Room 4561
August 18, 2005
Mr. Peter J. Ungaro
Chief Executive Officer and President
Cray, Inc.
411 First Avenue South
Suite 600
Seattle, WA 98104-2860
Re: Cray, Inc.
Form 10-K for Fiscal Year Ended December 31, 2004
Filed April 1, 2005
Form 8-K filed February 7, 2005
Form 8-K filed April 15, 2005
File No. 000-26820
Dear Mr. Ungaro:
We have reviewed the above referenced filings and have the
following comments. Please note that we have limited our review
to
the matters addressed in the comments below. We may ask you to
provide us with supplemental information so we may better
understand
your disclosure. Please be as detailed as necessary in your
explanation. 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, 2004
Note 2. Summary of Significant Accounting Policies
Goodwill, page F-7
1. Disclosure on page F-7 indicates that you assess goodwill for
impairment on an annual basis as of January 1 (and more often if
indicators of potential impairment exist). Describe more fully
your
process for assessing impairment of goodwill. Your response
should
address the following:
a) The number of reporting units and amount of goodwill allocated
to
each reporting unit.
b) How you considered the operating income (loss)/cash used in
operations either by reporting unit or on an entity-wide basis in
determining goodwill was not impaired at December 31, 2004 and
March
31, 2005.
c) How you considered the significant decrease in market
capitalization from $553 million as of June 30, 2004 to
approximately
$130 million as of May 3, 2005, the date you filed your Form 10-
K/A
and May 10, 2005, the date you filed your Form 10-Q for the
quarter
ended March 31, 2005 in assessing impairment of goodwill.
d) How your decision to record a valuation allowance on deferred
taxes in 2004, which would appear to indicate that you do not
expect
to have income in the future, is consistent with your assessment
that
goodwill is not impaired.
e) How goodwill of approximately $38 million relating to the 2004
acquisition of Octigabay was allocated to reporting units and how
that goodwill was considered in your impairment assessment.
Revenue Recognition, page F-7
2. We note that certain of your revenues are derived from
customers
in the government sector and that certain of your receivables are
designated `government funding pass-through.` Tell us how you
account for any fiscal funding clauses in your service
arrangements
with government agencies including the timing of expense and
revenue
recognition. Also tell us how fiscal funding clauses or other
government contract contingencies impact your revenue recognition
for
other products and services you provide. Include a reference to
the
authoritative accounting literature that you considered.
3. We note that you account for multiple element arrangements in
accordance with EITF 00-21. We further note that such
arrangements
can include software. Describe the nature of the software sold in
these arrangements, addressing whether the software is more than
incidental to the products. Tell us how you considered EITF 03-05
and SOP 97-2 in accounting for these arrangements.
Note 12. Income Taxes, page F-16
4. We note that in the fourth quarter of 2003 you reduced your
income
tax valuation allowance by $58.5 million. Disclosure on page 37
indicates that you determined that `based on our historical
operating
performance and reasonably expected future performance, we would
be
able to utilize most of our net deferred tax asset.` We further
note
that, three fiscal quarters later, you recorded an adjustment to
increase your income tax valuation allowance by $95.6 million.
Disclosure on page 37 indicates that `based on the results of our
operations in 2004 and based on our revised projections, we now
believe that it is more likely than not that the deferred tax
assets
will not be realized through future operations.` Tell us more
about
the events and circumstances leading up to the reversal of your
deferred tax asset valuation allowance and subsequent adjustment,
within the next nine months, to record a valuation allowance on
100
percent of your deferred tax asset.
Note 16. Segment Information, page F-22
5. Tell us how you considered the guidance in paragraph 10 of SFAS
No. 131 in determining that you have only one operating segment.
Specifically address why your various geographic regions or
product
and service lines are not considered separate operating segments.
Form 8-K filed on February 7, 2005
6. Your current disclosure does not appear to comply with Item
10(e)(1)(i)(C) and (D) of Regulation S-K and Questions 8 and 9 of
the
FAQ Regarding the Use of Non-GAAP Financial Measures. Tell us
what
consideration you gave to disclosing the reason why you believe
that
presentation of the non-GAAP financial measure provides useful
information to investors and, to the extent material, the
additional
purposes(s) for which you use the non-GAAP financial measure.
Such
disclosures regarding the usefulness of the non-GAAP measures
should
separately address each of the measures created by your
presentation
of a non-GAAP statement of operations (i.e. non-GAAP total
operating
expenses, non-GAAP income (loss) from operations, non-GAAP income
(loss) before income taxes). Tell us why you believe this is an
appropriate measure of performance when it excludes interest
expense,
interest income, and income taxes. Explain how such measures are
useful in assessing performance given that the excluded items are
essential to that assessment. Please explain to us how you
considered separately addressing these disclosure requirements for
each non-GAAP measure in your current presentation.
Form 8-K filed on April 15, 2005
7. We note in your Form 8-K filed on April 15, 2005 that Deloitte
&
Touche LLP (D&T) declined to stand for re-election for the fiscal
year ending December 31, 2005. However, as of the date of this 8-
K
was filed, D&T was still engaged to provide its attestation report
on
management`s assessment of internal control over financial
reporting
and to review your interim financial information to be included in
your Form 10-Q for the quarter ended March 31, 2005. Amend this
Form
8-K to state whether during the registrant`s two most recent
fiscal
years and any subsequent interim period through the date of
resignation or declination there were any disagreements with the
former accountant on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s), if not resolved to the
satisfaction
of the former accountant, would have caused it to make reference
to
the subject matter of the disagreement(s) in connection with its
reports. In the event of disagreement(s) and/or reportable
event(s),
provide the specific disclosures required by Item 304(a)(1)(iv)
and
(v) of Regulation S-K. To the extent that you make changes to the
Form 8-K in response to this comment, please obtain and file an
updated Exhibit 16 letter from the former accountants stating
whether
the accountant agrees with the statements made in your revised
Form
8-K.
******
Please respond to these comments within 10 business
days
or tell us when you will provide us with a response. Please
understand that we may have additional comments after reviewing
your
responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact April Coleman, Staff Accountant, at (202)
551-
3458, Thomas Ferraro, Senior Staff Accountant, at (202) 551-3225
or
me at (202) 551-3730 you have questions regarding these comments.
Sincerely,
Kathleen Collins
Accounting Branch Chief
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Mr. Peter J. Ungaro
Cray, Inc.
August 18, 2005
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