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, 2002
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
-- 1934
For the transition period from to .
----------------- -----------------
Commission File No. 1-7109
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
-------------------------------------- -------------
(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: $15,607,000
As of March 15, 2003 the aggregate market value of the voting common stock
held by non-affiliates of the registrant was $4,194,310.57 based on the average
of sales prices reported by the American Stock Exchange on that day.
As of March 15, 2003 the number of $.20 par value common shares outstanding
was 2,392,141.
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
-------
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 or 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 knives such as steak, carving,
bread, butcher and paring knives for household use and for use in restaurants,
government installations, institutions and private industry, and pocket and
other types of knives for hunting, fishing, camping and military use. The
Registrant also produces and markets other cutlery items such as carving forks,
sharpeners 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 cutlery and 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 22% of the Registrant's total
revenues. In 2002 and 2001, sales of advanced technology products to each of
Honeywell 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 any of these
years.
The Registrant's prime contracts and subcontracts with the United States
Government are subject to termination for the convenience of the Government. In
the event of such termination, the Registrant is ordinarily entitled to receive
-3-
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 1% of
the Registrant's 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 2002 and 2001 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 than it 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 ECKO Housewares, Inc., Russell Harrington Cutlery, Inc., W. R. Case &
Sons Cutlery Company, Imperial Schrade Corporation 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, 2002, had approximately 216 employees of
which approximately 201 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
------- -------------------------
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:
Number of
Principal buildings and Approx.
Approx. product type of floor area
Location acreage manufactured construction (sq. feet)
--------------------------------------------------------------------------------------------------------------
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 2002 and 2001.
High Low
---- ---
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
2001
Fourth Quarter $ 6.20 $ 3.70
Third Quarter 8.90 3.40
Second Quarter 3.65 2.30
First Quarter 2.69 1.65
(b) Approximate number of holders of common stock
---------------------------------------------
Title Approximate number of
of record holders (as of
class December 31, 2002)
----- ---------------------
Common Stock, $.20 par value per share 607
(c) Dividends on common stock
-------------------------
No cash dividends were paid in 2002 or 2001.
-8-
Item 6. Management's Discussion and Analysis or Plan of Operation
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Summary
-------
The following table sets forth for the periods 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
2002 2001 2002-2001
---- ---- ---------
Net revenues:
Advanced technology products 65.4% 67.9 % (16.2)%
Consumer products 34.6 32.1 (6.2)
------- -------- ----------
100.0 100.0 (13.0)
Cost of goods sold 77.5 72.1 (6.5)
------- -------- ----------
Gross profit 22.5 27.9 (29.8)
------- -------- ----------
Selling, general and administrative costs 19.1 16.9 (1.6)
Interest 1.3 1.5 (27.7)
Depreciation 4.2 3.3 12.2
------- -------- ----------
24.6 21.7 (1.3)
------- -------- ----------
Income (loss) before income taxes (2.1) 6.2 (128.9)
Income tax provision (benefit) (0.6) 2.3 (122.4)
-------- -------- ----------
Net income (loss) (1.5)% 3.9% (132.8)%
======== ======== ==========
-9-
Management Discussion
---------------------
During the year ended December 31, 2002 and for the comparable period ended
December 31, 2001, approximately 23% and 19% respectively of the Company's
revenues were derived from contracts with agencies of the U.S. Government or
their prime contractors. The Company's business is performed under fixed price
contracts. Sales to the government are affected by defense budgets, U.S. &
foreign policy and the level of military flight operations. As major
international events are currently unfolding, it is difficult to predict the
impact on future financial results. In addition, the aftermath of the September
11th terrorist's attacks and the perceived continued threat to the airline
industry has significantly lowered commercial passenger traffic and has had a
direct effect on revenues in the commercial aerospace markets.
See also Note 10 to the consolidated financial statements for information
concerning business segment operating results.
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.
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
-10-
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
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.
Results of Operations - Year 2001 as Compared to 2000
-----------------------------------------------------
The Company's consolidated results of operations for the year ended
December 31, 2001 showed an approximate 5.7% increase in net revenues with an
increase in net income of approximately 67.5%. The increase in net revenues is
primarily attributable to increased revenue at the Advanced Technology Group of
$2,699,000 partially offset by a decrease in revenue of $1,733,000 at the
Consumer Products Group. The resultant increase in net income is attributable to
both product mix at the Advanced Technology Group and the Consumer Products
Group, and previously reported cost controls as reflected in the accompanying
financial statements.
Selling, general and administrative costs remained consistent for the year
ended December 31, 2001 when compared to the same period in 2000 despite the
increase in net revenues. 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.
Interest expense as a percentage of long-term debt decreased by
approximately 2% for the year ended December 31, 2001 when compared to the same
-11-
period in 2000 due to market driven interest rate fluctuations, favorable
interest rate renewal agreements and the continued decrease of institutional
debt.
Depreciation expense decreased 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 was 37% in 2001 compared to 43% in 2000.
The decrease resulted from higher U.S. tax incentives on export sales in 2001.
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, 2002, the Company expended $717,000 on
capital expenditures of which approximately $260,000 was for the previously
reported planned capability expansion at the Consumer Products Group. During the
year ended December 31, 2001, the Company capital expenditures were $273,000.
There are no other material commitments for capital expenditures at
December 31, 2002.
The Company also has a $1,000,000 line of credit on which there is no
balance outstanding at December 31, 2002.
Principal maturities of long-term debt are as follows: 2003 - $378,000;
2004 - $463,000; 2005 - $418,000; 2006 - $312,000; 2007 and thereafter -
$4,481,000.
Critical Accounting Policies
----------------------------
See Note 1 to the consolidated financial statements.
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.
-12-
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 2002 fiscal year or such information will be
included by amendment.
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 2002 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 2002 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
definitive proxy statement if it is filed with the Commission within 120 days
after the end of the Registrant's 2002 fiscal year or such information will be
included by amendment.
-13-
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. 1-7109)
**Indicates management contract or compensatory plan or arrangement
-14-
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. 1-7109)
**Indicates management contract or compensatory plan or arrangement
-15-
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) 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**
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)(5)(b) Stock Option Agreement Exhibit 10(D)(5)(b) to 1998
for Nicholas D. Form 10-KSB*
Trbovich, Jr. dated
March 24, 1998**
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-7109)
**Indicates management contract or compensatory plan or arrangement
-16-
Exhibit
number Presentation Reference
------ ------------ ---------
10(D)(6)(b) Stock Option Agreement Exhibit 10(D)(6)(b) to 1998
for Nicholas D. Form 10-KSB*
Trbovich, Jr. dated
March 24, 1998**
10(D)(6)(c) Stock Option Agreement Exhibit 10(D)(6)(c) to 2000
for Nicholas D. Form 10-KSB*
Trbovich, Jr. dated
July 7, 2000**
10(D)(7)(b) Stock Option Agreement Exhibit 10(D)(7)(b) to 1998
for Lee D. Burns dated Form 10-KSB*
March 24, 1998**
10(D)(7)(c) Stock Option Agreement Exhibit 10(D)(7)(c) to 2000
for Lee D. Burns dated Form 10-KSB*
July 7, 2000**
10(D)(8)(b) Stock Option Agreement Exhibit 10(D)(8)(b) to 1998
for Raymond C. Zielinski Form 10-KSB*
dated March 24, 1998**
10(D)(8)(c) Stock Option Agreement Exhibit 10(D)(8)(c) to 2000
for Raymond C. Zielinski 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
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-7109)
**Indicates management contract or compensatory plan or arrangement
-17-
Exhibit
number Presentation Reference
------ ------------ ---------
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*
99.1 Section 906 Certification
of Chief Executive Officer Filed herewith
99.2 Section 906 Certification
of Chief Financial Officer Filed herewith
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
(1) Form 8-K Filed November 14, 2002
Regulation FD Disclosure. Certifications by the Chief
Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 to accompany the Quarterly Report on Form 10-QSB
for the quarterly period ended September 30, 2002.
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-7109)
**Indicates management contract or compensatory plan or arrangement
-18-
Item 14. Controls and Procedures
-------- -----------------------
Our management has reviewed our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days
prior to this report. Our management believes that 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.
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.
-19-
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 18, 2003 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 18, 2003
------------------------ Officer, Chairman of the
Nicholas D. Trbovich Board and Director
/s/ Lee D. Burns Treasurer and Secretary March 18, 2003
---------------- (Chief Financial Officer)
Lee D. Burns
/s/ Donald W. Hedges Director March 18, 2003
--------------------
Donald W. Hedges
/s/ William H. Duerig Director March 18, 2003
---------------------
William H. Duerig
/s/ Nicholas D. Trbovich Jr. Director March 18, 2003
----------------------------
Nicholas D. Trbovich Jr.
-20-
CERTIFICATION
I, Lee D. Burns, certify that:
1. I have reviewed this annual report on Form 10-KSB of Servotronics, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003
/s/ Lee D. Burns, Chief Financial Officer
-----------------------------------------
Lee D. Burns
Chief Financial Officer
-21-
CERTIFICATION
I, Nicholas D. Trbovich, certify that:
1. I have reviewed this annual report on Form 10-KSB of Servotronics, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003
/s/ Nicholas D. Trbovich, Chief Executive Officer
-------------------------------------------------
Nicholas D. Trbovich
Chief Executive Officer
-22-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of independent accountants F2
Consolidated balance sheet at December 31, 2002 F3
Consolidated statement of operations for the years ended
December 31, 2002 and 2001 F4
Consolidated statement of cash flows for the years ended
December 31, 2002 and 2001 F5
Notes to consolidated financial statements F6-F19
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 Accountants
---------------------------------
To the Board of Directors and Shareholders of
Servotronics, Inc.
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, 2002 and December 31, 2001, and the results
of their operations and their cash flows for the years then ended 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 18, 2003
-F2-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
December 31, 2002
-----------------
($000's omitted except share and per share data)
Assets
Current assets:
Cash $ 679
Accounts receivable 2,633
Inventories 6,763
Prepaid income taxes 145
Deferred income taxes 393
Other (See Note 1 to consolidated financial statements) 1,461
------------
Total current assets 12,074
Property, plant and equipment, net 7,080
Other assets 575
------------
$ 19,729
============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 378
Accounts payable 418
Accrued employee compensation and benefit costs 995
Other accrued liabilities 109
------------
Total current liabilities 1,900
Long-term debt 5,674
Deferred income taxes 213
Other non-current liabilities 269
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; issued 2,614,506 shares 523
Capital in excess of par value 13,361
Retained earnings 1,262
Accumulated other comprehensive income (loss) (82)
-------------
15,064
Employee stock ownership trust commitment (2,337)
Treasury stock, at cost 222,365 shares (1,054)
-------------
Total shareholders' equity 11,673
------------
$ 19,729
============
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,
2002 2001
---- ----
Net revenues $ 15,607 $ 17,934
Costs and expenses:
Cost of goods sold 12,096 12,935
Selling, general and administrative 2,977 3,025
Interest 196 271
Depreciation 660 588
---------- ----------
15,929 16,819
---------- ----------
Income (loss) before income taxes (322) 1,115
Income tax provision (benefit) (93) 415
---------- ----------
Net income (loss) $ (229) $ 700
========== ==========
Income (Loss) Per Share:
Basic
-----
Net income (loss) per share $ (0.12) $ 0.37
========== ==========
Diluted
-------
Net income (loss) per share $ (0.12) $ 0.37
========== ==========
See notes to consolidated financial statements
-F4-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
($000's omitted)
Year Ended
December 31,
2002 2001
---------- ----------
Cash flows related to operating activities:
Net income (loss) $ (229) $ 700
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation 660 588
Deferred income taxes (97) 369
Change in assets and liabilities -
Accounts receivable 66 (220)
Inventories 276 (632)
Prepaid income taxes (48) 121
Other current assets 628 (837)
Other assets (9) 31
Accounts payable (442) 296
Accrued employee compensation & benefit costs 103 122
Other accrued liabilities (77) 20
Other non-current liabilities (8) (33)
Employee stock ownership trust payment 101 101
---------- ----------
Net cash provided by operating activities 924 626
---------- ----------
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (717) (273)
Purchase of treasury shares - (99)
---------- ----------
Net cash used in investing activities (717) (372)
---------- ----------
Cash flows related to financing activities:
Increase in demand loan 400 850
Acquisition of long-term debt 500 0
Payments on demand loan (600) (650)
Principal payments on long-term debt (548) (393)
---------- ----------
Net cash used in financing activities (248) (193)
---------- ----------
Net (decrease) increase in cash (41) 61
Cash at beginning of period 720 659
--------- ----------
Cash at end of period $ 679 $ 720
========= ==========
Supplemental disclosures:
========================
Income taxes paid $ 132 $ 62
Interest paid $ 226 $ 283
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 $829,000 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, which
approximates actual cost (first-in, first-out), or market. 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 charged directly to cost or
expenses 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 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 generally accepted accounting principles 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 2001, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 contains accounting and reporting requirements for
the impairment and disposal of long-lived assets and discontinued
operations. Adoption of SFAS No. 144 had no effect on the Company's
financial statements.
2. Inventories December 31, 2002
----------- -----------------
($000's omitted)
Raw materials and common parts $ 979
Work-in-process 5,101
Finished goods 919
-----------
6,999
Less common parts expected to be used
after one year (236)
-----------
$ 6,763
===========
3. Property, plant and equipment December 31, 2002
----------------------------- -----------------
($000's omitted)
Land $ 25
Buildings and improvements 6,452
Machinery, equipment and tooling 9,611
-----------
16,088
Less accumulated depreciation (9,008)
-----------
$ 7,080
===========
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.
-F8-
4. Long-term debt December 31, 2002
-------------- -----------------
($000's omitted)
Industrial Development Revenue Bonds; secured by a letter of credit from
a bank with interest payable monthly
at a floating rate (1.85% at December 31, 2002) $ 4,490
Term loans; payable to a financial institution $500,000 at LIBOR plus
2% (3.38% at December 31, 2002); quarterly principal payments of
$17,500 commencing January 1, 2005; payable in full October 1,
2009; and $464,000 at a rate of 5.82% at December 31, 2002;
quarterly principal
payments of $35,714 through February 1, 2006 964
Various other secured term notes payable to government agencies 598
---
6,052
Less current portion (378)
-----------
$ 5,674
===========
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: 2003 - $378,000;
2004 - $463,000; 2005 - $418,000; 2006 - $312,000; 2007 and thereafter
$4,481,000.
The Company also has a $1,000,000 line of credit on which there was no
outstanding balance at December 31, 2002.
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
-F9-
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 379,000 shares have been
allocated, exclusive of shares distributed to ESOP participants. At
December 31, 2002 and 2001, approximately 470,000 and 497,000 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 2002 and 2001. 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.
Defined benefit plan
--------------------
The Company has noncontributory defined benefit pension plans. Plan
benefits are based on stated amounts for each year of service; funding is
in accordance with statutory requirements. Pension cost of $29,000 and
$20,000 was recognized in 2002 and 2001, respectively, and was calculated
using a weighted-average discount rate of 6.5% in 2002 and 7.0% in 2001,
and weighted-average expected rate of return on plan assets of 8.0% for
both years. The projected benefit obligation under the plan at December
31, 2002 was $90,000, net of $314,000 of plan assets at fair value.
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 2002, no amount was accrued under this program and
$24,000 was accrued during 2001. The current balance of $249,000 is
reflected on the December 31, 2002 Consolidated Balance Sheet.
-F10-
6. Income taxes
------------
The provision (benefit) for income taxes included in the consolidated
statement of operations consists of the following:
2002 2001
------- ------
($000's omitted)
Current:
Federal income tax (benefit) ($ 5) $ 25
State income tax 9 21
------- ------
4 46
------- -------
Deferred:
Federal income tax (benefit) (111) 308
State income tax 14 61
------- -------
(97) 369
------- -------
($ 93) $ 415
======= =======
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:
2002 2001
------- ------
Statutory rate (34%) 34%
Increase resulting from:
State income taxes (less federal effect) 5% 5%
Extraterritorial income exclusion (3%) (2%)
Nondeductible expenses 4% 1%
Other (1%) (1%)
------ ------
(29%) 37%
======= =======
-F11-
At December 31, 2002, the deferred tax assets (liabilities) were
comprised of the following:
($000's omitted)
Inventory $ 133
Accrued vacation 167
Federal and state net operating losses and credits 334
Deferred compensation 143
Other 5
---------
Total deferred tax assets 782
Property, plant and equipment (535)
Other liabilities (67)
---------
Total deferred tax liabilities (602)
---------
Net deferred tax asset $ 180
=========
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, 2002, the Company has a Federal consolidated net
operating loss carryforward of approximately $524,000 (approximately a
$178,000 tax benefit) which begins to expire in 2022.
At December 31, 2002, the Company also has New York State net operating
loss carryforwards of approximately $1,558,000 (approximately a $62,000
tax benefit) that begin to expire in 2019. The Company also has a State
of Pennsylvania net operating loss carryforward of approximately
$1,450,000 (approximately a $58,000 tax benefit) that begins to expire in
2008.
-F12-
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 income
-----------------------------------------------------------------------------------------
($000's omitted)
Balance December
31, 2000 2,614,506 $523 $13,361 $ 794 ($ 2,539) ($ 955) ($ 25)
Comprehensive income:
Net income - - - $ 700 - - $ 700 -
Other comprehensive
income (loss), net of tax:
Minimum pension
liability adjustment - - - - - - (33) (33)
---------
Other comprehensive
income (loss) - - - - - - (33) -
---------
Comprehensive income - - - - - - $ 667 -
=========
Compensation expense - - - - 101
Treasury stock - - - (3) - (99) -
--------- ---- ------- ------- -------- --------- ---------
Balance December
31, 2001 2,614,506 $523 $13,361 $1,491 ($ 2,438) ($ 1,054) ($ 58)
Comprehensive income (loss):
Net income (loss) - - - $ (229) - - $ (229) -
Other comprehensive
income (loss), net of tax:
Minimum pension
liability adjustment - - - - - (24) (24)
Other comprehensive
income (loss) - - - - - - (24) -
---------
Comprehensive income (loss) - - - - - $ (253) -
==========
Compensation expense - - - - 101 - -
--------- ---- ------- ------ -------- ---------- ---------
Balance December
31, 2002 2,614,506 $523 $13,361 $1,262 ($ 2,337) ($ 1,054) ($ 82)
========= ==== ======= ===== ======= ========= =========
-F13-
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,
2002 2001
--------- ---------
($000's omitted
except per share data)
Net income (loss) $ (229) $ 700
========= ========
Weighted average common shares
outstanding (basic) 1,898 1,877
Incremental shares from assumed
conversions of stock options 0 0
Weighted average common
shares outstanding (diluted) 1,898 1,877
Basic
-----
Net income (loss) per share $ (0.12) $ 0.37
======== ========
Diluted
-------
Net income (loss) per share $ (0.12) $ 0.37
======== ========
Comprehensive income (loss)
---------------------------
The minimum pension liability adjustment of $82,000, which is net of
taxes amounting to $48,000, is the only component of other comprehensive
income (loss) for 2002.
-F14-
Stock options
-------------
Under the Servotronics, Inc. 2000 Employee Stock Option Plan authorized
by the Board of Directors and the 2001 Long-Term Stock Incentive Plan
authorized by the Board of Directors and the Shareholders, and other
separate agreements authorized by the Board of Directors, the Company has
granted non-qualified options to its Directors and Officers. The Company
applies APB Opinion No. 25 and related interpretations in accounting for
these Plans and the separate option agreements. Accordingly, no
compensation expense has been charged to earnings in 2002 or prior years
as stock options granted have an exercise price equal to the market price
on the date of grant. At December 31, 2002, 301,600 shares of common
stock were available under these plans. Options granted under these Plans
have durations of ten years and vesting periods ranging from six months
to three years.
A summary of the status of options granted under all employee plans is
presented below:
Weighted
Average
Options Exercise
Outstanding Price ($)
----------- ---------
Outstanding as of December 31, 2000 211,372 6.06
Granted in 2001 125,000 4.38
Exercised in 2001 (17,172) 5.787
Forfeited in 2001 - -
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
The following tables summarize information about options outstanding at
December 31, 2002:
Remaining
Exercise Number contractual Options
Prices ($) Outstanding Life Exercisable
---------------------------------------------------------------------------
8.50 93,000 5 years 93,000
3.8125 101,200 8 years 93,700
4.38 125,000 9 years 109,000
------- ----------
Total 319,200 295,700
======= =======
-F15-
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". If the compensation cost for
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, 2002 and 2001 are as follows:
2002 2001
----------------------------
Net income (loss):
As reported $(229,000) $700,000
Pro forma $(406,000) $521,000
Earnings (loss) per common share:
As reported - basic $(0.12) $0.37
As reported - diluted $(0.12) $0.37
Pro forma - basic $(0.21) $0.28
Pro forma - diluted $(0.21) $0.28
There were 125,000 options granted in 2001. The Black-Scholes calculated
estimated value of the options granted in 2001 was $2.96. The assumptions
used to calculate this value include a risk-free interest rate of 4.85%,
an expected term of 10 years, and an annual standard deviation
(volatility) factor of 50.9%. 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 2001 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.
-F16-
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 2002 and 2001 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 significant portion of finished products are for foreign end
use.
-F17-
Information regarding the Company's operations in these segments is
summarized as follows:
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)
--------------
Income (loss) before income taxes $ (322)
==============
Identifiable assets $ 14,521 $ 5,208 $ 19,729
============ ========= =============
Capital expenditures $ 326 $ 391 $ 717
============= ========== ==============
Advanced Consumer
Year ended Technology Products
December 31, 2001 Group Group Consolidated
----------------- ------------ ----------- ------------
($000's omitted)
Revenues from unaffiliated customers $ 12,186 $ 5,749 $ 17,934
============ ========= =============
Profit $ 2,259 $ 167 2,426
============ =========
Depreciation expense $ (434) $ (154) (588)
============= ==========
Interest expense (271)
General corporate expense (452)
--------------
Income before income taxes $ 1,115
=============
Identifiable assets $ 15,759 $ 4,937 $ 20,696
============ ========= =============
Capital expenditures $ 200 $ 73 $ 273
============ ========= =============
-F18-
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
$3,400,000 in 2002 and $3,082,000 in 2001. Similar contracts by the Consumer
Products Group accounted for revenues of approximately $192,000 in 2002 and
$299,000 in 2001. Sales of advanced technology products to one prime contractor,
including various divisions and subsidiaries of a common parent company,
amounted to approximately 18% and 23% of total revenues in 2002 and 2001,
respectively. Sales to another customer amounted to approximately 21% and 22% of
total revenues in 2002 and 2001, respectively. No other single customer
represented more than 10% of the Company's revenues in any of these years.
-F19-