and for other corporate purposes because a portion of our cash flow from operations must be dedicated to the payment of principal and interest on our debt;
	•	impairing our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes;
	•	increasing our vulnerability to increases in interest rates;
	•	placing us at a competitive disadvantage because we are substantially more leveraged than certain of our competitors;
	•	hindering our ability to adjust rapidly to changing market conditions; and
	•	making us more vulnerable financially in the event of a further downturn in general economic conditions or in our business.

     The degree to which Intevac is leveraged could have an adverse effect on Intevac’s ability to obtain additional financing for working capital, acquisitions or other purposes, and could make it more vulnerable to industry downturns and competitive pressures. Intevac’sOur ability to meet itsour debt service obligations will be dependent on Intevac’sour future operating performance which will beand cash flow. Our operating performance and cash flow, in part, are subject to business, financial business and othereconomic factors affectingbeyond our control.

     We may not have the operations of Intevac, many of which are beyond its control. Infinancial resources to repurchase our convertible notes in the event of a transaction resulting in a change of control, the termination of trading of our common stock or a distribution of the capital stock of a subsidiary constituting our Photoncis business

     We may be unable to repurchase our convertible notes in the event of a transaction that results in a change in control or if a termination of trading of our common stock occurs, or, in the Company’s noteholderscase of the exchange notes, a distribution to all of the holders of our common stock of all the capital stock of a subsidiary that at the time constitutes our Photonics business. Holders of existing notes may require us to repurchase all or a portion of their existing notes upon a change in control or a termination of trading. Holders of exchange notes may require us to repurchase all or a part of their exchange notes upon a change in control, a termination in trading or a distribution of the capital stock of the Photonics business. If a change in control, a termination of trading or a distribution of the capital stock of the Photonics business were to occur, we may not have enough funds to pay the repurchase price for all notes for which repurchase is requested. Any future credit agreements or other debt agreements may prohibit the repurchase of the existing notes or exchange notes upon a change in control or upon a termination of trading, or, in the case of the exchange notes, a distribution of the capital stock of the Photonics business, or may provide that a change in control or a termination in trading or a distribution of the capital stock of the Photonics business constitutes an event of default under that debt agreement. If a change in control or termination of trading occurs at a time when we are prohibited from repurchasing the existing notes or a change in control, a termination of trading or distribution of capital stock of the Photoncis business occurs when we are prohibited from repurchasing the exchange notes, we could seek the consent of our lenders to repurchase the existing notes or exchange notes, as the case may be, or could attempt to refinance the debt agreements. If we do not chooseobtain the lenders consent, we could not repurchase the existing or exchange notes. Our failure to repurchase the existing notes or exchange their Convertible Notes for Intevac common stock priornotes would constitute an event of default under the particular indenture governing such notes, which might constitute an event of default under the terms of our other debt.

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     We may undertake significant additional financing transactions in order to the Convertible Notes’ 2004 maturity date, the Company will be required to repay the Convertible Notes at maturity. If this is the case, then there can be no assurance that the Company will have generatedmaintain sufficient cash fromto conduct our operations.

     Our cash and cash equivalents of approximately $16.6 million as of June 29, 2002 was reduced by the $7.6 million paid upon completing the exchange of our convertible notes. In late July, we received a $6.4 million federal income tax refund based upon the claim filed in June. We may need to obtain additional financing to fund our future operations and we may seek to repay the Convertible Notes without raisingraise additional capitalfunds through a variety of alternative sources, including the sale of additional debtsecurities or equity. Additionally, there can be no assurance that the Companyfrom other financing arrangements or asset sales. Our board of directors has from time to time considered a number of possible transactions. Such transactions might include:

	•	attempting to raise additional equity through public or private offerings,
	•	attempting to raise additional debt financing,
	•	undertaking a rights offering to obtain financing from our existing shareholders,
	•	selling off a portion of our assets to raise additional capital, or
	•	obtaining a line of credit.

We may undertake one or more of these transactions. We do not know whether we will be able to secure additional equity and/or debt financingcomplete any of these transactions on a timely basis, on terms favorablesatisfactory to the Company and its shareholders,us, or at all.

     Intevac hasWe have invested heavily in the development of products that address new markets. The Equipment DivisionPhotonics Technology Division’s LIVAR® target identification system and low-cost low-light level camera products are designed to offer significantly improved capability to military customers. The Products Group has developed a flexible deposition tool and a rapid thermal processing tool to address growing segments of the flat panel display equipment market that are intended to displace products offered by competing manufacturers. The Photonics Division’s LIVAR target identification system and low-cost low-light level camera products are designed to offer significantly improved capability relative to any products currently offered in the marketplace. Additionally, the PhotonicsProducts Group’s Intensified Imaging Division is entering a new market fordeveloping commercial products based on the

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     IntevacOur Products Group sells capital equipment to capital intensive industries, which manufacture and sell commodity products such as flat panel displays and disk drives. These industries operate with high fixed costs. When demand for these commodity products exceeds capacity, then demand for new capital equipment such as Intevac’sours tends to be amplified. When supply of these commodity products exceeds capacity,demand, then the demand for new capital equipment such as Intevac’sours tends to be depressed. The cyclical nature of the capital equipment industry means that in some years sales of new systems by the Companyus will be unusually high, and that in other years sales of new systems by the Companyus will be severely depressed. We are currently in a period where sales of new systems for disk production are depressed. Failure to anticipate or respond quickly to the industry business cycle could have an adverse effect on Intevac’sour business.

     Intevac’sOur ability to remain competitive requires substantial investments in research and development. The failure to develop, manufacture and market new systems, or to enhance existing systems, will have an adverse effect on Intevac’sour business. From time to time, in the past, Intevac haswe have experienced delays in the introduction of, and technical

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     Our products are complex, constantly evolving and are often designed and manufactured to individual customer requirements that require additional engineering.

     Intevac’s Equipment Division productsOur Products Group systems have a large number of components and are highly complex. IntevacWe may experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. In addition, some of the systems built by Intevacthat we manufacture must be customized to meet individual customer site or operating requirements. Intevac hasWe have limited manufacturing capacity and engineering resources and may be unable to complete the development, manufacture and shipment of itsthese products, or to meet the required technical specifications for itsthese products in a timely manner. Such delays could lead to rescheduling of orders in backlog, or in extreme situations, to cancellation of orders. In addition, Intevacwe may incur substantial unanticipated costs early in a product’s life cycle, such as increased engineering, manufacturing, installation and support costs whichthat we may not be ableunable to be passedpass on to the customer. In some instances, Intevac is dependentwe depend upon a sole supplier or a limited number of suppliers for complex components or sub-assemblies utilized in its products. Any of these factors could adversely affect Intevac’sour business.

     To date, the activities of the Photonics Technology Division have concentrated on the development of its technology and prototype products that demonstrate this technology. Revenues for this division have been derived primarily from research and development contracts funded by the United States Government and its contractors. The Company continuescontractors and our Photonics Technology Division has yet to earn an annual profit. We continue to develop standard Photonicsphotonics products for sale to military and commercial customers. The Photonics Technology Division will require substantial further investment in sales and marketing, in product development and in additional production facilities to support the planned transition to volume sales of Photonicsphotonics products to military and commercial customers. There can be no assurance that the Companywe will succeed in these activities and generate significant sales of products based on its Photonicsour photonics technology.

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     The purchase of Intevac’sour systems, along withand the purchase of other related equipment and facilities, requires extremely large capital expenditures by our customers. These costs are far in excess of the cost of the Intevacour systems alone. The magnitude of such capital expenditures requires that our customers have access to large amounts of capital and that they beare willing to invest that capital over long periods of time to be able to purchase our equipment. Some of our customers, particularly those that would otherwise purchase our disk manufacturing products, may not be willing, or able, to make the magnitude of capital investment required.

     Over the past few years the amount of data that can be stored on a single thin-film computer disk has been increasing at approximately 100% per year. Although the number of disk drives produced has continued to increase each year, the growth in areal density has resulted in a reduction in the number of disks required per disk drive. TrendFocus, a market research firm specializing in the disk drive industry, projects that the number of thin-film disks used worldwide declined in 2001 from 2000 levels and are expected to remain at the same level in 2002.levels. Without a significant technological change or an increase in the number of disks required, Intevac’sour disk equipment sales are largely limited to upgrades of existing systems, rather than capacity expansion or system replacement.

     Intevac experiencesWe experience intense competition in the Equipment Division.Products Group. For example, Intevac’s equipmentour disk and flat panel products experience competition worldwide from competitors including Anelva Corporation, Ulvac Japan, Ltd. and Unaxis Holdings, Ltd., each of which havehas sold substantial numbers of systems worldwide. Anelva, Ulvac and Unaxis all have substantially greater financial, technical, marketing, manufacturing and other resources than Intevac.we do. There can be no assurance that Intevac’sour competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features or that new competitors will not enter Intevac’sour markets and develop such enhanced products.

     Given the lengthy sales cycle and the significant investment required to integrate equipment into the manufacturing process, Intevac believeswe believe that once a manufacturer has selected a particular supplier’s equipment for a specific application, that manufacturer generally relies upon that supplier’s equipment and frequently will continue to purchase any additional equipment for that application from the same supplier. Accordingly, competition for customers in the equipment industry is intense, and suppliers of equipment may offer substantial pricing concessions and incentives to attract new customers or retain existing customers.

     There can be no assurance that:

	•	any of Intevac’sour pending or future patent applications will be allowed or that any of the allowed applications will be issued as patents, orpatents;
	•	any patent owned by Intevacof our patents will not be invalidated, deemed unenforceable, circumvented or challenged, orchallenged;
	•	the rights granted under our patents will provide competitive advantages to Intevac, orus;
	•	any of Intevac’sour pending or future patent applications will be issuedissue with claims of the scope sought by Intevac,us, if at all, orall;
	•	others will not develop similar products, duplicate Intevac’sour products or design around the patents owned by Intevac,our patents; or
	•	patent rights, intellectual property laws or Intevac’sour agreements will adequately protect Intevac’sour intellectual property rights.

     Failure to adequately protect Intevac’sour intellectual property rights could have an adverse effect upon Intevac’sour business.

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From time to time, Intevac haswe have received claims that it iswe are infringing third parties’ intellectual property rights. There can be no assurance that third parties will not in the future claim infringement by Intevacus with respect to current or future patents, trademarks, or other proprietary rights relating to Intevac’sour disk sputtering systems, flat panel manufacturing equipment or other products. Any present or future claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require Intevacus to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to Intevac,us, or at all. Any of the foregoing could have an adverse effect upon Intevac’sour business.

     Over the last nineten quarters Intevac’sour operating loss as a percentage of net revenues has fluctuated between approximately (59%)59% and (1%)1% of net revenues. Over the same period our sales per quarter have fluctuated between $23.6 million and $5.9 million. Intevac anticipatesWe anticipate that itsour sales and operating margins will continue to fluctuate. As a result, period-to-period comparisons of itsour results of operations are not necessarily meaningful and should not be relied upon as indications of future performance.

     Intevac’sOur operations are located in Santa Clara, California. The cost of living in northern California is extremely high, which increases both the cost of doing business and the cost and difficulty of recruiting new

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