3.	Equity-Based Compensation

At March 29, 2014, 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 permit the grant of incentive or non-statutory stock options, restricted stock, stock appreciation rights, restricted stock units (“RSUs” also referred to as performance units) and performance shares.

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. Under the terms of the ESPP, employees can choose to have up to 15% of their base earnings withheld to purchase Intevac common stock.

Compensation Expense

The effect of recording equity-based compensation for the three-month periods ended March 29, 2014 and March 30, 2013 was as follows:


	Three Months Ended
	March 29, 2014		March 30, 2013
	(In thousands)
Equity-based compensation by type of award:
Stock options	$	241	$	173
RSUs		292		76
Employee stock purchase plan		164		314

Total equity-based compensation	$	697	$	563

Tax benefit recognized	$	3	$	5

Equity-based compensation expense is based on awards ultimately expected to vest and 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.

Stock Options and ESPP

The fair value of stock options and ESPP awards is estimated at the grant date using the Black-Scholes option valuation model. The determination of fair value of stock options and ESPP awards on the date of grant using an option-pricing model is affected by Intevac’s 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 term of the awards, and actual employee stock option exercise behavior.

Option activity as of March 29, 2014 and changes during the three months ended March 29, 2014 were as follows:


	Shares			Weighted Average Exercise Price
Options outstanding at December 31, 2013		2,637,969		$	8.53
Options granted		48,000		$	8.49
Options cancelled and forfeited		(42,687	)	$	7.94
Options exercised		(41,836	)	$	4.58

Options outstanding at March 29, 2014		2,601,446		$	8.61

Vested and expected to vest at March 29, 2014		2,418,134		$	8.78
Options exercisable at March 29, 2014		1,381,138		$	10.45

Intevac issued 224,000 shares under the ESPP during the three months ended March 29, 2014.

Intevac estimated the weighted-average fair value of stock options and employee stock purchase rights using the following weighted-average assumptions:


	Three Months Ended
	March 29, 2014			March 30, 2013
Stock Options:
Weighted-average fair value of grants per share	$	4.14		$	1.97
Expected volatility		54.71	%		55.57	%
Risk free interest rate		1.87	%		0.52	%
Expected term of options (in years)		5.2			3.9
Dividend yield		None			None
Stock Purchase Rights:
Weighted-average fair value of grants per share	$	2.15		$	1.60
Expected volatility		43.40			52.42	%
Risk free interest rate		0.11	%		0.26	%
Expected term of purchase rights (in years)		0.74			1.85
Dividend yield		None			None

The computation of the expected volatility assumptions used in the Black-Scholes calculations for new stock option 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 stock option 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.

RSUs

A summary of the RSU activity is as follows:


	Shares			Weighted Average Grant Date Fair Value
Non-vested RSUs at December 31, 2013		237,859		$	5.34
Granted		29,000		$	7.97
Vested		(3,189	)	$	7.52
Cancelled and forfeited		(7,833	)	$	5.70

Non-vested RSUs at March 29, 2014		255,837		$	5.60

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. In fiscal 2014, the annual bonus for participants in the Company’s annual incentive plan will be settled with RSUs with one year vesting. The Company accrued for the payment of bonuses at the expected company-wide payout percentage amount at March 29, 2014, 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 $161,000 for the three months ended March 29, 2014.

Performance-based RSUs (“performance-based awards”) granted in fiscal 2013 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 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.