STOCK COMPENSATION PLANS AND STOCK-BASED COMPENSATION

Equity Incentive Plans

Cadence’s 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. During fiscal 2015, Cadence’s shareholders approved an amendment to the Omnibus Plan to increase the number of shares of common stock authorized for issuance by 7.5 million. As of January 2, 2016, the total number of shares available for issuance under the Omnibus Plan is approximately 23.0 million plus any shares that are forfeited under prior plans. 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 approximately 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 2015, 2014 and 2013 were as follows:



	2015		2014		2013
	(In thousands)
Stock options	$	7,903	$	11,870	$	13,100
Restricted stock	78,615		65,894		49,019
ESPP	5,823		6,028		4,166
Total stock-based compensation expense	$	92,341	$	83,792	$	66,285

Income tax benefit	$	24,294	$	20,544	$	16,236

Stock-based compensation expense is reflected in Cadence’s consolidated income statements during fiscal 2015, 2014 and 2013 as follows:



	2015		2014		2013
	(In thousands)
Cost of product and maintenance	$	2,436	$	2,244	$	1,596
Cost of services	3,561		3,280		2,321
Marketing and sales	21,654		20,580		15,642
Research and development	49,755		43,173		32,999
General and administrative	14,935		14,515		13,727
Total stock-based compensation expense	$	92,341	$	83,792	$	66,285

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 2015, 2014 and 2013 were as follows:



	2015			2014			2013
Dividend yield	None			None			None
Expected volatility	26.8		%	29.2		%	40.0		%
Risk-free interest rate	1.61		%	1.59		%	0.86		%
Expected term (in years)	5.0			4.8			4.7
Weighted-average fair value of options granted	$	4.60		$	3.89		$	4.93

A summary of the changes in stock options outstanding under Cadence’s equity incentive plans during fiscal 2015 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 January 3, 2015	13,876		$	9.71
Granted	1,305		17.25
Exercised	(5,948	)	8.79
Canceled and forfeited	(256	)	12.26
Options outstanding as of January 2, 2016	8,977		$	11.35	3.5	$	84,954
Options vested as of January 2, 2016	7,098		$	10.35	3.1	$	74,264
Options vested as of, and expected to vest after, January 2, 2016	8,976		$	11.35	3.5	$	84,947

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to stock option grants of $8.2 million as of January 2, 2016, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.3 years.

The total intrinsic value of and cash received from options exercised during fiscal 2015, 2014 and 2013 was:



	2015		2014		2013
	(In thousands)
Intrinsic value of options exercised	$	67,363	$	24,032	$	15,114
Cash received from options exercised	52,261		46,123		27,569

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 2015, 2014 and 2013 was as follows:



	2015		2014		2013
	(In thousands)
Stock-based compensation expense related to performance-based grants	$	5,544	$	5,227	$	4,340

A summary of the changes in restricted stock outstanding under Cadence’s equity incentive plans during fiscal 2015, 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 January 3, 2015	10,451		$	15.51
Granted	5,849		19.62
Vested	(5,019	)	14.68
Forfeited	(704	)	16.34
Unvested shares as of January 2, 2016	10,577		$	18.13	1.1	$	220,103
Unvested shares expected to vest after January 2, 2016	10,000		$	18.08	1.1	$	208,091

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock grants of $143.7 million as of January 2, 2016, 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 2015, 2014 and 2013 was:



	2015		2014		2013
	(In thousands)
Fair value of restricted stock realized upon vesting	$	99,564	$	75,283	$	58,091

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 74.0 million 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. Each offering period has a six-month duration beginning on either February 1 or 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 2015, 2014 and 2013 were as follows:



	2015			2014			2013
Dividend yield	None			None			None
Expected volatility	22.9		%	24.2		%	25.7		%
Risk-free interest rate	0.13		%	0.06		%	0.09		%
Expected term (in years)	0.5			0.5			0.5
Weighted-average fair value of options granted	$	4.23		$	3.39		$	3.21

Shares of common stock issued under the ESPP for fiscal 2015, 2014 and 2013 were as follows:



	2015		2014		2013
	(In thousands, except per share amounts)
Cadence shares purchased under the ESPP	1,519		1,689		1,382
Cash received for the purchase of shares under the ESPP	$	22,449	$	20,017	$	15,088
Weighted-average purchase price per share	$	14.78	$	11.85	$	10.91

Reserved for Future Issuance

As of January 2, 2016, Cadence had reserved the following shares of authorized but unissued common stock for future issuance:



	Shares
	(In thousands)
Employee equity incentive plans*	21,523
Employee stock purchase plans	6,660
Directors stock option plans*	1,845
Total	30,028

_____________

* 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.