BLACKWELL SANDERS PEPER MARTIN LLP 4801 MAIN STREET SUITE 1000 KANSAS CITY, MO 64112 P.O. BOX 219777 KANSAS CITY, MO 64121-6777 TEL: (816) 983-8000 FAX: (816) 983-8080 WEBSITE: www.blackwellsanders.com Greg S. Steinberg DIRECT FAX: (816) 983-8080 DIRECT: (816) 983-8387 E-MAIL: gsteinberg@blackwellsanders.com August 19, 2005 VIA EDGAR TRANSMISSION Ms. Beverly A. Singleton Staff Accountant Securities and Exchange Commission Division of Corporation Finance 100 F. Street, N.E. Washington, D.C. 20549 Re: Collins Industries, Inc. - Form 8-K, filed August 9, 2005 (File No. 0-32369) Dear Ms. Singleton: On behalf of Collins Industries, Inc. (the "company"), I am writing to respond to the comments of the staff (the "staff") of the Division of Corporation Finance of the Securities and Exchange Commission (the "Commission") set forth in your letter dated August 12, 2005 with respect to the above-referenced filing (the "comment letter"). This letter is being filed with the Commission today. We are providing a copy of this letter to Timothy P. Davis, Trial Counsel for the Commission in the Ft. Worth, Texas office, who has been informed of the workers' compensation investigation discussed in more detail below. For ease of reference, each of the staff's comments is reproduced below in its entirety in bold, followed by the corresponding response. Item 4.01 of Form 8-K Reportable Condition: Material Internal Control Weaknesses 1. See the fourth paragraph regarding the disclosure of material weaknesses in your internal controls. Please provide us with a copy of any letter or written communication to and from the former accountants, KPMG LLP, to management, the Board of Directors or the audit committee regarding the material weaknesses in your internal controls. KANSAS CITY, MISSOURI•ST. LOUIS, MISSOURI•OVERLAND PARK, KANSAS•OMAHA, NEBRASKA SPRINGFIELD, MISSOURI•EDWARDSVILLE, ILLINOIS•WASHINGTON, D.C.•LONDON, UNITED KINGDOM AFFILIATES: LEEDS•MANCHESTER MEMBER OF THE WORLD SERVICES GROUP
Ms. Beverly A. Singleton August 19, 2005 Page 2 Response: For your information and review, we have enclosed as supplemental materials copies of all written communications to and from KPMG LLP ("KPMG") to management, the Board of Directors or the audit committee regarding the material weaknesses in the company's internal controls: • Audit committee representation letter to KPMG dated June 23, 2005. • Management representation letter to KPMG dated July 28, 2005. • Letter from KPMG to the audit committee dated July 28, 2005 (the "SAS-61 Letter"). • Letter from KPMG to the audit committee dated July 28, 2005 (the "Material Weaknesses Letter"). 2. In detail, describe for us the nature of each material weakness in internal controls cited by the former auditors and the amounts involved, if any. Also, tell us in what period the reportable event occurred and whether or not you restated (or intend to restate) any prior period for any adjustment resulting from the reportable event; and if not, why not. Tell us in detail the steps you have taken (or plan to take) and procedures you implemented (or plan to implement) to correct each reportable event. Response: The company's material weaknesses identified in the Form 8-K filed August 9, 2005 were described in detail in its Form 10-K ("Form 10-K") for the fiscal year ended October 31, 2004, filed on August 3, 2005, and are as follows: (1) The company did not have effective policies and procedures regarding management override of controls, and it did not have effective policies and procedures implementing its Code of Conduct. As a result of this material weakness, the company did not maintain a control environment that promoted open and candid communication. In some instances, certain officers and personnel did not communicate critical information needed to properly record transactions. These deficiencies result in more than a remote likelihood that a material misstatement of interim or annual financial statements could occur and not be detected. The descriptions referred to below indicate in what period the events related to this material weakness occurred and the amounts involved, if any. The company has restated prior periods for the related adjustments, if appropriate.
Ms. Beverly A. Singleton August 19, 2005 Page 3 1. Workers' compensation: Please see (a) the discussion of the second material weakness provided in response to Question #2 below; (b) footnote (2) to the Description of Adjustments Table in response to Question #3 below; and (c) the first bullet point on Page 2 of the Material Weaknesses Letter. 2. Environmental liabilities: Please see (a) footnote (4) to the Description of Adjustments Table in response to Question #3 below and (b) the second bullet point on Page 2 of the Material Weaknesses Letter. 3. Facility expenses: Please see (a) footnote (6) to the Description of Adjustments Table in response to Question #3 below and (b) the third bullet point on Page 2 of the Material Weaknesses Letter. 4. Report of amounts of work-in-progress units: Please see the fourth bullet point on Page 2 of the Material Weaknesses Letter. It was not necessary to restate any prior period for this item because the report is used only by operational personnel and not for financial reporting purposes. To address this material weakness, on March 21, 2005, the company reported that the chief financial officer and the executive vice president of operations of the company had retired from the company, effective March 18, 2005. On March 30, 2005, the company reported the appointment of a new chief operating officer of the company, effective April 1, 2005. On May 12, 2005, the company reported the hiring of a new chief financial officer of the company. It is believed that these changes in senior personnel will lead to more open and candid communication within the company. The Board of Directors will also evaluate and modify, as appropriate, its policies and procedures implementing the company's Code of Conduct. (2) The company had inadequate controls in place to record workers' compensation reserves in accordance with generally accepted accounting principles. The company did not have appropriate policies and procedures to ensure the estimates provided by an independent insurance advisor, which was utilized to assist in estimating workers' compensation reserves, were appropriate. As a result, workers' compensation reserves were materially misstated in previously filed consolidated financial statements. Historical consolidated financial statements have been restated to correct these errors. The company discovered issues with workers' compensation claims for injuries dating back to 1990. The special investigation conducted by the audit committee revealed that company
Ms. Beverly A. Singleton August 19, 2005 Page 4 personnel with responsibility for setting reserves did so in an aggressive manner which caused the third-party administrator adjusters to recommend reserves at levels lower than they would have otherwise recommended. Personnel also employed a practice known as stair-stepping reserves for certain claims. This involves recording reserves initially at an amount lower than the amount the claim would be expected to settle for and increasing the reserve over time. In addition, several Florida claims that had existed for an extended period of time had reserves which had been set artificially low and then increased periodically to reflect on-going payments to claimants. The accrual of these amounts in the period that claims were incurred resulted in a charge to retained earnings for periods prior to October 31, 2001 and a reversal of reserves in subsequent years to reflect amounts that should already have been recorded. As a result of the investigation and review of estimated workers' compensation claims, the company has restated its consolidated financial statements for the fiscal years ended October 31, 2002 and 2003, and for the quarters ended January 31, 2004 through July 31, 2004. This restatement increased net income by $242,291, or $.04 per share (diluted), to $1,990,124 for 2002 and by $69,912, or $.01 per share (diluted), to $1,644,865 for 2003. The beginning balance in Retained Earnings for 2002 was reduced by $1,443,218 to $8,891,450 to reflect the additional workers' compensation liability. Previously reported unaudited net income for the first three quarters of fiscal 2004 increased by $106,734, or $.02 per share (diluted), to $1,530,207. Net income reflected in the unaudited consolidated financial statement information for the year ended October 31, 2004 contained in the November 22, 2004 Current Report on Form 8-K decreased by $153,579. The opening equity as of November 1, 2001 has been restated by $1,443,218. On May 12, 2005, the company announced that its audit committee had recommended revised procedures for establishing workers' compensation reserves. Revised procedures were put in place to help ensure reserve recommendations made by the Third Party Administrator ("TPA") are recorded. Procedures also prohibit inappropriate influence by management in the determination of the TPA's recommended reserve amounts. The revised procedures require increased accounting oversight to help insure reserves are recorded in accordance with generally accepted accounting principles. The Board of Directors approved the recommendation. Effective July 1, 2005, the company purchased guaranteed cost workers' compensation insurance for the states in which it had previously self-insured. The company continues to be self-insured in certain states for workers' compensation claims incurred prior to July 1, 2005. The Company's General Plans and Procedures to Address Both Material Weaknesses In addition to the steps taken and procedures implemented by the company as set forth above, now that the 2004 audit process is complete, the audit committee is scheduled to meet August 22,
Ms. Beverly A. Singleton August 19, 2005 Page 5 2005, and the Board of Directors is scheduled to meet August 23, 2005, to identify and address the steps the company will take and the procedures the company will implement to correct each material weakness. Any steps and procedures adopted pursuant to these meetings will be provided supplementally to the staff under separate cover. The company contemplates undertaking a thorough review of its internal controls as part of the company's preparation for compliance with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002 and the company is using this review to further assist in identifying and correcting any other control deficiencies, if any. At this time, the company has not completed its review of the existing controls and their effectiveness. The management and the Board are committed to correcting the material weaknesses and will take all necessary action to accomplish this. The company will also further develop and enhance its internal control policies, procedures, systems and staff to allow it to mitigate the risk that material accounting errors might go undetected and be included in its consolidated financial statements. 3. Please provide us with a schedule of your fiscal year end October 31, 2004 fourth quarter 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 if any of the adjustments relate to a prior period. Explain in detail why you believe the timing of each adjustment is appropriate. Response: The information contained in the Description of Adjustments Table and related footnotes is disclosed in Item 7 of the company's Form 10-K. The table identifies the adjustments made to previously-released consolidated financial statements. Each adjustment described below was recorded in the period in which the event giving rise to the adjustment occurred. The company also adjusted estimated accruals for actual values for certain items during the fourth quarter of 2004. In addition, the financial statements were adjusted for certain events which occurred subsequent to the balance sheet date but prior to issuance of the financial statements, which met the criteria set forth in AU 560.
Ms. Beverly A. Singleton August 19, 2005 Page 6 Description of Adjustments Table Description of Adjustments Periods Prior ($ In thousands) To 2004(1) 2003 2002 2002 - ------------------------------------------------------------------------------------------- Workers' Compensation Reserve Adjustments (2) $ 612 $ 24 $ 411 $ (2,359) Workers' Compensation Premium Increase (3) (37) - - - Environmental Reserve Accrual (4) (59) - - - Uncollectible Rebates (5) (55) (6) - - Other Accrued Expenses (6) (605) 82 (19) (14) - ------------------------------------------------------------------------------------------- Total pre-tax impact $ (144) $ 100 $ 392 $ (2,373) Income tax (7) (10) (30) (150) 930 - ------------------------------------------------------------------------------------------- Total Net Income Impact $ (154) $ 70 $ 242 $ (1,443) - ------------------------------------------------------------------------------------------- (1) The 2004 amounts have been revised by the company for the quarters ended January 31, 2004, April 30, 2004 and July 30, 2004 and financial statement information for the year ended October 31, 2004 compared to what was previously furnished in the November 22, 2004 Current Report on Form 8-K. (2) Adjustments to workers' compensation liability reserves which had not previously been recorded. These adjustments are reflected in cost of sales on the income statement and accrued expenses and other current liabilities on the balance sheet. Adjustments in 2004, 2003 and 2002 also reflect reversal of expense recorded in those years which should have been recorded in prior periods. Consolidated Statements of Income and Comprehensive Income: Adjustment decreased (increased) cost of sales by the amounts set forth in this table. Consolidated Balance Sheets: Adjustment increased accrued expenses and other current liabilities by $1,312, $1,923 and $1,948, at October 31, 2004, 2003 and 2002, respectively. (3) In January 2005 the company received a notice that its State of Ohio workers' compensation premium attributable to fiscal year 2004 would increase by $37. Consolidated Statements of Income and Comprehensive Income: Adjustment increased cost of sales by the amounts set forth in this table. Consolidated Balance Sheets: At October 31, 2004, adjustment increased accounts payable by $37. (4) In February 2005, the company received notice from its counsel that amounts previously recorded for potential environmental liabilities were understated. Such amounts were increased by $59. This adjustment is reflected in cost of sales on the income statement and accounts payable on the balance sheet. Consolidated Statements of Income and Comprehensive Income: Adjustment increased cost of sales by the amounts set forth in this table. Consolidated Balance Sheets: At October 31, 2004, adjustment increased accounts payable by $59.
Ms. Beverly A. Singleton August 19, 2005 Page 7 (5) Relates to corrections to the estimate of rebate collectibility at October 31, 2004. Consolidated Statements of Income and Comprehensive Income: Adjustment increased cost of sales by $55 in 2004 and $6 in 2003. Consolidated Balance Sheets: At October 31, 2004 and 2003, adjustment decreased receivables by $61 and $6, respectively. (6) The 2004 items relate to several miscellaneous adjustments primarily revising estimated accruals to actual expense. The 2004 items include legal reserve accruals ($340), employee medical expense accruals ($200), facility expenses ($10), product returns ($17), product concessions expense ($10), and reversal of product liability expense ($85) partially offset by lower actual employee bonuses ($34), and lower audit fees ($25). Consolidated Statements of Income and Comprehensive Income: Adjustments decreased sales by $13, increased cost of sales by $400 and increased selling, general and administrative expenses by $191. Consolidated Balance Sheets: At October 31, 2004, adjustment increased accrued expense and other current liabilities by $216, increased accounts payable by $295, increased inventories by $11 and decreased receivables by $56. An additional entry related to subsequent payments for goods and service made in 2005 related to 2004 increased inventories and accounts payable by $113, respectively. The 2003 items primarily include corrections to facility expenses ($35), product concessions ($14) offset by lower product liability expense ($85), lower actual employee bonuses ($3), and lower accounts receivable allowance expense ($43). Consolidated Statements of Income and Comprehensive Income: Adjustments decrease sales by $29, increased cost of sales by $20 and decreased selling, general and administrative expenses by $132 in 2003. Consolidated Balance Sheets: At October 31, 2003, adjustment decreased accrued expense and other current liabilities by $111, increased accounts payable by $35, decreased receivables by $53 and increased inventories by $26. The 2002 items primarily include corrections to increase accounts receivable allowance expense ($43) partially offset by lower actual employee bonuses ($22), and lower product concessions expense ($2). Consolidated Statements of Income and Comprehensive Income: Adjustments increased sales by $4, increased cost of sales by $2 and increased selling, general and administrative expense by $21 in 2002. Consolidated Balance Sheets: At October 31, 2002, adjustment decreased receivables by $56, and decreased accrued expense and other current liabilities by $23. The adjustment to periods prior to 2002 is increased product concessions expense by $14 and is reflected as a $28 decrease to sales and a $14 decrease to cost of sales in the Consolidated Statements of Income and Comprehensive Income in 2001. Receivables decreased $28 and inventories increased $14 in the Consolidated Balances Sheet as of October 31, 2001. Amounts in 2004, 2003 and 2002 also reflect adjustments for expenses recorded in those years which
Ms. Beverly A. Singleton August 19, 2005 Page 8 should have been recorded in prior periods. (7) Relates to approximately $40 of income tax benefit related to the adjustments described above, offset by $50 of additional estimated income tax expense in 2004. Tax amounts for 2003 and 2002 represent the tax effect due to the adjustments. Consolidated Statements of Income and Comprehensive Income: Adjustment increased income taxes by the amount set forth in this table. Consolidated Balance Sheets: At October 31, 2004, adjustment increased accounts payable by $50. The cumulative effect of all entries increased prepaid expenses and other current assets by $790, $750 and $780 for the years ended October 31, 2004, 2003 and 2002, respectively. * * * * * This restatement increased net income by $242,291, or $.04 per share (diluted), to $1,990,124 for 2002 and $69,912, or $.01 per share (diluted), to $1,644,865 for 2003. The balance in Retained Earnings as previously reported at October 31, 2001 was reduced by $1,443,218 to $8,891,450 to reflect the additional workers' compensation reserves which should have been recorded in earlier periods. Previously reported unaudited net income for the first three quarters of fiscal 2004 increased by $106,734, or $.02 per share (diluted), to $1,530,207. Net income reflected in the unaudited consolidated financial statement information for the year ended October 31, 2004 furnished in the November 22, 2004 Current Report on Form 8-K decreased by $153,579. The opening equity as of November 1, 2001 has been restated by $1,443,218. All applicable financial information contained in the Report on Form 10-K for the fiscal year ended October 31, 2004, gives effect to these restatements. * * * * * In accordance with your request in the comment letter, we have included a statement from the company acknowledging that: • the company is responsible for the adequacy and accuracy of the disclosure in the filing; • 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 • 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.
Ms. Beverly A. Singleton August 19, 2005 Page 9 If you have any questions regarding any of the responses, please feel free to call me at 816-983-8387. Very truly yours, BLACKWELL SANDERS PEPER MARTIN LLP By: /s/ Gregory S. Steinberg -------------------------------------- Gregory S. Steinberg Enclosures cc: Timothy P. Davis, Securities and Exchange Commission
Collins Industries, Inc. 15 Compound Drive Hutchinson, Kansas 67502-4349 (620) 663-5551 _______________________________________________
August 19, 2005 Via EDGAR Transmission Ms. Beverly A. Singleton Staff Accountant Securities and Exchange Commission Division of Corporation Finance 100 F. Street, N.E. Washington, D.C. 20549 Re: Collins Industries, Inc. - Form 8-K, filed August 9, 2005 (File No. 0-32369) Dear Ms. Singleton: In accordance with your request in your letter dated August 12, 2005 with respect to the above-referenced filing, we acknowledge that: • the company is responsible for the adequacy and accuracy of the disclosure in the filings; • staff comments or changes to disclosure in response to staff comments do not foreclose the Securities and Exchange Commission ("Commission") from taking any action with respect to the filings; and • 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. Very truly yours, COLLINS INDUSTRIES, INC. By: /s/ Cletus Glasener -------------------------------------- Cletus Glasener, Vice President of Finance and Chief Financial Officer
Collins Industries, Inc. 15 Compound Drive Hutchinson, Kansas 67502-4349 (620) 663-5551 _______________________________________________
KPMG LLP 1000 Walnut Street Suite 1000 Kansas City, Mo 64106-2170 June 23, 2005 Ladies and Gentlemen: We are providing this letter in connection with your audits of the consolidated balance sheets of Collins Industries, Inc., as of October 21, 2004 and 2003, and the related consolidated statements of earnings, retained earnings and comprehensive income, and cash flows for each of the years in the three-year period ended October 3l, 2004, for the purpose of expressing an opinion as to whether these consolidated financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America. For purposes of your audit noted above, we confirm that we are not aware of any information withheld from KPMG LLP that the Audit Committee of the Board of Directors has obtained regarding violations or possible violations or possible violations of laws or regulations that may have been committed by the Company, or any of its agents or employees. The Audit Committee of the Company also engaged Seigfried, Bingham, Levy, Selzer & Gee (Seigfried) to conduct an investigation into the practices employed by the Company in determining liability reserves under its self- insured workers' compensation plan for employees in Kansas and Florida and whether those practices, as implemented, violated any applicable federal, state or local law or regulation, hereafter referred to as the "Investigation". We have directed the Company and Seigfried to provide you with access to all relevant documents and facts obtained and/or prepared in connection with the Investigation. We have been advised by the Company and Seigfried that they have complied with such directions. Accordingly, and for the purposes of your audit of the consolidated balance sheet of the Company as of October 31, 2004, and the related consolidated statements of results of operations, shareholders' equity and cash flow for the year then ended, we confirm the following to the best of our knowledge and belief: 1. You lave been provided with access to all relevant documents and information obtained or prepared in connection with the Investigation. 2. The Investigation is complete. 3. The Investigation has provided us with all information necessary for us to determine that it is appropriate for the Company to include the financial statements referred to above in filings with the Securities and Exchange Commission. 4. Based on the findings of the Investigation, the Company's Board of Directors and management have taken, or are taking, or are currently planning to take timely and appropriate remedial action where necessary. 5. We confirm that all relevant information relating to the ongoing informal investigation initiated by the Securities and Exchange Commission has been disclosed by management to the Audit Committee, to the investigating team, and to you. We also confirm that all matters that have been
Collins Industries, Inc. 15 Compound Drive Hutchinson, Kansas 67502-4349 (620) 663-5551 _______________________________________________
Page 2 identified in the investigation that require disclosure or modifications to the Companies' financial statements as of and for the year ended October 31, 2004 have been disclosed. 6. There are no other possible illegal acts which the audit committee has become aware of that require investigation. /s/ William R. Patterson - -------------------------------- ---------------------------------------- William R. Patterson Chairman of the Audit Committee /s/ Arch G. Gothard III - -------------------------------- ---------------------------------------- Arch G. Gothard III Audit Committee
Collins Industries, Inc. 15 Compound Drive Hutchinson, Kansas 67502-4349 (620) 663-5551 _______________________________________________
Page 3 /s/ Don S. Peters - -------------------------------- ---------------------------------------- Don S. Peters Audit Committee
Collins Industries, Inc. 15 Compound Drive Hutchinson, Kansas 67502-4349 (620) 663-5551 _______________________________________________
KPMG LLP 1000 Walnut Street Suite 1000 Kansas City, Mo 64106-2170 July 28, 2005 Ladies and Gentlemen: We are providing this letter in connection with your audits of the consolidated balance sheets of Collins Industries, Inc. (the "Company"), as of October 31, 2004 and 2003, and the related consolidated statements of earnings, retained earnings and comprehensive income, and cash flows for each of the years in the three-year period ended October 31, 2004, for the purpose of expressing an opinion as to whether these consolidated financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America. In addition, we are providing this letter in connection with your review of the consolidated interim financial information of the Company as of January 31, 2005 and April 30, 2005 and for the three-month and six-month periods ended for the purpose of determining whether any materia1 modifications should be made to the consolidated interim financial information for them to conform with U.S. generally accepted accounting principles. We confirm that we are responsible for the fair presentation of the consolidated interim financial information in the aforementioned documents in conformity with U.S. generally accepted accounting principles. Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on that information would be changed or influenced by the omission or misstatement. We confirm, to the best of our knowledge and belief, the following representations made to you during your audits: 1. The consolidated financial statements referred to above are fairly presented in conformity with accounting principles generally accepted in the United States of America. 2. We have made available to you: a. All financial records and related data. b. All minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared. All material conclusions and findings of the special investigation have been communicated to you. 3. Except as disclosed to you in writing, there have been no: a. Facts and circumstances that have resulted in communications from any of the Company's external legal counsel to any member of the Company's management reporting evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the Company or any agent thereof.
b. False statements affecting the Company's consolidated financial statements made to the Company's internal auditors, or other auditors who have audited entities under our control upon whose work you may be relying in connection with your audits. c. Communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices. d. Violations or possible violations of laws or regulations, whose effects should be considered for disclosure in the consolidated financial statements or as a basis for recording a loss contingency. 4. There are no: a. Unasserted claims or assessments that our lawyers have advised us are probable of assertion and must be disclosed in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies. b. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by SFAS No. 5, which have not been appropriately disclosed. c. Material transactions that have not been properly recorded in the accounting records underlying the consolidated financial statements. d. Events that have occurred subsequent to the balance sheet date and through the date of this letter that would require adjustment to or disclosure in the consolidated financial statements that have not been appropriately disclosed. 5. In "Item 9A - Controls and Procedures" of the 2004 Form 10-K, we disclosed to you all significant deficiencies in the design or operation of internal controls, of which we are aware and we believe could adversely affect the Companies ability to record, process, summarize and report financial data and identified all material weaknesses in internal controls. We have disclosed in Item 9A the material control weaknesses identified as of October 31, 2004. We interpret "significant deficiencies in the design or operation of internal controls" to be consistent with the concept of a "reportable condition," defined under standards established by the American Institute of Certified Public Accountants. Such standards define a "reportable condition" as a significant deficiency in the design or operation of internal control that could adversely affect the entity's ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial statements. We understand that the term "material weakness in internal control" is a reportable condition for which the design or operation of one or more internal control components does not reduce to a relatively low level the risk that errors or fraud in amounts that could be material in relation to the financial statements may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. 6. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud. We understand that the term "fraud" includes misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets. Misstatements arising from fraudulent financial reporting are intentional misstatements, or omissions of amounts or disclosures in financial statements to deceive financial statement users. Misstatements arising from misappropriation of assets involve the theft of an entity's assets where the effect of the theft causes the consolidated financial statements not to be presented in conformity with accounting principles generally accepted in the United States of America. 7. Noting point eight below, we have no knowledge of any fraud or suspected fraud affecting the entity involving: a. Management, 2
b. Employees who have significant roles in internal control, or c. Others where the fraud could have a material effect on the consolidated financial statements. 8. We have discussed with you the matters set forth below. Excepting those matters, and without characterizing them, we have no knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications from employees, former employees, analysts, regulators, short sellers, or others. We have discussed: a. Results of the special investigation performed of the practices employed by the Company in determining liabilities reserves under its self-insured workers' compensation plan for employees in Kansas and Florida (the "Special Investigation") under the direction of the audit committee. b. Inventory reporting at Mid-Bus by a plant manager who was subsequently terminated. c. Allegations by regulators regarding documentation submitted to Ohio EPA. d. Invoices related to work performed by an electrical contractor at Wheeled Coach Kansas that were not originally recorded but should have been recorded at October 31, 2004. 9. The Company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities. 10. We believe that there are no material unrecoverable amounts classified as assets in the consolidated financial statements. 11. The Company has satisfactory title to all material owned assets, and there are no liens or encumbrances on such assets nor has any material asset been pledged as collateral, unless disclosed. 12. The Company has complied with all aspects of contractual agreements that would have a material effect on the consolidated financial statements in the event of noncompliance. 13. The following have been properly recorded or disclosed in the consolidated financial statements: a. Related party transactions including sales, purchases, loans, transfers, leasing arrangements, guarantees, ongoing contractual commitments and amounts receivable from or payable to related parties. We understand that the term "related party" refers to affiliates of the enterprise; entities for which investments are accounted for by the equity method by the enterprise; trusts for the benefit of employees, such as pension and profit sharing trusts that are managed by or under the trusteeship of management; principal owners of the enterprise; its management; members of the immediate families of principal owners of the enterprise and its management; and other parties with which the enterprise may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Another party also is a related party if it can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. b. Guarantees, whether written or oral, under which the Company is contingently liable, including guarantee contracts and indemnification agreements pursuant to FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. 3
c. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the AICPA's Statement of Position (SOP) 94-6, Disclosure of Certain Significant Risk and Uncertainties. Significant estimates are estimates at the balance sheet date, which could change materially within the next year. Concentrations refer to volumes of business, revenues, available sources of supply, or markets or geographic areas for which it is reasonably possible that events could occur which would significantly disrupt normal finances within the next year. Concentrations include material sources of financing, including off-balance sheet arrangements and transactions with unconsolidated, limited purpose entities, and contingencies inherent in the arrangements, that are reasonably likely to affect the continued availability of liquidity and financing. d. Off-balance sheet activities, including accounting policies relating to non-consolidation and revenue recognition. Specifically, for those off-balance sheet activities in which the Company is a sponsor or transferor, the majority owners of the off-balance sheet vehicle are independent third parties who have made and maintained a substantive capital investment in the vehicle, control the vehicle and have substantive risks and rewards of the assets of the vehicle, including residuals. e. Variable interest entities, and significant variable interests in variable interest entities in which the Company is not deemed the primary beneficiary, pursuant to either FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), or FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R). f. Changes in accounting principle affecting consistency. g. Results of the Special Investigation and related restatement adjustments and disclosures. 14. Receivables reported in the consolidated financia1 statements represent valid claims against debtors for sales or other charges arising on or before the balance sheet date and have been appropriately reduced to their estimated net realizable value. 15. Provision, when material, has been made for: a. Losses to be sustained in the fulfillment of, or from inability to fulfill, any sales commitments. b. Losses to be sustained as a result of purchase commitments for inventory quantities in excess of normal requirements or at prices in excess of the prevailing market prices. c. Losses to be sustained as a result of the reduction of excess or obsolete inventories to their estimated net realizable value. d. Losses to be sustained as a result of other-than-temporary declines in the fair value of investments. 16. The Company has not, directly or indirectly, including through a subsidiary, extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit in the form of a personal loan to or for any director or executive officer of the Company (or equivalent thereof) that is considered prohibited under Section 402 of the Sarbanes- Oxley Act of 2002. 17. The Company is responsible for determining the fair value of financial instruments as required by SFAS No. 107, Disclosures about Fair Value of Financial instruments. The amounts disclosed represent the Company's best estimate of fair value of financial instruments required to be disclosed under the Statement (and other assets or liabilities, if separately disclosed). The Company also has disclosed the methods and significant assumptions used to estimate the fair value of its financial instruments. 18. The calculations of current and deferred tax expense (benefit) and related current and deferred tax assets and liabilities have been determined based on appropriate provisions of applicable enacted tax laws and 4
regulations. Management believes the net defend tax asset at October 31, 2004 is realizable and that there is no need for a valuation allowance. 19. The Company's reporting units have been appropriately identified in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. No provision is required for any impairment losses related to goodwill and/or non-amortizable intangible assets. 20. The Company has accounted for its derivatives and hedging activities in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133, including the requirement for contemporaneous documentation of the hedging relationship and the Company's risk management objective and strategy for entering into the hedge as well as initial and periodic effectiveness assessments. The estimate of fair value of derivative instruments is in compliance with EITF Issue 02-03, Recognition and Reporting Gains and Losses on Energy Trading Contracts, including the propriety of recognized gains and losses at inception of the derivative instruments when using internal valuation techniques. 21. The unaudited interim financial information, accompanying the consolidated financial statements for the 2004 and 2003 three-month periods ending January 31, April 30, July 31, and October 31, and the unaudited interim financial information as of January 31, 2005 and April 30, 2005 and for the thee-month and six-month periods ended, have been prepared and presented in conformity with accounting principles generally accepted in the United States of America applicable to interim financial information and with Item 302(a) of Regulation S-K. The accounting principles used to prepare the unaudited interim financial information are consistent with those used to prepare the audited consolidated financial statements. The quarterly results for each period reflect the restatement adjustments required for fair presentation. 22. The Company's reportable segments have been appropriately identified and the related segment and enterprise-wide disclosures have been made in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Infomation. 23. Based on projections, we anticipate the Company will be in compliance with all covenants related to financing arrangements during fiscal year 2005, except for the late filing of the 2004 Annual Report for which we have obtained a waiver and discussed with you. 24. We believe that the actuarial assumptions and methods used to measure workers' compensation liabilities and costs for financial accounting purposes are appropriate in the circumstances. The restated reserves for workers' compensation claims represent management's best estimate of the ultimate liability for each claim. 25. Provision has been made for any material loss that is probable from environmental remediation liabilities associated with the states of Kansas, Texas, Ohio, Florida and Oklahoma. We believe that such estimate is reasonable based on available information and that the liabilities and related loss contingencies and the expected outcome of uncertainties have been adequately disclosed in the Company's consolidated financial statements. 26. The $152,292 accrued liability related to the joint strength failure cited by NHTSA at Mid-Bus is management's best estimate of the cost to repair the units projected to be submitted under recall at October 31, 2004. 27. All sales transactions entered into by the Company are final and there are no side agreements with customers, or other terms in effect, which allow for the return of merchandise, except for defectiveness or other conditions covered by the usual and customary warranties, other than the GE floor plan agreement. Units sold and held at Company facilities meet all the requirements of SAB 104 and related interpretations. 5
28. We believe any future losses under the repurchase agreement with GE related to floor plan financing for dealers will not have a material adverse effect on the Company's financial position or results of operations. The Company's repurchase obligation under these agreements is limited to vehicles which are in new condition and as to which the dealer still holds title. 29. Revenue from separately priced extended warranty contracts is deferred and recognized in income on a straight-line basis over the contract period as sufficient historical evidence does not exist which indicate that the costs of performing services under the contract are incurred on other than a straight-line basis. 30. We believe the net book value of the Oklahoma land and facility is equal to or less than the fair value. 31. Pursuant to provisions of the Securities Exchange Act of 1934, we are responsible for establishing and maintaining disclosure controls and procedures for the Company, and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the Company's financial statements and annual report on Form 10-K for the fiscal year ended October 31, 2004 are being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in the Company's annual report on Form 10-K for the fiscal year ended October 31, 2004 our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Company's annual report on Form 10-K for the fiscal year ended October 31, 2004, based on such evaluation; and d. Disclosed in the Company's annual report on Form 10-K for the fiscal year ended October 31, 2004 any change in the registrant's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 32. Except as set forth in point #5 above, pursuant to provisions of the Securities Exchange Act of 1934, there have been no changes in internal control over financial reporting that occurred during the Company's most recent fiscal quarter ended October 31, 2004, that has a material effect, or is reasonably likely to have a material effect, on internal control over financial reporting. 33. As of the date of this letter, the Company is not past due with respect to any portion of its assessed Public Company Accounting Oversight Board or FASB accounting support fees. 34. The delay in filing audited financial statements for the year ending October 31, 2004 constituted a covenant violation pursuant to the Company's Loan and Security Agreement. The Company obtained a waiver from its lender regarding this event. The Company has not received any default notifications. Management believes all covenant violations and events of non-compliance have been remedied with the filing of its delinquent reports on Forms 10-K and 10-Q concurrently. 35. Management has appropriately considered and disclosed the key findings of the Special Investigation and believes the restated financial statements reflect the adjustments needed to fairly present the Company's operating results and financial condition for all periods presented. 6
Further, we confirm that we are responsible for the fair presentation in the consolidated financial statements of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. Very truly yours, Collins Industries, Inc. and Subsidiaries 7
/s/ Donald Lynn Collins /s/ Cletus Glasener - -------------------------------- -------------------------------- Donald Lynn Collins Cletus Glasener President and CEO Chief Financial Officer 8
KPMG LLP Telephone 816 802 5200 Suite 1000 Fax 816 802 5400 1000 Walnut Street Internet www.us.kpmg.com Kansas City, MO 64106-2162 July 28, 2005 Mr. William R. Patterson Mr. Arch G. Gothard, III Mr. Don S. Petters Audit Committee Collins Industries 180 State Street Southlake, Texas 76092 Gentlemen: We have audited the consolidated financial statements of Collins Industries, Inc. (Collins or the Company) for the year ended October 31, 2004, and have issued our report thereon under date of July 28, 2005. Under our professional standards, we are providing you with the attached information related to the conduct of our audits. Our Responsibility Under Professional Standards We have a responsibility to conduct our audit of the financial statements in accordance with professional standards. In carrying out this responsibility, we planned and performed the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, we are to obtain reasonable, not absolute, assurance that material misstatements are detected. We have no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by error or fraud, that are not material to the financial statements are detected. In addition, in planning and performing our audit of the financial statements, we considered internal control in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements. An audit of the financial statements does not include examining the effectiveness of internal control and does not provide assurance on internal control. Accounting Policies Significant Accounting Policies and Unusual Transactions The significant accounting policies used by the Company are described in Note 1 to the consolidated financial statements. The special investigation and results are described in Note 11 of the consolidated financial statements. The debt covenant violation, waiver, and status are described in Note 3 of the consolidated financial statements. The control issues noted during out examination, including two material control weaknesses, are described in item 9a in the Form 10-K for financial year 2004.
KPMG Audit Committee Collins Industries July 28, 2005 Page 2 Critical Accounting Policies and Practices The critical accounting policies and practices used by the Company in preparing its consolidated financial statements are as described in Management's Discussion and Analysis. These policies and practices are considered both most important to the portrayal of the Company's financial condition and results of operations, and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain. We have discussed with the audit committee and management our assessment of management's disclosures regarding such policies and practices, the reasons why these policies and practices are considered critical, and how current and anticipated future events impact those determinations. Quality of Accounting Principles We have discussed with the audit committee and management our judgments about the quality, not just the acceptability, of the Company's accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the Company's accounting policies and their application, and the understandability and completeness of the Company's consolidated financial statements, which include related disclosures. Management Judgments and Accounting Estimates The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. We have discussed with you certain of these management judgments and accounting estimates and have disclosed control deficiencies that we consider to be material weaknesses in related areas in our letter to the Audit Committee dated July 28, 2005. Audit Adjustments All-proposed audit adjustments were made by the Company. Other Information in Documents Containing Audited Financial Statements Our responsibility for other information in documents containing the Company's consolidated financial statements and our auditors' report thereon does not extend beyond the financial information identified in our auditors' report, and we have no obligation to perform any procedures to corroborate other information contained in these documents, for example, Management's Discussion and Analysis of Financial Condition and Results of Operations. We have, however, read the other information included in the Company's Form 10-K, and no matters came to our attention that cause us to believe that such information, or its manner of presentation, is materially inconsistent with the information, or manner of its presentation, appearing in the consolidated financial statements. Disagreements with Management There were no disagreements with management on financial accounting, and reporting matters that, if not satisfactorily resolved, would have caused a modification of our auditors' report on the Company's consolidated financial statements.
KPMG Audit Committee Collins Industries July 28, 2005 Page 3 Difficulties Encountered in Performing the Audit We encountered no significant difficulties encountered in performing the audit, except as disclosed to you regarding control deficiencies that we consider to be material weaknesses in our letter, addressed to the Audit Committee of Collins Industries, dated July 28, 2005 and as related to the worker's compensation investigation conducted by the audit committee and reported in the Company's footnote 2 of Form 10-K. Material Written Communications We have made material written communications, between management, the audit committee and ourselves, including an engagement letter addressed to the audit committee, material control weakness letter addressed to the audit committee, audit committee representations signed by each member of the audit committee and management representation letter. Attached to this report please find a copy of the management representation letter. Independence Our professional standards and other regulatory requirements specify that we communicate to you in writing, at least annually, all independence-related relationships between our firm and the Company and provide confirmation that we are independent accountants with respect to the Company. We are not aware of any additional independence-related relationships between our firm and the Company other than the professional services that have been provided to the Company. The fees paid or payable to the firm relating to the audit of the 2004 consolidated financial statements and the fees for other professional services billed in 2004 are summarized in Item 14 Principal Accounting Fees and Services of Form 10-K. Confirmation of Audit Independence We hereby confirm that as of July 28, 2005, we are independent accountants with respect to the Company under all relevant professional and regulatory standards. KPMG's System of Quality Control and Related Matters The enclosed document entitled, KPMG-Our System of Quality Controls, including the attached addendum, is being provided to communicate to you matters related to KPMG's system of quality control. * * * * * * * This report to the Audit Committee is intended solely for the information and use of the audit committee and management and is not intended to be and should not be used by anyone other than these specified parties. This report is not intended for general use, circulation or publication and should not to be published, circulated, reproduced or used for any purpose without our prior written permission in each specific instance. Very truly yours, /s/ KPMG LLP cc: Cletus Glasener, Vice President of Finance and Chief Financial Officer
KPMG LLP Telephone 816 802 5200 Suite 1000 Fax 816 802 5400 1000 Walnut Street Internet www.us.kpmg.com Kansas City, MO 64106-2162 July 28, 2005 The Audit Committee Collins Industries, Inc. Hutchinson, Kansas Gentlemen: We have audited the consolidated financial statements of Collins Industries, Inc. (Collins or the Company) for the year ended October 31, 2004 and have issued our report thereon dated July 28, 2005. Our report includes an explanatory paragraph disclosing that the 2003 and 2002 consolidated financial statements were restated. In planning and performing our audit of the consolidated financial statements of Collins, we considered internal control in order to determine our auditing procedures for the purpose of expressing our opinion on the consolidated financial statements. An audit does not include examining the effectiveness of internal control and does not provide assurance on internal control. However, we noted certain matters involving internal control and its operation that we consider to be a material weakness or significant deficiency under standards established by the Public Company Accounting Oversight Board (United States). A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Company's annual or interim financial statements that is more than inconsequential will not be prevented or detected. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In connection with our audit of the Company, we noted the following control deficiencies that we consider to be material weaknesses: Workers' Compensation Reserves During the course of our audit, we became aware that the Company did not record reserves for workers' compensation in accordance with U.S. generally accepted accounting principles and did not have appropriate policies and procedures to ensure the estimates provided by an independent insurance adviser were appropriate. Specifically, the Company was "stair stepping" reserves for certain claims (i.e. gradually increasing reserves for known workers' compensation liabilities over a period of time, rather than recording them in the appropriate period) and did not record the estimated ultimate reserves for several older claims that involved cases where employees incurred permanent partial disability. Independent counsel retained by the audit committee determined that certain senior management representatives dealt aggressively with the third-party administrator (TPA) and this caused reserves to be recorded at lower levels than the TPA would otherwise have recommended. Accounting personnel also failed to maintain controls needed to ensure appropriate reserves were recorded. As a result, the Company determined that it was necessary to restate its historical consolidated financial statements to correct these errors. KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.
The Audit Committee Collins Industries, Inc. July 28, 2005 Page 2 Workers' compensation reserves should be recorded at management's best estimate of the ultimate liability of each claim. Actuarial analysis should be performed to substantiate the appropriateness of recorded reserves. Accounting personnel should be more diligent in actively overseeing this area to ensure recorded reserves are made in accordance with U.S. generally accepted accounting principles. Company Environment The Company did not have effective policies and procedures regarding management override of controls and it did not have effective policies and procedures implementing its Code or Conduct. As a result, it did not maintain a control environment that promoted open and candid communication within the organization or with its outside auditors. We noted several instances where ineffective or inappropriate communication impeded the accumulation of critical information needed to accurately record information for financial reporting purposes and/or cooperate fully and effectively in the audit, of the Company's consolidated financial statements. Examples of this are as follows. • During the investigation into the workers' compensation reserves, it was noted that senior management largely influenced the reserve recommended by the TPA. Specifically, the chief operating officer directed the TPA responsible for recommending workers' compensation reserves to "stair-step" the reserve recommendation and was aware of the older cases that did not have reserves recorded for the estimated ultimate liability. There also was correspondence from the chief financial officer that indicated he was aware of the "stair-stepping" and that "KPMG may have a problem with this." • Several invoices from a contractor totaling approximately $45,000 at one of the Company's subsidiaries were not recorded during fiscal 2004 when the work was performed. Instead, the plant manager or accounts payable clerk attempted to process these invoices over a number of months during the 2005 fiscal year. • Correspondence from the Ohio Environmental Protection Agency (the Agency) indicated that some of the Company's documentation to the Agency had apparently been falsified. • The plant manager at Mid Bus apparently manipulated amounts reported for work-in-progress units as being more complete than they actually were. Correspondence would suggest the plant manager, who was terminated, felt pressured to report inappropriate information to meet expectations of senior management. Senior management needs to create an atmosphere where employees can feel comfortable and report information candidly up and down the organization and to KPMG without fear of reprisal. We believe the four documented items noted are indicative of a material control weakness in overall company level controls. This is an issue that deserves immediate board of directors and senior management attention. Without the board of directors and senior management's attention and focus, this "tone-at-the-top" issue cannot be adequately addressed. Significant deficiencies, which have been discussed with the appropriate members of management, are summarized as follows:
The Audit Committee Collins Industries, Inc. July 28, 2005 Page 3 Hazardous Waste Management and Reporting at Mid Bus Correspondence from the Agency severely criticized Mid Bus. The regulators asserted Mid Bus fails to understand or accept that violations of hazardous waste rules and statutes have great potential for harm. The regulators also noted Mid Bus had failed in its continuing obligation to properly manage hazardous waste, and its apparent falsification of records makes a mockery of the self reporting program used in Ohio. This correspondence indicates, at a minimum, that there are potential serious deficiencies in procedures used by Mid Bus to manage and report hazardous waste. We recommend procedures used to manage and report hazardous waste at Mid Bus be reevaluated and corrective action taken to address the concerns of the Ohio regulator. Inventory The Company does not have a perpetual inventory system and performs a perpetual inventory and updates standard inventory costs only once per year. As a result, the Company experienced an inventory adjustment of approximately $850,000 during the fourth quarter of fiscal 2004. * * * * * * * These conditions were considered in determining the nature, timing, and extent of the audit tests applied in our audit of the fiscal 2004 consolidated financial statements, and in the restatement of the 2003 and 2002 consolidated financial statements, and this report does not affect our report on these consolidated financial statements dated July 28, 2005. We have not considered internal control since the date of our report. This report is intended solely for the information and use of the audit committee, management, and others within the organization and is not intended to be, and should not be, used by anyone other than these specified parties. Very truly yours, /s/ KPMG LLP