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SL INDUSTRIES, INC.
EXHIBIT 13
PDQ SOLUTIONS
SL Industries designs and manufactures advanced power products and systems
to ensure power and data quality (PDQ) for today's complex electronic equipment
and systems that require a stable and reliable source of power for proper
operation. The market for PDQ products and technology now exceeds $10 billion
worldwide, and is expected to grow at an average annual rate of 8% to 10% over
the next five years.
PDQ SOLUTIONS
The demand for PDQ solutions is driven by the increasing sophistication and
application of electronic equipment and consumer products. As electronic devices
incorporate a greater degree of computing capability, power irregularities pose
a greater threat of damage and data loss. The Company produces a wide range of
power supplies, power conditioners, motion control systems, power distribution
units, surge protection devices and other systems designed to ensure the safe
and reliable operation of sophisticated equipment. The Company's products are
sold in the medical, aerospace, telecommunications, industrial and consumer
industries.
SL Industries engineers its PDQ solutions for the world community. Its
products are sold, directly and through representatives, primarily to original
equipment manufacturers (OEMs) and distributors with global sales and
operations. In order to meet the demands of its multinational customers, the
Company has acquired a thorough knowledge of the diverse energy problems and
performance standards in effect in local and regional markets throughout the
world.
SL Industries' PDQ products are designed to operate under the wide range of
power conditions found around the world, and comply with international safety
agency requirements. The acquisition of ELEKTRO-METALL EXPORT GMBH (EME)
furthers the Company's plans to establish international manufacturing and
engineering capabilities and direct foreign sales channels for its global
products.
MASS CUSTOMIZATION
SL Industries implements its PDQ technology through its strategy called
"mass customization." Mass customization at SL is the process of configuring its
portfolio of PDQ solutions (products) to meet specific customer requirements or
market applications. This strategy enables the Company to establish strong
customer relationships and respond better to market developments, as well as to
reduce costs for both the Company and its customers.
Among SL's competitive advantages is its ability to rapidly deliver
comprehensive power solutions. In response to the market's demands for greater
functionality, energy efficiency and power density, OEMs are increasingly
integrating the design of power systems and electronics into their end products.
At the same time, just-in-time production methods are creating incentives for
OEMs to partner with a smaller number of qualified vendors. Thus, by providing
complete PDQ systems, the Company is able to strengthen and expand its
relationships with established customers and to penetrate new markets for
value-added applications of its technology.
In fiscal 1998, SL Industries realized a number of important product
developments. The following is a highlight of some of the Company's recent
developments and achievements:
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SL INDUSTRIES, INC.
POWER SUPPLIES
SL Industries produces a wide range of standard and custom power supplies
that convert AC or DC power to required levels of direct electrical current for
use in customers' end products. CONDOR designs and manufactures linear and
switching AC power supplies, primarily in the 7 watt to 700 watt power range.
The CONDOR product line is noted for its innovation and highly efficient designs
and dominates the market for low voltage power supplies for medical equipment.
The Company has incorporated its advanced technology and designs into products
for the telecom, instrumentation and industrial equipment markets. CONDOR'S
highly responsive product teams effectively partner with established customers
and have enabled CONDOR to penetrate new market applications for its products,
including home health care, air filtration systems, chemical and genetic
analysis equipment, and telecom and datacom interface equipment.
[POWER SUPPLY PHOTO]
[CAPTION]
During fiscal 1998, CONDOR introduced 11 new power supply products and is
currently developing new products at the rate of one every four to six weeks.
CONDOR has ongoing plans to develop external power supplies and DC to DC
converters and to expand the power range of its PDQ solutions. The Company is
currently engineering new power supply products to meet the growing needs of
OEMs in the emerging telemedicine industry.
POWER CONDITIONING AND DISTRIBUTION UNITS
SL Industries has established a prominent position in the growing market
for power conditioning and distribution units (PCDUs). PCDUs are used to filter
out noise from power lines, as well as for voltage conversion and stabilization,
system control and power distribution. In addition, PCDUs enhance the quality
and reliability of equipment and systems by providing the precise power and
distribution features required for dependable operation. TEAL ELECTRONICS is a
leader in the design and manufacture of custom power systems for OEMs in the
medical imaging, telecommunications and semiconductor production equipment
markets.
In fiscal 1998, TEAL successfully developed and introduced a new line of
PCDUs with voltage regulation. The technology developed by TEAL and its
well-recognized PCDU product line constitutes an excellent platform to penetrate
markets for more value-added and cost-effective solutions in the medical,
semiconductor, telecommunications and graphic arts industries.
[POWER CONDITIONER PHOTO]
[CAPTION]
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SL INDUSTRIES, INC.
SL WABER designs and manufactures power distribution units that safely
convert a high power input into user specified output ranges. These units
distribute power evenly and conveniently throughout the customer's system. In
fiscal 1998, SL WABER began working with its customers to develop advanced
microprocessor controlled systems that can satisfy the demanding new performance
requirements that are expected to be caused by utility deregulation.
EME power distribution equipment 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.
UNINTERRUPTIBLE POWER SUPPLIES
Uninterruptible power supply (UPS) products provide back-up power in the
event of a power failure. Dependable back-up power supplies prevent the loss of
data transmissions due to sudden power shortages and ensure an orderly system
shutdown in the event of an extended energy failure. UPS products also recharge
batteries and, in some applications, provide a direct power supply to connected
equipment.
[UNINTERRUPTIBLE POWER SUPPLY PHOTO]
[CAPTION]
SL WABER back-up power supplies include the Upstart Network series, which
are designed for computers operating in a network environment. These units
incorporate sophisticated software for managing, saving and restoring files. SL
WABER expanded its product line into higher power ranges with the introduction
of its 650va UPS unit during the past fiscal year, and is expected to introduce
its 850va UPS unit in the first half of fiscal 1999.
CONDOR has continued its expansion into custom back-up power supplies that
incorporate UPS and battery charging technology. These products are required by
OEMs that manufacture and sell medical and telecom equipment and other critical
industrial applications where the consequences of on-line interruption are
unacceptable. Applications for this capability are expected to proliferate in
the future, as sophisticated capital equipment in a wide range of industries is
designed to process information within wide and local area networks.
[REMOTE CONTROL AIR PLANE PHOTO]
[CAPTION]
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SL INDUSTRIES, INC.
MOTION CONTROL SYSTEMS
SL Industries' competitive advantage in motion control systems lies in its
cutting-edge designs. SL-MTI's new motor and motion controls are used in
numerous applications, including aerospace, medical and industrial products,
which require extremely high reliability under demanding operating conditions.
SL-MTI's proprietary motor/generator technology is employed in jet engines,
electric vehicles, hand-held precision tools and advanced flywheel systems for
telecommunications and utility markets.
[PASSENGER AIR PLANE PHOTO]
[CAPTION]
In fiscal 1998, SL-MTI's power and drive systems were incorporated into the
ground breaking "Personal Transit Module" electronic vehicle manufactured by
Corbin industries.
The acquisition of EME in June 1998 further expands the market for the
Company's motion control systems. EME designs and manufactures actuators and
power distribution units used in a variety of aerospace and industrial
applications. The synergies between EME and each of the Company's other
strategic business units, particularly SL-MTI, will enable SL Industries to
provide its customers with more comprehensive PDQ solutions.
SURGE SUPPRESSORS AND OTHER
SL Industries has a well-established reputation in the design and
manufacture of surge suppressors and surge suppression technologies. These
devices are sold to protect computers, audiovisual and other electronic
equipment from damage or destruction due to sudden power surges. SL WABER is a
leader in the design and manufacture of surge suppressors for the custom, OEM
and retail marketplaces. Surge suppression and other types of noise filtration
technology are generally incorporated into many of the Company's more advanced
PDQ products.
[EME PHOTO]
[CAPTION]
REPRESENTATIVE CUSTOMER LIST
SL Industries provides power and data quality solutions for world-class
customers in many industries. Some of the customers for the Company's PDQ
solutions over the past year include:
AKSYS Federal Express Newark Electronics
Airbus Industries Future Electronics Office Depot
Allied Signal GEC Marconi Philips
Audi General Electric Raytheon
Avnet/Allied Electronics Healthdyne Schlumberger
Bell/Milgray Electronics Hewlett Packard Siemens
B.F. Goodrich/Aerospace Home Depot Teradyne
Digi-Key Lucas Aerospace Textron
Digital Equipment Motorola 3M Corporation
Ericsson Nellcor/Puritan Bennett Toshiba
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SL INDUSTRIES, INC.
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------
Years ended July 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
SUMMARY OF OPERATIONS
Net sales.................................................................. $ 118,212 $ 115,687 $ 117,313
Income before cumulative effect of changes in accounting principles (1) ... $ 5,313 $ 7,815 $ 3,498
Cumulative effect of change in accounting for income taxes................. - - -
--------------------------------------
Net income................................................................. $ 5,313 $ 7,815 $ 3,498
======================================
Diluted net income per common share: (2)
Income before cumulative effect of changes in accounting principles (1) ... $ .90 $ 1.30 $ .59
Cumulative effect of change in accounting for income taxes................. - - -
--------------------------------------
Diluted net income......................................................... $ .90 $ 1.30 $ .59
======================================
Shares used in computing diluted net income per common share (2) .......... 5,897 6,021 5,950
Cash dividend per common share............................................. $ .08 $ .07 $ .06
YEAR-END FINANCIAL POSITION
Working capital............................................................ $ 21,344 $ 17,399 $ 20,765
Current ratio.............................................................. 2.1 1.8 2.3
Total assets............................................................... $ 80,915 $ 66,804 $ 64,175
Long-term debt............................................................. $ 13,283 $ 700 $ 13,186
Shareholders' equity....................................................... $ 38,345 $ 36,492 $ 28,680
Book value per share....................................................... $ 6.84 $ 6.27 $ 4.98
OTHER
Capital expenditures (3) .................................................. $ 2,756 $ 2,097 $ 2,219
Depreciation and amortization.............................................. $ 3,043 $ 2,700 $ 2,584
--------------------------------------
- -------------------------------------------------------------------------------------------------------------
Years ended July 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Summary of operations
Net sales.................................................................. $ 91,125 $ 76,593
Income before cumulative effect of changes in accounting principles (1) ... $ 3,677 $ 1,951
Cumulative effect of change in accounting for income taxes................. - 603
------------------------------
Net income................................................................. $ 3,677 $ 2,554
==============================
Diluted net income per common share: (2)
Income before cumulative effect of changes in accounting principles (1) ... $ .62 $ .32
Cumulative effect of change in accounting for income taxes................. - .10
------------------------------
Diluted net income......................................................... $ .62 $ .42
==============================
Shares used in computing diluted net income per common share (2) .......... 5,940 6,152
Cash dividend per common share............................................. $ .06 $ .06
Year-end financial position
Working capital............................................................ $ 21,929 $ 21,125
Current ratio.............................................................. 2.5 2.9
Total assets............................................................... $ 62,156 $ 52,397
Long-term debt............................................................. $ 17,373 $ 11,918
Shareholders' equity....................................................... $ 24,930 $ 23,577
Book value per share....................................................... $ 4.43 $ 3.93
Other
Capital expenditures (3) .................................................. $ 1,736 $ 1,446
Depreciation and amortization.............................................. $ 2,108 $ 1,868
------------------------------
(1) Fiscal 1997 includes pre-tax gain, net of severance, facility closing,
legal and other costs, on disposition of subsidiary of $5,888,000,
increasing net income by $3,556,000, or $.59 per common share. Fiscal
1995 includes pre-tax gain, net of severance, legal and other costs, on
disposition of subsidiary of $818,000, increasing net income by $1,100,000,
or $.19 per common share.
(2) The effect of outstanding dilutive stock options is not material for fiscal
1995 and is antidilutive for fiscal 1994; and is not included in the
calculations for these years.
(3) Excludes assets acquired in business combinations.
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SL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the net cash provided by operating activities was
$6,621,000, as compared to $3,266,000 and $4,687,000 provided in fiscal 1997 and
1996, respectively. The fiscal 1998 increase, as compared to fiscal 1997,
resulted primarily from increased income from operations, and decreased
receivables and inventories, offset, in part, by decreased accounts payable and
accrued liabilities. The fiscal 1997 decrease, as compared to fiscal 1996,
resulted primarily from increased inventories at current operations, offset, in
part, by increased accounts payable. During fiscal 1998, the net cash used in
investing activities of $13,634,000 was primarily related to the acquisition of
all of the issued and outstanding common shares of Elektro-Metall Export GmbH
("EME") and capital expenditures. During fiscal 1997, the net cash provided by
investing activities of $9,399,000 was primarily related to the sale of
substantially all of the assets of SL Auburn, Inc. ("Auburn"), offset, in part,
by capital expenditures. During fiscal 1996, the net cash used in investing
activities of $1,240,000, was primarily related to capital expenditures, offset,
in part, by the sale of substantially all of the assets of SL Piping Systems,
Inc. ("Piping"), net of certain liabilities. During fiscal 1998, the net cash
provided by financing activities of $7,000,000 was primarily related to the use
of the Company's revolving line of credit for the EME acquisition, offset, in
part, by the purchase of 375,500 shares of the Company's common stock. During
fiscal 1997 and 1996, the net cash used in financing activities of $12,665,000
and $4,024,000 was primarily related to payments made to reduce the Company's
long-term debt obligation.
The Company's current ratio was 2.1 to 1 at July 31, 1998, 1.8 to 1 at July 31,
1997, and 2.3 to 1 at July 31, 1996. The fiscal 1998 increase, as compared to
fiscal 1997, resulted from a 7% increase in current assets and a 5% decrease in
current liabilities. The increase in current assets resulted primarily from the
addition of inventories at EME. The decrease in current liabilities resulted
primarily from the payment of vendor invoices, offset, in part, by the addition
of liabilities at EME. The fiscal 1997 decrease, as compared to fiscal 1996,
resulted from a 28% increase in current liabilities, as compared to a 3%
increase in current assets. The increase in current liabilities resulted
primarily from increased accounts payable.
As a percentage of total capitalization, consisting of long-term debt and
shareholders' equity, total borrowings by the Company were 27% at July 31, 1998,
2% at July 31, 1997, and 32% at July 31, 1996. The fiscal 1998 increase in total
borrowings, as compared to fiscal 1997, was primarily a result of the Company's
use of its revolving line of credit to purchase all of the issued and
outstanding common shares of EME and 375,500 shares of the Company's common
stock. The fiscal 1997 decrease in total borrowings, as compared to fiscal 1996,
was primarily a result of payments made to reduce the outstanding balance of the
Company's revolving line of credit. On July 21, 1998, the Company amended its
revolving credit agreement in the amount of $25,000,000 with three participating
banks to provide for multi-currency borrowing and international acquisitions,
and to extend the agreement's maturity date to October 31, 2001. At July 31,
1998, the Company had $12,280,000, net of outstanding trade letters of credit of
$920,000, of this revolving line of credit available for use. See Note 8 to the
consolidated financial statements for additional information about the credit
agreement. The Company's borrowing capacity at July 31, 1998, remained
considerably above its use of outside financing.
Capital expenditures were $2,756,000 in 1998, as compared to $2,097,000 in 1997,
and $2,219,000 in 1996. Expenditures during the three-year period have primarily
included investments in new process technology and increased production
capacity. Fiscal 1999 capital expenditures are planned to be approximately
$3,963,000, and the Company expects to fund the expenditures with cash provided
by operations.
The Company is not aware of any demands, commitments, trends or
uncertainties, which are reasonably likely, in the normal course, to impair its
ability to generate or obtain adequate amounts of cash to meet its future needs.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Fiscal 1998 consolidated net sales of $118,212,000 increased approximately 2%
($2,525,000), as compared to fiscal 1997 consolidated net sales. Fiscal 1998 and
1997 consolidated net sales included one month of EME's net sales of $1,831,000
and nine months of Auburn's net sales of $8,489,000, respectively. Fiscal 1998
net income was $5,313,000, or a diluted $.90 per share, as compared to fiscal
1997 net income of $7,815,000, or a diluted $1.30 per share. Fiscal 1997 net
income included a gain, net of severance, facility closing, legal and other
costs, from the sale of substantially all of the assets of Auburn of $3,556,000
or a diluted $.59 per share. If the gain is excluded from fiscal 1997 net
income, fiscal 1998 net income increased approximately 25% ($1,054,000).
Fiscal 1998 power and data quality net sales increased approximately 10%
($11,014,000), as compared to fiscal 1997. Contributing to this increase were
increased net sales of linear and switching power supplies, power conditioning
and distribution units and precision motor products, which resulted primarily
from technology improvements, new customer programs and increased demand,
offset, in part, by decreased demand for surge protectors and uninterruptible
power supplies, which resulted primarily from reduced demand because of
competitive pressures within the retail marketplace. Fiscal 1998 power and
data quality operating income increased approximately 25% ($2,433,000), as
compared to fiscal 1997. The increase in fiscal 1998 operating income resulted
from the increased net sales and operational efficiencies realized by the power
and data quality businesses.
COST OF SALES
As a percentage of net sales, fiscal 1998 and 1997 costs of products sold were
approximately 63% and 64%, respectively. The Company continues to make
investments to improve operational efficiencies that should reduce cost of
products sold as a percentage of net sales.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Fiscal 1998 engineering and product development expenses of $6,167,000 increased
approximately 17% ($884,000), as compared to fiscal 1997. As a percentage of net
sales, fiscal 1998 and 1997 engineering and product development expenses were
approximately 5%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 1998 selling, general and administrative expenses of $25,576,000
decreased approximately 3% ($788,000), as compared to fiscal 1997. The fiscal
1998 decrease was primarily related to decreased selling expenses. As a
percentage of net sales, fiscal 1998 selling, general and
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SL INDUSTRIES, INC.
administrative expenses were approximately 22%, as compared to 23% in fiscal
1997.
DEPRECIATION AND AMORTIZATION EXPENSE
Fiscal 1998 depreciation and amortization expense of $3,043,000 increased
approximately 13% ($343,000), as compared to fiscal 1997. The increase was
primarily related to depreciation and amortization of computer hardware and
software, respectively.
OTHER INCOME (EXPENSE)
Fiscal 1998 other income (expense) consisted entirely of interest income and
expense. Fiscal 1997 other income (expense) included the gain from the Auburn
asset sale, as well as interest income and expense. Fiscal 1998 interest income
decreased, as compared to fiscal 1997, because of less cash available for
investment. Fiscal 1998 interest expense decreased, as compared to fiscal 1997,
primarily because of a lower average debt balance.
TAXES
The fiscal 1998 effective tax rate on pre-tax income was 38%, as
compared to 39% in fiscal 1997. The fiscal 1997 effective tax rate included
incremental taxes associated with the gain realized from the Auburn asset sale.
FISCAL 1997 COMPARED TO FISCAL 1996
Fiscal 1997 consolidated net sales of $115,687,000 decreased approximately 1%
($1,626,000), as compared to fiscal 1996 consolidated net sales. Fiscal 1997's
consolidated net sales included nine months of Auburn's net sales of $8,489,000
and fiscal 1996 consolidated net sales included twelve months of Auburn's net
sales of $10,766,000 and approximately seven months of Piping's net sales of
$2,964,000. Fiscal 1997 net income was $7,815,000, or a diluted $1.30 per share,
as compared to fiscal 1996 net income of $3,498,000, or a diluted $.59 per
share. Fiscal 1997 net income included a gain, net of severance, facility
closing, legal and other costs, from the sale of substantially all of the assets
of Auburn of $3,556,000 or a diluted $.59 per share. If the gain is excluded
from fiscal 1997 net income, net income increased approximately 22% ($761,000).
The power and data quality segment's fiscal 1997 net sales and operating income
increased approximately 3% ($3,616,000) and 5% ($463,000), respectively, as
compared to fiscal 1996 net sales and operating income. Contributing to these
increases were increased net sales of linear and switching power supplies, power
conditioning and distribution units and precision motor products which resulted
from increased market share, offset by decreased sales of surge protectors and
uninterruptible power supplies because of a flat retail market. The increase in
fiscal 1997 operating income resulted from the increased net sales realized by
the businesses within this segment.
The specialty products segment's fiscal 1997 net sales and operating income
decreased approximately 38% ($5,242,000), and increased approximately 92%
($272,000), respectively, as compared to fiscal 1996 net sales and operating
income. Fiscal 1997 and 1996's net sales and operating income included the
results of Auburn and, in fiscal 1996, also included the results of Piping.
COST OF SALES
As a percentage of net sales, fiscal 1997 cost of products sold was
approximately 64%, as compared to approximately 65% in fiscal 1996. The
percentage decrease was a direct result of improved operational efficiencies
contributed by the power and data quality segment's product lines.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Fiscal 1997 engineering and product development expenses of $5,283,000 increased
approximately 12% ($570,000), as compared to fiscal 1996. As a percentage of net
sales, fiscal 1997 engineering and product development expenses were 5%, as
compared to 4% in fiscal 1996. The fiscal 1997 increases were primarily related
to additional investments made by the businesses within the power and data
quality segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 1997 selling, general and administrative expenses of $26,364,000
decreased approximately 2% ($520,000), as compared to fiscal 1996. As a
percentage of net sales, fiscal 1997 and 1996 selling, general and
administrative expenses were approximately 23% for both years.
DEPRECIATION AND AMORTIZATION EXPENSE
Fiscal 1997 depreciation and amortization expense of $2,700,000 increased
approximately 4% ($116,000), as compared to fiscal 1996. The slight fiscal 1997
increase was primarily related to the depreciation of equipment within the power
and data quality segment.
OTHER INCOME (EXPENSE)
Fiscal 1997 other income (expense) included the gain from the Auburn asset sale,
as well as interest income and expense, as compared to fiscal 1996 other income
(expense), which consisted entirely of interest income and expense. Fiscal 1997
interest income increased, as compared to fiscal 1996, because of additional
cash available for investment. Fiscal 1997 interest expense decreased, as
compared to fiscal 1996, primarily because of a reduction in the Company's
long-term debt obligation.
TAXES
The fiscal 1997 effective tax rate on pre-tax income was 39%, as compared to 35%
in fiscal 1996. This increase was primarily related to taxes associated with the
Company's Mexican operations, the gain realized from the Auburn asset sale and
state income tax refunds included in fiscal 1996.
ENVIRONMENTAL
During fiscal 1998, 1997 and 1996, investigation or remediation activities, or
both, were continued at sites owned, leased or previously utilized by the
Company. During the latter part of fiscal 1995, the New Jersey Department of
Environmental Protection ("NJDEP") 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 for several years. 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; therefore, in fiscal 1996, the Company made an additional
provision of $900,000.
In a November 1991, Administrative Directive, NJDEP alleged that SL Surface
Technologies, Inc. ("STI"), formerly SL Modern Hard Chrome, Inc., and 20 other
respondents are responsible for a contaminant plume which has affected the
Puchack Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey).
Three other actions have been
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SL INDUSTRIES, INC.
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 STI 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 the Company's compliance with ECRA at the same site.
With regard to the $8,655,000 amount, in the Company's view it is not
appropriate to consider that amount as "potential cost reimbursements". The STI
site, which is the subject of these actions, has undergone remedial activities
under NJDEP's supervision since 1983. The Company believes that it has a
significant defense against all or any part of the $8,655,000 claim since
technical data generated as part of previous remedial activities indicate that
there is no offsite migration of contaminants at the Company's STI site. Based
on this and other technical factors, the Company has been advised by its outside
technical consultant, with the concurrence of its outside counsel, that it has a
significant defense to Directive No. 1 and any material exposure is remote.
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 affect on the Company's consolidated financial position or
results of earnings.
The Company filed claims with its insurers seeking reimbursement for past and
future environmental costs and it received $900,000 from one insurer during
fiscal 1996 and a commitment to pay 15% of the environmental costs associated
with the STI site, up to an aggregate of $300,000. During fiscal 1997, the
Company received $1,500,000 from three additional insurers and from two of those
insurers, commitments to pay 15% and 20% of the environmental costs associated
with the same location, up to an aggregate of $150,000 and $400,000,
respectively. In addition, the Company received $100,000 during fiscal 1998 and
will receive $100,000 during the fiscal years 1999, 2000 and 2001, as stipulated
in the settlement agreement negotiated with one of the three insurers.
See Note 10 to the consolidated financial statements for additional
information.
YEAR 2000
The Year 2000 issue is the result of computer programs using two digits rather
than four to define the applicable year. Computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
leading to disruptions in a company's operations.
The Company has taken actions to address and complete the work associated with
the Year 2000. Executive management and information system employees at each of
its business units have been contacted regarding Year 2000 readiness, either
through on-site visits or intercompany correspondence. Each of its business
units and corporate headquarters have established, or are in the process of
establishing, teams to identify and correct Year 2000 issues. Attention is being
given to computer hardware and software, communications equipment, manufacturing
equipment and facilities and products sold, if any, to achieve compliance in all
these areas. The teams are also charged with investigating the Year 2000
capabilities of suppliers, customers and other external entities, and with
developing contingency plans where necessary.
Three of the Company's business units implemented new enterprise software
packages during the last two years that their suppliers have stated are Year
2000 compliant. A detailed accounting and assessment of all computer systems and
most application software utilized throughout the Company's operations has been
completed, and plans for establishing compliance are either in process or have
been developed. These plans identify or will identify which non-compliant
hardware and software will be remediated, upgraded or replaced and the timetable
and resource requirements to achieve those objectives. Remediation and testing
activities have been completed or are in the process of being completed at all
of the Company's business units and at corporate headquarters.
The Company does not expect Year 2000 spending to materially affect consolidated
profitability or liquidity. This expectation assumes that its existing forecast
of costs to be incurred contemplates all significant actions required, and that
the Company will not be obligated to incur significant Year 2000 related costs
on behalf of its customers or suppliers.
TRENDS AND PROSPECTS
At the present time, all of the Company's businesses are profitable and are
expected to remain so, and it is anticipated that the Company's fiscal year 1999
consolidated financial results should continue to show improvements.
FORWARD-LOOKING INFORMATION
From time to time, information provided by the Company, including written or
oral statements made by its representatives, may contain forward-looking
information as defined in the Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical facts, which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as expansion and growth of the
company's business, future capital expenditures and the Company's prospects and
Year 2000 strategy, contain forward-looking information. In reviewing such
information, it should be kept in mind that actual results may differ materially
from those projected or suggested in such forward-looking information. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. Many of these factors have previously been
identified in filings or statements made by or on behalf of the Company.
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in consumer
spending, competitive factors and other factors affecting the Company's business
in or beyond the Company's control. These factors include changes in the rate of
inflation, changes in state or federal legislation or regulation, adverse
determinations with respect to litigation or other claims (including
environmental matters), adverse effects of failure to achieve Year 2000
compliance, the Company's ability to recruit and develop employees, its ability
to successfully implement new technology and stability of product costs.
Other factors and assumptions not identified above could also cause the actual
results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.
11
9
SL Industries, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------------------------------------------------------
Years ended July 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Net sales......................................................$ 118,212,000 $ 115,687,000 $ 117,313,000
-----------------------------------------------------------------
Cost and expenses:
Cost of products sold........................................ 74,646,000 74,085,000 76,773,000
Engineering and product development.......................... 6,167,000 5,283,000 4,713,000
Selling, general and administrative expenses................. 25,576,000 26,364,000 26,884,000
Depreciation and amortization................................ 3,043,000 2,700,000 2,584,000
-----------------------------------------------------------------
Total cost and expenses........................................ 109,432,000 108,432,000 110,954,000
-----------------------------------------------------------------
Income from operations......................................... 8,780,000 7,255,000 6,359,000
Other income (expense):
Gain on disposition of subsidiary............................ - 5,888,000 -
Interest income.............................................. 214,000 301,000 159,000
Interest expense............................................. (427,000) (680,000) (1,123,000)
-----------------------------------------------------------------
Income before income taxes..................................... 8,567,000 12,764,000 5,395,000
Provision for income taxes..................................... 3,254,000 4,949,000 1,897,000
-----------------------------------------------------------------
Net income......................................................$ 5,313,000 $ 7,815,000 $ 3,498,000
=================================================================
Basic net income per common share.............................. $ .95 $ 1.35 $ .61
=================================================================
Diluted net income per common share............................ $ .90 $ 1.30 $ .59
=================================================================
Shares used in computing basic net income per common share..... 5,598,000 5,776,000 5,701,000
=================================================================
Shares used in computing diluted net income per common share... 5,897,000 6,021,000 5,950,000
=================================================================
See accompanying notes to consolidated financial statements.
12
10
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------
July 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ - $ -
Receivables, less allowances
of $2,045,000 and $1,790,000, respectively................................ 18,886,000 18,141,000
Inventories................................................................. 18,538,000 16,505,000
Prepaid expenses............................................................ 972,000 712,000
Deferred income taxes....................................................... 3,014,000 3,168,000
------------------------------------------
Total current assets.................................................. 41,410,000 38,526,000
------------------------------------------
Property, plant and equipment, net............................................ 13,977,000 6,296,000
Assets held for future sale................................................... 913,000 958,000
Long-term note receivable..................................................... 2,201,000 2,234,000
Deferred income taxes......................................................... 1,865,000 2,442,000
Cash surrender value of life insurance policies............................... 8,657,000 7,627,000
Intangible assets, net........................................................ 10,705,000 7,594,000
Other assets.................................................................. 1,187,000 1,127,000
------------------------------------------
Total assets.......................................................... $ 80,915,000 $ 66,804,000
==========================================
LIABILITIES
Current liabilities:
Debt due within one year.................................................... $ 727,000 $ 133,000
Accounts payable............................................................ 5,982,000 8,839,000
Accrued income taxes........................................................ 2,105,000 770,000
Accrued liabilities:
Payroll and related costs................................................. 4,851,000 5,331,000
Other..................................................................... 6,401,000 6,054,000
------------------------------------------
Total current liabilities............................................. 20,066,000 21,127,000
------------------------------------------
Long-term debt less portion due within one year............................... 13,283,000 700,000
Deferred compensation and supplemental retirement benefits.................... 4,667,000 4,133,000
Other liabilities............................................................. 4,554,000 4,352,000
------------------------------------------
Total liabilities..................................................... $ 42,570,000 $ 30,312,000
------------------------------------------
Commitments and contingencies (Note 10)
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, 1998 - 8,153,000 shares, 1997 - 7,958,000 shares.................... 1,631,000 1,592,000
Capital in excess of par value................................................ 36,061,000 34,695,000
Retained earnings............................................................. 14,476,000 9,607,000
Translation adjustment........................................................ 80,000 -
Treasury stock at cost, 1998 - 2,546,000 shares, 1997 - 2,141,000 shares...... (13,903,000) (9,402,000)
------------------------------------------
Total shareholders' equity............................................ $ 38,345,000 $ 36,492,000
------------------------------------------
Total liabilities and shareholders' equity............................ $ 80,915,000 $ 66,804,000
==========================================
See accompanying notes to consolidated financial statements.
13
11
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
-------------------------------------------------------
Retained
Issued Held In Treasury Capital in Earnings
-------------------------- --------------------------- Excess of (Accumulated Translation
Shares Amount Shares Amount Par Value Deficit) Adjustment
---------------------------------------------------------------------------------------------
Balance August 1, 1995............. 7,773,000 $ 1,555,000 (2,141,000) $ (9,402,000) $33,735,000 $ (958,000) $ -
Net income ........................ 3,498,000
Cash dividends, $.06 per share..... (343,000)
Other, including exercise of
employee stock options and
related income tax benefits...... 126,000 25,000 571,000 (1,000)
---------------------------------------------------------------------------------------------
Balance july 31, 1996.............. 7,899,000 1,580,000 (2,141,000) (9,402,000) 34,306,000 2,196,000 -
Net income......................... 7,815,000
Cash dividends, $.07 per share..... (405,000)
Other, including exercise of
employee stock options and
related income tax benefits...... 59,000 12,000 389,000 1,000
---------------------------------------------------------------------------------------------
Balance July 31, 1997.............. 7,958,000 1,592,000 (2,141,000) (9,402,000) 34,695,000 9,607,000 -
Net income......................... 5,313,000
Cash dividends, $.08 per share..... (445,000)
Other, including exercise of
employee stock options and
related income tax benefits...... 195,000 39,000 1,366,000 1,000
Treasury stock purchased........... (405,000) (4,501,000)
Current year translation
adjustment....................... 80,000
---------------------------------------------------------------------------------------------
BALANCE JULY 31, 1998.............. 8,153,000 $ 1,631,000 (2,546,000) $ (13,903,000) $36,061,000 $ 14,476,000 $ 80,000
=============================================================================================
14
See accompanying notes to consolidated financial statements.
12
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
Years ended July 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income.............................................................. $ 5,313,000 $ 7,815,000 $ 3,498,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................................ 2,023,000 1,889,000 1,869,000
Amortization........................................................ 1,020,000 811,000 715,000
Provisions for losses on accounts receivable........................ 52,000 63,000 151,000
Additions to other assets........................................... (1,366,000) (820,000) (259,000)
Cash surrender value of life insurance premiums..................... (656,000) (534,000) (499,000)
Deferred compensation and supplemental retirement benefits.......... 1,158,000 942,000 863,000
Deferred compensation and supplemental retirement benefit payments.. (611,000) (499,000) (449,000)
Decrease (Increase) in deferred income taxes........................ 731,000 (1,454,000) (1,148,000)
Gain on the sale of equipment....................................... (13,000) (23,000) (5,000)
Discontinued product line expenses.................................. (168,000) (143,000) (246,000)
Gain on disposition of subsidiary................................... - (5,888,000) -
Changes in operating assets and liabilities, net of the effect of
acquisition and dispositions:
Receivables....................................................... 2,495,000 (3,073,000) (5,000,000)
Inventories....................................................... 1,068,000 (1,718,000) 2,682,000
Prepaid expenses.................................................. 181,000 135,000 11,000
Accounts payable.................................................. (3,588,000) 3,633,000 444,000
Accrued liabilities............................................... (1,978,000) 2,025,000 2,325,000
Accrued income taxes.............................................. 960,000 105,000 (265,000)
--------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES......................... $ 6,621,000 $ 3,266,000 $ 4,687,000
--------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment.................... 18,000 29,000 151,000
Purchases of property, plant and equipment.............................. (2,756,000) (2,097,000) (2,219,000)
Proceeds from notes receivable.......................................... 32,000 74,000 7,000
Payments for acquisitions, net of cash acquired......................... (10,928,000) (823,000) (533,000)
Proceeds from disposition of subsidiaries............................... - 12,216,000 1,354,000
--------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............... $ (13,634,000) $ 9,399,000 $ (1,240,000)
--------------------------------------------------------
FINANCING ACTIVITIES:
Cash dividends paid..................................................... (445,000) (405,000) (343,000)
Proceeds from long-term debt............................................ 17,550,000 2,200,000 600,000
Payments on long-term debt.............................................. (6,722,000) (14,740,000) (4,786,000)
Proceeds from stock options exercised................................... 1,118,000 280,000 505,000
Treasury stock acquired................................................. (4,501,000) - -
--------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............... $ 7,000,000 $ (12,665,000) $ (4,024,000)
--------------------------------------------------------
Effect of exchange rate changes on cash................................. $ 13,000 $ - $ -
--------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. - - (577,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ - - 577,000
--------------------------------------------------------
CASH AND CASH EQUIVALENTS AT YEAR END..................................... $ - $ - $ -
========================================================
See accompanying notes to consolidated financial statements.
15
13
SL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts of SL
Industries, Inc. and its wholly-owned subsidiaries ("the Company"). All
intercompany accounts and transactions have been eliminated in consolidation.
Revenue recognition: Sales are recognized upon shipment of products.
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 10 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 and patents. The goodwill resulting from the fiscal
1998 acquisition 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 $955,000, is considered to have
continuing value over an indefinite period, and is not being amortized.
Covenants are amortized over their stated terms and patents are amortized over
their remaining lives. Subsequent to its acquisitions, the Company continually
evaluates whether later 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 remaining life of the intangible asset to measure recoverability. If
impairment exists, measurement of the impairment will be based on the valuation
method which management believes most closely approximates the fair value of the
intangible asset.
Environmental expenditures: 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, 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 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 sales are recognized.
Advertising costs: Advertising costs are expensed as incurred. For the fiscal
years ended July 31, 1998, 1997 and 1996, these costs were $2,128,000,
$2,287,000 and $2,322,000, respectively.
Research and development costs: Research and development costs are expensed as
incurred. For the fiscal years ended July 31, 1998, 1997 and 1996, these costs
were $1,756,000, $1,405,000 and $1,245,000, respectively.
Income taxes: Deferred income taxes are provided to reflect the tax effect of
temporary differences in reporting income and deductions for tax and financial
statement purposes.
Foreign currency conversion: The balance sheets and statements of earnings of
the Company's Mexican subsidiaries are converted at the year-end rate of
exchange and the monthly weighted average rate of exchange, respectively, except
for those items requiring conversion at historical rates of exchange, as the
Mexican subsidiaries' functional currency is U.S. dollars. Gains or losses
resulting from these foreign currency conversions are included in the
accompanying consolidated statements of earnings. Since the functional currency
for the Company's German subsidiary is its local currency, the translation from
the local currency to U.S. dollars is performed for balance sheet accounts using
the current exchange rate in effect at the balance sheet date and for earnings
using the monthly weighted average exchange rate during the period. Gains or
losses resulting from such translation are included in a separate component of
stockholders' 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.
Net income per common share: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
"Earnings per Share ("SFAS No. 128")", which the Company adopted for both
interim and annual periods ending after December 15, 1997. SFAS No. 128
simplifies
16
14
SL INDUSTRIES, INC.
the Earnings per Share ("EPS") calculation by replacing primary EPS
with basic EPS. Basic EPS is computed by dividing reported earnings available to
common shareholders by weighted average shares outstanding. Fully diluted EPS,
now called diluted EPS, 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.
New accounting pronouncements: In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS No. 121")." SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill.
The Company adopted SFAS No. 121, effective August 1, 1996. The adoption had no
effect on the Company's financial condition or results of operations during
fiscal 1997 and 1998.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation
("SFAS No. 123")." SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. This statement also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company adopted SFAS No. 123,
effective August 1, 1996. The Company has elected to adopt the disclosure
requirement of this Statement with respect to its valuation of stock options.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income ("SFAS
No. 130")", which the Company is required to adopt for its fiscal year ended
July 31, 1999. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in interim and annual financial statements. The adoption of SFAS No. 130 is
expected to have no effect on the Company's presentation of its financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131")", which the Company is
required to adopt for its July 31, 1999, financial statements. SFAS No. 131
establishes standards for the reporting of information about operating segments
in interim and annual financial statements. Management is in the process of
analyzing the impact of the adoption of SFAS No. 131.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 "Employers" Disclosures about Pensions
and Other Postretirement Benefits ("SFAS No. 132")", which the Company is
required to adopt for annual periods beginning after December 15, 1997. SFAS No.
132 establishes new standards for disclosing pension and other postretirement
benefits in financial statements.
Reclassifications: Reclassifications, when applicable, are made to the prior
year consolidated financial statements to conform with current year
presentation.
2. ACQUISITIONS AND DISPOSITIONS
On February 20, 1996, the Company sold substantially all the assets of its
wholly-owned subsidiary, SL Piping Systems, Inc., for $1,354,000 and the
assumption of certain liabilities. The sale had no material impact on the
Company's consolidated financial position or income from operations.
On May 1, 1997, the Company sold substantially all the assets, excluding real
property, of its wholly-owned subsidiary, SL Auburn, Inc., for $12,216,000. For
financial reporting purposes, the sale resulted in a pre-tax gain, net of
severance, facility closing, legal and other costs of $5,888,000, increasing net
income by $3,556,000, or $.59 per common share.
On July 10, 1998, pursuant to a Purchase Agreement dated June 30, 1998, the
Company, through its wholly-owned subsidiary formed solely for such purpose, SL
Industries Vertrieb, GmbH, a German Corporation, acquired 100% of the issued and
outstanding Common Shares of Elektro-Metall Export GmbH ("EME"), a German
Corporation. The Company paid $9,500,000 in cash at closing. EME is a leading
German based designer and manufacturer of power quality products.
The acquisition was accounted for using the purchase method; therefore, the
aggregate purchase price has been allocated to the net assets acquired based on
their respective fair values at date of acquisition. The excess of the aggregate
purchase price over the fair value of net tangible assets acquired of $2,589,000
has been allocated to goodwill and is being amortized on a straight-line basis
over 30 years.
The results of operations of EME, since the acquisition date, are included in
the accompanying consolidated financial statements.
Unaudited pro forma consolidated results of operations, which included a
$3,556,000 after-tax gain from the sales of substantially all of the assets of
SL Auburn, Inc. in fiscal 1997, as though the Company acquired EME on August 1
of each fiscal year are as follows:
-----------------------------------------
1998 1997
-----------------------------------------
(In thousands, except per share data)
Net sales. . . . . . . . . . . . . . $138,526 $140,974
Net income . . . . . . . . . . . . . $5,847 $8,769
Basic net income per common share. . $1.04 $1.52
Diluted net income per common share. $.99 $1.46
The unaudited pro forma consolidated results of operations include the
amortization of goodwill, and additional interest and depreciation expense as if
these acquisition related expenses had been incurred from the beginning of the
respective periods. The unaudited pro forma results are not necessarily
indicative of the actual results of operations that would have occurred had the
purchase actually been made at the beginning of the respective periods, or of
results which may occur in the future.
3. INCOME TAXES
The provision for federal and state income taxes consists of the following:
---------------------------------
1998 1997 1996
---------------------------------
(In thousands)
Current:
Federal . . . . . . . . . . . . . $2,642 $ 5,288 $2,584
State . . . . . . . . . . . . . . 521 1,115 461
Deferred:
Federal . . . . . . . . . . . . . 36 (1,182) (1,038)
State . . . . . . . . . . . . . . 55 (272) (110)
------------------------------
$3,254 $ 4,949 $1,897
==============================
17
15
16
SL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and liabilities at
July 31, 1998 and 1997, are as follows:
----------------------
1998 1997
----------------------
(In thousands)
Deferred tax assets:
Deferred compensation. . . . . . . $1,883 $1,681
Liabilities related to
discontinued product line. . . . 313 366
Liabilities related to
environmental matters. . . . . . 145 304
Inventory valuation. . . . . . . . 615 514
Prepaid and accrued expenses . . . 3,306 3,484
Other. . . . . . . . . . . . . . . 17 17
---------------------
6,279 6,366
Deferred tax liabilities:
Accelerated depreciation and
amortization . . . . . . . . . . 1,400 756
---------------------
$4,879 $5,610
=====================
Following is a reconciliation between the amount of income tax
expense at the applicable federal statutory rate and the effective
rates:
------------------------------
1998 1997 1996
------------------------------
Federal statutory rate. . . . . . . . 34% 34% 34%
Tax rate differential on Foreign
Sales Corporation earnings. . . . . (1) - (1)
State income taxes, net of
federal income tax benefit. . . . . 4 4 4
Other . . . . . . . . . . . . . . . . 1 1 (2)
------------------------------
38% 39% 35%
==============================
4. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration 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.
5. INVENTORIES
Inventories consist of the following:
----------------------------
1998 1997
----------------------------
(In thousands)
Raw materials. . . . . . . . . . $10,543 $ 7,691
Work in process. . . . . . . . . 3,611 2,283
Finished goods . . . . . . . . . 4,384 6,531
----------------------------
$18,538 $16,505
============================
The above includes certain inventories, which are valued using the LIFO method,
which aggregated $3,009,000 and $2,254,000 at July 31, 1998 and 1997,
respectively. The excess of FIFO cost over LIFO cost at July 31, 1998 and 1997,
was approximately $455,000 and $446,000, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
-------------------------
1998 1997
-------------------------
(In thousands)
Land . . . . . . . . . . . . . . . $ 3,553 $ 58
Buildings and leasehold
improvements . . . . . . . . . 5,622 2,873
Equipment and other
property . . . . . . . . . . . . . 16,844 15,240
-----------------------
26,019 18,171
Less accumulated depreciation. . . 12,042 11,875
-----------------------
$13,977 $ 6,296
=======================
"Assets held for future sale" at July 31, 1998 and 1997, are not included above
and relate to assets remaining after the 1989 relocation of a power and data
quality operation. The assets remaining consist primarily of land, building and
building improvements which are being leased to a third party. The building and
building improvements are being depreciated and accounted for as an operating
lease. Aggregate accumulated depreciation for the building and building
improvements at July 31, 1998 and 1997, was $527,000 and $483,000, respectively.
Aggregate minimum rental income for fiscal 1998 and 1997 was $131,000 and
$123,000, respectively. Aggregate minimum rental income for the remaining lease
period will be $138,000 and $81,000 in 1999 and 2000, respectively. The net book
values of these assets are less than the estimated net realizable value based on
a market survey received from an independent third party.
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
-----------------------------
1998 1997
-----------------------------
(In thousands)
Patents . . . . . . . . . . . . . . $ 895 $ 873
Covenants not to compete. . . . . . 2,980 2,980
Goodwill . . . . . . . . . . . . . 8,204 4,447
Trademarks . . . . . . . . . . . . 920 920
Other . . . . . . . . . . . . . . . 398 386
-----------------------------
13,397 9,606
Less accumulated amortization . . . 2,692 2,012
-----------------------------
$10,705 $7,594
=============================
The fiscal 1998 increase in goodwill included $2,589,000 from the EME
acquisition (see Note 2 for additional information about the acquisition) and
$1,168,000 from the payment of additional
18
17
SL INDUSTRIES, INC.
purchase price as required by the May 1, 1995 Asset Purchase Agreement between
the Company and Teal Electronics Corporation. The Agreement includes a provision
to pay additional purchase price equal to 50% of the annual net profits of the
acquired business in excess of $1,100,000 for each of the five twelve-month
periods beginning May 1, 1995.
8. DEBT
Debt consists of the following:
---------------------
1998 1997
---------------------
(In thousands)
Note payable . . . . . . . . . . . . . $ 557 $ -
Mortgage payable. . . . . . . . . . . . 465 -
Revolving lines of credit . . . . . . . 12,926 700
Industrial revenue bonds, repaid in
fiscal 1998 . . . . . . . . . . . . . - 133
Other . . . . . . . . . . . . . . . . . 62 -
--------------------
14,010 833
Less portion due within one year . . . 727 133
--------------------
$13,283 $700
====================
The Company's German subsidiary has a note payable at an interest rate of 4.5%
that is due within 15 days of borrowing, unless extended and a mortgage payable
on a building addition, which has a fixed interest rate of 4.75% and requires
principal repayment through 2002.
On July 21, 1998, the Company amended its $25,000,000 revolving credit agreement
with its participating banks, which now expires on October 31, 2001. Under the
terms of this agreement, the Company can borrow for acquisitions, working
capital and, for other purposes, at either a "CD or LIBOR rate," as defined, or
prime interest rate. The agreement contains limitations on borrowings and
requires maintenance of specified ratios, the most restrictive of which is the
ratio of total funded debt plus standby letters of credit to earnings before
interest, taxes, depreciation and amortization. At July 31, 1998, the Company is
in compliance with the above covenants. In lieu of compensating balances, the
Company pays commitment fees as defined under the agreement. The Company's
German subsidiary also has $4,785,000 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 of 5.35% to 7%. No financial covenants are required.
Under the terms of the industrial revenue bond installment loan agreements,
interest was payable quarterly on the outstanding principal at 65% of the
prevailing prime rate, adjusted monthly. Generally the banks had the right and
option to call each loan, at specified dates, if certain levels of shareholders'
equity, as defined, were not maintained.
Principal maturities of long-term debt payable over the next five years are
$113,000 in 2000, $11,919,000 in 2001, $125,000 in 2002 and zero in 2003 and
2004.
9. RETIREMENT PLANS AND DEFERRED COMPENSATION
The Company maintains two noncontributory defined contribution pension plans
covering substantially all employees. The Company's aviation igniter subsidiary
also had a noncontributory defined contribution plan covering all its employees.
The Company's contribution to its plans is based on a percentage of employee
elective contributions and, in one plan, calendar year gross wages, as defined.
The power conditioner subsidiary's contribution to its plan is based on a
percentage of employee elective contributions. The aviation igniter subsidiary's
contribution to its plan was based on a percentage of salary, as defined in the
plan. Costs accrued under the plans for fiscal 1998, 1997 and 1996 amounted to
approximately $671,000, $531,000 and $508,000, respectively. It is the Company's
policy to fund its accrued retirement income costs.
In addition, the Company makes contributions, based on rates per hour, as
specified in two union agreements, to two union administered defined benefit
multi-employer pension plans. Contributions to these plans amounted to $64,000,
$55,000 and $52,000 in 1998, 1997 and 1996, 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 $456,000, $491,000 and
$398,000 in 1998, 1997 and 1996, 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
$702,000, $451,000 and $465,000 in 1998, 1997 and 1996, respectively.
The Company is the owner and beneficiary of insurance policies on the lives of a
majority of the participants having a deferred compensation or supplemental
retirement agreement. At July 31, 1998, the aggregate death benefit totaled
$17,048,000 with the corresponding cash surrender value totaling $8,657,000. At
July 31, 1998, certain agreements may restrict the Company from utilizing cash
surrender value totaling $1,958,000 for purposes other than 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 expense. Net amounts included in income in connection with
the policies amounted to $261,000, $257,000 and $337,000 in 1998, 1997 and 1996,
respectively.
10. COMMITMENTS AND CONTINGENCIES
For the fiscal years ended July 31, 1998, 1997 and 1996, rental expense
applicable to continuing operations aggregated $1,701,000, $1,602,000 and
$2,000,000, respectively. These expenses are primarily for facilities and
vehicles. The minimum rental commitments as of July 31, 1998, are as follows:
(In thousands)
1999 . . . . . . . $1,855 2002 . . . . . . . 982
2000 . . . . . . . 1,331 2003 . . . . . . . 394
2001 . . . . . . . 1,157 Thereafter . . . . 47
------
$5,766
======
At July 31, 1998, the Company was contingently liable for $1,077,000, under
outstanding letters of credit issued primarily for inventory purchases from
foreign suppliers and settlement of a civil lawsuit.
19
18
SL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 complaints by terminated employees. It is management's opinion
that the impact of these legal actions will not have a material affect on the
consolidated financial position or results of operations of the Company.
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 from other parties or from
insurance. Although these contingencies could result in additional expenses or
judgments, or off-sets thereto, at present such expenses or judgments are not
expected to have a material affect on the Company's consolidated financial
position or results of operations.
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 the independent engineering consulting
firm. In fiscal 1991 and 1996, the Company made additional provisions of
$480,000 and $900,000, respectively, based upon new estimates. 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. From fiscal 1993 through 1998, the Company incurred environmental
related capital expenditures of approximately $416,000.
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 will receive $100,000 during fiscal years 1999, 2000 and
2001, as stipulated in the settlement agreement negotiated with one of the three
insurers. At July 31, 1998 and 1997, the remaining environmental accrual was
$678,000 and $1,075,000, respectively, of which $250,000 and $400,000,
respectively, have been included in "Accrued Liabilities" and $428,000 and
$675,000, respectively, in "Other Liabilities" in the accompanying consolidated
balance sheets.
11. 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 nonemployee 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 the years 1996, 1997 and 1998 with respect to the Director Plan
is as follows:
---------------------------------------
Shares Option Price
---------------------------------------
(In thousands, except for option price)
Outstanding and exercisable
at August 1, 1995 . . . . . . . . . 51 $3.5625 to $5.125
Granted . . . . . . . . . . . . . . . 39 $5.6875 to $10.50
Exercised . . . . . . . . . . . . . . (14) $3.5625 to $5.125
Outstanding and exercisable
at July 31, 1996. . . . . . . . . . 76 $3.5625 to $10.50
Granted . . . . . . . . . . . . . . . 27 $7.1875 to $9.6875
Outstanding and exercisable
at July 31, 1997. . . . . . . . . . 103 $3.5625 to $10.50
Granted . . . . . . . . . . . . . . . 22 $10.1875 to $14.625
Exercised . . . . . . . . . . . . . . (71) $3.5625 to $12.0313
OUTSTANDING AND EXERCISABLE
AT JULY 31, 1998. . . . . . . . . . 54 $3.5625 TO $14.625
As of July 31, 1998, 1997 and 1996, the number of shares available for grant
were 110,000, 133,000 and 160,000, respectively.
At the Company's 1991 Annual Meeting, the shareholders approved the adoption of
a Long Term Incentive Plan (the "1991 Plan") which provides 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
20
19
20
SL INDUSTRIES, INC.
to options under the 1991 Plan from 500,000 to 922,650. 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 options can be granted under the 1991 Plan
after its September 25, 2001, expiration date. Information for the years 1996,
1997 and 1998 with respect to the 1991 Plan is as follows:
---------------------------------------
Shares Option Price
---------------------------------------
(In thousands, except for option price)
Outstanding and exercisable
at August 1, 1995 . . . . . . . . . 301 $3.25 to $4.50
Granted . . . . . . . . . . . . . . . 83 $6.875
Exercised . . . . . . . . . . . . . . (95) $3.25 to $6.875
Cancelled . . . . . . . . . . . . . . (2) $3.25 to $6.875
Outstanding at July 31, 1996. . . . . 287 $3.25 to $6.875
Granted . . . . . . . . . . . . . . . 133 $7.25 to $9.375
Exercised . . . . . . . . . . . . . . (59) $3.25 to $9.375
Cancelled . . . . . . . . . . . . . . (13) $3.25 to $9.375
Outstanding at July 31, 1997. . . . . 348 $3.25 to $9.375
Granted . . . . . . . . . . . . . . . 189 $11.00 to $14.5625
Exercised . . . . . . . . . . . . . . (90) $3.25 to $11.00
Cancelled . . . . . . . . . . . . . . (25) $4.25 to $11.00
OUTSTANDING AT JULY 31, 1998. . . . . 422 $3.25 TO $14.5625
The number of shares exercisable at July 31, 1998 and 1997, were 244,000 and
259,000, respectively. As of July 31, 1998, 1997, and 1996 the number of shares
available for grant were 217,000, 381,000, and 501,000, respectively.
The Company's 1981 Incentive Stock Option Plan for officers and employees
expired on July 31, 1991. The Plan provided that option prices were equivalent
to 100% of market value at date of grant. All options granted under the Plan
were exercisable three years from date of grant and expired five years after
date of grant. Information for the year 1996 with respect to the Plan is as
follows:
---------------------------------------
Shares Option Price
---------------------------------------
(In thousands, except for option price)
Outstanding at August 1, 1995 . . . . 17 $5.90
Exercised . . . . . . . . . . . . . . (1) $5.90
Expired . . . . . . . . . . . . . . . (16) $5.90
Outstanding at July 31, 1996 . . . . 0
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, and 15,000
shares at an option price of $ 5.25 to the Chief Executive Officer of the
Company and a subsidiary president, respectively. The option for 15,000 shares
was exercised during fiscal 1996. 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
and was exercisable at July 31, 1998, with an expiration date of November 30,
1998. Options for 25,100 shares were exercised during fiscal 1998. In fiscal
1996, an option to purchase 50,000 shares was granted to a subsidiary officer at
an option price of $8.375 and was exercisable 20% at July 31, 1997, and 50%, 20%
and 10% on or after October 13, 1997, April 13, 1998, and April 13, 1999,
respectively, with no expiration date, except in the event of termination,
disability or death provided that the subsidiary officer has been employed
through such date. Options for 8,000 shares were exercised during fiscal 1998.
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 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 and
net income per common share would have been reduced in 1998 and 1997 as follows:
-----------------------------
1998 1997
-----------------------------
Net income - as reported . . . . . . . . . . . . $5,313,000 $7,815,000
Net income - pro forma . . . . . . . . . . . . . $4,908,000 $7,617,000
Diluted net income per common share -
as reported . . . . . . . . . . . . . . . . . $.90 $1.30
Diluted net income per common share -
pro forma . . . . . . . . . . . . . . . . . . $.83 $1.27
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
-----------------------------
1998 1997
-----------------------------
Expected dividend yield. . . . . . . . . . . . . .61% .98%
Expected stock price volatility. . . . . . . . . 32.7% 31.0%
Risk-free interest rate. . . . . . . . . . . . . 6.1% 6.7%
Expected life of option. . . . . . . . . . . . . 7 YEARS 7 years
Transactions from August 1, 1995 through July 31, 1998, under the above plans
were as follows:
-------------------------------------------------------------------------------------
Weighted
Average Life
Number of Shares Option Price Weighted Remaining
(In thousands) per Share Average Price (Years)
-------------------------------------------------------------------------------------
Options at
August 1, 1995 . . 545 $3.25 to $5.90 $3.76 7.53
Granted . . . . . . 172 $5.6875 to $10.50 $7.48
Exercised . . . . . (126) $3.25 to $5.90 $3.87
Expired . . . . . . (16) $5.90 $5.90
Cancelled . . . . . (2) $3.25 to $6.875 $5.27
Outstanding at
July 31, 1996. . . 573 $3.25 to $10.50 $4.87 7.18
Granted . . . . . . 160 $7.1875 to $9.6875 $8.84
Exercised . . . . . (59) $3.25 to $9.375 $4.69
Cancelled . . . . . (13) $3.25 to $9.375 $7.26
Outstanding at
July 31, 1997. . . 661 $3.25 to $10.50 $5.78 6.83
Granted . . . . . . 211 $10.1875 to $14.625 $11.95
Exercised . . . . . (194) $3.25 to $12.0313 $5.75
Cancelled . . . . . (25) $4.25 to $11.00 $8.65
OUTSTANDING AT
JULY 31, 1998. . . 653 $3.25 TO $14.625 $7.67 6.73
EXERCISABLE AT
JULY 31, 1998. . . 470 $3.25 TO $14.625 $6.29
21
21
SL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table segregates the outstanding options at July 31, 1998, into
three ranges:
----------------------------------------------------------------------------
Weighted
Options Range of Option Weighted Average Life
Outstanding Prices Average Remaining
(In thousands) per Share Price (Years)
----------------------------------------------------------------------------
223 $3.25 to $4.125 $3.75 3.69
229 $4.1875 to $9.375 $7.69 7.43
201 $9.6875 to $14.625 $12.00 9.31
---
653
===
12. 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 Standards No. 95, Statement
of Cash Flows, cash flows from EME's 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 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.
Supplemental disclosures of cash flow information:
-------------------------------
1998 1997 1996
-------------------------------
(In thousands)
Interest paid . . . . . . . . . $368 $735 $1,158
Income taxes paid . . . . . . . $2,225 $6,431 $3,312
Non-cash investing and financing activities:
During fiscal 1996, the Company received a $2,300,000 note as part of the
consideration for a sale of property, plant and equipment.
During fiscal 1998, the Company acquired all of the capital stock of EME for
$9,500,000. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired . . . . . . $15,729,000
Cash paid for the capital stock . . . . . $ 9,500,000
Liabilities assumed . . . . . . . . . . . $ 6,229,000
13. INDUSTRY SEGMENTS
The Company's operations are conducted through domestic and foreign
subsidiaries. During fiscal 1997 and 1996 sales between segments were not
material. No single customer accounts for more than 10% of consolidated sales
nor are export sales material thereto.
-----------------------------------------------------
1998 1997(1) 1996(1)
-----------------------------------------------------
(In thousands)
NET SALES
Power and data quality . . . . . $118,212 $107,198 $103,582
Specialty products . . . . . . . - 8,489 13,731
-----------------------------------------------------
Consolidated . . . . . . . . . . $118,212 $115,687 $117,313
====================================================
OPERATING INCOME
Power and data quality . . . . . $12,112 $ 9,679 $ 9,216
Specialty products . . . . . . . - 569 297
Corporate. . . . . . . . . . . . (3,332) (2,993) (3,154)
-----------------------------------------------------
Total. . . . . . . . . . . . . 8,780 7,255 6,359
Gain on disposition. . . . . . . - 5,888 -
Interest income. . . . . . . . . 214 301 159
Interest expense . . . . . . . . (427) (680) (1,123)
-----------------------------------------------------
Consolidated income
before income taxes. . . . . $ 8,567 $12,764 $ 5,395
====================================================
IDENTIFIABLE ASSETS
Power and data quality . . . . . $62,569 $48,634 $41,863
Specialty products . . . . . . . 2,253 2,366 5,711
-----------------------------------------------------
Consolidated segment totals. . . 64,822 51,000 47,574
Corporate. . . . . . . . . . . . 16,093 15,804 16,601
-----------------------------------------------------
Consolidated assets. . . . . . . $80,915 $66,804 $64,175
====================================================
CAPITAL EXPENDITURES (2)
Power and data quality . . . . . $2,545 $2,002 $1,917
Specialty products . . . . . . . - 50 168
Corporate. . . . . . . . . . . . 211 45 134
----------------------------------------------------
Total. . . . . . . . . . . . . . $2,756 $2,097 $2,219
====================================================
DEPRECIATION AND AMORTIZATION
Power and data quality . . . . . $2,853 $2,396 $2,097
Specialty products . . . . . . . - 179 313
Corporate. . . . . . . . . . . . 190 125 174
----------------------------------------------------
Total. . . . . . . . . . . . . . $3,043 $2,700 $2,584
====================================================
(1) Reclassified to conform with current year's presentation.
(2) Excludes assets acquired in business combinations.
22
22
SL INDUSTRIES, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SL INDUSTRIES, INC.:
We have audited the accompanying consolidated balance sheets of SL Industries,
Inc. and subsidiaries as of July 31, 1998 and 1997, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
three years in the period ended July 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of SL Industries, Inc. and
subsidiaries as of July 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended July 31, 1998, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
/s/ARTHUR ANDERSEN LLP
- ----------------------
Philadelphia, PA
September 10, 1998
23
23
S/L INDUSTRIES, INC.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
---------------------------------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------------------------------
October 31, January 31, April 30, July 31,
---------------------------------------------------------------------------------------------
1997 1996 1998 1997 1998 1997 (1) 1998 1997
---------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net sales .................. $29,455 $27,844 $28,559 $29,253 $29,340 $29,773 $30,858 $28,817
Gross margin................ $10,491 $ 9,665 $10,096 $10,069 $10,635 $10,085 $10,981 $10,517
Income before income taxes.. $ 1,893 $ 1,416 $ 2,023 $ 1,619 $ 2,249 $ 7,526 $ 2,402 $ 2,203
Net income.................. $ 1,182 $ 880 $ 1,225 $ 964 $ 1,405 $ 4,572 $ 1,501 $ 1,399
Diluted net income per
common share................ $ 0.20 $ 0.15 $ 0.21 $ 0.16 $ 0.24 $ 0.76 $ 0.25 $ 0.23
(1) Includes pre-tax gain, net of severance, facility closing, legal and other
costs, on disposition of subsidiary of $5,888,000, increasing net income by
$3,556,000, or $.59 per common share. See Note 2 to consolidated financial
statements.
24