IM » Topics » ITEM 3. LEGAL PROCEEDINGS

These excerpts taken from the IM 10-K filed Feb 27, 2008.
ITEM 3.  LEGAL PROCEEDINGS
 
In 2003, our Brazilian subsidiary was assessed for commercial taxes on its purchases of imported software for the period January to September 2002. The principal amount of the tax assessed for this period was 12.7 million Brazilian reais. Prior to February 28, 2007, it had been our opinion, based upon the advice of outside legal counsel, that we had valid defenses to the payment of these taxes and it was not probable that any amounts would be due for the 2002 assessed period, as well as any subsequent periods. Accordingly, no reserve had been established previously for such potential losses. However, on February 28, 2007 changes to the Brazilian tax law were enacted. As a result of these changes, it is now our opinion, based on the advice of outside legal counsel, that it is probable such commercial taxes will be due. Accordingly, in the first quarter of 2007, we recorded a charge to cost of sales of $33.8 million, consisting of $6.1 million for commercial taxes assessed for the period January 2002 to September 2002, and $27.7 million for such taxes that could be assessed for the period October 2002 to December 2005. The subject legislation provides that such taxes are not assessable on software imports after January 1, 2006. The sums expressed are based on an exchange rate of 2.092 Brazilian reais to the U.S. dollar which was applicable when the charge was recorded. In the fourth quarter of 2007, we released a portion of the commercial tax reserve recorded in the first quarter of 2007 amounting to $3.6 million (6.5 million Brazilian reais at a December 2007 exchange rate of 1.771 Brazilian reais to the U.S. dollar). The partial reserve release was related to the unassessed period from October through December 2002, for which it is management’s opinion, based on the advice of outside legal counsel that the statute of limitations for an assessment from Brazilian tax authorities has expired.
 
While the tax authorities may seek to impose interest and penalties in addition to the tax as discussed above, we continue to believe, based on the advice of outside legal counsel, that we have valid defenses to the assessment of interest and penalties, which as of December 29, 2007 potentially amount to approximately $22.0 million and $27.4 million, respectively, based on the exchange rate prevailing on that date of 1.771 Brazilian reais to the U.S. dollar. Therefore, we currently do not anticipate establishing an additional reserve for interest and penalties. We will continue to vigorously pursue administrative and judicial action to challenge the current, and any subsequent assessments. However, we can make no assurances that we will ultimately be successful in defending any such assessments, if made.
 
In December 2007, the Sao Paulo Municipal Tax Authorities assessed our Brazilian subsidiary a commercial service tax based upon our sales and licensing of software. The assessment covers the years 2002 through 2006 and totaled 57.2 million Brazilian reais ($32.3 million based upon a December 29, 2007 exchange rate of 1.771 Brazilian reais to the U.S. dollar). The assessment included taxes claimed to be due as well as penalties for the years in question. The authorities could make adjustments to the initial assessment including assessments for the period after 2006, as well as additional penalties and interest, which may be material. It is our opinion, based on the advice of outside counsel, that our subsidiary has valid defenses against the assessment of these taxes and penalties, or any subsequent adjustments or additional assessments related to matter. Although we intend to vigorously pursue administrative and judicial action to challenge the current assessment and any subsequent adjustments or assessments, we can make no assurances that we will ultimately be successful in our defense of this matter.


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In May 2007, we received a “Wells Notice” from the SEC, which indicated that the SEC staff intends to recommend an administrative proceeding against the company seeking disgorgement and prejudgment interest, though no dollar amounts were specified in the notice. The staff contends that the company failed to maintain adequate books and records relating to certain of our transactions with McAfee Inc. (formerly Network Associates, Inc.), and was a cause of McAfee’s own securities-laws violations relating to the filing of reports and maintenance of books and records. During the second quarter of 2007, we recorded a reserve of $15.0 million for the current best estimate of the probable loss associated with this matter based on discussions with the SEC staff concerning the issues raised in the Wells Notice. No resolution with the SEC has been reached at this point, however, and there can be no assurance that such discussions will result in a resolution of these issues. When the matter is resolved, the final disposition and the related cash payment may exceed the current accrual for the best estimate of probable loss. At this time, it is also not possible to accurately predict the timing of a resolution. We have responded to the Wells Notice and continue to cooperate fully with the SEC on this matter, which was first disclosed during the third quarter of 2004.
 
In August 2007, the trustee of the Refco Litigation Trust (the Trustee), filed suit in Illinois state court against Grant Thornton LLP, Mayer Brown Rowe & Maw, LLP, Phillip Bennett, and numerous other individuals and entities, including the company and one of its subsidiaries, in connection with the bankruptcy of Refco, Inc., and its subsidiaries and affiliates (collectively, Refco), claiming damage to the bankrupt Refco entities in the amount of $2 billion. Of its forty-four claims for relief, the complaint contains a single claim against the company and one of its subsidiaries, alleging that loan transactions between the company’s subsidiary and Refco in early 2000 and early 2001, aided and abetted the common law fraud of Bennett and other defendants, resulting in damage to Refco in August 2004 when it effected a leveraged buyout in which it incurred substantial new debt while distributing assets to Refco insiders. We intend to vigorously defend the case and does not expect the final disposition to have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
 
ITEM 3.  LEGAL
PROCEEDINGS



 



In 2003, our Brazilian subsidiary was assessed for commercial
taxes on its purchases of imported software for the period
January to September 2002. The principal amount of the tax
assessed for this period was 12.7 million Brazilian reais.
Prior to February 28, 2007, it had been our opinion, based
upon the advice of outside legal counsel, that we had valid
defenses to the payment of these taxes and it was not probable
that any amounts would be due for the 2002 assessed period, as
well as any subsequent periods. Accordingly, no reserve had been
established previously for such potential losses. However, on
February 28, 2007 changes to the Brazilian tax law were
enacted. As a result of these changes, it is now our opinion,
based on the advice of outside legal counsel, that it is
probable such commercial taxes will be due. Accordingly, in the
first quarter of 2007, we recorded a charge to cost of sales of
$33.8 million, consisting of $6.1 million for
commercial taxes assessed for the period January 2002 to
September 2002, and $27.7 million for such taxes that
could be assessed for the period October 2002 to
December 2005. The subject legislation provides that such
taxes are not assessable on software imports after
January 1, 2006. The sums expressed are based on an
exchange rate of 2.092 Brazilian reais to the U.S. dollar
which was applicable when the charge was recorded. In the fourth
quarter of 2007, we released a portion of the commercial tax
reserve recorded in the first quarter of 2007 amounting to
$3.6 million (6.5 million Brazilian reais at a
December 2007 exchange rate of 1.771 Brazilian reais to the
U.S. dollar). The partial reserve release was related to
the unassessed period from October through December 2002, for
which it is management’s opinion, based on the advice of
outside legal counsel that the statute of limitations for an
assessment from Brazilian tax authorities has expired.


 



While the tax authorities may seek to impose interest and
penalties in addition to the tax as discussed above, we continue
to believe, based on the advice of outside legal counsel, that
we have valid defenses to the assessment of interest and
penalties, which as of December 29, 2007 potentially amount
to approximately $22.0 million and $27.4 million,
respectively, based on the exchange rate prevailing on that date
of 1.771 Brazilian reais to the U.S. dollar. Therefore, we
currently do not anticipate establishing an additional reserve
for interest and penalties. We will continue to vigorously
pursue administrative and judicial action to challenge the
current, and any subsequent assessments. However, we can make no
assurances that we will ultimately be successful in defending
any such assessments, if made.


 



In December 2007, the Sao Paulo Municipal Tax Authorities
assessed our Brazilian subsidiary a commercial service tax based
upon our sales and licensing of software. The assessment covers
the years 2002 through 2006 and totaled 57.2 million
Brazilian reais ($32.3 million based upon a
December 29, 2007 exchange rate of 1.771 Brazilian
reais to the U.S. dollar). The assessment included taxes
claimed to be due as well as penalties for the years in
question. The authorities could make adjustments to the initial
assessment including assessments for the period after 2006, as
well as additional penalties and interest, which may be
material. It is our opinion, based on the advice of outside
counsel, that our subsidiary has valid defenses against the
assessment of these taxes and penalties, or any subsequent
adjustments or additional assessments related to matter.
Although we intend to vigorously pursue administrative and
judicial action to challenge the current assessment and any
subsequent adjustments or assessments, we can make no assurances
that we will ultimately be successful in our defense of this
matter.





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In May 2007, we received a “Wells Notice” from the
SEC, which indicated that the SEC staff intends to recommend an
administrative proceeding against the company seeking
disgorgement and prejudgment interest, though no dollar amounts
were specified in the notice. The staff contends that the
company failed to maintain adequate books and records relating
to certain of our transactions with McAfee Inc. (formerly
Network Associates, Inc.), and was a cause of McAfee’s own
securities-laws violations relating to the filing of reports and
maintenance of books and records. During the second quarter of
2007, we recorded a reserve of $15.0 million for the
current best estimate of the probable loss associated with this
matter based on discussions with the SEC staff concerning the
issues raised in the Wells Notice. No resolution with the SEC
has been reached at this point, however, and there can be no
assurance that such discussions will result in a resolution of
these issues. When the matter is resolved, the final disposition
and the related cash payment may exceed the current accrual for
the best estimate of probable loss. At this time, it is also not
possible to accurately predict the timing of a resolution. We
have responded to the Wells Notice and continue to cooperate
fully with the SEC on this matter, which was first disclosed
during the third quarter of 2004.


 



In August 2007, the trustee of the Refco Litigation Trust (the
Trustee), filed suit in Illinois state court against Grant
Thornton LLP, Mayer Brown Rowe & Maw, LLP, Phillip
Bennett, and numerous other individuals and entities, including
the company and one of its subsidiaries, in connection with the
bankruptcy of Refco, Inc., and its subsidiaries and affiliates
(collectively, Refco), claiming damage to the bankrupt Refco
entities in the amount of $2 billion. Of its forty-four
claims for relief, the complaint contains a single claim against
the company and one of its subsidiaries, alleging that loan
transactions between the company’s subsidiary and Refco in
early 2000 and early 2001, aided and abetted the common law
fraud of Bennett and other defendants, resulting in damage to
Refco in August 2004 when it effected a leveraged buyout in
which it incurred substantial new debt while distributing assets
to Refco insiders. We intend to vigorously defend the case and
does not expect the final disposition to have a material adverse
effect on its consolidated financial position, results of
operations, or cash flows.


 




EXCERPTS ON THIS PAGE:

10-K (2 sections)
Feb 27, 2008

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