July 20, 2007
Ms. Kathleen Collins
Accounting Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Compuware Corporation
Form 10-K for the fiscal year ended March 31, 2007
File No. 000-20900
Dear Ms. Collins:
On behalf of Compuware Corporation, a Michigan corporation (the "Company" or
"Compuware"), I am responding to the Staff's comment letter dated June 26, 2007
with respect to Compuware's Form 10-K for the fiscal year ended March 31, 2007.
I have set forth below each question contained in the Staff's comment letter,
followed by our response thereto.
FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2007
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES, PAGE 37
1. WE NOTE THAT YOU PROVIDE LITTLE OR NO DISCUSSION OF CASH FLOWS FROM
OPERATING ACTIVITIES. IN THIS REGARD, WE NOTE THAT THERE WERE MATERIAL
CHANGES IN SEVERAL WORKING CAPITAL LINE ITEMS HOWEVER YOU HAVE NOT
DISCLOSED WHY THESE CHANGES OCCURRED AND HOW THEY IMPACTED OPERATING CASH
FLOW. WHEN PREPARING THE DISCUSSION AND ANALYSIS OF OPERATING CASH FLOWS,
YOU SHOULD ADDRESS MATERIAL CHANGES IN THE UNDERLYING DRIVERS THAT AFFECT
THESE CASH FLOWS. THESE DISCLOSURES SHOULD ALSO INCLUDE A DISCUSSION OF THE
UNDERLYING REASONS FOR CHANGES IN WORKING CAPITAL ITEMS THAT AFFECT
OPERATING CASH FLOWS. IN THIS REGARD, PLEASE TELL US HOW YOU CONSIDERED THE
GUIDANCE IN SECTION IV.B.1. OF SEC RELEASE 33-8350.
Section IV.B.1. of SEC Release 33-8350 states, in relevant part:
When preparing the discussion and analysis of operating cash flows,
companies should address material changes in the underlying drivers
(e.g. cash receipts from
the sale of goods and services and cash payments to acquire materials
for manufacture or goods for resale), rather than merely describe
items identified on the face of the statement of cash flows such as
the reconciling items used in the indirect method of presenting cash
flows.
We acknowledge that our discussion of cash flows from operating activities
should have been more robust. The following is a revised operating section
for the Liquidity and Capital Resources discussion to meet the criteria of
SEC Release 33-8350. We propose to modify future filings to provide
enhanced disclosure of material changes in underlying drivers that affect
operating cash flows.
LIQUIDITY AND CAPITAL RESOURCES:
As of March 31, 2007, cash and cash equivalents and investments totaled
approximately $439.1 million.
We believe cash flow from operations will be sufficient to meet operating
cash needs for the foreseeable future. We anticipate borrowing up to $300.0
million in order to fund the planned expansion of the stock repurchase
program. We also continue to evaluate business acquisition opportunities
that fit our strategic plans.
Net cash provided by operating activities:
For the three years presented, we have been profitable and net income has
been a primary source of cash from operating activities. During fiscal
2007, 2006, and 2005 cash flow from operations was $204.7 million, $229.7
million and $242.3 million, respectively. Depreciation and amortization
added to net income, $55.0, $50.2 million and $56.4 million in fiscal 2007,
2006 and 2005, respectively, to provide cash from operating activities.
Our cash provided by operations is also impacted by changes in working
capital accounts. Changes in accounts receivable and deferred revenue have
typically had the largest impact on our cash flows. The Company allows for
deferred payment terms on multi-year products contracts.
Net cash from operating activities decreased $25.0 million during fiscal
2007 as compared to fiscal 2006. The increase in net income in fiscal 2007
was offset by the following items: in fiscal 2007 and 2006 the net change
in accounts receivable contributed to cash flows. Prepaid expenses and
other current assets increased primarily due to the fiscal 2007 IBM unused
commitment balance of $10.7 million (see Note 14 of the Consolidated
Financial Statements) not being received as of March 31, 2007. The change
in accounts payable and accrued expenses significantly declined in fiscal
2007. The decline was primarily the result of the reversal of income tax
reserves of $26.6 million (see Note 12 of the Consolidated Financial
Statements), reduction in deferred rent and bonus and commission accruals
of $6.6 million, the
decline in account payable of $5.4 million and a decline in the
restructuring accrual of $3.5 million.
Net cash from operating activities decreased $12.6 million during fiscal
2006 as compared to fiscal 2005. The increase to net income in fiscal 2006
and the positive contribution of the net change in accounts receivable was
offset by the timing of tax payments and the increase in the deferred
revenue balance during fiscal 2005. The deferred revenue balance increased
in fiscal 2005 as a result of a $20 million prepayment by IBM under the
settlement agreement discussed in Note 14 to the Consolidated Financial
Statements and deferred revenue associated with several large transactions
that were recorded during the year.
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 44
2. YOU DISCLOSE ON PAGE 47 THAT CERTAIN REVENUE IS RECOGNIZED RATABLY DUE TO
THE LACK OF VSOE. PLEASE TELL US WHERE YOU INCLUDED THE REVENUE FOR THESE
BUNDLED ARRANGEMENTS IN YOUR STATEMENT OF OPERATIONS. FOR INSTANCE, TELL US
WHETHER THE REVENUE IS INCLUDED IN A SINGLE LINE ITEM (I.E. LICENSE FEES,
MAINTENANCE FEES OR PROFESSIONAL SERVICES FEES) OR TELL US IF THE COMPANY
ALLOCATES THE REVENUE FROM THESE ENGAGEMENTS AMONGST THE VARIOUS REVENUE
LINE ITEMS BASED ON A CERTAIN METHODOLOGY AND IF SO, PLEASE DESCRIBE SUCH
METHODOLOGY. WHERE THERE IS A LACK OF VSOE OF FAIR VALUE AMONG THE
ARRANGEMENT ELEMENTS, SOP 97-2 PROHIBITS SEPARATION OF THE TOTAL
ARRANGEMENT FEE FOR RECOGNITION PURPOSES. ABSENT A COMPELLING ARGUMENT
UNDER GAAP AND RULE 5-03(B)(1) OF REGULATION S-X THAT SUPPORTS ALLOCATING
THE ARRANGEMENT FEE IN THE INCOME STATEMENT, YOU SHOULD AMEND YOUR
PRESENTATION TO INCLUDE SEPARATE REVENUE, AND RELATED COST OF REVENUE, LINE
ITEMS FOR BUNDLED ARRANGEMENTS THAT ARE NOT SEPARABLE BECAUSE OF THE
ABSENCE OF VSOE FOR THE UNDELIVERED PCS ELEMENT. YOU SHOULD ALSO INCLUDE A
FOOTNOTE DESCRIPTION TO INFORM INVESTORS OF THE NATURE OF THE ADDITIONAL
LINE ITEM. PLEASE ALSO DESCRIBE TO US OTHER POSSIBLE ALLOCATION
METHODOLOGIES FOR INCOME STATEMENT PURPOSES THAT YOU CONSIDERED BUT
REJECTED.
We allocate revenues related to bundled revenue arrangements that are not
separable for recognition purposes because there is a lack of VSOE to the
relevant line items on our consolidated statement of operations for
classification purposes. These line items are: software license revenues,
maintenance revenues and professional services revenues. Our method for
allocating these revenues between the various revenue line items for
classification purposes is described in more detail below. In making the
determination as to the presentation of this revenue in the consolidated
statement of operations, we considered Rule 5-03(b) (1) of Regulation S-X,
which states:
"Net sales and gross revenues. State separately: (a) Net sales of
tangible products (gross sales less discounts, returns and
allowances), (b) operating revenues of
public utilities or others; (c) income from rentals; (d) revenues from
services; and (e) other revenues."
We believe Rule 5-03 (b) (1) of Regulation S-X has a requirement to
separately disclose products (software license fees) and services revenue
(maintenance fees and professional services fees). In addition, we
considered the guidance in "Software Revenue Recognition, An Analysis of
SOP 97-2 and Related Guidance, Second Edition" published by KPMG LLP,
Paragraph 8.038 (please note the last sentence):
KPMG - 8.038 Consistent with our views described above with respect to
contract accounting arrangements, if the vendor does not have VSOE of
fair value for PCS, we believe that the vendor generally would not
separate the license revenue from the PCS revenue and, accordingly,
the revenue would be included within one line on the face of the
income statement (e.g., license and service revenue or service
revenue). If material, it may be appropriate for a software vendor to
present such revenues as a separate line item on the income statement
(e.g., license and service revenue from short-term time-based
licensing arrangements) or to separately disclose such revenues in the
notes to the financial statements. However, in some situations it may
be acceptable for the vendor to apply an appropriate systematic and
rational method to separate the license and PCS revenue on the face of
the income statement, provided that the method used is consistently
applied and clearly disclosed.
We believe we have the ability to make reasonable estimates of the fair
value of the individual elements in our bundled arrangements and we have a
systematic and rational method to allocate such revenues to the appropriate
line items for the purpose of income statement presentation. In addition,
we believe separation provides the users of our financials statements
important information to interpret our financial results.
We follow the revenue recognition guidance in SOP 97-2 (as amended by SOP
98-9) and other interpretative guidance (e.g. TPAs referenced in this
document) for our software arrangements. Once we have determined when and
how revenue should be recognized for our software arrangements, we consider
the income statement presentation guidance of Rule 5-03(b) (1) of
Regulation S-X. To comply with this rule, we separate the total arrangement
fee based upon a systematic and rational method. We separate the total
arrangement fee among the deliverables within the arrangement based upon
our best estimate of fair value of the undelivered elements using the
residual method where we allocate revenue to professional services,
maintenance (PCS) and the remaining portion of the fee is classified as
license revenues. We determined fair value by using VSOE of fair value for
similar elements.
Following are three groups of bundled revenue arrangements that are not
separable because there is a lack of VSOE of fair value among the
arrangement elements.
- The majority of the arrangements that are not separable because there
is a lack of VSOE involve term licenses (either stand alone or
combined with perpetual licenses). This is because we lack VSOE of
fair value for post-contract customer support ("PCS") services in term
licenses. While we have VSOE of fair value for PCS services in
perpetual licenses, we cannot use such evidence to establish VSOE of
fair value for PCS services in term licenses (per TPA 5100.68). We
recognize revenue for these arrangements ratably over the term of the
arrangement. For presentation purposes, we consider our VSOE of fair
value of PCS for perpetual licenses (PCS renewals based on a fixed
percentage of the sales price) as our best estimate of the fair value
of PCS associated with term licenses. We use this estimate for
allocating revenue between PCS and license revenues, where the
remaining portion of the fee is classified as license revenue.
To a lesser extent:
- We have arrangements that include a product that has a different VSOE
of fair value for PCS than all of our other products. VSOE of fair
value of PCS is a fixed percentage of net license fee for all of our
products except one particular product for which VSOE of fair value of
PCS is a higher percentage of the net license fee. If this product is
bundled with other products, we are not able to establish VSOE of fair
value of the PCS because we do not have VSOE of fair value of software
license fees. We recognize these arrangements ratably over the PCS
term. For presentation purposes, we allocate the arrangement
consideration between the products with different PCS rates by
allocating any discount percentage proportionately. Then, we apply our
VSOE of fair value PCS rates to such allocation of the arrangement to
calculate our best estimate of fair value for allocating revenue
between PCS fees and license fees, where the remaining portion of the
fee is recognized as license revenue. Following is an example of the
allocation for presentation purposes:
Product A Product B
--------- ---------
Net Price, after allocating discount proportionately 30 70
PCS VSOE % 25% 18%
---- ----
Allocated to PCS Fees 7.5 12.6
Allocated to License Fees 22.5 57.4
- We also have software arrangements combined with professional services
where it is not possible to reasonably estimate the hours to complete
the professional services portion of the arrangement. While the
contracts governing these arrangements typically provide for time and
materials billing, we have a history of only charging the estimated
fee provided to the customer (i.e. in substance, these are fixed fee
arrangements). The professional services included in these
arrangements do not involve significant production, modification, or
customization of the software and are not considered essential to the
functionality of the software. We have established VSOE of fair value
for professional services based on the hourly and daily prices charged
when such services are sold
separately. Therefore, we generally determine the VSOE of fair value
of professional services by multiplying these hourly rates by the
estimated number of hours required to complete the professional
services. In situations where we can not reasonably estimate the
number of hours we have concluded that VSOE of fair value of the
professional services does not exist. Accordingly, we recognize
revenue for these arrangements over the period in which the
professional services are expected to be performed, on a straight-line
basis, in accordance with paragraph 67 of SOP 97-2. For presentation
purposes, we use our VSOE of fair value for professional services
(hourly or daily rates when sold separately) multiplied by the actual
hours incurred to date as our best estimate of fair value for
allocating revenue in these arrangements between professional services
revenues and the remaining portion of the fee is classified as license
revenue.
We believe, based upon Rule 5-03 (b) (1) of Regulation S-X, it is required
to allocate revenues between product and services revenues. Accordingly, we
believe it is acceptable to make such allocation based on our best estimate
of the fair value of the undelivered elements in the arrangement using the
residual method for income statement presentation purposes. This
classification provides the users of our financials statements important
information to interpret our financial results. We did not consider
alternative allocation methodologies.
We will expand our disclosures in future filings to discuss our policy and
methodology regarding the income statement presentation of bundled revenue
arrangements that are not separable for recognition purposes because there
is a lack of VSOE of fair value among the arrangement elements. The
following is an example of our expanded disclosure.
Software license fees - The Company's software license agreements
provide its customers with a right to use its software perpetually
(perpetual licenses) or during a defined term (term licenses).
Perpetual license fee revenue is recognized using the residual method,
under which the fair value, based on vendor specific objective
evidence ("VSOE"), of all undelivered elements of the agreement (e.g.,
maintenance and professional services) is deferred. VSOE is based on
rates charged for maintenance and professional services when sold
separately. The remaining portion of the fee, net of discretionary
discounts (the residual), is recognized as license fee revenue upon
delivery of the products, provided that no significant obligations
remain and collection of the related receivable is deemed probable.
For revenue arrangements that are not separable because there is a
lack of VSOE of fair value into the various arrangement elements, the
Company recognizes the license fee revenue on a ratable basis over the
maintenance term or over the period in which the services are expected
to be performed. However, for income statement presentation purposes,
we allocate revenue between professional
services fees, maintenance fees and licenses fees based on our best
estimate of the fair value of the undelivered elements using the
residual method.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE 47
3. YOU DISCLOSE THAT REVENUE FROM TERM LICENSE ARRANGEMENTS AND ARRANGEMENTS
IN WHICH YOU DO NOT HAVE VSOE OF UNDELIVERED ELEMENTS IS RECOGNIZED
RATABLY. WE ALSO NOTE YOUR DISCLOSURE ON PAGE 35 AND IN YOUR FORM 8-K FILED
ON APRIL 23, 2007 INDICATING THAT, DUE TO CHANGING AND MORE COMPLEX
CONTRACTUAL TERMS, YOU EXPECT AN INCREASING PERCENTAGE OF ARRANGEMENTS
WHERE RATABLE RECOGNITION WILL BE REQUIRED. PLEASE TELL US MORE ABOUT THESE
ARRANGEMENTS THAT RESULT IN RATABLE RECOGNITION BY DESCRIBING THE LICENSING
TRENDS AND SPECIFIC CONTRACTUAL TERMS THAT RESULT IN THE DEFERRAL OF
REVENUE. AS PART OF YOUR RESPONSE, REFER TO THE AUTHORITATIVE GUIDANCE YOU
RELIED UPON WHEN DETERMINING YOUR ACCOUNTING.
Our response to comment two provides a description of three types of
arrangements where we cannot establish VSOE of fair value for certain
elements in our multiple element arrangements.
We anticipate seeing more transactions that combine both term and perpetual
licenses as an increasing number of companies in the software industry are
offering these types of licenses. We believe our customers may demand more
of these types of licenses in the future.
4. WE NOTE THAT VSOE FOR MAINTENANCE AND PROFESSIONAL SERVICES IS BASED ON THE
PRICE CHARGED WHEN THESE SERVICES ARE SOLD SEPARATELY. DESCRIBE THE PROCESS
YOU USE TO EVALUATE THE VARIOUS FACTORS THAT EFFECT YOUR VSOE INCLUDING
CUSTOMER TYPE AND PRICING FACTORS. FURTHER ADDRESS THE ISSUE THAT IF YOUR
VSOE VARIES FROM CUSTOMER TO CUSTOMER, HOW YOU CAN REASONABLY ESTIMATE FAIR
VALUE. IN THIS REGARD, WE NOTE YOUR DISCLOSURES ON PAGE 34 WHERE YOU
INDICATE THAT BASED ON MARKET CONDITIONS, THE COMPANY PERIODICALLY CHANGES
PRICING METHODOLOGIES FOR MAINTENANCE AND PROFESSIONAL SERVICES. TELL US
HOW YOU FACTOR THESE CHANGES INTO YOUR ANALYSIS OF VSOE. SEE PARAGRAPH 10
OF SOP 97-2.
We evaluate VSOE of fair value for PCS and professional services based on
the prices charged when these elements are sold separately. Our evaluation
is based on GAAP including the following guidance from SOP 97-2 (including
paragraphs 10 and 57), SOP 98-9, TPA 5100.52 and TPA 5100.55.
When we evaluate our separate sales of PCS for purposes of establishing
VSOE of fair value, we consider the type of customer, the type of software,
contract types, pricing methodology, and estimate of the costs to provide
maintenance. Based on
these considerations we believe our separate sales of PCS are one
homogeneous group, except for one product. We price our annual maintenance
renewals for all of our software products based on a fixed percentage of
the net license fee. This fixed percentage is consistent across all of our
software products except for one product which has a higher fixed
percentage. We review actual customer renewals and have concluded that
these are sufficiently clustered within an appropriate range to establish
VSOE of fair value of PCS. We believe our VSOE of PCS is very accurate, as
we have found over 90% of our maintenance renewals, renew at the VSOE fixed
percentage of the net license fee. This evaluation is consistent with the
bell shaped curve methodology outlined in the "Software Revenue
Recognition, An Analysis of SOP 97-2 and Related Guidance, Second Edition"
published by KPMG LLP paragraph 5.008.
When we evaluate our separate sales of professional services for purposes
of establishing VSOE of professional services, we consider the type of
services, type of customer, contract type, pricing methodology and an
estimate of the costs to provide such professional services. Based on these
considerations we have stratified our separate sales of professional
services into two categories, product related services and general
services. Our professional services are priced on a fixed hourly rate or
daily rate. We review actual separate customer sales and have concluded
that these are sufficiently clustered within an appropriate range to
establish VSOE of professional services. We believe this evaluation is
consistent, by analogy, with the bell shaped curve methodology outlined in
"Software Revenue Recognition, An Analysis of SOP 97-2 and Related
Guidance, Second Edition" published by KPMG LLP paragraph 5.008.
We do consider price changes in our VSOE analysis. Because we have reviewed
PCS renewals over many years and found them to establish VSOE (using the
bell shaped curve methodology), we believe we have basis for VSOE of PCS
when we change the fixed percentage of net license fee our customers will
be charged for PCS. For professional services we have made only minor
pricing changes and these have not resulted in a change in VSOE.
5. WE FURTHER NOTE THAT WHILE YOUR STANDARD PERPETUAL LICENSES INCLUDE ONE
YEAR OF MAINTENANCE, THE COMPANY ALSO ENTERS INTO MULTI-YEAR CONTRACTS THAT
INCLUDE MAINTENANCE PERIODS RANGING FROM TWO TO FIVE YEARS. TELL US WHETHER
YOU HAVE ESTABLISHED VSOE FOR MAINTENANCE INCLUDED IN MULTI-YEAR
ARRANGEMENTS AND PLEASE DESCRIBE THE PROCESS USED TO ESTABLISH VSOE IN
ARRANGEMENTS THAT INCLUDE INITIAL MAINTENANCE PERIODS OF TWO TO FIVE YEARS.
FURTHER, IF YOU HAVE DETERMINED THAT THE COMPANY IS ABLE TO ESTABLISH VSOE
FOR MAINTENANCE IN YOUR MULTI-YEAR ARRANGEMENTS, PLEASE TELL US HOW YOU
DETERMINED THAT VSOE OF FAIR VALUE FOR SUCH SUPPORT IS CONSIDERED
SUBSTANTIVE. IN THIS REGARD, AT A MINIMUM, PLEASE ADDRESS EACH OF THE
CRITERIA IDENTIFIED IN TPA 5100.54, BY ANALOGY, AS INDICATORS THAT THE PCS
RENEWAL RATES MAY NOT BE SUBSTANTIVE.
As noted in our response to comment four above, we establish VSOE of fair
value for PCS and professional services based on the prices charged when
these elements are sold separately. We do not rely on contractual renewal
rates as VSOE of fair value of PCS. Therefore, we do not believe that TPA
5100.54 is applicable. As described in the response to comment four above
we have established VSOE of fair value for an annual period of PCS on our
perpetual licenses as a fixed percentage of the net license fee. In
accordance with TPA 5100.55, for perpetual arrangements with multiple years
of PCS, the annual VSOE of PCS is multiplied by the number of years for
which PCS is included in the arrangement.
6. WE NOTE YOUR DISCLOSURES ON PAGE 29 WHERE YOU INDICATE THAT FOR CERTAIN
TRANSACTIONS THAT INCLUDE AN OPTION TO EXCHANGE OR SELECT PRODUCTS IN THE
FUTURE, REVENUE IS DEFERRED AND RECOGNIZED OVER THE TERM OF THE AGREEMENT
OR WHEN ALL REVENUE RECOGNITION CRITERIA HAVE BEEN MET. PLEASE PROVIDE MORE
DETAILS REGARDING THE TERMS OF THESE ARRANGEMENTS. FOR INSTANCE, IF THE
CUSTOMER CHOOSES THE "SELECT PRODUCT" OPTION ARE THEY ENTITLED TO USE THE
PREVIOUSLY DELIVERED PRODUCT IN ADDITION TO THE SELECTED PRODUCT OR ARE
THEY OBLIGATED TO RETURN THE ORIGINAL PRODUCT? ALSO, IF THEY ELECT TO USE
THE "EXCHANGE" OPTION DOES THE EXCHANGE INCLUDE PRODUCTS WITH NO MORE THAN
MINIMAL DIFFERENCES IN PRICE, FUNCTIONALITY OR FEATURES? PLEASE EXPLAIN AND
TELL US HOW YOU APPLIED THE GUIDANCE IN PARAGRAPHS 39-51 OF SOP 97-2 IN
ACCOUNTING FOR THESE ARRANGEMENTS.
We have not entered into any of these types of arrangements for any year
presented in the Statements of Operations. The most recent arrangements
that may have been determined to fit this accounting description included
extended payment terms that called into question whether or not the fee was
fixed or determinable. Therefore, these arrangements were recognized as
payments became due and payable. We will update future filings to remove
this language unless we actually have transactions that require expanded
descriptions.
NOTE 12. INCOME TAXES, PAGE 64
7. WE NOTE THAT DURING THE QUARTER ENDED MARCH 31, 2007, THE COMPANY REDUCED
ITS INCOME TAX PROVISION BY $26.6 MILLION FOR "CERTAIN ITEMS RELATED TO
SETTLEMENTS OF PRIOR TAX MATTERS" WHICH INCLUDED AN AGREEMENT ON ISSUES
THAT AFFECTED A "SPECIAL DEDUCTION AND CREDITS AFFORDED TO U.S. BASED
TAXPAYERS THAT GENERATE INCOME FROM SALES TO FOREIGN CUSTOMERS." PLEASE
EXPLAIN FURTHER WHAT YOU MEAN BY "SPECIAL DEDUCTION" AND DESCRIBE THE
SETTLEMENT OF PRIOR YEAR TAX MATTERS THAT LEAD TO THE DECREASE IN THE
CURRENT YEAR'S PROVISIONS. DOES PART OF THIS SETTLEMENT RELATE TO THE
AMERICAN JOBS CREATION ACT OF 2004 OR TRANSFER PRICING ISSUES? WE FURTHER
NOTE THAT THE COMPANY HAS RESERVES OF $11.6 MILLION AND $37.8 MILLION AT
MARCH 31, 2007 AND MARCH 31, 2006, RESPECTIVELY FOR CERTAIN OPEN TAX
MATTERS WITH VARIOUS SIGNIFICANT TAXING JURISDICTIONS FOR TAX YEARS 1996
AND FORWARD.
PLEASE EXPLAIN FURTHER THE ITEMS IMPACTING THESE RESERVES AND TELL US
WHETHER THE SETTLEMENT OF CERTAIN ITEMS IN FISCAL 2007 AND THE
CORRESPONDING REDUCTION IN THE RESERVE BALANCE IS RELATED TO THE $26.6
MILLION REDUCTION IN YOUR TAX PROVISION.
The "special deduction" refers to foreign sales commissions under the
former foreign sales corporation (FSC) rules and the extraterritorial
income exclusion (ETI), the replacement for the FSC. The Company received
its Revenue Agent Report (RAR) on March 28, 2007 detailing particular items
of adjustment by the IRS for tax years ended March 31, 2000 through March
31, 2004. The Company accepted all but three of the adjustment items in
this RAR; such items have been formally protested to the IRS appeals
division. The Company considers these three items to have appropriate
reserves under Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies". The financial results of finalizing the IRS
audit have been reflected as "settlement of prior year tax matters" during
the quarter ended March 31, 2007 and amounted to $26.6 million. Items
settled that specifically related to the FSC and ETI special deductions
totaled $8.7 million. Items settled that specifically related to credits
afforded to U.S. based taxpayers that generate income from sales to foreign
customers totaled $10.2 million. Items settled regarding the proper
character and timing of certain deductions amounted to $3.3 million. In
addition, the aforementioned items settled had associated interest and
state taxes totaling $4.4 million. None of this settlement relates to the
American Jobs Creation Act of 2004 or transfer pricing issues.
The Company's income tax reserves were $37.8 million at March 31, 2006.
During fiscal 2007, the settlement of prior year tax matters comprised
substantially all of the reserve reduction of $26.2 million to arrive at
the income tax reserve balance of $11.6 million at March 31, 2007.
Moreover, this reduction in the reserve balance is substantially all
related to the $26.6 million reduction in the Company's income tax
provision.
The Company will modify future filings to describe the "special deductions"
as FSC and ETI.
ITEM 9A. CONTROLS AND PROCEDURES, PAGE 74
8. WE NOTE YOUR DISCLOSURE THAT THE "COMPANY'S CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER CONCLUDED THAT THE COMPANY'S DISCLOSURE CONTROLS
AND PROCEDURES ARE EFFECTIVE, AT THE REASONABLE ASSURANCE LEVEL, TO CAUSE
THE INFORMATION REQUIRED TO BE DISCLOSED BY THE COMPANY IN THE REPORTS THAT
IT FILES OR SUBMITS UNDER THE EXCHANGE ACT TO BE RECORDED, PROCESSED,
SUMMARIZED AND REPORTED WITHIN THE TIME PERIODS SPECIFIED IN THE
COMMISSION'S RULES AND FORMS." PLEASE CONFIRM, IF TRUE, THAT YOUR OFFICERS
CONCLUDED THAT YOUR DISCLOSURE CONTROLS AND PROCEDURES ARE ALSO EFFECTIVE
TO ENSURE THAT INFORMATION REQUIRED TO BE DISCLOSED IN THE REPORTS THAT YOU
FILE OR SUBMIT UNDER THE EXCHANGE ACT IS ACCUMULATED AND COMMUNICATED TO
YOUR MANAGEMENT, INCLUDING YOUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER, TO ALLOW TIMELY DECISIONS REGARDING
REQUIRED DISCLOSURE. SEE EXCHANGE ACT RULE 13A-15(E). CONFIRM YOU WILL
MODIFY YOUR DISCLOSURE, AS MAY BE NECESSARY, IN FUTURE FILINGS.
We confirm that the Company's Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are also
effective to ensure that information required to be disclosed in the
reports we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding disclosure.
We also confirm that we will modify this disclosure in future filings.
Following is the language that we intend to use:
"As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective, at the reasonable assurance level, to cause information required
to be disclosed by the Company in the reports that it files or submits
under the Exchange Act to be recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms and
that such information is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required financial
disclosure."
WE ACKNOWLEDGE THAT WE ARE RESPONSIBLE FOR THE ADEQUACY AND ACCURACY OF THE
DISCLOSURE IN ALL COMPANY FILINGS. WE UNDERSTAND THAT NEITHER THE STAFF'S
COMMENTS NOR CHANGES WE MAKE TO OUR DISCLOSURE IN RESPONSE TO STAFF COMMENTS
FORECLOSE THE COMMISSION FROM TAKING ANY ACTION WITH RESPECT TO OUR FILINGS AND
THAT THE COMPANY MAY NOT ASSERT STAFF COMMENTS AS A DEFENSE IN ANY PROCEEDINGS
INITIATED BY THE COMMISSION OR ANY PERSON UNDER THE FEDERAL SECURITIES LAWS OF
THE UNITED STATES.
PLEASE FEEL FREE TO CALL ME AT (313) 227-7372 WITH ANY QUESTIONS OR IF WE CAN BE
OF ANY ASSISTANCE.
VERY TRULY YOURS,
/s/LAURA FOURNIER
- -----------------
SENIOR VICE PRESIDENT, TREASURER AND
CHIEF FINANCIAL OFFICER