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 10, 2011

 

 

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 10, 2011, 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 15, 2011 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

Sr. Vice President, General Counsel and Secretary

 

San Jose, California

March 28, 2011

 

ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE CAST YOUR VOTE AS PROMPTLY AS POSSIBLE VIA THE INTERNET OR BY TELEPHONE, AS INSTRUCTED IN THE NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS. 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 FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.

 

TABLE OF CONTENTS

 

CADENCE DESIGN SYSTEMS, INC.

2655 SEELY AVENUE

SAN JOSE, CALIFORNIA 95134

 

 

 

 

PROXY STATEMENT

FOR ANNUAL MEETING OF STOCKHOLDERS

MAY 10, 2011

 

 

 

 

 

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 10, 2011, 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 publish this proxy statement on the investor relations page of its website at http://www.cadence.com/company/investor_relations/index.aspx on or about March 28, 2011.

 

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. Cadence believes that this process expedites stockholders’ receipt of the proxy materials, lowers the costs of its annual meeting and helps conserve natural resources. On or about March 28, 2011, Cadence will mail to each stockholder (other than those stockholders who previously had 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 its 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 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. Cadence may at its discretion voluntarily choose to mail or deliver a paper copy of the proxy materials, including its 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 http://www.cadence.com/company/investor_relations/index.aspx. 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 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 15, 2011, 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 268,572,911 shares of common stock outstanding and entitled to vote. Each holder of record of common stock outstanding at the close of business 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. Brokers are not permitted to vote on the election of directors without instructions from the beneficial owner, because the election of directors (Proposal 1) and Proposals 2, 3, 4, 5, 6 and 7 are considered non-routine matters. Therefore, unless you provide voting instructions to any broker holding shares on your behalf, your broker may not use discretionary authority to vote your shares on Proposals 1, 2, 3, 4, 5, 6 or 7. Proposal 8, regarding the ratification of Cadence’s independent registered public accounting firm, is considered a routine matter and brokers are therefore permitted to vote shares held by them without instruction.

 

ANNUAL MEETING ADMISSION

 

Stockholders at the close of business on the record date or holders of a valid proxy for the annual meeting are entitled to attend the annual meeting. Such individuals should be prepared to present photo identification, such as a valid driver’s license or passport, and verification of Cadence stock ownership for admittance. For stockholders at the close of business on the record date, proof of ownership as of the record date will be verified prior to admittance into the annual meeting. For stockholders who were not stockholders of record at the close of business on the record date but hold shares through a bank, broker or other nominee holder, proof of beneficial ownership at the close of business on the record date, such as an account statement or similar evidence of ownership, will be verified prior to admittance into the annual meeting. Stockholders will be admitted to the annual meeting if they comply with these procedures. Please allow ample time for admittance to the 1:00 p.m. Pacific time meeting time.

 

VOTE REQUIRED

 

The election of directors at the annual meeting requires that each director receive a majority of the votes cast 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, each director 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 the 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 at the close of business on the record date 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 a stockholder 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, telephone or 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 via the Internet, unless the proxy revocation procedures set forth above are followed.

 

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 by Cadence 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, and 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 $50,000, 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

 

SEC rules permit 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 http://www.cadence.com/company/investor_relations/index.aspx 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.

 

Cadence common stock is listed under the symbol CDNS 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 http://www.cadence.com/company/investor_relations/index.aspx. 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 board and committee responsibilities and other 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, and were most recently amended in November 2010.

 

CODE OF BUSINESS CONDUCT

 

Cadence has adopted a Code of Business Conduct to provide standards for ethical conduct in dealing with customers, suppliers, agents, government officials, political entities and others, which is referred to in this proxy statement as the Code of Business Conduct. 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 Senior Vice President and 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, and compliance with competition, anti-corruption and other laws and regulations.

 

Except as otherwise 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 and any concerns regarding corporate governance, accounting, internal accounting controls or auditing matters, 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 for its members and Cadence’s executive officers, 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. 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. As of the record date, all directors and executive officers met the Stock Ownership Guidelines applicable to them, subject to their respective phase-in periods according to Cadence’s Stock Ownership Guidelines.

 

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, as determined by the Board. 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 Ms. Bostrom, 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 1, 2011, the Board held ten meetings, in addition to taking actions by unanimous written consent in lieu of a meeting. Each director 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 2010. The Corporate Governance Guidelines encourage directors to attend the annual meeting of stockholders. All of Cadence’s then-current directors attended the 2010 Annual Meeting of Stockholders.

 

Under the Corporate Governance Guidelines, Cadence’s independent directors meet separately at least twice each year. Pursuant to the 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 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 http://www.cadence.com/company/investor_relations/index.aspx. The members and chairs of the current committees are identified in the following table.

 

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

 

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 three 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 last amended in February 2010 and complies with the NASDAQ listing standards. The duties and responsibilities of the Audit Committee include:

 

 

 

The Audit Committee held nine meetings during fiscal 2010. See “Report of the Audit Committee” below for more information.

 

Compensation Committee

 

The Compensation Committee of the Board, which is referred to in this proxy statement as the Compensation Committee, is comprised of four non-employee, independent 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 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. As provided in its charter, the Compensation Committee acts on behalf of the Board 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 compensation of the CEO and any director who is also a Cadence employee. 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 2010 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 last amended in February 2010. The duties and responsibilities of the Compensation Committee include:

 

 

 

 

In fiscal 2010, the Compensation Committee retained the services of a 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 outside evaluation of executive officer salary, bonus and equity compensation is a valuable tool for the Compensation Committee and Cadence’s stockholders. Semler Brossy has not been 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 Discussion and Analysis”), 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 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, by the Compensation Committee in its sole discretion. See “Compensation Discussion and Analysis” below for more information.

 

The Compensation Committee, in consultation with Semler Brossy, reviews Cadence’s compensation practices, policies and programs for all employees, including the Named Executive Officers, to assess the risks associated with such practices, policies and programs. Among the risk-mitigating factors considered by the Compensation Committee are:

 

 

 

The Compensation Committee held four meetings during fiscal 2010.

 

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 last amended in November 2010. The duties and responsibilities of the Corporate Governance and Nominating Committee include:

 

 

The Corporate Governance and Nominating Committee uses 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 directors, 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. In February 2011, the Board elected Susan L. Bostrom to serve as a director.

 

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 the 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, a prospective nominee’s experience, judgment, integrity, diversity of background, independence, ability to commit sufficient time and attention to Board activities, skills, such as an understanding of electronic design and semiconductor technologies, international background and other relevant characteristics. At least a majority of the 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 three meetings during fiscal 2010.

 

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 up to $60 million.

 

The Finance Committee held seven meetings during fiscal 2010.

 

Technology Committee

 

The Technology Committee was constituted to monitor trends in technology that might affect Cadence’s strategic plans, advise the Board regarding Cadence’s research and development activities and review and make recommendations to management regarding Cadence’s leading technologists and researchers.

 

The Technology Committee held three meetings during fiscal 2010 and was dissolved in February 2011 because the Board determined that it was more efficient for the Board as a whole, in conjunction with management, to monitor trends in technology that may affect Cadence’s strategic plans.

 

Board Leadership Structure

 

Mr. Tan serves as CEO and Dr. Shoven, an independent director, serves as Chairman of the Board. The Board believes that Cadence and its stockholders are best served at this time by this leadership structure because it is valuable to have strong independent leadership to assist the Board in fulfilling its role of overseeing the management of Cadence and its risk management practices, separate from the CEO. However, the Corporate Governance Guidelines permit the roles of the Chairman of the Board and the CEO to be filled by the same or different individuals. This provides the Board with flexibility to determine whether the two roles should be combined in the future based on Cadence’s needs and the Board’s assessment of Cadence’s leadership from time to time. The Corporate Governance Guidelines provide for a lead independent director if the roles are combined.

 

Risk Oversight

 

The Board exercises its risk oversight function through the Board as a whole and through certain of its committees. The Board and the relevant committees seek to understand and oversee the most critical risks facing Cadence. The Board does not view risk in isolation, but considers risk as part of its regular consideration of business decisions and business strategy. The Board as a whole has the ultimate responsibility for the oversight of risk

management, but has delegated the oversight of certain risks to the Audit Committee and the Compensation Committee. The Audit Committee is responsible for overseeing risk management as it relates to Cadence’s financial condition, financial statements, financial reporting process and accounting matters. The Compensation Committee is responsible for overseeing Cadence’s overall compensation practices, policies and programs and assessing the risks associated with such practices, policies and programs. The Board and the relevant committees review with Cadence’s management the risk management practices for which they have oversight responsibility. Since overseeing risk is an ongoing process and inherent in Cadence’s strategic decisions, the Board and the relevant committees also discuss risk throughout the year in relation to specific proposed actions.

 

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 (as defined below) for their service on the Board in fiscal 2010:

 

DIRECTOR COMPENSATION FOR FISCAL 2010^*

 

		Fees Earned				Option				All Other
		or Paid in Cash				Awards				Compensation				Total
Name		($)				($)(1)(2)				($)(3)				($)
Donald L. Lucas		$	187,000			$	71,823			$	8,279			$	267,102
Dr. Alberto Sangiovanni-Vincentelli			137,000				71,823				883				209,706
George M. Scalise			110,000				71,823				0				181,823
Dr. John B. Shoven			228,000				143,645				4,833				376,478
Roger S. Siboni			161,000				71,823				17,435				250,258
John A.C. Swainson			101,000				71,823				0				172,823

 

 

 

 

A “non-employee director” is a Cadence director who was not an employee of Cadence during fiscal 2010. The annual retainer for non-employee directors is set at $80,000, with an additional annual retainer of $80,000 for a non-employee director serving as Chairman of the Board. In May 2009, the Board temporarily reduced the retainer fees payable to the non-employee directors and the retainer fee payable to the Chairman of the Board by 10% each, effective July 1, 2009 through March 31, 2010. In February 2010, the Board extended the duration of the reduction through June 30, 2010. Effective July 1, 2010, the annual retainer for non-employee directors was restored back to its original fiscal 2009 level. A non-employee director serving as Chairman of the Audit Committee or the Finance

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. In 2010 and prior to the dissolution of the Technology Committee, the Chairman of the Technology Committee also received an annual retainer of $40,000 per year. A non-employee director serving as Chairman of the Board is also eligible to receive fees for service as the Chairman of any of these Board committees.

 

Each non-employee director of Cadence earned a $76,000 retainer for his service on the Board in fiscal 2010. Dr. Shoven earned an additional $76,000 retainer for his service as Chairman of the Board in fiscal 2010 and a retainer of $20,000 for his service as Chairman of the Compensation Committee. Mr. Siboni and Dr. Sangiovanni-Vincentelli each earned a retainer of $40,000 for his service as Chairman of the Audit Committee and Chairman of the Technology Committee, respectively. Mr. Lucas earned a retainer of $20,000 for his service as the Chairman of the Corporate Governance and Nominating Committee and a retainer of $40,000 for his service as the Chairman of the Finance Committee. Each non-employee director also received meeting fees of $2,000 for each meeting attended in person and $1,000 for each meeting attended via telephone. 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 attending Cadence’s Board meetings in accordance with Cadence’s 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 full 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 31^st following the grant date and have an exercise price equal to the average closing price of Cadence common stock for the 20 trading days prior to the grant date.

 

In addition, every April 1^st, 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 option to purchase an additional 25,000 shares of common stock. These annual stock option grants vest and become exercisable in full on the March 31^st following the grant date and have an exercise price equal to the average closing price of Cadence common stock for the 20 trading days prior to the grant date.

 

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 medical and prescription benefits coverage reimbursement 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. In accordance with the plan, which was last amended in February 2011, a director’s eligibility for participation in the plan immediately ceases if the plan administrator determines that an eligible director violated the Code of Business Conduct or is engaged as employee, consultant, director, advisor, or significant investor of a Cadence competitor. Under the plan, Cadence reimburses 100% of the premiums 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 medical costs. Benefits under the plan are fully taxable to the participants and Cadence does not gross up reimbursement payments to cover any such taxes. Messrs. Lucas and Siboni and Drs. Sangiovanni-Vincentelli and Shoven maintained medical coverage under this plan in fiscal 2010.

 

The Corporate Governance and Nominating Committee of the Board has recommended, and the Board has nominated, the eight nominees named below for election to the Board. Each director elected at the 2011 Annual Meeting of Stockholders will hold office until the 2012 Annual Meeting of Stockholders and until his or her successor is elected and qualified, or until the director’s earlier death, resignation or removal. Each nominee listed below is currently a Cadence director, and all of the nominees have previously been elected by Cadence’s stockholders.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH NAMED NOMINEE.

 

DIRECTOR QUALIFICATIONS AND DIVERSITY

 

The Board believes that the Board, as a whole, should possess a combination of skills, professional experience and diversity of backgrounds necessary to oversee Cadence’s business. In addition, the Board believes that there are certain attributes that every director should possess, as reflected in the Board’s membership criteria. Accordingly, the Board and the Corporate Governance and Nominating Committee consider the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and Cadence’s current and future needs.

 

The Corporate Governance and Nominating Committee is responsible for developing and recommending Board membership criteria to the Board for approval. The criteria, which are set forth in the Corporate Governance Guidelines, include a prospective nominee’s integrity, experience, judgment, diversity of background, independence, ability to commit sufficient time and attention to Board activities, skills such as an understanding of electronic design and semiconductor technologies, international background and other relevant characteristics. The Corporate Governance and Nominating Committee considers all of these criteria in the context of the perceived needs of the Board at that point in time. In addition, the Corporate Governance and Nominating Committee annually reviews with the Board the appropriate skills and characteristics required of directors in the context of the current composition of the Board. In seeking a diversity of background, the Corporate Governance and Nominating Committee seeks a variety of occupational and personal backgrounds on the Board in order to obtain a range of viewpoints and perspectives. This annual assessment enables the Board to update the skills and experience it seeks in the Board as a whole, and in individual directors, as Cadence’s needs evolve and change over time, and also enables the Board to assess the effectiveness of its policy to seek a diversity of background on the Board. In identifying director candidates from time to time, the Corporate Governance and Nominating Committee and the Board may establish specific skills and experience that it believes Cadence should seek in order to have an effective board of directors.

 

In evaluating director candidates, and considering incumbent directors for renomination to the Board, the Corporate Governance and Nominating Committee has considered all of the criteria described above and, for incumbent directors, past performance on the Board. Among other things, the Corporate Governance and Nominating Committee has determined that it is important to have individuals with the following skills and experiences on the Board:

 

 

 

The Corporate Governance and Nominating Committee believes that all of the eight director nominees listed below are highly qualified and have the skills and experience required for service on our Board. The biographies below contain information regarding each of their experiences, qualifications and skills.

 

NOMINEES

 

The names of the nominees and certain information about them, including term of service as a Cadence director and age as of the 2011 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 eight nominees named above, if authority to do so is not withheld.

 

The Board recommends a vote FOR the election of each of the eight 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. If, however, the election of directors is contested, the directors will 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 outlined above 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 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 eight director nominees.

 

Overview

 

On March 16, 2011, Cadence’s Board of Directors adopted, subject to stockholder approval, an amendment and restatement of the 2000 Equity Incentive Plan, formerly known as the 2000 Nonstatutory Equity Incentive Plan. The amended and restated form of the 2000 Equity Incentive Plan is referred to in this proxy statement as the 2000 Plan, and the prior version is referred to as the Original Plan. The Board recommends that Cadence’s stockholders approve the 2000 Plan because it believes that employee ownership in Cadence serves the best interests of all stockholders by promoting its employees’ focus on the long-term increase in stockholder value. The 2000 Plan supports this goal by allowing Cadence to award equity-based compensation that aligns a portion of employee compensation with increasing stockholder value. The 2000 Plan permits the grant of stock options (including nonqualified stock options and incentive stock options), incentive stock and restricted stock units, which are referred to in this proxy statement as RSUs. The 2000 Plan provides for an increase in the number of shares authorized for issuance from 50,000,000 shares to 57,500,000 shares. No employee or consultant who is an executive officer of Cadence, who is a member of the Board of Directors or who beneficially owns 10% or more of Cadence’s common stock will be entitled to receive a stock award under the 2000 Plan unless the stock award will be granted to a person not previously employed by Cadence as a material inducement to such person becoming an employee of Cadence.

 

A copy of the 2000 Plan is attached as Appendix A to this proxy statement.

Key Data

 

The following table includes information regarding outstanding equity awards and shares available for future awards under Cadence’s equity plans as of January 1, 2011:

 

 

 

 

Broad-based equity compensation is an essential and long-standing element of Cadence’s culture and success. It continues to be critical to attracting and retaining the most talented employees and consultants.

 

In a challenging macroeconomic environment, Cadence’s net annual dilution of stockholder interests pursuant to the 1987, 1993, 1997 and 2000 Plans (including the effect of annual cancellations and forfeitures) in 2008, 2009 and 2010 was 1.10%, 0.0078%, and negative 2.28%, respectively.

 

Institutional Shareholder Services, referred to in this proxy statement as ISS, applies an alternate methodology to analyze the level of annual share usage relative to the Company’s industry group. The ISS methodology converts full value shares to option equivalents, and does not include the effect of annual cancellations and forfeitures. Based on this approach, Cadence’s three-year average annual burn rate has been 6.16%, which is below the ISS burn rate threshold of 7.26% applied to our industry.

 

Three-Year Burn Rate — ISS Methodology

 

 

 

 

Promotion of Good Corporate Governance Practices

 

Cadence designed the 2000 Plan to include a number of best practice provisions that it believes reinforce the alignment between stockholders’ interests and equity compensation arrangements for employees and consultants. These provisions include, but are not limited to, the following:

 

 

VOTE REQUIRED AND BOARD RECOMMENDATION

 

The Board recommends a vote FOR approval of the 2000 Plan. The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the annual meeting 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 2000 Plan.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL
OF THE 2000 PLAN.

 

2000 PLAN SUMMARY

 

The following summary of the material provisions of the 2000 Plan is qualified in its entirety by the complete text of the 2000 Plan, a copy of which is attached as Appendix A to this proxy statement.

 

GENERAL

 

The 2000 Plan provides for the grant of incentive stock options, nonstatutory stock options, incentive stock awards and restricted stock units. Incentive stock options granted under the 2000 Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code. Nonstatutory stock options granted under the 2000 Plan are not intended to qualify as incentive stock options under the Code. See “Federal Income Tax Information” below for a discussion of the tax treatment of awards that may be granted under the 2000 Plan.

PURPOSE

 

The 2000 Plan was adopted to give an opportunity to Cadence’s and its affiliates’ employees and consultants to purchase Cadence common stock or receive grants of incentive stock subject to performance-based or time-based vesting, to incentivize them to exert maximum efforts for the success of Cadence and its affiliates and to attract and retain the services of persons most capable of filling these positions.

 

ADMINISTRATION

 

The 2000 Plan provides that the Board shall administer the 2000 Plan and has the final power to interpret the 2000 Plan, including the power to prescribe, amend and rescind rules and regulations relating to the plan and to delegate administration of the 2000 Plan as described below. The Board has the power to determine which of the persons eligible under the 2000 Plan will be granted awards, the types of awards that will be granted, when and how each award will be granted, and the terms and provisions of each award to be granted in accordance with the provisions of the 2000 Plan. While Cadence intends to continue to grant stock awards with specified vesting criteria, as described under “Option Provisions — Option Exercise” below, the Board has the power to accelerate the exercise date and vesting of any stock award granted under the 2000 Plan. The Board may delegate the administration of the 2000 Plan to a committee, such as Cadence’s Compensation Committee, consisting of one or more members of the Board.

 

Once appointed, the committee will continue to serve until otherwise directed by the Board. At any time, the Board or the committee may delegate to a committee of one or more members of the Board the authority to grant awards under the 2000 Plan. In addition, the Board or the Committee may by resolution authorize one or more officers of Cadence to perform any or all tasks that the Board is authorized and empowered to do or perform under the 2000 Plan, to the extent permitted by applicable law, and for all purposes under the 2000 Plan, such officer or officers shall be treated as the Board; provided, however, that the resolution so authorizing such officer or officers will specify the maximum number of shares per stock award (if any) and the total number of shares (if any) such officer or officers may award pursuant to such delegated authority, and any such stock award will be subject to the form of stock award agreement previously approved by the Board or the Committee

 

The Board has delegated administration of the 2000 Plan to the Compensation Committee. However, any increase in the number of shares authorized for issuance under the 2000 Plan requires the approval of the full Board. As used in this proxy statement solely with respect to the 2000 Plan, the “Board” refers to any committee the Board appoints to administer the 2000 Plan as well as to the Board itself.

 

ELIGIBILITY

 

Incentive stock options may be granted under the 2000 Plan only to employees of Cadence and its affiliates. Employees and consultants of Cadence and its affiliates are eligible to receive nonstatutory stock options, incentive stock awards and restricted stock units under the 2000 Plan. Notwithstanding the foregoing, no employee or consultant who is an executive officer of Cadence, who is a member of the Board of Directors or who beneficially owns 10% or more of Cadence’s common stock is entitled to receive the grant of a stock award under the 2000 Plan unless the stock award is granted to a person not previously employed by Cadence as a material inducement to take employment with Cadence. In addition, the aggregate fair market value, determined at the time of grant, of the shares of common stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year, under the 2000 and all other plans of Cadence and its affiliates, may not exceed $100,000.

 

Almost all of Cadence’s and its subsidiaries’ approximately 4,600 employees, excluding Cadence’s executive officers, are eligible to receive awards under the 2000 Plan. Directors are not eligible to receive awards under the 2000 Plan.

 

STOCK SUBJECT TO THE 2000 PLAN

 

The shares of common stock reserved under the 2000 Plan (if approved by stockholders) will include reserved shares of common stock that are not subject to a grant or as to which the stock award granted has been forfeited

under the Cadence Design Systems, Inc. 1993 Nonstatutory Stock Incentive Plan, as amended and the Cadence Design Systems, Inc. 1997 Nonstatutory Stock Incentive Plan, as amended, which are collectively referred to in this proxy statement as the Prior Plans, and under the Original Plan, and, subject to stockholder approval of this proposal, an additional 7,500,000 shares of common stock. As of January 1, 2011, and without giving effect to this proposal, the number of shares available for grant under the Original Plan was 6,260,587, and the number of shares available for grant under the Prior Plans (in the aggregate) was 2,049,389.

 

If a stock award should expire, become unexercisable, be forfeited or otherwise terminate for any reason without having been exercised in full, then the unpurchased or forfeited shares that were subject to the award will, unless the 2000 Plan has been terminated, become available for future grant under the 2000 Plan. Additionally, shares subject to a stock award under the 2000 Plan may not again be made available for issuance under the 2000 Plan if such shares are: (i) shares used to pay the exercise price of an option, (ii) shares delivered to or withheld by the Company to pay the withholding taxes related to a stock award or (iii) shares repurchased on the open market with the proceeds of an option exercise.

 

Subject to approval of this proposal, the aggregate number of shares that may be issued pursuant to the exercise of incentive stock options granted under the 2000 Plan will not exceed 57,500,000, which number will be calculated and adjusted for changes in capitalization only to the extent that such calculation or adjustment will not affect the status of any option intended to qualify as an incentive stock option under Section 422 of the Code.

 

OPTION PROVISIONS

 

The following describes the permissible terms of options granted under the 2000 Plan. Individual option grants may be more restrictive as to any or all of these permissible terms.

 

Exercise Price.  The exercise price of options granted under the 2000 Plan may not be less than the fair market value of Cadence’s common stock on the grant date. In the case of an incentive stock option granted to a 10% stockholder, the exercise price of the option may not be less than 110% of the fair market value on the grant date. The fair market value for purposes of the 2000 Plan is the closing price of Cadence’s common stock on the grant date as reported by NASDAQ.

 

Payment of Exercise Price.  The exercise price of options granted under the 2000 Plan may be paid by cash, check, promissory note, shares of Cadence common stock with a fair market value on the date of exercise equal to the aggregate exercise price of the shares as to which the option is being exercised, or any combination of these methods, or other consideration and payment method as may be determined by the Board. In determining the type of consideration to accept, the Board considers whether the acceptance of such consideration may be reasonably expected to benefit Cadence. The particular forms of consideration available to exercise a specific option are set forth in the terms of the option agreement for that option.

 

Option Exercise.  Options granted under the 2000 Plan become exercisable at the times and under the conditions determined by the Board. The Board has the power to accelerate the time at which an option may first be exercised or the time during which an option will vest.

 

Term.  The maximum term of options granted under the 2000 Plan is seven years. And, the maximum term of incentive stock options granted to a 10% stockholder is five years. Options granted under the 2000 Plan generally terminate three months (twelve months in the case of termination due to death or disability), or such other period of time as determined by the Board, after termination of the optionee’s employment or consulting relationship with Cadence or one of its affiliates.

 

INCENTIVE STOCK AWARD AND RESTRICTED STOCK UNIT PROVISIONS

 

The following describes the permissible terms of incentive stock awards and restricted stock units granted under the 2000 Plan.

 

Sales Price and Payment of Sales Price.  The Board determines the price, if any, at which shares of incentive stock or shares underlying restricted stock units will be sold or awarded to a participant under the 2000 Plan, subject to applicable law. The sales price may vary among participants and may be below the fair market value of the shares

of common stock on the grant date. The Board also determines the form of consideration that may be used to pay the sales price, if any, of shares of incentive stock or shares underlying restricted stock units.

 

Vesting.  The grant, issuance, retention and vesting of shares of incentive stock and restricted stock units granted under the 2000 Plan will be at the times and in the installments determined by the Board. The timing of the grant, the issuance, the ability to retain shares and the vesting of shares of incentive stock and restricted stock units may be subject to continued service, the passage of time and/or the performance criteria as the Board deems appropriate as described below. The Board may accelerate the vesting of an incentive stock award and restricted stock units in the event of a participant’s termination of service as an employee or consultant, a change in control of Cadence or a similar event.

 

EFFECT OF CERTAIN CORPORATE EVENTS

 

The 2000 Plan provides that, in the event of a change in control of Cadence, the surviving or acquiring corporation will assume the awards outstanding under the 2000 Plan or substitute them with similar awards. If the surviving or acquiring corporation refuses to assume such awards or to substitute similar awards, (i) the vesting of awards held by participants then providing services to Cadence as an employee or consultant will be accelerated prior to the change in control event and will terminate if not exercised after such acceleration and at, or prior to, such event, and (ii) all other awards outstanding under the 2000 Plan, if any, will terminate if not exercised prior to the change in control event.

 

ADJUSTMENT PROVISIONS

 

Upon an increase or decrease in the number of issued shares of Cadence common stock resulting from a stock split, the payment of a stock dividend or any other increase or decrease effected without receipt of consideration by Cadence, the number of shares authorized for issuance under the 2000 Plan, and the number of shares covered by each outstanding stock award and the price per share of common stock covered by each outstanding stock award, will be equitably adjusted for any increase or decrease.

 

DURATION, AMENDMENT AND TERMINATION

 

The Board may suspend or terminate the 2000 Plan without stockholder approval or ratification at any time or from time to time. Unless sooner terminated, the 2000 Plan will terminate on March 16, 2021. However, any suspension or termination of the 2000 Plan will not adversely affect awards previously granted and awards will remain in full force and effect, unless mutually agreed upon in a writing signed by the plan participant and Cadence.

 

The Board may also amend the 2000 Plan at any time or from time to time. However, if the amendment would require stockholder approval to comply with any securities exchange or national market system listing requirements or any other applicable law, the amendment will not be effective unless approved by Cadence stockholders before or after its adoption by the Board. The Board may submit any other amendment to the 2000 Plan for stockholder approval. Any amendment of the 2000 Plan will not adversely affect awards previously granted unless mutually agreed upon in a writing signed by the plan participant and Cadence.

 

RESTRICTIONS ON TRANSFER

 

Under the 2000 Plan, except as specifically provided in a stock award agreement, a stock award may not be transferred by the holder other than by will or by the laws of descent and distribution and, during the lifetime of the holder, may be exercised only by the holder or the holder’s legal representative. However, the holder may designate in writing a third party who may exercise the option in the event of the holder’s death.

 

FEDERAL INCOME TAX INFORMATION

 

The following is only a summary of the federal income tax consequences with respect to the grant and exercise of awards under the 2000 Plan based upon applicable federal law as currently in effect, is not complete, does not discuss the income tax laws of any state or foreign country in which a participant may reside, and is subject to

change. Participants in the 2000 Plan should consult their own tax advisors regarding the specific tax consequences to them of participating in the 2000 Plan.

 

Nonstatutory Stock Options.

 

Options granted under the 2000 Plan that are not intended to qualify as incentive stock options are referred to in this proxy statement as nonstatutory stock options, or NSOs. A participant will not recognize any taxable income when an NSO is granted. The participant will generally recognize ordinary income upon the exercise of an NSO equal to the amount by which the fair market value of the shares on the exercise date exceeds the exercise price. The ordinary income recognized by a participant will be subject to applicable tax withholding, including applicable income and employment taxes.

 

Upon the disposition of the shares acquired upon exercise of an NSO, the participant will recognize gain or loss equal to the difference between the amount realized on the disposition and the sum of the exercise price plus the amount of ordinary income recognized by the participant as a result of the exercise of the NSO. Any gain or loss on the subsequent disposition of shares acquired through the exercise of an NSO will generally be treated as long-term or short-term capital gain or loss, depending on whether the holding period for the shares exceeds one year at the time of the disposition.

 

Cadence will generally be entitled to a deduction to the extent a participant realizes ordinary income upon the exercise of an NSO.

 

Incentive Stock Options.

 

Although the 2000 Plan permits grants of incentive stock options, referred to in this proxy statement as ISOs, Cadence has not granted any options intended to be ISOs in the past several years and does not intend to do so in the foreseeable future. ISOs granted under the 2000 Plan are intended to be eligible for the favorable federal income tax treatment accorded to “incentive stock options” under Section 422 of the Code. Generally, a participant does not recognize any taxable income at the time of the grant of an ISO. In addition, the participant will not recognize income for regular federal income or employment tax purposes at the time of the exercise of an ISO. However, a participant may be subject to an alternative minimum tax upon the exercise of an ISO. Cadence is not entitled to a deduction at the time of the grant or the exercise of an ISO.

 

If the participant holds the shares acquired through the exercise of an ISO for at least one year from the date of exercise and two years from the grant date, referred to in this proxy statement as the ISO holding period, the participant generally will realize long-term capital gain or loss upon disposition of the shares. This gain or loss will generally equal the difference between the amount realized upon the disposition of the shares and the exercise price of the shares.

 

If a participant disposes of the shares acquired through the exercise of an ISO before expiration of the ISO holding period, referred to in this proxy statement as a disqualifying disposition, the participant will have: (i) ordinary income equal to the lesser of (a) the amount by which the sales price of such shares exceeds the exercise price, and (b) the amount by which the fair market value of such shares on the date of exercise exceeds the exercise price; (ii) capital gain equal to the amount by which the sales price of such shares exceeds the fair market value of such shares on the date of exercise; and capital loss equal to the amount by which the exercise price exceeds the sales price of such shares.

 

In the event of a disqualifying disposition, Cadence will generally be entitled to a deduction to the extent that the participant realized ordinary income as a result of the disqualifying disposition.

 

Incentive Stock Awards.

 

The tax consequences to a participant who receives an incentive stock award pursuant to the 2000 Plan will vary depending on whether or not the participant makes a timely Section 83(b) election under the Code with respect to the unvested shares of incentive stock. The Board has the discretion to establish, in accordance with the 2000 Plan, the terms of incentive stock awards, including whether or not participants may make Section 83(b) elections under the Code. A participant who does not make a timely Section 83(b) election with respect to unvested shares of incentive stock will not recognize any taxable income upon the award of the shares. However, when the restrictions

subsequently lapse on the shares, the participant will recognize ordinary income in the amount by which the fair market value of the shares on the date the restrictions lapse with respect to those shares exceeds the purchase price (if any) paid for the shares. A participant who makes a timely Section 83(b) election with respect to unvested shares of incentive stock will be required to recognize ordinary income in the year the incentive stock award is granted equal to the amount by which the fair market value of the shares on the award date exceeds the purchase price (if any) paid for the shares. The fair market value of the shares will be determined as if the shares were not restricted. A participant who makes a Section 83(b) election for unvested shares of incentive stock will not recognize any additional income when the restrictions on those shares subsequently lapse.

 

Cadence will generally be entitled to a deduction equal to the amount of ordinary income recognized by a participant in connection with the acquisition of shares of Cadence common stock pursuant to an incentive stock award.

 

Restricted Stock Units.

 

Participants who are granted restricted stock units do not recognize income at the time of the grant. When the award vests or is paid, participants generally recognize ordinary income in an amount equal to the fair market value of the units at such time, and Cadence will receive a corresponding deduction.

 

STOCK PRICE

 

On March 15, 2011, the closing price of Cadence common stock as reported by NASDAQ was $9.44.

 

PARTICIPATION IN THE 2000 PLAN

 

Other than in limited cases of new executives receiving awards as a material inducement to such person becoming an employee of Cadence, Cadence’s executive officers were not eligible to receive stock awards under the Original Plan and instead have historically received stock awards under the 1987 Plan. Cadence’s executive officers and non-employee directors will remain ineligible to receive stock awards under the 2000 Plan. As of January 1, 2011, stock awards covering 173,303,079 shares had been granted over the life of the Original Plan and the Prior Plans, which includes stock awards that were granted to former employees no longer employed by Cadence, and also includes forfeited shares.

 

Because the Board has the discretion to grant awards under the 2000 Plan, it is not possible as of the date of this proxy statement to determine future awards that will be received by executive officers and other employees under the 2000 Plan.

 

Cadence maintains the Senior Executive Bonus Plan, referred to in this proxy statement as the Bonus Plan, which was most recently approved by stockholders on May 10, 2006.

 

In order to allow for certain awards under the Bonus Plan to qualify as tax-deductible “performance-based compensation” within the meaning of Section 162(m) of the Code, which is referred to in this proxy statement as Section 162(m), Cadence is asking stockholders to re-approve the material terms of the performance goals under the Bonus Plan. One of the requirements of “performance-based compensation” for purposes of Section 162(m) of the Code is that the material terms of the performance goals under which compensation may be paid be disclosed to and approved by Cadence’s stockholders every five years. Stockholders are not being asked to approve any amendment to the Bonus Plan or to approve the Bonus Plan itself, but are only asked to re-approve the material terms for compliance with Section 162(m).

 

The Board believes that it is in the best interests of Cadence and its stockholders to provide for a stockholder-approved plan under which bonuses paid to its executive officers can be deducted by Cadence for federal income tax purposes. Accordingly, Cadence has structured the Bonus Plan in a manner such that payments made under the

Bonus Plan can satisfy the requirements for “performance-based compensation” within the meaning of Section 162(m). Under Section 162(m), the federal income tax deductibility of compensation paid to Cadence’s CEO and certain executive officers may be limited to the extent that such compensation exceeds $1,000,000 in any fiscal year. However, compensation that satisfies the requirements for “performance-based compensation” as defined in Section 162(m) is not subject to this limit and, therefore, is generally deductible in full by Cadence. One of the requirements of “performance-based compensation” for purposes of Section 162(m) of the Code is that the material terms of the performance goals under which compensation may be paid be disclosed to and approved by Cadence’s stockholders every five years. For purposes of Section 162(m), the material terms of the performance goals under which compensation may be paid include (i) the employees eligible to receive compensation, (ii) a description of the business criteria on which the performance goals are based and (iii) the maximum amount of compensation that can be paid to an employee under the performance goals. Each of these aspects of the Bonus Plan is discussed below. A copy of the Bonus Plan is attached as Appendix B to this proxy statement.

 

VOTE REQUIRED AND BOARD RECOMMENDATION

 

The Board of Directors recommends a vote FOR re-approval of the material terms of the performance goals under the Bonus Plan. The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the annual meeting 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 re-approval of the material terms of the performance goals under the Bonus Plan.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RE-APPROVAL OF THE PERFORMANCE GOALS UNDER THE SENIOR EXECUTIVE BONUS PLAN FOR
COMPLIANCE WITH SECTION 162(m) OF THE CODE.

 

SUMMARY OF THE BONUS PLAN

 

The following summary of the material provisions of the Bonus Plan is qualified in its entirety by the complete text of the Bonus Plan, a copy of which is attached as Appendix B to this proxy statement.

 

GENERAL

 

The Bonus Plan provides a framework under which Cadence can operate an executive bonus program that can satisfy the standard of “performance-based compensation” within the meaning of Section 162(m) of the Code.

 

PURPOSE

 

The purpose of the Bonus Plan is to motivate and reward Cadence’s CEO, and the individuals who are part of Cadence’s senior executive management team as designated by the CEO, in order to enhance stockholder value through incentivizing the improvement of Cadence’s profitability and achievement of Cadence’s strategic goals.

 

ADMINISTRATION

 

The Bonus Plan is administered by the Compensation Committee. The Compensation Committee has the sole discretion and authority to: (i) administer and interpret the Bonus Plan in accordance with Section 162(m) of the Code as appropriate; (ii) prescribe the terms and conditions of any awards granted under the Bonus Plan; (iii) adopt rules and guidelines for the administration of the Plan that are consistent with the Bonus Plan; and (iv) interpret, amend or revoke any such rules any guidelines. The decisions of the Compensation Committee are in every case final and binding on all persons having an interest in the Bonus Plan.

ELIGIBILITY

 

The Bonus Plan provides that bonuses may be paid under the Bonus Plan to the CEO and the individuals who are part of Cadence’s senior executive management team as designated by the CEO, who are collectively referred to in this section of the proxy statement as executives. As of March 15, 2011, 8 employees, including executive officers, as designated by the CEO, were eligible to participate in the Bonus Plan during fiscal 2011. Cadence’s non-employee directors are not entitled to participate in the Bonus Plan.

 

PERFORMANCE CRITERIA

 

The Bonus Plan provides for cash bonus payments to the executives. The amount of a performance-based bonus payment varies depending on the extent to which Cadence achieves its performance criteria within the applicable Bonus Plan measurement period. The performance criteria may be measured individually or in combination, and may be applied to Cadence’s performance as a whole or, alternatively, to individual business units of Cadence. In addition, the performance criteria can be measured by Cadence’s performance alone or, alternatively, measured relative to a designated group of companies or relative to a pre-established target or a previous performance period’s results. The performance criteria will include one or more of the following (and in each case, on a GAAP or non-GAAP basis, if applicable): (a) cash flow (including measures of operating or free cash flow), (b) earnings per share (diluted or basic), (c) earnings per share from continuing operations, (d) earnings (including but not limited to earnings before interest, taxes, depreciation and amortization), (e) return on equity, (f) total stockholder return, (g) return on capital, (h) return on assets or net assets, (i) revenue or revenue growth, (j) income or net income, (k) operating income or net operating income, (l) operating profit or net operating profit, (m) operating margin, (n) return on operating revenue, (o) market share, (p) customer loyalty or satisfaction, as measured by a customer loyalty index determined by an independent consultant or expert in measuring such matters, (q) return on investment, (r) stock price, (s) market capitalization, (t) cash from operations, (u) product innovation or release schedule, (v) capital expenditure, (w) working capital, (x) cost of capital, (y) cost reductions, (z) bookings and segments of bookings, such as net product bookings, (aa) market penetration, and (bb) technology development or proliferation.

 

To the extent consistent with Section 162(m) of the Code, the Compensation Committee may (i) appropriately adjust any evaluation of performance under a performance criteria to eliminate the effects of charges for restructurings, discontinued operations, extraordinary items and all items of gain, loss or expense determined to be extraordinary or unusual in nature or related to the disposal of a segment of a business or related to a change in accounting principles all as determined in accordance with applicable accounting provisions, as well as the cumulative effect of accounting changes, in each case as determined in accordance with generally accepted accounting principles or identified in Cadence’s financial statements or notes to the financial statements, and (ii) appropriately adjust any evaluation of performance under a performance criteria to exclude any of the following events that occur during a performance period: (a) asset write-downs, (b) litigation, claims, judgments or settlements, (c) the effect of changes in tax law or other such laws or provisions affecting reported results, (d) accruals for reorganization and restructuring programs and (e) accruals of any amounts for payment under the Bonus Plan or any other compensation arrangement maintained by Cadence.

 

The performance bonus amount payable to each executive is based on a target bonus, which is in turn based on the extent to which one or more relevant performance criteria targets identified for such criteria are realized. Any performance criteria may be measured over all or part of a fiscal year. If all of the performance criteria are to be measured over the entire fiscal year, the Compensation Committee will establish the target bonus amount, the relevant performance criteria and the respective targets for such criteria within the first 90 days of each fiscal year. If a shorter performance period is used, the Compensation Committee will establish the target bonus, the relevant performance criteria and the respective targets for such criteria within the first quarter of the shorter performance period.

 

The Compensation Committee may, in its discretion, direct that any performance bonus be reduced below the amount as calculated above. Thus, in administering the Bonus Plan, the Compensation Committee may establish performance criteria and targeted bonus amounts that would allow the Compensation Committee to establish a potential bonus amount at the high end of its targeted range, and then utilize its discretion to reduce the amount of

the actual bonus paid to a participant. Further, the Compensation Committee may, in its discretion, increase the bonus amount otherwise payable to any executive upon achievement of the designated targets, but only if the executive is not covered by Section 162(m) of the Code.

 

MAXIMUM AMOUNT OF COMPENSATION PAYABLE UNDER THE BONUS PLAN

 

The maximum aggregate amount payable under the Bonus Plan as a performance bonus to any executive is $5,000,000 for any fiscal year.

 

Any bonus under the Bonus Plan will be paid as soon as practicable after the end of the bonus measurement period, but only after the Compensation Committee has certified that the performance criteria and targets established for the relevant period have been achieved. In addition, the executive must remain employed by Cadence until the time the bonus payments are distributed, except in the event of death or disability or unless otherwise provided in a written agreement between Cadence and the executive. If the executive was not employed for the entire bonus measurement period, he or she may be entitled to receive a prorated amount of the bonus amount payable.

 

CLAWBACK

 

Executives participating in the Bonus Plan and all amounts earned by them under the Bonus Plan on or after January 1, 2010 are subject to the Cadence Design Systems, Inc. Clawback Policy as in effect from time to time (see description in the “Compensation Discussion and Analysis” section below).

 

AWARDS UNDER THE BONUS PLAN

 

No payments were made under the Bonus Plan for fiscal 2008 or fiscal 2009. Please refer to the Summary Compensation Table below under “Compensation of Executive Officers” for the amounts paid under the Bonus Plan for fiscal 2010 to the Named Executive Officers. For fiscal 2010, all current executive officers as a group were paid a total of $1,650,818 under the Bonus Plan. Non-employee directors and employees who are not executive officers do not participate in the Bonus Plan. Because payments under the Bonus Plan for fiscal 2011 will be determined by comparing actual performance to the performance targets set by the Compensation Committee, it is not possible to state the amounts that will be paid under the Bonus Plan in fiscal 2011.

 

AMENDMENT AND TERMINATION

 

The Compensation Committee may terminate the Bonus Plan at any time, for any or no reason, and may also amend the Bonus Plan in order to reduce the amount of any executive’s bonus payment at any time, for any or no reason.

 

NON-EXCLUSIVITY

 

Nothing contained in the Bonus Plan prevents the Board of Directors from adopting other or additional compensation arrangements that provide for bonuses or other forms of compensation for Cadence’s executive officers, directors or other employees, whether or not stockholders approve the Bonus Plan. However, any such other or additional compensation arrangements will not be designed to provide compensation to Bonus Plan participants to make up for a failure to achieve any performance goals or any part of the compensation they might have received under the Bonus Plan had such performance goals been achieved. Such other arrangements may or may not qualify for deductibility under Section 162(m) of the Code and may be applicable only for specific executives, directors or employees or may be generally applicable.

 

In April of 1987, Cadence’s Board of Directors originally adopted the 1987 Stock Incentive Plan. In February of 2007, the Compensation Committee approved the 1987 Plan, as amended, which was subsequently approved by Cadence’s stockholders on May 9, 2007. The 1987 Stock Incentive Plan, as amended in February and July 2007 and as further amended by the Compensation Committee in the first quarter of 2011, is referred to in this proxy statement as the 1987 Plan.

 

In order to allow for certain awards under the 1987 Plan to qualify as tax-deductible “performance-based compensation” within the meaning of Section 162(m) of the Code, which is referred to in this proxy statement as Section 162(m), Cadence is asking stockholders to re-approve the material terms of the performance goals under the 1987 Plan. Stockholders are not being asked to approve any amendment to the 1987 Plan or to approve the 1987 Plan itself in this Proposal 4, but are only asked to re-approve the material terms for compliance with Section 162(m) of the Code.

 

The Board believes that it is in the best interests of Cadence and its stockholders to continue providing an equity incentive plan under which equity-based compensation awards made to executive officers can be deducted by Cadence for federal income tax purposes. The 1987 Plan has been structured in a manner such that awards granted under it can satisfy the requirements for “performance-based compensation” within the meaning of Section 162(m). Under Section 162(m), the federal income tax deductibility of compensation paid to Cadence’s CEO and certain executive officers may be limited to the extent that such compensation exceeds $1,000,000 in any fiscal year. However, compensation that satisfies the requirements for “performance-based compensation” as defined in Section 162(m) is not subject to this limit and, therefore, is generally deductible in full by Cadence. One of the requirements of “performance-based compensation” for purposes of Section 162(m) is that the material terms of the performance goals under which compensation may be paid be disclosed to and approved by Cadence’s stockholders every five years.

 

For purposes of Section 162(m), the material terms include (i) the employees eligible to receive compensation, (ii) a description of the business criteria on which the performance goals are based and (iii) the maximum amount of compensation that can be paid to an employee under the performance goals. Each of these aspects is discussed below. A copy of the 1987 Plan with the proposed share increase and revised termination date, which are discussed further in Proposal 5 below is attached as Appendix C to this proxy statement.

 

VOTE REQUIRED AND BOARD RECOMMENDATION

 

The Board recommends a vote FOR re-approval of the material terms of the performance goals under the 1987 Plan. The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the annual meeting 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 re-approval of the material terms of the performance goals under the 1987 Plan.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RE-APPROVAL OF THE PERFORMANCE GOALS UNDER THE 1987 STOCK INCENTIVE PLAN.

 

SUMMARY OF THE 1987 PLAN

 

The following summary of the material provisions of the 1987 Plan is qualified in its entirety by the complete text of the 1987 Plan a copy of which is attached as Appendix C to this proxy statement. Appendix C also reflects the share increase and revised termination date requested in Proposal 5.

GENERAL

 

The 1987 Plan provides for the grant of incentive stock options, nonstatutory stock options, incentive stock awards and restricted stock units. Incentive stock options granted under the 1987 Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code. Nonstatutory stock options granted under the 1987 Plan are intended not to qualify as incentive stock options under the Code. See “Federal Income Tax Information” below for a discussion of the tax treatment of awards that may be granted under the 1987 Plan.

 

PURPOSE

 

The 1987 Plan was adopted to provide a means by which employees of and consultants to Cadence and its affiliates (including officers and directors who are also employees or consultants) could be given an opportunity to purchase Cadence common stock or receive grants of incentive stock subject to performance-based or time-based vesting to attract and retain the services of persons most capable of filling these positions, and to provide incentives for these persons to exert maximum efforts for the success of Cadence and its affiliates.

 

ADMINISTRATION

 

The 1987 Plan provides that the Board shall administer the 1987 Plan and has the final power to interpret the 1987 Plan, including the power to prescribe, amend and rescind rules and regulations relating to the plan and to delegate administration of the 1987 Plan as described below. The Board has the power to determine which of the persons eligible under the 1987 Plan will be granted awards, the types of awards that will be granted, when and how each award will be granted, and the terms and provisions of each award to be granted in accordance with the provisions of the 1987 Plan. While Cadence intends to continue to grant stock awards with specified vesting criteria, as described under “Option Provisions — Option Exercise” below, the Board has the power to accelerate the exercise date and vesting of any stock award granted under the 1987 Plan. The Board may delegate the administration of the 1987 Plan to a committee, such as Cadence’s Compensation Committee, consisting of one or more members of the Board.

 

Once appointed, the committee will continue to serve until otherwise directed by the Board. At any time, the Board or the committee may delegate to a committee of one or more members of the Board the authority to grant awards under the 1987 Plan. Members of the Board who are either eligible for awards or have been granted awards may vote on any matters affecting the administration of the 1987 Plan or the grant of any awards thereunder, but may not grant awards to themselves. However, such members may be counted in determining the existence of a quorum at a Board or committee meeting during which action is taken with respect to the granting of such awards.

 

The Board has delegated administration of the 1987 Plan to the Compensation Committee of the Board. However, any increase in the number of shares authorized for issuance under the 1987 Plan requires the approval of the full Board. As used in this proxy statement solely with respect to the 1987 Plan, the “Board” refers to any committee the Board appoints to administer the 1987 Plan as well as to the Board itself.

 

ELIGIBILITY

 

Incentive stock options may be granted under the 1987 Plan only to Cadence employees or employees of its affiliates. Employees of Cadence and its affiliates (including officers and directors who are also Cadence employees or employees of its affiliates) as well as consultants are eligible to receive nonstatutory stock options, incentive stock awards and restricted stock units under the 1987 Plan. No incentive stock option may be granted under the 1987 Plan to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of Cadence or any of its affiliates, such person being referred to below as a 10% stockholder, unless the option exercise price is at least 110% of the fair market value of the common stock subject to the option on the grant date, and the term of the option does not exceed five years from the grant date. In addition, the aggregate fair market value, determined at the time of grant, of the shares of common stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year, under the 1987 and all other plans of Cadence and its affiliates, may not exceed $100,000.

No person may be granted awards under the 1987 Plan covering more than an aggregate of 2,216,702 shares of common stock in any calendar year.

 

Almost all of Cadence’s and its subsidiaries’ approximately 4,600 employees, including Cadence’s 8 executive officers, are eligible to receive awards under the 1987 Plan. Non-employee directors are not eligible to receive awards under the 1987 Plan.

 

STOCK SUBJECT TO THE 1987 PLAN

 

75,370,100 shares of common stock have been authorized for issuance over the life of the 1987 Plan, with a limit of 5,000,000 of such shares authorized for issuance as incentive stock or restricted stock units. As of January 1, 2011, 7,997,314 shares of common stock remained available for issuance under the 1987 Plan, of which no more than 2,089,876 shares may be issued as awards of incentive stock or restricted stock units. These limits are subject to the provisions of the 1987 Plan relating to adjustments upon changes in common stock described below. If any award granted under the 1987 Plan expires, becomes unexercisable, is forfeited or otherwise terminates, in whole or in part, without having been exercised, the unpurchased or forfeited shares again become available for issuance under the 1987 Plan.

 

OPTION PROVISIONS

 

The following describes the permissible terms of options granted under the 1987 Plan. Individual option grants may be more restrictive as to any or all of these permissible terms.

 

Exercise Price.  The exercise price of options granted under the 1987 Plan may not be less than the fair market value of Cadence’s common stock on the grant date. In the case of an incentive stock option granted to a 10% stockholder, the exercise price of the option may not be less than 110% of the fair market value on the grant date. The fair market value for purposes of the 1987 Plan is the closing price of Cadence’s common stock on the grant date as reported by NASDAQ.

 

Payment of Exercise Price.  The exercise price of options granted under the 1987 Plan may be paid by cash, check, shares of Cadence common stock with a fair market value on the date of surrender equal to the aggregate exercise price of the shares as to which the option is being exercised, or any combination of these methods, or other consideration and payment method as may be determined by the Board. In determining the type of consideration to accept, the Board considers whether the acceptance of such consideration may be reasonably expected to benefit Cadence. The particular forms of consideration available to exercise a specific option are set forth in the terms of the option agreement for that option.

 

Option Exercise.  Options granted under the 1987 Plan become exercisable at the times and under the conditions, including the achievement of performance or other criteria with respect to Cadence and/or the optionee, as determined by the Board. The Board has the power to accelerate the time at which an option may first be exercised or the time during which an option will vest.

 

Term.  The maximum term of options granted under the 1987 Plan is seven years. In all cases, the maximum term of incentive stock options granted to a 10% stockholder is five years. Options granted under the 1987 Plan generally terminate three months, or such longer period of time as determined by the Board, after termination of the optionee’s employment or consulting relationship with Cadence or one of its affiliates.

 

INCENTIVE STOCK AWARD AND RESTRICTED STOCK UNIT PROVISIONS

 

The following describes the permissible terms of incentive stock awards and restricted stock units granted under the 1987 Plan.

 

Sales Price and Payment of Sales Price.  The sales price, if any, at which shares of incentive stock or shares underlying restricted stock units will be sold or awarded to a participant under the 1987 Plan will be determined by the Board. The sales price may vary among participants and may be below the fair market value of the shares of common stock on the grant date. The Board also will determine the form of consideration that may be used to pay the sales price, if any, of shares of incentive stock or shares underlying restricted stock units.

Vesting.  The grant, issuance, retention and vesting of shares of incentive stock and restricted stock units granted under the 1987 Plan will be at the times and in the installments as determined by the Board. The timing of the grant, the issuance, the ability to retain shares and the vesting of shares of incentive stock and restricted stock units may be subject to continued service, the passage of time and/or the performance criteria as the Board deems appropriate as described below. However, if the vesting of the incentive stock or restricted stock units is based solely on continued service, the award may not vest in full sooner than three years after the grant date and may not have a vesting schedule more favorable, at any point in time, than what would become vested under a monthly pro rata vesting schedule (i.e., 1/36th per month) over those three years. If vesting is also subject to the achievement of performance criteria, the award may not vest in full sooner than one year after the grant date. The Board may accelerate the vesting of an incentive stock award and restricted stock units in the event of a participant’s termination of service as an employee or consultant, a change in control of Cadence or a similar event, provided that, in the case of incentive stock awards and restricted stock units that are intended to qualify as “performance based compensation” under Section 162(m) of the Code, the acceleration complies with the regulations relating to Section 162(m).

 

Qualifying Performance Criteria.  The performance criteria for any incentive stock award or restricted stock unit that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code will be any one or more of the following performance criteria as determined pursuant to an objective formula, either individually, alternatively or in any combination, applied either to Cadence as a whole or to a Cadence business unit, segment or affiliate, either individually, alternatively or in any combination, and measured over a performance period determined by the Board, on an absolute basis or relative to a pre-established target, to previous results or to a designated comparison group, in each case as specified by the Board in the incentive stock award or restricted stock unit (and in each case on a GAAP or non-GAAP basis, if applicable): (a) cash flow (including measures of operating or free cash flow), (b) earnings per share (diluted or basic), (c) earnings per share from continuing operations, (d) earnings (including but not limited to earnings before interest, taxes, depreciation and amortization), (e) return on equity, (f) total stockholder return, (g) return on capital, (h) return on assets or net assets, (i) revenue or revenue growth, (j) income or net income, (k) operating income or net operating income, (l) operating profit or net operating profit, (m) operating margin, (n) return on operating revenue, (o) market share, (p) customer loyalty or satisfaction as measured by a customer loyalty or satisfaction index determined by an independent consultant or expert in measuring such matters, (q) return on investment, (r) stock price, (s) market capitalization, (t) cash from operations, (u) product innovation or release schedule, (v) capital expenditure, (w) working capital, (x) cost of capital, (y) cost reductions, (z) bookings and segments of bookings such as net product bookings, (aa) market penetration, and (bb) technology development or proliferation.

 

The Board, in its discretion, may reduce the number of shares granted, issued, retainable and/or vested under an incentive stock award or restricted stock unit on account of either financial performance or personal performance evaluations, despite the satisfaction of any performance criteria. In addition, the Board may appropriately adjust any evaluation of performance under qualifying performance criteria to exclude any of the following events that occurs during a performance period: (a) asset write-downs; (b) litigation or claim judgments or settlements; (c) the effect of changes in tax laws, accounting principles or other laws and provisions affecting reported results; (d) accruals for reorganization and restructuring programs; and (e) any extraordinary non-recurring items as described in management’s discussion and analysis of financial condition and results of operations in Cadence’s annual report to stockholders for the applicable year.

 

EFFECT OF CERTAIN CORPORATE EVENTS

 

The 1987 Plan provides that, in the event of a change in control of Cadence, the surviving or acquiring corporation shall assume the awards outstanding under the 1987 Plan or provide substitute similar awards. If the surviving or acquiring corporation refuses to assume such awards or to substitute similar awards, (i) the vesting of awards held by participants then providing services to Cadence as an employee or consultant will be accelerated prior to the change in control event and will terminate if not exercised after such acceleration and at or prior to such event, and (ii) all other awards outstanding under the 1987 Plan, if any, will terminate if not exercised prior to the change in control event.

ADJUSTMENT PROVISIONS

 

Upon an increase or decrease in the number of issued shares of Cadence common stock resulting from a stock split, the payment of a stock dividend or any other increase or decrease effected without receipt of consideration by Cadence, the number of shares authorized for issuance under the 1987 Plan, and the number of shares covered by each outstanding stock award and the price per share of common stock covered by each outstanding stock award, will be equitably adjusted for any increase or decrease.

 

DURATION, AMENDMENT AND TERMINATION

 

The Board may suspend or terminate the 1987 Plan without stockholder approval or ratification at any time or from time to time. Unless sooner terminated, the 1987 Plan will terminate on May 8, 2017, unless extended as requested in Proposal 5. However, any suspension or termination of the 1987 Plan will not adversely affect awards previously granted and awards will remain in full force and effect, unless mutually agreed upon in a writing signed by the plan participant and Cadence.

 

The Board may also amend the 1987 Plan at any time or from time to time. However, no amendment will be effective unless approved by Cadence stockholders before or after its adoption by the Board if the amendment would require stockholder approval to comply with Rule 16b-3 of the Exchange Act, Section 422 of the Code or any securities exchange or national market system listing requirements. The Board may submit any other amendment to the 1987 Plan for stockholder approval, including, but not limited to, amendments intended to satisfy the requirements of Section 162(m) of the Code regarding the exclusion of performance-based compensation from the limitation on the deductibility of compensation paid to certain employees. Any amendment of the 1987 Plan will not adversely affect awards previously granted unless mutually agreed upon in a writing signed by the participant and Cadence.

 

RESTRICTIONS ON TRANSFER

 

Under the 1987 Plan, except as specifically provided in a stock option agreement or incentive stock agreement, a stock award may not be transferred by the holder other than by will or by the laws of descent and distribution and, during the lifetime of the holder, may be exercised only by the holder or the holder’s legal representative. However, the holder may designate in writing a third party who may exercise the option in the event of the holder’s death.

 

FEDERAL INCOME TAX INFORMATION

 

The following is only a summary of the federal income tax consequences with respect to the grant and exercise of awards under the 1987 Plan based upon applicable federal law as currently in effect, is not complete, does not discuss the income tax laws of any state or foreign country in which a participant may reside, and is subject to change. Participants in the 1987 Plan should consult their own tax advisors regarding the specific tax consequences to them of participating in the 1987 Plan.

 

Nonstatutory Stock Options.

 

Options granted under the 1987 Plan that are not intended to qualify as incentive stock options are referred to as nonstatutory stock options, or NSOs. A participant will not recognize any taxable income when an NSO is granted. The participant will generally recognize ordinary income upon the exercise of an NSO equal to the amount by which the fair market value of the shares on the exercise date exceeds the exercise price. The ordinary income recognized by a participant will be subject to applicable tax withholding, including applicable income and employment taxes.

 

Upon the disposition of the shares acquired upon exercise of an NSO, the participant will recognize gain or loss equal to the difference between the amount realized on the disposition and the sum of the exercise price plus the amount of ordinary income recognized by the participant as a result of the exercise of the NSO. Any gain or loss on the subsequent disposition of shares acquired through the exercise of an NSO will generally be treated as long-term or short-term capital gain or loss, depending on whether the holding period for the shares exceeds one year at the time of the disposition.

 

Cadence will generally be entitled to a deduction to the extent a participant realizes ordinary income upon the exercise of an NSO.

Incentive Stock Options.

 

Although the 1987 Plan permits grants of incentive stock options, referred to as ISOs, Cadence has not granted any options intended to be ISOs in the past several years and does not intend to do so in the foreseeable future. ISOs granted under the 1987 Plan are intended to be eligible for the favorable federal income tax treatment accorded to “incentive stock options” under Section 422 of the Code. Generally, a participant does not recognize any taxable income at the time of the grant of an ISO. In addition, the participant will not recognize income for regular federal income or employment tax purposes at the time of the exercise of an ISO. However, a participant may be subject to alternative minimum tax upon the exercise of an ISO. Cadence is not entitled to a deduction at the time of the grant or the exercise of an ISO.

 

If the participant holds the shares acquired through the exercise of an ISO for at least one year from the date of exercise and two years from the grant date, referred to as the ISO holding period, the participant generally will realize long-term capital gain or loss upon disposition of the shares. This gain or loss will generally equal the difference between the amount realized upon the disposition of the shares and the exercise price of the shares.

 

If a participant disposes of the shares acquired through the exercise of an ISO before expiration of the ISO holding period, referred to as a disqualifying disposition, the participant will have: (i) ordinary income equal to the lesser of (a) the amount by which the sales price of such shares exceeds the exercise price, and (b) the amount by which the fair market value of such shares on the date of exercise exceeds the exercise price; and (ii) either (a) capital gain equal to the amount by which the sales price of such shares exceeds the fair market value of such shares on the date of exercise, or (b) capital loss equal to the amount by which the exercise price exceeds the sales price of such shares.

 

In the event of a disqualifying disposition, Cadence will generally be entitled to a deduction to the extent that the participant realized ordinary income as a result of the disqualifying disposition.

 

Incentive Stock Awards.

 

The tax consequences to a participant who receives an incentive stock award pursuant to the 1987 Plan will vary depending on whether or not the participant makes a timely Section 83(b) election under the Code with respect to the unvested shares of incentive stock. The Board has the discretion to establish, in accordance with the 1987 Plan, the terms of incentive stock awards, including whether or not participants may make Section 83(b) elections under the Code. A participant who does not make a timely Section 83(b) election with respect to unvested shares of incentive stock will not recognize any taxable income upon the award of the shares. However, when the restrictions subsequently lapse on the shares, the participant will recognize ordinary income in the amount by which the fair market value of the shares on the date the restrictions lapse exceeds the purchase price (if any) paid for the shares. A participant who makes a timely Section 83(b) election with respect to unvested shares of incentive stock will be required to recognize ordinary income in the year the incentive stock award is granted equal to the amount by which the fair market value of the shares on the award date exceeds the purchase price (if any) paid for the shares. The fair market value of the shares will be determined as if the shares were not restricted. A participant who makes a Section 83(b) election for unvested shares of incentive stock will not recognize any additional income when the restrictions on those shares subsequently lapse.

 

Cadence will generally be entitled to a deduction equal to the amount of ordinary income recognized by a participant in connection with the acquisition of shares of Cadence common stock pursuant to an incentive stock award.

 

Restricted Stock Units.

 

Participants who are granted restricted stock units do not recognize income at the time of the grant. When the award vests or is paid, participants generally recognize ordinary income in an amount equal to the fair market value of the units at such time, and Cadence will receive a corresponding deduction.

 

Potential Limitation on Deductions.

 

As described above, Section 162(m) of the Code denies a deduction to any publicly-held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation exceeds

$1,000,000 for such employee. It is possible that compensation attributable to stock awards granted under the 1987 Plan, when combined with all other types of compensation received by a Cadence covered employee, may cause this limitation to be exceeded in any particular year. Stock awards that qualify as “performance-based compensation” are disregarded for purposes of the deduction limitation of Section 162(m). If Cadence’s stockholders approve the material terms of the performance goals under the 1987 Plan, the plan will continue to enable Cadence to grant awards that will be exempt from the deduction limits of Section 162(m). Cadence does, however, weigh the benefits of compliance with Section 162(m) against the potential burdens of such compliance, and reserves the right to pay compensation that may not be fully deductible.

 

STOCK PRICE

 

On March 15, 2011, the closing price of Cadence common stock as reported by NASDAQ was $9.44.

 

PARTICIPATION IN THE 1987 PLAN

 

Non-employee directors are not eligible to receive grants under the 1987 Plan, except for Dr. Alberto Sangiovanni-Vincentelli, who is a consultant to Lip-Bu Tan, Cadence’s CEO. As of January 1, 2011, over the life of the 1987 Plan, stock awards covering 566,250 shares of Cadence common stock had been granted to Dr. Sangiovanni-Vincentelli, who is the only current director and director nominee who is not an executive officer who has been granted stock awards under the 1987 Plan, most recently in February 2002. As of January 1, 2011, as a group, Cadence’s current executive officers and Kevin S. Palatnik, who resigned his position as Senior Vice President and Chief Financial Officer on November 1, 2010, had been granted stock awards covering 6,109,150 shares over the life of the 1987 Plan. As of January 1, 2011, the current and former executive officers listed in the Summary Compensation Table below, referred to in this proxy statement as the Named Executive Officers, had been granted stock awards covering the following aggregate number of shares over the life of the 1987 Plan: Lip-Bu Tan, 3,115,000; Geoffrey G. Ribar, 0; Kevin S. Palatnik, 713,750; John J. Bruggeman II, 170,000; Thomas A. Cooley, 405,400, and Charlie Huang, 405,000. All other employees as a group had been granted stock awards covering 135,347,230 shares over the life of the 1987 Plan, which includes stock awards that were granted to former executive officers and other employees no longer employed by Cadence, and also includes forfeited shares.

 

Because the Board has the discretion to grant awards under the 1987 Plan, it is not possible as of the date of this proxy statement to determine future awards that will be received by executive officers and other employees under the 1987 Plan.

 

Overview

 

As discussed in Proposal 4 of this proxy statement, Cadence’s Board of Directors is seeking re-approval of the performance goals under the 1987 Plan. For information related to the 1987 Plan, including a general summary of the material provisions thereunder, see Proposal 4 of this proxy statement above.

 

In this Proposal 5, Cadence is asking stockholders to: (i) approve an increase in the number of shares of common stock authorized for issuance under the 1987 Plan from 75,370,100 shares to 79,370,100 shares under the 1987 Plan and to (ii) set the termination date for the plan to be March 16, 2021. Cadence is not asking stockholders to approve any increase to the 5,000,000 shares of common stock that are issuable under the 1987 Plan as incentive stock awards or restricted stock units.

 

Key Data

 

See Proposal 2 for information regarding outstanding equity awards and shares available for future awards under Cadence’s equity plans as of January 1, 2011.

Broad-based equity compensation is an essential and long-standing element of Cadence’s culture and success. It continues to be critical to attracting and retaining the most talented employees and consultants. As shown in Proposal 2, Cadence’s three-year average annual “burn rate” has been 6.16%, which is below the burn rate threshold of 7.26% applied to our industry by Institutional Shareholder Services, which is referred to in this proxy statement as ISS.

 

Promotion of Good Corporate Governance Practices

 

Cadence designed the 1987 Plan to include a number of best practice provisions that reinforce the alignment between stockholders’ interests and equity compensation arrangements for employees and consultants. These provisions include, but are not limited to, the following:

 

 

VOTE REQUIRED AND BOARD RECOMMENDATION

 

The Board recommends a vote FOR approval of (i) an increase in the shares of common stock authorized for issuance under the 1987 Plan from 75,370,100 to 79,370,100 and (ii) a March 16, 2021 termination date for the 1987 Plan. The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the annual meeting 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 an increase in the shares authorized for issuance under, and a March 16, 2021 termination date for, the 1987 Plan.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE

AMENDMENT TO THE 1987 PLAN.

 

BACKGROUND TO THE ADVISORY VOTE

 

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which is called the Dodd-Frank Act in this proxy statement, and Section 14A of the Exchange Act enable the Cadence’s stockholders to vote to approve, on an advisory (non-binding) basis, the compensation of the Named Executive Officers as disclosed in this proxy statement.

 

OUR COMPENSATION PROGRAM

 

Stockholders are encouraged to read the “Compensation Discussion and Analysis” in this proxy statement and the tables and narrative for the details on Cadence’s executive compensation. Cadence’s executive compensation programs are designed to support its long-term success and the creation of stockholder value. Highlights of Cadence’s executive compensation program for fiscal 2010 include:

 

 

After realigning its business operations with fiscal 2009’s economic realities and implementing the executive compensation program highlighted above, Cadence grew both its business and stockholder value in 2010. Cadence’s fiscal 2010 revenue and non-GAAP operating margin increased by $83.3 million and $100.2 million, respectively, as compared to fiscal 2009. Cadence exceeded its fiscal 2010 Annual Operating Plan targets and materially increased cash flow from operating activities, enhancing liquidity. The leadership, commitment and performance of the named executive officers were critical to Cadence’s performance.

 

Similarly, critical to the fiscal 2010 performance was Cadence’s focus on pay-for-performance in its compensation policies and decisions. As such, the Compensation Committee and the Board believe that the policies and procedures articulated in the “Compensation Discussion and Analysis” are consistent with sound executive compensation principles, as well as stockholder interests and concerns, and that they will act to incentivize the achievement of Cadence’s goals moving forward.

 

In accordance with recently adopted Section 14A of the Exchange Act, Cadence is asking stockholders to approve the following advisory resolution at the 2011 Annual Meeting of Stockholders:

 

RESOLVED, that the compensation paid to the Cadence’s Named Executive Officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.

 

This advisory resolution, commonly referred to as a “say-on-pay” resolution, is non-binding on the Board of Directors. Although non-binding, the Board and the Compensation Committee value the opinions of our stockholders and will review and consider the voting results when evaluating our executive compensation program.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL

OF THE ADVISORY RESOLUTION ON EXECUTIVE COMPENSATION.

 

BACKGROUND TO THE ADVISORY VOTE

 

In Proposal 6 above, Cadence stockholders were asked to vote on an advisory resolution on named executive compensation. Pursuant to recently adopted Section 14A of the Exchange Act, in this Proposal 7, stockholders are able to indicate how frequently they believe an advisory “say-on-pay” vote, as included in Proposal 6, should occur. By voting on this Proposal 7, stockholders may indicate whether they prefer that Cadence hold an advisory “say-on-pay” vote every year, every two years or every three years.

 

REASONS FOR THE BOARD RECOMMENDATION

 

After careful consideration, the Board has determined that holding an advisory vote on executive compensation every year is the most appropriate policy for Cadence, and recommends that stockholders vote for future advisory votes on named executive officer compensation to occur every year. While Cadence’s executive compensation programs are designed to promote a long-term connection between pay and performance, the Board recognizes that compensation disclosures are made annually. Holding an annual advisory vote on executive compensation would provide Cadence with more direct and immediate feedback on those compensation disclosures. However, stockholders should note that because the advisory vote on executive compensation occurs well after the beginning of the compensation year, and because the different elements of Cadence’s executive compensation programs are designed to operate in an integrated manner and to complement one another, in many cases it may not be appropriate or feasible to change such executive compensation programs in consideration of any one year’s advisory vote on executive compensation by the time of the following year’s annual meeting of stockholders.

 

Stockholders will be able to specify one of four choices for this proposal on the proxy card: one year, two years, three years or abstain. Stockholders are not voting to approve or disapprove the Board’s recommendation. This advisory vote on the frequency of future advisory “say-on-pay” votes is non-binding on the Board. The option of one year, two years or three years that receives the highest number of votes cast by stockholders will be the frequency for the advisory vote on “say-on-pay” that has been selected by our stockholders. However, because this vote is advisory and not binding, the Board may in the future decide to conduct advisory votes on a more or less frequent basis.

 

THE BOARD OF DIRECTORS RECOMMENDS STOCKHOLDERS VOTE TO CONDUCT FUTURE ADVISORY VOTES ON EXECUTIVE COMPENSATION EVERY YEAR.

 

 

The Audit Committee has selected KPMG LLP as Cadence’s independent registered public accounting firm for the fiscal year ending December 31, 2011. 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 2010 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 8.

 

 

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 2010, the Audit Committee was comprised of Dr. Shoven and Messrs. Lucas and Siboni, with Mr. Siboni serving as its Chairman. The Audit Committee met nine times in fiscal 2010.

 

The Audit Committee operates under a charter that was last amended by the Board in February 2010. 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, independence and performance, and the performance of Cadence’s internal audit function, 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 1, 2011 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 under Public Company Accounting Oversight Board standards (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 1, 2011 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 1, 2011 and January 2, 2010.

 

 

 

 

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 specified audit services, audit-related services, tax compliance services and tax planning and related tax 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 LLP During Fiscal 2010 and 2009” 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 15, 2011, the record date, unless otherwise indicated below, by:

 

 

 

 

 

 

Susan L. Bostrom			31,250			Lip-Bu Tan			1,458,437
Donald L. Lucas			175,000			Geoffrey G. Ribar			0
Dr. Alberto Sangiovanni-Vincentelli			250,000			Kevin S. Palatnik(8)			567,083
George M. Scalise			225,000			John J. Bruggeman II			127,916
Dr. John B. Shoven			375,000			Thomas A. Cooley			178,646
Roger S. Siboni			237,500			Charlie Huang(11)			386,917
John A.C. Swainson			125,000

 

 

This section discusses Cadence’s compensation program for the Named Executive Officers, or NEOs in fiscal 2010, who were: Lip-Bu Tan, its President and Chief Executive Officer, or CEO; Geoffrey G. Ribar, its Senior Vice President and Chief Financial Officer, or CFO; Kevin S. Palatnik, its Senior Vice President and CFO for part of fiscal 2010; and its three most highly compensated executive officers other than its CEO and CFO: John J. Bruggeman II, its Senior Vice President and Chief Marketing Officer; Thomas A. Cooley, its Senior Vice President, World Wide Field Operations; and Charlie Huang, its Senior Vice President and Chief Strategy Officer.

 

EXECUTIVE SUMMARY

 

Cadence’s Fiscal 2010 Compensation Highlights

 

In fiscal 2010, Cadence continued to compensate its executive officers in a manner consistent with its pay-for-performance philosophy, emphasizing both short and long-term incentive compensation.

 

In 2009, the semiconductor industry’s sales declined as the global macroeconomic environment was negatively affected by decreased consumer spending, high unemployment, and restrained corporate spending. As a result, Cadence faced significant challenges in fiscal 2009 that required realignment of Cadence’s business operations with the economic realities. As part of that realignment, Cadence initiated and executed a restructuring plan, and enacted significant pay reductions for its executive team, as discussed further below. In fiscal 2010, the semiconductor industry grew significantly as consumer demand for electronic products improved as global economic conditions improved. In fiscal 2010, Cadence grew its business and increased stockholder value by delivering superior technical solutions, implementing a number of austerity measures, and improving its operating margins. Total stockholder return over fiscal 2010 was 38%. Cadence’s fiscal 2010 revenue increased by 10% when compared to fiscal 2009 and Cadence’s non-GAAP operating margin improved to 9% in fiscal 2010 as compared to negative 2% in fiscal 2009. The executive officers’ leadership, commitment and performance were critical to the improvement in Cadence’s business results.

 

Consistent with Cadence’s executive compensation principles, the following compensation decisions were made with respect to fiscal 2010 (including related compensation decisions made prior to fiscal 2010):

 

 

 

 

 

 

 

 

 

 

Executive Compensation Objectives

 

Cadence is engaged in a very competitive industry, and its success depends on its ability to attract, motivate and retain highly qualified, talented and creative executives with the leadership skills necessary to achieve Cadence’s annual and long-term business objectives. Cadence seeks to accomplish these objectives in ways that are aligned with the long-term interests of its stockholders.

 

Cadence’s executive officer compensation is based on the following principles:

 

 

The Compensation Committee oversees the executive compensation program and assesses executive officer compensation at least annually to monitor Cadence’s adherence to these principles. The executive compensation program is results oriented and is dependent on achievement of difficult to attain targets and the long-term performance of Cadence’s stock.

 

Compensation Governance

 

In addition to the compensation decisions discussed above, Cadence’s executive compensation programs continued to support its commitment to sound corporate governance.

 

 

 

DETERMINING EXECUTIVE COMPENSATION

 

Competitive Compensation Levels

 

Each year, the Compensation Committee assesses 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.

 

For fiscal 2010, the Compensation Committee considered the competitiveness of the executive officers’ total direct compensation as compared to executives with similar titles and responsibilities at companies with which Cadence competes for talent. This group of companies is referred to in this proxy statement as the Peer Group. In order to more accurately reflect the pool from which executive talent is drawn and to which it is lost, the Peer Group is not limited to Cadence’s direct business competitors. Rather, the Compensation Committee included publicly traded electronic design automation (EDA) competitors, as well as a broader group of semiconductor and application software companies that are located in the San Francisco Bay Area (where Cadence is headquartered) and compete in the same talent market as Cadence.

 

All members of the Peer Group fall within a relevant revenue and market capitalization range as follows: (i) revenue is between one-half and two times that of Cadence’s twelve-month trailing revenue, and (ii) two-year average market capitalization is between one-third and three times that of Cadence’s two-year average market capitalization. In February 2010, the Compensation Committee approved the resulting group of 19 companies, which 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 comprised the Peer Group for fiscal 2010 for determining competitive compensation levels:

 

Altera Corporation		Intersil Corporation		National Semiconductor Corporation
ANSYS Inc.		KLA-Tencor Corporation		Novellus Systems, Inc.
Atheros Communications Inc.		Lam Research Corporation		PMC-Sierra Inc.
Atmel Corporation		Linear Technology Corporation		Synopsys, Inc.
Cypress Semiconductor Corporation		Maxim Integrated Products, Inc.		TIBCO Software Inc.
Informatica Corp.		Mentor Graphics Corporation		Xilinx Inc.
Integrated Device Technology Inc.

 

The Peer Group includes several changes from the peer group for fiscal 2009 (referred to in the 2009 proxy statement as the Primary Compensation Peer Group), primarily driven by two factors: (i) narrower revenue and market capitalization screening criteria, and (ii) decreases in Cadence’s revenue and market capitalization in fiscal 2009 as compared to fiscal 2008. As a result, 17 companies from the fiscal 2009 peer group were excluded, and 8 new companies were added. For the fiscal 2010 Peer Group, the median revenue was $800 million (as calculated on a trailing four-quarter basis as of December 31, 2009) and the median market capitalization was $2.0 billion (as calculated on a trailing two-year average basis as of December 31, 2009).

 

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 Peer Group, the Compensation Committee assesses the appropriateness of each executive officer’s compensation relative to executives with similar titles and responsibilities in the Peer

Group. For the purposes of this assessment, the Compensation Committee considers the annual base salary, short-term cash incentive award opportunities and long-term equity incentive award opportunities (based on the fair value of the equity awards on the date of grant). Cadence does not target executive officer compensation at a specific level or percentage relative to compensation provided by the companies in the Peer Group, whether for total direct compensation or any element of total direct compensation. Instead, when determining compensation 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 Peer Group, but also each of the following factors, without prescribing particular weightings:

 

Cadence Factors

 

 

Individual Factors

 

 

The Compensation Committee retains and does not delegate any of its exclusive power to determine all matters of executive compensation, although for each executive officer other than the CEO, the CEO typically makes assessments and recommendations to the Compensation Committee on other executive officers’ base salaries, short-term 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 or modify the CEO’s recommendations.

 

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 the CEO’s compensation. The Compensation Committee, in its sole discretion, makes all decisions related to the CEO’s compensation.

 

ELEMENTS OF EXECUTIVE COMPENSATION

 

The Named Executive Officers’ 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 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, motivate and retain qualified executives. The Compensation Committee believes that executive compensation should incentivize Cadence’s consistent and sustained performance. Accordingly, the executive officers’ compensation at Cadence is weighted towards short-term cash incentives and long-term equity incentives rather than base salaries.

 

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 or necessarily 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 or change in responsibilities.

 

In May 2009, in support of Cadence’s cost-reduction strategy and commitment to operational efficiency, Cadence’s executive officers, including the Named Executive Officers who were executive officers at the time, volunteered for a temporary reduction of their annual base salaries (effective July 1, 2009 through March 31, 2010) and the Compensation Committee accepted this voluntary reduction. During this period, the annual base salary of Mr. Tan was reduced by 20% and the annual base salary of each of Cadence’s Senior Vice Presidents (including all of the other Named Executive Officers who were executive officers at the time) was reduced by 10%. In February 2010, Mr. Tan requested, and the Compensation Committee agreed to, an additional 6.25% reduction of his already reduced annual base salary, effective March 1, 2010. Mr. Tan additionally requested, and the Compensation Committee agreed, that his reduced base salary remain in effect indefinitely. At the same time, Cadence’s other executive officers, including each of the Named Executive Officers, joined Mr. Tan and volunteered to continue (and in the case of Mr. Bruggeman, who became an executive officer after the initial reduction, to commence) the temporary 10% reductions in their base salaries through June 30, 2010, and the Compensation Committee accepted such extension. Effective July 1, 2010, the annual base salaries of the NEOs, except for Mr. Tan, were restored to their prior levels as follows: Mr. Palatnik, $450,000; Mr. Bruggeman, $350,000; Mr. Cooley, $425,000; and Mr. Huang, $400,000. Effective January 1, 2011, the annual base salary of Mr. Tan was restored to its original level of $600,000.

 

In September 2010, in connection with the appointment of Mr. Ribar as Senior Vice President and Chief Financial Officer of Cadence, effective November 1, 2010, the Compensation Committee set his base annual salary at $350,000, consistent with the principles of Cadence’s compensation for its executive officers described above. Mr. Palatnik resigned from his executive position at Cadence effective November 1, 2010.

 

Short-Term Cash Incentive Compensation

 

Target Bonuses

 

Cadence generally provides its executive officers with the opportunity to earn short-term cash incentive compensation under the Bonus Plan. The purpose of the Bonus Plan is to reward executive officers for performance during a single fiscal year (or portions thereof) and to provide incentives for them to achieve Cadence’s short-term financial and operational goals, as measured against specific performance criteria relative to Cadence’s overall

business results as well as the particular executive officer’s individual performance. Cash bonus payouts under the Bonus Plan are determined semi-annually after the end of each performance period, and the amount paid to each executive officer is determined based upon the executive officer’s target bonus multiplied by a company performance 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. 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.” For fiscal 2010, the target and actual bonuses paid to the executive officers are set forth in the table below:

 

 

 

 

Ordinarily, the Compensation Committee would have made determinations in February 2010 about executive officer bonus payments for performance during fiscal 2009. However, because management had foregone bonus opportunities for fiscal 2009, the Compensation Committee made no such determinations and paid no bonuses for fiscal 2009. At the same time, the Compensation Committee determined that the executive officers, including the Named Executive Officers, would be eligible for bonus opportunities under the Bonus Plan for fiscal 2010, but elected to set very challenging financial and operational goals under the Bonus Plan, anticipating only partial payment under the Bonus Plan compared to target bonus amounts outlined in the table above. 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. Moreover, the Compensation Committee set very difficult to attain financial performance measures that were not expected to result in payments at target levels.

 

For the first half of 2010, achievement of Cadence’s revenue and non-GAAP operating margin targets under its 2010 Operating Plan would have resulted in bonus payouts of 20% of annual target payouts under the 2010 Bonus Plan, and, for the second half of 2010, achievement of Cadence’s revenue and non-GAAP operating margin targets under its 2010 Operating Plan would have resulted in bonus payouts of 30% of annual target payouts under the 2010 Bonus Plan. Thus, for the full fiscal year, achievement of the revenue and non-GAAP operating margin targets under Cadence’s 2010 Operating Plan would have resulted in bonus payouts of only 50% of the annual target payouts under the Bonus Plan. Cadence weighted the payouts more heavily towards the second half of the fiscal year and set more challenging targets for the second half of the fiscal year because of a number of factors, including the expectation that its financial performance for fiscal 2010 would improve over the course of the year and that the Committee wanted to ensure that the company performed against its annual financial targets before paying the majority of executives’ bonuses.

Company Performance Modifier

 

The Company performance modifier is a percentage that reflects Cadence’s overall performance. The weightings and performance measures used to determine the Company performance modifier are reviewed by the Compensation Committee at the beginning of each performance period, 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 Cadence’s annual business and financial performance and directly impact long-term stockholder value. For fiscal 2010, the components of the Company performance modifier and relative weightings were as follows: 45% for the total revenue target and 55% for the non-GAAP operating margin target.

 

For each half of fiscal 2010, the performance goals, and actual performance against such goals, used to determine the group performance modifiers were as follows:

 

 

 

 

Individual Performance and Bonus Determination

 

For each executive officer other than the CEO, the CEO makes a bonus recommendation for each performance period. Based on the executive officer’s performance, as well as the CEO’s bonus recommendation, the Compensation Committee determines the bonus for each executive officer, which reflects individual and company performance. For the CEO’s bonus, the Compensation Committee evaluates the CEO’s performance and contributions as well as Cadence’s overall performance.

 

For the first half of 2010, based on Cadence’s business results, as discussed in the “Executive Summary” above, and to recognize the achievements of executives who had performed well not only as individuals but as a strong, unified team, the Compensation Committee determined that each Named Executive Officer would receive approximately 84% of their first half 2010 bonus targets, as enumerated in “Target Bonuses” above.

 

For the second half of 2010, the Compensation Committee took into consideration the business results the executive team accomplished, as well as the “Individual Factors” listed above, to determine each Named Executive Officer’s bonus payment.

 

The decision of the Compensation Committee to award Mr. Tan approximately 75% of his second half 2010 target bonus was based on numerous factors, including Cadence’s overall performance and the significant increase in stockholder value in 2010, overachievement of Cadence’s 2010 Operating Plan financial targets, including achievement of a 10% increase in revenue as compared with fiscal year 2009, Mr. Tan’s intense focus on and significant contributions to strategic customer relationships, his leadership on setting the EDA360 vision for the industry and the successful acquisition and integration of Denali Software, Inc.

 

Mr. Huang received a bonus of approximately 75% of his target bonus for the second half of 2010, in recognition of his roles as the Chief Strategy Officer, acting Chief Technology Officer and the CEO’s Chief of Staff, his development of and leadership with respect to Cadence’s strategy and the key role he played in the acquisition and integration of Denali Software, Inc.

 

Mr. Palatnik received a bonus payment of approximately 68% of his target bonus for the second half of 2010, which reflected his contributions to Cadence’s fiscal performance, particularly, the improvement in operating

margin from negative 2% in fiscal 2009 to 9% in fiscal 2010 and his role in ensuring a smooth transition of the CFO role to Mr. Ribar in the fourth quarter of 2010.

 

Mr. Ribar received a bonus payment of approximately 72% of his second half bonus target, as prorated to reflect the fact that Mr. Ribar joined Cadence during the second half of 2010. This bonus award was based on his quick assimilation as Cadence’s new CFO and the role he played in its fiscal performance in the fourth quarter of 2010.

 

Mr. Bruggeman received a bonus payment of approximately 72% of his second half 2010 target bonus based on the role he played in enhancing Cadence’s market presence and in developing and proliferating Cadence’s EDA360 vision for the EDA industry.

 

Mr. Cooley received a bonus payment of approximately 72% of his second half 2010 target bonus in recognition of his leadership of the Worldwide Sales team in driving Cadence’s success with new and existing customers, and Cadence’s progress in transitioning to a ratable revenue model.

 

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 solely to the extent Cadence’s stock price increases from the date of grant over time and the executive officers remain employed at 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, require continued employment of the executive throughout the vesting period, and increase in value when Cadence’s stock price increases.

 

When the Compensation Committee determines and approves individual equity grants to executive officers, it considers compensation paid to executives with similar titles and responsibilities at the companies in the 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 2010, the Compensation Committee adopted a policy that, in determining the compensation of executive officers, including the Named Executive Officers, a portion of their stock awards granted be performance-based. The performance-based stock awards may take either of the following forms:

 

 

Approximately 60% of the grant date fair value of the long-term equity incentives granted to the Named Executive Officers in February 2010 consisted of stock options, and the remaining approximately 40% consisted of restricted stock, with the exception of awards to Mr. Tan, approximately 80% of which consisted of stock options and the remaining approximately 20% consisted of restricted stock. The Compensation Committee intended this long-term equity incentive mix to provide the appropriate level of executive alignment with stockholder interests, reward its executives for building and sustaining long-term stockholder value, and balance between stock options (which provide value only if the stock price increases) and restricted stock (which provide more certain retention value subject to the fulfillment of certain conditions, including performance goals). The Compensation Committee and the CEO continue to believe that equity-based compensation is an important component of Cadence’s compensation program and essential to motivate executives and align their interests with those of its stockholders.

 

The stock options granted to the Named Executive Officers in February 2010 vest monthly over four years from the date of grant and expire seven years from the date of grant. The February 2010 restricted stock awards vest in equal semi-annual installments over three years from the date of grant, subject to the achievement of performance

goals intended to qualify the awards as “performance-based compensation” under Section 162(m) of the Code. The values reflected for equity awards in the Summary Compensation Table are the grant date fair values of such awards. The values in the Summary Compensation Table do not reflect the financial benefit that the holders of the awards will actually realize upon the vesting of the awards, nor, with respect to stock options, whether the stock options will be exercised or exercisable prior to their expiration.

 

In September 2010, as an inducement for Mr. Ribar to join Cadence and in connection with the negotiation of the terms of his employment, the Compensation Committee approved an equity grant to Mr. Ribar that included stock options and restricted stock. Please refer to the Grants of Plan-Based Awards in Fiscal Year 2010 table below for more detail regarding Mr. Ribar’s grants and the grants to the other Named Executive Officers.

 

In February 2011, the Compensation Committee made equity grants in the form of stock options and performance-based restricted stock to each of the Named Executive Officers who were executive officers at the time, except for Mr. Ribar, who received an equity grant as an inducement to join Cadence in November 2010. Consistent with the February 2010 equity grants, the February 2011 equity grants are also allocated more heavily towards stock options than restricted stock. The Compensation Committee awarded approximately 70% of the total grant date fair value of Mr. Tan’s equity grant in the form of stock options, with the remainder consisting of restricted stock. Mr. Huang’s equity award was comprised of 100% stock options. For Messrs. Bruggeman and Cooley, approximately 60% of the total grant date fair value of the equity grants is in the form of stock options. The terms and vesting schedules of the February 2011 stock option grants and the incentive stock awards are consistent with the stock option grants made in fiscal 2010.

 

Grant Timing Policy

 

The Compensation Committee and senior management monitor Cadence’s stock option and restricted stock grant policies to ensure that such policies comply with governing regulations and are consistent with good corporate practice. Grants to the executive officers are generally made at the Compensation Committee meeting held in February of each year, after results for the preceding fiscal year become publicly available and after review and evaluation of each executive officer’s performance, 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 2010, 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. The Deferred Compensation Plan is unfunded and is subject to the claims of creditors, so that participants in the Deferred Compensation Plan have rights in the plan only as unsecured creditors. 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 generally available to Cadence employees. 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 does not currently offer guaranteed pension benefits. Cadence periodically assesses 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 competitive with market practices.

Perquisites

 

Cadence does not provide NEOs any tax restoration payments with respect to any taxable income. Cadence did not provide material perquisites to any Named Executive Officer in fiscal 2010.

 

Severance Benefits

 

The Compensation Committee periodically reviews typical industry practices concerning severance and change in control agreements and Cadence’s severance and change in control agreements. Cadence has entered into employment agreements with Messrs. Tan, Bruggeman, Cooley, and Huang that provide for benefits upon termination of employment under certain circumstances, including in connection with a change in control of Cadence. Cadence entered into an Executive Transition and Release Agreement with Mr. Palatnik, referred to in this proxy statement as the Transition Agreement, in connection with his resignation from his executive position at Cadence, effective November 1, 2010. 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 executive’s employment without cause or resignation by the executive for good reason (constructive termination). In the event of a change in control of Cadence, and if the executive’s employment is terminated without cause or for good reason (constructive termination), the executive will receive enhanced severance benefits. Accordingly, Cadence provides for enhanced severance benefits only in the event of a “double trigger” because it believes that the executive officers would be materially harmed only if a change in control results in reduced responsibilities or compensation or loss of employment.

 

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 November 1, 2010, Mr. Palatnik resigned from his executive officer position with Cadence. Under the Transition Agreement, Mr. Palatnik remained with Cadence as a non-executive employee through February 28, 2011 to assist on transitional matters. Effective February 28, 2011, Mr. Palatnik became a part-time employee, and receives certain benefits consistent with a termination without cause as set forth in his Employment Agreement with Cadence dated July 29, 2008, as amended. For further detail of the severance benefits provided to and that will be provided to Mr. Palatnik, 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 satisfy Cadence’s stock ownership guidelines.

 

Stock Ownership Guidelines

 

 

For purposes of determining stock ownership levels, the following forms of equity interests in Cadence count towards satisfaction of the stock ownership guidelines: restricted or incentive shares (whether vested or unvested), shares obtained through the Amended and Restated Employee Stock Purchase Plan, which is referred to in this proxy statement as the ESPP, shares acquired and held through the exercise of stock options, shares purchased on the

open market, shares owned outright by the executive officer or his or her immediate family members residing in the same household, and shares held in trust for the benefit of the executive officer or his or her family.

 

CLAWBACK POLICY

 

Cadence has adopted a clawback policy, which provides that if Cadence restates its reported financial results, the Board will review all bonuses and other awards made to senior executive officers after January 1, 2010 on the basis of having met or exceeded performance goals during the period covered by the restatement and will, to the extent practicable and in the best interests of stockholders, instruct Cadence to seek to recover or cancel such bonuses or awards to the extent that performance goals would not have been met under such restated financial results.

 

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 2010, all stock option and restricted stock grants to Messrs. Tan, Palatnik, Bruggeman, Cooley, and Huang were structured with the intent to qualify them as “performance-based compensation” under Section 162(m) of the Code, and should be fully deductible, and performance measures and goals under the Bonus Plan were intended to comply with the exception for performance-based compensation Section 162(m) of the Code.

 

Section 280G of the Code

 

Section 280G of the Code disallows a company’s tax deduction for certain payments in connection with a change in control, defined as “excess parachute payments,” and Section 4999 of the Code imposes a 20% excise tax on certain persons who receive excess parachute payments. Messrs. Tan, Palatnik, Bruggeman, Cooley, and Huang will not be provided with tax gross-up payments in the event their payments become subject to this excise tax, but instead would be entitled to the best after-tax alternative. In other words, they would be entitled to whichever of the following payments results in the largest after-tax amount:

 

 

Cadence chose to provide Messrs. Tan, Palatnik, Bruggeman, Cooley, and Huang 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 1, 2011.

 

SUBMITTED BY THE COMPENSATION

COMMITTEE

 

John B. Shoven, Chairman
Donald L. Lucas
George M. Scalise
John A. C. Swainson

 

No member of the Compensation Committee is, or was during or prior to fiscal 2010, 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 Named Executive Officers in fiscal 2010.

 

SUMMARY COMPENSATION TABLE

 

 

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2010

 

 

 

 

NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE AND
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2010 TABLE

 

EMPLOYMENT TERMS

 

Certain elements of compensation set forth in the Summary Compensation Table and Grants of Plan-Based Awards in Fiscal Year 2010 table reflect the terms of an employment agreement or an offer letter between Cadence and each of the Named Executive Officers that were in effect as of January 1, 2011.

 

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. Effective July 1, 2009, Mr. Tan’s base salary was subject to a voluntary salary reduction whereby his salary was reduced by 20%. Effective March 1, 2010, Mr. Tan’s employment agreement was further amended to reflect Mr. Tan’s request to reduce his base salary by another 6.25% to $450,000. Effective January 1, 2011, Mr. Tan’s salary was restored back to $600,000.

 

Geoffrey G. Ribar.  Cadence is party to an offer letter with Mr. Ribar pursuant to which Mr. Ribar serves as Senior Vice President and Chief Financial Officer. The offer letter provides for an initial base salary of $350,000 per year and for Mr. Ribar’s participation in the Bonus Plan at an annual target bonus of 75% of his base salary.

 

Kevin S. Palatnik.  Cadence was a party to an employment agreement with Mr. Palatnik pursuant to which Mr. Palatnik served as Senior Vice President and Chief Financial Officer. The agreement provided 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. In February 2009, Mr. Palatnik’s base salary was increased to $450,000. Effective July 1, 2009 through June 30, 2010, Mr. Palatnik’s base salary was voluntarily reduced by 10% and effective July 1, 2010, Mr. Palatnik’s base salary was restored to $450,000. In connection with his resignation from all executive positions, effective November 1, 2010, Cadence entered into the Transition Agreement with Mr. Palatnik, which is discussed under “Executive Transition and Release Agreement with Mr. Palatnik” below.

 

John J. Bruggeman II.  Cadence is a party to an employment agreement with Mr. Bruggeman pursuant to which Mr. Bruggeman serves as Senior Vice President and Chief Marketing Officer. The employment agreement provides for an initial base salary of $350,000 per year and for Mr. Bruggeman’s participation in the Bonus Plan at an annual target bonus of 75% of his base salary. Mr. Bruggeman’s employment agreement also provides for a one-time hiring bonus of $40,000, which was payable upon the commencement of his employment in August 2009. Mr. Bruggeman must repay a pro-rated amount of the bonus if he voluntarily terminates his employment within 24 months of his hire date: 100% in the first 12 months after his hire date, 70% in the subsequent 12-18 months after his hire date, and 40% in the remaining 18-24 months after his hire date. Effective April 1, 2010 through June 30, 2010, Mr. Bruggeman’s base salary was voluntarily reduced by 10% and effective July 1, 2010, Mr. Bruggeman’s base salary was restored to $350,000.

 

Thomas A. Cooley.  Cadence is a party to an employment agreement with Mr. Cooley pursuant to which Mr. Cooley serves as Senior Vice President, Worldwide Field Operations. The agreement provides for an initial base salary of $425,000 per year and for Mr. Cooley’s participation in the Bonus Plan at an annual target bonus of 75% of his base salary. Effective July 1, 2009 through June 30, 2010, Mr. Cooley’s base salary was voluntarily reduced by 10% and effective July 1, 2010, Mr. Cooley’s base salary was restored to $425,000.

 

Charlie Huang.  Cadence is a party to an employment agreement with Mr. Huang pursuant to which Mr. Huang serves as Senior Vice President and Chief Strategy Officer. 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. In February 2009, Mr. Huang’s base salary was increased to $400,000. Effective July 1, 2009 through June 30, 2010, Mr. Huang’s base salary was voluntarily reduced by 10% and effective July 1, 2010, Mr. Huang’s base salary was restored to $400,000.

 

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

EQUITY PLAN AWARDS

 

The stock awards granted in fiscal 2010 to the Named Executive Officers were granted under the 1987 Plan vest over three years, with 1/6th of the shares subject to vesting every six months after the date of grant, except for the stock award to Mr. Ribar, which was granted under the 2000 Plan as an inducement for him to accept appointment as CFO, and vests over four years and is described in footnote (10) to the Outstanding Equity Awards at 2010 Fiscal Year End table below. The stock awards granted February 8, 2010 under the 1987 Plan were 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 2010 to the Named Executive Officers were granted under the 1987 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 grant to Mr. Ribar, which was made under the 2000 Plan and is described in footnote (9) to the Outstanding Equity Awards at 2010 Fiscal Year End table below. The exercise price of stock options granted under the 1987 Plan and the 2000 Plan in fiscal 2010 was 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, subject to the same restrictions and vesting conditions as the stock award with respect to which they were distributed.

 

OUTSTANDING EQUITY AWARDS AT 2010 FISCAL YEAR END