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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, 2004
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
N/A
- -------------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report)
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 4, 2004
were 5,438,408.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2004 (Unaudited) and December 31, 2003 ....................................... 1
Consolidated Statements of Operations
Three Months Ended September 30, 2004 and 2003 (Unaudited)
and Nine Months Ended September 30, 2004 and 2003 (Unaudited) .............................. 2
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003 (Unaudited) ................................. 3
Notes to Consolidated Financial Statements (Unaudited) ........................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..................................... 30
Item 4. Controls and Procedures ........................................................................ 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................. 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .................................... 30
Item 6. Exhibits and Reports on Form 8-K ............................................................... 31
SIGNATURES ............................................................................................. 33
Item 1. Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 1,078,000 $ 3,501,000
Receivables, net .................................................... 17,686,000 13,064,000
Notes receivable .................................................... - 1,000,000
Inventories, net .................................................... 15,234,000 11,009,000
Prepaid expenses .................................................... 812,000 1,066,000
Deferred income taxes, net .......................................... 3,513,000 3,947,000
------------ ------------
Total current assets ............................................ 38,323,000 33,587,000
------------ ------------
Property, plant and equipment, net ..................................... 8,720,000 9,547,000
Deferred income taxes, net ............................................. 3,236,000 2,308,000
Goodwill, net .......................................................... 10,303,000 10,303,000
Other intangible assets, net ........................................... 1,240,000 980,000
Other assets and deferred charges ........ ............................. 1,890,000 1,696,000
------------ ------------
Total assets ................................................... $ 63,712,000 $ 58,421,000
============ ============
LIABILITIES
Current liabilities:
Debt, current portion ............................................... $ 559,000 $ 887,000
Accounts payable .................................................... 6,823,000 3,818,000
Accrued income taxes ................................................ 2,227,000 1,203,000
Accrued liabilities:.................................................
Payroll and related costs ......................................... 6,004,000 5,665,000
Other ............................................................. 5,846,000 5,402,000
------------ ------------
Total current liabilities ...................................... 21,459,000 16,975,000
------------ ------------
Debt, less current portion ............................................. 1,596,000 2,015,000
Deferred compensation and supplemental retirement benefits ............. 3,905,000 3,904,000
Other liabilities ...................................................... 695,000 946,000
------------ ------------
Total liabilities .............................................. 27,655,000 23,840,000
============ ============
Commitments and contingencies
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 ......................................... 39,090,000 38,863,000
Retained earnings ...................................................... 16,289,000 9,018,000
Treasury stock at cost, 2,868,000 and 2,356,000 shares, respectively ... (20,982,000) (14,960,000)
------------ ------------
Total shareholders' equity ..................................... 36,057,000 34,581,000
------------ ------------
Total liabilities and shareholders' equity ..................... $ 63,712,000 $ 58,421,000
============ ============
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,
----------------------------- -----------------------------
2004 2003 * 2004 2003 *
------------ ------------ ------------ ------------
Net sales ................................................. $ 30,910,000 $ 26,243,000 $ 88,059,000 $ 78,880,000
------------ ------------ ------------ ------------
Cost and expenses:
Cost of products sold ................................... 19,630,000 16,551,000 55,795,000 49,809,000
Engineering and product development ..................... 2,284,000 1,945,000 6,867,000 5,969,000
Selling, general and administrative ..................... 5,827,000 5,425,000 17,803,000 16,889,000
Depreciation and amortization............................ 498,000 438,000 1,441,000 1,384,000
Asset impairment ........................................ - 275,000 - 275,000
------------ ------------ ------------ ------------
Total cost and expenses ................................... 28,239,000 24,634,000 81,906,000 74,326,000
------------ ------------ ------------ ------------
Income from operations .................................... 2,671,000 1,609,000 6,153,000 4,554,000
Other income (expense): ...................................
Amortization of deferred financing costs ................ (112,000) (123,000) (336,000) (324,000)
Interest income ......................................... 22,000 34,000 83,000 130,000
Interest expense ........................................ (59,000) (88,000) (207,000) (357,000)
------------ ------------ ------------ ------------
Income from continuing operations before income taxes ..... 2,522,000 1,432,000 5,693,000 4,003,000
Income tax provision (benefit) ............................ (32,000) 571,000 894,000 1,544,000
------------ ------------ ------------ ------------
Income from continuing operations ......................... 2,554,000 861,000 4,799,000 2,459,000
Income (loss) from discontinued operations (net of
tax) .................................................... (3,000) (706,000) 2,473,000 (1,419,000)
------------ ------------ ------------ ------------
Net income ................................................ $ 2,551,000 $ 155,000 $ 7,272,000 $ 1,040,000
============ ============ ============ ============
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income from continuing operations ..................... $ 0.44 $ 0.15 $ 0.82 $ 0.42
Income (loss) from discontinued operations
(net of tax)......................................... 0.00 (0.12) 0.42 (0.24)
------------ ------------ ------------ ------------
Net income ............................................ $ 0.44 $ 0.03 $ 1.24 $ 0.18
============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Income from continuing operations ..................... $ 0.43 $ 0.15 $ 0.81 $ 0.42
Income (loss) from discontinued operations (net
of tax) ............................................ 0.00 (0.12) 0.41 (0.24)
------------ ------------ ------------ ------------
Net income ............................................ $ 0.43 $ 0.03 $ 1.22 $ 0.18
============ ============ ============ ============
Shares used in computing basic net income (loss)
per common share ........................................ 5,801,000 5,932,000 5,873,000 5,908,000
Shares used in computing diluted net income (loss)
per common share ........................................ 5,909,000 5,967,000 5,978,000 5,931,000
* RECLASSIFIED FOR COMPARATIVE PURPOSES ONLY.
See accompanying notes to consolidated financial statements.
2
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
(Unaudited)
Income from continuing operations ........................... $ 4,799,000 $ 2,459,000
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Depreciation ............................................. 1,232,000 1,240,000
Amortization ............................................. 209,000 144,000
Amortization of deferred financing costs ................. 336,000 324,000
Asset impairment ......................................... - 275,000
Issuance of stock options ................................ 602,000 107,000
Provisions for losses on accounts receivable ............. 75,000 93,000
Additions to other assets ................................ (465,000) (344,000)
Deferred compensation and supplemental retirement
benefits ................................................. 354,000 313,000
Deferred compensation and supplemental retirement
benefit payments ....................................... (405,000) (402,000)
(Increase) decrease in deferred income taxes ............. (661,000) 549,000
Gain on sale of equipment ................................ (8,000) (3,000)
Changes in operating assets and liabilities, excluding
effects of business disposition:
Accounts receivable .................................... (4,150,000) 1,181,000
Inventories ............................................ (4,224,000) 2,507,000
Prepaid expenses ....................................... 254,000 (258,000)
Accounts payable ....................................... 3,117,000 (1,220,000)
Other accrued liabilities .............................. (174,000) (1,842,000)
Accrued income taxes ................................... 2,014,000 (84,000)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................... 2,905,000 5,039,000
----------- ------------
INVESTING ACTIVITIES:
Proceeds from sale of subsidiary (cash and notes
receivable) ............................................... 1,000,000 7,000,000
Proceeds from sale of equipment ............................. 9,000 -
Purchases of property, plant and equipment .................. (1,167,000) (1,166,000)
----------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ........... (158,000) 5,834,000
----------- ------------
FINANCING ACTIVITIES:
Payments of deferred financing costs ........................ - (736,000)
Net proceeds from Senior Credit Facility .................... - 4,798,000
Payments of term loans ...................................... (747,000) (981,000)
Payments to Revolving Credit Facility, net .................. - (17,557,000)
Proceeds from stock options exercised ....................... 272,000 114,000
Treasury stock (purchases) sales ............................ (6,218,000) 138,000
----------- ------------
NET CASH (USED IN) FINANCING ACTIVITIES ....................... (6,693,000) (14,224,000)
----------- ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS .................. 1,523,000 460,000
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ....................... (2,423,000) (2,891,000)
----------- ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. 3,501,000 3,539,000
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 1,078,000 $ 648,000
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................................. $ 214,000 $ 262,000
Income taxes .............................................. $ 1,426,000 $ 335,000
* RECLASSIFIED FOR COMPARATIVE PURPOSES ONLY.
See accompanying notes to consolidated financial statements.
3
SL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 2004. 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, 2003. The statements of operations and cash flows for the applicable periods
ended September 30, 2003 and certain footnotes have been reclassified to reflect
the effect of discontinued operations.
2. RECEIVABLES
Receivables at September 30, 2004 and December 31, 2003 consisted of the
following:
September 30, December 31,
2004 2003
------------- ------------
(in thousands)
----------------------------
Trade receivables $ 17,387 $ 12,656
Less allowances for doubtful accounts (439) (365)
-------- --------
16,948 12,291
Recoverable income taxes 231 406
Other 507 367
-------- --------
$ 17,686 $ 13,064
======== ========
3. INVENTORIES
Inventories at September 30, 2004 and December 31, 2003 consisted of the
following:
September 30, December 31,
2004 2003
------------- ------------
(in thousands)
----------------------------
Raw materials $ 10,285 $ 8,384
Work in process 5,091 3,769
Finished goods 2,925 1,494
-------- --------
18,301 13,647
Less allowances (3,067) (2,638)
-------- --------
$ 15,234 $ 11,009
======== ========
4
4. INCOME PER SHARE
The Company has presented net income per common share pursuant to 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.
The table below sets forth the computation of basic and diluted net income per
share:
Three Months Ended September 30,
2004 2003
------------------------------- ------------------------------
(in thousands, except per share amounts)
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
Basic net income per
common share $2,551 5,801 $ 0.44 $ 155 5,932 $ 0.03
Effect of dilutive
securities - 108 - - 35 -
------ ----- -------- ------ ----- --------
Diluted net income per
common share $2,551 5,909 $ 0.43 $ 155 5,967 $ 0.03
====== ===== ======== ====== ===== ========
Nine Months Ended September 30,
2004 2003
------------------------------- -------------------------------
(in thousands, except per share amounts)
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
Basic net income per
common share $7,272 5,873 $ 1.24 $1,040 5,908 $ 0.18
Effect of dilutive
securities - 105 - - 23 -
------ ----- -------- ------ ----- --------
Diluted net income per
common share $7,272 5,978 $ 1.22 $1,040 5,931 $ 0.18
====== ===== ======== ====== ===== ========
For the nine-month periods ended September 30, 2004 and September 30, 2003,
common stock options of 480,857 and 504,902, 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"). SFAS No. 148 provides alternative methods for a
voluntary change to the fair value method of
5
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123. The Company has elected to continue to account for
its stock-based employee compensation plans under Accounting Principals Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and
related interpretations. The following disclosures are provided in accordance
with SFAS No. 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
Opinion No. 25, compensation expense is measured as the excess, if any, of the
fair value of the Company's common stock at the date of the grant over the
amount a grantee must pay to acquire the stock. The Company's stock option plans
enable the Company to grant options with an exercise price not less than the
fair value of the Company's common stock at the date of the grant. However, the
Company has recognized approximately $24,000 and $451,000 in the three-month
period ended September 30, 2004 and the nine-month period ended September 30,
2004, respectively, in compensation expense related to certain stock based
compensation arrangements.
The exercise price of all stock options generally equals the market price of the
Company's common stock on the date of grant. Compensation cost has been
recognized for the Company's stock option plans as noted in the table below. 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 and
net income per common share would have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------- ------- --------- ---------
(in thousands, except per share amounts)
Net income, as reported $ 2,551 $ 155 $ 7,272 $ 1,040
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 15 63 316 77
------- ------- --------- ---------
2,566 218 7,588 1,117
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for awards granted,
modified, or settled, net of related tax effects (17) (219) (462) (726)
------- ------- --------- ---------
Pro forma net income $ 2,549 ($ 1) $ 7,126 $ 391
======= ======= ========= =========
Earnings per common share:
Basic - as reported $ 0.44 $ 0.03 $ 1.24 $ 0.18
Basic - pro forma $ 0.44 $ 0.00 $ 1.21 $ 0.07
Diluted - as reported $ 0.43 $ 0.03 $ 1.22 $ 0.18
Diluted - pro forma $ 0.43 $ 0.00 $ 1.19 $ 0.07
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
6
Nine Months Nine Months
Ended Ended
September 30, September 30,
2004 2003
------------- -------------
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 58.97% 60.06%
Risk-free interest rate 2.81% 2.69%
Expected life of stock option 5 years 5 years
The fair value of the above stock-based compensation costs was determined using
the Black-Scholes option valuation model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions, are fully transferable and do not include a
discount for large block trades. In addition, option valuation models require
the input of highly subjective assumptions, including the expected stock price
volatility, expected life of the option and other estimates. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes of the subjective input
assumptions can materially affect the fair value estimate, in the Company's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
5. INCOME TAX
The following is a reconciliation of income tax expense at the applicable
federal statutory rate and the effective rates:
Nine Months Ended September 30,
-------------------------------
2003
2004 (as adjusted)
---- -------------
Statutory rate 34% 34%
Tax rate differential on Extraterritorial
Income Exclusion benefit earnings (2) (3)
International rate differences 1 1
State income taxes, net of federal income tax benefit 5 5
Research and development tax/credits (22) --
Other -- 2
---- ----
16% 39%
==== ====
The 22% tax benefit for the nine months ended September 30, 2004 is the result
of research and development tax credit carry-forwards recorded primarily in the
third quarter of 2004.
6. RECENT AND PROPOSED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised Statement No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The FASB's revision of
Statement No. 132 requires new annual disclosures about the types of plan
assets, investment strategy, measurement date, plan obligations and cash flows,
as well as the components of the net periodic benefit cost recognized in interim
periods. In addition, companies are now required to disclose their estimates of
contributions to their plans during the next fiscal year and the components of
the fair value of total plan assets by type (i.e., equity securities, debt
securities, real estate and other assets). The Company adopted the provisions of
Statement No. 132 (revised) except for expected future benefit payments, which
must be disclosed for fiscal years ending after June 15, 2004.
On March 31, 2004, the FASB issued an exposure document entitled "Share-Based
Payment - an amendment of Statements No. 123 and 95 (Proposed Statement of
Financial Accounting
7
Standards)." The Proposed Statement would eliminate the ability to account for
share-based compensation transactions using APB No. 25, and generally would
require that such transactions be accounted for using a fair-value-based method.
This accounting treatment, if approved, could result in significant compensation
expense for the Company. The Proposed Statement currently contemplates its
provisions being applied to public entities prospectively for fiscal years
beginning after December 15, 2004, as if all share-based compensation awards
granted, modified, or settled after December 15, 1994, had been accounted for
using the fair-value method of accounting. Retrospective application of the
Proposed Statement is not permitted.
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30, 2004 December 31, 2003
---------------------------------------- ---------------------------------------
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 946 648 298 946 594 352
Covenant Not to Compete 110 110 - 110 110 -
Trademarks 922 347 575 922 319 603
Licensing Fees 355 9 346 - - -
Other 501 480 21 501 476 25
------- ------- ------- ------- ------- -------
Total Other Intangible Assets 2,834 1,594 1,240 2,479 1,499 980
------- ------- ------- ------- ------- -------
$15,001 $ 3,458 $11,543 $14,646 $ 3,363 $11,283
======= ======= ======= ======= ======= =======
The other intangible assets are all amortizable and have original estimated
useful lives as follows: patents are amortized over approximately 13 years,
trademarks over approximately 25 years, and licensing fees over approximately 10
years. Amortization expense for intangible assets for each of the three-month
periods ended September 30, 2004 and September 30, 2003 was $37,000 and $28,000,
respectively; and for the nine-month periods ended September 30, 2004 and
September 30, 2003 was $95,000 and $84,000, respectively. Amortization expense
for intangible assets subject to amortization in each of the next five fiscal
years is estimated to be $148,000 per year.
8. DEBT
Debt consists of the following:
September 30, December 31,
2004 2003
------------ ------------
(in thousands)
------------------------------
Revolving lines of credit $ 0 $ 327
Term loan A 1,697 1,992
Term loan B 458 583
------- -------
2,155 2,902
Less current portion (559) (887)
------- -------
Total long-term debt $ 1,596 $ 2,015
======= =======
8
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 overadvance amount
of $1,500,000. The overadvance amount was fully paid down on April 7, 2004. The
two term loans of $2,350,000 and $840,000 are being paid down over a three-year
term. The Senior Credit Facility restricts investments, acquisitions, capital
expenditures and dividends. The Senior Credit Facility also contains financial
covenants relating to minimum levels of net worth, fixed charge coverages,
levels of earnings before interest, taxes, depreciation and amortization 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 Company's 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, 2004, the outstanding revolving
loan balance was $0 and the outstanding term loan balances were $1,697,000 and
$458,000, or a total of $2,155,000. The outstanding term loan balances bore
interest at an annual rate of 5.25%. Availability under the Senior Credit
Facility at September 30, 2004 was $12,565,000.
The schedule of payments on long-term debt is as follows:
September 30,
--------------
(in thousands)
--------------
2005 $ 559
2006 1,596
-------
2,155
Less current portion (559)
-------
Total long-term debt $ 1,596
=======
9. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following:
September 30, December 31,
2004 2003
------------- ------------
(in thousands)
----------------------------
Taxes (other than income) and insurance $ 897 $ 1,062
Commissions 475 484
Accrued litigation and legal fees 1,326 1,109
Other professional fees 312 269
Environmental 1,148 957
Warranty 1,035 915
Other 1,253 1,206
Reclassified to long-term liabilities (600) (600)
------- -------
$ 5,846 $ 5,402
======= =======
9
The Company's warranty reserve, which is included in accrued liabilities and
other above, for the period ended September 30, 2004 is as follows:
September 30,
2004
--------------
(in thousands)
--------------
Liability, beginning of year $ 915
Expense for new warranties issued 345
Expense related to accrual revisions for prior year 30
Warranty claims (255)
-------
Liability, end of period $ 1,035
=======
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"), defended a
cause of action, brought against it in the fall of 2000, in the United States
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. The
full amount of the jury award and pre-trial interest is fully reserved. Eaton is
appealing the decision.
On February 3, 2004, the Company and American Power Conversion Corporation
("APC") executed a Settlement Agreement in connection with a lawsuit brought by
the Company against APC. Among other things the Settlement Agreement provided
for the payment to the Company of $4,000,000, which was paid on March 5, 2004. A
third party has threatened certain claims against the Company relating to this
matter for a portion of the payment. The Company disputes such claims and
intends to defend against them vigorously.
On June 12, 2002, the Company and its wholly owned subsidiary, SL Surface
Technologies, Inc. ("SurfTech"), were served with notice of a class action
complaint filed in Superior Court of New Jersey for Camden County.
(Substantially all of the operating assets of SurfTech were sold in November
2003). The Company and SurfTech are currently two of approximately 39 defendants
in this action. The complaint alleges, among other things, that the plaintiffs
suffered personal injuries as a result of consuming water distributed from the
Puchack Wellfield in Pennsauken, New Jersey (which supplied 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
10
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 plaintiffs' 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 and there
are several other technical factors and defenses available to the Company. Based
on the foregoing, 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 effects on the environment of the disposal or release of certain
chemical substances at various sites, such as Superfund sites and other
facilities, whether or not they are currently in operation. The Company is
currently participating in environmental assessments and cleanups at a number of
sites under these laws and may in the future be involved in additional
environmental assessments and cleanups. Based upon investigations completed by
the Company and its independent engineering-consulting firms to date, management
has provided an estimated accrual for all known costs believed to be probable in
the amount of $1,148,000. 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 off-sets thereto, at present such
expenses or judgments are not expected to have a material effect on the
consolidated financial position or results of operations of the Company.
Substantially all of the Company's environmental costs relate to discontinued
operations and all such costs have been recorded in discontinued operations.
The Company is the subject of various other lawsuits and actions relating to
environmental issues, including an administrative action 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 "NJDEP"). Technical data generated
as part of remedial activities at the SurfTech Site have not established offsite
migration of contaminants and there are other technical factors and defenses
available to the Company. Based on the foregoing, the Company has been advised
by its outside counsel that it has significant defenses against all or any part
of the claim and that any material impact is unlikely.
11
The Company has reported a ground water contamination plume on its property in
Camden, New Jersey. In January 2003, the Company submitted to the NJDEP a plan
to remediate the site, which is currently under review. Based upon the
preliminary evidence, the Company was advised that the cost to remediate the
site could amount to $500,000. The Company recorded a provision for this amount
during the first quarter of 2002.
The Company is investigating soil and ground water contamination on SL-MTI's
property in Montevideo, Minnesota. The Company has submitted to the Minnesota
Department of Environmental Protection a plan to remediate the site, which is
currently under review. The Company currently has an accrual of $87,000, net of
costs incurred, for all known costs believed to be probable related to this
site.
The Company filed claims with several of its insurers seeking reimbursement for
past and future environmental costs. In settlement of its claims, the Company
received aggregate cash payments of $2,800,000 prior to fiscal 2001 and
contingent commitments from three insurers to pay for a portion of environmental
costs associated with the SurfTech Site of 15% of costs up to $300,000, 15% of
costs up to $150,000 and 20% of costs up to $400,000, respectively. During the
second and third quarters of 2004, the Company received from these three
insurers a total of $555,000 as payment of their contingent commitments through
2003, which are recorded in discontinued operations. As of September 30, 2004
and December 31, 2003, the remaining environmental accruals of $1,148,000 and
$957,000, respectively, have been included in "Accrued liabilities and other"
(Note 9).
11. SEGMENT INFORMATION
The Company currently operates under four business segments: Condor D.C. Power
Supplies, Inc. ("Condor"), Teal Electronics Corp. ("Teal"), RFL Electronics Inc.
("RFL") and SL Montevideo Technology, Inc. ("SL-MTI"). In the second quarter of
2003, management decided to combine Condor and Teal into one business unit
classified as the Power Electronics Group. Accordingly, for the periods
presented, the Company's reportable segments consisted of Condor and Teal (the
"Power Electronics Group"), SL-MTI and RFL.
At December 31, 2002, the Company was comprised of five operating business
units. On November 24, 2003, the Company sold the operating assets of SurfTech.
SurfTech is classified as discontinued for all periods presented. 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
also provides customer service and maintenance for all electric utility
equipment protection systems. The Other segment includes corporate related
items, financing activities and other costs not allocated
12
to other reportable segments, which include but are not limited to certain
legal, litigation and public reporting charges.
The unaudited comparative results for the three-month and nine-month periods
ended September 30, 2004 and September 30, 2003 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
-------------------------------------------
NET SALES
Power Electronics Group:
Condor $11,442 $10,392 $30,966 $30,468
Teal 8,394 5,232 23,194 14,621
------- ------- ------- -------
Total 19,836 15,624 54,160 45,089
------- ------- ------- -------
SL-MTI 5,599 5,274 17,381 16,403
RFL 5,475 5,345 16,518 17,388
------- ------- ------- -------
Consolidated $30,910 $26,243 $88,059 $78,880
======= ======= ======= =======
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
-------------------------------------------
INCOME FROM OPERATIONS
Power Electronics Group:
Condor $ 1,357 $ 1,100 $ 2,758 $ 2,905
Teal 1,291 777 3,719 1,677
------- ------- ------- -------
Total 2,648 1,877 6,477 4,582
------- ------- ------- -------
SL-MTI 588 330 1,846 1,136
RFL 496 414 1,332 1,564
Other (1,061) (1,012) (3,502) (2,728)
------- ------- ------- -------
Consolidated $ 2,671 $ 1,609 $ 6,153 $ 4,554
======= ======= ======= =======
13
September 30, December 31,
2004 2003
------------- ------------
(in thousands)
---------------------------
TOTAL ASSETS
Power Electronics Group:
Condor $15,644 $11,439
Teal 13,072 9,665
------- -------
Total 28,716 21,104
------- -------
SL-MTI 9,765 9,255
RFL 17,366 16,512
Other 7,865 11,550
------- -------
Consolidated $63,712 $58,421
======= =======
September 30, December 31,
2004 2003
------------- ------------
(in thousands)
---------------------------
INTANGIBLE ASSETS, NET
Teal $ 5,927 $ 6,009
SL-MTI 21 25
RFL 5,595 5,249
------- -------
Consolidated $11,543 $11,283
======= =======
12. DISCONTINUED OPERATIONS
SL WABER
Effective August 27, 2001, substantially all of the assets of SL Waber, Inc.
("SL Waber") and the stock of Waber de Mexico S.A. de C.V. were sold for
approximately $1,053,000. As part of this transaction, the purchaser acquired
the rights to the SL Waber name and assumed certain liabilities and obligations
of SL Waber. Subsequent to the sale, the Company changed the name of SL Waber to
SLW Holdings, Inc. ("SLW Holdings"). The net income or losses of this subsidiary
are included in the consolidated statements of operations under discontinued
operations for all periods presented. There was no activity from operations of
SLW Holdings during the fourth quarter of 2001 and thereafter. In 1997, SL Waber
commenced patent infringement litigation against APC, the rights to which were
retained by SL Waber after the sale. On February 3, 2004, the Company and APC
executed a Settlement Agreement that provided, among other things, for a release
of all claims against APC and granted to APC a paid-up license, in return for
the payment to the Company of $4,000,000. The Settlement Agreement was
conditioned on the dismissal with prejudice of the lawsuit. On March 5, 2004,
the settlement fee was paid to the Company. The settlement fee, net of tax, in
the amount of $2,488,000 is recorded as part of discontinued operations in the
Company's consolidated statements of operations and cash flows for the nine
months ended September 30, 2004.
ELEKTRO-METALL EXPORT GMBH
On January 6, 2003, the Company sold its wholly-owned, indirect German
subsidiary, Elektro-Metall Export GmbH ("EME"). In consideration for 100% of the
issued and outstanding capital stock of EME, the purchaser paid $8,000,000,
consisting of cash of $4,000,000 paid at closing and $4,000,000 of purchaser
notes. In addition, EME made a distribution of $2,000,000 to the
14
Company prior to closing. The purchaser notes were comprised of a $3,000,000
secured note that bore interest at the prime rate plus 2%, which was received on
March 14, 2003, and a $1,000,000 unsecured note that bore interest at an annual
rate of 12%, which was received on April 2, 2004. All cash proceeds relating to
the purchase price for the sale of EME have now been received by the Company.
SL SURFACE TECHNOLOGIES, INC.
On November 24, 2003, the Company sold the operating assets of SurfTech. The
sale included current assets and equipment used by SurfTech. The purchaser paid
$600,000 in cash, plus the assumption of certain liabilities. The Company
continues to own the land and building on which SurfTech's operations were
conducted, and has entered into a ten-year lease with the buyer. As a result of
the sale, the Company recorded an after tax loss of $442,000 in the fourth
quarter of 2003, which included severance, closing costs and liabilities
associated with the withdrawal from a multi-employer union pension plan. The
Company paid most of the severance and all closing costs related to the sale in
the fourth quarter of 2003, but continues to make payments related to its
withdrawal liability from the pension plan in which SurfTech was a participant.
There has not been any operational activity related to SurfTech since the sale
in November 2003. During each of the three-month period and nine-month period
ended September 30, 2003, SurfTech had sales of $489,000 and $1,514,000,
respectively, and a net loss before income taxes of $717,000 and $1,039,000,
respectively, which has been reclassified as discontinued operations.
13. RETIREMENT PLANS AND DEFERRED COMPENSATION
The Company maintains three defined contribution pension plans covering
substantially all employees. The Company's contributions to these plans are
based on a percentage of employee elective contributions and, in one plan, plan
year gross wages, as defined. Contributions to plans maintained by Teal and RFL
are based on a percentage of employee elective contributions. RFL has also made
a profit sharing contribution annually. Costs incurred under these plans
amounted to $750,000 and $882,000 during the nine-month periods ended September
30, 2004 and September 30, 2003, respectively.
The Company has agreements with certain active and retired directors, officers
and key employees providing for supplemental retirement benefits. The liability
for supplemental retirement benefits is based on the most recent mortality
tables available at discount rates ranging from 6% to 12%. The amount charged to
income in connection with these agreements amounted to $314,000 and $235,000 for
the nine-month periods ended September 30, 2004 and September 30, 2003,
respectively.
14. RELATED PARTY TRANSACTIONS
During the period January 1, 2004 to June 9, 2004, the Company was billed
$81,000 in legal fees for services performed by Olshan Grundman Frome Rosenzweig
& Wolosky LLP ("Olshan"), a law firm in which a former director of the Company
is a senior partner. This director did not stand for reelection at the Company's
Annual Meeting of Shareholders held on June 9, 2004 and therefore is no longer
considered a related party. Regarding fees incurred through June 9, 2004 for
2004 services, $5,000 remains payable as of September 30, 2004. The fees relate
to general corporate and securities matters. During the nine months ended
September 30, 2003, the Company was billed $319,000 in legal fees for 2003
services performed by Olshan
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
15
Executive Officer of the Company, Warren Lichtenstein. These fees are in
consideration for the services of Mr. Lichtenstein and the Company's President,
Glen Kassan, as well as other assistance provided by SPL from time to time.
During the nine-month period ended September 30, 2004, the Company has expensed
$356,000 for SPL services, of which $40,000 remains payable. The Company
expensed $356,000 for services performed for the nine-month period ended
September 30, 2003.
RFL has an investment of $15,000 in RFL Communications PLC ("RFL
Communications"), representing 4.5% of the outstanding equity thereof. RFL
Communications is a distributor of teleprotection and communication equipment
located in the United Kingdom. It is authorized to sell RFL products in
accordance with an international sales agreement. Sales to RFL Communications
for each of the nine-month periods ended September 30, 2004 and September 30,
2003 were $1,005,000 and $560,000, respectively. Accounts receivable due from
RFL Communications at September 30, 2004 was $160,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company, through its subsidiaries, designs, manufactures and markets power
electronics, power motion, power protection, teleprotection and specialized
communication equipment that is used in a variety of aerospace, computer,
datacom, industrial, medical, telecom, transportation and utility equipment
applications. The Company is comprised of four domestic business segments, two
of which have significant manufacturing operations in Mexico. Most of the
Company's sales are made to customers who are based in the United States.
However, over the years the Company has increased its presence in international
markets. The Company places an emphasis on high quality, well-built, dependable
products and continues its dedication to product enhancement and innovations.
CRITICAL ACCOUNTING POLICIES
The Company's Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States. These
generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of net sales and expenses during
the reporting period.
The Company's significant accounting policies are described in Note 1 in the
Notes to Consolidated Financial Statements included in Part IV of the Company's
Annual Report on Form 10-K. Not all of these significant accounting policies
require management to make difficult, subjective or complex judgments or
estimates. However, the following policies could be deemed to be critical, as
that term is defined by the Securities and Exchange Commission.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time the product is shipped,
with provisions established for estimated product returns and returns related to
one business segment's stock scrap program with distributors. Upon shipment, the
Company provides for the estimated cost that may be incurred for product
warranties. Rebates and other sales incentives offered by the Company are
recorded as a reduction of sales at the time of shipment. Revenue recognition is
significant because net sales is a key component of results of operations. In
addition, revenue
16
recognition determines the timing of certain expenses, such as commissions and
royalties. The Company follows generally accepted guidelines in measuring
revenue. However, certain judgments affect the application of its revenue
policy. Revenue results are difficult to predict, and any shortfall in revenue
or delay in recognizing revenue could cause operating results to vary
significantly from quarter to quarter and could result in future operating
losses.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's estimate for the allowance for doubtful accounts related to trade
receivables is based on two methods. The amounts calculated from each of these
methods are combined to determine the total amount reserved. First, the Company
evaluates specific accounts where it has information that the customer may have
an inability to meet its financial obligations (bankruptcy, etc.). In these
cases, the Company uses its judgment, based on the best available facts and
circumstances, and records a specific reserve for that customer against amounts
due to reduce the receivable to the amount that is expected to be collected.
These specific reserves are reevaluated and adjusted as additional information
is received that impacts the amount reserved. Second, a general reserve is
established for all customers based on several factors, including historical
write-offs as a percentage of sales. If circumstances change (i.e., higher than
expected defaults or an unexpected material adverse change in a major customer's
ability to meet its financial obligation), the Company's estimates of the
recoverability of amounts due could be reduced by a material amount.
INVENTORIES
The Company values inventory at the lower of cost or market and continually
reviews the book value of discontinued product lines to determine if these items
are properly valued. The Company identifies these items and assesses the ability
to dispose of them at a price greater than cost. If it is determined that cost
is less than market value, then cost is used for inventory valuation. If market
value is less than cost, then related inventory is adjusted to that value.
If a write down to the current market value is necessary, the market value
cannot be greater than the net realizable value, which is defined as selling
price less costs to complete and dispose, and cannot be lower than the net
realizable value less a normal profit margin. The Company also continually
evaluates the composition of its inventory and identifies slow-moving and excess
inventories. Inventory items identified as slow-moving or excess are evaluated
to determine if reserves are required. If the Company is not able to achieve its
expectations of the net realizable value of the inventory at current market
value, it adjusts its reserves accordingly.
ACCOUNTING FOR INCOME TAXES
The Company's income tax policy records the estimated future tax effects of
temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carryforwards. The Company follows generally
accepted guidelines regarding the recoverability of any tax assets recorded on
the balance sheet and provides any necessary allowances as required. As part of
the process of preparing its consolidated financial statements, the Company is
required to estimate its income taxes in each of the jurisdictions in which it
operates. This process involves estimating the actual current tax exposure,
together with assessing temporary differences resulting from the differing
treatment of certain items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within the
consolidated balance sheet. Management must then assess the likelihood that
deferred tax assets will be recovered from future taxable income and to the
extent it believes that recovery is
17
not likely, the Company must establish a valuation allowance. To the extent it
establishes a valuation allowance or increases or decreases this allowance in a
period, it must include expense or income, as the case may be, within the tax
provision in the consolidated statement of operations.
Significant management judgment is required in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. As of September 30, 2004 and
December 31, 2003, the Company had recorded total valuation allowances of
$1,905,000 and $352,000, respectively, due to uncertainties related to the
utilization of some deferred tax assets, primarily consisting of certain
research and development tax credits, loss carryforwards and foreign tax credits
before they expire. The valuation allowance is based on estimates of taxable
income by jurisdiction in which the Company operates and the period over which
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or these estimates are adjusted in future periods, the
Company may need to establish an additional valuation allowance that could
materially impact its consolidated financial position and results of operations.
The net deferred tax assets as of September 30, 2004 and December 31, 2003 were
$6,749,000 and $6,255,000, respectively, net of valuation allowances of
$1,905,000 and $352,000, respectively. The carrying value of the Company's net
deferred tax assets assumes that it will be able to generate sufficient future
taxable income in certain tax jurisdictions based on estimates and assumptions.
If these estimates and related assumptions change in the future, the Company may
be required to record additional valuation allowances against its deferred tax
assets resulting in additional income tax expense in the consolidated statement
of operations. Management evaluates the recoverability of the deferred tax
assets and assesses the need for additional valuation allowances quarterly.
LEGAL CONTINGENCIES
The Company is currently involved in certain legal proceedings. As discussed in
Note 10 in the Notes to the Consolidated Financial Statements included in Part I
to this Quarterly Report on Form 10-Q, the Company has accrued an estimate of
the probable costs for the resolution of these claims. This estimate has been
developed after investigation and is based upon an analysis of potential
results, assuming a combination of litigation and settlement strategies.
Management does not believe these proceedings will have a material adverse
effect on the Company's consolidated financial position. It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in these assumptions, or
the effectiveness of these strategies, related to these proceedings.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
The Company's long-lived and intangible assets primarily consist of fixed
assets, goodwill and other intangible assets. Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") requires
that goodwill be tested for impairment at the reporting unit level (operating
segment or one level below an operating segment) on an annual basis and between
annual tests in certain circumstances. Application of the goodwill impairment
test requires judgment, including the identification of reporting units, the
assignment of assets and liabilities to reporting units, the assignment of
goodwill to reporting units, and the determination of the fair value of each
reporting unit. Significant judgments required to estimate the fair value of
reporting units include estimating future cash flows, determining appropriate
18
discount rates and other assumptions. Changes in these estimates and assumptions
could materially affect the determination of fair value for each reporting unit.
ENVIRONMENTAL EXPENDITURES
The Company is subject to United States and Mexican environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters, and generation, handling, storage, transportation, treatment
and disposal of waste materials. The Company is also subject to other federal,
state and local environmental laws and regulations, including those that require
it to remediate or mitigate the effects of the disposal or release of certain
chemical substances at various sites, including some where the Company has
ceased operations. It is impossible to predict precisely what effect these laws
and regulations will have in the future.
Expenditures that relate to current operations are charged to expense or
capitalized, as appropriate. Expenditures that relate to an existing condition
caused by past operations are expensed and recorded as part of discontinued
operations. Expenditures include costs of remediation and legal fees to defend
against claims for environmental liability. Liabilities are recorded when
remedial efforts are probable and the costs can be reasonably estimated. The
liability for remediation expenditures includes, as appropriate, elements of
costs such as site investigations, consultants' fees, feasibility studies,
outside contractor expenses and monitoring expenses. Estimates are not
discounted, and they are not reduced by potential claims for recovery from
insurance carriers. The liability is periodically reviewed and adjusted to
reflect current remediation progress, prospective estimates of required activity
and other relevant factors including changes in technology or regulations.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternatives would not produce a materially different result. See the Company's
audited Consolidated Financial Statements and Notes thereto included in Part IV
of its Annual Report on Form 10-K, which contain accounting policies and other
disclosures required by generally accepted accounting principles.
19
LIQUIDITY AND CAPITAL RESOURCES
September 30, December 31,
2004 2003 $ Variance % Variance
------------ ------------ ---------- ----------
(in thousands)
--------------------------------------------------------
Cash and cash equivalents $ 1,078 $ 3,501 ($ 2,423) (69%)
Bank debt $ 2,155 $ 2,902 ($ 747) (26%)
Working capital $16,864 $16,612 $ 252 2%
Shareholders' equity $36,057 $34,581 $ 1,476 4%
At September 30, 2004, the Company maintained a cash balance of $1,078,000, with
outstanding bank debt of $2,155,000. Availability under the Senior Credit
Facility was $12,565,000 during the nine-month period ended September 30, 2004,
the net cash provided by operating activities was $2,905,000, as compared to net
cash provided by operating activities of $5,039,000 during the nine-month period
ended September 30, 2003. The primary uses of cash from operating activities for
the nine-month period ended September 30, 2004 were increases in accounts
receivable and in inventory in the amount of $8,374,000. These uses of cash were
offset by a significant increase net income from continuing operations and
increases in accounts payable of $3,117,000 and to a lesser extent increases in
accrued income taxes of $2,014,000. In the nine-month period ended September 30,
2003, net cash provided by operating activities was $5,039,000. The principal
sources of cash were income from continuing operations, decreases in accounts
receivable primarily related to the receipt of an income tax refund of
$1,789,000 and a reduction of inventory levels from year-end. These sources of
cash were partially offset by reductions in accounts payable and other accrued
liabilities.
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 facility 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 amount of $1,500,000, which was repaid in full on April 7, 2004. The
two term loans of $2,350,000 and $840,000 are amortized 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 and EBITDA levels, 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 prime rate plus 2%. The Senior
Credit Facility is secured by all of the Company's assets.
During the nine-month period ended September 30, 2004, net cash used in
investing activities was $158,000. The uses of cash in investing activities is
primarily related to the purchases of machinery and equipment in the amount of
$1,167,000. These uses of cash were principally offset by the proceeds of
$1,000,000 received by the Company on April 2, 2004 as a final cash payment from
the sale of EME. During the nine-month period ended September 30, 2003, net cash
provided by investing activities was $5,834,000, which was primarily generated
by the cash proceeds of $7,000,000 from the sale of EME.
During the nine-month period ended September 30, 2004, net cash used in
financing activities was $6,693,000, principally due to the purchase of treasury
stock. During 2004, the Company
20
expended $6,218,000 to reacquire its shares, of which $6,076,000 related to the
purchase of 545,900 shares of treasury stock at an average price of $11.13 per
share. These purchases were made under the Company's repurchase program approved
by the Board of Directors on December 12, 2003. Also during this period, the
Company made payments of $747,000 on its two term loans and overadvance under
the Senior Credit Facility. These uses of cash were partially offset by proceeds
from stock options exercised during the year in the amount of $272,000. During
the nine-month period ended September 30, 2003, net cash used in financing
activities was $14,224,000, primarily related to the pay-down of the Company's
former revolving credit facility in the net amount of $17,557,000, offset by net
borrowing of $4,798,000 under the Senior Credit Facility.
The Company's current ratio was 1.79 to 1 at September 30, 2004 and 1.98 to 1 at
December 31, 2003. The decrease in the current ratio at September 30, 2004 is
due primarily to a reduction of cash balances and increase of accounts payable,
partially offset by increases in accounts receivable and inventory balances from
year-end levels.
As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 6% at September 30, 2004 and 8% at
December 31, 2003. During the first nine months of 2004, total debt decreased by
$747,000.
Capital expenditures of $1,167,000 were made during the first nine months of
2004. These expenditures primarily related to computer equipment and factory
machinery and equipment. Capital expenditures for the period approximate the
expenditures for the comparable period in 2003.
During the first nine months of 2004, the Company was able to generate adequate
amounts of cash to meet its operating needs, reduce total borrowings by $747,000
and purchase treasury stock in the amount of approximately $6,218,000. Operating
segments had an aggregate positive cash flow of $1,998,000 compared to a
positive cash flow of $7,433,000 for the same period in 2003. All of the
operating business segments had positive cash flows for the nine-month period
ended September 30, 2004 except RFL, which had a negative cash flow of $202,000.
All operating business segments are expected to have positive cash flow for the
year ending December 31, 2004.
21
CONTRACTUAL OBLIGATIONS
The following is a summary of the Company's contractual obligations that existed
as of September 30, 2004:
Less Than 1 to 3 4 to 5 After
1 Year Years Years 5 Years Total
--------- ------ ------- ------- ------
(in thousands)
------------------------------------------------------------
Operating Leases $ 816 $1,160 $ - $ - $1,976
Debt 559 1,596 - - 2,155
Capital Leases 69 81 - - 150
------ ------ ----- ------ ------
$1,444 $2,837 $ - $ - $4,281
====== ====== ===== ====== ======
OFF-BALANCE SHEET ARRANGEMENTS
It is not the Company's usual business practice to enter into off-balance sheet
arrangements, such as guarantees on loans and financial commitments,
indemnification arrangements, and retained interests in assets transferred to an
unconsolidated entity for securitization purposes. Consequently, the Company has
no off-balance sheet arrangements, except for operating lease commitments
disclosed in the table above, that have, or are reasonably likely to have, a
material current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Assuming no further significant slowdown of economic activity in the Company's
served markets, 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 SEPTEMBER 30, 2004, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2003
The table below shows the comparison of net sales for the quarter ended
September 30, 2004 and the quarter ended September 30, 2003:
22
Three Months Three Months $ Variance % Variance
Ended Ended Over Over
September 30, September 30, Same Quarter Same Quarter
2004 2003 Last Year Last Year
------------- ------------- ------------ ------------
(in thousands)
-------------------------------------------------------------
Power Electronics Group:
Condor $11,442 $10,392 $ 1,050 10%
Teal 8,394 5,232 3,162 60%
------- ------- ------- --
Total 19,836 15,624 4,212 27%
------- ------- ------- --
SL-MTI 5,599 5,274 325 6%
RFL 5,475 5,345 130 2%
------- ------- ------- --
Total $30,910 $26,243 $ 4,667 18%
======= ======= ======= ==
The table below shows the comparison of income from operations for the quarter
ended September 30, 2004 and the quarter ended September 30, 2003:
Three Months Three Months $ Variance % Variance
Ended Ended Over Over
September 30, September 30, Same Quarter Same Quarter
2004 2003 Last Year Last Year
------------- ------------- ------------ ------------
(in thousands)
-------------------------------------------------------------
Power Electronics Group:
Condor $ 1,357 $ 1,100 $ 257 23%
Teal 1,291 777 514 66%
------- ------- ------- --
Total 2,648 1,877 771 41%
------- ------- ------- --
SL-MTI 588 330 258 78%
RFL 496 414 82 20%
Other (1,061) (1,012) (49) (5%)
------- ------- ------- --
Total $ 2,671 $ 1,609 $ 1,062 66%
======= ======= ======= ==
Consolidated net sales for the three-month period ended September 30, 2004
increased by $4,667,000, or 18%, compared to the same period in 2003. Condor
recorded increased sales over 2003 of $1,050,000, or 10%. Teal experienced a
significant sales increase from 2003 of $3,162,000, or 60%. Compared to 2003,
SL-MTI had sales increases of $325,000, or 6%, while RFL recorded sales
increases of $130,000, or 2%, in 2004.
The Company had income from operations of $2,671,000 for the three-month period
ended September 30, 2004 as compared to income from of $1,609,000 for the
corresponding period last year, an increase of $1,062,000, or 66%.
Income from continuing operations was $2,554,000, or $0.43 per diluted share,
compared to $861,000, or $0.15 per diluted share, in 2003. Net income from
continuing operations increased $1,693,000, or 197%. Income from continuing
operations benefited by approximately $1,026,000, or $0.17 per diluted share,
due to research and development tax credits recorded during the period. The
Company's business segments and the components of operating expenses are
discussed more fully in the following sections.
23
The Power Electronics Group, which is comprised of Condor and Teal, recorded a
sales increase of $4,212,000, or 27%, and an increase in income from operations
of $771,000, or 41%. Condor experienced an increase in sales of $1,050,000, or
10%, and an increase in income from operations of $257,000, or 23%. Teal also
experienced a sales increase of $3,162,000, or 60%, and an increase in income
from operations of $514,000, or 66%. Condor's increase in sales for the quarter
is attributable to a sales increase in its medical and industrial product lines,
which more than offset a decrease in sales in its telecommunications product
line. Condor's increase in income from operations is primarily due to its
increase in sales volume. Teal's sales increase was attributable to increases in
its medical imaging product line and its semiconductor product line. Teal's
increase in income from operations is due to its significant increase in sales
volume.
SL-MTI's sales increased $325,000, or 6%, while income from operations increased
$258,000, or 78%. The increase in sales was driven by increases in sales of its
medical product line. The increase in income from operations is due to a
combination of an increase in sales and improved efficiency experienced at its
manufacturing facility in Cedro, Mexico. These manufacturing efficiencies
contributed to improved gross margins in 2004, compared to 2003.
RFL's sales increased $130,000, or 2%, during the third quarter of 2004,
compared to the third quarter of 2003 and income from operations increased by
$82,000, or 20%, for the comparable periods. The increase in income from
operations is due to the increase in sales compared to 2003 as the percentage of
cost of products sold remained comparable to 2003.
COST OF PRODUCTS SOLD
As a percentage of net sales, cost of products sold in each of the three-month
periods ended September 30, 2004 and September 30, 2003 was approximately 64%
and 63%, respectively. Although the cost of products sold as a percentage of net
sales remained relatively constant for the comparative quarters, the mix within
the Company's business segments changed. The cost of products sold percentage
for the Power Electronics Group increased approximately 3% in the third quarter
of 2004, compared to the third quarter of 2003. Within the Power Electronics
Group, Condor's cost of products sold percentage increased slightly due
primarily to increased direct labor and overtime costs incurred to meet its
current level of backlog. Teal's cost of products sold percentage increased due
to product mix and increases in the cost of raw materials. SL-MTI decreased its
cost of products sold percentage the third quarter of 2004, as compared to the
same period last year, due to an increase in sales volume and improved operating
efficiencies at its manufacturing facility in Cedro, Mexico. RFL's cost of
products sold as a percentage of sales remained relatively constant in 2004,
compared to 2003.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses for the three month periods ended
September 30, 2004 and September 30, 2003 were approximately 7% of net sales.
Engineering and product development expenses increased $339,000, or 17%, in the
third quarter of 2004, as compared to the same period in 2003. All of the
Company's business segments increased their engineering and product development
expenditures in 2004, compared to 2003. Condor and SL-MTI are working on new
products and product enhancements at a greater rate in 2004, compared to 2003.
Teal and RFL had marginal increases in 2004, as compared to 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for each of the third quarters in
2004 and 2003 were approximately 19% of sales and 21% of sales, respectively.
These expenses increased by
24
$402,000, or 7%, largely as the result of an 18% sales increase over 2003. The
most significant increases in selling, general and administrative costs were
experienced by Teal due primarily to corresponding increases in sales volume of
$3,162,000, or 60%, which caused sales related costs to increase. In addition,
the Company named an Executive Vice President and Chief Operating Officer during
the year, which is a position that did not exist in the third quarter of 2003.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses remained relatively constant at
approximately 2% of sales for each of the third quarters of 2003 and 2004.
AMORTIZATION OF DEFERRED FINANCING COSTS
In connection with entering into the Senior Credit Facility on January 6, 2003,
the Company incurred costs of approximately $1,342,000. These costs have been
deferred and are being amortized over the three-year term of the Senior Credit
Facility. For each of the quarters ended September 30, 2004 and September 30,
2003, amortization of these deferred financing assets was $112,000 and $123,000,
respectively.
INTEREST INCOME (EXPENSE)
Interest income for the three-month period ended September 30, 2004 was $22,000,
as compared to $34,000 in the same period last year. Interest expense decreased
by $29,000, or 33%, due primarily to the reduction of debt.
TAXES
The effective tax rate (benefit) for the three-month period ended September 30,
2004 was approximately (1%). This tax benefit reflects the statutory rate after
adjustments for state and international tax provisions, offset by the recording
of benefits from research and development tax credits primarily related to prior
years which were recorded during the period. The effective tax rate for the
comparable period in 2003 was approximately 39%, which was not significantly
impacted by additional taxes credits recorded in the period.
DISCONTINUED OPERATIONS
For the three months ended September 30, 2004, the Company recorded net loss
from discontinued operations, net of tax, of $3,000. This amount includes net
billings to insurance companies related to the recovery of certain legal fees
for environmental matters in the amount of $190,000, net of tax. These income
amounts were offset by current environmental, legal and litigation charges
related to discontinued operations. For the three months ended September 30,
2003, the Company recorded a loss from discontinued operations, net of tax, of
$706,000. This amount consisted primarily of the after-tax loss of SurfTech in
the amount of $437,000 and the cost of environmental and legal charges related
to discontinued operations.
ASSET IMPAIRMENT
During the quarter ending September 30, 2003 the Company recorded an impairment
charge of $275,000 against the carrying value of the Company's property, located
in Camden New Jersey. There were no asset impairment charges recorded during the
quarter ending September 30, 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2003
25
The table below shows the comparison of net sales for each of the nine-month
periods ended September 30, 2004 and September 30, 2003:
Nine Months Nine Months $ Variance % Variance
Ended Ended Over Over
September 30, September 30, Same Quarter Same Quarter
2004 2003 Last Year Last Year
------------- ------------- ------------ ------------
(in thousands)
-------------------------------------------------------------
Power Electronics Group:
Condor $30,966 $30,468 $ 498 2%
Teal 23,194 14,621 8,573 59%
------- ------- ------- --
Total 54,160 45,089 9,071 20%
------- ------- ------- --
SL-MTI 17,381 16,403 978 6%
RFL 16,518 17,388 (870) (5%)
------- ------- ------- --
Total $88,059 $78,880 $ 9,179 12%
======= ======= ======= ==
The table below shows the comparison of income from operations for each of the
nine-month periods ended September 30, 2004 and September 30, 2003:
Nine Months Nine Months $ Variance % Variance
Ended Ended Over Over
September 30, September 30, Same Quarter Same Quarter
2004 2003 Last Year Last Year
------------- ------------- ------------ ------------
(in thousands)
-------------------------------------------------------------
Power Electronics Group:
Condor $ 2,758 $ 2,905 ($ 147) (5%)
Teal 3,719 1,677 2,042 122%
------- ------- ------- --
Total 6,477 4,582 1,895 41%
------- ------- ------- --
SL-MTI 1,846 1,136 710 63%
RFL 1,332 1,564 (232) (15%)
Other (3,502) (2,728) (774) (28%)
------- ------- ------- --
Total $ 6,153 $ 4,554 $ 1,599 35%
======= ======= ======= ==
Consolidated net sales for the nine-month period ended September 30, 2004,
compared to the nine-month period ended September 30, 2003 increased $9,179,000,
or 12%. This increase was due mainly to an increase in sales in the Power
Electronics Group of $9,071,000, or 20%. Within the Power Electronics Group,
Condor's sales increased $498,000, or 2%, while Teal had a significant increase
in sales of $8,573,000, or 59%. SL-MTI had a sales increase of $978,000, or 6%
and RFL experienced a sales decrease of $870,000, or 5%. The sales decrease at
RFL was caused by sluggish demand in its served markets.
The Company recorded income from operations of $6,153,000 for the nine months
ended September 30, 2004, compared to income from operations of $4,554,000 for
the corresponding period last year. This change represents an increase of
$1,599,000, or 35%.
Income from continuing operations was $4,799,000, or $0.81 per diluted share,
for the first nine months of 2004, compared to $2,459,000, or $0.42 per diluted
share, for the same period in 2003. Net income from continuing operations
increased by $2,340,000 or 95%. Income from
26
continuing operations benefited by approximately $1,266,000, or $0.21 per
diluted share, due to research and development tax credits recorded during 2004.
The Company's business segments and the components of operating expenses are
discussed more fully in the following sections.
The Power Electronics Group recorded a sales increase of $9,071,000, or 20%, and
an increase in income from operations of $1,895,000, or 41%. Within the Power
Electronics Group, Condor recorded a sales increase of $498,000, or 2%. Teal
reported a sales increase of $8,573,000, or 59%. Condor's sales increase for the
nine-month period ended September 30, 2004 was attributed to a 3% increase in
domestic sales, as compared to the nine-month period ended September 30, 2003.
For the same periods, international sales decreased 18%. Domestic sales
increased in Condor's medical and industrial product lines. Teal's income from
operations increased by $2,042,000, or 122%, compared to 2003. Teal's increased
income from operations was due to the significant increase in sales volume,
which was partially offset by higher related selling and administrative costs.
In the first three quarters of 2004, Teal's medical imaging product line
increased in sales by 41%, as compared to 2003 and its semiconductor product
line increased sales by 97%, as compared to the same period in 2003.
For the first nine months of 2004 compared to the first nine months of 2003,
SL-MTI's sales increased by $978,000, or 6%, while income from operations
increased by $710,000, or 63%. The increase in sales was primarily due to
increased demand for its DC Motors' which experienced a sales increase of
$1,472,000, or 14%. These sales were primarily made to the medical market. The
increase in income from operations was the result of increased sales volume and
significantly improved gross margins. The gross margin improvements were caused
by efficiencies at SL-MTI's manufacturing facility in Cedro, Mexico. These
increases were partially offset by increased engineering and product development
spending.
RFL's sales decreased by $870,000, or 5%, for the nine-month period ended
September 30, 2004, compared to the same period in 2003. Income from operations
decreased by $232,000, or 15%, for the comparable periods. Domestic sales
decreased 8%, while international sales increased by 4%. Sales of control
systems and teleprotection equipment experienced decreases of $1,147,000, or
13%, while sales of RFL's carrier communications product line increased
$584,000, or 9%. RFL is experiencing weak demand in the U.S. market, as large
infrastructure expansion projects by electric power utility companies continue
to be deferred in favor of smaller maintenance projects. RFL has maintained its
gross margins, compared to 2003, due to certain cost containment programs.
Despite lower sales volume, RFL increased its expenditures for engineering and
product development by approximately 12%, compared to 2003.
COST OF PRODUCTS SOLD
Cost of products sold as a percentage of sales for each of the nine-month
periods ended September 30, 2004 and September 30, 2003 was approximately 63%.
With the exception of SL-MTI, all of the business segments' cost of products
sold as a percentage of sales were comparable to the same period in 2003. Cost
of products sold as a percentage of sales at SL-MTI improved by approximately
4%, due to increased volume and improved manufacturing efficiencies, as
previously discussed.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses for the nine-month periods ended
September 30, 2004 and September 30, 2003 remained at approximately 8% of sales.
Engineering and product development expenses increased $898,000, or 15%, in the
first nine months of 2004, as
27
compared to the same period in 2003. All of the Company's business segments
increased their engineering and product development expenditures in 2004,
compared to 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine-month period ended
September 30, 2004 were approximately 20% of sales, compared to 21% of sales in
the same period in 2003. These expenses increased by $914,000, or 5%, over the
comparative periods. The major reason for the increase were costs related to
greater sales volume. Also contributing to the increase was $451,000 in
compensation expense related to certain stock based compensation arrangements
with key executives, which were non-cash charges for the period. In addition, of
the Company named an Executive Vice President and Chief Operating Officer during
the year, which was a position that did not exist in 2003.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses were approximately 2% of sales in each of
2004 and 2003.
AMORTIZATION OF DEFERRED FINANCING COSTS
Amortization of deferred financing costs was $336,000 for the first nine months
of 2004 and $324,000 for the same period last year. These costs were less than
1% of sales in both periods.
INTEREST INCOME (EXPENSE)
Interest income for the nine months ended September 30, 2004 decreased by
$47,000 as compared to the same period last year. This decrease was primarily
related to the pay down of the purchaser's note received as part of the sale of
EME. Interest expense for the same nine-month period decreased by $150,000, or
42%, due primarily to the reduced debt levels.
TAXES
The effective tax rate for the nine months ended September 30, 2004 was
approximately 16%, compared to 39% for the nine months ended September 30, 2003.
The effective tax rate for the nine months ended September 30, 2004 reflects the
statutory rate, after adjustments for state and international tax provisions,
partially offset by research and development credits.
DISCONTINUED OPERATIONS
For the nine months ended September 30, 2004, the Company recorded income from
discontinued operations, net of tax, of $2,473,000. This amount is primarily
related to a settlement fee received by SL Waber, net of tax, in the amount of
$2,488,000 (see Note 12 to the Consolidated Financial Statements), the reversal
of tax reserves related to EME of $289,000, net of expenses and net billings to
insurance companies related to the recovery of certain legal fees for
environmental matters in the amount of $333,000, net of tax. These income
amounts were partially offset by current environmental, legal and litigation
charges related to discontinued operations. For the nine months ended September
30, 2003, the Company recorded a net loss from discontinued operations, net of
tax, of $1,419,000. This amount consisted primarily of the net loss for
SurfTech, net of tax, in the amount of $711,000 and the cost of environmental
and legal charges related to discontinued operations.
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
28
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical facts, contain forward-looking information, particularly
statements that 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 the
timing and degree of any business recovery in certain of the Company's markets
that are currently experiencing a cyclical economic downturn.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.
Future factors include the effectiveness of cost reduction actions undertaken by
the Company; 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, 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, 2003,
Part I, Item 1 - Risk Factors.
29
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, 2003, 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, (the "Exchange Act") as of this Quarterly Report on Form 10-Q (this
"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 Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. 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 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 1. LEGAL PROCEEDINGS
See Note 10 to the Consolidated Financial Statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 12, 2003, the Company announced that its Board of Directors had
authorized the repurchase of up to 10% of the outstanding shares of common stock
of the Company. Any repurchases are to be made on the open market or in
negotiated transactions. For the nine months ended September 30, 2004, the
Company purchased 545,900 shares pursuant to the repurchase program and 46,500
shares through its deferred compensation plans.
30
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number
of Shares Maximum Number
Total Purchased as Part of Shares That May
Number of Average of Publicly Yet Be Purchased
Shares Price Paid Announced Plans under the Plans or
Period Purchased per Share or Programs Programs
- ------------------------- --------- ---------- ----------------- ------------------
January 1 - 31, 2004 20,600(1) $ 9.13 - 593,924
February 1 - 29, 2004 4,300(1) $ 9.41 - 593,924
March 1 - 31, 2004 4,200(1) $ 9.67 - 593,924
April 1 - 30, 2004 80,250(2) $ 9.83 71,650 522,274
May 1 - 31, 2004 16,500(3) $ 9.86 11,800 510,474
June 1 - 30, 2004 1,700(1) $10.55 - 510,474
July 1 - 31, 2004 16,000(4) $10.18 16,000 494,474
August 1 - 31, 2004 80,850(5) $11.04 79,650 414,824
September 1 - 30, 2004 368,000(6) $11.48 366,800 48,024
--------- ------ ------- -------
Total 592,400(7) $11.01(8) 545,900
========= ====== =======
1. The Company purchased these shares other than through a publicly
announced plan or program in open market transactions or in
negotiated transactions.
2. Of the 80,250 shares purchased, 8,600 shares were purchased by the
Company other than through a publicly announced plan or program in
open market transactions or in negotiated transactions.
3. Of the 16,500 shares purchased, 4,700 shares were purchased by the
Company other than through a publicly announced plan or program in
open market transactions or in negotiated transactions.
4. Of the 16,000 shares purchased, no shares were purchased by the
Company other than through a publicly announced plan or program in
open market transactions or in negotiated transactions.
5. Of the 80,850 shares purchased, 1,200 shares were purchased by the
Company other than through a publicly announced plan or program in
open market transactions or in negotiated transactions.
6. Of the 368,000 shares purchased, 1,200 shares were purchased by the
Company other than through a publicly announced plan or program in
open market transactions or in negotiated transactions.
7. Of the aggregate 592,400 shares purchased, an aggregate of 46,500
shares were purchased through deferred compensation plans.
8. The average price per share for purchases made through a publicly
announced plan or program was $11.13 per share for the 545,900
shares purchase. The total amount paid for the shares was
$6,076,000.
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.
31
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.
32
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 8, 2004 SL INDUSTRIES, INC.
--------------------------------
(Registrant)
By: /s/ Warren G. Lichtenstein
--------------------------------
Warren G. 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)
33