UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-4987
SL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 21-0682685
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
520 FELLOWSHIP ROAD, SUITE A114, MT. LAUREL, NJ 08054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 856-727-1500
Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered
Title of each class New York Stock Exchange
Common stock, $.20 par value Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
The number of shares of common stock outstanding as of November 5, 2001, were
5,707,466.
10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001
PART I........................................................................................................... 3
Item 1. Consolidated Financial Statements.................................................................... 3
Notes to Consolidated Financial Statements................................................................. 6
1. Basis of presentation................................................................................ 6
2. Inventories.......................................................................................... 6
3. Income (loss) per share.............................................................................. 6
4. New accounting pronouncements....................................................................... 7
5. Reorganization of business........................................................................... 8
6. Segment information.................................................................................. 9
7. Discontinued operations.............................................................................. 10
8. Sale of Business..................................................................................... 11
Item 2. Management's discussion and analysis of financial condition and results of operations................ 11
Liquidity and Capital Resources............................................................................ 11
Results of Operations...................................................................................... 14
Quarter ended September 30, 2001 compared with quarter ended September 30, 2000......................... 14
Nine months ended September 30, 2001 compared with nine months ended September 30, 2000................. 16
Forward-Looking Information................................................................................ 17
Item 3. Quantitative and qualitative disclosures about market risk........................................... 24
PART II - OTHER INFORMATION...................................................................................... 25
Item 5. Other Information.................................................................................... 25
Item 6. Exhibits and Reports on Form 8-K..................................................................... 26
Item 1. Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 1,444 $ 1,189
Receivables, net ................................................ 21,707 20,312
Inventories (Note 2) ............................................ 20,971 23,491
Prepaid expenses ................................................ 999 1,140
Net current assets of discontinued operations ................... -- 4,866
Deferred income taxes ........................................... 9,494 4,864
--------- ---------
Total current assets ........................................ 54,615 55,862
Property, plant and equipment, net ................................. 18,989 19,781
Property, plant and equipment of discontinued operations, net ...... -- 980
Long-term note receivable .......................................... 2,089 2,118
Deferred income taxes .............................................. 973 1,629
Cash surrender value of life insurance policies .................... 12,085 11,486
Intangible assets, net ............................................. 19,806 20,770
Other assets ....................................................... 514 855
--------- ---------
Total assets ............................................... $ 109,071 $ 113,481
========= =========
LIABILITIES
Current liabilities:
Short-term bank debt ............................................ $ 1,165 $ --
Long-term debt due within one year .............................. 38,953 186
Accounts payable ................................................ 7,844 11,309
Accrued income taxes ............................................ 1,527 724
Accrued liabilities:
Payroll and related costs ..................................... 4,598 5,070
Other ......................................................... 8,809 7,393
--------- ---------
Total current liabilities .................................. 62,896 24,682
Long-term debt less portion due within one year .................... 1,052 36,533
Deferred compensation and supplemental retirement benefits ......... 5,962 5,892
Other liabilities .................................................. 2,593 3,024
--------- ---------
Total liabilities .......................................... 72,503 70,131
--------- ---------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized, 6,000 shares; none issued -- --
Common stock, $.20 par value; authorized, 25,000 shares;
issued 8,298 shares .............................................. 1,660 1,660
Capital in excess of par value ..................................... 38,992 38,455
Retained earnings .................................................. 12,004 19,547
Accumulated other comprehensive income ............................. 287 62
Treasury stock at cost, 2,588 and 2,639 shares, respectively ....... (16,375) (16,374)
--------- ---------
Total shareholders' equity ................................. 36,568 43,350
--------- ---------
Total liabilities and shareholders' equity ................. $ 109,071 $ 113,481
========= =========
See accompanying notes to consolidated financial statements.
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three-Months Ended Nine-Months Ended
September 30, September 30,
------------------------ --------------------------
2001 2000 2001 2000
-------- -------- --------- ---------
Net sales ..................................................... $ 33,968 $ 36,260 $ 104,029 $ 112,767
-------- -------- --------- ---------
Cost and expenses:
Cost of products sold ....................................... 22,571 25,149 70,345 73,809
Write-down of inventory ..................................... 50 -- 2,940 --
Engineering and product development ......................... 1,979 2,377 6,560 7,397
Selling, general and administrative ......................... 6,836 5,509 20,325 19,165
Depreciation and amortization ............................... 1,169 1,062 3,482 3,370
Restructuring costs ......................................... 1,783 -- 2,891 --
Settlement of Class Action Suit ............................. -- (875) -- (875)
-------- -------- --------- ---------
Total cost and expenses ....................................... 34,388 33,222 106,543 102,866
-------- -------- --------- ---------
Income (loss) from operations ................................. (420) 3,038 (2,514) 9,901
Other income (expense):
Interest income ............................................. 99 59 278 258
Interest expense ............................................ (1,168) (707) (2,628) (2,221)
-------- -------- --------- ---------
Income (loss) from continuing operations before income taxes . (1,489) 2,390 (4,864) 7,938
Income taxes .................................................. (405) 542 (1,565) 2,743
-------- -------- --------- ---------
Income (loss) from continuing operations ...................... (1,084) 1,848 (3,299) 5,195
Loss from discontinued operations (net of tax) ................ (1,626) (1,119) (4,244) (3,122)
-------- -------- --------- ---------
Net income (loss) ............................................. $ (2,710) $ 729 $ (7,543) $ 2,073
======== ======== ========= =========
Basic net income (loss) per common share
Income (loss) from continuing operations .................. $ (0.19) $ 0.33 $ (0.58) $ 0.92
Loss from discontinued operations (net of tax) ........... (0.28) (0.20) (0.74) (0.55)
-------- -------- --------- ---------
Net income (loss) ......................................... $ (0.47) $ 0.13 $ (1.32) $ 0.37
======== ======== ========= =========
Diluted net income (loss) per common share
Income (loss) from continuing operations .................. $ (0.19) $ 0.32 $ (0.58) $ 0.90
Loss from discontinued operations (net of tax) ........... (0.28) (0.19) (0.74) (0.54)
-------- -------- --------- ---------
Net income (loss) ......................................... $ (0.47) $ 0.13 $ (1.32) $ 0.36
======== ======== ========= =========
Shares used in computing basic net income (loss)
per common share ............................................ 5,707 5,643 5,695 5,628
Shares used in computing diluted net income (loss)
per common share ............................................ 5,707 5,753 5,695 5,760
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,
------------------------ --------------------------
2001 2000 2001 2000
-------- -------- --------- ---------
Net income (loss) ............................................. $ (2,710) $ 729 $ (7,543) $ 2,073
Currency translation and adjustment, net of related taxes ... 160 71 225 45
-------- -------- --------- ---------
Comprehensive income (loss) ................................... $ (2,550) $ 800 $ (7,318) $ 2,118
======== ======== ========= =========
See accompanying notes to consolidated financial statements.
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine-Months Ended
September 30,
------------------------
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net income (loss) from continuing operations ............................................. $ (3,299) $ 5,195
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation .......................................................................... 2,263 2,210
Amortization .......................................................................... 1,219 1,160
Restructuring charges ................................................................. 2,891 --
Write-down of inventory ............................................................... 2,940 --
Provisions for losses on accounts receivable .......................................... 154 561
Additions to other assets ............................................................. (206) (573)
Cash surrender value of life insurance premiums ....................................... (781) (1,399)
Deferred compensation and supplemental retirement benefits ............................ 427 473
Deferred compensation and supplemental retirement benefit payments .................... (357) (388)
Decrease (increase) in deferred income taxes .......................................... (3,620) 967
(Gain) loss on sales of equipment ..................................................... 1 (5)
Changes in operating assets and liabilities, excluding effects of business disposition:
Accounts receivable ................................................................. (1,655) 675
Inventories ......................................................................... (513) (741)
Prepaid expenses .................................................................... 66 87
Accounts payable .................................................................... (3,320) (2,580)
Other accrued liabilities ........................................................... (2,948) 1,033
Accrued income taxes ................................................................ 2,948 (1,316)
Cash dividends declared, but not paid ............................................... -- (283)
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ........................................ (3,790) 5,076
-------- --------
INVESTING ACTIVITIES:
Investment in Kreiss Johnson ............................................................. 107 68
Proceeds from sale of subsidiary ......................................................... 1,034 --
Proceeds from sales of equipment ......................................................... 1 72
Purchases of property, plant and equipment ............................................... (1,911) (1,595)
Decrease (increase) in notes receivable .................................................. 29 (10)
Payments for acquisitions, net of cash acquired .......................................... -- (372)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ...................................................... (740) (1,837)
-------- --------
FINANCING ACTIVITIES:
Cash Dividends Paid ...................................................................... -- (280)
Proceeds from life insurance policy ...................................................... 256 --
Proceeds from short-term debt ............................................................ 1,144 --
Proceeds from long-term debt ............................................................. 16,100 8,760
Payments on short-term debt .............................................................. -- (809)
Payments on long-term debt ............................................................... (12,632) (11,794)
Proceeds from stock options exercised .................................................... 449 448
Treasury stock (acquired) sold ........................................................... 89 (489)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................................ 5,406 (4,164)
-------- --------
NET CASH USED IN DISCONTINUED OPERATIONS ................................................... (827) (116)
Effect of exchange rate changes on cash .................................................... 206 (76)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................................... 255 (1,117)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................................. 1,189 1,117
-------- --------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, ................................................. $ 1,444 $ --
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................................................................... $ 2,680 $ 2,261
Income taxes ........................................................................... $ 1,387 $ 1,064
See accompanying notes to consolidated financial statements.
SL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation. Operating results for interim
periods are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001. 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, 2000. The Balance Sheets, Statements of Operations and Cash Flows have been
restated to reflect the effect of discontinued operations (see Notes 5, 6 and
7).
2. INVENTORIES
Inventories of continuing operations at September 30, 2001 and December 31,
2000, consisted of the following:
(in thousands) September 30, 2001 December 31, 2000
------------------ -----------------
Raw materials $12,820 $15,288
Work in process 6,630 6,234
Finished goods 1,521 1,969
------- -------
$20,971 $23,491
======= =======
Due to the decline in order-intake in the telecommunications sector, the Company
recorded a reserve for inventory write-down of $2,890,000 during the second
quarter of 2001 in the power supplies segment and an additional charge of
$50,000 in the third quarter of 2001 for other inventory.
3. 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 reported net income (loss) available to common
shareholders by the weighted average number of shares outstanding for the
period. Diluted net income (loss) per common share is computed by dividing
reported net income (loss) 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:
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
----------------------------------------------------------------------
Three-Months Ended
----------------------------------------------------------------------
(in thousands, except September 30, 2001 September 30, 2000
per share)
----------------------------------- ------------------------------
Basic net income (loss)
per common share $(2,710) 5,707 $ (0.47) $ 729 5,643 $ 0.13
Effect of dilutive
securities -- -- -- -- 110 --
----------------------------------- ------------------------------
Diluted net income
(loss) per common share $(2,710) 5,707 $ (0.47) $ 729 5,753 $ 0.13
=================================== ==============================
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
------------------------------------------------------------------------
Nine-Months Ended
------------------------------------------------------------------------
(in thousands, except per September 30, 2001 September 30, 2000
share)
---------------------------------- --------------------------------
Basic net income (loss)
per common share $(7,543) 5,695 $(1.32) $2,073 5,628 $ 0.37
Effect of dilutive
securities -- -- -- -- 132 (0.01)
---------------------------------- --------------------------------
Diluted net income (loss)
per common share $(7,543) 5,695 $(1.32) $2,073 5,760 $ 0.36
================================== ================================
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, 2000, common
stock options of 60,272 and 600,181, 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.
4. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations,"
(effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible
Assets." (effective for the Company on January 1, 2002). SFAS No. 141 prohibits
pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized, but instead
will be subject to periodic impairment testing. Beginning in the first quarter
of fiscal 2002, goodwill will no longer be amortized but will be subject to
annual impairment tests. All other intangible assets will continue to be
amortized over their estimated useful lives. The new rules also require business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and goodwill acquired after June 30, 2001 will not
be amortized. Goodwill existing at June 30, 2001, will continue to be amortized
through the end of fiscal 2001. Through the end of fiscal 2001, the Company will
test goodwill for impairment. During 2002, the Company will begin to test
goodwill for impairment under the new rules, applying a fair-value-based test.
5. REORGANIZATION OF BUSINESS
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 of
2001 and has continued to the present date. As a result, the Company needed to
reduce its fixed costs and manufacturing capacity in line with substantially
lower sales forecasts.
The restructuring plan is designed to address these requirements in a deliberate
manner which would not over burden the Company's personnel and monetary
resources. It is comprised of the following actions:
1) the closure of Condor's engineering and sales support facility in
Brentwood, New York;
2) the elimination of personnel at Condor's manufacturing facilities in
Reynosa, Mexico and Mexicali, Mexico and headquarters in Oxnard,
California;
3) the sale or other disposition of SL Waber, Inc.; and
4) the closure of Condor's manufacturing facility in Reynosa, Mexico.
Pursuant to the Company's restructuring plan, during the third quarter of 2001,
the Company recorded additional charges of approximately $3.1 million, as a
result of the sale of its SL Waber subsidiary. On August 27, 2001 the Company
sold substantially all the assets of SL Waber to an affiliate of Trippe
Manufacturing Company. (See details of sale under Note 7 below.) The components
of this charge, along with all charges during the year as a result of the
Company's restructuring plan, are presented in the following table and
accompanying notes:
Recorded in period ended Year to
------------------------------ date To record
Mar 31 Jun 30 Sep 30 Sep 30 Dec 31
(in thousands) 2001(1) 2001 (1) 2001 (1) 2001 (2) 2001 (3) Cash Non-Cash
------------------------------------------------------------------------------
Facility closures 1,108 1,783 2,891 1,240 4,131
Asset impairment -- 2,890 50 2,940 2,940
Discontinued operation:
Asset impairment -- 2,000 3,151 5,151 5,151
Operating losses 500 2,263 (890) 1,873 1,873
------------------------------------------------------------------------------
TOTAL 500 8,261 4,094 12,855 1,240 6,004 8,091
==============================================================================
Notes:
(1) Amount recorded in accounts for the period ended.
(2) Amount recorded in accounts for the year-to-date.
(3) Amount to be recorded in accounts during the fourth quarter ending
December 31, 2001.
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 second quarter 2002. Lease
payments for the closed facilities extend into 2003.
In April 2001, the Company announced plans to reduce headcount at its Condor DC
Power Supplies Inc. subsidiary and record a restructuring charge of
approximately $1,300,000. Additionally, in July 2001, the Company announced
further plans to reduce headcount at its Condor DC Power Supplies Inc.
subsidiary and record a further restructuring charge of approximately $331,000
in the Statement of Operations based on the notification of terminated
employees. At September 30, 2001, the restructuring costs yet to be recognized
were $600,000.
The restructuring plan includes the termination of approximately 775 employees,
and payment of related severance benefits. Approximately 550 employees have been
terminated as of September 30, 2001. The remaining terminations and associated
termination payments are expected to be effected in the fourth quarter 2001 and
first quarter 2002.
In connection with its restructuring plan and associated asset impairment
charges, the Company recorded a total charge of approximately $8 million in
2001.
6. SEGMENT INFORMATION
Under the disclosure requirements of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," the Company classifies its operations
into the following five business segments: Power Supplies, Power Conditioning
and Distribution Units ("PCDUs"), Motion Control Systems, Electric Utility
Equipment Protection Systems and Other.
In July 2001, the Board of Directors authorized the disposition of the Company's
SL Waber subsidiary. (See Note 7.) As a result, the surge suppressors segment is
no longer shown as part of segment reporting.
Comparative results for the three-month and nine-month periods are as follows:
Three Months Ended Nine months Ended
(in thousands) September 30, September 30,
2001 2000 2001 2000
--------------------- ------------------------
Net sales from Continuing
Operations
Power Supplies $10,527 $15,181 $ 38,762 $ 48,162
PCDUs 6,916 8,522 19,427 25,678
Motion Control Systems 7,527 5,536 22,051 16,397
Electric Utility Equipment
Protection Systems 7,641 5,529 19,870 18,234
Other 1,357 1,492 3,919 4,296
--------------------- ------------------------
Consolidated $33,968 $36,260 $104,029 $112,767
===================== ========================
(in thousands) Three Months Ended Nine months Ended
September 30, September 30,
2001 2000 2001 2000
-------------------- ------------------------
Operating income (loss) from
Continuing Operations
Power Supplies $ (970) $ 769 $(4,689) $ 3,851
PCDUs 474 989 2,324 3,714
Motion Control Systems 1,101 806 2,554 1,867
Electric Utility Equipment
Protection Systems 942 397 2,263 1,905
Other (1,967) 77 (4,966) (1,436)
--------------------- -----------------------
Consolidated $ (420) $3,038 $(2,514) $ 9,901
===================== =======================
7. DISCONTINUED OPERATIONS
On August 27, 2001 substantially all of the assets of SL Waber and the stock of
Waber de Mexico were sold to Trippe Manufacturing Company of Illinois for
$1,052,500. The net losses of this subsidiary are included in the Consolidated
Statements of Operations under discontinued operations. Net sales from
discontinued operations for the third quarter ended September 30, 2001 were $1.3
million, compared to net sales of $4.6 million for the third quarter last year,
a decrease of $3.3 million or 72%. Actual net loss from discontinued operations
for the third quarter ended September 30, 2001 was $1.6 million, compared with
actual net loss of $1.1 million, net of taxes, for the same period last year.
Net sales from discontinued operations for the nine months ended September 30,
2001 were $10.3 million, compared to net sales of $15.8 million for the nine
months ended September 30, 2000, a decrease of $5.5 million or 35%. Actual net
loss from discontinued operations for the nine months ended September 30, 2001
was $4.2 million, compared with actual net loss of $3.1 million, for the same
period last year. The provision for loss from discontinued operations reflected
in the Consolidated Statements of Operations includes the loss recognized from
sale of SL Waber and the losses of the subsidiary's operations through September
30, 2001, less the expected tax benefits applicable thereto.
8. SALE OF BUSINESS
As announced on March 19, 2001, the Company engaged Credit Suisse First Boston,
New York, to explore a possible sale of the Company. On July 19, 2001 the
Company announced that based on interest expressed by certain parties, the
Company directed Credit Suisse First Boston to solicit interest in the power
electronics group and power motion group separately, while pursuing the original
process to sell the entire Company. Indications of interest to acquire the
Company or its various business units were delayed in the wake of the terrorist
attacks of September 11 and were submitted by various potential purchasers in
October. On November 5, 2001, the Company announced that, based on the bids
received to date, it was not in the best interests to sell the entire business
at the present time, but that negotiations were underway to sell two of the
Company's subsidiaries. Those negotiations are currently ongoing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On September 11, 2001 the U.S. economy entered a period of increased economic
uncertainty, as a result of the terrorist attacks on the World Trade Center and
the Pentagon. At this time it is difficult to determine the impact of the
current war on terrorism on the Company's business. Since the attacks, the
Federal Reserve Bank has accelerated its efforts to reduce interest rates and to
increase liquidity in the U.S. economy. These macro-economic measures should
result in increased capital investment in the future. However, this stimulative
effect may be offset by a decrease in employment and consumer confidence. In
addition, the Company's motion control systems segment operates largely in the
commercial and military aerospace markets that will be impacted in different
ways in the year ahead.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and growth primarily
through funds generated from operations and borrowings under a revolving credit
facility (the "Revolving Credit Facility".)
The Company's financial priorities in 2001 are to increase cash flow and
optimize operating performance. To achieve these priorities, the Company
implemented an amended operating plan, which included reducing capital
expenditures, reducing costs and expenses, improving working capital performance
and seeking opportunities for the sale or other disposition of non-operating
assets. In order to conserve its cash assets, the Company did not pay its
semi-annual cash dividend in the second quarter 2001 and will not pay its
dividend in the fourth quarter.
During the nine months ended September 30, 2001, the net cash used in operating
activities was $3.8 million, as compared to cash provided of $5.1 million during
the nine months ended September 30, 2000. The operating activities cash
utilization increased by $8.9 million mainly due to the loss from operations of
$3.3 million during the period, a decrease of accounts payable of $3.3 million,
and a decrease of receivables and inventory of $2.1 million. During the
nine-months ended September 30, 2001, the net cash used in investing activities
of $0.7 million was primarily related to purchases of plant and equipment offset
in part by proceeds from sale of
subsidiary. During the nine months ended September 30, 2001, the net cash
provided by financing activities of $5.4 million was primarily related to net
borrowing of $3.5 million under the Revolving Credit Facility.
As of September 30, 2001, the Company had principal outstanding of $38.8 million
under the Revolving Credit Facility. The Revolving Credit Facility provides for
the Company to borrow up to $40 million, subject to commitment fees, but not
compensating balances. The Revolving Credit Facility contains limitations on
borrowings and their use, requires maintenance of specified financial covenants,
as amended, and has a maturity date of October 31, 2003. In addition, Elektro -
Metall Export GmbH (Germany) has approximately $4.7 million in lines of credit
with its banks. Under the terms of its lines of credit, the subsidiary can
borrow for any purpose at interest rates ranging from 5.5% to 8.25%. These lines
of credit do not contain any financial covenants. Also, as of September 30,
2001, the Company had $12.0 million available from the cash surrender value of
its life insurance policies, a substantial portion of which is pledged to secure
the Revolving Credit Facility.
At March 31, 2001, the Company was not in compliance with certain financial
covenants in the Revolving Credit Facility. On June 21, 2001, the Company and
its lenders entered into a Waiver and Amendment to the Revolving Credit
Facility, which, among other things, waived compliance with the financial
covenants at March 31, 2001 and substituted a new financial covenant as of June
30, 2001. The Company was in compliance with the terms of the June 30, 2001
financial covenant set forth in the Waiver and Amendment.
Under the terms of the Waiver and Amendment to the Revolving Credit Facility,
the original financial covenants of the Revolving Credit Facility will be
effective for the third quarter ending September 30, 2001. The Company has
advised its lenders that it was not in compliance with such financial covenants
at September 30, 2001 and has requested that the financial covenants of the
Revolving Credit Facility be amended for the third quarter ended September 30,
2001 and beyond. The parties are presently in negotiations to amend the
financial covenants, and certain other terms of the Revolving Credit Facility.
It is too early to determine if these negotiations will be successful.
If a waiver is not granted for failure to comply with the financial covenants at
September 30, 2001, the Company would be in default under the Revolving Credit
Facility, and its lenders would not be required to advance additional funds to
the Company and would be entitled to declare the unpaid amount of principal and
interest accrued thereon immediately due and payable. The refusal of the lenders
to advance the Company any additional funds that would otherwise be available
under the Revolving Credit Facility would have a material adverse affect on the
Company's operations and financial condition.
The Company's independent auditors have advised the Company that failure to
resolve these matters prior to the completion of their audit of the consolidated
financial statements for 2001, may result in a modification of their report with
respect to the Company's ability to continue as a going concern.
At September 30, 2001, the Company's current ratio was 0.87 to 1 and at December
31, 2000 it was 2.26 to 1. The September 30, 2001 decrease, as compared to
December 31, 2000, resulted primarily from the reclassification of the
borrowings under the Revolving Credit Facility as a current liability due to the
non-compliance with financial covenants in the Revolving Credit Facility. If the
borrowings under the Revolving Credit Facility were not classified as a current
liability at September 30, 2001, then the current ratio would be 2.28 to 1.
As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 52% at September 30, 2001 and 46%
at December 31, 2000. During the nine-months ended September 30, 2001,
borrowings were essentially unchanged under the Revolving Credit Facility, as
compared to the nine months ended September 30, 2000.
Capital expenditures of $1.9 million during 2001 primarily included improvements
in process technology and increased production capacity for the Company's motion
control systems segment. During the remainder of 2001, the Company plans to make
minimal capital expenditures in response to the slowdown in certain of its
markets. Capital expenditures are expected to be funded through cash provided by
operations.
As set forth above, this year the Company experienced negative operating cash
flows at certain of its business segments as a result of a severe economic
slowdown in the telecommunications and semiconductor industries. The Company has
taken measures to conserve cash and to restructure its power supplies segment to
reduce costs in line with lower revenue expectations. The Company's ability to
continue to meet its obligations in the ordinary course of business is dependent
upon the stabilization of markets in which certain of its customers operate. If
the business downturn in the telecommunications market and semiconductor
industry materially worsens, the Company may be required to borrow additional
funds over and above the amounts provided under the Revolving Credit Facility.
Additional financing, if available, may not be available on satisfactory terms.
If such additional financing is not available on terms satisfactory to the
Company, the Company's operations and financial condition would be materially
adversely affected.
With the exception of the Company's power supplies segment and the segment
reported as "other", all of the Company's remaining operating segments were
profitable in the quarter ended September 30, 2001. The Company's PCDU segment
was negatively impacted by the extended depression of the semiconductor
industry. The operating losses of the power supplies, and "other" segments and
the underperformance of the PCDU segment during this quarter had an adverse
effect on the Company's results, which offset the aggregate favorable
performance of the remaining segments. The operating losses of the power
supplies segment is directly related to the economic slowdown in the
telecommunications market. The Company is implementing a restructure plan of its
power supplies segment to meet the changing environment in the
telecommunications industry. The performance of the "other" business segment is
largely the result of corporate overhead and related expenses.
Assuming no further slowdown of economic activity in the markets in which the
Company conducts business, management believes that projected cash from
operations and funds presently
available under the Revolving Credit Facility will be sufficient to fund the
Company's operations and working capital requirements.
European Monetary Union--Euro
Several member countries of the European Union have established fixed conversion
rates between their existing sovereign currencies and the Euro and have adopted
the Euro as their new single legal currency. The legacy currencies will remain
legal tender in the participating countries for a transition period ending
January 1, 2002. During the transition period, cashless payments can be made in
the Euro. Between January 1, 2002 and March 1, 2002, the participating countries
will introduce Euro notes and coins and withdraw all legacy currencies so that
they will no longer be available.
The Company is evaluating Euro-related issues affecting pricing/marketing
strategy, conversion of information technology systems and existing contracts.
The Euro conversion may affect cross-border competition by creating cross-border
price transparency. The Company will continue to evaluate issues involving
introduction of the Euro as further accounting, tax and governmental legal and
regulatory guidance becomes available. Based on current information, the Company
does not expect that the Euro conversion will have a material adverse effect on
the Company's business or financial condition.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2001 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2000
The table below shows the comparison of net sales from continuing operations for
the quarter ended September 30, 2001, and the quarter ended September 30, 2000:
Increase / Increase /
(Decrease) (Decrease) Three Months Three Months
over same over same ended ended
quarter quarter September 30, September 30,
(in thousands) Last year Last year 2001 2000
--------------------------------------------------------
Percent Amount $ Amount $ Amount $
--------------------------------------------------------
Power Supplies (30.7) (4,654) 10,527 15,181
PCDUs (18.8) (1,606) 6,916 8,522
Motion Control Systems 36.0 1,991 7,527 5,536
Electric Utility Equipment
Protection Systems 38.2 2,112 7,641 5,529
Other (9.0) (135) 1,357 1,492
--------------------------------------------------------
TOTAL (6.3) (2,292) 33,968 36,260
--------------------------------------------------------
Consolidated net sales for the three-month period ended September 30, 2001
decreased by $2.3 million, compared to the same quarter last year. Sales
decreases were mainly due to lower sales of power supplies of $4.7 million and
PCDUs of $1.6 million, which were offset, in part, by increased sales of motion
control systems of $2.0 million and electric utility protection systems of $2.1
million. The sales increase in the motion control systems segment was primarily
due to
an increase in orders received from aerospace customers. The sales increase in
the electric utility equipment protection systems segment was primarily due to
an increase in product orders from utility customers. The sales decrease in the
power supplies segment during the three-month period was primarily due to the
economic slowdown in the telecommunications and electronics sectors. The sales
decrease in the PCDU segment was related to the continued sales depression in
the semiconductor industry during the second and third quarter of 2001.
The Company realized a net loss of $2.7 million for the three-month period ended
September 30, 2001, as compared to net income of $0.7 million, for the
corresponding prior year period. During the quarter ended September 30, 2001,
the Company recorded a restructuring charge of $1.8 million, as a result of the
restructuring of the power supplies segment, and recorded a loss of $1.6 million
after taxes, due to the discontinuance of its SL Waber operations.
Cost of products sold for the three-month period decreased 10.3% as compared to
same period last year, substantially due to lower sales during the quarter. As a
percentage of net sales, cost of products sold for the three-month period was
66.5% (excluding inventory write-down costs of $50,000), as compared to 69.4%
during the same period last year. The decrease was primarily related to product
mix for the power supplies segment.
Engineering and product development expenses for the three-month period
decreased 16.7%, as compared to the same period last year due to the
consolidation of engineering facilities for the power supplies segment. As a
percentage of net sales, engineering and product development expenses for the
three months ended September 30, 2001 were 5.8%, as compared to 6.6% for the
same period last year.
Selling, general and administrative expenses for the three-month period
increased 24%, as compared to the same period last year. As a percentage of net
sales, selling, general and administrative expenses for the three months ended
September 30, 2001 were 20.1%, as compared to 15.2% for the same period last
year. The three-month increase was primarily the result of additional legal
expenses, bank fees and consultant charges aggregating approximately $1.1
million.
Depreciation and amortization expense for the three-month period remained
consistent with the same period last year.
Interest income for the three-month period increased by $40,000, as compared to
the same period last year. Interest expense for the three-month period increased
by 65% primarily due to higher interest rates resulting from the default of the
Revolving Credit Facility.
The effective tax rate for the three-month period was 27% for the third quarter,
as compared to a charge of 22.7% for the same period last year. The effective
tax rate change primarily relates to reduced state tax benefits in the power
supplies segment.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2000
The table below shows the comparison of net sales for the nine months ended
September 30, 2001 and September 30, 2000:
Increase / Increase /
(Decrease) (Decrease) Nine months Nine months
over same over same ended ended
period period September 30, September 30,
(in thousands) Last year Last year 2001 2000
--------------------------------------------------------
Percent Amount $ Amount $ Amount $
--------------------------------------------------------
Power Supplies (19.5) (9,400) 38,762 48,162
PCDUs (24.3) (6,251) 19,427 25,678
Motion Control Systems 34.5 5,654 22,051 16,397
Electric Utility Equipment
Protection Systems 9.0 1,636 19,870 18,234
Other (8.8) (377) 3,919 4,296
---------------------------------------------------------
TOTAL (7.7) (8,738) 104,029 112,767
---------------------------------------------------------
Consolidated net sales for the nine months ended September 30, 2001 decreased by
$8.7 million, compared to same period last year. Sales decreases were mainly due
to lower sales of power supplies of $9.4 million and PCDUs of $6.3 million,
which were offset, in part, by increased sales of motion control systems of $5.6
million and electric utility protection systems of $1.6 million. The sales
increase in the motion control systems segment was primarily due to an increase
in orders received from aerospace customers. The sales increase in the electric
utility equipment protection systems segment was primarily due to an increase in
product orders from utility customers. The sales decrease in the power supplies
segment during the nine-month period was primarily due to the economic slowdown
in the telecommunications and electronics sectors. The sales decrease in the
PCDU segment was related to the continued sales depression in the semiconductor
industry.
The Company realized a net loss of $7.5 million for the nine months ended
September 30, 2001, as compared to net income of $2.1 million, for the same
period last year. During the nine months ended September 30, 2001, the Company
recorded a restructuring charge of $2.9 million, as a result of the
restructuring of the Company's power supplies segment, recorded a charge of $2.9
million, for the write-down of inventory in its power supplies segment and
recorded a loss of $4.2 million, after taxes, due to the discontinuance of its
SL Waber operations.
In July 2001, the Board authorized the disposition of the Company's SL Waber
subsidiary. Operations of this subsidiary were closed down on August 27, 2001 as
a result of the sale of the subsidiary's assets at that date. The net losses of
this subsidiary are included in the Consolidated Statements of Operations under
"discontinued operations". The discontinued operations charge of $4.2 million
includes operating losses for the nine months ended September 30, 2001 and the
loss on disposition of the SL Waber subsidiary, after recognizing related tax
benefits associated with these losses.
Cost of products sold for the six months ended September 30, 2001 decreased 4.7%
as compared to same period last year due to lower sales. As a percentage of net
sales, cost of products sold for the nine-month period was 67.8% (excluding
inventory write-down costs of $2.9 million), as compared to 65.5% during the
same period last year. The increase was primarily related to higher component
costs related to lower volumes and product mix for the power supplies segment.
Engineering and product development expenses for the nine months ended September
30, 2001 decreased 11%, as compared to the same period last year due to the
consolidation of engineering facilities for the power supplies segment. As a
percentage of net sales, engineering and product development expenses for the
nine months ended September 30, 2001 and 2000 were 6.3%, as compared to 6.5%.
Selling, general and administrative expenses for the nine months ended September
30, 2001 increased 6%, 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, 2001 were 19%, as compared to 17% for the same period last
year. Selling, general and administrative expenses included additional third
quarter legal expenses, bank fees and consultant charges aggregating
approximately $1.1 million.
Depreciation and amortization expense for the nine months ended September 30,
2001 remained consistent with the same period last year.
Interest income for the nine months ended September 30, 2001 remained consistent
with same period last year. Interest expense for the nine-month period ended
September 30, 2001 was 18% higher than the same period last year, due to
increased interest rates resulting from the default of the Revolving Credit
Facility.
The effective tax rate for the nine months ended September 30, 2001 was a
benefit of 32%, as compared to a charge of 34.6% for the same period last year.
FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this report contain forward-looking statements
that are based on current expectations, estimates, forecasts and projections
about the industries in which we operate, our beliefs, and assumptions made by
us. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of us. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") that are difficult to predict. Therefore, actual outcomes and results
may differ materially from what is expressed or forecast in such forward-looking
statements. Except as required under the federal securities laws and the rules
and regulations of Securities and Exchange Commission, we do not have any
intention or obligation to update publicly any
forward-looking statements after the distribution of this Form 10-Q, whether as
a result of new information, future events or otherwise.
Future Factors include the effectiveness of the restructuring plan and other
cost reduction actions undertaken by the Company; the timing and degree of any
business recovery in certain of the Company's markets that are currently
undergoing economic downturn; increasing price, products and services
competition by U.S. and non-U.S. competitors, including new entrants; rapid
technological developments and changes and the Company's ability to continue to
introduce and dependence upon the development of competitive new products and
services on a timely, cost-effective basis; the mix of products and services;
the availability of manufacturing capacity, components and materials; the
ability to recruit and retain talent; control of costs and expenses; credit
concerns and the potential for deterioration of the credit quality of customers;
customer demand for our products and services; timely completion of the sale of
certain of our manufacturing facilities and assets; the timely implementation of
our restructuring program and financial plan, including the amendment of our
bank credit facilities on satisfactory terms and on a timely basis to allow us
to accomplish our restructuring program in a timely way; U.S. and non-U.S.
governmental and public policy changes that may affect the level of new
investments and purchases made by customers; changes in environmental and other
U.S. and non-U.S. governmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers and
significant suppliers; technological, implementation and cost/financial risks in
the use of large, multiyear contracts; compliance with the covenants and
restrictions of our bank credit facilities; the outcome of pending and future
litigation and governmental proceedings and continued availability of financing
and financial resources in the amounts, at the times and on the terms required
to support the Company's future business. These are representative of the Future
Factors that could affect the outcome of the forward-looking statements. In
addition, such statements could be affected by general industry and market
conditions and growth rates, general U.S. and non-U.S. economic conditions,
including increased economic uncertainty and instability following the terrorist
attacks in the United States on September 11, 2001, the global economic slowdown
and interest rate and currency exchange rate fluctuations and other Future
Factors.
RESTRUCTURING PLAN.
In response to changes in industry and market conditions, the Company has
implemented a restructuring plan. It may continue to restructure its operations
to more strategically realign resources. Our restructuring plan is based on
certain assumptions regarding the cost structure of our business and the nature
and severity of the current industry adjustment which may not prove to be
accurate. Our restructuring plan has involved the implementation of a number of
initiatives to streamline our business, including discontinuing SL Waber
operations, writing off tangible and intangible assets, and otherwise exiting
businesses. There can be no assurance that our restructuring plan will be
sufficient in light of current or future capital markets and telecommunications
and semiconductor industry conditions. As well, there can be no assurance that
we will not be required to refine, expand or extend our restructuring plan, or
that we will return to profitability as a result of our restructuring plan. In
addition, there can be no assurance that the reductions in employee positions
and disposition of assets associated with our
restructuring plan have not impaired our ability to realize our current or
future business objectives.
There can be no assurance that the costs actually incurred in connection with
restructuring actions will not be higher than the estimated costs of such
actions. Additional restructuring actions may include assessing whether we
should consider disposing of or otherwise exiting additional businesses and
reviewing the recoverability of remaining tangible and intangible assets. Any
decision to further limit investment or to dispose of or otherwise exit
additional businesses may result in the recording of additional accrued
liabilities for one-time or other charges such as workforce reduction costs,
asset write downs, and contractual settlements. Current and additional
restructuring actions may result in further cash and/or non-cash charges, which
could have a material adverse effect on our business, results of operations, and
financial condition.
FLUCTUATIONS IN OPERATING RESULTS, GENERAL INDUSTRY, ECONOMIC, AND MARKET
CONDITIONS, AND VOLATILITY.
Our results of operations for any quarter or year are not necessarily indicative
of results to be expected in future periods. Our 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. These factors include:
- fixed costs and our ability to successfully complete programs on a timely
basis to reduce our cost structure and streamline our operations;
- our ability to focus our business on what we believe to be potentially
higher growth, higher margin businesses, and to dispose of or exit other
non-core businesses;
- inherent uncertainties underlying the estimates and assumptions used in
calculating asset valuations, changes in accounting estimates with respect to
the useful life and ultimate recoverability of our carrying basis of assets,
including goodwill and other intangible assets;
- our ability to implement our restructuring plan without negatively
impacting our relationships with our customers;
- fluctuations in our current cash flows and our estimates of future cash
requirements;
- increased price and product competition;
- variations in sales channels, product costs and the mix of products sold;
- the size and timing of customer orders and shipments;
- correctly sizing inventory levels; and
- product development schedules, manufacturing capacity and lead times.
In addition, there are trends and factors beyond our control, which may affect
our businesses. Such potential trends and factors include:
- adverse changes in the public and private equity and debt markets and our
ability as well as the ability of our customers and suppliers to obtain
financing or to fund working capital and capital expenditures;
- adverse changes in the credit ratings of our customers, suppliers, and
ourselves;
- adverse changes in the conditions in our industry and the specific
markets for our products;
- visibility to, and the actual size and timing of, capital expenditures by
our customers;
- inventory practices, including the timing of deployment, of our
customers;
- policies of our customers regarding utilization of single or multiple
vendors for the products they purchase;
- geographic mix of revenues, and the associated impact on gross margins;
- other factors.
We cannot assure you that the slowdown in capital spending will not affect our
revenues more than we currently expect. Moreover, the significant slowdown in
capital spending by service providers has created uncertainty as to market
demand. As a consequence of these and the above factors, revenues and operating
results for a particular period can be difficult to predict. In addition, there
can be no certainty as to the severity or duration of the current economic
adjustment. Any of the above 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 semi-conductor industry, in the United States and
globally affect our business. 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 operations, and
financial condition.
CASH FLOWS, LIQUIDITY, DEBT LEVELS, AND DEBT RATINGS.
Our 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 our business we have incurred, or have entered into credit
facilities allowing for drawdowns of, significant levels of debt compared to
historical levels, and we may be required to secure additional sources of
funding. A higher level of debt could have important consequences on the
operation of our business, including the following:
- we may have difficulty borrowing money in the future;
- we may need to use a larger portion of our cash flow from operations to
pay principal and interest on our indebtedness, which would reduce the amount of
cash available to finance our operations and other business activities;
- a high debt level would make us more vulnerable to economic downturns and
adverse developments in our business; and
- if operating cash flows are not sufficient to meet our 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, sell assets, and/or forego business
opportunities including research and development projects and product design
enhancements.
COSTS OF THE BUSINESS, AND RELATED FACTORS.
We must implement our restructuring plan in a timely manner to adjust the costs
of our business to reflect current and expected future economic conditions,
market demands and revenues, and to achieve future profitability. We must also
manage what we believe to be the potentially higher growth areas of our business
and the non-core areas of our business effectively in light of current and
future market demands and trends.
COMPETITION.
Competition is heightened in periods of slow overall market growth. These
factors could result in aggressive pricing practices and growing competition
both from start-up companies and established competitors, and from
well-capitalized companies, which, in turn, could have a material adverse effect
on our business, results of operations, and financial condition.
We expect that we will face additional competition from existing competitors and
from a number of companies that have entered or may enter our existing and
future markets. Some of our current and potential competitors have greater
financial (which includes the ability to provide customer financing in
connection with the sale of its products), marketing and technical resources.
Many of our current and potential competitors have also established, or may in
the future establish, relationships with our current and potential customers.
Increased competition could result in price reductions, reduced profit margins
and loss of market share, each of which could have a material adverse effect on
our business, results of operations, and financial condition.
OUR OPERATING RESULTS AND STOCK PRICE FLUCTUATE SUBSTANTIALLY
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 and in our guidance, when provided, for
financial performance in future periods. 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 ARE AFFECTED BY FLUCTUATIONS IN OUR
CUSTOMERS' BUSINESSES
Our business is dependent upon product sales to telecommunications,
semiconductor, medical imaging, aerospace and other businesses, who in turn are
dependent for their business upon orders from their customers. Any downturn in
the business of any of these parties affects us. Moreover, our sales often
reflect orders shipped in the same quarter in which they are received, which
makes our 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 our results of operations from quarter to
quarter. Also, as 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 ARE EXPERIENCING DECREASED SALES AND INCREASED DIFFICULTY IN PREDICTING
FUTURE OPERATING RESULTS
As the result of currently unfavorable economic and
market conditions, (a) our sales are declining, (b) we are unable to predict
future sales accurately, and (c) we are currently unable to provide guidance for
future financial performance. The conditions contributing to this difficulty
include:
- uncertainty regarding the capital spending plans of the major
telecommunications carriers, upon whom our customers and, ultimately we, depend
for sales;
- the telecommunications carriers' current limited access to the capital
required for expansion;
- our customers decreasing inventory levels, which, in turn, reduces our
sales;
- lower near term sales visibility; and
- general market and economic uncertainty.
Based on these and other factors, many of our major customers have reduced,
modified, cancelled or rescheduled orders for our products and have expressed
uncertainty as to their future requirements. As a result, we currently
anticipate that our net sales in future periods may decline. In addition, our
ability to meet financial expectations for future periods may be harmed.
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 we have incurred charges to align our
inventory with actual customer requirements over the near term. We use a rolling
six-month forecast based on anticipated product orders, product order history,
forecasts, and backlog to assess our inventory requirements. As discussed above,
our ability to forecast our customers' needs for our products in the current
economic environment is very limited. We have incurred, and may in the future
incur, significant inventory-related charges. We may incur significant similar
charges in future periods. Moreover, because of our current difficulty in
forecasting sales, we may in the future revise our previous forecasts. 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 or even excessive. As a result of
these and other factors, our stock price has declined substantially over the
past year.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING VOLUMES, YIELDS AND COSTS, OUR
BUSINESS WILL SUFFER
Our success depends upon our ability to timely deliver products to our customers
at acceptable volume and cost levels. The manufacture of our products involves
highly complex and precise processes. Changes in our manufacturing processes or
those of our 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, in some cases, existing manufacturing
techniques, which involve substantial manual labor, may not achieve the volume
or cost targets of our customers. In these cases, we will need to develop new
manufacturing processes and techniques, which are anticipated to involve higher
levels of automation, to achieve these targets, and we will need to undertake
other efforts to reduce manufacturing costs.
IF OUR BUSINESS OPERATIONS ARE INSUFFICIENT TO REMAIN COMPETITIVE IN OUR
INDUSTRY, OUR OPERATING RESULTS COULD SUFFER
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 our current competitors, we expect that new
competitors providing niche, and potentially broad, product solutions will
increase in the future. While the current economic downturn has reduced the
overall level of business in our industry, the competition for that business
remains fierce. To remain competitive in both the current and future business
climates, we believe 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 have sufficient
resources to continue to make the investments necessary to remain competitive,
or we may not make the technological advances necessary to remain competitive.
In addition, notwithstanding our efforts, technological changes, manufacturing
efficiencies or development efforts by our competitors may render our products
or technologies obsolete or uncompetitive.
OUR INDUSTRY IS CONSOLIDATING
Our industry is consolidating and we believe it will continue to consolidate in
the future as companies attempt to strengthen or hold their market positions in
an evolving industry. We anticipate that consolidation will accelerate as the
result of the current industry downturn. We believe that industry consolidation
may result in stronger competitors that are better able to compete as
sole-source vendors for customers. This could lead to more variability in
operating results as we compete to be a single vendor solution and could hurt
our business.
THE MARKETS IN WHICH WE OPERATE ARE DYNAMIC AND SUBJECT TO CONSTANT CHANGE
Our business operates in rapidly changing markets. An inability to anticipate
shifts in our markets, or unpredictable delays or difficulties in the
development of key new product programs may result in our being unable to
recover major research and development expenses, and/or major technology
shifting away from our technologies and core competencies.
WE ARE DEPENDENT UPON THIRD PARTIES FOR PARTS AND COMPONENTS UTILIZED TO
MANUFACTURE OUR PRODUCTS
Our ability to meet customer demand depends, in part, on our ability to obtain
timely and adequate delivery of parts and components from our 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 on our operations.
COMPLIANCE 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. Our present accruals for such
costs and liabilities may not be adequate in the future, since the estimates on
which the accruals are based depend on a number of factors including the nature
of the problem, the complexity of the site, the nature of the remedy, the
outcome of discussions with regulatory agencies and other potentially
responsible parties ("PRPs") at multiparty sites, and the number and financial
viability of other PRPs.
COSTS OF 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, or changes in accounting policies and practices
and the application of such policies and practices could have a material adverse
effect on our business.
TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
The power equipment market is characterized by rapidly changing technology and
shorter product life cycles. The Company's future success will continue to
depend upon its ability to enhance its current products and to develop new
products that keep pace with technological developments and respond to changes
in customer requirements. Any failure by the Company to respond adequately to
technological changes and customer requirements or any significant delay in new
product introductions could have a material adverse effect on the Company's
business and results of operations. In addition, there can be no assurance that
new products to be developed by the Company will achieve market acceptance.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF 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 us. In addition, our future success will depend on
the ability of our officers and key employees to manage our operations
successfully during the current economic downturn and to attract, retain,
motivate and manage our employees.
For a further description of Future Factors that could cause actual results to
differ materially from such forward-looking statements, see the discussion in
the Company's Annual Report on Form 10-K, for the year ended December 31, 2000 -
Item 1. section VIII. and Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition - Forward-Looking Statements, on
Form 10-Q, for the quarter ended March 31, 2001 and June 30, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative market risk
from the disclosure contained in Item 7A of the December 31, 2000 Form 10K which
is incorporated herein by reference.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
a. Lawsuit relating to annual meeting of shareholders.
On October 23, 2001, Steel Partners II, L.P. filed a complaint in the Superior
Court of New Jersey, Chancery Division, Morris County seeking an order from the
Court compelling an annual meeting of shareholders of the Company to take place
on December 19, 2001 in Boonton Township, New Jersey.
On November 5, 2001, the Company issued a press release that, among other
things, announced the Board of Directors' determination not to sell the entire
Company at this time and that a special meeting of shareholders for the election
of the Company's Board of Directors would occur on January 22, 2002. As
discussed by the Company several months prior to the press release, a
shareholders meeting was postponed pending the outcome of solicitation efforts
by the Company's investment banker. Since the Board of Directors decided not to
accept proposals that would require shareholder action in the short term, the
Company determined that it was appropriate to schedule the meeting for the
election of directors.
On November 9, 2001, the Company and Steel Partners II, L.P. signed a
stipulation, which has been submitted to the Court, under which they agreed that
an annual meeting of the Company's shareholders will be held on January 22, 2002
at 9:00 a.m. in Mt. Laurel, New Jersey. The stipulation and order provides that
the only matters to be brought to a vote of Company shareholders at the meeting
are the election of no more than eight Company directors, the ratification of a
accounting firm for the Company and such other matters that may properly come
before the meeting.
b. Submission of shareholder proposals for the 2001 Annual Meeting of
Shareholders.
Shareholder proposals submitted for inclusion in the Proxy Statement for the
2001 Annual meeting of Shareholders must be received by the Company at the
Company's corporate headquarters address and must be submitted in accordance
with Rule 14a-8 of the Exchange Act on or before December 7, 2001.
Under the Company's By-laws, director nominations by shareholders or proposals
regarding other business which are not submitted for inclusion in the Company's
Proxy Statement for the 2001 Annual Meeting of Shareholders must be actually
received at the Company's principal headquarters no later than the close of
business on the 60th calendar day prior to the date of the meeting, that is,
November 23, 2001. The notice should be addressed to the Secretary of the
Company and must set forth the information specified in Section 12 of the
Company's By-laws by the Secretary of the Company.
c. Notice from New York Stock Exchange regarding continuing listing
requirements.
The Company's common stock is currently traded on the New York Stock Exchange
("NYSE"). In October 2001, the NYSE notified the Company that it no longer met
the market capitalization requirements of not less than $50 million or total
stockholders' equity requirements of not less than $50 million for continued
listing on the NYSE. The NYSE further stated that it was reviewing the Company's
eligibility for continued listing on the NYSE and requested that the Company
provide a business plan no later than December 10, 2001 demonstrating how it
intends to achieve and sustain compliance. As of September 30, 2001, the Company
had stockholders equity of $36,568,000. At the close of the market on November
13, 2001, the Company's total market capitalization was approximately
$39,000,000. The Company intends to submit the required plan to the Listings and
Compliance Committee of the NYSE setting forth the action which Company intends
to take to comply with the eligibility standards. After reviewing the plan, the
Committee will either accept it (following which the Company will be subject to
quarterly monitoring for compliance with the plan), or not (in which event the
Company will be subject to NYSE trading suspension and delisting). Should the
Company's shares cease being traded on the NYSE, the Company believes that an
adequate alternative trading venue will be available.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended Change in Control Agreement between the Company and Mr. Owen
Farren.
10.2 Amended Change in Control Agreement between the Company and Mr. David
R. Nuzzo.
10.3 Amended Change in Control Agreement between the Company and Mr. Jacob
Cherian.
(b) Reports on Form 8-K
On July 11, 2001, the Company filed a Current Report on Form 8-K dated June 21,
2001, which contained a press release issued by the Company on June 25, 2001
announcing that the Company obtained a waiver of its default on certain
financial covenants in its revolving credit facility from its bank lenders. The
credit facility was also amended, in connection with the grant of the waiver, to
require, among other things, the Company to provide its lenders additional
collateral and to pay certain additional fees as well as an increased interest
rate. The waiver covers the fiscal quarters ended March 31, 2001 and September
30, 2001.
On July 25, 2001, the Company filed a Current Report on Form 8-K dated July 18,
2001, which contained a press release issued by the Company on July 19, 2001
announcing that the Company will further restructure its power electronics group
by further decreasing its workforce within its Condor D.C. Power Supplies
subsidiary and by reducing manufacturing capacity elsewhere in the group. The
Company also stated that it will record pre-tax charges against third quarter
earnings to reflect severance costs associated with the latest job cuts and
against second quarter earnings to reflect the write-down of excess inventory.
The Company further announced that it will record
pre-tax charges against second quarter earnings to reflect accrued operating
losses and anticipated asset impairment charges related to discontinued
operations.
The Company also stated that it believed that it will have adequate liquidity
from operations and through its credit facility to fund operations and working
capital requirements through the end of the third quarter. The Company stated
that it was considering raising additional funds in the near term through the
sale or other disposition of certain non-operating assets and discussed other
matters relating to its liquidity concerns.
On September 7, 2001, the Company filed a Current Report on Form 8-K dated
September 7, 2001, which contained a press release issued by the Company on
September 7, 2001 announcing that the Company sold substantially all the
operating assets of SL Waber and the stock of SL Waber's Mexican subsidiary,
Waber de Mexico for cash and future contingent cash payments and that the
Company will record an additional non-cash impairment of asset charge of $1.8
million.
On October 11, 2001, the Company filed a Current Report on Form 8-K dated
October 10, 2001, which contained a press release issued by the Company on
October 10, 2001 announcing that the Company had completed its telecom
restructuring program with the closure of Condor DC Power Supplies' Reynosa,
Mexico facility and that the Company will record an additional charge of
approximately $2.5 million in connection with the closure of the facility.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: November 14, 2001 SL INDUSTRIES, INC.
-------------------
(Registrant)
Date: November 14, 2001 By: /s/Owen Farren
------------------------------
Owen Farren
President,
Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
Date: November 14, 2001 By: /s/Jacob Cherian
------------------------------
Jacob Cherian
Vice President, Corporate Controller
(Principal Accounting Officer)