SecProbe.io

CORRESP
1
filename1.htm

corresp

December 20, 2005

VIA EDGAR

U.S. Securities and Exchange Commission

100 F Street, NE

Washington, D.C. 20549-7010

Attn: Mr. Nili Shah

Dear Mr. Shah:

We have received your letter dated November 21, 2005 regarding our Form 10-K for the fiscal year
ended December 31, 2004, our Form 10-Q for the quarter ended March 31, 2005 and our Form 10-Q for
the quarter ended June 30, 2005 (SEC File No. 0-00822). The Company’s responses to your comments
are provided below.

Form 10-K for the year ended December 31, 2004

(12) Commitments
and Contingencies, page 46

    1.

    We have reviewed your response to prior comment 2 in our letter dated September 13, 2005.
As discussed in FIN 39, assets and liabilities should not be netted unless both the asset and
the liability are between the same two parties and all of the conditions in paragraph 5 of

FIN 39 are met. Accordingly, loss contingencies should be evaluated for accounting and
disclosure purposes independently of any insurance recoveries.
Thus:

    •

    Where you have indicated that you do not believe that it is probable or reasonably
possible that a loss has been incurred with respect to the USS Great Lakes Fleet cases,
auto accident claim and pressure valve claim, please confirm to us that you have made this
determination independent of any potential insurance recovery. If not, please do so.
Further, to the extent that your losses meet the criteria of
paragraphs 8 or 10 of SFAS
5, please revise your accounting and disclosure accordingly.

RESPONSE: We confirm that as of the date we filed our respective filings with the SEC we had made
a determination that it was not probable or reasonably possible
that a loss had been incurred
with respect to the above mentioned cases independently of any potential insurance recoveries. As
such we did not make any specific disclosures related to these cases.

    •

    With respect to the product liability case in France, please disclose the nature of the
contingency and the reasonably possible range of loss, in accordance with paragraph 10 of
SFAS 5.

RESPONSE:
The nature of the claim by the claimant is a loss resulting from lost or late shipments and
additional costs of shipments during the time the machine was not operating due to the failure of a
manifold supplied by Oilgear. In our prior response we indicated “a French court ordered the
Company’s subsidiary, Oilgear Towler S.A., to pay

Mr. Nili Shah

U.S. Securities and Exchange Commission

December 20, 2005

Page 2

approximately EUR 1,255,000 (approximately $1,506,000) plus interest to the claimant.” It is
important to note that the judicial system in France is different
that in the United States and as such the
court order we referenced in our October 27, 2005 response letter to you is not similar to a court
order to pay in the United States. The order issued by the French court is simply an
acknowledgment that the court recognizes the claimant’s claim as an official claim and puts all the
parties involved (the claimant, the claimant’s insurance
company, our insurance company and Oilgear) on
notice that the court will hear this case. The amount of loss in the court order is a number
presented by the claimant in his claim against us and it has not
been adjudicated. We will have ample opportunity to litigate the amount of
any damages. At the time of the failure, the statute of limitations for latent defect claims was
an indeterminant “short period.” Subsequently, this was codified as two years. The claimant did
not bring their claim within this time period and was thus barred from claiming a latent defect. He
has now claimed based on an alleged failure to do a “sufficiently thorough investigation” at the
time of the design of the manifold.

We
believe we have very strong and meritorious defenses in this case
including the fact that a ten
year statute of limitations in France to file commercial claims may apply and we installed the
equipment on the claimants machine in 1993 which makes the claimant’s case weak. The claimant is a
current customer and our attorneys indicated it will take more than a year to get a judgement from
the French court system; we believe this case may likely be settled before it goes to trial.
There is no way to estimate the final judgement or settlement amount but history indicates that
these matters settle for much less than the claim. For example, in
September 2005 our
insurance company settled a 750,000 pounds sterling claim against us in England for 62,500 pounds
sterling. Due to the lapse of the statute of limitations and other very strong factors in our
favor we believe that the range of loss in this case is between $0 and $1,500,000 plus interest
(the amount of the undocumented and unsupported claim from the claimant). We do not believe that
an unfavorable outcome in this case is probable at this point and as such have not provided an
accrual. We will disclose the nature of this product liability case in future filings and we will
also disclose our estimate of the potential range of loss.

As
noted in prior filings, this matter is fully covered by insurance and as such there is no real
exposure to the Company. We will continue to monitor this case and in the event we determine that
an unfavorable outcome is probable we will book a liability in accordance with SFAS 5 and
independently will make an assessment of the recoverability of the loss from our insurance company.

Mr. Nili Shah

U.S. Securities and Exchange Commission

December 20, 2005

Page 3

Item 9A,
Controls and Procedures, page 50

    2.

    We have reviewed your response to prior comment 3 in our letter dated September 13, 2005.
Please remove the last sentence of your proposed disclosure which states, “Based on the
evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as
of the end of such period, the Company’s disclosure controls and procedures are not adequate
and effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that is files or submits
under the Exchange Act,” as it repeats the second sentence of
your proposed disclosures.

RESPONSE: We agree that the sentence you referred to is redundant and as such we will remove the
sentence you referenced in future filings.

Form 10-Q for the quarter ended March 31, 2005

Consolidated
Statements of Cash Flows, page 5

    3.

    We have reviewed your response to prior comment 4 in our letter dated September 13, 2005.
You have acknowledged that bank financing fees should have been presented in your statements of
cash flows as financing activities, and the amortization of these fees as operating. We note
the impact to operating and financing activities for the six months ended June 30, 2005 was 47%
and 13%, respectively; for the three months ended March 31, 2005, 21% and 22%, respectively;
and for the year ended December 31, 2004, 106% and 32%, respectively. Given these percentages,
we are not persuaded that these reclassifications are immaterial. Therefore, please amend your
December 31, 2004 Form 10-K and subsequent 2005 Forms 10Q to
correct these classifications.

RESPONSE: SEC Staff Accounting Bulletin: No. 99-Materiality (“SAB No. 99”) “expresses the views of
the staff that exclusive reliance on quantitative benchmarks to assess materiality in preparing
financial statements...is inapproprate”. While we acknowledge that the impact of this
reclassification is high quantitatively, we believe the following qualitative facts far outweigh
the quantitative facts.

A matter is “material” if there is a substantial likelihood that a reasonable person would consider
it important. In its Concepts Statement 2, the FASB stated the essence of the concept of
materiality as follows: “The omission or misstatement of an item in a financial report is material
if, in the light of surrounding circumstances, the magnitude of the item is

Mr. Nili Shah

U.S. Securities and Exchange Commission

December 20, 2005

Page 4

such that it is probable that the judgment of a reasonable person relying upon the report would
have been changed or influenced by the inclusion or correction of the
item.” Whether the Company reported net cash provided by
operating activities in 2004 of $423,000 or $0 is not relevant as both
are perceived to be breakeven results. Therefore, any significant
adjustments would be quantitatively material to the Company’s
2004 reported net cash provided by operating activities.

The users of our financial statements:

Our
banks are interested in EBITDA, debt and interest coverages and net income. This
reclassification adjustment has no impact on any of our financial covenants with our banks and
as such is not significant to the banks;

Institutional investors are generally interested in long term earnings and the future
prospects of the Company. We do not believe that their judgment would be influenced by the
misstatement;

Our
directors and employees hold more than 50% of the Company’s
stock. We believe the directors and employees are also interested in current
and long term earnings. We do not believe that their judgment would be influenced by the
misstatement.;

Our vendors are interested in the strength of the balance sheet and our ability to pay timely
for materials and services. As we disclosed quite prominently in our 2004 Form 10-K and in
our 2005 Forms 10-Q we have a new credit facility which provides for increased liquidity from
our prior facility. We believe that this is the most important factor to our vendors and as
such we do not believe that their judgment would be influenced by the
misstatement.;

Other shareholders — based on questions posed to the Company by other shareholders they are
interested in orders, shipments and net earnings. We do not believe that their judgment would
be influenced by the misstatement.;

The
Company is not followed by any analysts so no judgement could be influenced by an
analyst’s report.

There is not a substantial likelihood that the misstatement would have been viewed by a reasonable
investor as having significantly altered the “total mix” of information made available in the
statements.

Other qualitative factors:

The misstatement has no impact on management compensation.

Mr. Nili Shah

U.S. Securities and Exchange Commission

December 20, 2005

Page 5

The misstatement did not change the compliance with bank covenants or any other contractual
requirements.

The misstatement did not have any affect on net income.

The misstatement does not conceal any unlawful transactions.

CONCLUSION:

The Company believes that the qualitative factors outweigh the quantitative factors with regard to
the proposed restatement adjustments and that these adjustments are not material to all financial
statements, would not be considered significant or important to a financial statement user, and
would not change an investor’s evaluation of the Company’s financial position or performance. The
overall tone of SAB No. 99 stresses the importance of the qualitative factors in evaluating the
materiality of an adjustment. Based on these factors, the Company concludes that restatement
adjustments are not material to the financial statements.

We have
corrected the classifications on these items in our September 30, 2005 10-Q. We will present these items correctly
on future filings but we have concluded based on the total analysis of quantitative and qualitative
facts that these reclassifications are not material and we do not need to restate past financial
statements.

Form 10-Q/A for the quarter ended June 30, 2005

Financial
Statements

7.
Gain on Investments, page 12

    4.

    We have reviewed your response to prior comment 5 in our letter dated September 12, 2005
and note your qualitative analysis. However, the error in the accounting for the
demutualization resulted in significant quantitative changes to net earnings (loss) before
income taxes and minority interest and net earnings, as you acknowledge, in 2001 and 2004.
Therefore, please amend your December 31, 2004 Form 10-K and subsequent 2005 Forms 10-Q to
correct this accounting.

Mr. Nili Shah

U.S. Securities and Exchange Commission

December 20, 2005

Page 6

RESPONSE: We concur that the quantitative changes to net earnings (loss) before income taxes and
minority interest and net earnings from the restatement adjustments
appear high. Whether the Company reported net income of $400,000 or
$200,000 was not relevant as both are perceived to be breakeven
results. The Company’s 2004 reported net income would be perceived
as breakeven, and as such, any significant adjustments would be
quantitatively material. However, SEC
Staff Accounting Bulletin: No. 99-Materiality (“SAB No. 99”) “expresses the views of the staff that
exclusive reliance on quantitative benchmarks to assess materiality in preparing financial
statements...is inappropriate”. We believe the following qualitative facts far outweigh the
quantitative facts.

A matter is “material” if there is a substantial likelihood that a reasonable person would consider
it important. In its Concepts Statement 2, the FASB stated the essence of the concept of
materiality as follows: “The omission or misstatement of an item in a financial report is material
if, in the light of surrounding circumstances, the magnitude of the item is such that it is
probable that the judgment of a reasonable person relying upon the report would have been changed
or influenced by the inclusion or correction of the item.”

The users of our financial statements:

Our bankers are interested in EBITDA, Debt and interest
coverage and net income. We believe their judgment
was not influenced by the misstatement since we did not fail any
covenants in 2004, and the proposed
restatement would not have impacted any covenants. In addition, we refinanced our debt with a
new bank in the first quarter of 2005 prior to releasing our Form 10-K. The misstatement had
no impact on our prior bank as their loans were paid in full upon execution of the refinancing
with our new bank. In addition, the misstatement has no impact on the covenant under our new
bank agreement. As a result we do not believe that their judgment would be influenced by the
misstatement,

Institutional investors are interested in long term earnings and the long term prospects of
the Company. We believe that the institutional investors perceived 2004 as a turn around
from several years of significant losses to a break even year. We do
not believe that their view of
our performance in 2004 would be impacted by the misstatement related to the demutualization.
Whether the Company reported net income of $200,000 or $400,000 was not relevant as both are perceived to be
breakeven results;

Directors
and employees who own more than 50% of the Company are also interested in current
and long term earnings. Their judgments were not influenced by the misstatement because it
did not affect their compensation and they looked at 2004 as a break even year (note that this
is how management described the results for 2004 in internal communications and at the annual
shareholders’ meeting),

Mr. Nili Shah

U.S. Securities and Exchange Commission

December 20, 2005

Page 7

Our vendors are interested in the strength of the balance sheet and our ability to pay timely
for materials and services. As we disclosed quite prominently in our
2004 Forms 10-K and in
our 2005 Forms 10-Q we have a new credit facility which provides for increased liquidity from
our prior facility. We believe that this is the most important factor to our vendors and as
such we do not believe that their judgment would be influenced by the
misstatement,

Other
shareholders — based on questions posed to the Company by other
shareholders, they are
interested in orders, shipments and net earnings. We do not believe that their judgment would
be influence