STOCK COMPENSATION PLANS AND STOCK-BASED COMPENSATION

Equity Incentive Plans

During 2014, Cadence’s stockholders approved the Omnibus Equity Incentive Plan, or the Omnibus Plan, which amends and restates in its entirety Cadence’s Amended and Restated 1987 Stock Incentive Plan, or the 1987 Plan, and consolidates Cadence’s Amended and Restated 2000 Equity Incentive Plan, or the 2000 Plan, into the 1987 Plan. The Omnibus Plan provides for the issuance of both incentive and non-qualified options, restricted stock awards, restricted stock units, stock bonuses and the rights to acquire restricted stock to both executive and non-executive employees. The total number of shares available for issuance under the Omnibus Plan is approximately 15.5 million plus any shares that are forfeited under the 1987 Plan or the 2000 Plan. Options granted under the Omnibus 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 Omnibus Plan expire seven years from the date of grant. Vesting of restricted stock awards granted under the Omnibus Plan may require the attainment of specified performance criteria.

Cadence’s 1995 Directors Stock Incentive Plan, or the Directors Plan, provides for the issuance of non-qualified options, restricted stock awards and restricted stock units to its non-employee directors. Options granted under the Directors Plan have 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 3.6 million. Options granted under the Directors Plan expire after ten years, and options, restricted stock awards and restricted stock units 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 canceled, 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 2014, 2013 and 2012 were as follows:



	2014		2013		2012
	(In thousands)
Stock options	$	11,870	$	13,100	$	8,752
Restricted stock	65,894		49,019		34,838
ESPP	6,028		4,166		3,971
Total stock-based compensation expense	$	83,792	$	66,285	$	47,561

Income tax benefit	$	20,544	$	16,236	$	12,453

Stock-based compensation expense is reflected in Cadence’s consolidated income statements during fiscal 2014, 2013 and 2012 as follows:



	2014		2013		2012
	(In thousands)
Cost of product and maintenance	$	2,244	$	1,596	$	1,317
Cost of services	3,280		2,321		1,889
Marketing and sales	20,580		15,642		10,193
Research and development	43,173		32,999		21,516
General and administrative	14,515		13,727		12,646
Total stock-based compensation expense	$	83,792	$	66,285	$	47,561

The fair value of stock options and purchase rights issued under Cadence’s 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 2014, 2013 and 2012 were as follows:



	2014			2013			2012
Dividend yield	None			None			None
Expected volatility	29.2		%	40.0		%	46.4		%
Risk-free interest rate	1.59		%	0.86		%	0.79		%
Expected term (in years)	4.8			4.7			4.6
Weighted-average fair value of options granted	$	3.89		$	4.93		$	4.57

A summary of the changes in stock options outstanding under Cadence’s equity incentive plans during fiscal 2014 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 28, 2013	17,475		$	10.06
Acquired options	20		0.32
Granted	1,312		13.90
Exercised	(4,202	)	10.98
Canceled and forfeited	(729	)	18.09
Options outstanding as of January 3, 2015	13,876		$	9.71	3.3	$	126,892
Options vested as of January 3, 2015	11,425		$	9.28	2.8	$	109,501
Options vested as of, and expected to vest after, January 3, 2015	13,870		$	9.71	3.3	$	126,866

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to stock option grants of $11.4 million as of January 3, 2015, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.1 years.

The total intrinsic value of and cash received from options exercised during fiscal 2014, 2013 and 2012 was:



	2014		2013		2012
	(In thousands)
Intrinsic value of options exercised	$	24,032	$	15,114	$	11,493
Cash received from options exercised	46,123		27,569		19,119

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 2014, 2013 and 2012 was as follows:



	2014		2013		2012
	(In thousands)
Stock-based compensation expense related to performance-based grants	$	5,227	$	4,340	$	3,230

A summary of the changes in restricted stock outstanding under Cadence’s equity incentive plans during fiscal 2014, 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 28, 2013	10,113		$	13.11
Granted	5,840		16.90
Vested	(4,719	)	12.34
Forfeited	(783	)	13.94
Unvested shares as of January 3, 2015	10,451		$	15.51	1.1	$	196,801
Unvested shares expected to vest after January 3, 2015	9,846		$	15.47	1.1	$	185,398

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock grants of $118.4 million as of January 3, 2015, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.0 years.

The total fair value realized by employees upon vesting of restricted stock during fiscal 2014, 2013 and 2012 was:



	2014		2013		2012
	(In thousands)
Fair value of restricted stock realized upon vesting	$	75,283	$	58,091	$	48,249

Employee Stock Purchase Plan

Cadence provides an ESPP, as amended from time to time. Under the terms of the ESPP, Cadence is authorized to issue up to 74,000,000 shares of common stock.

Under the terms of the ESPP, for the offering period that commenced February 1, 2014, a majority of Cadence employees are eligible to purchase Cadence’s common stock in an amount not to exceed 7% of their annual base earnings plus bonuses and commissions, and subject to a limit in any calendar year of $9,411.76 worth of common stock.

Under the ESPP and through the January 31, 2014 purchase date, a majority of Cadence’s employees could 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 2014, 2013 and 2012 were as follows:



	2014			2013			2012
Dividend yield	None			None			None
Expected volatility	24.2		%	25.7		%	31.4		%
Risk-free interest rate	0.06		%	0.09		%	0.12		%
Expected term (in years)	0.5			0.5			0.5
Weighted-average fair value of options granted	$	3.39		$	3.21		$	2.78

Shares of common stock issued under the ESPP for fiscal 2014, 2013 and 2012 were as follows:



	2014		2013		2012
	(In thousands, except per share amounts)
Cadence shares purchased under the ESPP	1,689		1,382		1,548
Cash received for the purchase of shares under the ESPP	$	20,017	$	15,088	$	13,568
Weighted-average purchase price per share	$	11.85	$	10.91	$	8.77

Reserved for Future Issuance

As of January 3, 2015, Cadence had reserved the following shares of authorized but unissued common stock for future issuance:



	Shares
	(In thousands)
Employee equity incentive plans*	24,340
2015 Warrants	46,382
Employee stock purchase plans	8,180
Directors stock option plans*	2,240
Total	81,142

_____________

* 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.