U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
-
For the fiscal year ended December 31, 2003
TRANSITION REPORT UNDER 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.
----------------------------------------------------
(Name of small business issuer as specified in its charter)
Delaware 16-0837866
------------------------------- ----------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1110 Maple Street, Elma, New York 14059
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 716-655-5990
------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -----------------------
Common Stock, $.20 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Check whether 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 .
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
---
Issuer's revenues for its most recent fiscal year: $17,574,000
As of March 15, 2004 the aggregate market value of the voting common stock
held by non-affiliates of the registrant was $4,634,689.65 based on the average
of sales prices reported by the American Stock Exchange on that day.
As of March 15, 2004 the number of $.20 par value common shares outstanding
was 2,492,901.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-KSB
-------- -------------------
2003 Proxy Statement Part III
Transitional Small Business Disclosure Format. Yes . No X .
--- ---
PART I
------
Item 1. Description of Business
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General
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Servotronics, Inc. and its subsidiaries (collectively the "Registrant" or
the "Company") design, manufacture and market advanced technology products
consisting primarily of control components and consumer products consisting of
knives and various types of cutlery.
The Registrant was incorporated in New York in 1959. In 1972, the
Registrant was merged into a wholly-owned subsidiary organized under the laws of
the State of Delaware, thereby changing the Registrant's state of incorporation
from New York to Delaware.
Products
--------
Advanced Technology Products
----------------------------
The Registrant designs, manufactures and markets a variety of servo-control
components which convert an electrical current into a mechanical force or
movement and other related products. The principal servo-control components
produced include torque motors, electromagnetic actuators, proportional
solenoids, hydraulic valves, pneumatic valves and similar devices, all of which
perform the same general function. These are sold principally to the commercial
aerospace, missile, aircraft and government related industries.
To fill most of its orders for components, the Registrant must either
modify a standard model or design a new item in order to satisfy the customer's
particular requirements. The Registrant also produces unique products based on
specifications provided by its customers. The Registrant produces under
long-term contracts and other types of orders.
The Registrant also produces metallic seals of various cross-sectional
configurations. These seals fit between two surfaces, usually metal, to produce
a more secure and leak-proof joint. The Registrant manufactures these seals to
close tolerances from standard and special alloy steels. Ductile coatings are
often applied to the seals in order to increase their effectiveness.
-2-
From time to time, the Registrant has also produced other products of its
own and/or of a given design to meet customers' requirements.
Consumer Products
-----------------
The Registrant designs, manufactures and sells a variety of cutlery
products. These products include a wide range of kitchen knives such as steak,
carving, bread, butcher and paring knives for household use and for use in
restaurants, institutions and private industry, and pocket and other types of
knives for hunting, fishing and camping. The Registrant sells cutlery products
to the U.S. Government and related agencies. These products include machetes,
bayonets and other types of knives that are primarily for military use. The
Registrant also produces and markets other cutlery items such as carving forks
and various specialty tools such as putty knives, linoleum sheet cutters and
field knives. The Registrant manufactures its cutlery products from stainless or
high carbon steel in numerous styles, designs, models and sizes. Substantially
all of the Registrant's commercial cutlery related products are intended for the
medium to premium priced markets.
The Registrant sells many of its cutlery products under its own brand names
including "Old Hickory" and "Queen."
Sales, Marketing and Distribution
---------------------------------
Advanced Technology Products
----------------------------
The Registrant's advanced technology products are marketed throughout the
United States and are essentially non-seasonal in nature. These products are
sold to the United States Government, government prime contractors, government
subcontractors, commercial manufacturers and end users. Sales are made primarily
by the Registrant's professional staff and commissioned field engineering
representatives.
During the Registrant's last fiscal year, sales of advanced technology
products pursuant to subcontracts with prime or subcontractors for various
branches of the United States Government or pursuant to prime contracts directly
with the government accounted for approximately 30% of the Registrant's total
revenues as compared to 22% in 2002. In 2003, sales of advanced technology
products to each of Honeywell, Raytheon and United Technologies (including their
respective subsidiaries and/or divisions) exceeded 10% of Registrant's total
revenues. No other single customer represented more than 10% of the Company's
revenues in 2003 or 2002.
The Registrant's prime contracts and subcontracts with the United States
Government are subject to termination for the convenience of the Government. In
-3-
the event of such termination, the Registrant is ordinarily entitled to receive
payment for its costs and profits on work done prior to termination. Since the
inception of the Registrant's business, less than 1% of its Government contracts
have been terminated for convenience.
Consumer Products
-----------------
The Registrant's consumer products are marketed throughout the United
States. Consumer sales are moderately seasonal. Sales are to hardware,
supermarket, variety, department, discount, gift and drug stores. The
Registrant's Consumer Products Group also sells its cutlery products
(principally machetes, bayonets, survival knives and kitchen knives) to various
branches of the United States Government which accounted for approximately 12%
of the Registrant's total sales in 2003 and approximately 1% of total sales in
2002. The Registrant sells its products through its own sales personnel and
through independent manufacturers' representatives.
Business Segments
-----------------
Business segment information is presented in Note 10 of the accompanying
consolidated financial statements.
Intellectual Properties
-----------------------
The Company has rights under certain copyrights and registered domain
names. In the view of management, the Registrant's competitive position is not
dependent on patent protection.
Research Activities
-------------------
The amount spent by the Registrant in research and development activities
during its 2003 and 2002 fiscal years was not significant.
Environmental Compliance
------------------------
The Registrant does not anticipate that the cost of compliance with current
environmental laws will be material.
Manufacturing
-------------
The Registrant manufactures its consumer products in Franklinville, New
York and Titusville, Pennsylvania and its advanced technology products in Elma,
New York.
-4-
Raw Materials and Other Supplies
--------------------------------
The Registrant purchases raw materials and certain components for its
products from outside vendors. The Registrant is not generally dependent upon a
single source of supply for any raw material or component used in its
operations.
Competition
-----------
Although no reliable industry statistics are available to enable the
Registrant to determine accurately its relative competitive position with
respect to any of its products, the Registrant believes that it is a significant
factor with respect to certain of its servo-control components. The Registrant's
share of the overall cutlery market is not significant.
The Registrant encounters active competition with respect to its products
from numerous companies, many of which are larger in terms of manufacturing
capacity, financial resources and marketing organization. Its principal
competitors vary depending upon the customer and/or the products involved. The
Registrant believes that it competes primarily with more than 20 companies with
respect to its consumer products, in addition to foreign imports. To the
Registrant's knowledge, its principal competitors with regard to cutlery include
World Kitchen, Inc., Tramontina, Inc., Dexter-Russell Inc., W. R. Case & Sons
Cutlery Company, Imperial Schrade Corporation, Lifetime Hoan Corp. and Camillus
Cutlery Company.
The Registrant has many different competitors with respect to servo-control
components because of the nature of that business and the fact that these
products also face competition from other types of control components which, at
times, can accomplish the desired result.
The Registrant markets most of its products throughout the United States.
The Registrant believes that it competes in marketing its consumer products
primarily on the basis of price, quality and delivery, and its control products
primarily on the basis of operating performance, adherence to rigid
specifications, quality, price and delivery.
Employees
---------
The Registrant, at December 31, 2003, had approximately 222 employees of
which approximately 206 are full time. In excess of 82% of its employees are
engaged in production, inspection, packaging or shipping activities. The balance
are engaged in executive, engineering, administrative, clerical or sales
capacities.
-5-
Item 2. Description of Properties
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The Registrant's executive offices are located on premises leased by the
Registrant at 1110 Maple Street, Elma, a suburb of Buffalo, New York. The
Registrant owns and/or leases real property as set forth in the following table:
Principal Number of Approx.
Approx. product buildings and floor area
Location acreage manufactured type of (sq.feet)
construction
--------------------------------------------------------------------------------
Elma, New York 38.4 Advanced 1-concrete block/ 82,000
technology steel
products
Franklinville, 11.7 Cutlery products 1-tile/wood and
New York 1 concrete/metal 149,000
Titusville,
Pennsylvania .4 Cutlery products 2-brick 25,000
In Elma, New York, the Registrant leases approximately 38.4 acres of land
and a facility from a local industrial development agency. The lease is
accounted for as a capital lease and entitles the Registrant to purchase the
property for a nominal amount.
See the consolidated financial statements, including Note 8 thereto, for
further information with respect to the Registrant's lease commitments.
The Registrant possesses modern precision manufacturing and testing
equipment suitable for the development, manufacture, assembly and testing of its
advanced technology products. The Registrant designs and makes substantially all
of the tools, dies, jigs and specialized testing equipment necessary for the
production of the advanced technology products. The Registrant also possesses
automatic and semi-automatic grinders, tumblers, presses and miscellaneous metal
finishing machinery and equipment for use in the manufacture of consumer
products.
Item 3. Legal Proceedings
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There are no legal proceedings which are material to the Company currently
pending by or against the Company other than ordinary routine litigation
incidental to the business which is not expected to materially adversely affect
the business or earnings of the Company.
-6-
Item 4. Submission of Matters to a Vote of Security Holders
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Not applicable.
-7-
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
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(a) Price Range of Common Stock
---------------------------
The following table shows the range of high and low prices for
the Registrant's common stock as reported by the American
Stock Exchange for 2003 and 2002.
HIGH LOW
---- ---
2003
Fourth Quarter $ 3.55 $ 2.00
Third Quarter 2.45 2.10
Second Quarter 2.28 1.85
First Quarter 3.75 2.25
2002
Fourth Quarter $ 4.00 $ 3.30
Third Quarter 4.40 3.60
Second Quarter 5.20 4.40
First Quarter 5.22 4.70
(b) Approximate number of holders of common stock
Title Approximate number of
of record holders (as of
class December 31, 2003)
----- ------------------
Common Stock, $.20 par value per share 586
(c) Dividends on common stock
No cash dividends were paid in 2003 or 2002.
-8-
Item 6. Management's Discussion and Analysis or Plan of Operation
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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.
Period to
Relationship to period
net revenues year increase
ended (decrease)
December 31, year ended
2003 2002 2003-2002
---- ---- ---------
Net revenues:
Advanced technology products 58.5% 65.4 % 0.7%
Consumer products 41.5 34.6 35.1
----- ----- -----
100.0 100.0 12.6
Cost of goods sold, exclusive of depreciation 74.4 77.5 8.0
----- ----- -----
Gross profit 25.6 22.5 28.4
----- ----- -----
Selling, general and administrative 18.6 19.1 9.9
Interest 0.9 1.3 (18.4)
Depreciation and amortization 3.8 4.2 1.4
----- ----- -----
23.3 24.6 7.0
----- ----- -----
Income (loss) before income taxes 2.3 (2.1) 226.1
Income tax provision (benefit) 0.9 (0.6) 263.4
----- ----- -----
Net income (loss) 1.4% (1.5)% 210.9%
===== ===== =====
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Management Discussion
---------------------
During the year ended December 31, 2003 and for the comparable period ended
December 31, 2002, approximately 42% and 23% respectively of the Company's
revenues were derived from contracts with agencies of the U.S. Government or
their prime contractors and their subcontractors. Continued government
involvement in military operations overseas has had a direct impact on the
financial results in both the Advanced Technology and Consumer Product's
markets. Sales of products sold for government applications have increased
approximately $3,800,000 over 2002 and are expected to remain strong. While the
Company remains optimistic in relation to these opportunities, it recognizes
that sales to the government are affected by defense budgets, U.S. and foreign
policy and the level of military operations and as such, it is difficult to
predict the impact on future financial results.
See also Note 10 to the consolidated financial statements for information
concerning business segment operating results.
Results of Operations - Year 2003 as Compared to 2002
-----------------------------------------------------
The Company's consolidated results of operations for the year ended
December 31, 2003 showed an approximate $2,000,000 or 12.6% increase in net
revenues with a turnaround in income before taxes of approximately $728,000. The
increase in revenues is primarily attributed to increased government shipments.
Gross profit increased 28.4% for the twelve month period ended December 31,
2003. During 2002, the Company incurred significant front-end costs associated
with prototype, preproduction and start-up activities for Consumer Products
Group's combination combat knife and bayonet. The majority of such up-front
costs were incurred and expensed in 2002 and early 2003. While the Company
continues to incur such costs on an ongoing basis associated with products for
both the Advanced Technology Group (ATG) and Consumer Products Group (CPG), the
timing of such costs directly contributes to the fluctuation in gross profit
from period to period as these costs are expensed as they occur and, as such,
are not matched to their future revenues and benefits. Another factor
contributing to the increase in gross profit for the reported period is product
mix.
Selling, general and administrative (SG&A) costs increased approximately
10% when compared to the same period in 2002. The increase in SG&A costs is
primarily attributed to increased marketing of the expanded sales effort of the
ATG and CPG and the increased costs for professional services and corporate
governance necessitated by the Sarbanes-Oxley Act and related regulations that
are expected to continue to be significant expense factors.
-10-
Interest expense decreased for the year ended December 31, 2003 when
compared to the same period in 2002 due to market driven interest rate
fluctuations and the decrease of institutional debt.
Depreciation and amortization expense increased approximately 1.4% for the
year ended December 31, 2003 when compared to the same period in 2002 due to
variable estimated useful lives of depreciable property as identified in Note 1
to the consolidated financial statements.
The Company's effective tax rate (benefit) was 37% in 2003 compared to
(29%) in 2002. The variance in the effective tax rate is primarily attributable
to state income taxes, permanent non-deductible expenditures and the tax benefit
on certain foreign sales.
Results of Operations - Year 2002 as Compared to 2001
-----------------------------------------------------
The Company's consolidated results of operations for the year ended
December 31, 2002 showed an approximate 13% decrease in net revenues with a
decrease in net income of approximately 132.8%. The decrease in net revenues is
primarily attributable to a decrease in revenue at the Advanced Technology Group
of $1,973,000 and a decrease in revenue of $355,000 at the Consumer Products
Group. The decrease in revenues for the twelve month period ended December 31,
2002 can be attributed to the overall continued economic softness in the
aerospace industry and previously reported reductions and stretch-outs in the
commercial markets for the advanced technology products combined with a loss of
revenues at the Consumer Products Group due both to a regionalization of markets
by a significant customer, certain reprioritizations of government procurements
and the general decline in retail markets for edged products (i.e., knives,
etc.)
Gross profit decreased for the twelve month period ended December 31, 2002
primarily due to a decrease in net revenues along with increased expenses to
expand the capabilities of our current product lines and resources expended to
modify and adapt existing and new products for additional applications in both
the aerospace industry as well as other markets. As previously reported, recent
changes in accounting rules do not allow for the deferment of pre-production
and/or start-up costs and, as such, they are reflected in cost of goods sold for
the year ended December 31, 2002 with no, or minimal, benefit to revenue in the
current period. Although the current year's gross margin was negatively impacted
by the cyclical and costly nature of pre-production and/or prototype expenses,
these long-term investments are necessary and have the potential to provide
substantial positive effects on the funded and unfunded backlogs.
Selling, general and administrative costs increased for the year ended
December 31, 2002 as a percentage of sales when compared to the same period in
-11-
2001. This can be attributed to a smaller percentage of expenses that are
dependent upon sales levels and a greater percentage reflecting fixed general
and administrative costs. Further, the Company has incurred expenses for costs
dedicated to merger/acquisition evaluations, expanded sales and marketing
activities, and additional procedures and professional expenses to assure the
integrity of financial reporting and corporate disclosure following passage of
the Sarbanes-Oxley Act in 2002.
Interest expense as a percentage of long-term debt decreased for the year
ended December 31, 2002 when compared to the same period in 2001 due to market
driven interest rate fluctuations and the decrease of institutional debt.
Depreciation expense increased due to variable estimated useful lives of
depreciable property as identified in Note 1 to the consolidated financial
statements.
The Company's effective tax rate (benefit) was (29%) in 2002 compared to
37% in 2001. The variance in the effective tax rate is primarily attributable to
state income taxes, permanent non-deductible expenditures and the tax benefit on
certain foreign sales
Liquidity and Capital Resources
-------------------------------
The Company's primary liquidity and capital requirements relate to the
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 have been from positive cash flows and from bank financing.
During the year ended December 31, 2003, the Company expended $148,000 on
capital expenditures as compared to $717,000 in 2002.
There are no other material commitments for capital expenditures at
December 31, 2003.
The Company also has a $1,000,000 line of credit on which there is no
balance outstanding at December 31, 2003.
Principal maturities of long-term debt are as follows: 2004 - $463,000;
2005 - $418,000; 2006 - $312,000, 2007 - $278,000; 2008 and thereafter -
$4,203,000.
Off Balance Sheet Arrangements
------------------------------
None.
-12-
Critical Accounting Policies
----------------------------
The Company prepares our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America.
As such, we are required to make certain estimates, judgments and assumptions
that the Company believes are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the periods presented. Actual
results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses our most critical accounting policies, which are those that are most
important to the portrayal of our financial condition and results of operations
and which require our most difficult and subjective judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. Note 1 to the accompanying consolidated financial statements includes
a summary of the significant accounting policies used in the preparation of the
consolidated financial statements.
New Accounting Pronouncements
-----------------------------
Management reviewed recent accounting pronouncements and does not feel that
they will have a significant impact on Financial Statement results. See Note 1
to the accompanying consolidated financial statements for further discussion of
new accounting pronouncements.
Revenue Recognition
-------------------
The Company's revenues are principally recognized as units are shipped and
as terms and conditions of purchase orders are met. The Company also incurred
costs for certain contracts which are long-term. These contracts are accounted
for under the percentage of completion method (cost-to-cost) which recognizes
revenue as the work progresses towards completion.
Included in other current assets is $825,000 of unbilled revenues which
represents revenue earned under the percentage of completion method
(cost-to-cost) not yet billable under the terms of the contracts.
Inventories
-----------
Inventories are stated generally at the lower of standard cost and net
realizable value. Cost includes all cost incurred to bring each product to its
present location and condition, which approximates actual cost (first-in,
-13-
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.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Item 7. Financial Statements
------- --------------------
The financial statements of the Registrant which are included in this Form
10-KSB Annual Report are described in the accompanying Index to Consolidated
Financial Statements on Page F1.
Item 8. Changes in and Disagreements With Accountants On Accounting and
------- -----------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 8a. Controls and Procedures
-------- -----------------------
Our management has reviewed our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 and 15d-15). Our management believes that
as of the end of the Company's most recent fiscal year such 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.
In addition, our management reviewed our internal controls and, to
management's knowledge, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their last evaluation.
-14-
PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
------- -----------------------------------------------------------------
Compliance With Section 16(A) of the Exchange Act
-------------------------------------------------
Information regarding directors and executive officers of the Registrant is
incorporated herein by reference to the information included in the Registrant's
definitive proxy statement if it is filed with the Commission within 120 days
after the end of the Registrant's 2003 fiscal year or such information will be
included by amendment.
Code of Ethics
--------------
As of the date of this Form 10-KSB, the Company has not adopted a Code of
Ethics that applies to its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions. The Company is currently in the process of developing a Code
of Ethics and Business Conduct that will apply to all directors, officers and
employees of the Company as required by the listing standards of the American
Stock Exchange. Once adopted, the Code will be available on the Company's
website at www.servotronics.com and the Company intends to disclose on this
website any amendment to the Code. Waivers under the Code, if any, will be
disclosed under the rules of the SEC and the American Stock Exchange.
Item 10. Executive Compensation
-------- ----------------------
Information regarding executive compensation is incorporated herein by
reference to the information included in the Registrant's definitive proxy
statement if it is filed with the Commission within 120 days after the end of
the Registrant's 2003 fiscal year or such information will be included by
amendment.
Item 11. Security Ownership of Certain Beneficial Owners and Management
-------- -----------------------------------------------------------------
and Related Stockholder Matters
-------------------------------
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference to the information included in
the Registrant's definitive proxy statement if it is filed with the Commission
within 120 days after the end of the Registrant's 2003 fiscal year or such
information will be included by amendment.
Item 12. Certain Relationships and Related Transactions
-------- ----------------------------------------------
Information regarding certain relationships and related transactions is
incorporated herein by reference to the information included in the Registrant's
-15-
definitive proxy statement if it is filed with the Commission within 120 days
after the end of the Registrant's 2003 fiscal year or such information will be
included by amendment.
-16-
Item 13. Exhibits and Reports on Form 8-K
-------- --------------------------------
(a) Exhibits
--------
Exhibit
number Presentation Reference
------ ------------ ---------
3(A)(1) Certificate of Incorporation Exhibit 3(A)(1) to 1996
Form 10-KSB*
3(A)(2) Amendments to Certificate Exhibit 3(A)(2) to 1996
of Incorporation dated Form 10-KSB*
August 27, 1984
3(A)(3) Certificate of designation Exhibit 4(A) to 1987
regarding Series I Form 10-K*
preferred stock
3(A)(4) Amendments to Certificate Exhibit 3(A)(4) to 1998
of Incorporation dated Form 10-KSB*
June 30, 1998
3(B) By-laws Exhibit 3(B) to 1986
Form 10-K*
4.1(A) First amended and restated Exhibit 4(A) to 1993
term loan agreement with Form 10-KSB*
Fleet Bank of New York
dated October 4, 1993
4.1(B) Second amended and restated Exhibit 4.1(B) to 1999
term loan agreement with Form 10-KSB*
Fleet Bank of New York
dated February 26, 1999
4.1(C) First amendment to second Exhibit 4.1(C) to 1999
amended and restated term Form 10-KSB*
loan agreement with
Fleet Bank of New York
dated December 17, 1999
4.2(A)(1) Letter of Credit Reimbursement Exhibit 4(B)(1) to
Agreement with Fleet Bank 1994 10-KSB*
dated December 1, 1994
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-17-
Exhibit
number Presentation Reference
------ ------------ ---------
4.2(B) First Amendment and Exhibit 4.2(B) to 1999
Extension to Letter of Form 10-KSB*
Credit and Reimbursement
Agreement with Fleet Bank
of New York dated as of
December 17, 1999
4.2(B)(2) Agency Mortgage and Security Exhibit 4(B)(2) to
Agreement dated as of 1994 10-KSB*
December 1, 1994 from the
Registrant and its subsidiaries
4.2(B)(3) Guaranty Agreement dated as Exhibit 4(B)(3) to
of December 1, 1994 from 1994 10-KSB*
the Registrant and its
subsidiaries to the Erie
County Industrial
Development Agency
("ECIDA"), Norwest Bank
Minnesota, N.A., as Trustee,
and Fleet Bank
4.3 Shareholder Rights Plan Exhibit 4 to Form
dated as of August 27, 8-K filed August 27,
2002 2002*
10(A)(1) Employment contract** Exhibit 10(A) to 1986
Form 10-K*
10(A)(2) Amendment to employment Filed herewith
contract**
10(A)(3) Amendment to employment Filed herewith
contract**
10(B) Form of Indemnification Exhibit 10(E) to 1986
Agreement between the Form 10-K*
Registrant and each of
its Directors and Officers**
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-18-
Exhibit
number Presentation Reference
------ ------------ ---------
10(C)(1) Loan agreement between Exhibit 10(C)(1)
the Company and its to 1991 Form 10-K*
employee stock ownership
trust, as amended
10(C)(2) Stock purchase agreement Exhibit 10(D)(2) to
between the Company 1988 Form 10-K*
and its employee
stock ownership trust
10(D)(1)(a) 1989 Employees Stock Exhibit A to Form 8:
Option Plan** Amendment No. 1 to
1988 Form 10-K*
10(D)(1)(b) Amendment to 1989 Exhibit 10(D)(1)(b) to 1990
Employees Stock Option Form 10-K*
Plan**
10(D)(1)(c) Amendment No. 2 to 1989 Exhibit 10(D)(1)(d) to 1991
Employees Stock Option Form 10-K*
Plan**
10(D)(1)(d) 2000 Employees Stock Exhibit 10(D)(1)(a) to 2000
Option Plan** Form 10-KSB*
10(D)(2) Stock Option Agreement Exhibit 10(D)(2) to 1998
for Donald W. Hedges Form 10-KSB*
dated March 24, 1998**
10(D)(2)(a) Stock Option Agreement Exhibit 10(D)(2)(a) to 2000
for Donald W. Hedges Form 10-KSB*
dated July 7, 2000**
10(D)(3)(b) Stock Option Agreement Exhibit 10(D)(3)(b) to 1998
for Nicholas D. Form 10-KSB*
Trbovich dated
March 24, 1998**
10(D)(3)(c) Stock Option Agreement Exhibit 10(D)(3)(c) to 2000
for Nicholas D. Form 10-KSB*
Trbovich dated
July 7, 2000**
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-19-
Exhibit
number Presentation Reference
------ ------------ ---------
10(D)(4) Stock Option Agreement Exhibit 10(D)(4) to 1998
for William H. Duerig Form 10-KSB*
dated March 24, 1998**
10(D)(4)(a) Stock Option Agreement Exhibit 10(D)(4)(a) to 2000
for William H. Duerig Form 10-KSB*
dated July 7, 2000**
10(D)(9) Land Lease Agreement Exhibit 10(D)(9) to 1992
between TSV, Inc. Form 10-KSB*
(wholly-owned subsidiary
of the Registrant) and the
ECIDA dated as of May 1,
1992, and Corporate
Guaranty of the Registrant
dated as of May 1, 1992
10(D)(10) Amendment to Land Lease Exhibit 10(D) (11) to 1993
Agreement and Interim Form 10-KSB*
Lease Agreement dated
November 19, 1992
10(D)(11) Lease Agreement dated as of Exhibit 10(D)(11) to
December 1, 1994 between 1994 10-KSB*
the Erie County Industrial
Development Agency
("ECIDA") and TSV, Inc.
10(D)(12) Sublease Agreement dated Exhibit 10(D)(12) to
as of December 1, 1994 1994 10-KSB*
between TSV, Inc. and
the Registrant
10(D)(13) 2001 Long-Term Stock Appendix A to 2001
Incentive Plan Proxy**
21 Subsidiaries of the Exhibit 21 to 2001
Registrant 10-KSB*
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-20-
Exhibit
number Presentation Reference
------ ------------ ---------
23 Consent of Independent Filed herewith
Accountants Consent on
Form S-8 dated March 22, 2004
31.1 Certification of Chief Financial Filed herewith
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 Filed herewith
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 Chief Financial Filed herewith
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 Filed herewith
Officer pursuant to 18 U.S.C.
1350 as adopted pursuant to
Section 906 of the Sarbanes-
Oxley Act of 2002.
The Registrant hereby agrees that it will furnish to the
Securities and Exchange Commission upon request a copy of any
instrument defining the rights of holders of long-term debt not
filed herewith.
(b) Reports on Form 8-K
An 8-K was furnished on November 14, 2003
incorporating the Press Release of Servotronics,
Inc. dated November 13, 2003.
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-21-
Item 14. Principal Accountant Fees and Services
-------- --------------------------------------
Information regarding principal accountant fees and services is
incorporated herein by reference to the information included in the Registrant's
definitive proxy statement if it is filed with the Commission within 120 days
after the end of the Registrant's 2003 fiscal year or such information will be
included by amendment.
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-KSB
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, global competition, 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-KSB. Readers are cautioned not to place undue reliance
on forward-looking statements, which reflect management's analysis only as the
date hereof. The Company assumes no obligation to update forward-looking
statements.
-22-
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SERVOTRONICS, INC.
March 22, 2004 By /s/ Nicholas D. Trbovich, President
-----------------------------------
Nicholas D. Trbovich
President, Chief Executive Officer
and Chairman of the Board
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ Nicholas D. Trbovich President, Chief Executive March 22, 2004
------------------------ Officer, Chairman of the
Nicholas D. Trbovich Board and Director
/s/ Lee D. Burns Treasurer and Secretary March 22, 2004
---------------- (Chief Financial Officer)
Lee D. Burns
/s/ Donald W. Hedges Director March 22, 2004
--------------------
Donald W. Hedges
/s/ William H. Duerig Director March 22, 2004
---------------------
William H. Duerig
/s/ Nicholas D. Trbovich Jr. Director March 22, 2004
---------------------------
Nicholas D. Trbovich Jr.
-23-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of independent auditors F2
Consolidated balance sheet at December 31, 2003 F3
Consolidated statement of operations for the years ended
December 31, 2003 and 2002 F4
Consolidated statement of cash flows for the years ended
December 31, 2003 and 2002 F5
Notes to consolidated financial statements F6-F21
Financial statement schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
-F1-
Report of Independent Auditors
------------------------------
To the Board of Directors and Shareholders of
Servotronics, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and cash flows present fairly, in all
material respects, the financial position of Servotronics, Inc. (the "Company")
and its subsidiaries at December 31, 2003, and the results of their operations
and their cash flows for the years ended December 31, 2003 and 2002 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion
PricewaterhouseCoopers LLP
Buffalo, New York
March 22, 2004
-F2-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
($000's omitted except share and per share data)
December 31,
Assets 2003
----
Current assets:
Cash $ 1,506
Accounts receivable 2,488
Inventories 6,810
Prepaid income taxes 73
Deferred income taxes 368
Other assets (See Note 1 to consolidated financial statements) 1,586
------------
Total current assets 12,831
Property, plant and equipment, net 6,560
Other non-current assets 550
------------
$ 19,941
Liabilities and Shareholders' Equity ============
Current liabilities:
Current portion of long-term debt $ 463
Accounts payable 549
Accrued employee compensation and benefit costs 732
Other accrued liabilities 175
------------
Total current liabilities 1,919
Long-term debt 5,211
Deferred income taxes 358
Other non-current liabilities 244
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 1,516
Accumulated other comprehensive loss (107)
------------
14,965
Employee stock ownership trust commitment (2,236)
Treasury stock, at cost 121,605 shares (520)
------------
Total shareholders' equity 12,209
------------
$ 19,941
============
See notes to consolidated financial statements
-F3-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
($000's omitted except per share data)
Year Ended
December 31,
2003 2002
-------- --------
Net revenues $ 17,574 $ 15,607
Costs and expenses:
Cost of goods sold, exclusive of depreciation 13,067 12,096
Selling, general and administrative 3,272 2,977
Interest 160 196
Depreciation and amortization 669 660
-------- --------
17,168 15,929
-------- --------
Income (loss) before income taxes 406 (322)
Income tax provision (benefit) 152 (93)
-------- ---------
Net income (loss) $ 254 $ (229)
======== =========
Income (Loss) Per Share:
Basic
-----
Net income (loss) per share $ 0.13 $ (0.12)
======== =========
Diluted
-------
Net income (loss) per share $ 0.13 $ (0.12)
======== =========
See notes to consolidated financial statements
-F4-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
($000's omitted)
Year Ended
December 31,
2003 2002
--------- ---------
Cash flows related to operating activities:
Net income (loss) $ 254 $ (229)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization 669 660
Deferred income taxes 184 (97)
Change in assets and liabilities -
Accounts receivable 145 66
Inventories (47) 276
Prepaid income taxes 72 (48)
Other assets (125) 628
Other non-current assets 24 (9)
Accounts payable 131 (442)
Accrued employee compensation and benefit costs (57) 103
Other accrued liabilities 66 (77)
Other non-current liabilities (64) (8)
Employee stock ownership trust payment 101 101
--------- ---------
Net cash provided by operating activities 1,353 924
--------- ---------
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (148) (717)
--------- ---------
Net cash used in investing activities (148) (717)
--------- ---------
Cash flows related to financing activities:
Increase in demand loan 250 400
Acquisition of long-term debt 0 500
Payments on demand loan (250) (600)
Principal payments on long-term debt (378) (548)
--------- ---------
Net cash used in financing activities (378) (248)
--------- ---------
Net increase (decrease) in cash 827 (41)
Cash at beginning of period 679 720
--------- ---------
Cash at end of period $ 1,506 $ 679
========= =========
Supplemental disclosures:
=========================
Income taxes (received) paid ($ 131) $ 132
Interest paid $ 154 $ 226
See notes to consolidated financial statements
-F5-
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Summary of significant accounting policies
------------------------------------------
The principal accounting policies of Servotronics, Inc. (the "Company") and
subsidiaries are as follows:
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of Servotronics,
Inc. and its wholly-owned subsidiaries.
Cash and cash equivalents
-------------------------
The Company considers cash and cash equivalents to include all cash
accounts and short-term investments purchased with a maturity of three
months or less.
Revenue recognition
-------------------
The Company's revenues are principally recognized as units are shipped and
as terms and conditions of purchase orders are met. The Company also
incurred costs for certain contracts which are long-term. These contracts
are accounted for under the percentage of completion method (cost-to-cost)
which recognizes revenue as the work progresses towards completion.
Included in other current assets is $825,000 of unbilled revenues which
represents revenue earned under the percentage of completion method
(cost-to-cost) not yet billable under the terms of the contracts.
Inventories
-----------
Inventories are stated generally 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), and 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.
Shipping and handling costs
---------------------------
Shipping and handling costs are classified as a component of cost of goods
sold.
-F6-
Property, plant and equipment
-----------------------------
Property, plant and equipment is carried at cost; expenditures for new
facilities and equipment and expenditures which substantially increase the
useful lives of existing plant and equipment are capitalized; expenditures
for maintenance and repairs are expensed as incurred. Upon retirement or
disposal of properties, the related cost and accumulated depreciation are
removed from the respective accounts and any profit or loss on disposition
is included in income.
Depreciation is provided on the basis of estimated useful lives of
depreciable properties, primarily by the straight-line method for financial
statement purposes and by accelerated methods for tax purposes.
Depreciation expense includes the amortization of capital lease assets. The
estimated useful lives of depreciable properties are generally as follows:
Buildings and improvements 5-39 years
Machinery and equipment 5-15 years
Tooling 3-5 years
Income taxes
------------
The Company and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns.
The Company follows the asset and liability approach to account for income
taxes. This approach requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of operating loss and
credit carryforwards and temporary differences between the carrying amounts
and the tax bases of assets and liabilities.
Employee stock ownership plan
-----------------------------
Contributions to the employee stock ownership plan are determined annually
by the Company according to plan formula.
Use of estimates
----------------
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
-F7-
New accounting pronouncements
-----------------------------
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN No. 45
requires the recognition of a liability for certain guarantee obligations
issued or modified after December 31, 2002. FIN No. 45 also clarifies
disclosure requirements to be made by a guarantor of certain guarantees.
The disclosure provisions of FIN No. 45 are effective for fiscal years
ending after December 15, 2002. The adoption of FIN No. 45 did not have a
material impact on the Company's results of operations, financial position
or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." The FASB's stated intent in
issuing FIN 46 was to clarify the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial support
from other parties. FIN 46 requires an enterprise to consolidate a variable
interest entity (as defined in FIN 46) if that enterprise has a variable
interest (or combination of variable interests) that will absorb a majority
of the entity's expected losses if they occur, receive a majority of the
entity's expected returns if they occur, or both. In December 2003, the
FASB issued a revised FIN 46 ("FIN 46R") which attempts to clarify the
guidance in the original interpretation. FIN 46 applies to variable
interest entities created after January 31, 2003. FIN 46 also applies to
all variable interest entities created prior to February 1, 2003 that are
considered to be special-purpose entities (as defined in FIN 46R) as of
December 31, 2003. FIN 46R must be applied to all variable interest
entities no later than the end of the first reporting period that ends
after March 15, 2004. This provision did not have a material impact on the
Company's results of operations, financial position or cash flows.
In January 2003, the FASB issued EITF Issue No. 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor". This EITF addresses the accounting by a vendor for consideration
(vendor allowances) given to a customer, including a reseller of the
vendor's products, and the accounting by a reseller for cash consideration
received from a vendor. It is effective for certain arrangements entered
into after November 21, 2002, and for all new arrangements, including
modifications to existing arrangements, entered into after December 31,
2002. The adoption of this standard did not have a material impact on the
Company's financial position, results of operations or cash flows.
-F8-
Risk Factors
------------
The aviation and aerospace industries as well as markets for the Company's
consumer products are facing new and different 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.
2. Inventories December 31, 2003
----------- -----------------
($000's omitted)
Raw materials and common parts $ 1,112
Work-in-process 5,341
Finished goods 593
----------
7,046
Less: common parts expected to be used
after one year (236)
----------
$ 6,810
==========
3. Property, plant and equipment December 31, 2003
----------------------------- -----------------
($000's omitted)
Land $ 25
Buildings 6,452
Machinery, equipment and tooling 9,760
----------
16,237
Less accumulated depreciation (9,677)
----------
$ 6,560
==========
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. 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.
-F9-
4. Long-term debt December 31, 2003
-------------- -----------------
($000's omitted)
Industrial Development Revenue Bonds; secured by a
letter of credit from a bank with interest payable monthly
at a floating rate (1.53% at December 31, 2003) $ 4,320
Term loan payable to a financial institution
interest at LIBOR plus 2% (3.16% at
December 31, 2003); quarterly principal payments of
$17,500 commencing January 1, 2005; payable in full
October 1, 2009 500
Term loan payable to a financial institution
interest at a rate of 3.4% at
December 31, 2003; quarterly principal
payments of $35,714 through February 1, 2006 321
Secured term loan payable to a government agency
interest fixed at 6%, monthly payments of $2,778;
payable in full second quarter of 2004 117
Secured term loan payable to a government agency
interest fixed at 6%, monthly payments of $2,774
through second quarter of 2012 180
Secured term loan payable to a government agency
interest fixed at 3%; monthly payments of $1,950
through fourth quarter of 2015 236
----------
5,674
Less current portion (463)
-----------
$ 5,211
===========
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.
Principal maturities of long-term debt are as follows: 2004 - $463,000;
2005 - $418,000; 2006 - $312,000, 2007 - $278,000; 2008 and thereafter -
$4,203,000.
-F10-
The Company also has a $1,000,000 line of credit on which there is no
balance outstanding at December 31, 2003. The average interest rate on
draw-downs for 2003 was 4%.
Certain lenders require the Company to comply with debt covenants as
described in the specific loan documents, including the loan-to-value
ratio, the interest coverage ratio, the fixed charge coverage ratio and the
dividend payout ratio. At December 31, 2003, the Company was in compliance
with all of its debt covenants.
5. Employee benefit plans
----------------------
Employee stock ownership plan (ESOP)
------------------------------------
Under the Company's ESOP adopted in 1985, participating employees are
awarded shares of the Company's common stock based upon eligible
compensation and minimum service requirements. Upon inception of the ESOP,
the Company borrowed $2,000,000 from a bank and lent the proceeds to the
trust established under the ESOP to purchase shares of the Company's common
stock. The Company's loan to the trust is at an interest rate approximating
the prime rate and is repayable to the Company over a 40-year term ending
in December 2024. During 1987 and 1988, the Company loaned an additional
$1,942,000 to the trust under terms similar to the Company's original loan.
Each year the Company makes contributions to the trust which the plan's
trustees use to repay the principal and interest due the Company under the
trust loan agreement. Shares held by the trust are allocated in the
aggregate to participating employees in proportion to the amount of the
loan repayment made by the trust to the Company. Since inception of the
ESOP, approximately 392,000 shares have been allocated, exclusive of shares
distributed to ESOP participants. At December 31, 2003 and 2002,
approximately 445,000 and 470,000 shares, respectively, purchased by the
ESOP remain unallocated.
Related compensation expense associated with the Company's ESOP, which is
equal to the principal reduction on the loans receivable from the trust,
amounted to $101,000 in 2003 and 2002. Included as a reduction to
shareholders' equity is the employee stock ownership trust commitment which
represents the remaining indebtedness of the trust to the Company.
Employees are entitled to vote allocated shares and the ESOP trustees are
entitled to vote unallocated shares and those allocated shares not voted by
the employees.
-F11-
Defined benefit plan
--------------------
The Company has noncontributory defined benefit pension plans. Plan
benefits are based on stated amounts for each year of service and funding
is in accordance with statutory requirements. The Company uses a
measurement date of December 1 for its pension plans.
WEIGHTED - AVERAGE ASSUMPTIONS
The following table sets forth the weighted-average assumptions used to
determine benefit obligations:
Pension Benefits
December 1,
2003 2002
---- ----
Discount rate 6.0 6.5
Rate of compensation increase N/A N/A
The following table sets forth the weighted-average assumptions used to
determine net periodic benefit cost:
Pension Benefits
December 1,
2003 2002
---- ----
Discount rate 6.5 7.0
Rate of compensation increase N/A N/A
Expected long-term return on plan assets 8.0 8.0
PENSION PLAN
The following table sets forth certain information attributable to the
Company's employees participation in the Company's pension plans:
Funded Plans
December 1,
2003 2002
---- ----
Actuarial present value of benefit obligations:
Vested benefits $421,964 $396,437
Nonvested benefits 7,387 8,137
--------- --------
Accumulated benefit obligations $429,351 $404,574
======== ========
Projected benefit obligations $429,351 $404,574
======== ========
Pension cost allocated to the Company related to the plans was $25,000
and $29,000 in 2003 and 2002, respectively. Total anticipated employer
contribution for the 2004 plan year is $51,364.
-F12-
NARRATIVE DESCRIPTION OF DEVELOPMENT OF LONG-TERM RATE OF RETURN
The Company uses historical performance in the market blended with
consideration for inflation, risk-free rate of return and risk premium
in development of a long-term rate of return.
NARRATIVE DESCRIPTION OF INVESTMENT POLICY STRATEGIES
The Company seeks to maximize income, growth of income, and long-term
appreciation and preservation of capital. The assets must be invested
with care and diligence with the overriding prudent man rule as a guide
to investment management. The Company will, as a general guideline, make
occasional disbursements and care should be taken to ensure available
funds.
Deferred compensation program
-----------------------------
The Company maintains a deferred compensation program designed to achieve,
among other things, benefit parity for an officer of the Company. During
2003 and 2002, no amounts were accrued under this program. During 2003, the
Company issued treasury stock to satisfy the deferred compensation
liability and, as such, there are no amounts accrued on the deferred
compensation program at December 31, 2003.
6. Income tax provision (benefit)
------------------------------
The provision (benefit) for income taxes included in the consolidated
statement of operations consists of the following:
2003 2002
---- ----
($000's omitted)
Current:
Federal income tax (benefit) ($ 37) ($ 5)
State income tax 5 9
------- ------
(32) 4
Deferred: ------- ------
Federal income tax (benefit) 177 (111)
State income tax 7 14
------- -------
184 (97)
------- -------
$ 152 ($ 93)
======= =======
-F13-
The reconciliation of the difference between the Company's effective tax
rate based upon the total income tax provision (benefit) and the federal
statutory income tax rate is as follows:
2003 2002
---- ----
Statutory rate 34% (34%)
Increase resulting from:
State income taxes (less federal effect) 2% 5%
Extraterritorial income exclusion (3%) (3%)
Nondeductible expenses 3% 4%
Other 1% (1%)
----- ------
37% (29%)
===== ======
At December 31, 2003, the deferred tax assets (liabilities) were comprised
of the following:
($000's omitted)
Inventories $ 165
Accrued employee compensation and benefit costs 195
Operating loss and credit carryforwards 138
Minimum pension liability 63
Other 8
---------
Total deferred tax assets 569
Property, plant and equipment (515)
Other liabilities (44)
---------
Total deferred tax liabilities (559)
---------
Net deferred tax asset $ 10
=========
Realization of the net deferred tax asset is dependent upon generating
sufficient taxable income over the periods in which the temporary
differences are anticipated to reverse. Although realization is not
assured, management believes it is more likely than not that the net
deferred tax asset will be realized. However, the amount of net deferred
tax asset considered realizable could be reduced in the near term if
estimates of future taxable income are reduced.
At December 31, 2003, the Company has a Federal consolidated net operating
loss carryforward of approximately $80,000 (approximately a $27,000 tax
benefit) which begins to expire in 2022.
At December 31, 2003, the Company also has New York State net operating
loss carryforwards of approximately $992,000 (approximately a $33,000 net
tax benefit) that begin to expire in 2019. The Company also has a State of
Pennsylvania net operating loss carryforward of approximately $1,576,000
(approximately a $104,000 net tax benefit) that begins to expire in 2006.
-F14-
7. 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) income (loss)
---------------------------------------------------------------------------------------------
($000's omitted except share amounts)
Balance December
31, 2001 2,614,506 $523 $13,361 $1,491 ($ 2,438) ($ 1,054) ($ 58)
Comprehensive loss:
Net loss - - - (229) - - $ (229) -
Other comprehensive
loss, net of tax:
Minimum pension
liability adjustment - - - - - - (24) (24)
--------
Other comprehensive
loss - - - - - - (24) -
--------
Comprehensive loss - - - - - - $ (253) -
========
Compensation expense - - - - 101 - -
--------- ---- ------- ------ -------- ---------- ---------
Balance December
31, 2002 2,614,506 $523 $13,361 $1,262 ($ 2,337) ($ 1,054) ($ 82)
========= ==== ======= ====== ======== ========== =========
Comprehensive income:
Net income - - - 254 - - $ 254 -
Other comprehensive
loss, net of tax:
Minimum pension
liability adjustment - - - - - - (25) (25)
Other comprehensive
loss - - - - - - (25) -
--------
Comprehensive income - - - - - - $ 229 -
========
Compensation expense - - - - 101 - -
Treasury shares issued for
deferred compensation
obligation - - (328) - - 534 -
-------- ---- ------- ------ -------- --------- ---------
Balance December
31, 2003 2,614,506 $523 $13,033 $1,516 ($ 2,236) ($ 520) ($ 107)
========= ==== ======= ====== ======== ========= =========
-F15-
Earnings per share
------------------
Basic earnings per share is computed by dividing net earnings by the
weighted average number of shares outstanding during the period. Diluted
earnings per share is 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.
Year Ended
December 31,
2003 2002
---- ----
($000's omitted
except per share data)
Net income (loss) $ 254 $ (229)
======== =========
Weighted average common shares
outstanding (basic) 2,001 1,898
Incremental shares from assumed
conversions of stock options 10 0
Weighted average common
shares outstanding (diluted) 2,011 1,898
Basic
-----
Net income (loss) per share $ 0.13 $ (0.12)
======== ========
Diluted
-------
Net income (loss) per share $ 0.13 $ (0.12)
======== ========
Comprehensive income (loss)
---------------------------
The minimum pension liability adjustment of $107,000 ($82,000 - 2002),
which is net of taxes amounting to $63,000 ($48,000 - 2002), is the only
component of other comprehensive income (loss) for 2003.
-F16-
Stock options
-------------
Under the Servotronics, Inc. 2000 Employee Stock Option Plan authorized by
the Board of Directors and the 2001 Long-Term Stock Incentive Plan
authorized by the Board of Directors and the Shareholders, and other
separate agreements authorized by the Board of Directors, the Company has
granted non-qualified options to certain Directors and Officers. The
Company applies APB Opinion No. 25 and related interpretations in
accounting for these Plans and the separate option agreements. Accordingly,
no compensation expense has been charged to earnings in 2003 or prior years
as stock options granted have an exercise price equal to the market price
on the date of grant. At December 31, 2003, 156,600 shares of common stock
were available under these plans. Options granted under these plans have
durations of ten years and vesting periods ranging from six (6) months to
four (4) years.
A summary of the status of options granted under all employee plans is
presented below:
Weighted
Average
Options Exercise
Outstanding Price ($)
-------------------------
Outstanding as of December 31, 2001 319,200 5.37
Granted in 2002 - -
Exercised in 2002 - -
Forfeited in 2002 - -
Outstanding as of December 31, 2002 319,200 5.37
Granted in 2003 145,000 2.045
Exercised in 2003 - -
Forfeited in 2003 - -
Outstanding as of December 31, 2003 464,200 4.01
The following tables summarize information about options outstanding at
December 31, 2003:
Remaining
Exercise Number Contractual Options
Prices ($) Outstanding Life Exercisable
---------------------------------------------------------------
8.50 93,000 4 years 93,000
3.8125 101,200 7 years 101,200
4.38 125,000 8 years 117,000
2.045 145,000 10 years 122,000
------- -------
Total 464,200 433,200
======= =======
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". If the compensation cost for
-F17-
these plans had been determined based on the Black-Scholes calculated
values at the grant dates for awards consistent with the method prescribed
by SFAS No. 123, the pro forma effects on the years ended December 31, 2003
and 2002 are as follows:
2003 2002
---- ----
Net income (loss):
As reported $254,000 $(229,000)
Pro forma $128,000 $(406,000)
Earnings (loss) per common share:
As reported - basic $0.13 $(0.12)
As reported - diluted $0.13 $(0.12)
Pro forma - basic $0.06 $(0.21)
Pro forma - diluted $0.06 $(0.21)
There were 145,000 options granted in 2003. The Black-Scholes calculated
estimated value of the options granted in 2003 was $1.277. The assumptions
used to calculate this value include a risk-free interest rate of 3.83%, an
expected term of 10 years, and an annual standard deviation (volatility)
factor of 46.6%. The Black-Scholes option pricing model was developed for
use in estimating values of traded options that have no vesting
restrictions and are fully transferable. In addition, option pricing models
require the use of highly subjective assumptions, including the expected
stock price volatility. Because the Company's stock options are restricted
and have characteristics significantly different from those of traded
options, and because changes in the subjective assumptions can materially
affect the calculated estimated values, in the Company's opinion the
existing models do not necessarily provide a reliable measure of the value
of the Company's stock options. The estimated value calculated by the
Black-Scholes methodology is hypothetical and does not represent an actual
tangible Company expense or an actual tangible monetary transfer to the
optionee. Further, for the reasons stated above (among others) and
especially because of the volatility factor used in the Black-Scholes
calculations for the Company's 2003 options, the derived estimated value
may be, in the Company's opinion, substantially higher than the value which
may be realized in an arms-length transaction under the above stated and
existing conditions.
-F18-
Shareholders' rights plan
--------------------------
During 2002, the Company's Board of Directors adopted a shareholders'
rights plan (the "Rights Plan") and simultaneously declared a dividend
distribution of one Right for each outstanding share of the Company's
common stock outstanding at August 28, 2002. The Rights Plan replaced a
previous shareholder right plan that was adopted in 1992 and expired on
August 28, 2002. The Rights do not become exercisable until the earlier of
(i) the date of the Company's public announcement that a person or
affiliated group other than Dr. Nicholas D. Trbovich or the ESOP trust (an
"Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 25% or more of the Company's common stock
(excluding shares held by the ESOP trust) or (ii) ten business days
following the commencement of a tender offer that would result in a person
or affiliated group becoming an Acquiring Person.
The exercise price of a Right has been established at $32.00. Once
exercisable, each Right would entitle the holder to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock.
In the event that any person becomes an Acquiring Person, each Right would
entitle any holder other than the Acquiring Person to purchase common stock
or other securities of the Company having a value equal to three times the
exercise price. The Board of Directors has the discretion in such event to
exchange two shares of common stock or two one-hundredths of a share of
preferred stock for each Right held by any holder other than the Acquiring
Person.
8. Commitments
-----------
The Company leases certain equipment pursuant to operating lease
arrangements. Total rental expense in 2003 and 2002 and future minimum
payments under such leases are not significant.
9. Litigation
----------
There are no legal proceedings which are material to the Company currently
pending by or against the Company other than ordinary routine litigation
incidental to the business which is not expected to materially adversely
affect the business or earnings of the Company.
10. Business segments
------------------
The Company operates in two business segments, the Advanced Technology
Group and the Consumer Products Group. 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 the Advanced Technology Group involve the design,
manufacture, and marketing of servo-control components for government and
commercial applications. The Consumer Products Group'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 portion of finished
products are for foreign use.
-F19-
Information regarding the Company's operations in these segments is
summarized as follows:
Advanced Consumer
Year ended Technology Products
December 31, 2003 Group Group Consolidated
----------------- ----- ----- ------------
($000's omitted)
Revenues from unaffiliated customers $ 10,289 $ 7,285 $ 17,574
============ ========= =============
Profit $ 1,561 $ 203 1,764
============ =========
Depreciation and amortization $ (522) $ (147) (669)
============ =========
Interest expense (160)
General corporate expense (529)
--------------
Income before income taxes $ 406
=============
Identifiable assets $ 13,920 $ 6,021 $ 19,941
============ ========= =============
Capital expenditures $ 53 $ 95 $ 148
============ ========= =============
Advanced Consumer
Year ended Technology Products
December 31, 2002 Group Group Consolidated
----------------- ----- ----- ------------
($000's omitted)
Revenues from unaffiliated customers $ 10,213 $ 5,394 $ 15,607
============ ========= =============
Profit (loss) $ 1,080 $ (41) 1,039
============ =========
Depreciation expense $ (506) $ (154) (660)
============ =========
Interest expense (196)
General corporate expense (505)
--------------
Loss before income taxes $ (322)
==============
Identifiable assets $ 14,521 $ 5,208 $ 19,729
============ ========= =============
Capital expenditures $ 326 $ 391 $ 717
============ ========= =============
-F20-
The Company engages in a significant amount of business with the United
States Government through sales to its prime contractors and otherwise.
Such contracts by the Advanced Technology Group accounted for revenues of
approximately $5,200,000 in 2003 and $3,400,000 in 2002. Similar contracts
by the Consumer Products Group accounted for revenues of approximately
$2,100,000 in 2003 and $190,000 in 2002. Sales of advanced technology
products to one prime contractor, including various divisions and
subsidiaries of a common parent company, amounted to approximately 14% and
18% of total revenues in 2003 and 2002, respectively. The Company also had
sales to another customer that amounted to approximately 17% and 21% of
total revenues in 2003 and 2002, respectively. Another prime contractor
provided sales of approximately 13% and 6% of total revenues in 2003 and
2002. No other single customer represented more than 10% of the Company's
revenues in any of these years.
-F21-