10-Q 1 w65173e10vq.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 9/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-4987 SL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) NEW JERSEY 21-0682685 ------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 520 FELLOWSHIP ROAD, SUITE A114, MT. LAUREL, NJ 08054 ----------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 856-727-1500 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered Title of each class New York Stock Exchange Common stock, $.20 par value Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ The number of shares of common stock outstanding as of November 4, 2002 were 5,895,436. TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets September 30, 2002 and December 31, 2001.........................1 Consolidated Statements of Operations Three Months Ended September 30, 2002 and 2001 and Nine Months Ended September 30, 2002 and 2001..............2 Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001..................3 Notes to Consolidated Financial Statements..........................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................18 Item 3. Quantitative and Qualitative Disclosures about Market Risk ...........26 Item 4. Controls and Procedures...............................................26 PART II. OTHER INFORMATION..................................................26 SIGNATURES....................................................................28 ITEM 1. FINANCIAL STATEMENTS SL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2002 2001 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 5,644,000 $ 6,577,000 Receivables, net 20,687,000 36,041,000 Inventories, net 18,929,000 20,497,000 Prepaid expenses 1,116,000 815,000 Deferred income taxes 6,364,000 6,300,000 ------------- ------------- Total current assets 52,740,000 70,230,000 Property, plant and equipment, less accumulated depreciation of $21,608,000 and $18,941,000, respectively 18,197,000 18,829,000 Deferred income taxes 2,003,000 2,014,000 Cash surrender value of life insurance policies 962,000 1,323,000 Intangible assets, less accumulated amortization of $6,316,000 and $6,017,000, respectively 14,505,000 14,799,000 Other assets 569,000 563,000 ------------- ------------- Total assets $ 88,976,000 $ 107,758,000 ============= ============= LIABILITIES Current liabilities: Short-term bank debt $ 4,109,000 $ 1,367,000 Long-term debt due within one year 20,149,000 35,829,000 Accounts payable 5,736,000 8,149,000 Accrued income taxes 356,000 2,019,000 Accrued liabilities: Payroll and related costs 5,710,000 7,609,000 Other 10,814,000 11,781,000 ------------- ------------- Total current liabilities 46,874,000 66,754,000 Long-term debt less portion due within one year 38,000 1,009,000 Deferred compensation and supplemental retirement benefits 4,276,000 4,268,000 Other liabilities 2,952,000 2,523,000 ------------- ------------- Total liabilities 54,140,000 74,554,000 ------------- ------------- Commitments and contingencies (Note 8) SHAREHOLDERS' EQUITY Preferred stock, no par value; authorized, 6,000,000 shares; none issued -- -- Common stock, $.20 par value; authorized, 25,000,000 shares; issued, 8,298,000 shares 1,660,000 1,660,000 Capital in excess of par value 38,763,000 39,025,000 Retained earnings 9,401,000 8,897,000 Accumulated other comprehensive income (loss) 305,000 (5,000) Treasury stock at cost, 2,407,000 and 2,587,000 shares, respectively (15,293,000) (16,373,000) ------------- ------------- Total shareholders' equity 34,836,000 33,204,000 ------------- ------------- Total liabilities and shareholders' equity $ 88,976,000 $ 107,758,000 ============= =============
See accompanying notes to consolidated financial statements. SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three-Months Ended* Nine-Months Ended* September 30, September 30, ------------- ------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net Sales $34,580,000 $33,968,000 $101,937,000 $104,029,000 ----------- ----------- ------------ ------------ Cost and expenses: Cost of products sold 22,616,000 22,571,000 67,319,000 70,345,000 Write-down of inventory -- 50,000 -- 2,940,000 Engineering and product development 2,114,000 1,979,000 6,165,000 6,560,000 Selling, general and administrative 7,936,000 6,836,000 22,853,000 20,325,000 Depreciation and amortization 911,000 1,169,000 2,655,000 3,482,000 Special charges -- -- 1,834,000 -- Restructuring costs -- 1,783,000 265,000 2,891,000 ----------- ----------- ------------ ------------ Total cost and expenses 33,577,000 34,388,000 101,091,000 106,543,000 ----------- ----------- ------------ ------------ Income (loss) from operations 1,003,000 (420,000) 846,000 (2,514,000) Other income (expense): Interest income 31,000 99,000 171,000 278,000 Interest expense (443,000) (1,168,000) (1,428,000) (2,628,000) ----------- ----------- ------------ ------------ Income (loss) from continuing operations before income taxes 591,000 (1,489,000) (411,000) (4,864,000) Income tax provision (benefit) 8,000 (405,000) (602,000) (1,565,000) ----------- ----------- ------------ ------------ Income (loss) from continuing operations 583,000 (1,084,000) 191,000 (3,299,000) ----------- ----------- ------------ ------------ Discontinued operations (net of tax) -- (1,626,000) 313,000 (4,244,000) Net income (loss) $ 583,000 $(2,710,000) $ 504,000 $ (7,543,000) =========== =========== ============ ============ BASIC NET INCOME (LOSS) PER COMMON SHARE Income (loss) from continuing operations $ 0.10 $ (0.19) $ 0.03 $ (0.58) Discontinued operations (net of tax) -- (0.28) 0.06 (0.74) ----------- ----------- ------------ ------------ Net income (loss) $ 0.10 $ (0.47) $ 0.09 $ (1.32) =========== =========== ============ ============ DILUTED NET INCOME (LOSS) PER COMMON SHARE Income (loss) from continuing operations $ 0.10 $ (0.19) $ 0.03 $ (0.58) Discontinued operations (net of tax) -- (0.28) 0.06 (0.74) ----------- ----------- ------------ ------------ Net income (loss) $ 0.10 $ (0.47) $ 0.09 $ (1.32) =========== =========== ============ ============ Shares used in computing basic net income (loss) per common share 5,892,000 5,707,000 5,856,000 5,695,000 Shares used in computing diluted net income (loss) per common share 5,894,000 5,707,000 5,896,000 5,695,000
* RECLASSIFIED FOR COMPARATIVE PURPOSES ONLY. See accompanying notes to consolidated financial statements. SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (Unaudited)
Three-Months Ended Nine-Months Ended September 30, September 30, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net Income (loss) $ 583,000 $(2,710,000) $ 504,000 $(7,543,000) Other comprehensive income (loss): Currency translation adjustment, net of related taxes (92,000) 160,000 310,000 225,000 ----------- ----------- ----------- ----------- Comprehensive income (loss) $ 491,000 $(2,550,000) $ 814,000 $(7,318,000) =========== =========== =========== ===========
See accompanying notes to consolidated financial statements SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001 (UNAUDITED)
2002 2001 -------------- ------------- OPERATING ACTIVITIES: Net income (loss) from continuing operations $ 191,000 $ (3,299,000) Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: Depreciation 2,192,000 2,263,000 Amortization 463,000 1,219,000 Restructuring charges 265,000 2,891,000 Write-down of inventory -- 2,940,000 Provisions for losses on accounts receivable (41,000) 154,000 Additions to other assets (163,000) (206,000) Cash surrender value of life insurance premiums 16,000 (781,000) Deferred compensation and supplemental retirement benefits 411,000 427,000 Deferred compensation and supplemental retirement benefit payments (1,919,000) (357,000) (Increase) decrease in deferred income taxes 554,000 (3,620,000) (Gain) loss on sales of assets,net (141,000) 1,000 Investment in Kreiss Johnson -- 107,000 Changes in operating assets and liabilities, excluding effects of business dispositions: Accounts receivable 1,456,000 (1,665,000) Inventories 2,008,000 (513,000) Prepaid expenses (281,000) 66,000 Accounts payable (1,573,000) (3,320,000) Other accrued liabilities (3,564,000) (2,948,000) Accrued income taxes 2,910,000 2,948,000 ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,784,000 (3,683,000) ------------ ------------ INVESTING ACTIVITIES: Proceeds from sales of assets 167,000 1,035,000 Purchases of property, plant, and equipment (1,409,000) (1,911,000) Decrease in notes receivable 1,000 29,000 Proceeds from cash surrender life insurance policies 10,676,000 -- ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,435,000 (847,000) ------------ ------------ FINANCING ACTIVITIES: Proceeds from life insurance policy -- 256,000 Proceeds from short-term debt 2,428,000 1,144,000 Proceeds from long-term debt 15,100,000 16,100,000 Payments on long-term debt (31,733,000) (12,632,000) Proceeds from stock options exercised 756,000 449,000 Treasury stock sold 62,000 89,000 ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (13,427,000) 5,406,000 ------------ ------------ NET CASH PROVIDED BY(USED IN) DISCONTINUED OPERATIONS 25,000 (827,000) Effect of exchange rate changes on cash 250,000 206,000 ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS (933,000) 255,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,577,000 1,189,000 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,644,000 $ 1,444,000 ------------ ------------ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,655,000 $ 2,680,000 Income taxes $ 1,703,000 $ 1,387,000
See accompanying notes to consolidated financial statements. SL INDUSTRIES, INC. Notes to Consolidated Financial Statements -- Unaudited 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These financial statements should be read in conjunction with the Company's audited financial statements and notes thereon included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. LIQUIDITY: The Company is party to a Second Amended and Restated Credit Agreement, dated December 13, 2001, as amended (the "Revolving Credit Facility"), that allows the Company to borrow for working capital and other purposes. The Revolving Credit Facility contains 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 Revolving Credit Facility due to its failure to meet the 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 Revolving Credit Facility. The agreement provides, 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 Revolving Credit Facility matures on December 31, 2002 and provides for the payment of a facility fee of $780,000 in the event that the Revolving Credit Facility is not repaid by October 31, 2002. The Company did not repay the Revolving Credit Facility prior to October 31, 2002 and paid such facility fee. The Company is currently negotiating to refinance the Revolving Credit Facility, although there can be no assurance that the Company will be able to refinance the Revolving Credit Facility prior to December 31, 2002 or that the Revolving Credit Facility will be refinanced successfully (See Note 6). In connection with the refinancing of the Company's Revolving Credit Facility, the Company signed a commitment letter with a nationally recognized lending institution to refinance its existing Revolving Credit Facility, such commitment letter terminates on November 18, 2002. The Company had also signed a commitment letter with Steel Partners II, LP, an entity controlled by the Company's Chairman and Chief Executive Officer, to provide a subordinated -4- loan in the amount of $5,000,000 in connection with the refinancing of the Revolving Credit Facility. As the refinancing did not occur, the subordinated loan was not made. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 2. RECEIVABLES Receivables at September 30, 2002 and December 31, 2001 consisted of the following:
September 30, December 31, 2002 2001 (in thousands) ---------------------------- Trade receivables $ 20,738 $ 20,189 Less allowances for doubtful accounts (310) (568) -------- -------- 20,428 19,621 Receivables for life insurance policies surrendered -- 10,229 Recoverable income taxes 259 4,355 Other -- 1,836 -------- -------- $ 20,687 $ 36,041 ======== ========
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. In July 2002 the Company received a $1,400,000 German tax refund both of which were classified as recoverable income taxes at December 31, 2001. These funds were used principally to pay down debt under the Company's Revolving Credit Facility (See Notes 1 and 6). 3. INVENTORIES Inventories at September 30, 2002 and December 31, 2001 consisted of the following:
September 30, December 31, 2002 2001 (in thousands) ---------------------------- Raw materials $ 13,502 $ 15,341 Work in process 5,952 5,261 Finished goods 2,490 3,401 ------ ------ 21,944 24,003 Less allowances (3,015) (3,506) ------ ------ $ 18,929 $ 20,497 ======== ========
4. INCOME (LOSS) PER SHARE The Company has presented net income (loss) per common share pursuant to the Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 128, -5- "Earnings per Share." Basic net income (loss) per common share is computed by dividing reported net income (loss) available to common shareholders by the weighted average number of shares outstanding for the period. Diluted net income per common share is computed by dividing reported net income available to common shareholders by the weighted average shares outstanding for the period, adjusted for the dilutive effect of common stock equivalents, which consist of stock options, using the treasury stock method. The table below sets forth the computation of basic and diluted net income (loss) per share:
Three Months Ended September 30, 2002 2001 ----------------------------------------- --------------------------------------- (in thousands, except per share amounts) Net Income from Per Share Net (Loss) from Per Share Continuing Amount Continuing Shares Amount Operations Shares Operations --------------------------------------------------------------------------------------- Basic net income (loss) per common share $ 583 5,892 $0.10 $(1,084) 5,707 $ (0.19) Effect of dilutive securities -- 2 -- -- -- -- -------- ------ ----- ------- ----- ------ Diluted net income (loss) per common share $ 583 5,894 $0.10 $(1,084) 5,707 $ (0.19) ======== ====== ===== ======= ===== ========
Nine Months Ended September 30, 2002 2001 ----------------------------------------- ---------------------------------------- (in thousands, except per share amounts) Net Income from Per Share Net (Loss) from Continuing Amount Continuing Per Share Operations Shares Operations Shares Amount ---------------------------------------------------------------------------------------- Basic net income (loss) per common share $ 191 5,856 $ 0.03 $(3,299) 5,695 $(0.58) Effect of dilutive securities -- 40 -- -- -- -- ------- ----- ------ ------- ----- ------ Diluted net income (loss) per common share $ 191 5,896 $ 0.03 $(3,299) 5,695 $(0.58) ======= ===== ====== ======= ===== ======
For the three month and nine-month periods ended September 30, 2001, common stock options of 1,527,066 and 351,658, respectively, were outstanding but were excluded from the diluted -6- computation because the Company incurred a net loss and the effect of including the options would be anti-dilutive. For the three-month and nine-month periods ended September 30, 2002, options to purchase 586,784 and 539,264 shares of stock, respectively, were excluded from the diluted computation because the option exercise prices were greater than the average market price of the Company's common stock during these periods. 5. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial accounting Standard No. 141, "Business Combinations" ("SFAS No. 141"), which requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. As a result, use of the pooling-of-interests method is prohibited for business combinations initiated thereafter. SFAS No.141 also establishes criteria for the separate recognition of intangible assets acquired in a business combination. In June 2001, the Company adopted this statement, which did not have any impact on its consolidated financial position or results of operations. 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 will implement 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 will test for impairment after the annual forecasting process is completed which will occur in the fourth quarter of the year or as impairment indicators arise. There were no changes in the classifications of intangible assets or their remaining useful lives upon adoption of this pronouncement. The components of intangible assets are as follows: INTANGIBLE ASSETS:
September 30, 2002 December 31, 2001 Accumulated Accumulated Gross Value Amortization Net Value Gross Value Amortization Net Value ----------- ------------ --------- ----------- ------------ --------- (in thousands) Goodwill 15,482 2,192 13,290 15,482 2,192 13,290 ------ ----- ------ ------ ----- ------ Patents 936 507 429 932 454 478 Covenant Not To Compete 2,980 2,875 105 2,980 2,660 320 Trademarks 922 273 649 921 245 676 Other 501 469 32 501 466 35 ------ ----- ------ ------ ----- ------ 20,821 6,316 14,505 20,816 6,017 14,799 ------ ----- ------ ------ ----- ------
-7- Amortization expense for intangible assets subject to amortization in each of the next five fiscal years is estimated to be $154,000 in 2003, $112,100 in years 2004 through 2006 and $111,000 in 2007. 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):
Three Months Ended September 30, Nine Months Ended September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Reported net income (loss) $ 583 $ (2,710) $ 504 $ (7,543) Add back goodwill amortization -- 127 -- 363 --------- --------- ------------- --------- Adjusted net income (loss) $ 583 $ (2,583) $ 504 $ (7,180) --------- --------- ------------- --------- Income (loss) per share - basic Reported net income (loss) $ .10 $ (.47) $ .09 $ (1.32) Goodwill amortization -- .02 -- .06 --------- --------- ------------- --------- Adjusted net income (loss) $ .10 $ (.45) $ .09 $ (1.26) --------- --------- ------------- --------- Income (loss) per share - diluted Reported net income (loss) $ .10 $ (.47) $ .09 $ (1.32) Goodwill amortization -- .02 -- .06 --------- --------- ------------- --------- Adjusted net income (loss) $ .10 $ (.45) $ .09 $ (1.26) --------- --------- ------------- ---------
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 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, which did not have an impact on its consolidated financial position or results of operations. 6. DEBT Debt consists of the following:
September 30, December 31, 2002 2001 ---- ---- (in thousands) Short-term bank debt $ 4,109 $ 1,367 -------- -------- Revolving lines of credit $ 20,057 $ 35,689 Mortgages payable 130 1,149 -------- -------- 20,187 36,838 Less portion due within one year (20,149) (35,829) -------- -------- Long-term bank debt $ 38 $ 1,009 ======== ========
-8- Under the terms of the Revolving Credit Facility, the Company can borrow for working capital and other purposes at the prime interest rate plus two percent. Borrowings under the Revolving Credit Facility are collateralized by substantially all of the Company's assets. The Revolving Credit Facility contains limitations on borrowings and requires maintenance of certain financial and non-financial covenants, the most restrictive of which require certain levels of quarterly net income and a quarterly minimum fixed charge coverage ratio, which is the ratio of earnings before interest, taxes, depreciation and amortization, plus operating rent, to the sum of operating rent, capital expenditures and interest charges. In addition, the Company is prohibited under the Revolving Credit Facility from paying dividends. The Revolving Credit Facility matures on December 31, 2002 and provides for the payment of a Facility fee of approximately $780,000 in the event that the "Facility" is not repaid by October 31, 2002. The Company did not refinance the Revolving Credit Facility by October 31, 2002 and paid the Facility fee on November 4, 2002, which will be recorded as interest expense in the fourth quarter of the year. As of September 30, 2002, outstanding borrowings under the Company's Revolving Credit Facility were $20,057,000. The Company had available borrowings of $4,900,000 under the Revolving Credit Facility as of September 30, 2002. The Company's German subsidiary Elektro-Metall Export GmbH ("EME") also has $5,570,000 in lines of credit with several banks in Germany. One of those banks, Deutsche Bank, has indicated that it will terminate its line in two stages, December 31, 2002 and the remainder of the line at March 31, 2003. EME's management is presently engaged in discussions with its other two existing lenders to extend and increase their lines of credit, which expire March 31, 2003. Under the terms of its current lines of credit, EME can borrow for any purpose at interest rates ranging from 7.125% to 8.25%. No financial covenants are required. 7. ACCRUED LIABILITIES OTHER Accrued liabilities and Other at September 30, 2002 and December 31, 2001 consisted of the following:
September 30, December 31, 2002 2001 ------- ------- (in thousands) Taxes other than income $ 867 $ 902 Insurance -- 479 Advertising and promotions 69 79 Interest 53 280 Commissions 503 543 Royalties 84 64 Professional fees and other expenses 904 1,389 Reserves for other fees and services 2,034 1,374 Deferred revenue 2,761 3,760 Other 3,539 2,911 ------- ------- $10,814 $11,781 ======= =======
In November 2001, EME received approximately $4,100,000 as a progress payment related to a customer contract. The contract requires that the cash received from this progress payment be -9- specifically utilized for expenditures related to EME's performance under this program. As of September 30, 2002, $2,761,000 and at December 31, 2001, $3,760,000 of this progress payment was classified as deferred revenue and included in other accrued liabilities in the accompanying Consolidated Balance Sheets. EME is also restricted as to the use of the cash related to this progress payment. As of September 30, 2002, $2,638,000 of the Company's cash balance is restricted for use on this customer contract only. Also included in the above accruals is a restructuring reserve of $274,000 at September 30, 2002 (there are no remaining severance payments to be made against this reserve) and $1,163,000 at December 31, 2001. During the third quarter of 2002, $26,000 was charged against the restructuring reserve, all of which were cash items. The restructuring reserve established during the year ended December 31, 2001 was primarily in response to a significant reduction in the demand for products by telecommunication equipment manufacturers. 8. COMMITMENTS AND CONTINGENCIES In the ordinary course of 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. LITIGATION The Company's subsidiary, SL Montevideo Technology, Inc. ("SL-MTI"), is currently defending 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. The high precision motor was developed for use in an aircraft actuation system intended for use by Vickers Corporation. The complaint seeks compensatory damages of approximately $3,900,000. As part of pre-trial motions, both parties filed, briefed and argued cross-motions for summary judgment. On July 18, 2002, Eaton's motion for partial summary judgment was granted to the limited extent that the court found that SL-MTI sold motors to Eaton with an express warranty and an implied warranty of merchantability. Eaton's motion was denied in all other respects with the court indicating that the nature and extent of those warranties would have to be decided by a jury at trial. The trial commenced on October 28, 2002 and is expected to conclude during the first week of November 2002. On June 12, 2002, the Company and its subsidiary SL Surface Technologies, Inc. ("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 contaminated 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 under Commitments & Contingencies-Environmental below. The administrative actions and the class action lawsuit both allege that SurfTech and other defendants contaminated ground water through the disposal of hazardous -10- 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 plaintiff's complaint, as well as the environmental administrative actions discussed below. 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 its business or operations. ENVIRONMENTAL Loss contingencies include potential obligations to investigate and eliminate or mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other facilities, whether or not they are currently in operation. The Company is currently participating in environmental assessments and cleanups at a number of sites under these laws and may in the future be involved in additional environmental assessments and cleanups. Based upon investigations completed by the Company and its independent engineering consulting firm, to date, management has provided an estimated accrual for all known costs believed to be probable. However, it is in the nature of environmental contingencies that other circumstances might arise, the costs of which are indeterminable at this time due to such factors as changing government regulations and stricter standards, the unknown magnitude of defense and cleanup costs, the unknown timing and extent of the remedial actions that may be required, the determination of the Company's liability in proportion to other responsible parties, and the extent, if any, to which such costs are recoverable from other parties or from insurance. Although these contingencies could result in additional expenses or judgments, or offsets thereto, at present such expenses or judgments are not expected to have a material effect on the consolidated financial position or results of operations of the Company. In the fourth quarter of fiscal year 1990, the Company made a provision of $3,500,000 to cover various environmental costs for six locations, based upon estimates prepared at that time by an independent engineering consulting firm. In fiscal 1991, 1996 and 1999, based upon estimates, the Company made additional provisions of $480,000, $900,000 and $375,000, respectively. The fiscal 1996 provision was necessary since, during the latter part of fiscal 1995, the New Jersey Department of Environmental Protection required the Company to begin additional investigation of the extent of off-site contamination at its former facility in Wayne, New Jersey, where remediation had been underway. Based on the results of that investigation, which were received in fiscal 1996, the Company determined that additional remediation costs of approximately $1,000,000 were probable. -11- 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 one location 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. The Company is a party to an administrative action in connection with Surf Tech's Pennsauken facility, 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. 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. The Company has filed motions with the administrative court denying responsibility in this matter. Regardless of the court decision, the Company does not believe that remediation of this site will have a material adverse effect on its business or operations. The Company is investigating a ground water contamination with respect to its property in Camden, New Jersey. While a final determination of the extent of the contamination has not been made, the Company has been informed 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. Various legal actions, environmental investigations, proceedings and claims are pending, including those as mentioned above, or may be instituted or asserted in the future against the Company. Litigation is subject to many uncertainties, and the outcome of any individual matter cannot be predicted with assurance. The Company has established reserves for certain of the matters discussed in the foregoing paragraphs, where losses are deemed probable. It is possible, however, that some of the matters discussed in the foregoing paragraphs for which reserves have not been established could be decided unfavorably and require the Company to pay damages and other expenditures. Although the Company expects, based on analysis and recommendations from various outside counsels and other experts, that it has established adequate reserves for certain other matters, an unfavorable decision in any individual matter could exceed the estimated reserve. While management believes the Company has strong defenses in each of these actions, an unfavorable decision in any one of these actions could have a material adverse effect on the Company's financial condition. -12- EMPLOYMENT AGREEMENTS: The Company entered into severance agreements with certain key employees in 2001 and in prior years, that provide for one-time payments in the event that the employee is terminated within 12 months of a change in control, as defined. These payments range from three to 24 months of the employee's base salary as of the termination date, as defined. All senior divisional management teams are continuing in their positions. 9. SPECIAL CHARGES 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 re-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 (which included related benefits) to such officers under these change-of-control agreements totaling approximately $1,631,000 in the first quarter of 2002 and incurred additional proxy and legal costs of approximately $203,000. 10. NEW ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED 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 Company's 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 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 No. 145"). SFAS No. 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, and 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 No. 146"). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force -13- (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)." 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 is 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. 11. SEGMENT INFORMATION Under the disclosure requirements of Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company classifies its operations into the following six operating business units: Condor D.C. Power Supplies, Inc. ("Condor") produces a wide range of standard and custom power supply products that convert AC or DC power to direct electrical current to be used in customers' end products. Power supplies closely regulate and monitor power outputs, using patented filter and other technologies, resulting in little or no electrical interference. Teal Electronics Corporation ("Teal") is a leader in the design and manufacture of customized power conditioning and power distribution units. Teal products are developed and manufactured for custom electrical subsystems for original equipment manufacturers of semiconductor, medical imaging, graphics, and telecommunications systems. SL Montevideo Technology, Inc. ("SL-MTI") is a technological leader in the design and manufacture of intelligent, high power density precision motors. New motor and motion controls are used in numerous applications, including aerospace, medical, and industrial products. Elektro-Metall Export GmbH ("EME") is a leader in electromechanical actuation systems, power drive units, and complex wire harness systems for use in the aerospace and automobile industries. RFL Electronics Inc. ("RFL") designs and manufactures teleprotection products/systems that are used to protect utility transmission lines and apparatus by isolating faulty transmission lines from a transmission grid. RFL provides customer service and maintenance for all electric utility equipment protection systems. SL Surface Technologies, Inc. ("Surf Tech") produces industrial coatings and platings for equipment in the corrugated paper and telecommunications industries. The "Other" segment includes corporate related items not allocated to reportable segments and the results of insignificant operations. The Company's reportable business units are managed separately because each offers different products and services and requires different marketing strategies. The three-month and nine month periods ended September 30, 2001 have been reclassified to conform to the current reporting structure. The unaudited comparative results for the three-month and nine-month periods are as follows: -14-
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- (in thousands) Net sales from continuing operations: Condor $ 10,575 $ 10,527 $ 27,773 $ 38,760 Teal 5,295 3,293 14,384 9,508 SL-MTI 4,788 5,257 16,738 13,560 EME 7,495 6,445 19,394 20,089 RFL 5,873 7,641 21,906 19,870 Surf Tech 554 805 1,742 2,242 Other -- -- -- -- -------- -------- -------- -------- Consolidated $ 34,580 $ 33,968 $101,937 $104,029 ======== ======== ======== ========
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- (in thousands) Operating income (loss) from continuing operations: Condor $ 849 $ (969) $ 1,044 $(4,687) Teal 620 21 1,387 543 SL-MTI 174 268 1,113 967 EME 1,005 897 1,687 2,902 RFL 586 942 2,798 2,263 Surf Tech (156) (23) (642) (319) Other (2,075) (1,556) (6,541) (4,183) ------- ------- ------- ------- Consolidated $ 1,003 $ (420) $ 846 $(2,514) ======= ======= ======= =======
Included in "Other" for the three months ended September 30, 2002 are corporate expenses, environmental charges, professional and legal fees and other costs incurred, which are Company related costs not specifically allocated to the reportable business units. These charges were partially offset by a gain recorded by the Company related to the sale of real property located in Auburn, New York. There were no significant restructuring or special charges recorded during the current quarter. -15- Included in "Other" for the nine months ended September 30, 2002 were special charges of $1,834,000 related to change-of-control and proxy costs, a $772,000 addition to the reserve for environmental matters, professional, legal fees and other expenses not specifically allocated to the reportable business units. These charges were partially offset by the gain on the sale of real property mentioned above.
September 30, December 31, 2002 2001 ------------- ------------ (in thousands) Identifiable assets: Condor $ 18,669 $ 20,740 Teal 11,383 9,834 SL-MTI 9,536 11,637 EME 23,860 23,524 RFL 16,193 17,445 Surf Tech 3,133 3,929 Other 6,202 20,649 -------- -------- Consolidated $ 88,976 $107,758 ======== ========
12. DISCONTINUED OPERATIONS In July 2001, the Board of Directors authorized the disposition of the Company's SL Waber, Inc. ("SL Waber") subsidiary. Effective August 27, 2001, substantially all of the assets of SL Waber and the stock of its subsidiary, Waber de Mexico S.A. de C.V. were sold. As part of this transaction, the purchaser acquired the rights to the SL Waber name and assumed certain liabilities and obligations of SL Waber. Subsequent to the sale, the Company changed the name of the SL Waber subsidiary to SLW Holdings, Inc. ("SLW Holdings"). The net income or losses of this subsidiary are included in the consolidated statements of operations under discontinued operations for all periods presented. During the three months ended March 31, 2002, the Company, based upon a review of potential liabilities, reduced the accrual for the liabilities (excluding accrued income taxes) related to SLW Holdings by $450,000. As of September 30, 2002, the Company had $760,000 accrued for any liabilities (excluding accrued income taxes) related to SLW Holdings, compared to $1,519,000 at December 31, 2001. 13. SALE OF BUSINESS AND SELECT ASSETS 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 ("CSFB") assisted the Company's Board of Directors in its review and had been engaged to lead this process until July 2002. On July 17, 2002, the Company received notification from CSFB that CSFB was terminating its engagement as financial advisor to the Company. The termination was primarily the result of CSFB's internal reorganization and does not specifically relate to the Company. -16- The Company's Board of Directors has determined to continue to explore a sale of the Company of one or more of its divisions in order to maximize shareholder value. On August 8, 2002, Imperial Capital, LLC was engaged to spearhead the Company's initiative to explore a sale of some or all of its businesses and will also assist management in its ongoing efforts to secure new long term debt to refinance the Company's current Revolving Credit Facility. On July 18, 2002 the Company sold its real property located in Auburn, New York for $175,000 in cash. The Auburn property is the former industrial site of SL Auburn, Inc., a manufacturer of spark plugs and ignition systems. SL Auburn, Inc. was sold by the Company in May 1997. The gain from this transaction has been recorded in the Company's third quarter financial results. 14. RELATED PARTY TRANSACTIONS During the current year the Company has been billed $219,000 in legal fees by Olshan Grundman Frome Rosenzweig & Wolosky LLP, a law firm in which a director of the Company is a senior partner. In connection with the refinancing of the Revolving Credit Facility, the Company executed a commitment letter with Steel Partners II, L.P., an entity controlled by the Company's Chairman and Chief Executive Officer. The commitment letter was provided in the amount of $5,000,000 by Steel Partners to make a subordinated loan in connection with the refinancing of the Revolving Credit Facility. As the refinance did not occur, the subordinated loan was not made. 15. SUBSEQUENT EVENTS The Company filed a registration statement with the Securities and Exchange Commission on October 11, 2002 relating to an anticipated distribution to its shareholders of subscription rights to purchase additional shares of common stock of the Company. Upon the effectiveness of the registration statement, the Company will distribute to its shareholders of record as of the record date, which has not yet been determined, a fixed amount of non-transferable rights to subscribe for shares of its common stock. It is anticipated that each right will entitle the holder to purchase one share of the Company's common stock at a subscription price to be determined. The number of rights to be issued with respect to each outstanding share on the record date is also to be determined. Steel Partners II, L.P., an entity controlled by the Company's Chairman and Chief Executive Officer, has agreed to purchase any shares of common stock of the Company available under the rights offering that are not purchased by the Company's shareholders, subject to a $5,000,000 limit. The Company anticipates that the rights offering will begin promptly following the effectiveness of the registration statement filed with the Securities and Exchange Commission, and will continue for thirty days thereafter. The proceeds of the rights offering will be used to fund working capital requirements. -17- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations and growth primarily through funds generated from operations and borrowings under the Revolving Credit Facility, as such term is defined in Note 1 in the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q. During the nine months ended September 30, 2002, the net cash provided by operating activities was $2.8 million, as compared to net cash used by operating activities of $3.7 million during the nine months ended September 30, 2001. The increase, as compared to the same period last year, resulted primarily from improved operating results, significant reductions in inventory and collections of receivables, particularly collection of recoverable income taxes, partially offset by payments under deferred compensation and retirement plans and reductions in accrued liabilities. During the nine months ended September 30, 2002, the net cash provided by investing activities was $9.4 million. This was primarily generated by the proceeds from the surrender of life insurance policies of $10.7 million received during the first quarter of the year. In the nine-month period ended September 30,2001, the Company used $0.8 million of net cash, principally due to the purchase of equipment offset by the proceeds from the sale of assets. During the nine months ended September 30, 2002, net cash used by financing activities was $13.4 million, primarily related to the pay down of the Revolving Credit Facility in the net amount of $15.6 million. In the comparable period last year, financing activities provided cash of $5.4 million, principally due to net borrowings from the Revolving Credit Facility of $3.5 million. As of September 30, 2002, the Company had principal debt outstanding of $20.0 million under the Revolving Credit Facility, as compared to $35.7 million at December 31, 2001. The reduction in the Revolving Credit Facility balance is due primarily to improved operating performance, the $10.7 million receipt of the cash surrender value of life insurance policies and $3.6 million in tax refunds. The Revolving Credit Facility provides for the Company to borrow up to $25.5 million, subject to commitment fees, but not compensating balances. The Revolving Credit Facility contains limitations on borrowings and requires maintenance of certain levels of quarterly net income and a minimum fixed charge coverage ratio, which is the ratio of earnings before interest, taxes, depreciation and amortization, plus operating rent, to the sum of operating rent, capital expenditures and interest charges. The Company is also prohibited from paying dividends under the Revolving Credit Facility. The Company had $4.9 million available for borrowings under its Revolving Credit Facility as of September 30, 2002. The Revolving Credit Facility matures on December 31, 2002 and provides for the payment of a facility fee of $780,000 in the event that the Revolving Credit Facility is not repaid by October 31, 2002. The Company did not repay the Revolving Credit Facility prior to October 31, 2002 and paid such facility fee. The Company is currently negotiating to refinance the Revolving Credit Facility, although there can be no assurance that the Company will be able to refinance the Revolving Credit Facility prior to December 31, 2002 or that the Revolving Credit Facility will be refinanced successfully. - 18 - In connection with the refinancing of the Company's Revolving Credit Facility, the Company signed a commitment letter with a nationally recognized lending institution to refinance its existing Revolving Credit Facility, such commitment letter terminates on November 18, 2002. The Company had also signed a commitment letter with Steel Partners II, LP, an entity controlled by the Company's Chairman and Chief Executive Officer, to provide a subordinated loan in the amount of $5,000,000 in connection with the refinancing of the Revolving Credit Facility. As the refinancing did not occur, the subordinated loan was not made. The Company has retained Imperial Capital, LLC to spearhead the Company's initiative to explore a sale of some or all of its businesses and to assist management in its ongoing efforts to secure new long term debt to refinance the Company's current Revolving Credit Facility which matures on December 31, 2002. The Company's German subsidiary, EME, also has $5.6 million in lines of credit with its banks in Germany. One of those banks, Deutsche Bank, has indicated that it will terminate its line in two stages, December 31,2002 and the remainder of the line on March 31,2003. EME's management is presently engaged in discussions with its other two existing lenders to extend and increase their lines of credit, which expire March 31, 2003. Under the terms of its current lines of credit, EME can borrow for any purpose at interest rates ranging from 7.125% to 8.25%. No financial covenants are required. The Company's current ratio was 1.1 to 1 at September 30, 2002 and December 31, 2001. This ratio was maintained for the period ended September 30, 2002, primarily due to the receipt of life insurance proceeds of $10,676,000 used to pay down current debt, principally the Revolving Credit Facility, which was classified as current debt as of December 31, 2001. As a percentage of total capitalization, consisting of debt and shareholders' equity, total borrowings by the Company were 41% at September 30, 2002 and 54% at December 31, 2001. During the first nine months of 2002 total borrowings decreased by $13,909,000. Capital expenditures of $1,409,000 made during the first nine months of 2002 primarily related to improvements in process technology, equipment and building repairs. During the remaining quarter of 2002, the Company plans to incur up to $1,300,000 of capital expenditures. This amount is subject to change depending upon a number of factors including certain market conditions within the Company's business segments and availability of financing. During the first nine months of 2002, the Company has been able to generate adequate amounts of cash to meet its operating needs. During the first nine months of 2002, Teal, RFL and MTI had produced positive cash flow, aggregating approximately $5,300,000. Condor, EME and Surf Tech experienced negative cash flow for the same period. Condor's cash flow was negatively impacted by payments made against its restructuring reserve of $600,000 and deferred compensation payments of $1,252,000. Without these cash payments, Condor would have been cash flow positive. EME experienced negative cash flow primarily due to the pay down of accounts payable and performance under a long-term contract for which they received a large - 19 - cash advance in 2001 (See Note.7). Surf Tech's negative cash flow was primarily due to its move to consolidate into one location. With the exception of Surf Tech and the segment reported as "Other" (which consists primarily of corporate office expenses and accruals not specifically allocated to the reportable business units), all of the Company's operating segments were profitable at the operating level for the first nine months of 2002. Surf Tech's operating loss was $642,000. Surf Tech is facing historically low demand in its marketplace and its operations have been consolidated into one facility. Included in "Other" are special charges for the nine months ended September 30, 2002 of $1,834,000 related to the change-of-control and proxy costs (see Note 9). Also in "Other" is a $772,000 addition to the reserve for environmental matters, professional and legal fees and other expenses not allocated to the reportable business units. The following is a summary of the Company's contractual obligations for the periods indicated that existed as of September 30, 2002:
LESS THAN 1 TO 3 4 TO 5 AFTER 5 1 YEAR YEARS YEARS YEARS TOTAL --------- ------ ------ ------- ------ (in thousands) Operating Leases 920 1,396 1,332 166 3,814 Debt 24,258 38 0 0 24,296 Capital Leases 152 286 194 0 632 Standby Letter Of Credit 543 0 0 0 543 ------ ------ ------ ------ ------ TOTAL 25,873 1,720 1,526 166 29,285 ------ ------ ------ ------ ------
Assuming no further significant slowdown of economic activity in the markets in which the Company conducts business, management believes that projected cash from operations and funds expected to be available under the Revolving Credit Facility will be sufficient to fund the Company's operations and working capital requirements through December 31, 2002. The Revolving Credit Facility matures December 31, 2002. The Company is currently negotiating to refinance the Revolving Credit Facility. A failure to refinance the Revolving Credit Facility would have a material adverse effect on the Company. 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. On February 28, 2002, these countries permanently withdrew their national currencies as legal tender and replaced their currencies with euro notes and coins. - 20 - The euro conversion may have a favorable impact on cross-border competition by eliminating the effects of foreign currency translations, thereby creating price transparency. The Company is continuing to evaluate the accounting, tax, legal and regulatory requirements associated with the euro introduction. The Company does not expect the conversion to the euro to have a material adverse effect on its consolidated financial position, results of operations, or cash flows. RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2002 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2001 The table below shows the comparison of net sales from continuing operations for the quarter ended September 30, 2002, and the quarter ended September 30, 2001:
Increase/ Increase/ Three Months Three Months (Decrease) over (Decrease) over Ended Ended same quarter same quarter September 30, September 30, last year last year 2002 2001 --------- --------- ------ ------ Percent Amount Amount Amount ------- ------ ------ ------ (in thousands) Condor 0.5% $ 48 $ 10,575 $ 10,527 Teal 60.8 2,002 5,295 3,293 SL-MTI (8.9) (469) 4,788 5,257 EME 16.3 1,050 7,495 6,445 RFL (23.1) (1,768) 5,873 7,641 Surf Tech (31.2) (251) 554 805 ------ ------- ------- ------- TOTAL 1.8% $ 612 $34,580 $33,968 ------ ------- ------- -------
Consolidated net sales from continuing operations for the three-month period ended September 30, 2002 increased by $.6 million, or 1.8%, compared to the same quarter last year. This increase was due to significant increases in sales at Teal and EME offset by a significant decrease in RFL and to a lesser extent MTI and Surf Tech. Sales at Condor were relatively flat on a comparative basis, which reflects improved productivity over the prior year since it substantially reduced the breadth of its telecommunications-related product line. Teal's increase is related to a significant increase in its medical imaging business. EME's increase is primarily attributable to its wire harness business. The decrease in RFL is a combination of the following factors: lower international sales and a slow down in revenues from domestic utility customers and a relatively high sales volume in the prior year quarter. The Company had income from operations of $1,003,000 for the three-month period ended September 30, 2002, as compared to an operating loss of $420,000 for the corresponding prior year period. During the quarter ended September 30, 2001, the Company recorded a charge of $1,783,000 as a result of the restructuring charges and asset write-downs primarily at Condor and MTI. Without these charges the Company would have recorded operating income of $1,363,000 for the quarter ended September 30, 2001. There were no significant restructuring charges and write-downs recorded in the current year quarter. Included in "Other" are corporate expenses, environmental charges, legal and professional fees and other costs incurred, which are Company related costs not allocated to the Company's reportable business units. The current - 21 - quarter's operating income was positively affected by the implementation of SFAS No. 142, which required the discontinuation of goodwill amortization effective January 1, 2002 (see Note 5). The gross amount of goodwill amortized in the prior year quarter was $210,000. Cost of products sold for the three-month period remained about the same as compared to the same period last year even as sales increased 1.8%, as a percentage of net sales, cost of products sold for the three-month period was 65%, as compared to 67% during the same period last year. Condor's cost of sales decreased from 71% in 2001 to 62% in 2002 due to manufacturing efficiencies as a result of the termination of a substantial portion of its telecommunications- related product line and improved manufacturing. The remaining business segments' cost of sales remained relatively constant as a percentage of sales, as compared to the prior year quarter, except MTI and Surf Tech. MTI experienced lower sales volume, which effected manufacturing productivity. Surf Tech's business is a relatively minor portion of the consolidated operations. Engineering and product development expenses for the three-month period increased by 7%, as compared to the same period last year. MTI's expenses were slightly higher than last year and Condor's expenses were lower due primarily to the consolidation of engineering facilities. The overall increase was $135,000. As a percentage of net sales, engineering and product development expenses for the comparable three months ended September 30, 2002 and 2001 were 6%. Selling, general and administrative expenses for the three-month period increased 16%, or $1,100,000 as compared to the same period last year. As a percentage of net sales, selling, general and administrative expenses for the three months ended September 30, 2002 were 23%, as compared to 20% for the same period last year. The increased cost was primarily due to increased legal fees and expenses and higher commissions and bonus accruals due to increased operating profits. Depreciation and amortization expenses for the current three-month period decreased by $258,000, or 22%, due to the reduced fixed asset base. Also effective January 1, 2002, the Company adopted SFAS No. 142 and implemented certain provisions of this statement, specifically the discontinuance of goodwill amortization, which was $210,000 in the third quarter of 2001. For the three-month period ended September 30, 2001, the Company recorded a restructuring charge of $1,783,000 and an inventory write down of $50,000. There were no significant charges of this nature recorded during the quarter ended September 30, 2002. Interest income decreased for the current three-month period by $68,000, as compared to the same period last year. Interest expense for the current three-month period decreased by $725,000, or 62%, due primarily to the significant reduction of debt as compared to the prior year quarter and lower interest rates in the current quarter. The effective tax rate for the three-month period ended September 30, 2002, was less than the statutory rate primarily due to the recovery of tax benefits not previously recognized. - 22 - NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 The table below shows the comparison of net sales from continuing operations for the nine months ended September 30, 2002 and September 30, 2001:
Increase/ Increase/ Nine Months Nine Months (Decrease) over (Decrease) over Ended Ended same period same period September 30, September 30, last year last year 2002 2001 --------- --------- ------ ------ Percent Amount Amount Amount ------- ------ ------ ------ (in thousands) Condor (28.3)% $(10,987) $ 27,773 $ 38,760 Teal 51.3 4,876 14,384 9,508 SL-MTI 23.4 3,178 16,738 13,560 EME (3.5) (695) 19,394 20,089 RFL 10.2 2,036 21,906 19,870 Surf Tech (22.3) (500) 1,742 2,242 -------- -------- -------- -------- TOTAL (2.0)% $ (2,092) $101,937 $104,029 -------- -------- -------- --------
Consolidated net sales from continuing operations for the nine months ended September 30, 2002 decreased by $2.1 million, or 2%, compared to the same period last year. This decrease was due mainly to decreases at Condor of $11.0 million, or 28%, and at EME of $0.7 million, or 4%. These decreases were partially offset by relatively strong performances by the other business segments except Surf Tech, which represents only 2% of consolidated sales. Condor sales were adversely impacted by its reduction of a significant amount of its products offered under its telecommunications-related product line. EME's sales were principally affected by lower sales in the European commercial aerospace market. The Company had operating income of $846,000 for the nine months ended September 30, 2002, as compared to an operating loss of $2,514,000 for the corresponding prior year period. During the nine months ended September 30, 2002, the Company recorded (a) a charge of $265,000 as a result of the restructuring charges recorded at Condor, (b) special charges of $1,834,000 related to change-of-control and proxy costs and (c) a $500,000 addition to the reserve for environmental matters. Without these charges the Company would have had an operating profit of $3,445,000. In the comparable period last year the Company recorded restructuring charges of $2,891,000 and an inventory write down of $2,940,000. Without these charges the Company would have had an operating profit of $3,317,000. Included in "Other" are the special charges, the environmental charge, additional costs for professional fees and other costs incurred, which are Company related costs not specifically allocated to continuing operations. The current period nine month operating income was positively affected by the implementation of SFAS No. 142, which required the discontinuation of goodwill amortization effective January 1, 2002 (see Note 5). Related amortization charged to last years operating costs was $599,000. Cost of products sold for the nine months ended September 30, 2002 decreased by 4%, as compared to the same period last year. As a percentage of net sales, cost of products sold for the current nine-month period was 66%, as compared to 67% during the same period last year. - 23 - Significant improvements were made at Condor which improved its costs of products sold to 66% in the current year compared to 74% last year. Condor improved its cost of products sold in the current year as a result of a substantial reduction of the breadth of its telecommunications-related product line, as well as improved manufacturing efficiencies. Teal's costs of products sold went from 58% last year to 65% in the current year due to product mix. Earlier in the year Teal began a new major program with one customer, which included volume price discounts and had significant sales and increased production prototypes. All other reporting business unit's cost of sales percentages were relatively constant as compared to last year. Engineering and product development expenses for the nine months ended September 30, 2002 decreased 6%, as compared to the same period last year, due primarily to the consolidation of engineering facilities at Condor. As a percentage of net sales, engineering and product development expenses for the nine months ended September 30, 2002 were 6%, as compared to 6% for the same period last year. Selling, general and administrative expenses for the nine months ended September 30, 2002 increased 13%, as compared to the same period last year. As a percentage of net sales, selling, general and administrative expenses for the nine months ended September 30, 2002 were 22%, as compared to 20% for the same period last year. The percentage increase was primarily due to lower sales, a $500,000 addition to the reserve for environmental matters recorded in the first quarter of 2002 and increased bonus accruals based on significantly improved operating results. Depreciation and amortization expenses for the nine months ended September 30, 2002 decreased by $827,000, or 24%, due to the reduced fixed asset base and intangible impairment write-offs at Condor in 2001. Also effective January 1, 2002, the Company adopted SFAS No. 142 and implemented certain provisions of this statement, specifically the discontinuance of goodwill amortization, which amounted to $599,000 for the nine months ended September 30, 2001 (see Note 5). Interest income for the nine months ended September 30, 2002 decreased by $107,000, as compared to the same period last year. Interest expense for the nine-month period decreased by $1,200,000, or 46%, due primarily to the significant reduction of debt as compared to the prior year period. The effective tax rate for the nine-month period ended September 30, 2002, was less than the statutory rate primarily due to the recovery of tax benefits not previously recognized. 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 - 24 - actual results may differ materially from those projected or suggested in such forward-looking information. This forward-looking information is based on various factors and was derived utilizing numerous assumptions. Many of these factors previously have been identified in filings or statements made by or on behalf of the Company. Important assumptions and other important factors that could cause actual results to differ materially from those set forth in the forward-looking information include changes in the general economy, changes in capital investment and/or consumer spending, competitive factors and other factors affecting the Company's business in or beyond the Company's control. These factors include a change in the rate of inflation, a change in state or federal legislation or regulations, an adverse determination with respect to a claim in litigation or other claims (including environmental matters), the ability to recruit and develop employees, the ability to successfully implement new technology and the stability of product costs. These factors also include, in particular, whether or not a sale of all or part of the Company's business can be successfully effected and the timing and degree of any business recovery in certain of the Company's markets that are currently experiencing a cyclical economic downturn. Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. The Company does not undertake to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information. Future factors include the effectiveness of cost reduction actions undertaken by the Company; the timing and degree of any business recovery in certain of the Company's markets that are currently experiencing economic uncertainty; increasing price, products and services competition by U.S. and non-U.S. competitors, including new entrants; rapid technological developments and changes and the Company's ability to continue to introduce and develop competitive new products and services on a timely, cost-effective basis; availability of manufacturing capacity, components and materials; credit concerns and the potential for deterioration of the credit quality of customers; customer demand for the Company's products and services; ability of the Company to refinance its debt on satisfactory terms; U.S. and non-U.S. governmental and public policy changes that may affect the level of new investments and purchases made by customers; changes in environmental and other U.S. and non-U.S. governmental regulations; protection and validity of patent and other intellectual property rights; compliance with the covenants and restrictions of bank credit facilities; and outcome of pending and future litigation and governmental proceedings. These are representative of the future factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general U.S. and non-U.S. economic conditions, including increased economic uncertainty and instability, the global economic slowdown and interest rate and currency exchange rate fluctuations and other future factors. For a further description of future factors that could cause actual results to differ materially from such forward-looking statements, see the discussion in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, Part I, Item 1 - Risk Factors. - 25 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in quantitative and qualitative market risk from the disclosure contained in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2001, which is incorporated herein by reference. ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation, as of a date within 90 days of the filing of this Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 12, 2002, the Company and its subsidiary SL Surface Technologies, Inc. ("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 contaminated 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 in Note 8. "Environmental" included in the Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q. 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 disclosed in the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission, SL-MTI is currently defending a cause of action, brought against it in the fall of 2000 in 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. The complaint seeks compensatory damages of approximately $3,900,000. Both parties filed, briefed and argued cross-motions for summary judgement. On July 18, 2002, Eaton's motion for partial summary judgement was granted to the limited extent that the court found that SL-MTI sold motors to Eaton with an express warranty and an implied warranty of merchantability and the motion was denied in all other respects, the court indicating that the nature and extent of those warranties would have to be decided by the jury at trial. The trial commenced on October 28, 2002 and is expected to conclude during the first week of November 2002. On August 9, 2002, the Company received a "Demand for Arbitration" with respect to the claim of a former vendor of SL Waber. The claim concerns a dispute between SL Waber and an - 26 - 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 may bring counter claims against the vendor and will vigorously pursue defenses with respect to these claims. There have been no other material changes to the information previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. See Part I, Item 3 - Legal Proceedings of such Annual Report and Note 9 to the Consolidated Financial Statements included herein for additional information on these matters. ITEM 3. DEFAULTS UPON SENIOR SECURITIES On March 1, 2002, the Company was notified that it was in default under the Revolving Credit Facility due to its failure to meet the 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 upon effectiveness of the waiver, the Company was in full compliance with the Revolving Credit Facility. For additional information on this matter see the Company's filing on Form 8-K dated May 23, 2002. Also, see Notes 1 and 6 in the Notes to Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). 99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) (b) Reports on Form 8-K The following reports on Form 8-K were filed by the Company during the period covered by this report: On July 22, 2002, the Company filed a current Report on Form 8-K under Item 4 which related to a "Change in Registrant's Certifying Accountants." The Company dismissed Arthur Andersen LLP as its independent accountants and engaged Grant Thornton LLP as its new independent accountants. On July 31, 2002 the Company filed a Report on Form 8-K/A, related to this matter. On July 25, 2002 the Company filed a current Report on Form 8-K under Item 5 announcing certain recent developments. On August 15, 2002, the Company filed a Form 8-K under Item 5 announcing it retained Imperial Capital, LLC to act as its financial advisory. On August 28, 2002, the Company filed a Form 8-K under Item 7 and Item 9 announcing its financial results for the second quarter ended June 30, 2002. - 27 - Signatures Pursuant to the requirements 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. Date: November 5, 2002 SL INDUSTRIES, INC. ------------------------ (Company) By: /s/ Warren Lichtenstein --------------------------- Warren Lichtenstein Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ David R. Nuzzo --------------------------- David R. Nuzzo Chief Financial Officer (Principal Accounting Officer) - 28 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) I, WARREN LICHTENSTEIN, certify that: 1. I have reviewed this quarterly report of Form 10-Q of SL Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 3a-14 and l5d-14) for the registrant and we have: a) designed such disclosed controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, - 29 - 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; and 6. The registrant's other certifying officers and I have indicated in this quarterly 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. Date: November 5, 2002 By: /s/ --------------------------------- WARREN LICHTENSTEIN Chairman of the Board and Chief Executive Officer - 30 - CERTIFICATION OF CHIEF FINANCIAL OFFICER Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) I, DAVID R. NUZZO, certify that: 1. I have reviewed this quarterly report of Form 10-Q of SL Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 3a-14 and l5d-14) for the registrant and we have: a) designed such disclosed controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, - 31 - 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; and 6. The registrant's other certifying officers and I have indicated in this quarterly 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. Date: November 5, 2002 By: /s/ ------------------------------- DAVID R. NUZZO Chief Financial Officer - 32 -