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, 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 incorporation or (I.R.S. Employer Identification No.)
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 August 7, 2003 were
5,923,541.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002......................................... 1
Consolidated Statements of Operations
Three Months Ended June 30, 2003 and 2002
and Six Months Ended June 30, 2003 and 2002............................... 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002................................... 3
Notes to Consolidated Financial Statements..................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................ 25
Item 4. Controls and Procedures........................................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders.............................. 26
Item 5. Other Information................................................................ 26
Item 6. Exhibits and Reports on Form 8-K.................................................. 27
Signatures................................................................................ 28
Item 1 Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ - $ 3,539,000
Receivables, net ......................................................................... 16,650,000 18,001,000
Notes receivable ......................................................................... 1,000,000 -
Inventories, net ......................................................................... 12,856,000 13,747,000
Prepaid expenses ......................................................................... 906,000 657,000
Net current assets held for sale ......................................................... - 22,950,000
Deferred income taxes, net ............................................................... 2,108,000 2,690,000
------------ ------------
Total current assets ................................................................. 33,520,000 61,584,000
Property, plant and equipment, net ......................................................... 10,408,000 10,852,000
Deferred income taxes, net ................................................................. 5,278,000 5,118,000
Goodwill, net .............................................................................. 10,303,000 10,303,000
Other intangible assets, net ............................................................... 1,035,000 1,085,000
Other assets ............................................................................... 1,602,000 1,725,000
------------ -------------
Total assets ......................................................................... $ 62,146,000 $ 90,667,000
------------ -------------
LIABILITIES
Current liabilities:
Debt, current portion..................................................................... $ 3,756,000 $ 17,557,000
Accounts payable ......................................................................... 3,379,000 4,689,000
Accrued income taxes ..................................................................... 1,688,000 1,884,000
Net current liabilities held for sale .................................................... - 14,950,000
Accrued liabilities:
Payroll and related costs ............................................................. 4,096,000 4,937,000
Other ................................................................................. 6,695,000 7,470,000
------------ ------------
Total current liabilities ............................................................ 19,614,000 51,487,000
Debt, less current portion ................................................................. 2,835,000 -
Deferred compensation and supplemental retirement benefits ................................. 4,031,000 3,875,000
Other liabilities .......................................................................... 926,000 1,593,000
------------ ------------
Total liabilities .................................................................. $ 27,406,000 $ 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, 25,000,000 shares;
issued, 8,298,000 shares ................................................................. 1,660,000 1,660,000
Capital in excess of par value ............................................................. 38,806,000 38,820,000
Retained earnings .......................................................................... 9,312,000 8,427,000
Treasury stock at cost, 2,375,000 and 2,398,000 shares, respectively ....................... (15,038,000) (15,195,000)
------------ ------------
Total shareholders' equity ......................................................... 34,740,000 33,712,000
------------ ------------
Total liabilities and shareholders' equity ......................................... $ 62,146,000 $ 90,667,000
------------ ------------
See accompanying notes to consolidated financial statements.
1
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three-Months Ended Six-Months Ended
June 30, June 30,
2003 2002* 2003 2002*
------------ ------------ ------------ ------------
Net Sales .................................................. $ 27,444,000 $ 27,924,000 $ 53,662,000 $ 55,457,000
Cost and expenses:
Cost of products sold .................................... 17,018,000 18,458,000 34,137,000 35,627,000
Engineering and product development ...................... 1,996,000 1,646,000 3,914,000 3,644,000
Selling, general and administrative ...................... 6,639,000 6,682,000 12,659,000 13,408,000
Depreciation and amortization ............................ 635,000 721,000 1,283,000 1,452,000
Special charges .......................................... - 9,000 - 1,834,000
Restructuring costs ...................................... - 40,000 - 265,000
------------ ------------ ------------ ------------
Total cost and expenses .................................... 26,288,000 27,556,000 51,993,000 56,230,000
------------ ------------ ------------ ------------
Income (loss) from continuing operations ................... 1,156,000 368,000 1,669,000 (773,000)
Other income (expense):
Interest income .......................................... 31,000 7,000 96,000 10,000
Interest expense ......................................... (129,000) (376,000) (335,000) (892,000)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income taxes 1,058,000 (1,000) 1,430,000 (1,655,000)
Income tax provision (benefit) ............................. 359,000 (118,000) 545,000 (844,000)
------------ ------------ ------------ ------------
Income (loss) from continuing operations ................... 699,000 117,000 885,000 (811,000)
------------ ------------ ------------ ------------
Income from discontinued operations (net of tax) ........... - 214,000 - 766,000
------------ ------------ ------------ ------------
Net income (loss) .......................................... $ 699,000 $ 331,000 $ 885,000 $ (45,000)
------------ ------------ ------------ ------------
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income (loss) from continuing operations ................. $ 0.12 $ 0.02 $ 0.15 $ (0.14)
Income from discontinued operations (net of tax) ......... - 0.04 - 0.13
------------ ------------ ------------ ------------
Net income (loss) ........................................ $ 0.12 $ 0.06 $ 0.15 $ (0.01)
------------ ------------ ------------ ------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Income (loss) from continuing operations ................. $ 0.12 $ 0.02 $ 0.15 $ (0.14)
Income from discontinued operations (net of tax) ......... - 0.04 - 0.13
------------ ------------ ------------ ------------
Net income (loss) ........................................ $ 0.12 $ 0.06 $ 0.15 $ (0.01)
------------ ------------ ------------ ------------
Shares used in computing basic net income (loss)
per common share ......................................... 5,898,000 5,894,000 5,896,000 5,839,000
Shares used in computing diluted net income (loss)
per common share ......................................... 5,912,000 5,930,000 5,912,000 5,839,000
* 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,
2003 2002* 2003 2002*
--------- --------- --------- ---------
Net income (loss) ............................................ $ 699,000 $ 331,000 $ 885,000 $ (45,000)
Other comprehensive income:
Currency translation adjustment, net of related taxes ... - 389,000 - 402,000
--------- --------- --------- ---------
Comprehensive income ......................................... $ 699,000 $ 720,000 $ 885,000 $ 357,000
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements
2
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
(Unaudited)
2003 2002*
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) from continuing operations ................................................. $ 885,000 $ (811,000)
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation ............................................................................... 978,000 1,135,000
Amortization ............................................................................... 305,000 317,000
Restructuring charges ...................................................................... - 35,000
Provisions for losses on accounts receivable ............................................... 54,000 47,000
Cash surrender value of life insurance premiums ............................................ (74,000) 83,000
Deferred compensation and supplemental retirement benefits ................................. 208,000 249,000
Deferred compensation and supplemental retirement benefit payments ......................... (264,000) (1,780,000)
(Increase) decrease in deferred income taxes ............................................... 422,000 (662,000)
Gain on sale of equipment .................................................................. (2,000) (6,000)
Changes in operating assets and liabilities, excluding effects of business disposition:
Accounts receivable ...................................................................... 1,222,000 4,383,000
Inventories .............................................................................. 891,000 1,930,000
Prepaid expenses ......................................................................... (249,000) 15,000
Other assets, net ........................................................................ (59,000) (37,000)
Accounts payable ......................................................................... (780,000) (1,624,000)
Other accrued liabilities ................................................................ (1,577,000) (1,055,000)
Accrued income taxes ..................................................................... (1,262,000) (1,133,000)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITES ...................................................... 698,000 1,086,000
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of subsidiary ............................................................ 7,000,000 -
Proceeds from sale of equipment ............................................................. 59,000 -
Purchases of property, plant, and equipment ................................................. (567,000) (1,045,000)
Increase in notes receivable ................................................................ 1,000 1,000
Proceeds from cash surrender life insurance policies ........................................ - 10,676,000
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITES ...................................................... 6,493,000 9,632,000
------------ ------------
FINANCING ACTIVITIES:
Net proceeds from Senior Credit Facility .................................................... 6,824,000 -
Payments of term loans ...................................................................... (233,000) -
Payments to Revolving Credit Facility, net. ................................................. (17,557,000) (14,424,000)
Proceeds from stock options exercised ....................................................... - 755,000
Treasury stock sold ......................................................................... 143,000 165,000
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES ......................................................... (10,823,000) (13,504,000)
------------ ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS .................................................. 93,000 320,000
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ....................................................... (3,539,000) (2,466,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............................................. 3,539,000 2,466,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................................... $ - $ -
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................................................................. $ 222,000 $ 1,037,000
Income taxes ............................................................................. $ 247,000 $ 275,000
* RECLASSIFIED FOR COMPARATIVE PURPOSES ONLY.
See accompanying notes to consolidated financial statements.
3
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, 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 applicable periods
ended June 30, 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 of the sale 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. 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
recorded as a discontinued operation in the consolidated statement of operations
and statement of cash flows for the three and six month periods ended June 30,
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).
4
2. RECEIVABLES
Receivables at June 30, 2003 and December 31, 2002 consisted of the following:
June 30, December 31,
2003 2002
-----------------------
(in thousands)
Trade receivables ........................................................ $ 15,409 $ 14,306
Less allowances for doubtful accounts .................................... (402) (273)
---------------------
15,007 14,033
Recoverable income taxes ................................................. 265 1,992
Other .................................................................... 1,378 1,976
---------------------
$ 16,650 $ 18,001
=====================
Recoverable income taxes of $1,789,000 were received on May 27, 2003.
3. INVENTORIES
Inventories at June 30, 2003 and December 31, 2002 consisted of the following:
June 30, December 31,
2003 2002
-----------------------
(in thousands)
Raw materials ............................................................ $ 9,090 $ 9,951
Work in process .......................................................... 3,917 4,014
Finished goods ........................................................... 2,770 2,367
---------------------
15,777 16,332
Less allowances .......................................................... (2,921) (2,585)
---------------------
$ 12,856 $ 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 Standard
("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,
2003 2002
----------------------------------------- ----------------------------------------
(in thousands, except per share amounts)
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
----------------------------------------- ----------------------------------------
Basic net income per
common share $ 699 5,898 $ 0.12 $ 331 5,894 $ 0.06
Effect of dilutive
securities 14 36
----------------------------------------- ----------------------------------------
Diluted net income per
common share $ 699 5,912 $ 0.12 $ 331 5,930 $ 0.06
========================================= ========================================
Six Months Ended June 30,
2003 2002
----------------------------------------- ----------------------------------------
(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 $ 885 5,896 $ 0.15 $ (45) 5,839 $ (0.01)
Effect of dilutive
securities ---- 16 ---- ---- ---- ----
----------------------------------------- ---------------------------------------
Diluted net income (loss)
per common share $ 885 5,912 $ 0.15 $ (45) 5,839 $ (0.01)
========================================= =======================================
For the six-month period ended June 30, 2002, common stock options of 57,224
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 and six-month periods ended June 30, 2003, and June 30, 2002
common stock options of 492,475 and 469,315 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 SFAS
No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure"
("SFAS No. 148"), an amendment of SFAS No. 123 "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
6
compensation plans under APB Opinion 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related interpretations. The following disclosures
are provided in accordance with SFAS 148.
As permitted by the FASB, the Company has elected to follow APB No. 25, 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 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 Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
-------------------------- ------------------------
(in thousands, except per common share amounts)
Net income (loss), as reported $ 699 $ 331 $ 885 $ (45)
Add: Stock-based employee compensation
expense included in reported net
income (loss), net of related tax effects - - - -
----------------------- ---------------------
$ 699 $ 331 $ 885 $ (45)
Deduct: Total stock-based employee
compensation expense determined under fair value
based method for awards granted, modified, or
settled, net of related tax effects (170) (159) (494) (317)
----------------------- ---------------------
Pro forma net income (loss) $ 529 $ 172 $ 391 $ (362)
======================= =====================
Earnings (loss) per common share:
Basic - as reported $ 0.12 $ 0.06 $ 0.15 $ (0.01)
Basic - pro forma $ 0.09 $ 0.03 $ 0.07 $ (0.06)
Diluted - as reported $ 0.12 $ 0.06 $ 0.15 $ (0.01)
Diluted - pro forma $ 0.09 $ 0.03 $ 0.07 $ (0.06)
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.
7
5. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS 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. 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.
In April 2002, the FASB adopted SFAS No. 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 SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and amends, SFAS No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and amends
SFAS 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. SFAS 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 SFAS 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 (see Note 8). 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 SFAS No. 148, "Accounting for Stock-Based
Compensation Costs-Transition and Disclosure" ("SFAS No. 148"). This statement
amends
8
SFAS No. 123, 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 No. 25, 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," for
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.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables," ("Issue No. 00-21") which requires the
revenue from sales with multiple deliverables be accounted for based on a
determination of whether the multiple deliverables qualify to be accounted for
as separate units of accounting. The consensus is effective prospectively for
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company does not expect a material impact on its results of operations or
financial condition as a result of the adoption of Issue No. 00-21.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," ("SFAS No. 149"), which
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 149 is effective prospectively for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The exception to these requirements are the provisions of SFAS
No. 149 related to SFAS No. 133 implementation issues that have been effective
for fiscal quarters that began prior to June 15, 2003, and should continue to be
applied in accordance with their respective effective dates. In addition,
paragraphs 7(a) and 23 (a), which relate to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The Company does not expect a material impact on its results of operations
or financial condition as a result of the adoption of SFAS No. 149. The Company
has not yet determined the effect, if any, that SFAS No. 149 will have on its
consolidated financial statements.
9
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity" ("SFAS No. 150"), which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope, which may have previously been reported as equity, as a liability or
an asset in some circumstances. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
June 30, 2003 December 31, 2002
------------------------------------------ -------------------------------------------
Accumulated Accumulated
Gross Value Amortization Net Value Gross Value Amortization Net Value
--------------------------------------------------------------------------------------
(in thousands)
Goodwill $12,167 $1,864 $10,303 $12,167 $1,864 $10,303
----------------------------------------- ------------------------------------------
Other Intangible Assets:
Patents 944 558 386 938 523 415
Covenant Not To Compete 110 110 ---- 2,980 2,980 ----
Trademarks 922 301 621 922 282 640
Other 501 473 28 501 471 30
----------------------------------------- ------------------------------------------
Total Other Intangible Assets 2,477 1,442 1,035 5,341 4,256 1,085
----------------------------------------- ------------------------------------------
$14,644 $3,306 $11,338 $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 for the three and six month periods for fiscal 2003 was $28,000 and
$56,000, respectively. Amortization expense for intangible assets subject to
amortization in each of the next five fiscal years is estimated to be $111,000
per year.
7. DEBT
Debt consists of the following:
June 30, December 31,
2003 2002
--------------------------------
(in thousands)
Revolving lines of credit $ 3,633 $ 17,557
Term Loan A 2,188 -----
Term Loan B 770 -----
------------------------------
6,591 17,557
Less current portion (3,756) (17,557)
------------------------------
Long term debt $ 2,835 $ -----
==============================
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
10
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 June 30, 2003, the outstanding revolving loan balance was
$3,633,000 and the outstanding term loan balances were $2,188,000 and $770,000,
or a total of $6,591,000.
As of August 3, 2003, outstanding balances under the Senior Credit Facility were
$4,377,000 and availability under the revolving loan was $7,394,000.
The schedule of payments on long-term debt is as follows:
June 30
----------------
(in thousands)
2004 $ 3,756
2005 997
2006 1,838
-------
$ 6,591
Less-current portion (3,756)
-------
Total long-term debt $ 2,835
=======
8. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following:
June 30, December 31,
2003 2002
-------------------------------
(in thousands)
Insurance, taxes and commissions $ 1,820 $ 1,343
Professional fees 2,117 4,151
Accrual for contingencies, and other 2,758 1,976
-----------------------------
$ 6,695 $ 7,470
=============================
The Company's warranty reserve which is included in the accrual for
contingencies, and other above, for the period ended June 30, 2003 is as
follows:
June 30,
2003
-------------
(in thousands)
Liability, beginning of year $ 897
Expense for new warranties issued 77
Expense related to accrual revisions for prior year (6)
Warranty claims (75)
--------
Liability, end of period $ 893
--------
11
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.
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
12
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 $926,000.
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 adverse effect on the consolidated financial
position or results of operations of the Company.
In the fourth quarter of fiscal year 1990, the Company recorded 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.
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 June 30, 2003 and December 31, 2002, the remaining environmental
accrual was $926,000 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.
13
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 had classified its operations into the following five operating
business units: Condor D.C. Power Supplies, Inc. ("Condor"), Teal Electronics
Corporation ("Teal"), SL Montevideo Technology, Inc. ("SL-MTI"), RFL Electronics
Inc. ("RFL"), SL Surface Technologies, Inc. ("SurfTech"). 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 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-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 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. SurfTech produces industrial
coatings and platings for equipment in the corrugated paper and telecommuni-
cations industries. The "Other" segment includes corporate related items
not allocated to reportable segments and the results of insignificant
operations.
During the second quarter of 2003, management had decided to combine Condor and
Teal into one business unit classified as the Power Electronics group ("Power
Electronics"). Both subsidiaries develop, market and sell power electronics
equipment to original equipment manufacturers. Accordingly, they employ similar
technology, utilize similar production processes, and address market niches with
similar characteristics. This business unit now has the same management team
responsible for the performance of the two entities.
The Company has reflected the combination of Condor and Teal as the Power
Electronics group for all periods presented.
14
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,
2003 2002 2003 2002
----------------------------------------------------------
(in thousands)
Net sales from continuing operations:
Power Electronics $ 15,661 $13,842 $29,465 $26,286
SL-MTI 5,732 6,241 11,129 11,950
RFL 5,534 7,267 12,043 16,033
SurfTech 517 574 1,025 1,188
----------------------------------------------------------
Consolidated $ 27,444 $27,924 $53,662 $55,457
----------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------------------------------------------------------
(in thousands)
Operating income (loss) from continuing
operations:
Power Electronics $ 1,786 $ 232 $ 2,705 $ 962
SL-MTI 507 436 806 940
RFL 525 875 1,150 2,213
SurfTech (93) (178) (256) (485)
Other (1,569) (997) (2,736) (4,403)
----------------------------------------------------------
Consolidated $ 1,156 $ 368 $ 1,669 $ (773)
==========================================================
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 and other expenses not allocated to the
reportable business units. There were no special charges for the six months
ended June 30, 2003.
June 30, December 31,
2003 2002
---------------------------------
(in thousands)
Identifiable assets:
Power Electronics $ 26,514 $ 26,862
SL-MTI 9,222 9,691
RFL 16,432 16,322
SurfTech 1,735 1,995
Other 8,243 35,797
--------------------------------
Consolidated $ 62,146 $ 90,667
================================
15
The reduction of identifiable assets in the segment listed as "Other" is
primarily related to the sale of EME, the assets in the amount of $22,950,000
where listed as "net assets held for sale" at December 31, 2002.
June 30, December 31,
2003 2002
-------------------------------
(in thousands)
INTANGIBLE ASSETS (NET)
Power Electronics $ 6,062 $ 6,107
SL-MTI 28 30
RFL 5,248 5,251
-----------------------------
Consolidated $11,338 $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 a discontinued
operation in the Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for all of the 2002 periods presented. Net sales of EME
for the three and six month periods ended June 30, 2002 were $6,485,000 and
$11,899,000 respectively. Net income for the three and six month periods ended
June 30, 2002 was $214,000 and $453,000, respectively.
In July 2001, the Board of Directors authorized the disposition of SL Waber Inc.
Effective August 27, 2001, substantially all of the assets of SL Waber Inc. 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 Inc. name
and assumed certain liabilities and obligations of SL Waber Inc. Subsequent to
the sale, the Company changed the name of the SL Waber Inc. subsidiary to SLW
Holdings, Inc. ("SLW Holdings"). The net income of this subsidiary is 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. This reversal, net of tax in the amount of $313,000 is reported as a
component of discontinued operations for the six months ended June 30, 2002.
As of June 30, 2003 and December 31, 2002, the Company had accruals of $232,000
and $688,000, respectively related to SLW Holdings.
12. RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2003, the Company was billed $297,000 in
legal fees for 2003 services performed 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. SPL was
paid $237,000 for services performed for the six months ended June 30, 2003.
16
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 of the sale 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. The purchaser notes were 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 Company recorded the above sale in the fourth
quarter of 2002. EME is recorded as a discontinued operation in the consolidated
statement of operations and statement of cash flows for the three and six month
periods ended June 30, 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 coverage, 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 six months ended June 30, 2003, the net cash provided by operating
activities was $698,000, as compared to net cash provided by operating
activities of $1,086,000 during the six months ended June 30, 2002. Uses of cash
by operating activities for 2003 were primarily for payments made under the
Company's 2002 bonus and incentive programs, payments of professional fees
related to financing and closing costs offset by collections of accounts
receivable, primarily recoverable income taxes, a reduction of inventory levels
from year end and positive income from operations. In the first six months of
the prior year, net cash provided by operating activities was positively
affected by the recovery of income taxes and the reduction of inventory, offset
by payments under deferred compensation and retirement plans, reductions in
accrued liabilities and negative operating results.
During the six months ended June 30, 2003, net cash provided by investing
activities was $6,493,000, primarily related to the cash proceeds received from
the sale of EME previously discussed. During the six months ended June 30, 2002,
net cash provided by investing activities was $9,632,000, which was primarily
generated by the proceeds from the surrender of life insurance policies of
$10,676,000.
During the six months ended June 30, 2003, net cash used in financing activities
was $10,823,000, primarily due to the payoff of the Company's revolving credit
facility (the "Former
17
Credit Facility"). During the six months ended June 30, 2002, net cash used in
financing activities was $13,504,000, primarily related to the pay down of the
Former Credit Facility in the net amount of $14,424,000.
As of June 30, 2003, the Company had principal debt outstanding of $6,591,000
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, the collection of a
$3,000,000 purchaser note paid on March 14, 2003 and recoverable income taxes of
$1,789,000 received on May 27, 2003. The Company had $6,926,000 available for
borrowings under the Senior Credit Facility at June 30, 2003 and $7,394,000 on
August 3, 2003.
The Company's current ratio was 1.71 to 1 at June 30, 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 related to EME. Without these
amounts the December 31, 2002 current ratio would have been 1.06 to 1. The
improvement in the current ratio for June 30, 2003 is primarily due to the
reduction of current debt from $17,557,000 at December 31, 2002 to $3,756,000 at
June 30, 2003.
As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 16% at June 30, 2003 and 34% at
December 31, 2002. During the first six months of 2003 total borrowings
decreased by $10,966,000.
Capital expenditures of $567,000 made during the first six months of 2003
primarily related to equipment purchases and building repairs. The amount of
expenditures for the first six months of 2003 is down $478,000 from the
comparable 2002 period. During the remainder of the year 2003, the Company may
incur up to approximately $1,593,000 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 six months of 2003, the Company has been able to generate
adequate amounts of cash to meet its operating needs, while reducing total
borrowing by $10,966,000. During the first six months of 2003, the operating
segments had an aggregate positive cash flow of $3,350,000 compared to
$2,973,000 positive cash flow in the same period of 2002. All of the operating
business segments had positive cash flow for the first six months of 2003 except
SurfTech, which had a $124,000 negative cash flow for the period. Condor, now
part of the Power Electronics segment, experienced a significant increase in
cash flow in the first six months of 2003 as compared to 2002 due primarily to a
significant improvement in operating performance over the same 2002 period. Also
in 2002 Condor's cash flow was negatively impacted by payments made against its
restructuring reserve of $575,000 and deferred compensation payments of
$1,252,000. Without these cash payments, Condor would have been cash flow
positive in 2002.
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 had income from operations for the first six months of 2003. SurfTech's
operating loss of $256,000 improved over the comparable six month period in 2002
of $485,000. SurfTech is facing historically low demand in its marketplace and
has reduced
18
its operating costs by consolidating its operations into one facility and by
implementing several other cost cutting measures.
The following is a summary of the Company's contractual obligations that existed
as of June 30, 2003:
Less Than 1 to 3 4 to 5 After 5
1 Year Years Years Years Total
---------------------------------------------------------------------------
(in thousands)
Operating Leases $ 666 $2,513 $266 - $ 3,445
Debt 3,756 2,835 - - 6,591
Capital Leases 71 520 57 - 648
--------------------------------------------------------------------------
$4,493 $5,868 $323 $10,684
--------------------------------------------------------------------------
Assuming no further significant slowdown of economic activity in the markets in
which the Company conducts business, management believes that cash from
operations 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 JUNE 30, 2003, COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
The table below shows the comparison of net sales from continuing operations for
the quarter ended June 30, 2003 and the quarter ended June 30, 2002.
Increase/ Increase/ Three Months Three Months
Decrease Over Decrease Over Ended Ended
Same Quarter Same Quarter June 30, June 30,
Last Year Last Year 2003 2002
---------------------------------------------------------
Percent Amount Amount Amount
---------------------------------------------------------
(in thousands)
Power Electronics 13% $ 1,819 $15,661 $13,842
SL-MTI (8%) (509) 5,732 6,241
RFL (24%) (1,733) 5,534 7,267
Surf Tech (10%) (57) 517 574
------------------------------------------------------
Total (2%) $ (480) $27,444 $27,924
------------------------------------------------------
19
The table below shows the comparison of operating income (loss) from continuing
operations for the quarter ended June 30, 2003 and the quarter ended June 30,
2002.
Increase/ Increase/ Three Months Three Months
Decrease Over Decrease Over Ended Ended
Same Quarter Same Quarter June 30, June 30,
Last Year Last Year 2003 2002
---------------------------------------------------------
Percent Amount Amount Amount
---------------------------------------------------------
(in thousands)
Power Electronics 670% $ 1,554 $ 1,786 $ 232
SL-MTI 16% 71 507 436
RFL (40%) (350) 525 875
Surf Tech 48% 85 (93) (178)
Other (57%) (572) (1,569) (997)
-------------------------------------------------------
Total 214% $ 788 $ 1,156 $ 368
-------------------------------------------------------
Consolidated net sales from continuing operations for the three-month period
ended June 30, 2003 decreased by $480,000, or 2%, compared to the same quarter
in 2002. The Power Electronics segment had significant increases in sales while
the remaining business segments experienced a decrease in sales in the quarter
ended June 30, 2003 compared to the 2002 quarter (see preceding schedule). The
Power Electronics segment's net sales increased $1,819,000, or 13%, 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 $1,733,000,
or 24%. This decrease is primarily attributed to its teleprotection and
protective relaying product lines, which decreased by $1,055,000 from the 2002
quarter. At the end of 2001, RFL had a relatively strong backlog, which carried
into the first six months of 2002 and generated a relatively high sales
performance for the 2002 quarter. RFL is currently experiencing inconsistent
procurement patterns from electric power utility companies, which is its primary
market. At SL-MTI sales decreased $509,000, or 8% due to a combination of higher
than normal military spending in the 2002 quarter and the partial loss of
customer base in the windings product line which is in the process of being
replaced by brushless motors. SurfTech's sales decreased $57,000, or 10%. These
decreases were relatively less significant than those experienced by RFL and
less significant to the Company's consolidated net sales for the second quarter
of 2003, as compared to 2002.
The Company had income from continuing operations of $1,156,000 for the
three-month period ended June 30, 2003, as compared to operating income of
$368,000 for the corresponding period last year which is an increase of $788,000
or 214%. The components of operating expenses by business segment are discussed
in the following paragraphs.
Cost of products sold as a percentage of sales for the quarter ended June 30,
2003 decreased slightly to 62%, as compared to 66% for the corresponding period
in 2002. The major reasons for the decrease in the cost of products sold
percentage for the 2003 quarter compared to 2002 are related to significant
improvements at the Power Electronics segment, which had a 63% cost of products
sold compared to 72% in 2002. SL-MTI has improved its cost of products sold
20
percentage from 79% in 2002 compared to 72% in the 2003 quarter. SurfTech also
improved its percentage of cost of products sold, however to a lesser extent.
RFL's cost of products sold percentage in the current quarter was 53%, as
compared to 50% in the prior year quarter due to lower volume and increased
pricing pressures in the markets it serves. The Power Electronics segment's cost
of products sold as a percentage of sales decreased significantly during the
current quarter, as compared to the same period last year due to a number of
factors. The segment's volume increased significantly during the 2003 quarter
compared to 2002. The Power Electronics segment's manufacturing efficiency
increased due in part to Condor's re-engineering of its manufacturing facility
in Mexicali, Mexico. Also, in the comparable period for 2002, significant
inefficiencies and start up costs were incurred due to the movement of its
remaining telecommunication's product line from its Reynosa, Mexico facility, to
its current location in Mexicali, Mexico. The Power Electronics segment is also
experiencing a more favorable product mix in 2003 compared to 2002. The
improvement in SL-MTI's cost of products sold percentage improvement is
primarily due to an inventory charge taken in 2002. Without this charge, the
cost of products sold percentage would have remained constant.
Engineering and product development expenses for the three month periods ended
June 30, 2003 and June 30, 2002 were 7% and 6% of net sales, respectively. The
increase in engineering and product development expenses was $350,000 in the
current quarter, as compared to last year's quarter. This increase is primarily
attributable to SL-MTI, which had fewer commercial customer funded non-recurring
engineering projects in 2003 than 2002. All of the other business units had
expenditures in line with the 2002 levels.
Selling, general and administrative expenses for the comparative periods in 2003
compared to 2002 remained relatively constant. As a percentage of sales,
selling, general and administrative expenses for the three months ended June 30,
2003 and 2002 remained at 24%. The Company has incurred significant additional
costs of $320,000 during the period in defense of a class action complaint filed
in Superior Court of New Jersey for Camden County related to environmental
matters (See Note 9). Without these defense costs selling, general and
administrative expenses would have decreased to 23% of sales.
Depreciation and amortization expenses for the current three month period
decreased by $86,000, or 12%, primarily due to a reduced fixed asset base. As a
percentage of sales these expenses were 2% in 2003 and 3% in 2002.
For the three month period ended June 30, 2002, the Company recorded special
charges of $9,000 related to change-in-control and proxy costs and a
restructuring charge of $40,000 primarily related to Condor. There were no
charges of this nature recorded during the quarter ended June 30, 2003.
Interest income increased for the current three month period by $24,000, as
compared to the same period last year. This is primarily related to interest
income recorded on the note receivable issued in connection with the sale of
EME. Interest expense for the current three month period decreased by $247,000,
or 66%, due to the combination of a significant reduction of debt and more
favorable interest rates, as compared to the second quarter of the prior year.
Income from discontinued operations of $214,000 for the three month period ended
June 30, 2002 represents the net income of EME which was sold on January 6, 2003
and is reflected as a discontinued operation for the three and six month periods
in 2002.
21
The effective tax rate for the three month period ended June 30, 2003 was 34%.
The effective tax benefit rate for the three month period ended June 30, 2002
was greater than the statutory rate primarily due to the recovery of tax
benefits not previously recognized.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
The table below shows the comparison of net sales from continuing operations for
the six months ended June 30, 2003 and June 30, 2002.
Increase/ Increase/
(Decrease) Over (Decrease) Over Six Months Six Months
Same Quarter Same Quarter Ended Ended
Last Year Last Year June 30, 2003 June 30, 2002
-------------------------------------------------------------------------
Percent Amount Amount Amount
-------------------------------------------------------------------------
(in thousands)
Power Electronics 12% $ 3,179 $ 29,465 $ 26,286
SL-MTI (7%) (821) 11,129 11,950
RFL (25%) (3,990) 12,043 16,033
SurfTech (14%) (163) 1,025 1,188
-------------------------------------------------------------------
Total (3%) $(1,795) $ 53,662 $ 55,457
-------------------------------------------------------------------
The table below shows the comparison of operating income (loss) from continuing
operations for the six months ended June 30, 2003 and June 30, 2002.
Increase/ Increase/
(Decrease) Over (Decrease) Over Six Months Six Months
Same Quarter Same Quarter Ended Ended
Last Year Last Year June 30, 2003 June 30, 2002
---------------------------------------------------------------------
Percent Amount Amount Amount
---------------------------------------------------------------------
(in thousands)
Power Electronics 181% $ 1,743 $ 2,705 $ 962
SL-MTI (14%) (134) 806 940
RFL (48%) (1,063) 1,150 2,213
SurfTech (47%) 229 (256) (485)
Other 38% 1,667 (2,736) (4,403)
-------------------------------------------------------------------
Total 316% $ 2,442 $ 1,669 $ (773)
-------------------------------------------------------------------
Consolidated net sales from continuing operations for the six months ended June
30, 2003 compared to the six months ended June 30, 2002 decreased by $1,795,000,
or 3%. This decrease was due mainly to a significant sales decrease at RFL of
$3,990,000 or 25% and to a lesser extent SL-MTI's sales decrease of $821,000 or
7%. These decreases were partially offset by significant increases in sales in
the Power Electronics segment of $3,179,000 or 12%. RFL has experienced a
significant decrease in its teleprotection and protective relaying product lines
which have decreased 35% and 70% respectively in the six month period ended June
30, 2003 compared to the same period last year. Collectively these product lines
have experienced a sales
22
decrease of $4,103,000 when compared to the same period last year. RFL
experienced an increase in its carrier communications product line of $531,000
or 14% as compared to last year. At the end of 2001, RFL had a relatively strong
backlog, which carried into the first six months of 2002 and generated a record
sales performance for the first six months of 2002. SL-MTI's decrease in sales
for the comparative six months is primarily due to a decrease in military
spending, in the second quarter of 2003 compared to 2002 and a reduction in
sales of $1,138,000 in its windings product line. The windings product line is
older technology and being replaced by SL-MTI's brushless motors product line
which had an increase of 9% or $515,000 in the six months ended June 30, 2003
compared to 2002. Power Electronics' sales increase of $3,179,000 is primarily
related to increased sales to distributors and significant reductions in
allowances and returns. Allowances and returns offered to distributors in 2002
were primarily related to Condor's telecommunication product line, which has
been significantly scaled back.
The Company realized operating income of $1,669,000 for the six months ended
June 30, 2003, as compared to operating loss of $773,000 for the corresponding
period in 2002 an increase of $2,442,000 or 316%. During the six months ended
June 30, 2002, the Company recorded a charge of $265,000 as a result of
restructuring charges recorded primarily at Condor and special charges of
$1,834,000 related to change-of-control and proxy costs. Without these charges,
the Company would have had an operating profit of $1,326,000. The increase in
operating income from continuing operations for the six months ended June 30,
2003 compared to the comparable period in 2002 would have been $343,000 or 26%
on a reduced revenue base.
Cost of products sold as a percentage of sales for the six months ended June 30,
2003 and 2002 was approximately 64%. All of the business segments cost of
products sold as a percentage of sales were comparable to 2002 except SurfTech
which improved from 88% in 2002 to 76% in 2003. SurfTech's operations, however,
are not significant to the consolidated results of the Company.
Engineering and product development expenses for the six months ended June 30,
2003 and 2002 remained at approximately 7% of sales. The increase in expenses of
$270,000 from the 2002 period is primarily attributable to SL-MTI who had fewer
customer funded engineering programs in the current year as compared to 2002.
Selling, general and administrative expenses for the six months ended June 30,
2003 decreased by $749,000 or approximately 6%, 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, 2003 and 2002 were approximately 24%
of sales. The reduction of $749,000 in expenses is primarily due to reduced
selling costs and commissions related to reduced revenue levels. As mentioned
previously the Company has incurred approximately $580,000 in costs related to
the defense of a class action complaint related to environmental matters (See
Note 9). Without these defense costs selling, general and administrative
expenses would have decreased $1,329,000 or 10% compared to the same six month
period in 2002.
For the six month period ended June 30, 2002, the company recorded special
charges of $1,834,000 related to change-in-control and proxy costs, and a
restructuring charge of $265,000 primarily related to Condor. There were no
charges of this nature recorded during the six month period ended June 30, 2003.
23
Depreciation and amortization expenses for the six months ended June 30, 2003
decreased by $169,000, or 12%, compared to 2002, primarily due to a reduced
fixed asset base.
Interest income for the six months ended June 30, 2003 increased by $86,000, as
compared to the same period last year. This increase is primarily related to
interest income recorded on the note receivable issued in connection with the
sale of EME. Interest expense for the same six month period decreased by
$557,000, or 62% due primarily to the significant reduction of debt as compared
to the prior year period and improved interest rates.
The effective tax rate for the six months ended June 30, 2003 was 38%, which
approximates the statutory rate. The effective tax benefit rate for the six
months ended June 30, 2002 was 51%. The difference in tax rates is due primarily
to the recovery of certain tax benefits not previously recognized during the six
months ended June 30, 2002.
Income from discontinued operations of $766,000 for the six month period ended
June 30, 2002 represents the net income of EME in the amount of $453,000. EME
was sold on January 6, 2003 and is reflected as a discontinued operation for the
three and six month periods in 2002. Also included is the reversal of an accrual
made in the first quarter of 2002 related to SLW Holdings, net of tax, in the
amount of $313,000.
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 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
24
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 continue to finance its operations 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 the end of the period covered by 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are
effective. There have been no significant changes in internal controls over
financial reporting that have materially affected or are reasonably likely to
materially affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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,
25
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders on May 29, 2003, the Company's
shareholders re-elected seven incumbent members (Warren Lichtenstein, Glen
Kassan, J. Dwane Baumgardner, Mark E. Schwarz, James Henderson, Steven Wolosky
and Avrum Gray) to the Company's eight-member Board of Directors. One new
director was elected to the Board (James Risher). The votes cast for all
nominees were as follows:
NOMINEES FOR WITHHOLD AUTHORITY
-------- --- ------------------
Warren Lichtenstein 2,831,085 1,472,202
Glen Kassan 2,831,407 1,471,880
J. Dwane Baumgardner 2,770,866 1,532,421
Mark E. Schwarz 2,832,425 1,470,862
James Henderson 2,833,225 1,470,062
Steven Wolosky 2,831,407 1,471,880
Avrum Gray 2,833,232 1,470,055
James A. Risher 2,832,356 1,470,931
The votes cast for, against, and withheld for the ratification of the
appointment of Grant Thornton LLP as the Company's independent auditors for the
fiscal year ending December 31, 2003 were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
4,235,312 27,900 30,075 - 0 -
ITEM 5. OTHER INFORMATION
In 1997, the Company, through a wholly-owned subsidiary, commenced a patent
infringement action against American Power Conversion Corporation ("APC") in the
United States District Court for the District of New Jersey. The complaint
alleges that APC infringed a patent held by the subsidiary, and seeks damages
resulting from APC's infringement. APC petitioned the U.S. Patent and Trademark
Office ("PTO") to review the patent to determine whether the patent was valid,
and the District Court suspended the proceedings pending the outcome of the
PTO's determination. The PTO recently reaffirmed the validity of the patent, and
the District Court has restored the case to the active docket. The Company
intends to pursue the litigation vigorously, although there can be no assurance
that the matter will be resolved in the Company's favor, or when it will be
resolved.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
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 April 30, 2003 pursuant to Item 5 (Other
Events).
27
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: August 11, 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)