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1.
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Our July 8, 2010 letter may not have been clear; allow me attempt to be clearer and confirm matters that were covered in the July 23, 2010 conference call. It is not true that in past years we “…recorded a charge to the income statement for the full original value of the inventory rather than the new cost basis created at the time of the inventory write-down.” This will confirm to you that when inventory that had been reduced to lower of cost or market was relieved to cost of goods sold in prior years, the related inventory allowance was also relieved to reduce the write down to market for those goods. However, because of the nature of the procedures employed at that time, the inventory allowance continued to be maintained on a conservative basis. This reflected management’s judgment
at the time about product changes, component changes and likely changes, outsourcing vs. manufacturing and product life cycle matters. Many of these factors are less of an issue today. As such, certain inventory allowances built up over prior years would appear to no longer be necessary based on (a) more certainty on product and production matters, (b) more efficient inventory levels and (c) improved procedures over the documentation of the needs of the allowance. This reflects a change in managements estimate and judgment based on changed conditions.
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2.
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As we review ASC 250 with respect to accounting changes that result from revision of estimates, we have come to believe that the correct means to address the inventory valuation allowance is to credit amounts no longer needed to cost of goods sold as the related inventory, previously written down, is sold. This is different than the “cumulative catch up” adjustment that was recorded in the three months ended February 28, 2010. In order to determine whether there is a material difference between this method and what was recorded, we
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a.
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Examined our records to determine when the valuation account excesses were identified and by what amounts
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b.
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Determined which items within the inventory are affected and
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c.
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Tracked the movement of those affected items out of inventory.
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3.
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With respect to point 3 in your July 20, 2010 letter, I believe that our response to item 1 above addresses that point.
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the Company is responsible for the adequacy and accuracy of the disclosures in our filings;
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staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to our filings; and
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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.
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