<PAGE> 1
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, 1997
__ 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.
Issuer's revenues for its most recent fiscal year: $15,892,000.
As of February 28, 1998 the aggregate market value of the voting common
stock held by non-affiliates of the registrant was $8,341,917.43 based on the
average of sales prices reported by the American Stock Exchange on that day.
As of February 28, 1998 the number of $.20 par value common shares
outstanding was 2,355,478.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-KSB
-------- -------------------
1998 Proxy Statement Part III
Transitional Small Business Disclosure Format. Yes . No x .
--- ---
<PAGE> 2
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 catalog model or design a new item in order to satisfy the customer's
particular requirements. The Registrant also produces unique products based on
specifications provided by its' customers. The Registrant produces under
long-term contracts and otherwise.
The Registrant also produces metallic seals of various cross-sectional
configurations. These seals fit between two surfaces, usually metal, to produce
a more secure and leak-proof joint. They are generally designed for use under
circumstances in which more conventional seals and gaskets do not perform
adequately, such as exposure to extremes of temperature, high pressures,
vacuums, radiation or corrosive atmospheres. The Registrant manufactures these
seals to close tolerances from standard and special alloy steels. Ductile
coatings are often applied to the seals in order to increase their
effectiveness.
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From time to time, the Registrant has also produced other products of its
own and/or of a given design to meet customers' requirements.
The Registrant also designs and/or manufactures for its own use custom
precision metal stampings. These stampings are produced from precision single
stage and/or progressive dies which are also designed and manufactured by the
Registrant. The progressive die performs, in a series of stages in one die, the
stamping of a metal piece which could otherwise require stamping by a number of
separate dies.
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 and
commercial manufacturers and end users. Sales are made primarily by the
Registrant's professional staff.
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 18% of the
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<PAGE> 4
Registrant's total sales. If the Registrant were deemed to be unqualified by the
United States Government as a contractor or subcontractor, it would lose
approximately 29% of its sales of advanced technology products. In 1997 and 1996
sales of advanced technology products to each of the AlliedSignal Corporation
and United Technologies, through several of their respective subsidiaries and/or
divisions, exceeded 10% of Registrant's total sales. No other single customer
represented more than 10% of the Company's sales in any of these years.
The Registrant's prime contracts and subcontracts with the Government are
subject to termination for the convenience of the Government. In the event of
such termination, the Registrant is ordinarily entitled to receive payment for
its costs and profits on work done prior to termination. Since the inception of
the Registrant's business, less than 1% of its government contracts have been
terminated for convenience.
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
also sells its cutlery products (principally machetes, survival knives and
kitchen knives) to various branches of the United States Government. The
Registrant sells its products through its own sales personnel and through
independent manufacturers' representatives.
Business Segments
- -----------------
Business segment information is presented in Note 11 of the accompanying
consolidated financial statements.
Patents
- -------
In the view of management, the Registrant's competitive position is not
dependent on patent protection. The Registrant has rights under a number of
patents.
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<PAGE> 5
Research Activities
- -------------------
The amount spent by the Registrant in research and development activities
during its 1997 and 1996 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.
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.
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<PAGE> 6
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 February 28, 1998 had approximately 254 employees of
which approximately 243 are full time. In excess of 86% of its employees are
engaged in design, production, inspection, packaging or shipping activities. The
balance are engaged in executive, engineering, administrative, clerical or sales
capacities.
The Registrant considers its relationship with its employees to be good
and the Registrant has never experienced a significant labor work stoppage.
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:
<TABLE>
<CAPTION>
Number of
Principal buildings and Approx.
Approx. product type of floor area
Location acreage manufactured construction (sq. feet)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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<PAGE> 7
The Registrant leases approximately 38.4 acres of land and a facility
from a local industrial development agency. The lease is accounted for as a
capital lease and entitles the Registrant to purchase the property at a nominal
amount at the end of the lease term.
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
high technology products. The Registrant designs and makes substantially all of
the tools, dies, jigs and specialized testing equipment necessary for the
production of the high technology products. The Registrant also possesses
automatic and semi-automatic grinders, tumblers, presses and miscellaneous metal
and wood finishing machinery and equipment for use in the manufacture of
consumer products.
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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable.
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<PAGE> 8
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 1997 and 1996.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997
Fourth Quarter $ 13-3/8 $ 7-7/8
Third Quarter 9-3/8 6
Second Quarter 6 4-1/8
First Quarter 6-7/16 5-1/4
1996
Fourth Quarter $ 5-7/8 $ 4
Third Quarter 4-3/4 4-1/8
Second Quarter 5-1/2 3-13/16
First Quarter 4-7/8 4
</TABLE>
(b) Approximate number of holders of common stock
---------------------------------------------
<TABLE>
<CAPTION>
Title Approximate number of
of record holders (as of
class December 31, 1997)
----- ------------------
<S> <C>
Common Stock, $.20 par value 723
</TABLE>
(c) Dividends on common stock
-------------------------
No cash dividends were paid in 1997 or 1996.
-8-
<PAGE> 9
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
sales and the percentage increase or decrease of such items as compared to the
indicated prior period:
<TABLE>
<CAPTION>
PERIOD to
RELATIONSHIP to PERIOD
net sales year increase
ended (decrease)
DECEMBER 31, year ended
1997 1996 1997-96
------ ------ ------
<S> <C> <C> <C>
Net sales:
Advanced technology products 60.0% 52.5% 16.3%
Consumer products 40.0 47.5 -14.1
------ ------ ------
100.0 100.0 1.9
Cost of goods sold 68.0 69.2 0.0
------ ------ ------
Gross profit 32.0 30.8 6.0
------ ------ ------
Selling, general and administrative 19.3 19.3 2.0
Interest 2.1 2.1 0.6
Depreciation 4.2 4.1 5.8
Gain on sale of assets - -7.2 -
Charges related to sale of assets - 3.1 -
------ ------ ------
25.6 21.4 8.4
------ ------ ------
Income before income taxes 6.4 9.4 -30.9
Income tax provision 2.5 3.8 -33.4
------ ------ ------
Net income 3.9% 5.6% -29.2%
====== ====== ======
</TABLE>
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<PAGE> 10
Management Discussion
- ---------------------
During the year ended December 31, 1997 and for the comparable period
ended December 31, 1996, approximately 20% and 22% 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 programs will be
continued or that programs in the prototype stages will ultimately result in
production applications. It is because of such volatile uncertainties and
because such adverse occurrences may not be counterbalanced with new programs or
otherwise that cyclical downturns in operational performances are realistic
expectations.
See also Note 11 to the consolidated financial statements for information
concerning business segment operating results.
Results of Operations - Year 1997 as Compared to 1996
- -----------------------------------------------------
The Company's consolidated results of operations for the year ended
December 31, 1997 showed an approximate 2% increase in net sales with an
increase in operating income as a percentage of net sales from approximately
11.5% to 12.7% when compared to the same period in 1996. The increase in sales
is attributable to a 16% increase in sales at the Advanced Technology Group as
the result of past and current engineering, marketing and other support efforts
and new programs and applications, offset by a 14% decrease in sales at the
Consumer Products Group due to a decrease in customer demand and the phasing
out of low margin product lines.
The respective amounts of the funded and unfunded sales backlog at
December 31, 1997 and 1996 for the Advanced Technology Group were approximately
$59,192,000 and $46,462,000, a year to year increase of 27%, of which
$51,235,000 and $38,075,000 was unfunded in the respective comparable periods.
Approximately $38,000,000 of the December 31, 1997 backlog is for product
deliveries beyond 2000. 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.
Income before income taxes increased $188,000 or 23% to $1,010,000 for
the year ended December 31, 1997 from $822,000 for the year ended December 31,
1996 when comparing net
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<PAGE> 11
income before income taxes and the net gain on sale of assets. The net gain on
the sale of assets of $639,000 was recognized in the year ended December 31,
1996 and no similar gain occurred in 1997.
Selling, general and administrative costs increased by approximately 2%
for the year ended December 31, 1997 when compared to the same period 1996. This
is primarily attributable to the increase in net sales. Interest expense
remained relatively consistent for the same comparable periods while
depreciation expense increased due to an increase in capital expenditures.
Income taxes for the year ended December 31, 1997, as a percentage of
income before taxes, decreased when compared to the same period in 1996 due to
variable state income tax rates.
Results of Operations - Year 1996 as Compared to 1995
- -----------------------------------------------------
The Company's consolidated results of operations for the year ended
December 31, 1996 showed an approximate 4.6% decrease in net sales with an
increase in operating income as a percentage of net sales from approximately
8.5% to 11.5% when compared to the same year ended December 31, 1995. The
decrease in sales is primarily attributable to a decrease in sales at the
Consumer Products Group's operations due to a decrease in customer demands while
the increase in operating profit as a percentage of net sales is a result of
differences in product mix.
The respective amounts of the funded and unfunded sales backlog at
December 31, 1996 and 1995 for the Advanced Technology Group (ATG) were
approximately $46,462,000 and $31,628,000 of which $38,075,000 and $25,809,000
was unfunded in the respective comparable periods. Approximately $30,000,000 of
the December 31, 1996 unfunded backlog is for product deliveries beyond 1999.
The unfunded portion of the backlog is based on the Company's customers'
estimated quantities for multi-year agreements for which the Company has not
received firm orders.
Income before income taxes exclusive of $639,000 gain on sale of assets
net of related charges for the year ended December 31, 1996 increased 150.7%
when compared to the same year ended December 31, 1995. The gain of sale of
assets was for the previously reported sale of the former headquarters which was
located at 3901 Union Road, Buffalo, New York. This sale was completed in the
third quarter of 1996 and is reflected in the accompanying financial statements
as a gain on sale of assets and related charges, which include certain
environmental and compensation costs.
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<PAGE> 12
Selling, general and administrative costs remained relatively consistent
for the year ended December 31, 1996 when compared to the same year ended
December 31, 1995. Interest expense decreased because of lower long-term debt
and lower interest rates. Depreciation expense for the period decreased
primarily as a result of the sale of the former headquarters.
Income taxes for the year ended December 31, 1996, as a percentage of
income before taxes, remained consistent when compared to the year ended
December 31, 1995.
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 December 31, 1997 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 time. Also
included in inventory are $295,000 capitalized costs associated with the
introduction of new product lines. See also Note 2 to the Consolidated Financial
Statements for information concerning engineering and other support costs.
During the year ended December 31, 1997, the Company expended $685,000 on
capital expenditures. During the year ended December 31, 1996, the Company
expended $422,000. The Company also has a $1,000,000 line of credit at December
31, 1997 on which $200,000 is outstanding at December 31, 1997.
There are no material commitments for capital expenditures at December
31, 1997.
In 1991, the Company's Board of Directors authorized the purchase by the
Company of up to 250,000 additional shares of its common stock in open and
privately negotiated transactions for a total authorized purchase of up to
350,000 shares, of which 256,045 shares have been purchased.
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<PAGE> 13
Year 2000 Initiatives
- ---------------------
The Company is currently working to resolve the potential impact of "Year
2000" issues on the processing of date-sensitive information by the Company's
computer systems. The Year 2000 problem relates to the ability of computer
systems to be able to distinguish date data between the twentieth and
twenty-first centuries.
The Company does not currently expect that these "Year 2000" issues will
have a material adverse impact on the Company's financial position, results or
cash flows in the future.
The Company is also taking steps to assess the Year 2000 status of its
significant product and service suppliers.
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.
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<PAGE> 14
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 1997 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 1997 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 1997 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 1997 fiscal year or such information will be
included by amendment.
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<PAGE> 15
Item 13. Exhibits and Reports on Form 8-K
- -------- --------------------------------
(a) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit
number Presentation Reference
------ ------------ ---------
<S> <C> <C> <C>
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(B) By-laws Exhibit 3(B) to 1986
Form 10-K*
4(A) First amended and restated Exhibit 4(A) to 1993
term loan agreement with Form 10-KSB*
Fleet Bank of New York
dated October 4, 1993
4(B)(1) Letter of Credit Reimbursement Exhibit 4(B)(1) to
Agreement with Fleet Bank 1994 10-KSB*
dated as of December 1, 1994
4(B)(2) Agency Mortgage and Security Exhibit 4(B)(2) to
Agreement dated as of 1994 10-KSB*
December 1, 1994 from the
Registrant and its subsidiaries
4(B)(3) Guaranty Agreement dated as Exhibit 4(B)(3) to
of December 1, 1994 from the 1994 10-KSB*
Registrant and its subsidiaries
to the Erie County Industrial
Development Agency ("ECIDA"),
Norwest Bank Minnesota, N.A.,
as Trustee, and Fleet Bank
4(C) Shareholder Rights Plan Attachment B to Form
dated as of August 13, 8-K filed August 17,
1992 1992*
--------------------------------------------------------------------------------
<FN>
*Incorporated herein by reference (File No. 1-7109)
**Indicates management contract or compensatory plan or arrangement
</FN>
</TABLE>
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<PAGE> 16
<TABLE>
<CAPTION>
Exhibit
number Presentation Reference
------ ------------ ---------
<S> <C> <C> <C>
10(A)(1) Employment contract** Exhibit 10(A) to 1986
Form 10-K*
10(A)(2) Amendment to employment Exhibit 10(A)(2) to 1996
contract** Form 10-KSB*
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**
10(C)(1) Loan agreement between Exhibit 10(C)(1)
the Company and its to 1991 Form 10-K*
employee stock ownership
trust, as amended
10(C)(2) Stock purchase agreement Exhibit 10(D)(2) to
between the Company 1988 Form 10-K*
and its employee
stock ownership trust
10(D)(1)(a) 1989 Employees Stock Exhibit A to Form
Option Plan** 8: Amendment
No. 1 to 1988
Form 10-K*
10(D)(1)(b) Amendment to 1989 Exhibit 10(D)(1)(b)
Employees Stock Option to 1990 Form 10-K*
Plan**
10(D)(1)(c) Amendment No. 2 to Exhibit 10(D)(1)(d) to
1989 Employees Stock 1991 Form 10-K*
Option Plan**
10(D)(2) Stock Option Agreement Exhibit B to Form
for Donald W. Hedges 8: Amendment
dated April 28, 1989** No. 1 to 1988
Form 10-K*
--------------------------------------------------------------
<FN>
*Incorporated herein by reference (File No. 1-7109)
**Indicates management contract or compensatory plan or arrangement
</FN>
</TABLE>
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<PAGE> 17
<TABLE>
<CAPTION>
Exhibit
number Presentation Reference
------ ------------ ---------
<S> <C> <C> <C>
10(D)(3) Stock Option Agreement Exhibit D to Form
for Nicholas D. 8: Amendment
Trbovich, Sr. dated No. 1 to 1988
March 29, 1989** Form 10-K*
10(D)(4) Stock Option Agreement Exhibit 10(D)(4) to 1990
for William H. Duerig Form 10-K*
dated December 21,
1990**
10(D)(5) Stock Option Agreement Exhibit 10(D)(5) to 1990
for Nicholas D. Form 10-K*
Trbovich, Jr. dated
December 21, 1990**
10(D)(6) Stock Option Agreement
for Nicholas D.
Trbovich, Jr. dated Exhibit 10(D)(6) to 1991
October 17, 1991** Form 10-K*
10(D)(7) Stock Option Agreement Exhibit 10(D)(7) to 1991
for Lee D. Burns dated Form 10-K*
October 17, 1991**
10(D)(8) Stock Option Agreement Exhibit 10(D)(8) to 1991
for Raymond C. Zielinski Form 10-K*
dated October 17, 1991**
10(D)(9) Land Lease Agreement between Exhibit 10(D)(9) to 1992
TSV, Inc. (wholly-owned Form 10-KSB*
subsidiary of the Registrant)
and the ECIDA
dated as of May 1, 1992, and
Corporate Guaranty of the
Registrant dated as of May 1,
1992
10(D)(10) Amendment to Land Lease Exhibit 10(D) (11) to 1993
Agreement and Interim Form 10-KSB*
Lease Agreement dated
November 19, 1992
--------------------------------------------------------------
<FN>
*Incorporated herein by reference (File No. 1-7109)
**Indicates management contract or compensatory plan or arrangement
</FN>
</TABLE>
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<PAGE> 18
<TABLE>
<CAPTION>
Exhibit
number Presentation Reference
------ ------------ ---------
<S> <C> <C> <C>
10(D)(11) Lease Agreement dated as of Exhibit 10(D)(11) to
December 1, 1994 between 1994 10-KSB*
the Erie County Industrial
Development Agency
("ECIDA") and TSV, Inc.
10(D)(12) Sublease Agreement dated as Exhibit 10(D)(12) to
of December 1, 1994 between 1994 10-KSB*
TSV, Inc. and the Registrant
21 Subsidiaries of the Exhibit 22 to 1992
Registrant Form 10-KSB*
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, 1997.
---------------------------------------------------------------------
<FN>
*Incorporated herein by reference (File No. 1-7109)
**Indicates management contract or compensatory plan or arrangement
</FN>
</TABLE>
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 approximately 20% 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
-18-
<PAGE> 19
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-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-
<PAGE> 20
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of independent accountants F2
Consolidated balance sheet at December 31, 1997 F3
Consolidated statement of income for the years ended
December 31, 1997 and 1996 F4
Consolidated statement of cash flows for the
years ended December 31, 1997 and 1996 F5
Notes to consolidated financial statements F6-F18
</TABLE>
Financial statement schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
F1
<PAGE> 21
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of
Servotronics, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index on page F1 present fairly, in all material respects, the financial
position of Servotronics, Inc. and its subsidiaries at December 31, 1997 and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Buffalo, New York
March 24, 1998
F2
<PAGE> 22
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
($000's omitted except per share data)
<TABLE>
<S> <C>
Assets
Current assets:
Cash $ 1,185
Accounts receivable 2,202
Inventories 8,028
Prepaid income taxes 38
Deferred tax asset 640
Other 1,386
-------
Total current assets 13,479
Property, plant and equipment, net 7,371
Other assets 440
-------
$21,290
=======
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 246
Demand loan 200
Accounts payable 1,030
Accrued employee compensation and benefit costs 809
Other accrued liabilities 259
-------
Total current liabilities 2,544
-------
Long-term debt 6,398
Non-current deferred tax liability 534
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; Issued 2,614,506 shares 523
Capital in excess of par value 13,269
Retained earnings 2,104
-------
15,896
Employee stock ownership trust commitment (2,842)
Treasury stock, at cost, 259,028 shares (1,240)
-------
Total shareholders' equity 11,814
-------
$21,290
=======
</TABLE>
See notes to consolidated financial statements
F3
<PAGE> 23
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($000's omitted except per share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Net sales $ 15,892 $ 15,600
Costs and expenses:
Cost of goods sold 10,800 10,796
Selling, general and administrative 3,071 3,010
Interest 337 335
Depreciation and amortization 674 637
Gain on sale of assets - (1,116)
Charges related to sale of assets - 477
-------- --------
14,882 14,139
-------- --------
Income before income taxes 1,010 1,461
Income tax provision 391 587
-------- --------
Net income $ 619 $ 874
======== ========
Net income per share - Basic $ 0.37 $ 0.52
======== ========
Net income per share - Diluted $ 0.36 $ 0.52
======== ========
</TABLE>
See notes to consolidated financial statements
F4
<PAGE> 24
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000's omitted)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows related to operating activities:
Net Income $ 619 $ 874
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 674 637
Deferred taxes (85) (155)
Gain on sale of assets (exclusive of related charges) - (1,116)
Change in assets and liabilities -
Accounts receivable 512 (219)
Inventories (821) (539)
Prepaid income taxes (38) 261
Other current assets (257) (179)
Other assets 15 15
Accounts payable 39 93
Accrued employee compensation and benefit costs (65) 187
Other accrued liabilities 39 12
Accrued income tax (200) 200
Employee stock ownership trust payment 101 101
------- -------
Net cash provided by operating activities 533 172
------- -------
Cash flows related to investing activities:
Sale of assets - 1,255
Capital expenditures - property, plant and
equipment (685) (422)
------- -------
Net cash (used in) provided by investing activities (685) 833
------- -------
Cash flows related to financing activities:
Increase in demand loan 500 100
Payments on demand loan (300) (100)
Principal payments on long-term debt (252) (228)
------- -------
Net cash used in financing activities (52) (228)
------- -------
Net (decrease) increase in cash (204) 777
Cash at beginning of period 1,389 612
------- -------
Cash at end of period $ 1,185 $ 1,389
======= =======
Supplemental disclosures:
Income taxes paid $ 697 $ 294
Interest paid $ 334 $ 339
</TABLE>
See notes to consolidated financial statements
F5
<PAGE> 25
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 the Company
and its wholly-owned subsidiaries.
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 is $636,000 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.
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
F6
<PAGE> 26
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:
<TABLE>
<S> <C>
Buildings and improvements 5-39 years
Machinery and equipment 5-15 years
Tooling 3-5 years
</TABLE>
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
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. Significant estimates employed by
management include those used in revenue
F7
<PAGE> 27
recognition, amortization of engineering and other support costs included
in inventory (See Note 2 to the Consolidated Financial Statements).
2. Inventories
-----------
<TABLE>
<CAPTION>
December 31, 1997
-----------------
($000's omitted)
<S> <C>
Raw materials and common parts $ 1,168
Work-in-process (including engineering
and other support costs of $3,000,000) 6,666
Finished goods 430
----------
8,264
Less common parts expected to be used
after one year (236)
----------
$ 8,028
==========
</TABLE>
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.
The Company's Consumer Products Group (CPG) defers the costs associated
with the introduction of new product lines and amortizes that balance
over three years. As of December 31, 1997, $295,000 of product
introduction costs were capitalized in inventory of which $250,000 were
incurred in 1997.
During 1997, the Accounting Standards Executive Committee (AsSEC) of the
AICPA released a Statement of Position on Reporting on the Costs of
Start-Up Activities (the SoP) which is effective for fiscal years
beginning after December 15, 1998. The SoP would require that these costs
associated with the introduction of a new product line be expensed in the
period incurred. As a result, the Company will be required to write-off
the unamortized balances relating to start-up activities on January 1,
1999, which is estimated to be approximately $151,000. The Company will
adopt the provisions of the SoP when required.
F8
<PAGE> 28
3. Property, plant and equipment
-----------------------------
<TABLE>
<CAPTION>
December 31, 1997
-----------------
($000's omitted)
<S> <C>
Land $ 11
Buildings and improvements 6,129
Machinery, equipment and tooling 8,015
----------
14,155
Less accumulated depreciation (6,784)
----------
$ 7,371
==========
</TABLE>
4. Long-term debt
--------------
<TABLE>
<CAPTION>
December 31, 1997
-----------------
($000's omitted)
<S> <C>
Industrial Development Revenue Bonds; secured by a letter
of credit from a bank with interest payable monthly
at a floating rate (4.40% at December 31, 1997
convertible to a fixed rate at the option of the
Company) $ 5,000
Unsecured term note; payable to a bank with interest at
prime plus 1/4% (8.75% at December 31, 1997);
quarterly principal payments of $34,439 through
November 1, 2000 379
Various other secured term notes payable to government agencies 1,265
-------
6,644
Less current portion (246)
-------
$ 6,398
=======
</TABLE>
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 letter of credit is for the full amount of the Industrial
Development Revenue Bonds. The Company pays the letter of credit bank an
annual fee of 1% of the amount secured thereby and pays the remarketing
F9
<PAGE> 29
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 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: 1999 - $249,000;
2000 - $404,000; 2001 - $250,000; 2002 - $405,000, 2003 and thereafter
$5,090,000.
The Company also has a $1,000,000 line of credit on which there was
$200,000 outstanding at December 31, 1997.
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 salary levels and
minimum service requirements. Upon inception of the ESOP, the Company
borrowed $2,000,000 from a bank and lent the proceeds to the trust
established under the ESOP to purchase shares of the Company's common
stock. The Company's loan to the trust is at an interest rate
approximating the prime rate and is repayable to the Company over a
40-year term ending in December 2024. During 1987 and 1988, the Company
loaned an additional $1,942,000 to the trust under terms similar to the
Company's original loan. Each year the Company makes contributions to the
trust which the plan's trustees use to repay the principal and interest
due the Company under the trust loan agreement. Shares held by the trust
are allocated in the aggregate to participating employees in proportion
to the amount of the loan repayment made by the trust to the Company.
Since inception of the ESOP, approximately 293,000 shares have been
allocated, exclusive of shares distributed to ESOP participants. At
December 31, 1997 and 1996, approximately 629,000 and 662,000 shares,
respectively, purchased by the ESOP remain unallocated.
F10
<PAGE> 30
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 1997 and 1996. 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 maintains a
non-contributory 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 $29,000 and $31,000 was recognized in 1997 and 1996,
respectively, calculated using a weighted-average discount rate and
weighted-average expected rate of return on plan assets of 8%. The
projected benefit obligation under the plan at December 31, 1997 was
$107,000, net of $125,000 of plan assets at fair value.
Deferred compensation plan
--------------------------
The Company maintains a deferred compensation program designed to
achieve, among other things, benefit parity for an officer of the
Company. During 1997, no amount was accrued under this program. In 1996,
$165,000 was accrued under this program. No amounts under this plan have
been paid since its inception. Accrued in the December 31, 1997
consolidated balance sheet is $420,000.
F11
<PAGE> 31
6. Income taxes
------------
The provision for income taxes included in the consolidated statement of
income consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
($000's omitted)
<S> <C> <C>
Current:
Federal income tax $ 387 $ 611
State income tax 89 131
----- -----
476 742
Deferred: ----- -----
Federal income tax (benefit) (72) (131)
State income tax (benefit) (13) (24)
----- -----
(85) (155)
----- -----
$ 391 $ 587
===== =====
</TABLE>
The reconciliation of the difference between the Company's effective tax
rate based upon the total income tax provision and the federal statutory
income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory rate 34% 34%
Increase resulting from:
State tax (net of federal benefit) 5% 5%
Other - 1%
---- ----
39% 40%
==== ====
</TABLE>
F12
<PAGE> 32
At December 31, 1997, the deferred tax assets (liabilities) were
comprised of the following:
<TABLE>
<CAPTION>
($000's omitted)
<S> <C>
Inventory $ 289
Accrued pension 159
Accrued vacation 111
State taxes 25
Other 56
-----
Gross deferred tax assets 640
Property, plant and equipment (484)
State taxes (31)
Other (19)
-----
Gross deferred tax liabilities (534)
-----
Net deferred tax asset $ 106
=====
</TABLE>
7. Common shareholders' equity
---------------------------
<TABLE>
<CAPTION>
COMMON STOCK
------------
NUMBER CAPITAL IN
OF SHARES EXCESS OF RETAINED TREASURY
ISSUED AMOUNT PAR VALUE EARNINGS ESOP STOCK
-------------------------------------------------------------------------------
($000's omitted)
<S> <C> <C> <C> <C> <C> <C>
Balance December
31, 1995 2,440,408 $ 448 $ 12,495 $ 1,422 ($ 3,044) ($ 1,240)
Compensation expense - - - - 101 -
Stock dividend paid 174,098 35 774 (811) - -
Net income - - - 874 - -
--------- --------- --------- --------- --------- ---------
Balance December
31, 1996 2,614,506 $ 523 $ 13,269 $ 1,485 ($ 2,943) ($ 1,240)
Compensation expense - - - - 101 -
Net income - - - 619 - -
--------- --------- --------- --------- --------- ---------
Balance December
31, 1997 2,614,506 $ 523 $ 13,269 $ 2,104 ($ 2,842) ($ 1,240)
========= ===== ========= ========= ========= ========
</TABLE>
Earnings per share
------------------
All earnings per share amounts reflect the implementation of the
Statement of Financial Accounting Standards No. 128 Earnings per Share
(SFAS 128). SFAS 128 established new standards for computing and
presenting earnings per share and requires all prior period earnings per
share data be restated to conform with the provisions of the statement.
Basic earnings per share
F13
<PAGE> 33
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.
<TABLE>
<CAPTION>
($000's omitted, except share data) 1997 1996
--------------------------------------- ------ ------
<S> <C> <C>
Net earnings $ 619 $ 874
Weighted average common
shares outstanding (basic) 1,696 1,666
Incremental shares from
assumed conversions of stock options 32 22
Weighted average common
shares outstanding (diluted) 1,728 1,688
Earnings per share:
Basic $ 0.37 $ 0.52
Diluted $ 0.36 $ 0.52
</TABLE>
Stock options
-------------
Under the Servotronics, Inc. 1989 Employees Stock Option Plan (the Option
Plan) and other separate agreements authorized by the Board of Directors,
the Company has granted non-qualified options to its Chairman, directors
and/or officers. The Company applies APB Opinion No. 25 and related
interpretations in accounting for the Option Plan and the separate option
agreements. Accordingly, no compensation expense has been recognized as
stock options granted have an exercise price equal to the market price on
the date of grant. The Company did not grant options under the Option
Plan or through separate agreements in either 1997 or 1996. At December
31, 1997, 33,200 shares of common stock were available under the Option
Plan. Options granted under the Option Plan have durations of ten years.
At December 31, 1997, the number of shares subject to and the exercise
price of options granted to its Chairman, directors and/or officers are
37,778 at approximately $2.63 per share, 12,593 at approximately $2.56
per share, 25,186 at approximately $2.07 per share and 17,172 at
approximately $5.95 per share. At December 31, 1997, all of the 92,729
shares granted under the Option Plan and through the separate agreements
are exercisable and have a weighted average remaining contractual life of
3 years.
Subsequent to December 31, 1997 the Company granted approximately 93,000
nonqualified stock options to certain directors and officers of the
Company with an exercise price equal to the market price of the common
stock at the date of grant.
F14
<PAGE> 34
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 Dr. Nicholas D. Trbovich or
the ESOP trust (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of 25% or more of the Company's
common stock (excluding shares held by the ESOP trust) or (ii) ten
business days following the commencement of a tender offer that would
result in a person or affiliated group becoming an Acquiring Person.
The exercise price of a Right has been established at $30.00. Once
exercisable, each Right would entitle the holder to purchase one
one-hundredth of a share of Series A Junior Participating Preferred
Stock. In the event that any person becomes an Acquiring Person, each
Right would entitle any holder other than the Acquiring Person to
purchase common stock or other securities of the Company having a value
equal to three times the exercise price. The Board of Directors has the
discretion in such event to exchange two shares of common stock or two
one-hundredths of a share of preferred for each Right held by any holder
other than the Acquiring Person.
8. Commitments
-----------
The Company leases certain equipment pursuant to operating lease
arrangements. Total rental expense in 1997 and 1996 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. Gain on sale of assets
----------------------
Included in 1996 income before taxes is $639,000 realized from the sale
of the Company's former headquarters, net of charges related to the sale
including certain environmental and compensation costs.
F15
<PAGE> 35
11. Business segments
-----------------
The Company operates in two business segments, Advanced Technology
Products and Consumer Products. Operations in Advanced Technology
Products involve the design, manufacture, and marketing of servo-control
components for government and commercial industrial applications.
Consumer Products operations involve the design, manufacture and
marketing of a variety of cutlery products for use by consumers and
government agencies. Information regarding the Company's operations in
these segments is summarized as follows:
F16
<PAGE> 36
<TABLE>
<CAPTION>
Advanced
Year ended Technology Consumer
December 31, 1997 Products Products Consolidated
----------------- -------- -------- ------------
($000's omitted)
<S> <C> <C> <C>
Sales to unaffiliated customers $ 9,533 $ 6,359 $ 15,892
============ =========== ============
Operating profit $ 2,049 $ (277) $ 1,772
============ ============
Interest expense (337)
General corporate expense (425)
------------
Income before income taxes $ 1,010
============
Identifiable assets $ 15,097 $ 5,636 $ 20,733
============ =========== ============
Depreciation expense $ 369 $ 305 $ 674
============ =========== ============
Capital expenditures $ 456 $ 229 $ 685
============ =========== ============
Advanced
Year ended Technology Consumer
December 31, 1996 Products Products Consolidated
----------------- -------- -------- ------------
($000's omitted)
<S> <C> <C> <C>
Sales to unaffiliated customers $ 8,197 $ 7,403 $ 15,600
============ =========== ============
Operating profit $ 2,703 $ (493) $ 2,210 *
============ ===========
Interest expense (335)
General corporate expense (414)
-----------
Income before income taxes $ 1,461
============
Identifiable assets $ 14,339 $ 5,862 $ 20,201
============ =========== ============
Depreciation expense $ 336 $ 301 $ 637
============ =========== ============
Capital expenditures $ 193 $ 229 $ 422
============ =========== ============
<FN>
* Includes $639,000 as a net gain from sale of former headquarters. - See Note 10.
</FN>
</TABLE>
F17
<PAGE> 37
The Company engages in a significant amount of business with the United
States Government through sales to its prime contractors and otherwise.
Such contracts by the Advanced Technology segment accounted for
revenues of approximately $2,784,000 in 1997 and $2,795,000 in 1996.
Similar contracts by the Consumer Products segment accounted for
revenues of approximately $327,000 in 1997 and $646,000 in 1996. Sales
of advanced technology products to one prime contractor, including
various divisions and subsidiaries of a common parent company, amounted
to approximately 19% and 15% of total sales in 1997 and 1996,
respectively. Another customer amounted to approximately 18% of total
sales in 1997 and 13% of total 1996 sales respectively. No other single
customer represented more than 10% of the Company's sales in any of
these years.
F18
<PAGE> 38
SIGNATURES
----------
In accordance with of 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 24, 1998 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.
<TABLE>
<S> <C> <C>
/s/ Nicholas D. Trbovich President, Chief Executive March 24, 1998
- ------------------------ Officer, Chairman of the
Nicholas D. Trbovich Board and Director
/s/ Lee D. Burns Treasurer and Secretary March 24, 1998
- ---------------- (Chief Financial Officer)
Lee D. Burns
/s/ Donald W. Hedges Director March 24, 1998
- --------------------
Donald W. Hedges
/s/ William H. Duerig Director March 24, 1998
- ---------------------
William H. Duerig
/s/ Nicholas D. Trbovich Jr. Director March 24, 1998
- ----------------------------
Nicholas D. Trbovich Jr.
</TABLE>
<PAGE> 1
SERVOTRONICS, INC. AND SUBSIDIARIES
EXHIBIT 10(A)(3)
AS OF MAY 1, 1997
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 AND MAY 1, 1996 (THE "AGREEMENT"), PURSUANT TO WHICH YOU
ARE EMPLOYED BY THE COMPANY.
THIS WILL CONFIRM YOUR AGREEMENT AND THAT OF THE COMPANY (PURSUANT TO A
RESOLUTION OF THE BOARD OF DIRECTORS PASSED AT A MEETING HELD ON JUNE 30, 1997)
TO AMEND PARAGRAPH 3 OF THE AGREEMENT TO DELETE "$271,920.00" AND INSERT IN ITS
PLACE "$285,000.00".
EXCEPT AS SPECIFICALLY PROVIDED HEREIN, ALL OF THE OTHER TERMS AND CONDITIONS OF
THE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT.
IF THE FOREGOING MEETS WITH YOUR APPROVAL AND YOU ARE WILLING TO BECOME BOUND
HEREBY, WILL YOU PLEASE SIGN AND RETURN TO THE UNDERSIGNED THE ENCLOSED COPY OF
THIS LETTER.
VERY TRULY YOURS,
SERVOTRONICS, INC.
/S/LEE D. BURNS
LEE D. BURNS,
TREASURER/SECRETARY
ACCEPTED AND AGREED
/S/ DR. NICHOLAS D. TRBOVICH
- ----------------------------
DR. NICHOLAS D. TRBOVICH
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