4. Equity-Based Compensation

At July 2, 2011, Intevac had equity-based awards outstanding under the 2004 Equity Incentive Plan (the “2004 Plan”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s stockholders approved both of these plans.

The 2004 Plan permits the grant of incentive or non-statutory stock options, restricted stock, stock appreciation rights, performance units and performance shares. During the three months ended July 2, 2011, Intevac granted 514,000 stock options with an estimated total grant-date fair value of $3.1 million, including 2,000 shares granted to a consultant with a grant date fair value of $11,000. Of this amount, estimated awards of $722,000 are not expected to vest. During the three months ended July 3, 2010, Intevac granted 508,000 stock options with an estimated total grant-date fair value of $3.3 million, including 2,000 shares granted to a consultant with a grant date fair value of $13,000. Of this amount, estimated awards of $769,000 are not expected to vest. During the six months ended July 2, 2011, Intevac granted 540,000 stock options with an estimated total grant-date fair value of $3.3 million. Of this amount, estimated awards of $768,000 are not expected to vest. During the six months ended July 3, 2010, Intevac granted 595,000 stock options with an estimated total grant-date fair value of $4.0 million. Of this amount, estimated awards of $964,000 are not expected to vest.

The ESPP provides that eligible employees may purchase Intevac’s 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. During the six months ended July 2, 2011, Intevac granted purchase rights with an estimated total grant-date fair value of $1.3 million. During the six months ended July 3, 2010, Intevac granted purchase rights with an estimated total grant-date fair value of $48,000.

Compensation Expense

The effect of recording equity-based compensation for the three and six months ended July 2, 2011 and July 3, 2010 was as follows:


	Three Months Ended						Six Months Ended
	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
	(In thousands)
Equity-based compensation by type of award:
Stock options	$	761		$	855		$	1,492		$	1,342
Employee stock purchase plan		323			111			554			241

Total equity-based compensation		1,084			966			2,046			1,583
Tax effect on equity-based compensation		(293	)		(309	)		(562	)		(502	)

Net effect on net income (loss)	$	791		$	657		$	1,484		$	1,081

Valuation Assumptions

The fair value of share-based payment awards is estimated at the grant date using the Black-Scholes option valuation model. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the expected term of the awards, and actual employee stock option exercise behavior.

The weighted-average estimated value of employee stock options granted during the three months ended July 2, 2011 and July 3, 2010 was $6.07 per share and $6.46 per share, respectively. The weighted-average estimated value of employee stock options granted during the six months ended July 2, 2011 and July 3, 2010 was $6.12 per share and $6.79 per share, respectively. The weighted-average estimated fair value of employee stock purchase rights granted pursuant to the ESPP during the six months ended July 2, 2011 and July 3, 2010 was $5.18 and $4.78 per share, respectively. No purchase rights were granted under the ESPP during either the three months ended July 2, 2011 or July 3, 2010. The fair value of each option and employee stock purchase right grant is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:


	Three Months Ended						Six Months Ended
	July 2,			July 3,			July 2,			July 3,
	2011			2010			2011			2010
Stock Options:
Expected volatility		64.69	%		67.87	%		64.70	%		67.94	%
Risk free interest rate		1.77	%		1.61	%		1.78	%		1.73	%
Expected term of options (in years)		4.8			4.5			4.8			4.5
Dividend yield	None			None			None			None


	Six Months Ended
	July 2, 2011			July 3, 2010
Stock Purchase Rights:
Expected volatility		52.40	%		55.48	%
Risk free interest rate		0.51	%		0.44	%
Expected term of purchase rights (in years)		1.23			0.75
Dividend yield	None			None

The computation of the expected volatility assumptions used in the Black-Scholes calculations for new grants and purchase rights is based on the historical volatility of Intevac’s stock price, measured over a period equal to the expected term of the grant or purchase right. The risk-free interest rate is based on the yield available on U.S. Treasury Strips with an equivalent remaining term. The expected term 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 equity-based awards and vesting schedules. The expected term of purchase rights represents the period of time remaining in the current offering period. The dividend yield assumption is based on Intevac’s history of not paying dividends and the assumption of not paying dividends in the future.

As the equity-based compensation expense recognized in the Condensed Consolidated Statements of Operations is based on awards ultimately expected to vest, such amount has been reduced for estimated forfeitures. Forfeitures were estimated based on Intevac’s historical experience, which Intevac believes to be indicative of Intevac’s future experience.