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, 1995
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _________________ to _________________.
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)
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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
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Securities registered pursuant to Section 12(g) of the Act: None
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: $16,359,000.
As of February 29, 1996 the aggregate market value of the voting common stock held by non-affiliates of the registrant was $5,869,000 based on the average of sales prices reported by the American Stock Exchange on that day.
As of February 29, 1996 the number of $.20 par value common shares outstanding was 2,183,091.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-KSB
- -------- -------------------
1996 Proxy Statement Part III
Transitional Small Business Disclosure Format. Yes . No x .
----- -----
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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.
To fill most of its orders for components, the Registrant must either modify a catalog 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. During 1994, the Registrant began production under long-term contracts.
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. They are generally designed for use under circumstances in which more conventional seals and gaskets do not perform adequately, such as exposure to extremes of temperature, high pressures, vacuums, radiation or corrosive atmospheres. 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.
The Registrant also designs and/or manufactures for its own use custom precision metal stampings. These stampings are produced from precision single stage and/or progressive dies which are also designed and manufactured by the Registrant. The progressive die performs, in a series of stages in one die, the stamping of a metal piece which could otherwise require stamping by a number of separate dies.
The Registrant sells many of its cutlery products under its own brand names including "Old Hickory" and "Queen."
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 20% of the Registrant's total sales. If the Registrant were deemed to be unqualified by the United States
Government as a contractor or subcontractor, it would lose approximately 39% of its sales of advanced technology products. Sales of advanced technology products to the AlliedSignal Corporation and several of its subsidiaries and/or divisions exceeded 10% of Registrants' total sales in 1995 and 1994, as did sales to United Technologies through several of its subsidiaries and/or divisions in 1995 and with Martin Marietta Corporation in 1994. No other single customer represented more than 10% of the Company's sales in any of these years.
The Registrant's prime contracts and subcontracts with the 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.
1995 and 1994 fiscal years was 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.
The Registrant considers its relationship with its employees to be good and the Registrant has never experienced a significant labor work stoppage.
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 and steel
products
Cheektowaga, 4.6 1-concrete 20,000
New York - block and
steel
Franklinville, 7.7 Cutlery products 1-tile and
New York wood 85,000
Titusville,
Pennsylvania .4 Cutlery products 2-brick 25,000
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During 1994, the Registrant relocated it's corporate headquarters/Advance Technology operation to a new facility 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 at a nominal amount at the end of the lease term. The former corporate headquarters/Advanced Technology facility in Cheektowaga, New York is being marketed.
See the consolidated financial statements, including Note 8 thereto, for further information with respect to the Registrant's lease commitments.
During the fourth quarter of 1994, a fire occurred at one of the Registrant's Titusville, Pennsylvania buildings. As a result, certain consumer products manufacturing operations are temporarily being performed at the Registrant's Cheektowaga, New York facility. Property damaged by the fire and other related losses are covered by the Registrant's insurance policies. See further discussion in Item 6 (Management's Discussion and Analysis or Plan of Operation) and Note 10 to the consolidated financial statements.
The Registrant possesses modern precision manufacturing and testing equipment suitable for the development, manufacture, assembly and testing of its high technology products. The Registrant designs and makes substantially all of the tools, dies, jigs and specialized testing equipment necessary for the production of the high technology products. The Registrant also possesses automatic and semi-automatic grinders, tumblers, presses and miscellaneous metal and wood finishing machinery and equipment for use in the manufacture of consumer products.
High Low
---- ---
1995
Fourth Quarter $ 5 $ 4-1/8
Third Quarter 5-7/8 4-1/4
Second Quarter 4-9/16 3-7/8
First Quarter 4-13/16 3-1/2
1994
Fourth Quarter $ 4-5/16 $ 3-5/8
Third Quarter 4-13/16 4-1/8
Second Quarter 5-1/4 4
First Quarter 4-3/4 4-1/8
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Title Approximate number of
of record holders (as of
class December 31, 1995)
----- ------------------
Common Stock, $.20 par value 776
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PERIOD TO
RELATIONSHIP TO PERIOD
NET SALES YEAR INCREASE
ENDED (DECREASE)
DECEMBER 31, YEAR ENDED
1995 1994 1995-94
----- ----- -----------
Net sales:
Advanced technology products 51.2% 48.2% 9.9%
Consumer products 48.8 51.8 -2.5
----- ----- -----
100.0 100.0 3.5
Cost of goods sold 73.0 71.8 5.2
----- ----- -----
Gross profit 27.0 28.2 -0.9
----- ----- -----
Selling, general and administrative 18.5 19.3 -0.8
Interest 2.3 2.7 -10.2
Depreciation 4.2 3.3 32.9
Gain on involuntary conversion - (1.8) -
----- ----- -----
25.0 23.5 21.9
----- ----- -----
Income before income taxes 2.0 4.7 -56.1
Income tax provision 0.8 1.8 -57.8
----- ----- -----
Net income 1.2% 2.9% -55.8%
===== ===== =====
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See also Note 11 to the consolidated financial statements for information concerning business segment operating results.
The respective amounts of funded and unfunded sales backlog at March 21, 1996 and 1995 for the Advanced Technology Group (ATG) were approximately $31,597,000 and $23,649,000 of which $25,648,000 and $16,487,000 were unfunded in the respective comparable periods. Approximately $22,533,000 of the March 21, 1996 unfunded backlog is for product deliveries beyond 1999. The unfunded portion of the backlog is based on the Company's customers' estimated quantities for multi-year agreements for which the Company has not received firm orders.
Operating profit as a percentage of net sales for the year ended December 31, 1995 decreased to 6.7% from 9.9% as reported for the year ended December 31, 1994. The decrease in operating profit as a percentage of net sales is as described above. During the fourth quarter of 1994, the Company suffered damages caused by a fire at one if its subsidiaries. The Company maintained property and business interruption insurance and during 1995 has recognized approximately $130,000 as miscellaneous income and $150,000 as reductions of expenses incurred for losses due to business interruption.
Selling, general and administrative costs decreased for the year ended December 31, 1995 primarily because of moving costs incurred and expensed in 1994 which were not applicable in 1995. Interest expense decreased because of obtaining long-term financing at lower interest rates. Depreciation expense for the period primarily increased as a result of the move to the Company's new corporate headquarters/Advanced Technology facility (see discussion under liquidity on Capital Resources.)
Income taxes for the year ended December 31, 1995 decreased as a percentage of income before taxes when compared to the year ended December 31, 1994 due primarily to variable state income tax rates and changes made by the Omnibus Budget Reconciliation Act of 1994.
Operating profit as a percentage of net sales for the year ended December 31, 1994 decreased to 9.9% from 12.7% as reported for the year ended December 31, 1993. The fluctuations in operating profit as a percentage of net sales is a result of lower margins and product mix, partially offset by the gain from an involuntary conversion due to a fire at the Company's Titusville, Pennsylvania Cutlery operation and profit contributions from production under new long-term contracts, and as described above.
Selling, general and administrative costs increased for the year-ended December 31, 1994 due to an increase in sales and professional costs. Further, interest expense and depreciation expense for the same period increased as a result of an increase in institutional debt and as a result of the move to the Company's new corporate headquarters/Advanced Technology facility. (See discussion under liquidity and Capital Resources.)
Income taxes for the year ended December 31, 1994 increased as a percentage of income before taxes when compared to the year ended December 31, 1993 due primarily to variable state income tax rates changes made by the Omnibus Budget Reconciliation Act of 1993.
During the year ended December 31, 1995, the Company expended $126,000 on capital expenditure. During the year ended December 31, 1994, the Company expended $1,607,000 on
capital expenditures. The Company moved into its new corporate headquarters/Advanced Technology facility during 1994 and as previously noted has an agreement with a government agency to lease approximately 38 acres of land and facility in Elma, New York. The financing of certain construction and related costs of the new facility is government assisted. Nonetheless, the new facility has resulted in an increase in long-term debt and a substantial increase in depreciation expense. This facility is approximately 82,000 square feet and it is anticipated that this new facility will enable the Company to improve its competitive position and enhance its ability to meet customer needs. The Company also has a $1,000,000 line of credit at December 31, 1995 on which no amount is outstanding at December 31, 1995.
There are no material commitments for capital expenditures at December 31, 1995.
In 1991, the Company's Board of Directors authorized the purchase by the Company of up to 250,000 additional shares of its common stock in open and privately negotiated transactions for a total authorized purchase of up to 350,000 shares, of which 257,317 shares have been purchased. No shares were purchased in 1995.
None.
Exhibit
number Presentation Reference
------- ------------ ---------
3(A)(1) Certificate of Incorporation Exhibit 1 to Form 8-B
filed December 1972*
3(A)(2) Amendments to Certificate Exhibit 3(A)(2) to 1984
of Incorporation dated Form 10-K*
August 27, 1984
3(A)(3) Certificate of designation Exhibit 4(A) to 1987
regarding Series I Form 10-K*
preferred stock
3(B) By-laws Exhibit 3(B) to 1986
Form 10-K*
4(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(B)(1) Letter of Credit Reimbursement Exhibit 4(B)(1) to
Agreement with Fleet Bank 1994 10-KSB
dated as of December 1, 1994
4(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(B)(3) Guaranty Agreement dated as Exhibit 4(B)(3) to
of December 1, 1994 from the 1994 10-KSB
Registrant and its subsidiaries
to the Erie County Industrial
Development Agency ("ECIDA"),
Norwest Bank Minnesota, N.A.,
as Trustee, and Fleet Bank
4(C) Shareholder Rights Plan Attachment B to Form
dated as of August 13, 8-K filed August 17,
1992 1992
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*Incorporated herein by reference (File No. 1-7109) **Indicates management contract or compensatory plan or arrangement
Exhibit
number Presentation Reference
------- ------------ ---------
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 Exhibit 10 (A) (3) to 1993
contract** Form 10-KSB
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 its employee
stock ownership trust
10(D)(1)(a) 1989 Employees Stock Exhibit A to Form
Option Plan** 8: Amendment
No. 1 to 1988
Form 10-K*
10(D)(1)(b) Amendment to 1989 Exhibit (10)(D)(1)(b)
Employees Stock Option to 1990 Form 10-K*
Plan**
10(D)(1)(c) Amendment No. 2 to Exhibit 10(D)(1)(d) to
1989 Employees Stock 1991 Form 10-K*
Option Plan**
10(D)(2) Stock Option Agreement Exhibit B to Form
for Donald W. Hedges 8: Amendment
dated April 28, 1989** No. 1 to 1988
Form 10-K*
|
*Incorporated herein by reference (File No. 1-7109) **Indicates management contract or compensatory plan or arrangement
Form 10-K*
Exhibit
number Presentation Reference
------- ------------ ---------
10(D)(3) Stock Option Agreement Exhibit D to Form
for Nicholas D. 8: Amendment
Trbovich, Sr. dated No. 1 to 1988
March 29, 1989** Form 10-K*
10(D)(4) Stock Option Agreement Exhibit 10(D)(4) to 1990
for William H. Duerig Form 10-K*
dated December 21,
1990**
10(D)(5) Stock Option Agreement Exhibit 10(D)(5) to 1990
for Nicholas D. Form 10-K*
Trbovich, Jr. dated
December 21, 1990**
10(D)(6) Stock Option Agreement
for Nicholas D.
Trbovich, Jr. dated Exhibit 10(D)(6) to 1991
October 17, 1991** Form 10-K*
10(D)(7) Stock Option Agreement Exhibit 10(D)(7) to 1991
for Lee D. Burns dated Form 10-K*
October 17, 1991**
10(D)(8) Stock Option Agreement Exhibit 10(D)(8) to 1991
for Raymond C. Zielinski Form 10-K*
dated October 17, 1991**
10(D)(9) Land Lease Agreement between Exhibit 10(D)(9) to 1992
TSV, Inc. (wholly-owned Form 10-KSB*
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 K(D) (11) to 1993
Agreement and Interim Form 10-KSB
Lease Agreement dated
November 19, 1992
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*Incorporated herein by reference (File No. 1-7109) **Indicates management contract or compensatory plan or arrangement
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 as Exhibit 10(D)(12) to
of December 1, 1994 between 1994 10-KSB
TSV, Inc. and the Registrant
21 Subsidiaries of the Exhibit 22 to 1992
Registrant Form 10-KSB*
27 Financial data schedule 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.
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1995.
*Incorporated herein by reference (File No. 1-7109) **Indicates management contract or compensatory plan or arrangement
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 27, 1996 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 27, 1996
Nicholas D. Trbovich Officer, Chairman of the
Board and Director
/s/ Lee D. Burns
- ---------------------------- Treasurer and Secretary March 27, 1996
Lee D. Burns (Chief Financial Officer)
/s/ Donald W. Hedges
- ---------------------------- Director March 27, 1996
Donald W. Hedges
/s/ William H. Duerig
- ---------------------------- Director March 27, 1996
William H. Duerig
/s/ Nicholas D. Trbovich Jr.
- ---------------------------- Director March 27, 1996
Nicholas D. Trbovich Jr.
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Page
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Report of independent accountants F2
Consolidated balance sheet at December 31, 1995 F3
Consolidated statement of income for the years ended
December 31, 1995 and 1994 F4
Consolidated statement of cash flows for the
years ended December 31, 1995 and 1994 F5
Notes to consolidated financial statements F6-F17
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Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
To the Board of Directors and Shareholders of Servotronics, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index on page F1 present fairly, in all material respects, the financial position of Servotronics, Inc. and its subsidiaries at December 31, 1995 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 the opinion expressed above.
PRICE WATERHOUSE LLP
Buffalo, New York
March 27, 1996
ASSETS
Current assets:
Cash $ 612
Accounts receivable 2,495
Inventories 6,668
Prepaid income taxes 261
Deferred tax asset 501
Other 950
---------
Total current assets 11,487
---------
Property, plant and equipment, net 7,708
Other assets 470
---------
$ 19,665
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 226
Accounts payable 898
Accrued employee compensation and benefit cost 687
Other accrued liabilities 208
---------
Total current liabilities 2,019
---------
Long-term debt 6,890
Non-current deferred tax liability 635
Shareholders' equity:
Common stock, par value $.20 per share; authorized
4,000,000 shares; issued 2,440,408 shares 488
Capital in excess of par value 12,495
Retained earnings 1,422
---------
14,405
Employee stock ownership trust commitment (3,044)
Treasury stock, at cost, 257,317 shares (1,240)
---------
Total shareholders' equity 10,121
---------
$ 19,665
=========
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See notes to consolidated financial statements
YEAR ENDED DECEMBER 31,
1995 1994
---- ----
Net sales $ 16,359 $ 15,807
Costs and expenses:
Cost of goods sold 11,936 11,342
Selling, general and administrative 3,026 3,051
Interest 378 421
Depreciation and amortization 691 520
Gain on involuntary conversion - (283)
----------- -----------
16,031 15,051
----------- -----------
Income before income taxes 328 756
Income tax provision 127 301
----------- -----------
Net income $ 201 $ 455
=========== ===========
Net income per share $ .13 $ .31
=========== ===========
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See notes to consolidated financial statements
YEAR ENDED DECEMBER 31,
1995 1994
---- ----
Cash flows related to operating activities:
Net income $ 201 $ 455
Adjustments to reconcile net income
to net cash provided by operating activities -
Depreciation and amortization 691 520
Deferred taxes (6) 184
Change in assets and liabilities -
Accounts receivable 566 (1,050)
Inventories (358) (419)
Prepaid taxes 23 (284)
Other current assets 159 (504)
Other assets (181) 33
Accounts payable (892) 80
Accrued employee compensation and benefit costs 19 1
Other accrued liabilities (172) 167
Accrued income taxes (144)
Employee stock ownership trust payment 101 101
----------- -----------
Net cash provided by (used in) operating activities 151 (860)
----------- -----------
Cash flows related to investing activities:
Capital expenditures - property, plant
and equipment (126) (855)
Capital expenditures - construction project (752)
----------- -----------
Net cash used in investing activities (126) (1,607)
----------- -----------
Cash flows related to financing activities:
Increase in demand loan 667 400
Increase in long-term debt 575 532
Proceeds from interim construction loan 1,857
Repayment of interim construction loan (5,250)
Proceeds from issuance of revenue bonds 5,000
Principal payments on long-term debt (170) (143)
Payments of demand loans (975)
Purchase of treasury stock (1)
----------- -----------
Net cash provided by financing activities 97 2,395
----------- -----------
Net increase (decrease) in cash 122 (72)
Cash at beginning of year 490 562
----------- -----------
Cash at end of year $ 612 $ 490
=========== ===========
Supplemental disclosures:
Income taxes paid $ 298 $ 550
Interest paid $ 335 $ 415
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See notes to consolidated financial statements
The principal accounting policies of Servotronics, Inc. (the Company) and subsidiaries are as follows:
The consolidated financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries.
The Company 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. Revenues on the remaining contracts are recognized when the terms of purchase orders are met.
Included in accounts receivable is $43,000 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. Included in other accrued liabilities is $200,000 of deferred revenue which represents billings under the terms of the contracts in excess of revenue earned under the percentage of completion method.
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. The cost of property, plant and equipment is offset by a
$199,000 capital grant received in 1994 and grants received in 1995 totaling $300,000. 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 |
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 temporary differences between the carrying amounts and the tax bases of assets and liabilities.
Contributions to the employee stock ownership plan are determined annually by the Company according to plan formula.
Income per share is based on weighted average outstanding shares of 1,511,750 for 1995 and 1,477,462 in 1994. All shares owned by the Employee Stock Ownership Plan (ESOP) which are unallocated are not deemed to be outstanding for purposes of calculating income per share.
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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. Significant estimates employed by management include those used in revenue recognition, amortization of engineering and other support costs included in inventory (See Note 2) and calculating amounts receivable under an insurance claim (See Note 10). Actual results could differ from those estimates.
DECEMBER 31, 1995
----------------
($000'S OMITTED)
Raw materials and common parts $ 1,224
Work-in-process (including engineering
and other support costs of $1,900,000) 5,190
Finished goods 490
--------
6,904
Less common parts expected to be used
after one year (236)
--------
$ 6,668
=========
|
Engineering and other support costs are incurred in fulfilling certain contracts which have a production cycle longer than one year. A portion of these costs will therefore not be realized within one year.
During the fourth quarter of 1995, the Company revised estimates on certain contracts and the periods during which engineering and other support costs in inventory would be amortized. The effect of the change in these estimates was a charge to cost of sales of $200,000.
DECEMBER 31, 1995
-----------------
($000'S OMITTED)
Land $ 19
Buildings and improvements 6,347
Machinery, equipment and tooling 7,163
---------
13,529
Less accumulated depreciation (5,821)
---------
$ 7,708
=========
|
DECEMBER 31, 1995
-----------------
($000'S OMITTED)
Industrial Development Revenue Bonds; secured by a
letter of credit from a bank with interest payable monthly
at a floating rate (5.90% at December 31, 1995) $ 5,000
Unsecured term note; payable to a bank with
interest at prime plus 1/4% (8 3/4% at
December 31, 1995); quarterly principal
payments of $34,439 through November 1, 2000 656
Secured term note; payable to a government agency
with interest at 6%; monthly principal payments of
$2,778 commencing on July 1, 1995 through May 1, 2004,
with a final principal payment of $102,754 due June 1, 2004 383
Various other secured term notes payable to government agencies 1,077
---------
7,116
Less current portion 226
---------
$ 6,890
=========
|
Industrial Development Revenue Bonds were issued by a government agency in 1994 to replace an interim construction loan related to the construction of the Company's new headquarters/Advanced Technology facility. Annual sinking fund payments of $170,000 commence 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.
The letter of credit reimbursement agreement, the unsecured term note agreement and a secured term note contain, among other things, covenants relative to maintenance of working capital and tangible net worth and restrictions on capital expenditures, leases and additional borrowings. The secured term notes are secured by certain property and equipment and contain, among other things, covenants restricting loan proceeds for use in the construction of the Company's new headquarters/Advanced Technology facility.
Principal maturities of long-term debt are as follows: 1996 - $226,000; 1997 - $246,000; 1998 - $248,000; 1999 - $249,000; 2000 and thereafter $6,147,000.
The Company also has a $1,000,000 line of credit on which there was no amount outstanding at December 31, 1995.
Under the Company's ESOP adopted in 1985, participating employees are awarded shares of the Company's common stock based upon salary levels 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 271,000 shares have been allocated, exclusive of shares distributed to ESOP participants. At December 31, 1995 and 1994, approximately 644,000 and 677,000 shares, respectively, purchased by the ESOP remain unallocated, after adjustment for the 6% stock dividend declared in 1995.
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 1995 and 1994. 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.
A Consumer Products division subsidiary of the Company maintains a noncontributory defined benefit pension plan covering substantially all its employees. Plan benefits are based on stated amounts for each year of service; funding is in accordance with statutory requirements. Pension cost of $36,000 and $37,000 was recognized in 1995 and 1994, respectively, calculated using a weighted-average discount rate and weighted-average expected rate of return on plan assets of 8%. The projected benefit obligation under the plan at December 31, 1995 was $160,000, net of $72,000 of plan assets at fair value. Included in the December 31, 1995 consolidated balance sheet is $21,000 of prepaid pension cost related to the plan.
The Company maintains a deferred compensation program designed to achieve, among other things, benefit parity for an officer of the Company. No amount was accrued under this
program in 1995 or 1994. No amounts under this plan have been paid since its inception and accrued in the December 31, 1995 consolidated balance sheet is $230,000.
The provision for income taxes included in the consolidated statement of income consists of the following:
1995 1994
---- ----
($000'S OMITTED)
Current:
Federal income tax $ 111 $ 94
State income tax 22 23
------- -------
133 117
------- -------
Deferred:
Federal income tax (benefit) (4) 155
State income tax (benefit) (2) 29
------- -------
(6) 184
------- -------
$ 127 $ 301
======= =======
|
The reconciliation of the difference between the Company's effective tax rate based upon the total income tax provision and the federal statutory income tax rate is as follows:
1995 1994
---- ----
Statutory rate 34% 34%
Increase resulting from:
State tax (net of federal benefit) 4% 5%
Other 1% 1%
-- --
39% 40%
== ==
|
At December 31, 1995, the deferred tax liabilities (assets) were comprised of the following:
($000'S OMITTED)
Property, plant and equipment $ 605
Other 30
-------
Gross deferred tax liabilities 635
-------
Inventory (240)
Accrued pension (99)
Accrued vacation (107)
Other (55)
-------
Gross deferred tax assets (501)
-------
Net deferred tax liability $ 134
=======
|
COMMON STOCK
------------
NUMBER CAPITAL IN
OF SHARES EXCESS OF RETAINED TREASURY
ISSUED AMOUNT PAR VALUE EARNINGS ESOP STOCK
------ ------ --------- -------- ---- -----
($000's omitted)
Balance December
31, 1993 2,319,910 $ 464 $ 11,981 $ 1,307 ($ 3,246) ($ 1,239)
Compensation expense - - - - 101 -
Purchase of
treasury stock - - - - - (1)
Cancellation of issued shares (2,662) (1) 1 - - -
Net income - - - 455 - -
--------- --------- ---------- ------------ ---------- ---------
Balance December
31, 1994 2,317,248 463 11,982 1,762 (3,145) (1,240)
Compensation expense - - - - 101 -
Purchase of
treasury stock - - - - -
Stock dividend paid 123,160 25 513 (541)
Net income - - - 201 - -
--------- --------- ---------- ------------ ---------- ---------
Balance December
31, 1995 2,440,408 $ 488 $ 12,495 $ 1,422 ($ 3,044) ($ 1,240)
========= ========= ========== ============ ========== =========
|
Under the Servotronics, Inc. 1989 Employees Stock Option Plan (the Option Plan) and other separate agreements authorized by the Board of Directors, the Company has granted options to its Chairman, directors and/or officers. At December 31, 1995, 30,740 shares of common stock are available under the Option Plan. Options may be granted at the fair market value of the Company's stock on the date of the grant with durations of ten years.
At December 31, 1995, the number of shares subject to and the exercise price of options granted to its Chairman, directors and/or officers, as adjusted for the 1995 stock dividend, are 34,980 at approximately $ 2.83 per share, 11,660 at $2.76 per share, 23,320 at $2.24 per share and 15,900 at approximately $6.23 per share. At December 31, 1995, all of the 85,860 shares granted under options are exercisable.
During 1992, the Company's Board of Directors adopted a shareholders' rights plan (the "Rights Plan") and simultaneously declared a dividend of one Right for each outstanding share of the Company's common stock outstanding at August 28, 1992. 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 $30.00. 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 for each Right held by any holder other than the Acquiring Person.
The Company leases certain equipment pursuant to operating lease arrangements. Total rental expense in 1995 and 1994 and future minimum payments under such leases are not significant.
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.
During the fourth quarter of 1994, the Company suffered damages caused by a fire at one of its subsidiaries. The Company maintained property and business interruption insurance and during 1995 has recognized approximately $130,000 as miscellaneous income and $150,000 as reductions of expenses incurred for losses due to business interruption. Included in other current assets at December 31, 1995 is a $585,000 receivable for the full business interruption claim. During 1994, the Company recognized a gain of $283,000 for the excess of insurance proceeds over the book value of assets damaged. Insurance proceeds from this property damage claim were collected during 1995.
The Company operates in two business segments, Advanced Technology Products and Consumer Products. Operations in Advanced Technology Products involve the design, manufacture, and marketing of servo-control components for government and commercial industrial applications. Consumer Products operations involve the design, manufacture and marketing of a variety of cutlery products for use by consumers and government agencies. Information regarding the Company's operations in these segments is summarized as follows:
ADVANCED
YEAR ENDED TECHNOLOGY CONSUMER
DECEMBER 31, 1995 PRODUCTS PRODUCTS CONSOLIDATED
----------------- -------- -------- ------------
($000'S OMITTED)
Sales to unaffiliated customers $ 8,382 $ 7,977 $ 16,359
============= ========== ================
Operating profit $ 943 $ 148 $ 1,091 *
============= ==========
Interest expense (378)
General corporate expense (385)
----------------
Income before income taxes $ 328
================
Identifiable assets $ 13,388 $ 6,318 $ 19,706
============= ========== ================
Depreciation expense $ 358 $ 333 $ 691
============= ========== ================
Capital expenditures ($ 122) $ 248 $ 126
============= ========== ================
|
* Includes $280,000 as miscellaneous income and reductions of expenses from business interruption insurance proceeds - see Note 10.
ADVANCED
YEAR ENDED TECHNOLOGY CONSUMER
DECEMBER 31, 1994 PRODUCTS PRODUCTS CONSOLIDATED
----------------- -------- -------- ------------
($000'S OMITTED)
Sales to unaffiliated customers $ 7,625 $ 8,182 $ 15,807
============ ========== ================
Operating profit $ 757 $ 807 $ 1,564 **
============ ==========
Interest expense (421)
General corporate expense (387)
----------------
Income before income taxes $ 756
================
Identifiable assets $ 13,092 $ 6,562 $ 19,654
============ ========== ================
Depreciation expense $ 249 $ 271 $ 520
============ ========== ================
Capital expenditures $ 1,198 $ 409 $ 1,607
============ ========== ================
|
** Includes $282,684 gain on involuntary conversion - see Note 10.
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 segment accounted for revenues of approximately $3,258,000 in 1995 and $4,185,000 in 1994. Similar contracts by the Consumer Products segment accounted for revenues of approximately $568,000 in 1995 and $684,000 in 1994. Sales of advanced technology products to one prime contractor, including various divisions and subsidiaries of a common parent company, amounted to approximately 13% and 15% of total sales in 1995 and 1994, respectively, another customer amounted to approximately 10% of total sales in 1995 and another customer amounted to approximately 10% of total sales in 1994. No other single customer represented more than 10% of the Company's sales in any of these years.
SERVOTRONICS, INC. AND SUBSIDIARIES
EXHIBIT 10(A)(2)
As of May 1, 1995
Dr. Nicholas D. Trbovich
1110 Maple Street
Elma, NY 14059
Dear Dr. Trbovich:
You and Servotronics, Inc. (the "Company") are parties to an employment agreement, as amended and restated on August 8, 1986 and as subsequently amended as of October 1, 1986, October 1, 1987, July 20, 1988, October 1, 1988, October 1, 1989, May 1, 1990, May 1, 1991, May 1, 1992, May 1, 1993, March 28, 1994, and May 1, 1994 (the "Agreement"), pursuant to which you are employed by the Company.
This will confirm your agreement and that of the Company (pursuant to a resolution of the Board of Directors passed at a meeting held on June 30, 1994) to amend Paragraph 3 of the Agreement to delete "$256,470.00" and insert in its place "$264,000.00".
Except as specifically provided herein, all of the other terms and conditions of the Agreement shall remain in full force and effect.
If the foregoing meets with your approval and you are willing to become bound hereby, will you please sign and return to the undersigned the enclosed copy of this letter.
Very truly yours,
SERVOTRONICS, INC.
/s/ Lee D. Burns, Treasurer Lee D. Burns, Treasurer/Secretary |
ACCEPTED AND AGREED
/s/ Nicholas D. Trbovich _________________________ Dr. Nicholas D. Trbovich |
| ARTICLE 5 |
| CIK: 0000089140 |
| NAME: SERVOTRONICS, INC. AND SUBSIDIARIES |
| MULTIPLIER | 1,000 |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | DEC 31 1995 |
| PERIOD END | DEC 31 1995 |
| CASH | 612 |
| SECURITIES | 0 |
| RECEIVABLES | 2,495 |
| ALLOWANCES | 0 |
| INVENTORY | 6,668 |
| CURRENT ASSETS | 11,487 |
| PP&E | 7,708 |
| DEPRECIATION | 0 |
| TOTAL ASSETS | 19,665 |
| CURRENT LIABILITIES | 2,019 |
| BONDS | 6,890 |
| COMMON | 488 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| OTHER SE | 9,633 |
| TOTAL LIABILITY AND EQUITY | 19,665 |
| SALES | 16,359 |
| TOTAL REVENUES | 16,359 |
| CGS | 11,936 |
| TOTAL COSTS | 16,031 |
| OTHER EXPENSES | 0 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 378 |
| INCOME PRETAX | 328 |
| INCOME TAX | 127 |
| INCOME CONTINUING | 201 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 201 |
| EPS PRIMARY | $0.13 |
| EPS DILUTED | $0.13 |