UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant To Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.    )

Filed by the Registrant þ

Filed by a Party other than the Registrant o

Check the appropriate box:

o Preliminary Proxy Statement
o Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to § 240.14a-12

CADENCE DESIGN SYSTEMS, INC.

(Name of Registrant as Specified In Its Charter)

 

 

CADENCE DESIGN SYSTEMS, INC.

2655 SEELY AVENUE
SAN JOSE, CALIFORNIA 95134

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held on May 13, 2009

 

 

 

TO THE STOCKHOLDERS OF CADENCE DESIGN SYSTEMS, INC.:

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of CADENCE DESIGN SYSTEMS, INC., a Delaware corporation, will be held on May 13, 2009, at 1:00 p.m. Pacific time, at Cadence’s offices located at 2655 Seely Avenue, Building 10, San Jose, California 95134 for the following purposes:

 

 

These items of business are more fully described in the proxy statement accompanying this notice.

 

Cadence’s Board of Directors has fixed the close of business on March 17, 2009 as the record date for the determination of stockholders entitled to notice of, and to vote at, this Annual Meeting of Stockholders and at any adjournment or postponement thereof.

 

By Order of the Board of Directors

 

James J. Cowie

Secretary

 

San Jose, California

March 27, 2009

 

ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE CAST YOUR VOTE VIA THE INTERNET OR BY TELEPHONE AS INSTRUCTED IN THE NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS AS PROMPTLY AS POSSIBLE. IF YOU CHOSE TO RECEIVE PAPER COPIES OF YOUR PROXY MATERIALS, INCLUDING THE PROXY CARD, PLEASE COMPLETE, DATE, SIGN AND RETURN THE PROXY CARD IN THE RETURN ENVELOPE PROVIDED (WHICH HAS PREPAID POSTAGE IF MAILED IN THE UNITED STATES) AS PROMPTLY AS POSSIBLE TO ENSURE YOUR REPRESENTATION AT THE MEETING. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON AT THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN A PROXY ISSUED IN YOUR NAME FROM THE RECORD HOLDER.

 

TABLE OF CONTENTS

 

CADENCE DESIGN SYSTEMS, INC.
2655 SEELY AVENUE
SAN JOSE, CALIFORNIA 95134

 

 

 

 

PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
MAY 13, 2009

 

 

 

 

 

GENERAL

 

The enclosed proxy is solicited on behalf of the Board of Directors of Cadence Design Systems, Inc., a Delaware corporation, which is referred to in this proxy statement as Cadence, for use at its Annual Meeting of Stockholders to be held on May 13, 2009, at 1:00 p.m. Pacific time, or at any adjournment or postponement thereof, for the purposes set forth in this proxy statement and in the accompanying notice of annual meeting. The annual meeting will be held at Cadence’s offices located at 2655 Seely Avenue, Building 10, San Jose, California 95134. Cadence intends to make available this proxy statement on the Internet at http://www.cadence.com/company/
investor_relations/index.aspx on or about March 27, 2009 to all stockholders entitled to vote at the annual meeting.

 

INTERNET AVAILABILITY OF PROXY MATERIALS

 

Pursuant to the rules adopted by the U.S. Securities and Exchange Commission, which is referred to in this proxy statement as the SEC, Cadence is furnishing proxy materials to its stockholders primarily via the Internet, rather than mailing paper copies of these materials to each stockholder. We believe that this process expedites stockholders’ receipt of the proxy materials, lowers the costs of our annual meeting and helps conserve natural resources. On or about March 27, 2009, we will mail to each stockholder (other than those who previously requested electronic or paper delivery) a Notice of Internet Availability of Proxy Materials containing instructions on how to access and review the proxy materials, including our proxy statement and annual report, on the Internet and how to access a proxy card to vote on the Internet or by telephone. The Notice of Internet Availability of Proxy Materials also contains instructions on how to request a paper copy of the proxy materials. If you received a Notice of Internet Availability of Proxy Materials by mail, you will not receive a paper copy of the proxy materials unless you request one. If you received a Notice of Internet Availability of Proxy Materials by mail and would like to receive a paper copy of the proxy materials, please follow the instructions included in the Notice of Internet Availability of Proxy Materials. We may choose to mail a paper copy of the proxy materials, including our proxy statement and annual report, to one or more stockholders.

 

An audio webcast of the annual meeting will also be available on the investor relations page of Cadence’s website at www.cadence.com. The webcast will allow investors to listen to the proceedings of the annual meeting, but stockholders accessing the annual meeting using the Internet will not be considered present at the annual meeting by virtue of this access and will not be able to vote on matters presented at the annual meeting or ask any questions of Cadence’s directors, management or independent registered public accounting firm. For a description of how to vote on matters presented at the annual meeting, see “Voting” below. The webcast will begin promptly at 1:00 p.m. Pacific time on the day of the annual meeting and may be accessed on Cadence’s website for thirty (30) days thereafter.

 

VOTING RIGHTS AND OUTSTANDING SHARES

 

Only holders of record of Cadence’s outstanding common stock, $0.01 par value per share, at the close of business on March 17, 2009, which is referred to in this proxy statement as the record date, will be entitled to notice of and to vote at the annual meeting. At the close of business on the record date, Cadence had 263,488,918 shares of common stock outstanding and entitled to vote. Each holder of record of common stock outstanding on the record date will be entitled to one vote for each share held on all matters to be voted on at the annual meeting.

QUORUM; ABSTENTIONS; BROKER NON-VOTES

 

The presence in person or by proxy of a majority of the shares of Cadence common stock outstanding and entitled to vote on the record date is required for a quorum at the annual meeting. Both abstentions and “broker non-votes” are counted as present for purposes of determining the presence of a quorum, but broker non-votes will not be counted towards the tabulation of votes cast on proposals presented to stockholders.

 

Broker non-votes include shares for which a bank, broker or other nominee holder (i.e., record holder) has not received voting instructions from the beneficial owner and for which the record holder does not have discretionary power to vote on a particular matter. Under the rules that govern brokers who are record holders of shares that are held in brokerage accounts for the beneficial owners of the shares, brokers who do not receive voting instructions from their clients have the discretion to vote uninstructed shares on routine matters but have no discretion to vote such uninstructed shares on non-routine matters. The proposals to be voted on at this year’s annual meeting include both routine matters such as the proposal regarding the election of directors and the ratification of Cadence’s independent registered public accounting firm, and a non-routine matter such as the proposal regarding Cadence’s Amended and Restated Employee Stock Purchase Plan.

 

VOTE REQUIRED

 

The election of directors at the annual meeting requires that each director receive a majority of the votes cast with respect to that director at the annual meeting (number of shares voted “for” a director must exceed the number of votes cast “against” that director), provided that in a contested election, the directors shall be elected by the affirmative vote of a plurality of the votes cast at the annual meeting.

 

All other items to be voted on at the annual meeting require the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the annual meeting.

 

BNY Mellon Shareowner Services has been appointed as the inspector of elections for this year’s annual meeting. All votes will be tabulated by a representative of BNY Mellon Shareowner Services. This representative will also separately tabulate affirmative and negative votes, abstentions and broker non-votes.

 

VOTING

 

Stockholders of record have three options for submitting their vote prior to the annual meeting: (i) vote via the Internet by following the instructions provided in the Notice of Internet Availability of Proxy Materials, (ii) vote via telephone by following the instructions provided in the Notice of Internet Availability of Proxy Materials, or (iii) vote via mail by completing, signing, dating and mailing a paper proxy card in a pre-addressed envelope, which you can request as outlined in the Notice of Internet Availability of Proxy Materials.

 

If a stockholder attends the annual meeting, he or she may also submit his or her vote in person, and any votes that were previously submitted — whether via the Internet, by telephone or by mail — will be superseded by the vote that is cast at the annual meeting. Whether the proxy is submitted via the Internet, by telephone or by mail, if it is properly completed and submitted and if it is not revoked prior to the annual meeting, the shares will be voted at the annual meeting in the manner set forth in this proxy statement or as otherwise specified by the stockholder.

 

REVOCABILITY OF PROXIES

 

Whether the proxy is submitted via the Internet, by telephone or by mail, any person giving a proxy pursuant to this solicitation has the power to revoke it at any time before it is voted. A proxy may be revoked by providing a written notice of revocation or a duly executed proxy bearing a later date to Cadence’s Corporate Secretary at Cadence’s corporate offices located at 2655 Seely Avenue, Building 5, San Jose, California 95134, or it may be revoked by attending the meeting and voting in person. Attendance at the annual meeting will not, by itself, be sufficient to revoke a proxy. Accessing the webcast of the annual meeting will not, by itself, constitute attendance at the annual meeting and will not enable a stockholder to revoke his, her or its proxy using the Internet.

SOLICITATION

 

Cadence will bear the entire cost of soliciting proxies, including the preparation, assembly, printing and mailing of this proxy statement, the proxy card and any additional information furnished to stockholders in connection with the matters to be voted on at the annual meeting. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding shares of Cadence common stock beneficially owned by others for forwarding to the beneficial owners. Cadence will reimburse persons representing beneficial owners of its common stock for their costs of forwarding solicitation materials to the beneficial owners. The solicitation of proxies through this proxy statement may be supplemented by telephone, facsimile, use of the Internet or personal solicitation by directors, officers or other employees of Cadence and by Georgeson Inc., which is referred to in this proxy statement as Georgeson. Cadence has retained Georgeson to solicit proxies and to separately prepare a stockholder vote analysis of certain proposals for an aggregate fee of approximately $10,000, plus reasonable expenses. No additional compensation will be paid to directors, officers or other employees of Cadence or any of its subsidiaries for their services in soliciting proxies.

 

HOUSEHOLDING INFORMATION

 

The SEC has adopted rules that allow companies and intermediaries, such as brokers, to deliver a single copy of certain proxy materials to certain stockholders who share the same address, a practice referred to as “householding.” Some banks, brokers and other nominees will be householding Cadence’s Notice of Internet Availability of Proxy Materials and proxy materials for stockholders who do not participate in electronic delivery of proxy materials, unless contrary instructions are received from the affected stockholders. Once you have received notice from your broker or other nominee holder of your Cadence common stock that the broker or other nominee holder will be householding the Notice of Internet Availability of Proxy Materials or proxy materials to your address, householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate Notice of Internet Availability of Proxy Materials and proxy materials, or if you are receiving multiple copies of the Notice of Internet Availability of Proxy Materials and proxy materials and wish to receive only one copy, please notify your broker or other nominee holder of your Cadence common stock. You may also request additional copies of Cadence’s Notice of Internet Availability of Proxy Materials and proxy materials by writing to Cadence’s Corporate Secretary at Cadence’s corporate offices located at 2655 Seely Avenue, Building 5, San Jose, California 95134, or by calling Cadence’s Investor Relations Group at (408) 944-7100 or e-mailing the Investor Relations Group at investor_relations@cadence.com. Please note, however, that if you wish to receive a paper copy of the proxy or other proxy materials for purposes of this year’s annual meeting, you should follow the instructions provided in the Notice of Internet Availability of Proxy Materials. Copies of Cadence’s SEC filings and certain other submissions are made available free of charge on the investor relations page of Cadence’s website at www.cadence.com as soon as practicable after Cadence electronically files or furnishes these documents with the SEC. Information on Cadence’s website is not incorporated by reference in this proxy statement unless expressly noted.

 

Cadence common stock is listed on the NASDAQ Global Select Market, which is referred to in this proxy statement as NASDAQ.

 

Cadence and its Board of Directors, which is referred to in this proxy statement as the Board, regularly review and evaluate Cadence’s corporate governance practices. Cadence’s corporate governance documents are posted on the investor relations page of its website at www.cadence.com. Paper copies of these documents are also available to stockholders upon written request directed to Cadence’s Corporate Secretary at Cadence’s corporate offices located at 2655 Seely Avenue, Building 5, San Jose, California 95134.

 

CORPORATE GOVERNANCE GUIDELINES

 

The Board has adopted Corporate Governance Guidelines of the Board of Directors, which are referred to in this proxy statement as the Corporate Governance Guidelines. The Corporate Governance Guidelines cover various topics relating to the Board and its activities including, but not limited to, the selection and composition of the Board, Board leadership, compensation of directors, responsibilities of directors, Board access to senior

management and outside advisors, meeting procedures and committee matters. The Corporate Governance and Nominating Committee of the Board periodically reviews the Corporate Governance Guidelines, which may be amended by the Board at any time.

 

CODE OF BUSINESS CONDUCT

 

Cadence has adopted a Code of Business Conduct to provide standards for ethical conduct in dealing with customers, suppliers, agents, political entities and others. The Code of Business Conduct applies to all Cadence directors, officers and employees (and those of its subsidiaries), including Cadence’s President and Chief Executive Officer, who is referred to in this proxy statement as the CEO, and Cadence’s Chief Financial Officer, who is referred to in this proxy statement as the CFO. Compliance with the Code of Business Conduct is a condition of continued service to or employment with Cadence. The Code of Business Conduct covers topics including, but not limited to, integrity and confidentiality of assets and information, conflicts of interest, compliance with federal and state securities laws, employment practices, payment practices, compliance with competition laws and regulations and compliance with other laws.

 

Except as provided by applicable law, each person subject to the Code of Business Conduct has the responsibility to report any possible misconduct, including unethical business practices, violations of the Code of Business Conduct and apparent or suspected illegal activities, in the following manner:

 

 

Any waiver of a provision of the Code of Business Conduct with respect to a director or an executive officer may only be made by the Board or the Corporate Governance and Nominating Committee. Any waivers for other employees may be granted only by the CEO or the General Counsel, or their respective designees. To the extent required under applicable SEC rules, Cadence will disclose material amendments to the Code of Business Conduct and any waiver of its provisions with respect to any director or executive officer by filing a Current Report on Form 8-K with the SEC or posting such information on its website at www.cadence.com.

 

STOCK OWNERSHIP GUIDELINES

 

The Board has adopted Stock Ownership Guidelines to align the interests of its directors and executive officers with the interests of stockholders and to further promote Cadence’s commitment to sound corporate governance. Cadence does not require that directors or executive officers own a specific number of shares because it expects that directors and executive officers will act in Cadence’s best interests regardless of the number of shares they own. However, the Board has established share ownership guidelines for its members and Cadence’s executive officers. Each member of the Board is encouraged to hold at least 5,000 shares of Cadence common stock within the first two years of his or her election to the Board, and Cadence’s executive officers are encouraged to hold at least the following number of shares of Cadence common stock no later than five years after the date of his or her designation to the following offices: CEO — 100,000 shares; CFO — 50,000 shares; and Senior Vice Presidents — 25,000 shares. All directors and executive officers met the Stock Ownership Guidelines as of the record date.

 

DIRECTOR INDEPENDENCE

 

Cadence’s Corporate Governance Guidelines require that at least a majority of the Board be “independent directors” within the meaning of the listing standards of NASDAQ. To be “independent” a director must not have a

relationship that, in the opinion of the Board, would interfere with his or her exercise of independent judgment in carrying out the responsibilities of a Cadence director. In making these determinations, the Board considers all relevant facts and circumstances and applies the following standards:

 

 

The Board has determined that Dr. Shoven and Messrs. Lucas, Scalise, Siboni and Swainson, who constitute a majority of the Board, are “independent directors” within the meaning of the listing standards of NASDAQ.

 

BOARD MEETINGS

 

During the fiscal year ended January 3, 2009, the Board held eleven (11) meetings, in addition to taking actions by unanimous written consent in lieu of a meeting. Each Board member attended more than 75% of the meetings of the Board and of the committees on which he served that were held during the period for which he was a director or committee member during fiscal 2008. Cadence’s Corporate Governance Guidelines encourage directors to attend the annual meeting of stockholders. All of Cadence’s then current directors attended the 2008 Annual Meeting of Stockholders.

 

Under Cadence’s Corporate Governance Guidelines, Cadence’s independent directors meet separately at least twice annually. Pursuant to Cadence’s Corporate Governance Guidelines, Dr. Shoven, as the Chairman of the Board and an independent director, presides over meetings of the independent directors.

 

CONTACTING THE BOARD OF DIRECTORS

 

Stockholders interested in communicating directly with the Board may do so by sending a letter to the Board, or to any individual director, group of directors or committee of the Board, c/o the Office of the Corporate Secretary, Cadence Design Systems, Inc., 2655 Seely Avenue, Building 5, San Jose, California 95134. Inquiries and other communications may be submitted anonymously and confidentially. The Office of the Corporate Secretary will review the correspondence and will transmit such communications as soon as practicable to the identified director addressee(s), unless there are legal or other considerations that mitigate against further transmission of the communication, as determined by the Corporate Secretary. In that regard, certain items that are unrelated to the

duties and responsibilities of the Board will not be forwarded by the Corporate Secretary, such as business solicitations or advertisements, junk mail and mass mailings, new product suggestions, product complaints, product inquiries, resumes and other forms of job inquiries, spam and surveys. In addition, material that the Corporate Secretary determines is unduly hostile, threatening, illegal or similarly unsuitable will be excluded, with the provision that the Board or individual directors so addressed shall be advised of any communication withheld for legal or other considerations as soon as practicable.

 

COMMITTEES OF THE BOARD OF DIRECTORS

 

The Board currently has the following committees:

 

 

Each of the above committees has a written charter approved by the Board. The charters of the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee are posted on the investor relations page of Cadence’s website at www.cadence.com. The members and chairs of the current committees are identified in the following table.

 

						Corporate
						Governance
						and
Director		Audit		Compensation		Nominating		Finance		Technology
Donald L. Lucas		ü		ü		Chair		Chair
Dr. Alberto Sangiovanni-Vincentelli										Chair
George M. Scalise				ü		ü				ü
Dr. John B. Shoven		ü		Chair		ü		ü
Roger S. Siboni		Chair				ü		ü
John A.C. Swainson						ü
Lip-Bu Tan								ü		ü

 

Audit Committee

 

The Board has determined that all members of the Audit Committee are “independent” as defined by the NASDAQ listing standards and Rule 10A-3 of the Securities Exchange Act of 1934, as amended, which is referred to in this proxy statement as the Exchange Act. The Board has also determined that each of the members of the Audit Committee is an “audit committee financial expert” as defined in rules promulgated by the SEC. In addition, the Board has determined that each Audit Committee member is able to read and understand fundamental financial statements and, other than strictly in his capacity as a member of the Board or a committee of the Board, has not participated in preparing Cadence’s financial statements in any of the past three years.

 

The Audit Committee charter was most recently amended in February 2009 and complies with the NASDAQ listing standards. The duties and responsibilities of the Audit Committee include:

 

 

 

The Audit Committee held fifteen (15) meetings during fiscal 2008. See “Report of the Audit Committee” below for more information.

 

Compensation Committee

 

The Compensation Committee of the Board is comprised of three non-employee directors of Cadence, each of whom the Board has determined to be “independent” as defined by the listing standards of NASDAQ. In addition, all Compensation Committee members are “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (which is referred to in this proxy statement as the Code), to allow Cadence a tax deduction for certain employee compensation exceeding $1,000,000 for an individual. All Compensation Committee members are also “outside directors” within the meaning of Rule 16b-3 of the Exchange Act to allow Cadence to exempt certain option grants and similar transactions from the short-swing profits prohibition of Section 16 of the Exchange Act. The Compensation Committee acts on behalf of the Board, as provided in its charter, to identify, review and approve corporate goals and objectives relevant to the compensation of Cadence’s CEO and any director who is also a Cadence employee, evaluate the performance of the CEO and any director who is also a Cadence employee in light of those goals and objectives, and determine and approve the CEO’s and other executive officers’ compensation. Although the Compensation Committee may delegate its authority to management when it deems it to be appropriate and in the best interests of Cadence, the Compensation Committee did not delegate any authority with respect to the consideration and determination of executive officer and director compensation in fiscal 2008 and does not currently expect to delegate any such authority in the future. At or near the beginning of each fiscal year, the Compensation Committee typically establishes base salary levels and target bonuses for the CEO and other executive officers of Cadence. In addition, the Compensation Committee administers and, if deemed necessary, may amend the Senior Executive Bonus Plan, which is referred to in this proxy statement as the Bonus Plan, Cadence’s equity-based compensation plans and stock purchase plans, and Cadence’s deferred compensation plans. The Compensation Committee also reviews and recommends to the Board the compensation of Cadence’s directors.

 

The Compensation Committee charter was most recently amended in February 2009. The duties and responsibilities of the Compensation Committee include:

 

 

 

 

In fiscal 2008, the Compensation Committee retained the services of an independent compensation consultant, Semler Brossy Consulting Group, LLC, or Semler Brossy, for advice regarding the compensation of Cadence’s executive officers. The Compensation Committee believes that having an independent evaluation of executive officer salary, bonus and equity compensation is a valuable tool for the Compensation Committee and Cadence’s stockholders. Semler Brossy is not engaged to perform any other work for Cadence.

 

The Compensation Committee retained Semler Brossy for a number of purposes, including:

 

 

The Compensation Committee made a number of compensation decisions, including decisions with respect to Cadence’s Named Executive Officers (as defined below in “Compensation of Executive Officers”), based on the competitive assessments provided by and through consultation with Semler Brossy. In addition, Cadence’s CEO typically makes assessments and recommendations to the Compensation Committee on whether there should be adjustments to the annual base salary, annual cash incentive compensation and long-term equity incentive compensation of executive officers other than himself based upon an assessment of certain factors described further in “Compensation Discussion and Analysis” below. The Compensation Committee reviews such assessments and recommendations and determines whether or not to approve or modify the CEO’s recommendations. The Compensation Committee’s decisions are made, however, solely by the Compensation Committee, in its sole discretion. See “Compensation Discussion and Analysis” below for more information.

 

The Compensation Committee held ten (10) meetings during fiscal 2008.

 

Corporate Governance and Nominating Committee

 

The Board has determined that all Corporate Governance and Nominating Committee members are independent as defined by the NASDAQ listing standards.

The Corporate Governance and Nominating Committee charter was most recently amended in February 2009. The duties and responsibilities of the Corporate Governance and Nominating Committee include:

 

 

The Corporate Governance and Nominating Committee employs a variety of methods to identify and evaluate director nominees. The committee periodically assesses the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement of directors or otherwise, and the need for particular expertise on the Board. If vacancies are anticipated or otherwise arise, the committee considers potential director candidates. Additionally, candidates may come to the attention of the committee through current Board members, officers, professional search firms, stockholders or other persons. These candidates are evaluated at regular or special meetings of the committee, and may be considered at any point during the year. In connection with this evaluation, the Corporate Governance and Nominating Committee determines whether to interview the prospective nominee and, as warranted, one or more members of the committee, and others as appropriate, interview prospective nominees in person or by telephone. After completing this evaluation and interview, the committee makes a recommendation to the full Board as to the persons who should be nominated or elected by the Board, and the Board determines whether to reject, elect or nominate the candidate, as the case may be, after considering the recommendation of the committee.

 

The Corporate Governance and Nominating Committee will consider individuals recommended by stockholders for nomination as a director pursuant to the provisions of Cadence’s Bylaws relating to stockholder nominations. A stockholder who wishes to recommend a prospective nominee for the Board should notify Cadence’s Corporate Secretary or the Corporate Governance and Nominating Committee in writing with the supporting material required by Cadence’s Bylaws as described under “Other Matters — Stockholder Proposals and Nominations” below, and any other material the stockholder considers necessary or appropriate.

 

Although the Board currently has no defined minimum criteria for consideration or continued service as a director, the Corporate Governance and Nominating Committee evaluates prospective nominees against the standards and qualifications set out in Cadence’s Corporate Governance Guidelines and other relevant factors as it deems appropriate. Among the factors the Board may consider are the current composition of the Board, the need for particular expertise, the prospective nominee’s experience, judgment, understanding of electronic design and semiconductor technologies, and other relevant characteristics. At least a majority of directors on the Board must be “independent” as defined by the NASDAQ listing standards and as determined by the Board.

The Corporate Governance and Nominating Committee held five (5) meetings during fiscal 2008.

 

Finance Committee

 

The Finance Committee, on behalf of the Board, evaluates and approves financings, mergers, acquisitions, divestitures and other financial commitments of Cadence to unaffiliated third parties that involve amounts greater than $50 million and up to $125 million.

 

The Finance Committee held eighteen (18) meetings during fiscal 2008.

 

Technology Committee

 

The Technology Committee monitors trends in technology that may affect Cadence’s strategic plans, advises the Board regarding Cadence’s research and development activities and reviews and makes recommendations to management regarding Cadence’s leading technologists and researchers.

 

The Technology Committee held five (5) meetings during fiscal 2008.

 

Temporary Search Committee for New CEO

 

In connection with the resignation of Michael J. Fister as CEO of Cadence on October 15, 2008, the Board created a temporary committee to identify, evaluate and recommend to the Board qualified candidates to serve as CEO of Cadence. The temporary committee was comprised of Dr. Shoven and Messrs. Lucas, Scalise, Siboni and Tan, with Dr. Shoven and Mr. Tan serving as Co-Chairs of the temporary committee. The temporary committee was dissolved on January 8, 2009 upon the appointment of Mr. Tan as CEO of Cadence.

 

The temporary search committee held five (5) meetings during fiscal 2008.

 

COMPENSATION OF DIRECTORS

 

Directors who are Cadence employees do not receive additional compensation for their service on the Board. The following table sets forth the compensation earned by Cadence’s non-employee directors for their service on the Board in fiscal 2008:

 

DIRECTOR COMPENSATION FOR FISCAL 2008

 

 

 

 

(footnotes continue on following page)

 

 

A “non-employee director” is a Cadence director who is not otherwise an employee of Cadence or an affiliate of Cadence. The annual retainer for non-employee directors is $80,000 per year. The annual retainer for a non-employee director serving as Chairman of the Board is $80,000, which is in addition to the annual retainer the Chairman of the Board receives as a non-employee director. A non-employee director serving as Chairman of the Audit Committee, the Finance Committee or the Technology Committee receives an annual retainer of $40,000 per year and a non-employee director serving as Chairman of the Corporate Governance and Nominating Committee or the Compensation Committee receives an annual retainer of $20,000 per year. A non-employee director serving as Chairman of the Board is also eligible to receive fees for service as the Chairman of these committees of the Board.

 

Each non-employee director of Cadence earned the $80,000 annual retainer for his service on the Board in fiscal 2008, except Mr. Tan, who was no longer a non-employee director upon his appointment as Interim Vice Chairman of the Board and a member of the IOCE, and thus earned a prorated amount of $63,333 for his service as a non-employee director through October 14, 2008. In addition to the $80,000 annual retainer for his service as a non-employee director of the Board, Dr. Shoven earned the $80,000 retainer for his service as Chairman of the Board in 2008 and an annual retainer of $20,000 for his service as Chairman of the Compensation Committee. In addition to the annual retainer, Mr. Siboni and Dr. Sangiovanni-Vincentelli each earned an annual retainer of $40,000 for his service as Chairman of the Audit Committee and Chairman of the Technology Committee, respectively. Mr. Lucas earned an annual retainer of $20,000 for his service as the Chairman of the Corporate Governance and Nominating Committee and an annual retainer of $40,000 for his service as the Chairman of the Finance Committee. Dr. Shoven and Messrs. Lucas, Scalise, Siboni and Tan were members of a temporary committee formed in October 2008 to identify, evaluate and recommend to the Board qualified candidates to serve as Cadence’s CEO, and each received only meeting attendance fees and no other payments for his service as a member of the temporary committee. No additional compensation was paid when the Board or a committee acted by unanimous written consent in lieu of a meeting. Non-employee directors were also eligible for reimbursement of their expenses incurred in connection with attendance at Board meetings in accordance with Cadence policy.

Each non-employee director also receives stock option grants under Cadence’s 1995 Directors Stock Option Plan, as amended, which is referred to in this proxy statement as the Directors Plan. Only non-employee directors are eligible to receive stock options under the Directors Plan.

 

Under the Directors Plan, each non-employee director, upon joining the Board, is automatically granted a one-time option to purchase the number of shares of Cadence common stock equal to 6,250 multiplied by the number of full calendar quarters between the date the director’s service begins and the next April 1st. A director is considered to have served the entire calendar quarter if he or she becomes a director at any time during the first half of the quarter. These initial grants vest and become exercisable in full on the March 31st following the grant date and have an exercise price equal to the average closing price of Cadence common stock for the twenty (20) trading days prior to the grant date.

 

In addition, every April 1st, each non-employee director is automatically granted an option to purchase 25,000 shares of Cadence common stock and a non-employee director serving as Chairman of the Board is automatically granted an additional option to purchase 25,000 shares of common stock. These annual stock option grants vest and become exercisable in full on the March 31st following the grant date and have an exercise price equal to the average closing price of Cadence common stock for the twenty (20) trading days prior to the grant date.

 

On December 15, 2008, the Compensation Committee approved a discretionary cash payment of $250,000 and an option grant to purchase 100,000 shares of Cadence common stock to Mr. Tan in recognition of his service as a member of the IOCE. The stock option was scheduled to vest and the discretionary cash payment was to be paid on the earlier of (i) January 15, 2009 or (ii) the first day of employment of a new CEO of Cadence as determined by the Compensation Committee, provided that Mr. Tan was a member of the IOCE as of the day immediately prior to the applicable date. Mr. Tan was appointed CEO of Cadence, effective January 8, 2009, and on that date, the stock option fully vested and the discretionary cash payment became due.

 

Directors may elect to defer compensation payable to them under Cadence’s deferred compensation plan. These deferred compensation payments are held in accounts with values indexed to the performance of selected mutual funds, self-directed accounts or money market accounts. Cadence does not match contributions made under Cadence’s deferred compensation plan.

 

Furthermore, a health care and prescription drug insurance coverage plan is available for active non-employee directors, eligible retired directors and their dependents. All non-employee directors and their dependents are eligible for coverage under the plan during their term of service on the Board. Retired employee and non-employee directors and their dependents are eligible for continuing coverage under the plan after the director’s termination of service for a term not to exceed such director’s term of service on the Board. Under the plan, Cadence reimburses 100% of the premium for participants and their dependents up to a maximum of $20,000 per calendar year, which maximum amount may be adjusted for future changes in health care costs. Benefits under the plan are fully taxable to the participants and Cadence does not defray any such taxes. Messrs. Lucas, Siboni and Tan and Drs. Sangiovanni-Vincentelli and Shoven maintained health insurance coverage under this plan in 2008.

 

Dr. Sangiovanni-Vincentelli earned $18,333 for consulting services performed for Cadence between January 1, 2008 and June 30, 2008 pursuant to a consulting agreement, which expired on June 30, 2008. The consulting agreement also provided for reimbursement of reasonable costs and expenses incurred in the performance of work under the consulting agreement in accordance with Cadence policy and contained confidentiality and non-solicitation provisions in favor of Cadence. Dr. Sangiovanni-Vincentelli’s consulting services consisted of providing technical and strategic advice to Cadence’s CEO with respect to potential acquisitions and organizational and customer relations matters, serving as facilitator in customer and partner meetings to discuss industry trends, collaboration on technology and business issues, representing Cadence at industry, technical and government events, and participating in setting the direction of the Cadence Research Laboratories in Berkeley, California and of Cadence’s research partnerships. Cadence does not have any comparable arrangements with other consultants and, as a result, has no basis for comparing the terms of Dr. Sangiovanni-Vincentelli’s arrangement with others. In addition, Dr. Sangiovanni-Vincentelli is the Scientific Director of PARADES, an Italian entity engaged in research related to electronic systems engineering. During fiscal 2008, PARADES was transformed from a not-for-profit entity into a cooperative limited liability company (S.c.a.r.l.). By contract, a Cadence subsidiary holds 50% of equity of PARADES S.c.a.r.l. and contributes up to 50% of its annual funding needs. For his services to PARADES

S.c.a.r.l. in fiscal 2008, Dr. Sangiovanni-Vincentelli earned €92,400 (approximately $135,952 based on the average foreign currency exchange rate in 2008). Cadence intends to divest its interest in PARADES S.c.a.r.l. in fiscal 2009. Dr. Sangiovanni-Vincentelli also had use of a car in Italy that was leased by Cadence for approximately €4,175 (approximately $6,143 based on the average foreign currency exchange rate in 2008) until March 2008, when the lease expired and was not renewed.

 

ELECTION OF DIRECTORS

 

The Corporate Governance and Nominating Committee of the Board has recommended, and the Board has nominated, the seven nominees named below for election to the Board. Each director elected at the 2009 Annual Meeting of Stockholders will hold office until the 2010 Annual Meeting of Stockholders and until his successor is elected and qualified, or until the director’s earlier death, resignation or removal. Each nominee listed below is currently a Cadence director. All of the nominees have previously been elected by Cadence’s stockholders.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE.

 

NOMINEES

 

The names of the nominees and certain information about them, including term of service as a Cadence director and age as of the 2009 Annual Meeting of Stockholders, are set forth below:

 

 

VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATION

 

Shares represented by executed proxies will be voted FOR the election of the seven nominees named above, if authority to do so is not withheld.

 

The Board recommends a vote FOR the election of each of the seven nominees. The election of directors at the annual meeting requires that each director receive a majority of the votes cast with respect to that director, which means that the number of shares voted “for” a director must exceed the number of shares voted “against” that director; provided, however, that in a contested election, the directors shall be elected by the affirmative vote of a plurality of the votes cast at the annual meeting. The election this year is not contested and the majority voting standard applies.

 

In order for an incumbent Cadence director to become a nominee at the annual meeting, such director must submit an irrevocable resignation that becomes immediately effective if (i) the votes cast “for” such director does not exceed the votes cast “against” such director in an election that is not a contested election, and (ii) the Board accepts the resignation in accordance with the policies and procedures adopted by the Board for such purpose. If a nominee who is currently serving as a Cadence director is not elected at the annual meeting, the Corporate Governance and Nominating Committee will make a recommendation to the Board as to whether to accept or reject such director’s resignation, or whether to take other action. The Board will act on the Corporate Governance and Nominating Committee’s recommendation and publicly disclose (as required by applicable law) its decision and the reasons behind it within ninety (90) days from the date the election results are certified.

 

If any nominee should be unavailable for election as a result of unexpected circumstances, shares will be voted for the election of any substitute nominee named by the Board. Each person nominated for election has agreed to be named in this proxy statement and to serve if elected, and Cadence has no reason to believe that any nominee will be unable to serve.

 

Abstentions will be treated as being present and entitled to vote on the proposal, however, abstentions are not counted as votes “for” or “against” directors and will not have an effect on the election of directors. Unless marked to the contrary, proxies received will be voted FOR the election of each of the seven director nominees.

 

APPROVAL OF AMENDMENT TO THE AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE PLAN

 

In November 1998, the Board adopted, and Cadence stockholders subsequently approved, Cadence’s Amended and Restated Employee Stock Purchase Plan, which amended and restated the 1990 Employee Stock Purchase Plan, and which is referred to in this proxy statement as the Employee Plan. Subsequent amendments approved by the Board and stockholders increased the shares of common stock authorized for issuance under the Employee Plan to 54,000,000.

In February 2009, the Board approved an amendment to the Employee Plan to increase the number of shares of common stock authorized for issuance by 12,500,000 shares for a total of 66,500,000 shares authorized under the Employee Plan, subject to stockholder approval.

 

As of March 17, 2009, 6,481 shares of common stock remained available for issuance under the Employee Plan. The proposed increase in the number of shares authorized for issuance under the Employee Plan represents approximately 4.7% of Cadence’s outstanding common stock as of the record date.

 

REASONS FOR THE PROPOSED AMENDMENT

 

The Board approved the amendment to the Employee Plan to ensure that Cadence can continue to grant purchase rights to its employees at levels determined appropriate by the Board. The Employee Plan helps to attract and retain employees because employee stock purchase plans are a common benefit offered by Cadence’s competitors and other industry bellwethers. In addition, approximately two-thirds of Cadence’s eligible employees participate in the Employee Plan. As confirmed by the high level of employee participation, Cadence believes that the Employee Plan is a highly valued benefit that is necessary in order for Cadence to compete with other companies in attracting and retaining employees. The Employee Plan also provides eligible employees with the opportunity to become Cadence stockholders and participate in Cadence’s success, which aligns the interests of participating employees with those of stockholders.

 

VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATION

 

The Board recommends a vote FOR approval of the amendment to the Employee Plan. The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote on the proposal is required for approval of the proposal. Abstentions will be treated as being present and entitled to vote on the proposal and, therefore, will have the effect of votes against the proposal. Broker non-votes will be treated as not being entitled to vote on the proposal and, therefore, are not counted for purposes of determining whether the proposal has been approved. Unless marked to the contrary, proxies received will be voted FOR approval of the amendment to the Employee Plan.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2.

 

SUMMARY OF THE EMPLOYEE PLAN

 

The following summary of the main features of the Employee Plan, as amended, is qualified in its entirety by the complete text of the Employee Plan, a copy of which is attached as Appendix A to this proxy statement.

 

PURPOSE

 

The purpose of the Employee Plan is to provide a means by which employees of Cadence, and any parent or subsidiary of Cadence designated by the Board, may be given an opportunity to purchase Cadence common stock, through payroll deductions, to assist Cadence in retaining the services of its employees, to secure and retain the services of new employees, and to provide incentives for these persons to exert maximum efforts for the success of Cadence.

 

The rights to purchase common stock granted under the Employee Plan are intended to qualify as options issued under an “employee stock purchase plan” as that term is defined in Section 423(b) of the Code.

 

ADMINISTRATION

 

The Board administers the Employee Plan and has the final power to construe and interpret both the Employee Plan and the rights granted under it. The Board has the power, subject to the provisions of the Employee Plan, to determine when and how rights to purchase Cadence common stock will be granted, the provisions of each offering of these rights (which need not be identical), and whether employees of a parent or subsidiary of Cadence will be eligible to participate in the Employee Plan.

The Board may delegate administration of the Employee Plan to a committee comprised of not less than two Board members. The Board has delegated administration of the Employee Plan to the Compensation Committee. As used in this proxy statement solely with respect to the Employee Plan, the “Board” refers to any committee the Board appoints to administer the Employee Plan as well as to the Board itself.

 

STOCK SUBJECT TO EMPLOYEE PLAN

 

Upon stockholder approval of this proposal, an additional 12,500,000 shares of common stock would be reserved for issuance under the Employee Plan for an aggregate of 12,506,481 reserved but unissued shares, representing approximately 4.7% of Cadence’s outstanding common stock as of the record date. If rights granted under the Employee Plan expire, lapse or otherwise terminate without being exercised, the shares of common stock not purchased under the rights again become available for issuance under the Employee Plan.

 

Because benefits under the Employee Plan depend on employees’ voluntary elections to participate and the fair market value of Cadence common stock at various future dates, it is not possible as of the date of this proxy statement to accurately determine future benefits that will be received by executive officers and other employees under the Employee Plan.

 

OFFERINGS

 

The Board implements the Employee Plan by offering participation rights to all eligible employees. Currently, the offering periods of the Employee Plan are six months long commencing on February 1 and August 1 of each year and ending on July 31 and January 31, respectively. The Board has the discretion to change the duration of offering periods with respect to future offerings without stockholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first offering period to be affected.

 

ELIGIBILITY

 

Any person who is employed at least twenty (20) hours per week and five months per calendar year by Cadence, or any parent or subsidiary of Cadence designated by the Board, is eligible to participate in an offering if the employee was employed by Cadence or a designated affiliate on the fifteenth (15th) day of the month before the first day of the offering period. Approximately 90% of Cadence’s and its subsidiaries’ employees, including all of Cadence’s executive officers, are eligible to participate in the Employee Plan. However, employees of certain international Cadence subsidiaries are not eligible to participate in the Employee Plan because of local tax or regulatory issues or other considerations. Cadence’s non-employee directors are not eligible to participate in the Employee Plan.

 

No employee is eligible to participate in the Employee Plan if, immediately after the grant of purchase rights, the employee would, directly or indirectly, own stock or hold options possessing 5% or more of the total combined voting power or value of all classes of stock of Cadence or of any Cadence parent or subsidiary, including any stock which the employee may purchase under outstanding rights and options. In addition, as required by Section 423 of the Code, no employee may accrue the right to purchase shares under the Employee Plan at a rate that exceeds $25,000 worth of common stock (determined at the fair market value of the shares at the time the right is granted, which fair market value is based upon the closing price of the shares) for each calendar year in which such right is outstanding at any time.

 

Rights granted in any offering under the Employee Plan terminate immediately upon cessation of an employee’s employment for any reason, and Cadence will distribute to a terminated employee all of his or her accumulated payroll deductions, without interest.

 

PARTICIPATION IN THE PLAN

 

The Board has the discretion to designate the percentage and maximum dollar amount that eligible employees may deduct from their gross earnings (before withholding of taxes and other amounts) for an offering period, and the Board may modify such percentage and maximum dollar amount from time to time. Eligible employees enroll in the Employee Plan by delivering to Cadence, not later than the fifteenth (15th) day of the month before the

commencement of the offering period, an agreement authorizing payroll deductions of a certain percentage and dollar amount from the eligible employees’ gross earnings (before withholding of taxes and other amounts). In fiscal 2008, the Compensation Committee changed the eligibility participation terms under the Employee Plan in the following manner: (i) for the offering period commencing February 1, 2009, eligible employees would be entitled to purchase Cadence common stock in an amount not to exceed the lower of (A) $7,058.82 or (B) the difference between (x) $25,000 and (y) the aggregate amount of common stock purchased on January 31, 2009 under the Employee Plan; and (ii) for the offering period commencing August 1, 2009 and thereafter, eligible employees would be entitled to purchase Cadence common stock in an amount not to exceed $7,058.82 in any calendar year. Eligible employees may not contribute more than 5% of their gross earnings (before withholding of taxes and other amounts) to purchase common stock under the Employee Plan.

 

Once enrolled, a participant will automatically participate in all future offerings unless such participant makes an election to withdraw from the Employee Plan or subsequently becomes ineligible to participate in the Employee Plan. A participant may terminate payroll deductions and withdraw from a given offering under the Employee Plan by delivering a notice of withdrawal to Cadence at any time not later than the fifteenth (15th) day of the month in which the offering period ends (i.e., by January 15th or July 15th).

 

Upon an employee’s withdrawal from an offering, Cadence will distribute to the employee his or her accumulated payroll deductions, without interest, less any accumulated deductions previously applied to the purchase of common stock on the employee’s behalf during the offering.

 

PURCHASE PRICE

 

The purchase price at which shares of common stock are sold in an offering under the Employee Plan is the lower of:

 

 

PURCHASE OF STOCK

 

A participant accumulates the purchase price of the shares by payroll deductions over the course of the offering period. One time during the offering, a participant may reduce or terminate his or her payroll deductions if the Board has provided for such reduction or termination for that offering. The Board may provide that an employee who first becomes eligible to participate in the Employee Plan after an offering has begun may participate in the Employee Plan, as of a date specified during the offering period. Cadence will credit all payroll deductions made for a participant to the participant’s account under the Employee Plan and will deposit the payroll deductions into a Cadence bank account, which also contains the general funds of Cadence. A participant may not make additional payments into his or her account.

 

In connection with offerings made under the Employee Plan, the Board may specify a maximum number of shares of common stock an employee may be granted the right to purchase and the maximum number of shares of common stock that may be purchased in that offering by all participants. If the total number of shares to be purchased upon exercise of rights granted in the offering exceeds the maximum aggregate number of shares of common stock available for the offering, the Board will make a pro rata allocation of available shares in a uniform and equitable manner. Unless the employee’s participation is discontinued, his or her right to purchase shares is exercised automatically at the end of the purchase period at the then applicable purchase price.

 

DURATION, AMENDMENT AND TERMINATION

 

The Board may suspend or terminate the Employee Plan at any time. Unless terminated earlier, the Employee Plan will terminate when all of the shares reserved for issuance under the Employee Plan, as increased or adjusted from time to time, have been issued.

 

The Board may amend the Employee Plan at any time. Any amendment of the Employee Plan must be approved by the stockholders within 12 months before or after its adoption by the Board to the extent stockholder

approval is necessary for the Employee Plan to satisfy Section 423 of the Code, Rule 16b-3 under the Exchange Act or any NASDAQ or other applicable securities exchange listing requirements. Currently, under the Code, stockholder approval must be obtained if the amendment would, among other things:

 

 

Rights granted before any amendment or termination of the Employee Plan will not be altered or impaired by any amendment or termination of the Employee Plan without the consent of the employee to whom such rights were granted.

 

EFFECT OF CERTAIN CORPORATE EVENTS

 

In the event of a dissolution or liquidation of Cadence, all offerings will terminate prior to the consummation of the proposed transaction or, at the Board’s discretion, the purchase date of any offering will be accelerated so that the outstanding rights may be exercised before or concurrent with the proposed transaction. In the event of a proposed sale of all or substantially all of the assets of Cadence, or the merger of Cadence with or into another corporation where Cadence is not the surviving corporation, all offerings will terminate prior to the consummation of the proposed event, unless the surviving corporation assumes the rights under the Employee Plan or substitutes similar rights, or the Board, at its discretion, provides that participants may exercise outstanding rights. If the Board makes a right exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board must notify participants that their rights under the Employee Plan will be fully exercisable for a period of twenty (20) days from the date of such notice, or other period of time as the Board determines.

 

FEDERAL INCOME TAX INFORMATION

 

The following is an overview, as of the date of this proxy statement, of the effect of federal income taxation upon the participants and Cadence with respect to the grant and exercise of rights granted under the Employee Plan, but is not complete, does not discuss the income tax laws of any state or foreign country in which a participant may reside, is subject to change and is not intended to be relied upon as tax advice. Participants in the Employee Plan should consult their own tax advisors regarding the specific tax consequences to them of participating in the Employee Plan.

 

Rights granted under the Employee Plan are intended to qualify for favorable federal income tax treatment associated with rights granted under an employee stock purchase plan that qualifies under Section 423 of the Code, which requires stockholder approval of the Employee Plan and certain amendments.

 

A participant will be taxed on amounts withheld for the purchase of shares of common stock under the Employee Plan as if such amounts were actually received. No other income will be taxable to a participant as a result of participating in the Employee Plan until the disposition of the acquired shares, and the effect of taxation will depend on the holding period of the acquired shares.

 

If the stock is disposed of more than two years after the beginning of the offering period and more than one year after the stock is transferred to the participant, then the participant will recognize ordinary income equal to the lesser of:

 

 

Any further gain or any loss will be taxed as a long-term capital gain or loss. Generally, long-term capital gains are currently subject to lower tax rates than ordinary income. The deductibility of capital losses is limited.

 

If the stock is sold or disposed of before the expiration of either of the two holding periods described above, then the amount by which the fair market value of the stock on the purchase date exceeds the purchase price will be treated as ordinary income at the time of disposition. The balance of any gain will be treated as capital gain. Even if

the stock is later disposed of for less than its fair market value on the purchase date, the same amount of ordinary income is attributed to the participant, and a capital loss is recognized equal to the difference between the sales price and the fair market value of the stock on the purchase date. Any capital gain or loss will be short-term or long-term, depending on how long the stock has been held. As mentioned above, the deductibility of capital losses is limited, and thus a disposition of the stock, before the expiration of the one and two-year holding periods described above, for an amount less than the fair market value of the stock on the purchase date could result in ordinary income (and a tax liability) and a non-deductible capital loss.

 

Cadence generally is entitled to a tax deduction to the extent amounts are taxed as ordinary income to a participant, subject to satisfying tax reporting obligations. In all other cases, no tax deduction is allowed to Cadence.

 

RATIFICATION OF APPOINTMENT OF THE INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

 

The Audit Committee has selected KPMG LLP as Cadence’s independent registered public accounting firm for the fiscal year ending January 2, 2010. Pursuant to the Audit Committee charter, the Board has directed management to submit the selection of the independent registered public accounting firm for ratification by the stockholders at the annual meeting. KPMG LLP has audited Cadence’s financial statements since fiscal 2002. Representatives from KPMG LLP are expected to be present at the 2009 Annual Meeting of Stockholders, will have an opportunity to make a statement, if they so desire, and will be available to respond to appropriate questions.

 

Stockholder ratification of the selection of KPMG LLP as Cadence’s independent registered public accounting firm is not required by Cadence’s Bylaws or otherwise. However, the Board is submitting the selection of KPMG LLP to the stockholders for ratification as a matter of good corporate practice. If Cadence’s stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain KPMG LLP. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year, if it determines that such a change would be in the best interests of Cadence and its stockholders.

 

VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATION

 

The Board recommends a vote FOR ratification of the selection of KPMG LLP. The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote on the proposal is required for approval of this proposal. Abstentions will be treated as being present and entitled to vote on the proposal and, therefore, will have the effect of votes against the proposal. Unless marked to the contrary, proxies received will be voted FOR ratification of the selection of KPMG LLP.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3.

 

 

The Audit Committee of the Board is comprised of three non-employee directors of Cadence who are “independent” as defined by the listing standards of NASDAQ and as defined under the Exchange Act. During fiscal 2008, the Audit Committee was comprised of Dr. Shoven and Messrs. Lucas and Siboni, with Mr. Siboni serving as its Chairman. The Audit Committee met fifteen (15) times in fiscal 2008.

 

The Audit Committee operates under a charter that was most recently amended by the Board in February 2009. The Audit Committee charter is posted on the investor relations page of Cadence’s website at www.cadence.com. As more fully described in its charter, the Audit Committee appoints and retains the independent registered public accounting firm and oversees the quality and integrity of Cadence’s financial statements, Cadence’s compliance with legal and regulatory requirements, the independent registered public accounting firm’s qualifications and independence, and the performance of Cadence’s internal audit function, the independent registered public accounting firm, Cadence’s accounting and financial reporting processes and the audits of Cadence’s financial statements on behalf of the Board.

In this context, the Audit Committee has reviewed and discussed the audited financial statements included in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009 with Cadence’s management and KPMG LLP, Cadence’s independent registered public accounting firm. The Audit Committee has also discussed with KPMG LLP the matters required to be discussed by the Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended. In addition, the Audit Committee has received from KPMG LLP the written disclosures and the letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding KPMG LLP’s communications with the Audit Committee concerning independence, and has discussed with KPMG LLP its independence from Cadence and its management. The Audit Committee has also considered whether the provision of other non-audit services by KPMG LLP to Cadence is compatible with KPMG LLP’s independence.

 

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board, and the Board approved, the inclusion of the audited financial statements in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009 for filing with the SEC.

 

AUDIT COMMITTEE

 

Roger S. Siboni, Chairman

Donald L. Lucas

John B. Shoven

 

The foregoing Audit Committee report is not soliciting material, is not deemed filed with the SEC and is not to be incorporated by reference in any filing of Cadence under the Securities Act of 1933, as amended, or under the Exchange Act, whether made before or after the date of this proxy statement and irrespective of any general incorporation language in any such filing.

 

The following table presents fees incurred by Cadence for professional services rendered by KPMG LLP for the fiscal years ended January 3, 2009 and December 29, 2007.

 

 

 

 

(footnotes continue on following page)

 

AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee pre-approves all audit and permissible non-audit services provided by KPMG LLP prior to the engagement of KPMG LLP with respect to such services. Pursuant to its pre-approval policy, the Audit Committee has pre-approved tax compliance services, tax planning and related tax services, and the following audit-related services:

 

 

However, engagements for these pre-approved audit-related and tax services with an estimated cost of more than $250,000 or that exceed the applicable budgeted amount for the pre-approved services must be pre-approved on a case-by-case basis by the Audit Committee or the Chairman of the Audit Committee, or, if the Chairman is unavailable, another member of the Audit Committee. In addition, any proposed engagement of KPMG LLP for services that are not pre-approved audit-related and tax services as described above must also be pre-approved on a case-by-case basis by the Audit Committee or the Chairman of the Audit Committee, or, if the Chairman is unavailable, another member of the Audit Committee. The members to whom such authority is delegated must report any approval decisions to the full Audit Committee at its next scheduled meeting. None of the services described in the table above entitled “Fees Billed to Cadence by KPMG During Fiscal 2008 and 2007” were approved by the Audit Committee under the de minimis exception provided by Rule 2-01(c)(7)(i)(C) of Regulation S-X.

 

The following table sets forth certain information regarding the ownership of Cadence common stock as of March 17, 2009, the record date, unless otherwise indicated below, by:

 

 

 

 

 

(footnotes continue on following page)

 

 

 

OVERALL OBJECTIVES OF EXECUTIVE COMPENSATION

 

Compensation of Cadence’s executive officers is intended to attract, motivate and retain highly qualified individuals with the leadership skills necessary to achieve Cadence’s annual and long-term business objectives and to create stockholder value. Cadence’s executive officer compensation is based on the following principles:

 

 

The Compensation Committee assesses Cadence’s executive officer compensation annually to monitor Cadence’s adherence to these principles.

 

DETERMINING EXECUTIVE COMPENSATION

 

Competitive Compensation Levels

 

Each year the Compensation Committee benchmarks the competitiveness of the elements of the executive officers’ total direct compensation. The Compensation Committee also periodically reviews the competitiveness of the executive officers’ severance and change in control arrangements and the broad-based employee benefit plans in which the executive officers participate.

 

In fiscal 2008, the Compensation Committee identified two separate peer groups for benchmarking purposes. One peer group was used to understand market trends with respect to pay programs and practices among business and talent competitors and other industry bellwethers, and is referred to in this proxy statement as the Direct Practices Peer Group. The other peer group was used to assess the competitiveness of the executive officers’ total direct compensation compared to executives with similar titles and responsibilities at companies with which Cadence competes for talent, and is referred to in this proxy statement as the Primary Compensation Peer Group.

 

Direct Practices Peer Group

 

The Direct Practices Peer Group was determined qualitatively by the Compensation Committee with the assistance of its independent compensation consultant, Semler Brossy, and is comprised of technology bellwether companies, as well as companies in nearby or adjacent markets and other business and talent competitors. While the Compensation Committee monitors the compensation practices of the companies in this group so as to understand the compensation landscape in the technology market, it does not generally consider the level of compensation that these companies pay their executive officers (other than the companies that are also in the Primary Compensation Peer Group) when determining the compensation of Cadence’s executive officers because of differences in the scope of job responsibilities or the breadth of the organizations managed by executives holding the same or similar titles.

 

The following companies (three of which were also included in the Primary Compensation Peer Group, as indicated by an asterisk (*) below) comprised the Direct Practices Peer Group for fiscal 2008:

 

Adobe Systems Incorporated		Intel Corporation		Oracle Corporation
Applied Materials, Inc.		KLA-Tencor Corporation*		Synopsys, Inc.*
Broadcom Corporation		Mentor Graphics Corporation		VMware, Inc.
Cisco Systems, Inc.		NVIDIA Corporation*

Primary Compensation Peer Group

 

In order to reflect more accurately the pool from which executive talent is drawn and to which it is lost, the Primary Compensation Peer Group is not limited to Cadence’s direct business competitors. Rather, the Compensation Committee included companies that have a technology emphasis, are located in the San Francisco Bay Area (where Cadence is headquartered), compete in the same talent market as Cadence and fall within a relevant revenue and market capitalization range (i.e., technology companies with revenue between 0.5 and 2.5 times that of Cadence’s fiscal 2007 revenue and two-year average market capitalization between 0.25 and 4 times that of Cadence’s two-year average market capitalization as of July 2008). The resulting group of 28 companies was used to assess the competitiveness of the executive officers’ base salaries, target and actual annual cash incentive compensation, long-term equity incentive opportunities and total direct compensation.

 

The following companies (three of which were also included in the Direct Practices Peer Group, as indicated by an asterisk (*) below) comprised the Primary Compensation Peer Group for fiscal 2008 for determining competitive compensation levels:

 

Altera Corporation		Lam Research Corporation		NVIDIA Corporation*
Atmel Corporation		Linear Technology Corporation		Palm, Inc.
Autodesk, Inc.		Logitech International S.A.		Polycom Inc.
Brocade Communications Systems, Inc.		LSI Corporation		SanDisk Corporation
Cypress Semiconductor Corporation		Maxim Integrated Products, Inc.		Sybase, Inc.
Electronic Arts Inc.		McAfee, Inc.		Synopsys, Inc.*
Intuit Inc.		National Semiconductor Corporation		Trimble Navigation Limited
JDS Uniphase Corporation		Network Appliance Inc.		VeriSign, Inc.
Juniper Networks Inc.		Novellus Systems, Inc.		Xilinx Inc.
KLA-Tencor Corporation*

 

Compensation Determinations

 

Consistent with the principles of Cadence’s executive officer compensation outlined above, after the Compensation Committee determines the market levels of each executive officer’s compensation based on the compensation paid by the companies in the Primary Compensation Peer Group, the Compensation Committee assesses the appropriateness of each executive officer’s compensation level relative to executives with similar titles and responsibilities at the companies in the Primary Compensation Peer Group. Cadence does not target executive officer compensation at a specific level or percentage relative to compensation provided by the companies in the Primary Compensation Peer Group, whether for total direct compensation or any element of total direct compensation. Instead, when determining compensation levels for the executive officers, the Compensation Committee takes into account not only the information regarding compensation paid to executives with similar titles and responsibilities at the companies in the Primary Compensation Peer Group, but also each of the following factors, without prescribing particular weightings:

 

Cadence Factors

 

 

Individual Factors

 

 

 

For each executive officer other than the CEO, the CEO typically makes assessments and recommendations to the Compensation Committee on whether there should be adjustments to an executive officer’s annual base salary, annual cash incentive compensation and long-term equity incentive compensation based upon an assessment of each of the “Cadence Factors” and the “Individual Factors” outlined above, which are collectively referred to in this proxy statement as the Compensation Factors. The Compensation Committee then reviews these assessments and recommendations and determines whether or not to approve and/or modify the CEO’s recommendations. In fiscal 2008, Mr. Fister made recommendations to the Compensation Committee regarding compensation adjustments for the executive officers until he resigned as Cadence’s CEO in October 2008. In November 2008, the Compensation Committee conferred with the IOCE¹ regarding adjustments to the compensation of Messrs. Hsu and Modi in connection with their promotions in November 2008.

 

The Compensation Committee evaluates each of the “Cadence Factors” as well as the CEO’s performance with respect to each of the “Individual Factors” described above, and the assessment from such evaluation is used to determine whether or not to adjust the CEO’s compensation. The Compensation Committee, in its sole discretion, makes all decisions related to the CEO’s compensation.

 

ELEMENTS OF EXECUTIVE COMPENSATION

 

Executive Officer (as defined in “Compensation of Executive Officers” below) compensation is comprised of the following elements:

 

 

 

 

 

 

Consistent with the principles of Cadence’s executive officer compensation outlined above, an executive officer’s total direct compensation is based upon Cadence’s performance as well as the performance of the individual executive officer. Cadence does not have a pre-established policy or target for allocating between fixed and variable compensation or among the different types of variable compensation, although the allocation is influenced by the Compensation Committee’s assessment of the compensation practices of the companies in the

 

 

 (1) In connection with the departure of Mr. Fister in October 2008, the Board formed the IOCE to oversee the day-to-day running of Cadence’s operations. The members of the IOCE were Dr. Shoven (solely in an oversight capacity) and Messrs. Tan, Palatnik (Senior Vice President and CFO of Cadence) and Huang (Senior Vice President of Cadence and the Chief of Staff of the IOCE). Effective as of January 8, 2009, the Board appointed Mr. Tan to serve as CEO of Cadence and the IOCE was dissolved.

Primary Compensation Peer Group and Cadence’s short-term and long-term strategic objectives. Instead, the Compensation Committee aims to provide total direct compensation at levels sufficient to attract and retain qualified executives. Variable compensation generally consists of annual cash incentive compensation and long-term equity incentives, and represents the majority of the total direct compensation opportunity for each executive officer. The Compensation Committee believes that executive officers should be rewarded for achieving annual performance goals, but that the executive officers’ consistent and sustained performance is the single most important influence on long-term stockholder value. Accordingly, the executive officers’ variable compensation is typically weighted towards long-term equity incentives rather than annual cash incentive compensation.

 

Base Salaries

 

Cadence offers its executive officers an annual base salary to compensate them for services rendered during the year. Base salaries are essential for the attraction and retention of talented executive officers and are determined as described above under “Compensation Determinations.” The executive officers’ base salaries are reviewed annually by the Compensation Committee, but do not automatically increase each year. Changes to the executive officers’ base salaries, if any, are typically made in the first quarter of the year or in connection with an executive officer’s promotion. In February 2008, the Compensation Committee reviewed and benchmarked the base salaries of Messrs. Fister, McKeithen, Miller and Porter against the Primary Compensation Peer Group, and decided not to increase or decrease their base salaries because the Compensation Committee believed that their base salaries were appropriate.

 

In April 2008, the Compensation Committee promoted Mr. Cowie to Senior Vice President and General Counsel and Mr. Palatnik to CFO. Consistent with the principles of Cadence’s compensation for its executive officers described above, the Compensation Committee reviewed the base salaries of Messrs. Cowie and Palatnik in the context of their expanded roles and responsibilities, and set their base salaries at $350,000 and $400,000, respectively. In November 2008, the Compensation Committee promoted both Messrs. Hsu and Modi to Senior Vice President, Research and Development and set each of their base salaries at $350,000, following the principles described above and recognizing their increased responsibilities. In January 2009, the Compensation Committee established a base salary of $600,000 for Mr. Tan in connection with his appointment as CEO.

 

Annual Cash Incentive Compensation

 

Target Bonuses

 

Cadence generally provides its executive officers with the opportunity to earn variable cash compensation under the Bonus Plan. The purpose of the Bonus Plan is to reward executive officers for performance during a single fiscal year and to provide incentives for them to achieve Cadence’s annual financial and operational goals, as measured against specific performance criteria relative to their respective business groups and Cadence’s overall business results. Cash bonus payouts under the Bonus Plan are determined annually, and the amount paid to each executive officer is determined based upon the executive officer’s target bonus multiplied by a Cadence group modifier and an individual performance modifier (each described in more detail below).

 

For each executive officer other than the CEO, the Compensation Committee reviews, as described above under “Compensation Determinations,” and approves (with or without modification, in its sole discretion) the CEO’s recommendations as to the executive officer’s target bonus. After Mr. Fister’s resignation in October 2008, and while the IOCE was in effect, the Compensation Committee reviewed the recommendations of the IOCE for setting target bonuses for the newly promoted executive officers. For the CEO, however, the Compensation Committee is solely responsible for assigning a target bonus based on its review, as described above under “Compensation Determinations.” Target bonuses for the executive officers are expressed as either a dollar amount or a percentage of base salary. The target bonuses are also typically set forth in the executive officers’ employment agreements. The Compensation Committee may, however, re-assess from time to time the target bonuses for each executive officer.

 

In February 2008, the Compensation Committee reviewed the target bonus amounts of the Named Executive Officers who were executive officers at that time and decided not to make any changes to their existing target bonus amounts because the Compensation Committee believed that the target bonus levels were appropriate.

In connection with the promotions of Messrs. Cowie, Hsu and Modi from Corporate Vice President to Senior Vice President and their appointments as executive officers of the Company, the Compensation Committee set their target bonuses at 75% of base salary.

 

In addition, the Compensation Committee approved a target bonus of 100% of base salary for Mr. Tan in connection with his appointment as CEO in January 2009.

 

Cadence Group Modifier

 

The Cadence group modifier is a percentage that reflects Cadence’s overall performance (the company performance modifier) and, for all executive officers except the CEO, the performance of the business group that the executive officer leads (the business objectives modifier). The business objectives modifier for the CEO is the average of the business objectives modifiers for each of the executive officers reporting to the CEO. The weightings and performance measures used to determine the Cadence group modifier (including both the performance metrics for the company performance modifier and the business group objectives) are reviewed annually by the Compensation Committee, in consultation with the CEO, to assure that they align with what the Compensation Committee and the CEO believe are the most important factors that influence both annual business and financial performance of Cadence and long-term stockholder value. For fiscal 2008, the components of the Cadence group modifier and relative weightings were as follows: 35% for the total revenue target, 30% for the non-GAAP operating margin target and 35% for the business objectives modifier.

 

With respect to the company performance modifier, the total revenue target was defined as the total dollar value of revenue, as disclosed in Cadence’s periodic reports on Forms 10-Q and 10-K, and the non-GAAP operating margin target was defined as non-GAAP income from operations expressed as a percentage of total revenue, as disclosed in Cadence’s Current Reports on Form 8-K. The target levels for the company performance modifier were higher than the target levels in Cadence’s fiscal 2008 business plan, which had a total revenue target of $1.65 billion and a non-GAAP operating margin target of 33.1%. For each of the total revenue and the non-GAAP operating margin components of the company performance modifier, achievement of 90% of the Bonus Plan target levels was required before any payment would be made for such component of the company performance modifier. Cadence achieved total revenue of $1.04 billion and a non-GAAP operating margin of (3)% for fiscal 2008, which reflects performance below the threshold requirement set forth by the Compensation Committee for payment for these measures.

 

As a result of Cadence’s revenue and non-GAAP operating margin performance in fiscal 2008, the Compensation Committee determined that no bonus payouts would be made to the Named Executive Officers under the Bonus Plan for fiscal 2008.

 

The business objectives modifier for all executive officers except the CEO is based on the achievement of qualitative short-term and long-term performance goals by each executive officer’s business group. For fiscal 2008, each business group’s goals related to one or more of the following: operational excellence and efficiency, product development, customer satisfaction, innovation and Cadence’s short-term and long-term business strategy. In addition, in fiscal 2008, the Compensation Committee intended for the achievement of these goals at the 100% level to present a significant challenge to the participants. The Compensation Committee reviews the achievement of these goals based upon the CEO’s assessment of each business group’s performance relative to its specific objectives.

 

For fiscal 2008, the Compensation Committee determined that no bonus payouts would be made to the Named Executive Officers with respect to their business objectives in light of Cadence’s overall revenue and non-GAAP operating margin performance for the year.

 

Individual Performance Modifier

 

The individual performance modifier is derived from subjective assessments of individual performance during the performance period, based upon the “Individual Factors” listed above under “Compensation Determinations.” For each executive officer other than the CEO, the Compensation Committee evaluates the performance of the

executive officer during the performance period and, based in part upon the CEO’s recommendations, approves the individual performance modifier for the executive officer.

 

For the CEO’s individual performance modifier, the Compensation Committee evaluates the CEO’s performance based upon the CEO’s individual performance and contributions and Cadence’s overall performance.

 

For fiscal 2008, the Compensation Committee determined that no bonus payouts would be made to the Named Executive Officers for individual performance in light of Cadence’s overall revenue and non-GAAP operating margin performance for the year.

 

Other Discretionary Bonuses

 

The Compensation Committee has the discretion to reward executive officers with additional cash compensation, such as in connection with their performance, contribution or promotion. In March 2008, the Compensation Committee approved a discretionary cash payment of $100,000 to Mr. Cowie in recognition of his promotion to Senior Vice President and General Counsel. In August 2008, the Compensation Committee approved a discretionary cash payment of $2.5 million to Mr. Fister in recognition of his relocation costs arising out of his relocation from Oregon to the San Jose area, the termination of his housing allowance and in lieu of any future payments with respect to his housing allowance and relocation. Cadence does not have any similar relocation arrangements with any of the Named Executive Officers, nor does it currently expect to make similar bonus payments in the future. In December 2008, the Compensation Committee approved a discretionary cash payment of $250,000 to Mr. Tan in recognition of his service as a member of the IOCE, which became payable upon his appointment as CEO.

 

Annual Cash Incentive Compensation for 2009

 

In light of the economic environment and challenges facing the Company, the Compensation Committee currently does not intend to pay bonuses for fiscal 2009 performance to any of the executive officers. The Compensation Committee believes that long-term equity incentives will provide appropriate alignment with stockholders during this challenging period and will reward the executive officers, including the Named Executive Officers who are currently executive officers, for building and sustaining long-term stockholder value.

 

Long-Term Equity Incentive Compensation

 

Consistent with the principles of Cadence’s compensation for its executive officers outlined above, long-term equity incentives are designed to provide executive officers with an equity stake in Cadence, promote stock ownership to align the executive officers’ interests with those of Cadence’s stockholders and create significant incentives for executive retention. Specifically, stock options provide an opportunity for Cadence to reward its executive officers if Cadence’s stock price increases and the executive officers remain employed by Cadence during the period required for the stock options to vest. Furthermore, awards of restricted stock align the interests of executive officers with the interests of stockholders through stock ownership, and increase the reward to executive officers when Cadence’s stock price increases.

 

The Compensation Committee determines and approves individual equity grants to executive officers by taking into account information regarding compensation paid to executives with similar titles and responsibilities at the companies in the Primary Compensation Peer Group and each of the Compensation Factors, without prescribing particular weightings to any of the Compensation Factors. In addition, the Compensation Committee reviews the CEO’s assessments and recommendations as to the long-term equity compensation for all of the executive officers except himself.

 

In fiscal 2008, Cadence made equity grants in the form of stock options and restricted stock to each of the Named Executive Officers. Stock options granted to the Named Executive Officers in fiscal 2008 vest monthly over four years from the date of grant and expire seven years from the date of grant, except for the option to purchase 100,000 shares of Cadence common stock granted to Mr. Tan in December 2008 in recognition of his service as a member of the IOCE that vested and became exercisable upon his appointment as CEO in January 2009 (as disclosed in the Grants of Plan-Based Awards table). Awards of restricted stock granted to the Named Executive Officers in fiscal 2008 vest 25% on each of the first four anniversaries of the grant date, subject to the achievement

of certain specified performance goals intended to qualify the awards as “performance-based compensation” under Section 162(m) of the Code.

 

When allocating long-term equity incentive compensation for the Named Executive Officers other than Mr. Fister, the Compensation Committee generally awarded a majority of the total value of equity grants in the form of restricted stock, with the remainder comprised of stock options with an exercise price equal to the fair market value of Cadence common stock on the grant date. The long-term incentive equity compensation for Mr. Fister in fiscal 2008 was allocated approximately equally between stock options and restricted stock.

 

In connection with their respective promotions in April 2008, Mr. Cowie received an option to purchase 60,000 shares of Cadence common stock at its fair market value on the grant date and 30,000 shares of restricted stock and Mr. Palatnik received an option to purchase 100,000 shares of Cadence common stock at its fair market value on the grant date and 50,000 shares of restricted stock.

 

In addition to his stock option grant in December 2008, as a signing bonus for his appointment as CEO in January 2009, Mr. Tan received an option to purchase 900,000 shares of Cadence common stock at its fair market value on the grant date, 25% of which vests on the first anniversary of the grant date and the remainder of which vests monthly over a period of three years thereafter, and an award of 300,000 shares of restricted stock, 25% of which vests on each of the first four anniversaries of the grant date.

 

In February 2009, the Compensation Committee targeted the equity grants to the Named Executive Officers who are currently executive officers to provide 70% to 80% of the long-term equity incentive compensation opportunities in the form of stock options, which vest monthly over four years from the date of grant and expire seven years from the date of grant, with the remainder comprised of restricted stock, which vests in equal semi-annual installments over three years from the date of grant. The Compensation Committee changed the mix of the long-term equity incentive compensation because it believes that the new mix provides the appropriate level of stockholder alignment, rewards employees for building and sustaining long-term stockholder value, and balances the portfolio between stock options, which provide value only if the stock price increases, and restricted shares, which provide more certain retention value.

 

Grant Timing Policy

 

The Compensation Committee and senior management monitor Cadence’s stock option and restricted stock grant policies to ensure that they comply with governing regulations and are consistent with good corporate practice. Grants to the executive officers are generally made at the Compensation Committee meetings held in February of each year, after results for the preceding fiscal year become publicly available, enabling the Compensation Committee to consider both the prior year’s performance and expectations for the succeeding year in making grant decisions. However, the Compensation Committee may make grants at any time of the year it deems appropriate.

 

Deferred Compensation

 

In fiscal 2008, each of the Named Executive Officers was eligible to defer compensation payable to them under a nonqualified deferred compensation plan maintained by Cadence, which is referred to in this proxy statement as the Deferred Compensation Plan. The Deferred Compensation Plan is designed to allow for savings above the limits imposed by the Code for 401(k) plans on an income tax-deferred basis for Cadence employees at the level of vice president (or its equivalent) and above who choose to participate. Amounts deferred into the Deferred Compensation Plan are held in accounts with values indexed to the performance of selected mutual funds or money market accounts. The investment options made available under the Deferred Compensation Plan are substantially similar to those available under Cadence’s tax-qualified 401(k) plan. Cadence does not match contributions made under the Deferred Compensation Plan. Cadence maintains the Deferred Compensation Plan for the purposes of providing a competitive benefit and allowing all participants, including the Named Executive Officers, an opportunity to defer income tax payments on their cash compensation.

Other Employee Benefit Plans

 

The Named Executive Officers are eligible for the same benefits available to Cadence employees generally. These include participation in a tax-qualified 401(k) plan, employee stock purchase plan, and group life, health, dental, vision and disability insurance plans. Cadence also periodically benchmarks its broad-based employee benefit plans based upon a review of the benefits survey conducted by the Silicon Valley Employers’ Forum. Cadence aims to provide benefits to its employees that are consistent with market practice.

 

Perquisites

 

Cadence has provided perquisites selectively in situations that the Compensation Committee believed were reasonable and necessary to attract and/or retain executives. In connection with his initial hire, Cadence agreed to provide Mr. Fister with financial reimbursement related to his relocation to and housing in the San Jose area. This benefit was terminated upon the execution of Mr. Fister’s new employment agreement in July 2008.

 

Severance Benefits

 

Cadence has entered into agreements with all of its Named Executive Officers that provide for benefits upon termination of employment under certain circumstances, including in connection with a change in control of Cadence. Cadence provides these benefits as a means of remaining competitive, retaining executive officers, focusing executive officers on stockholder interests when considering strategic alternatives and providing income protection in the event of involuntary loss of employment. In general, these arrangements provide for severance benefits upon Cadence’s termination of the Named Executive Officer’s employment without cause or resignation by the Named Executive Officer for good reason (constructive termination). In the event of a change in control of Cadence, and if the Named Executive Officer is terminated without cause or resigns for good reason (constructive termination), the Named Executive Officer will receive enhanced severance benefits. Accordingly, Cadence provides for enhanced severance benefits only in the event of a “double trigger” because it believes that executive officers would be materially harmed only if a change in control results in reduced responsibilities or compensation or loss of employment.

 

In fiscal 2008, the Compensation Committee engaged Semler Brossy to provide information on typical industry practices concerning severance and change in control agreements. Based on this review and regulatory developments, including the documentary compliance deadline under Section 409A of the Code, the Compensation Committee approved new employment agreements with Messrs. Fister, Miller and Porter in July 2008 that included severance and change in control provisions that the Compensation Committee believed were competitive with market practices. Pursuant to the July 2008 employment agreements, upon a termination without cause or a constructive termination, Messrs. Fister, Miller and Porter were entitled to increased cash severance as compared to their prior employment agreements, as well as immediate vesting for certain unvested equity, as compared to continued vesting over a period of time under their prior employment agreements. In addition, pursuant to the July 2008 employment agreements, upon a termination without cause or a constructive termination in connection with a change in control, Messrs. Fister, Miller and Porter were entitled to increased cash severance as compared to their prior employment agreements.

 

In April 2008, the Compensation Committee approved a new employment agreement with Mr. McKeithen in connection with his promotion to Executive Vice President. Pursuant to the terms of the new employment agreement, upon a termination without cause or a constructive termination, Mr. McKeithen was entitled to a cash payment equal to the greater of the salary and target bonus he could have earned through March 31, 2010 or $800,000, and immediate vesting of his unvested options and restricted stock that would have vested through March 31, 2010, rather than a payment equal to one year’s base salary and target bonus and continued vesting for twelve months post-termination as under his prior employment agreement. Pursuant to the terms of the new employment agreement, upon a termination without cause or a constructive termination in connection with a change in control, Mr. McKeithen was also entitled to cash severance equal to the greater of $1,600,000 or the salary and target bonus he could have earned through March 31, 2010, as compared to one year’s base salary and target bonus under his prior employment agreement.

The Compensation Committee approved employment agreements with Messrs. Cowie, Huang and Palatnik in July 2008, Mr. Tan in January 2009 and Messrs. Hsu and Modi in February 2009, which include severance and change in control provisions similar to those contained in the employment agreements of the other Named Executive Officers. Prior to entering into employment agreements with Messrs. Cowie, Hsu, Huang, Modi, Palatnik and Tan, Cadence did not have employment agreements with any of them, and the employment agreements supersede their offer letters (except for Mr. Tan, who did not have an offer letter).

 

The Compensation Committee intends to review the severance and change in control arrangements periodically and in the event of changing circumstances.

 

Please refer to the discussion under “Potential Payments upon Termination or Change in Control and Employment Contracts” below for a more detailed discussion of the severance and change in control arrangements with the Named Executive Officers.

 

Severance Benefits Provided Upon Resignation

 

Effective October 15, 2008, Messrs. Fister, McKeithen, Miller and Porter resigned from their executive officer positions with Cadence. Cadence will provide certain benefits to Messrs. Fister, Miller and Porter as set forth in their Executive Transition and Release Agreements and to Mr. McKeithen as set forth in his 2008 employment agreement. Cadence also entered into supplemental agreements, effective October 15, 2008, with Messrs. Miller and Porter, whereby each executive agreed to provide additional services to Cadence related to the transition of his prior executive responsibilities for six months following his resignation as an executive officer of Cadence and receive a monthly salary as compensation for such services. Cadence amended Mr. McKeithen’s 2008 employment agreement, effective October 15, 2008, whereby Cadence agreed to extend the period during which Mr. McKeithen would be entitled to exercise his vested options to February 28, 2010 or until the maximum term of the option, whichever is shorter, and Mr. McKeithen agreed to provide services to Cadence related to the transition of his prior executive officer responsibilities for 45 days following his resignation. For further detail of the severance benefits provided to and that will be provided to Messrs. Fister, McKeithen, Miller and Porter, please refer to the footnotes to the Summary Compensation Table and the discussion under “Potential Payments Upon Termination or Change in Control and Employment Contracts.”

 

STOCK OWNERSHIP GUIDELINES

 

Cadence maintains stock ownership guidelines for its executive officers. These guidelines are designed to promote alignment with the interests of stockholders and Cadence’s commitment to sound corporate governance. The Compensation Committee reviewed industry standard practices when it established the guidelines below. All of the Named Executive Officers who are currently executive officers satisfy Cadence’s ownership guidelines, and the Named Executive Officers who are not currently executive officers satisfied Cadence’s ownership guidelines prior to their resignations.

 

Stock Ownership Guidelines

 

 

 

 

TAX CONSIDERATIONS

 

Section 162(m) of the Internal Revenue Code of 1986

 

Section 162(m) of the Code limits deductions for certain executive compensation in excess of $1,000,000 in any fiscal year. Certain types of compensation are deductible only if performance criteria are specified in detail and payments are contingent on stockholder approval of the compensation arrangement. Cadence attempts to structure its compensation arrangements to achieve deductibility under Section 162(m) of the Code, unless the benefit of such deductibility is outweighed by the need for flexibility or the attainment of other corporate objectives. The Compensation Committee will continue to monitor issues concerning the deductibility of executive compensation and will take appropriate action if and when it is warranted. Since corporate objectives may not always be consistent with the requirements for full deductibility, the Compensation Committee is prepared, if it deems appropriate, to enter into compensation arrangements under which payments may not be deductible under Section 162(m) of the Code. Thus, deductibility will not be the sole factor used by the Compensation Committee in ascertaining appropriate levels or modes of compensation.

 

In fiscal 2008, all annual incentive plan payments, stock option grants and restricted stock awards were structured with the intent to qualify them as “performance-based compensation” under Section 162(m) of the Code, and should be fully deductible. As noted above, the vesting of awards of restricted stock granted to certain Named Executive Officers in fiscal 2008 was subject to the achievement of certain specified performance goals that were intended to qualify the awards as performance-based compensation under Section 162(m) of the Code. In July 2008, the Compensation Committee amended these awards along with all similar awards granted in prior years that remained outstanding and unvested at that time. The amendments added to the awards additional performance goals for the second half of fiscal 2008 and all subsequent vesting periods in order to preserve, to the extent possible, the deductibility of the awards under Section 162(m) of the Code, while reflecting Cadence’s shift in strategic emphasis.

 

Section 280G of the Internal Revenue Code of 1986

 

Section 280G of the Code disallows a company’s tax deduction for what are defined as “excess parachute payments” and Section 4999 of the Code imposes a 20% excise tax on certain persons who receive excess parachute payments. The Named Executive Officers are not provided with tax gross-up payments in the event their payments become subject to this excise tax, but instead are entitled to the best after-tax alternative. In other words, the Named Executive Officers are entitled to whichever of the following payments results in the largest after-tax amount:

 

 

Cadence chose to provide the Named Executive Officers with the best after-tax alternative to maximize the benefits provided to each executive in connection with a change in control while allowing Cadence to avoid making any gross-up payments.

 

In the event that a portion of the payout would be classified as an excess parachute payment, Cadence’s tax deduction would be disallowed under Section 280G of the Code and an excise tax would be imposed on the Named Executive Officer under Section 4999 of the Code. Please refer to the discussion below under “Potential Payments upon Termination or Change in Control and Employment Contracts” for more detail on the potential lost tax deductions.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis above with management. In reliance on the review and discussions referred to above, the Compensation Committee recommended to the Board, and the Board approved, the inclusion of the Compensation Discussion and Analysis in this proxy statement and incorporation by reference into Cadence’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

 

COMPENSATION COMMITTEE

 

John B. Shoven, Chairman

Donald L. Lucas

George M. Scalise

 

No member of the Compensation Committee is, or was during or prior to fiscal 2008, an officer or employee of Cadence or any of its subsidiaries. None of Cadence’s executive officers serves or served as a director or member of the compensation committee of another entity where an executive officer of such other entity serves or served as a director or member of the Compensation Committee of Cadence.

 

The following table shows the compensation awarded or paid to, or earned by, Cadence’s Senior Vice President who performed functions similar to a principal executive officer as of the end of fiscal 2008, Cadence’s CFO as of the end of fiscal 2008, Cadence’s three most highly compensated executive officers other than the CEO and CFO as of the end of fiscal 2008, Cadence’s former CEO and CFO who served Cadence for a portion of fiscal 2008 and two additional individuals for whom disclosure would have been provided as two of the three most highly compensated executive officers but for the fact that they were not serving as executive officers at the end of fiscal 2008 (collectively referred to herein as the “Named Executive Officers”), and Cadence’s new CEO (appointed January 8, 2009).

 

SUMMARY COMPENSATION TABLE

 

 

 

 

(footnotes continue on following page)

 

 

(footnotes continue on following page)

 

 

 

The stock options included in this amount have exercise prices of $10.61, $13.06, $14.55, $16.53, $20.06 and $25.08 per share, which as of January 3, 2009 were significantly higher than the market price of Cadence common stock. The stock options expire on the earlier of January 15, 2010 or the original expiration dates set forth in the table below entitled Outstanding Equity Awards at 2008 Fiscal Year End.

 

 

The stock options included in this amount have exercise prices of $10.11, $10.89, $12.63, $13.61, $14.69, $15.49, $16.53, $19.16 and $20.06 per share, which as of January 3, 2009 were significantly higher than the market price of Cadence common stock. The stock options expire on the earlier of February 28, 2010 or the original expiration dates set forth in the table below entitled Outstanding Equity Awards at 2008 Fiscal Year End.

 

(footnotes continue on following page)

 

 

The stock options included in this amount have exercise prices of $10.61, $13.61, $16.53 and $20.06 per share, which as of January 3, 2009 were significantly higher than the market price of Cadence common stock. The stock options awards expire on the earlier of January 15, 2010 or the original expiration dates set forth in the table below entitled Outstanding Equity Awards at 2008 Fiscal Year End.

 

 

The stock options included in this amount have exercise prices of $10.61, $13.61, $16.53 and $20.06 per share, which as of January 3, 2009 were significantly higher than the market price of Cadence common stock. The stock options expire on the earlier of January 15, 2010 or the original expiration dates set forth in the table below entitled Outstanding Equity Awards at 2008 Fiscal Year End.

 

 

GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2008

 

 

 

 

(footnotes continue on following page)

 

NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE AND
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2008 TABLE

 

EMPLOYMENT AGREEMENTS

 

Certain elements of compensation set forth in the Summary Compensation Table and Grants of Plan-Based Awards in Fiscal Year 2008 table reflect the terms of employment agreements between Cadence and each of Messrs. Cowie, Huang and Palatnik that were in effect as of January 3, 2009. In January 2009, Cadence entered into an employment agreement with Mr. Tan and, in February 2009, Cadence entered into employment agreements with Messrs. Hsu and Modi, which are summarized below but are not reflected in the tables above.

 

James J. Cowie.  Cadence is a party to an employment agreement with Mr. Cowie pursuant to which Mr. Cowie serves as Senior Vice President, General Counsel and Secretary. The agreement provides for an initial base salary of $350,000 per year and for Mr. Cowie’s participation in the Bonus Plan at an annual target bonus of 75% of his base salary.

Chi-Ping Hsu.  Cadence is a party to an employment agreement with Mr. Hsu pursuant to which Mr. Hsu serves as Senior Vice President, Research and Development. The agreement provides for an initial base salary of $350,000 per year and for Mr. Hsu’s participation in the Bonus Plan at an annual target bonus of 75% of his base salary.

 

Charlie Huang.  Cadence is a party to an employment agreement with Mr. Huang pursuant to which Mr. Huang serves as Senior Vice President. The agreement provides for an initial base salary of $350,000 per year and for Mr. Huang’s participation in the Bonus Plan at an annual target bonus of 75% of his base salary.

 

Nimish H. Modi.  Cadence is a party to an employment agreement with Mr. Modi pursuant to which Mr. Modi serves as Senior Vice President, Research and Development. The agreement provides for an initial base salary of $350,000 per year and for Mr. Hsu’s participation in the Bonus Plan at an annual target bonus of 75% of his base salary.

 

Kevin S. Palatnik.  Cadence is a party to an employment agreement with Mr. Palatnik pursuant to which Mr. Palatnik serves as Senior Vice President and Chief Financial Officer. The agreement provides for an initial base salary of $400,000 per year and for Mr. Palatnik’s participation in the Bonus Plan at an annual target bonus of 75% of his base salary.

 

Lip-Bu Tan.  Cadence is a party to an employment agreement with Mr. Tan pursuant to which Mr. Tan serves as President and Chief Executive Officer. The agreement provides for an initial base salary of $600,000 per year and for Mr. Tan’s participation in the Bonus Plan at an annual target bonus of 100% of his base salary.

 

In connection with their resignations, Cadence has also entered into Executive Release and Transition Agreements with Messrs. Fister, Miller and Porter, agreements regarding transitioning prior executive responsibilities with Messrs. Miller and Porter, and an Amended and Restated First Amendment to Employment Agreement with Mr. McKeithen. See “Potential Payments Upon Termination or Change in Control and Employment Contracts” below.

 

The proportion of salary to total compensation of the Named Executive Officers is explained above under “Compensation, Discussion and Analysis — Elements of Executive Compensation.”

 

NON-EQUITY INCENTIVE PLAN AWARDS

 

Actual payouts under the non-equity incentive plan awards granted to the Named Executive Officers are determined as described above in “Compensation Discussion and Analysis — Elements of Executive Compensation — Annual Cash Incentive Compensation” and would be made under the Bonus Plan.

 

EQUITY PLAN AWARDS

 

The stock awards granted in fiscal 2008 to the Named Executive Officers were granted under the 1987 Plan or the 2000 Plan and vest over four years, with 1/4th of the shares subject to vesting on each anniversary after the date of grant. The stock awards granted in fiscal 2008 under the 1987 Plan are also subject to the achievement of certain specified performance goals intended to qualify the stock awards as “performance-based compensation” under Section 162(m) of the Code. The stock options granted in fiscal 2008 to the Named Executive Officers were granted under the 1987 Plan or the 2000 Plan and vest over four years, with 1/48th of the shares subject to vesting at the end of each month after the date of grant, except for the grants to Mr. Tan, which are described in footnotes (3) and (4) to the Outstanding Equity Awards at 2008 Fiscal Year End table below. The exercise price of stock options granted under the 1987 Plan or the 2000 Plan in fiscal 2008 is the closing price of Cadence common stock on the date of grant. Dividends, if any, are payable to the holders of restricted stock issued under Cadence’s equity plans.

OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR END