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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 MARCH 31, 2003
or
| | 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 Identification No.)
incorporation or organization)
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 American 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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes | | No |X|
The number of shares of common stock outstanding as of May 5, 2003 were
5,888,441.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002.......................... 1
Consolidated Statements of Operations
Three Months Ended March 31, 2003 and 2002.................... 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002.................... 3
Notes to Consolidated Financial Statements....................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 16
Item 3. Quantitive and Qualitive Disclosures about Market Risk............. 21
Item 4. Controls and Procedures............................................ 21
PART II. OTHER INFORMATION.................................................. 22
Item 1. Legal Proceedings.................................................. 22
Item 6. Exhibits and Reports on Form 8-K................................... 22
Signatures.................................................................. 23
i
Item 1. Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ -- $ 3,539,000
Receivables, net .................................................... 19,017,000 18,001,000
Inventories, net .................................................... 13,013,000 13,747,000
Prepaid expenses .................................................... 965,000 657,000
Net current assets held for sale .................................... -- 22,950,000
Deferred income taxes, net .......................................... 5,292,000 2,690,000
------------ ------------
Total current assets ........................................... 38,287,000 61,584,000
Property, plant and equipment, net ..................................... 10,582,000 10,852,000
Notes Receivable ....................................................... 1,004,000 5,000
Deferred income taxes, net ............................................. 2,516,000 5,118,000
Goodwill, net .......................................................... 10,303,000 10,303,000
Other intangible assets, net ........................................... 1,063,000 1,085,000
Other assets ........................................................... 1,665,000 1,720,000
------------ ------------
Total assets ................................................... $ 65,420,000 $ 90,667,000
------------ ------------
LIABILITIES
Current liabilities:
Senior credit facility .............................................. $ 6,839,000 $ 17,557,000
Accounts payable .................................................... 4,647,000 4,689,000
Accrued income taxes ................................................ 1,824,000 1,884,000
Net current liabilities held for sale ............................... -- 14,950,000
Accrued liabilities:
Payroll and related costs ......................................... 3,219,000 4,937,000
Other ............................................................. 7,065,000 7,470,000
------------ ------------
Total current liabilities ...................................... 23,594,000 51,487,000
Senior credit facility, less portion due within one year ............... 3,162,000 --
Deferred compensation and supplemental retirement benefits ............. 3,838,000 3,875,000
Other liabilities ...................................................... 969,000 1,593,000
------------ ------------
Total liabilities .............................................. $ 31,563,000 $ 56,955,000
------------ ------------
Commitments and contingencies (Note 9)
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized, 6,000,000 shares; none issued $ -- $ --
Common stock, $.20 par value; authorized, 25,000,0000 shares;
issued 8,298,000 shares .............................................. 1,660,000 1,660,000
Capital in excess of par value ......................................... 38,807,000 38,820,000
Retained earnings ...................................................... 8,613,000 8,427,000
Treasury stock at cost, 2,404,000 and 2,398,000 shares, respectively ... (15,223,000) (15,195,000)
------------ ------------
Total shareholders' equity ..................................... 33,857,000 33,712,000
------------ ------------
Total liabilities and shareholders' equity ..................... $ 65,420,000 $ 90,667,000
------------ ------------
See accompanying notes to consolidated financial statements.
1
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended
March 31,
2003 2002
------------ ------------
(Unaudited)
Net sales .................................................. $ 26,218,000 $ 27,533,000
------------ ------------
Cost and expenses:
Cost of products sold .................................... 17,119,000 17,169,000
Engineering and product development ...................... 1,918,000 2,010,000
Selling, general and administrative ...................... 6,020,000 6,719,000
Depreciation and amortization ............................ 648,000 731,000
Special charges .......................................... -- 1,825,000
Restructuring costs ...................................... -- 225,000
------------ ------------
Total cost and expenses .................................... 25,705,000 28,679,000
------------ ------------
Operating income (loss) from continuing operations ......... 513,000 (1,146,000)
------------ ------------
Other income (expense):
Interest income .......................................... 65,000 3,000
Interest expense ......................................... (206,000) (516,000)
------------ ------------
Income (loss) from continuing operations before income taxes 372,000 (1,659,000)
Income tax provision (benefit) ............................. 186,000 (731,000)
------------ ------------
Net income (loss) from continuing operations ............... 186,000 (928,000)
Income from discontinued operations (net of tax) ........... -- 552,000
------------ ------------
Net income (loss) .......................................... $ 186,000 $ (376,000)
============ ============
Basic net income (loss) per common share
Income (loss) from continuing operations ............... $ 0.03 $ (0.16)
Income from discontinued operations (net of tax) ....... -- 0.09
------------ ------------
Net income (loss) ...................................... $ 0.03 $ (0.07)
============ ============
Diluted net income (loss) per common share
Income (loss) from continuing operations ............... $ 0.03 $ (0.16)
Income from discontinued operations (net of tax) ....... -- 0.09
------------ ------------
Net income (loss) ...................................... $ 0.03 $ (0.07)
============ ============
Shares used in computing basic net income (loss)
per common share ......................................... 5,894,000 5,783,000
Shares used in computing diluted net income (loss)
per common share ......................................... 5,897,000 5,783,000
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
Three-Months Ended
March 31,
2003 2002
------------ ------------
(Unaudited)
Net income (loss) .......................................... $ 186,000 $ (376,000)
Other comprehensive income (loss):
Currency translation adjustment, net of related taxes -- 13,000
------------ ------------
Comprehensive income (loss) ................................ $ 186,000 $ (363,000)
============ ============
See accompanying notes to consolidated financial statements.
2
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended
March 31,
2003 2002
------------ ------------
(Unaudited)
OPERATING ACTIVITIES:
Net income (loss) from continuing operations ............................................. $ 186,000 $ (928,000)
Adjustments to reconcile net income (loss) from continuing operations
to net cash used in operating activities:
Depreciation .......................................................................... 491,000 568,000
Amortization .......................................................................... 157,000 163,000
Restructuring costs ................................................................... -- 35,000
Provisions for losses on accounts receivable .......................................... 9,000 12,000
Deletions (additions) to other assets ................................................. (80,000) 41,000
Cash surrender value of life insurance premiums ....................................... -- (3,000)
Deferred compensation and supplemental retirement benefits ............................ 101,000 106,000
Deferred compensation and supplemental retirement benefit payments .................... (138,000) (1,696,000)
Decrease in deferred income taxes ..................................................... -- 363,000
Gain on sale of equipment ............................................................. (2,000) (9,000)
Changes in operating assets and liabilities, excluding effects of business disposition:
Accounts receivable ................................................................. (1,100,000) 1,330,000
Inventories ......................................................................... 734,000 731,000
Prepaid expenses .................................................................... (308,000) (28,000)
Accounts payable .................................................................... (42,000) (2,644,000)
Other accrued liabilities ........................................................... (2,616,000) (1,004,000)
Accrued income taxes ................................................................ (60,000) (101,000)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES ..................................................... (2,668,000) (3,064,000)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of subsidiary ......................................................... 7,000,000 --
Proceeds from sales of equipment ......................................................... 59,000 41,000
Purchases of property, plant and equipment ............................................... (278,000) (274,000)
Decrease in notes receivable ............................................................. 1,000 1,000
Proceeds from cash surrender life insurance policies ..................................... -- 10,676,000
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES .................................................. 6,782,000 10,444,000
------------ ------------
FINANCING ACTIVITIES:
Net proceeds from Senior Credit Facility ................................................. 10,107,000 --
Payments of term loans ................................................................... (93,000) --
Proceeds from Revolving Credit Facility .................................................. -- 8,400,000
Payments to Revolving Credit Facility .................................................... (17,557,000) (18,045,000)
Proceeds from stock options exercised .................................................... -- 437,000
Treasury stock (acquired) sold ........................................................... (41,000) 297,000
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES ...................................................... (7,584,000) (8,911,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS ..................................... (69,000) 670,000
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................................... (3,539,000) (861,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................................... 3,539,000 2,466,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................. $ -- $ 1,605,000
============ ============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest ............................................................................... $ 125,000 $ 541,000
Income taxes ........................................................................... $ 114,000 $ 158,000
See accompanying notes to consolidated financial statements.
3
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, 2003. 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, 2002. The statements of operations and cash flows for the quarter ended
March 31, 2002 and certain footnotes have been restated to reflect the effect of
discontinued operations.
LIQUIDITY
On January 6, 2003, the Company sold all of the issued and outstanding shares of
capital stock of its subsidiary, Electro-Metall Export GmbH ("EME") for a
purchase price of $8,000,000, which consisted of cash and purchaser notes. In
addition, a dividend of $2,000,000 was paid prior to closing by EME to a
subsidiary of the Company, and the purchaser did not require that the Company
pay-down EME's bank debt of approximately $3,600,000 prior to closing. The
purchaser notes were comprised of a $3,000,000 secured note that paid interest
at the prime rate plus 2%, which was paid on March 14, 2003, and a $1,000,000
unsecured note that pays interest at an annual rate of 12% and matures April 3,
2004. Cash proceeds of $4,000,000 received at closing plus the $2,000,000
dividend and the cash received from the $3,000,000 note were used to pay down
bank debt. The above sale was recorded by the Company in the fourth quarter of
2002. EME is reflected as a discontinued operation in the consolidated statement
of operations and statement of cash flows for the quarter ended March 31, 2002.
On January 6, 2003, the Company entered into a three-year senior secured credit
facility (the "Senior Credit Facility") with LaSalle Business Credit LLC. The
Senior Credit Facility provides for a revolving loan and two term loans, up to a
maximum indebtedness of $20,000,000. The revolving loan of up to $16,810,000 is
based upon eligible receivables and inventory, as well as an original
overadvance amount of $1,500,000, which is reduced pro-rata over a two-year
term. The two term loans of $2,350,000 and $840,000 are paid down over a
three-year term. The Senior Credit Facility restricts investments, acquisitions,
capital expenditures and dividends. It contains financial covenants relating to
minimum levels of net worth, fixed charge coverages, EBITDA levels and maximum
levels of capital expenditures, as defined. The Company is currently in
compliance with all of the restrictions and covenants of the Senior Credit
Facility. The Senior Credit Facility bears interest ranging from the prime rate
plus fifty basis points to the prime rate plus 2%. The Senior Credit Facility is
secured by all of the Company's assets (see Note 7).
On October 11, 2002, the Company filed a registration statement with the
Securities and Exchange Commission (the "SEC") relating to an anticipated
distribution to its shareholders of subscription rights to purchase additional
shares of common stock of the Company. The Company filed an amendment to
Page 4
the Registration Statement on December 30, 2002. On March 28, 2003, following a
thorough discussion and review, the Company's Board of Directors determined not
to proceed with the offering of subscription rights and withdrew the
Registration Statement.
2. RECEIVABLES
Receivables at March 31, 2003 and December 31, 2002 consisted of the following:
March 31, December 31,
2003 2002
----------------- -----------------
(in thousands)
Trade receivables $ 16,020 $ 14,306
Less allowances for doubtful accounts (357) (273)
----------------- -----------------
15,663 14,033
Recoverable income taxes 1,992 1,992
Other 1,362 1,976
----------------- -----------------
$ 19,017 $ 18,001
================= =================
3. INVENTORIES
Inventories at March 31, 2003 and December 31, 2002 consisted of the following:
March 31, December 31,
2003 2002
----------------- -----------------
(in thousands)
Raw materials $ 9,066 $ 9,951
Work in process 3,871 4,014
Finished goods 2,627 2,367
----------------- -----------------
15,564 16,332
Less allowances (2,551) (2,585)
----------------- -----------------
$ 13,013 $ 13,747
================= =================
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.
Page 5
The table below sets forth the computation of basic and diluted net income(loss)
per share:
Three Months Ended March 31,
2003 2002
--------------------------------------- ----------------------------------------
(in thousands, except per common share amounts)
Net Per Share Net Per Share
Income Shares Amount (Loss) Shares Amount
------------ ---------- ------------- ------------ ----------- -------------
Basic net income
(loss) per common $ 186 5,894 $ 0.03 $ (376) 5,783 $ (0.07)
share
Effect of dilutive ---- 3 ---- ---- ---- ----
securities
------------ ---------- ------------- ------------ ----------- -------------
Diluted net income
(loss) per common $ 186 5,897 $ 0.03 $ (376) 5,783 $ (0.07)
============ ========== ============= ============ =========== =============
For the three-month period ended March 31, 2002, common stock options of 657,279
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 periods ended March 31, 2003, and March 31, 2002 common
stock options of 567,386 and 496,441, 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.
STOCK BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board "FASB" issued
Statement of Financial Accounting Standard SFAS No. 148, "Accounting for Stock
Based Compensation-Transition and Disclosure" ("SFAS No. 148"), an Amendment of
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which provided
alternative methods for a voluntary change to the fair value method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The Company has elected to continue to account for its
stock-based employee compensation plans under APB Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations. The following
disclosures are provided in accordance with SFAS 148.
As permitted by the FASB, the Company has elected to follow Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock-Issued to
Employees," and related interpretations in accounting for its stock option
plans. Under APB No. 25, no compensation expense is recognized at the time of
option grant because the exercise price of the Company's stock option equals the
fair market value of the underlying common stock on the date of grant.
The exercise price of all options equals the market price of the Company's
common stock on the date of grant. Accordingly, no compensation cost has been
recognized for the Company's option plans. Had compensation cost for such plans
been determined based on the fair value of the options at the grant dates
consistent with the method of SFAS No. 123, the Company's net income and loss
per share would have been affected to the proforma amounts indicated below.
Page 6
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, the Company's net income
(loss) and net income (loss) per common share would have been as follows:
Three Months Three Months
Ended March 31, Ended March 31,
2003 2002
--------------- ---------------
(in thousands, except per common share amounts)
Net income (loss), as reported $ 186 $ (376)
Add: Stock-based employee compensation --
expense included in reported net
income, net of related tax effects -- --
--------------- ---------------
Deduct: Total stock-based employee $ 186 $ (376)
compensation expense determined under
fair value based method for awards
granted, modified, or settled, net of
related tax effects (319) (158)
--------------- ---------------
Pro forma net income (loss) $ (133) $ (534)
=============== ===============
Earnings (loss) per common share:
Basic - as reported $ 0.03 $ (0.07)
Basic - pro forma $ (0.02) $ (0.09)
Diluted - as reported $ 0.03 $ (0.07)
Diluted - pro forma $ (0.02) $ (0.09)
--------------- ---------------
The fair value of the above stock-based compensation costs were determined using
the Black-Scholes option valuation model. The Black Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions, are fully transferable and do not include a
discount for large block trades. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock price
volatility, expected life of the option and other estimates. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes of the subjective input
assumptions can materially affect the fair value estimate, in the Company's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
5. RECENT ACCOUNTING PRONOUNCEMENTS
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 incurred. At the beginning of the year 2003, the Company adopted this
statement, which did not have an impact on its consolidated financial position
or results of operations.
Page 7
In April 2002, the FASB adopted Statement of Financial Accounting Standard 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS No. 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, "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. At the beginning of the year 2003, the Company
adopted the provisions of this statement, which did not have an impact on its
consolidated financial position or results of operations.
In June 2002, the FASB issued FASB Statement of Financial Accounting Standard
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 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)"("Issue 94-3"). 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. At the beginning of the year 2003, the Company adopted the provisions of
this statement, which did not have an impact on its consolidated financial
position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the
liability be recorded in the guarantor's balance sheet upon the issuance of a
guarantee. In addition, FIN 45 requires disclosure about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the provisions of FIN 45, which did not have an
impact on the Company's financial position.
In December 2002, the FASB issued Statement of Financial Accounting Standard No.
148, "Accounting for Stock-Based Compensation Costs-Transition and Disclosure"
(SFAS No. 148"). This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", and provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
compensation. It also requires additional disclosures about the effects on
reported net income of an entity's accounting policy with respect to stock-based
employee compensation. The Company accounts for stock-based compensation in
accordance with APB Opinion No. 25, "Accounting
Page 8
for Stock Issued to Employees," and has adopted the disclosure only alternative
of SFAS No. 123. The Company adopted the disclosure provisions of SFAS No. 148
in December 2002 (see Note 4).
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the process
of determining what impact, if any, the adoption of the provisions of FIN 46
will have upon its financial condition or results of operations.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, 2003 December 31, 2002
-------------------------------------- --------------------------------------
Gross Value Accumulated Net Value Gross Value Accumulated Net Value
Amortization Amortization
----------- ------------ --------- ----------- ------------ ---------
(in thousands)
Goodwill $ 12,167 $ 1,864 $ 10,303 $ 12,167 $ 1,864 $ 10,303
----------- ------------ --------- ----------- ------------ ---------
Other Intangible Assets
Patents 943 540 403 938 523 415
Covenant Not To Compete 110 110 -- 2,980 2,980 --
Trademarks 922 291 631 922 282 640
Other 501 472 29 501 471 30
----------- ------------ --------- ----------- ------------ ---------
Total Other Intangible Assets 2,476 1,413 1,063 5,341 4,256 1,085
----------- ------------ --------- ----------- ------------ ---------
$ 14,643 $ 3,277 $ 11,366 $ 17,508 $ 6,120 $ 11,388
=========== ============ ========= =========== ============ =========
The other intangible assets are all amortizable and have original estimated
useful lives as follows: patents are amortized over approximately 13 years and
trademarks over approximately 25 years. Amortization expense for intangible
assets subject to amortization in each of the next five fiscal years is
estimated to be $111,000 per year.
Page 9
7. DEBT
Debt consists of the following:
March 31, December 31,
2003 2002
------------ ------------
(In thousands)
Revolving lines of credit $ 6,904 $ 17,557
Term Loan A 2,285 --
Term Loan B 812 --
------------ ------------
$ 10,001
Less current portion (6,839) (17,557)
------------ ------------
Long term debt $ 3,162 --
============ ============
On January 6, 2003, the Company entered into the Senior Credit Facility with
LaSalle Business Credit LLC. The Senior Credit Facility provides for a revolving
loan and two term loans, up to a maximum indebtedness of $20,000,000. The
revolving loan of up to $16,810,000 is based upon eligible receivables and
inventory and an original overadvance amount of $1,500,000, which is reduced
pro-rata over a two-year term. The two term loans of $2,350,000 and $840,000 are
paid down over a three-year term. The Senior Credit Facility restricts
investments, acquisitions, capital expenditures and dividends. It contains
financial covenants relating to minimum levels of net worth, fixed charge
coverages, EBITDA levels and maximum levels of capital expenditures, as defined.
The Company is currently in compliance with all the restrictions and covenants
of the Senior Credit Facility. The Senior Credit Facility bears interest ranging
from the prime rate plus fifty basis points to the prime rate plus 2%. The
Senior Credit Facility is secured by all of the Company's assets. The Senior
Credit Facility also provides for certain reserves for outstanding letters of
credit and other contingencies, which have reduced the Company's availability
under the revolving loan portion of the Senior Credit Facility. At March 31,
2003, the outstanding revolving loan balance was $6,904,000 and the outstanding
term loan balances were $2,285,000 and $812,000, or a total of $10,001,000.
As of May 5, 2003, outstanding balances under the Senior Credit Facility were
$8,287,000 and availability under the revolving loan was $3,774,000.
The schedule of payments on long-term debt is as follows:
March 31
----------------
(in thousands)
2004 $ 6,839
2005 1,185
2006 1,977
------------
$ 10,001
Less-current portion (6,839)
------------
Total long-term debt $ 3,162
============
8. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following:
March 31, December 31,
2003 2002
------------ ------------
(in thousands)
Insurance, taxes and commissions $ 1,819 $ 1,343
Professional fees 2,574 4,151
Accrual for contingencies, and other 2,672 1,976
------------ ------------
$ 7,065 $ 7,470
============ ============
The accrual for contingencies includes an accrual related to SL Waber, Inc., a
former subsidiary of the Company sold in August 2001. This accrual at March
31, 2003 and December 31, 2002 was $619,000 and $688,000, respectively (see Note
9).
Page 10
A summary of the Company's warranty reserve for the period ended March 31, 2003
is as follows:
March 31,
2003
---------
(in thousands)
Liability, beginning of year $ 897
Expense for new warranties issued 39
Expense related to accrual revisions for prior year (5)
Warranty claims (37)
---------
Liability, end of year $ 894
=========
9. COMMITMENTS AND CONTINGENCIES
LITIGATION: 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 involving complaints by terminated employees and disputes with
customers and suppliers. 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"), recently
defended 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 a customer, Eaton Aerospace, Inc. ("Eaton"), alleging breach of
contract and warranty in the defective design and manufacture of a high
precision motor and demanding compensatory damages of approximately $3,900,000.
On November 7, 2002, after a full trial of the facts, a jury awarded Eaton
damages of $650,000, which when combined with pre-trial interest brings the
total claim to $780,000. Eaton is appealing the decision.
On June 12, 2002, the Company and SL Surface Technologies, Inc. ("SurfTech"), a
subsidiary of the Company, 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 water distributed from the Puchack Wellfield
in Pennsauken, New Jersey (which supplies Camden, New Jersey).
This case arises from the same factual circumstances as current administrative
actions involving the Puchack Wellfield, to which the Company is a party. The
administrative actions are discussed 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, New Jersey (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 plaintiffs' complaint, as well as the environmental administrative
actions.
Page 11
On August 9, 2002, the Company received a "Demand for Arbitration" with respect
to a claim of $578,000, plus interest and costs, from a former vendor of SL
Waber. The claim concerned a dispute between SL Waber and an electronics
manufacturer based in Hong Kong for alleged failure to pay for goods under a
Supplier Agreement. In April 2003, the Company settled this claim for $300,000.
As part of the settlement, the Company forfeited its right to assert counter
claims.
It is management's opinion that the impact of legal actions brought against the
Company and its operations will not have a material adverse effect on its
financial position or results of operations. 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 Company.
The adverse resolution of any one or more of these matters could have a material
adverse effect on the business, operating results, financial condition or cash
flows of the Company.
ENVIRONMENTAL: 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 firms to
date, management has provided an estimated accrual for all known costs believed
to be probable in the amount of $924,000. 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.
The Company is the subject of various other lawsuits and actions relating to
environmental issues, including administrative actions in connection with the
SurfTech Site, 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.
Page 12
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 the SurfTech
site 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. As of March 31, 2003 and December 31, 2002, the remaining
environmental accrual was $924,000 and $875,000, respectively.
The Company is investigating a possible ground water contamination plume on its
property in Camden, New Jersey. Based upon the preliminary evidence, the Company
was advised that the cost to remediate the site could amount to $500,000. The
Company recorded a provision for this amount during the first quarter of 2002.
The Company is investigating possible soil and ground water contamination on
property in Montevideo, Minnesota, which is owned and operated by SL-MTI. Based
upon the preliminary evidence, the Company does not believe it will incur
material remediation costs at this site.
10. 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 five 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 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. 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. ("SurfTech") 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.
Page 13
The unaudited comparative results for the three-month periods are as follows:
Three Months Ended
March 31,
2003 2002
------- -------
(in thousands)
Net sales from continuing operations:
Condor $ 9,489 $ 7,740
Teal 4,314 4,704
SL-MTI 5,397 5,709
RFL 6,510 8,766
Surf Tech 508 614
------- -------
Consolidated $26,218 $27,533
======= =======
Three Months Ended
March 31,
2003 2002
------- -------
(in thousands)
Operating income (loss) from continuing operations:
Condor $ 565 $ 261
Teal 355 469
SL-MTI 299 504
RFL 624 1,338
Surf Tech (163) (307)
Other (1,167) (3,411)
------- -------
Consolidated $ 513 $(1,146)
======= =======
Included in "Other" for the three months ended March 31, 2002 were special
charges of $1,825,000 related to change-of-control and proxy costs, a $500,000
addition to the reserve for environmental matters and other expenses not
allocated to the reportable business units. There were no comparable charges of
this nature for the three months ended March 31, 2003.
March 31, December 31,
2003 2002
------------ ------------
(in thousands)
Identifiable assets:
Condor $ 16,899 $ 16,817
Teal 10,058 10,045
SL-MTI 9,446 9,691
RFL 16,481 16,322
Surf Tech 1,817 1,995
Other 10,719 35,797
------------ ------------
Consolidated $ 65,420 $ 90,667
============ ============
Page 14
March 31, December 31,
2003 2002
------------ ------------
(in thousands)
INTANGIBLE ASSETS (NET)
Teal $ 6,088 $ 6,107
SL-MTI 29 30
RFL 5,249 5,251
------------ ------------
Consolidated $ 11,366 $ 11,388
============ ============
11. DISCONTINUED OPERATIONS
On January 6, 2003, the Company sold all of the issued and outstanding shares of
capital stock of EME, as discussed in Note.1. The above sale was recorded by
the Company in the fourth quarter of 2002. EME is reflected as discontinued
operations in the consolidated statement of operations and statement of cash
flows for all of the 2002 periods presented. Net sales of EME for the three
months ended March 31, 2002 were $ 5,414,000 and operating income was $334,000.
In July 2001, the Board of Directors authorized the disposition of SL Waber.
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 March 31, 2003 and December 31, 2002, the Company had accruals of $619,000
and $688,000, respectively related to SL Waber.
12. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2003, the Company was billed $490,000 in
legal fees by Olshan Grundman Frome Rosenzweig & Wolosky LLP, a law firm in
which a director of the Company is a senior partner.
The compensation committee has approved the payment of certain fees from the
Company to Steel Partners, Ltd. ("SPL"), a company controlled by the Chairman of
the Board and Chief Executive Officer of the Company, Warren Lichtenstein. These
fees are in consideration for the services of the Chairman of the Board and
Chief Executive Officer, Warren Lichtenstein and the Company's President, Glen
Kassan, as well as other assistance provided by SPL from time to time. These
individuals did not receive any fees for their services during the year ended
December 31, 2002. On April 1, 2003 SPL was paid $480,000, of which $362,000 was
for services performed during the year 2002 and $118,000 was for services
performed for the three months ended March 31, 2003.
13. SUBSEQUENT EVENTS
On April 28, 2003, the Company announced that effective April 30, 2003, its
common stock will be traded on the American Stock Exchange under the symbol
"SLI". The Company had been operating
Page 15
under a plan to address its non-compliance issues with the New York Stock
Exchange's market capitalization and stockholders' equity requirements, but was
unable to demonstrate compliance by the end of its 18-month plan period.
The Company had studied a number of alternatives to ensure its common stock
continues to be publicly traded and the American Stock Exchange was considered
the best solution. The Company believes the American Stock Exchange will provide
its shareholders with an excellent trading environment on a major national
exchange with state of the art technology so that trades are executed quickly,
reliably and transparently.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
On January 6, 2003, the Company sold all of the issued and outstanding shares of
capital stock of EME for a purchase price of $8,000,000, which consisted of cash
and purchaser notes. In addition, a dividend of $2,000,000 was paid prior to
closing by EME to a subsidiary of the Company and the purchaser did not require
that the Company pay-down EME's bank debt of approximately $3,600,000 prior to
closing. The purchaser notes are comprised of a $3,000,000 secured note bearing
interest at the prime rate plus 2%, which was paid on March 14, 2003, and a
$1,000,000 unsecured note bearing interest at an annual rate of 12% and maturing
on April 3, 2004. Cash proceeds of $4,000,000 received at closing plus dividends
of $2,000,000 and the cash received from the $3,000,000 note were used to pay
down bank debt. The above sale was recorded by the Company in the fourth quarter
of 2002. EME is reflected as discontinued operations in the consolidated
statement of operations and statement of cash flows for the quarter ended March
31, 2002.
On January 6, 2003, the Company entered into the Senior Credit Facility with
LaSalle Business Credit LLC. The Senior Credit Facility provides for a revolving
loan and two term loans, up to a maximum indebtedness of $20,000,000. The
revolving loan of up to $16,810,000 is based upon eligible receivables and
inventory, as well as an overadvance in the original amount of $1,500,000, which
is reduced pro-rata over a two-year term. The two term loans of $2,350,000 and
$840,000 are paid down over a three-year term. The Senior Credit Facility
restricts investments, acquisitions, capital expenditures and dividends. It
contains financial covenants relating to minimum levels of net worth, fixed
charge coverages, EBITDA levels and maximum levels of capital expenditures, as
defined. The Company is currently in compliance with all the restrictions and
covenants of the Senior Credit Facility. The Senior Credit Facility bears
interest ranging from the prime rate plus fifty basis points to the prime rate
plus 2%. The Senior Credit Facility is secured by all of the Company's assets.
During the three months ended March 31, 2003, the net cash used in operating
activities was $2,668,000, as compared to net cash used in operating activities
of $3,064,000 during the three months ended March 31, 2002. Uses of cash in
operating activities for 2003 were primarily used for payments made under the
Company's 2002 bonus and incentive programs, payments of professional fees
related to finance and closing costs and increases in accounts receivable. In
the first quarter of the prior year, net cash used in operating activities was
positively affected by the recovery of income taxes, offset by payments under
deferred compensation and retirement plans and reductions in accrued
liabilities.
Page 16
During the three months ended March 31, 2003, net cash provided by investing
activities was $6,782,000, primarily related to the cash proceeds received from
the sale of EME. During the three months ended March 31, 2002, net cash provided
by investing activities was $10,444,000. Net cash from investing activities for
the first quarter of 2002 was primarily generated by the proceeds from the
surrender of life insurance policies of $10,676,000.
During the three months ended March 31, 2003, net cash used in financing
activities was $7,584,000, primarily due to the payoff of the Company's
revolving credit facility (the "Former Credit Facility"). During the three
months ended March 31, 2002, net cash used in financing activities was
$8,911,000, primarily related to the pay down of the Former Credit Facility in
the net amount of $9,645,000.
As of March 31, 2003, the Company had principal debt outstanding of $10,001,000
under the Senior Credit Facility, as compared to $17,557,000 under the Former
Credit Facility at December 31, 2002. The significant reduction of debt is
primarily due to the proceeds received from the sale of EME, which included a
$2,000,000 dividend, $4,000,000 received at closing and the collection of a
$3,000,000 purchaser note which was paid on March 14, 2003. The Company had
$5,420,000 available for borrowings under the Senior Credit Facility at March
31, 2003.
The Company's current ratio was 1.62 to 1 at March 31, 2003 and 1.19 to 1 at
December 31, 2002. Included in the ratio calculation at December 31, 2002 were
net current assets and liabilities held for sale. Without these amounts the
December 31, 2002 ratio would have been 1.06 to 1. The improvement in the
current ratio for March 31,2003 is primarily due to the reduction of current
debt from $17,557,000 to $6,839,000 at March 31, 2003.
As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 23% at March 31, 2003 and 34% at
December 31, 2002. During the first three months of 2003 total borrowings
decreased by $7,556,000.
Capital expenditures of $278,000 made during the first three months of 2003
primarily related to equipment purchases and building repairs. The amount of
expenditures for the first quarter of 2003 is comparable to the 2002 levels.
During the remainder of the year 2003, the Company may incur up to approximately
$2,500,000 of additional capital expenditures, which includes obligations under
capital leases. 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 three months of 2003, the Company has been able to generate
adequate amounts of cash to meet its operating needs. During the first three
months of 2003, the operating segments had an aggregate negative cash flow of
$484,000, primarily due to scheduled payments made under the Company's 2002
bonus and incentive programs, as previously discussed and professional fees
related to financing and closing costs. Condor did however experience a
significant increase in cash flow in 2003 in the amount of $633,000, as compared
to a use of cash in the amount of $1,478,000 in 2002. During the first three
months of 2002, Teal, RFL and SL-MTI had produced positive cash flow,
aggregating approximately $2,965,000. Condor and SurfTech experienced negative
cash flow for the same period. Condor's cash flow was negatively impacted by
payments made against its restructuring reserve of $516,000 and deferred
compensation payments made in 2002 of $1,200,000. Without these cash
Page 17
payments, Condor would have been cash flow positive. SurfTech's negative cash
flow was primarily due to its move to consolidate operations into one location.
With the exception of SurfTech 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 three months of
2003. Surf Tech's operating loss was $163,000, which improved from the prior
year's loss in the 2002 quarter of $307,000. SurfTech is facing historically low
demand in its marketplace and has reduced its operating costs by consolidating
its operations into one facility and by other cost cutting measures.
The following is a summary of the Company's contractual obligations for the
periods indicated that existed as of March 31, 2003:
Less Than 1 to 3 4 to 5 After 5
1 Year Years Years Years Total
--------- ------- ------- ------- -------
(in thousands)
Operating Leases $ 626 $ 2,147 $ 308 -- $ 3,081
Debt 6,839 3,162 -- -- 10,001
Capital Leases 59 207 14 -- 280
--------- ------- ------- ------- -------
$ 7,524 $ 5,516 $ 322 $ -- $13,362
========= ======= ======= ======= =======
Assuming no further significant slowdown of economic activity in the markets in
which the Company conducts business, management believes that projected cash
from operations, an anticipated tax refund and funds expected to be available
under the Senior Credit Facility will be sufficient to fund the Company's
operations and working capital requirements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003, COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002
The table below shows the comparison of net sales from continuing operations for
the quarter ended March 31, 2003, and the quarter ended March 31, 2002:
Increase/ Increase/ Three Months Three Months
Decrease over Decrease over Ended Ended
same quarter same quarter March 31, March 31,
last year last year 2003 2002
Percent Amount Amount Amount
------------- ------------- ------------- -------------
(in thousands)
Condor 22.6% $ 1,749 $ 9,489 $ 7,740
Teal -8.3% (390) 4,314 4,704
SL-MTI -5.5% (312) 5,397 5,709
RFL -25.7% (2,256) 6,510 8,766
Surf Tech -17.3% (106) 508 614
------------- ------------- ------------- -------------
Total -4.8% $ (1,315) $ 26,218 $ 27,533
============= ============= ============= =============
Page 18
Consolidated net sales from continuing operations for the three-month period
ended March 31, 2003 decreased by $1,315,000, or 4.8%, compared to the same
quarter last year. With the exception of Condor, all of the Company's business
segments experienced a decrease in sales in the first quarter of 2003 compared
to 2002. Condor's net sales increased $1,749,000, or 22.6%, primarily due to
increased sales to distributors and a significant reduction in allowances and
returns. Allowances and returns offered to distributors in 2002 were primarily
related to Condor's telecommunication product line, which was substantially
scaled down in 2002. RFL experienced a significant reduction in sales in the
current quarter compared to 2002. RFL's sales decreased $2,256,000, or 25.7%.
This decrease is primarily attributed to its teleprotection product line, which
decreased by $2,246,000 from the 2002 quarter. In the end of 2001, RFL had a
relatively strong backlog, which carried into the first quarter of 2002 and
generated in a record quarterly performance for the 2002 quarter. RFL is
currently experiencing inconsistent procurement patterns from electric power
utility companies, which is its primary market. For the quarter ended 2003
compared to 2002 Teal's sales decreased $390,000, or 8.3%. At SL-MTI sales
decreased $312,000, or 5.5% and at SurfTech sales decreased $106,000, or 17.3%.
These decreases were relatively less significant than those experienced by RFL
and less significant to the Company's consolidated net sales for the first
quarter of 2003, as compared to 2002.
The Company had income from continuing operations of $513,000 for the
three-month period ended March 31, 2003, as compared to an operating loss of
$1,146,000 for the corresponding period last year. During the quarter ended
March 31, 2002, the Company recorded special charges of $1,825,000 related to
change-of-control and proxy costs and restructuring costs of $225,000 relating
to downsizing operations at Condor. Without these charges, the Company would
have had income from continuing operations in 2002 of $904,000, compared to
$513,000 in 2003.
Cost of products sold as a percentage of sales for the quarter ended March 31,
2003 increased slightly to 65.3%, as compared to 62.4% for the corresponding
period in 2002. The major reason for the increase was product mix at RFL. Cost
of products sold as a percentage of sales in the current quarter was 56.2%, as
compared to 52.5% in the prior year quarter. RFL's sales mix is currently
weighted more to the carrier communication product line, which has a lower
margin than its teleprotection product line. In addition, RFL has experienced
more pricing pressure from competitors this year than in the prior year.
Condor's cost of products sold as a percentage of sales also increased slightly
during the current quarter, as compared to last year. Condor's increase was due
to increases in inventory reserves and a less favorable product mix in 2003.
With respect to Teal and SL-MTI cost of products sold as a percentage of sales
remained relatively constant, as compared to last year. SurfTech recorded
significant improvements; however its results are not significant to the
Company's consolidated operating results.
Engineering and product development expenses for the three month periods ended
March 31, 2003 and March 31, 2002 remained at 7.3% of sales. The decrease in
engineering and product development expenses was $92,000 in the current quarter,
as compared to last year's quarter. Other than SL-MTI, all of the business units
had a decrease in spending in this area.
Selling, general and administrative expenses for the three month period
decreased $699,000, or 10.4%, as compared to the same period last year. As a
percentage of sales, selling, general and administrative expenses for the three
months ended March 31, 2002 were 23%, as compared to 24.4% for the same
Page 19
period last year. The decrease in these expenses were primarily due to reduced
environmental costs and lower commissions expenses as a result of the lower
sales level.
Depreciation and amortization expenses for the current three month period
decreased by $83,000, or 11.4%, primarily due to the reduced fixed asset base.
Effective January 1, 2002, the Company adopted SFAS No. 142 and implemented
certain provisions of this statement, specifically the discontinuance of
goodwill amortization. On a comparative quarterly basis, there was no effect on
amortization expense for 2003 compared to 2002.
For the three month period ended March 31, 2002, the Company recorded special
charges of $1,825,000 related to change-in-control, proxy costs and a
restructuring charge of $225,000 related to Condor. There were no significant
charges of this nature recorded during the quarter ended March 31, 2003.
Interest income increased for the current three month period by $62,000, as
compared to the same period last year. This is primarily related to interest
income recorded on the notes receivable issued in connection with the sale of
EME. Interest expense for the current three month period decreased by $310,000,
or 60%, due to the combination of a significant reduction of debt and more
favorable interest rates, as compared to the first quarter of the prior year.
Income from discontinued operations for the three month period ended March 31,
2002 is attributable to the reversal of an accrual related to SL Waber in the
amount of $313,000, net of tax and net income of EME in the amount of $239,000,
which is recorded as a discontinued operation for the quarter ended March 31,
2002.
The effective tax rate for the three month period ended March 31, 2003 was 50%,
compared to a benefit rate of 47% in 2002. The increase in the effective tax
rate was primarily driven by adjustments made to the Company's Mexican tax
liabilities.
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 adverse determination with respect
Page 20
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 effected 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, 2002,
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, 2002, which is incorporated herein by
reference.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer
have concluded the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are
effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Page 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 has
settled this claim for $300,000 and has paid this amount in April 2003. As part
of the settlement, the Company has forfeited its rights to counter claims
There have 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,
2002. See Part I, Item 3 - Legal Proceedings of such Annual Report and Note 9 to
the Consolidated Financial Statements included herein for additional information
on these matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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:
Current report on Form 8-K filed January 8, 2003 pursuant to Item 5 (Other
Events);
Current report on Form 8-K filed January 17, 2003 pursuant to Item 2
(Acquisition or Disposition of Assets); and
Current report on Form 8-K/A filed March 4, 2003 pursuant to Item 7 (Financial
Statements and Exhibits) in which the Company filed unaudited proforma
consolidated statements of operations for the year ended December 31, 2001 and
for the nine months ended September 30, 2002 and an unaudited proforma
consolidated balance sheet as of September 30, 2002, reflecting the sale of the
Company's EME subsidiary.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 2003 SL INDUSTRIES, INC.
-------------------
(Company)
By: /s/ Warren Lichtenstein
---------------------------
Warren Lichtenstein
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ David R. Nuzzo
----------------------
David R. Nuzzo
Chief Financial Officer
(Principal Accounting Officer)
Page 23
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
I, Warren Lichtenstein, certify that:
1. I have reviewed this quarterly report of Form 10-Q of SL
Industries, Inc.;
2. ____ Based on my knowledge, this quarterly report does not
contain any untrue statement of material fact or omit to state
a material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report;
3. ____ Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. ____ The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
3a-14 and 15d-14) for the registrant and we have:
a) ____ designed such disclosed controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) ____ evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) ____ presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date.
5. ____ The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
Board of Directors (or persons performing the equivalent
functions):
a) ____ all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in
internal controls; and
Page 24
b) ____ any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. ____ The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 By: /s/___________________________________
Warren Lichtenstein
Chairman of the Board and Chief Executive Officer
Page 25
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
I, David R. Nuzzo, certify that:
1. I have reviewed this quarterly report of Form 10-Q of SL
Industries, Inc.;
2. ____ Based on my knowledge, this quarterly report does not
contain any untrue statement of material fact or omit to state
a material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report;
3. ____ Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. ____ The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
3a-14 and 15d-14) for the registrant and we have:
a) ____ designed such disclosed controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) ____ evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) ____ presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date.
5. ____ The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
Board of Directors (or persons performing the equivalent
functions):
a) ____ all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in
internal controls; and
Page 26
b) ____ any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. ____ The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 By: /s/____________________________
David R. Nuzzo
Chief Financial Officer
Page 27