STOCK-BASED COMPENSATION

The following table shows total stock-based compensation expense recognized under ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), for employees and directors and the effect to the accompanying Consolidated Statement of Operations for the years ended December 31, 2011, 2010 and 2009. There was no tax effect.



In thousands	2011		2010		2009
Cost of sales	$	458	$	329	$	194
Research, development, and engineering	1,482		904		553
Selling, general and administrative expenses	7,077		3,606		2,175
Total stock-based compensation expense	$	9,017	$	4,839	$	2,922

Compensation cost capitalized as part of inventory was $0.3 million during the year ended December 31, 2011 and insignificant for the years ended 2010 and 2009, respectively.

The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period using a single grant approach on a ratable basis for awards granted after the adoption of ASC 718 and using a multiple grant approach on an accelerated basis for awards granted prior to the adoption of ASC 718.

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 life of options is based on observed historical exercise patterns. Groups of employees that have similar historical exercise patterns have been considered separately for valuation purposes. The Black-Sholes valuation input for expected volatility used for our stock options for all years presented was based on the historical volatility of our common stock. The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield reflects that we have not paid any cash dividends since inception and do not intend to pay any cash dividends in the foreseeable future.

We used the following weighted-average assumptions to estimate the fair value of stock options at the date of grant using the Black-Scholes option-pricing model.



	2011		2010		2009
Expected life (in years)	8.2		8.0		5.0
Risk-free interest rate	2.8	%	2.9	%	2.2	%
Volatility factor	48	%	51	%	48	%
Dividend yield	—		—		—

The weighted-average fair value per share of stock options granted during 2011, 2010 and 2009 was $14.61, $9.48, and $6.00 respectively.

1993 Stock Option Plan/Stock Issuance Plan

On July 19, 2011, our stockholders approved amendments to our 1993 Stock Option/Stock Issuance Plan which increased the number of shares available for issuance pursuant to the 1993 Plan by 3.3 million shares. The amendments, which were adopted by our Board of Directors on May 31, 2011, effective as of their approval by our stockholders, increase the share reserve, alter share-counting procedures, make changes to the non-employee director automatic grant program and enable the grant of performance-based awards under the plan. These plans provide for the grant of stock-based awards to our eligible employees, consultants and advisers and non-employee directors. There were no shares reserved for future awards under the 1998 Plan since the plan expired on October 19, 2008.

Under our 1993 Stock Option Plan/Stock Issuance Plan, as amended and restated as of May 31, 2011, officers and other key employees, non-employee Board members and consultants may receive equity incentive awards in the form of stock options to purchase shares of common stock at no less than 100% of fair value at the grant date or restricted stock or restricted stock units. Options historically have vested in equal monthly installments over a fifty-month period or one hundred-month period, with a minimum vesting period of twelve months from the grant date, and generally expire ten years from the date of grant or upon the expiration of a limited period following any earlier termination of employment. The plan was amended in January 2006 to allow the issuance of shares pursuant to restricted stock unit awards, and during fiscal years 2010, 2009 and 2008, restricted stock unit awards were made which generally vest in equal annual installments over a three-year period measured from the award date but which defer the issuance of the vested shares until the end of the vesting period, subject to earlier issuance upon termination of employment under certain circumstances or a change in control. Awards under the plan may be subject to accelerated vesting under certain circumstances should a change in control occur. The plan terminates on the earlier of June 6, 2020 or the date on which all shares available for issuance under the plan have been issued. Under the plan, approximately 3.2 million, 1.4 million and 2.5 million shares were available for issuance at December 31, 2011, 2010 and 2009, respectively.

1998 Supplemental Stock Option/Stock Issuance Plan

Under our 1998 Supplemental Stock Option/Stock Issuance Plan, as amended, eligible employees (i.e. other than executive officers and employees holding the title of Vice President or General Manager) were able to receive options to purchase shares of common stock at not less than 100% of fair value on the grant date. These options generally vest in equal monthly installments over a fifty-month period, with a minimum vesting period of twelve months from grant date, and generally expire ten years from date of grant, subject to earlier termination following the optionee’s cessation of employee status. Direct stock issuances may also be made under the plan, subject to similar vesting provisions. The plan was amended in January 2008 to allow the issuance of shares pursuant to restricted stock unit awards. Since the plan terminated on October 19, 2008, there were no options available for issuance under the plan at December 31, 2011 and 2010.

Stock Option Activity

A summary of our stock option activity for the period ended December 31, 2011, and related information follows:



	Options		Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value as of December 31, 2011
Outstanding at January 1, 2011	3,269,147		$	16.35
Granted	1,091,500		$	25.97
Exercised	(960,818	)	$	15.47
Forfeited and expired	(140,687	)	$	25.68
Outstanding at December 31, 2011	3,259,142		$	19.44	6.2	$	19,501,525
Exercisable at December 31, 2011	1,586,019		$	16.37	3.1	$	13,180,626
Vested and expected to vest as of December 31, 2011, net of anticipated forfeitures	3,175,540		$	19.34	6.1	$	19,235,329

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of fiscal 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. Total intrinsic value of options exercised (selling price of the exercised stock less the option strike price multiplied by the share amount) in fiscal year 2011 was $11.6 million as compared to $3.6 million and $0.5 million in each of 2010 and 2009, respectively. Cash received from option exercises in fiscal 2011 and 2010 was $14.9 million and $10.4 million, respectively.

A summary of our option activity for the prior years follows:



	2010				2009
	Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price
Outstanding at January 1	3,377,151		$	15.62	4,686,549		$	17.01
Granted	818,500		$	16.53	15,000		$	13.64
Exercised	(780,833	)	$	13.35	(204,454	)	$	11.97
Forfeited and expired	(145,671	)	$	16.27	(1,119,944	)	$	22.09
Outstanding at December 31	3,269,147		$	16.35	3,377,151		$	15.62

At December 31, 2011, options outstanding were as follows:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Options	Weighted- Average Exercise Price
$ 8.41 - $13.51	554,378	4.95	$	11.46	404,010	$	11.24
$13.67 - $16.01	647,414	4.08	$	14.86	496,645	$	14.69
$16.16 - $18.92	551,150	7.28	$	18.20	223,990	$	17.42
$19.44 - $22.00	664,625	4.71	$	21.70	421,700	$	21.55
$22.53 - $27.75	543,700	9.27	$	25.26	8,112	$	23.43
$29.68 - $31.21	297,875	8.56	$	30.83	31,562	$	30.14
Outstanding at December 31	3,259,142				1,586,019

As of December 31, 2011, $19.1 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 5.9 years.

Restricted Stock Unit Activity

A summary of our restricted stock unit activity as of December 31, 2011, 2010 and 2009, and related information follows:



	2011				2010				2009
	Shares		Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value
Nonvested stock at January 1	431,866		$	15.64	383,894		$	13.51	115,340		$	11.47
Granted	521,875		$	25.98	400,750		$	16.33	460,189		$	13.66
Vested	(271,651	)	$	18.23	(347,710	)	$	14.14	(167,968	)	$	12.70
Forfeited	(18,586	)	$	19.68	(5,068	)	$	13.43	(23,667	)	$	12.35
Nonvested stock at December 31	663,504		$	22.60	431,866		$	15.64	383,894		$	13.51

A total of 442,035 shares of our common stock subject to restricted stock units was vested but not yet distributed as of December 31, 2011. Stock-based compensation expense related to our restricted stock units for the year ended December 31, 2011 was $5.3 million. As of December 31, 2011, $14.3 million of total unrecognized compensation cost related to unvested restricted stock units is expected to be recognized over a weighted-average period of 4.8 years. Total fair value of vested shares in fiscal 2011 was $5.0 million compared to $4.9 million and $2.1 million in 2010 and 2009, respectively.

Stock Option Exchange Program

In September 2009, we filed a Tender Offer Statement on Schedule TO with the SEC relating to a one-time stock option exchange program (Option Exchange) to give employees (excluding executive officers and members of the board of directors) the opportunity to exchange eligible options for a lesser number of new restricted stock units (RSUs) with approximately the same fair value as the options surrendered, as of the date of the exchange. Eligible options included stock options granted under our equity incentive plans that had an exercise price per share equal to or greater than $13.50. The Option Exchange commenced on September 16, 2009 and expired on October 14, 2009. A total of 75 eligible employees participated in the Option Exchange. Eligible options to purchase a total of 799,799 shares of our common stock were tendered and cancelled in exchange for RSUs covering 123,189 shares of our common stock issued on October 14, 2009. These RSUs were issued at $15.44 under the 1993 Stock Option Plan/Stock Issuance Plan and are subject to its terms and conditions. These RSUs vested (subject to the grantees’ continued service to Ultratech) on October 14, 2010. Using the Black-Scholes option pricing model, we determined that the fair value of the surrendered stock options on a grant-by-grant basis was approximately equal, as of the date of the exchange, to the fair value of the RSUs issued in exchange for such stock options, resulting in an immaterial incremental amount of stock-based compensation.