sec document
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON December 30, 2002
REGISTRATION NO. 333-100519
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SL INDUSTRIES, INC.
(Exact Name of registrant as Specified in Its Charter)
New Jersey
(State or Other Jurisdiction of Incorporation or Organization)
360070
(Primary Standard Industrial Classification Code Number)
21-0682685
(I.R.S. Employer Identification Number)
520 Fellowship Road, Suite A114
Mt. Laurel, NJ 08054
(856) 727-1500
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Warren Lichtenstein, Chairman of the Board
SL Industries, Inc.
520 Fellowship Road, Suite A114
Mt. Laurel, NJ 08054
(856) 727-1500
(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
-----------------------
Copy To:
Adam Finerman, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, NY 10022
(212) 753-7200
------------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /
_______________________
CALCULATION OF REGISTRATION FEE
Proposed
Title Of Each Class Of Maximum Amount Of
Securities To Be Registered(1) Aggregate Registration
Offering Price(2) Fee
Nontransferable Common Stock Purchase Rights.................................... $ -0-(3) $ -0-(3)
Common Stock, $0.001 par value per share, issuable upon exercise of
nontransferable rights.......................................................... $5,000,000(4) $ 460(5)
(1) This registration statement relates to (a) nontransferable rights to
purchase shares of common stock of SL Industries, Inc., which rights will
be issued to holders of common stock of SL Industries, Inc., and (b) the
shares of common stock deliverable upon exercise of nontransferable rights
pursuant to the rights offering.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(3) The nontransferable rights are being issued without consideration. Pursuant
to Rule 457(g) under the Securities Act of 1933, as amended, no separate
registration fee is required because the rights are being registered in the
same registration statement as the common stock underlying the rights.
(4) Represents the gross proceeds from the assumed exercise of all
nontransferable rights issued.
(5) Previously paid.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 30, 2002
PROSPECTUS
SL INDUSTRIES, INC.
SUBSCRIPTION RIGHTS
SHARES OF COMMON STOCK
We are distributing to holders of our common stock, at no charge,
nontransferable subscription rights to purchase up to an aggregate of _______
shares of our common stock at a cash subscription price of $___________ per
share. If you exercise your rights in full, you may over-subscribe for the
purchase of additional shares that remain unsubscribed at the expiration of the
rights offering, subject to availability and allocation of shares among persons
exercising this over-subscription privilege. You will not be entitled to receive
any rights unless you hold of record shares of our common stock as of the close
of business on ________________, 2003.
This rights offering is being made in connection with the
refinancing of our bank credit facility, which is currently being negotiated.
The proceeds of this rights offering will be used for working capital purposes.
Steel Partners has agreed with us to exercise all of its rights,
including over-subscription rights, and further purchase any unsubscribed shares
remaining after the expiration of the over-subscription privilege in the rights
offering up to ____ shares. Warren Lichtenstein, our Chief Executive Officer and
the Chairman of the Board, is also the Managing Member of the General Partner of
Steel Partners.
The rights will expire if they are not exercised by 5:00 p.m., New
York City time, on ______________, 2002, the expected expiration date of this
rights offering. We may extend the period for exercising the rights. Rights that
are not exercised by the expiration date of the rights offering will expire and
will have no value. The rights may not be sold or transferred except under the
very limited circumstances described later in this prospectus. You should
carefully consider whether to exercise your rights before the expiration date.
Our board of directors is making no recommendation regarding your exercise of
rights.
Shares of our common stock are traded on the New York Stock Exchange
under the symbol "SL." On December 25, 2002, the last reported sales price for
our common stock was $5.20 per share.
AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD
CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE ___ OF THIS PROSPECTUS
BEFORE EXERCISING YOUR RIGHTS.
Proceeds of Offering
--------------------
Per Share Total
---------------- ----------------
Subscription Price................................ $ $
Estimated Expenses................................ $ $
- -
Net Proceeds to SL Industries $ $
= =
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
The date of this prospectus is ______________ , 2002.
TABLE OF CONTENTS
Page(s)
-------
Questions and Answers About the Rights Offering..................................................ii
Summary..........................................................................................1
Risk Factors.....................................................................................3
Use of Proceeds..................................................................................10
Price Range of Common Stock......................................................................10
The Company......................................................................................11
Description of Property..........................................................................17
Legal Proceedings................................................................................17
Capitalization...................................................................................19
Selected Consolidated Financial Data.............................................................20
Management Discussion and Analysis of Financial Condition and Results of Operations..............21
Quantitative and Qualitative Disclosures About Market Risk.......................................36
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.............36
Directors and Officers...........................................................................37
Security Ownership of Certain Beneficial Owners and Management...................................42
Certain Relationships and Related Transactions...................................................44
The Rights Offering..............................................................................44
Backstop Agreement...............................................................................50
Description of Capital Stock.....................................................................52
United States Federal Income Tax Consequences....................................................53
Legal Matters....................................................................................54
Experts..........................................................................................54
Where You Can Find More Information..............................................................54
Forward-Looking Statements.......................................................................55
Index to Financial Statements and Financial Statement Schedule...................................F-1
i
This prospectus is part of a registration statement we filed with
the SEC. You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with different information. This
prospectus may only be used where it is legal to sell these securities. You
should not assume that the information in this prospectus is accurate as of any
date other than the date on the front cover of those documents. Our business,
financial condition, results of operations and prospects may have changed since
those dates.
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
Q. WHAT IS THE RIGHTS OFFERING?
A. Therights offering is a distribution to holders of our common stock, at no
charge, of ______ nontransferable subscription rights at the rate of one
right for each ____ shares of common stock owned as of ________, 2003, the
record date. The rights will be evidenced by a nontransferable rights
certificate.
Q. WHAT IS A SUBSCRIPTION RIGHT?
A. Each subscription right is a right to purchase a share of our common stock
and carries with it a basic subscription privilege and an over-subscription
privilege.
Q. WHAT IS THE BASIC SUBSCRIPTION PRIVILEGE?
A. The basic subscription privilege of each right entitles you to purchase one
share of our common stock at the subscription price of $_____ per share.
Fractional rights will be eliminated by rounding up to the next higher
whole right.
Q. WHAT IS THE OVER-SUBSCRIPTION PRIVILEGE?
A. We do not expect that all of our stockholders will exercise all of their
basic subscription rights. By extending over-subscription privileges to our
stockholders, we are providing stockholders that exercise all of their
basic subscription privileges with the opportunity to purchase those shares
that are not purchased by other stockholders through the exercise of their
basic subscription privileges. The over-subscription privilege of each
right entitles you, if you fully exercise your basic subscription
privilege, to subscribe for additional shares of our common stock unclaimed
by other holders of rights in the rights offering, at the same subscription
price per share. If an insufficient number of shares is available to fully
satisfy all over-subscription privilege requests, the available shares will
be distributed proportionately among rights holders who exercised their
over-subscription privilege based on the number of shares each rights
holder subscribed for under the basic subscription privilege. The
subscription agent will return any excess payments by mail without interest
or deduction promptly after the expiration of the rights offering.
Q: HOW LONG WILL THE RIGHTS OFFERING LAST?
A: You will be able to exercise your subscription rights only during a
limited period. If you do not exercise your subscription rights before
5:00 p.m., New York City time, on _____________, 2003, your subscription
rights will expire. We may, in our discretion, extend the rights offering
until some later time no later than _______________.
Q. WHY IS SL ENGAGING IN A RIGHTS OFFERING?
A. The rights offering is being made to raise $5 million in funds for working
capital purposes. We want to give you the opportunity to participate in
this fund raising effort and to purchase additional shares of our common
stock.
Q. WHAT HAPPENS IF I CHOOSE NOT TO EXERCISE MY SUBSCRIPTION RIGHTS?
A. You will retain your current number of shares of common stock even if you
do not exercise your subscription rights. If you choose not to exercise
your subscription rights, then the percentage of our common stock that you
own will decrease. Rights not exercised prior to the expiration of the
rights offering will expire.
ii
Q: HOW DO I EXERCISE MY SUBSCRIPTION RIGHTS?
A: You may exercise your rights by properly completing and signing your rights
certificate. You must deliver your rights certificate with full payment of
the subscription price (including any amounts in respect of the
over-subscription privilege) to the subscription agent on or prior to the
expiration date. If you use the mail, we recommend that you use insured,
registered mail, return receipt requested. If you cannot deliver your
rights certificate to the subscription agent on time, you may follow the
guaranteed delivery procedures described under "The Rights
Offering--Guaranteed Delivery Procedures" beginning on page __.
Q. WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING BUT MY
SHARES ARE HELD IN THE NAME OF MY BROKER, CUSTODIAN BANK OR OTHER NOMINEE?
A. If you hold shares of our common stock through a broker, custodian bank or
other nominee, we will ask your broker, custodian bank or other nominee to
notify you of the rights offering. If you wish to exercise your rights, you
will need to have your broker, custodian bank or other nominee act for you.
To indicate your decision, you should complete and return to your broker,
custodian bank or other nominee the form entitled "Beneficial Owner
Election Form." You should receive this form from your broker, custodian
bank or other nominee with the other rights offering materials. You should
contact your broker, custodian bank or other nominee if you believe you are
entitled to participate in the rights offering but you have not received
this form.
Q: WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING AND I AM A
SHAREHOLDER IN A FOREIGN COUNTRY OR IN THE ARMED SERVICES?
A: The subscription agent will mail rights certificates to you if you are a
rights holder whose address is outside the United States or if you have an
Army Post Office or a Fleet Post Office address. To exercise your rights,
you must notify the subscription agent on or prior to 5:00 p.m., New York
City time, on _________ 2003, and take all other steps which are necessary
to exercise your rights, on or prior to that time. If you do not follow
these procedures prior to the expiration of the rights offering, your
rights will expire.
Q: WHAT IF THE MARKET PRICE OF OUR COMMON STOCK IS LESS THAN THE SUBSCRIPTION
PRICE OF [$ ], WHEN I AM DECIDING TO EXERCISE MY SUBSCRIPTION RIGHTS?
A: Consult your broker. Depending on the market price of our common stock, it
most likely will be more cost effective for you to purchase shares of our
common stock on the New York Stock Exchange rather than exercise your
subscription rights.
Q. WILL I BE CHARGED A SALES COMMISSION OR A FEE BY SL IF I EXERCISE MY
SUBSCRIPTION RIGHTS?
A. No. We will not charge a brokerage commission or a fee to rights holders
for exercising their rights. However, if you exercise your rights through a
broker or nominee, you will be responsible for any fees charged by your
broker or nominee.
Q. WHAT IS THE BOARD OF DIRECTORS' RECOMMENDATION REGARDING THE RIGHTS
OFFERING?
A. Our board of directors is not making any recommendation as to whether you
should exercise your subscription rights. You are urged to make your
decision based on your own assessment of the rights offering and SL.
Q. HOW MANY SHARES MAY I PURCHASE?
A. You will receive one nontransferable subscription right for each ____
shares of common stock that you owned on ____________, 2003, the record
date. Each subscription right contains the basic subscription privilege and
the over-subscription privilege. Each basic subscription privilege entitles
you to purchase one share of common stock for $___. Fractional rights will
be eliminated by rounding up to the next higher whole right. See "The
Rights Offering - Subscription Privileges - Basic Subscription Privilege."
The over-subscription privilege entitles you to subscribe for additional
shares of our common stock at the same subscription price per share on a
pro-rata basis to the number of shares you purchased under your basic
subscription privilege, provided you fully exercise your basic subscription
privilege. "Pro-rata"
iii
means in proportion to the number of shares of our common stock that you
and the other rights holders electing to exercise their over-subscription
privileges have purchased by exercising the basic subscription privileges
on their holdings of common stock. See "The Rights Offering--Subscription
Privileges--Over-Subscription Privilege."
Q. HOW WAS THE SUBSCRIPTION PRICE ESTABLISHED?
A. The subscription price per share was established by our board of directors
based on the recommendation of a special committee of directors, excluding
those directors affiliated with Steel Partners who did not participate (in
their capacity as directors) in the discussion, consideration or voting
with respect to these matters. These factors included the historic and then
current market price of the common stock, our business prospects, our
recent and anticipated operating results, general conditions in the
securities markets, our need for capital, alternatives available to us for
raising capital, the amount of proceeds desired, the pricing of similar
transactions, the liquidity of our common stock, and the level of risk to
our investors.
Q. IS EXERCISING MY SUBSCRIPTION RIGHTS RISKY?
A. Yes. The exercise of your rights involves risks. Exercising your rights
means buying additional shares of our common stock and should be considered
as carefully as you would consider any other equity investment. Among other
things, you should carefully consider the risks described under the heading
"Risk Factors," beginning on page __.
Q. MAY I TRANSFER MY RIGHTS IF I DO NOT WANT TO PURCHASE ANY SHARES?
A. No. Should you choose not to exercise your rights, you may not sell, give
away or otherwise transfer your rights. However, rights will be
transferable to affiliates of the recipient and by operation of law -- for
example, upon death of the recipient.
Q. AM I REQUIRED TO SUBSCRIBE IN THE RIGHTS OFFERING?
A. No.
Q. HOW MANY SHARES WILL BE OUTSTANDING AFTER THE RIGHTS OFFERING?
A. The number of shares of common stock that will be outstanding immediately
after the rights offering will be __________ shares.
Q. WHAT HAPPENS IF THE RIGHTS OFFERING IS NOT FULLY SUBSCRIBED AFTER GIVING
EFFECT TO THE OVER-SUBSCRIPTION PRIVILEGE?
A. [Steel Partners has agreed to exercise all of its rights, including
over-subscription rights, and further purchase any unsubscribed shares
remaining after the expiration of the over-subscription period up to
________ shares.]
Q. HOW WILL THE RIGHTS OFFERING AFFECT STEEL PARTNERS' OWNERSHIP OF OUR COMMON
STOCK?
A. Steel Partners beneficially owns 746,250 shares of our common stock,
representing 12.7% of our outstanding common stock and of the voting power
of our outstanding voting securities.
If no rights holders other than Steel Partners exercise their rights in the
rights offering, Steel Partners will, as a result of its subscription for
and purchase of all unsubscribed shares up to ___ shares, own approximately
_____ shares, representing ____% of our outstanding common stock and of the
voting power of our outstanding voting securities. If all rights holders
exercise their basic subscription privileges in full, then Steel Partners
will continue to own 12.7% of our common stock and of the voting power of
our outstanding voting securities.
Q. AFTER I EXERCISE MY RIGHTS, CAN I CHANGE MY MIND AND CANCEL MY PURCHASE?
A. No. Once you send in your subscription certificate and payment you cannot
revoke the exercise of your rights, even if you later learn information
about us that you consider to be unfavorable and even if the market price
of our common stock is below the $____ per share subscription price. You
should not
iv
exercise your subscription rights unless you are certain that you wish to
purchase additional shares of our common stock at a price of $_____ per
share. See "The Rights Offering - No Revocation."
Q. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING MY SUBSCRIPTION
RIGHTS AS A HOLDER OF COMMON STOCK?
A. A holder of common stock will not recognize income or loss for federal
income tax purposes in connection with the receipt or exercise of
subscription rights in the rights offering. See "Certain United States
Federal Income Tax Consequences" on page __.
Q: WHEN WILL I RECEIVE MY NEW SHARES?
A: If you purchase shares of common stock through this rights offering, you
will receive certificates representing those shares as soon as practicable
after the expiration of the rights offering. Subject to state securities
laws and regulations, we have the discretion to delay allocation and
distribution of any shares you may elect to purchase by exercise of your
basic or over-subscription privilege in order to comply with state
securities laws.
Q: WILL THE NEW SHARES BE INITIALLY LISTED ON THE NEW YORK STOCK EXCHANGE AND
TREATED LIKE OTHER SHARES?
A: Yes. Our common stock is traded on the New York Stock Exchange under the
symbol "SL." On October 10, 2002, the last trading day prior to the filing
of this registration statement relating to this rights offering, the
closing price of our common stock on the NYSE was $4.50 per share. On
________, 2003, the last trading day before the date of this prospectus,
the closing price of our common stock on the NYSE was $______ per share.
We have received official notification from the NYSE that we were "below
criteria" of certain of the NYSE's continued listing standards and there
can be no assurance that we will be able to satisfy NYSE requirements and
continue to be listed on the NYSE.
Q. IF THE RIGHTS OFFERING IS NOT COMPLETED, WILL MY SUBSCRIPTION PAYMENT BE
REFUNDED TO ME?
A. Yes. The subscription agent will hold all funds it receives in escrow until
completion of the rights offering. If the rights offering is not completed,
the subscription agent will return promptly, without interest, all
subscription payments.
Q: WILL SL TERMINATE THE RIGHTS OFFERING IF IT SELLS ALL OR A PORTION OF ITS
BUSINESS?
A: We will proceed with the rights offering if we sell a portion of our
business. If we sell all of our businesses, we will terminate the rights
offering and the subscription agent will return promptly, without interest,
all subscription payments held in escrow.
Q. WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS?
A. If you have questions or need assistance, please contact ____________, the
subscription agent, at: ( )_____-_____. Banks and brokerage firms please
call ( )_____-_____. For a more complete description of the rights
offering, see "The Rights Offering" beginning on page _____.
v
SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary may not contain all of the information that is
important to you. This prospectus includes information about our business and
our financial and operating data. Before making an investment decision, we
encourage you to read the entire prospectus carefully, including the risks
discussed in the "Risk Factors" section. We also encourage you to review our
financial statements and the other information we provide in the reports and
other documents that we file with the SEC, as described under "Where You Can
Find More Information."
THE COMPANY
We, through our subsidiaries, design, manufacture and market 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. Our products are incorporated
into larger systems to increase operating safety, reliability and efficiency.
Our products are largely sold to original equipment manufacturers, and to a
lesser extent, to commercial distributors. On March 29, 1956, we were
incorporated as G-L Electronics Company in the state of New Jersey. Our 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. For the year ended December 31, 2001, we sustained a loss from continuing
operations of $6,703,000 (after reflecting an income tax benefit of $4,172,000)
and for the nine months ended September 30, 2002 we recorded income from
continuing operations of $191,000 (after reflecting an income tax benefit of
$602,000).
During the fiscal year ended December 31, 2000, we were comprised of
five business segments: Power Supplies, Power Conditioning and Distribution
Units, Motion Control Systems, Electric Utility Equipment Protection Systems and
Other. At year-end December 2001, we changed the composition of our reportable
segments to reflect individual continuing business units as follows:
1. CONDOR DC POWER SUPPLIES, INC. which 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;
2. TEAL ELECTRONICS CORPORATION which designs and manufactures
customized power conditioning and power distribution units;
3. SL MONTEVIDEO TECHNOLOGY, INC. which designs and manufactures
intelligent, high power density precision motors;
4. ELEKTRO-METALL EXPORT GMBH which designs and manufactures
electromechanical actuation systems, power drive units and complex wire harness
systems for use in the aerospace and automobile industries;
5. RFL ELECTRONICS INC. which designs and manufactures
teleprotection products/systems used to protect electric utility transmission
lines and apparatus by isolating faulty transmission lines from a transmission
grid; and
6. SL SURFACE TECHNOLOGIES, INC. which produces industrial coatings
and platings for equipment in the corrugated paper and telecommunications
industries.
We are a New Jersey corporation, the address of our principal
executive office is 520 Fellowship Road, Suite A114, Mt. Laurel, NJ 08054, and
our telephone number at that address is (856) 727-1500.
1
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and notes thereto, and other
financial information included elsewhere in this prospectus. Our consolidated
statements of operations data set forth below for the years ended December 31,
2001 and 2000 and July 31, 1999, and for the five months ended December 31, 1999
and 1998 (unaudited) and the consolidated balance sheet data as of December 31,
2001 and 2000 have been derived from our audited consolidated financial
statements which are included elsewhere in this prospectus. The consolidated
statement of operations data set forth below for the years ended July 31, 1998
and 1997 and the consolidated balance sheet data as of December 31, 1999 and
1998 (unaudited) and July 31, 1999, 1998 and 1997 have been derived from our
audited consolidated financial statements which are not included in this
prospectus. The balance sheet data and the statement of operations data as of
and for the nine months ended September 30, 2002 and 2001 have been derived from
our unaudited financial statements, included elsewhere in this prospectus, which
we believe have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, which we consider necessary for a fair presentation of the selected
financial data shown.
Nine Nine
Months Months Twelve Twelve Twelve
Ended Ended Months Months Months
September September Ended Ended Ended
30, 2002 30, 2001 December December July 31,
(Unaudited) (Unaudited) 31, 2001 31, 2000 1999
--------------------------------------------------------------------------------
(amounts in thousands except per share data)
--------------------------------------------------------------------------------
Net sales(1) $ 101,937 $ 104,029 $ 138,467 $ 148,405 $ 88,694
Income (loss) from continuing
operations $ 191 $ (3,299) $ (6,703) $ 6,423 $ 5,799
Income (loss) from discontinued
operations $ 313 $ (4,244) $ (3,947) $ (4,723) $ (393)
Net income (loss)(2) $ 504 $ (7,543) $ (10,650) $ 1,700 $ 5,406
Diluted net income (loss) per
common share $ 0.09 $ (1.32) $ (1.87) $ 0.30 $ 0.92
Shares used in computing diluted
net income (loss) per common
share 5,856 5,695 5,698 5,757 5,876
Cash dividend per
Common share -0- -0- -0- $ 0.10 $ 0.09
Year-end financial position
Working capital $ 5,896 $ (8,281) $ 3,476 $ 31,180 $ 24,812
Current ratio(3) 1.1 0.9 1.1 2.3 1.9
Total assets $ 88,976 $ 109,071 $ 107,758 $ 113,481 $ 112,686
Long-term debt $ 38 $ 1,052 $ 1,009 $ 36,533 $ 31,984
Shareholders' equity $ 34,836 $ 36,568 $ 33,204 $ 43,350 $ 42,842
Book value per share $ 5.91 $ 6.40 $ 5.81 $ 7.69 $ 7.61
Other
Capital expenditures(4) $ 1,409 $ 1,911 $ 2,342 $ 2,563 $ 1,901
Depreciation and
amortization $ 2,655 $ 3,482 $ 4,587 $ 4,379 $ 3,092
Twelve Five Five Months
Months Twelve Months Ended
Ended Months Ended December 31,
July 31, Ended July December 1998
1998 1997 31, 1999 (Unaudited)
-------------------------------------------------------
-------------------------------------------------------
Net sales(1) $ 71,918 $ 68,044 $ 59,032 $ 32,809
Income (loss) from continuing
operations $ 4,383 $ 6,720 $ 2,789 $ 1,258
Income (loss) from discontinued
operations $ 930 $ 1,095 $ (3,473) $ 703
Net income (loss)(2) $ 5,313 $ 7,815 $ (684) $ 1,961
Diluted net income (loss) per
common share $ 0.90 $ 1.30 $ (0.12) $ 0.33
Shares used in computing diluted
net income (loss) per common
share 5,897 6,021 5,624 5,886
Cash dividend per
Common share $ 0.08 $ 0.07 $ 0.05 $ 0.04
Year-end financial position
Working capital $ 21,344 $ 17,399 $ 33,042 $ 22,145
Current ratio(3) 2.1 1.8 2.2 2.1
Total assets $ 80,915 $ 66,804 $ 117,050 $ 78,929
Long-term debt $ 13,283 $ 700 $ 39,245 $ 12,255
Shareholders' equity $ 38,345 $ 36,492 $ 42,072 $ 40,546
Book value per share $ 6.84 $ 6.27 $ 7.48 $ 7.16
Other
Capital expenditures(4) $ 2,029 $ 1,327 $ 849 $ 1,247
Depreciation and
amortization $ 2,335 $ 2,102 $ 1,830 $ 1,246
(1) During 2001, we sold SL Waber, Inc. and, accordingly, the operations of SL
Waber have been accounted for as discontinued operations in all periods
presented. The prior years have been restated to reflect this accounting
treatment.
(2) Calendar 2001 includes pre-tax 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 D.C. Power Supplies, Inc., inventory write-offs of
$50,000, and restructuring and intangible asset impairment charges of $185,000
and $125,000, respectively, related to SL Surface Technologies, Inc.
Calendar 2000 includes pre-tax income of $875,000 related to the settlement of a
class action suit against one of our 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 our life insurance carriers.
(3) The current ratio for 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.
2
RISK FACTORS
This offering and an investment in the shares of our common stock
involve a high degree of risk. You should carefully consider the following
factors and other information presented or incorporated by reference in this
prospectus before deciding to invest in our common stock. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us may also impair our operations and
business. If we do not successfully address any one or more of the risks
described below, there could be a material adverse effect on our financial
condition, operating results and business. We cannot assure you that we will
successfully address these risks.
RISKS RELATING TO OUR BUSINESS
WE WILL BE ADVERSELY IMPACTED IF WE DO NOT REFINANCE OUR REVOLVING CREDIT
FACILITY PRIOR TO MATURITY IN 2002.
We are a party to a Second Amended and Restated Credit Agreement
dated as of December 13, 2001, as amended, by and among us, SL Delaware, Inc.,
GE Capital CFE, Inc., Fleet National Bank and PNC Bank, National Association as
Banks, and GE Capital CFE, Inc. as Agent for the Banks. The revolving credit
facility matures on December 31, 2002, and provides for the payment of a fee of
approximately $780,000 in the event that the facility is not retired on or
before October 31, 2002, under certain circumstances. Under the terms of the
revolving credit facility, if we deliver a binding commitment letter to the
banks by September 30, 2002 and refinance the revolving credit facility on or
before October 31, 2002, no such fee is due. We delivered binding commitment
letters to the banks on September 30, 2002. However, we could not refinance the
revolving credit facility by October 31, 2002 and paid the fee of $780,000. We
are in the process of attempting to refinance the revolving credit facility
prior to December 31, 2002, its maturity date. There can be no assurance that we
will refinance the revolving credit facility prior to such date, or that the
revolving credit facility will be refinanced successfully.
CURRENT FINANCIAL CONDITIONS RAISE CONCERNS ABOUT OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
There can be no assurance that the revolving credit facility will be
refinanced successfully or that we will be able to find alternative sources of
financing. In the event we are unable to fund our working capital needs and
other cash requirements through our available funds or through borrowings under
the revolving credit facility, or are unable to refinance the revolving credit
facility, there would be a material adverse effect upon our financial condition.
The opinion of our auditors contains a qualification with respect to our ability
to continue as a going concern. This opinion was based upon concerns regarding
the refinancing of our revolving credit facility as well as our default of
certain financial covenants under the revolving credit facility. Compliance with
such financial covenants was waived pursuant to a waiver agreement dated May 23,
2002.
WE HAVE BEEN INFORMED THAT WE ARE NOT IN COMPLIANCE WITH NEW YORK STOCK EXCHANGE
LISTING STANDARDS, AND MAY BE DELISTED. IF WE ARE DELISTED, OUR STOCK PRICE MAY
SUFFER.
On October 17, 2001, we received official notification from the New
York Stock Exchange that we were "below criteria" of certain of the NYSE's
continued listing standards. Pursuant to the request of the NYSE, we submitted a
business plan on February 22, 2002 for compliance with the NYSE continued
listing standards. Our business plan was accepted by the NYSE. We are currently
required to deliver quarterly updates to the NYSE and we are currently working
with the NYSE to maintain our listing on the NYSE. There can be no assurance
that we will be able to satisfy NYSE requirements and continue to be listed on
the NYSE or, in the event that we cannot continue to be listed on the NYSE, that
we will be able to list our securities on another exchange. If our listing on
the NYSE cannot be maintained, shareholders may experience a greater difficulty
in trading shares of our common stock and the price of our common stock could be
adversely affected. This lack of liquidity may also make it more difficult for
us to raise capital.
WE MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS IN CASH FLOWS, LIQUIDITY, DEBT
LEVELS, AND REFINANCING.
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 our
business, results of operations, and financial condition. In order to finance
the working capital requirements of our business, we
3
have entered into the revolving credit facility and have borrowed funds
thereunder. If operating cash flows are not sufficient to meet operating
expenses, capital expenditures and debt service requirements as they become due,
we may be required, in order to meet our 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.
OUR OPERATING RESULTS MAY FLUCTUATE, AND THERE MAY BE VOLATILITY IN GENERAL
INDUSTRY, ECONOMIC, AND MARKET CONDITIONS.
Our 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 our business, results of operations and financial condition.
General economic conditions, and specifically market conditions in
the telecommunications and semiconductor industry in the United States and
globally, affect our 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 our
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 our business, results of operation and financial condition.
WE MAY BE SUBJECT TO SIGNIFICANT COSTS IN COMPLYING WITH ENVIRONMENTAL LAWS.
Our 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 at multiparty sites, and the number and financial viability of other
potentially responsible parties.
Additionally, we are the subject of various lawsuits and actions
relating to environmental issues, including administrative action in connection
with SL Surface Technologies' Pennsauken facility which could subject us to,
among other things, $9,266,000 in collective reimbursements (with other parties)
to the New Jersey Department of Environmental Protection. A class action suit
was filed on June 12, 2002 against us, SL Surface Technologies 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 we will be able to successfully defend or settle these or any
other actions to which we are a party.
WE 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 our business. Additionally, we
are subject to certain legal actions involving complaints by terminated
employees and disputes with customers and suppliers. One such claim has been
brought against our subsidiary, SL Montevideo, by a customer seeking $3,900,000
in compensatory damages. Prior to trial, SL Montevideo admitted to liability of
approximately $35,000. At the end of the trial, a jury rendered a verdict in
favor of this customer for $650,000. The customer has appealed various aspects
of this decision, which appeal, if determined adversely, could have a material
adverse impact upon us. 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 our business, results of operations and
financial condition.
WE EXPECT FLUCTUATIONS IN OPERATING RESULTS AND STOCK PRICE.
4
Operating results for future periods are never perfectly predictable
even in the most certain of economic times, and we expect to continue to
experience fluctuations in our quarterly results. These fluctuations, which in
the future may be significant, could cause substantial variability in the market
price of our stock.
OUR OPERATING RESULTS AND STOCK PRICE MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS
IN CUSTOMERS' BUSINESSES.
Our business is dependent upon product sales to telecommunications,
semiconductor, medical imaging, aerospace and other businesses, which in turn
are dependent for their business upon orders from their customers. Any downturn
in the business of any of these parties affects us. 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 have
affected, and will in the future affect, results of operations from quarter to
quarter. Also, because our customers typically order in large quantities, any
subsequent cancellation, modification or rescheduling of an individual order may
alone affect our results of operations.
WE HAVE 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 in 2001, we incurred charges to
align our 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.
We have incurred, and may in the future incur, significant inventory-related
charges. While we believe, based on current information, that the
inventory-related charges recorded in 2001 are appropriate, subsequent changes
to our forecast may indicate that these charges were insufficient.
FAILURE TO ACHIEVE ACCEPTABLE MANUFACTURING VOLUMES AND YIELDS MAY ADVERSELY
AFFECT OUR PROFITABILITY.
The ability to achieve profitability depends upon our ability to
timely deliver products to our customers at acceptable cost levels. The
manufacture of our products involves highly complex and precise processes.
Changes in manufacturing processes or those of suppliers, or their inadvertent
use of defective or contaminated materials, could significantly hurt our ability
to meet our customers' product volume and quality needs. Moreover, failure to
receive a sufficient level of customer orders could significantly hurt our
ability to meet our order volume and yield targets. Under existing manufacturing
techniques, which involve substantial manual labor, failure to meet volume and
yield targets could substantially increase unit costs. Failure to meet unit
costs would negatively impact operating results and, thereby, could have a
material adverse effect on our business, results of operations and financial
condition.
FAILURE TO REMAIN COMPETITIVE COULD ADVERSELY IMPACT OUR OPERATING RESULTS.
The markets in which we sell our products are highly competitive and
characterized by rapidly changing and converging technologies. We face intense
competition from established competitors and the threat of future competition
from new and emerging companies in all aspects of our business. Among our
current competitors are our customers, who are vertically integrated and either
manufacture and/or are capable of manufacturing some or all of the products we
sell 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,
we must maintain a substantial commitment to focused research and development,
improve the efficiency of our manufacturing operations, and streamline our
marketing and sales efforts and attendant customer service and support. Among
other things, we may not anticipate shifts in our 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 our efforts, technological
changes, manufacturing efficiencies or development efforts by competitors may
render our products or technologies obsolete or uncompetitive.
CONSOLIDATION IN THE INDUSTRY COULD INCREASE COMPETITIVE PRESSURES ON US.
The industries in which we operate 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
5
competitors that are better able to compete as sole-source vendors for
customers. Our relatively small size may increase competitive pressure for
customers seeking single vendor solutions. Such increased competition would
increase the variability of our operating results and could otherwise have a
material adverse effect on our business, results of operations and financial
condition.
WE ARE DEPENDENT UPON THIRD PARTIES FOR PARTS AND COMPONENTS.
The ability to meet customer demand depends, in part, on our ability
to obtain timely and adequate delivery of parts and components from suppliers
and internal manufacturing capacity. We have experienced significant shortages
in the past and, although we work closely with our suppliers to avoid shortages,
there can be no assurance that we 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 our business, results of operations and financial
condition.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO STAY CURRENT WITH TECHNOLOGICAL
CHANGE AND NEW PRODUCT DEVELOPMENT.
The markets in which Condor and Teal operate are characterized by
rapidly changing technology and shorter product life cycles. Our future success
will continue to depend upon our ability to enhance our current products and to
develop new products that keep pace with technological developments and respond
to changes in customer requirements. Any failure by us to respond adequately to
technological changes and customer requirements or any significant delay in new
product introductions could have a material adverse effect on our business and
results of operations. In addition, there can be no assurance that new products
to be developed will achieve market acceptance.
WE ARE DEPENDENT UPON KEY PERSONNEL FOR THE MANAGEMENT OF OUR OPERATIONS.
Our success depends in part upon the continued services of many of
our highly skilled personnel involved in management, engineering and sales, and
upon our 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 our business. In addition, our future success will
depend on the ability of officers and key employees to manage operations
successfully as we explore a sale of all or a part of our business, as well as
our ability to effectively attract, retain, motivate and manage employees during
this period of uncertainty.
OTHER FACTORS MAY AFFECT FUTURE RESULTS.
The risks and uncertainties described herein are not the only ones
facing us. Additional risks and uncertainties not presently known, or that may
now be deemed immaterial, may also impair business operations.
STEEL PARTNERS BENEFICIALLY OWNS A LARGE PERCENTAGE OF OUR VOTING STOCK.
As of the date of this prospectus, Steel Partners owned shares of
common stock entitling them to exercise 12.7% of the voting power of our
outstanding voting securities. As a result of the rights offering, the ownership
of Steel Partners could increase further as described under "The Rights
Offering--Shares of Common Stock Outstanding after the Rights Offering." In
addition, the Gabelli Funds beneficially owns 26.3% of the voting power of our
outstanding common stock.
Because of Steel Partners' and the Gabelli Funds' ownership of a
large percentage of our outstanding voting securities, they have significant
influence over our management and policies, such as the election of our
directors, the appointment of new management and the approval of any other
actions requiring the approval of our shareholders, including any amendments to
our certificate of incorporation and mergers or sales of all or substantially
all of our assets. In addition, the level of Steel Partners' and the Gabelli
Funds' ownership of our outstanding voting securities could have the effect of
discouraging or impeding an unsolicited acquisition proposal.
Steel Partners and its affiliates may have the right to appoint a
majority of our board of directors and will be able to exert substantial
influence over matters submitted to our shareholders, as well as over our
business operations.
RISKS RELATING TO THIS RIGHTS OFFERING
6
THE SUBSCRIPTION PRICE DETERMINED FOR THIS OFFERING IS NOT AN INDICATION OF OUR
VALUE OR THE VALUE OF OUR COMMON STOCK.
The subscription price for this rights offering is [$ ]. The
subscription price does not necessarily bear any relationship to the book value
of our assets, past operations, cash flows, losses, financial condition or any
other established criteria for value. You should not consider the subscription
price as an indication of our value. After the date of this prospectus, our
common stock may trade at prices above or below the subscription price.
IF YOU EXERCISE YOUR RIGHTS, YOU MAY LOSE MONEY IF THERE IS A DECLINE IN THE
TRADING PRICE OF OUR SHARES OF COMMON STOCK.
The trading price of our common stock in the future may decline
below the subscription price. We cannot assure you that the subscription price
will remain below any future trading price for the shares of our common stock.
Future prices of the shares of our common stock may adjust positively or
negatively depending on various factors including our future revenues and
earnings, changes in earnings estimates by analysts, our ability to meet
analysts' earnings estimates, speculation in the trade or business press about
our operations, and overall conditions affecting our businesses, economic trends
and the securities markets.
YOU MAY NOT REVOKE THE EXERCISE OF YOUR RIGHTS EVEN IF THERE IS A DECLINE IN OUR
COMMON STOCK PRICE PRIOR TO THE EXPIRATION DATE OF THE SUBSCRIPTION PERIOD.
Even if our common stock price declines below the subscription price
for the common stock, resulting in a loss on your investment upon the exercise
of rights to acquire shares of our common stock, you may not revoke or change
your exercise of rights after you send in your subscription forms and payment.
YOU MAY NOT REVOKE THE EXERCISE OF YOUR RIGHTS EVEN IF WE DECIDE TO EXTEND THE
EXPIRATION DATE OF THE SUBSCRIPTION PERIOD.
We may, in our discretion, extend the expiration date of the
subscription period to a date no later than _____________. During any potential
extension of time, our common stock price may decline below the subscription
price and result in a loss on your investment upon the exercise of rights to
acquire shares of our common stock. If the expiration date is extended after you
send in your subscription forms and payment, you still may not revoke or change
your exercise of rights.
IF WE SELL ALL OF OUR BUSINESS, WE WILL TERMINATE THE OFFERING.
We are in the process of exploring a sale of all or a portion of our
business and have provided potential purchasers with information on the company
as a whole as well as various divisions. These potential purchasers are
presently evaluating the information to determine whether they want to pursue a
transaction with us. If we sell a portion of our business, we will proceed with
the offering and you will not have any ability to withdraw your exercised rights
as a result of a sale of a division. If we sell our entire business, however, we
will terminate the offering and have no obligation with respect to the
subscription rights other than to return any subscription payments, without
interest, to you.
YOU WILL NOT RECEIVE INTEREST ON SUBSCRIPTION FUNDS RETURNED TO YOU.
If we cancel the rights offering, neither we nor the subscription
agent will have any obligation with respect to the subscription rights except to
return, without interest, any subscription payments to you.
BECAUSE WE MAY TERMINATE THE OFFERING, YOUR PARTICIPATION IN THE OFFERING IS NOT
ASSURED.
Once you exercise your subscription rights, you may not revoke the
exercise for any reason unless we amend the offering. If we decide to terminate
the offering, we will not have any obligation with respect to the subscription
rights except to return any subscription payments, without interest.
YOU NEED TO ACT PROMPTLY AND FOLLOW SUBSCRIPTION INSTRUCTIONS.
Shareholders who desire to purchase shares in this rights offering
must act promptly to ensure that all required forms and payments are actually
received by the subscription agent prior to 5:00 p.m., New York City time, on
______, 2003, the expiration date. If you fail to complete and sign the required
subscription forms, send an incorrect payment amount, or otherwise fail to
follow the subscription procedures that apply to your desired transaction the
subscription agent may, depending on the circumstances, reject your subscription
or accept it to the extent of the payment received. Neither we nor our
subscription agent undertakes to contact
7
you concerning, or attempt to correct, an incomplete or incorrect subscription
form or payment. We have the sole discretion to determine whether a subscription
exercise properly follows the subscription procedures.
OUR FORMER USE OF ARTHUR ANDERSEN LLP AS OUR INDEPENDENT ACCOUNTANTS MAY POSE A
RISK TO US AND WILL LIMIT YOUR ABILITY TO SEEK RECOVERIES FROM THEM RELATED TO
THEIR WORK.
On June 15, 2002, Arthur Andersen LLP, our 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 our common
stock. In July, 2002, our board of directors dismissed Arthur Andersen and
engaged Grant Thornton LLP as our independent accountants based on the
recommendation of the audit committee of our board of directors.
SEC rules require us to present our audited financial statements in
various SEC filings, along with Arthur Andersen's consent to our 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. We
have been unable to obtain, after reasonable efforts, the written consent of
Arthur Andersen to our naming of it as an expert and as having audited the
Consolidated Financial Statements for the year ended December 31, 2001 included
herein. Notwithstanding the SEC's regulatory relief, the inability of Arthur
Andersen to provide its consent or to provide assurance services to us could
negatively affect our 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 our 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.
RISKS RELATING TO OUR COMMON STOCK.
OUR COMMON STOCK IS SUBJECT TO PRICE FLUCTUATIONS.
The market price for our common stock has been, and is likely to
continue to be, highly volatile. The market for our common stock is subject to
fluctuations as a result of a variety of factors, including factors beyond our
control. These include:
o our ability to obtain refinancing of the revolving credit facility
prior to December 31, 2002;
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 the telecommunications and semiconductors
industries;
o announcements and expectations with respect to the sale of all or part
of us;
o general market and economic conditions; and
o other events or factors that are unforeseen.
WE DO NOT INTEND TO PAY DIVIDENDS ON SHARES OF OUR COMMON STOCK IN THE
FORESEEABLE FUTURE.
We currently expect to retain our future earnings, if any, to reduce
debt and for use in the operation of our business. Additionally, our credit
facility prohibits the payment of dividends without the consent of a majority of
our lenders. We do not anticipate paying any cash dividends on shares of our
common stock in the foreseeable future.
THE ISSUANCE OF PREFERRED STOCK OR ADDITIONAL COMMON STOCK MAY ADVERSELY AFFECT
OUR SHAREHOLDERS.
Our board of directors has the authority to issue up to 6,000,000
shares of our preferred stock, none of which are currently issued. Our board of
directors is authorized to determine the terms, including voting rights, of the
preferred shares without any further vote or action by our common shareholders.
The voting and other rights of the holders of our common stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. Similarly, our board has the right to
issue additional shares of common stock, up to the total number of shares
authorized, without any further vote
8
or action by common shareholders (as long at the additional shares of common
stock are not reserved for any other purpose), which would have the effect of
diluting common shareholders. An issuance could occur in the context of another
public or private offering of shares of common stock or preferred stock or in a
situation where the common stock or preferred stock is used to acquire the
assets or stock of another company. The issuance of common stock or preferred
stock, while providing desirable flexibility in connection with possible
acquisitions, investments and other corporate purposes, could have the effect of
delaying, deferring or preventing a change in control.
9
USE OF PROCEEDS
We expect that our proceeds from the rights offering will be $5
million, and we will use the proceeds for working capital purposes. Such amount
may include proceeds we receive from the exercise of nontransferable rights by
Steel Partners which are not being registered in this Registration Statement.
PRICE RANGE OF COMMON STOCK
Our 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 prices per share of our common stock for the periods
indicated:
HIGH LOW
Year Ended December 31, 2002:
Fourth Quarter (through December 25, 2002) $ 5.70 $ 4.30
Third Quarter 7.30 5.05
Second Quarter 8.05 6.60
First Quarter 8.30 4.99
Year Ended December 31, 2001:
Fourth Quarter 8.50 3.72
Third Quarter 11.10 5.60
Second Quarter 13.00 11.10
First Quarter 14.99 10.875
Year Ended December 31, 2000:
Fourth Quarter 12.125 10.00
Third Quarter 13.00 9.375
Second Quarter 10.00 8.375
First Quarter 12.625 8.875
We paid cash dividends of $.05 per share in November, 2000 and $.05
per share in June, 2000. We suspended dividend payments during 2001 and have no
present intention of making dividend payments in the foreseeable future, as,
under the terms of the revolving credit facility, we are prohibited from paying
dividends.
As of September 30, 2002, there were approximately [870] registered
shareholders.
On October 17, 2001, we received official notification from the NYSE
that we were "below criteria" of certain of the NYSE's continued listing
standards, and that, consequently, our stock may be delisted. At the request of
the NYSE, we submitted a business plan on February 22, 2002 for compliance with
the NYSE continued listing standards. We are currently working with the NYSE to
resolve this matter and maintain our listing on the NYSE. There can be no
assurance, however, that we will be able to satisfy NYSE requirements and
continue to be listed on the NYSE, or in the event that we cannot continue to be
listed on the NYSE, that we will be able to alternatively list on another
exchange.
On December 25, 2002, the last reported sales price for our common
stock on the NYSE was $5.20.
10
THE COMPANY
DESCRIPTION OF BUSINESS
General Development of Business
We, through our subsidiaries, design, manufacture and market 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. Our products are incorporated
into larger systems to increase operating safety, reliability and efficiency.
Our products are largely sold to original equipment manufacturers, and to a
lesser extent, to commercial distributors. On March 29, 1956, we were
incorporated as G-L Electronics Company in the state of New Jersey. Our 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.
In 1999, we changed the date of our fiscal year-end from July 31 to
December 31, commencing in January 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 and is also presented herein. Consequently, the
consolidated balance sheets have been presented as of December 31, 2001 and
December 31, 2000. The consolidated statements of operations and cash flows
present information for the calendar years ended December 31, 2001 and December
31, 2000, the fiscal year ended July 31, 1999 and the five-month periods ended
December 31, 1999 and December 31, 1998.
On May 11, 1999, pursuant to a Share Purchase Agreement dated April
1, 1999, we acquired 100% of the issued and outstanding shares of capital stock
of RFL Electronics Inc. We paid $11,387,000 in cash and issued promissory notes
with an aggregate face amount of $75,000 at closing. In addition, we 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 supplier
of teleprotection and specialized communication equipment that is primarily sold
to the electric power utility industry.
On July 27, 1999, pursuant to an Asset Purchase Agreement dated July
13, 1999, Condor, our wholly-owned subsidiary, acquired certain net operating
assets of Todd Products Corporation and Todd Power Corporation (together, "Todd
Products"). We paid $7,430,000, comprised of cash in the amount of $3,700,000
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 fee of $1,275,000. The consulting agreement was booked
on the date of acquisition as an intangible asset to be written off over the
life of the agreement. A corresponding liability was recorded for the payment of
the aggregate fee of $1,275,000, which was to be paid over the first three years
of the agreement. Although the agreement is for ten years, the chief executive
officer of Todd Products had negotiated for the full payment of the aggregate
fee in the first three years of the agreement. The consulting agreement was paid
in full at the end of 2001. In addition, the consulting contract and goodwill
acquired in the Todd Products transaction were written off as assets at the end
of 2001 after we determined that they had no value since we were exiting a
significant portion of the Todd Products' product lines. The write-off of the
consulting contract and goodwill is included in impairment of intangibles of
$4,145,000 recorded for Condor in 2001.
In July 2001, the Board of Directors authorized the disposition of
our subsidiary, SL Waber, Inc. On September 6, 2001, pursuant to an Asset
Purchase Agreement dated as of August 29, 2001, we 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. We received cash in the amount 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, we 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 discontinued operations for
all periods presented in the financial statements set forth herein.
In December 2001, we 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 $450,000 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 our
obligations under our 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 $3,120,000 as of December 31, 2001.
Proceeds from the life
11
insurance policies were received in December 2001, January 2002 and March 2002
and were used to pay down debt under our revolving credit facility.
Beneficiaries under the capital accumulation plan and deferred compensation plan
remain general unsecured creditors of ours.
In December 2001, we 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, we received cash proceeds of $1,600,000 upon the sale of the mortgage
note, all of which were used to pay down debt under our revolving credit
facility.
On January 22, 2002, we held our 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 (called 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. On March 8, 2002, Richard Smith was
elected to the Board of Directors, and on May 23, 2002, Avrum Gray was elected
to the Board of Directors, filling the two vacant directorships.
In 2001, we had entered into change-of-control agreements with Owen
Farren, the Chief Executive Officer at that time, David Nuzzo, the Vice
President-Finance and Administration, and Jacob Cherian, the Vice President and
Controller at that time. Following the election of the five new directors as
described above, we made payments to such officers under these change-of-control
agreements in the respective amounts of $877,565, $352,556 and $250,000. Owen
Farren's employment with us was terminated effective February 4, 2002. Jacob
Cherian resigned effective April 26, 2002. For more information on the
change-of-control agreements, see "Executive Compensation - Employment
Contracts, Termination and Change in Control Arrangements."
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 our Chief Executive Officer and Glen
Kassan was elected our President. Additionally, David Nuzzo was reelected as
Vice President-Finance and Administration, Treasurer and Secretary. All senior
divisional management teams are continuing in their positions other than Jacob
Cherian, who resigned effective April 26, 2002.
Financial Information About Segments
Financial information about our business segments is incorporated
herein by reference to Note 14 in the Notes to Consolidated Financial Statements
for the year ended December 31, 2001 included herein.
Narrative Description of Business
SEGMENTS
During the fiscal year ended July 31, 1999, the five-month period
ended December 31, 1999 and the year ended December 31, 2000, we were comprised
of six reportable business segments: Power Supplies, Power Conditioning and
Distribution Units, Motion Control Systems, Electric Utility Equipment
Protection Systems, Surge Suppressors and Other. During the fiscal year ended
July 31, 1998, we operated principally in one business segment; the design,
production and marketing of advanced power and data quality systems. During the
year ended December 31, 2001, we were comprised of five business segments: Power
Supplies, Power Conditioning and Distribution Units, Motion Control Systems,
Electric Utility Equipment Protection Systems and Other. At year-end December
2001, we changed the composition of our reportable segments to reflect
individual business units, as described below.
CONDOR DC 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. 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
12
electric equipment and other motion control systems. For the nine-month periods
ended September 30, 2002 and September 30, 2001, net sales of Condor, as a
percentage of consolidated net sales from continuing operations, were 28% and
36%, respectively. For the years ended December 31, 2001, December 31, 2000 and
the fiscal year ended July 31, 1999, net sales of Condor, as a percentage of
consolidated net sales from continuing operations, were 35%, 42% and 34%,
respectively. For the five-month periods ended December 31, 1999 and December
31, 1998, net sales of Condor, as a percentage of consolidated net sales from
continuing operations, were 43% and 36%, respectively.
TEAL ELECTRONICS CORPORATION - Teal designs and manufactures customized power
conditioning and power distribution units. Products are developed and
manufactured for custom electrical subsystems for original equipment
manufacturers of semiconductor, medical imaging, graphics and telecommunication
systems. Outsourcing the AC power system helps original equipment manufacturers
reduce cost and time to market, while increasing system performance 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 nine-month periods ended September 30, 2002 and September
30, 2001, net sales of Teal, as a percentage of consolidated net sales from
continuing operations, were 14% and 10%, respectively. For the years ended
December 31, 2001, December 31, 2000 and the fiscal year ended July 31, 1999,
net sales of Teal, as a percentage of consolidated net sales from continuing
operations, were 10%, 15% and 17%, respectively. For the five-month periods
ended December 31, 1999 and December 31, 1998, net sales of Teal, as a
percentage of consolidated net sales from continuing operations, were 15% and
17%, respectively.
SL MONTEVIDEO TECHNOLOGY, INC. - SL Montevideo designs and manufactures
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 nine-month periods ended September 30, 2002 and September 30, 2001, net
sales of SL Montevideo, as a percentage of consolidated net sales from
continuing operations, were 16% and 13%, respectively. For the years ended
December 31, 2001, December 31, 2000 and the fiscal year ended July 31, 1999,
net sales of SL Montevideo, as a percentage of consolidated net sales from
continuing operations, were 14%, 10% and 17%, respectively. For the five-month
periods ended December 31, 1999 and December 31, 1998, net sales of SL
Montevideo, as a percentage of consolidated net sales from continuing
operations, were 10% and 18%, respectively.
ELEKTRO-METALL EXPORT GMBH - Elektro-Metall Export is based in Ingolstadt,
Germany, with low-cost manufacturing operations in Paks, Hungary. It designs and
manufactures electromechanical actuation systems, power drive units and complex
wire harness systems for use in the aerospace and automobile industries.
Electromechanical actuation systems for aerospace and ordnance applications are
used in rudder trim actuation, cargo manipulation and door control. Power drive
units are utilized for aircraft on-board cargo loading systems and electrical
seat actuation systems for aircraft business class seats. Wire harness systems
can be found in aerospace applications, such as passenger entertainment units,
and in automotive applications used in mirror controls and general power wiring
systems throughout the vehicle. For the nine-month periods ended September 30,
2002 and September 30, 2001, net sales of Elektro-Metall Export, as a percentage
of consolidated net sales from continuing operations, were 20% and 19%,
respectively. For the years ended December 31, 2001, December 31, 2000 and the
fiscal year ended July 31, 1999, net sales of Elektro-Metall Export, as a
percentage of consolidated net sales from continuing operations, were 18%, 15%
and 23%, respectively. For the five-month periods ended December 31, 1999 and
December 31, 1998, net sales of Elektro-Metall Export, as a percentage of
consolidated net sales from continuing operations, were 14% and 26%,
respectively.
RFL ELECTRONICS, INC. - 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-
13
voltage transmission lines. RFL provides customer service and maintenance for
all electric utility equipment protection systems. For the nine-month periods
ended September 30, 2002 and September 30, 2001, net sales of RFL, as a
percentage of consolidated net sales from continuing operations, were 20% and
20%, respectively. For the years ended December 31, 2001, December 31, 2000 and
the fiscal year ended July 31, 1999, net sales of RFL, as a percentage of
consolidated net sales from continuing operations, were 21%, 17%, and 6%,
respectively. For the five-month periods ended December 31, 1999 and December
31, 1998, net sales of RFL, as a percentage of consolidated net sales from
continuing operations, were 17% and 0%, respectively.
SL SURFACE TECHNOLOGIES, INC. - SL Surface Technologies produces industrial
coatings and platings for equipment in the corrugated paper and
telecommunications industries. For the nine-month periods ended September 30,
2002 and September 30, 2001, net sales of SL Surface Technologies, as a
percentage of consolidated net sales from continuing operations, were 2% and 2%,
respectively. For the years ended December 31, 2001, December 31, 2000 and the
fiscal year ended July 31, 1999, net sales of SL Surface Technologies, as a
percentage of consolidated net sales from continuing operations, were 2%, 2% and
3%, respectively. For the five-month periods ended December 31, 1999 and
December 31, 1998, net sales of SL Surface Technologies, as a percentage of
consolidated net sales from continuing operations, were 2% and 3%, respectively.
SL WABER, INC. - 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 original equipment manufacturer customers,
as well as to distributors and dealers of electronics and electrical supplies,
retailers and wholesalers of office, computer, and consumer products. In
September 2001, we sold substantially all of the assets of SL Waber, including
its name and goodwill as a going concern. Since the decision was made to sell SL
Waber in June 2001, it has been reported on our financial statements as a
discontinued operation for all periods presented. For the years ended December
31, 2001, December 31, 2000 and the fiscal year ended July 31, 1999, net sales
of SL Waber were $10.3 million, $19.3 million, and $36.4 million, respectively.
For the five-month periods ended December 31, 1999 and December 31, 1998, net
sales of SL Waber were $11.9 million and $17.0 million, respectively.
RAW MATERIALS
Raw materials are supplied by various domestic and international
vendors. In general, availability for materials is not a problem for us.
However, in the fourth quarter of 2000, we experienced shortages in the supply
of certain strategic components for power supplies. During 2001, there were no
major disruptions in the supply of raw materials.
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.
SEASONALITY
Generally, seasonality is not a factor in any of our segments.
SIGNIFICANT CUSTOMERS
We have no customer that accounts for 10% or more of our
consolidated net sales from continuing operations. Each of Teal, SL Montevideo,
Elektro-Metall Export, RFL and SL Surface Technologies has certain major
customers, the loss of any of which would have a material adverse effect on such
entity.
BACKLOG
Backlog at March 1, 2002, March 9, 2001 and March 9, 2000, was
$53,246,000, $62,242,000 and $60,693,000, respectively. The lower backlog at
March 1, 2002, as compared to March 9, 2001, was principally the result of
substantially decreased orders from original equipment manufacturers in the
14
telecommunications and semiconductor industries, offset in part by increased
orders from aerospace customers.
COMPETITIVE CONDITIONS
Our 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. While we are a smaller company compared to many
of our competitors and do not have the economies of scale that these larger
competitors have, we also lack the bureaucracy found in larger entities.
Therefore, we believe we can respond more quickly to our customers' needs. There
are a significant number of competitors in each of our business segments except
for Teal, which faces competition primarily from only two other entities. Condor
has also experienced significant off-shore competition for certain products in
certain markets. Currently, our businesses are sourcing many components and
products outside of the United States. The uncertain commercial aerospace market
as a result of the terrorist attacks of September 11, 2001 has also created more
competitive conditions in that industry. We seek to operate in market niches and
our businesses differentiate themselves from their competition by concentrating
on customized products based on customer needs. Each of our businesses seek a
competitive advantage based on product quality and functionality, service,
innovation, delivery and price.
ENVIRONMENTAL
We (together with the industries in which we operate or have
operated) are subject to United States, Mexican, Hungarian and German
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. We and the industries
are also subject to other federal, state and local environmental laws and
regulations, including those that require us to remediate or mitigate the
effects of the disposal or release of certain chemical substances at various
sites, including some where we have ceased operations. It is impossible to
predict precisely what effect these laws and regulations will have on us in the
future.
It is our policy to comply with all environmental, health and safety
regulations, as well as industry standards for maintenance. Our domestic
competitors are subject to the same environmental, health and safety laws and
regulations, and we believe that the compliance issues and potential
expenditures of our operating subsidiaries are comparable to those faced by
their major domestic competitors. Compliance with federal, state and local laws
which have been enacted with respect to the discharge of materials into the
environment have had no material effect on our capital expenditures, earnings
and competitive position.
There are four current or former sites on which we may incur
environmental costs in the future: the SL Surface Technologies site near the
Puchack Wellfield in Pennsauken, New Jersey, a facility in Auburn, New York, a
former industrial site in New Haven, Connecticut, and our property in Camden,
New Jersey. Based on our investigation into the Pennsauken, New Jersey site
where we are one of several parties alleged to be responsible, we believe we
have a significant defense against all or any part of the claim and that any
material impact is unlikely. We have conducted preliminary investigations into
the Auburn, New York and New Haven, Connecticut sites. Based on these
preliminary investigations, we do not believe that remediation of either site
would have a material adverse effect on our business or operations. On the
Camden, New Jersey site, we have been advised that the cost to remediate the
property should not exceed $500,000. We recorded a provision for this amount
during the first quarter of 2002.
For additional information related to environmental issues, see
"Legal Proceedings," Notes 1 and 11 in the Notes to Consolidated Financial
Statements for the year ended December 31, 2001 included herein and Note 8 in
the Notes to the Consolidated Financial Statements for the nine months ended
September 30, 2002 included herein.
EMPLOYEES
15
As of December 31, 2001 and September 30, 2002, we had approximately
1,800 and 2,000 employees, respectively. Of these employees,
approximately 160 and 191, respectively, are subject to collective
bargaining agreements.
FOREIGN OPERATIONS
In addition to manufacturing operations in California, Minnesota,
and New Jersey, we manufacture substantial quantities of products in premises
leased or owned by us in Mexicali and Matamoros, Mexico; Ingolstadt, Germany;
and Paks, Hungary. These external and foreign sources of supply present risks of
interruption for reasons beyond our control, including political or economic
instability and other uncertainties. During the year ended December 31, 2001, we
manufactured products in two additional facilities in Mexico. The Condor plant
in Reynosa, Mexico was closed in March 2002, and the SL Waber plant in Nogales,
Mexico was sold in September 2001.
Generally, our sales are priced in United States dollars and
European Union euros (German marks prior to January 1, 2002), and our costs and
expenses are priced in United States dollars, Mexican pesos, European Union
euros (German marks prior to January 1, 2002) and Hungarian forints.
Accordingly, the competitiveness of our products relative to locally produced
products may be affected by the performance of the United States dollar compared
with that of our foreign customers' and competitors' currencies. Foreign net
sales comprised 27%, 23%, and 27% of net sales from continuing operations for
the years ended December 31, 2001 and December 31, 2000, and the fiscal year
ended July 31, 1999, respectively. Foreign net sales comprised 21% and 29% of
net sales from continuing operations for the five-month periods ended December
31, 1999 and December 31, 1998, respectively.
Additionally, we are exposed to foreign currency transaction and
translation losses, which might result from adverse fluctuations in the values
of the Mexican peso, European Union euro (German mark prior to January 1, 2002)
and Hungarian forint. At December 31, 2001, we had net liabilities of $241,000
subject to fluctuations in the value of the Mexican peso, net assets of
$4,578,000 subject to fluctuations in the value of the German mark and net
assets of $507,000 subject to fluctuations in the value of the Hungarian forint.
Fluctuations in the value of the Mexican peso, German mark, and Hungarian forint
were not significant in 1999, 2000 or 2001. However, there can be no assurance
that the value of the Mexican peso, European Union euro or Hungarian forint will
continue to remain stable.
Elektro-Metall Export manufactures all of its products in Germany or
Hungary and incurs its costs in European Union euros (German marks prior to
January 1, 2002) or Hungarian forints. Elektro-Metall Export's sales are priced
in European Union euros (German marks prior to January 1, 2002) and United
States dollars. Condor manufactures substantially all of its products in Mexico
and incurs its manufacturing labor costs and supplies in Mexican pesos. SL
Montevideo manufactures an increasing amount of its products in Mexico and
incurs related labor costs and supplies in Mexican pesos. Both Condor and
SL-Montevideo price their sales in United States dollars. Elektro-Metall Export
maintains its books and records in European Union euros (German marks prior to
January 1, 2002), and its Hungarian subsidiary maintains its books and records
in Hungarian forints. The Mexican subsidiaries of Condor and SL Montevideo
maintain their books and records in Mexican pesos. For additional information
related to financial information about foreign operations, see Notes 14 and 15
in the Notes to Consolidated Financial Statements for the year ended December
31, 2001 included herein.
RECENT DEVELOPMENTS
On August 8, 2002, we announced that we had retained Imperial
Capital, LLC to act as our financial advisor. Imperial Capital, LLC is
spearheading our initiative to explore a sale of some or all of our businesses
and has also assisted us in our ongoing efforts to secure new long term debt to
refinance our current revolving credit facility.
ADDITIONAL INFORMATION
Additional information regarding the development of our businesses
during 2001 is contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein.
16
DESCRIPTION OF PROPERTY
Set forth below are the properties where we conduct business as of September 30, 2002.
Approx. Owned or Leased
Square And
Location General Character Footage Expiration Date
-------- ----------------- ------- ---------------
Montevideo, MN Manufacture of precision motors and motion control 30,000 Owned
systems (SL Montevideo)
Matamoros, Mexico Manufacture of precision motors (SL Montevideo) 15,000 Leased - 11/05/03
Oxnard, CA Manufacture and distribution of power supply products 36,480 Leased - 02/28/03
(Condor)
Mexicali, Mexico Manufacture and distribution of power supply products Leased-
(Condor) 40,000 monthly
21,150 monthly
San Diego, CA Manufacture of power distribution and conditioning 45,054 Leased - 03/22/07
units (Teal)
Ingolstadt, Germany Manufacture of actuation systems and power 51,021 Owned
distribution products (Elektro-Metall Export)
Paks, Hungary Manufacture of power distribution products and wire 12,916 Owned
harness systems (Elektro-Metall Export)
Boonton Twp., NJ Manufacture of electric utility equipment protection 78,000 Owned
systems (RFL)
Camden, NJ Industrial surface finishing (SL Surface Technologies) 15,800 Owned
Pennsauken, NJ Industrial surface finishing warehouse (SL Surface 6,000 Owned
Technologies)
Mt. Laurel, NJ Corporate office (Other) 4,200 Leased - 11/30/05
All manufacturing facilities are adequate for current production
requirements. We believe that our 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 our
operations.
LEGAL PROCEEDINGS
In the ordinary course of our business, we are subject to loss
contingencies pursuant to foreign and domestic federal, state and local
governmental laws and regulations and are 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 our financial condition or results
of operations.
17
Our subsidiary, SL Montevideo, is currently involved in litigation
in federal district court for the western district of Michigan. The lawsuit was
filed in the fall of 2000 by Eaton Aerospace LLC, 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 sought compensatory
damages of approximately $3,900,000. Prior to trial, SL Montevideo admitted to
liability of $35,000. At the end of the trial, a jury rendered a verdict in
favor of this customer for $650,000. The customer has appealed various aspects
of this decision, which appeal, if determined adversely, could have a material
adverse impact on us.
In a November 1991 Administrative Directive, the New Jersey
Department of Environmental Protection alleged that SL Surface Technologies,
formerly SL Modern Hard Chrome, Inc., and 20 other respondents are responsible
for a containment 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 issued by 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 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.
The third matter is a Spill Act Directive by NJDEP to SL Surface Technologies
alone, regarding similar matters at its site. The state has not initiated
enforcement action regarding any of its three Directives. There also exists an
outstanding enforcement issue regarding our compliance with ECRA at the same
site.
On June 12, 2002, we and our subsidiary, SL Surface Technologies,
were served with notice of a class-action complaint filed in Superior Court of
New Jersey for Camden County. We and SL Surface Technologies 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. SL Surface Technologies once operated a chrome-plating
facility in Pennsauken.
With regard to the $8,655,000 amount discussed in the preceding
paragraphs, in our view it is not appropriate to consider that amount as
potential cost reimbursements. The SL Surface Technologies site, which is the
subject of these actions, has undergone remedial activities under NJDEP's
supervision since 1983. We believe that we have a significant defense against
all or any part of the $8,655,000 claim as well as the class action since
technical data generated as part of previous remedial activities indicate that
there is no offsite migration of containments at the SL Surface Technologies
site. Based on this and other technical factors, we believe we have a
significant defense to Directive No. 1 as well as the claims alleged in the
class action plaintiff's complaint, and any material exposure is unlikely.
In May 2000, we discovered evidence of possible soil contamination
at our facility in Auburn, New York. The New York State Department of
Environmental Controls has been contacted and an investigation is currently
underway. Based upon the preliminary evidence, we do not believe that we will
incur material remediation costs at this site.
In December 2001, we 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. We have requested an extension of time to determine the
nature of the alleged contamination and the extent of our responsibility. It is
still very early in the investigation; however, based upon the preliminary
investigation, we do not believe that remediation of this site would have a
material adverse effect on our business or operations.
We are investigating a possible ground water containment plume on
its property in Camden, New Jersey. While a final determination of the extent of
the contamination has not been made, we have been advised that the cost to
remediate the property should not exceed $500,000. We recorded a provision for
this amount during the first quarter of 2002.
18
We filed claims with several of our insurers seeking reimbursement
for past and future environmental costs. In settlement of these claims, we
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
associated with the SL Surface Technologies site of 15% of costs up to $300,000,
15% of costs up to $150,000 and 20% of costs up to $400,000, respectively. In
addition, we received $100,000 during fiscal 1998, 1999, 2000 and 2001, as
stipulated in the settlement agreement negotiated with one of the three
insurers.
On August 9, 2002, we 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 us and an electronics manufacturer based in Hong
Kong for alleged failure to pay for goods under a supplier agreement. We believe
this claim is without merit and have brought counter claims against the vendor
and will vigorously pursue defenses with respect to these claims.
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. We are
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
us to date, management has provided an estimated accrual for all known costs
believed to be probable in the amount of $290,000. 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 our 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 our
consolidated financial position or results of operations.
It is management's opinion that the impact of legal actions brought
against us and our operations will not have a material adverse effect on our
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 us. The adverse
resolution of any one or more of these matters could have a material adverse
effect on our business, operating results, financial condition or cash flows.
Additional information pertaining to legal proceedings is found in Note 11 in
the Notes to the Consolidated Financial Statements included herein.
CAPITALIZATION
The following table sets forth our summary capitalization as of
September 30, 2002. This table should be read in conjunction with our financial
statements and notes thereto incorporated by reference into this prospectus.
--------------------------------------------
Actual
---------------------------------------------
(in thousands)
-----------------------
Cash and cash equivalents............................................... $5,644
Total debt
Short-term bank debt.................................................... $4,109
Long-term debt due within one year................................ $20,149
Long-term debt less portion due within one year................... $38
Total debt.................................................. $24,296
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......................................................... $1,660
Capital in excess of par value.................................... $38,763
Retained earnings................................................. $9,401
Accumulated other comprehensive income
(loss)........................................................... $305
Treasury stock, at cost, 2,394,000 and 2,587,000
shares, respectively $(15,293)
19
Total shareholders' equity.................................. $34,836
Total capitalization.................................................... $59,132
Ratio of total debt-to-total capitalization............................. 41.1%
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the consolidated financial statements and notes thereto,
and other financial information included elsewhere in this prospectus. Our
consolidated statements of operations data set forth below for the years ended
December 31, 2001 and 2000 and July 31, 1999, and for the five months ended
December 31, 1999 and 1998 (unaudited) and the consolidated balance sheet data
as of December 31, 2001 and 2000 have been derived from our audited consolidated
financial statements which are included elsewhere in this prospectus. The
consolidated statement of operations data set forth below for the years ended
July 31, 1998 and 1997 and the consolidated balance sheet data as of December
31, 1999 and 1998 (unaudited) and July 31, 1999, 1998 and 1997 have been derived
from our audited consolidated financial statements which are not included in
this prospectus. The balance sheet data and the statement of operations data as
of and for the nine months ended September 30, 2002 and 2001 have been derived
from our unaudited financial statements, included elsewhere in this prospectus,
which we believe have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, which we consider necessary for a fair presentation of the selected
financial data shown.
Nine Nine
Months Months Twelve Twelve Twelve
Ended Ended Months Months Months
September September Ended Ended Ended
30, 2002 30, 2001 December December July 31,
(Unaudited) (Unaudited) 31, 2001 31, 2000 1999
--------------------------------------------------------------------------------
(amounts in thousands except per share data)
--------------------------------------------------------------------------------
Net sales (1) $ 101,937 $ 104,029 $ 138,467 $ 148,405 $ 88,694
Income (loss) from continuing
operations $ 191 $ (3,299) $ (6,703) $ 6,423 $ 5,799
Income (loss) from discontinued
operations $ 313 $ (4,244) $ (3,947) $ (4,723) $ (393)
Net income (loss) (2) $ 504 $ (7,543) $ (10,650) $ 1,700 $ 5,406
Diluted net income (loss) per
common share $ 0.09 $ (1.32) $ (1.87) $ 0.30 $ 0.92
Shares used in computing diluted
net income (loss) per common
share 5,856 5,695 5,698 5,757 5,876
Cash dividend per
Common share -0- -0- -0- $ 0.10 $ 0.09
Year-end financial position
Working capital $ 5,896 $ (8,281) $ 3,476 $ 31,180 $ 24,812
Current ratio(3) 1.1 0.9 1.1 2.3 1.9
Total assets $ 88,976 $ 109,071 $ 107,758 $ 113,481 $ 112,686
Long-term debt $ 38 $ 1,052 $ 1,009 $ 36,533 $ 31,984
Shareholders' equity $ 34,836 $ 36,568 $ 33,204 $ 43,350 $ 42,842
Book value per share $ 5.91 $ 6.40 $ 5.81 $ 7.69 $ 7.61
Other
Capital expenditures(4) $ 1,409 $ 1,911 $ 2,342 $ 2,563 $ 1,901
Depreciation and
Amortization $ 2,655 $ 3,482 $ 4,587 $ 4,379 $ 3,092
Twelve Five Five Months
Months Twelve Months Ended
Ended Months Ended December 31,
July 31, Ended July December 1998
1998 1997 31, 1999 (Unaudited)
--------------------------------------------------------
--------------------------------------------------------
Net sales (1) $ 71,918 $ 68,044 $ 59,032 $ 32,809
Income (loss) from continuing
operations $ 4,383 $ 6,720 $ 2,789 $ 1,258
Income (loss) from discontinued
operations $ 930 $ 1,095 $ (3,473) $ 703
Net income (loss) (2) $ 5,313 $ 7,815 $ (684) $ 1,961
Diluted net income (loss) per
common share $ 0.90 $ 1.30 $ (0.12) $ 0.33
Shares used in computing diluted
net income (loss) per common
share 5,896 6,021 5,624 5,886
Cash dividend per
Common share $ 0.08 $ 0.07 $ 0.05 $ 0.04
Year-end financial position
Working capital $ 21,344 $ 17,399 $ 33,042 $ 22,145
Current ratio(3) 2.1 1.8 2.2 2.1
Total assets $ 80,915 $ 66,804 $ 117,050 $ 78,929
Long-term debt $ 13,283 $ 700 $ 39,245 $ 12,255
Shareholders' equity $ 38,345 $ 36,492 $ 42,072 $ 40,546
Book value per share $ 6.84 $ 6.27 $ 7.48 $ 7.16
Other
Capital expenditures(4) $ 2,029 $ 1,327 $ 849 $ 1,247
Depreciation and
Amortization $ 2,335 $ 2,102 $ 1,830 $ 1,246
20
(1) During 2001, we sold SL Waber and, accordingly, the operations of SL Waber
have been accounted for as discontinued operations in all periods presented. The
prior years have been restated to reflect this accounting treatment.
(2) Calendar 2001 includes pre-tax 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 SL Surface Technologies.
Calendar 2000 includes pre-tax income of $875,000 related to the settlement of a
class action suit against one of our 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 our life insurance carriers.
(3) The current ratio for 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission 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.
Our significant accounting policies are described in Note 1 in the
Notes to Consolidated Financial Statements. 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 generally recognized at the time the
product is shipped, with provisions established for estimated product returns.
Upon shipment, we provide for the estimated cost that may be incurred for
product warranties. Rebates and other sales incentives offered by us to our
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. We follow generally accepted
guidelines in measuring revenue, however, certain judgments affect the
application of our 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
Our estimate for our 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, we
evaluate specific accounts where we have information that the customer may have
an inability to meet its financial obligations (bankruptcy, etc.). In these
cases, we use our judgment, based on the best available facts and circumstances,
and record 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 to us), our estimates of the recoverability of amounts due us could
be reduced by a material amount.
Inventories
21
We ensure inventory is valued at the lower of cost or market, and
continually review the book value of discontinued product lines to determine if
these items are properly valued. We identify these items and assess 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 we write down the related inventory 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. We also continually evaluate the composition of our
inventory and identify slow-moving and excess inventories. Inventory items
identified as slow-moving or excess are evaluated to determine if reserves are
required. If we are not able to achieve our expectations of the net realizable
value of the inventory at its current value, we would have to adjust our
reserves accordingly.
Accounting for Income Taxes
Our 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. We follow generally accepted
guidelines regarding the recoverability of any tax assets recorded on the
balance sheet and provide any necessary allowances as required. As part of the
process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. 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 we believe
that recovery is not likely, we must establish a valuation allowance. To the
extent we establish a valuation allowance or increase this allowance in a
period, we 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,
2001, we had recorded a valuation allowance of $1,677,000, due to uncertainties
related to our ability to utilize some deferred tax assets, primarily consisting
of certain net operating loss carryforwards for state tax purposes and foreign
tax credits, before they expire. The valuation allowance is based on estimates
of taxable income by jurisdiction in which we operate 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, we may
need to establish an additional valuation allowance that could materially impact
our consolidated financial position and results of operations.
The net deferred tax asset as of December 31, 2001 was $8,314,000,
net of a valuation allowance of $1,677,000. The carrying value of our net
deferred tax assets assumes that we 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, we may be
required to record additional valuation allowances against our deferred tax
assets resulting in additional income tax expense in the consolidated statement
of operations. Management evaluates the realizability of the deferred tax assets
quarterly, and assesses the need for additional valuation allowances quarterly.
Legal Contingencies
We are currently involved in certain legal proceedings. As discussed
in Note 11 in the Notes to the Consolidated Financial Statements for the year
ended December 31, 2001 included herein, we have accrued for our estimate of the
probable costs for the resolution of these claims. This estimate has been
developed after investigation and is based upon an analysis of potential
results, assuming a combination of litigation and settlement strategies.
Management does not believe these proceedings will have a material adverse
effect on our 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.
22
Impairment of Long-lived Assets
Our long-lived assets include goodwill and other intangible assets.
At December 31, 2001, we had a book value of $14,799,000 for goodwill and other
intangible assets, accounting for approximately 14% of our total assets. The
realizability of the goodwill and intangible assets is dependent on the
performance of the subsidiaries and businesses that we have acquired.
In assessing the recoverability of our goodwill and other
intangibles, we must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If these
estimates or related assumptions change in the future, we may be required to
record impairment charges for these assets not previously recorded. During the
year ended December 31, 2001, we determined that the value of the intangible
assets associated with the 1999 acquisition of Todd Products had been impaired
as a result of the severe downturn in the market for telecommunications
products. These intangible assets consisted of goodwill and a consulting
agreement with net book values of $3,179,000 and $966,000, respectively.
Accordingly, we have recorded a charge in the amount of $4,145,000 in
recognition of this impairment.
On January 1, 2002, we adopted certain provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." In connection with the adoption of the remaining provisions of SFAS No.
142, we will be required to analyze our goodwill for impairment on an annual
basis and between annual tests in certain circumstances. Goodwill and intangible
assets that have indefinite useful lives will not be amortized.
Determining Functional Currencies for the Purpose of Consolidation
We have several foreign subsidiaries which together account for
approximately 27% of our net sales from continuing operations, 25% of our assets
and 18% of our total liabilities for the year ended December 31, 2001.
In preparing the consolidated financial statements, we are required
to translate the financial statements of the foreign subsidiaries from the
currency in which they keep their accounting records, generally the local
currency, into United States dollars. This process results in exchange gains and
losses which, under the relevant accounting guidance, are either included within
the consolidated statement of operations or as a separate part of net equity
under the caption "Accumulated other comprehensive (loss) income."
Under the relevant accounting guidance the treatment of these
translation gains or losses is dependent upon management's determination of the
functional currency of each subsidiary. The functional currency is determined
based on management's judgment and involves consideration of all relevant
economic facts and circumstances affecting the subsidiary. Generally, the
currency in which our subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures, would be
considered the functional currency, but any dependency upon the parent and the
nature of the subsidiary's operations must also be considered.
If any subsidiary's functional currency is deemed to be the local
currency, then any gain or loss associated with the translation of that
subsidiary's financial statements is included in the cumulative translation
adjustments. However, if the functional currency is deemed to be the United
States dollar, then any gain or loss associated with the translation of these
financial statements would be included in the consolidated statement of
operations. If we dispose of any of our subsidiaries, any cumulative translation
gains or losses would be realized into the consolidated statement of operations.
If there has been a change in the functional currency of a subsidiary to the
United States dollar, any translation gains or losses arising after the date of
change would be included within the consolidated statement of operations.
The magnitude of these gains or losses is dependent upon movements
in the exchange rates of the foreign currencies in which we transact business
against the United States dollar. These currencies include the European Union
euro, Hungarian forint and Mexican peso. Any future translation gains or losses
could be significantly higher than those experienced historically. In addition,
if there is a change in the functional currency of one of our subsidiaries, we
would be required to include any translation gains or losses from the date of
change in our consolidated statement of operations.
23
Environmental Expenditures
We (together with the industries in which we operate or have
operated) are subject to United States, Mexican, Hungarian and German
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. We and the industries
are also subject to other federal, state and local environmental laws and
regulations, including those that require us to remediate or mitigate the
effects of the disposal or release of certain chemical substances at various
sites, including some where we have ceased operations. It is impossible to
predict precisely what effect these laws and regulations will have on us 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 our insurance carriers. The
liability is periodically reviewed and adjusted to reflect current remediation
progress, prospective estimates of required activity and other relevant factors
including changes in technology or regulations.
The above listing is not intended to be a comprehensive list of all
of our 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 our audited
Consolidated Financial Statements and Notes thereto, which contain accounting
policies and other disclosures required by generally accepted accounting
principles.
RESULTS OF OPERATIONS
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 Montevideo 23.4 3,178 16,738 13,560
Elektro-Metall Export (3.5) (695) 19,394 20,089
RFL 10.2 2,036 21,906 19,870
SL Surface Technologies (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 Elektro-Metall Export of $0.7 million, or 4%.
These decreases were partially offset by relatively strong performances by the
other business segments except SL Surface Technologies, which represents only 2%
of consolidated sales. Condor's sales were adversely impacted by its reduction
of a significant amount of its products offered under its telecommunications-
related
24
product line caused by the continued weakness in the telecommunications
industry. Elektro-Metall Export's sales were principally affected by lower sales
in the European commercial aerospace market. The sales increase at Teal is
related to a significant increase in its medical imaging business, while the
sales increases at. SL Montevideo and RFL were not related to any specific
reason other than increased orders and shipments.
We 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, we 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, we would have had an operating
profit of $3,445,000. In the comparable period last year, we recorded
restructuring charges of $2,891,000 and an inventory write down of $2,940,000.
Without these charges, we 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 our
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 to the Consolidated Financial Statements
for the nine months ended September 30, 2002 included herein). Related
amortization charged to last year's 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.
The table below shows a breakdown of cost of products sold by
segment for the nine months ended September 30, 2002 and September 30, 2001:
Nine Months Ended
September 30,
2002 2001
-----------------------------
(in thousands)
Cost of Products Sold:
Condor $18,395 $28,708
Teal 9,339 5,466
SL-MTI 12,696 9,537
EME 14,534 14,651
RFL 11,394 10,291
Surf Tech 1,452 1,692
Other (491) ----
-----------------------------
Consolidated $67,319 $70,345
-----------------------------
Significant improvements were made at Condor which lowered 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.
We had no write-down of inventory for the nine months ended
September 30, 2002 compared to a write-down of $2,940,000 for the nine months
ended September 30, 2001. Of the $2,940,000 inventory write-down, $2,890,000 was
recorded from the Todd Products acquisition and consisted primarily of the
telecommunications-related product line. As part of our restructuring plan,
management decided to exit or significantly reduce our
telecommunications-related product line due to the continued weakness in the
telecommunications industry. The inventory was evaluated based on current
backlog and sales forecasts. Following this evaluation, we considered the
inventory to have limited value and wrote it down. We disposed of approximately
$2,100,000 of this inventory in 2001.
25
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. The $500,000 addition to the reserve for
environmental matters resulted from our investigation of ground water
contamination on our property in Camden, NJ. While a final determination of the
extent of the contamination has not been made, we were advised during the first
quarter of 2002 that the cost to remediate the property should not exceed
$500,000. Accordingly, we made the $500,000 addition to the reserve for
environmental matters in the first quarter of 2002 to cover the estimated cost
of remediation of our property in Camden, NJ.
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 the same period last
year. There were no intangible impairment write-offs for the nine months ended
September 30, 2002 and 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 to the Consolidated Financial
Statements for the nine months ended September 30, 2002 included herein).
We incurred special charges of $1,834,000 for the nine months ended
September 30, 2002 as compared to $ -0- for the same period last year. These
special charges were related to payments (including related benefits) made under
change-in-control agreements with certain officers and additional proxy and
legal costs that resulted from a contested election to our Board of Directors in
which five new directors were elected over incumbent directors. In the future we
do not expect to incur any special charges related to these change-in-control
agreements and for additional proxy and legal costs.
We incurred restructuring charges for the nine months ended
September 30, 2002 that were comprised of $166,000 for severance payments and
$99,000 for certain exit costs related to the closure of Condor's engineering
and sales support office in Brentwood New York. All of these costs were paid
during the nine months ended September 30, 2002. During the comparable period in
2001, we incurred $2,891,000 of restructuring charges that were primarily
related to the closure of Condor's manufacturing facility in Reynosa, Mexico.
The closure of the Reynosa manufacturing facility was part of a plan that we
implemented to restructure certain of our operations as a result of the
significant reduction in demand for telecommunications-related products. The
restructuring charges for the nine months ended September 30, 2001 were
primarily related to severance costs at the Reynosa manufacturing facility
associated with the termination of approximately 828 employees and the payment
of related severance benefits.
26
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 related to net operating losses which became available due to recent
changes in the tax law.
For the nine months ended September 30, 2002, discontinued
operations contributed $313,000 to net income, as compared to a charge of
$4,244,000 in the same period last year. Included in discontinued operations for
the nine months ended September 30, 2002 is a $450,000 reduction in the reserve
for potential liabilities related to the sale of SL Waber in 2001. The reserve
was established after the sale of SL Waber to cover certain liabilities and
vendor claims that remained our responsibility. We continue to evaluate this
reserve (which does not cover accrued income taxes) on a quarterly basis, and
following an evaluation during the first quarter of 2002, we reduced the reserve
by $450,000. As of September 30, 2002, the reserve was $760,000 compared to
$1,519,000 as of December 31, 2001.
Twelve Months Ended December 31, 2001 Compared With Twelve Months Ended December
31, 2000
Consolidated net sales in 2001 of $138,467,000 decreased
approximately 7% ($9,938,000), as compared to consolidated net sales in 2000.
Consolidated net sales for 2001 and 2000 do not include net sales of $10,316,000
and $19,341,000, respectively, relating to SL Waber, since SL Waber's operating
results are a part of the net loss from discontinued operations. Net loss in
2001 was $10,650,000, or $1.87 per diluted share, as compared to net income in
2000 of $1,700,000, or $0.30 per diluted share. The net loss in 2001 included
$4,270,000 relating to the impairment of intangible assets of Condor and SL
Surface Technologies, $3,868,000 for restructuring expenses of Condor and SL
Surface Technologies, inventory write-downs of $2,940,000 for Condor and SL
Surface Technologies and a $3,947,000 net loss from SL Waber (a discontinued
operation).
Condor's net sales in 2001 decreased approximately 22% ($13,825,000)
and its operating income decreased approximately 326% ($13,695,000), as 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 operating income was primarily the result of the
substantial decrease in sales of telecommunications products, and includes
charges in connection with the write-down of telecommunications-related
inventory in the amount of $2,890,000, the restructuring expenditures to close
two facilities and lay-off 810 employees in the amount of $3,683,000 and the
impairment of intangible assets related to the 1999 Todd Products acquisition in
the amount of $4,145,000.
Teal's net sales in 2001 decreased approximately 39% ($8,512,000)
and operating income decreased approximately 84% ($3,200,000), as compared to
2000. The decrease in net sales and operating income was due to the continued
depressed demand for semiconductor manufacturing equipment.
Elektro-Metall Export's net sales in 2001 increased approximately
14% ($3,068,000) and operating income increased approximately 51% ($1,070,000),
as compared to net sales and operating income in 2000. Contributing to the
increased net sales and operating income were increased sales of actuation
systems to the aerospace industry.
SL Montevideo's net sales in 2001 increased approximately 36%
($5,061,000) and operating income increased approximately 92% ($949,000), as
compared to net sales and operating income in 2000. Contributing to the
increased net sales and operating income were increased sales of precision motor
products to the aerospace industry.
RFL's net sales in 2001 increased approximately 17% ($4,021,000) and
operating income increased approximately 28% ($707,000), as compared to net
sales and operating income in 2000. Contributing to the
27
increased net sales and operating income were increased sales of teleprotection
equipment and systems to the electric utility industry.
SL Surface Technologies' net sales in 2001 increased approximately
9% ($249,000) and the operating loss increased approximately 874% ($1,005,000),
as compared to net sales and operating loss in 2000. Contributing to the
increased net sales and decreased operating income was the continued development
of its coatings and platings sales and operations supporting the
telecommunications industry, and includes charges in connection with the
write-down of inventory of $50,000 and restructuring and impairment charges of
$185,000 and $125,000, respectively.
SL Waber's net sales in 2001 decreased approximately 47%
($9,025,000) as compared to 2000. This subsidiary was sold in September 2001 and
is reported as discontinued operations for all periods presented.
COST OF SALES
As a percentage of net sales, cost of products sold, including
inventory charges and losses on commitments, in 2001 was approximately 70%, as
compared to approximately 66% in 2000. The percentage increase was a result of
(i) product mix, which included a higher percentage of sales of lower margin
products to the aerospace, medical and industrial markets; and (ii) an increase
in cost of sales due to a reserve at Condor of $2,890,000 for excess and
obsolete inventory relating to the telecommunications industry. The $2,890,000
was from the Todd Products acquisition and consisted primarily of the
telecommunications-related product line. As part of the restructuring plan,
management decided to exit or significantly reduce our
telecommunications-related product line due to the continued weakness in the
telecommunications industry. The inventory was evaluated based on current
backlog and sales forecasts. Following this evaluation, we considered the
inventory to have limited value and wrote it down. We disposed of approximately
$2,100,000 of this inventory in 2001.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in 2001 were
$8,768,000, a decrease of approximately 9% ($903,000), as compared to 2000. As a
percentage of net sales, engineering and product development expenses in 2001
were 6%, as compared to 7% in 2000. 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
$28,405,000, an increase of approximately 13% ($3,236,000), as compared to 2000.
As a percentage of net sales, selling, general and administrative expenses in
2001 and 2000 were approximately 21% and 17%, 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 our business, $925,000 of bank charges incurred as a
result of the amendment to our revolving credit facility and default of
financial covenants thereunder, an increase of $450,000 in our litigation
reserve and $300,000 in expenses associated with the contested election of
directors and legal fees and $90,000 in consulting costs related to the
restructuring of Condor.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in 2001 were $4,587,000, an
increase of approximately 5% ($208,000), as compared to 2000. The increase in
2001 was primarily related to the increased base of property, plant and
equipment depreciated during the year.
RESTRUCTURING COSTS AND IMPAIRMENT OF INTANGIBLES
During 2001, we recognized $8,138,000 of restructuring and
impairment costs as well as inventory write-downs that were related to Condor
($7,828,000), and SL Surface Technologies ($310,000). Our restructuring costs
and impairment charges are summarized as follows:
Impairment
Restructuring Of
Costs Intangibles
-------------- ------------------- -
(In thousands)
Condor - intangible asset impairment....... $ ---- $4,145
28
Condor - workforce reduction and other.. 3,683 ----
Condor - inventory write-off ---- ----
SL Surface Technologies - intangible asset impairment. ---- 125
SL Surface Technologies - fixed asset write-offs............ 125 ----
SL Surface Technologies - workforce reduction and other 60 ----
SL Surface Technologies - inventory write-off ---- ----
--------------- -------------------
Total restructuring and impairment
Charges $3,868 $4,270
=============== ===================
The Condor restructuring charge relates to the closure of its
facility in Reynosa, Mexico. The workforce reduction charges are primarily for
severance costs and are discussed more fully below.
During 2001, we implemented a plan to restructure certain of our
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 throughout 2001. As a result, we needed to reduce our fixed costs and
manufacturing capacity in line with substantially lower sales forecasts.
The restructuring plan was designed to address these requirements in
a deliberate manner that would not overburden our 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 in employees and staff at Condor's
continuing manufacturing facilities 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 our estimate of the future lease commitments and buyout
options for closed facilities. We anticipate that these facilities will be
closed and assets will be disposed of by the end of the second quarter of 2002.
Lease payments for the closed facilities extend into 2003 and are estimated to
be $500,000. These lease payments are primarily related to Condor's
manufacturing facility in Reynosa, Mexico.
The restructuring plan included the termination of approximately 828
employees, and payment of related severance benefits. Approximately 810
employees were terminated as of December 31, 2001. The remaining terminations
and associated termination payments were made in the first quarter of 2002.
As of December 31, 2001, approximately $1,163,000 of the
restructuring costs is included as a component of other accrued liabilities in
the accompanying consolidated balance sheet.
OTHER INCOME (EXPENSE)
In 2001, interest income remained consistent with 2000. Interest
expense in 2001 increased, as compared to 2000, primarily due to the higher
levels of borrowing during 2001.
TAXES
29
The effective tax rate in 2001 was (38%), as compared to 36% in
2000. See Note 3 in the Notes to Consolidated Financial Statements for the year
ended December 31, 2001 included herein.
Twelve Months Ended December 31, 2000 Compared With Twelve Months Ended July 31,
1999
Consolidated net sales from continuing operations in 2000 of
$148,405,000 increased approximately 67% ($59,711,000), as compared to
consolidated net sales in fiscal 1999. Consolidated net sales for 2000 included
twelve months of RFL's net sales of $24,426,000 and twelve months of Todd
Products' net sales of $26,412,000. Consolidated net sales in fiscal 1999 of
$88,694,000 included approximately three months of RFL's net sales of
$5,274,000. Net income in 2000 was $1,700,000, or $0.30 per diluted share, as
compared to net income in fiscal 1999 of $5,406,000, or $0.92 per diluted share.
Condor's net sales in 2000 increased approximately 106%
($32,139,000) and its operating income decreased approximately 27% ($1,573,000),
as compared to net sales and operating income in fiscal 1999. Contributing to
the increase in net sales was the inclusion of twelve months of Todd Products'
net sales of $26,412,000. The decrease in operating income in 2000 resulted
primarily from costs incurred with the integration of the operations of Todd
Products during the year.
Teal's net sales in 2000 increased approximately 44% ($6,676,000)
and operating income increased approximately 91% ($1,816,000), as compared to
fiscal 1999. The increase in net sales and operating income was due to increased
demand for semiconductor manufacturing equipment and higher margin products.
Elektro-Metall Export's net sales in 2000 increased approximately
13% ($2,549,000) and operating income increased approximately 26% ($428,000), as
compared to net sales and operating income in fiscal 1999. Contributing to the
increased net sales and operating income were increased sales of actuation
systems to the aerospace industry.
SL Montevideo's net sales in 2000 decreased approximately 6%
($880,000) and operating income decreased approximately 16% ($191,000), as
compared to net sales and operating income in fiscal 1999. Contributing to the
decreased net sales and operating income were decreased sales of precision motor
products to the aerospace industry.
RFL's net sales in 2000 increased approximately 363% ($19,152,000)
and operating income increased approximately 395% ($2,013,000), as compared to
net sales and operating income in fiscal 1999. Contributing to the increased net
sales and operating income was inclusion of twelve months of net sales for RFL
in 2000, as compared to approximately three months in fiscal 1999.
SL Surface Technologies' net sales in 2000 increased approximately
3% ($75,000) and the operating loss increased approximately 1,250% ($125,000),
as compared to net sales and operating income in 1999. Contributing to the
increased net sales and decreased operating income was the development of its
coatings and platings sales and operations supporting the telecommunications
industry.
SL Waber's net sales in 2000 decreased approximately 47%
($17,093,000) as compared to fiscal 1999. This subsidiary was sold in September
2001 and is reported in these accounts as discontinued operations.
COST OF SALES
As a percentage of net sales, cost of products sold in 2000 was
approximately 66%, as compared to approximately 63% in fiscal 1999. The
percentage increase was a direct result of product mix, which included a higher
percentage of sales of lower margin products such as actuators and power
distribution systems.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in 2000 were
$9,671,000, an increase of approximately 61% ($3,665,000), as compared to fiscal
1999. As a percentage of net sales, engineering and product development expenses
in 2000 were approximately 6%, as compared to approximately 7% in fiscal 1999.
During 2000, increased expenses were primarily related to additional investments
made by Condor, SL
30
Montevideo and Elektro-Metall Export, as well as additional investments made in
connection with the RFL and Todd Products acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in 2000 were
$25,169,000, an increase of approximately 87% ($11,721,000), as compared to
fiscal 1999. As a percentage of net sales, selling, general and administrative
expenses in 2000 were approximately 17%, as compared to 15% in fiscal 1999. The
increase was mainly due to the inclusion of the twelve-months results of RFL and
Todd Products. The selling, general and administrative expenses in 2000 are net
of a reversal of a $650,000 reserve for environmental penalties. We originally
recorded the reserve for this possible environmental penalty in 1991. In 2000,
an investigation disclosed that the payment of the penalty was remote and the
reserve was reversed.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in 2000 were $4,379,000, an
increase of approximately 42% ($1,287,000) as compared to fiscal 1999. The
increase in 2000 was primarily related to the depreciation of property, plant
and equipment, the amortization of computer software and the amortization of
intangible assets associated with the acquisitions of RFL and Todd Products.
INCOME FROM CLASS ACTION SUIT
During 2000, we received $875,000 in settlement of a class action
suit against one of our life insurance carriers.
OTHER INCOME (EXPENSE)
For the year 2000, interest income increased, as compared to fiscal
1999, primarily due to higher cash balances maintained at Elektro-Metall Export.
Interest expense in 2000 increased, as compared to fiscal 1999, primarily due to
the higher levels of borrowing during 2000 due to the acquisition of RFL and
Todd Products.
TAXES
The effective tax rate in 2000 was 36%, as compared to 42% in fiscal
1999. This decrease was primarily due to non-taxable income from the settlement
of a life insurance class action suit in 2000.
Five Month Period Ended December 31, 1999 ("Short Year 1999") Compared With Five
Month Period Ended December 31, 1998 ("Short Year 1998")
Consolidated net sales in Short Year 1999 were $59,032,000, an
increase of approximately 80% ($26,223,000), as compared to Short Year 1998.
Consolidated net sales in Short Year 1999 included five months of RFL's net
sales of $10,073,000 and five months of Todd Product's net sales of $11,458,000.
RFL and Todd Products were acquired after Short Year 1998 and therefore Short
Year 1998 does not include the results of the two acquisitions. Net loss in
Short Year 1999 was $684,000, or $0.12 per diluted share, as compared to net
income in Short Year 1998 of $1,961,000, or $0.33 per diluted share.
Condor's net sales in Short Year 1999 increased approximately 115%
($13,563,000) and its operating income decreased approximately 8% ($171,000), as
compared to net sales and operating income in Short Year 1998. Contributing to
the increase in net sales was the addition of net sales from the acquisition of
Todd Products. The decrease in operating income resulted from costs associated
with the integration of Todd Products during Short Year 1999.
Teal's net sales in Short Year 1999 increased approximately 54%
($3,009,000) and operating income increased approximately 218% ($926,000), as
compared to Short Year 1998. The increase in net sales and operating income was
due to increased sales of power conditioning units and systems. Operating income
increased due to increased sales of higher margin customized power conditioning
and distribution units.
31
Elektro-Metall Export's net sales in Short Year 1999 decreased
approximately 3% ($272,000) and operating income increased approximately 98%
($474,000), as compared to net sales and operating income in Short Year 1998.
Contributing to the decreased net sales were decreased sales of actuation
systems to the aerospace industry.
SL Montevideo's net sales in Short Year 1999 decreased approximately
2% ($129,000) and operating loss increased approximately 127% ($427,000), as
compared to net sales and operating income in Short Year 1998. Contributing to
the decreased net sales were decreased sales of precision motor products to the
aerospace industry because of customer requests to delay the shipment of orders.
RFL's net sales and operating income in Short Year 1999 included the
financial results of the RFL acquisition during 1999 after Short Year 1998.
SL Surface Technologies' net sales in Short Year 1999 decreased
approximately 2% ($21,000) and the operating income increased approximately 944%
($85,000), as compared to net sales and operating income in Short Year 1998.
SL Waber was sold in September 2001 and is reported in these
accounts as discontinued operations.
COST OF SALES
As a percentage of net sales, cost of products sold in Short Year
1999 was approximately 66%, as compared to approximately 64% in Short Year 1998.
The percentage increase was a direct result of product mix, which included a
higher percentage of lower margin products such as actuators and power
distribution systems.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in Short Year 1999 were
$4,150,000, an increase of approximately 75% ($1,777,000), as compared to Short
Year 1998. As a percentage of net sales, engineering and product development
expenses were approximately 7% in both Short Year 1999 and Short Year 1998.
During Short Year 1999, increased expenses were primarily related to additional
investments associated with the RFL and Todd Products acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in Short Year 1999 were
$9,283,000, an increase of approximately 78% ($4,072,000), as compared to Short
Year 1998. Increases were primarily due to the acquisition of RFL and Todd
Products. As a percentage of net sales, selling, general and administrative
expenses in Short Year 1999 and Short Year 1998 were approximately 16%.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in Short Year 1999 were
$1,830,000, an increase of approximately 47% ($584,000), as compared to Short
Year 1998. The Short Year 1999 increase was primarily related to the
depreciation of property, plant and equipment, the amortization of computer
software and the amortization of intangible assets associated with the RFL and
Todd Products acquisitions.
OTHER INCOME (EXPENSE)
Interest income in Short Year 1999 decreased, as compared to Short
Year 1998, due to lower cash balances. Interest expense in Short Year 1999
increased, as compared to Short Year 1998, primarily due to the higher levels of
borrowing due to the acquisition of RFL and Todd Products.
GAIN FROM DEMUTUALIZATION OF LIFE INSURANCE COMPANY
32
We recorded a non-recurring gain in Short Year 1999 of $1,812,000
from the demutualization of a life insurance company.
TAXES
The effective tax rate in Short Year 1999 was 48%, as compared to
54% in Short Year 1998. This decrease was primarily due to a loss benefit in
Short Year 1999. This difference resulted from the timing of certain tax-related
expense allocations with respect to discontinued operations (SL Waber).
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations and growth primarily
through funds generated from operations and borrowings under the revolving
credit facility. 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 $35.8
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 us with the availability
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. We are also
prohibited from paying dividends under the revolving credit facility. We had
$4.9 million available for borrowings under the 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. We did not repay
the revolving credit facility prior to October 31, 2002 and paid this facility
fee on November 4, 2002. We are currently negotiating to refinance the revolving
credit facility, although there can be no assurance that we will be able to
refinance the revolving credit facility prior to December 31, 2002 or that the
revolving credit facility will be refinanced successfully. A failure to
refinance the revolving credit facility would have a material adverse effect on
us since our current lenders could claim default on the revolving credit
facility and demand full payment.
We have retained Imperial Capital, LLC to spearhead our initiative
to explore a sale of some or all of our businesses and to assist management in
our ongoing efforts to secure new long term debt to refinance our current
revolving credit facility which matures on December 31, 2002.
Our German subsidiary, Elektro-Metall Export, 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,
33
December 31,2002 and the remainder of the line on March 31,2003. Elektro-Metall
Export'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, Elektro-Metall
Export can borrow for any purpose at interest rates ranging from 7.125% to
8.25%. No financial covenants are required.
Our 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, our total borrowings 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, we plan 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 our business
segments and availability of financing.
During the first nine months of 2002, we have been able to generate
adequate amounts of cash to meet our operating needs. During the first nine
months of 2002, Teal, RFL and SL Montevideo had produced positive cash flow,
aggregating approximately $5,300,000. Condor, Elektro-Metall Export and SL
Surface Technologies 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. Elektro-Metall Export experienced negative cash flow primarily due to
the pay down of accounts payable and performance under a long-term contract for
which it received a large cash advance of approximately $4,100,000 in November,
2001. We do not typically receive significant advances on any of our contracts.
The contract requires that the cash received from this advance be specifically
utilized for expenditures related to Elektro-Metall Export's performance under
this program. As of September 30, 2002, $2,761,000 and at December 31, 2001,
$3,760,000 of this cash advance was classified as deferred revenue and included
in "Accrued Liabilities: Other" in the accompanying Consolidated Balance Sheets
to properly recognize our obligation under the contract. Revenue is recognized
at the time product is shipped , which is consistent with our revenue
recognition policy. Elektro-Metall Export is also restricted as to the use of
the cash received from this advance. As of September 30, 2002, $2,638,000 of our
cash balance is restricted for use on this customer contract only. SL Surface
Technologies' negative cash flow was primarily due to its move to consolidate
into one location.
With the exception of SL Surface Technologies 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
our operating segments were profitable at the operating level for the first nine
months of 2002. SL Surface Technologies' operating loss was $642,000. SL Surface
Technologies 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 to the Consolidated
Financial Statements for the nine months ended September 30, 2002 included
herein). 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:
Contractual Less than 1 to 3 4 to 5 After
Obligations 1 Year Years Years 5 Years Total
---------------------------------------------------------------------------------------------------
(in thousands)
Operating leases 920 1,396 1,332 166 3,814
Debt 24,258 38 0 0 24,296
34
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 we conduct business, management believes that projected cash from
operations and funds expected to be available under the revolving credit
facility will be sufficient to fund our operations and working capital
requirements through December 31, 2002. The revolving credit facility matures on
December 31, 2002. We are currently negotiating to refinance the revolving
credit facility. A failure to refinance the revolving credit facility would have
a material adverse effect on us, and there can be no assurance that we will have
sufficient liquidity in 2003 if the revolving credit facility is not refinanced.
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 our 2003
year. 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
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, 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. Statement No. 145 is
effective for fiscal years beginning after May 15, 2002. We are currently
evaluating the impact if any, that implementation of this statement will have on
our 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)." 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. We are currently evaluating the impact if
any, that implementation of this statement will have on our results of
operations or financial position.
European Monetary Unit
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.
The euro conversion may have a favorable impact on cross-border
competition by eliminating the effects of foreign currency translations, thereby
creating price transparency. We are continuing to evaluate the
35
accounting, tax, legal and regulatory requirements associated with the euro
introduction. We do not expect the conversion to the euro to have a material
adverse effect on our consolidated financial position, results of operations, or
cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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 us. Our investments and outstanding debt bear variable interest
rates. Debt consists primarily of a revolving credit agreement with three United
States banks, where we borrow at the prime interest rate, plus 2%. We also
maintain lines of credit with German banks, where Elektro-Metall Export can
borrow at interest rates ranging from 5.20% to 8.25% per year. We manufacture
some of our products in Mexico, Germany and Hungary and purchase some components
in foreign markets. With the exception of component purchases made by
Elektro-Metall Export, all other foreign market component purchases are
primarily invoiced in U.S. dollars. The Elektro-Metall Export foreign market
component purchases are primarily invoiced in European Union euros (German marks
prior to January 1, 2002). Changes in interest and foreign currency exchange
rates did not have a material impact on the reported earnings for the year ended
December 31, 2001 and are not expected to have a material impact on reported
earnings for 2002.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 18, 2002, we announced that we dismissed Arthur Andersen LLP
as our independent accountants and engaged Grant Thornton LLP as our new
independent accountants. The decision to dismiss Arthur Andersen and to engage
Grant Thornton LLP was recommended by the Audit Committee of our Board of
Directors and approved by our Board of Directors.
Arthur Andersen's reports on our 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 a subsidiary of ours recognized at December 31,
2001, we were in violation of our net income covenant for the fourth quarter of
2001 under our revolving credit facility. Additionally, on March 1, 2002 we
received a notice from our lenders under the revolving credit facility stating
that we are currently in default under the revolving credit facility due to our
failure to meet a scheduled debt reduction.
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 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."
On May 23, 2002, we and our lenders reached an agreement, pursuant
to which the lenders granted a waiver of default and amended certain financial
covenants of the revolving credit facility, so that we are in full compliance
with the revolving credit facility after giving effect to this agreement.
During our 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 Arthur Andersen's satisfaction, would have
caused them to make reference to the subject matter in connection with their
report on our consolidated financial statements for such years, and there were
no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
36
We have provided Arthur Andersen with a copy of the foregoing
disclosures and requested Arthur Andersen furnish us a letter stating whether it
agrees with the statements herein. We have not yet received that letter and have
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 our two most recent fiscal years and the subsequent interim
periods through July 18, 2002, we 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 our consolidated financial statements, or any other matters or
events as set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.
DIRECTORS AND OFFICERS
Set forth below are the names and ages of our directors and
executive officers, as such terms are defined in Items 401 and 402 of Regulation
S-K, and their principal occupations at present and for the past five years. In
a contested election on January 22, 2002, five directors were elected to the
Board: Warren Lichtenstein, Steven Wolosky, Glen Kassan, Mark Schwarz and James
Henderson. There are, to our knowledge, no other agreements or understandings by
which these individuals were selected. No family relationships exist between any
directors or executive officers.
Name Age Positions
---- --- ---------
Warren Lichtenstein (1) 37 Chairman of the Board, Chief Executive Officer
Glen Kassan (1) 58 President, Director
David R. Nuzzo 44 Vice President - Finance and Administration, Secretary and Treasurer
J. Dwane Baumgardner (2) 61 Director
James Henderson 44 Director
Mark E. Schwarz (1)(2)(3) 41 Director
Steven Wolosky (2)(3) 46 Director
Richard Smith 62 Director
Avrum Gray 67 Director
--------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
37
BUSINESS BACKGROUND
Warren G. Lichtenstein was elected Chairman on January 24, 2002 and
Chief Executive Officer on February 4, 2002. Mr. Lichtenstein has served as the
Chairman of the Board, Secretary and the Managing Member of Steel Partners,
L.L.C., the general partner of Steel Partners II, L.P., since January 1, 1996.
Prior to such time, Mr. Lichtenstein was the Chairman and a director of Steel
Partners, Ltd., the general partner of Steel Partners Associates, L.P., which
was the general partner of Steel, from 1993 until prior to January 1, 1996. Mr.
Lichtenstein was the acquisition/risk arbitrage analyst at Ballantrae Partners,
L.P., a private investment partnership formed to invest in risk arbitrage,
special situations and undervalued companies, from 1988 to 1990. Mr.
Lichtenstein has served as a director of WebFinancial Corporation, a consumer
and commercial lender, since 1996 and as its President and Chief Executive
Officer since December 1997. He served as a director and the Chief Executive
Officer of Gateway Industries, Inc., a provider of database development and Web
site design and development services, since 1994 and as the Chairman of the
Board since 1995. Mr. Lichtenstein has served as a Director and the President
and Chief Executive Officer of Steel Partners, Ltd. since June 1999 and as its
Secretary and Treasurer since May 2001. He has also served as Chairman of the
Board of Directors of Caribbean Fertilizer Group Ltd., a private company engaged
in the production of agricultural products in Puerto Rico and Jamaica, since
June 2000. Mr. Lichtenstein is also a Director of the following publicly held
companies: TAB Products Co., a document management company; Tandycrafts, Inc., a
manufacturer of picture frames and framed art; Puroflow Incorporated, a designer
and manufacturer of precision filtration devices; ECC International Corp., a
manufacturer and marketer of computer-controlled simulators for training
personnel to perform maintenance and operator procedures on military weapons;
and United Industrial Corporation, a designer and producer of defense, training,
transportation and energy systems.
Glen Kassan was elected as a Director on January 24, 2002 and as our
President on February 4, 2002. Mr. Kassan has served as Executive Vice President
of Steel Partners, Ltd., a management and advisory company, since March 2002.
Steel Partners, Ltd. has provided management services to Steel and other
affiliates of Steel since March 2002. Mr. Kassan served as Executive Vice
President of Steel Partners Services, Ltd., a management and advisory company,
from June 2001 through March 2002 and Vice President from October 1999 through
May 2001. Steel Partners Services, Ltd. provided management services to Steel
and other affiliates of Steel until March 2002, when Steel Partners, Ltd.
acquired the rights to provide certain management services from Steel Partners
Services, Ltd. He has also served as Vice President, Chief Financial Officer and
Secretary of WebFinancial Corporation, a commercial and consumer lender, since
June 2000. Mr. Kassan has served as Vice Chairman of the Board of Directors of
Caribbean Fertilizer Group Ltd., a private company engaged in the production of
agricultural products in Puerto Rico and Jamaica, since June 2000. From 1997 to
1998, Mr. Kassan served as Chairman and Chief Executive Officer of Long Term
Care Services, Inc., a privately owned healthcare services company which Mr.
Kassan co-founded in 1994 and initially served as Vice Chairman and Chief
Financial Officer. Mr. Kassan is currently a Director of Tandycrafts, Inc., a
manufacturer of picture frames and framed art, Puroflow Incorporated, a designer
and manufacturer of precision filtration devices, United Industrial Corporation,
a designer and producer of defense, training, transportation and energy systems
and the Chairman of the Board of US Diagnostic Inc., an operator of outpatient
diagnostic imaging.
David R. Nuzzo has been Vice President - Finance and Administration
& Secretary since December 1997 and Treasurer since January 2001. Prior thereto,
he was a Senior Partner with The Colchester Group, a financial and legal
consulting firm since April 1995. Mr. Nuzzo resigned effective January 23, 2002
and was reappointed effective February 8, 2002.
J. Dwane Baumgardner has been a Director since 1990. Mr. Baumgardner
has been the Chief Executive Officer and President of Magna Donnelly
Corporation, an automotive supplier of exterior and interior mirror, lighting
and engineered glass systems, since October 2002. Magna Donnelly Corporation is
a wholly owned subsidiary of Magna International Inc. that was established in
October 2002 by the merger of Donnelly Corporation and Magna Mirror Systems.
Prior to October 2002, Mr. Baumgardner had been the Chairman and Chief Executive
Officer of Donnelly Corporation, an automotive supplier, since 1986. Mr.
Baumgardner is currently a Director of Wescast Industries and Scanlon Leadership
Network (where he served as President from 1983 to 1985).
James R. Henderson was elected as a Director on January 24, 2002.
Mr. Henderson has served as a Vice President of Steel Partners, Ltd., a
management and advisory company, since March 2002. Steel Partners, Ltd. has
provided management services to Steel and its affiliates since March 2002. Mr.
Henderson served as a Vice President of Steel Partners Services, Ltd., a
management and advisory company, from August 1999 through March 2002. Steel
Partners Services, Ltd. provided management services to Steel and other
affiliates of Steel until March 2002, when Steel Partners, Ltd. acquired the
rights to provide certain management services from Steel Partners Services, Ltd.
He has also served as Vice President of Operations of WebFinancial Corporation,
a commercial and consumer lender, since September 2001. From 1996 to July 1999,
Mr. Henderson was employed in various positions with Aydin Corporation, a
defense-electronics manufacturer, which included a tenure as President and Chief
Operating Officer from October 1998 to June 1999. Prior to his employment with
Aydin Corporation, Mr. Henderson was employed as an executive with UNISYS
Corporation, an e-business solutions provider. Mr. Henderson is a Director and
Chief Executive Officer of ECC International Corp., a manufacturer and marketer
of computer-controlled simulators for training personnel to perform maintenance
and operator procedures on military weapons.
Mark E. Schwarz was elected as a Director on January 24, 2002. Mr.
Schwarz has served as the general partner, directly or through entities he
controls, of Newcastle Partners, L.P., a private investment firm, since 1993. As
of December 2001, Mr. Schwarz was the Managing Member of Newcastle Capital
Group, L.L.C., the general partner of Newcastle Capital Management, L.P., which
is the general partner of Newcastle Partners, L.P. Mr. Schwarz was also Vice
President and Manager of Sandera Capital, L.L.C., a private investment firm
affiliated with Hunt Financial Group, L.L.C., a Dallas-based investment firm
associated with the Lamar Hunt family, from 1995 to September 1999. Mr. Schwarz
currently serves as a Director of the following companies: WebFinancial
Corporation, a commercial and consumer lender; Nashua Corporation, a specialty
paper, label and printing supplies manufacturer; Bell Industries, Inc., a
computer systems integrator;
38
and Tandycrafts, Inc., a manufacturer of picture frames and framed art. Mr.
Schwarz has also served as Chairman of the Board of Directors of Hallmark
Financial Services, Inc., a property-and-casualty insurance holding company,
since October 2001.
Steven Wolosky has been a partner of Olshan Grundman Frome
Rosenzweig & Wolosky LLP, counsel to us and Steel, for more than five years.
Richard A. Smith has been a financial consultant, private investor
and trader from 1993 to the present. Mr. Smith previously served in various
management positions with Morgan Stanley Inc., most recently as co-head of the
Worldwide Institutional Equity from 1989 to 1992 and as a member of the
management committee from 1990 to 1992.
Avrum Gray has been the Chairman of G-Bar Limited Partnership, one
of the nation's largest independent options trading firms and a leading
specialist in computer-based arbitrage activities in the derivative markets,
since 1981. Mr. Gray is also a Director of Nashua Corporation, a specialty
paper, label and printing supplies manufacturer, and Lynch Corporation, a
holding company with subsidiaries engaged in manufacturing and distributing
frequency control devices and glass forming and other equipment. Mr. Gray is the
former Chairman of the Board of Lynch Systems, Inc., a glass press supplier to
the television and computer industry, and a former Chief Executive Officer of a
privately held manufacturer of components and devices for the automotive
aftermarket. Additionally, Mr. Gray has been Chairman of the Board of Spertus
College, as well as a board member of the Illinois Institute of Technology, the
Stuart School, and a number of philanthropic organizations, including the Jewish
Federation of Chicago.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation awarded to, earned by or paid to the Chief Executive Officer and
each of our other executive officers whose total annual salary and bonus
exceeded $100,000 during the year 2001 (the "Named Executive Officers") for
services in all capacities during the years ended December 31, 2001 and December
31, 2000, the fiscal year ended July 31, 1999, and for the five-month period
ended December 31, 1999. Owen Farren's employment with us was terminated
effective February 4, 2002 and Jacob Cherian resigned from us effective April
26, 2002.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Securities All Other
Name and Annual Compensation Underlying Compensation
Principal Position Year Salary ($) Bonus ($) Options/SARs (#) ($)(3)(4)
------------------ ---- ---------- --------- ---------------- ---------
Owen Farren 2001 281,423 0 20,000 30,315
President and CEO 2000 270,000 0 0 28,769
1999(1) 111,404 0 20,000 1,708
1999 252,231 238,275(2) 24,000 29,149
David R. Nuzzo
Vice President-Finance and 2001 171,000 0 17,000 19,567
Administration, Treasurer and 2000 165,000 0 0 7,365
Secretary 1999(1) 68,300 0 12,500 2,071
1999 155,708 58,000 7,500 8,298
Jacob Cherian 2001 119,808 0 17,000 20,056
Vice President 2000 --- --- --- ---
and Corporate 1999(1) --- --- --- ---
Controller 1999 --- --- --- ---
(1) Salary information for the five-month period ended December 31, 1999.
39
(2) Includes $121,275, received under the terms of a special incentive program
for senior executives that was based on our performance during the three
years ended July 31, 1998, and $117,000, which was based on our performance
and the achievement of individual goals during fiscal 1999.
(3) Includes our matching contributions and profit sharing contributions made
to the SL Industries Inc. Savings and Pension Plan for Messrs. Farren and
Nuzzo in fiscal year 1999 in the amounts of $7,353 and $6,448,
respectively; in fiscal year 1999 for Messrs. Farren, and Nuzzo in the
amounts of $8,249 and $7,398, respectively; in the five-month period for
1999 for Messrs. Farren and Nuzzo in the amounts of $1,333 and $1,696,
respectively; in calendar year 2000 for Messrs. Farren and Nuzzo in the
amounts of $7,923 and $6,519, respectively; and in calendar year 2001 for
Messrs. Farren, Nuzzo and Cherian in the amounts of $8,500, $8,500 and
$5,990, respectively. Our contribution to the plan is based on a percentage
of the participant's elective contributions up to the maximum defined under
the plan and a fixed percentage, determined annually by the Board of
Directors, of the participant's total fiscal years 1998 and 1999 earnings.
Under the plan, benefits are payable at retirement as a lump sum or as an
annuity.
(4) Includes premiums paid for group term life insurance for Messrs. Farren,
Nuzzo and Cherian, and premiums paid for an ordinary whole life insurance
policy on Mr. Farren's life in the face amount of $1,000,000, of which he
is the owner with the right to designate beneficiaries.
Pursuant to a standing resolution of the Board of Directors, upon
the death of any executive officer having more than five (5) years of service,
we will pay his spouse, over a 36-month period, an amount equal to the officer's
salary at his death.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options to
purchase common stock granted under our 1991 Long Term Incentive Plan in 2001 to
the Named Executive Officers. Twenty percent of the options granted were
exercisable on the date of grant with the balance exercisable in twenty percent
increments, one, two, three and four years after the date of grant. The material
terms of such options appear in the following table.
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (1)
------------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Stock Options
Underlying Granted to
Stock Options Employees in Exercise Expiration
Name Granted (#) Fiscal Year Price($/SH) Date 5%($) 10% ($)
---- ----------- ----------- ----------- ----------- ----- -------
Owen Farren 20,000 12% $ 5.75 09/25/2011 $72,323 $183,280
Jacob Cherian 7,000 4% $12.175 05/18/2011 $53,598 $135,827
Jacob Cherian 10,000 6% $5.75 09/25/2011 $36,161 $91,640
David R. Nuzzo 7,000 4% $12.175 05/18/2011 $53,598 $135,827
David R. Nuzzo 10,000 6% $ 5.75 09/25/2011 $36,161 $91,640
-------------
(1) The Potential Realizable Value, determined in accordance with SEC rules,
assumes annualized market appreciation rates of 5% and 10%, respectively,
from a market value of $5.75/share and $12.175/share on September 25, 2001
and May 18, 2001 (the date of the grant) to September 25, 2011 and May 18,
2011 (the date of expiration of such options) for all optionees. These
assumptions are not intended to forecast the future price of our stock
price. The real value of the options in this table depends on the actual
performance of our common stock during the applicable period, which may
increase or decrease in value over the time period set forth above. The
Potential Realizable Value does not assume future dividends, stock or cash.
The option grant does not accrue cash dividends unless the options are
exercised, should dividends be declared.
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END STOCK
OPTION VALUES
40
The following table sets forth the number of shares received upon
exercise of stock options by each of the Named Executive Officers during the
last completed fiscal year and the aggregate options to purchase shares of our
common stock held by the Named Executive Officers at December 31, 2001.
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-The-Money Options
At Fiscal Year End (#) at Fiscal Year End ($)(1)
----------------------- -------------------------
Shares
Acquired Upon Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
Owen Farren N/A N/A 227,200/27,800 252,300/1,500
David R. Nuzzo N/A N/A 42,750/19,250 250/750
Jacob Cherian N/A N/A 9,900/22,100 0/0
(1) Computed by multiplying the number of options by the difference between (i)
the per share closing price at fiscal year-end and (ii) the exercise price per
share.
LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
We did not grant awards to any of our executive officers under any
long-term incentive plans during the year ended December 31, 2001.
DIRECTOR COMPENSATION
Outside (i.e., non-employee) directors receive the following fees:
- $4,375 quarterly retainer fee;
- $1,000 for each Board of Directors meeting attended; and
- $750 for each committee meeting attended.
-
In fiscal year 1993, the Board of Directors adopted a Non-Employee
Director Non-Qualified Stock Option Plan (the "Directors' Plan"), which was
approved by the shareholders at our 1993 Annual Meeting. Under the Directors'
Plan, non-employee Directors have the right annually during the month of June to
elect to receive non-qualified stock options in lieu of all or a stated
percentage of upcoming yearly directors fees. The number of shares covered by
such options is determined at the time such fees would otherwise be payable
based upon the fair market value of our common stock at such times, except, with
respect to an election to defer all such fees, such determination shall be based
upon 133% of fair market value at such times. Elections are irrevocable.
Under the Directors' Plan, Messrs. Baumgardner and Caruso (Mr.
Caruso served as a director until January 2002), elected for 2001 to receive
non-qualified stock options in lieu of all such fees. In accordance with such
elections, they received options to acquire 7,487 and 7,122 shares,
respectively, during 2001.
EMPLOYMENT CONTRACTS, TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS
In 2001, we entered into change-in-control agreements with senior
executives and other key personnel.
In January 2002, the five nominees of the RORID Committee were
elected to our eight-member Board of Directors. Upon the occurrence of this
event, Messrs. Farren, Nuzzo and Cherian each received payment under his
respective change-in-control agreement. As a result, in January 2002 we paid to
Messrs. Farren, Nuzzo and Cherian, respectively, $877,565, $352,556 and $250,000
under such agreements. Under their respective change-in-control agreements,
these executives are not entitled to receive any further cash payments, but are
entitled to receive insurance benefits for specified time periods or until they
obtain new employment, whichever occurs first.
41
Upon receiving their resignations, we exercised our rights under the
change-in-control agreements to require Messrs. Farren, Nuzzo and Cherian to
remain in their positions for up to ninety days. Mr. Farren was subsequently
terminated as Chief Executive Officer and President on February 4, 2002. Mr.
Nuzzo has continued in his position with us. Mr. Cherian resigned effective as
of April 26, 2002.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2001, the Compensation Committee members were J. Dwane
Baumgardner (Chairman), Richard E. Caruso and Walter I. Rickard, all of whom
were non-employee directors of ours.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
ownership of our common stock, as of September 30, 2002 (except as otherwise
noted), by: (i) each person or entity (including such person's or entity's
address) who is known by us to own beneficially more than five percent of our
common stock, (ii) each of our Directors and nominees for Director who
beneficially owns shares, (iii) each Named Executive Officer (as defined under
Executive Compensation) who beneficially owns shares, and (iv) all executive
officers and Directors as a group. The information presented in the table is
based upon the most recent filings with the Securities and Exchange Commission
by such persons or upon information otherwise provided by such persons to us.
Number of Shares
Name of Beneficial Owner Beneficially Owned(1) Percentage Owned(2)
------------------------ --------------------- -------------------
Dimensional Fund Advisors, Inc. 296,900 5.0%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
The Gabelli Funds 1,545,700(4) 26.3%
One Corporate Center
Rye, NY 10580-1435
Oaktree Capital Management, LLC 525,000(5) 8.9%
333 South Grand Avenue
28th Floor
Los Angeles, CA 90071
Steel Partners II, L.P. 746,250(6) 12.7%
150 East 52nd Street
21st Floor
New York, NY 10022
J. Dwane Baumgardner 64,639(7) 1.1%
David R. Nuzzo 53,186(8) *
Warren Lichtenstein 756,550(9) 12.8%
Glen Kassan 0 *
Avrum Gray 26,200(10) *
James Henderson 0 *
Mark E. Schwarz 217,350(11) 3.7%
Richard Smith 0 *
42
Steven Wolosky 0 *
All Directors and Executive
Officers as a Group 1,117,925(12) 18.7%
* Less than one percent (1%).
(1) Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission. Under such rules, shares are deemed
to be beneficially owned by a person or entity if such person or entity has or
shares the power to vote or dispose of the shares, whether or not such person or
entity has any economic interest in such shares. Except as otherwise indicated,
and subject to community property laws where applicable, the persons and
entities named in the table above have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
Shares of common stock subject to options or warrants currently exercisable or
exercisable within 60 days are deemed outstanding for purposes of computing the
percentage ownership of the person or entity holding such option or warrant but
are not deemed outstanding for purposes of computing the percentage ownership of
any other person or entity.
(2) Based upon 5,888,158 shares outstanding as of September 30, 2002.
(3) Dimensional Fund Advisors Inc., a registered investment advisor,
is deemed to have beneficial ownership of 296,900 shares, as of January 30,
2002, all of which shares are held in portfolios of DFA Investment Dimensions
Group Inc., a registered open-end investment company, or in series of the DFA
Investment Trust Company, a Delaware business trust, or the DFA Group Trust and
DFA Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
(4) Based upon a Schedule 13D/A Amendment No. 20 dated April 2,
2002, filed with the Securities and Exchange Commission by Gabelli Funds, LLC.
Gabelli Group Capital Partners, Inc. makes investments for its own account and
is the parent company of Gabelli Asset Management Inc. Mario J. Gabelli is the
Chairman of the Board of Directors, Chief Executive Officer and majority
shareholder of Gabelli Partners. Gabelli Asset Management, a public company
listed on the New York Stock Exchange, is the parent company of a variety of
companies engaged in the securities business, including (i) GAMCO Investors,
Inc., a wholly-owned subsidiary of Gabelli Asset Management, an investment
adviser registered under the Investment Advisers Act of 1940, as amended, which
provides discretionary managed account services for employee benefit plans,
private investors, endowments, foundations and others; (ii) Gabelli Advisers,
Inc., a subsidiary of Gabelli Asset Management, which provides discretionary
advisory services to The Gabelli Westwood Mighty Mites Fund; (iii) Gabelli
Performance Partnership L.P., a limited partnership whose primary business
purpose is investing in securities (Mario J. Gabelli is the general partner and
a portfolio manager for Gabelli Performance Partnership); (iv) Gabelli
International Limited, a corporation whose primary business purpose is investing
in a portfolio of equity securities and securities convertible into, or
exchangeable for, equity securities offered primarily to persons who are neither
citizens nor residents of the United States; and (v) Gabelli Funds, LLC, an
investment adviser registered under the Investment Advisers Act, which presently
provides discretionary managed account services for various registered
investment companies.
Includes the following shares deemed to be owned beneficially by the
following affiliates: 1,263,200 shares held by GAMCO; 107,000 shares held by
Gabelli International; 98,500 shares held by Gabelli Funds; 1,000 shares held by
Gabelli Foundation, Inc., a private foundation; 16,000 shares held by Gabelli
Advisers; and 60,000 shares held by Gabelli Performance Partnership. Each of the
Gabelli affiliates claims sole voting and dispositive power over the shares held
by it. The foregoing persons do not admit to constituting a group within the
meaning of Section 13(d) of the Exchange Act. Mario J. Gabelli is the Chief
Investment Officer of each of the Gabelli affiliates; the majority stockholder
and Chairman of the Board of Directors and Chief Executive Officer of Gabelli
Partners; the president, a trustee and the investment manager of the Gabelli
Foundation; and the general partner and portfolio manager for Gabelli
Performance Partnership.
GAMCO, Gabelli Advisors, and Gabelli Funds, each has its principal
business office at One Corporate Center, Rye, New York 10580. Gabelli
Performance Partnership has its principal business office at 401 Theodore Freund
Ave., Rye, New York 10580. Gabelli International has its principal business
office at c/o Fortis Fund Services (Cayman) Limited, Grand Pavillion, Commercial
Centre, 802 West Bay Road, Grand Cayman, British West Indies. The Gabelli
Foundation has its principal offices at 165 West Liberty Street, Reno, Nevada
89501.
43
>
(5) Oaktree Capital Management, LLC, a California limited liability
company, is deemed to have beneficial ownership of 525,000 shares as of June 30,
2001. The principal business of Oaktree is providing investment advice and
management services to institutional and individual investors. Oaktree's general
partner is OCM Principal Opportunities Fund, L.P., a Delaware limited
partnership.
(6) Based upon a Schedule 13D/A Amendment No. 10 dated August 23,
2002, filed jointly with the Securities and Exchange Commission by Steel
Partners, Mr. Lichtenstein, Newcastle Partners, L.P., Newcastle Capital
Management, L.P., Newcastle Capital Group, L.L.C., Mr. Schwarz, Mr. Kassan, Mr.
Henderson and Mr. Wolosky, in addition to other information.
(7) Includes 2,000 shares owned by Mr. Baumgardner and 62,639
shares, which Mr. Baumgardner has the right to acquire at any time upon exercise
of stock options.
(8) Includes 4,500 shares owned by Mr. Nuzzo, 5,936 shares
beneficially owned by Mr. Nuzzo as a participant in our Savings and Pension
Plan, and 42,750 shares which Mr. Nuzzo has the right to acquire at any time
upon exercise of stock options.
(9) Includes the 746,250 shares of which, by virtue of his position
as Chairman of the Board, Chief Executive Officer and Secretary of Steel
Partners (as described in Note 6 above), Mr. Lichtenstein has the power to vote
and dispose.
(10) Includes 3,500 shares held by Mr. Gray's Individual Retirement
Account, 13,400 shares held by 1993 GF Limited Partnership, in which the general
partner is a corporation owned solely by Mr. Gray, and 6,800 shares held by AVG
Limited Partnership, in which Mr. Gray is a general partner. Also includes 2,500
shares held by JYG Limited Partnership, in which Mr. Gray's spouse is a general
partner. Except for the shares held in his Individual Retirement Account and by
JYG Limited Partnership, Mr. Gray disclaims beneficial ownership of these
shares.
(11) Includes 217,350 shares of which, by virtue of his position as
Managing Member of Newcastle Capital Group, L.L.C., which is the general partner
of Newcastle Capital Management, L.P., which is the general partner of Newcastle
Partners, L.P, Mr. Schwarz has the power to vote and dispose.
(12) Includes 105,389 shares which directors and executive officers
have the right to acquire, at any time, upon the exercise of nonqualified and
incentive stock options granted by us.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Steven Wolosky, one of our directors, is a partner at the law firm
of Olshan Grundman Frome Rosenzweig & Wolosky LLP. Olshan has been retained by
us as outside counsel.
THE RIGHTS OFFERING
BACKGROUND OF THE RIGHTS OFFERING
The Board of Directors has proposed that we attempt to raise equity
capital through a rights offering to all of our shareholders and to use the
proceeds from the equity financing to reduce long term debt under our senior
secured credit facility. In order to support the success of the rights offering,
Steel Partners, of which Warren Lichtenstein, our Chief Executive Officer and
Chairman of the Board, is the managing member of the general partner, offered to
purchase any shares of common stock unsubscribed in the rights offering. None of
the shares being purchased by Steel Partners through its basic privilege, its
over-subscription privilege and the backstop agreement will be registered in
this offering. Subsequent to this Offering, the Company will seek to register
the resale of any shares acquired by Steel Partners through its exercise of
nontransferable rights.
REASONS FOR THE RIGHTS OFFERING
At a meeting held on September 27, 2002 our Board unanimously
approved the rights offering.
The primary reason for authorizing the rights offering is to meet
our need for additional working capital. The Board determined that the rights
offering with Steel Partners' purchase of any unsubscribed shares was our best
alternative under the circumstances.
In approving the rights offering and Steel Partners' purchase, our
Board of Directors considered a number of factors, including the following:
44
o the difficulty of refinancing the revolving credit facility without
the additional proceeds to be realized hereby;
o the requirement of refinancing the revolving credit facility prior to
December 31, 2002, its maturity date;
o the commercial and other risks associated with a restructuring or
recapitalization and the impact of those alternatives on our
shareholders and our creditors;
o the willingness of Steel Partners to agree to purchase any
unsubscribed shares up to ______ shares; and
o the belief that the transaction was the best alternative reasonably
available to us from the perspective of our public shareholders and
our creditors.
The preceding discussion of the information and factors considered
and given weight by our Board of Directors is not intended to be exhaustive.
However, our board of directors believe that the discussion includes all of the
material factors that they considered. In reaching their decisions to approve
and to recommend approval of the rights offering and Steel Partners' purchase of
all unsubscribed rights, our Board of Directors did not assign any relative or
specific weights to the factors they considered. Individual Directors may have
given different weights to different factors.
NO BOARD OR FINANCIAL ADVISOR RECOMMENDATION
An investment in our common stock must be made according to your own
evaluation of your best interests. Accordingly, our Board of Directors does not
make any recommendation to you about whether you should exercise your rights.
Neither have we retained a financial advisor to make any recommendation to you
about whether you should exercise your rights.
THE RIGHTS
We will distribute to each holder of record of our common stock on
____________, 2002, at no charge, one nontransferable subscription right for
each _____ shares of our common stock they own. The rights will be evidenced by
rights certificates. Each right will allow you to purchase one additional share
of our common stock at a price of $___.
EXPIRATION OF THE RIGHTS OFFERING
You may exercise your subscription privilege at any time before 5:00
p.m., New York City time, on ______, 2002, the expiration date for the rights
offering. If you do not exercise your rights before the expiration date, your
unexercised rights will be null and void. We will not be obligated to honor your
exercise of rights if the subscription agent receives the documents relating to
your exercise after the rights offering expires, regardless of when you
transmitted the documents, except when you have timely transmitted the documents
under the guaranteed delivery procedures described below. We, with the consent
of Steel Partners, may extend the expiration date by giving oral or written
notice to the subscription agent on or before the scheduled expiration date. If
we elect to extend the expiration of the rights offering, we will issue a press
release announcing the extension no later than 9:00 a.m., New York City time, on
the next business day after the most recently announced expiration date.
SUBSCRIPTION PRIVILEGES
BASIC SUBSCRIPTION PRIVILEGE. With your basic subscription privilege, you may
purchase one share of our common stock per right, upon delivery of the required
documents and payment of the subscription price of $_____ per share. Fractional
rights will be rounded up to the next higher whole right. The number of rights
subject to the rights offering has been arbitrarily increased by ______ rights
to cover increases resulting from rounding up. You are not required to exercise
all of your rights. We will deliver to you certificates representing the shares
that you purchased with your basic subscription privilege as soon as practicable
after the rights offering has expired.
OVER-SUBSCRIPTION PRIVILEGE. Subject to the allocation described below, each
subscription right also grants each rights holder an over-subscription privilege
to purchase additional shares of common stock that are not purchased by other
rights holders pursuant to the other rights holders' basic subscription
privileges. You are entitled to exercise your over-subscription privilege only
if you exercise your basic subscription privilege in full.
45
If you wish to exercise your over-subscription privilege, you should
indicate the number of additional shares that you would like to purchase in the
space provided on your subscription certificate. When you send in your
subscription certificate, you must also send the full purchase price for the
number of additional shares that you have requested to purchase (in addition to
the payment due for shares purchased through your basic subscription privilege).
If the number of shares remaining after the exercise of all basic subscription
privileges is not sufficient to satisfy all requests for shares pursuant to
over-subscription privileges, you will be allocated additional shares pro-rata
(subject to elimination of fractional shares), based on the number of shares you
purchased through the basic subscription privilege in proportion to the total
number of shares that you and other over-subscribing shareholders purchased
through the basic subscription privilege. However, if your pro-rata allocation
exceeds the number of shares you requested on your subscription certificate,
then you will receive only the number of shares that you requested, and the
remaining shares from your pro-rata allocation will be divided among other
rights holders exercising their over-subscription privileges.
As soon as practicable after the expiration date,
_______________________, acting as our subscription agent, will determine the
number of shares of common stock that you may purchase pursuant to the
over-subscription privilege. You will receive certificates representing these
shares as soon as practicable after the expiration date. If you request and pay
for more shares than are allocated to you, we will refund that overpayment,
without interest. In connection with the exercise of the over-subscription
privilege, banks, brokers and other nominee holders of subscription rights who
act on behalf of beneficial owners will be required to certify to us and to the
subscription agent as to the aggregate number of subscription rights that have
been exercised, and the number of shares of common stock that are being
requested through the over-subscription privilege, by each beneficial owner on
whose behalf the nominee holder is acting.
Steel Partners has agreed to exercise all of its rights and
additionally purchase any unsubscribed shares up to _____ shares.
NON-TRANSFERABILITY OF THE RIGHTS
Except in the limited circumstances described below, only you may
exercise the basic subscription privilege and the over-subscription privilege.
You may not sell, give away or otherwise transfer the basic subscription
privilege or the over-subscription privilege.
Notwithstanding the foregoing, you may transfer your rights to any
affiliate of yours and your rights also may be transferred by operation of law;
for example a transfer of rights to the estate of the recipient upon the death
of the recipient would be permitted. As used in this paragraph, an affiliate of
yours shall mean any person (for this purpose, a person includes a partnership,
corporation or other legal entity such as a trust or estate) which controls, is
controlled by or is under common control with you. If the rights are transferred
as permitted, evidence satisfactory to us that the transfer was proper must be
received by us prior to the expiration date of the rights offering.
METHOD OF SUBSCRIPTION--EXERCISE OF RIGHTS
You may exercise your rights by delivering the following to the
subscription agent, at or prior to 5:00 p.m., New York City time, on
______________, 2002, the date on which the rights expire:
o your properly completed and executed rights certificate with any
required signature guarantees or other supplemental documentation; and
o your full subscription price payment for each share subscribed for
under your basic subscription privilege and your over-subscription
privilege.
METHOD OF PAYMENT
Your payment of the subscription price must be made in U.S. dollars
for the full number of shares of common stock you are subscribing for by either:
o check or bank draft drawn upon a U.S. bank or postal, telegraphic or
express money order payable to the subscription agent; or
o wire transfer of immediately available funds, to the subscription
account maintained by the subscription agent at
______________________. -
RECEIPT OF PAYMENT
Your payment will be considered received by the subscription agent
only upon:
46
o receipt by the subscription agent of any uncertified check, or
certified check or bank draft drawn upon a U.S. bank or of any postal,
telegraphic or express money order; or
o receipt of collected funds in the subscription account designated
above.
DELIVERY OF SUBSCRIPTION MATERIALS AND PAYMENT
You should deliver your rights certificate and payment of the
subscription price or, if applicable, notice of guaranteed delivery, to the
subscription agent by one of the methods described below:
If by mail, by hand or by overnight courier to:
________________________________________
[You may call the subscription agent at (800)
______________________or ( ) ______________.]
Your delivery to an address other than the address set forth above
will not constitute valid delivery.
CALCULATION OF RIGHTS EXERCISED
If you do not indicate the number of rights being exercised, or do
not forward full payment of the total subscription price for the number of
rights that you indicate are being exercised, then you will be deemed to have
exercised your basic subscription privilege with respect to the maximum number
of rights that may be exercised with the aggregate subscription price payment
you delivered to the subscription agent. If we do not apply your full
subscription price payment to your purchase of shares of our common stock, we
will return the excess amount to you by mail without interest or deduction as
soon as practicable after the expiration date of the rights offering.
YOUR FUNDS WILL BE HELD BY THE SUBSCRIPTION AGENT UNTIL SHARES OF COMMON STOCK
ARE ISSUED
The subscription agent will hold your payment of the subscription
price payment in a segregated account with other payments received from other
rights holders until we issue your shares to you.
SIGNATURE GUARANTEE MAY BE REQUIRED
Your signature on each rights certificate must be guaranteed by an
eligible institution such as a member firm of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc., or
from a commercial bank or trust company having an office or correspondent in the
United States, subject to standards and procedures adopted by the subscription
agent, unless:
o your rights certificate provides that shares are to be delivered to
you as record holder of those rights; or
o you are an eligible institution.
NOTICE TO BENEFICIAL HOLDERS
If you are a broker, a trustee or a depositary for securities who
holds shares of our common stock for the account of others on _______________
2002, the record date for the rights offering, you should notify the respective
beneficial owners of such shares of the rights offering as soon as possible to
find out their intentions with respect to exercising their rights. You should
obtain instructions from the beneficial owners with respect to the rights, as
set forth in the instructions we have provided to you for your distribution to
beneficial owners. If the beneficial owner so instructs, you should complete the
appropriate rights certificates and submit them to the subscription agent with
the proper payment. If you hold shares of our common stock for the account(s) of
more than one beneficial owner, you may exercise the number of rights to which
all such beneficial owners in the aggregate otherwise would have been entitled
had they been direct record holders of our common stock on the record date for
the rights offering, provided that, you, as a nominee record holder, make a
proper showing to the subscription agent by submitting the form entitled
"Nominee Holder Certification" which we will provide to you with your rights
offering materials.
BENEFICIAL OWNERS
If you are a beneficial owner of shares of our common stock or will
receive your rights through a broker, custodian bank or other nominee, we will
ask your broker, custodian bank or other nominee to notify you of this rights
offering. If you wish to exercise your rights, you will need to have your
broker, custodian bank or other nominee act for you. If you hold certificates of
our common stock directly and would prefer to have your broker, custodian bank
or other nominee exercise your rights, you should contact your nominee and
request it to effect the transaction for you. To indicate your decision with
respect to your rights, you should
47
complete and return to your broker, custodian bank or other nominee the form
entitled "Beneficial Owners Election Form." You should receive this form from
your broker, custodian bank or other nominee with the other rights offering
materials. If you wish to obtain a separate rights certificate, you should
contact the nominee as soon as possible and request that a separate rights
certificate be issued to you.
INSTRUCTIONS FOR COMPLETING YOUR RIGHTS CERTIFICATE
You should read and follow the instructions accompanying the rights
certificate(s) carefully.
If you want to exercise your rights, you should send your rights
certificate(s) with your subscription price payment to the subscription agent.
Do not send your rights certificate(s) and subscription price payment to us.
You are responsible for the method of delivery of your rights
certificate(s) with your subscription price payment to the subscription agent.
If you send your rights certificate(s) and subscription price payment by mail,
we recommend that you send them by registered mail, properly insured, with
return receipt requested. You should allow a sufficient number of days to ensure
delivery to the subscription agent prior to the time the rights offering
expires.
DETERMINATIONS REGARDING THE EXERCISE OF YOUR RIGHTS
We will decide all questions concerning the timeliness, validity,
form and eligibility of your exercise of your rights and our determinations will
be final and binding. We, in our sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as we may determine. We may reject the exercise of any of your rights
because of any defect or irregularity. We will not receive or accept any
subscription until all irregularities have been waived by us or cured by you
within such time as we decide, in our sole discretion.
Neither we nor the subscription agent will be under any duty to
notify you of any defect or irregularity in connection with your submission of
rights certificates and we will not be liable for failure to notify you of any
defect or irregularity. We reserve the right to reject your exercise of rights
if your exercise is not in accordance with the terms of the rights offering or
in proper form. We will also not accept your exercise of rights if our issuance
of shares of our common stock to you could be deemed unlawful under applicable
law.
REGULATORY LIMITATION
We will not be required to issue to you shares of common stock
pursuant to the rights offering if, in our opinion, you would be required to
obtain prior clearance or approval from any state or federal regulatory
authority to own or control such shares if, at the time the subscription rights
expire, you have not obtained such clearance or approval.
GUARANTEED DELIVERY PROCEDURES
If you wish to exercise your rights, but you do not have sufficient
time to deliver the rights certificate evidencing your rights to the
subscription agent on or before the time your rights expire, you may exercise
your rights by the following guaranteed delivery procedures:
o deliver your subscription price payment in full for each share you
subscribed for under your subscription privileges in the manner set
forth in "Method of Payment" on page __ to the subscription agent on
or prior to the expiration date;
o deliver the form entitled "Notice of Guaranteed Delivery,"
substantially in the form provided with the "Instructions as to Use of
SL Rights Certificates" distributed with your rights certificates at
or prior to the expiration date; and
o deliver the properly completed rights certificate evidencing your
rights being exercised and the related nominee holder certification,
if applicable, with any required signatures guaranteed, to the
subscription agent within three business days following the date of
your Notice of Guaranteed Delivery.
Your Notice of Guaranteed Delivery must be delivered in
substantially the same form provided with the Instructions as to the Use of SL
Rights Certificates, which will be distributed to you with your rights
certificate. Your Notice of Guaranteed Delivery must come from an eligible
institution, or other eligible guarantee institutions which are members of, or
participants in, a signature guarantee program acceptable to the subscription
agent.
48
In your Notice of Guaranteed Delivery, you must state:
o your name;
o the number of rights represented by your rights certificates and the
number of shares of our common stock you are subscribing for under
your basic subscription privilege; and
o your guarantee that you will deliver to the subscription agent any
rights certificates evidencing the rights you are exercising within
three business days following the date the subscription agent receives
your Notice of Guaranteed Delivery.
You may deliver your Notice of Guaranteed Delivery to the
subscription agent in the same manner as your rights certificates at the address
set forth above under "--Delivery of Subscription Materials and Payment" on page
___. Alternatively, you may transmit your Notice of Guaranteed Delivery to the
subscription agent by facsimile transmission (Facsimile No.: (___) ____-_____).
To confirm facsimile deliveries, you may call (___) --------------------.
The subscription agent will send you additional copies of the form
of Notice of Guaranteed Delivery if you need them. Please call (__) __________
to request any copies of the form of Notice of Guaranteed Delivery. Banks and
brokerage firms please call (800) _____________ to request any copies of the
form of Notice of Guaranteed Delivery.
QUESTIONS ABOUT EXERCISING RIGHTS
If you have any questions or require assistance regarding the method
of exercising your rights or requests for additional copies of this prospectus,
the Instructions as to the Use of SL Rights Certificates or the Notice of
Guaranteed Delivery, you should contact the subscription agent at the following
address and telephone number: _________________.
SUBSCRIPTION AGENT
We have appointed _______________ to act as subscription agent for
the rights offering. We will pay all fees and expenses of the subscription agent
related to the rights offering and have also agreed to indemnify the
subscription agent from liabilities which it may incur in connection with the
rights offering.
NO REVOCATION
Once you have exercised your subscription privileges, you may not
revoke your exercise. Rights not exercised prior to the expiration date of the
rights offering will expire.
PROCEDURES FOR DTC PARTICIPANTS
We expect that your exercise of your basic subscription privilege
may be made through the facilities of the Depository Trust Company. If your
rights are held of record through DTC, you may exercise your basic subscription
privilege and your over-subscription privilege by instructing DTC to transfer
your rights from your account to the account of the subscription agent, together
with certification as to the aggregate number of rights you are exercising and
the number of shares of our common stock you are subscribing for under your
basic subscription privilege and your over-subscription privilege, if any, and
your subscription price payment for each share you subscribed for pursuant to
your basic subscription privilege and your over-subscription privilege.
No change will be made to the cash subscription price by reason of
changes in the trading price of our common stock prior to the closing of the
rights offering.
FOREIGN AND OTHER SHAREHOLDERS
Rights certificates will be mailed to rights holders whose addresses
are outside the United States or who have an Army Post Office or Fleet Post
Office address. To exercise such rights, you must notify the subscription agent,
and take all other steps that are necessary to exercise your rights on or prior
to the expiration date of the rights offering. If the procedures set forth in
the preceding sentence are not followed prior to the expiration date your rights
will expire.
EXPIRATION DATE, EXTENSIONS AND TERMINATION
We may extend the rights offering and the period for exercising your
rights, in our sole discretion. The rights will expire at 5:00 p.m., New York
City time, on ________________ 2002, unless we decide
49
to extend the rights offering to a date no later than ______________. If the
commencement of the rights offering is delayed, the expiration date will be
similarly extended. If you do not exercise your basic subscription privilege
prior to that time, your rights will be null and void. We will not be required
to issue shares of common stock to you if the subscription agent receives your
subscription certificate or your payment after that time, regardless of when you
sent the subscription certificate and payment, unless you send the documents in
compliance with the guaranteed delivery procedures described above.
SHARES OF COMMON STOCK OUTSTANDING AFTER THE RIGHTS OFFERING
Approximately ______ million shares of our common stock will be
issued and outstanding after the rights offering.
EFFECTS OF RIGHTS OFFERING ON OUR STOCK OPTION PLANS AND OTHER PLANS
As of _____, 2002, there were outstanding options to purchase
___________ shares of our common stock issued or committed to be issued pursuant
to stock options granted by us and our predecessors. None of the outstanding
options have antidilution or other provisions for adjustment to exercise price
or number of shares which will be automatically triggered by the rights
offering. Each outstanding and unexercised option will remain unchanged and will
be exercisable for the same number of shares of common stock and at the same
exercise price as before the rights offering.
EFFECTS OF RIGHTS OFFERING ON STEEL PARTNERS' SECURITIES AND OWNERSHIP
Set forth below, for illustrative purposes only, are two scenarios
which indicate the effect the rights offering and related share issuance could
have on Steel Partners' relative voting and economic interest. As of the date of
this prospectus, Steel Partners controls 12.7% of the voting power of our
outstanding capital stock, and owns 12.7% of our outstanding common stock.
SCENARIO A -- All shares of common stock offered in the rights
offering are fully subscribed.
SCENARIO B -- Steel Partners is the only rights holder to acquire
shares of common stock pursuant to the rights offering.
Steel Partners
Total Steel Partners Steel Economic Ownership
Rights Rights Cash Partners Percentage
Scenario Offered Exercised Raised Voting % (at September 30, 2002)
----------------- ------------- ---------------- ----------- -------------- ----------------------------------
Undiluted Maximum
--------- Dilution
A
B
OTHER MATTERS
We are not making this rights offering in any state or other
jurisdiction in which it is unlawful to do so, nor are we selling or accepting
any offers to purchase any shares of our common stock from rights holders who
are residents of those states or other jurisdictions. We may delay the
commencement of the rights offering in those states or other jurisdictions, or
change the terms of the rights offering, in order to comply with the securities
law requirements of those states or other jurisdictions. We may decline to make
modifications to the terms of the rights offering requested by those states or
other jurisdictions, in which case, if you are a resident in those states or
jurisdictions, you will not be eligible to participate in the rights offering.
BACKSTOP AGREEMENT
We entered into an agreement with Steel Partners dated as of
___________, 2002. Under the backstop agreement, Steel Partners has agreed to
exercise all their rights and to subscribe for the purchase of any unsubscribed
shares of common stock in the rights offering up to ____ shares.
Under the backstop agreement, the subscription price will be equal
to the subscription price applicable to all shareholders under the rights
offering.
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Steel Partners, which owns approximately 12.7% of our outstanding
voting stock, has agreed with us to exercise all of its rights, including
over-subscription rights, and further purchase any unsubscribed shares remaining
after the expiration of the over-subscription privilege in the rights offering
up to ____ shares.
Warren Lichtenstein, our Chief Executive Officer and Chairman of the
Board, is also the Managing Member of the General Partner of Steel Partners. By
virtue of his position at Steel Partners, Mr. Lichtenstein has the power to vote
and dispose all of Steel Partners' shares of our stock.
REPRESENTATIONS AND WARRANTIES. Under the backstop agreement, we
have made representations and warranties relating to:
o its organization, good standing, qualification and other corporate
matters;
o its power and authority to execute, deliver and perform its
obligations in connection with the rights offering;
o required consents and approvals, and absence of violations of laws;
o the due authorization of the issuance of the rights and the common
stock;
o that it is not an "investment company" or a "public utility holding
company;" and
o brokers.
Steel Partners has made representations and warranties relating to:
o its organization, good standing, qualification and other corporate
matters;
o its power and authority to execute, deliver and perform its
obligations in connection with the rights offering;
o required consents and approvals, and absence of violations of laws;
o brokers; and
o its understanding of the investment risks associated with the rights
and the common stock it will be purchasing pursuant to the backstop
agreement.
CONDITIONS TO CLOSING. Execution of the backstop agreement does not,
by itself, obligate the parties to consummate the rights offering. Each party's
obligation to consummate the rights offering is conditioned upon the following
closing conditions:
o no legal or judicial barriers to the rights offering;
o effectiveness of the registration statement, with no stop order issued
or threatened by the SEC;
o the accuracy of the representations and warranties of the other party;
and
o receipt of required consents, approvals, authorizations, waivers and
amendments.
Steel Partners' obligation to consummate the purchase of securities
provided for in the backstop agreement is also conditioned upon the following
closing conditions:
o completion of the rights offering in conformity with the requirements
provided in the registration statement;
o approval of the common stock issuable upon exercise of the rights for
listing on the NYSE;
INDEMNIFICATION. We have agreed to indemnify Steel Partners and its
representatives for any losses suffered by Steel Partners and its
representatives resulting from the breach of any representation, warranty or
covenant made by us in the backstop agreement or any related document, except to
the extent that such losses are determined to be the direct result of fraud or
crime committed by Steel Partners. Steel Partners shall be entitled to initiate
claims for indemnification for breaches of representations and warranties until
the first anniversary of the closing of the rights offering.
TERMINATION OF THE BACKSTOP AGREEMENT. The backstop agreement may be
terminated at any time following its execution but prior to the closing of the
rights offering by:
o the mutual consent of us and Steel Partners;
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o either us or Steel Partners if any governmental entity has issued a
final and nonappealable order enjoining the issuance of the rights and
shares of common stock or the consummation of the transaction;
o by Steel Partners if:
-- any of our representations and warranties fail to be true and correct and
such failure causes a material adverse effect; or
-- we breach or fail to comply in any material respect with our obligations
under the agreement and do not cure such breach or failure within 15 days
after notice by Steel Partners; and
o by us if:
-- any of the representations and warranties of Steel Partners fail to be true
and correct and such failure causes a material adverse effect; or
-- Steel Partners breaches or fails to comply in any material respect with its
obligations under the agreement and does not cure such breach or failure
within 15 days after notice by us.
The foregoing description of the backstop agreement is qualified in
its entirety by the text of the backstop agreement which is an exhibit to the
registration statement that includes this prospectus. See "Where You Can Find
More Information" on page ___ of this prospectus.]
DESCRIPTION OF CAPITAL STOCK
As of September 30, 2002, our authorized capital stock consisted of
25,000,000 shares of common stock, par value $0.20 per share, and 6,000,000
shares of preferred stock, no par value. As of that date, we had 5,888,158
shares of common stock outstanding and no shares of preferred stock outstanding.
The following is a summary of the material terms of our capital stock. This
summary does not purport to be complete or to contain all the information that
may be important to you, and is qualified in its entirety by reference to our
articles of incorporation, as amended, and bylaws, as amended. We encourage you
to read the provisions of these documents to the extent they relate to your
individual investment strategy. Copies of our articles of incorporation, as
amended, and our bylaws, as amended, are filed as exhibits to our annual report
on Form 10-K for the year ended December 31, 2000.
PREFERRED STOCK
Our articles of incorporation authorize us to issue preferred stock
in one or more series having designations, rights, and preferences determined
from time to time by our Board of Directors. Accordingly, subject to applicable
stock exchange rules and the terms of existing preferred stock, our Board of
Directors is empowered, without the approval of the holders of common stock, to
issue shares of preferred stock with dividend, liquidation, conversion, voting,
or other rights that could adversely affect the voting power or other rights of
the holders of common stock. Currently, we have not issued any preferred stock.
In some cases, the issuance of preferred stock could delay a change of control
of us or make it harder to remove incumbent management. In addition, the voting
and conversion rights of a series of preferred stock could adversely affect the
voting power of our common shareholders. Preferred stock could also restrict
dividend payments to holders of our common stock. Although we have no present
intention to issue any shares of preferred stock, we could do so at any time in
the future.
COMMON STOCK
VOTING RIGHTS. Each share of our common stock is entitled to one vote in the
election of Directors and other matters. A majority of shares of our voting
stock constitute a quorum at any meeting of shareholders. Common shareholders
are not entitled to cumulative voting rights.
DIVIDENDS. Subject to the preferential rights of any outstanding shares of
preferred stock and the restrictive terms of our credit agreement, which
prohibits the payment of dividends, dividends may be paid to holders of common
stock as may be declared by our Board of Directors out of funds legally
available for that purpose. We do not intend to pay dividends at the present
time or in the near future.
52
LIQUIDATION. If we liquidate, dissolve or wind-up our business, either
voluntarily or not, common shareholders will receive pro rata all assets
remaining after we pay our creditors.
MISCELLANEOUS. Holders of common stock have no preemptive, subscription,
redemption, or conversion rights.
The transfer agent and registrar for the common stock is American
Stock Transfer Company.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income
tax consequences of the rights offering to holders of common stock that hold
such stock as a capital asset for federal income tax purposes. This discussion
is based on laws, regulations, rulings and decisions in effect on the date
hereof, all of which are subject to change (possibly with retroactive effect)
and to differing interpretations. This discussion applies only to holders that
are U.S. persons, which is defined as a citizen or resident of the United
States, a domestic partnership, a domestic corporation, any estate (other than a
foreign estate), and any trust so long as a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more U.S. persons have the authority to control all substantial decisions
of the trust. Generally, for federal income tax purposes an estate is classified
as a "foreign estate" based on the location of the estate assets, the country of
the estate's domiciliary administration, and the nationality and residency of
the domiciliary's personal representative.
This discussion does not address all aspects of federal income
taxation that may be relevant to holders in light of their particular
circumstances or to holders who may be subject to special tax treatment under
the Internal Revenue Code of 1986, as amended, including, holders of outstanding
participatory preferred stock or warrants, holders who are dealers in securities
or foreign currency, foreign persons (defined as all persons other than U.S.
persons), insurance companies, tax-exempt organizations, banks, financial
institutions, broker-dealers, holders who hold common stock as part of a hedge,
straddle, conversion or other risk reduction transaction, or who acquired common
stock pursuant to the exercise of compensatory stock options or warrants or
otherwise as compensation.
We have not sought, and will not seek, an opinion of counsel or a
ruling from the Internal Revenue Service regarding the federal income tax
consequences of the rights offering or the related share issuance. The following
summary does not address the tax consequences of the rights offering or the
related share issuance under foreign, state, or local tax laws. ACCORDINGLY,
EACH HOLDER OF COMMON STOCK SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES OF THE RIGHTS OFFERING OR THE RELATED SHARE ISSUANCE
TO SUCH HOLDER.
The federal income tax consequences for a holder of common stock on
a receipt of subscription rights under the rights offering are as follows:
o A holder will not recognize taxable income for federal income tax
purposes in connection with the receipt of subscription rights in the
rights offering.
o Except as provided in the following sentence, the tax basis of the
subscription rights received by a holder in the rights offering will
be zero. If either (i) the fair market value of the subscription
rights on the date such subscription rights are distributed is equal
to at least 15% of the fair market value on such date of the common
stock with respect to which the subscription rights are received or
(ii) the holder elects, by attaching a statement to its federal income
tax return for the taxable year in which the subscription rights are
received, to allocate part of the tax basis of such common stock to
the subscription rights, then upon exercise or transfer of the
subscription rights, the holder's tax basis in the common stock will
be allocated between the common stock and the subscription rights in
proportion to their respective fair market values on the date the
subscription rights are distributed. A holder's holding period for the
subscription rights received in the rights offering will include the
holder's holding period for the common stock with respect to which the
subscription rights were received. It is not expected that the value
of the rights will exceed 15% of the fair market value of the common
stock with respect to which the subscription rights are received.
o A holder that allows the subscription rights received in the rights
offering to expire will not recognize any gain or loss, and the tax
basis of the common stock owned by such holder with
53
respect to which such subscription rights were distributed will be
equal to the tax basis of such common stock immediately before the
receipt of the subscription rights in the rights offering.
o A holder will not recognize any gain or loss upon the exercise of the
subscription rights received in the rights offering.
o The tax basis of the common stock acquired through exercise of the
subscription rights will equal the sum of the subscription price for
the common stock and the holder's tax basis, if any, in the rights as
described above.
o The holding period for the common stock acquired through exercise of
the subscription rights will begin on the date the subscription rights
are exercised.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for us by Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York,
New York. Steven Wolosky, a member of this firm, is one of our directors.
EXPERTS
The consolidated balance sheets of SL Industries 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, appearing in this prospectus and registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing. We have not been able to obtain, after reasonable
efforts, the written consent of Arthur Andersen to the inclusion of its report
in this prospectus, and we have not filed its consent in reliance on Rule 437a
under the Securities Act. Because Arthur Andersen has not consented to the
inclusion of its report in this prospectus, your ability to assert claims
against Arthur Andersen may be limited. In particular, because of this lack of
consent, you will not be able to sue Arthur Andersen under Section 11(a)(4) of
the Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Arthur Andersen or any omissions to state a
material fact required to be stated in those financial statements and therefore
your right of recovery under that section may be limited.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934. Accordingly, we file reports, proxy statements and other
information with the SEC. You may read and copy any materials that we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon payment of the prescribed fees. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxy information statements and other materials that are filed through the
SEC's Electronic Data Gathering, Analysis, and Retrieval, or EDGAR, system. You
can access this web site at http://www.sec.gov.
We have filed a registration statement on Form S-1 with the SEC with
respect to this rights offering. This prospectus is a part of the registration
statement, but does not contain all of the information included in the
registration statement. You may wish to inspect the registration statement and
the exhibits to that registration statement for further information with respect
to us and the securities offered in this prospectus. Copies of the registration
statement and the exhibits to such registration statement are on file at the
offices of the SEC and may be obtained upon payment of the prescribed fee or may
be examined without charge at the public reference facilities of the SEC
described above. Statements contained in this prospectus concerning the
provisions of documents are necessarily summaries of the material provisions of
such documents, and each statement is qualified in its entirety by reference to
the copy of the applicable document filed with the SEC.
54
FORWARD-LOOKING STATEMENTS
This document and the information incorporated herein by reference
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are subject to risks
and uncertainties and are based on the beliefs and assumptions of management,
based on information currently available to management. Forward-looking
statements can be identified by the use of the future tense or other
forward-looking words such as "believe," "expect," "anticipate," "intend,"
"plan," "estimate," "should," "may," "will," "objective," "projection,"
"forecast," "management believes," "continue," "strategy," "position" or the
negative of those terms or other variations of them or by comparable
terminology. In particular, statements, express or implied, concerning future
operating results or the ability to generate sales, income or cash flow are
forward-looking statements. Forward-looking statements include the information
concerning possible or assumed future results of our operations set forth in
this document under:
o Summary;
o Risk Factors;
o Business; and
o Capitalization.
and in the documents incorporated by reference under the captions:
o Description of Business; and
o Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Our future results may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond management's
ability to control or predict. These statements are necessarily based upon
various assumptions involving judgments with respect to the future including,
among others:
o the ability to achieve synergies and revenue growth;
o national, regional and local economic, competitive and regulatory
conditions and developments;
o technological developments;
o capital market conditions;
o inflation rates;
o interest rates;
o weather conditions;
o the timing and success of integration and business development
efforts;
o the impact of a national energy policy; and
o other uncertainties,
all of which are difficult to predict and many of which are beyond management's
control. You are cautioned not to put undue reliance on any forward-looking
statements.
You should understand that the foregoing important factors, in
addition to those discussed elsewhere in this document, including those under
the heading "Risk Factors," could affect our future results and could cause
results to differ materially from those expressed in such forward-looking
statements.
55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number in this Report
Report of Independent Public Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets
December 31, 2001 and 2000 F-3
Consolidated Statements of Operations
Twelve Months Ended December 31, 2001 and 2000 and July 31, 1999
And Five Months Ended December 31, 1999 and 1998 F-4
Consolidated Statements of Comprehensive Income (Loss)
Twelve Months Ended December 31, 2001 and 2000 and July 31, 1999
And Five Months Ended December 31, 1999 and 1998 F-4
Consolidated Statements of Shareholders' Equity
December 31, 2001 and 2000 and July 31, 1999
And Five Months Ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows
Twelve Months Ended December 31, 2001 and 2000 and July 31, 1999
And Five Months Ended December 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule:
II. Valuation and Qualifying Accounts F-36
Consolidated Balance Sheets (unaudited)
September 30, 2002 and December 31, 2001 F-37
Consolidated Statements of Operations (unaudited)
Three Months Ended September 30, 2002 and 2001
And Nine Months Ended September 30, 2002 and 2001 F-38
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2002 and 2001 F-39
Notes to Consolidated Financial Statements (unaudited) F-40
F-1
THIS IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT.
THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
SEE EXHIBIT 23 FOR FURTHER DISCUSSION.
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
F-2
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 6,577,000 $ 1,189,000
Receivables, net 36,041,000 21,986,000
Inventories 20,497,000 23,491,000
Prepaid expenses 815,000 1,140,000
Net current assets of discontinued operations - 3,192,000
Deferred income taxes 6,300,000 4,864,000
----------------- -----------------
Total current assets 70,230,000 55,862,000
Property, plant and equipment, net 8,829,000 19,781,000
Property, plant and equipment of discontinued operations, net - 980,000
Long-term note receivable 6,000 2,118,000
Deferred income taxes 2,014,000 1,629,000
Cash surrender value of life insurance policies 1,323,000 11,486,000
Intangible assets, net 14,799,000 20,770,000
Other assets 557,000 855,000
----------------- -----------------
Total assets $ 107,758,000 $ 113,481,000
================= =================
LIABILITIES
Current liabilities:
Short-term bank debt $ 1,367,000 $ -
Long-term debt due within one year 35,829,000 186,000
Accounts payable 8,149,000 11,309,000
Accrued income taxes 2,019,000 724,000
Accrued liabilities:
Payroll and related costs 7,609,000 5,070,000
Other 11,781,000 7,393,000
----------------- ----------------
Total current liabilities 66,754,000 24,682,000
Long-term debt less portion due within one year 1,009,000 36,533,000
Deferred compensation and supplemental retirement benefits 4,268,000 5,892,000
Other liabilities 2,523,000 3,024,000
----------------- ----------------
Total liabilities $ 74,554,000 $ 70,131,000
----------------- -----------------
Commitments and contingencies (Note 11)
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 39,025,000 38,455,000
Retained earnings 8,897,000 19,547,000
Accumulated other comprehensive (loss) income (5,000) 62,000
Treasury stock at cost, 2,587,000 and 2,639,000 shares, respectively (16,373,000) (16,374,000)
----------------- -----------------
Total shareholders' equity 33,204,000 43,350,000
----------------- ----------------
Total liabilities and shareholders' equity $ 107,758,000 $ 113,481,000
================ ================
See accompanying notes to consolidated financial statements.
F-3
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve-Months Twelve-Months Twelve-Months
Ended Ended Ended
December 31, December 31, July 31,
2001 2000 1999
Net sales $ 138,467,000 $ 148,405,000 $ 88,694,000
------------- ------------- -----------
Cost and expenses:
Cost of products sold 96,403,000 97,295,000 55,395,000
Engineering and product development 8,768,000 9,671,000 6,006,000
Selling, general and administrative 28,405,000 25,169,000 13,448,000
Depreciation and amortization 4,587,000 4,379,000 3,092,000
Restructuring costs 3,868,000 -- --
Impairment of intangibles 4,270,000 -- --
Settlement of class action suit -- (875,000) --
Total cost and expenses 146,301,000 135,639,000 77,941,000
----------- ----------- ----------
Income (loss) from operations (7,834,000) 12,766,000 10,753,000
----------- ---------- ----------
Other income (expense):
Interest income 366,000 344,000 250,000
Interest expense (3,407,000) (3,045,000) (991,000)
Gain from demutualization of insurance company -- -- --
----------- --------- ---------
Income (loss) from continuing operations before income (10,875,000) 10,065,000 10,012,000
taxes
Income tax provision (benefit) (4,172,000) 3,642,000 4,213,000
----------- --------- ---------
Income (loss) from continuing operations (6,703,000) 6,423,000 5,799,000
Income (loss) from discontinued operations (net of tax) (3,947,000) (4,723,000) (393,000)
----------- ----------- ---------
Net income (loss) $ (10,650,000) $ 1,700,000 $ 5,406,000
============= ========== ==========
Basic net income (loss) per common share :
Income (loss) from continuing operations $ (1.18) $ 1.14 $ 1.03
Loss from discontinued operations (net of tax) (.069) (0.84) (0.07)
------ ------ ------
Net income (loss) $ (1.87) $ 0.30 $ 0.96
======= ===== =====
Diluted net income (loss) per common share :
Income (loss) from continuing operations $ (1.18) $ 1.12 $ 0.99
Loss from discontinued operations (net of tax) (.069) (0.84) (0.07)
------ ------ ------
Net income (loss) $ (1.87) $ 0.30 $ 0.92
======= ===== =====
Shares used in computing basic net income (loss) per 5,698,000 5,635,000 5,643,000
common share
Shares used in computing diluted net income (loss) per 5,698,000 5,757,000 5,876,000
common share
Five-Months Five-Months
Ended Ended
December 31, December 31,
1999 1998
Net sales $ 59,032,000 $ 32,809,000
----------- -----------
Cost and expenses:
Cost of products sold 39,198,000 20,998,000
Engineering and product development 4,150,000 2,373,000
Selling, general and administrative 9,283,000 5,211,000
Depreciation and amortization 1,830,000 1,246,000
Restructuring costs -- --
Impairment of intangibles -- --
Settlement of class action suit -- --
Total cost and expenses 54,461,000 29,828,000
---------- ----------
Income (loss) from operations 4,571,000 2,981,000
--------- ---------
Other income (expense):
Interest income 75,000 120,000
Interest expense (1,077,000) (391,000)
Gain from demutualization of insurance company 1,812,000 --
----------- --------- -------------
Income (loss) from continuing operations before income 5,381,000 2,710,000
taxes
Income tax provision (benefit) 2,592,000 1,452,000
--------- ---------
Income (loss) from continuing operations 2,789,000 1,258,000
Income (loss) from discontinued operations (net of tax) (3,473,000) 703,000
----------- -------
Net income (loss) $ (684,000) $ 1,961,000
========== ==========
Basic net income (loss) per common share :
Income (loss) from continuing operations $ 0.50 $ 0.23
Loss from discontinued operations (net of tax) (0.62) 0.12
------ ----
Net income (loss) $ (0.12) .33
======= ===
Diluted net income (loss) per common share :
Income (loss) from continuing operations $ 0.50 $ 0.21
Loss from discontinued operations (net of tax) (0.620) 0.12
------ ----
Net income (loss) $ (0.12) $ .33
======= ====
Shares used in computing basic net income (loss) per 5,624,000 5,641,000
common share
Shares used in computing diluted net income (loss) per
common share 5,624,000 5,886,000
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Twelve-Months Twelve-Months Twelve-Months
Ended Ended Ended
December 31, December 31, July 31,
2001 2000 1999
Net income (loss) $(10,650,000) $1,700,000 $5,406,000
------------- ---------- ----------
Other comprehensive income (loss):
Currency translation adjustment, net of related taxes (67,000) 9,000 (31,000)
-------- ----- --------
Comprehensive income (loss) $(10,717,000) $1,709,000 $5,375,000
============= ========== ==========
Five-Months Five-Months
Ended Ended
December 31, December 31,
1999 1998
(Unaudited)
Net income (loss) $(684,000) $1,961,000
---------- ----------
Other comprehensive income (loss):
Currency translation adjustment, net of related taxes 4,000 72,000
----- ------
Comprehensive income (loss) $(680,000) $2,033,000
========== ==========
F-4
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
Issued Held In Treasury
Shares Amount Shares Amount
Balance July 31, 1998 8,153,000 $ 1,631,000 (2,546,000) $(13,903,000)
Net income
Cash dividends, $.09 per share
Other, including exercise of Employee stock
options and related income tax benefits.... 87,000 17,000
Treasury stock sold 71,000 390,000
Treasury stock purchased (133,000) (1,648,000)
Current year translation adjustment
Balance July 31, 1999................
8,240,000 $ 1,648,000 (2,608,000) $(15,161,000)
Net loss.
Cash dividends, $.05 per share
Other, including exercise of
Employee stock options and
related income tax benefits. 32,000 6,000
Treasury stock sold 19,000 108,000
Treasury stock purchased. (61,000) (763,000)
Current year translation adjustment
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 income.
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)
Accumulated
Capital in Other
Excess of Retained Comprehensive
Par Value Earnings Income (Loss)
Balance July 31, 1998 $36,061,000 $14,476,000 $80,000
Net income 5,406,000
Cash dividends, $.09 per share
(507,000)
Other, including exercise of Employee stock
options and related income tax benefits.... 373,000 (1,000)
Treasury stock sold 498,000
Treasury stock purchased
Current year translation adjustment (31,000)
Balance July 31, 1999................
$36,932,000 $19,374,000 $49,000
Net loss. (684,000)
Cash dividends, $.05 per share (280,000)
Other, including exercise of
Employee stock options and
related income tax benefits. 715,000
Treasury stock sold 124,000
Treasury stock purchased.
Current year translation adjustment (4,000)
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 income. (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)
F-5
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve-Months Twelve-Months
Ended Ended
December 31, December 31,
2001 2000
OPERATING ACTIVITIES:
Income (loss) from continuing operations $(6,703,000) $6,423,000
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation 3,001,000 2,808,000
Amortization 1,586,000 1,571,000
Restructuring charges 3,868,000 --
Impairment of intangibles 4,270,000 --
Write-down of inventory 2,940,000 --
Provisions for losses on accounts receivable 469,000 389,000
Additions to other assets (259,000) (610,000)
Cash surrender value of life insurance policies (981,000) (1,548,000)
Deferred compensation and supplemental retirement benefits 511,000 732,000
Deferred compensation and supplemental retirement benefit payments (440,000) (490,000)
Decrease (increase) in deferred income taxes (3,715,000) (582,000)
Discontinued product line expenses -- --
(Gain) loss on sales of equipment 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
(1,672,000) 1,110,000
Inventories 2,701,000 (4,174,000)
Prepaid expenses 325,000 74,000
Accounts payable 5,492,000 (761,000)
Other accrued liabilities 1,061,000 (1,125,000)
Accrued income taxes (644,000) 105,000
--------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $11,930,000 $3,988,000
------------ -----------
INVESTING ACTIVITIES:
Proceeds from sale of assets of subsidiary 1,053,000 --
Proceeds from sales of equipment 3,000 76,000
Purchases of property, plant and equipment (2,342,000) (2,563,000)
Decrease (increase) in notes receivable 36,000 (10,000)
Payments for acquisitions, net of cash acquired -- (376,000)
Proceeds from cash surrender value of life insurance policies 880,000 --
-------- --
NET CASH USED IN INVESTING ACTIVITIES $(370,000) $(2,873,000)
----------- ------------
FINANCING ACTIVITIES:
Cash dividends paid -- (563,000)
Death benefits from life insurance policy 256,000 --
Proceeds from short-term debt 1,374,000 --
Proceeds from long-term debt 24,800,000 11,560,000
Twelve-Months Five-Months
Ended Ended
July 31, December 31,
1999 1999
OPERATING ACTIVITIES:
Income (loss) from continuing operations $5,799,000 $2,789,000
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation 1,961,000 1,180,000
Amortization 1,131,000 650,000
Restructuring charges -- --
Impairment of intangibles -- --
Write-down of inventory -- --
Provisions for losses on accounts receivable 40,000 10,000
Additions to other assets (945,000) (816,000)
Cash surrender value of life insurance policies (753,000) (298,000)
Deferred compensation and supplemental retirement benefits 852,000 356,000
Deferred compensation and supplemental retirement benefit payments (620,000) (219,000)
Decrease (increase) in deferred income taxes (765,000) (1,667,000)
Discontinued product line expenses (141,000) --
(Gain) loss on sales of equipment (13,000) 1,000
Investment in Kreiss Johnson (233,000) 58,000
Changes in operating assets and liabilities, excluding effects of business acquisitions and
Dispositions:
Accounts receivable
(1,405,000) (3,041,000)
Inventories (70,000) (2,563,000)
Prepaid expenses 156,000 (336,000)
Accounts payable (1,953,000) 235,000
Other accrued liabilities (2,012,000) (996,000)
Accrued income taxes 340,000 1,086,000
-------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $1,369,000 $(3,571,000)
----------- ------------
INVESTING ACTIVITIES:
Proceeds from sale of assets of subsidiary -- --
Proceeds from sales of equipment 920,000 2,000
Purchases of property, plant and equipment (1,901,000) (849,000)
Decrease (increase) in notes receivable 32,000 28,000
Payments for acquisitions, net of cash acquired (19,082,000) --
Proceeds from cash surrender value of life insurance policies -- --
-- --
NET CASH USED IN INVESTING ACTIVITIES $(20,031,000) $(819,000)
------------- ----------
FINANCING ACTIVITIES:
Cash dividends paid (507,000) (280,000)
Death benefits from life insurance policy -- --
Proceeds from short-term debt 21,863,000 --
Proceeds from long-term debt 33,878,000 15,279,000
Five-Months
Ended
December 31,
1998
(Unaudited)
OPERATING ACTIVITIES:
Income (loss) from continuing operations $1,258,000
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation 800,000
Amortization 446,000
Restructuring charges --
Impairment of intangibles --
Write-down of inventory --
Provisions for losses on accounts receivable 13,000
Additions to other assets (425,000)
Cash surrender value of life insurance policies (249,000)
Deferred compensation and supplemental retirement benefits 469,000
Deferred compensation and supplemental retirement benefit payments (275,000)
Decrease (increase) in deferred income taxes 526,000
Discontinued product line expenses --
(Gain) loss on sales of equipment (11,000)
Investment in Kreiss Johnson (257,000)
Changes in operating assets and liabilities, excluding effects of business acquisitions and
Dispositions:
Accounts receivable
657,000
Inventories (332,000)
Prepaid expenses 261,000
Accounts payable (1,406,000)
Other accrued liabilities (3,296,000)
Accrued income taxes (1,037,000)
-----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $(2,858,000)
-----------
INVESTING ACTIVITIES:
Proceeds from sale of assets of subsidiary --
Proceeds from sales of equipment 902,000
Purchases of property, plant and equipment (1,247,000)
Decrease (increase) in notes receivable 37,000
Payments for acquisitions, net of cash acquired --
Proceeds from cash surrender value of life insurance policies --
-
NET CASH USED IN INVESTING ACTIVITIES $(308,000)
-----------
FINANCING ACTIVITIES:
Cash dividends paid (226,000)
Death benefits from life insurance policy --
Proceeds from short-term debt 1,267,000
Proceeds from long-term debt 11,443,000
F-6
Payments on short-term debt - (809,000) (21,012,000)
Payments on long-term debt (24,276,000) (13,936,000) (17,395,000)
Proceeds from stock options exercised 440,000 215,000 476,000
Treasury stock (acquired) sold 131,000 (196,000) (760,000)
-------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $2,725,000 $(3,729,000) $16,543,000
----------- ------------ - ------------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (8,694,000) 2,450,000 2,138,000
Effect of exchange rate changes on cash. (203,000) 236,000 52,000
--------- -------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS. 5,388,000 72,000 71,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,189,000 1,117,000 -
---------- ---------- --
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6,577,000 $1,189,000 $71,000
=========== =========== ========
Payments on short-term debt - -
Payments on long-term debt (7,915,000) (12,500,000)
Proceeds from stock options exercised 257,000 108,000
Treasury stock (acquired) sold (531,000) 287,000
--------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $6,810,000 $379,000
----------- --------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (1,683,000) 2,940,000
Effect of exchange rate changes on cash. 309,000 (153,000)
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS. 1,046,000 -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 71,000 -
------- -
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,117,000 $ -
=========== ==========
F-7
Notes to Consolidated Financial Statements(Information for the five months ended
December 31, 1998 is Unaudited)
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 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
assisted the Company's Board of Directors in its review and has been engaged to
lead this process, which is ongoing.
LIQUIDITY AND GOING CONCERN: The Company is party to a Revolving Credit Facility
(as defined in Note 9) 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, 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. The Company also may not be able to
meet its net income covenant for the first quarter of 2002 due to the operating
charges incurred in connection with certain change-in-control payments and proxy
cost expenses. 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.
As a result of these covenant violations, the lender has all of the rights and
remedies available under the Revolving Credit Facility, including the ability to
demand immediate repayment of the outstanding balance. Management does not
believe that the lender will exercise its rights under the Revolving Credit
Facility to demand immediate repayment and plans to negotiate waivers of the
previous covenant violations, amendments to certain future required financial
covenants and an extension of the deadline for the scheduled debt reduction.
There can be no assurance that the lender will not demand immediate repayment of
the outstanding balance under the Revolving Credit Facility or that the Company
will be able to obtain waivers of default from its lender, amend certain future
required financial covenants, or extend the deadline for the scheduled debt
reduction.
The accompanying consolidated 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.
F-8
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 and is also
presented herein. 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, 2001 ("2001") and 2000 ("2000"), the fiscal year ended
July 31, 1999 ("fiscal 1999"), and the five months ended December 31, 1999 and
1998.
REVENUE RECOGNITION: Revenue from product sales is generally
recognized at the time the product is shipped, (FOB shipping point) 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. Revenue
from services is recognized in the period the service has been provided.
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.
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.
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.
INTANGIBLE ASSETS: Intangible assets consist primarily of goodwill,
trademarks, covenants not to compete, patents, and a consulting agreement. The
goodwill resulting from the 2000 and fiscal 1999 and 1998 acquisitions and the
goodwill and trademarks resulting from the May 1995 acquisition are being
amortized over 30 years or less. Goodwill resulting from acquisitions made prior
to November 1, 1970, of $429,000 is considered to have continuing value over an
indefinite period, and is 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. The Company continually evaluates 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 uses an estimate of the related
undiscounted cash flows over the
F-9
remaining life of the intangible asset to measure recoverability. If impairment
exists, measurement of the impairment is based on the valuation method which
management believes most closely approximates the fair value of the intangible
asset, which has 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 Notes 8 and 16).
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.
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.
ADVERTISING COSTS: Advertising costs are expensed as incurred. For
the years ended December 31, 2001, December 31, 2000, and July 31, 1999, these
costs were $404,000, $663,000, and $642,000, respectively. For the five months
ended December 31, 1999 and December 31, 1998, these costs were $303,000 and
$237,000, respectively.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are
expensed as incurred. For the years ended December 31, 2001, December 31, 2000,
and July 31, 1999, these costs were $2,946,000, $3,136,000, and $1,901,000,
respectively. For the five months ended December 31, 1999 and December 31, 1998,
these costs were $1,257,000 and $676,000, 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 bases of assets and
liabilities.
FOREIGN CURRENCY CONVERSION: The balance sheets and statements of
operations of the Company's Mexican subsidiaries are converted to US 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
functional currencies for the Company's German and Hungarian subsidiaries are
their local currencies. The translation from the local currency to U.S.
F-11
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.
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, 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 are expected to have permanently withdrawn their national currencies
as legal tender and replaced their currencies with euro notes and coins.
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 will continue 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 affect on its consolidated financial position, results of
operations, or cash flows.
NET INCOME (LOSS) PER COMMON SHARE: The Company determines net
income (loss) per share in accordance with Statement of Financial Accounting
Standards 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:
F-11
Income (Loss) Shares Per share amount
-------------------------------------------------------------------------
For the Year Ended December 31, 2001:
Basic net income (loss) per common share.......... $(10,650,000) 5,698,000 $(1.87)
Effect of dilutive securities..................... ---- ---- ----
------------------------------------------------------------------------
Dilutive net income (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
------------------------------------------------------------------------
For the Year Ended July 31, 1999:
Basic net income per common share.................. $ 5,406,000 5,643,000 $ 0.96
Effect of dilutive securities...................... ---- 233,000 (0.04)
------------------------------------------------------------------------
Dilutive net income per common share............... $ 5,406,000 5,876,000 $ 0.92
------------------------------------------------------------------------
For the Five Months Ended December 31, 1999:
Basic net income (loss) per common share........... $ (684,000) 5,624,000 $(0.12)
Effect of dilutive securities...................... ---- ---- ----
------------------------------------------------------------------------
Dilutive net income (loss) per common share........ $ (684,000) 5,624,000 $(0.12)
------------------------------------------------------------------------
For the Five Months Ended December 31, 1998:
Basic net income per common share.................. $ 1,961,000 5,641,000 $0.35
Effect of dilutive securities...................... ---- 245,000 (0.02)
------------------------------------------------------------------------
Dilutive net income per common share........... $ 1,961,000 5,886,000 $ 0.33
------------------------------------------------------------------------
During the years ended December 31, 2001, December 31, 2000, and
July 31, 1999, 1,268,000, 703,000, and 496,000 stock options, respectively, were
excluded from the dilutive computations because their effect would have been
anti-dilutive. During the five months ended December 31, 1999 and December 31,
1998, 793,000 and 508,000 stock options, respectively, were excluded from the
dilutive computations because their effect would have been anti-dilutive.
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 2001, the Company adopted this statement,
which did not have any impact on its consolidated financial position or results
of operations.
In June 2001, the 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
F-12
instead be subject to periodic testing for impairment. Intangible assets
determined to have definitive lives will continue to be amortized over their
useful lives. This statement is effective for the Company's 2002 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. In 2001, the Company recorded
goodwill amortization expense of approximately $808,000. The Company is
currently evaluating the remaining provisions of SFAS No. 142 to determine the
effect, if any, they may have on its consolidated financial position or results
of operations.
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 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 will be
effective for the Company's 2002 year. The Company is currently evaluating the
impact of SFAS No. 144 to determine the effect, if any, it may have on the
Company's consolidated financial position 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
On May 11, 1999, pursuant to a Share Purchase Agreement dated April
1, 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 gave promissory notes with an aggregate face amount of $75,000 at
closing. 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 for 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 is
being amortized on a straight-line basis over 30 years. The results of
operations of RFL, since the acquisition date, are included in the accompanying
consolidated financial statements.
On July 27, 1999, pursuant to an Asset Purchase Agreement dated July
13, 1999, Condor D.C. Power Supplies, Inc. ("Condor"), a wholly-owned subsidiary
of the Company, acquired
F-13
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.
There was also a contingent "earn-out" payment of either $1,000,000, $3,000,000
or $5,000,000, payable in the event that sales from the purchased assets were at
least $30,000,000, $35,000,000 or $40,000,000 during the twelve-month period
ended March 31, 2001. No contingent payment was earned or paid. 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 is 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 acquired in connection with the acquisition of Todd
Products (see Notes 8 and 16).
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 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. Net sales from
discontinued operations for the years ended December 31, 2001, December 31,
2000, and July 31, 1999 were $10,316,000, $19,341,000, and $36,434,000,
respectively. Net sales from discontinued operations for the five months ended
December 31, 1999 and December 31, 1998 were $11,938,000 and $17,007,000,
respectively. The after tax operating losses from discontinued operations for
the years ended December 31, 2001, December 31, 2000, and July 31, 1999, and the
five months ended December 31, 1999 were $3,947,000, $4,723,000, $393,000, and
$3,473,000, respectively. The operating income from discontinued operations for
the five months ended December 31, 1998 was $703,000. 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. As of December 31, 2001,
the Company had approximately $1,300,000 accrued for liabilities related to SL
Waber. The remaining accrued liability of $1,300,000 was comprised of reserves
related to certain wholesale customers who had certain rights to return products
to the Company and potential claims with certain vendors.
Note 3. Income taxes
Income (loss) from continuing operations before provision for income
taxes consists of the following:
F-14
Twelve Months Twelve Months Twelve Months Five Months Five Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
-----------------------------------------------------------------------------------
U.S..................... $(16,405) $7,098 $8,039 $4,491 $2,153
Non U.S................. 5,530 2,967 1,973 890 557
-----------------------------------------------------------------------------------
$(10,875) $10,065 $10,012 $5,381 $2,710
-----------------------------------------------------------------------------------
The provision (benefit) for income taxes consists of the following:
Twelve Months Twelve Months Twelve Months Five Months Five Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
-------------------------------------------------------------------------------------------
Current:
Federal................. $(2,114) $3,497 $2,503 $1,692 $604
International........... 677 1,214 876 317 212
State................... 138 475 624 449 123
Deferred:
Federal................. (2,231) (1,591) 173 40 453
International........... 2 (3) 1 99 22
State................... (644) 50 36 (5) 38
-------------------------------------------------------------------------------------------
$(4,172) $3,642 $4,213 $2,592 $1,452
-------------------------------------------------------------------------------------------
The pre-tax domestic loss incurred in 2001 was carried back to prior
years resulting in recoverable income taxes of approximately $3,082,000.
The benefit for income taxes related to discontinued operations
consists of $1,193,000, $3,055,000, and $1,132,000 for the years ended December
31, 2001, December 31, 2000, and July 31, 1999, respectively, and $2,904,000 and
$434,000 for the five months ended December 31, 1999 and December 31, 1998,
respectively.
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2001 and 2000 are as follows:
F-15
December 31, December 31,
2001 2000
-------------------------------
Deferred tax assets: (In thousands)
Deferred compensation $1,900 $2,348
Liabilities related to environmental matters 122 148
Inventory valuation 1,405 569
Prepaid and accrued expenses 3,478 2,595
Assets and liabilities related to discontinued operations 136 1,006
Federal and State tax loss carryforwards 1,681 1,625
1,723 --
Intangibles
Foreign tax credit carryforwards 1,272 --
-------------------------------
11,717 8,291
Less valuation allowances (1,677) --
-------------------------------
10,040 8,291
Deferred tax liabilities:
Accelerated depreciation and amortization 1,696 1,738
Other 30 60
-------------------------------
-------------------------------
$8,314 $6,493
-------------------------------
As of December 31, 2001, the Company's net operating loss
carryforwards decreased by $4,778,000 to $0 for federal income tax purposes.
As of December 31, 2001, the Company generated foreign tax credits
totaling approximately $1,272,000, through the repatriation of earnings from its
German subsidiaries. These credits can be carried forward for five years and
will expire at the end of 2006.
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 $8,314,000 of net deferred
tax assets as of December 31, 2001 will be realized. In 2001, a valuation
allowance of approximately $1,677,000 was provided against gross deferred tax
assets due to the uncertainty of the realization of tax benefits for certain
state net operating loss carryforwards and foreign tax credits.
Following is a reconciliation of income tax expense (benefit) at the
applicable federal statutory rate and the effective rates:
Twelve Twelve Twelve Five Five
Months Months Months Months Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
--------------------------------------------------------------------
Statutory rate (34%) 34% 34% 34% 34%
Tax rate differential on Foreign Sales
Corporation/Extraterritorial Income Exclusion benefit
earnings 5 (1) -- -- (1)
International rate differences (1) 3 1 2 3
State income taxes, net of federal income tax
.. (1) 4 4 8 6
Non-taxable settlement of life insurance class action
suit -- (5) -- -- --
Cumulative effect of reduction in German tax
rates 9 -- -- -- --
F-16
Taxable gain from surrender of life insurance
policies (14) -- -- -- --
Discontinued operations adjustments (1) 1 2 3 11
Other (1) -- 1 1 1
-------------------------------------------------------------------------
(38%) 36% 42% 48% 54%
-------------------------------------------------------------------------
NOTE 4. RECEIVABLES
Receivables consist of the following:
December 31, December 31,
2001 2000
-----------------------------------------
(In thousands)
Trade receivables. .................................. $20,189 $22,023
Less allowances for doubtful accounts................ (568) (560)
-----------------------------------------
19,621 21,463
Receivables for life insurance policies
surrendered........................................ 10,229
----
Recoverable income taxes............................. 4,355 --
Other 1,836 523
-----------------------------------------
$36,041 $21,986
-----------------------------------------
CASH SURRENDER VALUE OF LIFE INSURANCE POLICIES AT DECEMBER 31, 2000 OF
$11,486,000 WAS REDUCED TO $1,323,000 AS OF DECEMBER 31, 2001 DUE TO SURRENDER
OF POLICIES AGGREGATING $10,229,000 AND OTHER ADJUSTMENTS OF $66,000 (SEE NOTE
10).
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. The
Company received cash proceeds of $1,600,000, which was included in other
receivables as of December 31, 2001, in January 2002, all of which were used to
pay down debt under the Company's Revolving Credit Facility (as defined in Note
9).
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.
F-17
Note 6. Inventories
Inventories consist of the following:
December 31, December 31,
2001 2000
-------------------------------------------------------
(In thousands)
Raw materials....................................... $15,341 $17,419
Work in process..................................... 5,261 6,496
Finished goods...................................... 3,401 2,065
-------------------------------------------------------
24,003 25,980
Less allowances..................................... (3,506) (2,489)
-------------------------------------------------------
$20,497 $23,491
-------------------------------------------------------
The above includes certain inventories, which are valued using the LIFO method,
which aggregated $4,560,000 and $3,488,000 as of December 31, 2001 and 2000,
respectively. The excess of FIFO cost over LIFO cost as of December 31, 2001 and
2000 was approximately $335,000 and $507,000, respectively.
Note 7. Property, plant and equipment
Property, plant and equipment consist of the following:
December 31, 2001 December 31, 2000
-----------------------------------------------------
(In thousands)
Land $ 4,654 $ 4,494
Buildings and leasehold improvements 10,406 10,550
Equipment and other property 22,710 21,595
-----------------------------------------------------
37,770 36,639
Less accumulated depreciation (18,941) (16,858)
-----------------------------------------------------
$ 18,829 $ 19,781
-----------------------------------------------------
Note 8. Intangible assets
Goodwill by operating segment for the period December 30, 2000 to December
31,2001 is as follows:
Surf Tech Condor Teal EME
Goodwill, December 31, 2000 698 3,229 5,333 2,517
Additions 153
amortization for the year (18) (203) (280) (86)
Impairment (125) (3,179)
discontinued operation
----------------------------------------------------------------
Goodwill, December 31,2001 555 - 5,053 2,431
RFL Waber Total
Goodwill, December 31, 2000 5,472 526 17,775
Additions 153
amortization for the year (221) (808)
-
Impairment (3,304)
-
discontinued operation (526) (526)
-
-
------------------------------------------
Goodwill, December 31,2001 5,251 - 13,290
F-18
Intangible assets consist of the following:
December 31, 2001 December 31, 2000
Accumulated Accumulated
Gross Value Amortization Net Value Gross Value Amortization Net Value
--------------------------------------------------------------------------------------
(in thousands)
Goodwill 15,482 2,192 13,290 19,523 1,748 17,775
--------------------------------------------------------------------------------------
Patents 932 454 478 925 384 541
Covenant Not To Compete 2,980 2,660 320 4,255 2,554 1,701
Trademarks 921 245 676 920 209 711
Other 501 466 35 503 461 42
---------------------------------------------------------------------------------------------------------------------
20,816 6,017 14,799 26,126 5,356 20,770
--------------------------------------------------------------------------------------
During the year ended December 31, 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 16). In addition,
goodwill related to SL Waber in the amount of $526,000 was written off in
connection with the sale of substantially all of its assets and $125,000 of
goodwill related to SL Surface Technologies, Inc. ("Surf Tech") was also written
off in 2001.
Amortization expense for intangible assets subject to amortization
in each of the next five fiscal years is estimated to be $399,000 in 2002,
$154,000 in 2003 and $112,000 in each of years 2004 through 2006.
Note 9. Debt
Debt consists of the following:
December 31, December 31,
2001 2000
--------------------------------------------------------
(In thousands)
Short-term bank debt.............................. $ 1,367 $ ----
--------------------------------------------------------
Revolving lines of credit......................... $35,689 $35,318
Mortgages payable................................. 237 437
Term loan......................................... 912 964
--------------------------------------------------------
36,838 36,719
Less portion due within one year.................. 35,829 186
--------------------------------------------------------
Long-term bank debt............................... $ 1,009 $36,533
--------------------------------------------------------
The Company is party to a Second Amended and Restated Credit
Agreement dated as of December 13, 2001, as amended (the "Revolving Credit
Facility"). 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 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
F-19
which require certain levels of quarterly net income and a quarterly minimum
fixed charge coverage, which is the ratio of earnings before interest, taxes,
depreciation and amortization, plus operating rent to operating rent, capital
expenditures and interest charges. In addition, the Company is prohibited from
paying dividends. The Revolving Credit Facility matures on December 31, 2002 and
provides for the payment of a fee of approximately $780,000 in the event that
the facility is not retired on or before October 31, 2002.
As of December 31, 2001, outstanding borrowings under the Company's
Revolving Credit Facility were $35,689,000. Available borrowings under the
Company's Revolving Credit Facility were $1,268,000 as of December 31, 2001. The
weighted average interest rate during the years ended December 31, 2001 and
December 31, 2000 was 7.57% and 8.98%, respectively.
On March 1, 2002 the Company received a notice from its lenders
under the Revolving Credit Facility stating that it is currently in default
under the Revolving Credit Facility due to its failure to meet the previously
scheduled debt level to $25,500,000 on March 1, 2002. The Company's outstanding
debt under the Revolving Credit Facility was approximately $26,200,000 as of
March 1, 2002. Additionally, the Company did not meet its net income covenant
under the Revolving Credit Facility for the fourth quarter of 2001 due to the
charge related to the impairment of the intangible assets of Condor at December
31, 2001. Also, the Company may not be able to meet its net income covenant for
the first quarter of 2002. The Company and its lenders are currently in
discussions to extend the deadline for the scheduled debt reduction and to
obtain a waiver of the earnings covenant for the fourth quarter of 2001.
The Company's German subsidiary also has $3,457,000 in lines of
credit with its banks that mature in 2002. Under the terms of its lines of
credit, the subsidiary can borrow for any purpose at interest rates ranging from
5.2% to 8.25%. No financial covenants are required. As of December 31, 2001 and
2000, outstanding borrowings under these facilities were $1,367,000 and $0,
respectively.
As of December 31, 2001 and December 31, 2000, the Company's German
subsidiary had mortgages payable on building additions, at interest rates of
3.95% and 4.75%, respectively, that require principal repayments through 2002 to
2004.
Principal maturities of debt payable over the next three years are $35,829,000,
$996,000, and $13,000 in 2002, 2003, and 2004, respectively.
Note 10. Retirement plans and deferred compensation
The Company maintains three noncontributory defined contribution
pension plans covering substantially all employees. The Company's contribution
to its 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 the years ended December 31,
2001, December 31, 2000 and fiscal year ended July 31, 1999 amounted to
approximately $1,307,000, $1,485,000, and $788,000, respectively. Costs for the
five months ended December 31, 1999 and December 31, 1998 amounted to $624,000
and $312,000, respectively. It is the Company's policy to fund its accrued
retirement income costs.
F-20
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
$55,000, $60,000, and $60,000 for the years ended December 31, 2001, December
31, 2000 and fiscal year ended July 31, 1999, respectively. For the five months
ended December 31, 1999 and December 31, 1998, the amounts were $21,000 and
$26,000, 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 to income in connection with these agreements amounted
to $396,000, $420,000, and $438,000 for the years ended December 31, 2001,
December 31, 2000 and fiscal year ended July 31, 1999, respectively, and
$168,000 and $230,000 for the five months ended December 31, 1999 and December
31, 1998, respectively.
In addition, the Company has agreements with certain active officers
and key employees providing for deferred compensation benefits. Benefits to be
provided to each participant are stated in separate elective salary deferral
agreements. The amount charged to income in connection with these agreements
amounted to $115,000, $312,000, and $414,000 for the years ended December 31,
2001, December 31, 2000 and fiscal year ended July 31, 1999, respectively, and
$188,000 and $239,000 for the five months ended December 31, 1999 and December
31, 1998, respectively.
The Company is 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, 2001, the aggregate death
benefit totaled $1,938,000, with the corresponding cash surrender value of all
policies totaling $1,323,000.
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 debt under the
Company's Revolving Credit Facility.
As of December 31, 2001, certain agreements may restrict the Company from
utilizing cash surrender value totaling approximately $760,000 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 included in income in connection with the policies amounted to $789,000,
$1,399,000, and $354,000 for the years ended December 31, 2001, December 31,
2000 and fiscal year ended July 31, 1999, respectively, and $159,000 and $85,000
for the five months ended December 31, 1999 and December 31, 1998, respectively.
F-21
Note 11. Commitments and contingencies
For the years ended December 31, 2001, December 31, 2000 and fiscal
year ended July 31, 1999, rental expense applicable to continuing operations
aggregated approximately $1,696,000, $1,728,000, and $1,114,000, respectively.
For the five months ended December 31, 1999 and 1998, rental expense applicable
to continuing operations aggregated approximately $706,000 and $479,000,
respectively. These expenses are primarily for facilities and vehicles. The
minimum rental commitments as of December 31, 2001 are as follows:
(In thousands)
2002 $1,326
2003 866
2004 680
2005 665
2006 656
Thereafter 164
------------------------------
$4,357
------------------------------
As of December 31, 2001, the Company was contingently liable for
$543,000 under outstanding letters 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.
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 a customer, 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. Management believes it has strong defenses to these claims and
intends to defend them vigorously.
ENVIRONMENTAL: Loss contingencies include potential obligations to
investigate and eliminate or mitigate the affects on the environment of the
disposal or release of certain chemical substances at various sites, such as
Superfund sites and other facilities, whether or not they are currently in
operation. The Company is currently participating in environmental assessments
and cleanups at a number of sites under these laws and may in the future be
involved in additional environmental assessments and cleanups. Based upon
investigations completed by the Company and its independent engineering
consulting 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
F-22
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.
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 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. As of December 31, 2001
and December 31, 2000, the remaining environmental accrual was $290,000 and
$357,000, respectively, of which $190,000 and $257,000, respectively, have been
included in "Accrued Liabilities" and $100,000 and $100,000, respectively, in
"Other Liabilities" in the accompanying consolidated balance sheets.
The Company is the subject of various other lawsuits and actions
relating to environmental issues, including 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 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 has been contacted and an investigation is currently
underway. Based upon the preliminary evidence, management does not believe that
it will incur material remediation costs at this site.
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 requested an extension of time to determine
the nature of the alleged contamination and the extent of the Company's
responsibility. It is still very early in the investigation; however, based
F-23
upon the preliminary investigations, management does not believe that
remediation of this site will have a material adverse effect on its business or
operations.
The Company is investigating a possible ground water containment
plume on its property in Camden, New Jersey. The Company does not know the
extent of the contamination or the amount of the cost to remediate.
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.
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. These
payments range from three to 24 months of the employee's base salary as of the
termination date, as defined. If the change in control had occurred on December
31, 2001, and these employees had been terminated, the payments would have
aggregated approximately $4,500,000. All senior divisional management teams are
continuing in their positions.
Note 12. 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 fiscal year ended July 31, 1999, the five months ended December
31, 1999, and years ended December 31, 2000 and December 31, 2001 with respect
to the Director Plan is as follows:
Shares Option Price
(In thousands, except for Option Price)
----------------------------------------------------
Outstanding and exercisable as of August 1, 1998...... 54 $3.5625 to $14.625
Granted............................................... 20 $11.1563 to $14.625
Cancelled............................................. (6) $12.0313 to $14.625
----------------------------------------------------
Outstanding and exercisable as of July 31, 1999....... 68 $3.5625 to $14.625
Granted............................................... 8 $12.3125 to $13.875
----------------------------------------------------
Outstanding and exercisable as of December 31, 1999.... 76 $3.5625 to $14.625
Granted................................................ 18 $9.1875 to $12.84
----------------------------------------------------
Outstanding and exercisable as of December 31, 2000..... 94 $3.5625 to $14.625
F-24
Granted ....................................................... 16 $6.80 to $14.65
Exercised...................................................... (6) $9.1875 to $11.25
------------------------------------------------
Outstanding and exercisable as of December 31, 2001............ 104 $3.5625 to $14.625
------------------------------------------------
As of December 31, 2001, the number of shares available for grant
was 54,000.
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. Information for fiscal year
ended July 31, 1999, the five months ended December 31, 1999, and years ended
December 31, 2000 and December 31, 2001 with respect to the 1991 Plan is as
follows:
Shares Option Price
(In thousands, except for Option Price)
---------------------------------------------------
Outstanding at August 1, 1998 422 $3.25 to $14.5625
Granted 174 $11.125 to $12.875
Exercised (63) $3.25 to $11.125
Cancelled (24) $9.375 to $11.125
---------------------------------------------------
Outstanding as of July 31, 1999 509 $3.25 to $14.5625
Granted 140 $12.125 to $13.50
Exercised (22) $3.25 to $11.125
Cancelled (52) $11.00 to $14.5625
---------------------------------------------------
Outstanding as of December 31, 1999 575 $3.25 to $13.50
Granted 145 $9.781 to $12.00
Exercised (63) $3.25 to $9.375
Cancelled (34) $6.875 to $13.50
---------------------------------------------------
Outstanding as of December 31, 2000 623 $3.25 to $13.50
Granted 486 $5.75 to $12.175
Exercised (35) $6.875 to $13.50
Cancelled (18) $3.25 to $13.50
---------------------------------------------------
---------------------------------------------------
Outstanding as of December 31, 2001 1,056 $3.25 to $13.50
---------------------------------------------------
The number of shares exercisable as of December 31, 2001 was
536,000.
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 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
F-25
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.
Options for 8,000 shares, 10,000 shares and 34,000 shares were exercised during
the fiscal year ended July 31, 1998, the five months ended December 31, 1999,
and year ended December 31, 2000, respectively. The remaining options are
exercisable at any time after the date of grant with no expiration date, except
in the event of termination, disability or death. All of the option prices are
equivalent to 100% of market value at date of grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized in the
accompanying consolidated statements of operations for its stock-based
compensation plans. Had compensation cost for the Company's stock option plans
been determined based upon the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss) and
net income (loss) per common share would have been as follows:
Twelve Months Twelve Months Twelve Months Five Months Five Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
-----------------------------------------------------------------------------------------
Net income (loss) - as reported
........................... $(10,650,000) $1,700,000 $5,406,000 $(684,000) $1,961,000
Net income (loss) - pro forma. $(11,389,000) $1,153,000 $4,799,000 $(909,000) $1,695,000
Diluted net income (loss) per
Common share as reported. $(1.87) $.30 $.92 $(.12) $.33
Diluted net income (loss) per
Common share pro forma... $(2.00) $.20 $.82 $(.16) $.29
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:
Twelve Months Ended
December 31, 2001 Twelve Months Ended
Twelve Months Ended July 31,
December 31, 2000 1999
------------------------- -------------------------- --------------------- -
Expected dividend yield ............... 0.0% .94% .73%
Expected stock price volatility ....... 45.95% 29.58% 29.7%
Risk-free interest rate ............... 5.0% 6.3% 5.0%
Expected life of option ............... 7 years 7 years 7 years
Five Months
Ended
Five Months Ended December 31,
December 31, 1999 1998
---------------------- ---------------------
Expected dividend yield ............... .38% .33%
Expected stock price volatility ....... 29.58% 36.6%
Risk-free interest rate ............... 6.1% 4.9%
Expected life of option ............... 7 years 7 years
F-26
Transactions from August 1, 1998 through December 31, 2001, under
the above plans, were as follows:
Weighted
Average Life
Number of Shares Option Price Weighted Remaining
(In thousands) per Share Average Price (Years)
-------------------- ----------------------------------------------
Outstanding as of August 1, 1998 653 $3.25 to $14.625 $7.67 6.73
Granted 194 $11.125 to $14.625 $11.60
Exercised (88) $3.25 to $11.125 $5.44
Cancelled (30) $9.375 to $14.625 $12.00
--------------------------------------------------------------------
Outstanding as of July 31, 1999 729 $3.25 to $14.625 $8.85 6.71
Granted 148 $12.125 to $13.875 $13.43
Exercised (32) $3.25 to $11.156 $8.03
Cancelled (52) $11.00 to $14.5625 $12.99
--------------------------------------------------------------------
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
--------------------------------------------------------------------
Exercisable as of December 31, 2001 749 $3.25 to $14.625 $9.56
--------------------------------------------------------------------
The following tables segregate the outstanding options and
exercisable options as of December 31, 2001, into five ranges:
Options Outstanding Range of Option Prices Weighted Weighted Average Life Remaining
(In thousands) per Share Average Price (Years)
-------------------------------------------------------------------------------------------------------------------
162 $3.25 to $5.6875 $4.074442 7.08
369 $5.75 to $10.875 $6.777959 8.46
288 $11.00 to $12.00 $11.379993 7.18
314 $12.0313 to $13.0625 $12.289174 8.77
135 $13.50 to $14.625 $13.571681 7.65
---
1,268
-----
Options Exercisable Range of Option Prices Weighted
(In thousands) per Share Average Price
----------------------------------------------------------------------------------------
163 $3.25 to $5.6875 $4.074442
165 $5.75 to $10.875 $7.544435
209 $11.00 to $12.00 $11.323752
127 $12.0313 to $13.0625 $12.437501
85 $13.50 to $14.625 $13.614000
--
749
---
Note 13. Cash flow information
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid investments, purchased with an original
maturity of three months or less, to be cash equivalents.
In accordance with Statement of Financial Accounting Standard No.
95, "Statement of Cash Flows," cash flows from Elektro-Metall Export GmbH's
("EME") operations are 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
F-27
recorded on the consolidated balance sheet. The effect of exchange rate changes
on cash balances held in foreign currencies is reported on a separate line in
the statement of cash flows.
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 specifically utilized for
expenditures related to EME's performance under this program. As of December 31,
2001, approximately $3,600,000 of this progress payment is included as a
component of other accrued liabilities in the accompanying consolidated balance
sheet.
Supplemental disclosures of cash flow information:
Twelve Months Twelve Months Twelve Months Five Months Five Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
----------------------------------------------------------------------------------
(In thousands)
Interest paid $3,378 $3,026 $950 $970 $434
Income taxes paid $1,891 $1,288 $3,208 $1,646 $509
Non-cash investing and financing activities:
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
During fiscal 1999, Condor acquired certain of the net operating
assets of Todd Products for $7,430,000. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired................. $12,738,000
Cash paid..................................... $7,430,000
Liabilities assumed........................... $5,308,000
During fiscal 1999, the Company acquired all of the capital stock of
RFL for $12,462,000. In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired............... $16,417,000
Cash paid................................... $12,387,000
Liabilities assumed......................... $5,166,000
Note 14. Industry segments
During the years ended December 31, 2000 and July 31, 1999 and the
five months ended December 31, 1999 and December 31, 1998, the Company was
comprised of six business
F-28
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 the year ended December 31,
2001, the Company changed the composition of its reportable segments to
individual operating business units. Segment information for all periods
presented has been restated to conform with the December 31, 2001 presentation.
At December 31, 2001, the Company was comprised of six operating business units.
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. 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 designs and manufactures teleprotection
products/systems that are used to protect utility transmission lines and
apparatus by isolating faulty transmission lines from a transmission grid. RFL
provides customer service and maintenance for all electric utility equipment
protection systems. SurfTech produces industrial coatings and platings for
equipment in the corrugated paper and telecommunications industries. The other
segment includes corporate related items not allocated to reportable segments
and the results of insignificant operations. 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 and foreign
subsidiaries. For all periods presented, sales between business units were not
material. No single customer accounted for more than 10% of consolidated net
sales or a segment's net sales during 2001, 2000, fiscal 1999, or the five
months ended December 31, 1999 or December 31, 1998.
Twelve Twelve Twelve Five Five
Months Months Months Months Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
----------------------------------------------------------------------------------
(In thousands)
Net sales
Condor............... $48,742 $62,567 $30,428 $25,341 $11,778
Teal.................... 13,320 21,832 15,156 8,609 5,600
SL-MTI............. 19,262 14,201 15,081 5,765 5,894
EME.................. 25,609 22,541 19,992 8,122 8,394
RFL................... 28,447 24,426 5,274 10,073 ----
Surf Tech........... 3,087 2,838 2,763 1,122 1,143
----------------------------------------------------------------------------------
Consolidated...... $138,467 $148,405 $88,694 $59,032 $32,809
===================================================================================
F-29
Twelve Twelve Twelve Five Five
Months Months Months Months Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
-------------------------------------------------------------------------
Operating income (loss) (In thousands)
Condor $1,226 $4,203 $5,776 $2,118 $2,289
Teal 603 3,803 1,987 1,350 424
SL-MTI 1,981 1,032 1,223 (91) 336
EME 3,152 2,082 1,654 956 482
RFL 3,230 2,523 510 1,167 --
Surf Tech (760) (115) 10 94 9
Other expenses and Corporate office (6,188) (1,637) (407) (1,023) (559)
Write-down of inventory (a) (2,940) -- -- -- --
Restructuring charges (b) (3,868) -- -- -- --
Impairment of intangible assets (c) . (4,270) -- -- -- --
Settlement of class action suit
-- 875 -- -- --
-------------------------------------------------------------------------
Income (loss) from operations (7,834) 12,766 10,753 4,571 2,981
Demutualization of life insurance
company -- -- -- 1,812 --
Interest income 366 344 250 75 120
Interest expense (3,407) (3,045) (991) (1,077) (391)
-------------------------------------------------------------------------
Income (loss) from continuing operations before
taxes................... $(10,875) $ 10,065 $10,012 $5,381 $ 2,710
=========================================================================
(a) Includes $2,890 and $50 related to Condor and Surf Tech, respectively
(see Note 16).
(b) Includes $3,683 and $185 related to Condor and Surf Tech, respectively
(see Note 16).
(c) Includes $4,145 and $125 related to Condor and Surf Tech, respectively
(see Note 16).
As of December 31, As of December 31,
2001 2000
-------------------------------------------
Identifiable assets (In thousands)
Condor.................................................... $ 20,740 $ 31,889
Teal...................................................... 9,834 11,108
SL-MTI.................................................... 11,637 9,410
EME....................................................... 23,524 18,215
RFL....................................................... 17,445 16,193
Surf Tech................................................. 3,929 3,533
Other including Corporate Office.......... 20,649 23,133
-------------------------------------------
Consolidated.......................................... $107,758 $113,481
===========================================
F-30
Twelve Twelve Twelve Five Five
Months Months Months Months Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
-------------------------------------------------------------------------
CAPITAL EXPENDITURES(1) (In thousands)
Condor................................... $578 $270 $203 $151 $136
Teal..................................... 11 122 235 121 158
SL-MTI................................... 196 280 760 52 659
EME...................................... 632 398 340 128 130
RFL...................................... 195 434 151 297 ----
Surf Tech................................ 671 958 163 98 117
Other including Corporate Office. 59 101 49 2 47
-------------------------------------------------------------------------
Consolidated............................. $2,342 $2,563 $1,901 $849 $1,247
=========================================================================
(1) Excludes assets acquired in business combinations.
Twelve Twelve Twelve Five Five
Months Months Months Months Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
----------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION (In thousands)
Condor $1,745 $1,581 $679 $626 $394
Teal 762 836 873 369 372
SL-MTI 395 403 378 173 163
EME 418 394 570 184 207
RFL 795 770 169 328 --
Surf Tech 386 301 252 106 110
Other including Corporate Office 86 94 171 44 --
----------------------------------------------------------------------------------
Consolidated $4,587 $4,379 $3,092 $1,830 $1,246
==================================================================================
Financial information relating to the Company's segments by
geographic area as follows:
Twelve Twelve Twelve Five Five
Months Months Months Months Months
Ended Ended Ended Ended Ended
December 31, December 31, July 31, December 31, December 31,
2001 2000 1999 1999 1998
---------------------------------------------------------------------------
NET SALES(1) (In thousands)
United States ....................... $100,796 $113,731 $64,895 $46,354 $23,314
Germany ............................. 20,762 17,856 14,917 6,378 7,019
Other Foreign ....................... 16,909 16,818 8,882 6,300 2,476
---------------------------------------------------------------------------
Consolidated ........................ $138,467 $148,405 $88,694 $59,032 $32,809
===========================================================================
Long-lived assets
United States ....................... $22,407 $28,961 $30,529 $28,146 $12,854
Germany ............................. 9,407 9,215 9,639 9,454 10,034
Other Foreign ....................... 1,814 2,375 1,570 2,688 417
---------------------------------------------------------------------------
Consolidated ........................ $33,628 $40,551 $41,738 $40,288 $23,305
===========================================================================
(1) Net sales are attributed to countries based on location of customer.
Note 15. Foreign operations
In addition to manufacturing operations in California, Minnesota,
New Jersey and Maryland, the Company manufactures substantial quantities of
products in leased premises
F-31
located in Mexicali and Matamoros, Mexico; Ingolstadt, Germany; and Paks,
Hungary. These external and foreign sources of supply present risks of
interruption for reasons beyond the Company's control, including political and
other uncertainties. During the year ended December 31, 2001, the Company
manufactured products in two additional facilities in Mexico. The Condor plant
in Reynosa, Mexico was closed in March 2002, and the SLW Holdings plant in
Nogales, Mexico was sold in September 2001.
Generally, the Company's sales are priced in United States dollars
and German marks (European Union euros effective January 1, 2002), and its costs
and expenses are priced in United States dollars, Mexican pesos, German marks
(European Union euros effective January 1, 2002), and Hungarian forints.
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. Foreign sales comprised
27%, 23% and 27% of sales for the years ended December 31, 2001 and December 31,
2000, and fiscal year ended July 31, 1999, respectively. Foreign sales comprised
21% and 29% of sales for the five months ended December 31, 1999 and 1998,
respectively. 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, German mark (European Union euro effective
January 1, 2002), and Hungarian forint. As of December 31, 2001, the Company had
net liabilities of $241,000 subject to fluctuations in the value of the Mexican
peso, net assets of $4,578,000 subject to fluctuations in the value of the
German mark, and net assets of $507,000 subject to fluctuations in the value of
the Hungarian forint. Fluctuations in the value of the Mexican peso, German
mark, and Hungarian forint have not been significant in 2000 and 2001. However,
there can be no assurance that the value of the Mexican peso, European Union
euro, or Hungarian forint will continue to remain stable.
EME manufactures all of its products in Germany or Hungary and incurs its costs
in German marks (European Union euros effective January 1, 2002) or Hungarian
forints. EME's sales are priced in German marks (European Union euros effective
January 1, 2002) and United States dollars. 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. EME maintains its books and records
in German marks (European Union euros effective January 1, 2002), and its
Hungarian subsidiary maintains its books and records in Hungarian forints. The
Mexican subsidiaries of Condor and SL-MTI maintain their books and records in
Mexican pesos.
Note 16. Restructuring costs and impairment charges
The Company recorded restructuring, impairment charges, and inventory
write-downs during the year ended December 31, 2001 summarized as follows:
F-32
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
===================================================
The Condor restructuring charge relates to the closure of its facility in
Reynosa, Mexico. The workforce reduction charges are primarily for severance
costs and are discussed more fully below.
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. As a result, the Company needed to
reduce its fixed costs and manufacturing capacity in line with substantially
lower sales forecasts.
The restructuring plan was designed to address these requirements in
a deliberate manner that would not overburden the Company's personnel and
monetary resources. It consisted of the following actions:
1) the closure of Condor's engineering and sales support facility in
Brentwood, New York;
2) the closure of Condor's manufacturing facility in Reynosa, Mexico; and
3) the substantial reduction in employees and staff at Condor's
continuing manufacturing facilities 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 the Company's estimate of the future lease commitments and
buyout options for closed facilities. The Company anticipates that such
facilities will be closed and assets will be disposed of by the end of the
second quarter of 2002. Lease payments for the closed facilities extend into
2003.
The restructuring plan included the termination of approximately 828
employees, and payment of related severance benefits. Approximately 810
employees have been terminated as of December 31, 2001. The remaining
terminations and associated termination payments are expected to be effected in
the first quarter of 2002.
F-33
As of December 31, 2001, approximately $1,163,000 of the
restructuring costs is included as a component of other accrued liabilities in
the accompanying consolidated balance sheet.
Of the $2,940,000 inventory write-down, $2,890,000 was from the Todd
Products acquisition and consisted primarily of the telecommunications-related
product line. As part of the restructuring plan, management decided to exit or
significantly reduce the Company's telecommunications-related product line due
to the continued weakness in the telecommunications industry. The inventory was
evaluated based on current backlog and sales forecasts. Following this
evaluation, management considered the inventory to have limited value and wrote
it down. The Company disposed of approximately $2,100,000 of this inventory in
2001.
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
-------------------------------------------------------------------------------
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)
TWELVE MONTHS ENDED DECEMBER 31, 2001
Net sales (a) .................................... $ 37,582 $ 32,479 $ 33,968 $ 34,438
Gross margin (b) ................................. $ 12,294 $ 7,102 $ 11,347 $ 11,321
Income (loss) from continuing operations
before income
taxes (c) ........................................ $ 1,359 $ (4,734) $ (1,489) $ (6,011)
Net income (loss) (d) ............................ $ 479 $ (5,312) $ (2,710) $ (3,107)
Diluted net income per common
share ............................................ $ 0.08 $ (0.93) $ (0.47) $ (0.54)
(a) Excludes net sales from discontinued
operations of ................................ $ 6,145 $ 2,913 $ 1,258 $ --
(b) Excludes gross margin from discontinued
operations of ................................ $ 589 $ 393 $ (338) $ --
(c) Excludes income (losses) before income
taxes from discontinued operations of ........ $ (500) $ (1,063) $ (5,461) $ 1,884
(d) Includes income (losses) from
discontinued operations net of
tax .......................................... $ (32) $ (2,586) $ (1,626) $ 297
-----------------------------------------------------------------------------------
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
-----------------------------------------------------------------------------------
(In thousands, except per share data)
TWELVE MONTHS ENDED DECEMBER 31, 2000
Net sales (e) ...................................... $ 37,409 $ 39,098 $ 36,260 $ 35,638
Gross margin (f) ................................... $ 13,862 $ 13,985 $ 11,111 $ 12,152
Income from continuing operations before income
taxes (g) .......................................... $ 2,648 $ 2,899 $ 2,390 $ 2,128
Net income (loss)(h) ............................... $ 548 $ 796 $ 729 $ (373)
Diluted net income per common
share .............................................. $ 0.09 $ 0.14 $ 0.13 $ (0.07)
(e) Excludes net sales from discontinued
operations of .................................. $ 6,128 $ 5,046 $ 4,582 $ 3,585
(f) Excludes gross margin from discontinued
operations of .................................. $ 1,201 $ 977 $ 325 $ (430)
F-34
(g) Excludes (losses) before income taxes
from discontinued operations of ...................$ (1,567) $ (1,546) $ (1,763) $ (2,902)
(h) Includes (losses) from discontinued
operations net of tax .............................$ (1,007) $ (996) $ (1,119) $ (1,601)
F-35
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------------------------
Balance at Charged to Charged
Beginning of Costs and to Other Balance at End of
Description Period Expenses Accounts Deductions Period
---------------------------------------------------------------- ---------------------- ---------------------------
(In thousands)
TWELVE MONTHS ENDED
DECEMBER 31, 2001 Allowance for:
Doubtful accounts ......................... $560 $469 $ -- $461(b) $568
TWELVE MONTHS ENDED
DECEMBER 31, 2000 Allowance for:
Doubtful accounts ......................... $416 $389 $ 40(a) $285(b) $560
TWELVE MONTHS ENDED JULY
31, 1999 Allowance for:
Doubtful accounts ......................... $233 $ 40 $142(a) $ 35(b) $380
FIVE MONTHS ENDED DECEMBER
31, 1999 Allowance for:
Doubtful accounts ......................... $380 $ 10 $ 58(a) $ 32(b) $416
FIVE MONTHS ENDED DECEMBER
31, 1998 (Unaudited) Allowance for:
Doubtful accounts ......................... $233 $ 13 $ 32(a) $ 0(b) $278
(a) Due to reclassifications.
(b) Accounts receivable written off, net of recoveries.
F-36
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ITEM 1 FINANCIAL STATEMENTS
September 30, December 31,
2002 2001
------------------------ ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 5,644,000 $ 6,577,000
Receivables, .............................................................. 20,687,000 36,041,000
net
Inventories, .............................................................. 18,929,000 20,497,000
net
Prepaid expenses ......................................................... 1,116,000 815,000
Deferred income .......................................................... 6,364,000 6,300,000
--------- ---------
taxes
Total current ......................................................... 52,740,000 70,230,000
assets
Property, plant and equipment, less accumulated depreciation
of $21,608,000 and $18,941,000, respectively ............................... 18,197,000 18,829,000
Deferred income ............................................................. 2,003,000 2,014,000
taxes
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 .................................................... 5,710,000 7,609,000
costs
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.
F-37
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
F-38
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.
F-39
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.
F-40
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 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 good ...................................................... 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, "Earnings per Share." Basic net income (loss) per common share
is computed by dividing
F-41
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 amount)
Net Income Net (Loss)
from Continuing Shares Per Share from Continuing Shares Per Share
Operations Amount Operations Amount
--------------------------------------------------------------------------------------------------
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 amount)
-----------------------------------------------------------------------------------------------
Net Income Net (Loss)
from Continuing Shares Per Share from Continuing Shares Per Share
Operations Amount Operations 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 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.
F-42
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
------------------------------------ ------------------------------------
Gross Accumulated Gross Accumulated
Value Amortization Net Value 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
----------------------------------------------------------------------------
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.
F-43
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, 2002 December 31, 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
-------- --------
F-44
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
-------------------------------------
F-45
The Reserves for other fees and services of $2,034,000 as of September 30, 2002
is comprised primarily of an environmental reserve of $740,000, warranty
reserves of $760,000 and various other minor accruals.
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 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 in Other 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.
Also included in the above accruals in" Reserves for other fees and services" is
a restructuring reserve of $274,000 at September 30, 2002 and $1,163,000 at
December 31, 2001. During the nine months ended September 31, 2002 the reserve
was increased by $265,000. The restructuring charges for the current period is
comprised of $166,000 for severance payments and $99,000 for certain exit costs
related to the closure of Condor's engineering and sales support office in
Brentwood New York. All of the above costs were paid during the year and there
are no remaining severance cost remaining to be paid at September 30, 2002.
During 2002 restructuring cost of $1,154,000 were charged against the reserve.
The restructuring reserve was established during the year ended December 31, and
was principally in response to a significant reduction in the demand for
products by telecommunications manufacturers. A summary of the principal
components of the restructuring reserve from December 31, 2001 to September 30,
2002 is as follows:
Restructuring
Accrual December 31, 2001 Increases (Decreases) September 30, 2002
------- ----------------- --------- ----------- ------------------
(In Thousands)
Facility Costs $6,899 $99 $(782) $6
Asset write-off 325 (57) 268
Professional fees 102 (102) 0
Other 47 (47) 0
Severance 166 (166) 0
Total $1,163 $265 $(1,154) $274
F-46
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 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.
F-47
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.
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.
F-48
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.
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.
F-49
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 (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
F-50
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:
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
620 21 543
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)
---------------------------------------------------------------------
F-51
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.
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. Following the sale, the
Company remained responsible for certain liabilities and vendor claims related
to SL Waber and established a reserve to cover these potential liabilities. The
Company continues to evaluate this reserve on a quarterly basis. 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.
F-52
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.
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.
F-53
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.
F-54
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by us in connection with the issuance
and distribution of the securities being offered. All items below are estimates
other than the Securities and Exchange Commission registration fee and the NYSE
listing fee. SL will pay all of such expenses.
Securities and Exchange Commission registration fee $460
NYSE listing fee................................................. *
Printing and engraving expenses.................................. *
Accounting fees and expenses..................................... *
Legal fees and expenses.......................................... *
Subscription Agent fees and expenses............................. *
Miscellaneous.................................................... *
-------------
Total................................................ $ *
=============
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VIII of the Articles of Incorporation of SL Industries, Inc.
(the "Company") (therein referred to as the "Corporation") and Article 6 of the
Bylaws of the Company provide as follows:
The Corporation shall indemnify in the manner and to the full extent
permitted by the New Jersey Business Corporation Act, as amended, any "corporate
agent" of the Corporation (as such term is defined in Section 14A:3-5 of the New
Jersey Business Corporation Act) who was or is a party or is threatened to be
made a party to any "proceeding" (as such term is defined in said Section
14A:3-5), whether or not by or on behalf of the Corporation, by reason of the
fact that such person is or was a corporate agent of the Corporation. Where
required by law, the indemnification provided for herein shall be made only as
authorized in the specific case upon the determination, in the manner provided
by law, that indemnification of the Corporate agent is proper in the
circumstances. The Corporation, to the full extent permitted by law, may
purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against him. To the full extent permitted by
law[s], the indemnification provided herein shall include "expenses" (as such
term is defined in said Section 14A:3-5) and, in the manner provided by law, any
such expenses may be paid by the Corporation in advance of the final disposition
of such proceeding. The indemnification provided herein shall not be deemed to
limit the right of the Corporation to indemnify any other person [for] any such
expenses to the full extent permitted by law nor shall it be deemed exclusive of
any other rights to which any person seeking indemnification from the
Corporation may be entitled under any agreement, vote of Shareholders or
Directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
ITEM 16. EXHIBITS.
Exhibit # Description
--------- -----------
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.
4.1* Form of Rights Certificate.
II-1
5.1* Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP.
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.
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.
II-2
10.15 Death Benefit Arrangement with Certain Officers adopted by Board
Resolution dated September 18, 1975. Incorporated by reference to
Exhibit 10.7 to the Company's report on Form 8 dated November 9,
1990.
10.16 Non-Qualified Stock Option Agreement dated June 19, 1991.
Incorporated by reference to Exhibit 10-A to the Company's report
on Form 10-K for the fiscal year ended July 31, 1991.
10.17 Non-Qualified Stock Option Agreement dated September 25, 1991.
Incorporated by reference to Exhibit 10-B to the Company's report
on Form 10-K for the fiscal year ended July 31, 1991.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 Capital Accumulation Plan. Incorporated by reference to the
Company's report on Form 10K/A for the fiscal period ended July
31, 1994.
10.24 Amendment No. 1 to Non-Qualified Stock Option Agreement dated
September 25, 1991 is incorporated herein by reference to Exhibit
4.5 to Registration Statement on Form S-8/A (No. 33-53274) filed
with the Securities and Exchange Commission on June 18, 1996.
10.25 Non-Qualified Stock Option Agreement Incorporated by reference to
Exhibit 4.3 to Registration Statement No. 33-65445 filed December
28, 1995.
10.26 Severance Pay Agreement with James D. Klemashevich. Incorporated
by reference to Exhibit 10.26 to the Company's report on Form
10-K for the fiscal year ended July 31, 1997.
10.27 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.
10.28 Severance Pay Agreement with Jacob Cherian. Incorporated by
reference to Exhibit 10.28 to the Company's report on Form 10-K
for the fiscal year ended December 31, 2000.
10.29 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
II-3
10 to the Company's report on Form 8-K filed with the Securities
and Exchange Commission on July 11, 2001.
10.30 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.
10.31 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.
10.32 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.
10.33 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.
10.34 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.
10.35 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.
10.36 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.
21 Subsidiaries of the Company. Incorporated by reference to Exhibit
21 to the Company's report on Form 10-K for the fiscal year ended
December 31, 2001.
23 Notice Regarding Consent of Arthur Andersen, LLP (previously
filed)
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* Form of Instructions as to Use of Rights Certificates.
99.3* Form of Notice of Guaranteed Delivery for Rights Certificate.
99.4* Form of Letter to Shareholders Who Are Record Holders.
99.5* Form of Letter to Shareholders Who Are Beneficial Holders.
99.6* Form of Letter to Clients of Shareholders Who Are Beneficial Holders.
99.7* Form of Nominee Holder Certification Form.
99.8* Substitute Form W-9 for Use with the Rights Offering.
II-4
99.9* Form of Beneficial Owner Election Form.
99.10* Backstop Agreement between the Company and the Investors
Identified Therein, dated as of _____________, 2002.
------------------------
* To be filed by amendment.
II-5
ITEM 17. UNDERTAKINGS.
(a) Regulation S-K, Item 512 Undertakings
(1) The undersigned registrant hereby undertakes:
(i) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement:
(a) To include any prospectus required by section 10(a)
(3) of the Securities Act of 1933;
(b) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(c) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(ii) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(iii)To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(2)The undersigned registrant hereby undertakes that:
(i)For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(ii) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3)The undersigned registrant hereby undertakes to supplement
the prospectus, after the expiration of the subscription period,
to set forth the results of the subscription offer, the
transactions by the underwriters during the subscription period,
the amount of unsubscribed securities to be purchased by the
underwriters, and the terms of any subsequent reoffering
thereof. If any public offering by the underwriters is to be
made on terms differing from those set forth on the cover page
of the prospectus, a post-effective amendment will be filed to
set forth the terms of such offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
II-6
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Company has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Mt. Laurel, state
of New Jersey, on December 26, 2002.
SL INDUSTRIES
By: /s/ Glen Kasson
--------------------------------------
Glen Kasson
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the indicated
capacities on the dates indicated.
By: * Date:December 26, 2002
-------------------------------------------------------------------
Warren Lichtenstein - Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
By: Glen Kassan Date:December 26, 2002
-------------------------------------------------------------------
Glen Kassan - President and Director
By: Date:December 26, 2002
-------------------------------------------------------------------
David R. Nuzzo - Vice President - Finance
and Administration, Treasurer and Secretary
(Principal Financial Officer)
By: * Date:December 26, 2002
-------------------------------------------------------------------
J. Dwane Baumgardner - Director
By: * Date:December 26, 2002
-------------------------------------------------------------------
James R. Henderson - Director
By: * Date:December 26, 2002
-------------------------------------------------------------------
Richard Smith - Director
By: * Date:December 26, 2002
-------------------------------------------------------------------
Mark E. Schwarz - Director
By: * Date:December 26, 2002
-------------------------------------------------------------------
Steven Wolosky - Director
By: * Date:December 26, 20022
-------------------------------------------------------------------
Avrum Gray - Director