LUSE GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
5335 WISCONSIN AVENUE, N.W., SUITE 400
WASHINGTON, D.C. 20015
___________________
TELEPHONE (202) 274-2000
FACSIMILE (202) 362-2902
www.luselaw.com
WRITER'S DIRECT DIAL NUMBER WRITER'S EMAIL
(202) 274-2009 mlevy@luselaw.com
March 7, 2006
Via Edgar
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Mr. Paul Cline
Senior Accountant
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: AMASYS Corporation: Form 10-KSB for the Fiscal
Year Ended June 30, 2005
Filed September 28, 2005 - File No. 000-21555
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Dear Mr. Cline:
This is in response to your comment letter dated January 27, 2006
concerning the above referenced Form 10-KSB filed on behalf of AMASYS
Corporation (the "Company") on September 28, 2005. Below are the responses to
the comments (in bold).
General
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1. The Division of Investment Management has reviewed Amasys' Form 10-KSB
for the period ending June 30, 2005 ("Form 10-KSB") and Amasys' Form
10-QSB for the period ending September 30, 2005 ("Form 10-QSB"). Based
on its review, the Division of Investment Management believes that
Amasys is an investment company and has asked us to advise you as
follows.
Based on our preliminary review of Amasys' Form 10-KSB and Form 10-QSB,
we believe that Amasys may fall within the definition of an investment
company under Section 3(a)(1)(A) and/or Section 3(a)(1)(C) of the
Investment Company Act of 1940 ("1940 Act").
Section 3(a)(1)(A) defines an "investment company" to include
any issuer that "is or holds itself out as being engaged
primarily, or proposes to engage primarily, in the business of
investing, reinvesting, or trading in securities." Section
3(a)(l)(C) defines an "investment company" as any issuer which
"is engaged or proposes to engage in the business of investing,
LUSE GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
Mr. Paul Cline
March 7, 2006
Page 2
reinvesting, owning, holding, or trading in securities, and
owns or proposes to acquire investment securities having a
value exceeding 40 per centum of the value of such issuer's
total assets (exclusive of Government securities and cash
items) on an unconsolidated basis."
Amasys describes its business in its Form 10-KSB as maintaining its
equity interest in and note receivable from Comtex News Network, Inc.
("Comtex") and equity interest in Analex Corporation ("Analex").
Consistent with this statement, Amasys' Statement of Operations to the
Form 10-KSB reports that its sole source of income in fiscal years 2005
and 2004 was derived from its securities investments. Additionally,
Amasys' holdings in Comtex and Analex constitute investment securities
having a value greater than 40% of its total assets (exclusive of
Government securities and cash items). Amasys asserts that it should
not be deemed to be an investment company and refers to an exemption
from registration as an investment company under the 1940 Act. Amasys,
however, provides no information or legal analysis supporting its claim
to an exemption from registration. We therefore are unable to concur
with Amasys' position that it should not be deemed to be an investment
company under the 1940 Act.
Accordingly, please explain why Amasys is not required to register as
an investment company under the 1940 Act (e.g., provide a complete and
detailed explanation of the basis for Amasys' reliance upon any
exemption or exclusion from the definition of investment(.) company
contained in Section 3(a)(1)(A) and Section 3(a)(1)(C), as
appropriate); or (2) if no exemption or exclusion from the definition
of investment company is available to Amasys, explain what specific
remedial action you have taken or plan to take, either to cause Amasys
to fall outside of that definition, or to register Amasys as an
investment company.
Amasys had previously concluded that it would not be considered an
investment company pursuant to the safe harbor exemption afforded to
companies pursuant to Rule 3a-1 promulgated under the Investment
Company Act of 1940, as amended. Amasys acknowledges that such safe
harbor protection, if available, is of limited duration. Amasys also
acknowledges the Staff's analysis in Comment Number 1. Accordingly,
Amasys is in the process of determining: (1) whether it can terminate
its registration under Section 12(g) of the Securities Exchange Act of
1934 and/or (2) liquidate its existing assets in order to provide some
value to its stockholders. The Company anticipates that it will
determine if it can deregister by no later than March 17, 2006 and
whether it can implement a plan of liquidation by March 31, 2006. To
the extent that a plan of liquidation is authorized by the Company's
Board of Directors and requires stockholder approval, Amasys will
provide its stockholders with the information required to make an
informed decision.
LUSE GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
Mr. Paul Cline
March 7, 2006
Page 3
Amasys notes that it is a company of limited financial and managerial
means. Amasys is also unaware of its common stock trading at any time
in the last ten years. By exploring deregistration and a plan of
liquidation, Amasys is hopeful to provide some value to its
stockholders. Amasys therefore respectfully requests it not be required
to register as an investment company if it is able to deregister and
liquidate its assets to provide some value to its stockholders in a
timely manner.
Overview, page 2
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2. Please revise to clarify if there is a cap on the amount by which the
conversion price of the Comtex note will increase. You disclose that it
will increase $.05 every 180 days.
Please be advised that the conversion price of the Comtex note
increases $.05 for every 180 days until the due date of July 1, 2008.
If Amasys is unable to determine if it can deregister by March 17,
2006, it will file an amendment to its Form 10-KSB reflecting this
information.
Report of Independent Registered Public Accounting Firm, page F-1
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3. Please revise your audit opinion to state the magnitude of the portion
of the financial statements audited by the other auditor, which may be
done by indicating dollar amounts or percentages of total assets, total
revenue or other appropriate criteria. Refer to AU Section 508.
Please note that the Company has previously reported that it engaged
Turner, Stone & Company, L.L.P. ("Turner Stone") as its new independent
registered public accounting firm, effective January 17, 2006. The
Company reported that it continued its relationship with Kaiser Scherer
& Schlegel, PLLC ("KSS") as its independent registered public
accounting firm through the preparation and filing on November 14, 2005
of the Company's Form 10-QSB for the quarter ended September 30, 2005.
KSS was dismissed as the Company's independent registered public
accounting firm effective January 17, 2006.
KSS's reports on the financial statements of the Company as of and for
the years ended June 30, 2005 and 2004 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles. Turner Stone
has been engaged to audit the financial statements of the Company as of
and for the year ending June 30, 2006. The Registrant's Audit Committee
approved the engagement of Turner Stone.
LUSE GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
Mr. Paul Cline
March 7, 2006
Page 4
In connection with the audits of the two fiscal years ended June 30,
2005 and the subsequent interim period through the date of this Report,
there were (1) no disagreements with KSS on any matter of accounting
principles or practices, financial statement disclosure or auditing
scope or procedure which disagreements, if not resolved to the
satisfaction of KSS, would have caused them to make reference to the
subject matter of the disagreements in connection with their opinion
and (2) no reportable events.
Amasys has consulted with KSS, its former independent registered public
accounting firm, on Comment 3 and KSS will revise its opinion in
response to Comment 3 if Amasys is unable to determine if it can
deregister by March 17, 2006.
4. Please revise your scope paragraph to indicate that the principal
auditor's audit and report of other auditors provide a reasonable basis
for the opinion on the financial statements. Refer to AU Section 508.
Amasys has consulted with KSS, its former independent registered public
accounting firm, on Comment 4 and KSS will revise its opinion in
response to Comment 4 if Amasys is unable to determine if it can
deregister by March 17, 2006.
Note 2: Summary of Significant Accounting Policies Investment in Common Stock -
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Related Party, page F-7
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5. We note the significance to Comtex of your equity ownership and the
outstanding note and the significant control you have over the
operations of Comtex. Based on these facts, please revise to disclose
how you considered the requirements of paragraphs 4(h) and 5 of FIN 46R
in determining your accounting for your investment in Comtex.
Paragraph 4 of FIN 46R describes those entities to which this
accounting standard is not applicable and paragraph 4(h) states that an
entity need not be evaluated as a variable interest entity unless one
or more of four conditions (subparagraphs (1) through (4)) are met. In
our consideration of this issue we determined that Amasys did not
participate, significantly or otherwise, in the design or redesign of
Comtex, Comtex's activities do not involve nor are conducted on behalf
of Amasys, Amasys has not provided more than half of Comtex's financial
support and Comtex's activities are not primarily related to
securitizations or other forms of asset-backed financings. Furthermore,
considering the guidance provided by paragraph 5, Amasys concluded that
it would neither absorb a majority of Comtex's expected losses nor
receive a majority of its expected residual returns. Although Amasys
owns 16% of Comtex (up to 22% on a fully diluted basis), the majority
of its outstanding shares would either absorb the majority of Comtex's
expected losses or receive a majority of its expected residual returns.
LUSE GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
Mr. Paul Cline
March 7, 2006
Page 5
Lastly, although several of Amasys' directors also serve on Comtex's
board, they do not control Comtex's board and Amasys does not, through
common board members or any other way, exercise significant control
over the operations of Comtex.
6. Please revise to provide a roll-forward of the changes in both your
equity investment in Comtex and your note receivable from Comtex that
result from applying the equity method accounting.
Amasys notes that this information is currently reported in the
Statement of Operations and the Statement of Stockholder's Equity and
respectfully requests that a roll-forward be presented in the notes to
its financial statements in future filings if Amasys is unable to
determine if it can deregister by March 17, 2006.
Derivative Instruments. page F-7
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7. Please revise to disclose if you used and are using an independent
valuation expert to value the derivative component of the note
receivable when originally measured and recognized and on an on-going
basis. If you are not using such an expert, disclose who is performing
the valuation and his or her qualifications.
Amasys prepares the derivative valuation using a local certified public
accounting firm that does not have such expertise, although it
initially worked with a national accounting firm in the preparation of
such information and has continued to utilize the same common Black
Sholes model in its subsequent valuation determination. If Amasys is
unable to determine if it can deregister by March 17, 2006, it will
file an amendment to its Form 10-KSB reflecting this information.
8. Please revise to disclose the reasons for the significant fluctuations
in the valuation of your derivative asset period to period, including
identification of the material underlying assumptions and how they
changed from period to period.
Also, provide a roll-forward of the asset value between periods.
Amasys notes that it reviews individual derivative calculations for
each period to determine the fluctuations in the valuation of its
derivative asset. The individual calculations it reviews include: the
market price of Comtex common stock, the exercise price per share, the
time to maturity, its annualized risk-free interest of 4%, and the
volatility. Amasys respectfully requests that it be allowed to present
the roll-forward note to its financial statements in future filings if
Amasys is unable to determine if it can deregister by March 17, 2006.
LUSE GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
Mr. Paul Cline
March 7, 2006
Page 6
Comprehensive Income, page F-9
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9. Please revise to include the disclosures required by paragraphs 18
through 20 of SFAS 130.
Amasys has reported in Accumulated Other Comprehensive Income on the
Balance Sheet unrealized gains (losses) on its short term investments
net of realized gains (losses). It can and will report separately both
the realized and unrealized gains (losses) in the Balance Sheet to
reflect that a double reporting has not occurred in accordance with
Paragraphs 18 through 20 of SFAS No. 130.
If Amasys is unable to determine if it can deregister by March 17,
2006, it will file an amendment to its Form 10-KSB for the fiscal year
ended June 30, 2005 reflecting this information.
Fair Value of Financial Instruments, page F-9
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10. We do not understand why it is not practicable to disclose the fair
value of the note from Comtex. It appears the fair value may best be
represented by the value of the underlying shares into which the note
is convertible. Please tell us in more detail why you do not think it
is practicable to fair value this note.
Amasys has consistently disclosed that it is not practicable to
estimate the fair value of the Company's note receivable-related party
due to its unique nature. Amasys is not valuing the note based on the
underlying shares because it does not anticipate collecting this note
through conversion thereof. If Amasys is unable to determine if it can
deregister by March 17, 2006, it will file an amendment to its Form
10-KSB for the fiscal year ended June 30, 2005 reflecting this
information.
11. For all periods presented, please revise to disclose the number of
shares into which the note is convertible, the conversion price per
share and the per share of Comtex stock.
If Amasys is unable to determine if it can deregister by March 17,
2006, it will file an amendment to its Form 10-KSB reflecting this
information.
Note 6: Earnings Per Share
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12. Please revise to include the disclosure requirements of paragraph 40(c)
of SFAS 128.
Although the `Earnings per Share' section of footnote 2 could have been
drafted more clearly, Amasys is of the opinion that the disclosure
LUSE GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
Mr. Paul Cline
March 7, 2006
Page 7
requirement of SFAS No. 128, paragraph 40(c) has been complied with in
that this section identifies each such potentially dilutive security
(stock options and convertible preferred stock).
The Company acknowledges that:
o It is responsible for the adequacy and accuracy of the disclosure
in the filing;
o 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
o 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.
We trust that the above information is responsive to the staff's
comments. Please direct any additional comments or questions to the undersigned.
Sincerely,
/s/ Marc P. Levy
Marc P. Levy
cc: Margaret Fitzgerald, Securities and Exchange Commission
C.W. Gilluly, AMASYS Corporation