Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer
incorporation or organization) 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
--- ---
The number of shares of common stock outstanding as of August 7, 2002
was 5,884,623.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001......................................... 1
Consolidated Statements of Operations
Three Months Ended June 30, 2002 and 2001
and Six Months Ended June 30, 2002 and 2001............................... 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001................................... 3
Notes to Consolidated Financial Statements..................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 15
PART II. OTHER INFORMATION............................................................... 22
SIGNATURES ............................................................................... 25
Item 1 Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,722,000 $ 6,577,000
Receivables, net 21,762,000 36,041,000
Inventories 19,582,000 20,497,000
Prepaid expenses 997,000 815,000
Deferred income taxes 6,452,000 6,300,000
------------- -------------
Total current assets 51,515,000 70,230,000
Property, plant and equipment, less accumulated depreciation
of $20,866,000 and $18,941,000, respectively 18,574,000 18,829,000
Deferred income taxes 2,048,000 2,014,000
Cash surrender value of life insurance policies 949,000 1,323,000
Intangible assets, less accumulated amortization
of $6,216,000 and $6,017,000, respectively 14,602,000 14,799,000
Other assets 437,000 563,000
------------- -------------
Total assets $ 88,125,000 $ 107,758,000
------------- -------------
LIABILITIES
Current liabilities:
Short-term bank debt $ 2,534,000 $ 1,367,000
Long-term debt due within one year 20,387,000 35,829,000
Accounts payable 5,673,000 8,149,000
Accrued income taxes 1,717,000 2,019,000
Accrued liabilities:
Payroll and related costs 5,585,000 7,609,000
Other 10,663,000 11,781,000
------------- -------------
Total current liabilities 46,559,000 66,754,000
Long-term debt less portion due within one year 62,000 1,009,000
Deferred compensation and supplemental retirement benefits 4,252,000 4,268,000
Other liabilities 2,771,000 2,523,000
------------- -------------
Total liabilities 53,644,000 74,554,000
------------- -------------
Commitments and contingencies (Note 8)
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 shares 1,660,000 1,660,000
Capital in excess of par value 38,788,000 39,025,000
Retained earnings 8,852,000 8,897,000
Accumulated other comprehensive income (loss) 397,000 (5,000)
Treasury stock at cost, 2,394,000 and 2,587,000 shares, respectively (15,216,000) (16,373,000)
------------- -------------
Total shareholders' equity 34,481,000 33,204,000
------------- -------------
Total liabilities and shareholders' equity $ 88,125,000 $ 107,758,000
------------- -------------
See accompanying notes to consolidated financial statements.
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three-Months Ended * Six-Months Ended *
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 34,409,000 $ 32,479,000 $ 67,356,000 $ 70,061,000
------------ ------------ ------------ ------------
Cost and expenses:
Cost of products sold 23,369,000 22,486,000 44,702,000 47,774,000
Write-down of inventory -- 2,890,000 -- 2,890,000
Engineering and product development 1,834,000 2,253,000 4,050,000 4,581,000
Selling, general and administrative 7,576,000 6,659,000 14,862,000 13,489,000
Depreciation and amortization 870,000 1,167,000 1,744,000 2,313,000
Special charges 9,000 -- 1,834,000 --
Restructuring costs 40,000 1,108,000 265,000 1,108,000
------------ ------------ ------------ ------------
Total cost and expenses 33,698,000 36,563,000 67,457,000 72,155,000
------------ ------------ ------------ ------------
Income (loss) from operations 711,000 (4,084,000) (101,000) (2,094,000)
Other income (expense):
Interest income 62,000 107,000 140,000 179,000
Interest expense (431,000) (757,000) (985,000) (1,460,000)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income taxes 342,000 (4,734,000) (946,000) (3,375,000)
Income tax provision (benefit) 11,000 (2,008,000) (588,000) (1,160,000)
------------ ------------ ------------ ------------
Income (loss) from continuing operations 331,000 (2,726,000) (358,000) (2,215,000)
Discontinued operations (net of tax) -- (2,586,000) 313,000 (2,618,000)
------------ ------------ ------------ ------------
Net income (loss) $ 331,000 $ (5,312,000) $ (45,000) $ (4,833,000)
============ ============ ============ ============
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income (loss) from continuing operations $ 0.06 $ (0.48) $ (0.06) $ (0.39)
Discontinued operations (net of tax) -- (0.45) 0.05 (0.46)
------------ ------------ ------------ ------------
Net income (loss) $ 0.06 $ (0.93) $ (0.01) $ (0.85)
============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Income (loss) from continuing operations $ 0.06 $ (0.48) $ (0.06) $ (0.39)
Discontinued operations (net of tax) -- (0.45) 0.05 (0.46)
------------ ------------ ------------ ------------
Net income (loss) $ 0.06 $ (0.93) $ (0.01) $ (0.85)
============ ============ ============ ============
Shares used in computing basic net income (loss)
per common share 5,894,000 5,705,000 5,839,000 5,690,000
Shares used in computing diluted net income (loss)
per common share 5,930,000 5,705,000 5,839,000 5,690,000
* RECLASSIFIED FOR COMPARATIVE PURPOSES ONLY.
See accompanying notes to consolidated financial statements.
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
Three-Months Ended Six-Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income (loss) $ 331,000 $(5,312,000) $ (45,000) $(4,833,000)
Other comprehensive income (loss):
Currency translation adjustment, net of related taxes 389,000 (38,000) 402,000 (26,000)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 720,000 $(5,350,000) $ 357,000 $(4,859,000)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND JULY 1, 2001
(UNAUDITED)
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net loss from continuing operations $ (358,000) $ (2,215,000)
Adjustments to reconcile net loss from continuing operations
to net cash provided by operating activities:
Depreciation 1,427,000 1,509,000
Amortization 317,000 804,000
Restructuring charges 265,000 1,108,000
Write-down of inventory -- 2,890,000
Provisions for losses on accounts receivable (30,000) 185,000
Additions to other assets 9,000 (78,000)
Cash surrender value of life insurance premiums 31,000 (653,000)
Deferred compensation and supplemental retirement benefits 248,000 329,000
Deferred compensation and supplemental retirement benefit payments (1,780,000) (264,000)
(Increase) decrease in deferred income taxes 349,000 (1,707,000)
(Gain) loss on sales of equipment (6,000) 1,000
Investment in Kreiss Johnson -- 56,000
Changes in operating assets and liabilities, excluding effects of business disposition:
Accounts receivable 1,818,000 425,000
Inventories 1,401,000 (759,000)
Prepaid expenses (154,000) 40,000
Accounts payable (1,675,000) (3,923,000)
Other accrued liabilities (3,946,000) (2,021,000)
Accrued income taxes 2,938,000 1,920,000
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 854,000 (2,353,000)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of equipment 15,000 --
Purchases of property, plant and equipment (1,120,000) (1,725,000)
Increase in notes receivable -- 19,000
Proceeds from cash surrender life insurance policies 10,676,000 --
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,571,000 (1,706,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from short-term debt 917,000 873,000
Proceeds from long-term debt 10,300,000 12,645,000
Payments on long-term debt (26,711,000) (11,183,000)
Proceeds from stock options exercised 754,000 442,000
Treasury stock sold 166,000 125,000
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (14,574,000) 2,902,000
------------ ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 25,000 120,000
Effect of exchange rate changes on cash 269,000 (152,000)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,855,000) (1,189,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,577,000 1,189,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,722,000 $ --
============ ============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 1,107,000 $ 1,630,000
Income taxes $ 655,000 $ 450,000
See accompanying notes to consolidated financial statements.
SL INDUSTRIES, INC.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation. Operating results for interim
periods are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002. These financial statements should be read in
conjunction with the Company's audited financial statements and notes thereon
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
LIQUIDITY: The Company is party to a Second Amended and Restated Credit
Agreement, dated December 13, 2001, as amended (the "Revolving Credit
Facility"), that allows the Company to borrow for working capital and other
purposes. The Revolving Credit Facility contains certain financial and
non-financial covenants, including requirements for certain minimum levels of
net income and a minimum fixed charge coverage ratio, as defined therein, on a
quarterly basis. As of December 31, 2001, the Company was in violation of the
net income covenant for the fourth quarter of 2001. In addition, on March 1,
2002, the Company was notified that it was in default under the Revolving Credit
Facility due to its failure to meet the previously scheduled debt reduction to
$25,500,000 on March 1, 2002.
On May 23, 2002, the Company and its lenders reached an agreement, pursuant to
which the lenders granted a waiver of default and amendments to the violated
financial covenants, so that the Company will be in full compliance with the
Revolving Credit Facility. The agreement provides, among other things, for the
Company to pay-down outstanding borrowings by $689,000 to $25,500,000 and for
the payment to the lenders of an amendment fee of $130,000.
The Company is currently seeking to refinance the Revolving Credit Facility. The
Revolving Credit Facility matures on December 31, 2002 and provides for the
payment of a facility fee of $780,000 in the event that the Revolving Credit
Facility is not repaid by September 30, 2002 or by October 31, 2002 under
certain circumstances. There can be no assurance that the Company will be able
to refinance the Revolving Credit Facility prior to October 31, 2002 or that the
Revolving Credit Facility will be refinanced successfully. For more information
regarding the Revolving Credit Facility, see Note 6, as well as "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Quarterly Report on Form 10-Q.
The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
4
2. RECEIVABLES
Receivables at June 30, 2002 and December 31, 2001 consisted of the following:
June 30, December 31,
2002 2001
--------------------------
(in thousands)
Trade receivables ..................... $ 20,161 $ 20,189
Less allowances for doubtful accounts . (321) (568)
--------------------------
19,840 19,621
Receivables for life insurance policies
surrendered ........................... -- 10,229
Recoverable income taxes .............. 1,698 4,355
Other ................................. 224 1,836
--------------------------
$ 21,762 $ 36,041
==========================
In January 2002, the Company received $10,229,000 from the surrender value of
life insurance policies. These funds were used to pay down debt under the
Company's Revolving Credit Facility. See Notes 1 and 6.
3. INVENTORIES
Inventories at June 30, 2002 and December 31, 2001 consisted of the following:
June 30, December 31,
2002 2001
---------------------------------
(in thousands)
Raw materials ....... $ 14,326 $ 15,341
Work in process ..... 6,086 5,261
Finished goods ...... 2,455 3,401
---------------------------------
22,867 24,003
Less allowances ..... (3,285) (3,506)
---------------------------------
$ 19,582 $ 20,497
=================================
4. INCOME (LOSS) PER SHARE
The Company has presented net income (loss) per common share pursuant to the
Financial Accounting Standards Board Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." Basic net income (loss) per common share
is computed by dividing reported net income (loss) available to common
shareholders by the weighted average number of shares outstanding for the
period. Diluted net income per common share is computed by dividing reported net
income available to common shareholders by the weighted average shares
outstanding for the period, adjusted for the dilutive effect of common stock
equivalents, which consist of stock options, using the treasury stock method.
5
The table below sets forth the computation of basic and diluted net income
(loss) per share:
Three Months Ended June 30,
2002 2001
(in thousands, except per share amounts)
Net Per Share Net Per Share
Income Shares Amount (Loss) Shares Amount
------- ------ -------- ------- ------ --------
Basic net income (loss)
per common share $ 331 5,894 $ 0.06 $(5,312) 5,705 $ (0.93)
Effect of dilutive
securities -- 36 -- -- -- --
------- ------ -------- ------- ------ --------
Diluted net income (loss)
per common share $ 331 5,930 $ 0.06 $(5,312) 5,705 $ (0.93)
======= ====== ======== ======= ====== ========
Six Months Ended June 30,
2002 2001
(in thousands, except per share amounts)
Net Per Share Net Per Share
Income Shares Amount (Loss) Shares Amount
------- ------ -------- ------- ------ --------
Basic net (loss)
per common share $ (45) 5,839 $ (0.01) $(4,833) 5,690 $ (0.85)
Effect of dilutive
securities -- -- -- -- -- --
------- ------ -------- ------- ------ --------
Diluted net income (loss)
per common share $ (45) 5,839 $ (0.01) $(4,833) 5,690 $ (0.85)
======= ====== ======== ======= ====== ========
For the six-month period ended June 30, 2002, common stock options of 57,224
were outstanding and for the three-month and six-month periods ended June 30,
2001, common stock options of 678,470 were outstanding but were excluded from
the diluted computation because the Company incurred a net loss and the effect
of including the options would be anti-dilutive.
For the three-month and six-month periods ended June 30, 2002, options to
purchase 472,511 and 469,315 shares of stock, respectively, were excluded from
the diluted computation because the option exercise prices were greater than the
average market price of the Company's common stock during these periods.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 141, "Business Combinations" ("SFAS No.
141"), which requires all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method of accounting. As a result, use of
the pooling-of-interests method is prohibited for business combinations
initiated thereafter. SFAS No. 141 also establishes criteria for the separate
recognition of intangible assets acquired in a business combination. In 2001,
the
6
Company adopted this statement, which did not have any impact on its
consolidated financial position or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which requires
that goodwill and certain other intangible assets having indefinite lives no
longer be amortized to earnings, but instead be subject to periodic testing for
impairment. Intangible assets determined to have definitive lives will continue
to be amortized over their estimated useful lives. This statement is effective
for the Company's 2002 fiscal year. Effective January 1, 2002, the Company
adopted SFAS No. 142 and implemented certain provisions, specifically the
discontinuation of goodwill amortization, and will implement the remaining
provisions during 2002. The Company conducted its initial test for impairment in
the second quarter of 2002. The Company allocated its adjusted goodwill balance
to its reporting units and conducted the transitional impairment tests required
by SFAS No. 142. The fair values of the reporting units were estimated using a
combination of the expected present values of future cash flows and an
assessment of comparable market values. No impairment charges were recorded
during the quarter. The Company anticipates testing for impairment after the
annual forecasting process is completed which will occur in the fourth quarter
of the year or as impairment indicators arise.
There were no changes in the classifications of intangible assets or their
remaining useful lives upon adoption of this pronouncement.
The following table reflects the adjustment to exclude goodwill amortization
expense (including related tax effects) recognized in the prior periods as
presented (in thousands, except per share amounts):
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------------------------
Reported net income (loss) $ 331 $ (5,312) $ (45) $ (4,833)
Add back goodwill amortization -- 102 -- 185
----------------------------------------------------
Adjusted net income (loss) $ 331 $ (5,210) $ (45) $ (4,648)
====================================================
Income (loss) per share - basic
Reported net income (loss) $ .06 $ (.93) $ (.01) $ (.85)
Goodwill amortization -- .02 -- .03
----------------------------------------------------
Adjusted net income (loss) $ .06 $ (.91) $ (.01) $ (.82)
====================================================
Income (loss) per share - diluted
Reported net income (loss) $ .06 $ (.93) $ (.01) $ (.85)
Goodwill amortization -- .02 -- .03
----------------------------------------------------
Adjusted net income (loss) $ .06 $ (.91) $ (.01) $ (.82)
====================================================
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), which excludes from the definition of long-lived assets goodwill and
other intangibles that are not amortized in accordance with SFAS No. 142. SFAS
No. 144 requires that long-lived assets to be disposed of by sale be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. SFAS No. 144 also
expands the reporting of discontinued operations to include components of an
entity that have
7
been or will be disposed of rather than limiting such discontinuance to a
segment of a business. This statement is effective for the Company's 2002 fiscal
year. Effective January 1, 2002, the Company adopted this Statement, which did
not have an impact on its consolidated financial position or results of
operations.
6. DEBT
Debt consists of the following:
June 30, December 31,
2002 2001
-----------------------
(in thousands)
Short-term bank debt............ $ 2,534 $ 1,367
-----------------------
Revolving lines of credit ...... $ 20,286 $ 35,689
Mortgages payable .............. 163 1,149
-----------------------
20,449 36,838
Less portion due within one year (20,387) (35,829)
-----------------------
Long-term bank debt ............ $ 62 $ 1,009
=======================
Under the terms of the Revolving Credit Facility, the Company can borrow for
working capital and other purposes at the prime interest rate plus two percent.
Borrowings under the Revolving Credit Facility are collateralized by
substantially all of the Company's assets. The Revolving Credit Facility
contains limitations on borrowings and requires maintenance of certain financial
and non-financial covenants, the most restrictive of which require certain
levels of quarterly net income and a quarterly minimum fixed charge coverage
ratio, which is the ratio of earnings before interest, taxes, depreciation and
amortization, plus operating rent, to the sum of operating rent, capital
expenditures and interest charges. In addition, the Company is prohibited, under
the Revolving Credit Facility from paying dividends. The Revolving Credit
Facility matures on December 31, 2002 and provides for the payment of a fee of
approximately $780,000 in the event that the facility is not retired on
September 30, 2002 or in certain circumstances before October 31, 2002.
As of June 30, 2002, outstanding borrowings under the Company's Revolving Credit
Facility were $20,286,000. The Company had available borrowings of $4,672,000
under the Revolving Credit Facility as of June 30, 2002. During the second
quarter of 2002, $5,903,000 was paid against the Revolving Credit Facility.
The Company's German subsidiary Elektro-Metall Export GmbH ("EME"), also has
$5,591,000 in lines of credit with its banks in Germany that expire at various
times during 2002. Under the terms of its lines of credit, EME can borrow for
any purpose at interest rates ranging from 7.125% to 8.25%. No financial
covenants are required.
8
7. ACCRUED LIABILITIES OTHER
Accrued liabilities and Other at June 30, 2002 and December 31, 2001 consisted
of the following:
June 30, December 31,
2002 2001
--------------------
(in thousands)
Taxes other than ......... $ 1,054 $ 902
income
Insurance ................ 504 479
Advertising and promotions 63 79
Interest ................. 157 280
Commissions .............. 570 543
Royalties ................ 79 64
Professional fees ........ 1,221 1,389
Reserves for fees and .... 1,207 1,374
services
Deferred ................. 3,617 3,760
revenue
Other .................... 2,191 2,911
--------------------
$10,663 $11,781
====================
Included in the above accruals is a restructuring reserve of $300,000 at June
30, 2002 (there are no remaining severance payments to be made against this
reserve) and $1,163,000 at December 31, 2001. During the second quarter of 2002,
$295,000 was charged against the restructuring reserve, all of which were cash
items except an inventory write off of $57,000. The restructuring reserve
established during the year ended December 31, 2001 was primarily in response to
a significant reduction in the demand for products by telecommunication
equipment manufacturers.
8. COMMITMENTS AND CONTINGENCIES LITIGATION: In the ordinary course of 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. It is management's opinion that the impact of these legal
actions will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
The Company's subsidiary, SL Montevideo Technology, Inc. ("SL-MTI"), is
currently defending a cause of action, brought against it in the fall of 2000
in the federal district court for the western district of Michigan. The
lawsuit was filed by Eaton Aerospace LLC("Eaton") alleging breach of contract
and warranty in the defective design and manufacture of a high precision motor.
The high precision motor was developed for use in an aircraft actuation system
intended for use by Vickers Corporation. The complaint seeks compensatory
damages of approximately $3,900,000. Trial is currently scheduled for October
18, 2002.
As part of pre-trial motions, both parties filed, briefed and argued
cross-motions for summary judgement. On July 18, 2002, Eaton's motion for
partial summary judgment was granted to the limited extent that the court found
that SL-MTI sold motors to Eaton with an express warranty and an implied
warranty of merchantability. Eaton's motion was denied in all other respects
with the court indicating that the nature and extent of those warranties would
have to be decided by a jury at trial. The Company continues to believe that
it has strong defenses to Eaton's claims and intends to pursue them vigorously.
9
On June 12, 2002, the Company and its subsidiary SL Surface Technologies, Inc.
("SurfTech"), were served with notice of class action complaint filed in
Superior Court of New Jersey for Camden County. The Company and SurfTech are
currently two of approximately 39 defendants in this action. The complaint
alleges, among other things, that plaintiffs suffered personal injuries as a
result of consuming contaminated water distributed from the Puchack Wellfield in
Pennsauken, New Jersey (which supplies Camden, New Jersey).
This case arises from the same factual circumstances as the current
administrative actions involving the Puchack Wellfield, which is described under
Commitments & Contingencies-Environmental below. The administrative actions and
the class action lawsuit both allege that SurfTech and other defendants
contaminated ground water through the disposal of hazardous substances at
industrial facilities in the area. SurfTech once operated a chrome-plating
facility in Pennsauken (the "SurfTech Site").
As with the administrative actions, the Company believes it has significant
defenses against the class action plaintiff's claims and intends to pursue them
vigorously. Technical data generated as part of remedial activities at the
SurfTech Site have not established offsite migration of contaminants. Based on
this and other technical factors, the Company has been advised by its outside
counsel that it has a strong defense against the claims alleged in the class
action plaintiff's complaint, as well as the environmental administrative
actions discussed below.
ENVIRONMENTAL: Loss contingencies include potential obligations to investigate
and eliminate or mitigate the effects 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 offsets thereto, at present such expenses
or judgments are not expected to have a material effect on the consolidated
financial position or results of operations of the Company.
In the fourth quarter of fiscal year 1990, the Company made a provision of
$3,500,000 to cover various 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.
10
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 received $100,000 during 2001, 2000, and fiscal 1999, as
stipulated in the settlement agreement negotiated with one of the three
insurers. During 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.
The Company is the subject of various other lawsuits and actions relating to
environmental issues, including administrative action in connection with Surf
Tech's Pennsauken facility, which could subject the Company to, among other
things, $9,266,000 in collective reimbursements (with other parties) to the New
Jersey Department of Environmental Protection. The Company believes that it has
a significant defense against all or any part of the claim and that any material
impact is unlikely.
In December 2001, the Company received notice from the Connecticut Department of
Environmental Protection of an administrative hearing to determine
responsibility for contamination at a former industrial site located in New
Haven, Connecticut. The Company has filed motions with the administrative court
denying responsibility in this matter. Regardless of the court decision, the
Company does not believe that remediation of this site will have a material
adverse effect on its business or operations.
The Company is investigating a ground water contamination with respect to its
property in Camden, New Jersey. While a final determination of the extent of the
contamination has not been made, the Company has been informed that the cost to
remediate the property should not exceed $500,000. The Company recorded a
provision for this amount during the first quarter of 2002.
As of June 30, 2002 and December 31, 2001, the environmental accrual was
$832,000 and $290,000, respectively.
EMPLOYMENT AGREEMENTS: The Company entered into severance agreements with
certain key employees in 2001 and in prior years, that provide for one-time
payments in the event that the employee is terminated within 12 months of a
change in control, as defined. These payments range from three to 24 months of
the employee's base salary as of the termination date, as defined. All senior
divisional management teams are continuing in their positions.
9. SPECIAL CHARGES
In 2001, the Company entered into change-of-control agreements with certain
officers of the Company. On January 22, 2002, the Company held its annual
meeting of shareholders for 2001. At the annual meeting, all eight members of
the Board of Directors stood for re-election. In addition, five nominees from a
committee comprised of representatives of two institutional shareholders (such
committee, the "RORID Committee") stood for election to the Board of Directors.
Upon the certification of the election results on January 24, 2002, the five
nominees of the RORID Committee were elected and three incumbent directors were
re-elected. Following the election of the five new directors, the Company made
payments (which included
11
related benefits) to such officers under these change-of-control agreements
totaling approximately $1,631,000 in the first quarter of 2002 and incurred
additional proxy and legal costs of approximately $203,000.
10. NEW ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
In August 2001, the FASB issued Statement of Financial Accounting Standard No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which
provides the accounting requirements for retirement obligations associated with
tangible long-lived assets. This statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. This statement will be effective for the Company's 2003 year.
The adoption of SFAS No. 143 is not expected to have a material impact on the
Company's consolidated financial position or results of operations.
In April 2002, the FASB adopted Statement of Financial Accounting Standards 145,
rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections ("SFAS 145"). This Statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, and Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB
Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Statement No. 145 is effective for fiscal years beginning after May
15, 2002. The Company is currently evaluating the impact if any, that
implementation of this statement will have on its results of operations or
financial position.
In June 2002, The FASB Issued Statement 146 Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issues No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between this Statement and Issue 94-3 relates to its requirements for
recognition of a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company is currently evaluating the impact if any, that implementation
of this statement will have on its results of operations or financial position.
11. SEGMENT INFORMATION
Under the disclosure requirements of Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
the Company classifies its operations into the following six operating business
units: Condor D.C. Power Supplies, Inc. ("Condor") produces a wide range of
standard and custom power supply products that convert AC or DC power to direct
electrical current to be used in customers' end products. Power supplies closely
regulate and monitor power outputs, using patented filter and other
technologies, resulting in little or no electrical interference. Teal
Electronics Corporation ("Teal") is a leader
12
in the design and manufacture of customized power conditioning and power
distribution units. Teal products are developed and manufactured for custom
electrical subsystems for original equipment manufacturers of semiconductor,
medical imaging, graphics, and telecommunications systems. SL Montevideo
Technology, Inc. ("SL-MTI") is a technological leader in the design and
manufacture of intelligent, high power density precision motors. New motor and
motion controls are used in numerous applications, including aerospace, medical,
and industrial products. Elektro-Metall Export GmbH ("EME") is a leader in
electromechanical actuation systems, power drive units, and complex wire harness
systems for use in the aerospace and automobile industries. RFL Electronics Inc.
("RFL") designs and manufactures teleprotection products/systems that are used
to protect utility transmission lines and apparatus by isolating faulty
transmission lines from a transmission grid. RFL provides customer service and
maintenance for all electric utility equipment protection systems. SL Surface
Technologies, Inc. ("Surf Tech") produces industrial coatings and platings for
equipment in the corrugated paper and telecommunications industries. The "Other"
segment includes corporate related items not allocated to reportable segments
and the results of insignificant operations. The Company's reportable business
units are managed separately because each offers different products and services
and requires different marketing strategies.
The three month and six month periods ended June 30, 2001 have been reclassified
to conform to the current reporting structure. The unaudited comparative results
for the three-month and six-month periods are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----------------------------------------------
(in thousands)
Net sales from continuing operations:
Condor $ 9,457 $12,303 $17,197 $28,234
Teal 4,385 2,737 9,089 6,215
SL-MTI 6,241 4,224 11,950 8,303
EME 6,485 6,433 11,899 13,643
RFL 7,267 6,152 16,033 12,229
Surf Tech 574 630 1,188 1,437
Other -- -- -- --
----------------------------------------------
Consolidated $34,409 $32,479 $67,356 $70,061
==============================================
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----------------------------------------------
(in thousands)
Operating income (loss) from
continuing operations:
Condor $ (66) $(4,452) $ 195 $(3,719)
Teal 298 (7) 767 522
SL-MTI 822 340 1,326 699
EME 348 886 682 2,005
RFL 875 702 2,213 1,321
Surf Tech (178) (303) (485) (296)
Other (1,388) (1,250) (4,799) (2,626)
--------------------------------------------------
Consolidated $ 711 $(4,084) $ (101) $(2,094)
==================================================
13
Included in "Other" for the three months ended June 30, 2002 are corporate
expenses, environmental charges, legal and professional fees and other costs
incurred, which are Company related costs not specifically allocated to the
reportable business units. There were no significant restructuring or special
charges recorded during the current quarter.
Included in "Other" for the six months ended June 30, 2002 were special charges
of $1,834,000 related to change-of-control and proxy costs, a $542,000 addition
to the reserve for environmental matters, professional fees of $660,000 and
other expenses not specifically allocated to the reportable business units.
June 30, December 31,
2002 2001
----------------------
(in thousands)
Identifiable assets:
Condor $ 19,181 $ 20,740
Teal 9,850 9,834
SL-MTI 10,985 11,637
EME 24,308 23,524
RFL 15,564 17,445
Surf Tech 3,093 3,929
Other 5,144 20,649
----------------------
Consolidated $ 88,125 $107,758
======================
12. DISCONTINUED OPERATIONS
In July 2001, the Board of Directors authorized the disposition of the Company's
SL Waber, Inc. ("SL Waber") subsidiary. Effective August 27, 2001, substantially
all of the assets of SL Waber and the stock of its subsidiary, Waber de Mexico
S.A. de C.V. were sold. As part of this transaction, the purchaser acquired the
rights to the SL Waber name and assumed certain liabilities and obligations of
SL Waber. Subsequent to the sale, the Company changed the name of the SL Waber
subsidiary to SLW Holdings, Inc. ("SLW Holdings"). The net income or losses of
this subsidiary are included in the consolidated statements of operations under
discontinued operations for all periods presented. During the three months ended
March 31, 2002, the Company, based upon a review of potential liabilities,
reduced the accrual for the liabilities (excluding accrued income taxes)
related to SLW Holdings by $450,000.
As of June 30, 2002, the Company had $769,000 accrued for any liabilities
(excluding accrued income taxes) related to SLW Holdings, compared to $1,519,000
at December 31, 2001. See Subsequent Events Footnote 14.
13. SALE OF BUSINESS
On March 22, 2001, the Company announced, among other things, that the Board of
Directors had completed a previously announced review of strategic alternatives
and had determined that it would explore a sale of the Company in order to
maximize its value for shareholders. Credit Suisse First Boston ("CSFB")
assisted the Company's Board of Directors in its review and had been engaged to
lead this process until July 2002. See Subsequent Events Note 14.
14
14. SUBSEQUENT EVENTS
On July 17, 2002, the Company received notification from CSFB that CSFB was
terminating its engagement as financial advisor to the Company. The termination
was primarily the result of CSFB's internal reorganization and does not
specifically relate to the Company.
The Company's Board of Directors has determined to continue to explore a sale of
the Company or one or more of its divisions in order to maximize shareholder
value. On August 8, 2002, the company engaged Imperial Capital, LLC to act as
exclusive financial advisor to the Company. Imperial Capital, LLC will
spearhead the Company's initiative to explore a sale of some or all of its
businesses and will also assist management in its ongoing efforts to secure new
long term debt to refinance the Company's current Revolving Credit Facility.
On July 18, 2002 the Company sold its real property located in Auburn, New York
for $175,000 in cash. The Auburn property is the former industrial site of SL
Auburn, Inc., a manufacturer of spark plugs and ignition systems. SL Auburn,
Inc. was sold by the Company in May 1997. The gain from this transaction will be
recorded in the Company's third quarter financial results.
On July 31, 2002 the Company received a tax refund from Germany of
approximately $1,400,000. These proceeds were used principally to pay down the
Company's Revolving Credit Facility balance.
On August 9, 2002, the Company received a "Demand for Arbitration" with respect
to a claim of $578,000 from a former vendor of SL Waber. The claim concerns
a dispute between SL Waber and an electronics manufacturer based in Hong Kong
for alleged failure to pay for goods under a Supplier Agreement. The Company
believes this claim is without merit and intends to vigorously pursue defenses
with respect to these claims and may bring counter claims against the vendor.
Notwithstanding the outcome of these allegations, the Company does not believe
that this arbitration will have a material adverse effect on its business or
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and growth primarily
through funds generated from operations and borrowings under the Revolving
Credit Facility, as such term is defined in Note 1 in the Notes to Consolidated
Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
During the six months ended June 30, 2002, the net cash provided by operating
activities was $0.9 million, as compared to net cash used by operating
activities of $2.4 million during the six months ended June 30, 2001. The
increase, as compared to the same period last year, resulted primarily from
improved operating results, significant reductions in inventory and collections
of receivables, particularly collection of recoverable income taxes, partially
offset by reductions in accrued liabilities and accounts payable.
During the six months ended June 30, 2002, the net cash provided by investing
activities was $9.6 million. This was primarily generated by the proceeds from
life insurance policies of $10.7 million received during the first quarter of
the year. In the prior year six-month period, the Company used $1.7 million of
net cash, principally due to the purchase of equipment.
During the six months ended June 30, 2002, net cash used by financing activities
was $14.6 million, primarily related to the pay down of the Revolving Credit
Facility in the net amount of
15
$16.4 million. In the comparable period last year, financing activities provided
cash of $2.9 million, principally due to net borrowings from the Revolving
Credit Facility of $1.5 million.
As of June 30, 2002, the Company had principal debt outstanding of
$20.3 million under the Revolving Credit Facility, as compared to $35.7 million
at December 31, 2001. At August 16, 2002 the principal debt outstanding under
the Revolving Credit Facility had decreased to approximately $18.8 million,
principally as the result of the collection of an approximate $1.4 million in
German tax refunds. The Revolving Credit Facility provides for the Company to
borrow up to $25.5 million, subject to commitment fees, but not compensating
balances. The Revolving Credit Facility contains limitations on borrowings and
requires maintenance of certain levels of quarterly net income and a minimum
fixed charge coverage ratio, which is the ratio of earnings before interest,
taxes, depreciation and amortization, plus operating rent, to the sum of
operating rent, capital expenditures and interest charges. The Company is also
prohibited from paying dividends under the Revolving Credit Facility. The
Company had $4.7 million available for borrowings under its Revolving Credit
Facility as of June 30, 2002.
The Company is currently seeking to refinance the Revolving Credit Facility. The
Revolving Credit Facility matures on December 31, 2002 and provides for the
payment of a facility fee of $780,000 in the event that the Revolving Credit
Facility is not repaid by September 30, 2002 or by October 31, 2002 under
certain circumstances. There can be no assurance that the Company will be able
to refinance the Revolving Credit Facility prior to October 31, 2002 or that the
Revolving Credit Facility will be refinanced successfully.
The Company also has retained Imperial Capital, LLC to act as its financial
advisor. Imperial Capital, LLC will spearhead the Company's initiative to
explore a sale of some or all of its businesses and will also assist management
in its ongoing efforts to secure new long term debt to refinance the Company's
current Revolving Credit Facility which matures on December 31, 2002.
The Company's German subsidiary, EME, also has $5.6 million in lines of credit
with its banks in Germany that expire at various times during 2002. Under the
terms of its lines of credit, EME can borrow for any purpose at interest rates
ranging from 7.125% to 8.25%. No financial covenants are required.
The Company's current ratio was 1.1 to 1 at June 30, 2002 and December 31, 2001.
This ratio was maintained for the period ended June 30, 2002, primarily due to
the receipt of life insurance proceeds of $10,676,000 used to pay down current
debt, principally the Revolving Credit Facility, which was classified as current
debt as of December 31, 2001.
As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 40% at June 30, 2002 and 54% at
December 31, 2001. During the first six months total borrowings decreased by
$15,222,000.
Capital expenditures of $1,120,000 made during the first six months of 2002
primarily related to improvements in process technology and equipment. During
the remaining quarters of 2002, the Company plans to incur up to $2,000,000 of
capital expenditures. This amount is subject to change depending upon a number
of factors including certain market conditions within the Company's business
segments and availability of financing.
During the first six months of 2002, the Company has been able to generate
adequate amounts of cash to meet its operating needs. During the first six
months of 2002, Teal, RFL and MTI had produced positive cash flow, aggregating
approximately $5,000,000. Condor, EME and Surf
16
Tech experienced negative cash flow for the same period. Condor's cash flow was
negatively impacted by payments made against its restructuring reserve of
$575,000 and deferred compensation payments $1,252,000. Without these cash
payments, Condor would have been cash flow positive. EME experienced negative
cash flow primarily due to the pay down of debt and performance under a
long-term contract for which they received a large cash advance in 2001. Surf
Tech's negative cash flow was primarily due to its move to consolidate into one
location.
With the exception of Surf Tech and the segment reported as "Other" (which
consists primarily of corporate office expenses and accruals not specifically
allocated to the reportable business units), all of the Company's operating
segments were profitable at the operating level for the first six months of
2002. Surf Tech's operating loss was $485,000. Surf Tech is facing historically
low demand in its marketplace and its operations have been consolidated into one
facility. Included in "Other" are special charges for the six months ended June
30, 2002 of $1,834,000 related to the change-of-control and proxy costs (see
Note 9). Also in "Other" is a $542,000 addition to the reserve for environmental
matters, professional fees of $660,000, and other expenses not allocated to the
reportable business units.
Assuming no further significant slowdown of economic activity in the markets in
which the Company conducts business, management believes that projected cash
from operations, the tax refund received from Germany of approximately $1.4
million on July 31, 2002 and funds expected to be available under the Revolving
Credit Facility will be sufficient to fund the Company's operations and working
capital requirements.
EUROPEAN MONETARY UNIT ("EURO")
In 1999, most member countries of the European Union established fixed
conversion rates between their existing sovereign currencies and the European
Union's new currency, the euro. This conversion permitted transactions to be
conducted in either the euro or the participating countries' national
currencies. By February 28, 2002, all member countries were expected to have
permanently withdrawn their national currencies as legal tender and replaced
their currencies with euro notes and coins.
The euro conversion may have a favorable impact on cross-border competition by
eliminating the effects of foreign currency translations, thereby creating price
transparency. The Company is continuing to evaluate the accounting, tax, legal
and regulatory requirements associated with the euro introduction. The Company
does not expect the conversion to the euro to have a material adverse effect on
its consolidated financial position, results of operations, or cash flows.
17
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2002 COMPARED WITH QUARTER ENDED JUNE 30, 2001
The table below shows the comparison of net sales from continuing operations for
the quarter ended June 30, 2002, and the quarter ended June 30, 2001:
Increase/ Increase/
(Decrease) over (Decrease) over Three Months
same quarter same quarter ended Three Months ended
last year last year June 30, 2002 June 30, 2001
-------------------------------------------------------------------------------
Percent Amount Amount Amount
-------------------------------------------------------------------------------
(in thousands)
Condor (23.1)% $(2,846) $ 9,457 $12,303
Teal 60.2 1,648 4,385 2,737
SL-MTI 47.7 2,017 6,241 4,224
EME .8 52 6,485 6,433
RFL 18.1 1,115 7,267 6,152
Surf Tech (8.9) (56) 574 630
-------------------------------------------------------------------------------
TOTAL 5.9% $ 1,930 $34,409 $32,479
===============================================================================
Consolidated net sales from continuing operations for the three-month period
ended June 30, 2002 increased by $1.9 million, or 6%, compared to the same
quarter last year. This increase was due to significant increases in sales at
Teal, MTI and RFL. Sales at Condor decreased by $2.8 million, or 23%. Condor
sales were adversely impacted by its reduction of a significant amount of
products offered under its telecommunications-related product line. EME, which
had a marginal increase in sales, was principally affected by lower sales in the
European commercial aerospace market.
The Company had income from operations of $711,000 for the three-month period
ended June 30, 2002, as compared to an operating loss of $4,084,000 for the
corresponding prior period. During the quarter ended June 30, 2001, the
Company recorded (a) a charge of $1,108,000 as a result of the restructuring
charges recorded at Condor, (b) an inventory write down of $2,890,000 due to the
decline in orders in the telecommunication business at Condor. Without these
charges the Company would have recorded an operating loss of $86,000 for the
quarter ended June 20, 2001. There were no significant restructuring charges and
write-downs recorded in the current year quarter. Included in "Other" are
corporate expenses, environmental charges, legal and professional fees and other
costs incurred, which are Company related costs not allocated to the Company's
reportable business units. The current quarter's operating income was positively
affected by the implementation of SFAS No. 142, which required the
discontinuation of goodwill amortization effective January 1, 2002 (see Note 5).
The gross amount of goodwill amortized in the prior year quarter was $166,000.
Cost of products sold for the three-month period increased by 4%, as compared to
the same period last year as sales increased by 6%. As a percentage of net
sales, cost of products sold for the three-month period was 68%, as compared to
69% during the same period last year. Condor's cost of sales increased from 70%
in 2001 to 76 % in 2002 on a reduced revenue base, primarily due to
manufacturing inefficiencies related to its manufacturing facilities in Mexico.
The remaining business segments' cost of sales remained relatively constant as a
percentage of sales, as compared to the prior year quarter.
18
Engineering and product development expenses for the three-month period
decreased 19%, as compared to the same period last year, due primarily to the
consolidation of engineering facilities at Condor and the relatively high R&D
charges incurred at MTI in the prior year. As a percentage of net sales,
engineering and product development expenses for the three months ended June 30,
2002 were 5%, as compared to 7% for the same period last year.
Selling, general and administrative expenses for the three-month period
increased 14%, as compared to the same period last year. As a percentage of net
sales, selling, general and administrative expenses for the three months ended
June 30, 2002 were 22%, as compared to 21% for the same period last year. The
percentage increase was primarily due to higher commissions and bonus accruals
due to higher sales volume and increased operating profits. Also, Condor paid a
consulting firm $135,000 during the quarter to help improve the manufacturing
efficiencies at its plant in Mexico.
Depreciation and amortization expenses for the current three-month period
decreased by $297,000 or 25%, due to the reduced fixed asset base and intangible
impairment write-offs at Condor in 2001. Also effective January 1, 2002, the
Company adopted SFAS No. 142 and implemented certain provisions of this
statement, specifically the discontinuance of goodwill amortization, which was
$166,000 in the second quarter of 2001(see Note 5).
For the three-month period ended June 30, 2001, the Company recorded a
restructuring charge of $1,108,000 and an inventory write down of $2,890,000.
There were no significant charges of this nature recorded during the quarter
ended June 30, 2002.
Interest income decreased for the current three-month period by $45,000, as
compared to the same period last year. Interest expense for the current
three-month period decreased by $326,000, or 43%, due primarily to the
significant reduction of debt as compared to the prior year quarter.
The effective tax rate for the three-month period ended June 30, 2002, was less
than the statutory rate primarily due to the recovery of tax benefits not
previously recognized. The benefit in 2001 relates to a one-time tax benefit
associated with the Company's Foreign Sales Corporation (FSC).
19
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
The table below shows the comparison of net sales from continuing operations for
the six months ended June 30, 2002 and June 30, 2001:
Increase/ Increase/
(Decrease) over (Decrease) over
same quarter same quarter Six Months ended Six Months ended
last year last year June 30, 2002 June 30, 2001
-----------------------------------------------------------------------------------------------
Percent Amount Amount Amount
-----------------------------------------------------------------------------------------------
(in thousands)
Condor (39.1)% $(11,037) $ 17,197 $ 28,234
Teal 46.2 2,874 9,089 6,215
SL-MTI 43.9 3,647 11,950 8,303
EME (12.8) (1,744) 11,899 13,643
RFL 31.1 3,804 16,033 12,229
Surf Tech (17.3) (249) 1,188 1,437
-----------------------------------------------------------------------------------------------
TOTAL (3.9)% $ (2,705) $ 67,356 $ 70,061
===============================================================================================
Consolidated net sales from continuing operations for the six months ended June
30, 2002 decreased by $2.7 million, or 4%, compared to the same period last
year. This decrease was due mainly to decreases at Condor of $11 million, or
39%, and at EME of $1.7 million, or 13%. These decreases were partially offset
by relatively strong performances by the other business segments except Surf
Tech, which represents only 2% of consolidated sales. Condor sales were
adversely impacted by its reduction of a significant amount of its products
offered under its telecommunications-related product line. EME's sales were
principally affected by lower sales in the European commercial aerospace market.
The Company realized an operating loss of $101,000 for the six months ended June
30, 2002, as compared to operating loss of $2,094,000 for the corresponding
prior year period. During the six months ended June 30, 2002, the Company
recorded (a) a charge of $265,000 as a result of the restructuring charges
recorded at Condor, (b) special charges of $1,834,000 related to
change-of-control and proxy costs and (c) a $500,000 addition to the reserve for
environmental matters. Without these charges the Company would have had an
operating profit of $2,498,000. In the comparable period last year the Company
recorded restructuring charges of $1,108,000 and an inventory write down of
$2,890,000. Without these charges the Company would have had an operating profit
of $1,904,000. Included in "Other" are the special charges, the environmental
charge, additional costs for professional fees and other costs incurred, which
are Company related costs not specifically allocated to continuing operations.
The current period six month operating loss was positively affected by the
implementation of SFAS No. 142, which required the discontinuation of goodwill
amortization effective January 1, 2002 (see Note 5). Related amortization
charged to last years operating costs was $303,000.
Cost of products sold for the six months ended June 30, 2002 decreased by 6%, as
compared to the same period last year. As a percentage of net sales, cost of
products sold for the current six-month period was 66%, as compared to 68%
during the same period last year. All of the reporting business unit's cost of
sales percentages were relatively constant as compared to last year, except
Teal. Teal's cost of sales went from 55% for the six-month period ended June
2001 to 66% for the six-month period ended June 2002. Teal's increase in cost
was due to product
20
mix. During the period Teal began a new major program with one customer, which
included volume price discounts and had significant sales and increased
production prototypes.
Engineering and product development expenses for the six months ended June 30,
2002 decreased 12%, as compared to the same period last year, due primarily to
the consolidation of engineering facilities at Condor. As a percentage of net
sales, engineering and product development expenses for the six months ended
June 30, 2002 were 6%, as compared to 7% for the same period last year.
Selling, general and administrative expenses for the six months ended June 30,
2002 increased 10%, as compared to the same period last year. As a percentage of
net sales, selling, general and administrative expenses for the six months ended
June 30, 2002 were 22%, as compared to 19% for the same period last year. The
percentage increase was primarily due to lower sales and a $500,000 addition to
the reserve for environmental matters recorded in the first quarter of 2002.
Without the $500,000 addition to the environmental reserve, selling, general and
administrative expenses would have been 21% of net sales.
Depreciation and amortization expenses for the six months ended June 30, 2002
decreased by $569,000, or 25%, due to the reduced fixed asset base and
intangible impairment write-offs at Condor in 2001. Also effective January 1,
2002, the Company adopted SFAS No. 142 and implemented certain provisions of
this statement, specifically the discontinuance of goodwill amortization, which
was $303,000 for the six months, ended June 30, 2001 (see Note 5).
Interest income for the six months ended June 30, 2002 decreased by $39,000, as
compared to the same period last year. Interest expense for the six-month period
decreased by $475,000, or 33%, due primarily to the significant reduction of
debt as compared to the prior year period.
The effective tax benefit rate for the six months ended June 30, 2002 was 62%,
as compared to a benefit of 34% for the same period last year. The effective tax
rate change primarily relates to the recovery of tax benefits not previously
recognized.
FORWARD-LOOKING INFORMATION
From time to time, information provided by the Company, 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 Company expects or anticipates will or may occur in the
future, such as expansion and growth of the Company's business, future capital
expenditures and the Company'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 Company.
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 Company's business in or beyond the Company's control. These
factors include a change in the rate of inflation, a change in state or federal
legislation or regulations, an
21
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 all or part of the Company's business can be successfully affected and the
timing and degree of any business recovery in certain of the Company'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 Company 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.
Future factors include the effectiveness of cost reduction actions undertaken by
the Company; the timing and degree of any business recovery in certain of the
Company's markets that are currently experiencing economic uncertainty;
increasing price, products and services competition by U.S. and non-U.S.
competitors, including new entrants; rapid technological developments and
changes and the Company's ability to continue to introduce and develop
competitive new products and services on a timely, cost-effective basis;
availability of manufacturing capacity, components and materials; credit
concerns and the potential for deterioration of the credit quality of customers;
customer demand for the Company's products and services; ability of the Company
to refinance its debt on satisfactory terms; U.S. and non-U.S. governmental and
public policy changes that may affect the level of new investments and purchases
made by customers; changes in environmental and other U.S. and non-U.S.
governmental regulations; protection and validity of patent and other
intellectual property rights; compliance with the covenants and restrictions of
bank credit facilities; and outcome of pending and future litigation and
governmental proceedings. These are representative of the future factors that
could affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions and
growth rates, general U.S. and non-U.S. economic conditions, including increased
economic uncertainty and instability, the global economic slowdown and interest
rate and currency exchange rate fluctuations and other future factors.
For a further description of future factors that could cause actual results to
differ materially from such forward-looking statements, see the discussion in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001,
Part I, Item 1 - Risk Factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative market risk
from the disclosure contained in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2001, which is incorporated herein by
reference.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 12, 2002, the Company and its subsidiary SL Surface Technologies, Inc.
("SurfTech") were served with notice of class action complaint filed in Superior
Court of New Jersey for Camden County. The Company and SurfTech are currently
two of approximately 39 defendants in this action. The complaint alleges, among
other things, that plaintiffs suffered personal injuries as a result of
consuming contaminated water distributed from the Puchack Wellfield in
22
Pennsauken, New Jersey (which supplies Camden, New Jersey). This case arises
from the same factual circumstances as the current administrative actions
involving the Puchack Wellfield, which is described in Note 8. "Environmental"
included in the Consolidated Financial Statements in Part I of this Quarterly
Report on Form 10-Q. The administrative actions and the class action lawsuit
both allege that SurfTech and other defendants contaminated ground water through
the disposal of hazardous substances at industrial facilities in the area.
SurfTech once operated a chrome-plating facility in Pennsauken (the "SurfTech
Site").
As disclosed in the Company's Annual Report on Form 10-K and Quarterly Reports
on Form 10-Q filed with the Securities and Exchange Commission, SL-MTI is
currently defending a cause of action, brought against it in the fall of 2000 in
federal district court for the western district of Michigan. The lawsuit was
filed by Eaton Aerospace LLC ("Eaton"), alleging breach of contract and warranty
in the defective design and manufacture of a high precision motor. The complaint
seeks compensatory damages of approximately $3,900,000. Both parties filed,
briefed and argued cross-motions for summary judgement. On July 18, 2002,
Eaton's motion for partial summary judgement was granted to the limited extent
that the court found that SL-MTI sold motors to Eaton with an express warranty
and an implied warranty of merchantability and the motion was denied in all
other respects, the court indicating that the nature and extent of those
warranties would have to be decided by the jury at trial. Trial is currently
scheduled for October 18, 2002.
On August 9, 2002, the Company received a "Demand for Arbitration" with respect
to the claim of a former vendor of SL Waber. The claim concerns a dispute
between SL Waber and an electronics manufacturer based in Hong Kong for alleged
failure to pay for goods under a Supplier Agreement. The Company believes this
claim is without merit and may bring counter claims against the vendor and will
vigorously pursue defenses with respect to these claims.
There has been no other material changes to the information previously reported
in the Company's Annual Report on Form 10-K for the year ended December 31,
2001. See Part I, Item 3 - Legal Proceedings of such Annual Report for
additional information on these matters.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On March 1, 2002, the Company was notified that it was in default under the
Revolving Credit Facility due to its failure to meet the previously scheduled
debt reduction to $25,500,000 on March 1, 2002. On May 23, 2002, the Company and
its lenders reached an agreement, pursuant to which the lenders would grant a
waiver of default and amendments to the violated financial covenants, so that
the Company will be in full compliance with the Revolving Credit Facility after
giving effect to the amendment. For additional information on this matter see
the Company's filing on Form 8-K dated May 23, 2002. Also, see Notes 1 and 6 in
the Notes to Consolidated Financial Statements included in Part I of this
Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Second Amendment and Waiver to Second Amended and Restated Credit
Agreement, dated May 23, 2002 among SL Industries, Inc., SL Delaware, Inc., GE
Capital CFE, Inc., as Agent, and certain other parties to the Credit Agreement,
(Incorporated by reference).
23
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company during the period
covered by this report (August 14, 2002):
On May 23, 2002, the Company filed a Current Report on Form 8-K, which contained
a press release issued by the Company announcing financial results for the first
quarter ended March 31, 2002, and a Form of Second Amendment and Waiver to
Second Amended and Restated Credit Agreement among the Company, SL Delaware,
Inc., GE Capital CFE, Inc., as Agent, and certain other parties to the Credit
Agreement (incorporated by reference).
On July 22, 2002, the Company filed a current Report on Form 8-K, which related
to a "Change in Registrant's Certifying Accounts." The Company dismissed Arthur
Andersen LLP as its independent accountant and engaged Grant Thornton LLP as its
new independent accountants. On July 31, 2002 the Company filed a Report on Form
8-KA, related to this matter.
On July 25, 2002 the Company filed a current Report on Form 8-K announcing
certain recent developments as follows:
I. Termination of Financial Advisory Contract.
On July 17, 2002, the Company received notification from Credit Suisse First
Boston ("CSFB") that CSFB was terminating its engagement to act as financial
advisor to the Company with respect to the sale, merger, consolidation or other
business combination of the Company.
II. Developments in Eaton Aerospace LLC v. SL Montevideo Technology.
The Company's subsidiary, SL Montevideo Technology Inc. ("SL-MTI"), is currently
defending a cause of action, brought against it in the fall of 2000 in federal
district court for the western district of Michigan. The lawsuit was filed by
Eaton Aerospace LLC ("Eaton"), alleging breach of contract and warranty in the
defective design and manufacture of a high precision motor. The complaint seeks
compensatory damages of approximately $3,900,000. Both parties filed, briefed
and argued cross-motions for summary judgement. On July 18, 2002, Eaton's motion
for partial summary judgement was granted to the limited extent that the court
found that SL-MTI sold motors to Eaton with an express warranty and an implied
warranty of merchantability and the motion was denied in all other respects, the
court indicating that the nature and extent of those warranties would have to be
decided by the jury at trial.
III. Developments Regarding Pennsauken Facility.
On June 12, 2002 the Company and its subsidiary SL Surface Technologies, Inc.
("SurfTech"), were served with notice of a class-action complaint filed in
Superior Court of New Jersey for Camden County. The Company and SurfTech are
currently two of approximately 39 defendants in this action.
24
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 19, 2002 SL INDUSTRIES, INC.
-------------------
(Company)
Date: August 19, 2002 By: /s/Warren Lichtenstein
---------------------------
Warren Lichtenstein
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 19, 2002 By: /s/David R. Nuzzo
----------------------
David R. Nuzzo
Chief Financial Officer
(Principal Accounting Officer)
25