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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-4987
SL INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
NEW JERSEY 21-0682685
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 FELLOWSHIP ROAD, SUITE A114, MT. LAUREL, NJ 08054
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: 856-727-1500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
Common stock, $.20 par value New York Stock Exchange
Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Company (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 Company 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Indicate by check mark whether the registration is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
--- ---
On June 30, 2002, the aggregate market value of SL common stock was
approximately $44,305,000
The number of shares of common stock outstanding as of March 7, 2003, was
5,894,922.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this report (Items 10, 11, 12 and
13) is incorporated by reference from the Company's proxy statement to be filed
pursuant to Regulation 14A with respect to the registrant's 2003 annual meeting
of stockholders.
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Description of Business ..................................... 1
Item 2 Properties...................................................13
Item 3 Legal Proceedings............................................14
Item 4 Submission of Matters to a Vote of
Security Holders...........................................17
PART II
Item 5 Market for Company's Common Equity
and Related Stockholder Matters............................17
Item 6 Selected Financial Data......................................18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................19
Item 7A Quantitative and Qualitative Disclosures about
Market Risk................................................35
Item 8 Financial Statements and Supplementary Data..................35
Item 9 Change in and Disagreements with Accountants
on Accounting and Financial Disclosure.....................35
PART III
Item 10 Directors and Executive Officers of the Company..............36
Item 11 Executive Compensation.......................................36
Item 12 Security Ownership of Certain Beneficial Owners
and Management.............................................37
Item 13 Certain Relationships and Related Transactions...............37
Item 14 Controls and Procedures......................................37
PART IV
Item 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................37
SIGNATURES....................................................................39
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE................F1
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
The Company, through its subsidiaries, designs, manufactures and markets power
electronics, power motion and power protection equipment that is used in a
variety of aerospace, computer, datacom, industrial, medical, telecom,
transportation and utility equipment applications. Its products are generally
incorporated into larger systems to increase operating safety, reliability and
efficiency. The Company's products are largely sold to Original Equipment
Manufacturers ("OEMs"), the electric power utility industry, and to a lesser
extent, to commercial distributors. On March 29, 1956, the Company was
incorporated as G-L Electronics Company in the state of New Jersey. Its name was
changed to G-L Industries, Inc. in November 1963; SGL Industries, Inc. in
November 1970; and then to the present name of SL Industries, Inc. in September
1984.
On May 11, 1999, the Company acquired 100% of the issued and outstanding shares
of capital stock of RFL Electronics Inc. ("RFL"). The Company paid $11,387,000
in cash and issued $75,000 of promissory notes at closing. In addition, the
Company paid a contingent payment of $1,000,000 in fiscal 1999 based upon the
financial performance of RFL for its fiscal year ended March 31, 1999. RFL is a
leading supplier of teleprotection and specialized communication equipment
primarily sold to the electric power utility industry.
On July 27, 1999, Condor D.C. Power Supplies, Inc. ("Condor"), a wholly-owned
subsidiary of the Company, acquired certain net operating assets of Todd
Products Corporation and Todd Power Corporation (together "Todd Products"). The
Company paid $7,430,000, comprised of cash of $3,700,000 and assumption of
approximately $3,730,000 of debt. Condor also entered into a ten-year Consulting
Agreement with the chief executive officer of Todd Products for an aggregate fee
of $1,275,000, which was paid in quarterly installments over three years. This
agreement was terminated by the Company during 2002. Todd Products was a leading
supplier of high quality power supplies to the datacom, telecommunications and
computer industries.
On March 22, 2001, the Company announced, among other things, that the Board of
Directors had completed a previously announced review of strategic alternatives
and had determined that it would explore a sale of the Company in order to
maximize its value for shareholders. Credit Suisse First Boston was retained by
the Company to lead this process, but resigned from the assignment in June 2002.
On August 8, 2002, the Company announced that it retained Imperial Capital, LLC
to spearhead the sales process, including the potential sale of one or more
subsidiaries of the Company, which is now largely completed. The Company is
continuing discussions with certain potential acquirers who have expressed an
interest in purchasing one or more of the Company's subsidiaries.
In July 2001, the Board of Directors authorized the disposition of the Company's
subsidiary, SL Waber, Inc. ("SL Waber"). On September 6, 2001, the Company sold
substantially all of the assets of SL Waber and all the stock of SL Waber's
subsidiary, Waber de Mexico S.A. de C.V. The Company received cash of $1,053,000
at closing. In addition, the purchaser agreed to assume certain liabilities and
ongoing obligations of SL Waber. As a result of the transaction, the Company
recorded a pre-tax loss from the sale of discontinued operations of
approximately $2,745,000. The results of operations of SL Waber are presented as
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discontinued operations for all periods presented in the financial statements
set forth herein.
In December 2001, the Company surrendered for cash substantially all of its life
insurance policies with a total surrender value of $11,109,000. Additional
policies with a cash surrender value of $447,000 were surrendered in February
2002. These policies insured the lives of former and present executives and key
employees and had been maintained as an internal mechanism to fund the Company's
obligations under its capital accumulation plan and deferred compensation plan.
Aggregate liabilities under those plans, which are owed to former and current
executives and key employees, amount to $4,031,000 as of December 31, 2002.
Proceeds from the life insurance policies were received in December 2001,
January 2002 and March 2002 and were used to pay down bank debt. Beneficiaries
under the capital accumulation plan and deferred compensation plan remain
general unsecured creditors of the Company.
In December 2001, the Company sold back to the purchaser of a former subsidiary
a mortgage note in the outstanding principal amount of $2,200,000. The mortgage
note secured the real property of the former subsidiary. In January 2002, the
Company received cash proceeds of $1,600,000 upon the sale of the mortgage note,
all of which were used to pay down bank debt.
On January 22, 2002, the Company held its annual meeting of shareholders for the
2001 calendar year. At the annual meeting, all eight members of the Board of
Directors stood for election. In addition, five nominees from a committee
comprised of representatives of two institutional shareholders (the "RORID
Committee"), stood for election to the Board of Directors. Upon the
certification of the election results on January 24, 2002, the five nominees of
the RORID Committee were elected (James Henderson, Glen Kassan, Warren
Lichtenstein, Mark Schwarz and Steven Wolosky), and three incumbent directors
were reelected (J. Dwane Baumgardner, Charles T. Hopkins and J. Edward
Odegaard). Shortly after the annual meeting, Messrs. Hopkins and Odegaard
resigned from the Board of Directors. Upon the election of the five RORID
Committee nominees, Owen Farren, David Nuzzo, and Jacob Cherian each was
entitled to payment under his respective change-in-control agreement. As a
result, in January 2002, the Company paid Messrs. Farren, Nuzzo, and Cherian,
respectively, $877,565, $352,556, and $250,000 under such agreements.
On March 8, 2002, Richard Smith was elected to the Board of Directors, filling
one of the two vacant directorships. On June 6, 2002, Avrum Gray was elected to
the Board of Directors to fill the last vacancy.
At the initial meeting of the new Board of Directors on January 24, 2002, Warren
Lichtenstein was elected Chairman of the Board. On February 4, 2002, Warren
Lichtenstein was elected Chief Executive Officer and Glen Kassan was elected
President of the Company. Additionally, David Nuzzo was reelected as Vice
President-Finance and Administration, Treasurer and Secretary. Owen Farren was
terminated as Chairman, Chief Executive Officer and President effective February
4, 2002. All senior management teams are continuing in their positions, other
than Jacob Cherian, who resigned effective April 26, 2002.
On January 6, 2003, the Company sold all of the issued and outstanding shares of
capital stock of its subsidiary, Electro-Metall Export GmbH ("EME") for a
purchase price of $8,000,000 which consisted of cash and purchaser notes. In
addition, a dividend of $2,000,000 was paid prior to closing by EME to a
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subsidiary of the Company and the purchaser did not require that the Company
pay-down EME's bank debt of approximately $3,600,000 prior to closing. The
purchaser notes are comprised of a $3,000,000 secured note that bears interest
at the prime rate plus 2%, which was paid on March 14, 2003, and a $1,000,000
unsecured note that bears interest at an annual rate of 12% and matures April 3,
2004. Cash proceeds of $4,000,000 received at closing plus the $2,000,000
dividend were used to pay down bank debt. As a result of the transaction, the
Company recorded a pre-tax loss from the sale of discontinued operations of
approximately $1,619,000. The tax effects were not material to the transaction.
On January 6, 2003, the Company entered into a three-year senior secured credit
facility with LaSalle Business Credit LLC. The credit facility provides for a
maximum indebtedness of $20,000,000, with a revolving tranche and a term debt
tranche. Outstanding indebtedness under this facility bears interest ranging
from the prime rate plus .5% to the prime rate plus 2%. The credit facility is
secured by all of the Company's assets and requires that the Company maintain
specified financial ratios. Loan proceeds were used to retire the Company's
pre-existing bank debt, which matured on December 31, 2002, and for working
capital purposes.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
Financial information about the Company's business segments is incorporated
herein by reference to Note 15 in the Notes to Consolidated Financial Statements
included in Part IV of this Annual Report on Form 10-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS
SEGMENTS
During the year ended December 31, 2000, the Company was comprised of six
reportable business segments: Power Supplies, Power Conditioning and
Distribution Units ("PCDUs"), Motion Control Systems, Electric Utility Equipment
Protection Systems, Surge Suppressors and Other. During the year ended December
31, 2001, the Company was comprised of five business segments: Power Supplies,
PCDUs, Motion Control Systems, Electric Utility Equipment Protection Systems and
Other. For the year ended December 31, 2001, the Company changed the composition
of its reportable segments to reflect individual business units, as described
below.
CONDOR DC POWER SUPPLIES ("CONDOR") - 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. Standard and custom
AC-DC and DC-DC power supplies in both linear and switching configurations are
produced, with ranges in power from 1 to 5000 watts, and are manufactured in
either commercial or medical configurations. Power supplies closely regulate and
monitor power outputs, using patented filter and other technologies, resulting
in little or no electrical interference. Power supplies are also used in drive
systems for electric equipment and other motion control systems. For the years
ended December 31, 2002, December 31, 2001 and December 31, 2000, net sales of
Condor, as a percentage of consolidated net sales from continuing operations,
were 34%, 43% and 50%, respectively.
TEAL ELECTRONICS ("TEAL") - Teal designs and manufactures customized power
conditioning and power distribution units. Products are developed and
manufactured for custom electrical subsystems for OEMs of semiconductor, medical
imaging, graphics and telecommunication systems. Outsourcing the AC power system
helps OEMs reduce cost and time to market, while increasing system performance
Page 3
and customer satisfaction. Customers are also helped by getting necessary agency
approvals. Custom products are often called "Power Conditioning and Distribution
Units," which provide voltage conversion and stabilization, system control, and
power distribution for systems such as CT and MRI scanners, chip testers and
cellular radio systems. For the years ended December 31, 2002, December 31, 2001
and December 31, 2000, net sales of Teal, as a percentage of consolidated net
sales from continuing operations, were 18%, 12% and 17%, respectively.
SL MONTEVIDEO TECHNOLOGY ("SL-MTI") - SL-MTI is a technological leader in the
design and manufacture of intelligent, high power density precision motors.
Important programs in both traditional and new market areas have been won as a
result of new motor and (patented and patent pending) motor control
technologies. New motor and motion controls are used in numerous applications,
including aerospace, medical and industrial products. Negotiations are
continuing with customers on advanced designs for numerous programs, including
fuel cell energy storage systems, high performance missile guidance motors, and
medical/surgical drills and saws. For the years ended December 31, 2002,
December 31, 2001 and December 31, 2000, net sales of SL-MTI, as a percentage of
consolidated net sales from continuing operations, were 21%, 17% and 11%,
respectively.
RFL ELECTRONICS ("RFL") - RFL designs and manufactures teleprotection
products/systems that are used to protect electric utility transmission lines
and apparatus by isolating faulty transmission lines from a transmission grid.
These products are sophisticated communication systems that allow electric
utilities to manage their high-voltage power lines more efficiently, and include
a system that is a completely digital, fully-integrated relay/communications
terminal, suitable for high-speed protective relaying of overhead or underground
high-voltage transmission lines. RFL provides customer service and maintenance
for all electric utility equipment protection systems. For the years ended
December 31, 2002, December 31, 2001 and December 31, 2000, net sales of RFL, as
a percentage of consolidated net sales from continuing operations, were 25%, 25%
and 20%, respectively.
SL SURFACE TECHNOLOGIES ("SURFTECH") - SurfTech produces industrial coatings and
platings for equipment in the corrugated paper and telecommunications
industries. For the years ended December 31, 2002, December 31, 2001 and
December 31, 2000, net sales of SurfTech, as a percentage of consolidated net
sales from continuing operations, were 2%, 3% and 2%, respectively.
ELECTRO-METALL EXPORT ("EME") - EME is based in Ingolstadt, Germany, with low
cost manufacturing operations in Paks, Hungary. It is a leader in
electromechanical actuation systems, power drive units and complex wire harness
systems for use in the aerospace and automobile industries. On January 6, 2003,
the Company sold all of the issued and outstanding shares of capital stock of
EME. As a result, EME is reported as a discontinued operation for all periods
presented. For the years ended December 31, 2002, December 31, 2001 and December
31, 2000, net sales of EME were $27,700,000, $25,600,000 and $22,500,000,
respectively.
SL WABER, INC. ("SL Waber) - SL Waber manufactured surge suppressors that were
sold to protect computers, audiovisual and other electronic equipment from
sudden surges in power. These products were sold to OEM customers, as well as to
distributors and dealers of electronics and electrical supplies and retailers
and wholesalers of office, computer, and consumer products. In September 2001,
the Company sold substantially all of the assets of SL Waber, including its name
and goodwill, as a going concern. As a result, SL Waber is reported on the
Company's financial statements as a discontinued operation for all periods
presented. For the years
Page 4
ended December 31, 2001 and December 31, 2000, net sales of SL Waber were
approximately $10,300,000 and $19,300,000, respectively.
RAW MATERIALS
Raw materials are supplied by various domestic and international vendors. In
general, availability for materials is not a problem for the Company. However,
in the fourth quarter of 2000, the Company did experience shortages in the
supply of certain strategic components for power supplies. During 2002, there
were no major disruptions in the supply of raw materials. Currently, the
Company's businesses are sourcing many components and products outside of the
United States.
Raw materials are purchased directly from the manufacturer whenever possible to
avoid distributor mark-ups. Average lead times generally run from immediate
availability to eight weeks. Lead times can be substantially higher for
strategic components subject to industry shortages. In most cases, viable
multiple sources are maintained for flexibility and competitive leverage.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS
The Company has proprietary information which it has developed and uses in its
business. This proprietary information is protected by contractual agreements,
as well as through patents and patents pending, to the extent appropriate. The
patents are protected by Federal law. To protect its intellectual property, the
Company also enters into non-disclosure agreements with its employees, vendors
and customers. Where appropriate, the Company will take and has taken all steps
necessary to defend its intellectual property.
SEASONALITY
Generally, seasonality is not a factor in any of the Company's segments.
SIGNIFICANT CUSTOMERS
The Company has no customer that accounts for 10% or more of its consolidated
net sales from continuing operations. Each of Teal, Condor, SL-MTI, RFL and
SurfTech has certain major customers, the loss of any of which would have a
material adverse effect on such entity.
BACKLOG
Backlog at March 2, 2003, March 1, 2002 and March 9, 2001 was $41,616,000,
$41,993,000, and $42,306,000, respectively. The backlog remained relatively
unchanged at March 2, 2003, as compared to March 1, 2002. There has been a
decrease in orders from OEMs in the telecommunications and semiconductor
industries, offset in part by increased orders from medical imaging customers.
COMPETITIVE CONDITIONS
The Company's businesses are in active competition with domestic and foreign
companies, some with national and international name recognition, offering
similar products or services, and with companies producing alternative products
appropriate for the same uses. In addition, Condor has experienced significant
off-shore competition for certain products in certain markets. The uncertain
commercial aerospace market has also created more competitive conditions in that
industry and the current conflict in Iraq. Each of the Company's businesses
differentiate themselves from their competition by concentrating on customized
products based on customer needs. The Company's businesses seek a competitive
advantage based on quality, service, innovation, delivery and price.
Page 5
ENVIRONMENTAL
The Company (together with the industries in which it operates or has operated)
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 and the industry are also subject to other federal,
state and local environmental laws and regulations, including those that require
the Company to remediate or mitigate the effects of the disposal or release of
certain chemical substances at various sites, including some where it has ceased
operations. It is impossible to predict precisely what effect these laws and
regulations will have on the Company in the future.
It is the Company's policy to comply with all environmental, health and safety
regulations, as well as industry standards for maintenance. The Company's
domestic competitors are subject to the same environmental, health and safety
laws and regulations, and the Company believes that the compliance issues and
potential expenditures of its operating subsidiaries are comparable to those
faced by their major domestic competitors.
There are two current or former sites on which the Company may incur material
environmental costs in the future: the SurfTech site near the Puchack Wellfield
in Pennsauken, New Jersey, and the Company's property in Camden, New Jersey.
Based on the Company's investigation into the Pennsauken, New Jersey site, where
it is one of several parties alleged to be responsible, the Company believes it
has a significant defense against all or any part of the claim and that any
material impact is unlikely. On the Camden, New Jersey site, the Company
believes that the cost to remediate the property should not exceed $500,000. The
Company recorded a provision for this amount during the first quarter of 2002.
For additional information related to environmental issues, see "Item 3. Legal
Proceedings," and Note 12 to the Notes to Consolidated Financial Statements
included in Part IV of this Annual Report on Form 10-K.
EMPLOYEES
As of December 31, 2002, the Company had approximately 1,574 employees. Of these
employees, approximately 218 are subject to collective bargaining agreements.
FOREIGN OPERATIONS
In addition to manufacturing operations in California, Minnesota, and New
Jersey, the Company manufactures substantial quantities of products in premises
leased in Mexicali and Matamoros, Mexico. These external and foreign sources of
supply present risks of interruption for reasons beyond the Company's control,
including political or economic instability and other uncertainties.
Generally, the Company's sales are priced in United States dollars and its costs
and expenses are priced in United States dollars and Mexican pesos. With the
sale of EME, effective January 6, 2003, neither the Company's sales nor its
expenses will be priced in European Union euros or Hungarian forints.
Accordingly, the competitiveness of Company's products relative to locally
produced products may be affected by the performance of the United States dollar
compared with that of its foreign customers' and competitors' currencies.
Foreign net sales comprised 13%, 11%, and 10% of net sales from continuing
operations for the years ended December 31, 2002, December 31, 2001 and December
31, 2000, respectively.
Page 6
Additionally, the Company is exposed to foreign currency transaction and
translation losses, which might result from adverse fluctuations in the values
of the Mexican peso. At December 31, 2002, the Company had net assets of $25,873
subject to fluctuations in the value of the Mexican peso. Fluctuations in the
value of the foreign currencies were not significant in 2001 or 2000. With the
sale of EME, effective January 6, 2003, the Company will no longer be exposed to
foreign currency translation losses with respect to European Union euros or
Hungarian forints. There can be no assurance that the value of the Mexican peso
will continue to remain stable.
Condor manufactures substantially all of its products in Mexico and incurs its
labor costs and supplies in Mexican pesos. SL-MTI manufactures an increasing
amount of its products in Mexico and incurs related labor costs and supplies in
Mexican pesos. Both Condor and SL-MTI price their sales in United States
dollars. The Mexican subsidiaries of Condor and SL-MTI maintain their books and
records in Mexican pesos. For additional information related to financial
information about foreign operations, see Notes 15 and 16 in the Notes to
Consolidated Financial Statements included in Part IV of this Annual Report on
Form 10-K.
ADDITIONAL INFORMATION
Additional information regarding the development of the Company's businesses
during 2002 and 2001 is contained in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Part II
and Notes 1 and 2 of the Notes to the Consolidated Financial Statements included
in Part IV of this Annual Report on Form 10-K.
RISK FACTORS
THE COMPANY MAY BE ADVERSELY IMPACTED BY FLUCTUATIONS IN CASH FLOWS, LIQUIDITY,
AND DEBT LEVELS.
Working capital requirements and cash flows historically have been, and are
expected to continue to be, subject to quarterly and yearly fluctuations,
depending on such factors as levels of sales, timing and size of capital
expenditures, timing of deliveries and collection of receivables, inventory
levels, customer payment terms, customer financing obligations, and supplier
terms and conditions. The inability to manage cash flow fluctuations resulting
from such factors could have a material adverse effect on the Company's
business, results of operations, and financial condition. In order to finance
the working capital requirements of the Company's business, it has entered into
a three-year senior secured credit facility with LaSalle Business Credit LLC and
has borrowed funds thereunder. If operating cash flows are not sufficient to
meet operating expenses, capital expenditures and debt service requirements as
they become due, the Company may be required, in order to meet its debt service
obligations, to delay or reduce capital expenditures or the introduction of new
products, to sell assets, and/or to forego business opportunities, including
research and development projects and product design enhancements.
THE COMPANY'S OPERATING RESULTS MAY FLUCTUATE, AND THERE MAY BE VOLATILITY IN
GENERAL INDUSTRY, ECONOMIC, AND MARKET CONDITIONS.
The results of operations for any quarter or year are not necessarily indicative
of results to be expected in future periods. Future operating results may be
affected by various trends and factors that must be managed in order to achieve
favorable operating results. The inability to accurately forecast and manage
these trends and factors could have a material adverse effect on the Company's
business, results of operations, and financial condition.
Page 7
General economic conditions, and specifically market conditions in the
telecommunications and semiconductor industry in the United States and globally,
affect the Company's business. In addition, reduced capital spending and/or
negative economic conditions in the United States, Europe, Asia, Latin America
and/or other areas of the world could have a material adverse effect on the
Company's business, results of operations, and financial condition.
Gross margins may be adversely affected by increased price competition, excess
capacity, higher material or labor costs, warranty costs, obsolescence charges,
loss of cost savings on future inventory purchases as a result of high inventory
levels, introductions of new products, increased levels of customer services,
changes in distribution channels, and changes in product and geographic mix.
Lower than expected gross margins could have a material adverse effect on the
Company's business, results of operations, and financial condition.
THE COMPANY HAS BEEN INFORMED THAT IT IS NOT IN COMPLIANCE WITH NEW YORK STOCK
EXCHANGE LISTING STANDARDS, AND MAY BE DELISTED. IF THE COMPANY IS DELISTED, ITS
STOCK PRICE MAY SUFFER.
On October 17, 2001, the Company received official notification from the New
York Stock Exchange ("NYSE") that it was "below criteria" of certain of the
NYSE's continued listing standards. Pursuant to the request of the NYSE, the
Company submitted a business plan on February 22, 2002 for compliance with the
NYSE continued listing standards. The Company's business plan was accepted by
the NYSE. The Company is currently required to submit quarterly updates to the
NYSE and is currently working with the NYSE to resolve this matter and maintain
its listing on the NYSE. There can be no assurance that the Company will be able
to satisfy NYSE requirements and continue to be listed on the NYSE, or in the
event that it cannot continue to be listed on the NYSE, that it will be able to
alternatively list on another exchange. If the Company's listing on the NYSE
cannot be maintained, shareholders may experience a greater difficulty in
trading shares of the Company's common stock and the price of the Company's
common stock could be adversely affected.
THE COMPANY'S OPERATING RESULTS AND STOCK PRICE MAY BE ADVERSELY AFFECTED BY
FLUCTUATIONS IN CUSTOMERS' BUSINESSES.
Business is dependent upon product sales to telecommunications, semiconductor,
medical imaging, aerospace and other businesses, who in turn are dependent for
their business upon orders from their customers. Any downturn in the business of
any of these parties affects the Company. Moreover, sales often reflect orders
shipped in the same quarter in which they are received, which makes sales
vulnerable to short-term fluctuations in customer demand and difficult to
predict. In general, customer orders may be cancelled, modified or rescheduled
after receipt. Consequently, the timing of these orders and any subsequent
cancellation, modification or rescheduling of these orders has affected, and
will in the future affect, results of operations from quarter to quarter. Also,
as some of the Company's customers typically order in large quantities, any
subsequent cancellation, modification or rescheduling of an individual order may
affect results of operations.
THE COMPANY HAS INCURRED, AND MAY IN THE FUTURE INCUR, INVENTORY-RELATED
CHARGES, THE AMOUNTS OF WHICH ARE DIFFICULT TO PREDICT ACCURATELY.
As a result of the business downturn over the past eighteen months, the Company
incurred charges to align its inventory with actual customer requirements over
the near term. A rolling six-month forecast is utilized based on anticipated
product orders, product order history, forecasts, and backlog to assess
inventory requirements. The Company has incurred, and may in the future incur,
significant inventory-related charges. While the Company believes, based on
current information, that the inventory-related charges recorded in 2002 and
Page 8
2001 are appropriate, subsequent changes to its forecast may indicate that these
charges were insufficient or even excessive.
FAILURE TO REMAIN COMPETITIVE COULD ADVERSELY IMPACT THE COMPANY'S OPERATING
RESULTS.
The markets in which the Company sells its products are highly competitive and
characterized by rapidly changing and converging technologies. The Company faces
intense competition from established competitors and the threat of future
competition from new and emerging companies in all aspects of business. Among
its current competitors are its customers, who are vertically integrated and
either manufacture and/or are capable of manufacturing some or all of the
Company's products sold to them. In addition to current competitors, new
competitors providing niche, and potentially broad, product solutions will
likely increase in the future. To remain competitive in both the current and
future business climates, the Company must maintain a substantial commitment to
focused research and development, improve the efficiency of its manufacturing
operations, and streamline its marketing and sales efforts and attendant
customer service and support. Among other things, the Company may not be able to
anticipate shifts in its markets or technologies, may not have sufficient
resources to continue to make the investments necessary to remain competitive,
or may not make the technological advances necessary to remain competitive. In
addition, notwithstanding its efforts, technological changes, manufacturing
efficiencies or development efforts by competitors may render the Company's
products or technologies obsolete or uncompetitive.
CONSOLIDATION IN THE INDUSTRY COULD INCREASE COMPETITIVE PRESSURES ON THE
COMPANY.
The industries in which the Company operates are consolidating, and will
continue to consolidate in the future as companies attempt to strengthen or hold
their market positions. Such consolidations may result in stronger competitors
that are better able to compete as sole-source vendors for customers. The
Company's relatively small size may increase competitive pressure for customers
seeking single vendor solutions. Such increased competition would increase the
variability of the Company's operating results and could otherwise have a
material adverse effect on the Company's business, results of operations, and
financial condition.
THE COMPANY IS DEPENDENT UPON THIRD PARTIES FOR PARTS AND COMPONENTS.
The ability to meet customer demand depends, in part, on the ability of the
Company to obtain timely and adequate delivery of parts and components from
suppliers and internal manufacturing capacity. The Company has experienced
significant shortages in the past and, although it works closely with its
suppliers to avoid shortages, there can be no assurance that it will not
encounter further shortages in the future. A further reduction or interruption
in component supplies or a significant increase in the price of one or more
components could have a material adverse effect on the Company's business,
results of operations and financial condition.
THE COMPANY MAY BE SUBJECT TO SIGNIFICANT COSTS IN COMPLYING WITH ENVIRONMENTAL
LAWS.
The Company's facilities are subject to a broad array of environmental laws and
regulations. The costs of complying with complex environmental laws and
regulations may be significant in the future. Present accruals for such costs
and liabilities may not be adequate in the future, since the estimates on which
the accruals are based depend on a number of factors, including the nature of
the problem, the complexity of the site, the nature of the remedy, the outcome
of discussions with regulatory agencies and other potentially responsible
parties ("PRPs") at multiparty sites, and the number and financial viability of
other PRPs.
Page 9
Further, the Company is the subject of various lawsuits and actions relating to
environmental issues, including an administrative action in connection with
SurfTech's Pennsauken facility which could subject the Company to, among other
things, $9,266,000 in collective reimbursements (with other parties) to NJDEP
(as defined herein). In addition, a class action suit was filed on June 12, 2002
against the Company, SurfTech and 37 other defendants alleging that the
plaintiffs suffered personal injuries as a result of consuming contaminated
water distributed from the Puchack Wellfield in Pennsauken, New Jersey (which
supplies Camden, New Jersey). There can be no assurance that the Company will be
able to successfully defend itself against or settle these or any other actions
to which it is a party. For additional information related to environmental
risks, see "Item 3. Legal Proceedings," and Note 12 to the Notes to Consolidated
Financial Statements included in Part IV of this Annual Report on Form 10-K.
THE COMPANY MAY HAVE TO PAY SIGNIFICANT COSTS FOR REGULATORY COMPLIANCE AND
LITIGATION.
Rapid or unforeseen escalation of the cost of regulatory compliance and/or
litigation, including but not limited to, environmental compliance,
product-related liability, assertions related to intellectual property rights
and licenses, adoption of new accounting policies, or changes in current
accounting policies and practices and the application of such policies and
practices could have a material adverse effect on the Company's business.
Additionally, the Company is subject to certain legal actions involving
complaints by terminated employees and disputes with customers and suppliers.
One such claim was brought against the Company's subsidiary, SL-MTI, by a
customer seeking $3,900,000 in compensatory damages. On November 7, 2002, after
a full trial of the facts, a jury awarded this customer damages of $650,000,
which, when combined with pre-trial interest, amounts to a total claim of
$780,000. The customer has appealed various aspects of this decision, which
appeal, if determined adversely to the Company, could have a material adverse
impact upon the Company. In the future there can be no assurance of the outcome
in any litigation. An adverse determination in any one or more legal actions
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Item 3. Legal Proceedings," and Note 12
to the Notes to the Consolidated Financial Statements included in Part IV of
this Annual Report on Form 10-K.
THE COMPANY'S FUTURE SUCCESS DEPENDS ON ITS ABILITY TO STAY CURRENT WITH
TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT.
The markets in which the Company's businesses operate are characterized by
rapidly changing technology and shorter product life cycles. The Company's
future success will continue to depend upon its ability to enhance its current
products and to develop new products that keep pace with technological
developments and respond to changes in customer requirements. Any failure by the
Company to respond adequately to technological changes and customer requirements
or any significant delay in new product introductions could have a material
adverse effect on the Companys' business and results of operations. In addition,
there can be no assurance that new products to be developed by the Company will
achieve market acceptance.
THE COMPANY IS DEPENDENT UPON KEY PERSONNEL FOR THE MANAGEMENT OF ITS OPERATIONS.
The Company's success depends in part upon the continued services of many of its
highly skilled personnel involved in management, engineering and sales, and upon
its ability to attract and retain additional highly qualified officers and
employees. The loss of service of any of these key personnel could have a
material adverse effect on business. In addition, future success will depend on
the ability of officers and key employees to manage operations successfully.
Page 10
THE COMPANY'S FORMER USE OF ARTHUR ANDERSEN LLP AS ITS INDEPENDENT ACCOUNTANTS
MAY POSE A RISK TO IT AND WILL LIMIT INVESTORS' ABILITY TO SEEK RECOVERIES FROM
THEM RELATED TO THEIR WORK.
On June 15, 2002, Arthur Andersen LLP, the Company's former independent
accountants, was convicted on a federal obstruction of justice charge. Some
investors, including institutional investors, may choose not to invest in or
hold securities of a company whose financial statements were audited by Arthur
Andersen. This may serve to, among other things, depress the price of the
Company's common stock. In July, 2002, the Company's board of directors
dismissed Arthur Andersen and engaged Grant Thornton LLP as the Company's
independent accountants based on the recommendation of the audit committee of
its board of directors.
SEC rules require the Company to present its audited financial statements in
various SEC filings, along with Arthur Andersen's consent to the inclusion of
its audit report in those filings. The SEC recently provided regulatory relief
designed to allow companies that file reports with the SEC to dispense with the
requirement to file a consent of Arthur Andersen in certain circumstances. The
Company has been unable to obtain, after reasonable efforts, the written consent
of Arthur Andersen to its naming of them as an expert and as having audited the
Consolidated Financial Statements for the year ended December 31, 2001.
Notwithstanding the SEC's regulatory relief, the inability of Arthur Andersen to
provide their consent or to provide assurance services to the Company could
negatively affect the Company's ability to, among other things, access the
public capital markets. Any delay or inability to access the public markets as a
result of this situation could have a material adverse impact on the Company's
business. Also, an investor's ability to seek potential recoveries from Arthur
Andersen related to any claims that an investor may assert as a result of the
work performed by Arthur Andersen will be limited significantly in the absence
of a consent and may be further limited by the diminished amount of assets of
Arthur Andersen that are or may in the future be available for claims.
THE COMPANY'S OPERATING RESULTS AND COMMON STOCK IS SUBJECT TO PRICE
FLUCTUATIONS.
Operating results for future periods are never perfectly predictable even in the
most certain of economic times, and the Company expects to continue to
experience fluctuations in its quarterly results. These fluctuations, which in
the future may be significant, could cause substantial variability in the market
price of the Company's stock. The market price for the Company's common stock
has been, and is likely to continue to be, highly volatile. The market for the
Company's common stock is subject to fluctuations as a result of a variety of
factors, including factors beyond its control. These include:
o additions or departures of key personnel;
o changes in market valuations of similar companies;
o announcements of new products or services by competitors or new
competing technologies;
o conditions or trends in medical equipment, medical imaging,
aerospace, and electric utility industries;
o general market and economic conditions; and
o other events or factors that are unforeseen.
OTHER FACTORS MAY AFFECT FUTURE RESULTS.
The risks and uncertainties described herein are not the only ones facing the
Company. Additional risks and uncertainties not presently known, or that may now
be deemed immaterial, may also impair business operations.
(d) FORWARD-LOOKING INFORMATION
From time to time, information provided by the Company, including written or
oral statements made by representatives, may contain forward-looking information
as defined in the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, contain forward-looking
information, particularly statements which address activities, events or
developments that the Company expects or anticipates will or may occur in the
future, such as expansion and growth of the Company's business, future capital
expenditures and the Company's prospects and strategy. In reviewing such
information, it should be kept in mind that actual results may differ materially
from those projected or suggested in such forward-looking information. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. Many of these factors previously have been
identified in filings or statements made by or on behalf of the Company.
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in capital
investment and/or consumer spending, competitive factors and other factors
affecting the Company's business in or beyond the Company's control. These
factors include a change in the rate of inflation, a change in state or federal
legislation or regulations, an adverse determination with respect to a claim in
litigation or other claims (including environmental matters), the ability to
recruit and develop employees, the ability to successfully implement new
technology and the stability of product costs. These factors also include the
timing and degree of any business recovery in certain of the Company's markets
that are currently experiencing a cyclical economic downturn.
Page 11
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.
Future factors include the effectiveness of cost reduction actions undertaken by
the Company; the timing and degree of any business recovery in certain of the
Company's markets that are currently experiencing economic uncertainty;
increasing prices, products and services offered in 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; 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 following the terrorist
attacks in the United States on September 11, 2001 and the war with Iraq, the
global economic slowdown and interest rate and currency exchange rate
fluctuations and other future factors.
Page 12
ITEM 2. PROPERTIES
Set forth below are the properties where the Company conducted business as of
December 31, 2002.
Approx. Owned or Leased
Square And
Location General Character Footage Expiration Date
-------- ----------------- ------- ---------------
Montevideo, MN Manufacture of precision motors 30,000 Owned
and motion control systems (SL-
MTI)
Matamoros, Mexico Manufacture of precision motors 15,000 Leased -
(SL-MTI) 11/05/03
Oxnard, CA Manufacture and distribution of 36,480 Leased -
power supply products (Condor) 02/28/04
Mexicali, Mexico Manufacture and distribution of Leased -
power supply products (Condor) 40,000 monthly
21,150 monthly
San Diego, CA Manufacture of power distribution 45,054 Leased -
and conditioning units (Teal) 03/22/07
Ingolstadt, Germany Manufacture of actuation systems 51,021 Owned (1)
and power distribution products (EME)
Paks, Hungary Manufacture of power distribution 12,916 Owned (1)
products and wire harness systems (EME)
Boonton Twp., NJ Manufacture of electric utility 78,000 Owned
equipment protection systems (RFL)
Camden, NJ Industrial surface finishing (SurfTech) 15,800 Owned
Page 13
Pennsauken, NJ Industrial surface finishing 6,000 Owned
warehouse (SurfTech)
Mt. Laurel, NJ Corporate office (Other) 4,200 Leased -
11/30/05
(1) Transferred in connection with the sale of EME on January 6, 2003
All manufacturing facilities are adequate for current production requirements.
The Company believes that its facilities are sufficient for future operations,
maintained in good operating condition and adequately insured. Of the owned
properties, none are subject to a major encumbrance material to the operations
of the Company.
ITEM 3. LEGAL PROCEEDINGS
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,
frequently involving complaints by terminated employees and disputes with
customers and suppliers. In the opinion of management, such claims are not
expected to have a material adverse effect on the financial condition or results
of operations of the Company.
In a November 1991 Administrative Directive, the New Jersey Department of
Environmental Protection ("NJDEP") alleged that SurfTech, formerly SL Modern
Hard Chrome, Inc., and 20 other respondents are responsible for a contamination
plume which has affected the Puchack Wellfield in Pennsauken, New Jersey (which
supplies Camden, New Jersey). Three other actions have been initiated from the
underlying directive. The first is Supplemental Directive No. 1 ("Directive No.
1") issued by the NJDEP to the same parties in May 1992, which seeks a cost
reimbursement of $8,655,000 for the construction of a treatment system at the
Puchack site and an annual payment of $611,000 (a total of $9,266,000) for
ongoing operation and maintenance of the treatment system. The second matter is
a lawsuit initiated by one of the parties named in Directive No. 1 seeking to
have the remainder of those parties, and more than 600 others, pay some or all
of that party's cost of compliance with Directive No. 1 and any other costs
associated with its site. This second matter is a claim for indemnification of
potential damages. Accordingly, it is unspecified in amount. The third matter is
a Spill Act Directive by the NJDEP to SurfTech alone, regarding similar matters
at its site and consists of a claim for contribution towards potential damages
and is unspecified in amount. Both the second and third matters relate to the
payment of a portion of the damages set forth in the discussion of Directive No.
1. The state has not initiated enforcement action regarding any of its three
Directives. There also exists an outstanding enforcement issue regarding the
Company's compliance with state environmental laws at the same site.
With regard to the $8,655,000 amount discussed in the preceding paragraph, in
the Company's view it is not appropriate to consider that amount as "potential
cost reimbursements." The SurfTech site, which is the subject of these actions,
has undergone remedial activities under NJDEP's supervision since 1983. The
Company believes that it has a significant defense against all or any part of
the $8,655,000 claim since technical data generated as part of previous remedial
activities indicate that there is no offsite migration of contaminants at the
SurfTech site. Based on this and other technical factors, the Company has been
advised by its outside technical consultant, with the concurrence of its outside
counsel, that it has a significant defense to Directive No. 1 and any material
exposure is unlikely.
Page 14
On June 12, 2002, the Company and SurfTech were served with notice of a class
action complaint filed in Superior Court of New Jersey for Camden County. The
Company and SurfTech are currently two of approximately 39 defendants in this
action. The complaint alleges, among other things, that plaintiffs suffered
personal injuries as a result of consuming water distributed from the Puchack
Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey).
This case arises from the same factual circumstances as the current
administrative actions involving the Puchack Wellfield, which is described
above. The administrative actions and the class action lawsuit both allege that
SurfTech and other defendants contaminated ground water through the disposal of
hazardous substances at industrial facilities in the area. SurfTech once
operated a chrome-plating facility in Pennsauken.
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. Based on
this and other technical factors, the Company has been advised by its outside
counsel that it has a strong defense against the claims alleged in the class
action plaintiffs' complaint, as well as the environmental administrative
actions discussed above.
The Company's subsidiary, SL-MTI, recently defended a cause of action, brought
against it in the fall of 2000 in the federal district court for the western
district of Michigan. The lawsuit was filed by Eaton Aerospace LLC ("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 amounts
to a total claim of $780,000. Eaton has appealed this judgment.
On August 9, 2002, the Company received a "Demand for Arbitration" with respect
to a claim of $578,000 from a former vendor of SL Waber. The claim concerns a
dispute between SL Waber and an electronics manufacturer based in Hong Kong for
alleged failure to pay for goods under a Supplier Agreement. The Company
believes this claim is without merit and intends to vigorously pursue defenses
with respect to these claims and may bring counter claims against the vendor.
Notwithstanding the outcome of these allegations, the Company does not believe
that this arbitration will have a material adverse effect on the consolidated
financial position or results of operation of the Company.
The Company is investigating a possible ground water contamination plume on its
property in Camden, New Jersey. Based upon the preliminary evidence, the Company
was advised that the cost to remediate the site could amount to $500,000. The
Company recorded a provision for this amount during the first quarter of 2002.
The Company is investigating possible soil and ground water contamination on
SL-MTI's property in Montevideo, Minnesota. Based upon the preliminary evidence,
the Company believes it will not incur material remediation costs at 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 $2,400,000 prior to fiscal 1998 and
commitments from three insurers to pay for a portion of environmental costs
Page 15
associated with the SurfTech Site in Pennsauken, New Jersey of 15% of costs up
to $300,000, 15% of costs up to $150,000 and 20% of costs up to $400,000,
respectively. In addition, the Company received $100,000 during fiscal 1998,
1999, 2000 and 2001, as stipulated in the settlement agreement negotiated with
one of the three insurers.
Loss contingencies include potential obligations to investigate and eliminate or
mitigate the affects on the environment of the disposal or release of certain
chemical substances at various sites, such as Superfund sites and other
facilities, whether or not they are currently in operation. The Company is
currently participating in environmental assessments and cleanups at a number of
sites under these laws and may in the future be involved in additional
environmental assessments and cleanups. Based upon investigations completed by
the Company and its independent engineering consulting firms to date, management
has provided an estimated accrual for all known costs believed to be probable in
the amount of $875,000. 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.
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. Additional information pertaining to legal proceedings is
found in Note 12 in the Notes to the Consolidated Financial Statements included
in Part IV of this Annual Report on Form 10-K.
Page 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2002, no matter was submitted to a vote of
the Company's security holders.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is registered on both the NYSE and the Philadelphia
Stock Exchange under the symbol "SL." The following table sets forth the high
and low closing sales price per share of its common stock for the periods
indicated:
Year Year
ended December 31, ended December 31,
2002 2001
-------------------- ------------------
HIGH LOW HIGH LOW
Stock Prices
1st Quarter.................. $8.30 $4.99 $14.99 $10.875
2nd Quarter.................. 8.05 6.60 13.00 11.10
3rd Quarter.................. 7.30 5.05 11.10 5.60
4th Quarter.................. 5.75 4.25 8.50 3.72
As of March 10, 2003, there were approximately 843 registered shareholders. The
Company suspended dividend payments during 2001 and has no present intention of
making dividend payments in the foreseeable future. Under the terms of its
previous credit facility, the Company was prohibited from paying dividends. On
January 6, 2003, the Company entered into a new senior credit facility, which
has a term of three years. This.facility restricts the Company from paying
dividends.
On October 17, 2001, the Company received official notification from the NYSE
that it was "below criteria" of certain of the NYSE's continued listing
standards and, therefore, the Company's common stock may be delisted. At the
request of the NYSE, the Company submitted a business plan on February 22, 2002
for compliance with the NYSE continued listing standards. The Company's business
plan was accepted by the NYSE. The Company currently is required to submit
quarterly updates to the NYSE and is currently working with the NYSE to resolve
this matter and maintain its listing on the NYSE. There can be no assurance,
however, that the Company will be able to satisfy NYSE requirements and continue
to be listed on the NYSE, or in the event that the Company cannot continue to be
listed on the NYSE, that it will be able to alternatively list on another
exchange. If the Company's listing on the NYSE cannot be maintained,
shareholders may experience a greater difficulty in trading shares of the
Company's common stock and the price of the Company's common stock could be
adversely affected.
For the "Equity Compensation Plan Information," please refer to the Company's
Proxy Statement for the 2003 Annual Meeting of Shareholders, which is
incorporated herein by reference.
Page 17
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data with respect to the calendar years ended
December 31, 2002, 2001 and 2000, the Company's fiscal years ended July 31, 1999
and 1998 and the five-month periods ended.
Five
Twelve Twelve Twelve Twelve Twelve Five Months
Months Months Months Months Months Months Ended
Ended Ended Ended Ended Ended Ended December
December December December July July December 1998
2002 2001 2000 1999 1998 1999 (unaudited)
-------------------------------------------------------------------------------------
(prior to 2002 as adjusted)
-------------------------------------------------------------------------------------
(amounts in thousands except per share data)
-------------------------------------------------------------------------------------
Net sales (1) ............................. $ 110,149 $ 112,857 $ 125,864 $ 68,702 $ 70,087 $ 50,910 $ 24,415
Income (loss) from continuing
operations ............................. $ (1,247) $ (9,695) $ 5,300 $ 4,435 $ 4,245 $ 2,447 $ 790
Income (loss) from discontinued
operations ............................. $ 777 $ (955) $ (3,600) $ 971 $ 1,068 $ (3,131) $ 1,171
Net income (loss) (2) ..................... $ (470) $ (10,650) $ 1,700 $ 5,406 $ 5,313 $ (684) $ (1,961)
Diluted net income (loss) per
common share ........................... $ (0.08) $ (1.87) $ 0.30 $ 0.92 $ 0.90 $ (0.12) $ 0.33
Shares used in computing diluted
net income (loss)
per common share ....................... 5,867 5,698 5,757 5,876 5,897 5,624 5,886
Cash dividend per
common share ........................... $ -- $ -- $ 0.10 $ 0.09 $ 0.08 $ 0.05 $ 0.04
YEAR-END FINANCIAL POSITION
Working capital ........................... $ 10,097 $ 11,232 $ 39,945 $ 12,783 $ 8,624 $ 42,012 $ 10,599
Current ratio (3) ......................... 1.19 1.16 2.42 2.37 1.72 2.38 2.27
Total assets .............................. $ 90,667 $ 109,911 $ 115,491 $ 112,686 $ 80,915 $ 118,685 $ 78,929
Long-term debt ............................ $ 0 $ 0 $ 35,318 $ 30,307 $ 11,800 $ 37,748 $ 10,307
Shareholders' equity ...................... $ 33,712 $ 33,204 $ 43,350 $ 42,842 $ 38,345 $ 42,072 $ 40,546
Book value per share ...................... $ 5.71 $ 5.81 $ 7.81 $ 7.61 $ 6.84 $ 7.48 $ 7.16
OTHER
Capital expenditures (4) .................. $ 1,477 $ 1,710 $ 2,166 $ 1,584 $ 2,003 $ 718 $ 1,117
Depreciation and
amortization ........................... $ 2,948 $ 4,037 $ 3,851 $ 2,522 $ 2,091 $ 1,587 $ 980
(1) On January 6, 2003, effective for the year ended December 31, 2002, the
Company sold EME, and in 2001, the Company sold certain assets of SL Waber.
Accordingly, the operations of EME and SL Waber have been accounted for as
discontinued operations in all periods presented.
(2) Calendar 2002 includes $1,834,000 of special charges related to change of
control and proxy costs, $703,000 of impairment charges related to the write-off
of goodwill, $556,000 and $147,000 of asset impairment charges at SurfTech.
Calendar 2001 includes costs related to inventory write-offs of $2,890,000,
asset impairment charges of $4,145,000 and restructuring costs of $3,683,000
related to Condor, inventory write-offs of $50,000 and restructuring and
intangible asset impairment charges of $185,000 and $125,000, respectively,
related to SurfTech. Calendar 2000 includes income of $875,000 related to the
settlement of a class action suit against one of the Company's insurers, pre-tax
income of $650,000 related to the reduction of a contingency reserve for
environmental costs and restructuring costs of $790,000 related to SL Waber.
The five-month period ended December 31, 1999 includes pre-tax restructuring
costs, inventory write-downs and loss on commitments of $4,273,000 related to SL
Waber, and a pre-tax gain of $1,812,000 related to the demutualization of one of
the Company's life insurance carriers.
(3) The current ratio for 2002 and 2001 includes all debt classified as current,
due to the December 31, 2002 maturity date of the Revolving Credit Facility (see
Item 7 - Financial Condition)
(4) Excludes assets acquired in business combinations.
Page -18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission (the "SEC") issued
disclosure guidance for "critical accounting policies." The SEC defines
"critical accounting policies" as those that require application of management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 in the
Notes to Consolidated Financial Statements included in Part IV of this 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 within the SEC
definition.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time the product is shipped,
with provisions established for estimated product returns. Upon shipment, the
Company provides for the estimated cost that may be incurred for product
warranties. Rebates and other sales incentives offered by customers 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 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 and anticipated returns related to customer
receivables. 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 ensures inventory is valued 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 set to that value.
Page -19-
If a write down to the current market value is necessary, the market value
cannot be greater than the net realizable value, 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 value, it would have to
adjust 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 bases 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 not likely, the Company must establish a
valuation allowance. To the extent it establishes a valuation allowance or
increases this allowance in a period, it must include an expense 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 net deferred tax assets. As of December 31, 2002, the
Company had recorded a valuation allowance of $239,000 due to uncertainties
related to its ability to utilize some deferred tax assets, primarily consisting
of certain net operating loss carryforwards for state tax purposes, 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 asset as of December 31, 2002 was $7,808,000, net of a
valuation allowance of $239,000. 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 reliability of the deferred tax assets
quarterly, and assesses the need for additional valuation allowances quarterly.
LEGAL CONTINGENCIES
The Company is currently involved in certain legal proceedings. As discussed in
Note 12 in the Notes to the Consolidated Financial Statements included in Part
IV to this Annual Report on Form 10-K, the Company has accrued an estimate of
Page -20-
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 ASSETS
The Company's long-lived assets primarily consists 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, assigning assets and
liabilities to reporting units, assigning goodwill to reporting units, and
determining 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 discount rates and other assumptions.
Changes in these estimates and assumptions could materially affect the
determination of fair value for each reporting unit.
Effective January 1, 2002, the Company adopted SFAS 142 and performed a
transitional test of its goodwill and intangible assets. No impairment charges
were recorded as a result of the initial impairment test. Goodwill was also
tested for impairment in the fourth quarter, after the completion of the annual
budgeting and forecasting process. Due to, among other things, the overall
softening of the global economy and the related decline in operating results of
SurfTech, the Company recorded a goodwill impairment loss of $556,000. The fair
value of the reporting unit giving rise to the transitional impairment loss was
estimated using the expected present value of future cash flows. Any further
impairment losses recorded in the future could have a material adverse impact on
the Company's financial conditions and results of operations.
The Company periodically reviews the carrying value of its long-lived assets
held and used, other than goodwill and intangible assets with indefinite lives,
and assets to be disposed of whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company assesses the
recoverability of the asset. It compares estimated cash flows, on a discounted
basis, expected to be generated from the related assets to the carrying amounts
to determine whether impairment has occurred. If the estimate of cash flows
expected to be generated changes in the future, the Company may be required to
record impairment charges that were not previously recorded for these assets.
This review is performed using estimates of future cash flows. If the carrying
value of a long-lived asset is considered impaired, an impairment charge is
recorded for the amount by which the carrying value of the long-lived asset
exceeds its fair value.
Page -21-
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, which do not contribute to future revenues, are
generally expensed. 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, nor are they
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.
Page -22-
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 this Annual Report on Form 10-K, which contain accounting policies and other
disclosures required by generally accepted accounting principles.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2002 ("2002"), the net cash provided from
operating activities was $6,408,000, as compared to net cash used in operating
activities of $2,872,000 for the year ended December 31, 2001 ("2001"). The 2002
increase was primarily related to improved operating results, significant
reductions in inventory and increased collections of receivables, particularly
collection of recoverable income taxes, partially offset by payments under
change-in-control agreements, deferred compensation and retirement plans.
During 2002, net cash provided by investing activities was $9,367,000, as
compared to $237,000 in investing activities in 2001. The increase in 2002 was
primarily generated by the proceeds from the surrender value of life insurance
policies of $10,676,000 received in the first quarter of the year.
During 2002, net cash used in financing activities was $17,131,000, primarily
related to the pay down of bank debt in the amount of $18,103,000. In 2001, net
cash provided by financing activities was $1,174,000, principally due to
borrowings under the Company's line of credit.
During 2002, the Company was a party to a Second Amended and Restated Credit
Agreement, dated December 13, 2001, as amended (the "Former Credit Facility"),
that allowed the Company to borrow for working capital and other purposes. The
Former Credit Facility contained certain financial and non-financial covenants,
including requirements to maintain certain minimum levels of net income and a
minimum fixed charge coverage ratio, as defined therein, on a quarterly basis.
As of December 31, 2001, the Company was in violation of the net income covenant
for the fourth quarter of 2001. In addition, on March 1, 2002, the Company was
notified that it was in default under the Former Credit Facility due to its
failure to meet the previously scheduled debt reduction to $25,500,000.
On May 23, 2002, the Company and its lenders reached an agreement, pursuant to
which the lenders granted a waiver of default and amendments to the violated
financial covenants, so that the Company would be in full compliance with the
Former Credit Facility. The agreement provided, among other things, for the
Company to pay-down outstanding borrowings by $689,000 to $25,500,000 and for
the payment to the lenders of an amendment fee of $130,000.
The Former Credit Facility provided for the payment of a facility fee of
$780,000 in the event that it was not repaid in full by October 31, 2002. The
Company paid this facility fee on November 4, 2002. The Former Credit Facility
matured on December 31, 2002. The Company did not retire the Former Credit
Facility until January 6, 2003, and therefore, was in technical default
thereunder at December 31, 2002.
Page -23-
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 over
advance amount of $1,500,000, which is amortized over the three-year term. The
two term loans of $2,350,000 and $840,000 are also amortized over the three-year
term. The Senior Credit Facility restricts investments, acquisitions, capital
expenditures and dividends. It contains financial covenants relating to minimum
levels of net worth, fixed charge coverages, 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.
As of December 31, 2002, outstanding borrowings under the Former Credit Facility
were $17,557,000. The weighted average interest rates on borrowings during the
years ended December 31, 2002 and December 31, 2001 were 6.56% (with the
$780,000 facility fee included as interest expense, the weighted average
interest rate was 10.01%) and 7.57%, respectively. On January 6, 2003, the
Company borrowed $10,359,000 under the Senior Credit Facility, which together
with the proceeds from the sale of EME and available cash (including a
$2,000,000 dividend from EME) were used to retire the Former Credit Facility.
The Company's German subsidiary EME also had $5,600,000 in lines of credit with
its banks that matured in two stages: December 31, 2002 and March 31, 2003. This
subsidiary was sold on January 6, 2003. The assets and liabilities of EME are
categorized as held for sale on the Company's balance sheet. See Note 2 in the
Notes to Consolidated Financial Statements included in Part IV of this Annual
Report on Form 10-K.
The Company had retained Imperial Capital, LLC to assist it with refinancing the
Former Credit Facility, and had attempted to refinance it prior to October 31,
2002 in an effort to avoid repayment of the $780,000 fee described above, but
was unable to do so primarily due to uncertainties involving the then pending
trial relating to the litigation with Eaton (See Item 3. Legal Proceedings). The
Company had also attempted to extend the maturity of the Former Credit Facility,
but its lenders had expressed an unwillingness to extend the maturity past
December 31, 2002. Following October 31, 2002 the Company had continued working
to refinance the Former Credit Facility, however, due to difficult market
conditions, the Company experienced significant difficulties in obtaining
replacement financing sufficient in amount to fully refinance the Former Credit
Facility. The Senior Credit Facility, as well as the other alternative financing
sources available to and considered by the Company, were primarily revolving
credit facilities based upon eligible receivables and inventory, which did not
include the Company's assets located in Mexico as part of the Company's
borrowing base, resulting in a potential shortfall in refinancing the Former
Credit Facility. Accordingly, in refinancing the Former Credit Facility it was
necessary to obtain an additional source of capital. As discussed below, on
October 11, 2002, the Company had filed a registration statement with the SEC
relating to an anticipated distribution to its shareholders of subscription
rights to purchase additional shares of common stock of the Company (the "Rights
Offering"). At December 31, 2002, the registration process with the SEC was
proceeding, but was not complete, and proceeds from the Rights Offering were not
then available to be used in the refinancing of the Former Credit Facility.
Management determined that additional capital for the refinancing was required
from either the sale of a division or a subordinated debt financing, which could
be repaid from the proceeds of the Rights Offering at a later date.
As discussed in the notes to the financial statements (Notes 1 and 2), the
Company had engaged Imperial Capital, LLC to explore the sale of the Company or
one or more of its subsidiaries. During its sales process, Imperial Capital, LLC
contacted over four hundred potential buyers with respect to the sale of the
Company and its subsidiaries, including in connection with the sale of EME. All
interested bidders were given the opportunity to conduct certain due diligence.
After negotiations, the Company's Board of Directors determined that the bid
received for EME from the ultimate purchaser was the most favorable to the
Company in light of all of the circumstances, and the transaction closed January
6, 2003. These circumstances included the maturity of the Company's Former
Credit Facility on December 31, 2002 and the lender's unwillingness to extend
the facility, the necessity of obtaining additional capital to refinance the
Former Credit Facility in addition to entering into the Senior Credit Facility,
the effect on the Company if the Former Credit Facility was not refinanced on or
about its maturity date, the limited alternative transactions available to the
Company to obtain the additional capital required to refinance the Former Credit
Facility, and the additional costs of such alternative transactions. The
proceeds of the EME transaction were used in connection with the refinancing of
the Former Credit Facility and to reduce Company indebtedness. A principal of
the buyer of EME is a limited partner in Steel Partners II, L.P. ("Steel"), an
investment partnership. The Company's Chairman of the Board and Chief Executive
Officer is the sole executive officer and managing member of Steel.
On October 11, 2002, the Company had filed a registration statement with the SEC
relating to an anticipated distribution to its shareholders of subscription
rights to purchase additional shares of common stock of the Company. The Company
subsequently filed an amendment to the Registration Statement with the SEC on
December 30, 2002. On March 28, 2003, following a thorough discussion and
review, the Company's Board of Directors determined not to proceed with the
Rights Offering and withdrew the Registration Statement with the SEC.
Page -24-
The Company's current ratio was 1.19 to 1 at December 31, 2002, and 1.16 to 1 at
December 31, 2001. This ratio improved primarily due to the receipt of life
insurance proceeds of $10,676,000 used to pay down the Former Credit Facility
and improvements in net cash provided by operations.
As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 34% at December 31, 2002 and 52% at
December 31, 2001. At December 31, 2002, total borrowings, decreased by
$18,103,000, compared to December 31, 2001.
Capital expenditures of $1,477,000 were made in 2002, compared to $1,710,000 in
2001. The capital expenditures made in 2002 primarily related to improvements in
process technology, equipment and building repairs.
The Company has been able to generate adequate amounts of cash to meet its
operating needs. During 2002, Teal, RFL and SL-MTI produced positive cash flow,
aggregating $6,762,000. Condor and SurfTech experienced negative cash flow for
the year. Condor's cash flow was negatively impacted by payments made against
its restructuring reserve of $973,000 and deferred compensation payments of
$1,252,000, which is a non-recurring payment. Without these cash payments,
Condor would have recorded a positive cash flow for the year. SurfTech had
negative cash flow primarily due to poor operating results.
With the exception of SurfTech and the segment reported as "Other" (which
consists primarily of corporate office expenses and accruals not specifically
allocated to the reportable business segments) all of the Company's operating
segments were profitable at the operating profit level (operating profit
excludes non-recurring charges and allocations during the year) and are expected
to remain so in 2003. SurfTech's operating loss was $1,627,000 in 2002. SurfTech
is facing historically low demand in its marketplace. Included in "Other" are
special charges of $1,834,000 related to change of control and proxy costs (see
Note 15 in the Notes to the Consolidated Financial Statements included in Part
IV of this Annual Report on Form 10-K) and charges of $1,600,000 related to
environmental and legal reserves not fully allocated to reportable business
units.
The following is a summary of the Company's contractual obligations at December
31, 2002 for the periods indicated (in thousands):
Contractual Less than 1 to 3 4 to 5 After
Obligations 1 year Years Years 5 Years Total
- -----------------------------------------------------------------------
(in thousands)
Operating leases $ 1,112 $ 1,437 $ 837 -- $ 3,386
Debt (1) 17,557 -- -- -- 17,557
Capital Leases 194 345 204 -- 743
-------------------------------------------------
Total $18,863 $ 1,782 $ 1,041 -- $21,686
-------------------------------------------------
(1) On January 6, 2003, the Company entered into the Senior Credit Facility,
which provides for a revolving loan and a term loan, 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 a $1,500,000 over advance
amount, which is amortized over the three-year term. The two term loans of
$2,350,000 and $840,000 are also amortized over the three-year term. Contractual
Page -25-
obligations for the term loans are $559,000 in less than one year and $2,631,000
in one to three years.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Year ended December 31,
-------------------------
2002 2001
(as adjusted)
-------------------------
(in thousands)
NET SALES
Condor ..... $ 38,058 $ 48,742
Teal ....... 19,608 13,320
SL-MTI ..... 23,007 19,262
RFL ........ 27,239 28,447
SurfTech ... 2,237 3,086
------------------------
Consolidated $110,149 $112,857
========================
Year ended December 31,
--------------------------
2002 2001
(as adjusted)
--------------------------
(in thousands)
OPERATING INCOME (LOSS)
FROM CONTINUING OPERATIONS
Condor ............................. $ 1,457 $ (9,492)
Teal ............................... 1,873 603
SL-MTI ............................. 1,873 1,981
RFL ................................ 3,435 3,230
SurfTech ........................... (1,627) (1,120)
Other expenses and Corporate offices (6,584) (6,171)
-------------------------
Consolidated ....................... $ 427 $(10,969)
=========================
Consolidated net sales from continuing operations in 2002 of $110,149,000
decreased approximately $2,708,000 (2%), as compared to consolidated net sales
from continuing operations in 2001. This decrease was due mainly to decreases at
Condor of approximately $10,684,000 (22%), and RFL of approximately $1,208,000
(4%). These decreases were partially offset by increases in net sales at Teal of
$6,288,000 (47%) and MTI of $3,745,000 (19%). Consolidated net sales for 2002
and 2001 do not include net sales of $27,658,000 and $35,926,000, respectively,
relating the combined sales of EME and SL Waber, which are classified as
discontinued operations. Net loss from continuing operations in 2002 was
$1,247,000 or $.21 per diluted share compared to a net loss from continuing
operations in 2001 of $9,695,000 or $1.70 per diluted share. The net loss in
2002 included restructuring costs at Condor and SurfTech
Page -26-
in the amount of $265,000, goodwill and asset impairment charges at SurfTech of
$703,000, and special charges included in other of $1,834,000 related to
change-of-control and proxy costs. Without these charges the Company would have
had net income of $597,000 from continuing operations in 2002.
Condor's net sales in 2002 decreased $10,684,000 (22%), while its operating
income increased by $10,949,000 to $1,457,000, as compared to net sales and
operating income in 2001. Condor's net sales decreased as a result of the
withdrawal of significant portion of its telecommunications-related product
line. Operating results in 2002 includes a restructuring charge of $230,000
relating to facility consolidation at its Brentwood, New York and Reynosa,
Mexico facilities and related severance payments. The 2001 operating results
included charges in connection with the write-down of telecommunications-related
inventory in the amount of $2,890,000, the restructuring costs related to the
closing of the two facilities mentioned above of $3,683,000 and the impairment
of intangible assets in connection with the Todd Products acquisition in the
amount of $4,145,000. On a comparative basis, excluding the above-mentioned
charges, Condor's income from operations for 2002 was $1,687,000, compared to
$1,226,000 in 2001, or an increase of $461,000. The increase in operating income
was due to improved margins caused by a more favorable product mix and
efficiencies gained in its manufacturing processes.
Teal's net sales in 2002 increased approximately $6,288,000 (47%), and income
from operations increased approximately $1,270,000 (211%), compared to net sales
and income from operations in 2001. The significant increase in revenue and
income from operations is due to several new orders obtained by Teal, primarily
in the medical imaging product line.
SL-MTI's net sales in 2002 increased approximately $3,745,000 (19%), while
operating income decreased approximately $108,000 (5%), compared to net sales
and income from operations in 2001. Contributing to the increased net sales were
significant increases in sales of DC brushless motors. The decrease in income
from operations is due primarily to poor operating efficiencies associated with
the rapid increase in sales and an inventory write-off of $387,000.
RFL's net sales in 2002 decreased approximately $1,208,000 (4%), and income from
operations increased approximately $205,000 (6%), compared to net sales and
operating income in 2001. Contributing to the decrease in net sales was the weak
growth in the U.S. economy, which delayed the capital improvement plans of
several large customers in the electric power utility industry. Despite the
decrease in sales, income from operations increased slightly, primarily due to
the non-amortization provision of goodwill adopted by the Company in 2002.
SurfTech's net sales in 2002 decreased approximately $849,000 (28%), and loss
from operations increased approximately $507,000 (45%), compared to net sales
and operating loss in 2001. The decrease in sales is attributed to continued
weakness in the corrugated paper and telecommunications markets. Included in the
loss from operations for 2002 was a write-off of goodwill in the amount of
$556,000 and an asset impairment charge of $147,000. In 2001, SurfTech
recognized goodwill impairment and restructuring charges of $360,000. Without
the above charges, the loss from operations in 2002 would have been $889,000,
and the loss from operations in 2001 would have been $760,000.
EME's net sales in 2002 increased approximately $2,048,000 (8%), and income from
operations decreased approximately $218,000 (7%), compared to net sales and
income from operations in 2001. The increase in sales is primarily attributable
to
Page -27-
increased sales of wire harness systems offset by decreased sales of actuation
devices. The decreased income from operations was caused by the sharp drop in
sales of actuation devices in the aerospace market, which carries appreciably
higher margins than EME's other product lines. EME was sold January 6, 2003 and
is reported in discontinued operations for all periods presented.
COST OF PRODUCTS SOLD
As a percentage of net sales, cost of products sold in 2002 was approximately
65%, as compared to approximately 66% in 2001 (excluding the increase in cost of
products sold due to a reserve at Condor of $2,890,000 for excess and obsolete
inventory). Although the cost of products as a percentage to sales remained
relatively constant year-to-year, the subsidiaries' product mix changed
considerably. Significant improvements were made at Condor, which decreased its
percentage of cost of products sold from 73% in 2001 to 67% in 2002. Condor's
cost of products sold improved primarily as a result of the substantial
reduction of Condor's telecommunications related product line, as well as
improved manufacturing efficiencies. Teal's percentage of cost of products sold
increased from 60% in 2001 to 65% in 2002. In 2002, Teal began a new major
program with one customer, which included volume discounts and production of
prototypes. Teal expects to improve its cost of products sold percentage as
production increases on this program. SurfTech's cost of products sold
percentage increased from 75% in 2001 to 82% in 2002. SurfTech is experiencing
historic low demands in its served markets. SurfTech's income from operations is
relatively immaterial to the Company's consolidated results of operations.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in 2002 were $7,579,000, a decrease
of approximately $441,000 (5%), as compared to 2001. As a percentage of net
sales, engineering and product development expenses in 2002 and 2001 were 7% for
both years. The decrease of $441,000 was primarily due to the consolidation of
engineering facilities at Condor, which was completed during the year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in 2002 were $25,194,000, a
decrease of $1,018,000 (4%), compared to 2001. As a percentage of net sales,
selling, general and administrative expenses in 2002 and 2001 were approximately
23%. Included in 2002 are additional accruals for environmental matters of
$500,000, litigation of $1,100,000, and service fees of $400,000. In 2001,
selling, general and administrative expenses included $1,300,000 of professional
fees related to the possible sale of all or a portion of the Company's business
($765,000 of which was reversed in 2002), $700,000 of bank charges incurred as a
result of the default of financial covenants under the Former Credit Facility,
an increase of $450,000 in litigation reserves, $300,000 in expenses associated
with the contested election of directors and $90,000 in consulting costs related
to the restructuring of Condor.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in 2002 were $2,948,000, a decrease of
approximately $1,089,000 (27%), compared to 2001. The reduction in 2002 is due
primarily to the Company's reduced asset base and the discontinuance of goodwill
amortization. The discontinuance of goodwill amortization, which amounted to
$722,000 for the year ended December 31, 2001, was the result of the adoption of
SFAS No.142 during the year.
Page -28-
RESTRUCTURING COSTS AND IMPAIRMENT CHARGES
At December 31, 2001, the Company had a restructuring reserve of $1,163,000.
This restructuring reserve was established in 2001 to provide for anticipated
costs associated with the downsizing of Condor and SurfTech. During 2002, the
reserve was increased by $265,000, comprised of $90,000 for severance payments
and $140,000 for certain exit costs related to the closure of Condor's
engineering and sales support office in Brentwood, New York and manufacturing
facility in Reynosa, Mexico. The remaining increases relate to SurfTech. All of
the restructuring costs were either paid or applied to the write-down of assets
during 2002. At December 31, 2002, no amount remained in the Company's
restructuring reserve. A summary of the principal components of the
restructuring reserve from December 31, 2001 to December 31, 2002 is as follows:
Restructuring Accrual December 31, December 31,
2001 Increases (Decreases) 2002
- --------------------------------------------------------------------------------
(in thousands)
Facility Costs $ 689 $ 15 $ (704) $0
Asset write-off 325 160 (485) --
Professional fees 102 -- (102) --
Other 47 -- (47) --
Severance -- 90 (90) --
------- ------- ------- --
Total $ 1,163 $ 265 $(1,428) $0
======= ======= ======= ==
OTHER INCOME (EXPENSE)
In 2002, interest income was $25,000, compared to $153,000 in 2001. Interest
expense in 2002 was $2,454,000, compared to $3,261,000 in 2001. Included in
interest expense in 2002 is the payment of a facility fee in the amount of
$780,000, due to the Company's inability to pay down in full the Former Credit
Facility by October 31, 2002. (See Note 9 in the Notes to Consolidated Financial
Statements included in Part IV of this Annual Report on Form 10-K). The decrease
in interest expense for 2002 is related to significantly reduced debt levels and
lower interest rates.
TAXES
The effective benefit tax rate for 2002 was higher than the statutory rate due
to the recovery of certain tax benefits not previously recognized.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Years ended December 31,
------------------------
2001 2000
(as adjusted)
-------------------------
(in thousands)
NET SALES
Condor ..... $ 48,742 $ 62,567
Teal ....... 13,320 21,832
SL-MTI ..... 19,262 14,201
RFL ........ 28,447 24,426
SurfTech ... 3,086 2,838
-------- --------
Consolidated $112,857 $125,864
-------- --------
Page -29-
Year ended December 31,
--------------------------
2001 2000
(as adjusted) (as adjusted)
--------------------------
(in thousands)
OPERATING INCOME (LOSS) FROM
CONTINUING OPERATIONS
Condor ............................. $ (9,492) $ 4,203
Teal ............................... 603 3,803
SL-MTI ............................. 1,981 1,032
RFL ................................ 3,230 2,523
SurfTech ........................... (1,120) (115)
Other expenses and Corporate offices (6,171) (753)
-------------------------
Consolidated ....................... $(10,969) $ 10,693
=========================
Consolidated net sales in 2001 of $112,857,000 decreased $13,007,000 (10%),
compared to consolidated net sales in 2000. Consolidated net sales for 2001 and
2000 do not include net sales of $35,926,000 and $41,882,000, respectively,
relating to the combined sales of EME and SL Waber, which are classified as
discontinued operations. Net loss in 2001 was $10,650,000, or $1.87 per diluted
share, compared to net income in 2000 of $1,700,000, or $0.30 per diluted share.
The net loss in 2001 included a $4,270,000 charge relating to the impairment of
intangible assets at Condor and SurfTech, a $3,868,000 charge for restructuring
expenses of Condor and SurfTech, inventory write-downs of $2,940,000 for Condor
and SurfTech, net income of $3,157,000 for EME and a $3,947,000 net loss from SL
Waber (both classified as discontinued operations).
Condor's net sales in 2001 decreased $13,825,000 (22%), and its income from
operations decreased $13,695,000 (326%), compared to net sales and operating
income in 2000. Contributing to the decrease in net sales was the major downturn
in the market for telecommunication products, resulting in significantly lower
sales from the Todd Products division of Condor. The decrease in income from
operations was primarily the result of the reduced sales, and includes charges
in connection with the write-down of telecommunications-related inventory in the
amount of $2,890,000, restructuring expenditures of $3,683,000 to close two
facilities and lay-off 810 employees and impairment of intangible assets in the
amount of $4,145,000 related to the 1999 Todd Products acquisition.
Teal's net sales in 2001 decreased $8,512,000 (39%), and income from operations
decreased $3,200,000 (84%), compared to 2000. The decrease in net sales and
income from operations was due to the continued depressed demand for
semiconductor manufacturing equipment.
SL-MTI's net sales in 2001 increased $5,061,000 (36%), and income from
operations increased $949,000 (92%), compared to net sales and income from
operations in 2000. Contributing to the increased net sales and income from
operations were increased sales of precision motor products to the aerospace
industry.
RFL's net sales in 2001 increased $4,021,000 (16%), and income from operations
increased approximately $707,000 (28%), compared to net sales and operating
income in 2000. Contributing to the increased net sales and income from
operations were increased sales of teleprotection equipment and systems to the
electric power utility industry.
Page -30-
SurfTech's net sales in 2001 increased $248,000 (9%), and the operating loss
increased $1,005,000 (873%), compared to net sales and loss from operations in
2000. Contributing to the increased net sales and decreased operating income was
the subsidiary's increased penetration of the market for telecommunications
products and the costs associated with supporting this effort. Also included in
2001 are charges in connection with the write-down of inventory of $50,000 and
restructuring and impairment charges of $185,000 and $125,000, respectively.
EME's net sales in 2001 increased $3,068,000 (14%), and income from operations
increased $1,070,000 (51%), compared to net sales and operating income in 2000.
Contributing to the increased net sales and income from operations were
increased sales of actuation systems to the aerospace industry. EME was sold
January 6, 2003 and is reported as discontinued operations for all periods
presented.
SL Waber's net sales in 2001 decreased $9,025,000 (47%), compared to 2000. SL
Waber was sold in September 2001 and is reported as discontinued operations for
all periods presented.
COST OF PRODUCTS SOLD
As a percentage of net sales, cost of products sold, including inventory charges
and losses on commitments, was approximately 69% in 2001, as compared to
approximately 64% in 2000. The percentage increase was a result of product mix
and a reserve at Condor of $2,890,000 for excess and obsolete inventory relating
to the telecommunications-related products. As part of a restructuring plan,
management decided to significantly reduce the Condor telecommunications-related
product line due to the continued weak demand in that market. Inventory was
evaluated based on current backlog and sales forecasts, and written-down
accordingly. Condor disposed of approximately $2,100,000 of this inventory in
2001.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in 2001 were $8,020,000, a decrease
of $1,002,000 (11%), compared to 2000. As a percentage of net sales, engineering
and product development expenses in 2001 and 2000 were 7%. During 2001,
decreases were primarily due to lower investments made by the operating
divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in 2001 were $26,212,000, an
increase of $3,071,000 (13%), compared to 2000. As a percentage of net sales,
selling, general and administrative expenses in 2001 and 2000 were 23% and 18%,
respectively. The increase in 2001 was mainly due to $1,300,000 in professional
fees related to the possible sale of all or a portion of the Company's business,
$700,000 of bank charges incurred as a result of the amendment to the Former
Credit Facility and the default of financial covenants thereunder, an increase
of $450,000 in litigation reserve, $300,000 in expenses associated with the
contested election of directors and $90,000 in consulting costs related to the
restructuring of Condor.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in 2001 were $4,037,000, an increase of
$186,000 (5%), compared to 2000. The increase in 2001 was primarily related to
the increased base of property, plant and equipment depreciated during the year.
Page -31-
RESTRUCTURING COSTS AND IMPAIRMENT OF INTANGIBLES
During 2001, the Company recognized $8,138,000 of restructuring and impairment
costs, as well as $2,940,000 of inventory write-downs. The restructuring and
impairment charges related to Condor were $7,828,000. SurfTech also incurred
restructuring and impairment charges of $310,000. Condor incurred a charge for
an inventory write-down of $2,890,000, primarily related to
telecommunications-related products. SurfTech also incurred a charge of $50,000
related to inventory write-downs. Restructuring costs, impairment charges and
inventory write-downs are summarized as follows:
Impairment Inventory
Restructuring of Write-
Costs Intangibles downs
---------------------------------------
(In thousands)
Condor - intangible asset impairment .... $ -- $4,145 $ --
Condor - workforce reduction and other .. 3,683 -- --
Condor - inventory write-off ............ -- -- 2,890
Surf Tech - intangible asset impairment . -- 125 --
Surf Tech - fixed asset write-offs ...... 125 -- --
Surf Tech - workforce reduction and
other ................................... 60 -- --
Surf Tech - inventory write-off ......... -- -- 50
----------------------------------
Total restructuring and impairment
Charges ................................ $3,868 $4,270 $2,940
==================================
During 2001, the Company implemented a plan to restructure certain of its
operations as a result of a significant reduction in the demand for products by
telecommunications equipment manufacturers. The sharp decrease in orders for
telecommunications-related products occurred abruptly in the first quarter and
continued to the end of 2001.
The restructuring plan was designed to reduce fixed costs in line with lower
anticipated sales in a manner that would not overburden personnel and monetary
resources. It consisted of the following actions:
o the closure of Condor's engineering and sales support facility in
Brentwood, New York;
o the closure of Condor's manufacturing facility in Reynosa, Mexico; and
o the substantial reduction of Condor's employees and staff at Condor's
manufacturing facility in Mexicali, Mexico and headquarters in Oxnard,
California.
The charge for facility closures relates primarily to the write-off of equipment
and other fixed assets to be disposed of or abandoned. A portion of the charge
represents management's estimate of the future lease commitments and buyout
options for closed facilities.
The restructuring plan included the termination of approximately 828 employees,
and the payment of related severance benefits. Approximately 810 employees were
terminated during 2001. The remaining terminations and associated termination
payments were made in the first quarter of 2002.
As of December 31, 2001, $1,163,000 of the restructuring costs was included as a
component of other accrued liabilities in the accompanying consolidated balance
sheet. The Company had no remaining restructuring reserves at December 31, 2002.
Page -32-
Of the $2,940,000 inventory write-down, which was not part of the restructuring
reserve, $2,890,000 of the telecommunications-related product line inventory.
The inventory was evaluated based on current backlog and sales forecasts.
Following this evaluation, the Company considered the inventory to have limited
value. The Company disposed of approximately $2,100,000 of this inventory during
2001.
OTHER INCOME (EXPENSE)
In 2001, interest income was $153,000 compared to $272,000 in 2000. Interest
expense in 2001 increased 10% to $3,261,000, as compared to 2000, primarily due
to the higher levels of borrowing during 2001.
TAXES
The effective tax benefit rate in 2001 was (33%), as compared to 33% in 2000.
See Note 3 in the Notes to Consolidated Financial Statements included in Part V
of this Annual Report on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, FASB issued Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), which requires that
goodwill and certain other intangible assets having indefinite lives no longer
be amortized to earnings, but instead be subject to periodic testing for
impairment. Intangible assets determined to have definitive lives will continue
to be amortized over their estimated useful lives. This statement is effective
for the Company's 2002 fiscal year. Effective January 1, 2002, the Company
adopted SFAS No. 142 and implemented certain provisions, specifically the
discontinuation of goodwill amortization, and implemented the remaining
provisions during 2002. The Company conducted its initial test for impairment in
the second quarter of 2002. The Company allocated its adjusted goodwill balance
to its reporting units and conducted the transitional impairment tests required
by SFAS No. 142. The fair values of the reporting units were estimated using a
combination of the expected present values of future cash flows and an
assessment of comparable market values. No impairment charges were recorded
during the quarter. The Company tests for impairment after the annual
forecasting process is completed or as impairment indicators arise. During the
fourth quarter the Company recorded a charge to reduce goodwill in the amount of
$556,000, related to SurfTech.
There were no changes in the classifications of intangible assets or their
remaining useful lives upon adoption of this pronouncement.
In August 2001, the FASB issued Statement of Financial Accounting Standard No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which
provides the accounting requirements for retirement obligations associated with
tangible long-lived assets. This statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. This statement will be effective for the 2003 year. The adoption
of SFAS No. 143 is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), which excludes from the definition of long-lived assets goodwill and
other intangibles that are not amortized in accordance with SFAS No.142. SFAS
No. 144 requires that long-lived assets to be disposed of by sale be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. SFAS No. 144 also
expands the reporting of discontinued operations to include components of an
Page -33-
entity that have been or will be disposed of rather than limiting such
discontinuance to a segment of a business. This statement is effective for the
Company's 2002 fiscal year. Effective January 1, 2002, the Company adopted this
Statement.
In April 2002, the FASB adopted Statement of Financial Accounting Standards 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS 145"). This Statement rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." This
Statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002. The Company is currently evaluating the impact, if any, that
implementation of this statement will have on its results of operations or
financial position.
In June 2002, the FASB issued Statement 146 Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issues No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" ("Issue 94-3").
The principal difference between this SFAS 146 and Issue 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company is currently evaluating the impact, if any, that
implementation of this statement will have on its results of operations or
financial position.
In November 2002, the FASB issued FASB Interpretation No.45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the
liability be recorded in the guarantor's balance sheet upon the issuance of a
guarantee. In addition, FIN 45 requires disclosure about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company believes that the adoption of this standard will not have a
material impact on its operations or financial position.
In December 2002, the FASB issued Statement of Financial Accounting Standard No.
148, "Accounting for Stock-Based Compensation Costs-Transition and Disclosure"
("SFAS No. 148"). This statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," and provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based compensation. It also requires additional disclosures about the
effects on reported net income of an entity's accounting policy with respect to
stock-based employee compensation. The Company accounts for stock-based
Page -34-
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and has adopted the disclosure only alternative of SFAS No. 123.
The Company adopted the disclosure provisions of SFAS No.148 in December 2002.
See Note 1 to the Notes to the Consolidated Financial Statements included in
Part IV of this Annual Report on Form 10-K.
ENVIRONMENTAL
See "Item 3. Legal Proceedings" in Part I of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest and foreign
currency exchange rates. Changes in the market rate affect both interest paid
and earned by the Company. The Company's investments and outstanding debt bear
variable interest rates. As of January 6, 2003, debt consists primarily of the
Senior Credit Facility, which bears interest at interest rates ranging from
prime rate plus fifty basis points to prime rate plus 2%. The Company
manufactures some of its products in Mexico and purchases some components in
foreign markets. All other foreign market component purchases are primarily
invoiced in U.S. dollars. Changes in interest and foreign currency exchange
rates did not have a material impact on the reported earnings for 2002, and are
not expected to have a material impact on reported earnings for 2003.
See generally, "Item 1. Description of Business - Risk Factors" and "Item 1.
Description of Business - Foreign Operations" in Part I of this Annual Report on
Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and supplementary data, together with the
reports of Grant Thornton LLP, independent public accountants, are included in
Part IV of this Annual Report on Form 10-K.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On July 18, 2002, the Company announced that it dismissed Arthur Andersen LLP as
its independent accountants and engaged Grant Thornton LLP as its new
independent accountants. The decision to dismiss Arthur Andersen and to engage
Grant Thornton LLP was recommended by the Audit Committee of the Board of
Directors and approved by the Board of Directors.
Arthur Andersen's reports on the Company's financial statements for the two
years ended December 31, 2000 and December 31, 2001 did not contain an adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as to
audit scope or accounting principles. However, as a result of an impairment
charge related to the write off of intangible assets of Condor at December 31,
2001, the Company was in violation of its net income covenant for the fourth
quarter of 2001 under the Former Credit Facility. Additionally, on March 1, 2002
the Company received a notice from its lenders under the Former Credit Facility
stating that it was in default due to its failure to meet a scheduled debt
reduction.
Page -35-
Consequently, Arthur Andersen's report for the period ended December 31, 2001
dated March 15, 2002 did contain the following paragraph: "The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company was in technical default under its revolving credit
facility at December 31, 2001 and an additional event of default occurred on
March 1, 2002. Due to these events of default, the lenders that provide the
revolving credit facility do not have to provide any further financing and have
the right to terminate the facility and demand repayment of all amounts
outstanding. The existence of these events of default raised substantial doubt
about the Company's ability to continue as a going concern."
On January 6, 2003, the Company entered into the Senior Credit Facility, which
provides for debt financing for a term of three years. See Note 9 in the Notes
to Consolidated Financial Statements included in Part IV of this Annual Report
on Form 10-K.
During the Company's two most recent fiscal years and through July 18, 2002,
there were no disagreements with Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to Andersen's satisfaction, would have caused
them to make reference to the subject matter in connection with their report on
the Company's consolidated financial statements for such years, and there were
no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
The Company provided Arthur Andersen with a copy of the foregoing disclosures
and requested Arthur Andersen furnish it a letter stating whether it agrees with
the statements herein. The Company has not received a response to that letter
and has not been able to obtain it after reasonable efforts. Accordingly,
pursuant to Item 304T of Regulation S-K, no response from Arthur Andersen will
be filed as an exhibit hereto.
During the Company's two most recent fiscal years and the subsequent interim
periods through July 18, 2002, the Company did not consult with Grant Thornton
LLP regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on its consolidated financial statements, or any other matters
or events as set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Apart from certain information concerning the Company's executive officers,
which is set forth in Part I of this Annual Report on Form 10-K, the information
required under this Item is incorporated herein by reference to the applicable
information in the Proxy Statement for the Company's 2003 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated by reference to the
Proxy Statement for the Company's 2003 Annual Meeting of Shareholders.
Page -36-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is incorporated by reference to the
Proxy Statement for the Company's 2003 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated by reference to the
Proxy Statement for the Company's 2003 Annual Meeting of Shareholders.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days of the filing of this Form 10-K, the Company carried out an
evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of its
disclosure controls and procedures (as defined in Rules 13a-14 and 14d-15d of
the Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in the periodic filings with the
SEC.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of the Company's most recent evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The information required by this Item is included in Item 8 of Part II of this
Annual Report on Form 10-K.
(a) (2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule for the years ended December 31,
2002, December 31, 2001, and December 31, 2000 are submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because (a) the required information is shown
elsewhere in this Annual Report on Form 10-K, or (b) they are inapplicable, or
(c) they are not required.
Page -37-
See Index at page F-1 to Consolidated Financial Statements included in Part IV
of this Annual Report on Form 10-K.
(a) (3) EXHIBITS
The information called for by this section is listed in the Exhibit Index of
this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2002:
Current report on Form 8-K filed October 16, 2002 pursuant to Item 5 (Other
Events).
Current report on Form 8-K filed November 12, 2002 pursuant to Item 5 (Other
Events).
Page -38-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SL INDUSTRIES, INC.
(Company)
By /s/ Warren Lichtenstein Date March 28, 2003
-----------------------
Warren Lichtenstein
POWER OF ATTORNEY
SL INDUSTRIES, INC. AND EACH OF THE UNDERSIGNED DO HEREBY APPOINT GLEN KASSAN
AND WARREN LICHTENSTEIN, AND EACH OF THEM SEVERALLY, ITS OR HIS TRUE AND LAWFUL
ATTORNEY TO EXECUTE ON BEHALF OF SL INDUSTRIES, INC. AND THE UNDERSIGNED ANY AND
ALL AMENDMENTS TO THIS ANNUAL REPORT ON FORM 10-K AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION; EACH OF SUCH ATTORNEYS SHALL HAVE THE POWER
TO ACT HEREUNDER WITH OR WITHOUT THE OTHER.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN
THE CAPACITIES AND ON THE DATE INDICATED.
By /s/ Warren Lichtenstein Date March 28, 2003
-------------------------------------------
Warren Lichtenstein - Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
By /s/ Glen Kassan Date March 28, 2003
-------------------------------------------
Glen Kassan - President and Director
By /s/ David R. Nuzzo Date March 28, 2003
--------------------------------------------
David R. Nuzzo - Vice President Finance
and Administration, Treasurer and Secretary
(Principal Financial Officer)
By /s/ J. Dwane Baumgardner Date March 28, 2003
--------------------------------------------
J. Dwane Baumgardner - Director
By /s/ Avrum Gray Date March 28, 2003
--------------------------------------------
Avrum Gray - Director
By /s/ James R. Henderson Date March 28, 2003
--------------------------------------------
James R. Henderson - Director
By /s/ Mark E. Schwarz Date March 28, 2003
--------------------------------------------
Mark E. Schwarz - Director
By /s/ Richard Smith Date March 28, 2003
--------------------------------------------
Richard Smith - Director
By /s/ Steven Wolosky Date March 28, 2003
--------------------------------------------
Steven Wolosky - Director
Page -39-
SL Industries, Inc.
Certifications
I, Warren Lichtenstein, certify that:
1. I have reviewed this Annual Report on Form 10-K of SL Industries, Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual
Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
Page -40-
6. The registrant's other certifying officers and I have indicated in this
Annual Report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Warren Lichtenstein
- ---------------------------
Warren Lichtenstein
Chairman of the Board and
Chief Executive Officer
Date: March 28, 2003
Page -41-
SL Industries, Inc.
Certifications
I, David R. Nuzzo, certify that:
1. I have reviewed this Annual Report on Form 10-K of SL Industries, Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14c and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual
Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
Page -42-
6. The registrant's other certifying officers and I have indicated in this
Annual Report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ David R. Nuzzo
- ----------------------
David R. Nuzzo
Vice President, Finance and Administration
Treasurer and Secretary
Date: March 28, 2003
Page -43-
INDEX TO EXHIBITS
The exhibit number, description and sequential page number in the original copy
of this document where exhibits can be found as follows:
Exhibit # Description
- --------- -----------
2.1 Share Purchase Agreement Relating to the Acquisition of RFL
Electronics, Inc. by SL Industries, Inc. dated as of April 1,
1999. Incorporated by reference to Exhibit 2.1 to the Company's
report on Form 8-K filed with the Securities and Exchange
Commission on May 26, 1999.
2.2 Asset Purchase Agreement by and between Condor D.C. Power
Supplies, Inc., as the Purchaser, and Todd Products Corp., and
Todd Power Corporation as the Sellers dated as of July 13, 1999.
Incorporated by reference to Exhibit 2.1 to the Company's report
on Form 8-K filed with the Securities and Exchange Commission on
August 10, 1999.
2.3 Securities Purchase Agreement by and among SL Industries, Inc.,
SL Industries Vertrieb GmbH, and DCX-Chol Holding GmbH, DCX-Chol
Enterprises, Inc. and Chol Enterprises, Inc. dated as of January
3, 2003. Incorporated by reference to Exhibit 2.1 to the
Company's report on Form 8-K filed with the Securities and
Exchange Commission on January 17, 2003.
3.1 Articles of Incorporation. Restated Articles of Incorporation.
Incorporated by reference to Exhibit 3.1 to the Company's report
on Form 10-K for the fiscal year ended December 31, 2000.
3.2 By-Laws. Restated By-Laws. Incorporated by reference to Exhibit
3.2 to the Company's report on Form 10-K for the fiscal year
ended December 31, 2000.
10.1 Supplemental Compensation Agreement for the Benefit of Byrne
Litschgi. Incorporated by reference to Exhibit 10.1 to the
Company's report on Form 8 dated November 9, 1990.
10.2 Chairman's Executive Severance Agreement. Incorporated by
reference to Exhibit 10.2 to the Company's report on Form 8
dated November 9, 1990.
10.3 First Amendment to Chairman's Executive Severance Agreement and
to Supplemental Compensation Agreement. Incorporated by
reference to Exhibit 10.3.1 to the Company's report on Form 8
dated November 9, 1990.
10.4 Second Amendment to Chairman's Executive Severance Agreement and
to Supplemental Compensation Agreement. Incorporated by
reference to Exhibit 10.3.2 to the Company's report on Form 8
dated November 9, 1990.
10.5 Third Amendment to Chairman's Executive Severance Agreement and
to Supplemental Compensation Agreement. Incorporated by
reference to Exhibit 10.3.3 to the Company's report on Form 8
dated November 9, 1990.
10.6 Fourth Amendment to Chairman's Executive Severance Agreement and
to Supplemental Compensation Agreement. Incorporated by
reference to Exhibit 10.3.2 to the Company's report on Form 8
dated November 9, 1990.
10.7 Deferred Supplemental Compensation Agreement with Grant Heilman.
Incorporated by reference to Exhibit 10.4.5 to the Company's
report on Form 8 dated November 9, 1990.
10.8 Deferred Supplemental Compensation Agreement with William Hess.
Incorporated by reference to Exhibit 10.4.6 to the Company's
report on Form 8 dated November 9, 1990.
Page -44-
10.9 Supplemental Compensation Agreement for the Benefit of Donald J.
Lloyd-Jones. Incorporated by reference to Exhibit 10.5.1 to the
Company's report on Form 8 dated November 9, 1990.
10.10 Supplemental Compensation Agreement for the Benefit of Salvatore
J. Nuzzo. Incorporated by reference to Exhibit 10.5.3 to the
Company's report on Form 8 dated November 9, 1990.
10.11 Supplemental Compensation Agreement for the Benefit of Marlin
Miller, Jr. Incorporated by reference to Exhibit 10.5.4 to the
Company's report on Form 8 dated November 9, 1990.
10.12 Supplemental Compensation Agreement for the Benefit of Grant
Heilman. Incorporated by reference to Exhibit 10.5.5 to the
Company's report on Form 8 dated November 9, 1990.
10.13 Supplemental Compensation Agreement for the Benefit of William
M. Hess. Incorporated by reference to Exhibit 10.5.6 to the
Company's report on Form 8 dated November 9, 1990.
10.14 1988 Deferred Compensation Agreement with a Certain Officer.
Incorporated by reference to Exhibit 10.6 to the Company's
report on Form 8 dated November 9, 1990.
10.15 Severance Pay Agreement with Owen Farren. Incorporated by
reference to Exhibit 10-C to the Company's report on Form 10-K
for the fiscal year ended July 31, 1991.
10.16 Severance Pay Agreement with Ted D. Taubeneck. Incorporated by
reference to Exhibit 10-D to the Company's report on Form 10-K
for the fiscal year ended July 31, 1991.
10.17 Deferred Compensation Agreement with James E. Morris.
Incorporated by reference to Exhibit 10-E to the Company's
report on Form 10-K for the fiscal year ended July 31, 1991.
10.18 1991 Long Term Incentive Plan of SL Industries, Inc., as
amended, is incorporated by reference to Appendix to the
Company's Proxy Statement for its 1995 Annual Meeting held
November 17, 1995, previously filed with the Securities and
Exchange Commission.
10.19 SL Industries, Inc. Non-Employee Director Non-Qualified Stock
Option Plan. Incorporated by reference to Exhibit 4.3 to
Registration Statement No. 33-63681, filed October 25, 1995.
10.20 Capital Accumulation Plan. Incorporated by reference to the
Company's report on Form 10K/A for the fiscal period ended July
31, 1994.
10.21 Severance Pay Agreement with David R. Nuzzo. Incorporated by
reference to Exhibit 10.1 to the Company's report on Form 10-K
for the fiscal year ended July 31, 1998.
10.22 Severance Pay Agreement with Jacob Cherian Jr. Incorporated by
reference to Exhibit 10.28 to the Company's report on Form 10-K
for the fiscal year ended December 31, 2000.
Page -45-
10.23 Waiver and Amendment No. 1 to $40,000,000 Revolving Credit
Facility for SL Industries, Inc., Agented by Mellon Bank N.A.
Incorporated by reference to Exhibit 10 to the Company's report
on Form 8-K filed with the Securities and Exchange Commission on
July 11, 2001.
10.24 Change in Control Agreement between the Company and Mr. Owen
Farren. Incorporated by reference to Exhibit 10.1 to the
Company's report on Form 10-Q for the quarterly period ended
June 30, 2001.
10.25 Change in Control Agreement between the Company and Mr. David R.
Nuzzo. Incorporated by reference to Exhibit 10.2 to the
Company's report on Form 10-Q for the quarterly period ended
June 30, 2001.
10.26 Change in Control Agreement between the Company and Mr. Jacob
Cherian. Incorporated by reference to Exhibit 10.3 to the
Company's report on Form 10-Q for the quarterly period ended
June 30, 2001.
10.27 Amended Change in Control Agreement between the Company and Mr.
Owen Farren. Incorporated by reference to Exhibit 10.1 to the
Company's report on Form 10-Q for the quarterly period ended
September 30, 2001.
10.28 Amended Change in Control Agreement between the Company and Mr.
David R. Nuzzo. Incorporated by reference to Exhibit 10.2 to the
Company's report on Form 10-Q for the quarterly period ended
September 30, 2001.
10.29 Amended Change in Control Agreement between the Company and Mr.
Jacob Cherian. Incorporated by reference to Exhibit 10.3 to the
Company's report on Form 10-Q for the quarterly period ended
September 30, 2001.
10.30 Form of Amended and Restated Credit Agreement dated as of
December 13, 2001 among SL Industries, Inc., Mellon Bank N.A.,
as Agent, and certain other persons. Incorporated by reference
to Exhibit 10 to the Company's report on Form 8-K filed with the
Securities and Exchange Commission on December 26, 2001.
10.31 Loan and Security Agreement dated effective January 6, 2003
among LaSalle Business Credit LLC, the Agent for Lender,
Standard Federal National Association, the Lender, SL
Industries, Inc. and SL Delaware, Inc., Collectively, Borrowers
and Condor D.C. Power Supplies, Inc., Teal Electronics
Corporation, RFL Electronics, Inc., SL Montevideo Technology,
Inc., SL Surface Technologies, Inc., SL Delaware Holdings, Inc.,
SL Auburn, Inc., Waber Power Ltd., SLW Holdings, Inc., Condor
Holdings, Inc. and Cedar Corporation, Collectively, Guarantors
(transmitted herewith).
21 Subsidiaries of the Company (transmitted herewith)
23 Consent of Independent Accountants (transmitted herewith)
23.1 Consent of Grant Thornton LLP (transmitted herewith)
99.1 Executive Change in Control Rabbi Trust Agreement dated January
18, 2002. Incorporated by reference to Exhibit 99 to the
Company's report on Form 8-K filed with the Securities and
Exchange Commission on January 23, 2002.
99.2 Certification of Warren Lichtenstein, Chairman of the Board and
Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification of David R. Nuzzo, Chief Financial Officer,
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Page -46-
SL Industries, Inc.
Index to Financial Statements and Financial Statement Schedule
Page number
in this report
Report of Independent Public Accountants F2
Previously Issued Arthur Andersen Report F3
Consolidated Balance Sheets F4
Consolidated Statements of Operations F5
Consolidated Statements of Comprehensive Income (Loss) F5
Consolidated Statements of Shareholders' Equity F6
Consolidated Statements of Cash Flows F7
Notes to Consolidated Financial Statements F8 to F39
Financial Statement Schedule:
II. Valuation and Qualifying Accounts F40
Page F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
SL INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheet of SL Industries,
Inc. and its subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, comperhensive income (loss), shareholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of SL Industries, Inc. and its subsidiaries as of and for the years
ended December 31, 2001 and 2000, were audited by other auditors who have ceased
operations and who's report dated March 15, 2002 included an explanatory
paragraph that described certain uncertainties regarding the Company's ability
to continue as a going concern. The other auditors expressed their opinion prior
to the restatement discussed in Note 2.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SL Industries, Inc.
and its subsidiaries at December 31, 2002 and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of SL Industries, Inc.
and its subsidiaries as of December 31, 2001 and 2000, and for the years then
ended were audited by other auditors who have ceased operations. As described in
Note 2, these financial statements have been restated to present EME as a
discontinued operation. We audited the adjustments described in Note 2 that were
applied to restate the 2001 and 2000 financial statements. In our opinion, such
adjustments are appropriate and have been properly applied. However, we were not
engaged to audit, review, or apply any procedures to the 2001 and 2000 financial
statements of the Company other than with respect to such adjustments and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 and 2000 financial statements taken as a whole.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statements and financial statement schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ GRANT THORNTON LLP
New York, New York
March 25, 2003
Page F-2
THIS IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT.
THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
THE FINANCIAL STATEMENTS REFERRED TO IN ARTHUR ANDERSEN'S REPORT HAVE BEEN
RESTATED SUBSEQUENT TO THE DATE OF THEIR REPORT FOR THE PRESENTATION OF CERTAIN
DISCONTINUED OPERATIONS OCCURRING DURING 2002. GRANT THORNTON LLP HAS REPORTED
ON THE RESTATEMENT ADJUSTMENTS. SEE GRANT THORNTON'S REPORT ON F-2, INCLUDED
HEREIN AND NOTE 2 IN THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED
IN PART IV OF THIS ANNUAL REPORT ON FORM 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SL Industries, Inc.:
We have audited the accompanying consolidated balance sheets of SL Industries,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity and cash flows for the years ended December 31, 2001, and
2000 and July 31, 1999, and for the five months ended December 31, 1999. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SL Industries,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001, and 2000
and July 31, 1999, and for the five months ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company was in technical default under
its revolving credit facility at December 31, 2001 and an additional event of
default occurred on March 1, 2002. Due to these events of default, the lenders
that provide the revolving credit facility do not have to provide any further
financing and have the right to terminate the facility and demand repayment of
all amounts outstanding. The existence of these events of default raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and financial statement schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
March 15, 2002
Page F-3
Item 1. Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2002 2001
------------- -------------
(as adjusted)
ASSETS
Current assets:
Cash and cash equivalents $ 3,539,000 $ 2,466,000
Receivables, net 18,001,000 32,411,000
Inventories, net 13,747,000 16,790,000
Prepaid expenses 657,000 730,000
Net current assets held for sale 22,950,000 23,061,000
Deferred income taxes, net 2,690,000 6,300,000
------------- -------------
Total current assets 61,584,000 81,758,000
Property, plant and equipment, net 10,852,000 12,069,000
Long-term note receivable 5,000 6,000
Deferred income taxes, net 5,118,000 2,476,000
Cash surrender value of life insurance policies 261,000 677,000
Intangible assets, net 11,388,000 12,368,000
Other assets 1,459,000 557,000
------------- -------------
Total assets $ 90,667,000 $ 109,911,000
============= =============
LIABILITIES
Current liabilities:
Long-term debt due within one year $ 17,557,000 $ 35,689,000
Accounts payable 4,689,000 7,550,000
Accrued income taxes 1,884,000 1,203,000
Net current liabilities held for sale 14,950,000 13,380,000
Accrued liabilities:
Payroll and related costs 4,937,000 5,703,000
Other 7,470,000 7,001,000
------------- -------------
Total current liabilities 51,487,000 70,526,000
Deferred compensation and supplemental retirement benefits 3,875,000 4,268,000
Other liabilities 1,593,000 1,913,000
------------- -------------
Total liabilities $ 56,955,000 $ 76,707,000
------------- ------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized, 6,000,000 shares; none issued $ - $ -
Common stock, $.20 par value; authorized, 25,000,0000 shares;
issued 8,298,000 shares 1,660,000 1,660,000
Capital in excess of par value 38,820,000 39,025,000
Retained earnings 8,427,000 8,897,000
Accumulated other comprehensive loss - (5,000)
Treasury stock at cost, 2,398,000 and 2,587,000 shares, respectively (15,195,000) (16,373,000)
------------- -------------
Total shareholders' equity 33,712,000 33,204,000
------------- -------------
Total liabilities and shareholders' equity $ 90,667,000 $ 109,911,000
============= =============
See accompanying notes to consolidated financial statements.
Page F-4
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
(as adjusted) (as adjusted)
----------------------------------------------------------
Net sales $ 110,149,000 $ 112,857,000 $ 125,864,000
-------------- -------------- -------------
Cost and expenses:
Cost of products sold 71,199,000 77,419,000 80,032,000
Engineering and product development 7,579,000 8,020,000 9,022,000
Selling, general and administrative 25,194,000 26,212,000 23,141,000
Depreciation and amortization 2,948,000 4,037,000 3,851,000
Restructuring costs 265,000 3,868,000 -
Impairment of intangibles 703,000 4,270,000 -
Special charges 1,834,000 - -
Settlement of class action suit - - (875,000)
-------------- -------------- -------------
Total cost and expenses 109,722,000 123,826,000 115,171,000
-------------- -------------- -------------
Income (loss) from operations 427,000 (10,969,000) 10,693,000
-------------- -------------- -------------
Other income (expense):
Interest income 25,000 153,000 272,000
Interest expense (2,454,000) (3,261,000) (2,964,000)
-------------- -------------- -------------
Income (loss) from continuing operations before income taxes (2,002,000) (14,077,000) 8,001,000
Income tax provision (benefit) (755,000) (4,382,000) 2,701,000
-------------- -------------- -------------
Income (loss) from continuing operations (1,247,000) (9,695,000) 5,300,000
Income (loss) from discontinued operations (net of tax) 777,000 (955,000) (3,600,000)
-------------- -------------- -------------
Net Income (loss) $ (470,000) $ (10,650,000) $ 1,700,000
============== ============== =============
Basic net income (loss) per common share
Income (loss) from continuing operations $ (0.21) $ (1.70) $ 0.94
Income (loss) from discontinued operations (net of tax) 0.13 (0.17) (0.64)
-------------- -------------- -------------
Net income (loss) $ (0.08) $ (1.87) $ 0.30
============== ============== =============
Diluted net income (loss) per common share
Income (loss) from continuing operations $ (0.21) $ (1.70) $ 0.92
Income (loss) from discontinued operations (net of tax) 0.13 (0.17) (0.62)
-------------- -------------- -------------
Net income (loss) $ (0.08) $ (1.87) $ 0.30
============== ============== =============
Shares used in computing basic net income (loss)
per common share 5,867,000 5,698,000 5,635,000
Shares used in computing diluted net income (loss)
per common share 5,867,000 5,698,000 5,757,000
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
(as adjusted) (as adjusted)
Net income (loss) $ (470,000) $(10,650,000) $ 1,700,000
Other comprehensive income (loss):
Currency translation adjustment (net of tax) 5,000 (67,000) 9,000
------------ ------------ ------------
Comprehensive income (loss) $ (465,000) $(10,717,000) $ 1,709,000
=========== ============== ===========
See accompanying notes to consolidated financial statements.
Page F-5
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
----------------------------------------------------------
Issued Held In Treasury
Shares Amount Shares Amount
-----------------------------------------------------------------
BALANCE DECEMBER 31, 1999................... 8,272,000 $ 1,654,000 (2,650,000) $ (15,816,000)
Net income
Cash dividends, $.10 per share
Other, including exercise of
employee stock options and
related income tax benefits 26,000 6,000
Treasury stock sold 159,000 967,000
Treasury stock purchased (148,000) (1,525,000)
Current year translation adjustment
-----------------------------------------------------------------
BALANCE DECEMBER 31, 2000................... 8,298,000 $ 1,660,000 (2,639,000) $ (16,374,000)
Net loss
Other, including exercise of
employee stock options and
related income tax benefits
Treasury stock sold 134,000 847,000
Treasury stock purchased (82,000) (846,000)
Current year translation adjustment
-----------------------------------------------------------------
BALANCE DECEMBER 31, 2001................... 8,298,000 $ 1,660,000 (2,587,000) $ (16,373,000)
=================================================================
Net loss
Other, including exercise of
employee stock options and
related income tax benefits 171,000 1,089,000
Treasury stock sold 188,000 1,191,000
Treasury stock purchased (170,000) (1,102,000)
Reclassification of foreign currency
translation gain realized upon the sale
of foreign entity
Current year translation adjustment
-----------------------------------------------------------------
BALANCE DECEMBER 31, 2002................... 8,298,000 $ 1,660,000 (2,398,000) $ (15,195,000)
=================================================================
Accumulated
Capital in Other
Excess of Retained Comprehensive
Par Value Earnings Income (Loss)
-----------------------------------------------------
BALANCE DECEMBER 31, 1999................... $ 37,771,000 $ 18,410,000 $ 53,000
Net income 1,700,000
Cash dividends, $.10 per share (563,000)
Other, including exercise of
employee stock options and
related income tax benefits 320,000
Treasury stock sold 364,000
Treasury stock purchased
Current year translation adjustment 9,000
-----------------------------------------------------
BALANCE DECEMBER 31, 2000................... $ 38,455,000 $ 19,547,000 $ 62,000
Net loss (10,650,000)
Other, including exercise of
employee stock options and
related income tax benefits 440,000
Treasury stock sold 130,000
Treasury stock purchased
Current year translation adjustment (67,000)
-----------------------------------------------------
BALANCE DECEMBER 31, 2001................... $ 39,025,000 - $ 8,897,000 $ (5,000)
=====================================================
Net loss (470,000)
Other, including exercise of
employee stock options and
related income tax benefits (221,000)
Treasury stock sold 16,000
Treasury stock purchased
foreign currency
translation gain realized upon the sale
of foreign entity (543,000)
Current year translation adjustment 548,000
-----------------------------------------------------
BALANCE DECEMBER 31, 2002................... $ 38,820,000 - $ 8,427,000 $ -
=====================================================
See accompanying notes to consolidated financial statements.
Page F-6
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
---------------------------------------------
(as adjusted) (as adjusted)
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (1,247,000) $ (9,695,000) $ 5,300,000
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation 2,305,000 2,537,000 2,280,000
Amortization 643,000 1,500,000 1,571,000
Non cash restructuring charges 35,000 375,000 -
Impairment of intangibles 703,000 4,270,000 -
Write-down of inventory - 2,940,000 -
Provisions for losses on accounts receivable 109,000 469,000 389,000
Cash surrender value of life insurance policies (31,000) (902,000) (1,548,000)
Deferred compensation and supplemental retirement benefits 516,000 511,000 732,000
Deferred compensation and supplemental retirement benefit payments (2,081,000) (440,000) (490,000)
Decrease (increase) in deferred income taxes 968,000 (1,703,000) (255,000)
(Gain) loss on sales of equipment (42,000) 13,000 (3,000)
Investment in Kreiss Johnson - 107,000 69,000
Changes in operating assets and liabilities, excluding effects of
business acquisitions and dispositions:
Accounts receivable 4,072,000 (2,461,000) 323,000
Inventories 3,043,000 1,790,000 (2,454,000)
Prepaid expenses 73,000 280,000 237,000
Accounts payable (2,861,000) (2,953,000) (2,322,000)
Other assets (868,000) 24,000 (480,000)
Other accrued liabilities 390,000 (747,000) (1,137,000)
Accrued income taxes 681,000 1,213,000 15,000
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 6,408,000 $ (2,872,000) $ 2,227,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of assets of subsidiary - 1,053,000 -
Proceeds from sales of equipment 167,000 - 76,000
Purchases of property, plant and equipment (1,477,000) (1,710,000) (2,166,000)
Decrease in notes receivable 1,000 14,000 31,000
Payments for acquisitions, net of cash acquired - - (376,000)
Proceeds from cash surrender value of life insurance policies 10,676,000 880,000 -
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 9,367,000 $ 237,000 $ (2,435,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Cash dividends paid - - (563,000)
Proceeds from life insurance policy - 256,000 -
Proceeds from long-term debt 18,800,000 24,447,000 11,629,000
Payments on long-term debt (36,903,000) (24,100,000) (13,762,000)
Proceeds from stock options exercised 867,000 440,000 221,000
Treasury stock (acquired) sold 105,000 131,000 (196,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $(17,131,000) $ 1,174,000 $ (2,671,000)
------------ ------------ ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 2,429,000 3,927,000 2,879,000
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,073,000 2,466,000 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 2,466,000 - -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 3,539,000 $ 2,466,000 $ -
============ ============ ============
See accompanying notes to consolidated financial statements.
Page F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND: SL Industries, Inc. (the "Company"), a New Jersey corporation,
through its subsidiaries, designs, manufactures and markets power electronics,
power motion and power protection equipment that is used in a variety of
aerospace, computer, datacom, industrial, medical, telecom, transportation and
utility equipment applications. Its products are incorporated into larger
systems to increase operating safety, reliability and efficiency. The Company's
products are largely sold to original equipment manufacturers, the electric
utility industry, and, to a lesser extent, commercial distributors.
On March 22, 2001, the Company announced, among other things, that the Board of
Directors had completed a previously announced review of strategic alternatives
and had determined that it would explore a sale of the Company in order to
maximize its value for shareholders. Credit Suisse First Boston initially
assisted the Company's Board of Directors in its review and resigned from the
assignment in June 2002. On August 8, 2002, Imperial Capital, LLC was engaged to
continue this initiative and assist management in its efforts to secure long
term debt financing.
LIQUIDITY: During 2002, the Company was a party to a Second Amended and Restated
Credit Agreement, dated December 13, 2001, as amended (the "Former Credit
Facility"), that allowed the Company to borrow for working capital and other
purposes. The Former Credit Facility contained certain financial and
non-financial covenants, including requirements to maintain certain minimum
levels of net income and a minimum fixed charge coverage ratio, as defined
therein, on a quarterly basis. As of December 31, 2001, the Company was in
violation of the net income covenant for the fourth quarter of 2001. In
addition, on March 1, 2002, the Company was notified that it was in default
under the Former Credit Facility due to its failure to meet a previously
scheduled debt reduction to $25,500,000 on March 1, 2002.
On May 23, 2002, the Company and its lenders reached an agreement, pursuant to
which the lenders granted a waiver of default and amendments to the violated
financial covenants, so that the Company would be in full compliance with the
Former Credit Facility. The agreement provided, among other things, for the
Company to pay-down outstanding borrowings by $689,000 to $25,500,000 and for
the payment to the lenders of an amendment fee of $130,000.
The Former Credit Facility provided for payment of a facility fee of $780,000 in
the event that it was not repaid in full by October 31, 2002. The Company paid
the facility fee on November 4, 2002. The Former Credit Facility matured on
December 31, 2002. The Company did not retire the Former Credit Facility until
January 6, 2003, and therefore, was in technical default thereunder at December
31, 2002.
On January 6, 2003, the Company entered into a three-year senior secured credit
facility (the "Senior Credit Facility") with LaSalle Business Credit LLC. The
Senior Credit Facility provides for a revolving loan and two term loans, up to a
maximum indebtedness of $20,000,000. The Senior Credit Facility restricts
investments, acquisitions, capital expenditures and dividends. It contains
financial covenants relating to minimum levels of net worth, fixed charge
coverages and EBITDA levels, as defined. The Company is currently in compliance
Page F-8
with all the restrictions and covenants of the Senior Credit Facility (See Note
9). The proceeds from the Senior Credit Facility were used to repay the Former
Credit Facility and for working capital needs.
CONSOLIDATION: The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
REPORTING YEAR CHANGE: Pursuant to a resolution adopted by the Board of
Directors on September 24, 1999, the Company elected to change the date of its
fiscal year-end from July 31 to December 31 commencing January 1, 2000. As a
result, a transition period for the five-month period ended December 31, 1999,
was previously reported on a transition report on Form 10-Q. Consequently, the
consolidated balance sheets have been prepared as of December 31. The
consolidated statements of operations, other comprehensive income (loss) and
cash flows present information for the calendar years ended December 31, 2002
("2002"), December 31, 2001 ("2001") and December 31, 2000 ("2000").
CASH EQUIVALENTS: The Company considers all highly liquid debt instruments with
an original maturity date of three months or less and investments in money
market accounts to be cash equivalents. At December 31, 2002 and December 31,
2001, cash and cash equivalents were held principally at two financial
institutions.
REVENUE RECOGNITION: Revenue from product sales are recognized at the time the
product is shipped, with provisions established for estimated product returns.
Upon shipment, the Company also provides for the estimated cost that may be
incurred for product warranties. Rebates and other sales incentives offered by
the Company to its customers are recorded as a reduction of revenue at the time
of sale.
SHIPPING AND HANDLING FEES AND COSTS: In accordance with Emerging Issues Task
Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs,"
shipping and handling costs billed to customers are included in net sales, while
the costs of shipping and handling incurred by the Company are included in the
cost of products sold.
Page F-9
ACCOUNTS RECEIVABLE: The Company's accounts receivable primarily consist of
trade receivables and are reported net of allowances for doubtful accounts of
approximately $273,000 and $541,000, respectively. 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 and anticipated returns related to customer receivables. If
circumstances change (e.g., 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: Inventories are valued at the lower of cost or market. Cost is
primarily determined using the first-in, first-out ("FIFO") method. Cost for
certain inventories is determined using the last-in, first-out ("LIFO") method.
The Company ensures inventory is valued 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 set 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, 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 value, it would have to
adjust its reserves accordingly.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at cost
and include expenditures for new facilities and major renewals and betterments.
Maintenance, repairs and minor renewals are charged to expense as incurred. When
assets are sold or otherwise disposed of, any gain or loss is recognized
currently. Depreciation is provided primarily using the straight-line method
over the estimated useful lives of the assets, which range from 25 to 40 years
for buildings, 3 to 15 years for equipment and other property, and the lease
term for leasehold improvements.
GOODWILL AND OTHER INTANGIBLES: In June 2001, FASB issued Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"), which requires that goodwill and certain other intangible assets having
indefinite lives no longer be amortized to earnings, but instead be subject to
periodic testing for impairment. Intangible assets determined to have definitive
lives will continue to be amortized over their estimated useful lives. Effective
January 1, 2002, the Company adopted SFAS No. 142 and implemented certain
provisions, specifically the discontinuation of goodwill amortization, and
implemented the remaining provisions during 2002.
Page F-10
Prior to January 1, 2002, the goodwill resulting from the 2000 and fiscal 1999
and 1998 acquisitions and the goodwill and trademarks resulting from the May
1995 acquisition were being amortized over 30 years or less. Goodwill of
$429,000 resulting from acquisitions made prior to November 1, 1970, was
considered to have continuing value over an indefinite period, and was not being
amortized. Covenants not to compete are amortized over the stated terms and
patents are amortized over the remaining estimated useful lives. The consulting
agreement had an amortizable life of ten years.
LONG-LIVED ASSETS: As of January 1, 2002, the Company adopted Statement of
Financial Accounting Standard No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long Lived Assets" ("SFAS No. 144"), which supersedes
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of."
Accordingly, whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable, the Company assesses the recoverability of
the asset. It compares estimated cash flows, on a discounted basis, expected to
be generated from the related assets to the carrying amounts to determine
whether impairment has occurred. If the estimate of cash flows expected to be
generated changes in the future, the Company may be required to record
impairment charges that were not previously recorded for these assets. The
adoption of SFAS No. 144 had no significant effect on the Company.
Prior to 2001, the Company evaluated whether events or circumstances have
occurred that would indicate that the remaining estimated useful life of an
intangible asset may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that intangible assets should be evaluated
for possible impairment, the Company used an estimate of the related
undiscounted cash flows over the remaining life of the intangible asset to
measure recoverability. If impairment existed, measurement of the impairment was
based on the valuation method which the Company believed most closely
approximated the fair value of the intangible asset, which had historically been
based upon future projected discounted cash flows. Impairment charges totaling
$4,270,000 were recognized in 2001 related to corporate restructuring efforts
(see Note 17).
ENVIRONMENTAL EXPENDITURES: Environmental 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, which do not
contribute to future revenues, are charged to expense. Liabilities are recorded
when remedial efforts are probable and the costs can be reasonably estimated.
The liability for remediation expenditures includes elements of costs such as
site investigations, consultants' fees, feasibility studies, outside contractor
expenses and monitoring expenses. Estimates are not discounted, nor are they
reduced by potential claims for recovery from the Company's 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.
DEBT ISSUANCE COST: Cost incurred in securing long-term debt are deferred and
amortized over the term of the related debt, which approximate the interest
method of amortization.
PRODUCT WARRANTY COSTS: The Company offers various warranties on its products.
The Company provides for its estimated future warranty obligations in the period
in which the related sale is recognized. For 2002, 2001 and 2000, these costs
were $605,000, $727,000, and $704,000, respectively.
Page F-11
ADVERTISING COSTS: Advertising costs are expensed as incurred. For 2002, 2001
and 2000, these costs were $311,000, $404,000, and $663,000, respectively.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred. For 2002, 2001 and 2000, these costs were $2,572,000, $2,549,000, and
$2,790,000, respectively.
INCOME TAXES: The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.
FOREIGN CURRENCY CONVERSION: The balance sheets and statements of operations of
the Company's Mexican subsidiaries are converted to U.S. dollars at the year-end
rate of exchange and the monthly weighted average rate of exchange,
respectively. As the Mexican subsidiaries' functional currency is U.S. dollars,
conversion gains or losses resulting from these foreign currency transactions
are included in the accompanying consolidated statements of operations. The
translation from the local currency to U.S. dollars is performed for balance
sheet accounts using the current exchange rate in effect at the balance sheet
date and for earnings using the monthly weighted average exchange rate during
the period. Gains or losses resulting from such translation are included in a
separate component of shareholders' equity. Through November 2001, a foreign
currency loan was used to hedge the value of the investment in the German
subsidiary. Gains and losses on the translation of this foreign currency loan to
U.S. dollars were not included in the statement of operations but shown as a
separate component of shareholders' equity. The German subsidiary was sold on
January 6, 2003. Accordingly, gains or losses related to its currency
translation included in shareholders' equity have been eliminated with the sale
of that subsidiary.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management estimates relate to
product warranty costs, accrued litigations, allowance for doubtful accounts,
allowance for inventory obsolescence and environmental costs.
EUROPEAN MONETARY UNIT ("EURO"): In 1999, most member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the European Union's new currency, the euro. This conversion
permitted transactions to be conducted in either the euro or the participating
countries' national currencies. By February 28, 2002, all member countries were
expected to have permanently withdrawn their national currencies as legal tender
and replaced their currencies with euro notes and coins.
The Company's German subsidiary converted to the euro in January 2002. This
conversion did not have an adverse impact on the Company's consolidated
financial position, results of operations, or cash flows.
Page F-12
NET INCOME (LOSS) PER COMMON SHARE: The Company determines net income (loss) per
share in accordance with Statement of Financial Accounting Standard No. 128
"Earnings per Share." Basic earnings per share is computed by dividing reported
earnings available to common shareholders by weighted average shares
outstanding. Diluted earnings per share is computed by dividing reported
earnings available to common shareholders by weighted average shares outstanding
plus the effect of outstanding dilutive stock options, using the treasury
method.
The following table reconciles the numerators and denominators of the basic and
diluted net income (loss) per common share calculations: (in thousands except
per share amounts)
Per
Income (loss) Shares share amount
----------------------------------------------
----------------------------------------------
For the Year Ended December 31, 2002:
Basic net loss per common share $ (470,000) 5,867,000 $ (0.08)
Effect of dilutive securities -- -- --
--------------------------------------------
Dilutive net (loss) per common share $ (470,000) 5,867,000 $ (0.08)
For the Year Ended December 31, 2001:
Basic net loss per common share $(10,650,000) 5,698,000 $ (1.87)
Effect of dilutive securities -- -- --
--------------------------------------------
Dilutive net loss per common share $(10,650,000) 5,698,000 $ (1.87)
--------------------------------------------
For the Year Ended December 31, 2000:
Basic net income per common share $ 1,700,000 5,635,000 $ 0.30
Effect of dilutive securities -- 122,000 --
--------------------------------------------
Dilutive net income per common share $ 1,700,000 5,757,000 $ 0.30
--------------------------------------------
During 2002, 2001 and December 31, 2000, 533,000, 1,268,000 and 303,000 stock
options, respectively, were excluded from the dilutive computations because
their effect would have been anti-dilutive.
STOCK BASED COMPENSATION: The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB Opinion No.
25") and related interpretations in accounting for its plans and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). 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. Accordingly,
no compensation expense has been recognized in the accompanying consolidated
statements of operations for its stock-based compensation plans.
Page F-13
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, "Accounting for Stock-Based
Compensation," the Company's net income (loss) and net income (loss) per common
share would have been as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2001
(as adjusted) (as adjusted)
-----------------------------------------------------
Net income (loss), as reported $ (470,000) $ (10,650,000) $ 1,700,000
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects -- -- --
----------------------------------------------------
Deduct: Total stock-based employee
compensation expense determined under fair value
based method for awards granted, modified, or
settled, net of related tax effects (684,000) (739,000) (547,000)
----------------------------------------------------
Pro forma net income (loss) $ (1,154,000) $ (11,389,000) $ 1,153,000
====================================================
Earnings (loss) per share:
Basic - as reported $ (.08) $ (1.87) $ .30
Basic - pro forma $ (.20) $ (2.00) $ .20
Diluted - as reported $ (.08) $ (1.87) $ .30
Diluted - pro forma $ (.20) $ (2.00) $ .20
====================================================
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:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
(as adjusted) (as adjusted)
-----------------------------------------------------
Expected dividend yield 0.0% 0.0% .94%
Expected stock price volatility 33.34% 45.95% 29.58%
Risk-free interest rate 4.28% 5.0% 6.3%
Expected life of option 5 years 7 years 7 years
===============================================
RECENT ACCOUNTING PRONOUNCEMENTS: In August 2001, the FASB issued Statement of
Financial Accounting Standard No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"), which provides the accounting requirements for
retirement obligations associated with tangible long-lived assets. This
statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This statement will
be effective for 2003. The adoption of SFAS No. 143 is not expected to have a
material impact on our consolidated financial position or results of operations.
In April 2002, the FASB adopted Statement of Financial Accounting Standard 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS No. 145"). This Statement rescinds
FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of
Page F-14
Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds
FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers."
This Statement amends FASB Statement No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. Statement No. 145 is effective for fiscal years
beginning after May 15, 2002. Management is currently evaluating the impact, if
any, that implementation of this statement will have on the Company's results of
operations or financial position.
In June 2002, the FASB issued FASB Statement of Financial Accounting Standard
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"). This Statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issues No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)"("Issue 94-3"). The principal
difference between this Statement and Issue 94-3 relates to its requirements for
recognition of a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002. Management is currently evaluating the impact, if any, that implementation
of this statement will have on the Company's results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the
liability be recorded in the guarantor's balance sheet upon the issuance of a
guarantee. In addition, FIN 45 requires disclosure about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company believes that the adoption of this standard will not have a
material impact on its operations or financial position.
In December 2002, the FASB issued Statement of Financial Accounting Standard No.
148, "Accounting for Stock-Based Compensation Costs-Transition and Disclosure"
(SFAS No. 148"). This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", and provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
compensation. It also requires additional disclosures about the effects on
reported net income of an entity's accounting policy with respect to stock-based
employee compensation. The Company accounts for stock-based compensation in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and has adopted the disclosure only alternative of SFAS No. 123. The Company
adopted the disclosure provisions of SFAS No. 148 in December 2002.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, for certain
Page F-15
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the process
of determining what impact, if any, the adoption of the provisions of FIN 46
will have upon its financial condition or results of operations.
RECLASSIFICATIONS: Reclassifications, when applicable, are made to the prior
year consolidated financial statements to conform with current year
presentation.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
RFL ELECTRONICS, INC.
On May 11, 1999, the Company acquired 100% of the issued and outstanding shares
of capital stock of RFL Electronics Inc. ("RFL"). The Company paid $11,387,000
in cash and issued $75,000 of promissory notes. In addition, in fiscal 1999 the
Company paid a contingent payment of $1,000,000 based upon the financial
performance of RFL for its fiscal year ended March 31, 1999. RFL is a leading
supplier of teleprotection and specialized communication equipment. The
acquisition was accounted using the purchase method. Accordingly, the aggregate
purchase price was allocated to the net assets acquired based on their
respective fair values at the date of acquisition. The excess of the aggregate
purchase price over the fair value of net tangible assets acquired of $5,838,000
has been allocated to goodwill and was being amortized on a straight-line basis
over 30 years through December 31, 2001. The results of operations of RFL, since
the acquisition date, are included in the accompanying consolidated financial
statements.
CONDOR D.C. POWER SUPPLIES, INC.
On July 27, 1999, Condor D.C. Power Supplies, Inc. ("Condor"), a wholly-owned
subsidiary of the Company, acquired certain of the net operating assets of Todd
Products Corporation and Todd Power Corporation (together, "Todd Products"). The
Company paid $7,430,000 comprised of $3,700,000 in cash and assumption of debt
equal to approximately $3,730,000. Condor also entered into a ten-year
Consulting Agreement with the chief executive officer of Todd Products for an
aggregate consulting fee of $1,275,000 to be paid in quarterly installments over
three years. Todd Products was a leading supplier of high quality power supplies
to the datacom, telecommunications and computer industries. The acquisition was
accounted using the purchase method. Accordingly, the aggregate purchase price
was allocated to the net assets acquired, based on their respective fair values
at the date of acquisition. The excess of the aggregate purchase price over the
fair value of net tangible assets acquired of $4,665,000 was allocated to
goodwill ($3,390,000) and a consulting agreement ($1,275,000). During 2001, an
evaluation of the remaining value of the goodwill and the consulting agreement
was undertaken, resulting in the write-off of the remaining unamortized balance
of $4,145,000 due to the impairment of assets, including the consulting
agreement acquired in connection with the acquisition of Todd Products (see
Notes 17 and 8).
Page F-16
In July 2001, the Board of Directors authorized the disposition of the Company's
SL Waber, Inc. subsidiary ("SL Waber"). Effective August 27, 2001, substantially
all of the assets of 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. Net
sales from discontinued operations for the years ended 2001 and 2000 were
$10,316,000 and $19,341,000, respectively. The after-tax operating losses from
discontinued operations for the 2001 and December 31, 2000 were $3,947,000 and
$4,723,000, respectively. The provision for income or loss from discontinued
operations reflected in the accompanying consolidated statements of operations
includes the loss recognized in 2001 from the sale of the assets of SL Waber of
$2,745,000 and the income or losses of the subsidiary's operations during all
periods presented through December 31, 2001, net of the expected tax benefits
applicable thereto.
ELECTRO-METALL EXPORT GMBH
On January 6, 2003, the Company sold its wholly-owned German subsidiary,
Electro-Metall Export GmbH ("EME"). EME is a producer of electronic actuation
devices and cable harness systems sold to original equipment manufacturers in
the aerospace and automotive industries. Its operations are located in
Ingolstadt, Germany and Paks, Hungary. 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 paid a dividend of $2,000,000 to the Company prior to closing. The
purchaser notes are comprised of a $3,000,000 secured note that bears interest
at the prime rate plus 2%, which was paid on March 14, 2003, and a $1,000,000
unsecured note that bears interest at an annual rate of 12% and matures April 3,
2004.
In December 2002, the Board of Directors authorized the sale of EME, which was a
separate reportable segment of the Company. EME is distinguishable as a
component of the Company and meets the criteria as held for sale under SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly,
related operating results of EME have been reported as discontinued operations
for all years presented. At December 31, 2002, the Company recorded a provision
of $1,631,000 ($.28 per share), net of related income taxes, to reduce the
carrying value of EME to its fair value less costs to sell.
Page F-17
Revenue and net income before income taxes from the discontinued operations of
EME (exclusive of the impairment provision) were as follows:
Assets and liabilities of discontinued operations include the following:
Years Ended December 31,
--------------------------------------------------
2002 2001 2000
(as adjusted) (as adjusted)
(in thousands)
Revenues $27,658 $25,610 $22,541
--------------------------------------------------
Net income before income taxes $ 3,049 $ 3,436 $ 2,293
==================================================
Assets and liabilities of discontinued operations include the following:
December 31, December 31,
---------------------------------
2002 2001
(as adjusted)
---------------------------------
(in thousands)
Assets:
Cash $ 3,089 $ 4,111
Accounts receivable 5,575 4,859
Inventory 4,868 3,707
Property and equipment, net 6,728 2,191
Other 2,690 8,193
---------------------------------
$22,950 $23,061
Liabilities:
Accounts payable $ 3,606 $ 1,828
Accrued liabilities 7,263 9,036
Debt 4,081 2,516
---------------------------------
$14,950 $13,380
=================================
The following table represents the restatement required to present EME as a
discontinued operation for the periods presented.
DECEMBER, 31 2001
As Previously
Reported EME Adjustment As Adjusted
------------ ------------ ------------
Current assets: $ 70,230,000 $(11,533,000) $ 58,697,000
Assets held for sale - 23,061,000 23,061,000
Long lived and other assets 37,528,000 (9,375,000) 28,153,000
------------ ------------ ------------
Total assets $107,758,000 $ 2,153,000 $109,911,000
============ ============ ============
Current liabilities $ 66,754,000 $ (9,608,000) $ 57,146,000
Liabilities held for sale - 13,380,000 13,380,000
Long term liabilities 7,800,000 (1,619,000) 6,181,000
- - -
------------ ------------ ------------
Total liabilities 74,554,000 2,153,000 76,707,000
Equity 33,204,000 - 33,204,000
------------ ------------ ------------
Total Equity and liabilities $107,758,000 $ 2,153,000 $109,911,000
============ ============ ============
YEAR ENDING DECEMBER, 31 2001
As Previously
Reported EME Adjustment As Adjusted
------------- ------------- -------------
Net Sales $ 138,467,000 $ (25,610,000) $ 112,857,000
Expenses 146,301,000 (22,475,000) 123,826,000
------------- ------------- -------------
Net Loss from Operations (7,834,000) (3,135,000) (10,969,000)
Other Income (Expense) (3,041,000) (67,000) (3,108,000)
------------- ------------- -------------
Loss from continuing operations before income taxes (10,875,000) (3,202,000) (14,077,000)
Income Tax Provision (4,172,000) (210,000) (4,382,000)
------------- ------------- -------------
Loss from continuing operations (6,703,000) (2,992,000) (9,695,000)
Discontinued operations (3,947,000) 2,992,000 (955,000)
------------- ------------- -------------
Net Loss $ (10,650,000) $ - $ (10,650,000)
============= ============= =============
YEAR ENDING DECEMBER, 31 2000
As Previously
Reported EME Adjustment As Adjusted
------------- ------------- -------------
Net Sales $ 148,405,000 $ (22,541,000) $ 125,864,000
Expenses 135,639,000 (20,468,000) 115,171,000
------------- ------------- -------------
Net Income (Loss) From Operations 12,766,000 (2,073,000) 10,693,000
Other Income (Expense) (2,701,000) 9,000 (2,692,000)
------------- ------------- -------------
Income (Loss) from continuing operations before income taxes 10,065,000 (2,064,000) 8,001,000
Income Tax Provision 3,642,000 (941,000) 2,701,000
------------- ------------- -------------
Income (Loss) from continuing operations 6,423,000 (1,123,000) 5,300,000
Discontinued operations (4,723,000) 1,123,000 (3,600,000)
------------- ------------- -------------
Net Income $ 1,700,000 $ - $ 1,700,000
============= ============= =============
NOTE 3. INCOME TAXES
Income (loss) from continuing operations before provision for income taxes
consists of the following:
Years ended December 31,
--------------------------------------------------
2002 2001 2000
(as adjusted) (as adjusted)
--------------------------------------------------
(in thousands)
U.S. $ (2,476) $(16,026) $ 7,316
Non-U.S 474 1,949 685
--------------------------------------------------
$ (2,002) $(14,077) $ 8,001
==================================================
The provision (benefit) for income taxes from continuing operations consists of
the following:
Years ended December 31,
-----------------------------------------------
2002 2001 2000
(as adjusted) (as adjusted)
-----------------------------------------------
Current: (in thousands)
Federal $(1,451) $ (395) $ 2,461
International 283 688 428
State (45) 386 314
Deferred:
Federal 567 (4,176) (713)
International ---- ---- ----
State (109) (885) 211
-----------------------------------------------
$ (755) $(4,382) $ 2,701
===============================================
Page F-18
The pre-tax domestic losses incurred in 2002 and 2001 were carried back to prior
years resulting in recoverable income taxes of approximately $1,992,000 and
$3,082,000, respectively.
The provision for income taxes related to discontinued operations for 2002 was
$948,000. Income tax benefits related to discontinued operations consisted of
$983,000 and $2,122,000 for 2001 and 2000, respectively.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2002 and December 31, 2001 are as follows:
December 31, December 31,
2002 2001
(as adjusted)
-----------------------------
(in thousands)
-----------------------------
Deferred compensation $ 1,903 $ 1,900
Liabilities related to environmental matters 372 122
Inventory valuation 1,014 1,405
Prepaid and accrued expenses 1,952 3,940
Federal tax loss carryforwards 939 ----
State tax loss carryforwards 444 298
Intangibles 1,377 1,723
Foreign tax credit carryforwards 911 1,272
-----------------------------
8,912 10,660
Less valuation allowances (239) (180)
-----------------------------
8,673 10,480
Deferred tax liabilities:
Accelerated depreciation and amortization 721 1,108
Assets and liabilities related to discontinued operations 108 573
Other 36 23
-----------------------------
$ 7,808 $ 8,776
=============================
As of December 31, 2002, the Company's net operating loss carryforwards were
$939,000 for U.S. federal income tax purposes and $444,000 for U.S. state income
tax purposes. These losses can be carried forward from five to 20 years and will
begin expiring at the end of 2006.
As of December 31, 2002 and December 31, 2001, the Company's foreign tax credits
totaled approximately $911,000. These credits can be carried forward for five
years and will expire at the end of 2006 and 2007.
The Company has assessed its past earnings history and trends, sales backlog,
budgeted sales, and expiration dates of carryforwards and has determined that it
is more likely than not that the $7,808,000 of net deferred tax assets as of
December 31, 2002 will be realized. The Company has an allowance of $239,000
provided against the gross deferred tax asset.
Page F-19
Following is a reconciliation of income tax expense (benefit) at the applicable
federal statutory rate and the effective rates:
Years ended December 31,
----------------------------------------
2002 2001 2000
(as adjusted) (as adjusted)
----------------------------------------
Statutory rate (34%) (34%) 34%
Tax rate differential on Foreign Sales Corporation/Extraterritorial
Income Exclusion benefit earnings (7) (4) (1)
International rate differences 1 ---- 1
State income taxes, net of federal income tax (3) (1) 2
Taxable gain from surrender of life insurance policies ---- 9 ----
Other 5 (3) (3)
----------------------------------------
(38%) (33%) 33%
========================================
NOTE 4. RECEIVABLES
Receivables consist of the following:
December 31, December 31,
2002 2001
(as adjusted)
-----------------------------
(in thousands)
-----------------------------
Trade receivables $ 14,306 $ 16,867
Less allowances for doubtful accounts (273) (541)
-----------------------------
14,033 16,326
Receivables for life insurance policies
surrendered ---- 10,229
Recoverable income taxes 1,992 3,809
Other 1,976 2,047
-----------------------------
$ 18,001 $ 32,411
=============================
In January 2002, the Company received $10,229,000 from the surrender value of
life insurance policies. In June 2002, the Company received a $2,200,000 United
States tax refund. These funds were used principally to pay down bank debt.
NOTE 5. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high credit
quality financial institutions. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base, and their dispersion across many industries and
geographic regions.
Page F-20
NOTE 6. INVENTORIES
Inventories consist of the following:
December 31, December 31,
2002 2001
(as adjusted)
---------------------------------
(in thousands)
---------------------------------
Raw materials $ 9,951 $ 12,279
Work in process 4,014 4,616
Finished goods 2,367 3,401
---------------------------------
16,332 20,296
Less allowances (2,585) (3,506)
---------------------------------
$ 13,747 $ 16,790
---------------------------------
The above includes certain inventories, which are valued using the LIFO method,
which aggregated $3,469,000 and $4,560,000 as of December 31, 2002 and December
31, 2001, respectively. The excess of FIFO cost over LIFO cost as of December
31, 2002 and December 31, 2001 was approximately $265,000 and $335,000,
respectively.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31, December 31,
2002 2001
(as adjusted)
---------------------------------
(in thousands)
---------------------------------
Land $ 1,149 $ 1,149
Buildings and leasehold improvements 6,894 6,800
Equipment and other property 16,996 18,995
---------------------------------
25,039 26,944
Less accumulated depreciation (14,187) (14,875)
---------------------------------
$ 10,852 $ 12,069
=================================
In December 2002, the Company recorded an asset impairment of $147,000 related
to assets used by its SurfTech business unit. Certain equipment was not fully
utilized by SurfTech in the production of its current product line. In December
2002, management decided to attempt to sell the equipment to interested buyers.
The impairment was determined by open market quotes. This charge is recorded in
the consolidated statement of operations along with the goodwill impairment of
$556,000 related to SurfTech.
Page F-21
Note 8. Intangible assets
Intangible assets consist of the following:
December 31, 2002 December 31, 2001
----------------------------------------------- -------------------------------------------
Gross Accumulated Gross Accumulated
Value Amortization Net Value Value Amortization Net Value
-------------------------------------------------------------------------------------------------
(in thousands) (as adjusted)
-------------------------------------------------------------------------------------------------
Goodwill $12,167 $1,864 $10,303 $12,752 $1,893 $10,859
----------------------------------------------- -------------------------------------------
Patents 938 523 415 932 454 478
Covenant Not To Compete 2,980 2,980 ---- 2,980 2,660 320
Trademarks 922 282 640 921 245 676
Other 501 471 30 501 466 35
-------------------------------------------------------------------------------------------------
Other Intangible Assets 5,341 4,256 1,085 5,334 3,825 1,509
-------------------------------------------------------------------------------------------------
$17,508 $6,120 $11,388 $18,086 $5,718 $12,368
-------------------------------------------------------------------------------------------------
The Company conducted its initial test for impairment in the second quarter of
2002. The Company allocated its adjusted goodwill balance to its reporting units
and conducted the transitional impairment tests required by SFAS No. 142. The
fair values of the reporting units were estimated using a combination of the
expected present values of future cash flows and an assessment of comparable
market values. No impairment charges were recorded as a result of the initial
impairment test. Goodwill was also tested for impairment in the fourth quarter,
after the completion of the annual budgeting and forecasting process. As a
result, the Company recorded a charge to reduce goodwill in the amount of
$556,000 related to SurfTech in the fourth quarter of 2002.
In addition, the goodwill related to EME in the amount of $2,431,000 was
included in the basis of the loss calculation related to the sale of that
subsidiary, classified as discontinued operations. The assets and liabilities of
EME are classified as held for sale for all periods presented and are excluded
from the intangible asset table.
The other intangible assets are all amortizable and have original estimated
useful lives as follows: patents are amortized over approximately 13 years and
trademarks over approximately 25 years. Amortization expense for intangible
assets subject to amortization in each of the next five fiscal years is
estimated to be $111,000 per year.
During 2001, the Company determined that goodwill of $3,179,000 and a consulting
agreement of $966,000 related to the Todd Products acquisition had become
impaired (see Note 17). In addition, goodwill related to SL Waber was
written-off in connection with the sale of substantially all of its assets. A
portion of the goodwill related to SurfTech in the amount of $125,000 was also
written-off in 2001.
Page F-22
The following table reflects the adjustment to exclude goodwill amortization
expense (including related tax effects) recognized in the prior periods as
presented (in thousands, except per share amounts):
Years Ended December 31,
2002 2001 2000
(as adjusted) (as adjusted)
-------------------------------------------------
(in thousands)
Reported net income (loss) $ (470) $ (10,650) $ 1,700
Add back goodwill amortization --- 491 432
-------------------------------------------------
Adjusted net income (loss) $ (470) $ (10,159) $ 2,132
-------------------------------------------------
Income (loss) per share - basic
Reported net income (loss) $ (.08) $ (1.87) $ .30
Goodwill amortization --- .09 .08
-------------------------------------------------
Adjusted net income (loss) $ (.08) $ (1.78) $ .38
-------------------------------------------------
Income (loss) per share - diluted
Reported net income (loss) $ (.08) $ (1.87) $ .30
Goodwill amortization --- .09 .07
-------------------------------------------------
Adjusted net income (loss) $ (.08) $ (1.78) $ .37
-------------------------------------------------
NOTE 9. DEBT
Debt consists of the following:
December 31, December 31,
2002 2001
(as adjusted)
------------------------------------------
(in thousands)
Revolving lines of credit.................. $ 17,557 $35,689
==========================================
During 2002, the Company was a party to a Second Amended and Restated Credit
Agreement dated as of December 13, 2001, as amended (the "Former Credit
Facility"), that allowed the Company to borrow for working capital and other
purposes. The Former Credit Facility contained certain financial and
non-financial covenants, including requirements for certain minimum levels of
net income and a minimum fixed charge coverage ratio, as defined therein, on a
quarterly basis. As of December 31, 2001, the Company was in violation of the
net income covenant for the fourth quarter of 2001. In addition, on March 1,
2002, the Company was notified that it was in default under the Former Credit
Facility due to its failure to meet the previously scheduled debt reduction to
$25,500,000.
On May 23, 2002, the Company and its lenders reached an agreement, pursuant to
which the lenders granted a waiver of default and amendments to the violated
financial covenants, so that the Company would be in full compliance with the
Former Credit Facility. The agreement provided, among other things, for the
Company to pay-down outstanding borrowings by $689,000 to $25,500,000 and for
the payment to the lenders of an amendment fee of $130,000.
Page F-23
The Former Credit Facility provided for payment of a facility fee of $780,000 in
the event that it was not paid in full by October 31, 2002. The Company paid the
facility fee on November 4, 2002. The Company recorded the facility fee as
interest expense during 2002.
As of December 31, 2002, outstanding borrowings under the Former Credit Facility
were $17,557,000. The weighted average interest rate on borrowings during 2002
and 2001 was 6.56% (weighted average interest rate was 10.01% after factoring in
the facility fee of $780,000) and 7.57%, respectively. The Former Credit
Facility matured on December 31, 2002. The Company did not retire the Former
Credit Facility until January 6, 2003, and therefore, was in technical default
thereunder at December 31, 2002.
On January 6, 2003, the Company entered into a three-year senior secured credit
facility (the "Senior Credit Facility") with LaSalle Business Credit LLC. The
Senior Credit Facility provides for a revolving loan and two term loans, up to a
maximum indebtedness of $20,000,000. The revolving loan of up to $16,810,000 is
based upon eligible receivables and inventory and an overadvance amount of
$1,500,000, which is amortized over the three-year term. The two term loans of
$2,350,000 and $840,000 are also amortized over the three-year term. The Senior
Credit Facility restricts investments, acquisitions, capital expenditures and
dividends. It contains financial covenants relating to minimum levels of net
worth, fixed charge coverages, 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 prime
rate plus .5% to prime rate plus 2%. The Senior Credit facility is secured by
all of the Company's assets.
Principal maturities of term debt payable under the Senior Credit Facility are
$513,029 in 2003, $559,668 in 2004, and $559,668 in 2005. The balance of the
term debt of $1,557,635 is due in 2006. The remaining revolving loan is also due
in 2006.
NOTE 10. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following:
December 31, December 31,
2002 2001
(as adjusted)
------------------------------
(in thousands)
------------------------------
Taxes other than income $ 430 $ 539
Insurance 542 419
Commissions 371 543
Accrued litigation and legal 1,391 338
Professional fees and other expenses 1,171 1,021
Restructuring --- 1,163
Financing costs 714 ---
Environmental 875 290
Warranty 897 898
Accrual for contingencies 775 1,264
Advertising and promotions 24 79
Interest 93 280
Other 187 167
------------------------------
$7,470 $7,001
==============================
The accrual for contingencies includes an accrual related to SL Waber. This
accrual was established in 2001, after SL Waber was sold, to provide for
potential liabilities that may arise after the sale. This accrual at December
Page F-24
31, 2002 and December 31, 2001 was $688,000 and $750,000, respectively.
Also included in the December 31, 2001 accrual was a restructuring reserve of
$1,163,000. The restructuring reserve was established during the year ended
December 31, 2001 and was primarily in response to a significant reduction in
the demand for products by telecommunication equipment manufacturers. There are
no restructuring reserves at December 31, 2002. (See Note 17).
A summary of the Company's warranty reserve for 2002 and 2001 are as follows:
December 31, December 31,
2002 2001
(as adjusted)
---------------------------
(in thousands)
---------------------------
Liability, beginning of year $ 898 $ 649
Expense for new warranties issued 605 727
Expense related to accrual revisions for prior
year warranties (341) 91
Warranty claims (265) (569)
---------------------------
Liability, end of year $ 897 $ 898
===========================
NOTE 11. RETIREMENT PLANS AND DEFERRED COMPENSATION
The Company maintains three noncontributory defined contribution pension plans
covering substantially all employees. The Company's contribution to these plans
is based on a percentage of employee elective contributions and, in one plan,
plan year gross wages, as defined. Contributions to plans maintained by Teal
Electronics Corporation ("Teal") and RFL are based on a percentage of employee
elective contributions. RFL also makes a profit sharing contribution annually.
Costs accrued under the plans during 2002, 2001 and 2000 amounted to
approximately $1,268,000, $1,307,000 and $1,485,000, respectively. It is the
Company's policy to fund its accrued retirement costs.
In addition, the Company makes contributions, based on rates per hour, as
specified in two union agreements, to two union-administered defined benefit
multi-employer pension plans. Contributions to these plans amounted to $53,000,
$55,000 and $60,000 for 2002, 2001 and 2000, respectively. Under the
multi-employer Pension Plan Amendments Act of 1980, an employer is liable upon
withdrawal from or termination of a multi-employer plan for its proportionate
share of the plan's unfunded vested benefits liability. The Company's share of
the unfunded vested benefits liabilities of the union plans to which it
contributes is not material.
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 and discount rates of 6%, 8%, 10% and 12%. The amount charged
Page F-25
to income in connection with these agreements amounted to $334,000, $396,000 and
$420,000, for 2002, 2001 and 2000, respectively.
The Company was the owner and beneficiary of life insurance policies on the
lives of a majority of the participants having a deferred compensation or
supplemental retirement agreement. As of December 31, 2002, the aggregate death
benefit totaled $389,000, with the corresponding cash surrender value of all
policies totaling $261,000.
As of December 31, 2001, life insurance policies with a cash surrender value of
approximately $11,109,000 were surrendered to the life insurance company in
exchange for the cash proceeds from the build up of cash surrender value in the
policies. In December 2001 and January 2002, the Company received approximately
$880,000 and $10,229,000, respectively, from the surrender of these policies.
These funds were used to pay down bank debt.
As of December 31, 2002, certain agreements may restrict the Company from
utilizing cash surrender value totaling approximately $261,000 for purposes
other than the satisfaction of the specific underlying deferred compensation
agreements, if benefits are not paid by the Company. The Company nets the
dividends realized from the insurance policies with premium expenses. Net
credits (expenses) included in income in connection with the policies amounted
to ($18,000), $789,000, and $1,399,000 for 2002, 2001 and 2000, respectively.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, equipment and vehicles from third parties
that expire through 2007. The minimum rental commitments as of December 31, 2002
are as follows:
Operating Capital
-------------------------------------
(in thousands)
2003 $1,112 $194
2004 762 191
2005 675 154
2006 673 146
2007 164 58
Thereafter - -
-----------------------------------
Total Minimum Payments $3,386 743
-----------------------------------
Less: Interest on Capital Leases (125)
-----------------------------------
Total Principal Payable on Capital Leases $618
===================================
For 2002, 2001 and 2000, rental expense applicable to continuing operations
aggregated approximately $1,165,000, $1,487,000, and $1,528,000, respectively.
LETTERS OF CREDIT: As of December 31, 2002 and 2001, the Company was
contingently liable for $543,000 under an outstanding letter of credit issued
for casualty insurance requirements.
LITIGATION: In the ordinary course of its business, the Company is subject to
loss contingencies pursuant to foreign and domestic federal, state and local
governmental laws and regulations and is also party to certain legal actions,
most frequently involving complaints by terminated employees and disputes with
customers and suppliers. It is management's opinion that the impact of these
legal actions will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
Page F-26
The Company's subsidiary, SL Montevideo Technology, Inc. ("SL-MTI"), recently
defended a cause of action, brought against it in the fall of 2000, in the
federal district court for the western district of Michigan. The lawsuit was
filed by a customer, Eaton Aerospace, Inc. ("Eaton"), alleging breach of
contract and warranty in the defective design and manufacture of a high
precision motor and demanding compensatory damages of approximately $3,900,000.
On November 7, 2002, after a full trial of the facts, a jury awarded Eaton
damages of $650,000, which when combined with pre-trial interest brings the
total claim to $780,000. Eaton is appealing the decision.
On June 12, 2002, the Company and SurfTech were served with notice of class
action complaint filed in Superior Court of New Jersey for Camden County. The
Company and SurfTech are currently two of approximately 39 defendants in this
action. The complaint alleges, among other things, that plaintiffs suffered
personal injuries as a result of consuming water distributed from the Puchack
Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey).
This case arises from the same factual circumstances as current administrative
actions, involving the Puchack Wellfield, to which the Company is a party. The
administrative actions are discussed below. The administrative actions and the
class action lawsuit both allege that SurfTech and other defendants contaminated
ground water through the disposal of hazardous substances at industrial
facilities in the area. SurfTech once operated a chrome-plating facility in
Pennsauken (the "SurfTech Site").
As with the administrative actions, the Company believes it has significant
defenses against the class action plaintiff's claims and intends to pursue them
vigorously. Technical data generated as part of remedial activities at the
SurfTech Site have not established offsite migration of contaminants. Based on
this and other technical factors, the Company has been advised by its outside
counsel that it has a strong defense against the claims alleged in the class
action plaintiffs' complaint, as well as the environmental administrative
actions.
On August 9, 2002, the Company received a "Demand for Arbitration" with respect
to a claim of $578,000 from a former vendor of SL Waber. The claim concerns a
dispute between SL Waber and an electronics manufacturer based in Hong Kong for
alleged failure to pay for goods under a Supplier Agreement. The Company
believes this claim is without merit and intends to vigorously pursue defenses
with respect to these claims and may bring counter claims against the vendor.
Notwithstanding the outcome of these allegations, the Company does not believe
that this arbitration will have a material adverse effect on the consolidated
financial position or results of operations of the Company.
It is management's opinion that the impact of legal actions brought against the
Company and its operations will not have a material adverse effect on its
financial position or results of operations. However, the ultimate outcome of
these matters, as with litigation generally, is inherently uncertain, and it is
possible that some of these matters may be resolved adversely to the Company.
The adverse resolution of any one or more of these matters could have a material
adverse effect on the business, operating results, financial condition or cash
flows of the Company.
ENVIRONMENTAL: Loss contingencies include potential obligations to investigate
and eliminate or mitigate the affects on the environment of the disposal or
release of certain chemical substances at various sites, such as Superfund sites
and other facilities, whether or not they are currently in operation. The
Company is currently participating in environmental assessments and cleanups at
Page F-27
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 $875,000. 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 affect on the
consolidated financial position or results of operations of the Company.
In the fourth quarter of fiscal year 1990, the Company made a provision of
$3,500,000 to cover various such environmental costs for six locations, based
upon estimates prepared at that time by an independent engineering consulting
firm. In fiscal 1991, 1996 and 1999, based upon estimates, the Company made
additional provisions of $480,000, $900,000 and $375,000, respectively. The
fiscal 1996 provision was necessary since, during the latter part of fiscal
1995, the New Jersey Department of Environmental Protection required the Company
to begin additional investigation of the extent of off-site contamination at its
former facility in Wayne, New Jersey, where remediation had been underway. Based
on the results of that investigation, which were received in fiscal 1996, the
Company determined that additional remediation costs of approximately $1,000,000
were probable.
The Company is the subject of various other lawsuits and actions relating to
environmental issues, including administrative action in connection with the
Surf Tech Site which could subject the Company to, among other things,
$9,266,000 in collective reimbursements (with other parties) to the New Jersey
Department of Environmental Protection. The Company believes that it has a
significant defense against all or any part of the claim and that any material
impact is unlikely.
The Company filed claims with its insurers seeking reimbursement for many of
these costs, and received $900,000 from one insurer during fiscal year 1996 and
a commitment to pay 15% of the environmental costs associated with the SurfTech
site up to an aggregate of $300,000. During fiscal 1997, the Company received
$1,500,000 from three additional insurers and from two of those insurers,
commitments to pay 15% and 20% of the environmental costs associated with the
same location up to an aggregate of $150,000 and $400,000, respectively. In
addition, the Company received $100,000 during 2001, 2000, and fiscal 1999, as
stipulated in the settlement agreement negotiated with one of the three
insurers. During 2000, the Company reversed a separate accrual for a potential
environmental penalty after being advised by legal counsel that there was only a
remote chance such penalty would be enforced. As of December 31, 2002, and 2001
the remaining environmental accrual was $875,000 and $290,000, respectively,
have been included in "Accrued Liabilities."
In May 2000, the Company discovered evidence of possible soil contamination at
its facility in Auburn, New York. The New York State Department of Environmental
Controls (the "NYSDEC") was contacted and conducted an investigation. At the
Page F-28
conclusion of its investigation, the NYSDEC determined that remediation of the
site was not required.
In December 2001, the Company received notice from the Connecticut Department of
Environmental Protection of an administrative hearing to determine
responsibility for contamination at a former industrial site located in New
Haven, Connecticut. At the conclusion of the administrative hearing, the court
determined that the Company did not have responsibility to remediate the site.
The Company is investigating a possible ground water contamination plume on its
property in Camden, New Jersey. Based upon the preliminary evidence, the Company
was advised that the cost to remediate the site could amount to $500,000. The
Company recorded a provision for this amount during the first quarter of 2002.
The Company is investigating possible soil and ground water contamination on
SL-MTI's property in Montevideo, Minnesota. Based upon the preliminary evidence,
the Company does not believe it will incur material remediation costs at this
site.
EMPLOYMENT AGREEMENTS: In 2001, the Company entered into change-of-control
agreements with certain officers of the Company. On January 22, 2002, the
Company held its annual meeting of shareholders for 2001. At the annual meeting,
all eight members of the Board of Directors stood for election. In addition,
five nominees from a committee comprised of representatives of two institutional
shareholders (such committee, the "RORID Committee"), stood for election to the
Board of Directors. Upon the certification of the election results on January
24, 2002, the five nominees of the RORID Committee were elected and three
incumbent directors were re-elected. Following the election of the five new
directors, the Company made payments to such officers under these
change-of-control agreements totaling approximately $1,480,000 which is reported
as special charges in the statement of operations.
The Company also entered into severance agreements with certain key employees in
2001 that provide for one-time payments in the event of a change in control, as
defined, if the employee is terminated within 12 months of the change of
control. These payments range from three to 24 months of the employee's base
salary as of the termination date, as defined. If a change in control had
occurred on December 31, 2002, and these employees had been terminated, the
payments would have aggregated approximately $3,900,000 under the change of
control agreement. All senior divisional management teams are continuing in
their positions.
Page F-29
NOTE 13. STOCK OPTIONS AND CAPITAL STOCK
At the Company's 1993 Annual Meeting, the shareholders approved a Nonemployee
Director Nonqualified Stock Option Plan (the "Director Plan"), which was
effective June 1, 1993. The Director Plan provides for the granting of
nonqualified options to purchase up to 250,000 shares of the Company's common
stock to non-employee directors of the Company in lieu of paying quarterly
retainer fees and regular quarterly meeting attendance fees, when elected. The
Director Plan enables the Company to grant options, with an exercise price per
share not less than fair market value of the Company's common stock on the date
of grant, which are exercisable at any time. Each option granted under the
Director Plan expires no later than ten years from date of grant and no options
can be granted under the Director Plan after its May 31, 2003 expiration date.
Information for 2002, 2001 and 2000 with respect to the Director Plan is as
follows:
Weighted
Shares Option Price Average Exercise Price
-------------------------------------------------------------------
(in thousands, except for option price)
-------------------------------------------------------------------
Outstanding and exercisable as of December 31, 1999 76 $3.5625 to $14.625 $ 9.83
Granted ........................................... 18 $9.1875 to $12.84 $11.00
-------------------------------------------------------------------
Outstanding and exercisable as of December 31, 2000 94 $3.5625 to $14.625 $10.05
Granted ........................................... 16 $6.80 to $14.65 $ 9.73
Exercised ......................................... (6) $9.1875 to $11.25 $10.52
-------------------------------------------------------------------
Outstanding and exercisable as of December 31, 2001 104 $3.5625 to $14.625 $ 9.98
Granted ........................................... 5 $7.15 to $8.20 $ 7.70
Cancelled ......................................... (42) $6.80 to $14.625 $12.00
-------------------------------------------------------------------
Outstanding and exercisable as of December 31, 2002 67 $3.5625 to $14.625 $ 8.57
===================================================================
As of December 31, 2002, the number of shares available for grant was 91,000.
At the Company's 1991 Annual Meeting, the shareholders approved the adoption of
a Long Term Incentive Plan (the "1991 Plan") which provided for the granting of
options to officers and key employees of the Company to purchase up to 500,000
shares of the Company's common stock. At the 1995 Annual Meeting, the
shareholders approved an amendment to increase the number of shares subject to
options under the 1991 Plan from 500,000 to 922,650. At the 1998 Annual Meeting,
the shareholders approved an amendment to increase the number of shares subject
to options under the 1991 Plan from 922,650 to 1,522,650. The 1991 Plan enables
the Company to grant either nonqualified options, with an exercise price per
share established by the Board's Compensation Committee, or incentive stock
options, with an exercise price per share not less than the fair market value of
the Company's common stock on the date of grant, which are exercisable at any
time. Each option granted under the 1991 Plan expires no later than ten years
from date of grant, and no future options can be granted under the 1991 Plan as
a result of its expiration on September 25, 2001.
Page F-30
Information for 2002, 2001 and 2000 with respect to the 1991 Plan is as follows:
Shares Option Price Weighted
Average Price
---------------------------------------------------------
(in thousands, except for option price)
---------------------------------------------------------
Outstanding as of December 31, 1999 575 $3.25 to $13.50 $10.44
Granted ........................... 145 $9.781 to $12.00 $11.24
Exercised ......................... (63) $3.25 to $9.375 $ 5.43
Cancelled ......................... (34) $6.875 to $13.50 $11.69
---------------------------------------------------------
Outstanding as of December 31, 2000 623 $3.25 to $13.50 $11.07
Granted ........................... 486 $5.75 to $12.175 $ 8.91
Exercised ......................... (35) $6.875 to $13.50 $10.98
Cancelled ......................... (18) $3.25 to $13.50 $11.47
---------------------------------------------------------
Outstanding as of December 31, 2001 1,056 $3.25 to $13.50 $10.08
Exercised ......................... (63) $7.55 to $7.85 $ 4.92
Cancelled ......................... (252) $3.50 to $13.50 $10.39
---------------------------------------------------------
Outstanding as of December 31, 2002 741 $3.25 to $13.50 $10.37
=========================================================
The number of shares exercisable as of December 31, 2002 was 482,000.
During fiscal 1991, the Board of Directors approved the granting of nonqualified
stock options to purchase 110,000 shares at an option price of $4.13 to the then
Chief Executive Officer of the Company. In fiscal 1992, an option to purchase
50,000 shares was granted to another officer of the Company at an option price
of $3.25, with an expiration date of November 30, 1998. Options for 25,100 and
24,900 shares were exercised during fiscal 1998 and 1999, respectively. In
fiscal 1996, an option to purchase 50,000 shares was granted to a subsidiary
officer at an option price of $8.375 and was exercisable 20% at July 31, 1997,
and 50%, 20% and 10% on or after October 13, 1997, April 13, 1998, and April 13,
1999, respectively, with no expiration date, except in the event of termination,
disability or death, provided that the subsidiary officer has been employed
through such date. All remaining options have been exercised in the year 2002.
All of the option prices are equivalent to 100% of market value at date of
grant.
Transactions from December 31, 1999 through December 31, 2002, under the above
plans, were as follows:
Weighted
Number of Average Life
Shares Option Price Weighted Remaining
(in thousands) per Share Average Price (years)
--------------------------------------------------------------------------
Outstanding as of December 31, 1999 793 $3.25 to $14.625 $9.46 6.80
Granted ........................... 163 $9.1875 to $12.84 $11.22
Exercised ......................... (97) $3.25 to $9.375 $6.46
Cancelled ......................... (34) $6.875 to $13.50 $11.71
--------------------------------------------------------------------------
Outstanding as of December 31, 2000 825 $3.25 to $14.625 $10.06 6.64
Granted ........................... 502 $5.75 to $12.175 $8.94
Exercised ......................... (41) $6.875 to $13.50 $10.92
Cancelled ......................... (18) $3.25 to $13.50 $11.47
--------------------------------------------------------------------------
Outstanding as of December 31, 2001 1,268 $3.25 to $14.625 $9.56 7.98
--------------------------------------------------------------------------
Granted ........................... 5 $7.15 to $8.20 $7.70
Exercised ......................... (171) $3.25 to $6.875 $4.42
Cancelled ......................... (294) $3.50 to $14.625 $10.519
--------------------------------------------------------------------------
Outstanding as of December 31, 2002 808 $3.25 to $14.625 $10.218 7.25
--------------------------------------------------------------------------
Exercisable as of December 31, 2002 549 $3.25 to $14.625 $10.465
==========================================================================
Page F-31
The following tables segregate the outstanding options and exercisable options
as of December 31, 2002, into five ranges:
Options Outstanding Range of Option Prices Weighted Weighted Average Life Remaining
(in thousands) per Share Average Price (years)
------------------------------------------------------------------------------------------------------------------------
18 $3.25 to $5.6875 $4.470 1.75
195 $5.75 to $5.75 $5.750 8.73
163 $6.80 to $11.50 $10.208 5.90
289 $11.65 to $12.175 $12.089 7.82
143 $12.25 to $14.625 $13.252 6.32
---
808
---
========================================================================================================================
Options Exercisable Range of Option Prices Weighted
(in thousands) per Share Average Price
-------------------------------------------------------------------------------
18 $3.25 to $5.6875 $ 4.470
97 $5.75 to $5.75 $ 5.750
142 $6.80 to $11.50 $ 10.175
170 $11.65 to $12.175 $ 12.050
122 $12.25 to $14.625 $ 13.241
---
549
---
===============================================================================
NOTE 14. CASH FLOW INFORMATION
In accordance with Statement of Financial Accounting Standard No. 95, "Statement
of Cash Flows," cash flows from EME's operations were calculated based on their
reporting currencies. As a result, amounts related to assets and liabilities
reported on the consolidated cash flows will not necessarily agree with the
translation adjustment recorded on the consolidated balance sheet. The effect of
exchange rate changes on cash balances held in foreign currencies had been
reported on a separate line in the statement of cash flows.
Supplemental disclosures of cash flow information:
Years ended December 31,
--------------------------------------
2002 2001 2000
(as adjusted) (as adjusted)
--------------------------------------
(in thousands)
Interest paid $2,640 $3,230 $2,926
Income taxes paid $ 379 $ 461 $ 669
======================================
During 2001, the Company sold substantially all of the assets of SL Waber and
the stock of Waber de Mexico S.A. de C.V. for $1,053,000. In conjunction with
this sale, net assets deconsolidated were as follows:
Book value of net assets sold $3,798,000
Cash received $1,053,000
NOTE 15. INDUSTRY SEGMENTS
During 2000, the Company was comprised of six business segments: Power Supplies,
Power Conditioning and Distribution Units, Motion Control Systems, Electric
Utility Equipment Protection Systems, Surge Suppressors and Other. The Surge
Suppressor segment was discontinued in 2001 as a result of the sale of the
assets of SL Waber. For 2001, the Company changed the composition of its
Page F-32
reportable segments to individual operating business units. Segment information
for all periods presented were restated to conform with the December 31, 2001
presentation.
At December 31, 2002 and 2001, the Company was comprised of five and six
operating business units, respectively. With the sale of EME on January 6, 2003,
the Company has classified this operating segment 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
provides customer service and maintenance for all electric utility equipment
protection systems. SurfTech produces industrial coatings and platings for
equipment in the corrugated paper and telecommunications industries. The other
segment includes corporate related items not allocated to reportable segments,
which includes but not limited to certain legal, litigation and environmental
charges and the results of insignificant operations. The accounting policies of
these business units are the same as those described in the summary of
significant accounting policies (see Note 1 for additional information). The
Company's reportable business units are managed separately because each offers
different products and services and requires different marketing strategies.
Business unit operations are conducted through domestic subsidiaries. For all
periods presented, sales between business units were not material. No single
customer accounted for more than 10% of consolidated net sales during 2002, 2001
and 2000. Each of the segments has certain major customers, the loss of any of
which would have a material adverse effect on such entity.
Years ended December 31,
-----------------------------------------------
2002 2001 2000
(as adjusted) (as adjusted)
-----------------------------------------------
(in thousands)
Net sales
Condor $ 38,058 $ 48,742 $ 62,567
Teal 19,608 13,320 21,832
SL-MTI 23,007 19,262 14,201
RFL 27,239 28,447 24,426
SurfTech 2,237 3,086 2,838
-----------------------------------------------
Consolidated $110,149 $112,857 $125,864
===============================================
Page F-33
Years ended December 31,
--------------------------------------------------
2002 2001 2000
(as adjusted) (as adjusted)
--------------------------------------------------
(in thousands)
Operating Income (loss) from continuing operations
Condor $ 1,687 $ 1,226 $ 4,203
Teal 1,873 603 3,803
SL-MTI 1,873 1,981 1,032
RFL 3,435 3,230 2,523
SurfTech (889) (760) (115)
Other expenses and Corporate office (4,750) (6,171) (1,628)
Write-down of inventory (a) --- (2,940) ----
Restructuring charges (b) (265) (3,868) ----
Impairment of intangible assets (c) (703) (4,270) ----
Special Charges (1,834) ---- ----
Settlement of class action suit ---- ---- 875
--------------------------------------------------
Income (loss) from operations 427 (10,969) 10,693
Interest income 25 153 272
Interest expense (2,454) (3,261) (2,964)
--------------------------------------------------
Income (loss) from continuing operations before taxes $ (2,002) $(14,077) $ 8,001
==================================================
(a) Includes $2,890 and $50 related to Condor and SurfTech, respectively (see
Note 17).
(b) Includes $3,683 and $185 related to Condor and SurfTech, respectively (see
Note 17).
(c) Includes $703 related to SurfTech for 2002 and $4,145 and $125 related to
Condor and SurfTech, respectively for 2001 (see Note 17).
December 31, December 31,
-----------------------------------------
2002 2001
(as adjusted)
-----------------------------------------
Identifiable Assets (in thousands)
Condor $ 16,817 $ 20,740
Teal 10,045 9,834
SL-MTI 9,691 11,637
RFL 16,322 17,445
SurfTech 1,995 3,929
Other including Corporate Office 35,797 46,326
-----------------------------------------
Consolidated $ 90,667 $109,911
=========================================
December 31, December 31,
------------------------------------
2002 2001
(as adjusted)
------------------------------------
Intangible Assets (net) (in thousands)
Condor $ --- $ 320
Teal 6,107 6,207
SL-MTI 30 35
RFL 5,251 5,251
SurfTech ----- 555
Other including Corporate Office ----- ----
------------------------------------
Consolidated $11,388 $12,368
====================================
Page F-34
Years ended December 31,
2002 2001 2000
(as adjusted) (as adjusted)
------------------------------------------
Capital expenditures (1) (in thousands)
------------------------------------------
Condor $ 511 $ 578 $ 270
Teal 143 11 122
SL-MTI 206 196 280
RFL 606 195 434
SurfTech 11 671 958
Other including Corporate Office -- 59 102
------------------------------------------
Consolidated $1,477 $1,710 $2,166
==========================================
(1) Excludes assets acquired in business combinations.
Years ended December 31,
----------------------------------------------
2002 2001 2000
(as adjusted) (as adjusted)
----------------------------------------------
Depreciation and amortization (in thousands)
Condor $ 1,181 $ 1,745 $ 1,581
Teal 474 762 836
SL-MTI 375 395 403
RFL 562 795 770
SurfTech 314 386 301
Other including Corporate Office 42 (46) (40)
----------------------------------------------
Consolidated $ 2,948 $ 4,037 $ 3,851
==============================================
Financial information relating to the Company's segments by geographic area as
follows:
Years ended December 31,
2002 2001 2000
(as adjusted) (as adjusted)
------------------------------------------------
Net sales (1) (in thousands)
------------------------------------------------
United States $ 96,298 $100,796 $113,333
Foreign 13,851 12,061 12,531
------------------------------------------------
Consolidated $110,149 $112,857 $125,864
------------------------------------------------
Long-lived assets
United States $ 20,942 $ 22,407 $ 28,961
Foreign 1,301 1,814 2,374
------------------------------------------------
Consolidated $ 22,243 $ 24,221 $ 31,335
================================================
(1) Net sales are attributed to countries based on location of customer.
NOTE 16. FOREIGN OPERATIONS
In addition to manufacturing operations in California, Minnesota and New Jersey,
the Company manufactures substantial quantities of products in leased premises
located in Mexicali and Matamoros, Mexico. These external and foreign sources of
supply present risks of interruption for reasons beyond the Company's control,
including political and other uncertainties. During 2002, the Company
manufactured products in Ingolstadt, Germany and Paks, Hungary. The locations in
Germany and Hungary were transferred as part of the sale of EME on January 6,
2003. In addition the Condor plant in Reynosa, Mexico, was closed in March 2002.
During 2001, the Company manufactured products in Nogales, Mexico, which was
transferred as part of the sale of SL Waber in September 2001.
Condor manufactures substantially all of its products in Mexico and incurs its
labor costs and supplies in Mexican pesos. SL-MTI manufactures an increasing
amount of its products in Mexico and incurs related labor costs and supplies in
Mexican pesos. Both Condor and SL-MTI price their sales in United States
F-35
dollars. The Mexican subsidiaries of Condor and SL-MTI maintain their books and
records in Mexican pesos.
Generally, the Company's sales from continuing operations are priced in United
States dollars and its costs and expenses are priced in United States dollars
and Mexican pesos. Foreign sales comprised 13%, 11% and 10% of sales for 2002,
2001 and 2000, respectively. Accordingly, the competitiveness of the Company's
products relative to locally produced products may be affected by the
performance of the United States dollar compared with that of its foreign
customers' currencies. Additionally, the Company is exposed to foreign currency
transaction and translation losses which might result from adverse fluctuations
in the values of the Mexican peso. As of December 31, 2002, the Company had net
assets of $26,000 subject to fluctuations in the value of the Mexican peso.
Fluctuations in the value of the Mexican peso were not significant in 2002 and
2001. However, there can be no assurance that the value of the Mexican peso will
continue to remain stable.
NOTE 17. RESTRUCTURING COSTS AND IMPAIRMENT CHARGES
At December 31, 2001, the Company had a restructuring reserve of $1,163,000.
This restructuring reserve was established in 2001 to provide for anticipated
costs associated with the downsizing of Condor and SurfTech. During 2002,
additional restructuring costs of $265,000 were recorded and were comprised
primarily of $90,000 for severance payments and $140,000 for certain exit costs
related to the closure of Condor's engineering and sales support office in
Brentwood, New York and the manufacturing facility in Reynosa, Mexico. During
2002 all of the restructuring costs were either paid or applied to the
write-down of assets during the year. At December 31, 2002 no amount remained in
the Company's restructuring reserve. A summary of the principal components of
the restructuring reserve from December 31, 2001 to December 31, 2002 is set
forth below:
Restructuring Accrual
December 31,
2001 Increases (Decreases)
- --------------------------------------------------------------------------------
(in thousands)
Facility Costs $ 689 $ 15 $ (704)
Asset write-off 325 160 (485)
Professional fees 102 -- (102)
Other 47 -- (47)
Severance -- 90 (90)
------- ------- -------
Total $ 1,163 $ 265 $(1,428)
======= ======= =======
Page F-36
The Company recorded restructuring, impairment charges, and inventory
write-downs during 2001 as follows:
Impairment Inventory
Restructuring of Write-
Costs Intangibles downs
-----------------------------------------------
(in thousands)
Year ended December 31, 2001
Condor - intangible asset impairment $ ---- $4,145 $ ----
Condor - workforce reduction and other 3,683 ---- ----
Condor - inventory write-off ---- ---- 2,890
SurfTech - intangible asset impairment ---- 125 ----
SurfTech - fixed asset write-offs 125 ---- ----
SurfTech - workforce reduction and other 60 ---- ----
SurfTech - inventory write-off ---- ---- 50
-----------------------------------------------
Total restructuring and impairment
Charges $3,868 $4,270 $2,940
===============================================
During 2001, the Company implemented a plan to restructure certain of its
operations as a result of a significant reduction in the demand for products by
telecommunications equipment manufacturers. The sharp decrease in orders for
telecommunications-related products occurred abruptly in the first quarter and
continued to the end of 2001.
The restructuring plan was designed to reduce fixed costs in line with lower
anticipated sales in a manner that would not overburden personnel and monetary
resources. It consisted of the following actions:
o the closure of Condor's engineering and sales support facility in
Brentwood, New York;
o the closure of Condor's manufacturing facility in Reynosa, Mexico; and
o the substantial reduction of Condor's employees and staff at Condor's
manufacturing facility in Mexicali, Mexico and headquarters in Oxnard,
California.
The charge for facility closures relates primarily to the write-off of equipment
and other fixed assets to be disposed of or abandoned. A portion of the charge
represents management's estimate of the future lease commitments and buyout
options for closed facilities.
The restructuring plan included the termination of approximately 828 employees,
and the payment of related severance benefits. Approximately 810 employees were
terminated during 2001. The remaining terminations and associated termination
payments were made in the first quarter of 2002.
Of the $2,940,000 inventory write-down in 2001, which was not part of the
restructuring reserve, $2,890,000 consisted of the telecommunications-related
product inventory line. The inventory was evaluated based on current backlog and
sales forecasts. Following this evaluation, the Company considered the inventory
to have limited value. The Company disposed of approximately $2,100,000 of this
inventory during 2001.
Page F-37
NOTE 18. RELATED PARTY TRANSACTIONS
As discussed in Notes 1 and 2, the Company had engaged Imperial Capital, LLC to
explore the sale of the Company or one or more of its subsidiaries. Imperial
Capital, LLC contacted over four hundred potential buyers with respect to the
sale of the Company and its subsidiaries, and in the process received several
indications of interest to acquire EME. After negotiations, the Company's Board
of Directors determined that in light of the circumstances including but not
limited to the maturity of the Company's Former Credit Facility on December 31,
2002 and its need for additional capital, it was in the best interest of the
Company to pursue the offer received for EME from the ultimate purchaser. A
principal of the buyer of EME is a limited partner in Steel Partners II, L.P.
("Steel"), an investment partnership. The Company's Chairman of the Board and
Chief Executive Officer is the sole executive officer and managing member of
Steel.
During 2002, the Company has paid approximately $340,000 and has been billed an
additional $430,000 in legal fees by Olshan Grundman Frome Rosenzweig &
Wolosky LLP, a law firm in which a director of the Company is a senior partner.
The fees were incurred related to the sale of EME, the refinancing of the
Company's debt, the preparation, filing and amending a Registration Statement
regarding a potential Rights Offering, the potential issuance of subordinated
debt, matters related to the Company's continuing listing on the New York Stock
Exchange and general corporate matters.
As a result of certain services being provided to the Company by Steel Partners,
Ltd. ("SPL"), a company controlled by the Chairman of the Board and Chief
Executive Officer of the Company, Warren Lichtenstein, the Compensation
Committee engaged an independent firm to provide a report and advice regarding
the amount of management fees that should be payable to SPL. These fees are in
consideration for the services of the Chairman of the Board and Chief Executive
Officer, Warren Lichtenstein, the Company's President, Glen Kassan, and other
assistance from SPL. These individuals did not receive any fees for their
services. The services provided include management and advisory services with
respect to operations, strategic planning, finance and accounting, merger, sale
and acquisition activities and other aspects of the businesses of the Company. A
fee of $362,000 was accrued by the Company for 2002 and has been paid.
Page F-38
Note 19. Selected quarterly financial data (unaudited)
NOTE 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(as adjusted)
--------------------------------------------------------------------------
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
--------------------------------------------------------------------------
(in thousands, except per share data)
YEAR ENDED DECEMBER 31, 2002
Net sales (a) $ 27,533 $ 27,924 $ 27,086 $ 27,606
Gross margin (b) $ 10,364 $ 9,466 $ 9,928 $ 9,192
Income (loss) from continuing operations before income $ (1,654) (1) $ (527) $ 180
taxes (c)
Net income (loss) (d) $ (376) $ 331 $ 549 $ (974)
Diluted net income per common share $ (.07) $ .06 $ .10 $ (.17)
(a) Excludes net sales from discontinued $ 5,415 $ 6,485 $ 7,494 $ 8,264
operations of
(b) Excludes gross margin from discontinued $ 1,250 $ 1,574 $ 2,036 $ 2,364
operations of
(c) Excludes income (losses) before income $ 817 $ 343 $ 1,061 $ (496)
taxes from discontinued operations of
(d) Includes income (losses) from $ 552 $ 214 $ 668 $ (657)
discontinued operations net of tax
(as adjusted)
-----------------------------------------------------------------------------
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
------------------------------------------------------------------------------
(in thousands, except per share data)
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
Net sales (e) $30,372 $26,046 $27,522 $28,917
Gross margin (f) $10,306 $ 5,459 $ 9,540 $10,133
Income from continuing operations before income
taxes (g) $ 186 $(5,588) $(2,590) $(6,085)
Net income (loss)(h) $ 479 $(5,312) $(2,710) $(3,107)
Diluted net income per common share $ 0.08 $ (0.93) $ (0.47) $ (0.55)
(e) Excludes net sales from discontinued
operations of $13,355 $ 9,346 $ 7,704 $ 5,521
(f) Excludes gross margin from discontinued
operations of $ 2,577 $ 2,036 $ 1,469 $ 1,186
(g) Excludes income (losses) before income
taxes from discontinued operations of
$ 673 $(3,409) $(1,340) $ 2,138
(h) Includes income (losses) from discontinued
operations net of tax $ 691 $(2,044) $(1,023) $ 1,421
Page F-39
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
- ---------------------------------------------------------------------------------------------------------
Additions
--------------------------
Balance at Charged to Charged
Beginning of Costs and to Other Balance at
Description Period Expenses Accounts Deductions End of Period
- ---------------------------------------------------------------------------------------------------------
(In thousands)
YEAR ENDED DECEMBER 31,
2002 Allowance for:
Doubtful accounts $541 $ 109 $---- $377(b) $273
YEAR ENDED DECEMBER 31, 2001
Allowance for:
Doubtful accounts $515 $ 469 $---- $443(b) $541
YEAR ENDED DECEMBER 31, 2000
Allowance for:
Doubtful accounts $385 $ 389 $ 40(a) $299(b) $515
(a) Due to reclassifications.
(b) Accounts receivable written off, net of recoveries.
Page F-40