STOCK COMPENSATION PLANS AND STOCK-BASED COMPENSATION

Equity Incentive Plans

Cadence's 2000 Equity Incentive Plan, as amended, or 2000 Plan, provides for the issuance of non-qualified options, restricted stock awards, restricted stock units, stock bonuses and the rights to acquired restricted stock. The total number of shares available for issuance under the 2000 Plan, as amended, is 57,500,000 plus any shares that were not subject to a grant or that are forfeited under prior plans that were terminated and incorporated into the 2000 Plan. Options granted under the 2000 Plan have an exercise price not less than the fair market value of the stock on the date of grant. Options and restricted stock generally vest over a three to four-year period. Options granted under the 2000 Plan expire seven years from the date of grant.

Cadence's 1987 Stock Incentive Plan, or the 1987 Plan, provides for the issuance of either incentive or non-qualified options and restricted stock awards. The 1987 Plan is used to grant awards to certain executive officers. The number of shares available for issuance under the 1987 Plan, as amended, is 79,370,100 shares, of which only 5,000,000 shares may be issued pursuant to restricted stock awards. Options granted under the 1987 Plan have an exercise price not less than fair market value of the stock on the date of grant and become exercisable over periods of up to five years, and expire seven years from the date of grant. Vesting of restricted stock awards granted under the 1987 Plan may require attainment of specified performance criteria.

Under the 1995 Directors Stock Incentive Plan, or the Directors Plan, Cadence may grant non-qualified options to its non-employee directors at an exercise price not less than the fair market value of the stock on the date of grant. The maximum number of shares available for issuance under the Directors Plan is 3,550,000. Options granted under the Directors Plan expire after ten years and vest one year from the date of grant.

Cadence has assumed certain options granted to employees of acquired companies, or Acquired Options. The Acquired Options were assumed by Cadence outside of its stock option plans, and each option is administered under the terms of the respective original plans of the acquired companies. All of the Acquired Options have been adjusted for the price conversion under the terms of the acquisition agreement between Cadence and the relevant acquired company. If the Acquired Options are cancelled, forfeited or expire, they do not become available for future grant. No additional options will be granted under any of the acquired companies' plans.

Stock-based Compensation

Stock-based compensation expense and the related income tax benefit recognized in connection with stock options, restricted stock and the Employee Stock Purchase Plan, or ESPP, during fiscal 2012, 2011 and 2010 were as follows:



	2012		2011		2010
	(In thousands)
Stock options	$	8,752	$	8,685	$	7,924
Restricted stock	34,838		30,815		31,725
ESPP	3,971		4,088		3,811
Total stock-based compensation expense	$	47,561	$	43,588	$	43,460

Income tax benefit	$	12,453	$	1,406	$	1,370

Stock-based compensation expense is reflected throughout Cadence's costs and expenses during fiscal 2012, 2011 and 2010 as follows:



	2012		2011		2010
	(In thousands)
Cost of product	$	99	$	111	$	117
Cost of services	1,889		2,105		2,225
Cost of maintenance	1,218		1,357		1,435
Marketing and sales	10,193		10,356		9,765
Research and development	21,516		18,561		18,324
General and administrative	12,646		11,098		11,594
Total stock-based compensation expense	$	47,561	$	43,588	$	43,460

The fair value of stock options and purchase rights issued under our ESPP are calculated using the Black-Scholes option pricing model. The computation of the expected volatility assumption used for new awards is based on implied volatility when the remaining maturities of the underlying traded options are at least one year. When the remaining maturities of the underlying traded options are less than one year, expected volatility is based on a weighting of historical and implied volatilities. When determining the expected term, Cadence reviews historical employee exercise behavior from options having similar vesting periods. The risk-free interest rate for the period within the expected term of the option is based on the yield of United States Treasury notes for the comparable term in effect at the time of grant. The expected dividend yield used in the calculation is zero because Cadence has not historically paid and does not expect to pay dividends in the foreseeable future.

Stock Options

The exercise price of each stock option granted under Cadence's employee equity incentive plans is equal to or greater than the closing price of Cadence's common stock on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average grant date fair value of options granted and the weighted-average assumptions used in the model for fiscal 2012, 2011 and 2010 were as follows:



	2012			2011			2010
Dividend yield	None			None			None
Expected volatility	46.4		%	44.9		%	45.9		%
Risk-free interest rate	0.79		%	2.18		%	2.45		%
Expected term (in years)	4.6			4.7			4.6
Weighted-average fair value of options granted	$	4.57		$	3.93		$	2.51

A summary of the changes in stock options outstanding under Cadence's equity incentive plans during fiscal 2012 is presented below:



			Weighted- Average		Weighted- Average Remaining Contractual Terms	Aggregate Intrinsic
	Shares		Exercise Price		(Years)	Value
	(In thousands)					(In thousands)
Options outstanding as of December 31, 2011	22,996		$	11.01
Granted	1,700		$	11.63
Exercised	(2,457	)	$	7.78
Canceled and forfeited	(2,961	)	$	16.03
Options outstanding as of December 29, 2012	19,278		$	10.71	3.4	$	71,574
Options vested as of December 29, 2012	15,696		$	11.00	2.9	$	57,307
Options vested as of, and expected to vest after, December 29, 2012	19,222		$	10.71	3.3	$	71,386

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to stock option grants of $11.9 million as of December 29, 2012, which will be recognized over the remaining weighted-average vesting period of 2.1 years.

The total intrinsic value of and cash received from options exercised during fiscal 2012, 2011 and 2010 was:



	2012		2011		2010
	(In thousands)
Intrinsic value of options exercised	$	11,493	$	7,255	$	1,435
Cash received from options exercised	$	19,119	$	6,478	$	868

Restricted Stock

Generally, restricted stock, which includes restricted stock awards and restricted stock units, vests over three to four years and is subject to the employee's continuing service to Cadence. The vesting of certain restricted stock grants is subject to attainment of specified performance criteria. Each fiscal quarter, Cadence estimates the probability of the achievement of these performance goals and recognizes any related stock-based compensation expense using the graded-vesting method. The amount of stock-based compensation expense recognized in any one period can vary based on the attainment or expected attainment of the various performance goals. If such performance goals are not ultimately met, no compensation expense is recognized and any previously recognized compensation expense is reversed.

Stock-based compensation expense related to performance-based restricted stock grants for fiscal 2012, 2011 and 2010 was as follows:



	2012		2011		2010
	(In thousands)
Stock-based compensation expense related to performance-based grants	$	3,230	$	2,174	$	2,541

A summary of the changes in restricted stock outstanding under Cadence's equity incentive plans during fiscal 2012 is presented below:



			Weighted- Average Grant Date		Weighted- Average Remaining Vesting Terms	Aggregate Intrinsic
	Shares		Fair Value		(Years)	Value
	(In thousands)					(In thousands)
Unvested shares as of December 31, 2011	7,827		$	8.39
Granted	6,078		$	11.33
Vested	(4,033	)	$	8.02
Forfeited	(428	)	$	9.07
Unvested shares as of December 29, 2012	9,444		$	10.40	1.2	$	126,928
Unvested shares expected to vest after December 29, 2012	8,869		$	10.38	1.2	$	119,206

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock grants of $77.3 million as of December 29, 2012, which will be recognized over the remaining weighted-average vesting period of 2.2 years.

The total fair value realized by employees upon vesting of restricted stock during fiscal 2012, 2011 and 2010 was:



	2012		2011		2010
	(In thousands)
Fair value of restricted stock realized upon vesting	$	48,249	$	43,756	$	28,866

Employee Stock Purchase Plan

Cadence administers an ESPP, as amended from time to time. Under the terms of the ESPP, Cadence is authorized to issue up to 66,500,000 shares of common stock.

Under the ESPP, a majority of Cadence's employees are eligible to purchase Cadence's common stock at a price equal to 85% of the lower of the fair market value at the beginning or the end of the applicable offering period, in an amount not to exceed 5% of their annual base earnings plus bonuses and commissions, and subject to a limit in any calendar year of $7,058.82 worth of common stock. The offering periods have a six-month duration and begin on each February 1 and August 1. The purchase dates fall on the last days of the six-month offering periods.

Compensation expense is calculated using the fair value of the employees' purchase rights under the Black-Scholes option pricing model. The weighted-average grant date fair value of purchase rights granted under the ESPP and the weighted-average assumptions used in the model for fiscal 2012, 2011 and 2010 were as follows:



	2012			2011			2010
Dividend yield	None			None			None
Expected volatility	31.4		%	38.4		%	39.1		%
Risk-free interest rate	0.12		%	0.17		%	0.19		%
Expected term (in years)	0.5			0.5			0.5
Weighted-average fair value of options granted	$	2.78		$	2.48		$	1.72

Shares of common stock issued under the ESPP for fiscal 2012, 2011 and 2010 were as follows:



	2012		2011		2010
	(In thousands, except per share amounts)
Cadence shares purchased under the ESPP	1,548		2,029		2,568
Cash received for the purchase of shares under the ESPP	$	13,568	$	13,236	$	12,765
Weighted-average purchase price per share	$	8.77	$	6.52	$	4.97

Reserved for Future Issuance

As of December 29, 2012, Cadence had reserved the following shares of authorized but unissued common stock for future issuance:



	Shares
	(In thousands)
Employee equity incentive plans*	39,505
2015 Warrants (Note 3)	46,382
2011 and 2013 Notes Warrants (Note 3)	6,830
Employee stock purchase plans	3,752
Directors stock option plans*	2,681
2023 Notes conversion (Note 3)	11
Total	99,161

* Includes shares reserved for: (i) issuance upon exercise of future option grants, (ii) issuance upon vesting of future restricted stock grants, (iii) outstanding but unexercised options to purchase common stock, or (iv) unvested restricted stock units.