SEC Company Response from INTERNATIONAL DISPLAYWORKS, INC (CIK 0000866415) — Jul 1, 2005
INTERNATIONAL DISPLAYWORKS, INC (CIK 0000866415)
Date: July 1, 2005 · CIK: 0000866415 · Accession: 0001001277-05-000454
AI Filing Summary & Sentiment
Referenced dates: June 17, 2005
Letter
July 1, 2005 Mary Beth Breslin Attorney-Advisor US Securities and Exchange Commission Division of Corporation Finance Mail Stop 6010 100 F Street, N.E. Washington, D.C. 20549
Re: International DisplayWorks, Inc. Form 10-K for fiscal year ended October 31, 2004 Filed January 3, 2005 Form 10-Q for period ended April 30, 2005 Filed June 6, 2005 Form 8-K filed June 6, 2005 SEC File No. 0-27002
Dear Ms. Breslin:
On behalf of International DisplayWorks, Inc. ("Company"), we are filing an amendment to our annual report for the year ended October 30, 2004 on Form 10-K/A and an amendment to our quarterly report for the period ended April 30, 2005 on Form 10-Q/A in response to the Staff's letter dated June 17, 2005, and the comments contained in that letter. Further responses to the Staff's letter and comments will be provided below in the order in which they were provided in the Staff's letter in connection with the review of the above-referenced filings. For the Staff's convenience, we have re-inserted the Staff comment before our response, where meaningful. All responses are numbered to correspond to the numbered Staff comments in the June 17, 2005 letter.
Form10-K for the fiscal year ended October 31, 2004 ---------------------------------------------------
Item 1. Business, page 1 ------------------------
1. We note your disclosure on page 3 that the current focus of the company's business is the "small form factor" LCD market. Please revise to explain what this is to provide investors an understanding of the company's target market. Also revise to provide the basis for your estimate of the size of this market and the LCD module market.
Response: Noted. We have revised the item in our Form 10-K/A to further define small form factor (LCDs that are 7" or smaller, on page 1) and the sources for the market estimate for such displays.
<PAGE>
Our Customers, page 6 ---------------------
2. Please revise to identify the customers who account for 10% or more of total sales. For example, we note that one of your customers accounted for 16% of total sales in fiscal 2004.
Response: We amended the report to provide the customer names.
Backlog, page 10 ----------------
3. We note that most orders are subject to cancellation by your customers. Please revise to discuss, if material, the percentage of backlog orders that have been cancelled in recent fiscal quarters.
Response: We noted the comment and added additional disclosure. Supplementally, we note that such cancellations have historically not been material.
Item 6. Selected Financial Data, page 16 ----------------------------------------
4. With respect to the quarterly data presented on page 17, please revise to explain the effect of any unusual or infrequently occurring items recognized in each quarter as well as the aggregate effect and nature of any year-end or other adjustments that are material to the results of that quarter. See Item 302 (a)(3) of Regulation S-K for guidance. For instance, we see the litigation charge in fiscal 2004.
Response: Other than the litigation charge, which was previously disclosed and identified as non-recurring and related to discontinued operations, there are no other unusual or infrequently occurring items that would be material or otherwise enhance the disclosures made. We have added a footnote to identify the litigation expense in light of other comments and amendments made with respect to the litigation expense in the financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------------------------------------------
Overview, page 18 -----------------
5. Please reviseh your MD&A to include quantified disclosure about significant asset and business acquisitions, including how you valued and financed those transactions. For instance, with respect to the second LCD line, disclose what you paid for the acquired assets, how you determined the fair
<PAGE>
values recorded in the financial statements and how you financed the purchase. If significant, please also make disclosure about the costs of installation and costs to bring the assets to production, including disclosure about the underlying accounting for those costs.
Response: The Staff comment was noted. We reviewed our disclosure and revised it accordingly to break out expenses associated with the purchase of the LCD equipment line.
Critical Accounting Policies and Estimates, page 19 ---------------------------------------------------
6. With respect to inventories, please revise to include disclosure about how you estimate and record inventory reserves, including how your methods are faithful to the requirements of SAB Topic 5-BB. Your disclosure should more fully address the nature and extent of management estimates and judgments inherent to that process. In general, critical accounting policy disclosure should provide insight about complex judgments and estimated that underlie your key accounting policies, including disclosure about the susceptibility of estimates to change. That information should generally expand upon and not merely repeat your basic accounting policies. Refer to FR-60 and Exchange Act Release 34-48960 for further guidance. Apply the substance of the general guidance and revise, as relevant, to each of the policies you identify as critical.
Response: We have reviewed Release 34-48960 and expanded the disclosure to further explain our assumptions and judgments.
7. With respect to inventory, we see from the Qualifying Accounts schedule (page F-31) that the amounts "charged" to costs and Expenses in fisca1 2002 and in fiscal 2004 are credits to earnings. As provided by SAB Topic 5-BB, inventory charges are permanent reductions to inventory lost that should not be reversed until the related inventory is sold or otherwise disposed. Under that guidance, the inventory provision should not be a credit to earnings. Please tell us how your method is faithful to that requirement. If necessary, the Qualifying Accounts schedule should be revised to present inventory reserve activity on a gross basis.
Response: We reviewed SAB Topic 5-BB and revised the schedule of qualifying accounts accordingly, consistent with the Staff comment.
Results of Operations, page 20 ------------------------------
8. Please expand to present disclosure about the legal matter responsible for the $625,000 charge. MD&A should provide full and transparent disclosure about material unusual items included in your operating results until those items no longer appear in earnings. Please revise to expand, as appropriate.
<PAGE>
Response: The disclosure with respect to the litigation was made in conjunction with the Company's quarterly report for the period ended April 30, 2004, Note 10. There is no ongoing impact of the litigation on financial results, as previously noted. Nevertheless, we have amended the report to include the nature of the litigation settlement previously disclosed.
9. We refer to the disclosure about the goodwill impairment (page 23). Please revise to present disclosure about the underlying business and operational conditions leading to material impairment charges.
Response: During the year, the Company identified triggering events, including the continued decline in market price and the continued decline in operating performance, that indicated the goodwill might be impaired. As such, the Company engaged CBIZ to evaluate and perform a formal valuation. That report indicated that the goodwill was permanently impaired. Based on a review of the report and further analysis of the operations, the Company determined that the goodwill was permanently impaired, adopting the report's conclusions.
Liquidity and Capital Resources, page 23 ----------------------------------------
10. Please revise to present a discussion of cash flows from operating activities. That discussion should identify and analyze the underlying drivers of operating cash flows, in general, and specific to the relevant periods presented. Please note that the form of the cash flow statement should not drive the substance of this discussion and that it is insufficient to present a narrative that merely lists items from that Statement. Refer to FR.72 for guidance.
Response: The Staff comment was noted, and we expanded our disclosure.
11. As a related matter, when necessary for an understanding of operating cash flows, please revise to also identify and describe reasons for significant changes in the components of working capital.
Response: Disclosure has been added. The comment was noted, and we will also treat it as a future comment that we will expand on in future reports, as appropriate and necessary for an understanding of operating cash flow.
12. Please revise to include the tabular disclosure of contractual obligations required by Item. 303 (a)(5) of Regulation S-K.
Response: The tabular listing of contractual commitments was added.
<PAGE>
13. We see the expenditures related to the second LCD line. Please revise MD&A to include disclosure about any material commitments for capital expenditures. Refer to Item 303 (2)(i) of Regulation S-K.
Response: Out MD&A was revised to include the material commitments for capital expenditures, in line with Item 303 of Regulation S-K.
14. Please revise to make quantified disclosure about unused credit lines and borrowing capacity at year end. Refer to Item 303(a)(l) to Regulation S-K.
Response: The comment is noted and additional disclosure was added.
15. Revise to discuss the material terms of your credit facility with Wells Fargo, such as the term of the agreement, the interest rate, any assets that secure the facility, and any financial covenants that you must maintain. For instance, we note your disclosure in Note 10 to the financial statement that this facility is secured by your accounts receivable, inventory, equipment and intangibles.
Response: In connection with Comment 14, additional disclosure was added.
Financial Statements, page F-1 ------------------------------
Report of Independent Registered Public Accounting Firm, page F-2 -----------------------------------------------------------------
16. We see that you are a domestic U.S. registrant while your auditor is located in Hong Kong. The Staff interprets Article 2 to Regulation S-X to require that the audit report on the financial statements of a domestic registrant be ordinarily rendered by an auditor licensed in the U.S. Tell us why you have selected an auditor located in Hong Kong. Please also respond to the following:
o Tell us where each of your executives, including your principal accounting officer, currently resides and the location of their primary office. Clarify the proportion of their work time spent in the U.S., China and Hong Kong.
o Describe the organization and location of your accounting function, including the location of your accounting records. Identify where the majority of the audit field work is completed. Tell us whether your underlying accounting records reflect US GAAP. If not, please explain.
o In Rule 3400T the PCAOB adopted, on an interim basis, the quality control standards of the SEC Practice Section. Tell us who performed the U.S. GAAP quality review of your financial statements and describe that person's expertise in U.S. GAAP, OMS and PCAOB Standards.
<PAGE>
o Describe the nature and extent of involvement of Grant Thornton's U.S. practice in completion of the audit.
For guidance refer to the document "International Reporting and Disclosure Issues in the Division of Corporation Finance", dated November 1, 2004, available on our web-site at www.sec.gov.
Response: In response to the Staff comment, we note that our principal operations are in Shenzhen, China, including 100% of the captive manufacturing, and the majority of the Company's employees. In addition, the Company's CFO was located in Shenzhen. Grant Thornton's Hong Kong office was chosen as the Company's auditor due to their close proximity to the Company's operations, where the majority of the audit field work would occur. As further described below, Grant Thornton's Hong Kong office has a close working relationship with its U.S. offices, including accountants licensed within those jurisdictions.
o Presently, our Chief Executive Officer and Chief Financial Officer reside in the Place County and Sacramento County, California, areas, in proximity to the Company's corporate headquarters. Since the change in location, both executives continue to spend more than 20% of their time physically in our Shenzhen, Beijing, or Hong Kong offices. Both executives also devote approximately 20% of their time to other travel associated with customers, corporate operations, and business development. The remaining time is spent in the U.S. office located in Roseville, California. With the more recent change in the location of our Chief Financial Officer, we are currently evaluating our audit firm relationship to determine if the Hong Kong office or the U.S. office can best meet our needs.
o The Company is primarily organized around 4 locations (with the recent addition of Beijing), which include the Roseville, California corporate office, the Shenzhen, China manufacturing operations, the Hong Kong business office, and the newly acquired facility located in Beijing, China. Primary accounting functions occur in Shenzhen, Hong Kong, and Beijing, with world-wide accounts reporting and consolidation occurring in our Roseville, California office. Our underlying accounting records reflect U.S. GAAP.
o The work performed by Grant Thornton - Hong Kong is reviewed in the field by a Senior Manager from Grant Thornton - U.S. who is seconded to Hong Kong on a multi-year rotation. The Senior Manager has over ten years of experience with Grant Thornton - US and whose experience has been mainly in the manufacturing and distribution sector. He is licensed in the states of Alabama and Florida and has specific experience in the audits of public companies. A technical review of the financial statements is performed pursuant to Grant Thornton U.S.'s gatekeeper responsibilities by the U.S. Managing Partner of
<P
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
July 1, 2005
Mary Beth Breslin
Attorney-Advisor
US Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 6010
100 F Street, N.E.
Washington, D.C. 20549
Re: International DisplayWorks, Inc.
Form 10-K for fiscal year ended October 31, 2004
Filed January 3, 2005 Form 10-Q for period ended April 30,
2005 Filed June 6, 2005 Form 8-K filed June 6, 2005 SEC File
No. 0-27002
Dear Ms. Breslin:
On behalf of International DisplayWorks, Inc. ("Company"), we are filing an
amendment to our annual report for the year ended October 30, 2004 on Form
10-K/A and an amendment to our quarterly report for the period ended April 30,
2005 on Form 10-Q/A in response to the Staff's letter dated June 17, 2005, and
the comments contained in that letter. Further responses to the Staff's letter
and comments will be provided below in the order in which they were provided in
the Staff's letter in connection with the review of the above-referenced
filings. For the Staff's convenience, we have re-inserted the Staff comment
before our response, where meaningful. All responses are numbered to correspond
to the numbered Staff comments in the June 17, 2005 letter.
Form10-K for the fiscal year ended October 31, 2004
---------------------------------------------------
Item 1. Business, page 1
------------------------
1. We note your disclosure on page 3 that the current focus of the company's
business is the "small form factor" LCD market. Please revise to explain
what this is to provide investors an understanding of the company's target
market. Also revise to provide the basis for your estimate of the size of
this market and the LCD module market.
Response: Noted. We have revised the item in our Form 10-K/A to further
define small form factor (LCDs that are 7" or smaller, on page 1) and the
sources for the market estimate for such displays.
<PAGE>
Our Customers, page 6
---------------------
2. Please revise to identify the customers who account for 10% or more of
total sales. For example, we note that one of your customers accounted for
16% of total sales in fiscal 2004.
Response: We amended the report to provide the customer names.
Backlog, page 10
----------------
3. We note that most orders are subject to cancellation by your customers.
Please revise to discuss, if material, the percentage of backlog orders
that have been cancelled in recent fiscal quarters.
Response: We noted the comment and added additional disclosure.
Supplementally, we note that such cancellations have historically not been
material.
Item 6. Selected Financial Data, page 16
----------------------------------------
4. With respect to the quarterly data presented on page 17, please revise to
explain the effect of any unusual or infrequently occurring items
recognized in each quarter as well as the aggregate effect and nature of
any year-end or other adjustments that are material to the results of that
quarter. See Item 302 (a)(3) of Regulation S-K for guidance. For instance,
we see the litigation charge in fiscal 2004.
Response: Other than the litigation charge, which was previously disclosed
and identified as non-recurring and related to discontinued operations,
there are no other unusual or infrequently occurring items that would be
material or otherwise enhance the disclosures made. We have added a
footnote to identify the litigation expense in light of other comments and
amendments made with respect to the litigation expense in the financial
statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Overview, page 18
-----------------
5. Please reviseh your MD&A to include quantified disclosure about significant
asset and business acquisitions, including how you valued and financed
those transactions. For instance, with respect to the second LCD line,
disclose what you paid for the acquired assets, how you determined the fair
<PAGE>
values recorded in the financial statements and how you financed the
purchase. If significant, please also make disclosure about the costs of
installation and costs to bring the assets to production, including
disclosure about the underlying accounting for those costs.
Response: The Staff comment was noted. We reviewed our disclosure and
revised it accordingly to break out expenses associated with the purchase
of the LCD equipment line.
Critical Accounting Policies and Estimates, page 19
---------------------------------------------------
6. With respect to inventories, please revise to include disclosure about how
you estimate and record inventory reserves, including how your methods are
faithful to the requirements of SAB Topic 5-BB. Your disclosure should more
fully address the nature and extent of management estimates and judgments
inherent to that process. In general, critical accounting policy disclosure
should provide insight about complex judgments and estimated that underlie
your key accounting policies, including disclosure about the susceptibility
of estimates to change. That information should generally expand upon and
not merely repeat your basic accounting policies. Refer to FR-60 and
Exchange Act Release 34-48960 for further guidance. Apply the substance of
the general guidance and revise, as relevant, to each of the policies you
identify as critical.
Response: We have reviewed Release 34-48960 and expanded the disclosure to
further explain our assumptions and judgments.
7. With respect to inventory, we see from the Qualifying Accounts schedule
(page F-31) that the amounts "charged" to costs and Expenses in fisca1 2002
and in fiscal 2004 are credits to earnings. As provided by SAB Topic 5-BB,
inventory charges are permanent reductions to inventory lost that should
not be reversed until the related inventory is sold or otherwise disposed.
Under that guidance, the inventory provision should not be a credit to
earnings. Please tell us how your method is faithful to that requirement.
If necessary, the Qualifying Accounts schedule should be revised to present
inventory reserve activity on a gross basis.
Response: We reviewed SAB Topic 5-BB and revised the schedule of qualifying
accounts accordingly, consistent with the Staff comment.
Results of Operations, page 20
------------------------------
8. Please expand to present disclosure about the legal matter responsible for
the $625,000 charge. MD&A should provide full and transparent disclosure
about material unusual items included in your operating results until those
items no longer appear in earnings. Please revise to expand, as
appropriate.
<PAGE>
Response: The disclosure with respect to the litigation was made in
conjunction with the Company's quarterly report for the period ended April
30, 2004, Note 10. There is no ongoing impact of the litigation on
financial results, as previously noted. Nevertheless, we have amended the
report to include the nature of the litigation settlement previously
disclosed.
9. We refer to the disclosure about the goodwill impairment (page 23). Please
revise to present disclosure about the underlying business and operational
conditions leading to material impairment charges.
Response: During the year, the Company identified triggering events,
including the continued decline in market price and the continued decline
in operating performance, that indicated the goodwill might be impaired. As
such, the Company engaged CBIZ to evaluate and perform a formal valuation.
That report indicated that the goodwill was permanently impaired. Based on
a review of the report and further analysis of the operations, the Company
determined that the goodwill was permanently impaired, adopting the
report's conclusions.
Liquidity and Capital Resources, page 23
----------------------------------------
10. Please revise to present a discussion of cash flows from operating
activities. That discussion should identify and analyze the underlying
drivers of operating cash flows, in general, and specific to the relevant
periods presented. Please note that the form of the cash flow statement
should not drive the substance of this discussion and that it is
insufficient to present a narrative that merely lists items from that
Statement. Refer to FR.72 for guidance.
Response: The Staff comment was noted, and we expanded our disclosure.
11. As a related matter, when necessary for an understanding of operating cash
flows, please revise to also identify and describe reasons for significant
changes in the components of working capital.
Response: Disclosure has been added. The comment was noted, and we will
also treat it as a future comment that we will expand on in future reports,
as appropriate and necessary for an understanding of operating cash flow.
12. Please revise to include the tabular disclosure of contractual obligations
required by Item. 303 (a)(5) of Regulation S-K.
Response: The tabular listing of contractual commitments was added.
<PAGE>
13. We see the expenditures related to the second LCD line. Please revise MD&A
to include disclosure about any material commitments for capital
expenditures. Refer to Item 303 (2)(i) of Regulation S-K.
Response: Out MD&A was revised to include the material commitments for
capital expenditures, in line with Item 303 of Regulation S-K.
14. Please revise to make quantified disclosure about unused credit lines and
borrowing capacity at year end. Refer to Item 303(a)(l) to Regulation S-K.
Response: The comment is noted and additional disclosure was added.
15. Revise to discuss the material terms of your credit facility with Wells
Fargo, such as the term of the agreement, the interest rate, any assets
that secure the facility, and any financial covenants that you must
maintain. For instance, we note your disclosure in Note 10 to the financial
statement that this facility is secured by your accounts receivable,
inventory, equipment and intangibles.
Response: In connection with Comment 14, additional disclosure was added.
Financial Statements, page F-1
------------------------------
Report of Independent Registered Public Accounting Firm, page F-2
-----------------------------------------------------------------
16. We see that you are a domestic U.S. registrant while your auditor is
located in Hong Kong. The Staff interprets Article 2 to Regulation S-X to
require that the audit report on the financial statements of a domestic
registrant be ordinarily rendered by an auditor licensed in the U.S. Tell
us why you have selected an auditor located in Hong Kong. Please also
respond to the following:
o Tell us where each of your executives, including your principal
accounting officer, currently resides and the location of their
primary office. Clarify the proportion of their work time spent in the
U.S., China and Hong Kong.
o Describe the organization and location of your accounting function,
including the location of your accounting records. Identify where the
majority of the audit field work is completed. Tell us whether your
underlying accounting records reflect US GAAP. If not, please explain.
o In Rule 3400T the PCAOB adopted, on an interim basis, the quality
control standards of the SEC Practice Section. Tell us who performed
the U.S. GAAP quality review of your financial statements and describe
that person's expertise in U.S. GAAP, OMS and PCAOB Standards.
<PAGE>
o Describe the nature and extent of involvement of Grant Thornton's U.S.
practice in completion of the audit.
For guidance refer to the document "International Reporting and Disclosure
Issues in the Division of Corporation Finance", dated November 1, 2004,
available on our web-site at www.sec.gov.
Response: In response to the Staff comment, we note that our principal
operations are in Shenzhen, China, including 100% of the captive
manufacturing, and the majority of the Company's employees. In addition,
the Company's CFO was located in Shenzhen. Grant Thornton's Hong Kong
office was chosen as the Company's auditor due to their close proximity to
the Company's operations, where the majority of the audit field work would
occur. As further described below, Grant Thornton's Hong Kong office has a
close working relationship with its U.S. offices, including accountants
licensed within those jurisdictions.
o Presently, our Chief Executive Officer and Chief Financial Officer
reside in the Place County and Sacramento County, California, areas,
in proximity to the Company's corporate headquarters. Since the change
in location, both executives continue to spend more than 20% of their
time physically in our Shenzhen, Beijing, or Hong Kong offices. Both
executives also devote approximately 20% of their time to other travel
associated with customers, corporate operations, and business
development. The remaining time is spent in the U.S. office located in
Roseville, California. With the more recent change in the location of
our Chief Financial Officer, we are currently evaluating our audit
firm relationship to determine if the Hong Kong office or the U.S.
office can best meet our needs.
o The Company is primarily organized around 4 locations (with the recent
addition of Beijing), which include the Roseville, California
corporate office, the Shenzhen, China manufacturing operations, the
Hong Kong business office, and the newly acquired facility located in
Beijing, China. Primary accounting functions occur in Shenzhen, Hong
Kong, and Beijing, with world-wide accounts reporting and
consolidation occurring in our Roseville, California office. Our
underlying accounting records reflect U.S. GAAP.
o The work performed by Grant Thornton - Hong Kong is reviewed in the
field by a Senior Manager from Grant Thornton - U.S. who is seconded
to Hong Kong on a multi-year rotation. The Senior Manager has over ten
years of experience with Grant Thornton - US and whose experience has
been mainly in the manufacturing and distribution sector. He is
licensed in the states of Alabama and Florida and has specific
experience in the audits of public companies. A technical review of
the financial statements is performed pursuant to Grant Thornton
U.S.'s gatekeeper responsibilities by the U.S. Managing Partner of
<P