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.      )

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CADENCE DESIGN SYSTEMS, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held on May 9, 2007

 

 

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 9, 2007, at 1:00 p.m. Pacific time, at Cadence’s principal executive offices located at 2655 Seely Avenue, Building 5, San Jose, California 95134 for the following purposes:

 

1. To elect directors to serve until the 2008 Annual Meeting of Stockholders and until their successors are elected and qualified.

 

2. To approve the amendment and restatement of the 1987 Stock Incentive Plan to extend the term thereof.

 

3. To approve an amendment of the amended and restated 1987 Stock Incentive Plan to increase the number of shares of common stock reserved for issuance thereunder.

 

4. To consider and vote on a stockholder proposal, if properly presented at the meeting, requesting that the board of directors amend the company’s governance documents to provide that director nominees be elected by the affirmative vote of the majority of votes cast.

 

5. To ratify the selection of KPMG LLP as independent auditors of Cadence for its fiscal year ending December 29, 2007.

 

6. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.

 

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 21, 2007 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

 

R.L. Smith McKeithen

Secretary

 

San Jose, California

April 2, 2007

 

ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE TO ENSURE YOUR REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN A PROXY ISSUED IN YOUR NAME FROM THE RECORD HOLDER.

 

TABLE OF CONTENTS

 

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

 

 

PROXY STATEMENT

FOR ANNUAL MEETING OF STOCKHOLDERS

MAY 9, 2007

 

 

 

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 9, 2007, 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 5, San Jose, California 95134. Cadence intends to mail this proxy statement and accompanying proxy card on or about April 2, 2007 to all stockholders entitled to vote at the annual meeting.

 

An audio webcast of the annual meeting will also be available on the investor relations page of Cadence’s website at www.cadence.com. The webcast will allow investors to listen to the proceedings of the annual meeting, but stockholders accessing the annual meeting using the Internet will not be considered present at the annual meeting by virtue of this access and will not be able to vote on matters presented at the annual meeting or ask any questions of Cadence’s directors, management, or its independent auditors. The webcast will begin promptly at 1:00 p.m. on the day of the 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 21, 2007, 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 approximately 278,082,647 shares of common stock outstanding and entitled to vote. Each holder of record of common stock outstanding on the record date will be entitled to one vote for each share held on all matters to be voted on at the annual meeting.

 

QUORUM; ABSTENTIONS; BROKER NON-VOTES

 

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

 

“Broker non-votes” include shares for which a bank, broker or other nominee (i.e., record) holder has not received voting instructions from the beneficial owner and for which the nominee holder does not have discretionary power to vote on a particular matter. Under the rules that govern brokers who are record owners of shares that are held in brokerage accounts for the beneficial owners of the shares, brokers who do not receive voting instructions from their clients have the discretion to vote uninstructed shares on routine matters but have no discretion to vote such uninstructed shares on non-routine matters. The proposals to be voted on at the annual meeting include both routine matters, such as the election of directors and the ratification of independent auditors, and non-routine matters such as the proposals regarding the 1987 Stock Incentive Plan and the stockholder proposal.

 

VOTE REQUIRED

 

The election of directors at the annual meeting requires the affirmative vote of a plurality of the votes cast at the annual meeting.

 

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

 

All votes will be tabulated by a representative of the inspector of elections appointed for the annual meeting. This representative will separately tabulate affirmative and negative votes, abstentions and broker non-votes. Mellon Investor Services LLC has been appointed as the inspector of elections for the annual meeting.

 

REVOCABILITY OF PROXIES

 

Any person giving a proxy pursuant to this solicitation has the power to revoke it at any time before it is voted. It may be revoked by filing a written notice of revocation or a duly executed proxy bearing a later date with the Cadence Corporate Secretary at Cadence’s principal executive 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 meeting will not, by itself, be sufficient to revoke a proxy. Accessing the webcast of the annual meeting will not, by itself, constitute attendance at the annual meeting and will not enable a stockholder to revoke his, her or its proxy using the Internet.

 

SOLICITATION

 

Cadence will bear the entire cost of soliciting proxies, including the preparation, assembly, printing and mailing of this proxy statement, the proxy card and any additional information furnished to stockholders in connection with the matters to be voted on at the annual meeting. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding shares of Cadence common stock beneficially owned by others for forwarding to the beneficial owners. Cadence will reimburse persons representing beneficial owners of its common stock for their costs of forwarding solicitation materials to the beneficial owners. The solicitation of proxies through this proxy statement may be supplemented by telephone, facsimile, use of the Internet, or personal solicitation by directors, officers or other employees of Cadence and by Georgeson Inc., which is referred to in this proxy statement as Georgeson. Cadence has retained Georgeson to solicit proxies for a fee of approximately $8,500, plus reasonable expenses, and has separately retained Georgeson to prepare a stockholder vote analysis of certain proposals. No additional compensation will be paid to directors, officers or other employees of Cadence or any of its subsidiaries for their services in soliciting proxies.

 

HOUSEHOLDING INFORMATION

 

The Securities and Exchange Commission, which is referred to in this proxy statement as the SEC, has adopted rules that allow companies and intermediaries, such as brokers, to deliver a single copy of certain proxy materials to certain stockholders who share the same address, a practice referred to as “householding.” Some banks, brokers and other nominees will be householding Cadence’s 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 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 proxy statement and annual report, or if you are receiving multiple copies of the proxy statement and annual report 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 annual report and/or proxy statement by writing to Cadence’s Corporate Secretary at 2655 Seely Avenue, Building 5, San Jose, California 95134, or by calling Cadence’s Investor Relations Group at 1-877-236-5972. Additionally, copies of Cadence’s SEC filings and certain other submissions are made available free of charge on the investor relations page of Cadence’s website at www.cadence.com as soon as practicable after we have electronically filed or furnished these documents with the SEC.

 

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

 

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

 

CORPORATE GOVERNANCE GUIDELINES

 

The Board of Directors of Cadence has adopted Corporate Governance Guidelines for the Board, which cover various topics relating to the Board and its activities including, but not limited to, the selection and composition of the Board, Board leadership, compensation of directors, responsibilities of directors, Board access to senior management and outside advisors, meeting procedures and committee matters. The Corporate Governance and Nominating Committee periodically reviews the Corporate Governance Guidelines, which may be amended by the Board at any time. The Corporate Governance Guidelines were most recently amended in February 2007.

 

CODE OF BUSINESS CONDUCT

 

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

 

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

 

 

Any waiver of a provision of the Code of Business Conduct with respect to a director or an executive officer may only be made by the Board or the Corporate Governance and Nominating Committee. Any waivers for other employees may be granted only by the Chief Executive Officer or the General Counsel, or their respective designees. Cadence will file with the SEC on Form 8-K amendments to the Code of Business Conduct and any waiver of its provisions made with respect to any director or executive officer as required under applicable SEC rules.

 

STOCK OWNERSHIP GUIDELINES

 

Cadence’s Board of Directors has adopted Stock Ownership Guidelines to align the interests of its directors and executive officers with the interests of stockholders and to further promote Cadence’s commitment to sound corporate governance. Cadence does not require that directors or executive officers own a specific number of shares because it expects that directors and executive officers will act in Cadence’s best interests regardless of the number

of shares they own. However, the Board has established share ownership guidelines for its members and Cadence’s executive officers. Each member of Cadence’s Board of Directors 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: Chief Executive Officer — 100,000 shares; Chief Financial Officer and Executive Vice Presidents — 50,000 shares; and Senior Vice Presidents — 25,000 shares. All directors and executive officers met the Stock Ownership Guidelines as of the record date.

 

DIRECTOR INDEPENDENCE

 

Cadence’s Corporate Governance Guidelines require that at least a majority of the Board of Directors be “independent directors” within the meaning of the corporate governance listing standards of NASDAQ. To be “independent” a director must not have a relationship that, in the opinion of the Board, would interfere with his or her exercise of independent judgment in carrying out the responsibilities of a Cadence director. In making these determinations, the Board considers all relevant facts and circumstances and applies the following standards:

 

 

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

 

BOARD MEETINGS

 

During the fiscal year ended December 30, 2006, Cadence’s Board of Directors held five meetings, in addition to taking other actions by unanimous written consent in lieu of a meeting. Each Board member attended more than 75% of the meetings of the Board and of the committees on which he served that were held during the period for which he was a director or committee member during fiscal 2006. Cadence’s Corporate Governance Guidelines

encourage directors to attend its annual meetings of stockholders. All of Cadence’s then current directors attended the 2006 Annual Meeting of Stockholders.

 

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

 

CONTACTING THE BOARD OF DIRECTORS

 

Stockholders interested in communicating directly with the Board may do so by sending a letter to the Cadence Board of Directors, or to any individual director, group of directors or committee of the Board, c/o the Office of the Corporate Secretary, Cadence Design Systems, Inc., 2655 Seely Avenue, Building 5, San Jose, California 95134. Inquiries and other communications may be submitted anonymously and confidentially. The Office of the Corporate Secretary will review the correspondence and forward it to the individual director, group of directors or committee of the Board to whom the communication is directed, as applicable, if the communication is relevant to Cadence’s business and financial operations, policies and corporate philosophies.

 

COMMITTEES OF THE BOARD OF DIRECTORS

 

The Board of Directors currently has the following committees:

 

 

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

 

 

Audit Committee

 

The Board has determined that all members of the Audit Committee are independent as defined by the NASDAQ corporate governance 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 Mr. Lucas, Dr. Shoven and Mr. Siboni, constituting all the members of the Audit Committee, is an “audit committee financial expert” as defined by rules promulgated by the SEC. In addition, the Board has determined that each Audit Committee member is able to read and understand fundamental financial statements and, other than

strictly in his capacity as a member of the Board or a committee of the Board, has not participated in preparing Cadence’s financial statements in any of the past three years.

 

The Audit Committee charter was most recently amended in February 2006 and complies with the NASDAQ corporate governance listing standards. The duties and responsibilities of the Audit Committee include:

 

 

The Audit Committee held nine meetings during fiscal 2006. See “Report of the Audit Committee” below for more information.

 

Compensation Committee

 

The Board has determined that all Compensation Committee members are independent as defined by the NASDAQ corporate governance listing standards. In addition, all Compensation Committee members are “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, which is referred to in this proxy statement as the Code, to allow Cadence a tax deduction for certain employee compensation exceeding $1,000,000 for an individual. All Compensation Committee members are also “outside directors” within the meaning of Exchange Act Rule 16b-3 to exempt certain option grants and similar transactions from the short-swing profits prohibition of Section 16 of the Exchange Act.

 

The Compensation Committee charter was most recently amended in February 2007. The duties and responsibilities of the Compensation Committee include:

 

 

 

 

The Compensation Committee held six meetings during fiscal 2006. See “Report of the Compensation Committee of the Board of Directors on Executive Compensation” below for more information.

 

Corporate Governance and Nominating Committee

 

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

 

The Corporate Governance and Nominating Committee charter was most recently amended in February 2007. The duties and responsibilities of the Corporate Governance and Nominating Committee include:

 

 

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

with the supporting material required by Cadence’s Bylaws as described under “Other Matters — Stockholder Proposals and Nominations” below, and any other material the stockholder considers necessary or appropriate.

 

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

 

The Corporate Governance and Nominating Committee held three meetings during fiscal 2006.

 

Finance Committee

 

The Finance Committee (formerly the Venture Committee), on behalf of the Board, monitors the liquidation of Telos Venture Partners L.P., Telos Venture Partners II, L.P. and Telos Venture Partners III, L.P., which are venture capital funds in which Cadence is or was a limited partner. The Finance Committee also evaluates and approves financings, mergers, acquisitions, divestitures and other financial commitments of Cadence to unaffiliated third parties that involve amounts greater than $10 million and up to $50 million.

 

The Finance Committee held four meetings during fiscal 2006.

 

Technology Committee

 

The Technology Committee monitors trends in technology that may affect Cadence’s strategic plans, advises the Board regarding Cadence’s research and development activities and reviews and makes recommendations to management regarding Cadence’s leading technologists and researchers. The Technology Committee held eleven meetings during fiscal 2006.

 

COMPENSATION OF DIRECTORS

 

Directors who are Cadence employees do not receive additional compensation for their service on the Board. The following table sets forth the compensation earned by Cadence’s non-employee directors for their service on the Board in 2006:

 

DIRECTOR COMPENSATION FOR FISCAL 2006

 

 

 

 

 

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

 

As a result, each non-employee director of Cadence other than Mr. Swainson earned the $80,000 annual retainer for his service on the Board in 2006. Mr. Swainson earned a prorated portion of the $80,000 annual retainer for his service as a non-employee director of Cadence from February 2006 through December 2006. In addition to the $80,000 retainer for his service as a non-employee director of the Board, Dr. Shoven earned the $80,000 retainer for his service as Chairman of the Board in 2006. In addition to the annual retainer, Mr. Siboni and Dr. Sangiovanni-Vincentelli each earned an annual fee of $40,000 for his service as Chairman of the Audit Committee and Technology Committee, respectively. Mr. Lucas earned an annual fee of $20,000 for his service as the Chairman of the Compensation Committee and $40,000 for his service as the Chairman of the Finance Committee. Non-employee directors were also paid $2,000 for each Board or committee meeting attended in person and $1,000 for each Board or committee meeting attended by telephone. No additional compensation was paid when the Board or a committee acted by unanimous written consent in lieu of a meeting. Non-employee members of the Board were also eligible for reimbursement of their expenses incurred in connection with attendance at Board meetings in accordance with Cadence policy.

 

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

 

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

 

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

 

Directors may elect to defer compensation payable to them under Cadence’s 1994 Deferred Compensation Plan. These deferred compensation payments are held in accounts with values indexed to the performance of selected mutual funds or money market accounts.

 

Prior to December 31, 2006, directors could also elect to defer receipt of all or any portion of the compensation payable to them by Cadence under Cadence’s 2002 Deferred Compensation Venture Investment Plan. Compensation deferred under this plan was invested in Telos Venture Partners II, L.P. or Telos Venture Partners III, L.P., which are venture capital funds in which Cadence is or was a limited partner.

 

In addition, a health care and prescription drug insurance coverage plan is available for active non-employee directors and eligible retired directors and their dependents. All non-employee directors are eligible for the plan

during their term of service on the Board. Retired employee and non-employee directors will be eligible for the plan for a term not to exceed their term of service on the Board. Under the plan, Cadence reimburses 100% of the premium for participants and their dependents up to a maximum of $15,000 per year, which maximum amount may be adjusted for future changes in health care costs. In addition, benefits under the plan are fully taxable to the participants and Cadence does not defray any such taxes. Mr. Lucas, Dr. Shoven, Mr. Siboni and Mr. Tan maintained health insurance coverage under this plan in 2006.

 

Dr. Sangiovanni-Vincentelli earned $55,000 for consulting services performed for Cadence in 2006. Cadence and Dr. Sangiovanni-Vincentelli have entered into a consulting agreement which provides for an annual consulting fee of $55,000 and reimbursement of reasonable costs and expenses incurred in the performance of work under the consulting agreement in accordance with Cadence policy. The consulting agreement also contains confidentiality and non-solicitation provisions in favor of Cadence. Dr. Sangiovanni-Vincentelli’s consulting services consisted of providing technical and strategic advice to Cadence’s CEO with respect to potential acquisitions and organizational and customer relations matters, serving as facilitator in customer and partner meetings to discuss industry trends, collaboration on technology and business issues, representing Cadence at industry, technical and government events, and participating in setting the direction of the Cadence Berkeley Labs and of Cadence’s research partnerships. Dr. Sangiovanni-Vincentelli has provided consulting services to Cadence, or one of its predecessor corporations, since 1983, and is expected to render similar services throughout 2007. Cadence does not have any comparable arrangements with other consultants and, as a result, has no basis for comparing the terms of Dr. Sangiovanni-Vincentelli’s arrangement with others. In addition, Dr. Sangiovanni-Vincentelli is the Scientific Director of PARADES-EEIG, an Italian not-for-profit entity engaged in research related to electronic systems engineering. By contract, a Cadence subsidiary contributes up to 50% of the annual funding needs of PARADES-EEIG. For his services to PARADES-EEIG in 2006, Dr. Sangiovanni-Vincentelli earned 92,400 euros (approximately $116,000 based on the average foreign currency exchange rate in 2006). Dr. Sangiovanni-Vincentelli is also a member of the board of directors of Accent S.p.a., an Italian company that provides microelectronics product design and realization services as well as semiconductor IP licensing. Cadence owns approximately 22% of the equity interests in Accent. For his services as a director of Accent in 2006, Dr. Sangiovanni-Vincentelli earned 12,000 euros (approximately $15,000 based on the average foreign currency exchange rate in 2006).

 

PROPOSAL 1

 

ELECTION OF DIRECTORS

 

The Corporate Governance and Nominating Committee of the Board has recommended, and the Board has nominated, the eight nominees named below for election to Cadence’s Board of Directors. Each director elected at the annual meeting will hold office until the 2008 Annual Meeting of Stockholders and until his successor is elected and qualified, or until the director’s earlier death, resignation or removal. Each nominee listed below is currently a Cadence director. All of the nominees have previously been elected by Cadence’s stockholders.

 

VOTE REQUIRED AND BOARD RECOMMENDATION

 

Shares represented by executed proxies will be voted FOR the election of the eight nominees named below, if authority to do so is not withheld. Directors are elected by a plurality of the votes cast at the annual meeting. 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.

 

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

 

NOMINEES

 

The names of the nominees and certain information about them, including term of service as a Cadence director and age as of the 2007 Annual Meeting of Stockholders, are set forth below:

 

 

PROPOSAL 2

 

APPROVAL OF AMENDMENT AND RESTATEMENT OF THE 1987 STOCK INCENTIVE PLAN

 

The 1987 Stock Incentive Plan, which is referred to in this proxy statement as the 1987 Plan, was adopted by the Board in April 1987 and subsequently approved by Cadence’s stockholders.

 

In February 2007, the Compensation Committee approved, subject to stockholder approval, the amendment and restatement of the 1987 Plan to, among other things, extend the term of the 1987 Plan by ten (10) years to continue in effect until May 8, 2017. All other changes to the 1987 Plan for purposes of this Proposal 2 were immaterial in nature.

 

As of March 21, 2007, 3,019,099 shares of common stock remained available for issuance under the 1987 Plan and, of those shares, 816,975 shares of common stock authorized for issuance as incentive stock awards under the 1987 Plan remained available for issuance.

 

REASONS FOR THE PROPOSED AMENDMENT AND RESTATEMENT

 

Cadence is seeking stockholder approval of the amendment and restatement of the 1987 Plan to continue to be able to attract, retain and motivate its executive officers. Upon stockholder approval, the term of the 1987 Plan will be extended for an additional 10 years, which will enable Cadence to continue to grant equity awards to its executive officers at levels determined by the Board to be necessary to attract, retain and motivate the individuals who will be critical to Cadence’s success in achieving its business objectives and thereby creating greater value for all Cadence stockholders.

 

The 1987 Plan is Cadence’s only equity compensation plan under which executive officers are eligible to receive equity-based compensation awards. Cadence believes that equity compensation aligns the interests of its executive officers and other employees with the interests of its other stockholders. Stockholder approval of the proposed amendment and restatement of the 1987 Plan, as described above, is a critical component of Cadence’s equity compensation policies. Absent stockholder approval of the extension of the 1987 Plan, it will terminate pursuant to its terms on May 21, 2007. If the 1987 Plan terminates, Cadence will not be able to continue to grant incentive stock or options to its executive officers. The ability to grant equity-based compensation to executive officers is a critical component of Cadence’s compensation policies that seek to align the interests of its executive officers with the interests of stockholders. The inability to grant equity-based compensation awards to executive officers would likely result in a substantial increase in the cash compensation paid to these officers in order to attract and retain their services.

 

It is important to note that with the proposed amendment and restatement under this Proposal 2 Cadence is not seeking to increase the number of authorized shares available for grant under the 1987 Plan.

 

In this era of fierce global competition for the services of talented individuals, the ability to attract, retain and motivate the most critical executives has become vital to Cadence’s success. Accordingly, the Board seeks approval of the proposal to amend and restate the 1987 Plan to facilitate Cadence’s ability to achieve the important equity compensation goals described above.

 

Section 162(m)

 

The Board believes that it is in the best interests of Cadence and its stockholders to continue to provide an equity incentive plan under which equity-based compensation awards made to executive officers can qualify for deductibility 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) of the Code. In general, under Section 162(m), in order for Cadence to be able to deduct compensation in excess of $1,000,000 paid in any one year to Cadence’s Chief Executive Officer or any of Cadence’s four other most highly compensated executive officers, such compensation must qualify as “performance-based.” 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.

 

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 goal is based, and (iii) the maximum amount of compensation that can be paid to an employee under the performance goal. With respect to awards of incentive stock under the 1987 Plan, each of these aspects is discussed below, and stockholder approval of the amendment and restatement of the 1987 Plan will be deemed to constitute approval of each of these aspects of the 1987 Plan for purposes of the approval requirements of Section 162(m).

 

VOTE REQUIRED AND BOARD RECOMMENDATION

 

The Board recommends a vote FOR approval of the amendment and restatement of the 1987 Plan. The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote on the proposal is required for approval of 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. Broker non-votes will be treated as not being entitled to vote on the proposal and, therefore, are not counted for purposes of determining whether the

proposal has been approved. Unless marked to the contrary, proxies received will be voted FOR approval of the amendment and restatement of the 1987 Plan.

 

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

 

SUMMARY OF THE 1987 PLAN

 

The following summary of the material provisions of the 1987 Plan, as amended and restated, is qualified in its entirety by the complete text of the 1987 Plan, as amended and restated, a copy of which is attached as Appendix A to this proxy statement.

 

GENERAL

 

The 1987 Plan provides for the grant of incentive stock options, nonstatutory stock options and incentive stock awards. 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. See “Reasons for the Proposed Amendment and Restatement” above.

 

ADMINISTRATION

 

The 1987 Plan provides that the Board administers 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 the vesting 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. To the extent required to satisfy the requirements of Rule 16b-3 of the Exchange Act or Section 162(m) of the Code, any such committee will consist of two or more:

 

 

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) and consultants are eligible to receive nonstatutory stock options and incentive stock awards 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 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 5,200 employees, including Cadence’s six 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

 

This proposed amendment and restatement does not increase the total number of shares available for issuance under the 1987 Plan. As of March 21, 2007, 3,019,099 shares of common stock (including 816,975 shares available for issuance as incentive stock awards) remained available for issuance of the 73,370,100 shares authorized over the life of the 1987 Plan, 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. However, for purposes of Section 162(m) of the Code, stock awards that are cancelled, forfeited or treated as having been cancelled, count against the maximum number of shares for which stock awards may be granted to any person under the terms of 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. Prior to January 1, 2007, the fair market value for purposes of the 1987 Plan was the average of the high and low prices of Cadence’s common stock on the grant date as reported by NASDAQ. As of January 1, 2007, 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. Shares covered by a majority of currently outstanding options under the 1987 Plan vest at the rate of 1/48th of the shares subject to the option each month following the grant date. The remaining outstanding options vest at a rate of 1/60th of the shares subject to the option each month. Shares covered by options granted in the future under the 1987 Plan may be subject to different vesting terms. 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.  Prior to October 1, 2006, the maximum term of options granted under the 1987 was ten years. From and after October 1, 2006, 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. However, if the optionee dies while an employee of or consultant to Cadence or one of its affiliates, the option may be exercised within three months after the optionee’s death, or such longer period of time as determined by the Board, by the optionee’s estate or by a person who acquires the right to exercise the option by bequest or inheritance, but only to the extent the right to exercise would have accrued had the optionee continued living three months after the date of death, or such longer period of time as determined by the Board. If the optionee dies within one month after termination of his or her employment or consulting relationship with Cadence or one of its affiliates, the option may be exercised within three months after the optionee’s death, or such longer period of time as determined by the Board, by the optionee’s estate or by a person who acquires the right to exercise the option by bequest or inheritance, but only to the extent the right to exercise had accrued at the date of termination.

 

INCENTIVE STOCK AWARD PROVISIONS

 

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

 

Sales Price and Payment of Sales Price.  The sales price, if any, at which shares of incentive stock 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.

 

Vesting.  The grant, issuance, retention and vesting of shares of incentive stock 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 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 is based solely on continued service, an award of incentive stock 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 sooner than one year after the grant date. The Board may accelerate the vesting of an incentive stock award 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 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 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 subsidiary, 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:

 

 

The Board, in its discretion, may reduce the number of shares granted, issued, retainable and/or vested under an incentive stock award 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:

 

 

EFFECT OF CERTAIN CORPORATE EVENTS

 

The 1987 Plan provides that, in the event of a change of 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 of 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 of 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, and subject to stockholder approval of the amendment and restatement of the 1987 Plan, the 1987 Plan will terminate on May 8, 2017. 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 within 12 months 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 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 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.

 

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:

 

 

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.

 

Potential Limitation on Deductions

 

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 the amendment and restatement of the 1987 is approved by the stockholders, the 1987 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 21, 2007, the closing price of Cadence common stock as reported by NASDAQ was $21.10.

 

PARTICIPATION IN THE 1987 PLAN

 

As of March 21, 2007, over the 20-year life of the 1987 Plan, stock awards covering 566,250 shares of Cadence common stock have 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. Directors other than Dr. Sangiovanni-Vincentelli, who is a consultant to Cadence, and Mr. Fister, who is Cadence’s CEO, are not eligible to receive grants under the 1987 Plan. As a group, Cadence’s current executive officers have been granted stock awards covering 8,390,114 shares over the life of the 1987 Plan. The executive officers listed in the Summary Compensation Table below, referred to in this proxy statement as the Named Executive Officers, have been granted stock awards covering the following aggregate number of shares over the life of the 1987 Plan: Mr. Fister, 2,820,114; Mr. Bushby, 1,340,000; Mr. Gavrielov, 305,000; Mr. Miller, 750,000; and Mr. Porter, 1,870,000. All other employees as a group have been granted stock awards covering 119,914,432 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. Of these 119,914,432 stock awards, 57,254,365 have been exercised, 66,751,029 have been terminated or cancelled and returned to the 1987 Plan, and awards covering 147,500 shares are currently outstanding.

 

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.

 

PROPOSAL 3

 

APPROVAL OF AMENDMENT OF THE 1987 STOCK INCENTIVE PLAN

 

In February 2007, the Compensation Committee approved, subject to stockholder approval, the amendment of the 1987 Plan to:

 

 

As of March 21, 2007, 3,019,099 shares of common stock remained available for issuance under the 1987 Plan and, of those shares, 816,975 shares of common stock authorized for issuance as incentive stock awards under the 1987 Plan remained available for issuance. The increase in the total number of shares of common stock available for

issuance under the 1987 Plan represents approximately 1.4% of Cadence’s outstanding common stock as of the record date. The increase in the number of shares of common stock authorized for issuance as incentive stock awards under the 1987 Plan represents approximately 0.7% of Cadence’s outstanding common stock as of the record date.

 

REASONS FOR THE PROPOSED AMENDMENT

 

Cadence is seeking stockholder approval of the amendment of the 1987 Plan to continue to be able to attract, retain and motivate its executive officers and to continue to reduce the dilution to Cadence’s stockholders resulting from option grants. Upon stockholder approval, additional shares of common stock will be reserved for issuance under the 1987 Plan, which will enable Cadence to continue to grant equity awards to its executive officers at levels determined by the Board to be necessary to attract, retain and motivate the individuals who will be critical to Cadence’s success in achieving its business objectives and thereby creating greater value for all Cadence stockholders. In addition, upon stockholder approval, of the 75,370,100 shares of common stock available for issuance under the 1987 Plan, the number of those shares authorized for issuance as incentive stock awards will also be increased to 5,000,000. Cadence believes that a share of incentive stock is more valuable than an option to purchase a share of common stock, and it is Cadence’s experience that an equity incentive program that includes awards of both options and incentive stock results in a lower aggregate number of shares being issued. This approach is designed to lower dilution by reducing the number of shares included in outstanding equity. As a result, Cadence selectively uses incentive stock in its overall approach to equity compensation.

 

Furthermore, Cadence believes that equity compensation aligns the interests of its executive officers and other employees with the interests of its other stockholders. Stockholder approval of the proposed amendment of the 1987 Plan, as described above, is a critical component of Cadence’s equity compensation policies and is required for Cadence to achieve the following goals:

 

 

Incentive stock has become an increasingly important tool to Cadence for retaining key employees and executives. Options remain an important element of executive compensation. However, Cadence believes that incentive stock provides more retention power per share than options because the recipient loses the full value of a share of stock, as well as the opportunity for future gains, by leaving Cadence. Cadence believes that it is important

to continue to be able to use incentive stock, as well as options, to retain Cadence’s executive officers. As in the past, grants of incentive stock to executive officers in the future will have specific limitations on vesting. The 1987 Plan requires that if a grant has performance-based vesting (i.e., vesting tied to the achievement of specified goals), it may not begin to vest until one year after the grant date, or if a grant has time-based vesting, it may not fully vest over a period less than three years with a vesting schedule not more favorable, at any point in time, than what would be vested under a monthly pro rata vesting schedule (i.e., 1/36th per month) over those three years. Cadence still expects options to remain a significant form of equity compensation for executive officers, but in most cases, a significant portion of the equity compensation granted to executive officers will consist of incentive stock rather than options.

 

Overview of Cadence’s Current Equity Compensation Overhang

 

As discussed above, Cadence intends to continue using incentive stock to assist in reducing its equity compensation plan “overhang”, or calculated dilution. Cadence calculates dilution according to the following formula:

 

optioned shares granted but not yet exercised + unvested restricted stock awards + shares available for grant

total shares outstanding + optioned shares granted but not yet exercised + unvested restricted stock awards + shares available for grant

 

The following are important factors affecting Cadence’s current stockholder dilution:

 

 

 

 

 

As the global economy continues to improve, the ability to attract, retain and motivate Cadence’s most critical executives has become more important for Cadence. Accordingly, the Board seeks approval of the proposal to amend the 1987 Plan to facilitate Cadence’s ability to achieve the important equity compensation goals described above.

 

VOTE REQUIRED AND BOARD RECOMMENDATION

 

The Board recommends a vote FOR approval of the amendment of the 1987 Plan. The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote on the proposal is required for approval of 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. Broker non-votes will be treated as not being entitled to vote on the proposal and, therefore, are not counted for purposes of determining whether the proposal has been approved. Unless marked to the contrary, proxies received will be voted FOR approval of the amendment of the 1987 Plan.

 

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

 

SUMMARY OF THE 1987 PLAN

 

Please see Proposal 2 above for a summary of the material provisions of the 1987 Plan.

 

The proposed amendment of the 1987 Plan increases the total number of shares of Cadence common stock available for issuance under the 1987 Plan by 4,000,000 shares, for a total of 75,370,100 shares. As of March 21, 2007, 3,019,099 shares of common stock (including 816,975 shares available for issuance as incentive stock awards) remained available for issuance under the 1987 Plan of the 71,370,100 shares authorized over the life of the plan. Subject to stockholder approval, up to 2,000,000 of those shares would be issuable as incentive stock awards in addition to the 3,000,000 shares that were previously reserved for issuance as incentive stock awards. A copy of the proposed amendment is attached as Appendix B to this proxy statement.

 

PROPOSAL 4

 

STOCKHOLDER PROPOSAL REGARDING ELECTION OF DIRECTORS BY A MAJORITY VOTE

 

The New England Carpenters Pension Fund, 350 Fordham Road, Wilmington, MA 01887, beneficial owner of approximately 10,500 shares of Cadence common stock, has notified Cadence that it intends to present the following proposal at the annual meeting.

 

DIRECTOR ELECTION MAJORITY VOTE STANDARD PROPOSAL

 

Resolved:  That the shareholders of Cadence Design Systems, Inc. (“Company”) hereby request that the Board of Directors initiate the appropriate process to amend the Company’s governance documents (certificate of incorporation or bylaws) to provide that director nominees shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders, with a plurality vote standard retained for contested director elections, that is, when the number of director nominees exceeds the number of board seats.

 

Supporting Statement:  In order to provide shareholders a meaningful role in director elections, our Company’s director election vote standard should be changed to a majority vote standard. A majority vote standard would require that a nominee receive a majority of the votes cast in order to be elected. The standard is particularly well-suited for the vast majority of director elections in which only board nominated candidates are on the ballot. We believe that a majority vote standard in board elections would establish a challenging vote standard for board nominees and improve the performance of individual directors and entire boards. Our Company presently uses a plurality vote standard in all director elections. Under the plurality vote standard, a nominee for the board can be elected with as little as a single affirmative vote, even if a substantial majority of the votes cast are “withheld” from the nominee.

 

In response to strong shareholder support for a majority vote standard in director elections, an increasing number of companies, including Intel, Dell, Motorola, Texas Instruments, Wal-Mart, Safeway, Home Depot, Gannett, Marathon Oil, and General Electric, have adopted a majority vote standard in company by-laws. Additionally, these companies have adopted director resignation policies in their by-laws or corporate governance policies to address post-election issues related to the status of director nominees that fail to win election. Other

companies have responded only partially to the call for change by simply adopting post-election director resignation policies that set procedures for addressing the status of director nominees that receive more “withhold” votes than “for” votes. At the time of the submission of this proposal, our Company and its board had not taken either action.

 

We believe the critical first step in establishing a meaningful majority vote policy is the adoption of a majority vote standard in Company governance documents. Our Company needs to join the growing list of companies that have taken this action. With a majority vote standard in place, the board can then consider action on developing post-election procedures to address the status of directors that fail to win election. A combination of a majority vote standard and a post-election director resignation policy would establish a meaningful right for shareholders to elect directors, while reserving for the board an important post-election role in determining the continued status of an unelected director. We feel that this combination of the majority vote standard with a post-election policy represents a true majority vote standard.

 

STATEMENT IN OPPOSITION TO DIRECTOR ELECTION MAJORITY VOTE STANDARD PROPOSAL

 

This stockholder proposal requests that Cadence adopt a majority voting standard for uncontested director elections. After due consideration, the Board of Directors recommends a vote against this proposal because, for the reasons discussed below, it is unnecessary.

 

Cadence is a Delaware company, and Cadence directors currently are elected based on a plurality voting standard (the default standard under Delaware law). Under plurality voting, the director nominees who receive the most affirmative votes are elected to serve on Cadence’s Board of Directors. Many large public companies incorporated in Delaware and elsewhere use a plurality voting standard. Under plurality voting, Cadence stockholders have a history of electing strong and independent Boards.

 

Moreover, the Board of Directors believes that Cadence already has strong corporate governance processes that are designed to identify and propose director nominees who will serve the best interests of Cadence and all its stockholders. Director nominees are evaluated and recommended for election by the Corporate Governance and Nominating Committee, all of whose members are independent directors. Cadence also includes in this proxy statement information on how stockholders can communicate their views on potential nominees or other matters to the Board of Directors. Thus, we believe that Cadence already maintains appropriate mechanisms for electing an effective Board of Directors committed to delivering long-term stockholder value.

 

Nevertheless, after Cadence received the stockholder proposal, the Board evaluated it thoroughly and determined that it was in Cadence’s best interests to adopt instead a policy, which is referred to in this proxy statement as the Majority Vote Policy, that we believe addresses the concerns expressed in this stockholder proposal. The Majority Vote Policy, which is set forth in Cadence’s Corporate Governance Guidelines, provides that any director nominee who receives a greater number of votes “withheld” from his or her election than votes “for” such election will tender his or her resignation for consideration by the Corporate Governance and Nominating Committee, which is composed entirely of independent directors. The Corporate Governance and Nominating Committee will then recommend to the Board whether to accept such tendered resignation, and the Board must publicly disclose its decision and, if applicable, the reasons for rejecting the tendered resignation. The complete text of the Majority Vote Policy is set forth in Appendix C to this proxy statement. We believe that the Majority Vote Policy is effective in giving stockholders a meaningful role in the election of directors and in removing from office a director opposed by stockholders.

 

Finally, stockholders at numerous public companies have rejected similar stockholder proposals when those companies had previously adopted a policy similar to Cadence’s Majority Vote Policy. Examples include American Express, Eli Lilly, International Business Machines Corporation, Johnson & Johnson, Medtronic and others.

 

VOTE REQUIRED AND BOARD RECOMMENDATION

 

The Board of Directors of Cadence recommends a vote AGAINST the stockholder proposal regarding election of directors by a majority vote. 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 AGAINST the stockholder proposal regarding election of directors by a majority vote.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 4.

 

 

PROPOSAL 5

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

 

The Audit Committee has selected KPMG LLP as Cadence’s independent auditors for the fiscal year ending December 29, 2007. Pursuant to the Audit Committee charter, the Board has directed management to submit the selection of independent auditors 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 annual meeting, 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 auditors 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 different independent auditors 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 RECOMMENDATION

 

The Board of Directors of Cadence 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 5.

 

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee of the Board is comprised of three non-employee directors of Cadence who are “independent” as defined by the corporate governance listing standards of NASDAQ and as defined under the Exchange Act. During fiscal 2006, the Audit Committee was comprised of Mr. Lucas, Dr. Shoven and Mr. Siboni as Chairman. The Audit Committee met nine times in 2006.

 

The Audit Committee operates under a charter, which was most recently amended by the Board in February 2006. 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 auditors and oversees the quality and integrity of Cadence’s financial statements, Cadence’s compliance with legal and regulatory requirements, the independent auditors’ qualifications and independence, and the performance of Cadence’s internal audit function, the independent auditors, 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 with Cadence’s management and independent auditors, KPMG LLP. The Audit Committee has also discussed with KPMG LLP the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended. In addition, the Audit Committee has received from KPMG LLP the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) 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 the auditors’ 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 year ended December 30, 2006 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, which is referred to in this proxy statement as the Securities Act, 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 December 30, 2006 and December 31, 2005.

 

 

 

 

AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS

 

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

 

 

However, engagements for these pre-approved audit-related and tax services with an estimated cost of more than $250,000 or that exceed the applicable budgeted amount for the pre-approved services must be pre-approved on a case-by-case basis by the Audit Committee or the Chairman of the Audit Committee, or, if the Chairman is unavailable, another member of the Audit Committee. In addition, any proposed engagement of KPMG LLP for

services that are not pre-approved audit-related and tax services as described above must also be pre-approved on a case-by-case basis by the Audit Committee or the Chairman of the Audit Committee, or, if the Chairman is unavailable, another member of the Audit Committee. The members to whom such authority is delegated must report any approval decisions to the full Audit Committee at its next scheduled meeting. None of the services described in the table above entitled “Fees Billed to Cadence by KPMG During Fiscal 2006 and 2005” 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’s common stock as of March 21, 2007, the record date, unless otherwise indicated below, by:

 

 

 

 

 

 

 

The Compensation Committee of the Board of Directors is comprised of three non-employee directors of Cadence who are “independent” as defined by the corporate governance listing standards of NASDAQ. Until May 10, 2006, the Compensation Committee was comprised of Mr. Lucas as Chairman, Mr. Scalise and Mr. Tan. As of May 10, 2006, Dr. Shoven replaced Mr. Tan on the Compensation Committee. The Compensation Committee met six times in fiscal 2006.

 

ROLE OF THE COMPENSATION COMMITTEE

 

The Compensation Committee acts on behalf of the Board, as provided in the committee’s charter, to review and approve corporate goals and objectives relevant to the compensation of Cadence’s CEO and other executive officers, evaluate the CEO’s performance in light of those goals and objectives, and determine and approve the CEO’s and other executive officers’ compensation. 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 the Senior Executive Bonus Plan, Cadence’s equity-based compensation plans and stock purchase plans, and the 1994 Deferred Compensation Plan.

 

The Compensation Committee also reviews and recommends to the Board the compensation of Cadence’s directors. Each year the Compensation Committee, with the assistance of its compensation consultant, benchmarks the competitiveness of the directors’ total compensation, which includes a cash retainer, committee chair retainers,

Board and committee meeting fees and stock option grants. The goal of the Compensation Committee’s benchmarking is to assess the competitiveness of the directors’ total direct compensation in light of the total direct compensation offered to directors of companies that are comparable to Cadence.

 

In fiscal 2006, the Compensation Committee retained the services of an independent compensation consultant, Semler Brossy Consulting Group, LLC, or Semler Brossy, for further investigation into and advice on total compensation for Cadence’s directors and executive officers. The Compensation Committee believes that having an independent evaluation of director compensation and executive officer salary, bonus and equity compensation is a valuable tool for the Committee and stockholders. Semler Brossy is not otherwise engaged to perform 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 the Named Executive Officers, based on the competitive assessments provided by and through consultation with Semler Brossy. However, the Compensation Committee retained complete discretion over its decisions.

 

OVERALL OBJECTIVES OF EXECUTIVE COMPENSATION PROGRAM

 

Cadence’s compensation program for its Named Executive Officers is designed to attract, motivate and retain highly qualified individuals with the leadership skills necessary to achieve Cadence’s annual and long-term business objectives and to create stockholder value. Cadence’s executive compensation program is based on the following underlying principles:

 

 

The Compensation Committee, with the assistance of its compensation consultant and input from management, assesses Cadence’s executive compensation program annually to monitor Cadence’s adherence to these principles.

 

DETERMINING EXECUTIVE COMPENSATION

 

The Compensation Committee determines compensation levels for Cadence’s Named Executive Officers by compiling external benchmarks and assessing the competitiveness of Cadence’s compensation levels relative to those benchmarks while taking into account a number of factors (as discussed below).

 

Competitive Benchmarking

 

Each year the Compensation Committee, with the assistance of its compensation consultant, benchmarks the competitiveness of the Named Executive Officers’ total direct compensation. The Compensation Committee also periodically reviews the competitiveness of the Named Executive Officers’ severance and change in control arrangements.

 

The goal of the Compensation Committee’s benchmarking is to assess the competitiveness of the Named Executive Officers’ total direct compensation in light of the total direct compensation offered to executives at companies with which Cadence competes for talent. In order to reflect more accurately the pool from which talent is drawn and to which it is lost, these peer groups are not limited to Cadence’s direct business competitors. Rather, the Compensation Committee and its compensation consultant have developed peer groups comprised of electronic design automation, semiconductor, and select other technology companies and have taken into account the geographic location and the relative size of the comparator companies (based on revenue, net income, and/or market capitalization). Cadence also routinely benchmarks its broad-based employee benefit plans based upon a review of the benefits survey conducted by the Silicon Valley Employers’ Forum. Cadence aims to provide benefits to its employees that are competitive.

 

In 2006, the Compensation Committee, with the assistance of its compensation consultant, developed two separate peer groups for benchmarking purposes. The first group, referred to as Peer Group A, contains 13 companies that the Compensation Committee believes to be the companies most relevant with respect to competition for talent at the Named Executive Officer level. Cadence’s fiscal year 2005 revenue was 64% of the median of the revenue for each company’s most recent fiscal year. The Compensation Committee purposefully excluded from Peer Group A companies that Cadence would consider competitors in the talent market, but that had revenue of more than 10 times Cadence’s revenue. While the Compensation Committee monitors the practices of these larger companies, it does not consider their compensation levels in the benchmarking process because of differences in the scope of job responsibilities or the breadth of the organizations reporting to executives holding the same or similar titles. Due to the relatively small size of Peer Group A, the Compensation Committee developed a second comparator group, referred to as Peer Group B, in order to provide more robust compensation data for comparison purposes. Peer Group B is comprised of 29 technology companies, most of which are based in the Silicon Valley, where Cadence is headquartered. Revenue for each company’s most recent fiscal year ranged from 0.5 to 3.1 times that of Cadence’s fiscal year 2005 revenue. Cadence’s revenue was 83% of the median for Peer Group B.

 

The following companies comprised Peer Group A for 2006 decision making:

 

 

The following companies (some of which were also included in Peer Group A) comprised Peer Group B for 2006 decision making:

 

The Compensation Committee weighed each group equally as it assessed the competitiveness of the Named Executive Officers’ base salaries, target and actual annual incentive compensation, long-term equity incentive opportunities, and total direct compensation. In developing the peer groups and comparison information, the Compensation Committee and its compensation consultant generally relied on compensation information reported in the peer group companies’ public filings and data from the Radford Executive Compensation Survey.

 

Compensation Determinations

 

Consistent with the general principles outlined above, after the Compensation Committee has determined the market levels of compensation based on the benchmarking process, the Compensation Committee assesses the appropriateness of each Named Executive Officer’s compensation level relative to similar executives at the comparator companies taking into account the following factors:

 

Cadence Factors

 

 

Individual Factors

 

 

For each Named Executive Officer other than the CEO, the CEO makes recommendations for annual adjustments to compensation levels and short-term and long-term incentive compensation components to the Compensation Committee based upon the CEO’s assessment of the factors described above. The Compensation Committee reviews with the CEO these assessments and recommendations for each Named Executive Officer other than the CEO and determines whether or not to approve and/or modify the CEO’s recommendations. The CEO’s performance with respect to these individual factors is evaluated by the Compensation Committee. Annual adjustments to the CEO’s compensation levels and short-term and long-term incentive compensation components are based on these assessments without input from management.

 

ELEMENTS OF EXECUTIVE COMPENSATION

 

The executive compensation program is comprised of the following elements, although not all the Named Executive Officers receive each element listed under ’other compensation and benefits’:

 

 

 

 

 

 

 

Consistent with the principles outlined above, a substantial portion of total direct compensation varies based upon Cadence’s achievement of its financial and operational objectives, as well as an executive’s individual performance objectives. 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 this allocation is influenced by the Compensation Committee’s assessment of the compensation practices of the comparator companies described above. Instead, the Compensation Committee strives to provide fixed pay (base salary) at levels sufficient to attract and retain qualified executives. The remaining portion of total direct compensation is comprised of variable compensation in the form of annual incentive compensation and long-term equity incentives. Cadence believes that executives should be rewarded for achieving annual performance goals, but that consistent and sustained performance is the single most important influence on long-term stockholder value. Additionally, Cadence believes that the interests of the Named Executive Officers should be aligned with the interests of stockholders. Accordingly, the Named Executive Officers’ variable compensation is weighted towards long-term equity incentives rather than annual cash incentive compensation.

 

Base Salaries

 

Cadence offers all of its Named 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 executives and are determined consistent with the methodology outlined above under “Compensation Determinations.” Salaries are reviewed annually by the Compensation Committee, but do not automatically increase. Changes to base salaries, if any, are typically made in the first quarter of the year. In February 2006, the Compensation Committee reviewed the base salaries of the Named Executive Officers, and decided not to increase base salaries.

 

Annual Cash Incentive Compensation

 

Cadence provides all Named Executive Officers the opportunity to earn variable cash compensation under the stockholder-approved Cadence Senior Executive Bonus Plan. The purpose of this plan is to reward the Named Executive Officers for performance during a single fiscal year and to provide appropriate incentives for them to achieve Cadence’s annual business and financial goals, as measured against specific performance criteria relative to their respective business groups and Cadence’s overall business results. Bonus payouts are made semi-annually, with 40% of the annual target payable for performance in the first half of the year and 60% payable for performance in the second half. Greater emphasis is placed on the second half of the year because a greater share of annual revenue and profits are typically earned during that half of the year. The annual bonus paid to each Named Executive Officer is determined based upon the Named Executive Officer’s target bonus multiplied by a Cadence group modifier and an individual performance modifier (each described in more detail below). For each Named Executive Officer other than the CEO, the Compensation Committee approves (with or without modification, in its sole discretion) the CEO’s recommendations as to the executive’s target bonus based on the methodology outlined above under ’Compensation Determinations’. The Compensation Committee also assigns the CEO a target bonus based on the methodology outlined above under ’Compensation Determinations’. Target bonuses for Named Executive Officers are expressed as either a dollar amount or a percent of salary.

 

Cadence Group Modifier

 

The Cadence group modifier is a percentage that reflects Cadence’s overall performance (the company performance modifier) and, for all Named Executive Officers except the CEO, the performance of the business group for which the Named Executive Officer is responsible (the business objectives modifier). For 2006, the performance metrics for the company performance modifier were net bookings (defined as the total net dollar value of all legally binding sales arrangements concluded during the performance period), total revenue (defined as the total dollar value of revenue as disclosed in Cadence’s periodic reports on Forms 10-Q and 10-K) and non-GAAP operating margin (defined as non-GAAP income from operations, as disclosed in Cadence’s current reports on

Form 8-K, which incorporate quarterly announcement of financial results, represented as a percentage of total revenue). The achievement of the company performance modifier is determined based on a formula. The business objectives modifier is based on the achievement of qualitative performance goals that vary by business group and focus upon short-term and long-term goals for the specific business group (including improving operational excellence and efficiencies, achieving milestones with respect to new product development, customer satisfaction, driving innovation and achieving goals related to Cadence’s long-term business strategy). The Compensation Committee reviews the achievement of these goals based upon the CEO’s assessment of each business group’s performance relative to its specific objectives. The business objectives modifier for the CEO is an average of the business objective modifiers for each of his direct reports.

 

The weightings and performance measures used to determine the Cadence group modifier are reviewed semi-annually by the Compensation Committee, in consultation with senior management, to assure that they align with what the Compensation Committee and management believe are the most important drivers of both annual business and financial performance and long-term stockholder value.

 

For 2006, the net bookings target represented 10% of the Cadence group modifier, the total revenue target represented 25%, the operating margin target represented 40% and the business objectives modifier represented 25%. Performance targets for the company performance modifier are based on achievement of Cadence’s 2006 business plan and are approved by the Compensation Committee. Performance on each measure is determined independently (e.g., it is possible to miss the performance target for one or more measures and still receive a payout based upon the achievement of the remaining performance targets). For 2006, achievement of 85% of the targeted level of net bookings and 90% of target level of total revenue and operating margin was required before any payment with respect of each such measure pursuant to the plan could be made. For each of the past three years, including for 2006, the Compensation Committee has established targets for the three elements that constitute the company performance modifier that would require an increase in corporate performance as compared to the immediately preceding year’s actual results, thus presenting a significant challenge to the senior management team to continue improving Cadence’s financial performance on a year-over-year basis to achieve the bonus targets. Over the past three years (comprising six, semi-annual performance periods from 2004 through 2006), Cadence has achieved performance in excess of the target level for the net bookings goal four times, the total revenue goal four times and the operating margin goal twice. During this period, Cadence achieved performance in excess of the maximum performance level once for one of the three performance criteria, and once achieved less than the minimum performance level for one of three performance criteria. Generally, the target levels for each of the performance criteria approved by the Compensation Committee are set at a level such that the relative difficulty of achieving the target level for each of the criteria is consistent from year to year.

 

Individual Performance Modifier

 

The individual performance modifier is derived from qualitative assessments of individual performance during the performance period, based upon an individual’s contributions to Cadence, the importance of the individual’s position and retention considerations. Together with the CEO, the Compensation Committee evaluates the performance of each Named Executive Officer (other than the CEO) during the performance period and, based in part upon the CEO’s recommendations, approves the individual performance modifiers for each of the Named Executive Officers, other than the CEO. The Compensation Committee evaluates the CEO’s performance based upon CEO’s individual performance and contributions, and Cadence’s overall performance. This evaluation determines the CEO’s individual performance modifier.

 

Long-Term Equity Incentive Compensation

 

Consistent with the principles outlined above, long-term incentives are designed to provide the Named Executive Officers with an equity stake in Cadence and promote stock ownership to align the Named Executive Officers’ interests with those of Cadence’s stockholders and create significant incentives for executive retention. In addition, the Compensation Committee approves individual equity grants based on the methodology outlined above under ’Compensation Determinations’. The Compensation Committee also takes into account survey information regarding competitive levels of equity compensation awards gathered by Cadence’s human resources department, prior grant histories, and data on current vested and unvested stock and option positions.

 

In 2006, Cadence made equity grants in the form of stock options and restricted stock to the Named Executive Officers. When allocating long-term incentive compensation opportunities, the Compensation Committee currently targets between 60% and 70% of the total value of equity grants in the form of restricted stock, with the remainder comprised of stock options. The Compensation Committee believes this mix of restricted stock and options creates an effective tool for incentivizing and retaining those executives who are most responsible for influencing stockholder value.

 

Stock options provide an opportunity for Cadence to reward its Named Executive Officers if Cadence’s share price increases and the Named Executive Officers remain employed by Cadence during the period required for the options to vest. The stock options granted to Named Executive Officers in 2006 vest monthly over four years and expire ten years from the date of grant. In October of 2006, the Compensation Committee adjusted its policies for granting options under Cadence’s equity plans to reduce the term of all future option grants to employees from ten to seven years. In addition, prior to January 1, 2007, the exercise price of all stock options granted was equal to the average of the high and low sale price of Cadence’s common stock on the date of grant. Effective January 1, 2007, the exercise price of all stock options granted is equal to the closing price of Cadence’s common stock on the date of grant.

 

Awards of restricted stock align the interests of Named Executive Officers with the interests of stockholders through stock ownership, increase the reward to the Named Executive Officers when Cadence’s stock price increases, and serve as a retention tool for the Named Executive Officers. Awards of restricted stock granted to Named Executive Officers in 2006 vest annually over four years from the date of grant.

 

Grant Timing Policy

 

The Compensation Committee and senior management monitor Cadence’s stock option and restricted stock grant policies to ensure that they comply with governing regulations and are consistent with good corporate practice. In each of 2006 and 2007, grants to executive officers were made at Compensation Committee meetings held in February, after results for the preceding fiscal year became available, enabling the Compensation Committee to consider both the prior year’s performance and expectations for the succeeding year in making grant decisions. However, the Compensation Committee has the right to make grants at other times of the year when appropriate.

 

Deferred Compensation Plans

 

The Named Executive Officers may elect to defer compensation payable to them under Cadence’s 1994 Nonqualified Deferred Compensation Plan. This plan is designed to allow for retirement savings above the limits imposed by the IRS 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 plan are held in accounts with values indexed to the performance of selected mutual funds or money market accounts. On January 1, 2007, Cadence eliminated, with respect to new deferrals, a self-directed investment option previously available under the plan. With the elimination of this investment option, the investment options made available under the plan are substantially similar to those available under Cadence’s tax-qualified 401(k) plan. Cadence does not provide a match on executive deferrals under the deferred compensation plan. Cadence maintains this plan for the purposes of providing a competitive benefit and allowing Named Executive Officers an opportunity to defer income tax payments on their cash compensation.

 

Other Employee Benefit Plans

 

The Named Executive Officers are eligible for the same benefits available to Cadence employees generally. These include participation in a tax-qualified 401(k) plan and group life, health, dental, vision, and disability insurance plans.

 

Perquisites

 

Cadence generally does not provide its Named Executive Officers with significant perquisites and personal benefits. In connection with his initial hire, Cadence agreed to provide Michael J. Fister, President and CEO, with financial reimbursement related to his relocation to and housing in the San Jose area. Similarly, Cadence has

provided relocation and housing assistance to Kevin Bushby, Executive Vice President, Worldwide Field Operations, in connection with his relocation from England to the San Jose area. The Compensation Com mittee believes that these benefits are reasonable and necessary to attract and/or retain each of these executives.

 

Severance Benefits

 

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

 

In early 2006 the Compensation Committee engaged its compensation consultant to provide information on typical industry practices concerning employment, severance, and change in control agreements. Based on this review, the Compensation Committee believes its current arrangements with the Named Executive Officers are consistent with competitive practices. The Compensation Committee intends to review these arrangements periodically.

 

STOCK OWNERSHIP GUIDELINES

 

In 2005, Cadence established stock ownership guidelines for its Named Executive Officers. The guidelines were instituted to promote alignment with the interests of stockholders and Cadence’s commitment to sound corporate governance. Before establishing these guidelines, Cadence, with the assistance of its compensation consultant, reviewed industry standard practices. The Compensation Committee has established the following guidelines:

 

Stock Ownership Guidelines

 

 

 

 

Currently, all of Cadence’s Named Executive Officers exceed Cadence’s ownership guidelines.

 

TAX CONSIDERATIONS

 

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

 

Section 162(m) of the Code limits deductions for certain executive compensation in excess of $1,000,000 in any fiscal year. Certain types of compensation are deductible only if performance criteria are specified in detail and payments are contingent on stockholder approval of the compensation arrangement. Cadence attempts to structure

its compensation arrangements to achieve deductibility under Section 162(m), 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). Thus, deductibility will not be the sole factor used by the Compensation Committee in ascertaining appropriate levels or modes of compensation.

 

In 2006, all annual incentive plan payments, stock option grants, and restricted stock grants qualified as performance-based compensation under Section 162(m), and thus will be fully deductible.

 

Section 280G of the Internal Revenue Code of 1986

 

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

 

 

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

 

In the event that a portion of the payout would be classified as an excess parachute payment, Cadence’s tax deduction would be disallowed under Section 280G and an excise tax would be imposed under Section 4999. 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 year ended December 30, 2006.

 

COMPENSATION COMMITTEE

 

Donald L. Lucas, Chairman

George M. Scalise

John B. Shoven

 

No member of the Compensation Committee is, or was during or prior to fiscal 2006, 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 in a case 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, for fiscal year 2006, compensation awarded or paid to, or earned by, Cadence’s CEO, CFO, and three most highly compensated executive officers other than the CEO and CFO (collectively referred to herein as the Named Executive Officers) at December 30, 2006:

 

SUMMARY COMPENSATION TABLE

 

 

 

 

 

 

Cadence has entered into employment agreements with Messrs. Fister, Bushby, Miller and Porter and has entered into an offer letter with Mr. Gavrielov. See “Potential Payments Upon Termination or Change in Control and Employment Contracts” below.

 

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

 

GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2006

 

 

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

 

The stock awards granted to the Named Executive Officers were granted under the 1987 Plan and vest over four years, with 1/4th of the shares subject to such stock award vesting each anniversary after the date of grant, subject to the achievement of certain specified performance goals intended to ensure that the awards qualify as “performance-based compensation” under Section 162(m) of the Code. The stock options granted to the Named

Executive Officers were granted under the 1987 Plan and vest over four years, with 1/48th of the shares subject to such option vesting each month after the date of grant. Prior to January 1, 2007, the exercise price of options granted under the 1987 Plan was equal to the average of the high and low price of Cadence common stock on the date of grant. As of January 1, 2007, the exercise price of options granted under the 1987 Plan is equal to 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 plans.

 

OUTSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR END

 

 

 

 

OPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR 2006