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