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, 2005
__ 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
-------------------------------------- -------------
(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 is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.
----
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
---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X.
---- ----
Issuer's revenues for its most recent fiscal year: $23,126,000
As of March 27, 2006 the aggregate market value of the voting common stock
held by non-affiliates of the registrant was $14,617,768.22 based on the average
of sales prices reported by the American Stock Exchange on that day.
As of March 27, 2006 the number of $.20 par value common shares outstanding
was 2,481,752.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-KSB
-------- -------------------
2006 Proxy Statement Part III
Transitional Small Business Disclosure Format. Yes . No X.
---- ----
TABLE OF CONTENTS
PART I
Item 1. Description of Business............................................3
Item 2. Description of Properties..........................................7
Item 3. Legal Proceedings..................................................7
Item 4. Submission of Matters to a Vote of Security Holders................8
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities................8
Item 6. Management's Discussion and Analysis or Plan of Operation..........9
Item 7. Financial Statements..............................................15
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.............................15
Item 8A. Controls and Procedures...........................................16
Item 8B. Other Information.................................................16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...............17
Item 10. Executive Compensation............................................17
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters......................17
Item 12. Certain Relationships and Related Transactions....................17
Item 13. Exhibits..........................................................18
Item 14. Principal Accountant Fees and Services............................23
Signatures....................................................................24
Consolidated Financial Statements.........................................F1-F21
-2-
PART I
------
Item 1. Description of Business
------ -----------------------
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, 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.
From time to time, the Registrant has also produced other products of its
own and/or of a given design to meet customers' requirements.
-3-
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 various
specialty tools, 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 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 23% of the Registrant's total
revenues as compared to 22% in 2004. In 2005 and 2004, the Registrant had sales
of advanced technology products to two customers (including their respective
subsidiaries and/or divisions) that each exceeded 10% of Registrant's total
revenues. No other single customer represented more than 10% of the Company's
revenues in 2005 or 2004.
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
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.
-4-
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 16%
of the Registrant's total sales in 2005 as compared to 23% in 2004. No other
single customer represented more than 10% of the Company's revenues in 2005. 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, trademarks, patents, 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 2005 and 2004 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.
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.
-5-
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, Lifetime Hoan Corp., Gerber 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
and to a lesser extent in selected foreign markets. 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, 2005, had approximately 245 employees of
which approximately 230 are full time; 189 in Western New York and 41 in
Pennsylvania. In excess of 83% of its employees are engaged in production,
inspection, packaging or shipping activities. The balance are engaged in
executive, engineering, administrative, clerical or sales capacities.
-6-
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, 12.7 Cutlery products 1-tile/wood
New York 1 concrete/metal
1 concrete block 154,000
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 uses computer-aided technology
throughout its processes, procedures, designs, manufacturing and administrative
functions. 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
------ -----------------
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.
-7-
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
Not applicable.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
------ ---------------------------------------------------------------
Business Issuer Purchases of Equity Securities
----------------------------------------------
(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 2005 and 2004.
High Low
---- ---
2005
Fourth Quarter $ 4.75 $ 3.85
Third Quarter 5.05 4.10
Second Quarter 5.00 4.10
First Quarter 5.00 4.41
2004
Fourth Quarter $ 4.99 $ 3.70
Third Quarter 5.90 3.50
Second Quarter 4.98 2.72
First Quarter 3.54 2.75
(b) Approximate number of holders of common stock
---------------------------------------------
Title Approximate number of
of record holders (as of
class December 31, 2005)
----- ------------------
Common Stock, $.20 par value per share 605
(c) Dividends on common stock
-------------------------
No cash dividends were paid in 2005 or 2004.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------------------------------
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of outstanding exercise price of equity compensation
options, warrants outstanding options, plans (excluding securities
and rights warrants and rights reflected in column (a))
Plan category (a) (b) (c)
------------- ------------------------- --------------------- --------------------------
Equity compensation
plans approved by
security holders 333,000 $3.503 17,000
Equity compensation
plans not approved
by security holders 180,900 $6.072 16,300
------- ------
Total 513,900 $4.407 33,300
======= ======
-8-
(e) Company Re-purchases of Equity Securities
During 2005, the Company did not purchase any shares of Servotronics,
Inc. common stock. In January 2006, the Board of Directors authorized
the purchase of up to 250,000 shares of the Company's outstanding
common stock. The shares may be purchased in the open market or in
privately negotiated transactions; and at times and in amounts that the
Company deems appropriate.
Item 6. Management's Discussion and Analysis or Plan of Operation
------ ---------------------------------------------------------
Management Discussion
---------------------
During the years ended December 31, 2005 and 2004, approximately 39% and
45% respectively of the Company's revenues were derived from contracts with
agencies of the U.S. Government or their prime contractors and their
subcontractors. Sales of products sold for government applications have
decreased a net of approximately $560,000 when comparing the results of 2005 to
2004 as the result of the previously reported scheduled completion of a
significant order to the Consumer Products Group (CPG). The Company believes
that government involvement in military operations overseas will continue to
have a direct impact on the financial results in both the Advanced Technology
and Consumer Products markets. While the Company remains optimistic in relation
to these opportunities, it recognizes that sales to the government are affected
by defense budgets, the foreign policies of the U.S. and other nations, the
level of military operations and other factors and, as such, it is difficult to
predict the impact on future financial results. The Company's commercial
business is affected by such factors as uncertainties in today's global economy,
global competition, the vitality and ability of the commercial aviation industry
to purchase new aircraft, market demand and acceptance both for the Company's
products and its customers' products which incorporate Company-made components.
See also Note 10 to the consolidated financial statements for information
concerning business segment operating results.
Results of Operations - Year 2005 as Compared to 2004
-----------------------------------------------------
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 period to period dollar and percentage increase or decrease of
such items as compared to the indicated prior period.
-9-
Period to Period to
Relationship to period period
net revenues $ increase % increase
year ended (decrease) (decrease)
December 31, year ended year ended
2005 2004 2005-2004 2005-2004
---- ---- --------- ---------
Net revenues and other income:
Advanced technology products 59.8% 51.3% $ 2,480 21.8%
Consumer products 40.2 48.7 (1,467) (13.6)
---- ---- --------- ---------
100.0 100.0 1,013 4.6
Cost of goods sold, exclusive of depreciation 73.7 73.9 703 4.3
---- ---- --------- ---------
Gross profit 26.3 26.1 310 5.4
---- ---- --------- ---------
Selling, general and administrative 16.5 17.1 15 0.4
Interest 1.0 0.7 74 46.0
Depreciation and amortization 2.9 3.0 24 3.7
Insurance proceeds, net (3.4) - 795 -
---- ---- --------- ---------
17.0 20.8 682 50.1
Income before income tax provision 9.3 5.3 992 85.3
Income tax provision 3.4 2.0 363 84.6
---- ---- --------- ---------
Net income 5.9% 3.3% $ 629 85.7%
==== ==== ========= =========
Revenues increased by approximately $1,013,000 or 4.6% with an increase in
net income of $629,000 or 85.7%. The increase in revenues is primarily
attributed to an increase in government and commercial shipments as well as
price increases under certain long-term agreements at the Advanced Technology
Group (ATG) partially off-set by a decrease in government shipments at the
Consumer Products Group as a result of the aforementioned scheduled completion
of a significant government order.
Gross margins for the twelve month period ended December 31, 2005 increased
5.4% when compared to the same period in 2004 primarily due to the
aforementioned price increases offset by increased costs associated with certain
retirement obligations (See Note 5 Consolidated Financial Statements). Other
factors affecting margins include the mix of products sold. The Company
continues to incur costs associated with prototype and preproduction activities
that are expensed in the period incurred.
Selling, general and administrative (SG&A) costs increased approximately
0.4% when compared to the same period in 2004. The increase in SG&A costs is
attributed to an increase in administrative and professional costs as well as
increase in costs attributed to expanded marketing and sales efforts and
continuing compliance-related costs under federal securities laws and
regulations applicable to registrant companies.
-10-
Interest expense increased for the year ended December 31, 2005 when
compared to the same period in 2004. Although average debt outstanding was lower
and will continue to decline as the Company continues to repay its scheduled
debt obligations, the increase in interest expense was primarily due to an
increase in market driven interest rates. See also Note 4 to the consolidated
financial statements for information on long-term debt.
Depreciation and amortization expense increased approximately 3.7% for the
year ended December 31, 2005 when compared to the same period in 2004 due to
variable estimated useful lives of depreciable property as identified in Note 1
to the consolidated financial statements.
In December 2005, the Company received $1,000,000, equal to the policy
limit, from its insurance carrier in partial recovery of a defalcation by a
former employee. As of December 31, 2005, the Company incurred approximately
$205,000 in professional, legal and related costs associated with the recovery
and the Company continues to seek additional restitution.
The Company's effective tax rate was 37% in 2005 and 2004. The effective
tax rate in both years reflects state income taxes, permanent non-deductible
expenditures and the tax benefit for extraterritorial sales as well as
manufacturing deductions allowable under the American Jobs Creation Act of 2004.
See also Note 6 to the consolidated financial statements for information
concerning income tax rates.
Net income increased $629,000 after the aforementioned increase in costs
associated with certain retirement obligations. The increase in net income is
primarily attributed to the net after tax insurance proceeds of approximately
$500,000 and the increase in gross profits generated from approximately $1
million increase in net revenues for 2005.
Results of Operations - Year 2004 as Compared to 2003
-----------------------------------------------------
The Company's consolidated results of operations for the year ended
December 31, 2004 showed an approximate $4,539,000 or 25.8% increase in net
revenues with an increase in income before taxes of approximately $757,000. The
increase in revenues is primarily attributed to increased government shipments.
Gross profit increased 28.0% for the twelve month period ended December 31,
2004. The variation in gross profit can be attributed to several factors
including year-to-year variations in the previously discussed front-end costs
associated with new products and changes in design on existing products. The
timing of such costs directly contributes to the fluctuation in gross profit
-11-
from period to period as these costs are expensed as they occur and, as such,
are not matched to their future revenues and benefits. As previously reported,
while 2004 revenues from Consumer Products Group's combination combat knife and
bayonet increased, a substantial amount of front-end costs associated with these
revenues were expensed in prior periods. The Company continues to incur such
costs on an ongoing basis associated with products for both the ATG and CPG.
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
15.8% when compared to the same period in 2003. The increase in SG&A costs is
attributed to increased marketing and sales efforts of the ATG and CPG, however,
the most significant impact has been increased costs for professional services
and corporate governance necessitated by the Sarbanes-Oxley Act. The Company
estimates that it has incurred in excess of $200,000 on related expenses in 2004
and expects to incur significant expenses in the future.
Interest expense remained consistent for the year ended December 31, 2004
when compared to the same period in 2003. Despite the decrease in the average
outstanding balances on institutional debt, average market driven interest rates
increased when comparing the twelve month period ending December 31, 2004 to the
same period of 2003. See also Note 4 to the consolidated financial statements
for information on long-term debt.
Depreciation and amortization expense decreased approximately 2.1% for the
year ended December 31, 2004 when compared to the same period in 2003 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 2004 and 2003. The effective
tax rate in both years reflects state income taxes, permanent non-deductible
expenditures and the tax benefit on certain foreign sales. See also Note 6 to
the consolidated financial statements for information concerning income tax
rates.
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. At December 31, 2005, the Company
has approximately $4.6 million in cash on hand and working capital of
approximately $13 million.
The Company's primary sources of liquidity in 2005 have been from positive
cash flows from operations. For fiscal 2005, the Company generated approximately
$3.3 million in cash flow from operations, an increase of approximately $2.2
million over fiscal 2004. The increase was primarily funded through an increase
in net income as discussed above and a lower use of cash to fund working
capital.
-12-
During the year ended December 31, 2005, the Company expended $421,000 on
capital expenditures as compared to $622,000 in 2004.
At December 31, 2005, there are no material commitments for capital
expenditures.
The Company also has a $1,000,000 line of credit on which there is no
balance outstanding at December 31, 2005. This will be used to fund cash flow
required for operations if needed.
Principal maturities of long-term debt are as follows: 2006 - $382,000,
2007 - $386,000, 2008 - $387,000, 2009 - $539,000, 2010 - $321,000 and
thereafter - $3,383,000.
In January of 2006, the Company's Board of Directors authorized the
purchase by the Company of up to 250,000 shares of its common stock in the open
market or in privately negotiated transactions. As of March 27, 2006, the
Company has purchased or committed to purchase 77,757 shares for a total of
$679,300 under this program.
Off Balance Sheet Arrangements
------------------------------
None.
Critical Accounting Policies
----------------------------
The Company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
(GAAP). 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. Notes 1 and 7 to the accompanying consolidated financial statements
include a summary of the significant accounting policies used in the preparation
of the consolidated financial statements.
-13-
New Accounting Pronouncements
-----------------------------
Management reviewed recent accounting pronouncements and has not determined
the effect these pronouncements will have on Financial Statement results. See
Notes 1 and 7 to the accompanying consolidated financial statements for further
discussion of new accounting pronouncements.
Revenue Recognition
-------------------
Revenues are recognized as servies are rendered or as units are shipped and
at the designated FOB point consistent with the transfer of title, risks and
rewards of ownership. Such purchase orders generally include specific terms
relative to quantity, item description, specifications, price, customer
responsibility for in-process costs, delivery schedule, shipping point, payment
and other standard terms and conditions of purchase and may provide for progress
payments based on in-process costs as they are incurred.
Inventories
-----------
Inventories are stated at the lower of standard cost or net realizable
value. Cost includes all cost incurred to bring each product to its present
location and condition, which approximates actual cost (first-in, first-out).
Market provisions in respect to net realizable value and obsolescence are
applied to the gross value of the inventory. Pre-production and start-up costs
are expensed as incurred.
Employee Benefit Plans
----------------------
As discussed in Note 5 to the financial statements, the Company provides a
range of benefits to its employees and retired employees, including pension and
post retirement benefits. The Company records annual amounts relating to these
plans based on calculations specified by GAAP, which includes various actuarial
assumptions, such as discount rates, assumed rates of return on plan assets and
health care cost trend rates. The Company believes that the assumptions utilized
in recording its obligations under its plans are reasonable based on advice from
its actuaries.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity
with GAAP 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. Such estimates include,
but are not limited to, reserves and allowances for inventories and trade
receivables. Actual results could differ from those estimates.
-14-
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
--------------------
As previously disclosed on Form 8-K, on September 7, 2005, the Audit
Committee of the Company's Board of Directors terminated PricewaterhouseCoopers
LLP ("PWC") as the Company's independent registered public accounting firm. The
audit reports of PWC on the Company's consolidated financial statements as of
and for the two most recent fiscal years ended December 31, 2004 did not contain
any adverse opinion or disclaimer of opinion, nor were these opinions modified
as to uncertainty, audit scope or accounting principles. During the Company's
two fiscal years ended December 31, 2004 and through September 7, 2005, there
were no disagreements between the Company and PWC on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PWC,
would have caused it to make a reference to the subject matter of the
disagreement in connection with its audit report which did not occur.
The Company provided PWC with a copy of its Form 8-K disclosure and
requested that PWC furnish the Company with a letter addressed to the Securities
and Exchange Commission stating whether PWC agreed with the Company's
statements. PWC agreed that there were no disagreements, and issued the letter
which is incorporated by reference as Exhibit 16.1 to this Form 10-KSB.
In connection with obtaining consent from PWC to the inclusion of their
audit report dated March 31, 2005 in this Form 10-KSB for the year ended
December 31, 2004, the Company agreed to indemnify PWC against any legal costs
and expenses incurred by PWC in the successful defense of any legal action that
arises as a result of such inclusion. Such indemnification will be void if a
court finds PWC liable for professional malpractice. As stated in the Division
of Corporate Finance's Accountant Disclosure Rules and Practices Training
Manual, the Securities and Exchange Commission does not object to a domestic or
foreign registrant's indemnification of predecessor auditors for costs incurred
in successful defense of claims.
-15-
On September 7, 2005, the Audit Committee engaged Freed Maxick & Battaglia,
CPAs, P.C., effective September 8, 2005, to serve as the Company's independent
registered public accounting firm for the fiscal year ending December 31, 2005.
Item 8A. Controls and Procedures
------- -----------------------
(i) Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with the
participation of its management, including the Company's Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures as of December 31, 2005. Based upon
that evaluation, the CEO and CFO concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to the material
information relating to the Company (or the Company's consolidated subsidiaries)
required to be included in the Company's periodic filings with the SEC, such
that the information relating to the Company, required to be disclosed in SEC
reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and
communicated to the Company's management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
(ii)Changes in Internal Controls
The Company reviewed its internal control policy and procedures and during
the period ended December 31, 2005 it developed and implemented additional
measures designed to insure that information is recorded, processed, summarized
and reported accurately. These measures include additional procedures relative
to the review and reconciliation of bank statements for payroll and operating
accounts.
Item 8B. Other Information
------- -----------------
None.
-16-
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 2005 fiscal year or such information will be
included by amendment to this form 10-KSB.
Code of Ethics
--------------
The Company has adopted a Code of Ethics and Business Conduct that applies
to all directors, officers and employees of the Company as required by the
listing standards of the American Stock Exchange. The Code is 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 2005 fiscal year or such information will be included by
amendment to this form 10-KSB.
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 2005 fiscal year or such
information will be included by amendment to this form 10-KSB.
Also incorporated by reference is the information in the table under the
heading "Securities Authorized for Issuance Under Equity Compensation Plans"
included in Item 5 of this Form 10-KSB.
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 2005 fiscal year or such information will be
included by amendment to this form 10-KSB.
-17-
Item 13. Exhibits
------- --------
(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
4.1(D) Second amendment to a second Exhibit 4.1(D) to 2004
amended and restated term Form 10-KSB*
loan agreement with
Fleet National Bank
dated December 20, 2004
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-18-
Exhibit
-------
number Presentation Reference
------ ------------ ---------
4.2(A) Letter of Credit Reimbursement Exhibit 4(B)(1) to
Agreement with Fleet Bank 1994 10-KSB*
dated December 1, 1994
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(C) Second Amendment and Exhibit 4.2(C) to 2004
Extension to Letter of Form 10-KSB*
Credit and Reimbursement
Agreement originally dated
December 1, 1994, with
Fleet National Bank, dated as
of December 20, 2004
4.3 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
4.4 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
4.5 Shareholder Rights Plan Exhibit 4 to Form
dated as of August 27, 8-K filed August 27,
2002 2002*
10(A)(1) Employment contract for Exhibit 10(A)(1) to Form
Dr. Nicholas D. Trbovich, 8-K filed August 18,
Chief Executive Officer 2005**
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-19-
Exhibit
-------
number Presentation Reference
------ ------------ ---------
10(A)(4) Employment contract for Exhibit 10(A)(1) to Form
Nicholas D. Trbovich, Jr. 8-K filed August 18,
Vice President 2005**
10(B) Form of Indemnification Exhibit 10(E) to 1986
Agreement between the Form 10-K*
Registrant and each of
its Directors and Officers**
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**
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-20-
Exhibit
-------
number Presentation Reference
------ ------------ ---------
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)(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
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-21-
Exhibit
-------
number Presentation Reference
------ ------------ ---------
10(D)(13) 2001 Long-Term Stock Appendix A to 2001
Incentive Plan Proxy**
16 Letter from
PricewaterhouseCoopers Exhibit 16.1 to Form 8-K/A
regarding dismissal filed September 21, 2005
21 Subsidiaries of the Filed herewith
Registrant
23.1 Consent of Freed Maxick & Filed herewith
Battaglia, CPAs, P.C.
23.2 Consent of Filed herewith
PricewaterhouseCoopers LLP
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.
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.
--------------------------------------------------------------
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
-22-
Exhibit
-------
number Presentation Reference
------ ------------ ---------
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.
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 2005 fiscal year or such information will be
included by amendment to this Form 10-KSB.
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.
-23-
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 28, 2006 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 28, 2006
------------------------ Officer, Chairman of the
Nicholas D. Trbovich Board and Director
/s/ Cari L. Jaroslawsky Chief Financial Officer, March 28, 2006
----------------------- Treasurer
Cari L. Jaroslawsky
/s/ Donald W. Hedges Director March 28, 2006
--------------------
Donald W. Hedges
/s/ William H. Duerig Director March 28, 2006
---------------------
William H. Duerig
/s/ Nicholas D. Trbovich Jr. Director March 28, 2006
---------------------------
Nicholas D. Trbovich Jr.
-24-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Reports of Independent Registered Public Accounting Firms F2
Consolidated balance sheet at December 31, 2005 F4
Consolidated statement of operations for the years ended
December 31, 2005 and 2004 F5
Consolidated statement of cash flows for the years ended
December 31, 2005 and 2004 F6
Notes to consolidated financial statements F7-F21
Consolidated financial statement schedules are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or the notes thereto.
-F1-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Servotronics, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Servotronics, Inc. and
Subsidiaries (the "Company") as of December 31, 2005, and the related
consolidated statements of operations and cash flows for the year then ended.
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 audit. The consolidated financial statements of the Company for the year
ended December 31, 2004 were audited by other auditors whose report dated March
31, 2005 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provided a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Servotronics, Inc.
and Subsidiaries as of December 31, 2005, and the results of their operations
and their cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ Freed Maxick & Battaglia, CPAs, P.C.
Buffalo, New York
March 28, 2006
-F2-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Servotronics, Inc. and Subsidiaries:
In our opinion, the consolidated statements of operations and cash flows for the
year ended December 31, 2004 appearing on pages F-5 through F-6 of the
Servotronics, Inc. 2005 Annual Report to Shareholders which has been
incorporated by reference in this Form 10-KSB, present fairly, in all material
respects, the results of operations and cash flows of Servotronics, Inc. and its
subsidiaries for the year ended December 31, 2004, 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 audit. We conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Buffalo, New York
March 31, 2005
-F3-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
($000's omitted except share and per share data)
December 31,
Assets 2005
------------
Current assets:
Cash $ 4,637
Accounts receivable 3,775
Inventories 6,558
Deferred income taxes 391
Other assets 930
------------
Total current assets 16,291
Property, plant and equipment, net 6,270
Other non-current assets 648
------------
$ 23,209
============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 382
Accounts payable 890
Accrued employee compensation and benefit costs 1,116
Accrued income taxes 329
Other accrued liabilities 279
------------
Total current liabilities 2,996
Long-term debt 5,016
Deferred income taxes 386
Other non-current liabilities 386
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 3,609
Accumulated other comprehensive loss (186)
-------------
16,979
Employee stock ownership trust commitment (2,034)
Treasury stock, at cost 121,605 shares (520)
-------------
Total shareholders' equity 14,425
------------
$ 23,209
============
See notes to consolidated financial statements
-F4-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
($000's omitted except per share data)
Year Ended
December 31,
2005 2004
---- ----
Net revenues $ 23,126 $ 22,113
Costs, expenses and other:
Cost of goods sold, exclusive of depreciation 17,047 16,344
Selling, general and administrative 3,805 3,790
Interest 235 161
Depreciation and amortization 679 655
Insurance proceeds, net (Note 11) (795) -
---------- ----------
20,971 20,950
---------- ----------
Income before income tax provision 2,155 1,163
Income tax provision 792 429
---------- ----------
Net income $ 1,363 $ 734
========== ==========
Income per share:
Basic
-----
Net income per share $ 0.66 $ 0.36
========= ==========
Diluted
-------
Net income per share $ 0.64 $ 0.35
========= ==========
See notes to consolidated financial statements
-F5-
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
($000's omitted)
Year Ended
December 31,
2005 2004
---- ----
Cash flows related to operating activities:
Net income $ 1,363 $ 734
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 679 655
Deferred income taxes (39) (16)
Change in assets and liabilities -
Accounts receivable (441) (846)
Inventories 283 (31)
Prepaid income taxes - 73
Other assets 614 42
Other non-current assets (111) 13
Accounts payable 95 246
Accrued employee compensation and benefit costs 311 73
Other accrued liabilities 127 (23)
Accrued income tax 262 67
Other non-current liabilities 90 27
Employee stock ownership trust payment 101 101
--------- ---------
Net cash provided by operating activities 3,334 1,115
--------- ---------
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (421) (622)
---------- ----------
Net cash used in investing activities (421) (622)
---------- ----------
Cash flows related to financing activities:
Proceeds from demand loan - 572
Proceeds from long-term debt issuance - 750
Payments on demand loan - (572)
Principal payments on long-term debt (382) (643)
---------- ----------
Net cash provided by (used in) provided by financing activities (382) 107
---------- ---------
Net increase in cash 2,531 600
Cash at beginning of year 2,106 1,506
--------- ---------
Cash at end of year $ 4,637 $ 2,106
========= =========
Supplemental disclosures:
-------------------------
Income taxes paid $ 419 $ 306
========= =======
Interest paid $ 222 $ 153
========= =======
See notes to consolidated financial statements
-F6-
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
------------------------------------------
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of
Servotronics, Inc. and its wholly-owned subsidiaries (the "Company").
Cash and cash equivalents
-------------------------
The Company considers cash and cash equivalents to include all cash
accounts and short-term investments purchased with an original
maturity of three months or less.
Revenue recognition
-------------------
Revenues are recognized as services are rendered or as units are
shipped and at the designated FOB point consistent with the transfer
of title, risks and rewards of ownership. Such purchase orders
generally include specific terms relative to quantity, item
description, specifications, price, customer responsibility for
in-process costs, delivery schedule, shipping point, payment and other
standard terms and conditions of purchase and may provide for progress
payments based on in-process costs as they are incurred.
Inventories
-----------
Inventories are stated at the lower of standard cost or net realizable
value. Cost includes all cost incurred to bring each product to its
present location and condition, which approximates actual cost
(first-in, first-out). Market provisions in respect of net realizable
value and obsolescence are applied to the gross value of the
inventory. Pre-production and start-up costs are expensed as incurred.
Shipping and handling costs
---------------------------
Shipping and handling costs are classified as a component of cost of
goods sold.
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 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.
-F7-
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 accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 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. The Company and its subsidiaries file a consolidated
federal income tax return and separate state income tax returns.
Employee stock ownership plan
-----------------------------
Contributions to the employee stock ownership plan are determined
annually by the Company according to plan formula.
Impairment of long-lived assets
-------------------------------
The Company reviews long-lived assets for impairment whenever events
or changes in business circumstances indicate that the carrying amount
of the assets may not be fully recoverable based on undiscounted
future operating cash flow analyses. If an impairment is determined to
exist, any related impairment loss is calculated based on fair value.
Impairment losses on assets to be disposed of, if any, are based on
the estimated proceeds to be received, less costs of disposal.
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.
-F8-
New accounting pronouncements
-----------------------------
During the year ended December 31, 2005, the Financial Accounting
Standards Board (FASB) issued a revision to SFAS 123 entitled SFAS 123
R - "Share-Based Payment", requiring companies to include the fair
value of stock options granted as an expense in the statement of
operations. This revision will become effective for the Company
commencing January 1, 2006. See Note 7 for the expected impact of
recording the fair value of options granted.
During the year ended December 31, 2004, the FASB issued SFAS 151,
"Inventory Costs". This Statement amends the guidance in Accounting
Research Bulletin (ARB) No. 43, Chapter 4, "Inventory Pricing", to
clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "abnormal". In
addition, this Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity
of the production facilities. Statement 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005, with
earlier application permitted in certain circumstances. The Company
will adopt SFAS 151 effective January 1, 2006 and does not expect the
adoption of this new standard to have a significant impact on the
Company's financial statements.
Risk Factors
------------
The aviation and aerospace industries as well as markets for the
Company's consumer products are facing new and evolving challenges on
a global basis. The success of the Company depends upon the trends of
the economy, including interest rates, income tax laws, governmental
regulation, legislation, and other risk factors. In addition,
uncertainties in today's global economy, competition from expanding
manufacturing capabilities and technical sophistication of low-cost
developing countries, particularly in South and East Asia, currency
policies in relation to the U.S. dollar of some major foreign
exporting countries so as to maintain or increase a pricing advantage
of their exports vis-a-vis U.S. manufactured goods, 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.
-F9-
Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash and cash equivalents, accounts receivable,
inventories, accounts payable and accrued expenses are reasonable
estimates of their fair value due to their short maturity. Based on
variable interest rates and the borrowing rates currently available to
the Company for loans similar to its long-term debt, the fair value
approximates its carrying amount.
2. Inventories
-----------
December 31, 2005
-----------------
($000's omitted)
Raw materials and common parts $ 3,055
Work-in-process 3,278
Finished goods 548
----------
6,881
Less: common parts expected to be used
after one year (classified as long-term) (323)
-----------
$ 6,558
===========
3. Property, plant and equipment
-----------------------------
December 31, 2005
-----------------
($000's omitted)
Land $ 25
Buildings 6,537
Machinery, equipment and tooling 10,717
----------
17,279
Less accumulated depreciation and amortization (11,009)
-----------
$ 6,270
===========
Property, plant and equipment includes land and building under a
$5,000,000 capital lease which can be purchased for a nominal amount
at the end of the lease term. As of December 31, 2005, accumulated
amortization on the building amounted to approximately $1,500,000. The
associated current and long-term liabilities are discussed in footnote
4 to the consolidated financial statements. The Company believes that
it maintains property and casualty insurance in amounts adequate for
the risk and nature of its assets and operations and which are
generally customary in its industry.
-F10-
4. Long-term debt December 31, 2005
-------------- -----------------
($000's omitted)
Industrial Development Revenue Bonds; secured by an equivalent letter of
credit from a bank with interest payable monthly
at a floating rate (3.71% at December 31, 2005) (A) $ 3,980
Term loan payable to a financial institution; interest at LIBOR plus 2%
(6.00% at December 31, 2005); quarterly principal payments of $17,500
commencing January 1, 2005; payable in full
in the fourth quarter of 2009 430
Term loan payable to a financial institution; interest at LIBOR plus 2%
(6.41% at December 31, 2005); quarterly principal payments of $26,786
through the fourth quarter of 2011 643
Secured term loan payable to a government agency;
monthly payments of approximately $1,455 with
interest waived payable through second quarter of 2012 145
Secured term loan payable to a government agency;
monthly payments of $1,950 including interest
fixed at 3% payable through fourth quarter of 2015 200
----------
5,398
Less current portion (382)
-----------
$ 5,016
===========
(A) The 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: 2006 -
$382,000, 2007 - $386,000, 2008 - $387,000, 2009 - $539,000, 2010 -
$321,000 and thereafter - $3,383,000.
-F11-
The Company also has a $1,000,000 line of credit on which there is no
balance outstanding at December 31, 2005.
Certain lenders require the Company to comply with debt covenants as
described in the specific loan documents, including a debt service
ratio. At December 31, 2005, 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 419,000 shares have been allocated, exclusive of
shares distributed to ESOP participants. At December 31, 2005 and
2004, approximately 397,000 and 422,000 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 2005 and 2004. 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 frozen 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
-F12-
a measurement date of December 1 for its pension plans. The plan
assets consist of cash and cash equivalents.
NARRATIVE DESCRIPTION OF DEVELOPMENT OF LONG-TERM RATE OF RETURN
The Company uses historical performance in the market blended with
consideration for inflation and a risk-free 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 is taken to ensure
available funds.
December 1,
MEASUREMENT DATE 2005 2004
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at prior measurement date $437,926 $429,351
Interest cost 24,479 25,121
Actuarial (gain)/loss 96,907 15,482
Benefits paid (exclusive of settlements) (15,908) (19,573)
Settlements (17,139) (12,455)
-------- --------
Benefit obligation at current measurement date $526,265 $437,926
======== ========
CHANGE IN FAIR VALUE OF PLAN ASSETS
Plan assets at prior measurement date $364,636 $345,256
Actual return (net of investment expenses) 4,119 2,523
Employer contributions 50,471 51,418
Benefits paid (exclusive of settlements) (15,908) (19,573)
Settlements (14,695) (14,988)
------- -------
Plan assets at current measurement date $388,623 $364,636
======== ========
FUNDED STATUS
Funded status ($137,642) ($73,290)
Unrecognized prior service cost 45,874 47,435
Unrecognized net loss 295,269 197,831
Unrecognized net transition obligation 44,458 59,278
Intangible asset (90,332) (106,713)
Accumulated other comprehensive income (295,269) (197,831)
-------- --------
Accrued pension cost ($137,642) ($73,290)
========= ========
NET PERIODIC PENSION COST
Interest cost $24,479 $25,121
Expected return on assets (30,212) (28,823)
Amortization of transition obligation 14,820 14,820
Recognized loss 12,414 9,849
Amortization of prior service cost 1,561 1,561
Recognized settlement loss 10,704 6,508
------ -----
Net periodic pension cost $33,766 $29,036
======= =======
-F13-
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate prior measurement date 5.75% 6.00%
Discount rate current measurement date 5.75% 5.75%
Rate of compensation increase n/a n/a
Long-term rate of return 8.00% 8.00%
ADDITIONAL FINANCIAL STATEMENT DISCLOSURES FOR SFAS NO. 132 (R)
PLAN ASSETS
Cash and cash equivalents 100.00% 100.00%
====== ======
REQUIRED EMPLOYER CONTRIBUTIONS
Remaining Contributions for the 2004 Plan Year $32,157 $11,855
Installments for the subsequent Plan Year 61,014 38,616
------ ------
Total $93,171 $50,471
======= =======
ACCUMULATED BENEFIT OBLIGATION
Projected benefit obligation (PBO) $526,265 $437,926
Accumulated benefit obligation (ABO) $526,265 $437,926
Plan assets $388,623 $364,636
Excess of ABO over plan assets $137,642 $73,290
ESTIMATED FUTURE BENEFIT PAYMENTS
First plan year $23,349 $24,430
Second plan year $27,915 $25,569
Third plan year $27,116 $27,164
Fourth plan year $28,469 $27,824
Fifth plan year $29,956 $28,702
Sixth through tenth plan years $166,042 $147,998
Other Postretirement Benefit Plans
----------------------------------
The Company provides certain post retirement health and life insurance
benefits for two executives of the Company. Upon retirement and after
attaining at least the age of 65, the Company will pay the annual cost
of health insurance for the retired executives and dependents and will
continue the Company provided life insurance in force at the time of
retirement. The retiree's health insurance benefits ceases upon the
death of the retired executive. The actuarially calculated future
obligation of the benefits at the date of adoption of the plan was
$128,675 and is being amortized into expense at a rate of
approximately $17,000 per year. Estimated future annual expenses
associated with the plan are immaterial.
-F14-
6. Income tax provision
--------------------
The provision (benefit) for income taxes included in the consolidated
statement of operations consists of the following:
2005 2004
------- ------
($000's omitted)
Current:
Federal income tax provision $ 764 $ 388
State income tax provision 67 57
------- ------
831 445
Deferred:
Federal income tax (benefit) (61) (13)
State income tax provision (benefit) 22 (3)
------- --------
(39) (16)
$ 792 $ 429
======= =======
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:
2005 2004
------- ------
Federal statutory rate 34% 34%
State income taxes (less federal effect) 3% 3%
----- -----
Effective tax rate 37% 37%
===== =====
At December 31, 2005, the deferred tax assets (liabilities) were
comprised of the following:
($000's omitted)
Inventories $ 158
Accrued employee compensation and benefit costs 213
Operating loss and credit carryforwards 52
Minimum pension liability 126
Other 3
----------
Total deferred tax assets 552
Property, plant and equipment (540)
Other liabilities (7)
----------
Total deferred tax liabilities (547)
----------
Net deferred tax asset $ 5
=========
At December 31, 2005, the Company has New York State net operating
loss carryforwards of approximately $279,000 (approximately a $9,000
net tax benefit) that begin to expire in 2019.
-F15-
The Company also has a State of Pennsylvania net operating loss
carryforward of approximately $1,306,000 (approximately a $43,000 net
tax benefit) that begins to expire in 2006.
7. Common shareholders' equity
---------------------------
Common stock
Number Capital in Other Total
of shares excess of Retained Treasury Comprehensive Shareholders
issued Amount par value earnings ESOP stock Loss Equity
------------------------------------------------------------------------------------
($000's omitted except share amounts)
Balance December
31, 2003 2,614,506 $523 $13,033 $1,516 ($ 2,236) ($ 520) ($ 107) $ 12,209
========= ==== ======= ====== ======== ======== ======== ========
Comprehensive income:
Net income - - - 734 - - - $ 734
Other comprehensive
loss, net of tax
Minimum pension
liability adjustment - - - - - - (18) (18)
-------
Total comprehensive income - - - - - - - 716
Compensation expense - - - - 101 - - 101
Other - - - (4) - - - (4)
-------- ---- ------- ------- ------ ------ ------- ---------
Balance December
31, 2004 2,614,506 $523 $13,033 $2,246 ($ 2,135) ($ 520) ($ 125) $ 13,022
========= ==== ======= ====== ======== ======== ========
Comprehensive income:
Net income - - - 1,363 - - - $ 1,363
Other comprehensive
loss, net of tax
Minimum pension
liability adjustment - - - - - - (61) (61)
Total comprehensive income - - - - - - - 1,302
Compensation expense - - - - 101 - - 101
-------- ---- ------- ------ ------ ------ ------- --------
Balance December
31, 2005 2,614,506 $523 $13,033 $3,609 ($ 2,034) ($ 520) ($ 186) $ 14,425
========= ==== ======= ====== ======== ======== ======= ========
In January of 2006, the Company's Board of Directors authorized the
purchase by the Company of up to 250,000 shares of its common stock in
the open market or in privately negotiated transactions. As of March
27, 2006, the Company has purchased or committed to purchase 77,757
shares for a total of $679,300 under this program.
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. Incremental shares from assumed
conversions are calculated as the number of shares that would be
issued, net of the number of shares that could be purchased in the
marketplace with the cash received upon stock option exercise.
-F16-
Year Ended
December 31,
2005 2004
-------- --------
($000's omitted)
except per share data)
Net income $ 1,363 $ 734
======== ========
Weighted average common shares
outstanding (basic) 2,075 2,052
Incremental shares from assumed
conversions of stock options 64 46
Weighted average common
shares outstanding (diluted) 2,139 2,098
Basic
-----
Net income per share $ 0.66 $ 0.36
======== =======
Diluted
-------
Net income per share $ 0.64 $ 0.35
======== =======
Other comprehensive loss
------------------------
The minimum pension liability of $186,000 ($125,000 - 2004), which is
shown net of deferred income taxes of $109,000 ($73,000 - 2004), is
the only component of other comprehensive loss.
Stock options
-------------
Under the Servotronics, Inc. 2000 Employee Stock Option Plan
authorized by the Board of Directors and the 2001 Long-Term Stock
Incentive Plan authorized by the Board of Directors and the
Shareholders, and other separate agreements authorized by the Board of
Directors, the Company has granted non-qualified options to certain
Directors and Officers. The Company applies APB Opinion No. 25 and
related interpretations in accounting for these Plans and the separate
option agreements. Accordingly, no compensation expense has been
charged to earnings in 2005 or prior years as stock options granted
have an exercise price equal to the market price on the date of grant.
At December 31, 2005, 33,300 shares of common stock were available
under these plans. Options granted under these plans have durations of
ten years and vesting periods ranging from immediate vesting to four
(4) years.
-F17-
A summary of the status of options granted under all employee plans is
presented below:
Weighted
Average
Options Exercise
Outstanding Price ($)
Outstanding as of December 31, 2003 464,200 4.01
Granted in 2004 - -
Exercised in 2004 - -
Forfeited in 2004 - -
Outstanding as of December 31, 2004 464,200 4.01
Granted in 2005 80,000 4.70
Exercised in 2005 - -
Forfeited in 2005 30,300 4.34
------ ----
Outstanding as of December 31, 2005 513,900 4.41
======= ====
The following tables summarize information about options outstanding
at December 31, 2005:
Remaining
Exercise Number Contractual Options
Prices ($) Outstanding Life Exercisable
--------------------------------------------------------
8.50 87,200 2 years 87,200
3.8125 93,700 5 years 93,700
4.38 117,000 6 years 117,000
2.045 136,000 8 years 133,000
4.70 80,000 10 years 80,000
------ ------
Total 513,900 510,900
======= =======
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, 2005 and 2004 are as follows:
-F18-
2005 2004
---- ----
Net income:
As reported $1,363,000 $734,000
Pro forma $1,171,778 $703,781
Earnings per common share:
As reported - basic $0.66 $0.36
As reported - diluted $0.64 $0.35
Pro forma - basic $0.56 $0.34
Pro forma - diluted $0.55 $0.34
There were 80,000 options granted in 2005. There were no options
granted in 2004. The Black-Scholes calculated estimated value of the
options granted in 2005 was $3.095. The assumptions used to calculate
this value include a risk-free interest rate of 4.39%, an expected
term of 10 years, a dividend yield of zero and an annual standard
deviation (volatility) factor of 49.6%. 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 2005 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.
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
-F19-
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 2005 and 2004 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, Advanced Technology
Group (ATG) and Consumer Products Group (CPG). The Company's
reportable segments are strategic business units that offer different
products and services. The segments are composed of separate
corporations and are managed separately. Operations in ATG involve the
design, manufacture, and marketing of servo-control components (i.e.,
torque motors, control valves, actuators, etc.) for government,
commercial and industrial applications. CPG's operations involve the
design, manufacture and marketing of a variety of cutlery products for
use by consumers and government agencies. The Company derives its
primary sales revenue from domestic customers, although a significant
portion of finished products are for foreign end use.
-F20-
Information regarding the Company's operations in these segments is
summarized as follows ($000's omitted):
Advanced Technology Consumer Products
Group Group Consolidated
----- ----- ------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Revenues from unaffiliated customers $13,834 $11,354 $ 9,292 $ 10,759 $ 23,126 $ 22,113
======= ======= ======== ======== ========= ========
Profit $ 2,974 $ 1,844 $ 48 $ 871 $ 3,022 $ 2,715
======= ======= ========= ========
Depreciation and amortization $ (508) $ (506) $ (171) $ (149) (679) (655)
======== ======== ========= =========
Interest expense (235) (161)
Insurance proceeds, net 795 -
General corporate expense (748) (736)
---------- ---------
Income before income taxes $ 2,155 $ 1,163
========= ========
Identifiable assets $16,046 $14,519 $ 7,163 $ 6,841 $ 23,209 $ 21,360
======= ======= ======== ======== ========= ========
Capital expenditures $ 192 $ 302 $ 229 $ 320 $ 421 $ 622
======= ======= ======== ======== ========= ========
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 $5,600,000 in 2005 and $4,800,000 in
2004. Similar contracts by the Consumer Products Group accounted for
revenues of approximately $3,800,000 in 2005 and $5,100,000 in 2004.
Sales of advanced technology products to one prime contractor,
including various divisions and subsidiaries of a common parent
company, amounted to approximately 13% in 2005 and 14% in 2004. The
Company also had sales to another customer that amounted to
approximately 18% of total revenues in 2005 and 17% in 2004. No other
single customer represented more than 10% of the Company's revenues in
any of these years.
11. Insurance proceeds
------------------
As previously reported, in December of 2005, the Company received
$1,000,000, equal to the policy limit, from its insurance carrier in
partial recovery of a defalcation by a former employee. As of December
31, 2005, the Company incurred approximately $205,000 in professional,
legal and related costs associated with the recovery and the Company
continues to seek additional restitution.
-F21-