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 2016, Cadence’s shareholders approved an amendment to the Omnibus Plan to increase the number of shares of common stock authorized for issuance by 6.0 million. As of December 31, 2016, the total number of shares available for issuance under the Omnibus Plan is approximately 29.0 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 2016, 2015 and 2014 were as follows:



	2016		2015		2014
	(In thousands)
Stock options	$	5,649	$	7,903	$	11,870
Restricted stock	96,989		78,615		65,894
ESPP	6,579		5,823		6,028
Total stock-based compensation expense	$	109,217	$	92,341	$	83,792

Income tax benefit	$	30,980	$	24,294	$	20,544

Stock-based compensation expense is reflected in Cadence’s consolidated income statements during fiscal 2016, 2015 and 2014 as follows:



	2016		2015		2014
	(In thousands)
Cost of product and maintenance	$	1,995	$	2,436	$	2,244
Cost of services	2,911		3,561		3,280
Marketing and sales	22,700		21,654		20,580
Research and development	64,061		49,755		43,173
General and administrative	17,550		14,935		14,515
Total stock-based compensation expense	$	109,217	$	92,341	$	83,792

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 2016, 2015 and 2014 were as follows:



	2016			2015			2014
Dividend yield	None			None			None
Expected volatility	31.5		%	26.8		%	29.2		%
Risk-free interest rate	1.21		%	1.61		%	1.59		%
Expected term (in years)	4.8			5.0			4.8
Weighted-average fair value of options granted	$	5.84		$	4.60		$	3.89

A summary of the changes in stock options outstanding under Cadence’s equity incentive plans during fiscal 2016 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 2, 2016	8,977		$	11.35
Granted	1,325		20.05
Exercised	(3,148	)	9.84
Canceled and forfeited	(37	)	15.80
Options outstanding as of December 31, 2016	7,117		$	13.61	3.9	$	82,618
Options vested as of December 31, 2016	5,036		$	11.73	3.3	$	67,954

Cadence had total unrecognized compensation expense related to stock option grants of $10.3 million as of December 31, 2016, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.4 years.

The total intrinsic value of and cash received from options exercised during fiscal 2016, 2015 and 2014 was:



	2016		2015		2014
	(In thousands)
Intrinsic value of options exercised	$	44,835	$	67,363	$	24,032
Cash received from options exercised	30,984		52,261		46,123

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. Stock-based compensation expense is recognized ratably over the vesting term. 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.

During fiscal 2016, Cadence granted 1.25 million shares of long-term, performance-based stock awards to executives that vest over three to five years and are subject to certain market conditions and the executive’s continuing service to Cadence. If the market conditions are not ultimately met, compensation expense previously recognized is not reversed.

Stock-based compensation expense related to performance-based restricted stock grants for fiscal 2016, 2015 and 2014 was as follows:



	2016		2015		2014
	(In thousands)
Stock-based compensation expense related to performance-based grants	$	9,195	$	5,544	$	5,227

A summary of the changes in restricted stock outstanding under Cadence’s equity incentive plans during fiscal 2016, 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 2, 2016	10,577		$	18.13
Granted	7,145		21.60
Vested	(4,939	)	17.45
Forfeited	(701	)	19.18
Unvested shares as of December 31, 2016	12,082		$	20.40	1.1	$	304,698

Cadence had total unrecognized compensation expense related to restricted stock grants of $198.0 million as of December 31, 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 fair value realized by employees upon vesting of restricted stock during fiscal 2016, 2015 and 2014 was:



	2016		2015		2014
	(In thousands)
Fair value of restricted stock realized upon vesting	$	113,114	$	99,564	$	75,283

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. A majority of Cadence employees are eligible to participate in the ESPP.

Under the terms of the ESPP, from and after the offering period that commenced February 1, 2014, eligible employees may 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 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 terms of the ESPP that were in effect through the January 31, 2014 purchase date, eligible employees were subject to a limit of 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 2016, 2015 and 2014 were as follows:



	2016			2015			2014
Dividend yield	None			None			None
Expected volatility	24.4		%	22.9		%	24.2		%
Risk-free interest rate	0.43		%	0.13		%	0.06		%
Expected term (in years)	0.5			0.5			0.5
Weighted-average fair value of options granted	$	4.85		$	4.23		$	3.39

Shares of common stock issued under the ESPP for fiscal 2016, 2015 and 2014 were as follows:



	2016		2015		2014
	(In thousands, except per share amounts)
Cadence shares purchased under the ESPP	1,471		1,519		1,689
Cash received for the purchase of shares under the ESPP	$	24,450	$	22,449	$	20,017
Weighted-average purchase price per share	$	16.62	$	14.78	$	11.85

Reserved for Future Issuance

As of December 31, 2016, Cadence had reserved the following shares of authorized but unissued common stock for future issuance:



	Shares
	(In thousands)
Employee equity incentive plans*	18,709
Employee stock purchase plans	5,189
Directors stock option plans*	1,484
Total	25,382

_____________

* 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.