Equity and Stock Based Compensation Plans

Options

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The expected term of options granted was calculated using the simplified method. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of Nanometrics’ stock price. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.



	Three Months Ended				Nine Months Ended
	September 28, 2013		September 29, 2012		September 28, 2013		September 29, 2012
Stock Options
Expected life	4.6 years		4.6 years		4.5 years		4.5 years
Volatility	64.38	%	75.44	%	71.04	%	77.96	%
Risk free interest rate	1.52	%	0.74	%	1.00	%	0.84	%
Dividends	—		—		—		—
Employee Stock Purchase Plan
Expected life	0.5 years		0.5 years		0.5 years		0.5 years
Volatility	25.94	%	38.58	%	26.75	%	45.47	%
Risk free interest rate	0.10	%	0.16	%	0.11	%	0.12	%
Dividends	—		—		—		—

The weighted average fair value per share of the stock options awarded in the three month periods ended September 28, 2013, and September 29, 2012, was $7.75 and $8.94, respectively, and in the nine month periods ended September 28, 2013, and September 29, 2012, was $8.55 and $10.5, respectively, based on the fair market value of the Company’s common stock on the grant dates.

A summary of activity under the Company’s stock option plans during the nine month period ended September 28, 2013, is as follows:



	Number of Shares Outstanding (Options)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in Thousands)
Options
Outstanding at December 29, 2012	2,020,319		$	12.01	4.44	$	6,770
Exercised	(218,474	)	7.46
Granted	374,700		15.22
Cancelled	(121,881	)	15.10
Outstanding at September 28, 2013	2,054,664		$	12.90	4.28	$	7,158
Exercisable at September 28, 2013	1,258,894		$	11.43	3.49	$	6,150

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $16.05 as of September 28, 2013, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the three month periods ended September 28, 2013, and September 29, 2012, was $0.2 million and $1.0 million, respectively. The total intrinsic value of options exercised during the nine month periods ended September 28, 2013, and September 29, 2012, was $1.7 million and $4.5 million, respectively.

Restricted Stock Units ("RSUs")

A summary of activity for RSUs during the nine month period ended September 28, 2013, is as follows:



	Number of RSUs		Weighted Average Fair Value
Outstanding RSU as of December 29, 2012	235,162		$	16.32
Granted	292,360		15.41
Released	(85,707	)	15.55
Cancelled	(9,518	)	14.41
Outstanding RSU as of September 28, 2013	432,297		$	16.05

Stock-based Compensation Expense

Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans by function was as follows (in thousands):



	Three Months Ended				Nine Months Ended
	September 28, 2013		September 29, 2012		September 28, 2013		September 29, 2012
Cost of products	$	55	$	50	$	153	$	128
Cost of service	74		62		204		195
Research and development	412		289		1,092		952
Selling	476		451		1,418		1,374
General and administrative	789		630		2,149		1,886
Restructuring	896		—		896		—
Total stock-based compensation expense	$	2,702	$	1,482	$	5,912	$	4,535