High Low
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 |
2003
|
Fourth Quarter |
$ 3.55 |
$ 2.00 |
|
Third Quarter |
2.45 |
2.10 |
|
Second Quarter |
2.28 |
1.85 |
|
First Quarter |
3.75 |
2.25 |
(b) Approximate number of holders of common stock
Title Approximate number of
of record holders (as of
class December 31, 2004)
Common Stock, $.20 par value per share 567
(c) Dividends on common stock
No cash dividends were paid in 2004 or 2003.
(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 |
|
270,000 |
|
$3.126 |
|
80,000 |
| |
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
194,200 |
|
$6.057 |
|
76,600 |
| |
|
|
|
|
|
|
|
Total |
|
464,200 |
|
$4.352 |
|
156,600 |
| |
|
|
|
|
|
|
(e) Company Re-purchases of Equity Securities
None.
Item 6. Management’s Discussion and Analysis or Plan of Operation
The following table sets forth for the period indicated the percentage relationship of certain items in the consolidated statement of operations to net revenues and the percentage increase or decrease of such items as compared to the indicated prior period.
| |
|
|
|
|
|
| |
|
Relationship to
net revenues year
ended
December 31, |
|
Period to
period
increase
(decrease)
year ended |
|
| |
|
|
2004 |
|
|
2003 |
|
|
2004-2003 |
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
Advanced technology products |
|
|
51.3 |
% |
|
58.5 |
% |
|
10.4 |
% |
|
Consumer products |
|
|
48.7 |
|
|
41.5 |
|
|
47.7 |
|
| |
|
|
100.0 |
|
|
100.0 |
|
|
25.8 |
|
|
Cost of goods sold, exclusive of depreciation |
|
|
73.9 |
|
|
74.4 |
|
|
25.1 |
|
|
Gross profit |
|
|
26.1 |
|
|
25.6 |
|
|
28.0 |
|
|
Selling, general and administrative |
|
|
17.1 |
|
|
18.6 |
|
|
15.8 |
|
|
Interest |
|
|
0.7 |
|
|
0.9 |
|
|
0.6 |
|
|
Depreciation and amortization |
|
|
3.0 |
|
|
3.8 |
|
|
(2.1 |
) |
| |
|
|
20.8 |
|
|
23.3 |
|
|
14.3 |
|
|
Income before income taxes |
|
|
5.3 |
|
|
2.3 |
|
|
186.5 |
|
|
Income tax provision |
|
|
2.0 |
|
|
0.9 |
|
|
182.2 |
|
|
Net income |
|
|
3.3 |
% |
|
1.4 |
% |
|
189.0 |
% |
Management Discussion
During the year ended December 31, 2004 and for the comparable period ended December 31, 2003, approximately 45% and 42% respectively of the Company’s revenues were derived from contracts with agencies of the U.S. Government or their prime contractors and their subcontractors. Continued government involvement in military operations overseas has had a direct impact on the financial results in both the Advanced Technology and Consumer Product’s markets. Sales of products sold for government applications have increased approximately $2,700,000 over 2003. While the Company remains optimistic in relation to these opportunities, it recognizes that sales to the government are affected by defense budgets, U.S. and foreign policy and the level of military operations and as such, it is difficult to predict the impact on future financial results.
See also Note 10 to the consolidated financial statements for information concerning business segment operating results.
Results of Operations - Year 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 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 Advanced Technology Group (ATG) and Consumer Products Group (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 of the expanded sales effort 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 continue 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.
Results of Operations - Year 2003 as Compared to 2002
The Company’s consolidated results of operations for the year ended December 31, 2003 showed an approximate $2,000,000 or 12.6% increase in net revenues with a turnaround in income before taxes of approximately $728,000. The increase in revenues is primarily attributed to increased government shipments.
Gross profit increased 28.4% for the twelve month period ended December 31, 2003. During 2002, the Company incurred significant front-end costs associated with prototype, preproduction and start-up activities for Consumer Products Group’s combination combat knife and bayonet. The majority of such up-front costs were incurred and expensed in 2002 and early 2003. While the Company continues to incur such costs on an ongoing basis associated with products for both the Advanced Technology Group (ATG) and Consumer Products Group (CPG), the timing of such costs directly contributes to the fluctuation in gross profit from period to period as these costs are expensed as they occur and, as such, are not matched to their future revenues and benefits. Another factor contributing to the increase in gross profit for the reported period is product mix.
Selling, general and administrative (SG&A) costs increased approximately 10% when compared to the same period in 2002. The increase in SG&A costs is primarily attributed to increased marketing of the expanded sales effort of the ATG and CPG and the increased costs for professional services and corporate governance necessitated by the Sarbanes-Oxley Act and related regulations that are expected to continue to be significant expense factors.
Interest expense decreased for the year ended December 31, 2003 when compared to the same period in 2002 due to market driven interest rate fluctuations and the decrease of institutional debt.
Depreciation and amortization expense increased approximately 1.4% for the year ended December 31, 2003 when compared to the same period in 2002 due to variable estimated useful lives of depreciable property as identified in Note 1 to the consolidated financial statements.
The Company’s effective tax rate (benefit) was 37% in 2003 compared to (29%) in 2002. The variance in the effective tax rate is primarily attributable to state income taxes, permanent non-deductible expenditures and the tax benefit on certain foreign sales.
Liquidity and Capital Resources
The Company’s primary liquidity and capital requirements relate to the working capital needs; primarily inventory, accounts receivable, capital investments in facilities, machinery, tools/dies and equipment and principal/interest payments on indebtedness. The Company’s primary sources of liquidity have been from positive cash flows and from bank financing.
During the year ended December 31, 2004, the Company expended $622,000 on capital expenditures as compared to $148,000 in 2003.
At December 31, 2004, the Company has commitments for approximately $70,000 in capital expenditures.
The Company also has a $1,000,000 line of credit on which there is no balance outstanding at December 31, 2004.
Principal maturities of long-term debt are as follows: 2005 - $381,000; 2006 - $384,000, 2007 - $386,000; 2008 - $387,000, 2009 and thereafter - $4,243,000.
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. As such, we are required to make certain estimates, judgments and assumptions that the Company believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ significantly from those estimates under different assumptions and
conditions. The Company believes that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and which require our most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note 1 to the accompanying consolidated financial statements includes a summary of the significant accounting policies used in the preparation of the consolidated financial statements.
New Accounting Pronouncements
Management reviewed recent accounting pronouncements and has not determined the effect these pronouncements will have on Financial Statement results. See Note 1 to the accompanying consolidated financial statements for further discussion of new accounting pronouncements.
Revenue Recognition
The Company’s revenues are principally recognized as units are shipped and as terms and conditions of purchase orders are met.
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.
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. Such estimates include, but are not limited to, reserves and allowances for inventories and trade receivables. Actual results could differ from those estimates.
Item 7. Financial Statements
The financial statements of the Registrant which are included in this Form 10-KSB Annual Report are described in the accompanying Index to Consolidated Financial Statements on Page F1.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 8A. Controls and Procedures
Our management has reviewed our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15). Our management believes that as of the end of the Company’s most recent fiscal year such disclosure controls and procedures are adequate to ensure that material information relating to the Company is made known to management by others within the Company.
In addition, our management reviewed our internal controls and, to management’s knowledge, during the quarter ended December 31, 2004 there has been no change that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 8B. Other Information
None.
PART III
Item 9. Directors and Executive Officers of the Registrant
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 2004 fiscal year or such information will be included by amendment.
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 2004 fiscal year or such information will be included by amendment.
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the information included in the Registrant’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Registrant’s 2004 fiscal year or such information will be included by amendment.
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 10KSB.
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 2004 fiscal year or such information will be included by amendment.
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 |
Filed herewith |
| |
amended and restated term |
|
| |
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
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 |
Filed herewith |
| |
Extension to Letter of |
|
| |
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) to 1986 |
| |
Dr. Nicholas D. Trbovich, |
Form 10-K* |
| |
Chief Executive Officer** |
|
_______________________________________________________________________________________________________
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
Exhibit
number Presentation Reference
| |
|
|
|
10(A)(2) |
Amendment to employment |
Filed herewith |
| |
contract for Dr. Nicholas D. |
|
| |
Trbovich, Chief Executive |
|
| |
Officer** |
|
| |
|
|
|
10(A)(3) |
Amendment to employment |
Filed herewith |
| |
contract for Dr. Nicholas D. |
|
| |
Trbovich, Chief Executive |
|
| |
Officer** |
|
| |
|
|
|
10(A)(4) |
Employment contract for |
Filed herewith |
| |
Nicholas D. Trbovich, Jr. |
|
| |
Vice President** |
|
| |
|
|
|
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* |
_______________________________________________________________________________________________________
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
Exhibit
number Presentation Reference
| |
|
|
|
10(D)(2) |
Stock Option Agreement |
Exhibit 10(D)(2) to 1998 |
| |
for Donald W. Hedges |
Form 10-KSB* |
| |
dated March 24, 1998** |
|
| |
|
|
|
10(D)(2)(a) |
Stock Option Agreement |
Exhibit 10(D)(2)(a) to 2000 |
| |
for Donald W. Hedges |
Form 10-KSB* |
| |
dated July 7, 2000** |
|
| |
|
|
|
10(D)(3)(b) |
Stock Option Agreement |
Exhibit 10(D)(3)(b) to 1998 |
| |
for Nicholas D. |
Form 10-KSB* |
| |
Trbovich dated |
|
| |
March 24, 1998** |
|
| |
|
|
|
10(D)(3)(c) |
Stock Option Agreement |
Exhibit 10(D)(3)(c) to 2000 |
| |
for Nicholas D. |
Form 10-KSB* |
| |
Trbovich dated |
|
| |
July 7, 2000** |
|
| |
|
|
|
10(D)(4) |
Stock Option Agreement |
Exhibit 10(D)(4) to 1998 |
| |
for William H. Duerig |
Form 10-KSB* |
| |
dated March 24, 1998** |
|
| |
|
|
|
10(D)(4)(a) |
Stock Option Agreement |
Exhibit 10(D)(4)(a) to 2000 |
| |
for William H. Duerig |
Form 10-KSB* |
| |
dated July 7, 2000** |
|
| |
|
|
|
10(D)(9) |
Land Lease Agreement |
Exhibit 10(D)(9) to 1992 |
| |
between TSV, Inc. |
Form 10-KSB* |
| |
(wholly-owned subsidiary |
|
| |
of the Registrant) and the |
|
| |
ECIDA dated as of May 1, |
|
| |
1992, and Corporate |
|
| |
Guaranty of the Registrant |
|
| |
dated as of May 1, 1992 |
|
| |
|
|
|
10(D)(10) |
Amendment to Land Lease |
Exhibit 10(D) (11) to 1993 |
| |
Agreement and Interim |
Form 10-KSB* |
| |
Lease Agreement dated |
|
| |
November 19, 1992 |
|
_______________________________________________________________________________________________________
*Incorporated herein by reference (File No. 1-07109)
**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 |
Exhibit 10(D)(12) to |
| |
as of December 1, 1994 |
1994 10-KSB* |
| |
between TSV, Inc. and |
|
| |
the Registrant |
|
| |
|
|
|
10(D)(13) |
2001 Long-Term Stock |
Appendix A to 2001 |
| |
Incentive Plan |
Proxy** |
| |
|
|
|
21 |
Subsidiaries of the |
Exhibit 21 to 2001 |
| |
Registrant |
10-KSB* |
| |
|
|
|
23 |
Consent of Independent |
Filed herewith |
| |
Accountants Consent on |
|
| |
Form S-8 dated March 31, |
|
| |
2005 |
|
| |
|
|
|
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. |
|
_______________________________________________________________________________________________________
*Incorporated herein by reference (File No. 1-07109)
**Indicates management contract or compensatory plan or arrangement
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. |
|
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.
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 2004 fiscal year or such information will be included by amendment.
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-KSB contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company’s capital resources and profitability. Forward-looking statements involve numerous risks and uncertainties. The Company derives a material portion of its revenues from contracts with agencies of the U.S. Government or their prime contractors. The Company’s business is performed under fixed price contracts and the following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: uncertainties in today’s global economy, global competition, difficulty in predicting defense appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company’s customers to fund long-term purchase programs and market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company-made components. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-KSB. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements.
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 31, 2005 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 31, 2005
Nicholas D. Trbovich Officer, Chairman of the
Board and Director
/s/ Lee D. Burns Treasurer and Secretary March 31, 2005
Lee D. Burns (Chief Financial Officer)
/s/ Donald W. Hedges Director March 31, 2005
Donald W. Hedges
/s/ William H. Duerig Director March 31, 2005
William H. Duerig
/s/ Nicholas D. Trbovich Jr. Director March 31, 2005
SERVOTRONICS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F2
Consolidated balance sheet at December 31, 2004 F3
Consolidated statement of operations for the years ended
December 31, 2004 and 2003 F4
Consolidated statement of cash flows for the years ended
December 31, 2004 and 2003 F5
Notes to consolidated financial statements F6 - F21
Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Servotronics, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and cash flows present fairly, in all material respects, the financial position of Servotronics, Inc. (the “Company”) and its subsidiaries at December 31, 2004, and the results of their operations and their cash flows for the years ended December 31, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with 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 audits provide a reasonable basis for our opinion
PricewaterhouseCoopers LLP
Buffalo, New York
March 31, 2005
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($000’s omitted except share and per share data)
| |
|
December 31, |
|
|
Assets |
|
|
2004 |
|
|
Current assets: |
|
|
|
|
|
Cash |
|
$ |
2,106 |
|
|
Accounts receivable |
|
|
3,334 |
|
|
Inventories |
|
|
6,841 |
|
|
Deferred income taxes |
|
|
471 |
|
|
Other assets |
|
|
1,544 |
|
|
Total current assets |
|
|
14,296 |
|
|
Property, plant and equipment, net |
|
|
6,527 |
|
|
Other non-current assets |
|
|
537 |
|
| |
|
$ |
21,360 |
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Current portion of long-term debt |
|
$ |
381 |
|
|
Accounts payable |
|
|
795 |
|
|
Accrued employee compensation and benefit costs |
|
|
805 |
|
|
Accrued income taxes |
|
|
67 |
|
|
Other accrued liabilities |
|
|
152 |
|
|
Total current liabilities |
|
|
2,200 |
|
|
Long-term debt |
|
|
5,400 |
|
|
Deferred income taxes |
|
|
434 |
|
|
Other non-current liabilities |
|
|
304 |
|
|
Shareholders’ equity: |
|
|
|
|
|
Common stock, par value $.20; authorized |
|
|
|
|
|
4,000,000 shares; issued 2,614,506 shares |
|
|
523 |
|
|
Capital in excess of par value |
|
|
13,033 |
|
|
Retained earnings |
|
|
2,246 |
|
|
Accumulated other comprehensive loss |
|
|
(125 |
) |
| |
|
|
15,677 |
|
|
Employee stock ownership trust commitment |
|
|
(2,135 |
) |
|
Treasury stock, at cost 121,605 shares |
|
|
(520 |
) |
|
Total shareholders’ equity |
|
|
13,022 |
|
| |
|
$ |
21,360 |
|
See notes to consolidated financial statements
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
($000’s omitted except per share data)
|
|
|
|
|
|
|
Year Ended
|
| |
|
|
2004 |
|
|
2003 |
|
|
Net revenues |
|
$ |
22,113 |
|
$ |
17,574 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of goods sold, exclusive of depreciation |
|
|
16,344 |
|
|
13,067 |
|
|
Selling, general and administrative |
|
|
3,790 |
|
|
3,272 |
|
|
Interest |
|
|
161 |
|
|
160 |
|
|
Depreciation and amortization |
|
|
655 |
|
|
669 |
|
| |
|
|
20,950 |
|
|
17,168 |
|
|
Income before income taxes |
|
|
1,163 |
|
|
406 |
|
|
Income tax provision |
|
|
429 |
|
|
152 |
|
|
Net income |
|
$ |
734 |
|
$ |
254 |
|
|
Income Per Share: |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.36 |
|
$ |
0.13 |
|
| |
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.35 |
|
$ |
0.13 |
|
See notes to consolidated financial statements
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000’s omitted)
| |
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
| |
|
|
2004 |
|
|
2003 |
|
|
Cash flows related to operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
734 |
|
$ |
254 |
|
|
Adjustments to reconcile net income to net |
|
|
|
|
|
|
|
|
cash provided by operating activities - |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
655 |
|
|
669 |
|
|
Deferred income taxes |
|
|
(16 |
) |
|
184 |
|
|
Change in assets and liabilities - |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(846 |
) |
|
145 |
|
|
Inventories |
|
|
(31 |
) |
|
(47 |
) |
|
Prepaid income taxes |
|
|
73 |
|
|
72 |
|
|
Other assets |
|
|
42 |
|
|
(125 |
) |
|
Other non-current assets |
|
|
13 |
|
|
24 |
|
|
Accounts payable |
|
|
246 |
|
|
131 |
|
|
Accrued employee compensation and benefit costs |
|
|
73 |
|
|
(57 |
) |
|
Other accrued liabilities |
|
|
(23 |
) |
|
66 |
|
|
Other non-current liabilities |
|
|
27 |
|
|
(64 |
) |
|
Accrued income tax |
|
|
67 |
|
|
- |
|
|
Employee stock ownership trust payment |
|
|
101 |
|
|
101 |
|
|
Net cash provided by operating activities |
|
|
1,115 |
|
|
1,353 |
|
|
Cash flows related to investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures - property, plant & |
|
|
|
|
|
|
|
|
equipment |
|
|
(622 |
) |
|
(148 |
) |
|
Net cash used in investing activities |
|
|
(622 |
) |
|
(148 |
) |
|
Cash flows related to financing activities: |
|
|
|
|
|
|
|
|
Proceeds from demand loan |
|
|
572 |
|
|
250 |
|
|
Proceeds from long-term debt issuance |
|
|
750 |
|
|
- |
|
|
Payments on demand loan |
|
|
(572 |
) |
|
(250 |
) |
|
Principal payments on long-term debt |
|
|
(643 |
) |
|
(378 |
) |
|
Net cash provided by (used) in financing activities |
|
|
107 |
|
|
(378 |
) |
|
Net increase in cash |
|
|
600 |
|
|
827 |
|
|
Cash at beginning of period |
|
|
1,506 |
|
|
679 |
|
|
Cash at end of period |
|
$ |
2,106 |
|
$ |
1,506 |
|
Supplemental disclosures:
====================
|
Income taxes (received) paid |
|
$ |
306 |
|
|
($131 |
) |
|
Interest paid |
|
$ |
153 |
|
$ |
154 |
|
See notes to consolidated financial statements
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
The principal accounting policies of Servotronics, Inc. (the “Company”) and subsidiaries are as follows:
Principles of consolidation
The consolidated financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries.
Cash and cash equivalents
The Company considers cash and cash equivalents to include all cash accounts and short-term investments purchased with a maturity of three months or less.
Revenue recognition
The Company’s revenues are principally recognized as units are shipped and as terms and conditions of purchase orders are met.
Inventories
Inventories are stated generally at the lower of standard cost or net realizable value. Cost includes all cost incurred to bring each product to its present location and condition, which approximates actual cost (first-in, first-out), and market provisions in respect of net realizable value and obsolescence are applied to the gross value of the inventory. Pre-production and start-up costs are expensed as incurred.
Shipping and handling costs
Shipping and handling costs are classified as a component of cost of goods sold.
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.
Depreciation is provided on the basis of estimated useful lives of depreciable properties, primarily by the straight-line method for financial statement purposes and by accelerated methods for tax purposes. Depreciation expense includes the amortization of capital lease assets. The estimated useful lives of depreciable properties are generally as follows:
Buildings and improvements 5-39 years
Machinery and equipment 5-15 years
Tooling 3-5 years
Income taxes
The Company and its subsidiaries file a consolidated federal income tax return and separate state income tax returns.
The Company follows the asset and liability approach to account for income taxes. This approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of operating loss and credit carryforwards and temporary differences between the carrying amounts and the tax bases of assets and liabilities.
Employee stock ownership plan
Contributions to the employee stock ownership plan are determined annually by the Company according to plan formula.
Use of estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New accounting pronouncements
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 changes the accounting guidance for certain financial instruments that, under previous guidance, could be classified as equity or “mezzanine” equity by now requiring those instruments to be classified as liabilities (or assets in some circumstances) on the balance sheet. Further, SFAS 150 requires disclosure regarding the terms of those instruments and settlement alternatives. SFAS is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have any material impact on the Company’s financial position, results of operations or cash flows.
In December 2003, the FASB issued a revision to SFAS No. 132 (SFAS 132), “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” This Statement retains the disclosures previously required by SFAS 132 but adds additional disclosure requirements about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. It also calls for the required information to be provided separately for pension plans and for other postretirement benefit plans. The disclosures required by this Statement are included in Note 5 to the Financial Statements.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” (“SFAS 151”) which clarifies the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005 and the Company will adopt this standard in its third quarter of fiscal 2005. We do not expect implementation of this statement to have a material effect on our consolidated financial position or results of operations.
The FASB issued Statement of Financial Accounting Standard (SFAS) No. 123 (Revised 2004) (SFAS No. 123R), “Share-Based Payment,” in December 2004. SFAS No. 123R is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005, which will require the expensing of any stock options issued in the future.
Risk Factors
The aviation and aerospace industries as well as markets for the Company’s consumer products are facing new and different challenges on a global basis. The success of the Company depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, and other risk factors. In addition, uncertainties in today’s global economy, global competition, the effect of terrorism, difficulty in predicting defense and other government appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company’s customers to fund long-term purchase programs, volatile market demand and the continued market acceptance of the Company’s advanced technology and cutlery products make it difficult to predict the impact on future financial results.
2. Inventories December 31, 2004
($000’s omitted)
|
Raw materials and common parts |
$ 3,181 |
|
Work-in-process |
3,268 |
|
Finished goods |
640 |
| |
7,089 |
|
Less: common parts expected to be used |
|
|
after one year |
(248) |
| |
$ 6,841 |
3. Property, plant and equipment December 31, 2004
($000’s omitted)
|
Land |
$ 25 |
|
Buildings |
6,484 |
|
Machinery, equipment and tooling |
10,349 |
| |
16,858 |
|
Less accumulated depreciation and amortization |
(10,331) |
| |
$ 6,527 |
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, 2004, accumulated amortization on the building amounted to approximately $1,400,000. 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.
4. Long-term debt December 31, 2004
($000’s omitted)
|
Industrial Development Revenue Bonds; secured by a |
|
|
letter of credit from a bank with interest payable monthly |
|
|
at a floating rate (2.12% at December 31, 2004) |
$ 4,150 |
| |
|
|
Term loan payable to a financial institution |
|
|
interest at LIBOR plus 2% (4.00% at |
|
|
December 31, 2004); quarterly principal payments of |
|
|
$17,500 commencing January 1, 2005; payable in full |
|
|
in the fourth quarter of 2009 |
500 |
| |
|
|
Term loan payable to a financial institution |
|
|
interest at a rate of 5.25% at December 31, 2004, |
|
|
changing to LIBOR plus 2% (4.56% at January 4, 2005); |
|
|
quarterly principal payments of $26,786 through the |
|
|
fourth quarter of 2011 |
750 |
| |
|
|
Secured term loan payable to a government agency, |
|
|
monthly payments of approximately $1,455 with |
|
|
interest waived payable through second quarter of 2012 |
163 |
| |
|
|
Secured term loan payable to a government agency |
|
|
monthly payments of $1,950 including interest |
|
|
fixed at 3% payable through fourth quarter of 2015 |
218 |
| |
5,781 |
|
Less current portion |
(381) |
| |
$ 5,400 |
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: 2005 - $381,000; 2006 - $384,000, 2007 - $386,000; 2008 - $387,000, 2009 and thereafter - $4,243,000.
The Company also has a $1,000,000 line of credit on which there is no balance outstanding at December 31, 2004. The average interest rate on draw-downs for 2004 was 5%.
Certain lenders require the Company to comply with debt covenants as described in the specific loan documents, including the debt service ratio. At December 31, 2004, 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 405,000 shares have been allocated, exclusive of shares distributed to ESOP participants. At December 31, 2004 and 2003, approximately 422,000 and 445,000 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 2004 and 2003. Included as a reduction to shareholders’ equity is the employee stock ownership trust commitment which represents the remaining indebtedness of the trust to the Company. Employees are entitled to vote allocated shares and the ESOP trustees are entitled to vote unallocated shares and those allocated shares not voted by the employees.
Defined benefit plan
The Company has noncontributory defined benefit pension plans. Plan benefits are based on stated amounts for each year of service and funding is in accordance with statutory requirements. The Company uses 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, 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 should be taken to ensure available funds.
|
Weighted - Average Assumptions |
|
|
| |
December 1, |
| |
2004 |
2003 |
|
Discount rate for benefit obligations |
5.75% |
6.0% |
|
Discount rate for net periodic pension cost |
6.0% |
6.5% |
|
Rate of compensation increase |
N/A |
N/A |
|
Long-term rate of return and expected |
|
|
|
long-term return on plan assets |
8.0% |
8.0% |
| |
|
|
|
Accumulated benefit obligation |
|
|
| |
December 1, |
| |
2004 |
2003 |
|
Accumulated benefit obligations (ABO) |
$437,926 |
$429,351 |
|
Projected benefit obligations (PBO) |
$437,926 |
$429,351 |
|
Plan assets |
$364,636 |
$345,256 |
|
Excess of ABO over plan assets |
$73,290 |
$84,095 |
| |
|
|
|
|
|
|
|
|
Pension cost and employer contributions |
|
|
|
|
|
|
|
|
|
|
December 1, |
| |
|
|
2004 |
|
|
2003 |
|
|
Net periodic pension cost |
|
$ |
29,036 |
|
$ |
25,101 |
|
|
Anticipated employer contributions |
|
$ |
50,491 |
|
$ |
51,364 |
|
| |
|
|
|
|
|
|
|
|
Estimated future benefit payments |
|
|
|
|
|
|
|
| |
|
|
2004 |
|
|
2003 |
|
|
Plan year 2005 |
|
$ |
24,430 |
|
$ |
22,157 |
|
|
Plan year 2006 |
|
$ |
25,569 |
|
$ |
23,607 |
|
|
Plan year 2007 |
|
$ |
27,164 |
|
$ |
24,791 |
|
|
Plan year 2008 |
|
$ |
27,824 |
|
$ |
26,077 |
|
|
Plan year 2009 |
|
$ |
28,702 |
|
$ |
26,837 |
|
|
Plan years 2010 through 2014 |
|
$ |
147,998 |
|
$ |
141,434 |
|
6. Income tax provision
The provision (benefit) for income taxes included in the consolidated statement of operations consists of the following:
| |
|
|
2004 |
|
|
2003 |
|
|
|
|
($000’s omitted) |
|
Current: |
|
|
|
|
|
|
|
|
Federal income tax (benefit) |
|
$ |
388 |
|
|
($37 |
) |
|
State income tax |
|
|
57 |
|
|
5 |
|
| |
|
|
445 |
|
|
(32 |
) |
|
Deferred: |
|
|
|
|
|
|
|
|
Federal income tax (benefit) |
|
|
(13 |
) |
|
(177 |
) |
|
State income tax |
|
|
(3 |
) |
|
7 |
|
| |
|
|
|
|
|
|
|
| |
|
|
(16 |
) |
|
184 |
|
| |
|
$ |
429 |
|
$ |
152 |
|
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:
| |
|
|
2004 |
|
|
2003 |
|
|
Statutory rate |
|
|
34 |
% |
|
34 |
% |
|
Increase resulting from: |
|
|
|
|
|
|
|
|
State income taxes (less federal effect) |
|
|
3 |
% |
|
2 |
% |
|
Extraterritorial income exclusion |
|
|
(2 |
%) |
|
(3 |
%) |
|
Nondeductible expenses |
|
|
1 |
% |
|
3 |
% |
|
Other |
|
|
1 |
% |
|
1 |
% |
| |
|
|
37 |
% |
|
37 |
% |
At December 31, 2004, the deferred tax assets (liabilities) were comprised of the following:
($000’s omitted)
|
Inventories |
|
$ |
247 |
|
|
Accrued employee compensation and benefit costs |
|
|
222 |
|
|
Operating loss and credit carryforwards |
|
|
62 |
|
|
Minimum pension liability |
|
|
64 |
|
|
Other |
|
|
10 |
|
|
Total deferred tax assets |
|
|
605 |
|
|
Property, plant and equipment |
|
|
(558 |
) |
|
Other liabilities |
|
|
(10 |
) |
|
Total deferred tax liabilities |
|
|
(568 |
) |
|
Net deferred tax asset |
|
$ |
37 |
|
Realization of the net deferred tax asset is dependent upon generating sufficient taxable income over the periods in which the temporary differences are anticipated to reverse. Although realization is not assured, management believes it is more likely than not that the net deferred tax asset will be realized. However, the amount of net deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income are reduced.
At December 31, 2004, the Company also has New York State net operating loss carryforwards of approximately $556,000 (approximately a $18,000 net tax benefit) that begin to expire in 2019. The Company also has a State of Pennsylvania net operating loss carryforward of approximately $1,312,000 (approximately a $43,000 net tax benefit) that begins to expire in 2006.
On October 22, 2004, the President of the United States signed the American Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. The Company has not determined the effect this Act will have on future effective tax rates.
7. Common shareholders’ equity
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
Common stock |
|
|
|
|
|
Accumulated |
| |
Number |
|
Capital in |
|
|
|
|
other |
| |
of shares |
|
excess of |
Retained |
|
Treasury |
Comprehensive |
comprehensive |
| |
issued |
Amount |
par value |
Earnings |
ESOP |
stock |
income |
income (loss) |
| |
($000’s omitted except share amounts) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
Balance December |
|
|
|
|
|
|
|
|
|
31, 2002 |
2,614,506 |
$523 |
$13,361 |
$1,262 |
($2,337) |
($1,054) |
|
($82) |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
Net income |
- |
- |
- |
254 |
- |
- |
$254 |
- |
|
Other comprehensive |
|
|
|
|
|
|
|
|
|
loss, net of tax: |
|
|
|
|
|
|
|
|
|
Minimum pension |
|
|
|
|
|
|
|
|
|
liability adjustment |
- |
- |
- |
- |
- |
- |
(25) |
(25) |
|
Other comprehensive |
|
|
|
|
|
|
|
|
|
loss |
- |
- |
- |
- |
- |
- |
(25) |
- |
|
Comprehensive income |
- |
- |
- |
- |
- |
- |
$229 |
- |
|
Compensation expense |
- |
- |
- |
- |
101 |
- |
|
- |
|
Treasury shares issued for |
|
|
|
|
|
|
|
|
|
deferred compensation |
|
|
|
|
|
|
|
|
|
obligation |
- |
- |
(328) |
- |
- |
534 |
|
- |
|
Balance December |
|
|
|
|
|
|
|
|
|
31, 2003 |
2,614,506 |
$523 |
$13,033 |
$1,516 |
($2,236) |
($520) |
|
($107) |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
Net income |
- |
- |
- |
734 |
- |
- |
$734 |
- |
|
Other comprehensive |
|
|
|
|
|
|
|
|
|
loss, net of tax: |
|
|
|
|
|
|
|
|
|
Minimum pension |
|
|
|
|
|
|
|
|
|
liability adjustment |
- |
- |
- |
- |
- |
- |
(18) |
(18) |
|
Other comprehensive |
|
|
|
|
|
|
|
|
|
loss |
- |
- |
- |
- |
- |
- |
(18) |
- |
|
Comprehensive income |
- |
- |
- |
- |
- |
- |
$716 |
- |
|
Compensation expense |
- |
- |
- |
- |
101 |
- |
- |
|
|
Treasury shares issued for |
|
|
|
|
|
|
|
|
|
deferred compensation |
|
|
|
|
|
|
|
|
|
obligation |
- |
- |
|
- |
- |
|
|
- |
|
Other |
- |
- |
- |
(4) |
- |
- |
|
- |
|
Balance December |
|
|
|
|
|
|
|
|
|
31, 2004 |
2,614,506 |
$523 |
$13,033 |
$2,246 |
($2,135) |
($520) |
|
($125) |
Earnings per share
Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period.
|
|
Year Ended
December 31, |
|
|
|
|
| |
|
|
2004 |
|
|
2003 |
|
|
|
|
($000’s omitted
except per share data) |
|
|
|
|
Net income |
|
$ |
734 |
|
$ |
254 |
|
| |
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
|
|
|
|
|
|
outstanding (basic) |
|
|
2,052 |
|
|
2001 |
|
| |
|
|
|
|
|
|
|
|
Incremental shares from assumed |
|
|
|
|
|
|
|
|
conversions of stock options |
|
|
46 |
|
|
10 |
|
| |
|
|
|
|
|
|
|
|
Weighted average common |
|
|
|
|
|
|
|
|
shares outstanding (diluted) |
|
|
2,098 |
|
|
2,011 |
|
| |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.36 |
|
$ |
0.13 |
|
| |
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.35 |
|
$ |
0.13 |
|
| |
|
|
|
|
|
|
|
Other comprehensive loss
The minimum pension liability adjustment of $125,000 ($107,000 - 2003), which is net of taxes amounting to $73,000 ($63,000 - 2003), is the only component of other comprehensive loss for 2004.
Stock options
Under the Servotronics, Inc. 2000 Employee Stock Option Plan authorized by the Board of Directors and the 2001 Long-Term Stock Incentive Plan authorized by the Board of Directors and the Shareholders, and other separate agreements authorized by the Board of Directors, the Company has granted non-qualified options to certain Directors and Officers. The Company applies APB Opinion No. 25 and related interpretations in accounting for these Plans and the separate option agreements. Accordingly, no compensation expense has been charged to earnings in 2004 or prior years as stock options granted have an exercise price equal to the market price on the date of grant. At December 31, 2004, 156,600 shares of common stock were available under these plans. Options granted under these plans have durations of ten years and vesting periods ranging from six (6) months to four (4) years.
A summary of the status of options granted under all employee plans is presented below:
| |
|
Weighted |
| |
|
Average |
| |
Options |
Exercise |
| |
Outstanding |
Price ($) |
| |
|
|
|
Outstanding as of December 31, 2002 |
319,200 |
5.37 |
|
Granted in 2003 |
145,000 |
2.045 |
|
Exercised in 2003 |
- |
- |
|
Forfeited in 2003 |
- |
- |
| |
|
|
|
Outstanding as of December 31, 2003 |
464,200 |
4.01 |
|
Granted in 2004 |
- |
- |
|
Exercised in 2004 |
- |
- |
|
Forfeited in 2004 |
- |
- |
| |
|
|
|
Outstanding as of December 31, 2004 |
464,200 |
4.01 |
The following tables summarize information about options outstanding at December 31, 2004:
| |
|
|
Remaining |
|
|
Exercise |
Number |
Contractual |
Options |
|
Prices ($) |
Outstanding |
Life |
Exercisable |
| |
8.50 |
93,000 |
3 years |
93,000 |
| |
3.8125 |
101,200 |
6 years |
101,200 |
| |
4.38 |
125,000 |
7 years |
125,000 |
| |
2.045 |
145,000 |
9 years |
141,000 |
|
Total |
|
464,200 |
|
460,200 |
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, 2004 and 2003 are as follows:
2004 2003
Net income:
As reported $734,000 $254,000
Pro forma $703,781 $128,000
Earnings per common share:
As reported - basic $0.36 $0.13
As reported - diluted $0.35 $0.13
Pro forma - basic $0.34 $0.06
Pro forma - diluted $0.34 $0.06
There were no options granted in 2004. There were 145,000 options granted in 2003. The Black-Scholes calculated estimated value of the options granted in 2003 was $1.277. The assumptions used to calculate this value include a risk-free interest rate of 3.83%, an expected term of 10 years, and an annual standard deviation (volatility) factor of 46.6%. The Black-Scholes option pricing model was developed for use in estimating values of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the use of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options are restricted and have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the calculated estimated values, in the Company’s opinion the existing models do not necessarily provide a reliable measure of the value of the Company’s stock options. The estimated value calculated by the Black-Scholes methodology is hypothetical and does not represent an actual tangible Company expense or an actual tangible monetary transfer to the optionee. Further, for the reasons stated above (among others) and especially because of the volatility factor used in the Black-Scholes calculations for the Company’s 2003 options, the derived estimated value may be, in the Company’s opinion, substantially higher than the value which may be realized in an arms-length transaction under the above stated and existing conditions.
Shareholders’ rights plan
During 2002, the Company’s Board of Directors adopted a shareholders’ rights plan (the “Rights Plan”) and simultaneously declared a dividend distribution of one Right for each outstanding share of the Company’s common stock outstanding at August 28, 2002. The Rights Plan replaced a previous shareholder right plan that was adopted in 1992 and expired on August 28, 2002. The Rights do not become exercisable until the earlier of (i) the date of the Company’s public announcement that a person or affiliated group other than Dr. Nicholas D. Trbovich or the ESOP trust (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 25% or more of the Company’s common stock (excluding shares held by the ESOP trust) or (ii) ten business days following the commencement of a tender offer that would result in a person or affiliated group becoming an Acquiring Person.
The exercise price of a Right has been established at $32.00. Once exercisable, each Right would entitle the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock. In the event that any person becomes an Acquiring Person, each Right would entitle any holder other than the Acquiring Person to purchase common stock or other securities of the Company having a value equal to three times the exercise price. The Board of Directors has the discretion in such event to exchange two shares of common stock or two one-hundredths of a share of preferred stock for each Right held by any holder other than the Acquiring Person.
8. Commitments
The Company leases certain equipment pursuant to operating lease arrangements. Total rental expense in 2004 and 2003 and future minimum payments under such leases are not significant.
9. Litigation
There are no legal proceedings which are material to the Company currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to materially adversely affect the business or earnings of the Company.
10. Business segments
The Company operates in two business segments, the Advanced Technology Group and the Consumer Products Group. The Company’s reportable segments are strategic business units that offer different products and services. The segments are composed of separate corporations and are managed separately. Operations in the Advanced Technology Group involve the design, manufacture, and marketing of servo-control components for government and commercial applications. The Consumer Products Group’s operations involve the design, manufacture and marketing of a variety of cutlery products for use by consumers and government agencies. The Company derives its primary sales revenue from domestic customers, although a portion of finished products are for foreign use.
Information regarding the Company’s operations in these segments is summarized as follows:
|
Year ended |
|
|
Advanced |
|
|
Consumer |
|
|
|
|
|
December 31, 2004 |
|
|
Technology |
|
|
Products |
|
|
|
|
|
|
|
Group |
|
|
Group |
|
|
Consolidated |
|
|
|
($000's omitted) |
|
Revenues from unaffiliated customers |
|
$ |
11,354 |
|
$ |
10,759 |
|
$ |
22,113 |
|
|
Profit |
|
$ |
1,844 |
|
$ |
871 |
|
|
2,715 |
|
|
Depreciation and amortization |
|
$ |
(506 |
) |
$ |
(149 |
) |
|
(655 |
) |
|
Interest expense |
|
|
|
|
|
|
|
|
(161 |
) |
|
General corporate expense |
|
|
|
|
|
|
|
|
(736 |
) |
|
Income before income taxes |
|
|
|
|
|
|
|
$ |
1,163 |
|
|
Identifiable assets |
|
$ |
14,519 |
|
$ |
6,841 |
|
$ |
21,360 |
|
|
Capital expenditures |
|
$ |
302 |
|
$ |
320 |
|
$ |
622 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
Advanced |
|
|
Consumer |
|
|
|
|
|
December 31, 2003 |
|
|
Technology |
|
|
Products |
|
|
|
|
|
|
|
|
Group |
|
|
Group |
|
|
Consolidated |
|
|
|
|
($000's omitted) |
|
Revenues from unaffiliated customers |
|
$ |
10,289 |
|
$ |
7,285 |
|
$ |
17,574 |
|
|
Profit |
|
$ |
1,561 |
|
$ |
203 |
|
|
1,764 |
|
|
Depreciation and amortization |
|
$ |
(522 |
) |
$ |
(147 |
) |
|
(669 |
) |
|
Interest expense |
|
|
|
|
|
|
|
|
(160 |
) |
|
General corporate expense |
|
|
|
|
|
|
|
|
(529 |
) |
|
Income before income taxes |
|
|
|
|
|
|
|
$ |
406 |
|
|
Identifiable assets |
|
$ |
13,920 |
|
$ |
6,021 |
|
$ |
19,941 |
|
|
Capital expenditures |
|
$ |
53 |
|
$ |
95 |
|
$ |
148 |
|
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 $4,800,000 in 2004 and $5,200,000 in 2003. Similar contracts by the Consumer Products Group accounted for revenues of approximately $5,100,000 in 2004 and $2,100,000 in 2003. Sales of advanced technology products to one prime contractor, including various divisions and subsidiaries of a common parent company, amounted to approximately 14% in 2004 and 2003. The Company also had sales to another customer that amounted to approximately 17% of total revenues in 2004 and 2003. Another prime contractor provided sales of approximately 8% and 13% of total revenues in 2004 and 2003. No other single customer represented more than 10% of the Company’s revenues in any of these years.
-F21-