September
8, 2005
Mr.
Brad
Skinner, Accounting Branch Chief
Ms.
Christine Davis, Staff Accountant
United
States Securities and Exchange Commission
Washington,
D. C. 20549
Sent
via
EDGAR
Dear
Mr.
Skinner:
We
submit
this letter in response to comments from the staff of the Securities and
Exchange Commission (the “Staff”), received by letter dated August 24, 2005
relating to International Microcomputer Software, Inc.’s (the “Company”) Form
10-KSB for the fiscal year ended June 30, 2004 filed on September 13, 2004
(File
No. 000-15949).
We
appreciate your review comments to assist us in our compliance with the
applicable disclosure requirements. Management and the Board of IMSI are
committed to fulfilling our obligations to the public.
Set
forth
below are the Staff’s comments followed by our responses.
Item
1.
Comment:
We
note your response to previous comment number 1. It remains unclear to us
why
you consider the transfers into and out of your brokerage account to be
investing cash flow. Your reconciliation appears to suggest that these transfers
effectively represent the gross purchases and sales of securities considering
that such amounts do not appear to be provided elsewhere within your response.
We note that you present “gains on marketable securities” which appears to
represent realized gains on these securities according to your statements
of
operations, but we were unable to locate the gross purchases and sales relating
to these securities. Please explain to us in more detail why you believe
such
cash flows are investing cash flows and refer us to the authoritative guidance
that supports your accounting.
Answer: As
noted in our response to Item 1 of the letter to you dated August 19, 2005,
we
presented the activity related to trading securities in our cash flow statement
as follows:
| |
·
|
The
unrealized gains on marketable securities of $1,982,400 were included
in
“Cash flows from operating activities - Adjustments to reconcile
net
income to net cash used by operating
activities”.
|
| |
·
|
The
gains on marketable securities and the expenses pertaining to the
marketable securities brokerage account were netted to $583,000
and
included in “Cash flows from operating activities - Changes in assets and
liabilities”.
|
| |
·
|
The
cash transfers into the investment account of $475,600 were included
in
“Cash flows from investing
activities”.
|
| |
·
|
The
cash transfers from the investment account of $115,900 were included
in
“Cash flows from investing
activities”.
|
We
now
realize that our presentation was not in conformity with Paragraph 118 of
FAS
115, which provides guidance on the financial statement presentation and
disclosure of trading securities, as follows -
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·
|
“Because
trading securities are bought and held principally for the purpose
of
selling them in the near term, the cash flows from purchases and
sales of
trading securities should be classified as cash flows from operating
activities.”
|
Therefore,
in the future, the IMSI Consolidated Statements of Cash Flows will classify
cash
flows from trading securities as cash flows from operating
activities.
The
gross
purchases and sales of securities were not shown in our reconciliation or
the
financial statements. To clarify that area of interest in future filings,
we
have an illustration (Exhibit A) of a trading securities footnote which we
intend to use when encountering a similar situation in the future. These
figures
are within the text of the illustrative footnote. Although not directly relevant
to the comment, we have expanded our disclosure of margin used in the securities
account. For background only, as of the IMSI current fiscal year end, there
is
no margin utilized in the securities account.
Item
2.
Portion
of Comment:
We
have read your response to prior comment number 3. It does not appear that
you
have addressed the impact of the cash flows occurring subsequent to the
disposition that result from your continued involvement with Keynomics in
the
form of a licensing agreement. Please respond by addressing how these ongoing
cash flows affected your conclusion with respect to paragraph 42 of SFAS
144.
Answer:
We considered this matter as follows, determining there was no impact and
this
warranted no mention.
SFAS
144,
Appendix B, Paragraph 111, states:
Paragraphs
44(a) and (b) of this Statement refer to adjustments relating to the resolution
of contingencies that arise pursuant to the terms of the disposal transaction,
as well as to those that arise from, and that are directly related to, the
operations of a component of an entity prior to its disposal. Paragraph 25
of
Opinion 30 specifies requirements for reporting in discontinued operations
adjustments related to the disposal of a segment of a business that was reported
in a prior period. It did not, however, specify the types of adjustments
to
which that reporting was intended to apply. Paragraph 25 of Opinion 30, as
amended by FASB Statement No. 16, Prior
Period Adjustments,
stated:
Circumstances
attendant to disposal of a segment of a business and extraordinary items
frequently require estimates, for example, of associated costs and occasionally
of associated revenue, based on judgment and evaluation of the facts known
at
the time of first accounting for the event. Each
adjustment in the current period of a loss on disposal of a business segment
or
of an element of an extraordinary item that was reported in a prior period
should be separately disclosed as to year of origin, nature, and amount and
classified separately in the current period in the same manner as the original
item. If the adjustment is the correction of an error, the provisions of
APB
Opinion No. 20, Accounting
Changes,
paragraphs 36 and 37 should be applied.
SFAS
144,
Appendix B, Paragraph 112, states:
SEC
Staff
Accounting Bulletin No. 93, Accounting
and Disclosures Relating to Discontinued Operations,
clarified for public enterprises the reporting required by paragraph 25 of
Opinion 30 as follows:
The
[SEC]
staff believes that the provisions of paragraph 25 apply only to adjustments
that are necessary to reflect new information about events that have occurred
that becomes available prior to disposal of the business, to reflect the
actual
timing and terms of the disposal when it is consummated, and to reflect the
resolution of contingencies associated with that business, such as warranties
and environmental liabilities retained by the seller.
Probably
the significant fact relates to the value of the activity. The subsequent
cash
flows resulting from our 10% investment in Keynomics, L.L.C. total $0 on
a
cumulative basis since June 30, 2004 and are not considered material,
considering SAB No. 99, and therefore:
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·
|
Do
not reflect new information about the events that occurred prior
to the
disposal of Keynomics, Inc.,
|
| |
·
|
Do
not impact the timing and terms of the disposal, and
|
| |
·
|
Do
not reflect the resolution of contingencies associated with that
business.
|
Therefore,
we believe that we have no ongoing reporting requirements regarding our
licensing agreement with Keynomics, L.L.C. As such, we reported the disposal
of
Keynomics, Inc. in accordance with paragraph 42 of SFAS 144, which stipulates
the following two conditions that must be met for the results of operations
of a
component of an entity to be reported in discontinued operations:
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·
|
The
operations and cash flows of the component have been (or will be)
eliminated from the ongoing operations of the entity as a result
of the
disposal transactions (e.g., as shown in the discontinued operations
section of the income statement).
|
| |
·
|
The
entity will not have any significant continuing involvement in
the
operations of the component after the disposal transaction (e.g.,
subsequent cash flows are
immaterial).
|
Additionally,
SAB Topic 5.E offers guidance on whether circumstances exist that may lead
the
staff to conclude that the risks of the business have not been transferred
to
the new owners and that a divestiture has not occurred. Topic 5.E indicates
that
factors to consider in determining whether a transaction should be accounted
for
as a divestiture: (1) continuing involvement by the seller in the business
(such
continuing involvement may take the form of veto power over major contracts
or
customers, significant voting power on the board of directors, or other
involvement in the continuing operations of the business entailing risks
or
managerial authority similar to that of ownership); (2) absence of a significant
financial investment in the business by the buyer; (3) repayment of debt,
which
constitutes the principal consideration in the transaction, is dependent
on
future successful operations; or (4) the continued necessity for debt or
contract performance guarantees on behalf of the business by the seller.
Overall, these considerations are not applicable to our sale of Keynomics,
Inc.
Portion
of Comment:
Refer to authoritative guidance that supports our assertion that the
“arms-length” and “non-exclusive” nature of the licensing agreement is relevant
to our conclusion (re: SFAS 144, paragraph 42).
Answer:
“Arms-length” and “non-exclusive” are not, to our knowledge, tests from
authoritative literature, and we only used these terms to illustrate our
thought
process.
We
trust
that we have addressed your comments with our responses. If you have further
comments, please contact me at (415) 878-4011 or Mr. Robert O’Callahan, Chief
Financial Officer, at (415) 878-4020.
Very
truly yours,
International
Microcomputer Software, Inc.
/s/
Martin Wade III
Martin
Wade III
Chief
Executive Officer
Exhibit
A
Example
of planned future disclosure referenced in answer to Comment 1.
Marketable
Securities (illustration)
Short-term
investments comprise equity securities, all of which are classified as trading
securities and are carried at their fair value based on the quoted market
prices
of the securities at June 30, 2004. Net realized and unrealized gains and
losses
on trading securities are included in net earnings. For purpose of determining
realized gains and losses, the cost of securities sold is based on specific
identification. For the year ended June 30, 2004, gross purchases of trading
securities totaled $2,402,000 and gross sales of trading securities totaled
$1,198,000. The marketable securities balance of $2,151,000 is net of a margin
loan of $584,000. Margin interest expense rates ranged between 5.37% and
6.37%
during the year and margin interest expense totaled $2,556.
The
composition of trading securities, classified as current assets, is as follows
at June 30, 2004 (all amounts in thousands):
| |
|
Cost
|
|
Fair
Value
|
|
| |
|
|
|
|
|
|
|
|
Common
stock
|
|
$
|
1,182
|
|
$
|
2,151
|
|
| |
|
|
|
|
|
|
|
|
Total
trading securities
|
|
$
|
1,182
|
|
$
|
2,151
|
|
Investment
income for the year ended June 30, 2004 consists of the following (all amounts
in thousands):
|
Gross
realized gains from sale of trading securities
|
|
$
|
585
|
|
| |
|
|
|
|
|
Dividend
and interest income
|
|
|
78
|
|
| |
|
|
|
|
|
Net
unrealized holding gains
|
|
|
1,982
|
|
| |
|
|
|
|
|
Net
investment income
|
|
$
|
2,645
|
|
5