Room 4561
June 16, 2006
Michael J. Fister
President and Chief Executive Officer
Cadence Design Systems, Inc.
2655 Seely Avenue, Building 5
San Jose, CA 95134
Re: Cadence Design Systems, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2005
Filed March 10, 2006
Form 10-Q for the Quarterly Period Ended April 1, 2006
Filed May 4, 2006
File no. 1-10606
Dear Mr. Fister:
We have reviewed your response letter dated May 17, 2006 and
have the following comments. Where indicated, we think you should
revise your document in response to these comments. If you
disagree,
we will consider your explanation as to why our comment is
inapplicable or a revision is unnecessary. Please be as detailed
as
necessary in your explanation. In our comment, we ask you to
provide
us with information so we may better understand your disclosure.
After reviewing this information, we may raise additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-K for the Fiscal Year Ended December 31, 2005
Note 2. Summary of Significant Accounting Policies
Revenue Recognition, page 63
1. We note your response to our previous comment no. 1 where you
indicate "since the subscription license includes a right to
access
unspecified additional products that become available during the
term
of the license, Cadences applies paragraphs 48 and 49 of SOP 97-2,
as
such, the entire arrangement fee is recognized as revenue ratably
over the term of the arrangement." Paragraphs 48 and 49 of SOP
97-2
allows for subscription accounting where a vendor agrees to
deliver
software currently and to deliver unspecified additional products
in
the future. It appears that your customers are receiving the
right
to remix additional product as opposed to the right to continue to
use the previously delivered software in addition to the right to
use
the unspecified additional product. Therefore please explain
further
how the Company concluded that the remix rights included in
contracts
that allow for unspecified additional software product do not
constitute exchange rights as contemplated by paragraphs 50 and 51
of
SOP 97-2.
2. We note your response to our previous comment no. 2. With
regards
to such information, please explain the following:
* Tell us when you deliver each of products that are subject to
remix
rights under your term license agreements. For instance, are all
such products delivered at once upon the term license inception?
If
not, tell us how the timing of delivery impacts your revenue
recognition.
* Your response indicates that the arrangements may limit the
customer`s use at any time to any mix or combination of the
products
as long as the cumulative value of all products in use does not
exceed "a value that was established at the outset of the
arrangement." Tell us how you determine this value. Is the value
established at the outset of the arrangement equal to the total
license fee? If not, tell us how you met the requirements of TPA
5100.45 for these arrangements.
Note 16. Income Taxes, page 102
3. We note your response to our previous comment no. 4 where you
indicate that the Company has accrued a tax liability related to
the
proposed tax deficiency based on your best estimate, for each
proposed adjustment, of what ultimately will be sustained upon the
final resolution of the matter through future negotiations. Tell
us
how much of the $143 million tax deficiency has be accrued for and
tell us where you have classified this accrual in your balance
sheet
(i.e. current or long-term liabilities) and why. Also, tell us
what
consideration you gave to disclosing the amount accrued pursuant
to
paragraph 9 of SFAS 5.
4. You further indicate that the Company provides for tax
liabilities
on its Consolidated Balance Sheets unless it is probable that
Cadence`s tax position will be sustained. Has the Company
therefore
determined it is probable that your tax position regarding
transfer
pricing arrangements will be sustained? Please explain your
conclusions and its impact on your current tax provisions.
Form 10-Q for the Quarterly Period Ended April 1, 2006
Condensed Consolidated Statements of Operations, page 2
5. We note that the Company included stock-based compensation
expense
throughout the various cost and expenses during the three months
ended, April 1, 2006. We further note that you included similar
expenses in a single line item for the three months ended, April
2,
2005 with footnote disclosures indicating the individual line
items
impacted by such expense. While we understand that the 2005
expenses
were calculated pursuant to APB 25 and SFAS 123 and the 2006
expenses
were calculated pursuant to SFAS 123R, please explain how the
Company
determined that presenting such expenses differently in
comparative
financial statement disclosures is appropriate. Please note that
pursuant to SAB 107, the Staff believes that companies should
present
expenses related to share-based payment arrangements in the same
line
or line items as cash compensation paid to the same employees.
Please explain.
6. We note that the Company estimates the volatility of your
common
stock based on the implied volatility. Tell us what publicly
traded
options the Company looked to determine implied volatility. Also,
tell us how you considered each of the factors in Question 4 of
SAB
107 in determining that use of the implied volatility is
appropriate.
As appropriate, please amend your filing and respond to
these
comments within 10 business days or tell us when you will provide
us
with a response. Please submit all correspondence and
supplemental
materials on EDGAR as required by Rule 101 of Regulation S-T. You
may wish to provide us with marked copies of any amendment to
expedite our review. Please furnish a cover letter with any
amendment that keys your responses to our comments and provides
any
requested information. Detailed cover letters greatly facilitate
our
review. Please understand that we may have additional comments
after
reviewing any amendment and your responses to our comments.
You may contact Kari Jin, Staff Accountant, at (202) 551-
3481
or me at (202) 551-3730 if you have questions regarding these
comments.
Sincerely,
Kathleen Collins
Accounting Branch Chief
Mr. Michael J. Fister
Cadence Design Systems, Inc.
June 16, 2006
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