-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W0bHm29WcuvYfLDXVcS4QmMwu34/U7N2eOqoznyUDmrKsBIkI9I7tasRZtK7v4yW UuFEtFEYnhK4XkA8NSF6JQ== 0000950152-02-002516.txt : 20020415 0000950152-02-002516.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950152-02-002516 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVOTRONICS INC /DE/ CENTRAL INDEX KEY: 0000089140 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 160837866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07109 FILM NUMBER: 02591355 BUSINESS ADDRESS: STREET 1: 1110 MAPLE ST CITY: ELMA STATE: NY ZIP: 14059 BUSINESS PHONE: 7166335990 MAIL ADDRESS: STREET 1: P O BOX 300 STREET 2: ELMA STATE: NY ZIP: 14059-0300 10KSB40 1 l92917ae10ksb40.txt SERVOTRONICS, INC. FORM 10KSB40 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, 2001 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT - --- OF 1934 For the transition period from _________________ to _________________. Commission File No. 1-7109 SERVOTRONICS, INC. --------------------------------------------------------- (Name of small business issuer as specified in its charter) Delaware 16-0837866 - ------------------------------- ---------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 1110 Maple Street, Elma, New York 14059 - -------------------------------------- ------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: 716-655-5990 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ----------------------- Common Stock, $.20 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its most recent fiscal year: $17,934,000. As of March 15, 2002 the aggregate market value of the voting common stock held by non-affiliates of the registrant was $7,663,315.44 based on the average of sales prices reported by the American Stock Exchange on that day. As of March 15, 2002 the number of $.20 par value common shares outstanding was 2,392,141. DOCUMENTS INCORPORATED BY REFERENCE Document Part of Form 10-KSB -------- ------------------- 2002 Proxy Statement Part III Transitional Small Business Disclosure Format. Yes . No x . --- --- PART I ------ Item 1. Description of Business - ------- ----------------------- General - ------- Servotronics, Inc. and its subsidiaries (collectively the "Registrant" or the "Company") design, manufacture and market advanced technology products consisting primarily of control components and consumer products consisting of knives and various types of cutlery. The Registrant was incorporated in New York in 1959. In 1972, the Registrant was merged into a wholly-owned subsidiary organized under the laws of the State of Delaware, thereby changing the Registrant's state of incorporation from New York to Delaware. Products - -------- Advanced Technology Products ---------------------------- The Registrant designs, manufactures and markets a variety of servo-control components which convert an electrical current into a mechanical force or movement and other related products. The principal servo-control components produced include torque motors, electromagnetic actuators, proportional solenoids, hydraulic valves, pneumatic valves and similar devices, all of which perform the same general function. These are sold principally to the commercial, aerospace, missile, aircraft and government related industries. To fill most of its orders for components, the Registrant must either modify a standard model or design a new item in order to satisfy the customer's particular requirements. The Registrant also produces unique products based on specifications provided by its customers. The Registrant produces under long-term contracts and other types or orders. The Registrant also produces metallic seals of various cross-sectional configurations. These seals fit between two surfaces, usually metal, to produce a more secure and leak-proof joint. The Registrant manufactures these seals to close tolerances from standard and special alloy steels. Ductile coatings are often applied to the seals in order to increase their effectiveness. -2- From time to time, the Registrant has also produced other products of its own and/or of a given design to meet customers' requirements. Consumer Products ----------------- The Registrant designs, manufactures and sells a variety of cutlery products. These products include a wide range of knives such as steak, carving, bread, butcher and paring knives for household use and for use in restaurants, government installations, institutions and private industry, and pocket and other types of knives for hunting, fishing and camping. The Registrant also produces and markets other cutlery items such as carving forks, sharpeners and various specialty tools such as putty knives, linoleum sheet cutters and field knives. The Registrant manufactures its cutlery products from stainless or high carbon steel in numerous styles, designs, models and sizes. Substantially all of the Registrant's cutlery and cutlery related products are intended for the medium to premium priced markets. The Registrant sells many of its cutlery products under its own brand names including "Old Hickory" and "Queen." Sales, Marketing and Distribution - --------------------------------- Advanced Technology Products ---------------------------- The Registrant's advanced technology products are marketed throughout the United States and are essentially non-seasonal in nature. These products are sold to the United States Government, government prime contractors, government subcontractors, commercial manufacturers and end users. Sales are made primarily by the Registrant's professional staff and commissioned field engineering representatives. During the Registrant's last fiscal year, sales of advanced technology products pursuant to subcontracts with prime or subcontractors for various branches of the United States Government or pursuant to prime contracts directly with the government accounted for approximately 17% of the Registrant's total revenues. In 2001 and 2000, sales of advanced technology products to Honeywell and United Technologies (including their subsidiaries and/or divisions) individually exceeded 10% of Registrant's total revenues. No other single customer represented more than 10% of the Company's revenues in any of these years. The Registrant's prime contracts and subcontracts with the 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. -3- Since the inception of the Registrant's business, less than 1% of its government contracts have been terminated for convenience. Consumer Products ----------------- The Registrant's consumer products are marketed throughout the United States. Consumer sales are moderately seasonal. Sales are to hardware, supermarket, variety, department, discount, gift and drug stores. The Registrant's Consumer Products Group also sells its cutlery products (principally machetes, survival knives and kitchen knives) to various branches of the United States Government which accounted for approximately 2% of the Registrant's total sales in 2001. The Registrant sells its products through its own sales personnel and through independent manufacturers' representatives. Business Segments - ----------------- Business segment information is presented in Note 10 of the accompanying consolidated financial statements. Intellectual Properties - ----------------------- The Company has rights under certain copyrights and registered domain names. In the view of management, the Registrant's competitive position is not dependent on patent protection. Research Activities - ------------------- The amount spent by the Registrant in research and development activities during its 2001 and 2000 fiscal years was not significant. Environmental Compliance - ------------------------ The Registrant does not anticipate that the cost of compliance with current environmental laws will be material. Manufacturing - ------------- The Registrant manufactures its consumer products in Franklinville, New York and Titusville, Pennsylvania and its advanced technology products in Elma, New York. -4- Raw Materials and Other Supplies - -------------------------------- The Registrant purchases raw materials and certain components for its products from outside vendors. The Registrant is not generally dependent upon a single source of supply for any raw material or component used in its operations. Competition - ----------- Although no reliable industry statistics are available to enable the Registrant to determine accurately its relative competitive position with respect to any of its products, the Registrant believes that it is a significant factor with respect to certain of its servo-control components. The Registrant's share of the overall cutlery market is not significant. The Registrant encounters active competition with respect to its products from numerous companies, many of which are larger than it in terms of manufacturing capacity, financial resources and marketing organization. Its principal competitors vary depending upon the customer and/or the products involved. The Registrant believes that it competes primarily with more than 20 companies with respect to its consumer products, in addition to foreign imports. To the Registrant's knowledge, its principal competitors with regard to cutlery include ECKO Housewares, Inc., Russell Harrington Cutlery, Inc., W. R. Case & Sons Cutlery Company, Imperial Schrade Corporation and Camillus Cutlery Company. The Registrant has many different competitors with respect to servo-control components because of the nature of that business and the fact that these products also face competition from other types of control components which, at times, can accomplish the desired result. The Registrant markets most of its products throughout the United States. The Registrant believes that it competes in marketing its consumer products primarily on the basis of price, quality and delivery, and its control products primarily on the basis of operating performance, adherence to rigid specifications, quality, price and delivery. Employees - --------- The Registrant, at December 31, 2001, had approximately 230 employees of which approximately 215 are full time. In excess of 83% of its employees are engaged in production, inspection, packaging or shipping activities. The balance are engaged in executive, engineering, administrative, clerical or sales capacities. -5- Item 2. Description of Properties - ------- ------------------------- The Registrant's executive offices are located on premises leased by the Registrant at 1110 Maple Street, Elma, a suburb of Buffalo, New York. The Registrant owns and/or leases real property as set forth in the following table:
Number of Principal buildings and Approx. Approx. product type of floor area Location acreage manufactured construction (sq. feet) -------------------------------------------------------------------------------------------------------------- Elma, New York 38.4 Advanced 1-concrete block 82,000 technology and steel products Franklinville, 7.7 Cutlery products 1-tile and New York wood 85,000 Titusville, Pennsylvania .4 Cutlery products 2-brick 25,000
In Elma, New York, the Registrant leases approximately 38.4 acres of land and a facility from a local industrial development agency. The lease is accounted for as a capital lease and entitles the Registrant to purchase the property for a nominal amount. See the consolidated financial statements, including Note 8 thereto, for further information with respect to the Registrant's lease commitments. The Registrant possesses modern precision manufacturing and testing equipment suitable for the development, manufacture, assembly and testing of its advanced technology products. The Registrant designs and makes substantially all of the tools, dies, jigs and specialized testing equipment necessary for the production of the advanced technology products. The Registrant also possesses automatic and semi-automatic grinders, tumblers, presses and miscellaneous metal finishing machinery and equipment for use in the manufacture of consumer products. Item 3. Legal Proceedings - ------- ---------------- There are no legal proceedings which are material to the Company currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to materially adversely affect the business or earnings of the Company. -6- Item 4. Submission of Matters to a Vote of Security Holders - ------- ------------------------------------------------- Not applicable. -7- PART II Item 5. Market for Common Equity and Related Stockholder Matters - ------- -------------------------------------------------------- (a) Price range of common stock --------------------------- The following table shows the range of high and low prices for the Registrant's common stock as reported by the American Stock Exchange for 2001 and 2000.
High Low ---- --- 2001 Fourth Quarter $ 6.20 $ 3.70 Third Quarter 8.90 3.40 Second Quarter 3.65 2.30 First Quarter 2.69 1.65 2000 Fourth Quarter $ 3.50 $ 2.50 Third Quarter 4.31 3.00 Second Quarter 5.13 3.75 First Quarter 5.38 4.63
(b) Approximate number of holders of common stock --------------------------------------------- Title Approximate number of of record holders (as of class December 31, 2001) ----- ------------------ Common Stock, $.20 par value per share 645
(c) Dividends on common stock ------------------------- No cash dividends were paid in 2001 or 2000. -8- Item 6. Management's Discussion and Analysis or Plan of Operation - ------- --------------------------------------------------------- Summary - ------- 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: Period to Relationship to period net revenues year increase ended (decrease) December 31, year ended 2001 2000 2001-2000 ---- ---- --------- Net revenues: Advanced technology products 67.9% 55.9% 28.4% Consumer products 32.1 44.1 (23.2) ------ ------ ------ 100.0 100.0 5.7 Cost of goods sold 72.1 71.7 6.4 ------ ------ ------ Gross profit 27.9 28.3 3.9 ------ ------ ------ Selling, general and administrative costs 16.9 17.9 (0.6) Interest 1.5 2.3 (30.5) Depreciation 3.3 3.8 (9.0) ------ ------ ------ 21.7 24.0 (40.1) ------ ------ ------ Income (loss) before income taxes 6.2 4.3 52.3 Income tax provision 2.3 1.9 32.2 ------ ------ ------ Net income (loss) 3.9% 2.5% 67.5% ====== ====== ====== -9- Management Discussion - --------------------- During the year ended December 31, 2001 and for the comparable period ended December 31, 2000, approximately 19% and 25% 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 the difficulty in predicting defense appropriations (both actual and proposed) preclude any guarantees or even assurances that current government and/or commercial programs will be continued or that programs in the prototype stages will ultimately result in production applications. On September 11, 2001, the United States was attacked by terrorists using four hijacked commercial airline jets. These tragic events have had a significant negative impact on the US and world economies. In particular, the commercial airline industry and other industries such as the edged products industry (i.e., cutlery products, knives, etc.) have been adversely impacted. Although certain defense programs may offset these effects on the Company's business, the Company is unable to predict or quantify with any certainty the extent that these events will have on the future financial results of the Company. See also Note 10 to the consolidated financial statements for information concerning business segment operating results. Results of Operations - Year 2001 as Compared to 2000 - ----------------------------------------------------- The Company's consolidated results of operations for the year ended December 31, 2001 showed an approximate 5.7% increase in net revenues with an increase in net income of approximately 67.5%. The increase in net revenues is primarily attributable to increased revenue at the Advanced Technology Group of $2,699,000 partially offset by a decrease in revenue of $1,733,000 at the Consumer Products Group. The resultant increase in net income is attributable to both product mix at the Advanced Technology Group and the Consumer Products Group, and previously reported cost controls as reflected in the accompanying financial statements. Selling, general and administrative costs remained consistent for the year ended December 31, 2001 when compared to the same period in 2000 despite the increase in net revenues. This can be attributed to a smaller percentage of expenses that are dependent upon sales levels and a greater percentage reflecting fixed general and administrative costs. Interest expense as a percentage of long-term debt decreased by approximately 2% for the year ended December 31, 2001 when compared to the same period in 2000 due to market driven -10- interest rate fluctuations, favorable interest rate renewal agreements and the continued decrease of institutional debt. Depreciation expense decreased due to variable estimated useful lives of depreciable property as identified in Note 1 to the consolidated financial statements. The Company's effective tax rate was 37% in 2001 compared to 43% in 2000. The decrease resulted from higher U.S. tax incentives on export sales in 2001. Results of Operations - Year 2000 as Compared to 1999 - ----------------------------------------------------- The Company's consolidated results of operations for the year ended December 31, 2000 showed an approximate 5% increase in net revenues with an increase in gross profit of 19.8%. The increase in revenues is primarily attributable to proactive marketing and product development. The resultant increase in gross profit is both attributable to the Company's previously reported restructuring plan as identified during 1999 as well as continued efforts to control costs. Selling, general and administrative costs decreased for the year ended December 31, 2000 when compared to the same period in 1999 primarily as the result of fluctuations in selling compensation expenses dependent upon product mix. Interest expense increased by approximately 13% for the year ended December 31, 2000 when compared to the same period in 1999 due to market driven interest rate fluctuations notwithstanding the Company's decreased institutional debt by nearly $900,000. Depreciation expense decreased due to variable estimated useful lives of depreciable property as identified in Note 1 to the consolidated financial statements. 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, 2001, the Company expended $273,000 on capital expenditures. During the year ended December 31, 2000, the Company expended $858,000 of which a majority was for test equipment in anticipation of the 2001 increased production and shipping requirements of the advanced technology products. -11- During 2001 the Company expended $200,000 in conjunction with a planned capability expansion at the Consumer Products Group. These assets are properly classified in current assets on the December 31, 2001 Consolidated Balance Sheet. Related to the expansion, the Company has commitments of $170,000. There are no other material commitments for capital expenditures at December 31, 2001. The Company also has a $1,000,000 line of credit at December 31, 2001 on which there is a $200,000 balance outstanding at December 31, 2001. Principle maturities of long-term debt are as follows: 2003 - $378,000; 2004 - $463,000; 2005 - $348,000; 2006 - $242,000; 2007 and thereafter $4,121,000. Critical Accounting Policies - ---------------------------- See Note 1 to the consolidated financial statements. Item 7. Financial Statements - ------- -------------------- The financial statements of the Registrant which are included in this Form 10-KSB Annual Report are described in the accompanying Index to consolidated financial statements on Page F1. Item 8. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure -------------------- None. -12- PART III -------- Item 9. Directors, Executive Officers, Promoters and Control Persons; - ------- ------------------------------------------------------------- Compliance with Section 16(a) of the Exchange Act ------------------------------------------------- Information regarding directors and executive officers of the Registrant is incorporated herein by reference to the information included in the Registrant's definitive proxy statement if it is filed with the Commission within 120 days after the end of the Registrant's 2001 fiscal year or such information will be included by amendment. Item 10. Executive Compensation - -------- ---------------------- Information regarding executive compensation is incorporated herein by reference to the information included in the Registrant's definitive proxy statement if it is filed with the Commission within 120 days after the end of the Registrant's 2001 fiscal year or such information will be included by amendment. Item 11. Security Ownership of Certain Beneficial Owners and Management - -------- -------------------------------------------------------------- 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 2001 fiscal year or such information will be included by amendment. Item 12. Certain Relationships and Related Transactions - -------- ---------------------------------------------- Information regarding certain relationships and related transactions is incorporated herein by reference to the information included in the Registrant's definitive proxy statement if it is filed with the Commission within 120 days after the end of the Registrant's 2001 fiscal year or such information will be included by amendment. -13- Item 13. Exhibits and Reports on Form 8-K - -------- --------------------------------
(a) Exhibits -------- Exhibit number Presentation Reference ------ ------------ --------- 3(A)(1) Certificate of Incorporation Exhibit 3(A)(1) to 1996 Form 10-KSB* 3(A)(2) Amendments to Certificate Exhibit 3(A)(2) to 1996 of Incorporation dated Form 10-KSB* August 27, 1984 3(A)(3) Certificate of designation Exhibit 4(A) to 1987 regarding Series I Form 10-K* preferred stock 3(A)(4) Amendments to Certificate Exhibit 3(A)(4) to 1998 of Incorporation dated Form 10-KSB* June 30, 1998 3(B) By-laws Exhibit 3(B) to 1986 Form 10-K* 4.1(A) First amended and restated Exhibit 4(A) to 1993 term loan agreement with Form 10-KSB* Fleet Bank of New York dated October 4, 1993 4.1(B) Second amended and restated Exhibit 4.1(B) to 1999 term loan agreement with Form 10-KSB* Fleet Bank of New York dated February 26, 1999 4.1(C) First amendment to second Exhibit 4.1(C) to 1999 amended and restated term Form 10-KSB* loan agreement with Fleet Bank of New York dated December 17, 1999 4.2(A)(1) Letter of Credit Reimbursement Exhibit 4(B)(1) to Agreement with Fleet Bank 1994 10-KSB* dated December 1, 1994
-------------------------------------------------------------- *Incorporated herein by reference (File No. 1-7109) **Indicates management contract or compensatory plan or arrangement -14-
Exhibit number Presentation Reference ------ ------------ --------- 4.2(B) First Amendment and Exhibit 4.2(B) to 1999 Extension to Letter of Form 10-KSB* Credit and Reimbursement Agreement with Fleet Bank of New York dated as of December 17, 1999 4.2(B)(2) Agency Mortgage and Security Exhibit 4(B)(2) to Agreement dated as of 1994 10-KSB* December 1, 1994 from the Registrant and its subsidiaries 4.2(B)(3) Guaranty Agreement dated as Exhibit 4(B)(3) to of December 1, 1994 from 1994 10-KSB* the Registrant and its subsidiaries to the Erie County Industrial Development Agency ("ECIDA"), Norwest Bank Minnesota, N.A., as Trustee, and Fleet Bank 4.3 Shareholder Rights Plan Attachment B to Form dated as of August 13, 8-K filed August 17, 1992 1992* 10(A)(1) Employment contract** Exhibit 10(A) to 1986 Form 10-K* 10(A)(2) Amendment to employment Filed herewith contract** 10(A)(3) Amendment to employment Filed herewith contract** 10(B) Form of Indemnification Exhibit 10(E) to 1986 Agreement between the Form 10-K* Registrant and each of its Directors and Officers**
-------------------------------------------------------------- *Incorporated herein by reference (File No. 1-7109) **Indicates management contract or compensatory plan or arrangement -15-
Exhibit number Presentation Reference ------ ------------ --------- 10(C)(1) Loan agreement between Exhibit 10(C)(1) the Company and its to 1991 Form 10-K* employee stock ownership trust, as amended 10(C)(2) Stock purchase agreement Exhibit 10(D)(2) to between the Company 1988 Form 10-K* and its employee stock ownership trust 10(D)(1)(a) 2000 Employees Stock Exhibit 10(D)(1)(a) to 2000 Option Plan** Form 10-KSB* 10(D)(2) Stock Option Agreement Exhibit 10(D)(2) to 1998 for Donald W. Hedges Form 10-KSB* dated March 24, 1998** 10(D)(2)(a) Stock Option Agreement Exhibit 10(D)(2)(a) to 2000 for Donald W. Hedges Form 10-KSB* dated July 7, 2000** 10(D)(3)(b) Stock Option Agreement Exhibit 10(D)(3)(b) to 1998 for Nicholas D. Form 10-KSB* Trbovich dated March 24, 1998** 10(D)(3)(c) Stock Option Agreement Exhibit 10(D)(3)(c) to 2000 for Nicholas D. Form 10-KSB* Trbovich dated July 7, 2000** 10(D)(4) Stock Option Agreement Exhibit 10(D)(4) to 1998 for William H. Duerig Form 10-KSB* dated March 24, 1998** 10(D)(4)(a) Stock Option Agreement Exhibit 10(D)(4)(a) to 2000 for William H. Duerig Form 10-KSB* dated July 7, 2000** 10(D)(5)(b) Stock Option Agreement Exhibit 10(D)(5)(b) to 1998 for Nicholas D. Form 10-KSB* Trbovich, Jr. dated March 24, 1998**
-------------------------------------------------------------- *Incorporated herein by reference (File No. 1-7109) **Indicates management contract or compensatory plan or arrangement -16-
Exhibit number Presentation Reference ------ ------------ --------- 10(D)(6)(b) Stock Option Agreement Exhibit 10(D)(6)(b) to 1998 for Nicholas D. Form 10-KSB* Trbovich, Jr. dated March 24, 1998** 10(D)(6)(c) Stock Option Agreement Exhibit 10(D)(6)(c) to 2000 for Nicholas D. Form 10-KSB* Trbovich, Jr. dated July 7, 2000** 10(D)(7)(b) Stock Option Agreement Exhibit 10(D)(7)(b) to 1998 for Lee D. Burns dated Form 10-KSB* March 24, 1998** 10(D)(7)(c) Stock Option Agreement Exhibit 10(D)(7)(c) to 2000 for Lee D. Burns dated Form 10-KSB* July 7, 2000** 10(D)(8)(b) Stock Option Agreement Exhibit 10(D)(8)(b) to 1998 for Raymond C. Zielinski Form 10-KSB* dated March 24, 1998** 10(D)(8)(c) Stock Option Agreement Exhibit 10(D)(8)(c) to 2000 for Raymond C. Zielinski Form 10-KSB* dated July 7, 2000** 10(D)(9) Land Lease Agreement Exhibit 10(D)(9) to 1992 between TSV, Inc. Form 10-KSB* (wholly-owned subsidiary of the Registrant) and the ECIDA dated as of May 1, 1992, and Corporate Guaranty of the Registrant dated as of May 1, 1992 10(D)(10) Amendment to Land Lease Exhibit 10(D) (11) to 1993 Agreement and Interim Form 10-KSB* Lease Agreement dated November 19, 1992
-------------------------------------------------------------- *Incorporated herein by reference (File No. 1-7109) **Indicates management contract or compensatory plan or arrangement -17-
Exhibit number Presentation Reference ------ ------------ --------- 10(D)(11) Lease Agreement dated as of Exhibit 10(D)(11) to December 1, 1994 between 1994 10-KSB* the Erie County Industrial Development Agency ("ECIDA") and TSV, Inc. 10(D)(12) Sublease Agreement dated Exhibit 10(D)(12) to as of December 1, 1994 1994 10-KSB* between TSV, Inc. and the Registrant 10(D)(13) 2001 Long-Term Stock Appendix A to 2001 Incentive Plan Proxy** 21 Subsidiaries of the Filed herewith Registrant
The Registrant hereby agrees that it will furnish to the Securities and Exchange Commission upon request a copy of any instrument defining the rights of holders of long-term debt not filed herewith. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 2001. -------------------------------------------------------------- *Incorporated herein by reference (File No. 1-7109) **Indicates management contract or compensatory plan or arrangement -18- FORWARD-LOOKING STATEMENTS In addition to historical information, certain sections of this Form 10-KSB contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company's capital resources and profitability. Forward-looking statements involve numerous risks and uncertainties. The Company derives a material portion of its revenues from contracts with agencies of the U.S. Government or their prime contractors. The Company's business is performed under fixed price contracts and the following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: uncertainties in today's global economy, global competition, difficulty in predicting defense appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company's customers to fund long-term purchase programs and market demand and acceptance both for the Company's products and its customers' products which incorporate Company-made components. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-KSB. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements. -19- SIGNATURES ---------- In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SERVOTRONICS, INC. March 15, 2002 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 15, 2002 - ------------------------ Nicholas D. Trbovich Officer, Chairman of the Board and Director /s/ Lee D. Burns Treasurer and Secretary March 15, 2002 - ---------------- Lee D. Burns (Chief Financial Officer) /s/ Donald W. Hedges Director March 15, 2002 - -------------------- Donald W. Hedges /s/ William H. Duerig Director March 15, 2002 - --------------------- William H. Duerig /s/ Nicholas D. Trbovich Jr. Director March 15, 2002 - ---------------------------- Nicholas D. Trbovich Jr. -20- SERVOTRONICS, INC. AND SUBSIDIARIES ----------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Page ---- Report of independent accountants F2 Consolidated balance sheet at December 31, 2001 F3 Consolidated statement of income for the years ended December 31, 2001 and 2000 F4 Consolidated statement of cash flows for the years ended December 31, 2001 and 2000 F5 Notes to consolidated financial statements F6-F20 Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. F-1 Report of Independent Accountants --------------------------------- To the Board of Directors and Shareholders of Servotronics, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of income and of cash flows present fairly, in all material respects, the financial position of Servotronics, Inc. and its subsidiaries at December 31, 2001 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Buffalo, New York March 15, 2002 F-2 SERVOTRONICS, INC. AND SUBSIDIARIES ----------------------------------- CONSOLIDATED BALANCE SHEET -------------------------- December 31, 2001 ----------------- ($000's omitted except per share data) Assets Current assets: Cash $ 720 Accounts receivable 2,699 Inventories 7,039 Prepaid income taxes 97 Deferred income taxes 461 Other 2,089 -------- Total current assets 13,105 Property, plant and equipment, net 7,024 Other assets 566 -------- $ 20,695 Liabilities and Shareholders' Equity ======== Current liabilities: Current portion of long-term debt $ 548 Demand loan 200 Accounts payable 860 Accrued employee compensation and benefit costs 892 Other accrued liabilities 186 -------- Total current liabilities 2,686 -------- Long-term debt 5,552 Deferred income taxes 384 Other non-current liability 248 Shareholders' equity: Common stock, par value $.20; authorized 4,000,000 shares; issued 2,614,506 shares 523 Capital in excess of par value 13,361 Retained earnings 1,491 Accumulated other comprehensive income (58) -------- 15,317 Employee stock ownership trust commitment (2,438) Treasury stock, at cost 222,365 shares (1,054) -------- Total shareholders' equity 11,825 -------- $ 20,695 ======== See notes to consolidated financial statements F-3 SERVOTRONICS, INC. AND SUBSIDIARIES ----------------------------------- CONSOLIDATED STATEMENT OF INCOME -------------------------------- ($000's omitted except per share data) Year Ended December 31, 2001 2000 ---- ---- Net revenues $ 17,934 $ 16,969 Costs and expenses: Cost of goods sold 12,935 12,159 Selling, general and administrative 3,025 3,042 Interest 271 390 Depreciation and amortization 588 646 ---------- ---------- 16,819 16,237 ---------- ---------- Income before income taxes 1,115 732 Income taxes 415 314 ---------- ---------- Net income $ 700 $ 418 ========== ========== Income Per Share: Basic Net income per share $ 0.37 $ 0.23 ========= ========== Diluted - ------- Net income per share $ 0.37 $ 0.21 ========= ========== F-4 SERVOTRONICS, INC. AND SUBSIDIARIES ----------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ ($000's omitted)
Year Ended December 31, 2001 2000 ---- ---- Cash flows related to operating activities: Net income $ 700 $ 418 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 588 646 Deferred income taxes 369 513 Tax benefit from stock options 0 3 Change in assets and liabilities - Accounts receivable (220) 328 Inventories (632) (239) Prepaid income taxes 121 548 Other current assets (837) 44 Other assets 31 12 Accounts payable 296 (582) Accrued employee compensation & benefit costs 122 (56) Other accrued liabilities 20 (139) Other non-current liabilities (33) (12) Employee stock ownership trust payment 101 101 ------- ------- Net cash provided by operating activities 626 1,585 ------- ------- Cash flows related to investing activities: Capital expenditures - property, plant & equipment (273) (858) Purchase of treasury shares (99) 0 ------- ------- Net cash used in investing activities (372) (858) ------- ------- Cash flows related to financing activities: Increase in demand loan 850 600 Payments on demand loan (650) (1,050) Principal payments on long-term debt (393) (439) Net cash proceeds from exercise of stock options 0 27 ------- ------- Net cash used in financing activities (193) (862) ------- ------- Net increase (decrease) in cash 61 (135) Cash at beginning of period 659 794 ------- ------- Cash at end of period $ 720 $ 659 ======= ======= Supplemental disclosures: - ------------------------- Income taxes paid $ 62 $ 68 Interest paid $ 283 $ 386
See notes to consolidated financial statements F-5 SERVOTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of significant accounting policies ------------------------------------------ The principal accounting policies of Servotronics, Inc. (the "Company") and subsidiaries are as follows: Principles of consolidation --------------------------- The consolidated financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries. Cash and cash equivalents ------------------------- The Company considers cash and cash equivalents to include all cash accounts and short-term investments purchased with a maturity of three months or less. Revenue recognition ------------------- The Company's revenues are principally recognized as units are shipped and as terms and conditions of purchase orders are met. The Company also incurred costs for certain contracts which are long term. These contracts are accounted for under the percentage of completion method (cost-to-cost) which recognizes revenue as the work progresses towards completion. Included in other current assets is $1,387,000 of unbilled revenues which represents revenue earned under the percentage of completion method (cost-to-cost) not yet billable under the terms of the contracts. Inventories ----------- Inventories are stated generally at the lower of standard cost, which approximates actual cost (first-in, first-out), or market. Pre-production costs related to long-term supply arrangements are expensed as incurred. Shipping and handling costs --------------------------- As required by FASB Emerging Issues Task Force "EITF" 00-10, "Accounting for Shipping and Handling Fees and Costs" shipping and handling costs are classed as a component of cost of goods sold. F-6 Property, plant and equipment ----------------------------- Property, plant and equipment is carried at cost; expenditures for new facilities and equipment and expenditures which substantially increase the useful lives of existing plant and equipment are capitalized; expenditures for maintenance and repairs are charged directly to cost or expenses as incurred. Upon retirement or disposal of properties, the related cost and accumulated depreciation are removed from the respective accounts and any profit or loss on disposition is included in income. Depreciation is provided on the basis of estimated useful lives of depreciable properties, primarily by the straight-line method for financial statement purposes and by accelerated methods for tax purposes. Depreciation expense includes the amortization of capital lease assets. The estimated useful lives of depreciable properties are generally as follows: Buildings and improvements 5-39 years Machinery and equipment 5-15 years Tooling 3-5 years Income taxes ------------ The Company and its subsidiaries file a consolidated federal income tax return and separate state income tax returns. The Company follows the asset and liability approach to account for income taxes. This approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of operating loss carryforwards and temporary differences between the carrying amounts and the tax bases of assets and liabilities. Employee stock ownership plan ----------------------------- Contributions to the employee stock ownership plan are determined annually by the Company according to plan formula. Use of estimates ---------------- The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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. F-7 New accounting pronouncements ----------------------------- In June 2001, the Financial Accounting Standards Board FASB No. 141, "Business Combinations" (SFAS No. 141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) which are effective July 1, 2001 and January 1, 2002, respectively, for the Company. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. With the adoption of SFAS No. 142 on January 1, 2002 (earlier adoption is not permitted), goodwill will no longer be amortized over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based-test. In addition, under the new rules, any future acquired intangible asset will be separately recognized if the benefit of the intangible is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. Intangible assets with definitive lives will be amortized over their useful lives. Implementation of SFAS No. 141 and 142 is not expected to have a material impact on the Company's financial position and results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which will be effective January 1, 2003. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as a part of the carrying amount of the long-lived asset. Implementation of SFAS No. 143 is not expected to have a material impact on the Company's financial position and results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which will be effective January 1, 2002. SFAS No. 144 supercedes SFAS No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Capital Assets To Be Disposed Of", but retains its fundamental provisions for recognition and measurement of the impairment of long-lived assets to be held and used and those to be disposed of by sale. The implementation of SFAS No. 144 is not expected to have a material impact on the Company's financial position and results of operations. F-8
2. Inventories December 31, 2001 ----------- ----------------- ($000's omitted) Raw materials and common parts $ 992 Work-in-process 5,342 Finished goods 941 ---------- 7,275 Less common parts expected to be used after one year (236) ----------- $ 7,039 ===========
3. Property, plant and equipment December 31, 2001 ----------------------------- ----------------- ($000's omitted) Land $ 11 Buildings and improvements 6,170 Machinery, equipment and tooling 10,167 ---------- 16,348 Less accumulated depreciation (9,324) ----------- $ 7,024 ===========
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. F-9
4. Long-term debt December 31, 2001 -------------- ----------------- ($000's omitted) Industrial Development Revenue Bonds; secured by a letter of credit from a bank with interest payable monthly at a floating rate (2.20% at December 31, 2001) $ 4,660 Term loan; payable to a financial institution with interest on $107,000 at LIBOR plus 2% (4.30% at December 31, 2001) and interest on the remaining $500,000 at a rate of 5.82% at December 31, 2001; quarterly principal payments of $35,714 through February 1, 2006 607 Various other secured term notes payable to government agencies 833 --- 6,100 Less current portion (548) ----------- $ 5,552 ===========
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 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. The Company's unsecured term note is payable in equal quarterly installments, maturing in 2006. The loan is collaterallized 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. Principal maturities of long-term debt are as follows: 2003 - $378,000; 2004 - $463,000; 2005 - $348,000; 2006 - $242,000; 2007 and thereafter $4,121,000. The Company also has a $1,000,000 line of credit on which there was $200,000 outstanding at December 31, 2001 at an interest rate of 4.75%. F-10 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 366,000 shares have been allocated, exclusive of shares distributed to ESOP participants. At December 31, 2001 and 2000, approximately 497,000 and 530,000 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 2001 and 2000. 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 -------------------- A Consumer Products division subsidiary of the Company has 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 $20,000 and $23,000 was recognized in 2001 and 2000, respectively, and was calculated using a weighted-average discount rate of 7.0% in 2001 and 7.5% in 2000, and weighted-average expected rate of return on plan assets of 8.0% for both years. The projected benefit obligation under the plan at December 31, 2001 was $88,000, net of $299,000 of plan assets at fair value. F-11 Deferred compensation program ----------------------------- The Company maintains a deferred compensation program designed to achieve, among other things, benefit parity for an officer of the Company. During 2001, $24,000 was accrued under this program. No amount was accrued under this program in 2000. The current balance of $249,000 is reflected on the December 31, 2001 Consolidated Balance Sheet. 6. Income taxes ------------ The provision (benefit) for income taxes included in the consolidated statement of income consists of the following:
2001 2000 ---- ---- ($000's omitted) Current: Federal income tax (benefit) $ 25 $ (213) State income tax 21 14 ------- ------ 46 (199) Deferred: ------- ------- Federal income tax 308 445 State income tax 61 68 ------- ------- 369 513 ------- ------- $ 415 $ 314 ======= =======
The provision for income taxes does not include the tax benefit of $3,000 for 2000 associated with the exercise of stock options which have been credited to capital in excess of par value. 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:
2001 2000 ---- ---- Statutory rate 34% 34% Increase resulting from: State income taxes (less federal effect) 5% 7% Other (2%) 2% ------ ----- 37% 43% ====== ======
F-12 At December 31, 2001, the deferred tax assets (liabilities) were comprised of the following:
($000's omitted) Inventory $ 232 Accrued vacation 141 State net operating losses and credits 135 Deferred compensation 145 Other 1 --------- Total deferred tax assets 654 Property, plant and equipment (511) Other liabilities (66) --------- Total deferred tax liabilities (577) --------- Net deferred tax asset $ 77 ========
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, 2001, the Company has New York State net operating loss carryforwards of approximately $994,000 (approximately a $39,000 tax benefit) that begin to expire in 2019. The Company also has a State of Pennsylvania net operating loss carryforward of approximately $1,756,000 (approximately a $76,000 tax benefit) that begins to expire in 2006. F-13 7. Common shareholders' equity ---------------------------
Common stock ------------ Accumulated Number Capital in other of shares excess of Retained Treasury Comprehensive comprehensive issued Amount par value earnings ESOP stock income income ---------------------------------------------------------------------------------------------- ($000's omitted) Balance December 31, 1999 2,614,506 $ 523 $ 13,358 $ 411 ($ 2,640) ($ 1,017) ($24) Comprehensive income Net income - - - $ 418 - - $ 418 - Other comprehensive income, net of tax - - - - - - - - Minimum pension liability adjustment - - - - - - (1) (1) -------- Other comprehensive income - - - - - - (1) - --------- Comprehensive income - - - - - - $ 417 - ========= Issuance of common stock - - - (35) - - Compensation expense - - - - 101 - Treasury stock - - - - - 62 - Exercise of stock options - - 3 - - - - --------- --------- --------- --------- --------- --------- ----- Balance December 31, 2000 2,614,506 $ 523 $ 13,361 $ 794 ($ 2,539) ($ 955) ($25) Comprehensive income Net income - - - $ 700 - - $ 700 - Other comprehensive income, net of tax - - - - - - - - Minimum pension liability adjustment - - - - - - (33) (33) ------ Other comprehensive income - - - - - - (33) - ------ Comprehensive income - - - - - - $ 667 - ========= Issuance of common stock - - - - - - Compensation expense - - - - 101 - - Treasury stock - - - (3) - (99) - Exercise of stock options - - - - - - - --------- --------- --------- --------- --------- --------- ---- Balance December 31, 2001 2,614,506 $ 523 $ 13,361 $ 1,491 ($ 2,438) ($ 1,054) ($58) ========= ========= ========= ========= ========= ========= ====
F-14 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, 2001 2000 -------- -------- ($000's omitted except per share data) Net income $ 700 $ 418 ======== ======== Weighted average common shares outstanding (basic) 1,877 1,848 Incremental shares from assumed conversions of stock options 0 111 Weighted average common shares outstanding (diluted) 1,877 1,959 Basic ----- Net income per share $ 0.37 $ 0.23 ======== ======== Diluted ------- Net income per share $ 0.37 $ 0.21 ======== ========
Comprehensive income -------------------- The minimum pension liability adjustment of $58,000, net of tax of $34,000, is the only component of other comprehensive income for 2001. F-15 Stock options ------------- Under the Servotronics, Inc. 2000 Employee Stock Option Plan authorized by the Board of Directors and the 2001 Long-Term Stock Incentive Plan authorized by the Board of Directors and the Shareholders, and other separate agreements authorized by the Board of Directors, the Company has granted non-qualified options to its Directors and Officers. The Company applies APB Opinion No. 25 and related interpretations in accounting for these Plans and the separate option agreements. Accordingly, no compensation expense has been charged to earnings in 2001 or prior years as stock options granted have an exercise price equal to the market price on the date of grant. At December 31, 2001, 301,600 shares of common stock were available under these plans. Options granted under these Plans have durations of ten years and vesting periods ranging from six months to three years. A summary of the status of options granted under all employee plans is presented below:
Weighted Average Options Exercise Outstanding Price ($) ---------------------------- Outstanding as of December 31, 1999 122,765 7.48 Granted in 2000 101,200 3.875 Exercised in 2000 (12,593) 2.07 Forfeited in 2000 - - Outstanding as of December 31, 2000 211,372 6.06 Granted in 2001 125,000 4.38 Exercised in 2001 (17,172) 5.787 Forfeited in 2001 - - Outstanding as of December 31, 2001 319,200 5.42
The following tables summarize information about options outstanding at December 31, 2001:
Weighted- Average Remaining Exercise Number contractual Options Prices ($) Outstanding Life Exercisable --------------------------------------------------------------------------- 8.50 93,000 6 years 93,000 3.875 101,200 9 years 86,200 4.38 125,000 10 years 0 ------- --------- Total 319,200 179,200 ======= =======
F-16 The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). 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 FAS 123, the pro forma effects on the years ended December 31, 2001 and 2000 are as follows: 2001 2000 ---------------------------- Net income: As reported $700,000 $418,000 Pro forma $521,000 $387,000 Earnings per common share: As reported - basic $0.37 $0.23 As reported - diluted $0.37 $0.21 Pro forma - basic $0.28 $0.21 Pro forma - diluted $0.28 $0.20 There were 125,000 options granted in 2001. The Black-Scholes calculated estimated value of the options granted in 2001 was $2.96. The assumptions used to calculate this value include a risk-free interest rate of 4.85%, an expected term of 10 years, and an annual standard deviation (volatility) factor of 50.9%. The Black-Scholes option pricing model was developed for use in estimating values of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the use of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options are restricted and have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the calculated estimated values, in the Company's opinion the existing models do not necessarily provide a reliable measure of the value of the Company's stock options. The estimated value calculated by the Black-Scholes methodology is hypothetical and does not represent an actual tangible Company expense or an actual tangible monetary transfer to the optionee. Further, for the reasons stated above (among others) and especially because of the volatility factor used in the Black-Scholes calculations for the Company's 2001 options, the derived estimated value may be, in the Company's opinion, substantially higher than the value which may be realized in an arms-length transaction under the above stated and existing conditions. F-17 Shareholders' rights plan ------------------------- 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 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. 8. Commitments ----------- The Company leases certain equipment pursuant to operating lease arrangements. Total rental expense in 2001 and 2000 and future minimum payments under such leases are not significant. 9. Litigation ---------- There are no legal proceedings which are material to the Company currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to materially adversely affect the business or earnings of the Company. 10. Business segments ----------------- The Company operates in two business segments, the Advanced Technology Group and the Consumer Products Group. The Company's reportable segments are strategic business units that offer different products and services. The segments are composed of separate corporations and are managed separately. Operations in the Advanced Technology Group involve the design, manufacture, and marketing of servo-control components for government and commercial applications. The Consumer Products Group's operations involve the design, manufacture and marketing of a variety of cutlery products for use by consumers and government agencies. The Company derives its primary sales revenue from domestic customers, although a significant portion of finished products are for foreign end use. F-18 Information regarding the Company's operations in these segments is summarized as follows:
Advanced Consumer Year ended Technology Products December 31, 2001 Group Group Consolidated ----------------- ----- ----- ------------ ($000's omitted) Revenues from unaffiliated customers $ 12,186 $ 5,749 $ 17,934 ============ ========= ============= Profit $ 2,259 $ 167 2,426 ============ ========= Depreciation expense $ (434) $ (154) (588) ============= ========== Interest expense (271) General corporate expense (452) -------------- Income before income taxes $ 1,115 ===== Identifiable assets $ 13,937 $ 5,068 $ 19,005 ============ ========= ============= Capital expenditures $ 200 $ 73 $ 273 ============ ========= =============
Advanced Consumer Year ended Technology Products December 31, 2000 Group Group Consolidated ----------------- ----- ----- ------------ ($000's omitted) Revenues from unaffiliated customers $ 9,487 $ 7,482 $ 16,969 ============ ========= ============= Profit $ 2,087 $ 187 2,274 ============ ========= Depreciation expense $ (481) $ (165) (646) ============= ========== Interest expense (390) General corporate expense (506) -------------- Income before income taxes $ 732 === Identifiable assets $ 13,216 $ 4,915 $ 18,131 ============ ========= ============= Capital expenditures $ 797 $ 61 $ 858 ============ ========= =============
F-19 The Company engages in a significant amount of business with the United States Government through sales to its prime contractors and otherwise. Such contracts by the Advanced Technology Group accounted for revenues of approximately $3,082,000 in 2001 and $1,980,000 in 2000. Similar contracts by the Consumer Products Group accounted for revenues of approximately $299,000 in 2001 and $2,235,000 in 2000. Sales of advanced technology products to one prime contractor, including various divisions and subsidiaries of a common parent company, amounted to approximately 23% and 20% of total revenues in 2001 and 2000, respectively. Sales to another customer amounted to approximately 22% of total revenues in 2001 and 20% of total 2000 revenues respectively. No other single customer represented more than 10% of the Company's revenues in any of these years. F-20 EX-10.A.2 3 l92917aex10-a_2.txt EX-10(A)(2) AMDMT. TO EMPLOYMENT CONTRACT 7-3-01 Exhibit 10(A)(2) Servotronics, Inc. and Subsidiaries July 3, 2001 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, May 1, 1994, May 1, 1995, May 1, 1996, May 1, 1997, March 9, 1998, May 1, 1998, October 6, 1998, April 28, 1999, May 1, 1999, May 1, 2000, and May 1, 2001 (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 July 3, 2001) to amend Paragraph 1 of the Agreement to delete "September 30, 2004" and insert in its place "September 30, 2006". 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 Lee D. Burns, Treasurer/Secretary ACCEPTED AND AGREED /S/ Dr. Nicholas D. Trbovich ------------------------ Dr. Nicholas D. Trbovich EX-10.A.3 4 l92917aex10-a_3.txt EX-10(A)(3) AMDMT. TO EMPLOYMENT CONTRACT 5-1-01 Exhibit 10(A)(3) Servotronics, Inc. and Subsidiaries As of May 1, 2001 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, May 1, 1994, May 1, 1995, May 1, 1996, May 1, 1997, March 9, 1998, May 1, 1998, October 6, 1998, April 28, 1999, May 1, 1999, May 1, 2000, and July 3, 2001 (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 July 3, 2001) to amend Paragraph 3 of the Agreement to delete "$331,500.00" and insert in its place "$341,445.00". 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 Lee D. Burns, Treasurer/Secretary ACCEPTED AND AGREED /S/ Dr. Nicholas D. Trbovich - ---------------------------- Dr. Nicholas D. Trbovich EX-21 5 l92917aex21.txt EX-21 SUBSIDIARIES OF REGISTRANT Exhibit 21 SERVOTRONICS, INC. ------------------ SUBSIDIARIES OF --------------- REGISTRANT ---------- Name and address of each member Employer ID No. - ------------------------------- --------------- Servotronics, Inc. 16-0837866 P.O. Box 300 Elma, New York 14059-0300 Ontario Knife Company 16-0578540 26 Empire Street Franklinville, New York 14737 Queen Cutlery Company 25-0743840 507 Chestnut Street Titusville, Pennsylvania 16354 G.N. Metal Products, Inc. 16-0964682 P.O. Box 300 Elma, New York 14059-0300 SVT Management, Inc. 16-1037766 P.O. Box 300 Elma, New York 14059-0300 MRO Corporation 16-1230799 P.O. Box 300 Elma, New York 14059-0300 TSV ELMA, Inc. 16-1415699 P.O. Box 300 Elma, New York 14059-0300 TSV Franklinville, Inc. 52-2364297 P.O. Box 300 Elma, New York 14059-0300 -----END PRIVACY-ENHANCED MESSAGE-----