July 12, 2007
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C. 20549-3561
ATTN: William Choi, Branch Chief
RE: Form 10-KSB for the Fiscal Year Ended September 30, 2006;
Forms 10-QSB for the Fiscal Quarters Ended December 31, 2006
and March 31, 2007;
Comment Letter Dated May 21, 2007 and Response Letter Dated
June 4, 2007;
File No. 0-13757
Dear Mr. Choi:
We are in receipt of your follow-up letter dated June 21, 2007, with respect
to the above-captioned filings and our response to the Staff's initial
comment letter. The following addresses the Staff's comments as set forth
in such letter.
Form 10-KSB for the Fiscal Year Ended September 30, 2006
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Notes to Consolidated Financial Statements
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6. Income Taxes
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We continue to believe that our primary tax strategy, among others available
to us, may be effectively employed to reasonably assure that realization of
at least the recorded net deferred tax asset is more likely than not.
Historically, our primary tax strategy for utilization of the NOLs has been
to bulk sell a portion of our appreciated inventory. In addition, as
discussed below, if we were to change our primary strategy to one of selling
appreciated real estate, our net deferred tax asset might actually increase
(not decrease) in a future period. Regarding our primary tax strategy, we
believe that most items in our inventory are substantially appreciated We
continually do internal valuations that we believe support this conclusion
and are unaware of any professional standard that either suggests or requires
independent appraisals. In fact, SFAS 157 effectively establishes that fair
value measurements are an accounting function with no mention of independent
appraisals. Our historical gross margin realization in the 90% range, we
believe, is indicative of such appreciation. For example, while the vast
majority of our documents are unique, we also have many documents that are
similar. Using current arms-length market driven non-discounted (or "retail")
transactions as the value matrix for such similar documents, we have recently
calculated that the estimated value of the similar items alone exceeded the
historical cost of our entire inventory. In addition, each year our
independent auditors select a statistical sample of our documents for
existence and valuation testing. Such testing has included their engagement
Mr. William Choi
Securities and Exchange Commission
July 12, 2007
Page 2
of a specialist to attest to the authenticity and continuing value of the
documents selected.
While we have recently hired a new marketing director for retail sales and
are exploring different alternatives, as discussed below, to generate short
and long-term profits, we currently believe that it may be imprudent from a
business standpoint to effectuate a bulk sale to generate short-term profits
simply to demonstrate the viability of our recorded net deferred tax asset.
At September 30, 2006, our NOLs totaled approximate $6.3 million and do not
begin to expire until 2019. Using a 34% tax rate, the deferred tax asset
associated with these NOLs total approximately $2.1 million ($1.3 million net
of valuation allowance). To illustrate, at an approximate 90% gross margin,
the potential retail value of our inventory ($6.5 million at cost) may
approximate $65 million. Even if the wholesale value was one-third
($21.7 million) of that amount, only approximately 25% of our inventory would
need to be bulk sold to utilize the recorded net deferred tax asset of $1.3
million. Management currently believes that a bulk sale of our inventory to
utilize the net deferred tax asset would not be implausible but would rather
clearly constitute a tax planning strategy (i.e., an action that "management
ordinarily might not take but would take, if necessary, to realize a tax
benefit for a carryforward before it expires"). Management firmly believes
that this tax strategy is both prudent and feasible (as those terms are
described and discussed in paragraphs 22, 107 and 247 of SFAS 109);
particularly if the alternative was to permanently lose the benefit of the
NOLs, something that will not become an immediate concern until 2019. It
would be far less plausible to assume we would not use available tax
strategies that are both prudent and feasible to utilize at least a significant
portion of the NOLs and therefore require a 100% valuation allowance.
It should also be noted that we have provided valuation allowances equal to
the deferred tax asset associated with losses incurred during 2007, 2006, and
2005 and most of 2004 so if the tax strategy of bulk selling a portion of our
inventory were implemented, it would not significantly impact our business
model by requiring too much of our inventory to be sold and also to correlate
with the perceived potential benefit associated with another available tax
strategy discussed in the following paragraph.
In this and our prior filings, we have focused our comments on our tax
strategy of bulk selling a portion of our inventory. However, we also own
appreciated real property consisting of a 40,000 square-foot office / retail
building on 1.7 acres of land located in Las Vegas, Nevada. The depreciated
cost of the property at September 30, 2006 and 2005 was $1,083,987 and
$1,138,533, respectively. The property was last valued by an independent
appraiser in August 2005. If sold in 2005 at the 2005 appraised amount, the
taxable gain would have been sufficient to utilize the net deferred tax asset
of $1.3 million. Based on very recent discussions with several real estate
brokers, we currently believe that the value of the real property may exceed
the prior appraisal by a material amount. Accordingly, we are considering
adopting the sale of the appreciated real property as our primary tax
strategy, which would entail moving operations to less expensive warehouse
space, and changing our business model to that of a wholesaler of documents
Mr. William Choi
Securities and Exchange Commission
July 12, 2007
Page 3
to retailers. If selling the appreciated real property were to become our
primary tax strategy, it now appears that the entire valuation allowance
could be immediately eliminated. It is estimated that the marketing cost to
implement either tax strategy is not significant.
We trust that the foregoing is responsive to the Staff's comments. Please do
not hesitate to contact us, if we can be of any further assistance.
Sincerely,
/s/ Rod Lynam
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Rod Lynam
Treasurer