SEC Company Response from ACL SEMICONDUCTOR INC (CIK 0000934445) — Dec 2, 2005
ACL SEMICONDUCTOR INC (CIK 0000934445)
Date: Dec. 2, 2005 · CIK: 0000934445 · Accession: 0000930413-05-008031
AI Filing Summary & Sentiment
Letter
Re: ACL SEMICONDUCTORS, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 FORMS 10Q- FOR MARCH 31 AND JUNE 30, 2005 FILE NO. 0-50140
REITLER BROWN & 800 Third Avenue, 21st Floor ROSENBLATT LLC New York, NY 10022-7604 ------------------- Tel (212) 209-3050 ATTORNEYS AT LAW Fax (212) 371-5500
December 1, 2005
Securities and Exchange Commission 100 F Street, North East Washington, D.C. 20549
Ladies and Gentlemen:
We are special counsel for ACL Semiconductors, Inc., a Delaware corporation (the "COMPANY").
We are in receipt of the letter, dated October 24, 2005 (the "COMMENT LETTER"), from Brian R. Cascio, Accounting Branch Chief of the Securities and Exchange Commission (the "COMMISSION"), addressed to the Company. Set forth below are the responses of the Company to the comments set forth in the Comment Letter, numbered to correspond thereto. All capitalized terms used, but not otherwise defined, herein shall have the respective definitions assigned thereto in the filing transmitted herewith.
COMMENT NUMBER RESPONSE -------------- --------
1. The Company takes notice of the Commission's comments and the Company will revise accordingly in its future filings.
2. The Company takes notice of the Commission's comments and the Company will revise accordingly in its future filings.
3. The Company purchased from the affiliates listed on pages 32 -35 of the Form 10K for the year ended December 31, 2004 memory products such as chips, flash memory cards, integrated circuits, Dynamic Random Access Memory (DRAM). The sales of the Company's inventories were to these affiliates which were then sold to such affiliates' customers. The inventories were not resold to the Company. The Company also purchased certain inventories from these affiliates to meet its customers' demand if the Company could not obtain sufficient inventory supplies from Samsung Hong Kong. However, the Company did not sell to and repurchase from the affiliates the identical inventories. In addition, none of the Company's purchases from these affiliates represent any returns of the previous sales to these affiliates.
4. During the calendar year of 2004, Samsung Hong Kong was actively seeking to expand its market share of its memory products in the region. Samsung Hong Kong
<PAGE>
COMMENT NUMBER RESPONSE -------------- --------
implemented a policy to reduce the prices of its memory products which translated into a lower profit margin for companies selling Samsung's memory products, such as the Company. The lower prices for the memory products have continued for much of the calendar year of 2005. The Company has adopted this "aggressive pricing strategy" in order to maximize its sales. The Company's strategy is dependent upon market competition and demand for the memory products. The Company will revise its disclosure in its future filings to include this response.
5. The Company previously had a line of credit with DahSing bank in the amount of approximately $987,179 (HK$7,700,000). In June 2004, the Company was in negotiation with DahSing bank for modification of certain terms and the amount of the line of credit. As a result of this negotiation, in August 2004, the Company loaned $611,446 to City Royal to pay off the mortgage loan on a residential property owned by City Royal and pledged to DahSing Bank as collateral to secure the Company's borrowings from DahSing Bank. The line of credit amount was also increased to a total of approximately $2,308,000 (HK$18,000,000). In February 2005, City Royal sold the residential property and has repaid the loan of $611,446 through transferring the entire proceeds from the sale of approximately $1,025,641 (HK$8,000,000) to DahSing Bank as collateral for the Company's line. The excess of the amount transferred to DahSing Bank over the outstanding loan receivable of $414,195 was classified as payable to City Royal. The Company repaid $86,276 in the second quarter of 2005 with an outstanding balance of $327,919 as of September 30, 2005. The loan from City Royal was short-term in nature and the Company expects the loan to be repaid by January 2006. The Company did not impute any interest on the loan. The imputed interest amount was immaterial to the consolidated financial statements of the Company based on the relatively low prevailing borrowing rate in Hong Kong. The loan with DahSing Bank had not been repaid as of the date of this letter. The Company will revise its disclosure in its future fillings to include this response.
6. The Company is highly dependent on the memory products from Samsung Hong Kong with sales of memory products supplied by Samsung Hong Kong accounting for approximately 80% of the Company's revenues for the year ended December 31, 2004. If the Company is unable to receive sufficient quantities of memory products from Samsung Hong Kong, the Company may not be able to continue its business. The Company is in the process of taking steps to reduce its dependence on Samsung Hong Kong such as its contemplated acquisition of Classic Electronics Ltd. ("CLASSIC"), a reseller of memory products. Additionally, the Company is currently seeking other companies which sell memory products for possible acquisition or strategic partnership. The Company will revise its disclosure in its future filings to include this response.
7. During the course of the audit for the year ended December 31, 2004, the Company's auditors found certain errors and certain undisclosed related party transactions. These errors include (a) approximately $320,000 of amount paid to a related party was incorrectly expensed; such amount was an advance to the related party, was expected to be repaid by this related party and, therefore, should be classified as an asset; (b) approximately $2.5 million of sales to related party was inadvertently included in the regular sales; (c) approximately $55,000 of prepaid insurance was incorrectly expensed as such amount should be capitalized and expensed over the benefit period.
<PAGE>
COMMENT NUMBER RESPONSE -------------- --------
Since the Company's auditors' findings, the Company has taken the following steps to prevent these errors from happening: (a) the Company added one more level of technical review by hiring an outside consultant who is a CPA to oversee all the accounting records after the controller has completed the period end closing prior to submitting the financial statements to our CFO for final review; and (b) the sales reports are reviewed by the Company's CFO and COO to ensure all the related parties and related party transactions are being captured.
The Company's auditors have not found any material adjustments during their quarterly reviews for the first, second and third quarters of 2005.
8. (1) The majority of the Company's revenues are earned in Hong Kong and South East China region;
(2) The majority of the Company's assets are located in Hong Kong;
(3) The Company's management and accounting records are located in Hong Kong; and
(4) The majority of the audit work was performed in Hong Kong by the Company's U.S. auditors (out of its office in Irvine, California).
9. The Company takes notice of the Commission's comments and the Company will revise accordingly in its future filings.
10. The fair value of the shares issued to the consultants as merger costs was computed based on the most recent quoted market price of $1.05 (on September 29, 2003) prior to the effective date of the merger on September 30, 2003.
The Company will disclose the aforementioned information in its future filings.
11. The Company takes notice of the Commission's comments and the Company will revise accordingly in its future filings.
12. The $2.7 million merger costs represent the fair value of the 2,620,000 shares of the Company's common stock issued to certain financial advisors. These shares were valued at $1.05 per share based on the most recent quoted market price prior to the effective date of the merger.
The services provided by these advisors include identifying the acquiree (Atlantic Components Ltd.) and the efforts negotiating the terms of the merger.
Prior to the acquisition, none of these advisors had any relationship with either the acquirer or the acquiree and had no direct interest in either the Company or Atlantic Components Ltd.
13. The Company paid the $1 million acquisition deposit through a reduction of the accounts receivable due from Classic. The deposit was non-cash in nature and was disclosed in the Statements of Cash Flows on Page F-6 of our Form 10K for 2004.
Per the agreement between the Company and Classic, the deposit is fully refundable. Based on the verbal agreement between the management of the two entities, the Company and Classic expect the acquisition to be consummated prior to December 31, 2005.
<PAGE>
COMMENT NUMBER RESPONSE -------------- --------
14. Discounts and price adjustments represent cash rebates and discounts given to certain customers based on the verbal agreements with these customers. Amounts for such rebates and discounts were classified as a reduction of revenues, in accordance with EITF 01-19, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)."
15. The Company takes notice of the Commission's comments and the Company will revise accordingly in its future filings.
16. The Company takes notice of the Commission's comments and the Company will revise accordingly in its future filings.
17. A majority of the related party transactions are consummated with Classic, an entity the Company expects to acquire later this year. Classic is in the business of selling/reselling memory products. Unlike the business of the Company, Classic sells memory products of all brands. Certain customers of Classic often place orders of memory products of different brands including Samsung memory products. Classic will then purchase the products from the Company in order to fill the customers' orders. The Company has been selling its products to Classic at prices equal or comparable to those sold to other non-related customers.
The Company, from time to time, may purchase products from Classic. This situation occurs when there is a shortage of products from Samsung Hong Kong. The Company may engage Classic to search for Samsung products from other Samsung distributors located throughout Asia in order to fill its customer orders.
Additionally, the Company has other transactions with other affiliates during the normal course of business. All of these affiliates are in the business of electronic products which need memory products for their assembling lines. The Company has been selling its products at the same price levels as those sold to other non-related customers.
During the quarter ended March 31, 2004, the Company evaluated the implication of FIN 46R and the impact of applying FIN 46R to its consolidated financial statements and has produced the following analysis and conclusion.
Under FIN 46R, an entity shall be subject to consolidation if by design any of the following 3 conditions exists:
1. The amount of equity investment at risk is not sufficient to allow it to finance its activities without additional subordinated financial support from other parties. Subordinated financial support refers to variable interests that will absorb some or all of an entity's expected losses, if they occur.
2. The holders of the equity investment at risk as a group lack any one or more of the following characteristics of a controlling financial interest:
a. The ability, directly or indirectly, to make decisions about the investee's activities;
b. The obligation to absorb the investee's expected losses if they occur;
c. The right to receive expected residual returns if they occur.
Show Raw Text
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REITLER
BROWN & 800 Third Avenue, 21st Floor
ROSENBLATT LLC New York, NY 10022-7604
------------------- Tel (212) 209-3050
ATTORNEYS AT LAW Fax (212) 371-5500
December 1, 2005
Securities and Exchange Commission
100 F Street, North East
Washington, D.C. 20549
Re: ACL SEMICONDUCTORS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
FORMS 10Q- FOR MARCH 31 AND JUNE 30, 2005
FILE NO. 0-50140
Ladies and Gentlemen:
We are special counsel for ACL Semiconductors, Inc., a Delaware
corporation (the "COMPANY").
We are in receipt of the letter, dated October 24, 2005 (the "COMMENT
LETTER"), from Brian R. Cascio, Accounting Branch Chief of the Securities and
Exchange Commission (the "COMMISSION"), addressed to the Company. Set forth
below are the responses of the Company to the comments set forth in the Comment
Letter, numbered to correspond thereto. All capitalized terms used, but not
otherwise defined, herein shall have the respective definitions assigned thereto
in the filing transmitted herewith.
COMMENT NUMBER RESPONSE
-------------- --------
1. The Company takes notice of the Commission's comments and the
Company will revise accordingly in its future filings.
2. The Company takes notice of the Commission's comments and the
Company will revise accordingly in its future filings.
3. The Company purchased from the affiliates listed on pages 32
-35 of the Form 10K for the year ended December 31, 2004 memory
products such as chips, flash memory cards, integrated
circuits, Dynamic Random Access Memory (DRAM). The sales of the
Company's inventories were to these affiliates which were then
sold to such affiliates' customers. The inventories were not
resold to the Company. The Company also purchased certain
inventories from these affiliates to meet its customers' demand
if the Company could not obtain sufficient inventory supplies
from Samsung Hong Kong. However, the Company did not sell to
and repurchase from the affiliates the identical inventories.
In addition, none of the Company's purchases from these
affiliates represent any returns of the previous sales to these
affiliates.
4. During the calendar year of 2004, Samsung Hong Kong was
actively seeking to expand its market share of its memory
products in the region. Samsung Hong Kong
<PAGE>
COMMENT NUMBER RESPONSE
-------------- --------
implemented a policy to reduce the prices of its memory
products which translated into a lower profit margin for
companies selling Samsung's memory products, such as the
Company. The lower prices for the memory products have
continued for much of the calendar year of 2005. The Company
has adopted this "aggressive pricing strategy" in order to
maximize its sales. The Company's strategy is dependent upon
market competition and demand for the memory products. The
Company will revise its disclosure in its future filings to
include this response.
5. The Company previously had a line of credit with DahSing bank
in the amount of approximately $987,179 (HK$7,700,000). In June
2004, the Company was in negotiation with DahSing bank for
modification of certain terms and the amount of the line of
credit. As a result of this negotiation, in August 2004, the
Company loaned $611,446 to City Royal to pay off the mortgage
loan on a residential property owned by City Royal and pledged
to DahSing Bank as collateral to secure the Company's
borrowings from DahSing Bank. The line of credit amount was
also increased to a total of approximately $2,308,000
(HK$18,000,000). In February 2005, City Royal sold the
residential property and has repaid the loan of $611,446
through transferring the entire proceeds from the sale of
approximately $1,025,641 (HK$8,000,000) to DahSing Bank as
collateral for the Company's line. The excess of the amount
transferred to DahSing Bank over the outstanding loan
receivable of $414,195 was classified as payable to City Royal.
The Company repaid $86,276 in the second quarter of 2005 with
an outstanding balance of $327,919 as of September 30, 2005.
The loan from City Royal was short-term in nature and the
Company expects the loan to be repaid by January 2006. The
Company did not impute any interest on the loan. The imputed
interest amount was immaterial to the consolidated financial
statements of the Company based on the relatively low
prevailing borrowing rate in Hong Kong. The loan with DahSing
Bank had not been repaid as of the date of this letter. The
Company will revise its disclosure in its future fillings to
include this response.
6. The Company is highly dependent on the memory products from
Samsung Hong Kong with sales of memory products supplied by
Samsung Hong Kong accounting for approximately 80% of the
Company's revenues for the year ended December 31, 2004. If the
Company is unable to receive sufficient quantities of memory
products from Samsung Hong Kong, the Company may not be able to
continue its business. The Company is in the process of taking
steps to reduce its dependence on Samsung Hong Kong such as its
contemplated acquisition of Classic Electronics Ltd.
("CLASSIC"), a reseller of memory products. Additionally, the
Company is currently seeking other companies which sell memory
products for possible acquisition or strategic partnership. The
Company will revise its disclosure in its future filings to
include this response.
7. During the course of the audit for the year ended December 31,
2004, the Company's auditors found certain errors and certain
undisclosed related party transactions. These errors include
(a) approximately $320,000 of amount paid to a related party
was incorrectly expensed; such amount was an advance to the
related party, was expected to be repaid by this related party
and, therefore, should be classified as an asset; (b)
approximately $2.5 million of sales to related party was
inadvertently included in the regular sales; (c) approximately
$55,000 of prepaid insurance was incorrectly expensed as such
amount should be capitalized and expensed over the benefit
period.
2
<PAGE>
COMMENT NUMBER RESPONSE
-------------- --------
Since the Company's auditors' findings, the Company has taken
the following steps to prevent these errors from happening: (a)
the Company added one more level of technical review by hiring
an outside consultant who is a CPA to oversee all the
accounting records after the controller has completed the
period end closing prior to submitting the financial statements
to our CFO for final review; and (b) the sales reports are
reviewed by the Company's CFO and COO to ensure all the related
parties and related party transactions are being captured.
The Company's auditors have not found any material adjustments
during their quarterly reviews for the first, second and third
quarters of 2005.
8. (1) The majority of the Company's revenues are earned in Hong
Kong and South East China region;
(2) The majority of the Company's assets are located in Hong
Kong;
(3) The Company's management and accounting records are located
in Hong Kong; and
(4) The majority of the audit work was performed in Hong Kong
by the Company's U.S. auditors (out of its office in Irvine,
California).
9. The Company takes notice of the Commission's comments and the
Company will revise accordingly in its future filings.
10. The fair value of the shares issued to the consultants as
merger costs was computed based on the most recent quoted
market price of $1.05 (on September 29, 2003) prior to the
effective date of the merger on September 30, 2003.
The Company will disclose the aforementioned information in its
future filings.
11. The Company takes notice of the Commission's comments and the
Company will revise accordingly in its future filings.
12. The $2.7 million merger costs represent the fair value of the
2,620,000 shares of the Company's common stock issued to
certain financial advisors. These shares were valued at $1.05
per share based on the most recent quoted market price prior to
the effective date of the merger.
The services provided by these advisors include identifying the
acquiree (Atlantic Components Ltd.) and the efforts negotiating
the terms of the merger.
Prior to the acquisition, none of these advisors had any
relationship with either the acquirer or the acquiree and had
no direct interest in either the Company or Atlantic Components
Ltd.
13. The Company paid the $1 million acquisition deposit through a
reduction of the accounts receivable due from Classic. The
deposit was non-cash in nature and was disclosed in the
Statements of Cash Flows on Page F-6 of our Form 10K for 2004.
Per the agreement between the Company and Classic, the deposit
is fully refundable. Based on the verbal agreement between the
management of the two entities, the Company and Classic expect
the acquisition to be consummated prior to December 31, 2005.
3
<PAGE>
COMMENT NUMBER RESPONSE
-------------- --------
14. Discounts and price adjustments represent cash rebates and
discounts given to certain customers based on the verbal
agreements with these customers. Amounts for such rebates and
discounts were classified as a reduction of revenues, in
accordance with EITF 01-19, "Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)."
15. The Company takes notice of the Commission's comments and the
Company will revise accordingly in its future filings.
16. The Company takes notice of the Commission's comments and the
Company will revise accordingly in its future filings.
17. A majority of the related party transactions are consummated
with Classic, an entity the Company expects to acquire later
this year. Classic is in the business of selling/reselling
memory products. Unlike the business of the Company, Classic
sells memory products of all brands. Certain customers of
Classic often place orders of memory products of different
brands including Samsung memory products. Classic will then
purchase the products from the Company in order to fill the
customers' orders. The Company has been selling its products to
Classic at prices equal or comparable to those sold to other
non-related customers.
The Company, from time to time, may purchase products from
Classic. This situation occurs when there is a shortage of
products from Samsung Hong Kong. The Company may engage Classic
to search for Samsung products from other Samsung distributors
located throughout Asia in order to fill its customer orders.
Additionally, the Company has other transactions with other
affiliates during the normal course of business. All of these
affiliates are in the business of electronic products which
need memory products for their assembling lines. The Company
has been selling its products at the same price levels as those
sold to other non-related customers.
During the quarter ended March 31, 2004, the Company evaluated
the implication of FIN 46R and the impact of applying FIN 46R
to its consolidated financial statements and has produced the
following analysis and conclusion.
Under FIN 46R, an entity shall be subject to consolidation if
by design any of the following 3 conditions exists:
1. The amount of equity investment at risk is not sufficient to
allow it to finance its activities without additional
subordinated financial support from other parties. Subordinated
financial support refers to variable interests that will absorb
some or all of an entity's expected losses, if they occur.
2. The holders of the equity investment at risk as a group lack
any one or more of the following characteristics of a
controlling financial interest:
a. The ability, directly or indirectly, to make decisions
about the investee's activities;
b. The obligation to absorb the investee's expected losses
if they occur;
c. The right to receive expected residual returns if they
occur.