Following
receipt of the Auditor’s Letter, the SEC issued a comment letter to the Company
dated August 31, 2007 (the “Comment Letter”), which, in part, also supplements a
SEC comment letter issued on August 16, 2007. The Company intends to file a
comment response letter with the SEC (the “Response Letter”) shortly
and believes its responses, in addition to this filling, address the issues
set forth in the Comment Letter. Since some of the issues raised by the SEC
in
the Comment Letter are based on certain statements made by Marcum &
Kliegman which the Company believes have no basis in fact, the Company feels
it
necessary in this instance to disclose such portion of the Response Letter
as
set forth below so that the Company’s shareholders and the public may
understand the Company’s formal position in advance of the publication of the
Comment Letter.
SEC
Comment No. 5 in the Comment Letter
:
Marcum
& Kliegman’s August 29, 2007 letter also states that
they
believe
there
were
two
reportable
events and describes those events which they considered reportable in accordance
with Item 304(a)(1)(iv) of Regulation S-K. We note that your August 13, 2007
Form 8-K did not disclose any reportable events. In
light
of
the
information provided by Marcum & Kliegman, please tell us if you continue to
believe there were no
reportable
events; alternatively revise your disclosure to include a description meeting
the
requirements of Item 304(a)(1)(iv) of Regulation S-K.
Company
Response
:
“The
Company believes that there is only one “reportable event” that occurred during
its engagement of Marcum & Kliegman. That reportable event was that Marcum
& Kliegman advised the Company of material weaknesses in the Company’s
internal controls over financial reporting. The Company added disclosure in
the
Amended 8-K to reflect this reportable event. This reportable event occurred
in
conjunction with Marcum & Kliegman’s audit of the consolidated financial
statements for the year ended June 30, 2006 and not, as stated in the Auditor’s
Letter, in conjunction with Marcum & Kliegman’s “subsequent reviews of the
Company’s condensed consolidated financial statements for the quarterly periods
ended September 30, 2006 and December 31, 2006.” In June 2007, when Marcum &
Kliegman began its review of the Company quarterly financial statements for
the
periods ended September 30, 2006 and December 31, 2006, the Company had already
disclosed the material weakness in its internal controls over financial
reporting in the Company’s annual report on Form 10-K for the year ended June
30, 2006 (filed on April 12, 2007). Further, no such advice of these material
weaknesses over internal controls was discussed, in writing or orally, with
the
Company by representatives of Marcum & Kliegman during the review of such
quarterly financial statements.
The
Company notes that Marcum & Kliegman incorrectly characterized the
restatement of the Company’s financial statements for the year ended June 30,
2005 as being the result of the reportable event. As disclosed by the Company
in
its Current Report on Form 8-K filed on December 26, 2006 (which Marcum &
Kliegman reviewed and approved prior to its filing), the financial restatement
appeared in a draft audit report from the Company’s prior auditors, Simontacchi
& Company, LLP. It was subsequent to the receipt of the draft audit report
that the Company reevaluated its disclosure controls and procedures and
identified the various material weaknesses which existed at the time of the
filing of the original 2005 Annual Report (which weaknesses included “(1)
insufficient accounting expertise to apply accounting principles generally
accepted in the United States and (2) inadequate segregation of duties,
including insufficient supervision and review of accounting staff work”).
The
Company unequivocally asserts that the other “reportable event” claimed by
Marcum & Kliegman regarding an event described in Item 304(a)(1)(v)(A) did
not occur. At no time prior to the date of the Auditor’s Letter (which was dated
11 days after the auditor’s termination) did Marcum & Kliegman ever advise
the Company, in writing or orally, that information had come to Marcum &
Kliegman’s attention that had led it to no longer be able to rely on
management’s representations, or made it unwilling to be associated with the
financial statements prepared by management. Prior to the Auditor’s Letter,
Marcum & Kliegman never questioned the integrity of the Company’s Chief
Executive Officer.
The
Company has provided Marcum & Kliegman with full access to Kramer Levin
Naftalis & Frankel LLP, the law firm representing the Company with respect
to the SEC formal investigation and Marcum & Kliegman even stated in its
audit report, dated April 4, 2007, and in note 24 to audited financials, that
“The Company has produced and continues to produce responsive documents and
intends to continue cooperating with the SEC in its investigation.”
Further,
Marcum & Kliegman never discussed with the Company, its audit committee or
with management of the Company any concerns of the nature of Mr. Frost’s
communications at any time. For example, no such concerns were mentioned or
discussed by Marcum & Kliegman at the SAS 100 meetings on July 23, 2007 and
July 31, 2007 held in regard to the Company’s Quarterly Reports for the periods
ended September 30, 2006 and December 31, 2006, respectively. Moreover, neither
the Company nor the Audit Committee received any oral communication or written
correspondence (including emails) regarding such concerns. Further, the
Company notes that on Sunday, August 26, 2007, Mr. Alan Richards (Chairman
of
the Company’s Audit Committee) and Mr. Frank Nocito (our Vice President of
Business Development and, through a family trust, our largest shareholder),
at
the request of Mr. Stephen Feldman of Marcum & Kliegman, attended a meeting
with Mr. Feldman and another partner of Marcum & Kliegman, Jeffrey Weiner.
At the meeting, Messrs. Nocito and Richards demanded that the two principals
from Marcum & Kliegman provide the basis for the statements regarding Mr.
Frost’s integrity and conduct as alleged in the Audit Letter. Both Marcum &
Kliegman partners stated that they had “no documents” and “no proof” to make
these statements but only a “gut instinct.” Both Messrs. Richards and Nocito
have provided the Company with sworn affidavits in support of these
statements.
The
Company also notes another inaccurate statement in the Auditor’s Letter
regarding paragraph (i). Marcum & Kliegman wrote in the Auditor’s Letter
that “for more than a month prior to the date of termination, Marcum &
Kliegman had numerous conversations with management of the Company and the
Chairman of the Audit Committee regarding whether or not we would continue
as
the independent registered accountant for the Company.” The Company notes that
no such conversations ever occurred nor did the Company receive any
correspondence from Marcum & Kliegman to such effect. In fact, the Chairman
of the Audit Committee, Mr. Richards, was told by Marcum & Kliegman during
this period that Marcum & Kliegman wished to remain as the Company’s
accountants since Marcum & Kliegman were advised that the Company was
considering retaining the services of the accountants that were performing
the
audit review for All American Plazas, Inc., for the year ended June 30,
2007.
Additionally,
on August 9, 2007, the Company received three invoices (each dated July 15,
2007) from Marcum & Kliegman for a total of $180,000. On that date, Mr.
Frost sent an Email to Mr. Stephen Feldman and Mr. Paul Sherman at Marcum &
Kliegman to obtain further explanation of the billing because the invoices
were not consistent with the engagement letters executed on April 1, 2007 and
July 12, 2007 by the Company and Marcum Kliegman. Mr. Frost, in his Email of
August 9, 2007, also requested more detail of the services provided because
the
invoice description of services were one line (e.g., “Billing on account for
review of 10QSBs for 9/30/06, 12/31/06 and 3/31/07”). The next day at the SAS
100 meeting in regard to the Quarterly Report for the quarter ended March 31,
2007, which was held with the members of the Company’s Audit Committee (Mr. Alan
Richards, Ms. Solange Charas and Mr. Edward Miller), Messrs. Feldman and Steven
Kriete of Marcum & Kliegman presented a series of demands in order for
Marcum & Kliegman to continue as auditors for the Company. These demands
were (i) the payment of the invoices delivered on August 9, 2007 (none of which
was overdue), (ii) a binding commitment from the Company to engage Marcum &
Kliegman as the Company’s independent auditors for the year ended June 30, 2007,
(iii) the hiring of a permanent CFO and (iv) the immediate resignation of Mr.
Frost as Chief Executive Officer. At this SAS 100 meeting, the representatives
of Marcum & Kliegman did not discuss or mention any concerns of the nature
of Mr. Frost’s communications regarding the SEC investigation or the acquisition
of All American Plazas nor any other concerns regarding Mr. Frost’s integrity in
regard to the demand for Mr. Frost’s resignation or otherwise. It should also be
noted that Marcum & Kliegman, when presenting its list of demands to the
Company, specifically “consented” to Mr. Frost remaining as Chairman of
the Board of the Company, which is a view the Company believes is
inconsistent with Marcum & Kliegman’s alleged concerns in the Auditor’s
Letter regarding Mr. Frost’s integrity.”
