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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 SEPTEMBER 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 organization) (I.R.S. Employer Identification No.)
520 FELLOWSHIP ROAD, SUITE A114, MT. LAUREL, NJ 08054
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 856-727-1500
Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered
Title of each class 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 November 3, 2003
were 5,946,768.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002...................................... 1
Consolidated Statements of Operations
Three Months Ended September 30, 2003 and 2002
and Nine Months Ended September 30, 2003 and 2002............................. 2
Consolidated Statements of Cash Flows
Nine Months Ended September 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...................................... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................... 26
Item 4. Controls and Procedures.......................................................... 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................. 27
Signatures............................................................................... 28
Item 1 Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 648,000 $ 3,539,000
Receivables, net......................................................... 15,762,000 18,001,000
Note receivable.......................................................... 1,000,000 -
Inventories, net......................................................... 11,290,000 13,747,000
Prepaid expenses......................................................... 917,000 657,000
Net current assets held for sale ........................................ - 22,950,000
Deferred income taxes, net .............................................. 4,381,000 2,690,000
-------------- --------------
Total current assets................................................... 33,998,000 61,584,000
Property, plant and equipment, net........................................ 9,849,000 10,852,000
Deferred income taxes, net................................................ 3,423,000 5,118,000
Goodwill, net............................................................. 10,303,000 10,303,000
Other intangible assets, net.............................................. 1,009,000 1,085,000
Other assets and deferred charges......................................... 1,694,000 1,725,000
-------------- --------------
Total assets .......................................................... $ 60,276,000 $ 90,667,000
-------------- --------------
LIABILITIES
Current liabilities:
Debt, current portion ................................................... $ 1,310,000 $ 17,557,000
Accounts payable......................................................... 3,255,000 4,689,000
Accrued income taxes..................................................... 2,459,000 1,884,000
Net current liabilities held for sale.................................... - 14,950,000
Accrued liabilities:
Payroll and related costs............................................... 4,196,000 4,937,000
Other................................................................... 6,667,000 7,470,000
-------------- --------------
Total current liabilities.............................................. 17,887,000 51,487,000
Debt, less current portion................................................ 2,507,000 -
Deferred compensation and supplemental retirement benefits................ 3,996,000 3,875,000
Other liabilities......................................................... 883,000 1,593,000
-------------- --------------
Total liabilities...................................................... $ 25,273,000 $ 56,955,000
-------------- --------------
Commitments and contingencies (Note 10)
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized, 6,000,000 shares; none issued.. $ - $ -
Common stock, $.20 par value; authorized, 25,000,000 shares;
issued, 8,298,000 shares................................................ 1,660,000 1,660,000
Capital in excess of par value............................................ 38,822,000 38,820,000
Retained earnings......................................................... 9,467,000 8,427,000
Treasury stock at cost, 2,359,000 and 2,398,000 shares, respectively...... (14,946,000) (15,195,000)
-------------- --------------
Total shareholders' equity............................................. 35,003,000 33,712,000
-------------- --------------
Total liabilities and shareholders' equity............................. $ 60,276,000 $ 90,667,000
-------------- --------------
See accompanying notes to consolidated financial statements.
1
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three-Months Ended Nine-Months Ended
September 30, September 30,
2003 2002* 2003 2002*
----------- ------------ ------------ ------------
Net Sales .................................................... $26,732,000 $ 27,086,000 $ 80,394,000 $ 82,543,000
Cost and expenses:
Cost of products sold ....................................... 17,113,000 17,158,000 51,250,000 52,785,000
Engineering and product development ......................... 1,874,000 1,935,000 5,788,000 5,579,000
Selling, general and administrative ......................... 5,977,000 7,236,000 18,636,000 20,703,000
Depreciation and amortization ............................... 609,000 754,000 1,891,000 2,206,000
Asset impairment charges .................................... 703,000 - 703,000 -
Special charges ............................................. - - - 1,834,000
Restructuring costs ......................................... - - - 265,000
----------- ------------ ------------ ------------
Total cost and expenses ...................................... 26,276,000 27,083,000 78,268,000 83,372,000
----------- ------------ ------------ ------------
Income (loss) from continuing operations ..................... 456,000 3,000 2,126,000 (829,000)
Other income (expense):
Interest income ............................................. 34,000 6,000 130,000 16,000
Interest expense ............................................ (105,000) (379,000) (440,000) (1,271,000)
----------- ------------ ------------ ------------
Income (loss) from continuing operations before income taxes.. 385,000 (370,000) 1,816,000 (2,084,000)
Income tax provision (benefit) ............................... 230,000 (344,000) 776,000 (1,213,000)
----------- ------------ ------------ ------------
Income (loss) from continuing operations ..................... 155,000 (26,000) 1,040,000 (871,000)
Income from discontinued operations (net of tax) ............. - 609,000 - 1,375,000
----------- ------------ ------------ ------------
Net income ................................................... $ 155,000 $ 583,000 $ 1,040,000 $ 504,000
----------- ------------ ------------ ------------
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income (loss) from continuing operations .................... $ 0.03 $ 0.00 $ 0.18 $ (0.15)
Income from discontinued operations (net of tax)............. - 0.10 - 0.24
----------- ------------ ------------ ------------
Net income .................................................. $ 0.03 $ 0.10 $ 0.18 $ 0.09
----------- ------------ ------------ ------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Income (loss) from continuing operations .................... $ 0.03 $ 0.00 $ 0.18 $ (0.15)
Income from discontinued operations (net of tax)............. - 0.10 - 0.24
----------- ------------ ------------ ------------
Net income .................................................. $ 0.03 $ 0.10 $ 0.18 $ 0.09
----------- ------------ ------------ ------------
Shares used in computing basic net income (loss)
per common share............................................. 5,932,000 5,892,000 5,908,000 5,856,000
Shares used in computing diluted net income (loss)
per common share............................................. 5,967,000 5,894,000 5,931,000 5,896,000
* RECLASSIFIED FOR COMPARATIVE PURPOSES ONLY.
See accompanying notes to consolidated financial statements.
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(unaudited)
Three-Months Ended Nine-Months Ended
September 30, September 30,
2003 2002* 2003 2002*
----------- ------------ ------------ ------------
Net income.............................................. $ 155,000 $ 583,000 $ 1,040,000 $ 504,000
Other comprehensive income (loss):
Currency translation adjustment, net of related taxes.. - (92,000) - 310,000
----------- ------------ ------------ ------------
Comprehensive income.................................... $ 155,000 $ 491,000 $ 1,040,000 $ 814,000
----------- ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
2
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
(unaudited)
2003 2002*
-------------- --------------
OPERATING ACTIVITIES:
Net income (loss) from continuing operations ............................. $ 1,040,000 $ (871,000)
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation ............................................................ 1,421,000 1,742,000
Amortization ............................................................ 471,000 464,000
Impairment of long-lived assets ......................................... 703,000 -
Restructuring costs ..................................................... - 35,000
Provisions for losses on accounts receivable ............................ 14,000 361,000
Deferred compensation and supplemental retirement benefits .............. 311,000 411,000
Deferred compensation and supplemental retirement benefit payments ...... (402,000) (1,918,000)
Decrease in deferred income taxes ....................................... 91,000 606,000
Gain on sale of equipment ............................................... (2,000) (141,000)
Changes in operating assets and liabilities, excluding effects
of business disposition:
Accounts receivable .................................................... 2,150,000 4,830,000
Inventories ............................................................ 2,457,000 2,377,000
Additions to other assets .............................................. (378,000) (230,000)
Cash surrender value of life insurance premiums ........................ 11,000 96,000
Prepaid expenses ....................................................... (260,000) (135,000)
Accounts payable ....................................................... (1,434,000) (2,418,000)
Other accrued liabilities .............................................. (1,453,000) (50,000)
Accrued income taxes ................................................... 575,000 (715,000)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................ 5,315,000 4,444,000
-------------- --------------
INVESTING ACTIVITIES:
Proceeds from sale of subsidiary ........................................ 7,000,000 -
Proceeds from sale of equipment ......................................... 59,000 167,000
Purchases of property, plant, and equipment ............................. (1,169,000) (1,285,000)
Decrease in notes receivable ............................................ 1,000 1,000
Proceeds from cash surrender life insurance policies .................... - 10,676,000
-------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES ................................ 5,891,000 9,559,000
-------------- --------------
FINANCING ACTIVITIES:
Net proceeds from Senior Credit Facility ................................ 4,798,000 -
Payments of term loans .................................................. (981,000) -
Proceeds from Revolving Credit Facility ................................. - 15,100,000
Payments to Revolving Credit Facility ................................... (17,557,000) (30,703,000)
Proceeds from stock options exercised ................................... 122,000 86,000
Treasury stock sold ..................................................... 127,000 847,000
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES .................................... (13,491,000) (14,670,000)
-------------- --------------
NET CASH USED IN DISCONTINUED OPERATIONS ................................. (606,000) (1,086,000)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................. (2,891,000) (1,753,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................... 3,539,000 2,466,000
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 648,000 $ 713,000
-------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................................................... $ 262,000 $ 1,535,000
Income taxes ........................................................... $ 335,000 $ 379,000
*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 September 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's
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 on April 3, 2004.
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 applicable periods ended September 30, 2002.
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 in
2003.
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. The Senior Credit Facility 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 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 8).
4
2. RECEIVABLES
Receivables at September 30, 2003 and December 31, 2002 consisted of the
following:
September 30, December 31,
2003 2002
---------------------------
(in thousands)
Trade receivables.......................................... $ 14,732 $ 14,306
Less allowances for doubtful accounts...................... (362) (273)
-----------------------
14,370 14,033
Recoverable income taxes................................... 299 1,992
Other...................................................... 1,093 1,976
-----------------------
$ 15,762 $ 18,001
=======================
Recoverable income taxes of $1,789,000 were received on May 27, 2003.
3. INVENTORIES
Inventories at September 30, 2003 and December 31, 2002 consisted of the
following:
September 30, December 31,
2003 2002
---------------------------
(in thousands)
Raw materials............................................... $ 8,720 $ 9,951
Work in process............................................. 3,725 4,014
Finished goods.............................................. 1,833 2,367
-----------------------
14,278 16,332
Less allowances............................................. (2,988) (2,585)
-----------------------
$ 11,290 $ 13,747
=======================
4. INCOME PER SHARE
The Company has presented net income per common share pursuant to the Financial
Accounting Standards Board Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings per Share." Basic net income per common share is computed by
dividing reported net income 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 per
share:
Three Months Ended September 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 $ 155 5,932 $ 0.03 $ 583 5,892 $0.10
Effect of dilutive
securities -- 35 -- -- 2 --
------------------------------ -----------------------------
Diluted net income
per common share $ 155 5,967 $ 0.03 $ 583 5,894 $0.10
============================== =============================
Nine Months Ended September 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 $1,040 5,908 $ 0.18 $ 504 5,856 $0.09
Effect of dilutive
securities -- 23 -- -- 40 --
----------------------------- --------------------------------
Diluted net income per
common share $1,040 5,931 $ 0.18 $ 504 5,896 $0.09
============================= ================================
For the nine month periods ended September 30, 2003, and September 30, 2002,
common stock options of 504,902 and 539,264, respectively, were excluded from
the diluted computations 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 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
6
expense is recognized at the time of stock 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 stock 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 stock 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------------------- ---------------------
(in thousands, except per common share amounts)
Net income, as reported $ 155 $ 583 $ 1,040 $ 504
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects - - - -
------------------ ------------------
$ 155 $ 583 $ 1,040 $ 504
Deduct: Total stock-based employee
compensation expense determined under fair value
based method for awards granted, modified, or
settled, net of related tax effects (156) (188) (649) (505)
------------------ ------------------
Pro forma net income (loss) $ (1) $ 395 $ 391 $ (1)
================== ==================
Earnings per common share:
Basic - as reported $ 0.03 $ 0.10 $ 0.18 $ 0.09
Basic - pro forma $ 0.00 $ 0.07 $ 0.07 $ 0.00
Diluted - as reported $ 0.03 $ 0.10 $ 0.18 $ 0.09
Diluted - pro forma $ 0.00 $ 0.07 $ 0.07 $ 0.00
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. Adoption of SFAS No. 149 had no impact on the Company's financial
condition or results of operations.
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
9
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. Adoption of SFAS No. 150
had no impact on the Company's financial condition or results of operations.
6. LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of an asset may not be
recoverable in accordance with SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." If the carrying amounts of its long-lived
assets exceeds the Company's assessment of fair market value an impairment
charge is recorded. During the third quarter of 2003, the Company completed a
strategic review of its SL Surface Technologies, Inc. ("SurfTech") business
segment. As a result of that review, an impairment charge of $703,000 was
recorded during the quarter ending September 30, 2003. Included in the $703,000
is a charge of $275,000, which was recorded against the carrying value of the
Company's property located in Camden, New Jersey. The value of the property was
determined by an independent third party appraiser. An impairment charge of
$428,000 was also recorded during the quarter against certain machinery and
equipment being utilized by SurfTech.
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
September 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 946 575 371 938 523 415
Covenant Not To Compete 110 110 ---- 2,980 2,980 ----
Trademarks 922 310 612 922 282 640
Other 501 475 26 501 471 30
--------------------------------------- ---------------------------------------
Total Other Intangible Assets 2,479 1,470 1,009 5,341 4,256 1,085
--------------------------------------- ---------------------------------------
$ 14,646 $ 3,334 $ 11,312 $ 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 nine month periods for fiscal 2003 was $28,000 and
$84,000, respectively. Amortization expense for intangible assets subject to
amortization in each of the next five fiscal years is estimated to be
approximately $111,000 per year.
10
8. DEBT
Debt consists of the following:
September 30, December 31,
2003 2002
---------------------------
(in thousands)
Revolving line of credit $ 1,000 $ 17,557
Term Loan A 2,089 -----
Term Loan B 728 -----
---------------------------
3,817 17,557
Less current portion (1,310) (17,557)
---------------------------
Long term debt $ 2,507 $ -----
===========================
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. The Senior Credit
Facility 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 September 30, 2003, the outstanding revolving loan balance was
$1,000,000 and the outstanding term loan balances were $2,089,000 and $728,000,
or a total of $3,817,000.
As of November 2, 2003, outstanding balances under the Senior Credit Facility
were $3,708,000 and availability under the revolving loan was $10,862,000.
The schedule of payments on long-term debt is as follows:
September 30
--------------
(in thousands)
2004 $ 1,310
2005 810
2006 1,697
-------
$ 3,817
Less-current portion (1,310)
-------
Total long-term debt $ 2,507
=======
11
9. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following:
September 30, December 31,
2003 2002
----------------------------
(in thousands)
Insurance, taxes and commissions $ 1,820 $ 1,343
Professional fees 2,158 4,151
Accrued warranty reserve 895 897
Accrual for contingencies, and other 1,794 1,079
-------- --------
$ 6,667 $ 7,470
======== ========
The Company's warranty reserve, which is included in accrued liabilities and
other above, for the period ended September 30, 2003 is as follows:
September 30,
2003
-------------
(in thousands)
Liability, beginning of year $ 897
Expense for new warranties issued 149
Expense related to accrual revisions for prior year (6)
Warranty claims (145)
-------------
Liability, end of period $ 895
=============
10. 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,
which may occur in the normal operations of the Company's business. 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.
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
12
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.
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 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 $940,000. 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
13
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 September 30, 2003 and December 31, 2002, the remaining
environmental accrual was $940,000 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 approximately
$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.
11. SEGMENT INFORMATION
Under the disclosure requirements of Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
the Company 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
14
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
telecommunications 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.
The unaudited comparative results for the three-month and nine-month periods are
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-----------------------------------------
(in thousands)
Net sales from continuing operations:
Power Electronics $ 15,624 $ 15,871 $ 45,089 $ 42,157
SL-MTI 5,274 4,788 16,403 16,738
RFL 5,345 5,873 17,388 21,906
SurfTech 489 554 1,514 1,742
-----------------------------------------
Consolidated $ 26,732 $ 27,086 $ 80,394 $ 82,543
=========================================
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------------------------------------
(in thousands)
Income (loss) from continuing operations:
Power Electronics $ 1,877 $ 1,469 $ 4,582 $ 2,431
SL-MTI 330 174 1,136 1,113
RFL 414 586 1,564 2,798
SurfTech (975) (156) (1,231) (642)
Other (1,190) (2,070) (3,925) (6,529)
----------------------------------------
Consolidated $ 456 $ 3 $ 2,126 $ (829)
========================================
Included in "Other" for the three month periods ended September 30, 2003 and
2002 are corporate office expenses, environmental charges, professional and
legal fees and other costs
15
incurred, which are Company related costs not specifically allocated to the
reportable business segments.
Included in "Other" for the nine months ended September 30, 2002 were special
charges of $1,834,000 related to change-of-control and proxy costs, a $772,000
addition to the reserve for environmental matters, professional, legal fees and
other expenses not specifically allocated to the reportable business units.
These charges were partially offset by the gain on the sale of real property
located in Auburn, New York.
There were no special charges for the nine month period ended September 30,
2003; however, the Company has incurred significant additional charges of
approximately $681,000 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 10).
September 30, December 31,
2003 2002
----------------------------------
(in thousands)
Identifiable assets:
Power Electronics $ 23,769 $ 26,862
SL-MTI 9,290 9,691
RFL 16,335 16,322
SurfTech 1,241 1,995
Other 9,641 35,797
--------------------------------
Consolidated $ 60,276 $ 90,667
================================
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.
September 30, December 31,
2003 2002
----------------------------------
(in thousands)
Intangible assets (net):
Power Electronics $ 6,037 $ 6,107
SL-MTI 26 30
RFL 5,249 5,251
--------------------------------
Consolidated $ 11,312 $ 11,388
================================
12. 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 nine month periods ended September 30, 2002 were $7,495,000
and $19,394,000 respectively. Net income for the three and nine month periods
ended September 30, 2002 was $609,000 and $1,062,000, respectively.
16
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 nine months ended September 30,
2002.
13. RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2003, the Company was billed $319,000
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 fees were incurred related to the sale of EME, the refinancing of the
Company's debt, the preparation, filing and amending a Registration Statement
regarding a potential Rights Offering, matters related to the Company's
continued listing on the New York Stock Exchange and eventual listing on the
American Stock Exchange and general corporate matters.
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 $356,000 for services performed for the nine months ended September 30,
2003.
17
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. 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 applicable periods
ended September 30, 2002. 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 in 2003.
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 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 restricts investments, acquisitions, capital
expenditures and dividends. The Senior Credit Facility contains financial
covenants relating to minimum levels of net worth, fixed charge coverage, EBITDA
levels and maximum levels of capital expenditures, as defined. As of September
30, 2003, the Company was in compliance with all the restrictions and covenants
of the Senior Credit Facility.
During the nine months ended September 30, 2003, the net cash provided by
operating activities was $5,315,000, as compared to net cash provided by
operating activities of $4,444,000 during the nine months ended September 30,
2002. The primary source of cash provided by operating activities for 2003 were
the reduction of accounts receivable primarily related to the receipt of an
income tax refund, reduction of inventory levels from year-end and positive
income from operations, offset primarily by payments made under the Company's
2002 bonus and incentive programs and payments of professional fees related to
closing the Senior Credit Facility and the sale of EME. In the first nine months
of 2002, net cash provided by operating activities was positively affected by
the recovery of income taxes, reduction of inventory and accounts receivables,
partially offset by payments under deferred compensation and retirement plans,
reductions in accounts payable, and negative operating results.
During the nine months ended September 30, 2003, net cash provided by investing
activities was $5,891,000, primarily related to the cash proceeds of $7,000,000
received from the sale of EME, partially offset by $1,169,000 in capital
expenditures. During the nine months ended September 30, 2002, net cash provided
by investing activities was $9,559,000, which was primarily generated by the
proceeds of $10,676,000 from the surrender of life insurance policies.
18
During the nine months ended September 30, 2003, net cash used in financing
activities was $13,491,000, primarily due to the payoff of the Company's
revolving credit facility (the "Former Credit Facility"). During the nine months
ended September 30, 2002, net cash used in financing activities was $14,670,000,
primarily related to the pay down of the Former Credit Facility in the net
amount of $15,603,000.
As of September 30, 2003, the Company had principal debt outstanding of
$3,817,000 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, the $4,000,000 cash purchase price, the receipt
of $3,000,000 under the purchaser note and the receipt of a $1,789,000 federal
income tax refund. The Company had $9,774,000 available for borrowings under the
Senior Credit Facility at September 30, 2003 and $10,862,000 on November 2,
2003.
The Company's current ratio was 1.9 to 1 at September 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 September 30, 2003 is primarily due to the
reduction of current debt from $17,557,000 at December 31, 2002 to $1,310,000 at
September 30, 2003.
As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 10% at September 30, 2003 and 34%
at December 31, 2002. During the first nine months of 2003 total borrowings
decreased by $13,740,000.
Capital expenditures of $1,169,000 made during the first nine months of 2003
primarily related to equipment purchases, new management information system and
building repairs. The amount of expenditures for the first nine months of 2003
is lower by $116,000 from the comparable 2002 period. During the remainder of
the year 2003, the Company may incur up to approximately $1,591,000 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 nine months of 2003, the Company has been able to generate
adequate amounts of cash to meet its operating needs, while reducing total
borrowing by $13,740,000. During the first nine months of 2003, the operating
segments had an aggregate positive cash flow of $7,054,000, compared to
$3,937,000 positive cash flow in the same period of 2002. All of the operating
business segments had positive cash flow for the first nine months of 2003,
except RFL and SurfTech, which had negative cash flow. Condor, now part of the
Power Electronics Group, experienced the most significant increase in cash flow
in the first nine 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 of $600,000 made
against its restructuring reserve, and payments of $1,252,000 under its deferred
compensation plan. 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 nine months of
19
2003. SurfTech's operating loss of $1,231,000 was negatively affected by a
$703,000 asset impairment charge recorded in the third quarter ending September
30, 2003. SurfTech is facing historically low demand in its marketplace.
The following is a summary of the Company's contractual obligations that existed
as of September 30, 2003:
Less Than 1 to 3 4 to 5 After 5
1 Year Years Years Years Total
-------------------------------------------------------------
(in thousands)
Operating Leases $ 799 $ 1,951 $ 422 --- $ 3,172
Debt 1,310 2,507 --- --- 3,817
Capital Leases 35 520 57 --- 612
-------------------------------------------------------------
$ 2,144 $ 4,978 $ 479 --- $ 7,601
=============================================================
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.
THREE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2002
The table below shows the comparison of net sales from continuing operations for
the quarter ended September 30, 2003 and the quarter ended September 30, 2002.
Increase/ Increase/ Three Months Three Months
(Decrease) Over (Decrease) Over Ended Ended
Same Quarter Same Quarter September 30, September 30,
Last Year Last Year 2003 2002
----------------------------------------------------------------------
Percent Amount Amount Amount
----------------------------------------------------------------------
(in thousands)
Power Electronics (2)% $ (247) $ 15,624 $ 15,871
SL-MTI 10% 486 5,274 4,788
RFL (9)% (528) 5,345 5,873
SurfTech (12)% (65) 489 554
----------------------------------------------------------------------
Total (1)% $ (354) $ 26,732 $ 27,086
----------------------------------------------------------------------
20
The table below shows the comparison of income from continuing operations for
the quarter ended September 30, 2003 and the quarter ended September 30, 2002.
Increase/ Increase/ Three Months Three Months
(Decrease) Over (Decrease) Over Ended Ended
Same Quarter Same Quarter September 30, September 30,
Last Year Last Year 2003 2002
------------------------------------------------------------------
Percent Amount Amount Amount
------------------------------------------------------------------
(in thousands)
Power Electronics 28% $ 408 $ 1,877 $ 1,469
SL-MTI 90% 156 330 174
RFL (29)% (172) 414 586
SurfTech (525)% (819) (975) (156)
Other 43% 880 (1,190) (2,070)
------------------------------------------
Total $ 453 $ 456 $ 3
------------------------------------------
Consolidated net sales from continuing operations for the three month period
ended September 30, 2003 decreased by $354,000, or 1%, compared to the same
quarter in 2002. SL-MTI was the only business segment to experience an increase
in sales ($486,000 or 10%), compared to the same quarter last year. This
increase resulted from a combination of relatively strong military sales in the
2003 quarter, compared to historically weak military sales in the 2002 quarter.
The Power Electronics Group had a sales decrease of $247,000, or 2%. Condor,
which is part of this segment, experienced a sales decrease of $185,000, or 2%,
primarily related to lower international sales and increased allowances related
to its distributor scrap program. RFL experienced a significant reduction in
sales in the current quarter compared to 2002. RFL's sales decreased $528,000,
or 9%. This decrease is primarily attributed to its teleprotection and
protective relaying product lines, which decreased significantly from the 2002
quarter. At the end of 2001, RFL had a relatively strong backlog, which carried
into the first nine 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 for its teleprotection and protective relaying product lines. SurfTech's
sales decreased $65,000, or 12%. SurfTech's decrease was relatively less
significant than those experienced by RFL and the Power Electronics Group and
less significant to the Company's consolidated net sales for the third quarter
of 2003, as compared to 2002.
The Company had income from continuing operations of $456,000 for the three
month period ended September 30, 2003, as compared to operating income of $3,000
for the corresponding period last year, which is an increase of $453,000. The
components of operating expenses by business segment are discussed below.
Cost of products sold as a percentage of sales for the quarter ended September
30, 2003 increased slightly to 64%, as compared to 63% for the corresponding
period in 2002. Although most of the business segment sales decreased in the
2003 quarter as compared to the 2002 quarter cost of products sold percentage
remained relatively constant. The Power Electronics segment had a 63% cost of
products sold percentage for the comparative periods. SL-MTI has improved its
cost of products sold percentage from 75% in 2002, compared to 74% in the 2003
quarter due primarily to volume increases. RFL's cost of products sold
percentage in the current
21
quarter was 55%, as compared to 54% in the prior year quarter due to lower
volume and increased pricing pressures in the markets it serves.
Engineering and product development expenses for the three month periods ended
September 30, 2003 and September 30, 2002 were 7% of net sales and decreased by
$61,000 for the comparable periods. As a percentage of sales, all of the
business segments had engineering and product development expenditures in line
with the 2002 levels.
Selling, general and administrative expenses for the comparative periods in 2003
compared to 2002 decreased by $1,259,000, or 17%. As a percentage of sales,
selling, general and administrative expenses for the three months ended
September 30, 2003 and 2002 were 22% and 27%, respectively. The decrease in 2003
compared to 2002 is primarily related to reduced legal fees, lower commissions
and selling expenses due to reduced sales levels.
Depreciation and amortization expenses for the current three month period
decreased by $145,000, or 19%, primarily due to a reduced fixed asset base. As a
percentage of sales, these expenses were 2% in 2003 and 3% in 2002.
A $703,000 impairment of long lived assets was recorded during the quarter ended
September 30, 2003. The asset impairment charges were related to the recorded
value of SurfTech's machinery and equipment and the land and building that
houses SurfTech's business. An impairment charge of $275,000 was recorded
against the carrying value of land and building, as determined by an independent
third party appraiser. An impairment charge of $428,000 was recorded against the
recorded value of machinery and equipment based on management's ongoing review
of the carrying value of its long lived assets. SurfTech's business continues to
remain at historic lows.
Interest income increased for the current three month period by $28,000, 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 $274,000,
or 72%, 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 $609,000 for the three month period ended
September 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 nine
month periods in 2002.
The effective tax rate for the three month period ended September 30, 2003 was
approximately 60%, which was higher than the statutory rate, primarily due to
the expected loss of a portion of the tax benefits related to the asset
impairment recorded during the quarter. The effective tax benefit rate for the
three month period ended September 30, 2002 was greater than the statutory rate
primarily due to the recovery of tax benefits not previously recognized.
22
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002
The table below shows the comparison of net sales from continuing operations for
the nine months ended September 30, 2003 and the nine months ended September 30,
2002.
Increase/ Increase/
(Decrease) (Decrease) Nine Months Nine Months
Over Same Over Ended Ended
Quarter Same Quarter September 30, September 30,
Last Year Last Year 2003 2002
-------------------------------------------------------------
Percent Amount Amount Amount
-------------------------------------------------------------
(in thousands)
Power Electronics 7% $ 2,932 $ 45,089 $ 42,157
SL-MTI (2)% (335) 16,403 16,738
RFL (21)% (4,518) 17,388 21,906
SurfTech (13)% (228) 1,514 1,742
----------------------------------------------------------
Total (3)% $ (2,149) $ 80,394 $ 82,543
----------------------------------------------------------
The table below shows the comparison of income (loss) from continuing operations
for the nine months ended September 30, 2003 and September 30, 2002.
Increase/ Increase/
(Decrease) (Decrease) Nine Months Nine Months
Over Same Over Ended Ended
Quarter Same Quarter September 30, September 30,
Last Year Last Year 2003 2002
-------------------------------------------------------------
Percent Amount Amount Amount
-------------------------------------------------------------
(in thousands)
Power Electronics 88% $ 2,151 $ 4,582 $ 2,431
SL-MTI 2% 23 1,136 1,113
RFL (44)% (1,234) 1,564 2,798
SurfTech (92)% (589) (1,231) (642)
Other 40% 2,604 (3,925) (6,529)
-----------------------------------------------------------
Total 356% $ 2,955 $ 2,126 $ (829)
-----------------------------------------------------------
Consolidated net sales from continuing operations for the nine months ended
September 30, 2003, compared to the nine months ended September 30, 2002
decreased by $2,149,000, or 3%. This decrease was due mainly to a significant
sales decrease at RFL of $4,518,000, or 21%, and to a lesser extent SL-MTI's
sales decrease of $335,000, or 2%, and SurfTech, which decreased $228,000, or
13%. These decreases were partially offset by significant increases in sales in
the Power Electronics Group of $2,932,000, or 7%. RFL has experienced a
significant decrease in its teleprotection and protective relaying product
lines, which have decreased $3,629,000, or 33%, and $1,624,000, or 70%,
respectively, in the nine month period ended September 30, 2003, compared to the
same period last year. At the end of 2001, RFL had a relatively strong backlog,
which carried into the first nine months of 2002 and generated a record sales
performance for the first nine months of 2002. RFL is experiencing inconsistent
procurement patterns from electric power utility companies who are the major
purchasers of its teleprotection and protective
23
relaying product lines. SL-MTI's decrease in sales for the comparative nine
months is primarily due to a decrease in military spending through the first six
months of 2003, as compared to 2002. Power Electronics' sales increase is
primarily related to increased sales recorded by Condor of $2,695,000, or 10%,
which is reflected within the Power Electronics Group. The increase in sales at
Condor is related to increased sales to distributors of telecommunication
products. In addition, Condor had lower returns from distributors in the 2003
period, as compared to 2002, due to its new distributor scrap program. Teal,
which is also in the Power Electronics Group, had a sales increase of $237,000,
or 2%, primarily due to increased sales in its semiconductor product line.
The Company realized operating income of $2,126,000 for the nine months ended
September 30, 2003, as compared to operating loss of $829,000 for the
corresponding period in 2002, or an increase of $2,955,000. During the nine
months ended September 30, 2003, the Company recorded an asset impairment charge
of $703,000 related to certain long-lived assets held by SurfTech. During the
nine months ended September 30, 2002, the Company recorded (i) a charge of
$265,000 as a result of the restructuring charges primarily recorded at Condor,
(ii) a special charge of $1,834,000 related to change-of-control and proxy costs
and (iii) an addition of $500,000 to the reserve for environmental matters. 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 nine months ended
September 30, 2003 and 2002 was approximately 64%. The Power Electronics Group
and MTI improved their cost of products sold percentage by slightly greater than
2%. RFL's cost of products sold percentage increased by approximately 3%. The
improvement in the Power Electronics Group is primarily attributable to Condor,
which had a significant increase in sales. Condor also improved production
efficiency as a result of the 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 telecommunications product line from its Reynosa, Mexico facility to
its current location in Mexicali, Mexico. The improvement in SL-MTI's cost of
products sold percentage is primarily due to an inventory charge taken in 2002
and slightly improved manufacturing efficiency at its Cedro, Mexico plant. RFL's
increase in cost of goods sold percentage is primarily due to a significant
reduction in volume.
Engineering and product development expenses for the nine months ended September
30, 2003 and 2002 remained at approximately 7% of sales. The increase in
expenses of $209,000 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 nine months ended September
30, 2003 decreased by $2,067,000, or approximately 10%, as compared to the same
period last year. As a percentage of net sales, selling, general and
administrative expenses for the nine months ended September 30, 2003 and 2002
were approximately 23% and 25%, respectively. The reduction in expenses is
primarily due to reduced selling costs and commissions related to reduced
revenue levels and reduced legal fees. Additionally in 2003, the Company
incurred approximately $681,000 in costs related to the defense of a class
action lawsuit related to environmental matters. Without these defense costs,
selling, general and administrative expenses would have decreased $2,748,000, or
13%, compared to the same nine month period in 2002.
Depreciation and amortization expenses for the nine months ended September 30,
2003 decreased by $315,000, or 14%, compared to 2002, primarily due to a reduced
fixed asset base.
24
Interest income for the nine months ended September 30, 2003 increased by
$114,000, 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 nine month period decreased
by $831,000, or 65%, 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 nine months ended September 30, 2003 was
approximately 43%, and higher than the statutory rate, primarily due to the
expected loss of a portion of the tax benefits related to the asset impairment
recorded during the quarter. The effective tax benefit rate for the nine months
ended September 30, 2002 was 58%, which is greater than the statutory rate due
to the recovery of tax benefits not previously recognized.
Income from discontinued operations of $1,375,000 for the nine month period
ended September 30, 2002 represents the net income of EME in the amount of
$1,062,000. EME was sold on January 6, 2003 and is reflected as a discontinued
operation for the three and nine 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 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.
25
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
The Company, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the Company's "disclosure controls and procedures," as such term is defined
in Rules 13a-15e and 15d-15e promulgated under the Securities Exchange Act of
1934, as amended, as of this Quarterly Report (the "Report"). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this Report to provide reasonable
assurance that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms. There have been no 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.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent
26
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected.
PART II - OTHER INFORMATION
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
None.
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: November 11, 2003 SL INDUSTRIES, INC.
-------------------
(Registrant)
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)
28