-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U3jX6B103BnVPJCFzCsaXI0KCH/GLnyrvSh7h+ZEf3wgJi0qCU9+qcTq3VZGVmSy ROfpqmSIgSLeOMf9gMAakQ== 0001110550-05-000128.txt : 20061031 0001110550-05-000128.hdr.sgml : 20061031 20050930170436 ACCESSION NUMBER: 0001110550-05-000128 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050930 DATE AS OF CHANGE: 20050930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVOTRONICS INC /DE/ CENTRAL INDEX KEY: 0000089140 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 160837866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-07109 FILM NUMBER: 051114923 BUSINESS ADDRESS: STREET 1: 1110 MAPLE ST CITY: ELMA STATE: NY ZIP: 14059 BUSINESS PHONE: 7166335990 MAIL ADDRESS: STREET 1: P O BOX 300 STREET 2: ELMA STATE: NY ZIP: 14059-0300 10QSB/A 1 tenqsba.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A Amendment No. 1 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - -- EXCHANGE ACT OF 1934 For the transition period from to --------------------- --------------------- Commission File No. 1 - 07109 SERVOTRONICS, INC. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 16-0837866 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1110 Maple Street, Elma, New York 14059-0300 -------------------------------------------- (Address of principal executive offices) 716-655-5990 ------------ (Issuer's telephone number, including area code) Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at August 31, 2005 - ---------------------------- ------------------------------------- Common Stock, $.20 par value 2,492,901 Transitional Small Business Disclosure Format (Check one): Yes ; No X ------ ------ -1-
INDEX PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements (Unaudited) a) Independent Accountants' Report 3 b) Consolidated balance sheet, June 30, 2005 4 c) Consolidated statement of operations for the three and six months ended June 30, 2005 and 2004 5 d) Consolidated statement of cash flows for the six months ended June 30, 2005 and 2004 6 e) Notes to consolidated financial statements 7 Item 2. Management's Discussion and Analysis or Plan of Operation 11 Item 3. Controls and Procedures 13 PART II. OTHER INFORMATION Item 6. Exhibits 14 Signatures 15
-2- EXPLANATORY NOTE Due to the circumstances described in Part I, Item 3 regarding internal control procedures and deficiencies relating to payroll disbursements, our predecessor independent registered public accounting firm was unable to complete a review of the interim unaudited financial statements included in the Form 10-QSB for the quarter ended June 30, 2005 that was previously filed on August 22, 2005. The accompanying financial statements filed with this amended 10-QSB/A now comply with the requirements of Item 310(b) of Regulation S-B as it relates to interim financial statements. This form 10-QSB/A contains no changes in the financial statements from the previously filed 10-QSB for period ended June 30, 2005. PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (UNAUDITED) - ------ -------------------------------- Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders Servotronics, Inc. We have reviewed the accompanying balance sheet of Servotronics, Inc. as of June 30, 2005 and the related consolidated statement of operations for the three and six month periods ended June 30, 2005, and the related consolidated statement of cash flows for the six months ended June 30, 2005. These interim financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the Public Company Accounting Oversight Board. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America. /s/Freed Maxick & Battaglia, CPAs, P.C. Buffalo, New York September 29, 2005 -3-
SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ($000's omitted except per share data) (Unaudited) June 30, 2005 ------------- Assets Current assets: Cash $ 2,770 Accounts receivable 3,588 Inventories 6,435 Prepaid income taxes 14 Deferred income taxes 471 Other assets 1,267 ------------ Total current assets 14,545 ------------ Property, plant and equipment, net 6,407 Other non-current assets 554 ------------ $ 21,506 ============ Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 381 Accounts payable 707 Accrued employee compensation and benefit costs 855 Other accrued liabilities 115 Accrued income taxes 65 ------------ Total current liabilities 2,123 ------------ Long-term debt 5,294 Deferred income taxes 434 Other non-current liability 304 Shareholders' equity: Common stock, par value $.20; authorized 4,000,000 shares; Issued 2,614,506 shares 523 Capital in excess of par value 13,033 Retained earnings 2,575 Accumulated other comprehensive loss (125) ------------- 16,006 Employee stock ownership trust commitment (2,135) Treasury stock, at cost 121,605 shares (520) ------------- Total shareholders' equity 13,351 ------------ $ 21,506 ============ See notes to consolidated financial statements and independent accountant's report -4-
SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS ($000's omitted except per share data) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 --------- --------- --------- ---------- Net revenues $ 6,136 $ 5,640 $ 11,819 $ 10,968 Costs and expenses: Cost of goods sold, exclusive of depreciation 4,617 4,145 8,867 8,142 Selling, general and administrative 990 951 1,996 1,832 Interest 48 36 96 72 Depreciation and amortization 170 165 337 327 --------- --------- --------- ---------- 5,825 5,297 11,296 10,373 --------- --------- --------- ---------- Income before income taxes 311 343 523 595 Income tax provision 116 128 194 222 --------- --------- --------- ---------- Net income $ 195 $ 215 $ 329 $ 373 ========= ========= ========= ========== Income Per Share: Basic - ----- Net income per share $ 0.09 $ 0.11 $ 0.16 $ 0.18 ========= ========= ========= ========== Diluted - ------- Net income per share $ 0.09 $ 0.10 $ 0.15 $ 0.18 ========= ========= ========= ========== See notes to consolidated financial statements and independent accountant's report -5-
SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS ($000's omitted) (Unaudited) Six Months Ended June 30, 2005 2004 ---- ---- Cash flows related to operating activities: Net income $ 329 $ 373 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 337 327 Change in assets and liabilities - Accounts receivable (254) (748) Inventories 406 25 Prepaid income taxes (14) - Other assets 277 214 Other current assets (17) 3 Accounts payable (88) 277 Accrued employee compensation & benefit costs 50 162 Accrued income taxes (2) 63 Other accrued liabilities (37) 121 ---------- --------- Net cash provided by operating activities 987 817 --------- --------- Cash flows related to investing activities: Capital expenditures - property, plant & equipment (217) (213) ---------- ---------- Net cash used in investing activities (217) (213) ---------- ---------- Cash flows related to financing activities: Principal payments on long-term debt (106) (202) ---------- ---------- Net cash used in financing activities (106) (202) ---------- ---------- Net increase in cash 664 402 Cash at beginning of period 2,106 1,506 --------- --------- Cash at end of period $ 2,770 $ 1,908 ========= ========= See notes to consolidated financial statements and independent accountant's report -6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($000 omitted in tables except for per share data) 1. Basis of presentation --------------------- The consolidated financial statements include the accounts of Servotronics, Inc. (the "Company") and its majority owned subsidiaries. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. The financial statements should be read in conjunction with the annual report and the notes thereto. 2. Summary of risk factors and significant accounting policies ------------------------------------------------------------ Risk factors - ------------ The aviation and aerospace industries as well as markets for the Company's consumer products are facing new and evolving challenges on a global basis. The success of the Company depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, and other risk factors. In addition, uncertainties in today's global economy, global competition, the effect of terrorism, difficulty in predicting defense and other government appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company's customers to fund long-term purchase programs, volatile market demand and the continued market acceptance of the Company's advanced technology and cutlery products make it difficult to predict the impact on future financial results. Revenue recognition - ------------------- The Company's revenues are recognized when the risks and rewards of ownership and title to the product are transferred to the customer as units are shipped and as terms and conditions of purchase orders are met. 3. Inventories ----------- June 30, 2005 ------------- Raw materials and common parts $ 3,271 Work-in-process 2,457 Finished goods 955 --------- 6,683 Less common parts expected to be used after one year (248) ---------- $ 6,435 ========= Inventories are stated at the lower of standard cost or net realizable value. Cost includes all cost incurred to bring each product to its present location and condition, which approximates actual cost (first-in, first-out). Market provisions in respect of net realizable value and obsolescence are applied to the gross value of the inventory. Pre-production and start-up costs are expensed as incurred. -7- 4. Property, plant and equipment ----------------------------- June 30, 2005 ------------- Land $ 25 Buildings 6,487 Machinery, equipment and tooling 10,563 -------- 17,075 Less accumulated depreciation (10,668) ---------- $ 6,407 ========= Property, plant and equipment includes land and building under a $5,000,000 capital lease which can be purchased for a nominal amount at the end of the lease term. As of June 30, 2005, accumulated amortization on the building amounted to approximately $1,450,000. The associated current and long-term liabilities are discussed in footnote 5 to the consolidated financial statements. The Company believes that it maintains property and casualty insurance in amounts adequate for the risk and nature of its assets and operations and which are generally customary in its industry. 5. Long-term debt --------------
June 30, 2005 -------------- Industrial Development Revenue Bonds; secured by a letter of credit from a bank with interest payable monthly at a floating rate (2.48% at June 30, 2005) $ 4,150 Term loan payable to a financial institution interest at LIBOR plus 2% (5.10% at June 30, 2005); quarterly principal payments of $17,500 commencing January 1, 2005; payable in full in the fourth quarter of 2009 465 Term loan payable to a financial institution interest at LIBOR plus 2% (5.39% at June 30, 2005) quarterly principal payments of $26,786 through the fourth quarter of 2011 697 Secured term loan payable to a government agency, monthly payments of approximately $1,455 with interest waived payable through second quarter of 2012 154 Secured term loan payable to a government agency monthly payments of $1,950 including interest fixed at 3% payable through fourth quarter of 2015 209 ---------- 5,675 Less current portion (381) ---------- $ 5,294 ==========
Industrial Development Revenue Bonds were issued by a government agency to finance the construction of the Company's headquarters/Advanced Technology facility. Annual sinking fund payments of $170,000 commenced December 1, 2000 and continue through 2013, with a final payment of $2,620,000 due December 1, 2014. The Company has agreed to reimburse the issuer of the letter of credit if there are draws on that letter of credit. The Company pays the letter of credit bank an annual fee of 1% of the amount secured thereby and pays the remarketing agent for the bonds an annual fee of .25% of the principal amount outstanding. The Company's interest under the facility capital lease has been pledged to secure its obligations to the government agency, the bank and the bondholders. -8- The Company also has a $1,000,000 line of credit on which there was no balance outstanding at June 30, 2005. 6. Common shareholders' equity ---------------------------
Common stock ------------ Accumulated Number Capital in other of shares excess of Retained Treasury Comprehensive comprehensive issued Amount par value earnings ESOP stock income loss ------------------------------------------------------------------------------------- Balance December 31, 2004 2,614,506 $523 $13,033 $2,246 ($ 2,135) ($ 520) ($125) ========= ==== ======= ===== ======= ======= ===== Comprehensive income Net income - - - $ 329 - - $ 329 - ----- Comprehensive income - - - - - - $ 329 - ---------- ---- ------ ------ -------- -------- ===== ---- Balance June 30, 2005 2,614,506 $523 $13,033 $2,575 ($ 2,135) ($ 520) ($125) ========= ==== ======= ====== ======== ======== =====
Earnings per share - ------------------ Basic earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period.
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net income $ 195 215 $ 329 $ 373 ====== ====== ====== ===== Weighted average common shares outstanding (basic) 2,071 2,048 2,071 2,048 Incremental shares from assumed conversions of stock options 65 52 69 32 Weighted average common shares outstanding (diluted) 2,136 2,100 2,140 2,080 Basic ----- Net income per share $ 0.09 $ 0.11 $ 0.16 $ 0.18 ======= ====== ====== ====== Diluted ------- Net income per share $ 0.09 $ 0.10 $ 0.15 $ 0.18 ======= ====== ====== ======
7. Business segments ----------------- The Company operates in two business segments, Advanced Technology Group (ATG) and Consumer Products Group (CPG). The Company's reportable segments are strategic business units that offer different products and services. The segments are composed of separate corporations and are managed separately. Operations in ATG involve the design, manufacture, and marketing of servo-control components (i.e., control valves, actuators, etc.) for government and commercial industrial applications. CPG's operations involve the design, manufacture and marketing of a variety of cutlery products for use by consumers and government agencies. The Company derives its primary sales revenue from domestic customers, although a significant portion of finished products are for foreign end use. -9-
Six Month Advanced Consumer Period Ended Technology Products June 30, 2005 Group Group Consolidated ------------- ----- ----- ------------ Revenues from unaffiliated customers $ 6,364 $ 5,455 $ 11,819 ========= ========= ========== Profit $ 973 $ 351 $ 1,324 ========= ========= Depreciation and amortization (337) Interest expense (96) General corporate expense (368) ----------- Income before income taxes $ 523 ========== Six Month Advanced Consumer Period Ended Technology Products June 30, 2004 Group Group Consolidated ------------- ----- ----- ------------ Revenues from unaffiliated customers $ 5,329 $ 5,639 $ 10,968 ========= ========= ========== Profit $ 782 $ 476 $ 1,258 ========= ========= Depreciation and amortization (327) Interest expense (72) General corporate expense (264) ----------- Income before income taxes $ 595 ========== Three Month Advanced Consumer Period Ended Technology Products June 30, 2005 Group Group Consolidated ------------- ----- ----- ------------ Revenues from unaffiliated customers $ 3,494 $ 2,642 $ 6,136 ========= ========= ========== Profit $ 560 $ 153 $ 713 ========= ========= Depreciation and amortization (170) Interest expense (48) General corporate expense (184) ----------- Income before income taxes $ 311 ========== Three Month Advanced Consumer Period Ended Technology Products June 30, 2004 Group Group Consolidated ------------- ----- ----- ------------ Revenues from unaffiliated customers $ 2,658 $ 2,982 $ 5,640 ========= ========= ========== Profit $ 384 $ 292 $ 676 ========= ========= Depreciation and amortization (165) Interest expense (36) General corporate expense (132) ----------- Income before income taxes $ 343 ==========
-10- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - ------- --------------------------------------------------------- The following table sets forth for the period indicated the percentage relationship of certain items in the consolidated statement of operations to net revenues, and the percentage increase or decrease of such items as compared to the indicated prior period.
Relationship to Period to Relationship to Period to net revenues period $ net revenues period $ three months ended increase six months ended increase June 30, (decrease) June 30, (decrease) 2005 2004 05-04 2005 2004 05-04 ---- ---- ----- ---- ---- ----- Net revenues Advanced Technology Group 56.9% 47.1% 31.5% 53.8% 48.6% 19.4% Consumer Products Group 43.1% 52.9% (11.4%) 46.2% 51.4% (3.3%) ---- ----- ----- 100.0% 100.0% 8.8% 100.0% 100.0% 7.8% Cost of goods sold, exclusive of depreciation 75.2% 73.5% 11.4% 75.0% 74.2% 8.9% ---- ---- ----- ----- Gross profit 24.8% 26.5% 1.6% 25.0% 25.8% 4.5% ---- ---- ----- ----- Selling, general and administrative 16.1% 16.9% 4.1% 16.9% 16.7% 9.0% Interest 0.8% 0.6% 33.3% 0.8% 0.7% 33.3% Depreciation and amortization 2.8% 2.9% 3.0% 2.9% 3.0% 3.1% --- --- ---- ---- 19.7% 20.4% 4.9% 20.6% 20.4% 8.9% ---- ---- ----- ----- Income before income taxes 5.1% 6.1% (9.3%) 4.4% 5.4% (12.1%) Income tax provision 1.9% 2.3% (9.4%) 1.6% 2.0% (12.6%) --- --- ---- ---- Net income 3.2% 3.8% (9.3%) 2.8% 3.4% (11.8%) === === ==== ====
Management Discussion - --------------------- During the six month period ended June 30, 2005 and for the comparable period ended June 30, 2004, approximately 47% of the Company's revenues were derived from contracts with agencies of the U.S. Government or their prime contractors and their subcontractors. Total government sales are anticipated to decrease in 2005 as a result of the scheduled completion of a significant government order to the CPG as previously reported. The Company's business is performed under fixed price contracts. Allocations of defense expenditures and government involvement in overseas military operations have had an impact on the Company's financial results. Sales of products sold for government applications have increased approximately 9% for the six month period ended June 30, 2005 compared to the corresponding period of 2004. While the Company remains optimistic in relation to these opportunities, it recognizes that sales to the government are affected by defense budgets, the foreign policies of the U.S. and other nations, the level of military operations and other factors and, as such, it is difficult to predict the impact on future financial results. The Company's commercial business is affected by such factors as uncertainties in today's global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, market demand and acceptance both for the Company's products and its customers' products which incorporate Company-made components. Results of Operations - --------------------- The Company's consolidated results of operations for the six month period ended June 30, 2005 showed an approximate $851,000 or 7.8% increase in net revenues to $11,819,000 with a decrease in net income of approximately $44,000 or 11.8% when compared to the same six month period of 2004. The Company's consolidated results of operations for the three month period ended June 30, 2005 showed an approximate $496,000 or 8.8% increase in net revenues to $6,136,000 with a decrease in net income of approximately $20,000 or 9.3% when compared to the same three month period of 2004.The increase in revenues is primarily attributed to both increased government shipments and commercial shipments at the Advanced Technology Group. -11- Gross profit for the six and three month periods ended June 30, 2005 remained consistent as a percentage of sales when compared to the same period in 2004. The Company continues to incur costs associated with prototype and preproduction activities that are expensed in the period incurred. These costs as well as product mix can contribute to fluctuations in gross profit from period to period. Selling, general and administrative (SG&A) costs increased approximately 9.0% when compared to the same six month period in 2004 and increased 4.1% for the three month period ended June 30, 2005 when compared to the same three month period in 2004. The increase is primarily attributable to costs incurred for professional services and corporate governance necessitated by the Sarbanes-Oxley Act as well as increased marketing of the expanded sales effort of the Company. The Company expects these costs to continue to be significant components of SG&A in the future. Interest expense increased for the six months and quarter ended June 30, 2005 when compared to the same period in 2004 primarily due to an increase in institutional debt and market driven interest rates. The Company continues to take advantage of the tax benefit for extraterritorial sales as well as the new manufacturing deductions allowable under the American Jobs Creation Act of 2004, which is reflected in the effective tax rate of approximately 37%. Liquidity and Capital Resources - ------------------------------- The Company's primary liquidity and capital requirements relate to the Company's working capital needs; primarily inventory, accounts receivable, capital investments in facilities, machinery, tools/dies and equipment and principal/interest payments on indebtedness. The Company's primary sources of liquidity in 2005 have been from positive cash flows from operations. These cash flows have been positively affected by efforts in inventory control and satisfactory payment terms with suppliers and customers. As of June 30, 2005 there are no material commitments for capital expenditures. The Company also has a $1,000,000 line of credit on which there was no balance outstanding at June 30, 2005. Item 3. CONTROLS AND PROCEDURES - ------- ----------------------- (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of June 30, 2005, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Interim Chief Financial Officer ("ICFO"), of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, the CEO and ICFO concluded that as more fully described below, as of June 30, 2005, our disclosure controls and procedures were not effective in timely alerting them to the material information relating to the Company (or the Company's consolidated subsidiaries) required to be included in our periodic filings with the SEC, such that the information relating to the Company, required to be disclosed in SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our CEO and ICFO, as appropriate to allow timely decisions regarding required disclosure. (b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. Other than as described below, there has been no change in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. -12- (c) IDENTIFIED CONTROLS AND PROCEDURE WEAKNESSES FOR PAYROLL DISBURSEMENTS. As previously reported the Company discovered certain unauthorized disbursements by a senior finance officer and reported this discovery to all appropriate parties including the Company's Attorney, the Audit Committee, the Company's Independent Auditors, the SEC, the AMEX and the District Attorney of Erie County, New York. An investigation was immediately initiated and is continuing. Although the Company has not yet received a definitive investigation report it appears that such unauthorized disbursements by this individual have occurred over a period of 22 1/2 years and amounts to, on average, approximately $107,000 per year after tax, for a total of approximately $2,400,000 after tax or $4,000,000 before tax. The above amounts were expensed as incurred and the associated tax benefits were received. Therefore, all future restitution, net of recovery costs, will be reflected as additional income in the time periods they are received. The subject individual, through his attorney, has offered to make restitution to the extent possible. The Company has a $1,000,000 crime policy with a $10,000 deductible. The individual is no longer an employee of the Company and, to date, has cooperated with the investigation. At this stage, the Company cannot reliably forecast its total net recovery. We are currently not aware of any other weaknesses in our internal controls and procedures, other than the weakness relative to payroll disbursements as described above. In connection with this investigation, we will perform further evaluation and implement the appropriate remedial action. Notwithstanding the weakness in our controls and procedures relative to payroll disbursements, management believes that the information contained in this Form 10-QSB/A, including the financial statements contained herein, present, in all material respects, our financial condition and results of operations as of the dates so indicated. We are only in the initial phases of establishing compliance under Section 404 of the Sarbanes-Oxley Act, which now will not be effective for our Company until our fiscal year ending December 31, 2007. We anticipate expending significant additional resources to evaluate and maintain appropriate controls and procedures and to prepare the required financial and other information during the process of establishing our Section 404 Sarbanes-Oxley controls and procedures. (d) LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS. Our management, including the CEO and ICFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, and/or the degree of compliance with the policies or procedures may change. -13- PART II OTHER INFORMATION Item 6. EXHIBITS 10(A)(1) Employment contract for Dr. Nicholas D. Trbovich, Chief Executive Officer (Incorporated by reference to Exhibit 10(A)(1) to the Company's current report on Form 8-K filed on August 18, 2005). 10(A)(4) Employment contract for Nicholas D. Trbovich, Jr., Vice President (Incorporated by reference to Exhibit 10(A)(4) to the Company's current report on Form 8-K filed on August 18, 2005). 31.1 Certification of Interim Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. FORWARD-LOOKING STATEMENTS In addition to historical information, certain sections of this Form 10-QSB/A contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company's capital resources and profitability. Forward-looking statements involve numerous risks and uncertainties. The Company derives a material portion of its revenues from contracts with agencies of the U.S. Government or their prime contractors. The Company's business is performed under fixed price contracts and the following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: uncertainties in today's global economy and global competition, and difficulty in predicting defense appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company's customers to fund long-term purchase programs, and market demand and acceptance both for the Company's products and its customers' products which incorporate Company-made components. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-QSB/A. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update forward-looking statements. -14- SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 29, 2005 SERVOTRONICS, INC. By: /s/ Dr. Nicholas D. Trbovich, Chief Executive Officer ------------------------------------------------------------ Dr. Nicholas D. Trbovich Chief Executive Officer By: /s/ Cari L. Jaroslawsky, Interim Chief Financial Officer ------------------------------------------------------------ Cari L. Jaroslawsky Interim Chief Financial Officer (effective 8/9/2005) By: /s/ Raymond C. Zielinski, Vice President ------------------------------------------------------------ Raymond C. Zielinski Vice President -15- EX-31.1 3 exthirtyoneone.txt Exhibit 31.1 CERTIFICATION I, Cari L. Jaroslawsky, certify that: 1. I have reviewed this quarterly report on Form 10-QSB/A of Servotronics, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer 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 small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: September 29, 2005 By: /s/ Cari L. Jaroslawsky, Interim Chief Financial Officer -------------------------------------------------------- Cari L. Jaroslawsky Interim Chief Financial Officer (effective 8/9/2005) EX-31.2 4 exthirtyonetwo.txt Exhibit 31.2 CERTIFICATION I, Nicholas D. Trbovich, certify that: 1. I have reviewed this quarterly report on Form 10-QSB/A of Servotronics, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer 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 small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: September 29, 2005 By: /s/ Nicholas D. Trbovich, Chief Executive Officer --------------------------------------------- Nicholas D. Trbovich Chief Executive Officer EX-32.1 5 exthirthytwoone.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Servotronics, Inc. (the "Company"), on Form 10-QSB/Afor the quarter ended June 30, 2005, I hereby certify solely for the purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. Other than the completion of a review of the interim financial statements contained within this report by an independent accountant using professional review standards and procedures, the quarterly report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934, and 2. The information contained in the quarterly report fairly represents, in all materials respects, the financial condition and results of operations of the Company. Date: September 29, 2005 /s/Cari L. Jaroslawsky, Interim Chief Financial Officer ------------------------------------------------------- Cari L. Jaroslawsky Interim Chief Financial Officer (effective 8/9/2005) EX-32.2 6 exthirtytwotwo.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Servotronics, Inc. (the "Company"), on Form 10-QSB/Afor the quarter ended June 30, 2005, I hereby certify solely for the purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. Other than the completion of a review of the interim financial statements contained within this report by an independent accountant using professional review standards and procedures, the quarterly report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934, and 2. The information contained in the quarterly report fairly represents, in all materials respects, the financial condition and results of operations of the Company. Date: September 29, 2005 /s/Nicholas D. Trbovich, Chief Executive Officer ------------------------------------------------ Nicholas D. Trbovich ` Chief Executive Officer CORRESP 7 filename7.txt [GRAPHIC EXCLUDED] JAECKLE FLEISCHMANN & MUGEL, LLP ATTORNEY AT LAW 12 FOUNTAIN PLAZA, BUFFALO, NEW YORK 14202-2292 TEL 716.856.0600 FAX 716.856.0432 Michael C. Donlon Direct Dial 716-843-3881 Associate E-mail: mdonlon@jaeckle.com September 30, 2005 Mail Stop 7010 Securities and Exchange Commission Washington, D.C. 20549 Attention: John Cash, Accounting Branch Chief RE: SERVOTRONICS, INC. (THE "COMPANY") FORM 10-KSB FOR FISCAL YEAR ENDED DECEMBER 31, 2004 FORM 10-QSB FOR FISCAL QUARTER ENDED MARCH 31, 2005 FILE NO. 1-07109 Ladies and Gentlemen: This letter is being filed with the Company's quarterly report on Form 10-QSB/A to respond to comments made by the Securities and Exchange Commission staff (the "Staff") in its comment letter dated July 26, 2005. We have transcribed the Staff's comments below, and each of the Staff's comments is followed by the Company's responses. FORM 10-KSB FOR FISCAL YEAR ENDED DECEMBER 31, 2004 MD&A, Liquidity and Capital Resources, page 12 - ---------------------------------------------- COMMENT 1: REVISE FUTURE ANNUAL AND QUARTERLY FILINGS TO DISCLOSE AND DISCUSS CHANGES IN CASH FLOWS DURING EACH PERIOD, INCLUDING THE REASONS WHY ACCOUNTS RECEIVABLE APPEAR TO BE INCREASING AT A FASTER RATE THAN REVENUES. Response: The Company has reviewed this comment and will provide appropriate disclosure in future annual and quarterly filings. Controls and Procedures, page 14 - -------------------------------- COMMENT 2: WE NOTE YOUR STATEMENT THAT YOUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CONCLUDED THAT THE "DISCLOSURE CONTROLS AND PROCEDURES ARE ADEQUATE TO ENSURE THAT MATERIAL INFORMATION RELATING TO THE COMPANY IS MADE KNOWN TO MANAGEMENT BY OTHERS WITHIN THE COMPANY." PLEASE BE ADVISED THAT YOUR OFFICERS ARE REQUIRED TO CONCLUDE IF YOUR DISCLOSURE CONTROLS AND PROCEDURES ARE EFFECTIVE. PLEASE CONFIRM TO US THAT YOUR OFFICER'S HAVE CONCLUDED THAT YOUR DISCLOSURE CONTROLS AND PROCEDURES ARE EFFECTIVE AND REVISE FUTURE ANNUAL AND QUARTERLY FILINGS TO CLARIFY THEIR CONCLUSIONS. Securities and Exchange Commission September 30, 2005 Page 2 Response: The Company has disclosed the conclusion of its chief executive officer and interim chief financial officer as to the effectiveness (rather than the adequacy) of the Company's disclosure controls and procedures under Part I, Item 3 of the Company's quarterly report on Form 10-QSB/A for the period ended June 30, 2005. The Company's future annual and quarterly filings will likewise comply with this comment. COMMENT 3: ALSO, PLEASE BE ADVISED THAT IF YOU DEFINE DISCLOSURE CONTROLS AND PROCEDURES, YOU SHOULD INCLUDE A FULL DEFINITION. IN THIS REGARD, PLEASE CONFIRM TO US, AND REVISE YOUR DISCLOSURE IN FUTURE ANNUAL AND QUARTERLY FILINGS, TO CLARIFY, IF TRUE, THAT YOUR OFFICERS CONCLUDED THAT YOUR DISCLOSURE CONTROLS AND PROCEDURES ARE EFFECTIVE TO ENSURE THAT INFORMATION REQUIRED TO BE DISCLOSED BY YOU IN THE REPORTS THAT YOU FILE OR SUBMIT UNDER THE EXCHANGE ACT IS RECORDED, PROCESSED, SUMMARIZED AND REPORTED, WITHIN THE TIME PERIODS SPECIFIED IN THE COMMISSION'S RULES AND FORMS AND TO ENSURE THAT INFORMATION REQUIRED TO BE DISCLOSED BY YOU IN THE REPORTS YOU FILE OR SUBMIT UNDER THE EXCHANGE ACT IS ACCUMULATED AND COMMUNICATED TO YOUR MANAGEMENT, INCLUDING YOUR PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER, OR PERSONS PERFORMING SIMILAR FUNCTIONS, AS APPROPRIATE TO ALLOW TIMELY DECISIONS REGARDING REQUIRED DISCLOSURE. ALTERNATIVELY, YOUR OFFICERS MAY CONCLUDE THAT YOUR DISCLOSURE CONTROLS AND PROCEDURES ARE EFFECTIVE, WITHOUT DEFINING THEM. Response: Disclosure responding to this comment has been added under Part I, Item 3 of the Company's quarterly report on Form 10-QSB/A for the period ended June 30, 2005. The Company's future annual and quarterly filings will likewise comply with this comment. Note 1 -- Summary of significant accounting policies, page F-6 - -------------------------------------------------------------- COMMENT 4: WE NOTE YOUR ACCOUNTING POLICIES ARE "GENERALLY" FOLLOWED FOR VALUING INVENTORIES, ESTIMATING USEFUL LIVES OF DEPRECIABLE PROPERTIES, AND RECOGNIZING REVENUES. IF THERE ARE EXCEPTIONS TO YOUR ACCOUNTING POLICIES, TELL US WHAT THEY ARE AND REVISE FUTURE ANNUAL AND QUARTERLY FILINGS TO DISCLOSE THEM, OTHERWISE DELETE THE TERMS GENERALLY AND PRINCIPALLY FROM YOUR POLICIES. Securities and Exchange Commission September 30, 2005 Page 3 Response: The Company's inventories are stated at the lower of standard cost or net realizable value. Revenue is recognized when the risks and rewards of ownership and title to the product are transferred to the customer as units are delivered or obligations are satisfied. The Company will delete the terms generally and principally when discussing its significant accounting policies with respect to inventory valuation and revenue recognition in future annual and quarterly filings unless the Company has exceptions to the policy stated in the preceding sentences in which event the Company will disclose the exceptions. The Company will also delete the term "generally" when discussing its significant accounting policies with respect to the estimated useful lives of depreciable properties in future annual and quarterly filings. COMMENT 5: PROVIDE US ADDITIONAL INFORMATION REGARDING WHEN AND HOW YOU RECOGNIZE REVENUE AS TERMS AND CONDITIONS OF PURCHASE ORDERS ARE MET. TELL US THE GENERAL NATURE OF THESE TERMS AND TELL US THE CIRCUMSTANCES WHEN THESE TERMS ARE INCLUDED IN PURCHASE ORDERS. IN ADDITION, BASED ON YOUR DISCLOSURES IN BUSINESS REGARDING YOU PRODUCING UNIQUE PRODUCTS BASED ON SPECIFICATIONS PROVIDED BY CUSTOMERS AND OPERATING UNDER LONG-TERM CONTRACTS, TELL US WHEN AND HOW YOU RECOGNIZE REVENUE IN EACH SUCH CIRCUMSTANCE. Response: Revenue is recognized when the risks and rewards of ownership and title to the product are transferred to the customer as units are delivered or obligations are satisfied. Currently, under one long-term contract, revenue is recognized using the percentage of completion, cost-to-cost method of accounting which accounts for an immaterial percentage of total revenues. Included in other current assets are unbilled receivables related to revenue recognized under the percentage of completion method. FORM 10-QSB FOR FISCAL QUARTER ENDED MARCH 31, 2005 Note 7 -- Business segments - --------------------------- COMMENT 6: REVISE FUTURE QUARTERLY FILINGS TO PROVIDE COMPARATIVE SEGMENT DISCLOSURES (I.E. FOR THE PERIOD ENDED MARCH 31, 2004). Response: Disclosure responding to this comment has been included in Note 7, Business segments, to the consolidated financial statements in the Company's quarterly report on Form 10-QSB/A for the period ended June 30, 2005. Additionally, disclosure responding to this comment will be included in future annual and quarterly filings. Securities and Exchange Commission September 30, 2005 Page 4 As requested in your letter, the Company acknowledges that: * The Company is responsible for the adequacy and accuracy of the disclosure in the filings; * Staff comments or changes to disclosures in response to Staff comments do not foreclose the 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. If you have any questions about the matters in this letter, please call the undersigned at (716) 843-3881. Very truly yours, JAECKLE FLEISCHMANN & MUGEL, LLP By: /s/ Michael C. Donlon ----------------------------- Michael C. Donlon -----END PRIVACY-ENHANCED MESSAGE-----