-----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, PiGNvr0WckVQgNkY3nW39XuZrAXf8i5CmMZG5WVwKVfbo6YnPP9SW9VwHBtZZ8Sb nyQeVqZ5P/lsVZ+cYwE41A== 0000950152-99-004624.txt : 19990518 0000950152-99-004624.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950152-99-004624 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 10QSB SEC ACT: SEC FILE NUMBER: 001-07109 FILM NUMBER: 99627364 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 10QSB 1 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 March 31, 1999 __ 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 April 30, 1999 - ----------------------------- ----------------------------- Common Stock, $.20 par value 2,405,488
(See Note 5 to Consolidated Financial Statements) 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, March 31, 1999 3 b) Consolidated Statement of Income for the Three Months Ended March 31, 1999 and 1998 4 c) Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1999 and 1998 5 d) Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis or Plan of Operation 9 Signatures 12 Item 6(a). Exhibits 27 Financial Data Schedule
-2- 3 PART I FINANCIAL INFORMATION SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31, 1999 ($000's omitted except per share data) (Unaudited)
Assets Current assets: Cash $ 1,213 Accounts receivable 2,231 Inventories 9,735 Prepaid income taxes 124 Deferred tax asset 539 Other 1,098 ------------ Total current assets 14,940 ------------ Property, plant and equipment, net 7,291 Other assets 626 ------------ $ 22,857 ============ Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 254 Accounts payable 965 Accrued employee compensation and benefit costs 846 Other accrued liabilities 270 ------------ Total current liabilities 2,335 ------------ Long-term debt 6,877 Non-current deferred tax liability 477 Other non-current liability 277 Shareholders' equity: Common stock, par value $.20; authorized 4,000,000 shares; Issued 2,614,506 shares 523 Capital in excess of par value 13,324 Retained earnings 2,845 Accumulated other comprehensive income (43) ------------ 16,649 Employee stock ownership trust commitment (2,741) Treasury stock, at cost 209,018 shares (1,017) ------------ Total shareholders' equity 12,891 ------------ $ 22,857 ============
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 March 31, 1999 1998 ---- ---- Net revenues $ 3,591 $ 4,438 Costs and expenses: Cost of goods sold 2,505 3,201 Selling, general and administrative 696 806 Interest 67 79 Depreciation and amortization 157 158 --------- ---------- 3,425 4,244 --------- ---------- Income before income taxes and cumulative effect of a change in accounting principle 166 194 Income tax provision 66 81 --------- ---------- Income before cumulative effect of a change in accounting principle 100 113 Cumulative effect of a change in accounting principle (75) 0 ---------- ---------- Net income $ 25 $ 113 ========= ========== Income (Loss) Per Share: Basic - ----- Income per share before cumulative effect of a change in accounting principle $ 0.06 $ 0.07 Cumulative effect per share of a change in accounting principle (0.04) 0.00 ---------- ---------- Net income per share $ 0.02 $ 0.07 ========= ========== Diluted - ------- Income per share before cumulative effect of a change in accounting principle $ 0.06 0.06 Cumulative effect per share of a change in accounting principle (0.04) 0.00 ---------- ---------- Net income per share $ 0.02 $ 0.06 ========= ==========
See notes to consolidated financial statements -4- 5 SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS ($000's omitted) (Unaudited)
Three Months Ended March 31, 1999 1998 ---- ---- Cash flows related to operating activities: Net income $ 25 $ 113 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 157 158 Cumulative effect of change in accounting principle 75 0 Change in assets and liabilities - Accounts receivable (33) (132) Inventories (876) (75) Prepaid income taxes (59) (105) Other current assets 278 (268) Other assets 4 4 Accounts payable 75 82 Accrued employee compensation & benefit costs (84) 180 Other accrued liabilities 87 64 --------- --------- Net cash (used in) provided by operating activities (351) 21 ---------- --------- Cash flows related to investing activities: Capital expenditures - property, plant & equipment (238) (187) ---------- ---------- Net cash used in investing activities (238) (187) ---------- ---------- Cash flows related to financing activities: Increase in demand loan 0 150 Payments on demand loan 0 (150) Acquisition of long-term debt 1,000 0 Principal payments on long-term debt (262) (56) Tax benefit from stock options 55 0 ---------- ---------- Net cash provided by (used in) financing activities 793 (56) --------- ---------- Net increase (decrease) in cash 204 (222) Cash at beginning of period 1,009 1,185 --------- --------- Cash at end of period $ 1,213 $ 963 ========= =========
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 $635,000 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 -----------
March 31, 1999 -------------- Raw materials and common parts $ 1,445 Work-in-process (including engineering and other support costs) 7,962 Finished goods 564 ---------- 9,971 Less common parts expected to be used after one year (236) ---------- $ 9,735 ==========
Engineering and other support costs are incurred in fulfilling certain contracts which have a production cycle longer than one year. A portion of these costs will, therefore, not be realized within one year. On January 1, 1999, as required by the Accounting Standards Executive Committee, the Company adopted the newly enacted Statement of Position No. 98-5 "Reporting on the Cost of Start-Up Activities" (SoP 98-5). The effect of adopting SoP-98-5 resulted in the write-off of approximately $125,000 of start-up costs which were appropriately capitalized to inventory in prior years. An approximate $75,000 charge (net of tax of $50,000) was recorded as of January 1, 1999, which was recorded as a cumulative effect of a change in accounting principle in the March 31, 1999 Consolidated Statement of Income. 3. Property, plant and equipment -----------------------------
March 31, 1999 -------------- Land $ 11 Buildings 6,155 Machinery, equipment and tooling 8,698 ---------- 14,864 Less accumulated depreciation (7,573) ---------- $ 7,291 ==========
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. -6- 7 4. Long-term debt --------------
March 31, 1999 -------------- Industrial Development Revenue Bonds; secured by a letter of credit from a bank with interest payable monthly at a floating rate (3.50% at March 31, 1999) $ 5,000 Unsecured term note; payable to a financial institution with interest on $500,000 at LIBOR plus 2% (7.09% at March 31, 1999) and interest on the remaining $500,000 at a current rate of 5.86%; quarterly principal payments of $35,714 through February 1, 2006 1,000 Various other secured term notes payable to government agencies 1,131 --------- 7,131 Less current portion (254) --------- $ 6,877 =========
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. The letter of credit reimbursement agreement, the unsecured term note agreement and a secured term note contain, among other things, covenants relative to maintenance of working capital and tangible net worth and restrictions on capital expenditures, leases and additional borrowings. The Company also has a $1,000,000 line of credit on which there was no amount outstanding at March 31, 1999. -7- 8 5. 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, 1998 2,614,506 $523 $13,324 $2,904 ($ 2,741) ($ 1,156) ($ 43) ========= ==== ======= ===== ======= ======= ========= Comprehensive income Net income - - - $ 25 - - $ 25 - Other comprehensive income, net of tax - - - - - - - - Minimum pension liability adjustment - - - - - - - - Other comprehensive income - - - - - - - - ------- Comprehensive income - - - - - - $ 25 - ======= Issuance of common stock - - - (84) - - - Compensation expense - - - - - - - Treasury stock - - - - - 139 - Exercise of stock options - - - - - - - --------- ---- ------- ------ -------- -------- ------ Balance March 31, 1999 2,614,506 $523 $13,324 $2,845 ($ 2,741) ($ 1,017) ($ 43) ========= ==== ======= ===== ======= ======= =========
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 March 31, ($000's omitted, except per share data) 1999 1998 --------------------------------------- ---- ---- Income before cumulative effect of a change in accounting principle $ 100 $ 113 Cumulative effect of a change in accounting principle (75) - ---- ----- Net earnings $ 25 $ 113 Weighted average common shares outstanding (basic) 1,792 1,727 Incremental shares from assumed conversions of stock options 5 48 Weighted average common shares outstanding (diluted) 1,797 1,775 Income (Loss) Per Share Basic ----- Income per share before cumulative effect of a change in accounting principle $ 0.06 $ 0.07 Cumulative effect per share of a change in accounting principle (0.04) 0.00 -------- -------- Net income per share: $ 0.02 $ 0.07 ======= ======== Diluted ------- Income per share before cumulative effect of a change in accounting principle $ 0.06 $ 0.06 Cumulative effect per share of a change in accounting principle (0.04) 0.00 -------- -------- Net income per share $ 0.02 $ 0.06 ======= ========
-8- 9 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 net revenues period $ three months ended increase March 31 (decrease) 1999 1998 99-98 ---- ---- ----- Net revenues Advanced technology products 58.6% 60.6% (22.0)% Consumer products 41.4% 39.4% (13.3)% ----- ----- ---- 100.0% 100.0% (19.1)% Cost of goods sold, exclusive of depreciation 69.8% 72.1% (21.7)% ---- ----- ---- Gross profit 30.2% 27.9% (12.2)% ---- ----- ---- Selling, general and administrative 19.4% 18.2% (13.6)% Interest 1.9% 1.8% (15.2)% Depreciation and amortization 4.4% 3.6% (0.6)% ---- ----- ---- 25.7% 23.6% (29.4)% ----- ----- ---- Income before income taxes and cumulative effect of a change in accounting principle 4.5% 4.3% (14.4)% Income tax provision 1.7% 1.8% (18.5)% ---- ----- ---- Net income before cumulative effect of a change in accounting principle 2.8% 2.5% (11.5)% ---- ----- ---- Cumulative effect of a change in accounting principle (2.1)% 0.0% -- ----- ----- ---- Net income 0.7% 2.5% (77.9)% ==== ===== ====
Management Discussion - --------------------- During the three month period ended March 31, 1999 and for the comparable period ended March 31, 1998, approximately 13% and 20% 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 (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 three month period ended March 31, 1999 showed an approximate 19.1% decrease in net revenues and a decrease in net income of approximately 11.5%, before the $75,000 cumulative effect of a change in accounting principle, when compared to the same three month period of 1998. The decrease in revenues is primarily the result of the stretch-out of certain Advanced Technology Group's deliveries. The Advanced Technology Group's total backlog (funded and unfunded) as of March -9- 10 31, 1999 increased by approximately $3,200,000 from a year earlier. The March 31, 1999 total backlog is approximately $60,600,000 as compared to $57,400,000 of which $51,000,000 and $50,000,000 were unfunded in each of the respective comparative periods. Approximately $36,700,000 of the March 31, 1999 backlog is for product deliveries beyond 2001. The unfunded portion of the backlog is based on the Company's customers' estimated quantities for multi-year agreements for which the Company has not received firm orders. Operating profit as a percentage of net revenues for the three month period ended March 31, 1999 decreased to 4.5% from 4.3% as reported for the same three month period of 1998. The fluctuations in operating profit as a percentage of net revenues are primarily the result of differences in product mix. Selling, general and administrative costs decreased for the three month period ended March 31, 1999 when compared to the comparable period of 1998 primarily because of an increase in professional costs. Income taxes for the three month period ended March 31, 1999 decreased as a percentage of income before taxes when compared to the comparable period of 1998 because of the effects of variable state income taxes. Liquidity and Capital Resources - ------------------------------- Certain contracts of the Advanced Technology Group require development and engineering costs in addition to hardware and the maintenance of inventory for replacement and/or overhaul. The replacement and/or overhaul units are billed at the time of shipment. The inventories at March 31, 1999, include costs associated with the initiation and maintenance of certain programs and costs in anticipation of increased demands upon the Company to support new programs and the request of customers for shorter production lead times. During the three month period ended March 31, 1999, the Company expended $238,000 on capital expenditures. There are no material commitments for capital expenditures at March 31, 1999. Year 2000 Initiatives - --------------------- The Company is reliant on systems that use time-based mechanisms for asset and information management. Management recognizes that such systems may have potential problems affecting their capabilities because of the Year 2000 date change. The Company also has relationships with vendors, services and product suppliers, customers and financial institutions among others, which are reliant on such systems. It is possible that Year 2000 problems encountered by the Company or these outside parties could result in a loss of business that is potentially material to the Company. During the previous and current years, the Company formulated, initiated and continued the implementation of a three-phase plan to determine and, when appropriate, address any internal or external Year 2000 problems to the extent they existed. Phase I identified internal and external (outside parties with a material relationship to the Company) Year 2000 compliance concerns. Phase II assessed the Year 2000 readiness of the Company. Phase III is the implementation of solutions and contingency plans for the potential problems identified during Phase I and Phase II. To date, the Company has assessed its internal computing systems and determined that there are no apparent material Year 2000 issues, although certain reprogramming of internal systems were determined to be desirable and are being accomplished. With respect to external -10- 11 compliance, the Company has developed and mailed a Year 2000 survey to its suppliers, customers and financial institutions to determine their Year 2000 readiness and compliance. As of April 30, 1999, the Company has not received notification from any such outside parties that any material Year 2000 readiness or compliance issues have been identified. The Company is implementing Phase III and is in the process of making reprogramming changes to internal software as well as upgrading to Year 2000 compliant versions of purchased desktop software. The Company is unaware of any internal Year 2000 issues that will not be resolved by the end of 1999. Should the Company become aware of any internal or external Year 2000 issues that will not be resolved by the end of 1999, it will immediately formulate and implement the appropriate solutions and contingency plans. In any event, it is anticipated that the Company will complete all phases of its Year 2000 plan by the end of 1999. The Company does not believe that the costs of Year 2000 compliance will be material and anticipates such costs will be funded out of working capital. At this time, the Company cannot predict the final outcome of the on-going survey and assessment of the outside parties considered important to the Company's business or the ability of such outside parties to achieve Year 2000 Compliance by the end of 1999. 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, the growth of the national deficit and difficulty in predicting defense appropriations, the discontinuance of current defense programs, 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 and issue substantial follow-on orders to the Company for long-term programs, competitive products and pricing, difficulties in the development or commercialization of products, product demand and market acceptance, both for the Company's products and its customers' products which incorporate components supplied by the Company, enforceability of intellectual property rights, capacity and supply, the effects of foreign competition, and the Company's future accounting policies. 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: May 14, 1999 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- EX-27 2 EXHIBIT 27
5 3-MOS DEC-31-1999 MAR-31-1999 1,213 0 2,231 0 9,735 14,940 7,291 0 22,857 2,335 6,877 0 0 523 12,891 22,857 0 3,591 2,505 3,425 0 0 67 166 66 25 0 0 (75) 25 0.02 0.02
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