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
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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.
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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.
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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
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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.
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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:
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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
