CORRESP 1 filename1.txt AMERICAN LOCKER GROUP INCORPORATED 815 SOUTH MAIN STREET GRAPEVINE, TEXAS 76051 October 12, 2005 United States Securities and Exchange Commission Washington, D.C. 20549-7010 Attention: Ryan Rohn, Staff Accountant RE: American Locker Group Incorporated File #000-00439 Dear Mr. Rohn: This correspondence is in response to your letter dated September 12, 2005, concerning additional information regarding American Locker Group Incorporated's recent filings. Question #1. "Provide us with any letter or written communication to and from the former accountants regarding the material weaknesses in internal control over financial reporting, to management or the Audit Committee." Response: Enclosed, as supplemental information, please find copies of communications by the Company's independent registered public accounting firm, as follows: o Required Communications related to the audit of the Company for the year ended December 31, 2004, addressed to the Audit Committee of the Board of Directors of American Locker Group Incorporated, dated June 15, 2005. o Management Letter related to the audit of the Company for the year ended December 31, 2004, addressed to the Audit Committee of the Board of Directors of American Locker Group Incorporated, and dated May 11, 2005. Enclosed, as supplemental information, you will also find management's responses to the Management Letter, dated July 13, 2005. In the response, which was addressed to the Audit Committee Chairman, Mr. Stuart Goodner was identified as a newly hired Senior Accounting Manager and future CFO. In September 2005, Mr. Goodner's employment with the Company was terminated and the search for a CFO is currently underway. Following the completion of your review, we respectfully request the return of the enclosed letters. United State Security and Exchange Commission October 12, 2005 Page 2 Question #2. "Please provide us with a schedule of your fiscal year end 2004 fourth quarter adjustments to close the books, or adjustments recorded in connection with or as a result of the audit. Clearly explain the reason for each adjustment. For each adjustment, show us the impact on pre-tax net loss. Quantify the net effect of all adjustments on pre-tax net income (loss). Also, tell us why none of the adjustments relate to prior period. Explain in detail why you believe the timing of each adjustment is appropriate. Provide a similar schedule for the March 2005 and June 2005 quarters." Response: Fourth Quarter of 2004 ---------------------- During the monthly closing process the Company makes a significant number of journal entries to record transactions related to that specific month. These are considered normal and recurring monthly closing entries. The following entries were recorded in the fourth quarter of 2004. These entries were the result of additional year-end analyses, annual accounting procedures (eg. physical inventory adjustments, update of standard costs, etc.) and entries identified during the audit process.
(Increase) Decrease Pre-tax (Loss) --------------------- 1. Inventory book-to-physical and costing adjustments o The Company's divisions and subsidiaries annually perform a physical inventory on October 31st. At this time, inventory cost standards are updated to approximate recent acquisition and manufacturing costs. In November of 2004, a number of entries were made to adjust inventory values as a result of the physical inventory and re-standardization. The aggregate impact of these adjustments decreased the pre-tax loss for the fourth quarter by $540,000. $ 540,000 o After analysis, it was determined that the Company's accounting practices during 2004 had improperly accounted for certain labor costs. This discovery caused the Company to quantify the impact of the error on the operating results of the first, second and third quarters of 2004. In addition, due to cost increases during 2004, it was determined that a certain portion of the year end United State Security and Exchange Commission October 12, 2005 Page 3 re-standardization adjustment related to the first, second and third quarters of 2004. The Form 10-Q's filed for the first three quarters of 2004 were amended to properly reflect inventory and cost of sales during these quarters, and refiled with the SEC in July 2005. These adjustments served to increase the reported pre-tax income during the first three quarters of 2004 by $582,000. (582,000) --------------------- The impact of the fourth quarter of 2004 book-to-physical inventory adjustments and adjustments to inventory cost, less the restatement of the first three quarters resulted in a $42,000 net increase to the reported pre-tax loss in the fourth quarter of 2005. $ (42,000) ===================== 2. Certain of the Company's inventories are maintained on the last-in, first-out (LIFO) costing method. The calculation required to determine the cost of inventory under the LIFO method was performed in December 2004. The adjustment to properly reflect LIFO costing was recorded in the fourth quarter of 2004, and resulted in an increase in the fourth quarter 2004 pre-tax loss of $203,000. $ (203,000) 3. Inventory valuation reserve adjustments: o The Company made a detailed evaluation of its inventory on hand at December 31, 2004. As a result of this analysis, certain inventories deemed worthless were charged-off directly to earnings. The net impact of these adjustments, made in the fourth quarter of 2004, increased the fourth quarter pre-tax loss by $80,000. $ (80,000) United State Security and Exchange Commission October 12, 2005 Page 4 o The Company's auditors performed an independent evaluation of the Company's on-hand inventory. This analysis resulted in proposed journal entries to: 1) reduce a previously established "lower of cost or market" valuation reserve by $194,000; and 2) increase the reserve for potentially obsolete inventory by $124,000. Management agreed with the auditors' analysis and recorded the proposed entries. The net impact of these two entries service to reduce the fourth quarter loss by $70,000. 70,000 --------------------- Net impact of the inventory valuation reserve adjustments made in the fourth quarter of 2004. $ (10,000) ===================== 4. With respect to certain ongoing environmental claims, settlement discussions commenced in the fourth quarter of 2004 and concluded in early 2005. In previous filings, the potential exposure to an environmental claim was disclosed, but because a range of loss could not be determined, an accrual was not established. As a result of the settlement, the loss became estimable prior to closing the books for December 2004. Accordingly, an accrual and related pre-tax charge to earnings was recorded in the fourth quarter of 2004, totaling $1,103,000. $ (1,103,000) 5. In the fourth quarter of 2004, pursuant to an analysis by management, it was determined that collection of certain aged trade receivables had become doubtful. Accordingly, an entry to increase the reserve for doubtful accounts was posted totaling $66,000. This adjustment increased the reported fourth quarter pre-tax loss by $66,000. $ (66,000) 6. As disclosed in the Company's annual report, the Company provides "Other Postretirement Benefits" in the form of a death benefit to certain retirees. In 2004, as a result of the aging population of the participants, the calculated liability under this plan decreased. This adjustment was proposed by the Company's auditors as part of their audit findings. An adjustment was posted decreasing the reported pre-tax loss in the fourth quarter by $39,000. $ 39,000 United State Security and Exchange Commission October 12, 2005 Page 5 7. During the course of their audit, the Company's auditors identified an error in the accrued payroll calculation at certain divisions/subsidiaries. The auditors proposed an adjustment. Management agreed and recorded an adjustment that increased the fourth quarter pre-tax loss by $32,000. $ (32,000) 8. During the course of the year the Company provides a monthly estimated provision to record expense associated with its defined benefit pension plan. This estimated provision is based on information provided to the Company by its consulting actuary at the beginning of the year. The Company's actuary updates the annual pension cost along with the other FASB Statement No. 87 disclosures at the end of the accounting year. An adjustment was made in December 2004 to adjust the estimated defined benefit pension expense to the actuary's final calculation for 2004. This adjustment increased the reported fourth quarter pre-tax loss by $20,000. $ (20,000) 9. The Company periodically pays year-end discretionary bonuses to both its hourly and salaried workforce. During the year, the Company accrues an estimate of these potential bonuses. In December, after the Board of Directors' approval, final bonuses were determined and were either paid or accrued. Actual bonuses paid and accrued (i.e., expensed) in excess of the accrual established for these bonuses during the year totaled $198,000. Accordingly, bonuses in excess of the normal provision, recorded in December of 2004, increased the fourth quarter pre-tax loss by $198,000. $ (198,000) 10. Upon performing the bank reconciliation procedures at December 31, 2004, certain adjustments were identified and made in December 2004. These adjustments increased the fourth quarter loss by $14,000. $ (14,000) The following entries were recorded during the first and second quarters of 2005. They would not be considered normal monthly closing entries in the ordinary course of business. United State Security and Exchange Commission October 12, 2005 Page 6 First Quarter of 2005 --------------------- 1. During the first quarter of 2005, it became clear that a more significant allocation of the Company's production would be shifting to the Company's Texas facility. Accordingly, management evaluated its inventory costing model used in Texas to value its work-in-progress inventory. As a result of this evaluation, a decision was made to adjust the costing model to more accurately account for production labor allocated to work-in-progress. The imprecision of the prior costing model has not been significant to the Company's previously reported financial results or financial position. However, the impact of this change in the costing model will likely become significant to the Company's future financial results and financial position as production volumes continue to shift to Texas. Accordingly, management implemented the costing model in the first quarter of 2005. This costing adjustment decreased the reported pre-tax loss for the first quarter of 2005 by $250,000. $ 250,000 2. On February 8, 2005, the Company was contacted by the United States Postal Service (USPS) and informed that its supply contract to the USPS would not be renewed. As discussed in more detail within Note 7 of the Form 10-Q for the quarter ended March 31, 2005, the loss of this contract caused management to conclude that the fair value of the Company was no longer in excess of the carrying value of the net underlying assets. Accordingly, the Company's test for impairment indicated no goodwill exists. As a result the Company recorded an impairment charge of $6,155,000 in the quarter ended March 31, 2005. $ (6,155,000) 3. Again, as a result of the loss of the USPS contract, management made an evaluation of inventories on hand and purchase commitments related to supplying products under the USPS contract. As a result of this analysis, an entry was made to reserve for the potential that certain inventory items are obsolete without the USPS contract $147,000. Further, management identified certain committed purchases related to the USPS contract totaling $125,000. The impact of the adjustments for these items increased the reported pre-tax loss for the first quarter of 2005 by $272,000. $ (272,000) United State Security and Exchange Commission October 12, 2005 Page 7 Second Quarter of 2005 ---------------------- 1. Because of decreasing inventory quantities during the second quarter of 2005 related to the loss of the USPS contract, management made a mid-year analysis of its LIFO costing. As a result of the interim analysis of LIFO costing, an adjustment was made to decrease the previously established debit balance LIFO reserve, thus increasing the pre-tax loss for the second quarter of 2005 by $83,000. $ (83,000) 2. As discussed in greater detail in the Form 10-Q for the quarter ended June 30, 2005, on May 18, 2005, the Company's Board of Directors announced a restructuring plan to significantly reduce operating costs. As a result, an entry was required in the second quarter of 2005, which increased the second quarter reported pre-tax loss by $532,000 for the following items related to the restructuring: Asset impairment $ 75,000 Severance costs 427,000 Other 30,000 -------------------- -------------------- $ 532,000 $ (532,000) ==================== 3. During the latter half of 2004 and into 2005, the Company had been negotiating with a customer to acquire certain specific purpose lockers. In the second quarter of 2005 it became clear this customer was not going to purchase this inventory. Further, the Company was unsure if it would be able to find another buyer for this specific purpose product. Accordingly, in the second quarter of 2005, this inventory was written-off. This adjustment increased the second quarter pre-tax loss by $100,000. $ (100,000)
United State Security and Exchange Commission October 12, 2005 Page 8 Question #3. "We note in your Item 4. Controls and Procedures disclosures on page 19 of your Form 10-Q for the quarterly period ended June 30, 2005 that there were no changes in your internal control over financial reporting during the second quarter of 2005. We also note the following disclosure: "Although the Company's remediation efforts are currently ongoing, control weaknesses will not be considered and remediated until new internal controls over financial reporting are implemented and operational for a period of time and are tested, and management concludes that these controls are operating effectively." Tell us as to the nature of remediation efforts implemented to date and what additional steps need to be taken. Tell us of the time frame expected for additional remediation steps and when the controls and procedures are expected to become "effective." Please explain to us why you have not been able to correct any of your control deficiencies by June 30, 2005. Also, tell us why there has not been any disclosure of changes in your control over financial reporting." Response: In the fall of 2004, management and the Audit Committee developed a plan to evaluate the Company's internal control systems, pursuant to the requirement to be compliant with Section 404 of Sarbanes-Oxley (SOX) by December 2006. To that end, management, with the assistance of outside consultants, began the process of identifying and evaluating entity and activity level controls that surround the financial reporting process. In the beginning phases of the evaluation, a number of control gaps were identified, most specifically in the area of entity level controls. As disclosed in Form 10-K for the year ended December 31, 2004, in February of 2005, the Company received notification from the United States Postal Service (USPS) that certain contracts to supply the USPS postal lockers would not be renewed. These contracts had represented over 50% of the Company's sales volume in the previous three years. The loss of this business significantly changed the focus of the Company during the first half of 2005. The SOX compliance project was put on hold, as efforts and resources were allocated towards the development of a restructuring plan. In May of 2005, a restructuring plan was adopted and approved by the Company's Board of Directors. A significant component of this restructuring plan involved closing down the Company's Jamestown, New York manufacturing facility and moving its Jamestown corporate headquarters to Grapevine, Texas. During the months of June, July and August, efforts have been focused towards implementing the restructuring plan and completing the past due Form 10-K for 2004, and the first and second quarter Form 10-Q's for 2005. A significant component of the restructuring plan includes identifying a Chief Financial Officer to reside in Texas and to properly staff the Texas corporate headquarters with accounting and administrative United State Security and Exchange Commission October 12, 2005 Page 9 personnel. The process to identify and hire the appropriate people to fill these positions is currently underway. As part of the restructuring plan, the Company engaged a consulting firm to assist with its implementation. In July, the Company's management and the consulting professionals began to focus on the administrative infrastructure of the proposed re-aligned company. As mentioned above, one of the first activities was to identify and hire a qualified CFO, to, along with consulting professionals, begin to address the following control issues: Milestones Scheduled for September and October ---------------------------------------------- o Conduct a search for an individual to serve as Chief Financial Officer CFO). o Develop a new chart of accounts for the general ledger to better facilitate the current business model. o Re-design the "shop floor" reporting system to track product through the production process and accumulate information for accurate costing of production. o Re-design process for determining inventory standard costs to provide more accurate costing information. Milestones Scheduled for September, October and November -------------------------------------------------------- o Develop a Management Reporting Package to be integrated with the current business system software. The reporting package will provide adequate and timely financial and statistical information to management and the Audit Committee to properly monitor the Company. o Develop a reliable perpetual inventory system. This will require the Company to take a physical inventory to determine accurate starting balances; apply daily product movement reporting; continue to take monthly physical inventory counts until the perpetual system is deemed reliable; and reconcile the perpetual records to general ledger balances monthly. o Information Technology Evaluation and Upgrade: Move the network and computer support to the new corporate headquarters in Grapevine, Texas. Develop control systems, including user access controls and disaster recovery plan. o Accounts Payable: Move accounts payable processing to Grapevine, Texas and establish controls over the new process. o Accounts Receivable: Relocate the billing function to Grapevine, Texas and establish controls over the new process. United State Security and Exchange Commission October 12, 2005 Page 10 o Cash: Relocate the treasury function to Grapevine, Texas; develop daily cash management reports and establish controls for authorization, recoding and timely reconciliation procedures. o Payroll: Relocate the human resource functions to Grapevine, Texas; evaluate payroll processing systems and implement controls over recording, authorization and reconciliation procedures. o General Ledger: Relocate the accounting functions to Grapevine, Texas; formalize the accounting closing process and implement reconciliation and review procedures, including review and approval of journal entries. o Credit activities: Implement policies and procedures to minimize credit risk on trade receivables and develop collection procedures and methods to identify and properly measure exposure to potentially uncollectible accounts. o Record retention: Inventory current documents on hand and develop a retention policy for all business documents. o Develop and implement entity level controls such as: 1) Develop an administrative procedures manual to document control activities; 2) Detailed review procedures for financial information generated by the Company; 3) Develop and implement procedures to ensure that purchase or sales transactions are recorded in the proper accounting period; 4) Develop budget and forecasting control activities; and 5) implement formal internal control monitoring processes. Progress has been made since the filing of the second quarter 2005 Form 10-Q, including: 1) The President and Chief Executive Officer has relocated his business office to Grapevine, Texas. 2) A professional search firm has been engaged to identify appropriate CFO candidates. 3) The information systems have been set up in Grapevine, Texas and are currently undergoing testing to ensure reliability. 4) All manufacturing has been relocated to Grapevine, Texas with the exception of several small operations. 5) With the assistance of consultants, budgeting and forecasting procedures are being performed to outline near-term profit and cash flow expectations. The Company plans on having the operations and corporate headquarters relocated and operating in Grapevine, Texas by the end of November. Accordingly, management is committed to identifying and remediating all known weaknesses. Shortly after the relocation is complete, our assessment of the internal control structure will resume. As control gaps are identified, remediation will be implemented and the new controls re-evaluated. Management anticipates that the relocated business processes and newly developed controls and procedures will become "effective" by the first quarter of 2006. United State Security and Exchange Commission October 12, 2005 Page 11 In response to your inquiry relating to why there has been no change in controls over financial reporting through June 30, 2005, it is assumed you are referring to disclosures in Item 9A of the Form 10-K for 2004, compared to the disclosures in Item 4 of Form 10-Q filed for June, 2005. Due to the operational challenges discussed above as a result of the loss of the USPS contract, the Form 10-K for 2004 was not finalized and filed until July of 2005, just days prior to the filing of the second quarter for Form 10-Q for 2005. The disclosures in Item 9A of Form 10-K for 2004 were current as of July 2005. Therefore, there were approximately two weeks between the control related disclosures on the 10-K and the control related disclosures in the second quarter Form 10-Q. I trust the above will provide you the additional information you requested to address the concerns raised in your letter. Respectfully submitted, /s/ Edward F. Ruttenberg Mr. Edward F. Ruttenberg President and Chief Executive Officer American Locker Group Incorporated Hand Delivery-Enclosures as supplemental information