10QSB 1 l84500ae10qsb.txt SERVOTRONICS, INC. FORM 10QSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________ COMMISSION FILE NO. 1 - 7109 SERVOTRONICS, INC. -------------------------------------------------------------------------------- (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) DELAWARE 16-0837866 --------------------------------- ------------------------------ (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1110 MAPLE STREET, ELMA, NEW YORK 14059-0300 --------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 716-655-5990 ------------------------------------------------- (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X ; NO --- --- STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE. CLASS OUTSTANDING AT OCTOBER 31, 2000 ----------------------------------------- --------------------------------- COMMON STOCK, $.20 PAR VALUE 2,405,488 TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES ; NO X --- --- -1- 2 INDEX ----- PART I. FINANCIAL INFORMATION PAGE NO. -------- ITEM 1. FINANCIAL STATEMENTS A) CONSOLIDATED BALANCE SHEET, SEPTEMBER 30, 2000 3 B) CONSOLIDATED STATEMENT OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 4 C) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 5 D) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 9 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11 SIGNATURES 12 ITEM 6(a). EXHIBITS 27 FINANCIAL DATA SCHEDULE -2- 3 PART I FINANCIAL INFORMATION SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2000 ($000'S OMITTED EXCEPT PER SHARE DATA) (UNAUDITED) ASSETS CURRENT ASSETS: CASH $ 889 ACCOUNTS RECEIVABLE 2,353 INVENTORIES 6,883 DEFERRED INCOME TAXES 1,443 OTHER 1,273 ------------ TOTAL CURRENT ASSETS 12,841 ------------ PROPERTY, PLANT AND EQUIPMENT, NET 6,844 OTHER ASSETS 613 ------------ $ 20,298 ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: CURRENT PORTION OF LONG-TERM DEBT $ 392 ACCOUNTS PAYABLE 694 ACCRUED EMPLOYEE COMPENSATION AND BENEFIT COSTS 923 OTHER ACCRUED LIABILITIES 164 ACCRUED INCOME TAX 159 ------------ TOTAL CURRENT LIABILITIES 2,332 ------------ LONG-TERM DEBT 6,324 DEFERRED INCOME TAXES 518 OTHER NON-CURRENT LIABILITY 227 SHAREHOLDERS' EQUITY: COMMON STOCK, PAR VALUE $.20; AUTHORIZED 4,000,000 SHARES; ISSUED 2,614,506 SHARES 523 CAPITAL IN EXCESS OF PAR VALUE 13,358 RETAINED EARNINGS 697 ACCUMULATED OTHER COMPREHENSIVE INCOME (24) ------------- 14,554 EMPLOYEE STOCK OWNERSHIP TRUST COMMITMENT (2,640) TREASURY STOCK, AT COST 209,018 SHARES (1,017) ------------- TOTAL SHAREHOLDERS' EQUITY 10,897 ------------ $ 20,298 ============ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -3- 4 SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME ($000'S OMITTED EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- NET REVENUES $ 4,129 $ 3,862 $ 12,855 $ 12,067 COSTS AND EXPENSES: COST OF GOODS SOLD 3,047 2,755 9,389 8,604 SELLING, GENERAL AND ADMINISTRATIVE 757 799 2,317 2,368 INTEREST 99 90 295 249 DEPRECIATION AND AMORTIZATION 125 157 389 470 --------- --------- --------- ---------- 4,028 3,801 12,390 11,691 --------- --------- --------- ---------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 101 61 465 376 INCOME TAXES 39 25 179 151 --------- --------- --------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE; NET OF TAXES (BENEFIT) 62 36 286 225 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - - - ( 1,727) --------- --------- --------- ---------- NET INCOME $ 62 $ 36 $ 286 ($ 1,502) ========= ========= ========= ========== INCOME (LOSS) PER SHARE: BASIC ----- INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ 0.03 $ 0.02 $ 0.16 $ 0.12 CUMULATIVE EFFECT PER SHARE OF A CHANGE IN ACCOUNTING PRINCIPLE 0.00 0.00 0.00 ( 0.96) --------- --------- --------- ---------- NET INCOME PER SHARE $ 0.03 $ 0.02 $ 0.16 ($ 0.84) ========= ========= ========= ========== DILUTED ------- INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ 0.03 $ 0.02 $ 0.15 0.12 CUMULATIVE EFFECT PER SHARE OF A CHANGE IN ACCOUNTING PRINCIPLE 0.00 0.00 0.00 ( 0.96) --------- --------- --------- ---------- NET INCOME PER SHARE $ 0.03 $ 0.02 $ 0.15 ($ 0.84) ========= ========= ========= ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMEMTS -4- 5 SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS ($000'S OMITTED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ---- ---- CASH FLOWS RELATED TO OPERATING ACTIVITIES: NET INCOME (LOSS) $ 286 ($1,502) ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - 1,727 DEPRECIATION AND AMORTIZATION 389 470 CHANGE IN ASSETS AND LIABILITIES - ACCOUNTS RECEIVABLE 454 (406) INVENTORIES (715) (846) PREPAID INCOME TAXES 766 (22) OTHER CURRENT ASSETS 22 (81) OTHER ASSETS 6 11 ACCOUNTS PAYABLE (452) 241 ACCRUED EMPLOYEE COMPENSATION & BENEFIT COSTS 97 (50) OTHER ACCRUED LIABILITIES (141) (71) ACCRUED INCOME TAX 159 - --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 871 (529) --------- ---------- CASH FLOWS RELATED TO INVESTING ACTIVITIES: CAPITAL EXPENDITURES - PROPERTY, PLANT & EQUIPMENT (110) (647) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (110) (647) ---------- ---------- CASH FLOWS RELATED TO FINANCING ACTIVITIES: INCREASE IN DEMAND LOAN 600 600 PAYMENTS ON DEMAND LOAN (1,050) (300) ACQUISITION OF LONG-TERM DEBT - 1,000 PRINCIPAL PAYMENTS ON LONG-TERM DEBT (216) (369) NET CASH PROCEEDS FROM EXERCISE OF STOCK OPTIONS - 55 --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (666) 986 ---------- --------- NET INCREASE (DECREASE) IN CASH 95 (190) CASH AT BEGINNING OF PERIOD 794 1,009 --------- --------- CASH AT END OF PERIOD $ 889 $ 819 ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -5- 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($000 OMITTED IN TABLES EXCEPT FOR PER SHARE DATA) 1. THE INFORMATION SET FORTH HEREIN IS UNAUDITED. THIS FINANCIAL INFORMATION REFLECTS ALL NORMAL ACCRUALS AND ADJUSTMENTS WHICH, IN THE OPINION OF MANAGEMENT, ARE NECESSARY FOR A FAIR STATEMENT OF THE RESULTS FOR THE PERIODS PRESENTED. REVENUE RECOGNITION 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 OTHER CURRENT ASSETS ARE $827,000 OF UNBILLED REVENUES WHICH REPRESENT REVENUE EARNED UNDER THE PERCENTAGE OF COMPLETION METHOD (COST-TO-COST) NOT YET BILLABLE UNDER THE TERMS OF THE CONTRACTS. RECLASSIFICATION OF PRIOR YEAR BALANCES CERTAIN PRIOR YEAR BALANCES HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR PRESENTATION. 2. INVENTORIES SEPTEMBER 30, 2000 ----------- ------------------ RAW MATERIALS AND COMMON PARTS $ 1,035 WORK-IN-PROCESS 5,827 FINISHED GOODS 257 ---------- 7,119 LESS COMMON PARTS EXPECTED TO BE USED AFTER ONE YEAR (236) ----------- $ 6,883 =========== ENGINEERING AND OTHER SUPPORT COSTS ARE INCURRED IN FULFILLING CERTAIN CONTRACTS WHICH HAVE A PRODUCTION CYCLE LONGER THAN ONE YEAR. THESE COSTS ARE PROPERLY ACCOUNTED FOR IN ACCORDANCE WITH EMERGING ISSUES TASK FORCE ("EITF") 99-5, "ACCOUNTING FOR PRE-PRODUCTION COSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS". SEE NOTE 4 TO THE CONSOLIDATED FINANCIAL STATEMENTS. 3. PROPERTY, PLANT AND EQUIPMENT ----------------------------- SEPTEMBER 30, 2000 LAND $ 11 BUILDINGS 6,170 MACHINERY, EQUIPMENT AND TOOLING 9,146 ---------- 15,327 LESS ACCUMULATED DEPRECIATION (8,483) ----------- $ 6,844 =========== PROPERTY, PLANT AND EQUIPMENT INCLUDES LAND AND BUILDING UNDER A $5,000,000 CAPITAL LEASE WHICH CAN BE PURCHASED FOR A NOMINAL AMOUNT AT THE END OF THE LEASE TERM. THE COMPANY BELIEVES THAT IT MAINTAINS PROPERTY AND CASUALTY INSURANCE IN AMOUNTS ADEQUATE FOR THE RISK AND NATURE OF ITS ASSETS AND OPERATIONS AND WHICH ARE GENERALLY CUSTOMARY IN ITS INDUSTRY. -6- 7 4. CHANGES IN ACCOUNTING PRINCIPLES -------------------------------- ON JANUARY 1, 1999, THE COMPANY ELECTED EARLY ADOPTION OF EMERGING ISSUES TASK FORCE ("EITF") 99-5, "ACCOUNTING FOR PRE-PRODUCTION COSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS". EITF 99-5 STATES THAT DEVELOPMENT AND PRE-PRODUCTION COSTS FOR PRODUCTS SOLD UNDER LONG-TERM SUPPLY ARRANGEMENTS BE EXPENSED AS INCURRED. ON JANUARY 1, 1999, AS REQUIRED BY THE ACCOUNTING STANDARDS EXECUTIVE COMMITTEE, THE COMPANY ALSO ADOPTED THE STATEMENT OF POSITION NO. 98-5 "REPORTING ON THE COST OF START-UP ACTIVITIES" (SOP 98-5). AS A RESULT OF THE EARLY ADOPTION OF EITF 99-5 AND ADOPTION OF SOP 98-5, THE COMPANY WROTE OFF $1,727,000 OF COSTS WHICH WERE APPROPRIATELY CAPITALIZED IN PRIOR YEARS. THESE CHARGES WERE RECORDED NET OF TAX OF $1,013,000 AS A CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ON JANUARY 1, 1999. 5. LONG-TERM DEBT -------------- SEPTEMBER 30, 2000 INDUSTRIAL DEVELOPMENT REVENUE BONDS; SECURED BY A LETTER OF CREDIT FROM A BANK WITH INTEREST PAYABLE MONTHLY AT A FLOATING RATE (5.85% AT SEPTEMBER 30, 2000) $ 5,000 UNSECURED TERM NOTE; PAYABLE TO A FINANCIAL INSTITUTION WITH INTEREST ON $286,000 AT LIBOR PLUS 2% (8.16% AT SEPTEMBER 30, 2000) AND INTEREST ON THE REMAINING $500,000 AT A CURRENT RATE OF 5.86%; QUARTERLY PRINCIPAL PAYMENTS OF $35,714 THROUGH FEBRUARY 1, 2006 786 VARIOUS OTHER SECURED TERM NOTES PAYABLE TO GOVERNMENT AGENCIES 930 --------- 6,716 LESS CURRENT PORTION (392) ---------- $ 6,324 =========
INDUSTRIAL DEVELOPMENT REVENUE BONDS WERE ISSUED BY A GOVERNMENT AGENCY TO FINANCE 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. ON FEBRUARY 26, 1999, THE COMPANY RECEIVED A $1,000,000 LOAN FROM A FINANCIAL INSTITUTION PAYABLE IN EQUAL QUARTERLY INSTALLMENTS, MATURING IN 2006. THE PROCEEDS WERE USED TO PAY OFF AN UNSECURED TERM NOTE AND TO FINANCE PURCHASES OF EQUIPMENT AND WORKING CAPITAL. THE LOAN IS COLLATERALIZED BY ANY AND ALL EQUIPMENT PURCHASED WITH THE PROCEEDS OF THE TERM LOAN. THE LETTER OF CREDIT REIMBURSEMENT AGREEMENT, THE UNSECURED TERM NOTE AGREEMENT AND THE SECURED TERM NOTES 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 COMPANY ALSO HAS A $1,000,000 LINE OF CREDIT ON WHICH THERE WAS NO OUTSTANDING BALANCE AT SEPTEMBER 30, 2000. -7- 8 6. 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 -------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1999 2,614,506 $523 $13,358 $ 411 ($ 2,640) ($ 1,017) ($ 24) ========= ==== ======= ===== ======= ======= ========= COMPREHENSIVE INCOME NET INCOME - - - $ 286 - - $ 286 - OTHER COMPREHENSIVE INCOME, NET OF TAX - - - - - - - - MINIMUM PENSION LIABILITY ADJUSTMENT - - - - - - - - OTHER COMPREHENSIVE INCOME - - - - - - - - ------- COMPREHENSIVE INCOME - - - - - - $ 286 - ======= ISSUANCE OF COMMON STOCK - - - - - - - COMPENSATION EXPENSE - - - - - - - TREASURY STOCK - - - - - - - EXERCISE OF STOCK OPTIONS - - - - - - - --------- ---- ------- ------ -------- -------- ------ BALANCE SEPTEMBER 30, 2000 2,614,506 $523 $13,358 $ 697 ($ 2,640) ($ 1,017) ($ 24) ========= ==== ======= ===== ======= ======= =========
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.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ 62 $ 36 $ 286 $ 225 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - - - ( 1,727) ------ ------ ------ --------- NET EARNINGS $ 62 $ 36 $ 286 ($ 1,502) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (BASIC) 1,844 1,811 1,844 1,804 INCREMENTAL SHARES FROM ASSUMED CONVERSIONS OF STOCK OPTIONS 3 5 3 5 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (DILUTED) 1,847 1,816 1,847 1,809 BASIC ----- INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $0.03 $ 0.02 $ 0.16 $ 0.12 CUMULATIVE EFFECT PER SHARE OF A CHANGE IN ACCOUNTING PRINCIPLE 0.00 0.00 0.00 ( 0.96) ---- ------ ---- -------- NET INCOME PER SHARE $0.03 $ 0.02 $ 0.16 ($ 0.84) ===== ====== ====== ========= DILUTED ------- INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $0.03 $ 0.02 $ 0.15 $ 0.12 CUMULATIVE EFFECT PER SHARE OF A CHANGE IN ACCOUNTING PRINCIPLE 0.00 0.00 0.00 ( 0.96) ---- ------ ---- -------- NET INCOME PER SHARE $0.03 $ 0.02 $ 0.15 ($ 0.84) ===== ====== ====== ========
-8- 9 7. BUSINESS SEGMENTS ----------------- THE COMPANY OPERATES IN TWO BUSINESS SEGMENTS, ADVANCED TECHNOLOGY PRODUCTS AND CONSUMER PRODUCTS. THE COMPANY'S REPORTABLE SEGMENTS ARE STRATEGIC BUSINESS UNITS THAT OFFER DIFFERENT PRODUCTS AND SERVICES. THE SEGMENTS ARE SEPARATE CORPORATIONS AND ARE MANAGED SEPARATELY. 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 CONSUMER AND GOVERNMENT AGENCIES. THE COMPANY DERIVES SUBSTANTIALLY ALL OF ITS SALES REVENUE FROM DOMESTIC CUSTOMERS. ADVANCED PERIOD ENDED TECHNOLOGY CONSUMER SEPTEMBER 30, 2000 PRODUCTS PRODUCTS CONSOLIDATED ------------------ -------- -------- ------------ REVENUES FROM UNAFFILIATED CUSTOMERS $ 6,948 $ 5,907 $ 12,855 ========= ========= ========= PROFIT $ 1,338 $ 105 $ 1,443 ========= ========= DEPRECIATION EXPENSE (389) INTEREST EXPENSE (295) GENERAL CORPORATE EXPENSE (324) ---------- INCOME BEFORE INCOME TAXES $ 435 ========= ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ------- --------------------------------------------------------- THE FOLLOWING TABLE SETS FORTH FOR THE PERIODS INDICATED THE PERCENTAGE RELATIONSHIP OF CERTAIN ITEMS IN THE CONSOLIDATED STATEMENT OF INCOME TO NET REVENUES AND THE PERCENTAGE INCREASE OR DECREASE OF SUCH ITEMS AS COMPARED TO THE INDICATED PRIOR PERIOD.
RELATIONSHIP TO PERIOD TO RELATIONSHIP TO PERIOD TO NET REVENUES PERIOD $ NET REVENUES PERIOD $ THREE MONTHS ENDED INCREASE NINE MONTHS ENDED INCREASE SEPTEMBER 30 (DECREASE) SEPTEMBER 30 (DECREASE) 2000 1999 00-99 2000 1999 00-99 ---- ---- ----- ---- ---- ----- NET REVENUES ADVANCED TECHNOLOGY PRODUCTS 55.8% 63.6% (6.2%) 54.0% 61.6% (6.5%) CONSUMER PRODUCTS 44.2% 36.4% 29.7% 46.0% 38.4% 27.4% ----- ----- ----- ----- 100.0% 100.0% 6.9% 100.0% 100.0% 6.5% COST OF GOODS SOLD, EXCLUSIVE OF DEPRECIATION 73.8% 71.3% 10.6% 73.0% 71.3% 9.1% ----- ----- ----- ----- GROSS PROFIT 26.2% 28.7% (2.3%) 27.0% 28.7% 0.1% ----- ----- ----- ----- SELLING, GENERAL AND ADMINISTRATIVE 18.3% 20.7% (5.3%) 18.0% 19.6% (2.2%) INTEREST 2.4% 2.3% 10.0% 2.3% 2.1% 18.5% DEPRECIATION AND AMORTIZATION 3.0% 4.1% (20.4%) 3.0% 3.9% (17.2%) ---- ---- ------ ---- ---- ----- 23.7% 27.1% (15.7%) 23.3% 25.6% (0.9%) ----- ----- ----- ----- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 2.5% 1.6% 65.6% 3.7% 3.1% 23.7% INCOME TAX PROVISION 1.0% 0.7% 56.0% 1.5% 1.2% 18.5% ---- ---- ---- ---- NET INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 1.5% 0.9% 72.2% 2.2% 1.9% 27.1% CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 0.0% 0.0% - 0.0% (14.3%) - ---- ---- ---- ----- NET INCOME 1.5% 0.9% 72.2% 2.2% (12.4%) 119.0% ==== ==== ==== =======
-9- 10 MANAGEMENT DISCUSSION DURING THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND FOR THE COMPARABLE PERIOD ENDED SEPTEMBER 30, 1999, APPROXIMATELY 24% AND 19% RESPECTIVELY, OF THE COMPANY'S REVENUES WERE DERIVED FROM CONTRACTS WITH AGENCIES OF THE U.S. GOVERNMENT OR THEIR PRIME CONTRACTORS. THE COMPANY'S BUSINESS IS PERFORMED UNDER FIXED PRICE CONTRACTS. IT IS NOTED THAT THE MANY UNCERTAINTIES IN TODAY'S GLOBAL ECONOMY, AND DIFFICULTY IN PREDICTING DEFENSE APPROPRIATIONS, GOVERNMENT AND OTHER EXPENDITURES (BOTH ACTUAL AND PROPOSED) PRECLUDE ANY GUARANTEES OR EVEN ASSURANCES THAT CURRENT PROGRAMS WILL BE CONTINUED OR THAT PROGRAMS IN THE PROTOTYPE STAGES WILL ULTIMATELY RESULT IN PRODUCTION APPLICATIONS. IT IS BECAUSE OF SUCH UNCERTAINTIES AND BECAUSE SUCH ADVERSE OCCURRENCES MAY NOT BE COUNTERBALANCED WITH NEW PROGRAMS OR OTHERWISE, THAT CYCLICAL DOWNTURNS IN OPERATIONAL PERFORMANCES ARE REALISTIC EXPECTATIONS. RESULTS OF OPERATIONS THE COMPANY'S CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 SHOWED AN APPROXIMATE 6.5% INCREASE IN NET REVENUES AND AN INCREASE IN NET INCOME OF APPROXIMATELY 27.1% BEFORE THE $1,727,000 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, WHEN COMPARED TO THE SAME NINE MONTH PERIOD OF 1999. THE INCREASE IN REVENUES FOR THE NINE MONTH PERIOD IS PRIMARILY THE RESULT OF INCREASED SALES AND SHIPMENTS FROM BOTH THE ADVANCED TECHNOLOGY AND CONSUMER PRODUCTS GROUPS. FOR THE THIRD QUARTER OF 1999, NET SALES INCREASED APPROXIMATELY 6.9% WITH AN INCREASE IN NET INCOME OF APPROXIMATELY 72.2%. OPERATING INCOME AS A PERCENTAGE OF NET REVENUES REMAINED REASONABLY CONSISTENT FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 WHEN COMPARED TO THE COMPARABLE PERIODS OF 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES DECREASED FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 WHEN COMPARED TO THE SAME PERIODS IN 1999 PRIMARILY BECAUSE OF A DECREASE IN SELLING, COMPENSATION AND PROFESSIONAL COSTS. INTEREST EXPENSE FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 WHEN COMPARED TO THE SAME PERIODS IN 1999 INCREASED BECAUSE OF THE GENERAL TREND OF INCREASING RATES WITHIN THE LENDING MARKETS. INCOME TAXES FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 DECREASED AS A PERCENTAGE OF INCOME BEFORE TAXES WHEN COMPARED TO THE SAME PERIODS IN 1999 BECAUSE OF THE EFFECTS OF VARIABLE STATE INCOME TAXES. 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 OPERATING CASH FLOWS AND FROM BANK FINANCING. DURING THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000, THE COMPANY EXPENDED $110,000 ON CAPITAL EXPENDITURES. THERE ARE NO MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES AT SEPTEMBER 30, 2000. -10- 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------ --------------------------------------------------- THE ANNUAL MEETING OF SHAREHOLDERS OF THE REGISTRANT WAS HELD ON JULY 7, 2000. AT THE MEETING, EACH OF THE DIRECTORS OF THE REGISTRANT WAS ELECTED TO SERVE UNTIL THE NEXT ANNUAL MEETING OF SHAREHOLDERS UNTIL HIS SUCCESSOR IS ELECTED AND QUALIFIED. THE FOLLOWING TABLE SHOWS THE RESULTS OF THE VOTING AT THE MEETING. WITHHELD NAME OF NOMINEE FOR AUTHORITY --------------- --- --------- DR. WILLIAM H. DUERIG 2,141,548 16,525 DONALD W. HEDGES 2,141,548 16,525 NICHOLAS D. TRBOVICH, JR. 2,141,123 16,950 DR. NICHOLAS D. TRBOVICH 2,141,548 16,525 FORWARD-LOOKING STATEMENTS IN ADDITION TO HISTORICAL INFORMATION, CERTAIN SECTIONS OF THIS FORM 10-QSB 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 AND GLOBAL COMPETITION, AND 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-QSB. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE HEREOF. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE FORWARD-LOOKING STATEMENTS. -11- 12 SIGNATURES PURSUANT TO THE REQUIREMENTS 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. DATE: NOVEMBER 8, 2000 SERVOTRONICS, INC. BY: /s/LEE D. BURNS, TREASURER ----------------------------------------- LEE D. BURNS, TREASURER AND CHIEF FINANCIAL OFFICER BY: /s/RAYMOND C. ZIELINSKI, VICE PRESIDENT ----------------------------------------- RAYMOND C. ZIELINSKI, VICE PRESIDENT -12-