<PAGE> 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, 2000
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File No. 1 - 7109
SERVOTRONICS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 16-0837866
------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1110 Maple Street, Elma, New York 14059-0300
--------------------------------------------
(Address of principal executive offices)
716-655-5990
------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X; No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at April 30, 2000
----------------------------- -----------------------------
Common Stock, $.20 par value 2,405,488
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
--- ---
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INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements
a) Consolidated Balance Sheet, March 31, 2000 3
b) Consolidated Statement of Income for the Three Months Ended
March 31, 2000 and 1999 4
c) Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
PART II. OTHER INFORMATION
Signatures 12
Item 6(a). Exhibits
27 Financial Data Schedule
</TABLE>
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PART I FINANCIAL INFORMATION
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2000
($000's omitted except per share data)
(Unaudited)
<TABLE>
<S> <C>
Assets
Current assets:
Cash $ 708
Accounts receivable 2,289
Inventories 6,600
Prepaid income taxes 736
Deferred income taxes 1,443
Other 1,439
--------
Total current assets 13,215
--------
Property, plant and equipment, net 7,019
Other assets 613
--------
$ 20,847
========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 444
Demand loan 475
Accounts payable 953
Accrued employee compensation and benefit costs 836
Other accrued liabilities 283
--------
Total current liabilities 2,991
--------
Long-term debt 6,434
Deferred income taxes 518
Other non-current liability 227
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; Issued 2,614,506 shares 523
Capital in excess of par value 13,358
Retained earnings 477
Accumulated other comprehensive income (24)
--------
14,334
Employee stock ownership trust commitment (2,640)
Treasury stock, at cost 209,018 shares (1,017)
--------
Total shareholders' equity 10,677
--------
$ 20,847
</TABLE> ========
See notes to consolidated financial statements
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<PAGE> 4
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($000's omitted except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Net revenues $ 4,256 $ 3,591
Costs and expenses:
Cost of goods sold 3,160 2,570
Selling, general and administrative 768 696
Interest 92 67
Depreciation and amortization 129 157
------- -------
4,149 3,490
------- -------
Income before income taxes and cumulative
effect of a change in accounting principle 107 101
Income taxes 41 40
------- -------
Income before cumulative effect of a change
in accounting principle; net of taxes (benefit) 66 61
Cumulative effect of a change
in accounting principle - (1,727)
------- -------
Net income (loss) $ 66 $(1,666)
======= =======
Income (Loss) Per Share:
Basic
- -----
Income per share before cumulative effect of a
change in accounting principle $ 0.04 $ 0.03
Cumulative effect per share of a change in
accounting principle 0.00 (0.96)
------- -------
Net income (loss) per share $ 0.04 $ (0.93)
======= =======
Diluted
- -------
Income per share before cumulative effect of a
change in accounting principle $ 0.04 $ 0.03
Cumulative effect per share of a change in
accounting principle 0.00 (0.96)
------- -------
Net income (loss) per share $ 0.04 $ (0.93)
======= =======
</TABLE>
See notes to consolidated financial statements
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SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000's omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------- -------
<S> <C> <C>
Cash flows related to operating activities:
Net income (loss) $ 66 $(1,666)
Adjustments to reconcile net income to net
cash provided by operating activities -
Cumulative effect of change in accounting principle - 1,727
Depreciation and amortization 129 157
Change in assets and liabilities -
Accounts receivable 518 (33)
Inventories (432) (811)
Prepaid income taxes 30 (85)
Other current assets (144) 278
Other assets - 4
Accounts payable (193) 75
Accrued employee compensation & benefit costs 10 (84)
Other accrued liabilities (22) 87
------- -------
Net cash used in operating activities (38) (351)
------- -------
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (19) (238)
------- -------
Net cash used in investing activities (19) (238)
------- -------
Cash flows related to financing activities:
Increase in demand loan 400 -
Payments on demand loan (375) -
Acquisition of long-term debt - 1,000
Principal payments on long-term debt (54) (262)
Net cash proceeds from exercise of stock options - 55
------- -------
Net cash (used in) provided by financing activities (29) 793
------- -------
Net (decrease) increase in cash (86) 204
Cash at beginning of period 794 1,009
------- -------
Cash at end of period $ 708 $ 1,213
======= =======
</TABLE>
See notes to consolidated financial statements
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<PAGE> 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 $988,000 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, 2000
----------- --------------
Raw materials and common parts $ 991
Work-in-process 5,588
Finished goods 257
-------
6,836
Less common parts expected to be used after one year (236)
-------
$ 6,600
=======
Engineering and other support costs are incurred in fulfilling certain
contracts which have a production cycle longer than one year. These costs are
properly accounted for in accordance with Emerging Issues Task Force ("EITF")
99-5, "Accounting for Pre-Production Costs Related to Long-Term Supply
Arrangements". See Note 4 to the Consolidated Financial Statements.
3. Property, plant and equipment
-----------------------------
March 31, 2000
--------------
Land $ 11
Buildings 6,170
Machinery, equipment and tooling 9,055
-------
15,236
Less accumulated depreciation (8,217)
-------
$ 7,019
=======
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.
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4. Changes in Accounting Principles
--------------------------------
On January 1, 1999, the Company elected early adoption of Emerging
Issues Task Force ("EITF") 99-5, "Accounting for Pre-Production Costs Related to
Long-Term Supply Arrangements". EITF 99-5 states that development and
pre-production costs for products sold under long-term supply arrangements be
expensed as incurred. On January 1, 1999, as required by the Accounting
Standards Executive Committee, the Company also adopted the Statement of
Position No. 98-5 "Reporting on the Cost of Start-Up Activities" (SoP 98-5). As
a result of the early adoption of EITF 99-5 and adoption of SoP 98-5, the
Company wrote off $1,727,000 of costs which were appropriately capitalized in
prior years. These charges were recorded net of tax of $1,013,000 as a
cumulative effect of a change in accounting principle on January 1, 1999.
<TABLE>
<CAPTION>
5. Long-term debt
-------------- March 31, 2000
--------------
<S> <C>
Industrial Development Revenue Bonds; secured by a
letter of credit from a bank with interest payable monthly
at a floating rate (4.00% at March 31, 2000) $ 5,000
Unsecured term note; payable to a financial institution with
interest on $357,000 at LIBOR plus 2% (7.63% at
March 31, 2000) and interest on the remaining $500,000
at a current rate of 5.86%; quarterly principal
payments of $35,714 through February 1, 2006 857
Various other secured term notes payable to government agencies 1,021
-------
6,878
Less current portion (444)
--------
$ 6,434
=======
</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 Company pays the
letter of credit bank an annual fee of 1% of the amount secured thereby and pays
the remarketing agent for the bonds an annual fee of .25% of the principal
amount outstanding. The Company's interest under the facility capital lease has
been pledged to secure its obligations to the government agency, the bank and
the bondholders.
On February 26, 1999, the Company received a $1,000,000 loan from a
financial institution payable in equal quarterly installments, maturing in 2006.
The proceeds were used to pay off an unsecured term note and to finance
purchases of equipment and working capital. The loan is collateralized by any
and all equipment purchased with the proceeds of the term loan. The letter of
credit reimbursement agreement, the unsecured term note agreement and the
secured term notes contain, among other things, covenants relative to
maintenance of working capital and tangible net worth and restrictions on
capital expenditures, leases and additional borrowings.
The Company also has a $1,000,000 line of credit on which there was
$475,000 outstanding at March 31, 2000 at an interest rate of 9.00%.
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<PAGE> 8
6. Common shareholders' equity
----------------------------
<TABLE>
<CAPTION>
Common stock
------------- Accumulated
Number Capital in other
of shares excess of Retained Treasury Comprehensive comprehensive
issued Amount par value earnings ESOP stock income income
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December
31, 1999 2,614,506 $523 $13,358 $ 411 ($ 2,640) ($ 1,017) ($ 24)
========= ==== ======= ===== ======= ======= =========
Comprehensive income
Net income - - - $ 66 - - $ 66 -
Other comprehensive income,
net of tax - - - - - - - -
Minimum pension liability
adjustment - - - - - - - -
Other comprehensive income - - - - - - - -
-------
Comprehensive income - - - - - - $ 66 -
=======
Issuance of common stock - - - - - - -
Compensation expense - - - - - - -
Treasury stock - - - - - - -
Exercise of stock options - - - - - - -
--------- ---- ------- ------ -------- -------- ----------
Balance March 31, 2000 2,614,506 $523 $13,358 $ 477 ($ 2,640) ($ 1,017) ($ 24)
========= ==== ======= ===== ======= ======= =========
</TABLE>
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,
2000 1999
------ --------
Income before cumulative effect of a
change in accounting principle $ 66 $ 61
Cumulative effect of a change in
accounting principle - (1,727)
------- -------
Net earnings (loss) $ 66 $ (1,666)
Weighted average common shares
outstanding (basic) 1,843 1,792
Incremental shares from assumed
conversions of stock options 4 5
Weighted average common
shares outstanding (diluted) 1,847 1,797
Income (Loss) Per Share:
Basic
-----
Income per share before cumulative effect of a
change in accounting principle $ 0.04 $ 0.03
Cumulative effect per share of a change in
accounting principle 0.00 (0.96)
---- ---------
Net income (loss) per share $ 0.04 $ (0.93)
======= ========
Diluted
-------
Income per share before cumulative effect of a
change in accounting principle $ 0.04 $ 0.03
Cumulative effect per share of a change in
accounting principle 0.00 (0.96)
---- ---------
Net income (loss) per share $ 0.04 $ (0.93)
======= ========
-8-
<PAGE> 9
7. Business segments
-----------------
The Company operates in two business segments, Advanced Technology
Products and Consumer Products. The Company's reportable segments are strategic
business units that offer different products and services. The segments are
separate corporations and are managed separately. Operations in Advanced
Technology Products involve the design, manufacture, and marketing of
servo-control components for government and commercial industrial applications.
Consumer Products operations involve the design, manufacture and marketing of a
variety of cutlery products for use by consumer and government agencies. The
Company derives substantially all of its sales revenue from domestic customers.
<TABLE>
<CAPTION>
Advanced
Period ended Technology Consumer
March 31, 2000 Products Products Consolidated
-------------- -------- -------- ------------
<S> <C> <C> <C>
Revenues from unaffiliated customers $ 2,163 $ 2,093 $ 4,256
========= ========= =========
Profit $ 422 $ 14 $ 436
========= =========
Depreciation expense (129)
Interest expense (92)
General corporate expense (108)
----------
Income before income taxes $ 107
=========
</TABLE>
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.
<TABLE>
<CAPTION>
Relationship to Period to
net revenues period $
Three months ended increase
March 31 (decrease)
2000 1999 00-99
---- ---- -----
Net revenues
<S> <C> <C> <C>
Advanced technology products 50.8% 58.6% 3.9%
Consumer products 49.2% 41.4% 38.7%
----- -----
100.0% 100.0% 18.5%
Cost of goods sold, exclusive of
depreciation 74.2% 71.6% 23.0%
----- -----
Gross profit 25.8% 28.4% 7.3%
----- -----
Selling, general and administrative 18.0% 19.4% 10.3%
Interest 2.2% 1.9% 37.3%
Depreciation and amortization 3.0% 4.4% (17.8%)
---- ---- ------
23.2% 25.7% 29.8%
----- -----
Income before income taxes and cumulative
effect of a change in accounting principle 2.6% 2.7% 5.9%
Income tax provision 1.0% 1.0% 2.5%
---- ----
Net income before cumulative effect of a change
in accounting principle 1.6% 1.7% 8.2%
---- ----
Cumulative effect of a change in accounting principle - (48.1%) -
----- ------
Net income 1.6% (46.4%) -
==== ------
</TABLE>
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<PAGE> 10
Management Discussion
- ---------------------
During the three month period ended March 31, 2000 and for the
comparable period ended March 31, 1999, approximately 29% and 15% respectively,
of the Company's revenues were derived from contracts with agencies of the U.S.
Government or their prime contractors. The Company's business is performed under
fixed price contracts. It is noted that the many uncertainties in today's global
economy, and difficulty in predicting defense appropriations, government and
other expenditures (both actual and proposed) preclude any guarantees or even
assurances that current programs will be continued or that programs in the
prototype stages will ultimately result in production applications. It is
because of such uncertainties and because such adverse occurrences may not be
counterbalanced with new programs or otherwise, that cyclical downturns in
operational performances are realistic expectations.
Results of Operations
- ---------------------
The Company's consolidated results of operations for the three month
period ended March 31, 2000 showed an approximate 18.5% increase in net revenues
and in net income of approximately 8.2%, before the $1,727,000 cumulative effect
of a change in accounting principle, when compared to the same three month
period of 1999. The increase in revenues is primarily the result of increased
sales and shipments to the government from the Consumer Products Group.
Operating profit, selling, general and administrative costs as a
percentage of net revenues remained reasonably consistent for the three month
period ended March 31, 2000 when compared to the comparable period of 1999.
Interest expense for the three month period ended March 31, 2000 when
compared to same three month of 1999 increased due to the general trend of
increasing rates within the lending markets.
Income taxes for the three month period ended March 31, 2000 decreased
as a percentage of income before taxes when compared to the comparable period of
1999 because of the effects of variable state income taxes.
Liquidity and Capital Resources
- -------------------------------
The Company's primary liquidity and capital requirements relate to the
working capital needs; primarily inventory, accounts receivable, capital
investments in facilities, machinery, tools/dies and equipment and
principal/interest payments on indebtedness. The Company's primary sources of
liquidity have been from operating cash flows and from bank financing.
During the three month period ended March 31, 2000, the Company
expended $19,000 on capital expenditures.
There are no material commitments for capital expenditures at March 31,
2000.
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-QSB
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as those pertaining to the Company's capital resources and profitability.
Forward-looking statements involve numerous risks and uncertainties. The Company
derives a material portion of its revenues from contracts with agencies of the
U.S. Government or their prime contractors. The Company's business is performed
under fixed price contracts and the following factors, among others discussed
herein, could cause actual results and future events to differ materially from
those set forth or contemplated in the forward-looking statements: uncertainties
in today's global economy and global competition, and difficulty in predicting
defense appropriations, the vitality of the commercial aviation industry and its
ability to purchase new aircraft, the
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<PAGE> 11
willingness and ability of the Company's customers to fund long-term purchase
programs, and market demand and acceptance both for the Company's products and
its customers' products which incorporate Company- made components. The success
of the Company also depends upon the trends of the economy, including interest
rates, income tax laws, governmental regulation, legislation, population changes
and those risk factors discussed elsewhere in this Form 10-QSB. Readers are
cautioned not to place undue reliance on forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company assumes no
obligation to update forward-looking statements.
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<PAGE> 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 8, 2000
SERVOTRONICS, INC.
By: /s/Lee D. Burns, Treasurer
-----------------------------------------------
Lee D. Burns, Treasurer and
Chief Financial Officer
By: /s/Raymond C. Zielinski, Vice President
-----------------------------------------------
Raymond C. Zielinski, Vice President
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<PAGE> 13
SERVOTRONICS, INC. AND SUBSIDIARIES
Item 6(a). EXHIBITS
- ---------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000089140
<NAME> SERVOTRONICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 708
<SECURITIES> 0
<RECEIVABLES> 2,289
<ALLOWANCES> 0
<INVENTORY> 6,600
<CURRENT-ASSETS> 13,215
<PP&E> 7,019
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,847
<CURRENT-LIABILITIES> 2,991
<BONDS> 6,434
0
0
<COMMON> 523
<OTHER-SE> 10,677
<TOTAL-LIABILITY-AND-EQUITY> 20,847
<SALES> 0
<TOTAL-REVENUES> 4,256
<CGS> 3,160
<TOTAL-COSTS> 4,149
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 107
<INCOME-TAX> 41
<INCOME-CONTINUING> 66
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
