January 17, 2006
Mr. John Cash
Accounting Branch Chief
Securities and Exchange Commission
Division of Corporation Finance
Washington, DC 20549
Re: Strategic Diagnostics Inc.
Form 10-K for the year ended December 31, 2004
Filed March 30, 2005
File No. 000-22400
Dear Mr. Cash:
This letter is in response to comments of the Staff contained in your letter to
Anthony J. Simonetta, Vice President -- Finance and Chief Financial Officer of
Strategic Diagnostics Inc. ("management", "we", "our", "us" or the "Company"),
dated December 13, 2005. The comments in the Staff's letter have been set forth
below, along with the Company's responses thereto.
The information contained herein is being furnished by the Company on a
supplemental basis.
FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 2004
- ------------------------------------------------
1. WE DISAGREE WITH YOUR QUANTITATIVE ASSESSMENT OF MATERIALITY AND BELIEVE
THAT THE FINANCIAL STATEMENTS INCLUDED IN YOUR FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2004 AND SUBSEQUENT FORM 10QS SHOULD BE RESTATED. WE REMIND
YOU THAT YOUR RESTATED FINANCIAL STATEMENTS MUST INCLUDE ALL THE
DISCLOSURES REQUIRED BY APB 20.
On December 15, 2005, the Company determined that the Company's financial
statements for the years ended December 31, 2004, 2003 and 2002, and as of
and for the periods ended March 31, 2005 and 2004, June 30, 2005 and 2004
and September 30, 2005 and 2004, will be restated.
Mr. John Cash
January 17, 2006
Page Two
2. WE NOTE THAT YOUR QUANTITATIVE ANALYSIS INCLUDES THE IMPACT OF PROPOSED
2004 AUDIT ADJUSTMENTS THAT WERE NOT RECORDED BECAUSE YOU CONCLUDED THAT
THE IMPACT OF THOSE ADJUSTMENTS WERE NOT MATERIAL. PLEASE PROVIDE US WITH A
REVISED QUANTITATIVE ANALYSIS THAT EXCLUDES THE IMPACT OF THOSE
ADJUSTMENTS. IN ADDITION, PROVIDE US WITH THE DETAIL OF THOSE UNRECORDED
ADJUSTMENTS, INCLUDING AN ANALYSIS OF HOW THOSE ADJUSTMENTS WERE EVALUATED
FOR MATERIALITY ON AN "AS RECORDED" AND "AS RESTATED" BASIS.
Please refer to the attached letter furnished to Ms. Patricia Armelin of
the Staff dated December 14, 2005, which includes a quantitative analysis
that presents the impact of the change in accounting as if (i) such change
had been made on our previously reported financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2004, our
Quarterly Reports on Form 10-Q for the periods ended March 31 and June 30,
2005 and our earnings release for the period ended September 30, 2005
(Tables A, B and C) and (ii) such change had been made only on our earnings
release for the three and nine month periods ended September 30, 2005
(Table D) without consideration of adjustments proposed during the 2004
audit that were not recorded because we concluded that the impact of these
adjustments were immaterial. Also attached to that letter is a detailed
listing of such proposed audit adjustments and a memorandum entitled
Assessment of Materiality in Connection with the Proposed 2004 Audit
Adjustments.
3. WE HAVE REVIEWED YOUR PROPOSED TREATMENT REGARDING THE EVALUATION OF THE
CUSTOM ANTIBODY COSTS FOR IMPAIRMENT AS WELL AS THE TREATMENT OF ADDITIONAL
CUSTOM ANTIBODY ORDERS. YOUR FILINGS SHOULD BE REVISED TO INCLUDE THE
DISCLOSURE OF THESE ACCOUNTING POLICIES. PLEASE PROVIDE US WITH A DRAFT OF
YOUR PROPOSED DISCLOSURES ON A SUPPLEMENTAL BASIS.
We propose to include in our amended filings revised disclosures relating
to the evaluation of the impairment of custom antibody costs, revenue
recognition for custom antibody projects and the treatment of additional
custom antibody orders that will read substantially as follows:
VALUATION OF INVENTORIES - Inventories are valued at the lower of cost or
market.
For inventories that consist of costs associated with the production of
custom antibodies, cost is determined using the specific identification
method. Realization of such inventories is dependent upon the successful
completion of a project in accordance with customer specifications. Losses
on projects in progress are recorded in the period such losses become
likely and estimable.
Mr. John Cash
January 17, 2006
Page Three
REVENUE RECOGNITION -
The Company enters into contracts related to the production of custom
antibodies, which provide for the performance of defined tasks for a fixed
price, with delivery of the product upon completion of production. The
standard time to complete a project is typically longer than 30 days but
less than 12 months and effort is expended over the life of the project.
Revenues related to sales of custom antibody projects are recognized when a
project's specifications have been met and the related materials have been
shipped.
Fees associated with products and services added on to a custom antibody
project subsequent to delivery of the initial project are billed monthly
and recognized as revenue as the services and other deliverables are
provided.
Any comments or questions with respect to the foregoing should be addressed to
Anthony J. Simonetta of the Company at 302-456-6789 ext. 305.
Very truly yours,
/s/ Anthony J. Simonetta
- ------------------------------------------------------
Anthony J. Simonetta, Vice President - Finance and CFO
cc: Ellen Goitia, KPMG
Justin Chairman, Morgan Lewis
Patricia Armelin, SEC
Jeanne Baker, SEC
December 14, 2005
Ms. Patricia Armelin
Staff Accountant
Securities and Exchange Commission
Division of Corporation Finance
Washington, DC 20549
Re: Strategic Diagnostics Inc.
Form 10-K for the year ended December 31, 2004
Filed March 30, 2005
File No. 000-22400
Dear Ms. Armelin:
This letter is being furnished by the Company to supplement our December 8, 2005
response to comments of the Staff contained in Mr. John Cash's November 17, 2005
letter to Anthony J. Simonetta, Vice President -- Finance and Chief Financial
Officer of Strategic Diagnostics Inc. ("management", "we", "our", "us" or the
"Company"). A formal response to Mr. John Cash's December 13, 2005 letter to Mr.
Simonetta will be forthcoming following a call with the Staff tentatively
scheduled for December 15, 2005.
Attached is our Quantitative Analysis that presents the impact of the change in
accounting as if it was made on our previously reported financial statements
included in Form 10-K for the year ended December 31, 2004, Form 10-Q for the
periods ended March 31 and June 30, 2005 and our earnings release for the period
ended September 30, 2005 (Tables A, B and C) and, as if the impact of the change
in accounting was only made on our earnings release for the three and nine month
period ended September 30, 2005 (Table D) without consideration of adjustments
proposed during the 2004 audit that were not recorded because we concluded that
the impact of these adjustments were immaterial. Also, attached is a detailed
listing of such proposed audit adjustments and a memorandum entitled Assessment
of Materiality in Connection with the Proposed 2004 Audit Adjustments.
Any comments or questions with respect to the foregoing should be addressed to
Anthony J. Simonetta of the Company at 302-456-6789 ext. 305.
Very truly yours,
/s/ Anthony J. Simonetta
- ------------------------------------------------------
Anthony J. Simonetta, Vice President - Finance and CFO
STRATEGIC DIAGNOSTICS INC.
ASSESSMENT OF MATERIALITY IN CONNECTION WITH THE 2004 AUDIT
Attached is the 2004 summary of unadjusted audit differences. Please note that
adjustments numbers 1 through 9 were the unadjusted differences that we
evaluated at the time we filed our 2004 Form 10-K.
The Company evaluated proposed adjustments numbers 1 through 9 primarily based
on a quantitative assessment. The impact on net income was 2% and the
adjustments did not impact our compliance with debt covenants. Based on these
facts, we concluded that the impact of the proposed adjustments were immaterial.
Subsequent to the filing of our 2004 Form 10-K, we determined that there was
another adjustment that should be considered in assessing the materiality of all
known differences on our 2004 financial statements. Adjustment number 10
documents the impact of this additional adjustment. The following presents the
Company's assessment of the factors described in Staff Accounting Bulletin No.
99 - Materiality to determine whether all known 2004 audit differences are
material to the affected financial statement item(s).
o WHETHER THE MISSTATEMENT ARISES FROM AN ITEM CAPABLE OF PRECISE
MEASUREMENT OR WHETHER IT ARISES FROM AN ESTIMATE AND, IF SO, THE DEGREE
OF IMPRECISION INHERENT IN THE ESTIMATE
The misstatements related to the Company's unrecorded audit differences
can be categorized as follows:
o Items associated with changes in estimates relate to the
percentage-of-completion method of accounting utilized in our custom
antibody business (# 2), the determination of the allowance for bad
debts (# 8), taxes receivable (# 7), accrued expenses (# 3) and the
amortization period for a license fee (# 9).
o Adjustments to inventory values resulting from an updating of
standard costs and reconciliation of intercompany charges (# 1 and
4).
o Other miscellaneous differences (# 5, 6 and 10).
The Company has processes in place to identify matters similar to the
above including to periodically update, during the duration of a custom
antibody project, the costs and time necessary to complete a project;
estimate the reserves for uncollectible receivables; reevaluate (generally
after the end of a fiscal year) standard costs used for inventory
valuation; and, ensure expenses that require accrual are estimated and
recorded. Consequently, we believe that, while there has been some degree
of imprecision in the processes as a result of the necessary application
of estimates, the Company has had effective and proven processes to
minimize the imprecision in its estimates. We believe the audit
differences do not result in materially different results being reported.
2004 Audit Differences
Materiality Memorandum
Page Two
o WHETHER THE MISSTATEMENT MASKS A CHANGE IN EARNINGS OR OTHER TRENDS
The effect of the 2004 audit differences would not change the nature or
trend in earnings or other trends on an "as recorded" or "as adjusted"
basis. After considering the effects of the audit differences:
o the net earnings trend from 2003 to 2004 would continue to reflect the
Company becoming profitable.
o earnings per share (EPS) on a diluted basis for 2004 would remain
unchanged.
o Revenues, operating expenses and operating income in 2004 would continue
to reflect similar trends on an "as reported" and "as restated" basis.
o WHETHER THE MISSTATEMENT HIDES A FAILURE TO MEET ANALYSTS' CONSENSUS
EXPECTATIONS FOR THE ENTERPRISE
The Company has not been followed by analysts since October 2004. In 2004,
we were followed by only one analyst and in 2003 and 2002 by two analysts.
The Company has never provided earnings guidance of any sort to the
investment community. In the final report of the analyst in 2004, the
Company was downgraded from a buy to neutral and the price target was
reduced. The analyst had this comment, "We expected more sales traction
and new business by this point in 2004 and are concerned about growth
catalysts materializing." Thus, the impact of not recording the 2004 audit
differences would not hide a failure to meet the analysts' expectations.
o WHETHER THE MISSTATEMENT CHANGES A LOSS INTO INCOME OR VICE VERSA
The effect of the 2004 audit differences would not result in a change of a
loss into income or vice versa in any period affected.
o WHETHER THE MISSTATEMENT CONCERNS A SEGMENT OR OTHER PORTION OF THE
REGISTRANT'S BUSINESS THAT HAS BEEN IDENTIFIED AS PLAYING A SIGNIFICANT
ROLE IN THE REGISTRANT'S OPERATIONS OR PROFITABILITY
The 2004 audit differences did not have an impact on one product group
more than any other.
2004 Audit Differences
Materiality Memorandum
Page Three
o WHETHER THE MISSTATEMENT AFFECTS THE REGISTRANT'S COMPLIANCE WITH
REGULATORY REQUIREMENTS
The impact of the 2004 audit differences does not affect the Company's
compliance with regulatory requirements.
o WHETHER THE MISSTATEMENT AFFECTS THE REGISTRANT'S COMPLIANCE WITH LOAN
COVENANTS OR OTHER CONTRACTUAL REQUIREMENTS
The impact of the 2004 audit differences does not affect the Company's
compliance with loan covenants or other contractual requirements.
o WHETHER THE MISSTATEMENT HAS THE EFFECT OF INCREASING MANAGEMENT'S
COMPENSATION - FOR EXAMPLE, BY SATISFYING REQUIREMENTS FOR THE AWARD OF
BONUSES OR OTHER FORMS OF INCENTIVE COMPENSATION
The impact of the 2004 audit differences would have resulted in a
reduction of the cash incentive paid to participants of approximately
$10,000 in the aggregate and an aggregate reduction of the long term
incentive component of approximately $18,400. The total impact on
incentive compensation of $28,400 comprises only 1.6% of the total
compensation for the participants.
o WHETHER THE MISSTATEMENT INVOLVES CONCEALMENT OF AN UNLAWFUL TRANSACTION
The impact of the 2004 audit differences does not involve the concealment
of an unlawful transaction.
o THE DEMONSTRATED VOLATILITY OF THE PRICE OF A REGISTRANT'S SECURITIES IN
RESPONSE TO CERTAIN TYPES OF DISCLOSURES MAY PROVIDE GUIDANCE AS TO
WHETHER INVESTORS REGARD QUANTITATIVELY SMALL MISSTATEMENTS AS MATERIAL
The Company believes that generally the volatility of the price of the
Company's stock has historically been the result of events occurring
outside the Company's control such as natural disasters, environmental
issues, water pollution, etc. wherein investors believed that the
bio-detection test kits we manufacture would find a ready market as a
result of these events and translate into a significant increase in
revenues. In addition, questions we receive from investors relate
primarily to the Company's ability to grow revenues.
2004 Audit Differences
Materiality Memorandum
Page Four
o MANAGEMENT HAS INTENTIONALLY MISSTATED ITEMS IN THE FINANCIAL STATEMENTS
TO "MANAGE" REPORTED EARNINGS
Given the nature of the 2004 audit differences described above, there is
no evidence that Management was managing earnings by deciding not to
record such differences.
CONCLUSION
Management believes that the impact of not recording the 2004 audit differences
is not material quantitatively or qualitatively to the previously issued
financial statements and should not result in a restatement of those financial
statements but rather be effectuated on a prospective basis beginning with the
first quarter of 2005.
This conclusion is based on (1) the fact that past trends in revenues and net
income do not change because of the impact of the 2004 audit differences; (2)
the impact of the 2004 audit differences does not change a loss into income or
vice versa for the period affected; (3) one portion of the Company's business
would not have been significantly impacted by the 2004 audit differences more
than any other; (4) the impact on executive compensation resulting from the
differences was small in terms of dollars and percentage of total compensation;
(5) there is no effect on compliance with regulatory or debt compliance; and (6)
the Company had no intention of managing earnings or performance by deciding not
to record the 2004 audit differences.
Strategic Diagnostics Inc
TABLE A: Annual Change as a Percentage of As Reported Results
Without Unadjusted 2004 Audit Differences
04 Audit 04 Audit
Difference % Difference %
2000 2001 2002 2003 Impact Change 2004 Impact Change
------------------------------- -------------------------------- ---------------------------------
Product Related Revenue
as reported 24,773 28,497 23,262 25,466 0 0.00 24,011 (48) (0.00)
as corrected 24,566 28,610 22,968 25,692 0 0.00 23,712 (48) (0.00)
------------------------------- ---------- ----------
Change (207) 113 (294) 226 (299)
Percentage -0.8% 0.4% -1.3% 0.9% -1.2%
Operating Expense
as reported 23,552 27,756 25,915 27,160 (48) (0.00) 22,240 30 0.00
as corrected 23,598 27,711 25,845 27,104 (48) (0.00) 22,098 30 0.00
------------------------------- ---------- ----------
Change 46 (45) (70) (56) 0.00 (142)
Percentage 0.2% -0.2% -0.3% -0.2% 0.00 -0.6%
Operating Income (loss)
as reported 2,322 1,615 (2,134) (1,577) (48) 0.03 1,771 (78) (0.04)
as corrected 2,069 1,773 (2,360) (1,295) (48) 0.04 1,614 (78) (0.05)
------------------------------- ---------- ----------
Change (253) 158 (226) 282 (157)
Percentage -10.9% 9.8% 10.6% -17.9% -8.9%
Pre-tax income (loss)
as reported 2,190 1,658 (1,810) (1,617) (48) 0.03 1,824 (78) (0.04)
as corrected 1,937 1,816 (2,036) (1,335) (48) 0.04 1,667 (78) (0.05)
------------------------------- ---------- ----------
Change (253) 158 (226) 282 (157)
Percentage -11.6% 9.5% 12.5% -17.4% -8.6%
Net income (loss)
as reported 1,548 1,126 (912) (854) (26) 0.03 1,503 (64) (0.04)
as corrected 1,369 1,255 (1,026) (704) (26) 0.04 1,374 (64) (0.05)
------------------------------- ---------- ----------
Change (179) 129 (114) 150 (129)
Percentage -11.6% 11.5% 12.5% -17.6% -8.6%
Diluted EPS
as reported 0.09 0.06 (0.05) (0.04) 0 0.00 0.08 0 0.00
as corrected 0.08 0.07 (0.06) (0.04) 0 0.00 0.07 0 0.00
------------------------------- ---------- ----------
Change (0.01) 0.01 (0.01) 0.00 (0.01)
Percentage -11.1% 16.7% 20.0% 0.0% -12.5%
Strategic Diagnostics Inc
TABLE B: Trend Analysis
2001 2002 2003 2004
--------------------------------------------------------
Product Related Revenues
% Year-Over-Year Change, as reported 15.03% -18.37% 9.47% -5.71%
% Year-Over-Year Change, as corrected 16.46% -19.72% 11.86% -7.71%
Operating Expense
% Year-Over-Year Change, as reported 17.85% -6.63% 4.80% -18.11%
% Year-Over-Year Change, as corrected 17.43% -6.73% 4.87% -18.47%
Operating income (loss)
% Year-Over-Year Change, as reported -30.45% -232.14% 26.10% 212.30%
% Year-Over-Year Change, as corrected -14.31% -233.11% 45.13% 224.63%
Pre-tax income (loss)
% Year-Over-Year Change, as reported -24.29% -209.17% 10.66% 212.80%
% Year-Over-Year Change, as corrected -6.25% -212.11% 34.43% 224.87%
Net income (loss)
% Year-Over-Year Change, as reported -27.26% -180.99% 6.36% 276.00%
% Year-Over-Year Change, as corrected -8.33% -181.75% 31.38% 295.17%
Diluted EPS
% Year-Over-Year Change, as reported -33.33% -183.33% 20.00% 300.00%
% Year-Over-Year Change, as corrected 12.50% -185.71% 33.33% 275.00%
Strategic Diagnostics Inc
Table C: Impact on Previously Reported 2004 and 2005
Without Unadjusted 2004 Audit Differences
(in $ thousands)
04 Audit 04 Audit
Q1 Difference % Q1 Difference %
2004 Impact Change 2005 Impact Change
------------------------------------ -----------------------------------
Product Related Revenue
as reported 6,350 0 0.00 6,555 48 0.01
as corrected 6,212 0 0.00 6,671 48 0.01
--------- ---------
Change (138) 116
Percentage Change -2.2% 1.8%
Operating Expense
as reported 5,737 48 0.01 5,985 18 0.00
as corrected 5,684 48 0.01 5,964 18 0.00
--------- ---------
Change (53) (21)
Percentage Change -0.9% -0.4%
Operating income (loss)
as reported 613 (48) (0.08) 570 30 0.05
as corrected 528 (48) (0.09) 707 30 0.04
--------- ---------
Change (85) 137
Percentage Change -13.9% 24.0%
Pre-tax income (loss)
as reported 617 (48) (0.08) 597 30 0.05
as corrected 532 (48) (0.09) 734 30 0.04
--------- ---------
Change (85) 137
Percentage Change -13.8% 22.9%
Net income (loss)
as reported 418 (32) (0.08) 418 20 0.05
as corrected 360 (32) (0.09) 514 20 0.04
--------- ---------
Change (58) 96
Percentage Change -13.88% 23.0%
Diluted EPS
as reported 0.02 0 0.00 0.02 0 0.00
as corrected 0.02 0 0.00 0.03 0 0.00
--------- ---------
Change 0.00 0.01
Percentage Change 0.00% 50.00%
Strategic Diagnostics Inc
Table C: Impact on Previously Reported 2004 and 2005
Without Unadjusted 2004 Audit Differences
(in $ thousands)
Q2 Q2 Q3 Q3
2004 2005 2004 2005
--------------------- -----------------------
Product Related Revenue
as reported 5,420 6,218 5,546 5,705
as corrected 5,550 6,178 5,583 6,093
------- ------ -------- --------
Change 130 (40) 37 388
Percentage Change 2.4% -0.6% 0.7% 6.8%
Operating Expense
as reported 5,229 5,992 5,211 5,426
as corrected 5,337 5,984 5,205 5,722
------- ------ -------- --------
Change 108 (8) (6) 296
Percentage Change 2.1% -0.1% -0.1% 5.5%
Operating income (loss)
as reported 191 226 335 279
as corrected 213 194 378 371
------- ------ -------- --------
Change 22 (32) 43 92
Percentage Change 11.5% -14.2% 12.8% 33.0%
Pre-tax income (loss)
as reported 201 270 352 338
as corrected 223 238 395 430
------- ------ -------- --------
Change 22 (32) 43 92
Percentage Change 10.9% -11.9% 12.2% 27.2%
Net income (loss)
as reported 148 189 271 295
as corrected 164 167 304 369
------- ------ -------- --------
Change 16 (22) 33 74
Percentage Change 10.8% -11.6% 12.2% 25.1%
Diluted EPS
as reported 0.01 0.01 0.01 0.01
as corrected 0.01 0.01 0.02 0.02
------- ------ -------- --------
Change 0.00 0.00 0.01 0.01
Percentage Change 0.00% 0.00% 100.0% 100.0%
Strategic Diagnostics Inc
Table D: Impact If Recorded Prospectively in 3rd Quarter 2005
(in $ thousands)
Q3 9 MO
2005 2005
as reported 5,705 18,478
as corrected 5,452 18,225
------- -------
Change (253) (253)
Percentage Change -4.4% -1.4%
Operating Expense
as reported 5,426 17,403
as corrected 5,295 17,272
------- -------
Change (131) (131)
Percentage Change -2.4% -0.8%
Operating income (loss)
as reported 279 1,075
as corrected 157 953
------- -------
Change (122) (122)
Percentage Change -43.7% -11.3%
Pre-tax income (loss)
as reported 338 1,205
as corrected 216 1,083
------- -------
Change (122) (122)
Percentage Change -36.1% -10.1%
Net income (loss)
as reported 295 902
as corrected 205 812
------- -------
Change (90) (90)
Percentage Change -30.5% -10.0%
Diluted EPS
as reported 0.01 0.05
as corrected 0.01 0.04
------- -------
Change 0 -0.01
Percentage Change 0.0% -20.0%
Strategic Diagnostics, Inc.
Summary of Unadjusted Audit Differences
A: 12/31/04
- --------------------------------------------------------------------------------------------------------------------------------
Adjustments on financial statement captions
--------------------------------------------------------------------------
Net Income Balance Sheet
--------------------------------------------------------------------------
Current Stockholders' Current Non-Current Current Non-Current
# Description Period Equity Assets Assets Liabilities Liabilities
- --------------------------------------------------------------------------------------------------------------------------------
Increase
(Decrease)
------------------------------------------------------------------------------------------------------------------------------
Pre-tax Adjustments:
1 COGS (4,999)
Inventory (4,999)
To properly value inventory at year end based on
review of inventory subledger and cut off
procedures performed.
2 SBS revenue (41,250)
Unbilled AR (41,250)
To adjust unbilled revenue asset based on analysis
of costs and progress of projects.
3 Accrued Expenses 43,023
SGA 43,023
To reduce accrued expenses based on analysis
of actual invoices received subsequent to
year end.
4 Inventory 6,161
COGS (6,161)
To adjust inventory to actual cost at year end
5 Revenue (6,750)
Deferred Revenue (6,750)
To properly record deferred revenue on Q4 sale
6 SGA (6,347)
Accrued Commission (6,347)
To accrue additional sales commission payable
at 12/31/04.
7 VAT Rec. 30,725
SGA 30,725
To adjust UK VAT receivable to actual at 12/31/04.
8 Bad Debt Expense (34,251)
Allowance for doubtful accounts (34,521)
To increase allowance for bad debts at 12/31/04.
9 Amortization Expense (3,643)
Accumulated amortization (3,643)
To adjust amortization expense for
intangible asset
-----------
Total pre tax P&L effect evaluated during
2004 Audit (29,653)
Effective tax rate (18%) 5,338
-----------
Total effect on net income (24,315)
2004 net income as reported 1,503,000
% effect of unadjusted audit differences on
net income as reported -2%
Additional entry noted subsequent to 2004 Audit
--------------------------------------------------
10 COGS (48,000)
Beginning retained earnings 48,000
To properly value inventory written off
inventory at 12/31/03 based on sale that occurred
prior to filing of the 2003 10K.
Effective tax rate (18%) 8,640
-----------
Total effect on net income (39,360)
-------------------------------------------------------------------------
Total impact of 2004 audit differences (63,675) 48,000 (47,527) 29,926
% effect of unadjusted audit differences
on net income as reported -4.2%
------------------------------------------------------------------------------------------------------------------------------