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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ______ to ______
Commission file number 1-4987
SL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 21-0682685
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
520 FELLOWSHIP ROAD, SUITE A114, MT. LAUREL, NJ 08054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 856-727-1500
Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered
Title of each class New York Stock Exchange
Common stock, $.20 par value Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
--- ---
Indicate by check mark if disclosure of delinquent filers to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
On March 16, 2001, the aggregate market value of SL common stock was
approximately $79,619,000.
The number of shares of common stock outstanding as of March 16, 2001, was
5,687,057.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
On March 29, 1956, the Registrant was incorporated as G-L Electronics Company in
the state of New Jersey. Its name was changed to G-L Industries, Inc., in
November 1963, SGL Industries, Inc., in November 1970 and then to the present
name of SL Industries, Inc., in September 1984. The Registrant and its
subsidiaries design and produce proprietary advanced systems and equipment for
the Power and Data Quality ("PDQ") industry. The products of the Registrant and
its subsidiaries are sold to Original Equipment Manufacturers ("OEMs") and
incorporated into larger industrial equipment and systems or sold through
distribution for general retail or commercial use.
For the most part, the Registrant and its subsidiaries concentrate on specialty
markets believed to offer higher profit margins and greater potential for growth
than industrial commodities. During the year ended December 31, 2000, the five
months ended December 31, 1999 and fiscal years ended July 31, 1999 and July 31,
1998, no single customer accounted for more than 10% of consolidated net sales.
Export sales are not a material part of the Registrant's business.
On May 11, 1999, pursuant to a Share Purchase Agreement dated April 1, 1999, the
Registrant, acquired 100% of the issued and outstanding shares of capital stock
of RFL Electronics Inc. ("RFL"). The Registrant paid $11,387,000 in cash and
gave promissory notes with an aggregate face amount of $75,000, which bear
simple interest at a rate of 5.5% per annum, at closing. In addition, the
Registrant paid a contingent payment of $1,000,000 based upon the financial
performance of RFL for its fiscal year ended March 31, 1999. RFL is a leading
supplier of teleprotection and specialized communication equipment primarily
sold to the electric power utility industry.
On July 27, 1999, pursuant to an Asset Purchase Agreement dated July 13, 1999,
Condor D.C. Power Supplies, Inc. ("Condor"), a wholly-owned subsidiary of the
Registrant, acquired certain net operating assets of Todd Products Corporation
and Todd Power Corporation (together, "Todd Products"). The Registrant paid
$7,430,000; cash in the amount of $3,700,000, and assumption of debt equal to
approximately $3,730,000. Condor also entered into a ten-year Consulting
Agreement with the Chief Executive Officer of Todd Products for an aggregate
amount of $1,275,000, which is paid in quarterly installments ending three years
after the acquisition. Todd Products is a leading supplier of high quality power
supplies to the datacom, telecommunications and computer industries.
Pursuant to a resolution adopted by the Board of Directors on September 24,
1999, the Registrant elected to change the date of its fiscal year-end from July
31 to December 31, commencing January 1, 2000. As a result, a transition period
for the five month period ended December 31, 1999, was previously reported on a
transition report on Form 10-Q and is also presented herein. Consequently, the
consolidated balance sheets have been prepared at December 31. The consolidated
statements of operations and cash flows present information for the years ended
July 31, 1998 and July 31, 1999, the
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five month periods ended December 31, 1998 and December 31, 1999, and the year
ended December 31, 2000.
On March 22, 2001, the Registrant filed a Period Report on Form 8-K, which
contained a press release issued by the Registrant on March 19, 2001. On that
date the Registrant announced, among other things, that the Board of Directors
had completed its previously announced review of strategic alternatives and
determined to explore a sale of the Registrant in order to maximize its value
for shareholders. Credit Suisse First Boston, New York, assisted the
Registrant's Board of Directors in its review and has been engaged to lead this
process.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
Financial information about the Registrant's business segments is incorporated
herein by reference to Note 13 in the Notes to Consolidated Financial Statements
included in Part IV of this Annual Report on Form 10-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS
FORWARD-LOOKING INFORMATION
From time to time, information provided by the Registrant, including written or
oral statements made by representatives, may contain forward-looking information
as defined in the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, contain forward-looking
information, particularly statements which address activities, events or
developments that the Registrant expects or anticipates will or may occur in the
future, such as expansion and growth of the Registrant's business, future
capital expenditures and the Registrant's prospects and strategy. In reviewing
such information, it should be kept in mind that actual results may differ
materially from those projected or suggested in such forward-looking
information. This forward-looking information is based on various factors and
was derived utilizing numerous assumptions. Many of these factors previously
have been identified in filings or statements made by or on behalf of the
Registrant.
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in capital
investment and/or consumer spending, competitive factors and other factors
affecting the Registrant's business in or beyond the Registrant's control. These
factors include a change in the rate of inflation, a change in state or federal
legislation or regulations, an adverse determination with respect to a claim in
litigation or other claims (including environmental matters), the ability to
recruit and develop employees, the ability to successfully implement new
technology and the stability of product costs. These factors also include, in
particular, whether or not a sale of the Registrant can be successfully effected
and the timing and degree of any business recovery in certain of the
Registrant's markets that are currently experiencing a cyclical economic
downturn.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. The Registrant does not undertake to update
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forward-looking information contained herein or elsewhere to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking information.
SEGMENTS
During the fiscal year ended July 31, 1999, the five month period ended December
31, 1999 and the year ended December 31, 2000, the Registrant was comprised of
six business segments: Power Supplies, Power Conditioning and Distribution Units
("PCDUs"), Motion Control Systems, Electric Utility Equipment Protection
Systems, Surge Suppressors and Other. During the fiscal year ended July 31,
1998, the Registrant operated principally in one business segment; the design,
production and marketing of advanced power and data quality systems.
PRODUCTS
Power Supplies - The Registrant produces a wide range of standard and custom
power supply products which convert AC or DC power to direct electrical current
to be used in customers' end products. Standard and custom AC-DC and DC-DC power
supplies in both linear and switching configurations are produced with ranges in
power from 1 to 5000 watts and are manufactured in either commercial or medical
configurations. Power supplies closely regulate and monitor power outputs, using
patented filter and other technologies, resulting in little or no electrical
interference. Power supplies are also used in drive systems for electric
equipment and other motion control systems. Uninterruptible power supplies that
provide back-up power in the event of a power failure are also produced by this
segment. Uninterruptible power supply products are also used to recharge
batteries and, in some applications, provide a direct power supply to connected
equipment. These products are sold through a worldwide network of sales
representatives and electronic distributors to OEM customers in the medical,
industrial, telecommunications and instrumentation markets; as well as to
retailers and wholesalers of office, computer and consumer products. For the
year ended December 31, 2000 and the fiscal years ended July 31, 1999 and July
31, 1998, net sales of power supplies, as a percentage of consolidated net
sales, were 38%, 27% and 31%, respectively. For the five month periods ended
December 31, 1999 and December 31, 1998, net sales of power supplies, as a
percentage of consolidated net sales, were 37% and 27%, respectively.
Power Conditioning and Distribution Units - The Registrant is a leader in the
design and manufacture of customized power conditioning and power distribution
units. Products are developed and manufactured for custom electrical subsystems
for OEMs of semiconductor, medical imaging, graphics and telecommunication
systems. Outsourcing the AC power system to the Registrant helps its customers
reduce cost and time to market, while increasing system performance and customer
satisfaction. Customers are also helped by getting necessary agency approvals.
Custom products are often called "Power Conditioning and Distribution Units,"
which provide voltage conversion and stabilization, system control, and power
distribution for systems such as CT and MRI scanners, chip testers and cellular
radio systems. Power distribution products can be found in aerospace
applications such as passenger entertainment units, and in automotive
applications used in mirror controls and general power wiring systems throughout
the vehicle. Products are also designed and manufactured that safely convert a
high power input into user specified output ranges. A majority of these products
are sold directly to OEM customers who include them with their systems, which
are sold to the end user. For the year ended
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December 31, 2000 and the fiscal years ended July 31, 1999 and July 31, 1998,
net sales of power distribution and power conditioning units, as a percentage of
consolidated net sales, were 20%, 20% and 17%, respectively. For the five month
periods ended December 31, 1999 and December 31, 1998, net sales of power
distribution and power conditioning units, as a percentage of consolidated net
sales, was 18% for both periods.
Motion Control Systems - The Registrant is continuing its recent growth as a
technological leader in the design and manufacture of intelligent, high power
density precision motors. Important programs in both traditional and new market
areas have been won as a result of new motor and (patented and patent pending)
motor control technologies. New motor and motion controls are used in numerous
applications, including aerospace, medical and industrial products. Negotiations
are continuing with customers on advanced designs for numerous programs
including fuel cell energy storage systems, high performance missile guidance
motors, and medical/surgical drills and saws. Electromechanical products for
aerospace and ordnance applications are used in rudder trim actuation, cargo
manipulation and door control. Some of the more recent developments are the
production of power drive units for aircraft on-board cargo loading systems and
electrical seat actuation systems for aircraft business class seats. For the
year ended December 31, 2000 and the fiscal years ended July 31, 1999 and July
31, 1998, net sales of motion control systems, as a percentage of consolidated
net sales, were 13%, 19% and 14%, respectively. For the five month periods ended
December 31, 1999 and December 31, 1998, net sales of motion control systems, as
a percentage of consolidated net sales, were 12% and 18%, respectively.
Electric Utility Equipment Protection Systems - The Registrant designs and
manufactures teleprotection products/systems that are used to protect
electric-utility transmission lines and apparatus by isolating faulty
transmission lines from a transmission grid. Products are sophisticated
communication systems that allow electric utilities to manage their high-voltage
power lines more efficiently and include a system that is a completely digital,
fully-integrated relay/communications terminal, suitable for high-speed
protective relaying of overhead or underground high-voltage transmission lines.
The Registrant provides customer service and maintenance for all electric
utility equipment protection systems. Sales are made through both Company and
independent sales representatives. For the year ended December 31, 2000 and the
fiscal year ended July 31, 1999, net sales of electric utility equipment
protection systems, as a percentage of consolidated net sales, were 15% and 4%,
respectively. For the five month period ended December 31, 1999, net sales of
electric utility equipment protection systems, as a percentage of consolidated
net sales, was 14%.
Surge Suppressors - Surge suppressors are sold to protect computers, audiovisual
and other electronic equipment from sudden surges in power. The Registrant is a
leader in the design and manufacture of surge suppressors for the industrial,
OEM and retail marketplaces. These products are sold to distributors and dealers
of electronics and electrical supplies; retailers and wholesalers of office,
computer, and consumer products; and to OEMs. For the year ended December 31,
2000 and the fiscal years ended July 31, 1999 and July 31, 1998, net sales of
surge suppressors, as a percentage of consolidated net sales, were 11%, 26% and
35%, respectively. For the five month periods ended December 31, 1999 and
December 31, 1998, net sales of surge suppressors, as a percentage of
consolidated net sales, were 16% and 31%, respectively.
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RAW MATERIALS
Raw materials are supplied by various domestic and international vendors. In
general, availability for materials is not a problem for the Registrant.
However, in the fourth quarter of 2000 the Registrant experienced shortages in
the supply of certain strategic components for power supplies. The Registrant
expects shortages for such components to continue to some extent through the
first half of 2001.
Raw materials are purchased direct from the manufacturer whenever possible to
avoid distributor mark-ups. Average lead times generally run from immediate
availability to eight weeks. Lead times can be substantially higher for
strategic components subject to industry shortages. In most cases, viable
multiple sources are maintained for flexibility and competitive leverage.
SEASONALITY
Generally, seasonality is not a factor.
SIGNIFICANT CUSTOMERS
No business has a customer which accounts for 10% or more of consolidated net
sales. The loss of any single customer should not have a material adverse affect
on the business.
BACKLOG
Backlog at March 9, 2001, March 9, 2000 and September 5, 1999, were $62,242,000,
$60,693,000 and $58,256,000, respectively.
COMPETITIVE CONDITIONS
The businesses are in active competition with domestic and foreign companies,
some with national and international name recognition, offering similar products
or services and with companies producing alternative products appropriate for
the same uses. In addition, the surge suppressor and power supply businesses
have experienced significant off-shore competition for certain products in
certain markets. Currently, the businesses are sourcing many components and
products outside of the United States. The decreasing military market has also
created more competitive conditions in both the military and commercial markets.
The businesses differentiate themselves from their competition by concentrating
on customized products based on customer needs. The businesses seek a
competitive advantage based on quality, service, innovation, delivery and price.
ENVIRONMENTAL
The Registrant (together with the industries in which it operates or has
operated) is subject to United States, Mexican, Hungarian and German
environmental laws and regulations concerning emissions to the air, discharges
to surface and subsurface waters, and generation, handling, storage,
transportation, treatment and disposal of waste materials. The Registrant and
the industries are also subject to other federal, state and local environmental
laws and regulations, including those that require the Registrant to remediate
or mitigate the affects of the disposal or release of certain chemical
substances at various
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sites, including some where it has ceased operations. It is impossible to
predict precisely what affect these laws and regulations will have on the
Registrant in the future.
It is the Registrant's policy to comply with all environmental, health and
safety regulations, as well as industry standards for maintenance. The
Registrant's domestic competitors are subject to the same environmental, health
and safety laws and regulations, and the Registrant believes that the compliance
issues and potential expenditures of its operating subsidiaries are comparable
to those faced by their major domestic competitors. For additional information
related to environmental issues, see Note 10 in the Notes to Consolidated
Financial Statements included in Part IV of this Annual Report on Form 10-K and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Part II of this Annual Report on Form 10-K.
EMPLOYEES
As of December 31, 2000, the Registrant had approximately 2000 employees. Of
these employees, approximately 544 are subject to collective bargaining
agreements.
FOREIGN OPERATIONS
In addition to manufacturing operations in California, Minnesota, New Jersey and
Maryland, the Registrant manufactures substantial quantities of products in
leased premises located in Mexicali, Reynosa, Matamoros and Nogales, Mexico,
Ingolstadt, Germany and Paks, Hungary. These external and foreign sources of
supply present risks of interruption for reasons beyond the Registrant's
control, including political or economic instability and other uncertainties
regarding Mexico, Germany and Hungary.
Generally, the Registrant's revenues are priced in United States dollars and
German marks and its costs and expenses are priced in United States dollars,
Mexican pesos, German marks and Hungarian forints. Accordingly, the
competitiveness of Registrant's products relative to locally produced products
may be affected by the performance of the United States dollar compared with
that of its foreign customers' currencies. Foreign sales comprised 21%, 21% and
6% of revenues for the year ended December 31, 2000, and the fiscal years ended
July 31, 1999, and July 31, 1998, respectively. Foreign sales comprised 18% and
20% of revenues for the five month periods ended December 31, 1999 and December
31, 1998, respectively. Additionally, the Registrant is exposed to foreign
currency transaction and translation losses which might result from adverse
fluctuations in the values of the Mexican peso, German mark and Hungarian
forint. At December 31, 2000, the Registrant had net liabilities of $349,000
subject to fluctuations in the value of the Mexican peso and net assets of
$58,000 subject to fluctuations in the value of the German mark. Fluctuations in
the value of the Mexican peso, German mark and Hungarian forint were not
significant in 1999 and 2000. However, there can be no assurance that the value
of the Mexican peso, German mark or Hungarian forint will continue to remain
stable.
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ADDITIONAL INFORMATION
Additional information regarding the development of the Registrant's businesses
during 2000 is contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Part II of this Annual Report
on Form 10-K.
ITEM 2. PROPERTIES
Set forth below are the properties as of December 31, 2000.
Approx. Owned or Leased
Square And
Location General Character Footage Expiration Date
-------- ----------------- ------- ---------------
Montevideo, MN Manufacture of precision motors 30,000 Owned
and motion control systems
Matamoros, Mexico Manufacture of precision motors 12,000 Leased - 11/05/01
Nogales, Mexico Manufacture of power protection products 65,000 Leased - 12/31/02
Mt. Laurel, NJ Power protection products 15,900 Leased - 01/31/01
(vacated on
1/31/01)
Oxnard, CA Manufacture and distribution of power 36,480 Leased - 02/28/03
supply products
Mexicali, Mexico Manufacture and distribution of power Leased
supply products 40,000 6/01/01
21,150 08/31/01
Brentwood, NY Design of power supply products 46,894 Leased - 5/31/02
San Diego, CA Manufacture of power distribution and 45,054 Leased - 03/22/02
conditioning units
Ingolstadt, Germany Manufacture of actuation systems and power 36,210 Owned
distribution products 16,684 Leased - 09/30/03
Boonton Twp., NJ Manufacture of electric utility equipment 78,000 Owned
protection systems
Camden, NJ Industrial surface finishing 15,800 Owned
Pennsauken, NJ Industrial surface finishing 6,000 Owned
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warehouse
Forest Hills, MD Industrial parts / plating 11,000 Leased - 5/31/01
Mt. Laurel, NJ Corporate Office 4,200 Leased - 11/30/02
All manufacturing facilities are adequate for current production requirements.
The Registrant believes that its facilities are sufficient for future
operations, maintained in good operating condition and adequately insured. Of
the owned properties, none are subject to a major encumbrance material to the
operations of the Registrant.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Registrant is subject to loss
contingencies pursuant to foreign and domestic federal, state and local
governmental laws and regulations and is also party to certain legal actions,
frequently involving complaints by terminated employees and disputes with
customers and suppliers. The Registrant is also a party to certain proceedings
relating to environmental compliance remediation. It is management's opinion
that the impact of these legal actions will not have a material affect on the
financial position or results of operations of the Registrant. However, the
ultimate outcome of these matters, as with litigation generally, is inherently
uncertain and it is possible that some of these matters may be resolved
adversely to the Registrant. The adverse resolution of any one or more of these
matters could have a material adverse affect on the business, operating results,
financial condition or cash flows of the Registrant. Additional information
pertaining to legal proceedings is found in Note 10 in the Notes to the
Consolidated Financial Statements included in Part IV of this Annual report on
Form 10-K, and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Part II of this Annual Report on Form
10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As a result of the change in the Registrant's fiscal year from July 31 to
December 31, the Registrant did not hold an Annual Meeting of Shareholders
during the year ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
-------------------------------------------------------------------------------
Twelve Months ended Five Months ended Twelve Months ended
December 31, 2000 December 31, 1999 July 31, 1999
-------------------------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW
-------------------------------------------------------------------------------
Stock Prices
1st Quarter........... 12 5/8 8 7/8 15 1/2 11 1/2 14 3/4 9 1/2
2nd Quarter........... 10 8 3/8 13 1/2 11 1/2 13 3/4 11 3/4
3rd Quarter........... 13 9 3/8 - - 13 11 3/8
4th Quarter........... 12 1/8 10 - - 13 5/8 11 3/8
Dividends
Cash - November....... $.05 $.05 $.04
Cash - June........... $.05 - $.05
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As of March 16, 2001, there were approximately 1,000 registered shareholders. A
semi-annual cash dividend of $.05 per share was declared on May 18, 2000, which
was paid on June 9, 2000, to shareholders of record on June 2, 2000 and a
semi-annual cash dividend of $.05 per share was declared on September 22, 2000,
which was paid on November 22, 2000, to shareholders of record on November 1,
2000.
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ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data with respect to the Registrant's year ended
December 31, 2000, five month period ended December 31, 1999 and four fiscal
years ended July 31, 1996 to July 31, 1999 is set forth below. This data should
be read in conjunction with the Consolidated Financial Statements and related
Notes thereto for the corresponding periods contained in Part IV of this Annual
Report on Form 10-K.
Twelve Twelve Twelve Twelve Twelve
Months Five Months Months Months Months Months
Ended Ended Ended Ended Ended Ended
December December July July July July
2000 1999 1999 1998 1997 1996
--------- --------- --------- --------- --------- ---------
(In thousands, except per share data)
SUMMARY OF OPERATIONS
Net sales ................ $ 167,746 $ 70,970 $ 125,128 $ 118,212 $ 115,687 $ 117,313
Net income (loss)
(1) ...................... $ 1,700 ($ 684) $ 5,406 $ 5,313 $ 7,815 $ 3,498
Diluted net income
(loss) per common
share (1) ................ $ 0.30 $ (0.12) $ .92 $ .90 $ 1.30 $ .59
Shares used in
computing Diluted net
income (loss) per
common share ............. 5,757 5,624 5,876 5,897 6,021 5,950
Cash dividend per
Common share ........... $ .10 $ .05 $ .09 $ .08 $ .07 $ .06
Year-end financial
position
Working capital .......... $ 31,180 $ 33,042 $ 24,812 $ 21,344 $ 17,399 $ 20,765
Current ratio ............ 2.3 2.2 1.9 2.1 1.8 2.3
Total assets ............. $ 113,481 $ 117,050 $ 112,686 $ 80,915 $ 66,804 $ 64,175
Long-term debt ........... $ 36,533 $ 39,245 $ 31,984 $ 13,283 $ 700 $ 13,186
Shareholders'
equity ................... $ 43,350 $ 42,072 $ 42,842 $ 38,345 $ 36,492 $ 28,680
Book value per
share .................... $ 7.69 $ 7.48 $ 7.61 $ 6.84 $ 6.27 $ 4.98
Other
Capital
expenditures (2) ......... $ 2,586 $ 1,375 $ 2,688 $ 2,756 $ 2,097 $ 2,219
Depreciation and
amortization .......... $ 4,983 $ 2,129 $ 3,881 $ 3,043 $ 2,700 $ 2,584
(1) Calendar 2000 includes pre-tax income of $875,000 related to the settlement
of a class action suit against one of the Registrant's insurers, $650,000
related to the reduction of a contingency reserve for environmental costs offset
by restructuring costs of $790,000 ($481,000 or $.08 per diluted share, after
tax) related to its SL Waber subsidiary.
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The five month period ended December 31, 1999 includes restructuring costs,
inventory writedowns and loss on commitments of $4,273,000, net of related
taxes, and $1,812,000 related to the demutualization of one of its life
insurance carriers, net of related taxes.
Fiscal 1997 includes pre-tax gain, net of severance, facility closing, legal and
other costs, on disposition of subsidiary of $5,888,000, increasing net income
by $3,556,000, or $.59 per common share.
(2) Excludes assets acquired in business combinations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the twelve months ended December 31, 2000 (2000), the net cash provided
by operating activities was $6,392,000, as compared to $4,527,000 and $6,621,000
provided during the twelve months ended July 31, 1999 (fiscal 1999) and the
twelve months ended July 31, 1998 (fiscal 1998), respectively. The 2000
increase, as compared to fiscal 1999, resulted primarily from decreased
receivables and inventories, offset, in part, by lower income and reduction of
accounts payable. The fiscal 1999 decrease, as compared to fiscal 1998, resulted
primarily from increased inventories and federal and state income tax payments,
offset, in part, by a reduction in accounts receivable and an increase in
accounts payable. During 2000, the net cash used in investing activities of
$2,827,000 was primarily related to capital expenditures. During fiscal 1999,
the net cash used in investing activities of $21,051,000 was primarily related
to the acquisition of all the issued and outstanding common shares of RFL, the
acquisition of certain net operating assets of Todd Products and capital
expenditures, offset, in part, by the proceeds received from the sale of land
and buildings leased to a third party. During fiscal 1998, the net cash used in
investing activities of $13,634,000 was primarily related to the acquisition of
all of the issued and outstanding common shares of Elektro-Metall Export GmbH
("EME") and capital expenditures. During 2000, the net cash used by financing
activities of $3,729,000 was primarily related to the net payment of long term
debt. During fiscal 1999, the net cash provided by financing activities of
$16,543,000 was primarily related to the use of the Registrant's revolving line
of credit for the RFL and Todd Products acquisitions. During fiscal 1998, the
net cash provided by financing activities of $7,000,000 was primarily related to
the use of the Registrant's revolving line of credit for the EME acquisition,
offset, in part, by the purchase of 375,500 shares of the Registrant's common
stock.
The Registrant's current ratio was 2.3 to 1 at December 31, 2000 and 2.2 to 1 at
December 31, 1999. The December 31, 2000 increase, as compared to December 31,
1999, resulted from a 9% decrease in current liabilities, as compared to a 7%
decrease in current assets.
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As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Registrant were 46% at December 31, 2000 and 49%
at December 31, 1999. The 2000 decrease in total borrowings, as compared to
fiscal 1999, was primarily a result of the Registrant's partial repayment of its
revolving line of credit. The fiscal 1999 increase in total borrowings, as
compared to fiscal 1998, was primarily a result of the Registrant's use of its
revolving line of credit to purchase all of the issued and outstanding shares of
RFL and the net operating assets of Todd Products. At December 31, 2000, the
Registrant had $1,374,000, net of outstanding trade letters of credit of
$3,310,000, of this credit facility available for use. See Note 8 to the
Consolidated Financial Statements for additional information about the credit
agreement.
Capital expenditures of $2,586,000 in 2000, $2,688,000 in fiscal 1999 and
$2,756,000 in fiscal 1998, primarily included improvement in process technology
and increased production capacity. Capital expenditures during the five months
ended December 31, 1999 of $1,375,000 and the five months ended Decemeber 31,
1998 of $1,390,000, primarily included investments in new process technology and
increased production capacity. During 2001, the Registrant plans to make minimal
capital expenditures in response to the slowdown in the U.S. economy. Capital
expenditures, to the extent they are authorized, are expected to be funded
through cash provided by operations.
The Registrant has been able to generate adequate amounts of cash to meet its
operating needs. During the fourth quarter of 2000 and the first quarter of
2001, the Registrant experienced negative operating cash flows at one of its
business segments as a result of a shortage of certain strategic components and
a severe economic slowdown in the telecommunications industry. As a result, the
Registrant has suspended planned capital expenditures and will take such
additional action as it deems appropriate to reduce costs in line with lower
revenue expectations. If the business downturn in the telecommunications market
and semiconductor industry continues for a prolonged period of time, the
Registrant may be required to borrow additional funds over and above the amounts
provided by its current facility to meet its future needs. Additional financing,
if available, may not be available on satisfactory terms.
With the exception of the Registrant's surge suppressors and the segment
reported as "other", all of the Registrant's remaining operating segments are
profitable and are expected to remain so. The surge suppressors and "other"
segments' underperformance during 2000 had an adverse affect on the Registrant's
results, which offset the aggregate favorable performance of the remaining
segments. The underperformance of the surge suppressors segment was attributable
to restructuring charges, inventory devaluations and operating losses sustained
largely in the mass merchandise/retail market. The Registrant is improving the
surge suppressors segment's competitive position by withdrawing from the mass
merchandise/retail market, downsizing and consolidating operations and
eliminating administrative overhead expenses. The performance of the "other"
business segment is largely the result of corporate overhead and expenses.
Page 13
14
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2000 (2000) COMPARED WITH TWELVE MONTHS ENDED
JULY 31, 1999 (FISCAL 1999)
Consolidated net sales in 2000 of $167,746,000 increased approximately 34%
($42,618,000), as compared to consolidated net sales in fiscal 1999.
Consolidated net sales for 2000 included twelve months of RFL's net sales of
$24,426,000 and twelve months of Todd Products' net sales of $26,412,000.
Consolidated net sales in fiscal 1999 of $125,128,000 included three months of
RFL's net sales of $5,274,000. Net income in fiscal 2000 was $1,700,000, or a
diluted $0.30 per share, as compared to net income in fiscal 1999 of $5,406,000,
or a diluted $0.92 per share.
The power supplies segment's net sales in 2000 increased approximately 87%
($29,408,000) and its operating income decreased approximately 26% ($1,469,000),
as compared to fiscal 1999 net sales and operating income. Contributing to the
increase in net sales was the acquisition of the net operating assets of Todd
Products. The decrease in operating income in 2000 resulted from costs
associated with the integration of the operation of Todd Products during the
year.
The power conditioning and distribution units segment's net sales in 2000
increased approximately 36% ($8,903,000) and operating income increased
approximately 71% ($1,914,000), as compared to fiscal 1999, primarily due to the
increased net sales of higher margin power conditioning units.
The motion control systems segment's net sales in 2000 decreased approximately
7% ($1,533,000) and operating income increased approximately 5% ($123,000), as
compared to net sales and operating income in fiscal 1999. Contributing to the
decreased net sales were increased sales of aviation actuators offset by
decreased sales of precision motor products.
The electric utility equipment protection systems segment's net sales and
operating income in 2000 included the financial results of RFL for the twelve
months in 2000, as compared to three months in fiscal 1999. Net sales in 2000
increased approximately 363% ($19,153,000), and operating income increased
approximately 395% ($2,013,000), due to the inclusion of RFL for the full year
2000.
The surge suppressors segment's net sales in 2000 decreased approximately 43%
($14,260,000) and operating loss increased by $6,500,000, from $624,000 in
fiscal 1999 to $7,124,000 in 2000. Contributing to these decreases were expenses
and losses associated with the Registrant's withdrawal from the mass
merchandise/retail market and cost overruns and delays in the introduction of a
new product line of surge suppressors. See the Liquidity and Capital Resources
section of this MD&A for further explanation.
COST OF SALES
As a percentage of net sales, cost of products sold in 2000 was approximately
68%, as compared to approximately 65% in fiscal 1999. The percentage increase
was a direct result of product mix, which included a higher percentage of lower
margin products such as actuators and power distribution systems. Cost of sales
in 2000 included a reserve of $650,000 for excess and obsolete inventory
relating to the Registrant's SL Waber subsidiary.
Page 14
15
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in 2000 were $11,306,000, an
increase of approximately 47% ($3,626,000), as compared to fiscal 1999. As a
percentage of net sales, engineering and product development expenses in 2000
were 7%, as compared to 6% in fiscal 1999. During 2000, increases were primarily
related to additional investments made by the businesses within the power
supplies and motion control systems segments, as well as additional investments
made in connection with the RFL and Todd Products acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in 2000 were $31,995,000, an
increase of approximately 37% ($8,593,000), as compared to fiscal 1999. As a
percentage of net sales, selling, general and administrative expenses in 2000
and fiscal 1999 were approximately 19% for both years. This includes a reversal
of a $650,000 reserve for environmental penalties, the chance of payment of
which is remote, based on consultation with legal counsel.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in 2000 were $4,983,000, an increase of
approximately 28% ($1,102,000) as compared to fiscal 1999. The increase in 2000
was primarily related to the depreciation of property, plant and equipment, the
amortization of computer software and the amortization of goodwill associated
with the RFL and Todd Products acquisitions.
RESTRUCTURING COSTS
During 2000, the Registrant recognized $790,000 of restructuring costs that were
related to its SL Waber subsidiary. For additional information related to
restructuring costs, see Note 15 in the Notes to Consolidated Financial
Statements included in Part IV of this Annual Report on Form 10-K.
OTHER INCOME (EXPENSE)
For the year 2000 interest income increased, as compared to fiscal 1999,
primarily due to higher cash balances maintained at EME. Interest expense in
2000 increased, as compared to fiscal 1999, primarily due to the higher levels
of borrowing during 2000 due to the acquisition of RFL and Todd Products.
TAXES
The effective tax rate on pre-tax income in 2000 was 26%, as compared to 36% in
fiscal 1999. This decrease was primarily due to non-taxable income from
settlement of a life insurance class action suit and a 4% benefit in the
Registrant's effective state tax rate due to utilization of losses related to
the Registrant's SL Waber subsidiary.
INCOME FROM CLASS ACTION SUIT
During 2000, the Registrant received $875,000 in settlement of a class action
suit against one of its life insurance carriers.
Page 15
16
TWELVE MONTHS ENDED JULY 31, 1999 (FISCAL 1999) COMPARED WITH TWELVE MONTHS
ENDED JULY 31, 1998 (FISCAL 1998)
Consolidated net sales of $125,128,000 in fiscal 1999 increased approximately 6%
($6,916,000), as compared to consolidated net sales in fiscal 1998. Consolidated
net sales in fiscal 1999 included twelve months of EME's net sales of
$19,992,000 and three months of RFL's net sales of $5,274,000. Consolidated net
sales in fiscal 1998 included one month of EME's net sales of $1,831,000. Net
income in fiscal 1999 was $5,406,000, or a diluted $.92 per share, as compared
to net income in fiscal 1998 of $5,313,000, or a diluted $.90 per share.
The power supplies segment's net sales in fiscal 1999 decreased approximately 8%
($3,042,000) and its operating income increased approximately 3% ($167,000), as
compared to net sales and operating income in fiscal 1998. Contributing to the
reduction in net sales were decreased net sales of linear and switching power
supplies because of a slowdown in the volume of orders received from customers
in the distribution channel, as well as decreased net sales of uninterruptible
power supplies because of continued competitive pricing and related pressures in
the retail marketplace. The increase in operating income in fiscal 1999 resulted
from decreased costs associated with the expiration of a profit sharing
agreement during the first half of fiscal 1998.
The power conditioning and distribution units segment's net sales in fiscal 1999
increased approximately 26% ($5,199,000), and its operating income decreased
approximately 9% ($282,000), as compared to net sales and operating income in
fiscal 1998. Contributing to the increase in net sales and decrease in operating
income were increased sales of power distribution systems, offset by decreased
sales of higher margin customized power conditioning and distribution units
because of a slowdown in the semiconductor industry. Segment results in fiscal
1999 included twelve months of power distribution systems' net sales, as
compared to fiscal 1998, which included one month of net sales. If these power
distribution systems' net sales were excluded from both periods, net sales and
operating income in fiscal 1999 decreased approximately 19% ($3,637,000) and 31%
($904,000), respectively.
The motion control systems segment's net sales in fiscal 1999 increased
approximately 46% ($7,376,000) and its operating income increased approximately
72% ($980,000), as compared to net sales and operating income in fiscal 1998.
Contributing to the increased net sales and operating income were increased
sales of actuators, offset by decreased sales of precision motor products
because of customer requests to delay the shipment of their orders. Segment
results in fiscal 1999 included twelve months of actuator net sales and
operating income, as compared to one month in fiscal 1998. If these actuator
sales were excluded from both periods, net sales and operating income in fiscal
1999 decreased approximately 2% ($358,000) and remained constant, respectively.
The electric utility equipment protection systems segment's net sales and
operating income in fiscal 1999 included the financial results of RFL for the
three month period ended July 31, 1999.
The surge suppressors segment's net sales and operating income in fiscal 1999
decreased approximately 20% ($8,472,000) and 137% ($2,303,000), respectively, as
compared to net sales and operating income in fiscal 1998. Contributing to these
decreases were delays in the introduction of new
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17
products and losses in the mass merchandise/retail market due to competitors'
aggressive pricing initiatives. See the Liquidity and Capital Resources section
of this MD&A for further explanation.
COST OF SALES
As a percentage of net sales, cost of products sold in fiscal 1999 was
approximately 65%, as compared to approximately 63% in fiscal 1998. The
percentage increase was a direct result of product mix, which included a higher
percentage of lower margin products such as actuators and power distribution
systems.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in fiscal 1999 were $7,680,000, an
increase of approximately 25% ($1,513,000), as compared to fiscal 1998. As a
percentage of net sales, engineering and product development expenses were 6%,
as compared to 5% in fiscal 1998. The fiscal 1999 increases were primarily
related to additional investments made by the businesses within the power
supplies, motion control systems and surge suppressors segments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in fiscal 1999 were $23,402,000 a
decrease of approximately 9% ($2,174,000), as compared to fiscal 1998. As a
percentage of net sales, selling, general and administrative expenses in fiscal
1999 and fiscal 1998 were approximately 19% and 22%, respectively. The fiscal
1999 decreases were primarily related to reduced marketing expenses, staff
reductions and the expiration of a profit sharing agreement during the first
half of fiscal 1998.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in fiscal 1999 were $3,881,000, an
increase of approximately 28% ($838,000), as compared to fiscal 1998. The fiscal
1999 increase was primarily related to the depreciation of property, plant and
equipment, the amortization of computer software and the amortization of
goodwill associated with the EME and RFL acquisitions.
OTHER INCOME (EXPENSE)
Interest income in fiscal 1999 increased, as compared to fiscal 1998, primarily
because of the inclusion of EME's interest income in current year results.
Interest expense in fiscal 1999 increased, as compared to fiscal 1998, primarily
because of an increase in debt that resulted from the acquisitions of RFL in
fiscal 1999 and EME in fiscal 1998.
TAXES
The effective tax rate on pre-tax income in fiscal 1999 was 36%, as compared to
38% in fiscal 1998. This decrease was primarily related to net non-taxable life
insurance dividend income and a 1% decrease in the Registrant's effective state
tax rate, offset, in part, by a higher effective international tax rate.
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18
FIVE MONTH PERIOD ENDED DECEMBER 31, 1999 (SHORT YEAR 1999) COMPARED WITH FIVE
MONTH PERIOD ENDED DECEMBER 31, 1998 (SHORT YEAR 1998)
Consolidated net sales in short year 1999 were $70,970,000, an increase of
approximately 42% ($21,154,000), as compared to short year 1998. Consolidated
net sales in short year 1999 included five months of RFL's net sales of
$10,073,000 and five months of Todd Products' net sales of $11,458,000. RFL and
Todd Products were acquired after short year 1998 and therefore the short year
1998 does not include the results of the two acquisitions. Net loss in short
year 1999 was $684,000, or a diluted $0.12 per share, as compared to net income
in short year 1998 of $1,961,000, or a diluted $0.33 per share.
The power supplies segment's net sales in short year 1999 increased
approximately 94% ($12,628,000) and operating income decreased approximately 13%
($290,000), as compared to net sales and operating income in short year 1998.
Contributing to the increase in net sales were the addition of net sales from
the acquisition of Todd Products. The decrease in operating income resulted from
costs associated with the integration of Todd Products during the year.
The power conditioning and distribution units segment's net sales in short year
1999 increased approximately 41% ($3,723,000), and operating income increased
approximately 138% ($989,000), as compared to net sales and operating income in
short year 1998. Net sales increased due to increased sales of power
conditioning units and systems. Operating income increased due to increased
sales of higher margin customized power conditioning and distribution units.
The motion control systems segment's net sales in short year 1999 decreased
approximately 1% ($131,000) and operating income increased approximately 12%
($61,000), as compared to net sales and operating income in short year 1998.
Contributing to the decreased net sales were decreased sales of precision motor
products because of customer requests to delay the shipment of orders offset by
increased sales of aviation actuators.
The electric utility equipment protection systems segment's net sales and
operating income in short year 1999 included the financial results of RFL.
The surge suppressors segment's net sales in short year 1999 decreased
approximately 27% ($4,075,000) and net loss increased by $2,342,000, from
operating profit of $538,000 in short year 1998 to operating loss of $1,804,000
in short year 1999. Contributing to these decreases were losses in the mass
merchandise market due to competitors' aggressive pricing initiatives and delays
and cost overruns in the introduction of a new product line of surge
suppressors. See the Liquidity and Capital Resources section of this MD&A for
further explanation.
COST OF SALES
As a percentage of net sales, cost of products sold in short year 1999 was
approximately 67%, as compared to approximately 65% in short year 1998. The
percentage increase was a direct result of product mix, which included a higher
percentage of lower margin products such as actuators and power distribution
systems.
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19
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in short year 1999 were $4,849,000,
an increase of approximately 59% ($1,800,000), as compared to short year 1998.
As a percentage of net sales, engineering and product development expenses were
7% in short year 1999 and 6% in short year 1998. During short year 1999,
increases were primarily related to additional investments made by the
businesses within the power supplies and motion control systems segments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in short year 1999 were
$14,066,000, an increase of approximately 47% ($4,528,000), as compared to short
year 1998. Increases were primarily due to the acquisition of RFL and Todd
Products. As a percentage of net sales, selling, general and administrative
expenses in short year 1999 and short year 1998 were approximately 20% and 19%,
respectively.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in short year 1999 were $2,129,000, an
increase of approximately 32% ($515,000), as compared to short year 1998. The
short year 1999 increase was primarily related to the depreciation of property,
plant and equipment, the amortization of computer software and the amortization
of goodwill associated with the RFL and Todd Products acquisitions.
RESTRUCTURING COSTS
During short year 1999, the Registrant recognized $1,128,000 of restructuring
costs that were related to its SL Waber subsidiary. For additional information
related to restructuring costs, see Note 15 in the Notes to Consolidated
Financial Statements included in Part IV of this Annual Report on Form 10-K.
OTHER INCOME (EXPENSE)
Interest income in short year 1999 decreased, as compared to short year 1998,
due to lower bank balances. Interest expense in short year 1999 increased, as
compared to short year 1998, primarily due to the higher levels of borrowing due
to the acquisition of RFL and Todd Products.
TAXES
The effective tax rate on pre-tax income in short year 1999 was (31%), as
compared to 34% in short year 1998. This decrease was primarily due to a loss in
short year 1999.
GAIN FROM DEMUTUALIZATION OF LIFE INSURANCE COMPANY.
The Registrant recorded a non-recurring gain in short year 1999 of $1,812,000
from the demutualization of a life insurance company.
ENVIRONMENTAL
In a November 1991 Administrative Directive, the New Jersey Department of
Environmental Protection ("NJDEP") alleged that SL Surface Technologies, Inc.
("STI"), formerly SL Modern Hard Chrome, Inc., and 20 other respondents are
responsible for a containment plume which has affected the Puchack
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20
Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey). Three
other actions have been initiated from the underlying directive. The first is
Supplemental Directive No. 1 issued by NJDEP to the same parties in May 1992,
which seeks a cost reimbursement of $8,655,000 for the construction of a
treatment system at the Puchack site and an annual payment of $611,000 for
ongoing operation and maintenance of the treatment system. The second matter is
a lawsuit initiated by one of the parties named in Directive No. 1 seeking to
have the remainder of those parties, and more than 600 others, pay some or all
of that party's cost of compliance with Directive No. 1 and any other costs
associated with its site. The third matter is a Spill Act Directive by NJDEP to
STI alone, regarding similar matters at its site. The state has not initiated
enforcement action regarding any of its three Directives. There also exists an
outstanding enforcement issue regarding the Registrant's compliance with ECRA at
the same site.
With regard to the $8,655,000 amount, in the Registrant's view it is not
appropriate to consider that amount as "potential cost reimbursements". The STI
site, which is the subject of these actions, has undergone remedial activities
under NJDEP's supervision since 1983. The Registrant believes that it has a
significant defense against all or any part of the $8,655,000 claim since
technical data generated as part of previous remedial activities indicate that
there is no offsite migration of containments at the Registrant's STI site.
Based on this and other technical factors, the Registrant has been advised by
its outside technical consultant, with the concurrence of its outside counsel,
that it has a significant defense to Directive No. 1 and any material exposure
is remote.
In May 2000, the Registrant discovered evidence of possible soil contamination
at its facility in Auburn, New York. The New York State Department of
Environmental Controls has been contacted and an investigation is currently
underway. Based upon the preliminary evidence, the Registrant does not believe
that it will incur material remediation costs at this site.
Although these contingencies could result in additional expenses or judgments,
or offsets thereto, at present such expenses or judgements are not expected to
have a material affect on the Registrant's consolidated financial position or
results of operation.
The Registrant filed claims with its insurers seeking reimbursement for past and
future environmental costs. In settlement of its claims, the Registrant received
aggregate cash payments of $2,400,000 prior to fiscal 1998 and commitments from
three insurers to pay for a portion of environmental costs associated with the
STI site of 15% of costs up to $300,000, 15% of costs up to $150,000 and 20% of
costs up to $400,000, respectively. In addition, the Registrant received
$100,000 during fiscal 1998, 1999, and 2000 and will receive $100,000 during
fiscal 2001, as stipulated in the settlement agreement negotiated with one of
the three insurers.
See Note 10 to the Consolidated Financial Statements for additional information.
FORWARD-LOOKING INFORMATION
From time to time, information provided by the Registrant, including written or
oral statements made by representatives, may contain forward-looking information
as defined in the Private Securities Litigation
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21
Reform Act of 1995. All statements, other than statements of historical facts,
contain certain forward looking information, particularly statements which
address activities, events or developments that the Registrant expects or
anticipates will or may occur in the future, such as the expansion and growth of
the Registrant's business, future capital expenditures and the Registrant's
prospects and strategy. In reviewing such information, it should be kept in mind
that actual results may differ materially from those projected or suggested in
such forward-looking information. This forward-looking information is based on
various factors and was derived utilizing numerous assumptions. Many of these
factors have previously been identified in filings or statements made by or on
behalf of the Registrant.
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in capital
investment and consumer spending, competitive factors and other factors
affecting the Registrant's business in or beyond the Registrant's control. These
factors include a change in the rate of inflation, a change in state or federal
legislation or regulations, an adverse determination with respect to a claim in
litigation or other claims (including environmental matters), the ability to
recruit and develop employees, the ability to successfully implement new
technology and the stability of product costs. These factors also include, in
particular, whether or not the sale of the Registrant can be successfully
effected and the timing and degree of any business recovery in certain of the
Registrant's markets, which are currently experiencing a cyclical economic
downturn.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. The Registrant does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.
ITEM 7A. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
The Registrant is exposed to market risk from changes in interest and foreign
currency exchange rates. Changes in the market rate affect both interest paid
and earned by the Registrant. The Registrant's investments and outstanding debt
bear variable interest rates. Debt consists primarily of a revolving credit
agreement with three United States banks, where the Registrant can borrow at a
"LIBOR rate," as defined, or the prime interest rate. The Registrant also
maintains lines of credit with German banks, where EME can borrow at interest
rates ranging from 3.95% to 8.25% per annum. The Registrant manufactures some of
its products in Mexico, Germany and Hungary and purchases some components in
foreign markets. With the exception of component purchases made by EME, all
other foreign market component purchases are primarily invoiced in U.S. dollars.
The EME foreign market component purchases are primarily invoiced in German
marks. A foreign currency loan is used to hedge the value of the Registrant's
investment in EME; therefore, related foreign currency transaction gains and
losses are primarily reported in the same manner as translation adjustments
under generally accepted accounting principles. Changes in interest and foreign
currency exchange rates did not have a material impact on the reported earnings
for the year ended December 31, 2000 and is not expected to have a material
impact on reported earnings for 2001.
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22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and supplementary data, together with the
reports of Arthur Andersen LLP, independent public accountants are included in
Part IV of this Annual Report on Form 10-K.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Positions with the Registrant
- ---- --- -----------------------------
Owen Farren 50 Chairman of the Board, President and Chief Executive Officer
David R. Nuzzo 43 Vice President - Finance and Administration & Secretary
James E. Morris 63 Vice President, Corporate Controller and Treasurer (retired December 31, 2000)
Jacob Cherian, Jr. 49 Vice President, Corporate Controller (effective January 1, 2001)
Owen Farren has been Chairman of the Board since June 1998 and President and
Chief Executive Officer since April 1991. Prior thereto, he acted as Executive
Vice President since May 1990.
David R. Nuzzo has been Vice President - Finance and Administration & Secretary
since December 1997. Prior thereto, he was a Senior Partner with The Colchester
Group, a financial and legal consulting firm since April 1995.
James E. Morris was Vice President and Corporate Controller since September 1991
and Treasurer since November 1995. From November 1995 through December 1997, Mr.
Morris served as Corporate Secretary and acted as a financial executive since
1978. Mr. Morris retired on December 31, 2000.
Jacob Cherian, Jr. has been Vice President - Corporate Controller since January
1, 2001. Prior to joining SL Industries, Inc., Mr. Cherian was Corporate
Controller of Measurement Specialties, Inc. from November 1997 to November 2000.
Prior thereto, he was Corporate Controller of the Merdien/RST group of companies
from 1988 to 1997.
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SERVED
NAME AGE PRINCIPAL OCCUPATION FOR FIVE CONTINUOUSLY
OF DIRECTOR --- YEARS AND DIRECTORSHIPS AS DIRECTOR
----------- ----------------------- SINCE
-----
- -------------------------------------------------------------------------------------------------------------------------
J. Dwane Baumgardner(1)(3) (60) Chairman of Donnelly Corporation, Inc., a 1990
manufacturing company in Holland, Michigan,
1986 to present and Chief Executive Officer,
1982 to present; Director of Walbro
Corporation, 1997 to present; Director of
Westcast Industries, Inc., 1997 to present.
- -------------------------------------------------------------------------------------------------------------------------
Richard E. Caruso(3)(4) (54) President of Hosting Solutions, Nortel 1999
Networks, November 1999 to present; Vice
President and General Manager of Service
Provider Applications, Nortel Networks, July
1999 to November 1999; Vice President of
Digital Media Projects, IBM Global Media and
Entertainment Industries, 1998 to 1999;
General Manager of Solutions, IBM Global
Technologies, 1994 to 1998; Director of
Globecomm Systems Inc., May 2000 to present.
- -------------------------------------------------------------------------------------------------------------------------
Owen Farren(1) (50) Chairman of the Company, June 1998 to present 1991
and President and Chief Executive Officer of
the Company April 1991 to present; Executive
Vice President of the Company, May 1990 to
April 1991.
- -------------------------------------------------------------------------------------------------------------------------
Walter I. Rickard(1)(3)(4) (59) President and CEO, Listing Services 1997
Solutions, Inc., 1996 to present; President
and CEO, NYNEX, Entertainment and Information
Services Group, 1994 to 1996, and Corporate
Vice President, 1992 to 1994.
- -------------------------------------------------------------------------------------------------------------------------
Robert J. Sanator(1)(2) (70) Dean, College of Management, Long Island 1993
University, 1991 to present.
- -------------------------------------------------------------------------------------------------------------------------
J. Edward Odegaard(2)(5) (49) Managing Director, Whitehead Mann, January 2000
2001 to present; Managing Director, Palm
Ventures, 2000 to 2001; Managing Director, JP
Morgan, 1978 to 2000.
- -------------------------------------------------------------------------------------------------------------------------
Judith A. Maynes(4)(5) (54) Vice President, International Law, AT&T, 1972 2000
to 2000 (Retired).
- -------------------------------------------------------------------------------------------------------------------------
Charles T. Hopkins(2)(5) (58) Managing Partner, KPMG LLP, 1966 to 1999 2000
(Retired).
- -------------------------------------------------------------------------------------------------------------------------
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25
-------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Nominating Committee.
(5) Member of the Finance Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and persons who own more than ten percent (10%) of the Common Stock
(collectively, "Reporting Persons") to file initial reports of ownership and
reports of change of ownership of the Common Stock with the Securities and
Exchange Commission ("SEC"). Reporting Persons are required to furnish the
Company with copies of all forms that they file under Section 16(a). Based
solely upon a review of the copies of such forms received by the Company or
written representations from Reporting Persons, the Company believes that, with
respect to fiscal 2000, all Reporting Persons complied with all applicable
filing requirements under Section 16(a), with the following exceptions: Each of
Messrs. Hopkins and Odegaard as well as Ms. Maynes failed to file a Form 3 in
connection with their appointment as a director. Mr. Cherian failed to file a
Form 3 in connection with his appointment as an executive officer and a Form 4
in connection with a grant of stock options. Mr. Hopkins failed to file a Form
4 relating to a purchase of common stock. Each such Reporting Person
subsequently filed late a Form 5 to report the required information.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
awarded to, earned by or paid to the Chief Executive Officer and the
Registrant's other executive officers whose total annual salary and bonus
exceeded $100,000 during fiscal year 2000 (the "Named Executive Officers") for
services in all capacities during fiscal year ending December 31, 2000, fiscal
year ending July 31, 1999, August 1, 1999 to December 31, 1999 and fiscal year
ending July 31, 1998.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
------
Annual Compensation Securities All Other
Name and -------------------------- Underlying Compensation
Principal Position Year Salary ($) Bonus ($) Options/SARs (#) ($)(3)(4)
------------------ ---- ---------- --------- ---------------- -------------
Owen Farren
President & CEO....... 2000 270,000 0 0 28,769
1999(1) 111,404 0 20,000 1,708
1999 252,231 238,275(2) 24,000 29,149
1998 237,289 163,000 20,000 28,276
James E. Morris
Vice President/
Corporate Controller
& Treasurer........... 2000 109,000 0 0 6,001
1999(1) 45,173 0 5,000 3,801
1999 105,262 38,500 5,000 8,502
1998 100,567 54,000 5,500 7,017
David R. Nuzzo
Vice President -
Finance and
Administration &
Secretary............. 2000 165,000 0 0 7,365
1999(1) 68,300 0 12,500 2,071
1999 155,708 58,000 7,500 8,298
1998 98,077 65,000 25,000 2,450
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26
(1) Salary information for the period from 8/1/99 to 12/31/99.
(2) Includes $121,275, received under the terms of a special incentive program
for senior executives that was based on the Registrant's performance during
the three years ended July 31, 1998; and $117,000, which was based on the
performance of the Registrant and the achievement of individual goals during
fiscal 1999.
(3) Includes Registrant matching contributions and profit sharing contributions
made to the SL Industries Inc., Savings and Pension Plan for Messrs. Farren,
Nuzzo and Morris in the fiscal year 1999 in the amounts of $7,353, $6,448,
and $2,000, respectively, in fiscal year 1999, for Messrs. Farren, Morris
and Nuzzo in the amounts of $8,249, $7,882 and $7,398, respectively, in five
month period for 1999 for Messrs. Farren, Morris and Nuzzo in the amounts of
$1,333, $3,538 and $1,696, respectively and in calendar year 2000, for
Messrs. Farren, Morris and Nuzzo in the amounts of $7,923, $5,386 and
$6,519, respectively. The Registrant's contribution to the plan is based on
a percentage of the participant's elective contributions up to the maximum
defined under the plan and a fixed percentage, determined annually by the
Board of Directors, of the participant's total fiscal 1998 and 1999 calendar
year earnings and fiscal year 1999 earnings. Under the plan, benefits are
payable at retirement as a lump sum or as an annuity.
(4) Includes premiums paid for group term life insurance for Messrs. Farren,
Morris, and Nuzzo and premiums paid for an ordinary whole life insurance
policy on Mr. Farren's life in the face amount of $1,000,000 of which he is
the owner with the right to designate beneficiaries.
Mr. Morris is scheduled to receive a $30,000 per year annuity, payable at age 65
for life with a term certain of 10 years. This agreement is funded by the
purchase of a life insurance policy and provides both a death and retirement
benefit, and the Registrant is both owner and beneficiary of the policy. If the
participant dies after becoming eligible for retirement benefits and before the
guaranteed retirement benefits have been paid, the unpaid balance of the
benefits guaranteed will continue to be paid by the Registrant to the designated
beneficiary.
Pursuant to a standing resolution of the Board of Directors, upon the death of
any executive officer, having more than five (5) years of service, the
Registrant will pay his spouse, over a 36-month period, an amount equal to the
officer's salary at his death.
SENIOR EXECUTIVE SEVERANCE AGREEMENTS
On May 1, 1991, the Registrant entered into a Severance Pay Agreement with Mr.
Farren, providing for payment equal to his annual base salary or $135,000,
whichever is greater, and to continue for a limited time certain fringe benefits
in the event of involuntary termination of his employment, or voluntary
termination for "good reason." Good reason is defined to include (i) a demotion
in position, authority or similar action which would substantially alter the
officer's standing in the Registrant, (ii) a reduction in salary or failure to
increase compensation commensurate with other executive officers, (iii) a
relocation
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of the officer's place of employment, (iv) a change of control of the
Registrant, (v) incurring any serious illness or disability, or (vi) any other
circumstance as determined by the Board of Directors in good faith.
On December 1, 1997, the Registrant entered into a Severance Pay Agreement with
Mr. Nuzzo providing for payment of his annual base salary for a period not
greater than 24 months, or until he secures new employment, whichever comes
first, but, in any event, not less than 12 months in the event of termination of
his employment within six months of a change in control of the Registrant.
On December 29, 2000, the Registrant entered into a Severance Pay Agreement with
Mr. Cherian providing for payment of his annual base salary for a period not
greater than 12 months, in the event of termination of his employment within six
months of a change in control of the Registrant.
On March 19, 2001 the Registrant announced that the Board of Directors had
determined to explore a sale of the Registrant to maximize value for
shareholders. As a result of the uncertainties arising in connection with this
process, the Board has determined to offer various retention and severance
arrangements to senior executives and other key personnel designed to retain the
services and dedication of such employees. The terms of these arrangements have
not yet been finalized.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
None.
AGGREGATED STOCK OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END STOCK OPTION VALUES
The following table sets forth the number of shares received upon exercise of
stock options by each of the Named Executive Officers during the last completed
fiscal year and the aggregate options to purchase shares of Common Stock of the
Registrant held by the Named Executive Officers at December 31, 2000.
Number of
Securities
Underlying Value of Unexercised
Unexercised Options In-The-Money Options
At Fiscal Year End at Fiscal Year End ($)(1)
------------------ -----------------------------
(#)
---
Shares Exercisable/
Acquired Upon Value Exercisable/ ------------
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
Owen Farren(2).... 7,000 58,500 213,400/ 21,600 1,144,188/ 3,000
James E. Morris... 26,500 190,000 15,500/ 0 3,969/ 0
David R. Nuzzo.... N/A N/A 34,500/ 10,500 1,406/ 938
(1) Computed by multiplying the number of options by the difference between
(i) the per share closing price of $11.4375 at fiscal year end and (ii)
the exercise price per share.
(2) Shares exercised between August 1, 1999 and December 31, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Page 27
28
During fiscal 2000, the Compensation Committee members were J. Dwane Baumgardner
(Chairman), Richard E. Caruso and Walter I. Rickard, all of whom are
non-employee directors of the Registrant.
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29
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Compensation
Committee") is responsible for the establishment of the level and manner of
compensation of the Registrant's executive officers (including its Named
Executive Officers). In addition, the Compensation Committee seeks to ensure
that sound compensation policies and practices exist and are being followed.
During fiscal 2000, the members of the Compensation Committee were J. Dwane
Baumgardner (Chairman), Richard E. Caruso and Walter I. Rickard, all of whom
were (and are) non-employee directors of the Registrant.
The following describes the Compensation Committee's compensation policies
applicable to its executive officers (including its Named Executive Officers),
including the relationship of corporate performance to executive compensation,
with respect to compensation reported for the last fiscal year.
The Compensation Committee believes that executive compensation should be linked
to value delivered to shareholders. The Registrant's compensation programs have
been designed to provide a correlation between the financial success of the
executive and the shareholders. Both long and short-term incentives are intended
to align the interests of executives and shareholders and to reward the
executive for building value within the Registrant.
The functions of the Compensation Committee are to oversee general compensation
policies for the Registrant's employees, to review and approve compensation
packages annually for the Registrant's executive officers and subsidiary
presidents, to approve cash incentive programs for all subsidiaries, and to
grant stock options to officers of the Registrant and other key employees as
appropriate. The Registrant seeks to provide executive compensation that will
support the achievement of the Registrant's financial goals, while attracting
and retaining talented executives and rewarding superior performance. In
performing this function, the Compensation Committee reviews executive
compensation surveys, the compensation levels of executive officers of companies
in competing businesses, and recommendations by management. The Compensation
Committee may also from time to time consult with independent compensation
consultants and others.
The Committee's current philosophy is to balance short-term performance of
executives with achievement of long-range strategic goals resulting in
continuously improving shareholder value, and to engender and preserve a sense
of fairness and equity among employees, shareholders, and customers. In keeping
with that philosophy, it has set the following objectives: (1) to link a
significant portion of annual compensation directly to operating performance;
(2) to promote achievement of the Registrant's long-term strategic goals and
objectives; (3) to align the interest of Registrant executives with long-term
shareholder interest; (4) to see that management aligns the interest of
Registrant employees with long-term shareholder interest; and (5) to attract,
retain, and motivate executives critical to the Registrant's long-term success.
The Registrant's executive compensation program consists of base salary, annual
cash bonus incentive, and stock options. (Along with all other employees,
executives also participate in one of the Registrant's defined contribution
pension plans.) Salary levels of executive officers are reviewed
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30
annually by the Compensation Committee. Bonus payments are based on the
achievement of the Registrant's performance targets and the achievement of
individual performance goals. Bonus amounts are calculated after fiscal year-end
financial results become available to the Compensation Committee and are
determined in accordance with guidelines established by the Compensation
Committee. The Registrant seeks to provide an overall level of compensation that
is competitive with other companies in competing businesses and in the
Registrant's geographic markets. Compensation in any particular case will vary
on the basis of the Registrant's annual and long-term performance as well as
individual performance.
The Compensation Committee believes stock options and stock ownership contribute
to the aligning of the executive's interests with those of the shareholders. The
Registrant's 1991 Long Term Incentive Plan encourages stock ownership by
authorizing the grant of stock options to officers and key employees of the
Registrant. From time to time, the Compensation Committee provides long term
incentive compensation in the form of stock options where appropriate as
compensation for its executive officers. In determining whether individual stock
option grants will be made, the Compensation Committee evaluates each
participant's job responsibilities and performance during the last completed
fiscal year, as well as the perceived potential that the individual has in
contributing to the success of the Registrant.
The salary for the Company's chief executive officer, Owen Farren, for fiscal
2000 was established by the Compensation Committee based, in large part, on the
performance of the Registrant during fiscal 1999. Based on the above
considerations, effective January 1, 2000, the Compensation Committee increased
Mr. Farren's annual base salary by approximately 6%, from $255,000 to $270,000.
The Compensation Committee's determination was not subject to precise criteria
or formulas. Accordingly, the determination may be deemed informal and
subjective although based on detailed considerations. The increase was reviewed
and ratified by the Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of the
Registrant's Common Stock, as of March 16, 2001 (except as otherwise noted), by:
(i) each person or entity (including such person's or entity's address) who is
known by the Registrant to own beneficially more than five percent of the
Registrant's Common Stock, (ii) each of the Registrant's Directors and nominees
for Director who beneficially owns shares, (iii) each Named Executive Officer
(as defined under Executive Compensation) who beneficially owns shares, and (iv)
all executive officers and Directors as a group. The information presented in
the table is based upon the most recent filings with the Securities and Exchange
Commission by such persons or upon information otherwise provided by such
persons to the Registrant.
Page 30
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- --------------------------------------------------------------------------------------------
Number of Shares
Name of Beneficial Owner Beneficially Owned(1) Percentage Owned
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Dimensional Fund Advisors, Inc. 296,400(2) 5.21%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
The Gabelli Funds 1,269,620 (3) 22.32%
One Corporate Center
Rye, NY 10580-1435
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Oaktree Capital Management, LLC 525,000 (4) 9.23%
333 South Grand Avenue
28th Floor
Los Angeles, CA 90071
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Steel Partners II, L.P. 503,500 (5) 8.85%
750 Lexington Avenue
27th Floor
New York, NY 10022
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
J. Dwane Baumgardner 57,153 (6) *
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Richard E. Caruso 5,992 (7) *
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Owen Farren 239,914 (8) 4.22%
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Charles T. Hopkins 1,000 *
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
David R. Nuzzo 40,781 (9) *
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
J. Edward Odegaaard 2,000 (10) *
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Walter I. Rickard 12,669 (11) *
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Robert J. Sanator 8,000 *
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
All Directors and Executive 367,509 (12) 6.46%
Officers as a Group
- --------------------------------------------------------------------------------------------
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32
* Less than one percent (1%).
1. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Under such rules, shares are deemed
to be beneficially owned by a person or entity if such person or entity
has or shares the power to vote or dispose of the shares, whether or not
such person or entity has any economic interest in such shares. Except
as otherwise indicated, and subject to community property laws where
applicable, the persons and entities named in the table above have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Shares of Common Stock subject to
options or warrants currently exercisable or exercisable within 60 days
are deemed outstanding for purposes of computing the percentage
ownership of the person or entity holding such option or warrant but are
not deemed outstanding for purposes of computing the percentage
ownership of any other person or entity.
2. Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 296,400 shares, as of
February 2, 2001, all of which shares are held in portfolios of DFA
Investment Dimensions Group Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional serves as investment manager. Dimensional disclaims
beneficial ownership of all such shares.
3. Includes the following shares deemed to be owned beneficially, as of
March 6, 2001, by the following affiliates (the "Gabelli Affiliates"):
73,600 shares held by Gabelli Funds, LLC, a registered investment
advisor and wholly-owned subsidiary of Gabelli Asset Management, Inc.
("GAMI"), a public company and subisidiary of Gabelli Group Capital
Partners, Inc. ("Gabelli Partners"); 1,001,520 shares held by GAMCO
Investors, Inc., a registered investment advisor and wholly-owned
subsidiary of GAMI; 25,000 shares held by Gabelli Advisors, Inc., an
investment advisor and subsidiary of GAMI; 1,000 shares held by Gabelli
Foundation, Inc. (the "Foundation"), a private foundation; 60,000 shares
held by Gabelli Performance Partnership LP ("GPP"), whose primary
purpose is investing in securities; and 108,500 shares held by Gabelli
International Limited, whose primary business purpose is investing in a
portfolio of equity securities and securities convertible into or
exchangeable for equity securities in order to achieve its investment
objective of significant long-term growth of capital. Each of the
Gabelli Affiliates claims sole voting and dispositive power over the
shares held by it. The foregoing persons do not admit to constituting a
group within the meaning of Section 13(d) of the Securities Exchange
Act. Mario J. Gabelli is the Chief Investment Officer of each of the
Gabelli Affiliates; the majority stockholder and Chairman of the Board
of Directors and Chief Executive Officer of Gabelli Partners and GAMI;
the President, a Trustee and the Investment Manager of the Foundation;
and the portfolio manager for GPP. The general partner of GPP is MJG
Associates, Inc., the sole shareholder, director and employee of which
is Mario J. Gabelli.
GAMCO Investors, Inc. is a New York corporation, Gabelli Advisors, Inc.
is a Delaware
Page 32
33
corporation, and Gabelli Funds, LLC is a New York limited liability
company, each having its principal business office at One Corporate
Center, Rye, New York 10580. GPP is a New York limited partnership
having its principal business office at 401 Theodore Fremd Ave., Rye,
New York 10580. Gabelli International Limited is a corporation organized
under the laws of the British Virgin Islands, having its principal
business office at c/o MeesPierson (Cayman) Limited, British American
Centre, Dr. Roy's Drive-Phase 3, George Town, Grand Cayman, British West
Indies. The Foundation has its principal offices at 165 West Liberty
Street, Reno, Nevada 90501.
4. Oaktree Capital Management, LLC, a California limited liability company
("Oaktree"), is deemed to have beneficial ownership of 525,000 shares as
of December 31, 2000. The principal business of Oaktree is providing
investment advice and management services to institutional and
individual investors. Oaktree's General Partner is OCM Principal
Opportunities Fund, L.P., a Delaware limited partnership.
5. Steel Partners II, L.P., ("Steel Partners II"), is a Delaware limited
partnership. Steel Partners II is deemed to have beneficial ownership of
503,500 shares as of February 15, 2001. The principal business of Steel
Partners II is investing in the securities of microcap companies. Steel
Partners II's General Partner is Steel Partners L.L.C., a Delaware
limited liability company.
6. Includes 55,153 shares which Mr. Baumgardner has the right to acquire at
any time upon exercise of stock options.
7. Includes 5,992 shares, which Mr. Caruso has the right to acquire at any
time upon exercise of stock options.
8. Includes 69 shares owned jointly by Mr. Farren and his wife, who share
voting and investment power, 6,200 shares held in an IRA for Mr. Farren,
20,245 shares beneficially owned as a participant in the Registrant's
Savings and Pension Plan, and 202,600 shares which Mr. Farren has the
right to acquire, at any time, upon the exercise of stock options.
9. Includes 1,781 shares beneficially owned by Mr. Nuzzo as a participant
in the Registrant's Savings and Pension Plan, and 34,500 shares which
Mr. Nuzzo has the right to acquire at any time upon exercise of stock
options.
10. Shares owned jointly by Mr. Odegaaard and his wife, who share voting and
investment power.
11. Includes 12,331 shares which Mr. Rickard has the right to acquire at any
time upon exercise of stock options.
12. Includes 87,597 shares which directors and executive officers have the
right to acquire, at any time, upon the exercise of nonqualified and
incentive stock options granted by the Registrant. Except for 4,385
shares, as to which certain directors and executive officers share
voting and investment power, the directors and executive officers have
sole voting and investment power as to the shares beneficially owned by
them.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
George R. Hornig, former director of the Registrant, is a managing director of
Credit Suisse First Boston. Credit Suisse First Boston has been retained to
explore the sale of the Registrant. Mr. Hornig resigned from the Registrant's
Board of Directors effective March 8, 2001.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) FINANCIAL STATEMENTS
See Index to Financial Statements at Page F-1.
(a) (2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule for the year ended December 31, 2000,
fiscal years ended July 31, 1999 and 1998 and the five month periods ended
December 31, 1999 and 1998 are submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because (a) the required information is shown
elsewhere in the Annual Report, or (b) they are inapplicable, or (c) they are
not required. See Index to Financial Statements at Page F-1.
(a) (3) EXHIBITS
The information called for by this section is listed in the Exhibit Index of
this report.
(b) REPORTS ON FORM 8-K
No reports were filed during the quarter ended December 31, 2000.
On March 22, 2001, the Registrant filed a Period Report on Form 8-K, which
contained a press release issued by the Registrant on March 19, 2001. On that
date the Registrant announced, among other things, that the Board of Directors
had completed its previously announced review of strategic alternatives and
determined to explore a sale of the Company in order to maximize value for
shareholders. Credit Suisse First Boston, New York, assisted the Company's Board
of Directors in its review and has been engaged to lead this process.
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35
SIGNATURES
Pursuant to the requirements 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.
SL INDUSTRIES, INC.
-------------------
(Registrant)
/s/ Owen Farren
----------------------
Owen Farren, President
March 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
/s/ Owen Farren /s/ J. Dwane Baumgardner
- ------------------ ------------------------
Owen Farren J. Dwane Baumgardner
Chairman of the Board, Director
President and Chief Executive Officer March 26, 2001
(Principal Executive Officer)
March 26, 2001
/s/ David R Nuzzo /s/ Richard E. Caruso
- ----------------- ---------------------
David R Nuzzo Richard E. Caruso
Vice President, Finance and Administration, Director
Treasurer and Secretary March 26, 2001
(Principal Financial Officer)
March 26, 2001 /s/ Charles T. Hopkins
----------------------
Charles T. Hopkins
/s/ Jacob Cherian Jr Director
- -------------------- March 26, 2001
Jacob Cherian Jr
Vice President, Corporate Controller
(Principal Accounting Officer) /s/ J. Edward Odegaard
March 26, 2001 -----------------------
J. Edward Odegaard
Director
March 26, 2001
Page 35
36
/s/ Judith A. Maynes
--------------------
Judith A. Maynes
Director
March 26, 2001
/s/ Walter I. Rickard
---------------------
Walter I. Rickard
Director
March 26, 2001
/s/ Robert J. Sanator
---------------------
Robert J. Sanator
Director
March 26, 2001
Page 36
37
INDEX TO EXHIBITS
The exhibit number, description and sequential page number in the original copy
of this document where exhibits can be found follows:
Exhibit # Description
--------- -----------
3.1 Articles of Incorporation. Restated Articles of Incorporation
(transmitted herewith).
3.2 By-Laws. Restated By-Laws (transmitted herewith).
10.1 Supplemental Compensation Agreement for the Benefit of Byrne
Litschgi. Incorporated by reference to Exhibit 10.1 to the
Registrants report on Form 8 dated November 9, 1990.
10.2 Chairman's Executive Severance Agreement. Incorporated by
reference to Exhibit 10.2 to the Registrant's report on Form 8
dated November 9, 1990.
10.3 First Amendment to Chairman's Executive Severance Agreement and
to Supplemental Compensation Agreement. Incorporated by
reference to Exhibit 10.3.1 to the Registrant's report on Form 8
dated November 9, 1990.
10.4 Second Amendment to Chairman's Executive Severance Agreement and
to Supplemental Compensation Agreement. Incorporated by
reference to Exhibit 10.3.2 to the Registrant's report on Form 8
dated November 9, 1990.
10.5 Third Amendment to Chairman's Executive Severance Agreement and
to Supplemental Compensation Agreement. Incorporated by
reference to Exhibit 10.3.3 to the Registrant's report on Form 8
dated November 9, 1990.
10.6 Fourth Amendment to Chairman's Executive Severance Agreement and
to Supplemental Compensation Agreement. Incorporated by
reference to Exhibit 10.3.2 to the Registrant's report on Form 8
dated November 9, 1990.
10.7 Deferred Supplemental Compensation Agreement with Grant Heilman.
Incorporated by reference to Exhibit 10.4.5 to the Registrant's
report on Form 8 dated November 9, 1990.
10.8 Deferred Supplemental Compensation Agreement with William Hess.
Incorporated by reference to Exhibit 10.4.6 to the Registrant's
report on Form 8 dated November 9, 1990.
10.9 Supplemental Compensation Agreement for the Benefit of Donald J.
Lloyd-Jones. Incorporated by reference to Exhibit 10.5.1 to the
Registrant's report on Form 8 dated November 9, 1990.
10.10 Supplemental Compensation Agreement for the Benefit of Salvatore
J. Nuzzo. Incorporated by reference to Exhibit 10.5.3 to the
Registrant's report on Form 8 dated November 9, 1990.
10.11 Supplemental Compensation Agreement for the Benefit of Marlin
Miller, Jr. Incorporated by reference to Exhibit 10.5.4 to the
Registrant's report on Form 8 dated November 9, 1990.
10.12 Supplemental Compensation Agreement for the Benefit of Grant
Heilman. Incorporated by reference to Exhibit 10.5.5 to the
Registrant's report on Form 8 dated November 9, 1990.
10.13 Supplemental Compensation Agreement for the Benefit of William
M. Hess.
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38
Incorporated by reference to Exhibit 10.5.6 to the Registrant's
report on Form 8 dated November 9, 1990.
10.14 1988 Deferred Compensation Agreement with a Certain Officer.
Incorporated by reference to Exhibit 10.6 to the Registrant's
report on Form 8 dated November 9, 1990.
10.15 Death Benefit Arrangement with Certain Officers adopted by Board
Resolution dated September 18, 1975. Incorporated by reference
to Exhibit 10.7 to the Registrant's report on Form 8 dated
November 9, 1990.
10.16 Non-Qualified Stock Option Agreement dated June 19, 1991.
Incorporated by reference to Exhibit 10-A to the Registrant's
report on Form 10-K for the fiscal year ended July 31, 1991.
10.17 Non-Qualified Stock Option Agreement dated September 25, 1991.
Incorporated by reference to Exhibit 10-B to the Registrant's
report on Form 10-K for the fiscal year ended July 31, 1991.
10.18 Severance Pay Agreement with Owen Farren. Incorporated by
reference to Exhibit 10-C to the Registrant's report on Form
10-K for the fiscal year ended July 31, 1991.
10.19 Severance Pay Agreement with Ted D. Taubeneck. Incorporated by
reference to Exhibit 10-D to the Registrant's report on Form
10-K for the fiscal year ended July 31, 1991.
10.20 Deferred Compensation Agreement with James E. Morris.
Incorporated by reference to Exhibit 10-E to the Registrant's
report on Form 10-K for the fiscal year ended July 31, 1991.
10.21 1991 Long Term Incentive Plan of SL Industries, Inc., as
amended, is incorporated by reference to Appendix to the
Registrant's Proxy Statement for its 1995 Annual Meeting held
November 17, 1995, previously filed with the Securities and
Exchange Commission.
10.22 SL Industries, Inc. Non-Employee Director Non-Qualified Stock
Option Plan. Incorporated by reference to Exhibit 4.3 to
Registration Statement No. 33-63681, filed October 25, 1995.
10.23 Capital Accumulation Plan. Incorporated by reference to the
Registrant's report on Form 10K/A for the fiscal period ended
July 31, 1994.
10.24 Amendment No. 1 to Non-Qualified Stock Option Agreement dated
September 25, 1991, is incorporated herein by reference to
Exhibit 4.5 to Registration Statement on Form S-8/A (No.
33-53274) filed with the Securities and Exchange Commission on
June 18, 1996.
10.25 Non-Qualified Stock Option Agreement Incorporated by reference
to Exhibit 4.3 to Registration Statement No. 33-65445, filed
December 28, 1995.
10.26 Severance Pay Agreement with James D. Klemashevich. Incorporated
by reference to Exhibit 10.26 to the Registrant's report on Form
10-K for the fiscal year ended July 31, 1997.
10.27 Severance Pay Agreement with David R. Nuzzo. Incorporated by
reference to Exhibit 10.1 to the Registrant's report on Form
10-K for the fiscal year ended
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39
July 31, 1998.
10.28 Severance Pay Agreement with Jacob Cherian Jr. (transmitted
herewith).
22 Subsidiaries of the Registrant (transmitted herewith).
24 Consent of Independent Public Accountants - Arthur Andersen
LLP (transmitted herewith).
40
SL Industries, Inc. and subsidiaries
Index to Financial Statements and Financial Statement Schedule
Page number in
this report
Report of Independent Public Accountants F2
Consolidated Balance Sheets F3
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Income (Loss) F4
Consolidated Statements of Shareholders' Equity F5
Consolidated Statements of Cash Flows F6
Notes to Consolidated Financial Statements F7 to F31
Financial Statement Schedule:
II. Valuation and Qualifying Accounts F32
F-1
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SL Industries, Inc.:
We have audited the accompanying consolidated balance sheets of SL Industries,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity and cash flows for the year ended December 31, 2000, the
five months ended December 31, 1999 and each of the two years in the period
ended July 31, 1999. These financial statements and schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SL Industries,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the year ended December 31, 2000, the five
months ended December 31, 1999 and each of the two years in the period ended
July 31, 1999, in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
FEBRUARY 16, 2001
F-2
42
SL INDUSTRIES, INC
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 1,189,000 $ 1,117,000
Receivables, less allowances of
$2,519,000 and $1,899,000, respectively ................................ 22,532,000 25,471,000
Inventories ............................................................. 26,137,000 28,083,000
Prepaid expenses ........................................................ 1,140,000 1,317,000
Deferred income taxes ................................................... 4,864,000 4,075,000
------------- -------------
Total current assets ................................................ 55,862,000 60,063,000
------------- -------------
Property, plant and equipment, net ......................................... 20,761,000 22,027,000
Long-term note receivable .................................................. 2,118,000 2,149,000
Deferred income taxes ...................................................... 1,629,000 1,950,000
Cash surrender value of life insurance policies ............................ 11,486,000 9,923,000
Intangible assets, net ..................................................... 20,770,000 19,785,000
Other assets ............................................................... 855,000 1,153,000
------------- -------------
Total assets ....................................................... $ 113,481,000 $ 117,050,000
============= =============
LIABILITIES
Current liabilities:
Short-term bank debt .................................................... $ -- $ 772,000
Long-term debt due within one year ...................................... 186,000 190,000
Accounts payable ........................................................ 11,309,000 13,104,000
Accrued income taxes .................................................... 724,000 411,000
Accrued liabilities:
Payroll and related costs ............................................. 5,070,000 4,377,000
Other ................................................................. 7,393,000 8,167,000
------------- -------------
Total current liabilities .......................................... 24,682,000 27,021,000
------------- -------------
Long-term debt less portion due within one year ............................ 36,533,000 39,245,000
Deferred compensation and supplemental retirement benefits ................. 5,892,000 5,650,000
Other liabilities .......................................................... 3,024,000 3,062,000
------------- -------------
Total liabilities .................................................. 70,131,000 74,978,000
------------- -------------
Commitments and contingencies (Note 10)
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized, 6,000,000 shares; none issued ... -- --
Common stock, $ 20 par value; authorized, 25,000,000 shares;
issued, 8,298,000 and 8,272,000 shares, respectively ..................... 1,660,000 1,654,000
Capital in excess of par value ............................................. 38,455,000 37,771,000
Retained earnings .......................................................... 19,547,000 18,410,000
Accumulated other comprehensive income ..................................... 62,000 53,000
Treasury stock at cost, 2,639,000 and 2,650,000 shares, respectively ....... (16,374,000) (15,816,000)
------------- -------------
Total shareholders' equity ......................................... 43,350,000 42,072,000
------------- -------------
Total liabilities and shareholders' equity ......................... $ 113,481,000 $ 117,050,000
============= =============
See accompanying notes to consolidated financial statements
F-3
43
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve-Months Ended Twelve-Months Ended Twelve-Months Ended
December 31, July 31, July 31,
2000 1999 1998
------------------- ------------------- -------------------
Net sales ............................................. $ 167,746,000 $ 125,128,000 $ 118,212,000
------------- ------------- -------------
Cost and expenses:
Cost of products sold ............................... 114,563,000 80,957,000 74,646,000
Write-down of inventory and losses on commitments ... -- -- --
Engineering and product development ................. 11,306,000 7,680,000 6,167,000
Selling, general and administrative ................. 31,995,000 23,402,000 25,576,000
Depreciation and amortization ....................... 4,983,000 3,881,000 3,043,000
Restructuring costs ................................. 790,000 -- --
Settlement of class action suit ..................... (875,000) -- --
------------- ------------- -------------
Total cost and expenses ............................... 162,762,000 115,920,000 109,432,000
------------- ------------- -------------
Income (loss) from operations ......................... 4,984,000 9,208,000 8,780,000
------------- ------------- -------------
Other income (expense):
Interest income ..................................... 348,000 272,000 214,000
Interest expense .................................... (3,049,000) (993,000) (427,000)
Gain from demutualization of insurance company ...... -- -- --
------------- ------------- -------------
Income (loss) before income taxes ..................... 2,283,000 8,487,000 8,567,000
Income tax provision (benefit) ........................ 583,000 3,081,000 3,254,000
------------- ------------- -------------
Net income (loss) ..................................... $ 1,700,000 $ 5,406,000 $ 5,313,000
============= ============= =============
Basic net income (loss) per common share .............. $ 0.30 $ 0.96 $ 0.95
============= ============= =============
Diluted net income (loss) per common share ............ $ 0.30 $ 0.92 $ 0.90
============= ============= =============
Shares used in computing basic net income (loss)
per common share .................................... 5,635,000 5,643,000 5,598,000
Shares used in computing diluted net income (loss)
per common share .................................... 5,757,000 5,876,000 5,897,000
Five-Months Ended Five-Months Ended
December 31, December 31,
1999 1998
----------------- -----------------
(Unaudited)
Net sales ............................................. $ 70,970,000 $ 49,816,000
------------- -------------
Cost and expenses:
Cost of products sold ............................... 47,459,000 32,379,000
Write-down of inventory and losses on commitments ... 3,145,000 --
Engineering and product development ................. 4,849,000 3,049,000
Selling, general and administrative ................. 14,066,000 9,538,000
Depreciation and amortization ....................... 2,129,000 1,614,000
Restructuring costs ................................. 1,128,000 --
Settlement of class action suit ..................... -- --
------------- -------------
Total cost and expenses ............................... 72,776,000 46,580,000
------------- -------------
Income (loss) from operations ......................... (1,806,000) 3,236,000
------------- -------------
Other income (expense):
Interest income ..................................... 76,000 134,000
Interest expense .................................... (1,078,000) (391,000)
Gain from demutualization of insurance company ...... 1,812,000 --
------------- -------------
Income (loss) before income taxes ..................... (996,000) 2,979,000
Income tax provision (benefit) ........................ (312,000) 1,018,000
------------- -------------
Net income (loss) ..................................... $ (684,000) $ 1,961,000
============= =============
Basic net income (loss) per common share .............. $ (0.12) $ 0.35
============= =============
Diluted net income (loss) per common share ............ $ (0.12) $ 0.33
============= =============
Shares used in computing basic net income (loss)
per common share .................................... 5,624,000 5,641,000
Shares used in computing diluted net income (loss)
per common share .................................... 5,624,000 5,886,000
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Twelve-Months Ended Twelve-Months Ended Twelve-Months Ended
December 31, July 31, July 31,
2000 1999 1998
------------------- ------------------- -------------------
Net income (loss) ......................................... $ 1,700,000 $ 5,406,000 $ 5,313,000
Other comprehensive income (loss):
Currency translation adjustment, net of related taxes ... 9,000 (31,000) 80,000
----------- ----------- -----------
Comprehensive income (loss) ............................... $ 1,709,000 $ 5,375,000 $ 5,393,000
=========== =========== ===========
Five-Months Ended Five-Months Ended
December 31, December 31,
1999 1998
----------------- -----------------
(Unaudited)
Net income (loss) ......................................... $ (684,000) $ 1,961,000
Other comprehensive income (loss):
Currency translation adjustment, net of related taxes ... 4,000 72,000
----------- -----------
Comprehensive income (loss) ............................... $ (680,000) $ 2,033,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
44
SL INDUSTRIES, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
------------------------------------------------------------------------------
Issued Held In Treasury
----------------------------------- -----------------------------------------
Shares Amount Shares Amount
------------------------------------------------------------------------------
Balance August 1, 1997 ................ $ 7,958,000 $ 1,592,000 $(2,141,000) ($9,402,000)
Net income ............................
Cash dividends, $.08 per share ........
Other, including exercise of
employee stock options and
related income tax benefits ......... 195,000 39,000
Treasury stock purchased .............. (405,000) (4,501,000)
Current year translation adjustment ...
------------------------------------------------------------------------------
Balance July 31, 1998 ................. 8,153,000 $ 1,631,000 (2,546,000) $ (13,903,000)
==============================================================================
Net income ............................
Cash dividends, $.09 per share ........
Other, including exercise of
employee stock options and
related income tax benefits ......... 87,000 17,000
Treasury stock sold ................... 71,000 390,000
Treasury stock purchased .............. (133,000) (1,648,000)
Current year translation adjustment ...
------------------------------------------------------------------------------
Balance July 31, 1999 ................. 8,240,000 $ 1,648,000 (2,608,000) $ (15,161,000)
==============================================================================
Net loss ..............................
Cash dividends, $.05 per share ........
Other, including exercise of
employee stock options and
related income tax benefits ......... 32,000 6,000
Treasury stock sold ................... 19,000 108,000
Treasury stock purchased .............. (61,000) (763,000)
Current year translation adjustment ...
------------------------------------------------------------------------------
Balance December 31, 1999 ............. 8,272,000 $ 1,654,000 (2,650,000) $ (15,816,000)
==============================================================================
Net income ............................
Cash dividends, $.10 per share ........
Other, including exercise of
employee stock options and
related income tax benefits ......... 26,000 6,000
Treasury stock sold ................... 159,000 967,000
Treasury stock purchased .............. (148,000) (1,525,000)
Current year translation adjustment ...
------------------------------------------------------------------------------
Balance December 31, 2000 ............. 8,298,000 $ 1,660,000 (2,639,000) $ (16,374,000)
==============================================================================
Retained
Capital in Earnings
Excess of (Accumulated Translation
Par Value Deficit) Adjustment
-----------------------------------------------------------
Balance August 1, 1997 ................ $ 34,695,000 $ 9,607,000 $ --
Net income ............................ 5,313,000
Cash dividends, $.08 per share ........ (445,000)
Other, including exercise of
employee stock options and
related income tax benefits ......... 1,366,000 1,000
Treasury stock purchased ..............
Current year translation adjustment ... 80,000
-----------------------------------------------------------
Balance July 31, 1998 ................. $ 36,061,000 $ 14,476,000 $ 80,000
===========================================================
Net income ............................ 5,406,000
Cash dividends, $.09 per share ........ (507,000)
Other, including exercise of
employee stock options and .......... (1,000)
related income tax benefits ......... 373,000
Treasury stock sold ................... 498,000
Treasury stock purchased ..............
Current year translation adjustment ... (31,000)
-----------------------------------------------------------
Balance July 31, 1999 ................. $ 36,932,000 $ 19,374,000 $ 49,000
===========================================================
Net loss .............................. (684,000)
Cash dividends, $.05 per share ........ (280,000)
Other, including exercise of
employee stock options and
related income tax benefits ......... 715,000
Treasury stock sold ................... 124,000
Treasury stock purchased ..............
Current year translation adjustment ... 4,000
-----------------------------------------------------------
Balance December 31, 1999 ............. $ 37,771,000 $ 18,410,000 $ 53,000
===========================================================
Net income ............................ 1,700,000
Cash dividends, $.10 per share ........ (563,000)
Other, including exercise of
employee stock options and
related income tax benefits ......... 320,000
Treasury stock sold ................... 364,000
Treasury stock purchased ..............
Current year translation adjustment ... 9,000
-----------------------------------------------------------
Balance December 31, 2000 ............. $ 38,455,000 $ 19,547,000 $ 62,000
===========================================================
See accompanying notes to consolidated financial statements
F-5
45
SL INDUSTRIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve-Months Twelve-Months Twelve-Months
Ended Ended Ended
December 31, July 31, July 31,
2000 1999 1998
--------------- -------------- -------------
OPERATING ACTIVITIES:
Net income (loss) ............................................ $ 1,700,000 $ 5,406,000 $ 5,313,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation .............................................. 3,367,000 2,643,000 2,023,000
Amortization .............................................. 1,616,000 1,262,000 1,020,000
Restructuring charges, write down of inventory & loss
on committments .......................................... 790,000 -- --
Provisions for losses on accounts receivable .............. 494,000 (90,000) 52,000
Additions to other assets ................................. (706,000) (990,000) (1,366,000)
Cash surrender value of life insurance premiums ........... (1,548,000) (753,000) (656,000)
Deferred compensation and supplemental retirement
benefits ................................................. 732,000 852,000 1,158,000
Deferred compensation and supplemental retirement
benefit payments ......................................... (490,000) (620,000) (611,000)
(Increase) decrease in deferred income taxes .............. (1,326,000) (729,000) 731,000
Discontinued product line expenses ........................ -- (141,000) (168,000)
(Gain) loss on sales of equipment ......................... 6,000 (13,000) (13,000)
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Receivables ............................................. 3,019,000 1,023,000 2,495,000
Inventories ............................................. 535,000 (1,268,000) 1,068,000
Prepaid expenses ........................................ 174,000 81,000 181,000
Accounts payable ........................................ (1,864,000) 727,000 (3,588,000)
Other accrued liabilities ............................... (1,258,000) (2,129,000) (1,978,000)
Accrued income taxes .................................... 1,151,000 (734,000) 960,000
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............ 6,392,000 4,527,000 6,621,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Investment in Kreiss Johnson ................................. 69,000 (233,000) --
Proceeds from sales of equipment ............................. 76,000 920,000 18,000
Purchases of property, plant and equipment ................... (2,586,000) (2,688,000) (2,756,000)
Increase (decrease) in note receivable ....................... (10,000) 32,000 32,000
Payments for acquisitions, net of cash acquired .............. (376,000) (19,082,000) (10,928,000)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .......................... (2,827,000) (21,051,000) (13,634,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Cash dividends paid .......................................... (563,000) (507,000) (445,000)
Proceeds from short-term debt ................................ -- 21,863,000 --
Proceeds from long-term debt ................................. 11,560,000 33,878,000 17,550,000
Payments on short-term debt .................................. (809,000) (21,012,000) --
Payments on long-term debt ................................... (13,936,000) (17,395,000) (6,722,000)
Proceeds from stock options exercised ........................ 215,000 476,000 1,118,000
Treasury stock (acquired) sold ............................... (196,000) (760,000) (4,501,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............ (3,729,000) 16,543,000 7,000,000
------------ ------------ ------------
Effect of exchange rate changes on cash ........................ 236,000 52,000 13,000
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................ 72,000 71,000 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............... 1,117,000 -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................... $ 1,189,000 $ 71,000 $ --
============ ============ ============
Five-Months Five-Months
Ended Ended
December 31, December 31,
1999 1998
------------- ------------
(Unaudited)
OPERATING ACTIVITIES:
Net income (loss) ............................................ $ (684,000) $ 1,961,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation .............................................. 1,431,000 1,103,000
Amortization .............................................. 698,000 511,000
Restructuring charges, write down of inventory & loss
on committments .......................................... 4,273,000 --
Provisions for losses on accounts receivable .............. 10,000 18,000
Additions to other assets ................................. (816,000) (425,000)
Cash surrender value of life insurance premiums ........... (298,000) (249,000)
Deferred compensation and supplemental retirement
benefits ................................................. 356,000 469,000
Deferred compensation and supplemental retirement
benefit payments ......................................... (219,000) (275,000)
(Increase) decrease in deferred income taxes .............. (1,815,000) 422,000
Discontinued product line expenses ........................ -- --
(Gain) loss on sales of equipment ......................... 1,000 (11,000)
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Receivables ............................................. (2,001,000) 2,250,000
Inventories ............................................. (4,409,000) (606,000)
Prepaid expenses ........................................ (260,000) 289,000
Accounts payable ........................................ 181,000 (621,000)
Other accrued liabilities ............................... (1,425,000) (3,500,000)
Accrued income taxes .................................... 191,000 (854,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............ (4,786,000) 482,000
------------ ------------
INVESTING ACTIVITIES:
Investment in Kreiss Johnson ................................. 58,000 (257,000)
Proceeds from sales of equipment ............................. 2,000 902,000
Purchases of property, plant and equipment ................... (1,375,000) (1,390,000)
Increase (decrease) in note receivable ....................... 28,000 37,000
Payments for acquisitions, net of cash acquired .............. -- --
---------------------------------
NET CASH USED IN INVESTING ACTIVITIES .......................... (1,287,000) (708,000)
------------ ------------
FINANCING ACTIVITIES:
Cash dividends paid .......................................... (280,000) (226,000)
Proceeds from short-term debt ................................ -- 1,267,000
Proceeds from long-term debt ................................. 15,279,000 11,443,000
Payments on short-term debt .................................. -- --
Payments on long-term debt ................................... (7,915,000) (12,500,000)
Proceeds from stock options exercised ........................ 257,000 108,000
Treasury stock (acquired) sold ............................... (531,000) 287,000
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............ 6,810,000 379,000
------------ ------------
Effect of exchange rate changes on cash ........................ 309,000 (153,000)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................ 1,046,000 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............... 71,000 --
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................... $ 1,117,000 $ --
============ ============
See accompanying notes to consolidated financial statements
F-6
46
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the five months ended December 31, 1998 is Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The consolidated financial statements include the accounts of SL
Industries, Inc. and its wholly-owned subsidiaries ("the Company"). All
intercompany accounts and transactions have been eliminated in consolidation.
The investment in the more than 20% owned affiliate is accounted for using the
equity method.
REPORTING YEAR CHANGE: Pursuant to a resolution adopted by the Board of
Directors on September 24, 1999, the Company elected to change the date of its
fiscal year-end from July 31 to December 31 commencing January 1, 2000. As a
result, a transition period for the five months period ended December 31, 1999,
was previously reported on a transition report on Form 10-Q and is also
presented herein. Consequently, the consolidated balance sheets have been
prepared at December 31. The consolidated statements of operations, other
comprehensive income (loss) and cash flows present information for the year
ended December 31, 2000, the fiscal years ended July 31, 1999, July 31, 1998,
and the five months ended December 31, 1999 and 1998.
REVENUE RECOGNITION: Revenue from product sales is generally recognized at the
time the product is shipped, with provisions established for estimated product
returns. Upon shipment, the Company provides for the estimated cost that may be
incurred for product warranties. Rebates and other sales incentives offered by
the Company to its customers are recorded as a reduction of revenue at the time
of sale.
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is
primarily determined using the first-in, first-out ("FIFO") method. Cost for
certain inventories is determined using the last-in, first-out ("LIFO") method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at cost
and include expenditures for new facilities and major renewals and betterments.
Maintenance, repairs and minor renewals are charged to expense as incurred. When
assets are sold or otherwise disposed of, any gain or loss is recognized
currently. Depreciation is provided primarily using the straight-line method
over the estimated useful lives of the assets, which range from 25 to 40 years
for buildings, 3 to 10 years for equipment and other property and the lease term
for leasehold improvements.
INTANGIBLE ASSETS: Intangible assets consist primarily of goodwill, trademarks,
covenants not to compete, patents and a consulting agreement. The goodwill
resulting from the 2000 and fiscal 1999 and 1998 acquisitions and the goodwill
and trademarks resulting from the May 1995 acquisition are being amortized over
30 years or less. Goodwill resulting from acquisitions made prior to November 1,
1970, of $955,000, is considered to have continuing value over an indefinite
period, and is not being amortized. Covenants are amortized over their stated
terms and patents are amortized over their remaining lives. The consulting
agreement is being amortized over 10 years. The Company continually evaluates
whether events or circumstances have occurred that would indicate that the
remaining estimated useful life of an intangible asset may warrant revision or
that the remaining balance may not be
Page F-7
47
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
recoverable. When factors indicate that intangible assets should be evaluated
for possible impairment, the Company uses an estimate of the related
undiscounted cash flows over the remaining life of the intangible asset to
measure recoverability. If impairment exists, measurement of the impairment will
be based on the valuation method which management believes most closely
approximates the fair value of the intangible asset. No such impairments were
recognized in any of the periods presented.
ENVIRONMENTAL EXPENDITURES: Expenditures that relate to current operations are
charged to expense or capitalized, as appropriate. Expenditures that relate to
an existing condition caused by past operations, which do not contribute to
future revenues, are charged to expense. Liabilities are recorded when remedial
efforts are probable and the costs can be reasonably estimated. The liability
for remediation expenditures includes, as appropriate, elements of costs such as
site investigations, consultants' fees, feasibility studies, outside contractor
expenses and monitoring expenses. Estimates are not discounted, nor are they
reduced by potential claims for recovery from the Company's insurance carriers.
The liability is periodically reviewed and adjusted to reflect current
remediation progress, prospective estimates of required activity and other
relevant factors including changes in technology or regulations.
PRODUCT WARRANTY COSTS: The Company offers various warranties on its products.
The Company provides for its estimated future warranty obligations in the period
in which the related sale is recognized.
ADVERTISING COSTS: Advertising costs are expensed as incurred. For the years
ended December 31, 2000, July 31, 1999, and 1998, these costs were $1,660,000,
$1,739,000, and $2,128,000, respectively. For the five months ended December 31,
1999 and 1998 these costs were $676,000 and $844,000, respectively.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred. For the years ended December 31, 2000, July 31, 1999, and 1998, these
costs were $3,206,000, $2,165,000, and $1,756,000, respectively. For the five
months ended December 31, 1999 and 1998 these costs were $1,283,000 and
$824,000, respectively.
INCOME TAXES: The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
FOREIGN CURRENCY CONVERSION: The balance sheets and statements of operations of
the Company's Mexican subsidiaries are converted to US dollars at the year-end
rate of exchange and the monthly weighted average rate of exchange. As the
Mexican subsidiaries' functional currency is U.S. dollars, conversion gains or
losses resulting from these foreign currency transactions are included in the
accompanying consolidated statements of operations. Since the functional
currency for the Company's German subsidiary is its local currency, the
translation from the local currency to U.S. dollars is
Page F-8
48
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
performed for balance sheet accounts using the current exchange rate in effect
at the balance sheet date and for earnings using the monthly weighted average
exchange rate during the period. Gains or losses resulting from such
translation are included in a separate component of shareholders' equity. A
foreign currency loan is used to hedge the value of the investment in the German
subsidiary. Gains and losses on the translation of this foreign currency loan to
U.S. dollars is generally not included in the statement of operations but is
shown in a separate component of shareholders' equity.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management estimates relate to
product warranty costs, allowance for doubtful accounts, allowance for inventory
obsolescence and environmental costs.
Page F-9
49
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
NET INCOME (LOSS) PER COMMON SHARE: The Company determines net income per share
in accordance with Statement of Financial Accounting Standards No. 128 "Earnings
per Share ("SFAS No. 128")". Basic earnings per share is computed by dividing
reported earnings available to common shareholders by weighted average shares
outstanding. Diluted earnings per share is computed by dividing reported
earnings available to common shareholders by weighted average shares outstanding
plus the effect of outstanding dilutive stock options, using the treasury
method.
The following table reconciles the numerators and denominators of the basic and
diluted net income (loss) per common share calculations (in thousands, except
per share data):
Income Shares Per share amount
----------------------------------------------------
For the Year Ended December 31, 2000:
Basic net income per common share $ 1,700,000 5,635,000 $ 0.30
Effect of dilutive securities -- 122,000 --
----------------------------------------------------
Dilutive net income per common share $ 1,700,000 5,757,000 $ 0.30
----------------------------------------------------
For the Year Ended July 31, 1999:
Basic net income per common share $ 5,406,000 5,643,000 $ 0.96
Effect of dilutive securities -- 233,000 (0.04)
----------------------------------------------------
Dilutive net income per common share $ 5,406,000 5,876,000 $ 0.92
----------------------------------------------------
For the Year Ended July 31, 1998:
Basic net income per common share $ 5,313,000 5,598,000 $ 0.95
Effect of dilutive securities -- 299,000 (0.05)
----------------------------------------------------
Dilutive net income per common share $ 5,313,000 5,897,000 $ 0.90
----------------------------------------------------
For the five months ended
December 31, 1999:
Basic net income per common share $ (684,000) 5,624,000 $(0.12)
Effect of dilutive securities -- -- --
----------------------------------------------------
Dilutive net income per common share $ (684,000) 5,624,000 $(0.12)
----------------------------------------------------
For the five months ended
December 31, 1998:
Basic net income per common share $ 1,961,000 5,641,000 $ 0.35
Effect of dilutive securities -- 245,000 (0.02)
----------------------------------------------------
Dilutive net income per common share $ 1,961,000 5,886,000 $ 0.33
----------------------------------------------------
During the years ended December 31, 2000, July 31, 1999 and July 31, 1998,
702,975, 496,239 and 353,236 stock options, respectively, were excluded from the
dilutive computations because their effect would have been anti-dilutive. During
the five months ended December 31, 1999 and December 31, 1998, 792,450 and
508,127 stock options, respectively, were excluded from the dilutive
computations because their effect would have been anti-dilutive.
Page F-10
50
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133").
SFAS No. 133 establishes standards for the recognition and measurement of
derivatives and hedging activities and requires that all derivative instruments
be recorded on the balance sheet at their fair value. This statement, as amended
by SFAS No. 137, "Accounting for Derivatives Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133," and Statement No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," is effective for all quarters for all fiscal years beginning after
June 15, 2000. The Company does not currently engage in these types of risk
management or investment activities. Therefore, SFAS No. 133 is not anticipated
to have any impact on the Company's financial position or results of operations.
Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling
Fees and Costs," requires that all amounts billed to a customer in a sale
transaction related to shipping and handling, if any, should be recorded as
revenue. The Company adopted this consensus during the twelve months ended
December 31, 2000. The adoption had no material effect on the Company's
financial condition or results of operation.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). This pronouncement provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. Accordingly, guidance is provided with respect to the
recognition, presentation and disclosure of revenue in the financial statements.
Adoption of SAB 101, as amended by SAB Nos. 101A and 101B, was to be effective
in the fourth quarter of 2000. The adoption had no effect on the Company's
financial condition or results of operations.
RECLASSIFICATIONS: Reclassifications, when applicable, are made to the prior
year consolidated financial statements to conform with current year
presentation.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
On July 10, 1998, pursuant to a Purchase Agreement dated June 30, 1998, the
Company, through its wholly-owned subsidiary formed solely for such purpose, SL
Industries Vertrieb, GmbH, a German Corporation, acquired 100% of the issued and
outstanding common shares of Elektro-Metall Export GmbH ("EME"), a German
Corporation. The Company paid $9,500,000 in cash at closing. EME is a leading
German based designer and manufacturer of power quality products. The
acquisition was accounted for using the purchase method. Accordingly, the
aggregate purchase price has been allocated to the acquired net assets based on
their respective fair values at the date of acquisition. The excess of the
aggregate purchase price over the fair value of net tangible assets acquired in
the amount of $2,589,000 was allocated to goodwill and is being amortized on a
straight-line basis over 30 years. The results of operations of EME, since the
acquisition date, are included in the accompanying consolidated financial
statements.
On May 11, 1999, pursuant to a Share Purchase Agreement dated April 1, 1999, the
Company acquired 100% of the issued and outstanding shares of capital stock of
RFL Electronics Inc. ("RFL").
Page F-11
51
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
The Company paid $11,387,000 in cash at closing and gave promissory notes with
an aggregate face amount of $75,000, which bear simple interest at a rate of
5.5% per annum. In addition, in fiscal 1999 the Company paid a contingent
payment of $1,000,000 based upon the financial performance of RFL for its fiscal
year ended March 31, 1999. RFL is a leading supplier of teleprotection and
specialized communication equipment. The acquisition was accounted for using the
purchase method. Accordingly, the aggregate purchase price was allocated to the
net assets acquired based on their respective fair values at the date of
acquisition. The excess of the aggregate purchase price over the fair value of
net tangible assets acquired of $5,838,000 has been allocated to goodwill and is
being amortized on a straight-line basis over 30 years. The results of
operations of RFL, since the acquisition date, are included in the accompanying
consolidated financial statements.
On July 27, 1999, pursuant to an Asset Purchase Agreement dated July 13, 1999,
Condor D.C. Power Supplies, Inc., a wholly-owned subsidiary of the Company,
acquired certain of the net operating assets of Todd Products Corporation and
Todd Power Corporation (together, "Todd Products"). The Company paid $7,430,000;
$3,700,000 in cash and assumption of debt equal to approximately $3,730,000.
There is also a contingent "earn-out" payment of either $1,000,000, $3,000,000
or $5,000,000, payable in the event that sales from the purchased assets are at
least $30,000,000, $35,000,000 or $40,000,000 during the twelve-month period
ending March 31, 2001. Condor also entered into a ten-year Consulting Agreement
with the chief executive officer of Todd Products for an aggregate consulting
fee of $1,275,000 which will be paid in quarterly installments over the next
three years. Todd Products is a leading supplier of high quality power supplies
to the datacom, telecommunications and computer industries. The acquisition was
accounted using the purchase method. Accordingly, the aggregate purchase price
was allocated to the net assets acquired, based on their respective fair values
at the date of acquisition. The excess of the aggregate purchase price over the
fair value of net tangible assets acquired of $4,665,000 has been allocated to
goodwill ($3,390,000) and consulting agreement ($1,275,000) and is being
amortized on a straight line basis over thirty years and ten years,
respectively.
The following unaudited pro forma summary information includes results for RFL
and EME as though acquired on August 1, 1997:
July 31, 1999 July 31, 1998
=====================================
(In thousands, except per share data)
Net sales.............................. $141,376 $156,440
Net income............................. 5,872 5,939
Basic net income per common share. .... $1.04 $1.06
Diluted net income per common share.... $1.00 $1.01
The unaudited pro forma summary information includes the amortization of
goodwill and additional interest and depreciation expense as if these
acquisition related expenses had been incurred from the beginning of the
respective periods. The unaudited pro forma results are not necessarily
indicative of the
Page F-12
52
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
actual results of operations that would have occurred had the purchase actually
been made at the beginning of the respective periods, or of results which may
occur in the future. The unuaudited pro forma summary information does not
include the Todd Products acquisition as financial information was not readily
available.
NOTE 3. INCOME TAXES
The provision (benefit) for federal and state income taxes consists of the
following:
Twelve Twelve Five Five
Twelve Months Months Months Months Months
December 31, July 31, July 31, December 31, December 31,
2000 1999 1998 1999 1998
==============================================================================
(In thousands)
Current:
Federal ......... $ 69 $ 1,648 $ 2,454 $ 372 $ 341
International ... 1,365 890 188 347 142
State ........... 475 409 521 108 117
Deferred:
Federal ......... (713) 118 36 (971) 384
International ... (3) 1 -- 99 (4)
State ........... (610) 15 55 (267) 38
------------------------------------------------------------------------------
$ 583 $ 3,081 $ 3,254 $ (312) $ 1,018
==============================================================================
Foreign income before income taxes was $2,967,000, $1,973,000 and $328,000 for
the year ended December 31, 2000 and fiscal years ended July 31, 1999 and July
31, 1998 respectively. Foreign income before income taxes for the five months
ended December 31, 1999 and 1998 were $890,000 and $557,000, respectively.
Significant components of the Company's deferred tax assets and liabilities at
December 31, 2000, and 1999 are as follows:
December 31, December 31,
2000 1999
================================
Deferred tax assets: (In thousands)
Deferred compensation .............................. $2,348 $2,257
Liabilities related to discontinued product line ... -- 238
Liabilities related to environmental matters ....... 148 265
Inventory valuation ................................ 1,192 1,604
Prepaid and accrued expenses ....................... 2,825 3,063
Net operating loss ................................. 1,625 --
--------------------------------
8,138 7,427
Deferred tax liabilities:
Accelerated depreciation and amortization ........... 1,585 1,380
Other ................................................ 60 22
--------------------------------
Page F-13
53
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
--------------------------------
$6,493 $6,025
================================
As of December 31, 2000, the Company had a net operating loss of approximately
$4,778,000 for Federal tax purposes, which expires in 2020. The entire benefit
of this net operating loss has been recorded as a deferred income tax asset, as
it is more likely than not it will be realized.
Following is a reconciliation of income tax expense (benefit) at the applicable
federal statutory rate and the effective rates:
Twelve Twelve Twelve Five Five
months months months months months
December July July December December
31, 2000 31, 1999 31, 1998 31, 1999 31, 1998
================================================================
Statutory rate ............................. 34% 34% 34% (34)% 34%
Tax rate differential on Foreign Sales
Corporation earnings ................ (2) (1) (1) 1 (1)
International rate differences ............. 15 2 1 11 (2)
State income taxes, net of federal
income tax ................................. (4) 3 4 (10) 3
Non-taxable settlement of life insurance
class action suit .......................... (15) -- -- -- --
Other ...................................... (2) (2) -- 1 --
----------------------------------------------------------------
26% 36% 38% (31)% 34%
================================================================
NOTE 4. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high credit
quality financial institutions. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base, and their dispersion across many industries and
geographic regions.
NOTE 5. INVENTORIES
Inventories consist of the following:
December 31, December 31,
2000 1999
=================================
(In thousands)
Raw materials ..... $17,052 $20,678
Work in process ... 6,234 3,959
Finished goods .... 2,851 3,446
---------------------------------
$26,137 $28,083
=================================
Page F-14
54
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
The above includes certain inventories, which are valued using the LIFO method,
which aggregated $3,488,000, and $2,935,000 at December 31, 2000 and 1999,
respectively. The excess of FIFO cost over LIFO cost at December 31, 2000 and
1999, was approximately $507,000 and $1,881,000, respectively.
Page F-15
55
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31, December 31,
2000 1999
=================================
(In thousands)
Land ................................... $ 4,494 $ 4,359
Buildings and leasehold improvements ... 11,167 10,709
Equipment and other property ........... 27,122 27,393
---------------------------------
42,783 42,461
Less accumulated depreciation .......... 22,022 20,434
---------------------------------
$20,761 $22,027
=================================
NOTE 7. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31, December 31,
2000 1999
================================
(In thousands)
Patents ................................... $ 925 $ 895
Covenants not to compete and consulting
agreement ................................. 4,255 4,255
Goodwill .................................. 19,523 17,292
Trademarks ................................ 920 920
Other ..................................... 503 503
--------------------------------
26,126 23,865
Less accumulated amortization ............. 5,356 4,080
--------------------------------
$20,770 $19,785
================================
During the year ended December 31, 2000, the Company finalized its purchase
allocation in connection with the Todd Products acquisition resulting in a
write-down of the acquired inventory value of approximately $1,400,000. The
remaining increase in goodwill during the year ended December 31, 2000 primarily
relates to earn-out provisions recorded in connection with other prior period
acquisitions.
NOTE 8. DEBT
Debt consists of the following:
December 31, December 31,
2000 1999
================================
(In thousands)
Revolving lines of credit .......... $35,318 $37,748
Mortgages payable .................. 437 657
Term loan .......................... 964 1,802
--------------------------------
36,719 40,207
Page F-16
56
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
Less portion due within one year ... 186 962
--------------------------------
$36,533 $39,245
================================
On September 30, 2000, the Company amended its revolving credit agreement with
its participating banks. Under the terms of this agreement, which expires on
October 31, 2003, the Company can borrow for acquisitions, working capital and,
for other purposes, at either a "LIBOR rate," as defined, or prime interest
rate. The agreement contains limitations on borrowings and requires maintenance
of specified ratios, the most restrictive of which is the ratio of total funded
debt plus standby letters of credit to earnings before interest, taxes,
depreciation and amortization. At December 31, 2000, the Company was in
compliance with the above covenants. As a condition to its amended revolving
credit agreement, the Company agreed to pledge to the banks as collateral on its
borrowing a security interest on its accounts receivable and rights to receive
benefits up to $8 million pursuant to outstanding life insurance policies with
respect to certain former officers and directors. In lieu of compensating
balances, the Company pays commitment fees as defined under the agreement. The
Company's German subsidiary also has $4,577,000 in lines of credit with its
banks. Under the terms of its lines of credit, the subsidiary can borrow for any
purpose at interest rates of 3.95% to 8.25%. No financial covenants are
required. As of December 31, 2000 and 1999, there were no outstanding
borrowings. As of December 31, 2000, outstanding borrowings under the Company's
revolving credit agreement were $35,318,000, of which $5,445,000 is denominated
in German marks. Available borrowings under the Company's revolving credit
agreement were $1,374,000 as of December 31, 2000. The weighted average interest
rate at December 31, 2000 and December 31, 1999 was 8.98% and 7.32%,
respectively.
Principal maturities of debt payable over the next four years are $186,000 in
2001, $1,112,000 in 2002, $35,407,000 in 2003 and $14,000 in 2004.
As of December 31, 2000 and December 31, 1999, the Company's German subsidiary
had mortgages payable on building additions, at interest rates of 3.95% and
4.75%, respectively, that require principal repayments through 2002 to 2004.
NOTE 9. RETIREMENT PLANS AND DEFERRED COMPENSATION
The Company maintains three noncontributory defined contribution pension plans
covering substantially all employees. The Company's contribution to its plans is
based on a percentage of employee elective contributions and, in one plan, plan
year gross wages, as defined. The power conditioner and electric utility
equipment protection subsidiaries' contributions to its plans are based on a
percentage of employee elective contributions. The electric utility equipment
protection subsidiary also makes a profit sharing contribution annually. Costs
accrued under the plans for the year ended December 31, 2000 and fiscal years
ended July 31, 1999 and July 31, 1998 amounted to approximately $1,485,000,
$788,000 and $671,000, respectively. Costs for the five month periods ended
December 31, 1999 and 1998 amounted to $624,000 and $312,000, respectively. It
is the Company's policy to fund its accrued retirement income costs.
Page F-17
57
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
In addition, the Company makes contributions, based on rates per hour, as
specified in two union agreements, to two union administered defined benefit
multi-employer pension plans. Contributions to these plans amounted to $60,000,
$60,000 and $64,000 for the year ended December 31, 2000 and fiscal years ended
July 31, 1999 and 1998, respectively. For the five month period ended December
31, 1999 and 1998 the amounts were $21,000 and $26,000, respectively. Under the
multi-employer Pension Plan Amendments Act of 1980, an employer is liable upon
withdrawal from or termination of a multi-employer plan for its proportionate
share of the plan's unfunded vested benefits liability. The Company's share of
the unfunded vested benefits liabilities of the union plans to which it
contributes is not material.
The Company has agreements with certain active and retired directors, officers
and key employees providing for supplemental retirement benefits. The liability
for supplemental retirement benefits is based on the most recent mortality
tables available and discount rates of 6%, 8%, 10% and 12%. The amount charged
to income in connection with these agreements amounted to $420,000, $438,000 and
$456,000 for the year ended December 31, 2000 and fiscal years ended July 31,
1999 and 1998, respectively and $168,000 and $230,000 for the five month period
ended December 31, 1999 and 1998, respectively.
In addition, the Company has agreements with certain active officers and key
employees providing for deferred compensation benefits. Benefits to be provided
to each participant are stated in separate elective salary deferral agreements.
The amount charged to income in connection with these agreements amounted to
$312,000, $414,000 and $702,000 for the year ended December 31, 2000 and fiscal
years ended July 31, 1999 and 1998, respectively and $188,000 and $239,000 for
the five month periods ended December 31, 1999 and 1998, respectively.
The Company is the owner and beneficiary of life insurance policies on the lives
of a majority of the participants having a deferred compensation or supplemental
retirement agreement. At December 31, 2000, the aggregate death benefit totaled
$21,578,000, with the corresponding cash surrender value totaling $11,486,000.
At December 31, 2000, certain agreements may restrict the Company from utilizing
cash surrender value totaling $2,539,000 for purposes other than satisfaction of
the specific underlying deferred compensation agreements, if benefits are not
paid by the Company. The Company nets the dividends realized from the insurance
policies with premium expenses. Net credits included in income in connection
with the policies amounted to $1,399,000, $354,000 and $261,000 for the year
ended December 31, 2000 and fiscal years ended July 31, 1999 and July 31, 1998,
respectively and $159,000 and $85,000 for the five month periods ended December
31, 1999 and December 31, 1998, respectively.
Page F-18
58
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
NOTE 10. COMMITMENTS AND CONTINGENCIES
For the year ended December 31, 2000 and fiscal years ended July 31, 1999 and
1998, rental expense applicable to operations aggregated $2,364,000, $1,850,000
and $1,701,000, respectively. For the five month period ended December 31, 1999
and 1998, rental expense applicable to operations aggregated $996,000 and
763,000, respectively. These expenses are primarily for facilities and vehicles.
The minimum rental commitments as of December 31, 2000, are as follows:
(In thousands)
2001 $1,833
2002 1,023
2003 303
2004 101
2005 80
Thereafter -
--------------
$3,340
==============
At December 31, 2000, the Company was contingently liable for $3,717,000 under
outstanding letters of credit issued for inventory purchases from foreign
suppliers, casualty insurance requirements and a civil lawsuit settlement.
In the ordinary course of its business, the Company is subject to loss
contingencies pursuant to foreign and domestic federal, state and local
governmental laws and regulations and is also party to certain legal actions,
most frequently complaints by terminated employees. It is management's opinion
that the impact of these legal actions will not have a material affect on the
consolidated financial position or results of operations of the Company.
Loss contingencies include potential obligations to investigate and eliminate or
mitigate the affects on the environment of the disposal or release of certain
chemical substances at various sites, such as Superfund sites and other
facilities, whether or not they are currently in operation. The Company is
currently participating in environmental assessments and cleanups at a number of
sites under these laws and may in the future be involved in additional
environmental assessments and cleanups. Based upon investigations completed by
the Company and its independent engineering consulting firm to date, management
has provided an estimated accrual for all known costs believed to be probable.
However, it is in the nature of environmental contingencies that other
circumstances might arise, the costs of which are indeterminable at this time
due to such factors as changing government regulations and stricter standards,
the unknown magnitude of defense and cleanup costs, the unknown timing and
extent of the remedial actions that may be required, the determination of the
Company's liability in proportion to other responsible parties, and the extent,
if any, to which such costs are recoverable from other parties or from
insurance. Although these contingencies could result in additional expenses or
judgments, or off-sets thereto, at present such expenses or judgments are not
expected to have a material affect on the consolidated financial position or
results of operations of the Company.
Page F-19
59
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
In the fourth quarter of fiscal year 1990, the Company made a provision of
$3,500,000 to cover various such environmental costs for six locations, based
upon estimates prepared at that time by an independent engineering consulting
firm. In fiscal 1991, 1996 and 1999, based upon estimates, the Company made
additional provisions of $480,000, $900,000 and $375,000, respectively. The
fiscal 1996 provision was necessary since, during the latter part of fiscal
1995, the New Jersey Department of Environmental Protection required the Company
to begin additional investigation of the extent of off-site contamination at its
former facility in Wayne, New Jersey, where remediation had been underway. Based
on the results of that investigation, which were received in fiscal 1996, the
Company determined that additional remediation costs of approximately $1,000,000
were probable.
The Company filed claims with its insurers seeking reimbursement for many of
these costs, and received $900,000 from one insurer during fiscal year 1996 and
a commitment to pay 15% of the environmental costs associated with one location
up to an aggregate of $300,000. During fiscal 1997, the Company received
$1,500,000 from three additional insurers and from two of those insurers,
commitments to pay 15% and 20% of the environmental costs associated with the
same location up to an aggregate of $150,000 and $400,000, respectively. In
addition, the Company will receive $100,000 during 2001, as stipulated in the
settlement agreement negotiated with one of the three insurers. During fiscal
2000 the Company reversed a separate accrual for a potential environmental
penalty after being advised by legal counsel that there was only a remote chance
such penalty would be enforced. At December 31, 2000 and December 31, 1999 the
remaining environmental accrual was $357,000 and $640,000 respectively, of which
$257,000 and $540,000, respectively, have been included in "Accrued Liabilities"
and $100,000 and $100,000, respectively, in "Other Liabilities" in the
accompanying consolidated balance sheets.
NOTE 11. STOCK OPTIONS AND CAPITAL STOCK
At the Company's 1993 Annual Meeting, the shareholders approved a Nonemployee
Director Nonqualified Stock Option Plan (the "Director Plan"), which was
effective June 1, 1993. The Director Plan provides for the granting of
nonqualified options to purchase up to 250,000 shares of the Company's common
stock to non-employee directors of the Company in lieu of paying quarterly
retainer fees and regular quarterly meeting attendance fees, when elected. The
Director Plan enables the Company to grant options, with an exercise price per
share not less than fair market value of the Company's common stock on the date
of grant, which are exercisable at any time. Each option granted under the
Director Plan expires no later than ten years from date of grant and no options
can be granted under the Director Plan after its May 31, 2003, expiration date.
Information for fiscal year ended July 31, 1998 and July 31, 1999, the five
month period ended December 31, 1999 and year ended December 31, 2000 with
respect to the Director Plan is as follows:
Page F-20
60
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
SHARES OPTION PRICE
(In thousands, except for Option Price)
Outstanding and exercisable at August 1, 1997........... 103 $3.5625 to $10.50
Granted................................................. 22 $10.1875 to $14.625
Exercised............................................... (71) $3.5625 to $12.0313
----------------------------------------
Outstanding and exercisable at July 31, 1998............ 54 $ 3.5625 to $14.625
Granted................................................. 20 $11.1563 to $14.625
Cancelled............................................... (6) $12.0313 to $14.625
----------------------------------------
Outstanding and exercisable at July 31, 1999............ 68 $3.5625 to $14.625
Granted................................................. 8 $12.3125 to $13.875
----------------------------------------
Outstanding and exercisable at December 31, 1999....... 76 $3.5625 to $14.625
Granted ................................................ 18 $9.1875 to $12.84
----------------------------------------
Outstanding and exercisable at December 31, 2000........ 94 $3.5625 TO $14.625
========================================
As of December 31, 2000, December 31, 1999, July 31, 1999 and July 31, 1998 the
number of shares available for grant were 70,000, 88,000, 96,000 and 110,000,
respectively.
At the Company's 1991 Annual Meeting, the shareholders approved the adoption of
a Long Term Incentive Plan (the "1991 Plan") which provides for the granting of
options to officers and key employees of the Company to purchase up to 500,000
shares of the Company's common stock. At the 1995 Annual Meeting, the
shareholders approved an amendment to increase the number of shares subject to
options under the 1991 Plan from 500,000 to 922,650. At the 1998 Annual Meeting,
the shareholders approved an amendment to increase the number of shares subject
to options under the 1991 Plan from 922,650 to 1,522,650. The 1991 Plan enables
the Company to grant either nonqualified options, with an exercise price per
share established by the Board's Compensation Committee, or incentive stock
options, with an exercise price per share not less than the fair market value of
the Company's Common Stock on the date of grant, which are exercisable at any
time. Each option granted under the 1991 Plan expires no later than ten years
from date of grant and no options can be granted under the 1991 Plan after its
September 25, 2001, expiration date. Information for fiscal year ended July 31,
1998 and July 31, 1999, the five month period ended December 31, 1999 and year
ended December 31, 2000 with respect to the 1991 Plan is as follows:
Page F-21
61
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
SHARES OPTION PRICE
(In thousands, except for Option Price)
Outstanding at August 1, 1997.................. 348 $3.25 to $9.375
Granted........................................ 189 $11.00 to $14.5625
Exercised...................................... (90) $3.25 to $11.00
Cancelled...................................... (25) $4.25 to $11.00
-----------------------------------------
Outstanding at July 31, 1998................... 422 $3.25 to $14.5625
Granted........................................ 174 $11.125 to $12.875
Exercised...................................... (63) $3.25 to $11.125
Cancelled...................................... (24) $9.375 to $11.125
-----------------------------------------
Outstanding at July 31, 1999................... 509 $3.25 to $14.5625
Granted........................................ 140 $12.125 to $13.50
Exercised...................................... (22) $3.25 to $11.125
Cancelled...................................... (52) $11.00 to $14.5625
-----------------------------------------
Outstanding at December 31, 1999............... 575 $3.25 to $13.50
Granted........................................ 145 $9.781 to $12.00
Exercised...................................... (63) $3.25 to $9.375
Cancelled...................................... (34) $6.875 to $13.50
-----------------------------------------
Outstanding at December 31, 2000............... 623 $3.25 to $13.50
-----------------------------------------
The number of shares exercisable at December 31, 2000 and December 31, 1999 were
574,000 and 358,000, respectively. As of December 31, 2000, December 31, 1999,
July 31, 1999 and July 31, 1998, the number of shares available for grant were
469,000, 580,000, 668,000 and 799,000, respectively.
During fiscal 1991, the Board of Directors approved the granting of nonqualified
stock options to purchase 110,000 shares at an option price of $4.13 to the
Chief Executive Officer of the Company. In fiscal 1992, an option to purchase
50,000 shares was granted to another officer of the Company at an option price
of $3.25 with an expiration date of November 30, 1998. Options for 25,100 and
24,900 shares were exercised during fiscal 1998 and 1999, respectively. In
fiscal 1996, an option to purchase 50,000 shares was granted to a subsidiary
officer at an option price of $8.375 and was exercisable 20% at July 31, 1997,
and 50%, 20% and 10% on or after October 13, 1997, April 13, 1998, and April 13,
1999, respectively, with no expiration date, except in the event of termination,
disability or death provided that the subsidiary officer has been employed
through such date. Options for 8,000 shares, 10,000 shares and 34,000 shares
were exercised during the fiscal year ended July 31, 1998, the five months ended
December 31, 1999 and year ended December 31, 2000, respectively. The remaining
options are exercisable at any time after the date of grant with no expiration
date, except in the event of termination, disability or death. All of the option
prices are equivalent to 100% of market value at date of grant.
The Company applies Accounting Principles Board opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
plans. Accordingly, no compensation
Page F-22
62
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
expense has been recognized for its stock-based compensation plans. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income (loss) and net income (loss) per common
share would have been reduced as follows:
Twelve Twelve Five
Months Twelve Months Five Months Months
December 31, Months July July December December
2000 31, 1999 31, 1998 31, 1999 31, 1998
------------- ------------- ------------- ------------- -------------
Net income (loss) - as reported ... $ 1,700,000 $ 5,406,000 $ 5,313,000 $ (684,000) $ 1,961,000
Net income (loss) - pro forma ..... $ 1,153,000 $ 4,799,000 $ 4,908,000 $ (909,000) $ 1,695,000
Diluted net income (loss) per
common share as reported .......... $ .30 $ .92 $ .90 $ (.12) $ .33
Diluted net income (loss) per
common share pro forma ............ $ .20 $ .82 $ .83 $ (.16) $ .29
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Twelve Twelve Twelve
Months Months Months Five Months Five Months
December July July December December
31, 2000 31, 1999 31, 1998 31, 1999 31, 1998
---------------------------------------------------------------
Expected dividend yield ................... .94% .73% .61% .38% .33%
Expected stock price volatility ........... 29.58% 29.7% 32.7% 29.58% 36.6%
Risk-free interest rate ................... 6.3% 5.0% 6.1% 6.1% 4.9%
Expected life of option ................... 7 years 7 years 7 years 7 years 7 years
Page F-23
63
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
Transactions from August 1, 1997 through December 31, 2000, under the above
plans were as follows:
Number of Weighted
Shares Average Life
(In Option Price Weighted Remaining
thousands) per Share Average Price (Years)
----------------------------------------------------------------------------
Outstanding at August 1, 1997...... 661 $3.25 to $10.50 $5.78 6.83
Granted............................ 211 $10.1875 to $14.625 $11.95
Exercised.......................... (194) $3.25 to $12.0313 $5.75
Cancelled.......................... (25) $4.25 to $11.00 $8.65
----------------------------------------------------------------------------
Outstanding at July 31, 1998 653 $3.25 to $14.625 $7.67 6.73
Granted............................ 194 $11.125 to $14.625
Exercised.......................... (88) $3.25 to $11.125
Cancelled.......................... (30) $9.375 to $14.625
----------------------------------------------------------------------------
Outstanding at July 31, 1999....... 729 $3.25 to $14.625 $8.85 6.71
Granted............................ 148 $12.125 to $13.875
Exercised.......................... (32) $3.25 to $11.156
Cancelled.......................... (52) $11.00 to $14.5625
----------------------------------------------------------------------------
Outstanding at December 31, 1999... 793 $3.25 to $14.625 $9.46 6.80
Granted............................ 163 $9.1875 to $12.84
Exercised.......................... (97) $3.25 to $9.375
Cancelled.......................... (34) $6.875 to $13.50
----------------------------------------------------------------------------
Outstanding at December 31, 2000... 825 $3.25 TO $14.625 $10.06 6.64
----------------------------------------------------------------------------
Exercisable at December 31, 2000... 574 $3.25 TO $14.625 $9.18
----------------------------------------------------------------------------
The following tables segregate the outstanding options and exercisable options
at December 31, 2000, into five ranges:
Options Outstanding Range of Option Prices Weighted Weighted Average Life
(In thousands) per Share Average Price Remaining (Years)
- -----------------------------------------------------------------------------------------------------
188 $3.25 to $ 6.875 $4.469766 1.88
184 $6.9375 to $11.00 $10.160113 7.28
162 $11.125 to $11.75 $11.268540 7.84
146 $12.00 to $13.0625 $12.337833 8.68
145 $13.50 to $14.625 $13.563978 8.65
---
825
---
Options Exercisable (In Range of Option Prices Weighted
thousands) per Share Average Price
- ----------------------------------------------------------------------------
188 $3.25 to $6.875 $4.469766
144 $6.9375 to $11.00 $10.136774
96 $11.125 to $11.75 $11.311698
77 $12.00 to $13.0625 $12.556484
64 $13.50 to $14.625 $13.644675
---
Page F-24
64
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
569
NOTE 12. CASH FLOW INFORMATION
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments, purchased with an original maturity of three
months or less, to be cash equivalents.
In accordance with Statement of Financial Accounting Standards No. 95, Statement
of Cash Flows, cash flows from EME's operations are calculated based on their
reporting currencies. As a result, amounts related to assets and liabilities
reported on the consolidated cash flows will not necessarily agree with the
translation adjustment recorded on the consolidated balance sheet. The effect of
exchange rate changes on cash balances held in foreign currencies is reported on
a separate line in the statement of cash flows.
Supplemental disclosures of cash flow information:
Twelve Twelve Twelve Five
months months months Five months months
December July July December December
31, 2000 31, 1999 31, 1998 31, 1999 31, 1998
--------------------------------------------------------------------
(In thousands)
Interest paid................... $3,026 $950 $368 $970 $434
Income taxes paid............... $1,288 $3,208 $2,225 $1,646 $509
Non-cash investing and financing activities:
During fiscal 1999, Condor acquired certain of the net operating assets of Todd
Products for $7,430,000. In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired....... $12,738,000
Cash paid........................... $7,430,000
Liabilities assumed................. $5,308,000
During fiscal 1999, the Company acquired all of the capital stock of RFL for
$12,462,000. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired....... $16,417,000
Cash paid........................... $12,387,000
Liabilities assumed................. $5,166,000
During fiscal 1998, the Company acquired all of the capital stock of EME for
$9,500,000. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired........ $15,729,000
Cash paid............................ $9,500,000
Liabilities assumed.................. $6,229,000
Page F-25
65
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
NOTE 13. INDUSTRY SEGMENTS
Under the disclosure requirements of SFAS 131, the Company classifies its
operations into the following six business segments: Power Supplies, Power
Conditioning and Distribution Units ("PCDUs"), Motion Control Systems, Electric
Utility Equipment Protection Systems, Surge Suppressors and Other. The power
supplies segment designs and manufactures a wide range of standard and custom
power supply products which convert AC to DC power which is the electrical
current used to operate customers' end products. Uninterruptible power supplies
that provide back-up power in the event of a power failure are also designed and
manufactured by this segment. The power conditioning and distribution units
segment designs and manufactures customized PCDUs and wiring systems which
provide voltage conversion and stabilization, system control, power distribution
for aerospace passenger entertainment units and automotive applications. The
motion control systems' segment designs and manufactures intelligent, high
power density, precision motors and actuators for both commercial and military
aerospace applications. The electric utility equipment protection systems'
segment designs and manufactures teleprotection products/systems that are used
to protect electric-utility transmission lines and apparatus by isolating faulty
transmission lines from a transmission grid. The surge suppressors segment
designs and manufactures products to protect electrical equipment from damage
or destruction due to sudden power surges. The other segment includes corporate
related items not allocated to reportable segments and the results of
insignificant operations. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies (see Note 1
for additional information). The Company's reportable segments are managed
separately because each offers different products and services and requires
different marketing strategies.
The segments' operations are conducted through domestic and foreign
subsidiaries. For all periods presented, sales between segments were not
material. No single customer accounted for more than 10% of consolidated net
sales during 2000, fiscal 1999, fiscal 1998 or the five months ended December
31, 1999.
Twelve Twelve Twelve Five Five
months months months months months
December July July December December
31, 2000 31, 1999 31, 1998 31, 1999 31, 1998
---------------------------------------------------------------------
(In thousands)
NET SALES
Power Supplies ............... $ 63,077 $ 33,669 $ 36,711 $ 26,091 $ 13,463
PCDUs ........................ 33,809 24,906 19,707 12,878 9,155
Motion Control Systems ....... 21,943 23,476 16,100 8,802 8,933
Electric Utility Equipment
Protection Systems ....... 24,427 5,274 -- 10,073 --
Surge Suppressors ............ 18,781 33,041 41,513 11,176 15,251
Other ........................ 5,709 4,762 4,181 1,950 3,014
---------------------------------------------------------------------
Consolidated ................. $167,746 $125,128 $118,212 $ 70,970 $ 49,816
=====================================================================
Page F-26
66
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
Twelve Twelve Twelve Five Five
months months months Months Months
December July July December December
31, 2000 31, 1999 31, 1998 31, 1999 31, 1998
--------------------------------------------------------------------
OPERATING INCOME (LOSS) (In thousands)
Power Supplies ............................ $ 4,254 $ 5,723 $ 5,556 $ 2,007 $ 2,297
PCDUs ..................................... 4,624 2,710 2,992 1,704 715
Motion Control Systems .................... 2,468 2,345 1,365 571 510
Electric Utility Equipment
Protection Systems ................... 2,523 510 -- 1,167 --
Surge Suppressors ....................... (7,124) (624) 1,679 (1,804) 538
Other ..................................... (1,846) (1,456) (2,812) (1,178) (824)
Settlement of class action suit ........... 875 -- -- -- --
Writedown of inventory and
losses on commitments ..................... -- -- -- (3,145) --
Restructuring costs ....................... (790) -- -- (1,128) --
--------------------------------------------------------------------
Income (loss) from
operations ................................ 4,984 9,208 8,780 (1,806) 3,236
Demutualization of life insurance
company ................................... -- -- -- 1,812 --
Interest income ........................... 348 272 214 76 134
Interest expense .......................... (3,049) (993) (427) (1,078) (391)
--------------------------------------------------------------------
Consolidated income (loss)
before income taxes .................... $ 2,283 $ 8,487 $ 8,567 $ (996) $ 2,979
====================================================================
As of As of
December December
31, 2000 31, 1999
---------------------------
IDENTIFIABLE ASSETS (In thousands)
Power Supplies ....................... $ 32,059 $ 30,286
PCDUs ................................ 20,765 20,653
Motion Control Systems ............... 15,665 14,762
Electric Utility Equipment
Protection Systems ............... 16,193 18,502
Surge Suppressors .................... 6,268 11,225
Other ................................ 22,531 21,622
---------------------------
Consolidated ......................... $113,481 $117,050
===========================
Page F-27
67
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
Twelve Twelve Twelve Five
Months Months Months Months Five Months
December 31, July 31, July 31, December December
2000 1999 1998 31, 1999 31, 1998
------------------------------------------------------------------
CAPITAL EXPENDITURES(1) (In thousands)
Power Supplies ........................... $ 270 $ 273 $ 375 $ 184 $ 150
PCDUs .................................... 332 444 408 189 213
Motion Control Systems ................... 416 894 789 100 706
Electric Utility Equipment
Protection
Systems .................................. 434 151 -- 297 --
Surge Suppressors ........................ 23 714 652 493 129
Other .................................... 1,111 212 532 112 192
------------------------------------------------------------------
Consolidated ............................. $2,586 $2,688 $2,756 $1,375 $1,390
==================================================================
(1) Excludes assets acquired in business combinations.
Twelve Twelve Twelve Five Five
Months Months Months Months Months
December July July December December
31, 2000 31, 1999 31, 1998 31, 1999 31, 1998
---------------------------------------------------------------
DEPRECIATION AND AMORTIZATION (In thousands)
Power Supplies................... $1,581 $ 750 $ 571 $ 645 $ 430
PCDUs ........................... 1,045 1,124 931 466 513
Motion Control
Systems ......................... 539 670 341 241 240
Electric Utility Equipment
Protection
Systems ......................... 770 169 -- 328 --
Surge Suppressors ............... 604 714 739 280 312
Other ........................... 444 454 461 169 119
---------------------------------------------------------------
Consolidated .................... $4,983 $3,881 $3,043 $2,129 $1,614
===============================================================
Page F-28
68
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
Financial information relating to the Company's segments by geographic area as
follows:
Twelve Five
Months Twelve Months Twelve Months Months Five Months
December July July December December
31, 2000 31, 1999 31, 1998 31, 1999 31, 1998
------------------------------------------------------------------------
NET SALES(1) (In thousands)
United States ...................... $132,434 $ 99,182 $110,926 $ 57,947 $ 39,658
Germany ............................ 17,856 14,917 1,531 6,378 7,019
Other Foreign ...................... 17,456 11,029 5,755 6,645 3,139
------------------------------------------------------------------------
Consolidated ....................... $167,746 $125,128 $118,212 $ 70,970 $ 49,816
========================================================================
LONG-LIVED ASSETS (In thousands)
United States ...................... $ 29,134 $ 31,805 $ 14,487 $ 28,983 $ 13,807
Germany ............................ 9,215 9,639 9,881 9,454 10,034
Other Foreign ...................... 3,182 2,322 1,227 3,375 1,204
------------------------------------------------------------------------
Consolidated ....................... $ 41,531 $ 43,766 $ 25,595 $ 41,812 $ 25,045
========================================================================
(1) Net sales are attributed to countries based on location of customer.
NOTE 14. FOREIGN OPERATIONS
In addition to manufacturing operations in California, Minnesota, New Jersey and
Maryland, the Company manufactures substantial quantities of products, in leased
premises located in Mexicali, Reynosa, Matamoros and Nogales, Mexico,
Ingolstadt, Germany and Paks, Hungary. These external and foreign sources of
supply present risks of interruption for reasons beyond the Company's control,
including political and other uncertainties regarding Mexico, Germany and
Hungary.
Generally, the Company's revenues are priced in United States dollar and German
mark and its costs and expenses are priced in United States dollar, Mexican
peso, German mark and Hungarian forint. Accordingly, the competitiveness of
Company's products relative to locally produced products may be affected by the
performance of the United States dollar compared with that of its foreign
customers' currencies. Foreign sales comprised 21%, 21% and 6% of revenues for
the year ended December 31, 2000, and fiscal years ended July 31, 1999, and
1998, respectively. Foreign sales comprised 18% and 20% of revenues for the five
month periods ended December 31, 1999 and1998, respectively. Additionally, the
Company is exposed to foreign currency transaction and translation losses which
might result from adverse fluctuations in the values of the Mexican peso, German
mark and Hungarian forint. At December 31, 2000, the Company had net liabilities
of $349,000 subject to fluctuations in the value of the Mexican peso and net
assets of $58,000 subject to fluctuations in the value of the German mark.
Fluctuations in the value of the Mexican peso, German mark and Hungarian forint
have not been significant in 1999 and 2000. However, there can be no assurance
that the value of the Mexican peso, German mark or Hungarian forint will
continue to remain stable.
Page F-29
69
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
NOTE 15. RESTRUCTURING COSTS
During the five months ended December 31, 1999, the Company recorded charges of
$4,273,000 to cover restructuring, inventory writedowns and losses on
commitments recognized by its SL Waber subsidiary. During the year 2000, an
additional $650,000 provision for excess and obsolete inventory was charged to
cost of products sold and an additional $790,000 of restructuring costs for
severance and other payroll related costs were recorded as a result of the
Company's decision to integrate the operations of its SL Waber and Condor D.C.
Power Supplies subsidiaries. At December 31, 2000, the restructuring costs
remaining from the $5,713,000 in charges was as follows: $274,000 in inventory
reserves and $426,000 in accrued liabilities.
Page F-30
70
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
NOTE 16. SELECTED QUARTERLY FINANCIAL
(UNAUDITED)
------------------------------------------------------------
Three months Three months Three months Three months
Ended Ended Ended Ended
03/31/00 06/30/00 09/30/00 12/31/00
------------------------------------------------------------
(In thousands, except per share data)
TWELVE MONTHS ENDED DECEMBER 31, 2000
Net sales ............................... $ 43,537 $ 44,144 $ 40,842 $ 39,223
Gross margin ............................ $ 15,063 $ 14,962 $ 11,436 $ 11,722
Income before income taxes .............. $ 1,081 $ 1,354 $ 626 $ (778)
Net income .............................. $ 548 $ 796 $ 729 $ (373)
Diluted net income per common
share ................................... $ 0.09 $ 0.14 $ 0.13 $ (0.07)
--------------------------------------------------------
Three months Two months
Ended Ended
10/31/99 12/31/99
--------------------------------------------------------
(In thousands, except per share data)
FIVE MONTHS ENDED DECEMBER 31, 1999
Net sales ............................... $ 42,156 $ 28,814 $ - $ -
Gross margin ............................ $ 14,469 $ 9,042 $ - $ -
Income before income taxes .............. $ (1,326) $ 330 $ - $ -
Net income .............................. $ (851) $ 167 $ - $ -
Diluted net income per common
share ................................... $ (0.15) $ 0.03 $ - $ -
----------------------------------------------------------
Three months Three months Three months Three months
Ended Ended Ended Ended
10/31/98 01/31/99 04/30/99 07/31/99
----------------------------------------------------------
(In thousands, except per share data)
TWELVE MONTHS ENDED JULY 31, 1999
Net sales ............................... $30,247 $29,084 $30,474 $35,323
Gross margin ............................ $10,335 $ 9,654 $10,539 $11,792
Income before income taxes .............. $ 1,991 $ 1,941 $ 2,382 $ 2,173
Net income .............................. $ 1,213 $ 1,329 $ 1,402 $ 1,462
Diluted net income per common
share ................................... $ 0.21 $ 0.22 $ 0.24 $ 0.25
Page F-31
71
Notes to Consolidated Financial Statements
(INFORMATION FOR THE FIVE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------------------------------------------------------------------
Additions
----------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at End
Description of Period Expenses Accounts Deductions of Period
- -----------------------------------------------------------------------------------------------------------
(In Thousands)
TWELVE MONTHS ENDED
DECEMBER 31, 2000
Allowance for:
Doubtful accounts $620 $494 $40(b) $310(c) $844
Customer credits $1,279 $1,635 - $1,239(d) $1,675
TWELVE MONTHS ENDED
JULY 31, 1999
Allowance for:
Doubtful accounts $590 $(90)(a) $121(b) $32(c) $589
Customer credits $1,455 $1,223 - $1,282(d) $1,396
TWELVE MONTHS ENDED
JULY 31, 1998
Allowance for:
Doubtful accounts $496 $53 $85(b) $44(c) $590
Customer credits $1,294 $2,462 - $2,301(d) $1,455
FIVE MONTHS ENDED
DECEMBER 31, 1999
Allowance for:
Doubtful accounts $589 $10 $59(b) $38(c) $620
Customer credits $1,396 $831 - $948(d) $1,279
FIVE MONTHS ENDED
DECEMBER 31, 1998
(Unaudited)
Allowance for:
Doubtful accounts $590 $18 $32(b) $68(c) $572
Customer credits $1,455 $1,871 - $1,856(d) $1,470
(a) Primarily for allowances not needed.
(b) Due to reclassifications.
(c) Accounts receivable written off, net of recoveries.
(d) Primarily for customer advertising programs.
Page F-32