1
EXHIBIT 13
OIL-DRI CORPORATION OF AMERICA
2
FINANCIAL HIGHLIGHTS
(in thousands except
for per share amounts) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Net Sales ........................ $160,252 $156,616 $153,787 $152,899 $147,147
Income from Operations(1)$ ....... 8,429 $ 10,669 $ 5,983 $ 12,710 $ 14,296
Net Income(1)..................... $ 4,723 $ 6,793 $ 3,374 $ 8,003 $ 9,852
BALANCE SHEET DATA
Working Capital .................. $ 36,283 $ 31,165 $ 30,399 $ 33,074 $ 29,337
Total Assets ..................... $134,215 $114,558 $117,693 $116,988 $112,267
Long-Term Debt ................... $ 39,976 $ 17,052 $ 18,978 $ 20,422 $ 21,521
PER SHARE DATA
Net Income per Share(1) .......... $ 0.77 $ 1.03 $ 0.50 $ 1.15 $ 1.41
Book Value per Share ............. $ 12.15 $ 12.03 $ 11.46 $ 11.35 $ 10.51
- ----------------------------------------------------------------------------------------------------------
(1) Includes pre-tax special charges of $3,129,000 or $0.36 per share in 1998
and $921,000 or $0.10 per share in 1996.
NET SALE NET INCOME PER SHARE(1)
millions of dollars millions of dollars
1994 145 million 1994 1.4 million
1995 150 million 1995 1.1 million
1996 155 million 1996 5.0 million
1997 157 million 1997 1.0 million
1998 165 million 1998 .75 million
Owned Leased Total Proven Reserves
LAND HOLDINGS & MINERAL RESERVES (acres) (acres) (acres) (thousands of tons)
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Florida.......................... 537 446 983 4,512
Georgia.......................... 1,852 1,804 3,656 44,295
Illinois......................... 161 598 759 9,000
Mississippi...................... 2,354 1,431 3,785 129,235
Nevada........................... 415 6,747 7,162 306,830
Oregon........................... 360 640 1,000 83
Tennessee........................ 778 -- 778 4,250
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6,457 11,666 18,123 498,205
===== ====== ====== =======
3
BUSINESS OVERVIEW
Oil-Dri Corporation of America delivers innovative solutions that help our
customers make the world cleaner, safer and healthier. The company is the
leading developer, manufacturer and marketer of sorbent products for a variety
of markets.
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[PHOTO OF PET PRODUCTS]
PET PRODUCTS
Oil-Dri is the largest manufacturer of cat litters in North America. The
company's Cat's Pride(R) brand has grown faster than both the market and all
other major brands over the past two years. During the past year, the company
increased retail sales and product distribution. Recent acquisitions and new
product launches are expected to strengthen Oil-Dri's position in this
competitive market.
[PHOTO OF INDUSTRIAL & AUTOMOTIVE PRODUCTS]
INDUSTRIAL & AUTOMOTIVE PRODUCTS
Oil-Dri(R) branded oil and grease absorbents have been the professional's
choice for cleanup since 1941. The company continues to distinguish itself as
the premier supplier by offering a breadth of cleanup solutions, including clay
and polypropylene sorbents. In addition, Oil-Dri products are being offered to
consumers through wholesale clubs and automotive aftermarket retailers.
[PHOTO OF AGRICULTURAL PRODUCTS]
AGRICULTURAL PRODUCTS
Oil-Dri sets the standard for the highest quality carriers for crop
protection products in the agricultural chemical industry. The company is
expanding its participation in the agricultural industry with animal health
products, including feed binders and conditioners. The company's position in the
turf and ornamental market is expanding with Terra-Green(R) soil conditioner.
[PHOTO OF FLUIDS PURIFICATION PRODUCTS]
FLUIDS PURIFICATION PRODUCTS
These specialty adsorbents are used to remove impurities from food oils and
petroleum products. This past year, sales of Pure-Flo(R) adsorbents to Malaysia,
the world's largest producer of palm oil, were down substantially due to
devaluation of the local currency. On the positive side, business in Europe was
very strong. Oil-Dri is consolidating global fluids purification activities and
expanding business opportunities worldwide.
SALES TRENDS (millions of dollars) 1998 1997 1996 1995 1994
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Pet Products....................................... $ 99.9 $ 95.0 $ 90.5 $ 91.1 $84.4
Industrial and Automotive Products................. 20.6 19.6 20.2 22.2 22.8
Agricultural Products.............................. 19.7 18.6 19.9 16.6 18.3
Fluids Purification Products....................... 17.7 15.7 13.6 13.7 14.1
Transportation Services(2)......................... 2.4 7.7 9.6 9.3 7.5
----------------------------------------------------------------------
$160.3 $156.6 $153.8 $152.9 $147.1
====== ====== ====== ====== ======
(2) Oil-Dri exited the transportation business in the second quarter of fiscal
1998.
4
[PHOTO OF RICHARD M. JAFFEE] To Our Shareholders
FROM THE CHAIRMAN
Fiscal 1998 was a year of significant progress and solid achievement. Dan
Jaffee and his team completed two important acquisitions and exited a non-core
business. These strategic steps were consistent with the company's five-year
business plan. The financial results achieved were in line with the company's
stated growth objectives.
The success recorded this year should be particularly gratifying to all
Oil-Dri shareholders since it was accomplished against a background of difficult
and unexpected external events. Worldwide currency devaluations, so much in the
news this past year, had a very negative impact on our Malaysian Pure-Flo(R)
business and slowed the introduction of our agricultural products in Asia. The
Canadian dollar depreciated in value steadily throughout the year, negatively
impacting profitability.
When good results are achieved in a difficult economic environment, it is
particularly important. I want to take this opportunity to congratulate Dan, the
senior management and all of our Oil-Dri employees on a job well done.
I would also like to thank the Board of Directors for their ongoing support
and counsel. Their dedication to the success of Oil-Dri is one of our greatest
assets. The strength of our board comes from the wisdom and long-term business
experience of some members and the fresh perspective of others.
At the start of the year, Arnold W. Donald, Senior Vice-President of the
Monsanto Company, joined our board. Mr. Donald's experience in agriculture and
biotechnology is invaluable. In addition, his general management experience,
particularly in international marketing, is important. Mr. Donald's integrity
and social responsibility complement the corporate culture and core values of
our organization.
All of us at Oil-Dri were very proud when our long-time friend and director,
Allan H. (Bud) Selig, was unanimously chosen as the ninth Commissioner of
Baseball. We are proud of Bud's accomplishments and pleased that his first
official year as commissioner has been one of greatly renewed interest in our
national pastime.
My brother, Robert Jaffee, an Oil-Dri director since 1956, is retiring from
the board this year. I want to extend my sincere and deepest thanks to Bob for
his years of service. He has both challenged and supported me over these many
years and I am grateful for his input and guidance.
While these are difficult times in the financial markets and particularly
tough for small capitalization stocks such as ours, the future of Oil-Dri has
never been brighter. Sales and earnings growth have reaccelerated and our
business continues to generate excess free cash. In the past few years, a
portion of that cash has been returned to shareholders in the form of dividends
and the repurchase of our common stock. Since 1994, the company has repurchased
more than one million shares of its common stock, reducing shares outstanding by
approximately 15%.
Fiscal 1999 promises to be a very exciting year. We will continue to
profitably integrate our recent acquisitions while launching several significant
new products.
We thank you for your continued support and look forward to another
successful year.
/S/ Richard M. Jaffee
Richard M. Jaffee
Chairman
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To Our Shareholders [Photo of Daniel S. Jaffee]
FROM THE PRESIDENT AND CEO
This year, my letter is being written as if you, our shareholder, are sitting
in my office and giving me five minutes to communicate why Oil-Dri is a company
worthy of your investment. The only rules are that I stick to what transpired
during fiscal 1998 and that I cover the positive and negative events with equal
attention. When my time is up, I hope you will have a clear picture of where
Oil-Dri is heading so you can decide for yourself whether Oil-Dri is a company
you will be glad to own over the long term. With that, turn over your
five-minute egg timer and say, "Go."
By focusing on the businesses which give Oil-Dri the best chance to succeed
over the long term, we are committed to growing the sales and earnings by 10%
per year; some years will be more, some less, but over time we fully expect to
achieve double-digit growth on both the top and bottom lines.
We finished the year with record sales of $160 million and, due to our stock
repurchase program, we were able to deliver a 10% increase in earnings per share
(before a special charge) from $1.03 to $1.13. This made fiscal 1998 the second
consecutive year of double-digit growth in per share earnings.
Fiscally, Oil-Dri had a good year in 1998. Strategically, we had a great
year. We opened the year by acquiring the Phoebe Products Company, a
manufacturer of high-quality pet treats. While retail sales of cat litter in the
United States are roughly $850 million, pet treats represent nearly $1 billion
annually. This acquisition broadens Oil-Dri's position as a pet products
company. We spent this year doing our homework. We talked to consumers about
what they did and did not like about treats on the market today. In fiscal 1999
we will test market our new line of pet treats. We plan to leverage Oil-Dri's
critical mass in the grocery and mass merchandiser channels to build a sizable
and profitable pet treat business. Provided we have a successful test market,
this new product line will be prominently featured in next year's annual report.
In the second quarter, we exited the transportation business and formed a
strategic alliance with CRST. This divestiture and the ensuing alliance were all
about focusing on core strengths. Oil-Dri needs to invest your money in
businesses that can give you a better than average return. Trucking was not one
of those businesses. CRST is doing what they do best, so Oil-Dri can focus on
doing what it does best.
As Sir Winston Churchill said after Dunkirk, "Wars are
[ILLUSTRATION]
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TO OUR SHAREHOLDERS
not won in retreat." With that in mind, let's turn from defense to offense. In
April of this year, after months of negotiations, we acquired the Oil-Dri,
Mounds Production Company from one of our competitors. This acquisition enhanced
our position as a supplier of quality private label cat litter products. By
manufacturing an account's private label cat litter, we in effect become a
partner with them. We know from experience that retailers are more receptive to
stocking our Cat's Pride(R) brand of products when we are supplying their
private label requirements. Additionally, the geographic location of this plant
has allowed us to better serve our agricultural, industrial and automotive
customers.
Not all events were positive during the year. When the Malaysian ringgit's
value plummeted versus the US dollar, our Pure-Flo(R) business in that country
evaporated. Our products are sold in US dollars and became too expensive as
compared to locally available bleaching clays. Year over year, we saw sales to
Malaysia drop $1,540,000. We have not budgeted any Malaysian sales for fiscal
1999.
The second negative event of the year was the loss of most of our Sam's
Wholesale Club business. Eighteen months ago, Sam's decided to discontinue our
brand of scoopable litter in favor of stocking their own private label. However,
Cat's Pride Premium traditional litter was awarded distribution in over 80% of
their clubs after winning head-to-head, in-store tests against our competitors.
During the ensuing year and a half, sales of our Cat's Pride Premium traditional
litter grew dramatically faster than the category. Despite this, Sam's decided
to replace our brand with a competitor's product.
To put this in perspective, over the past four years we have lost $14 million
of sales with Sam's, yet companywide sales have increased $7 million. This means
that our non-Sam's business has grown by $21 million during this period. This is
a good news/bad news story. The bad news is that we never like to lose business.
The good news is that in spite of the loss of what was once our single largest
account, the company has been able to offset these losses and show small sales
growth and greater diversification. Furthermore, our relationship with Wal-Mart
Stores, Sam's sister company, has never been stronger. All-in-all, our total
business with Wal-Mart is doing very well.
Finally, the cost of natural gas impacted profitability this year. In March
1997, the manufacturing team was given the authority to forward-purchase a
significant percentage of our gas requirements for the 1998 fiscal year. In an
effort to bottom fish, we waited for the market to go lower and lower. This left
us unprotected against the unexpected run-up in prices which occurred during the
first six months of the fiscal year, and cost us 7 cents per share during fiscal
1998.
My grandfather, Nick Jaffee, the founder of this business, was fond of the
saying, "You don't learn anything by getting kicked by a mule a second time." We
got kicked last year and are not about to let it happen again. We have
implemented a policy which dictates when and how much we will forward buy so as
to minimize the impact that the volatility of natural gas prices can have on our
business.
Despite the negative events of the year, Oil-Dri reported sales and earnings
growth. In addition, we successfully digested two acquisitions, restructured our
over-the-road shipping program, and continued to reduce costs by investing in
productivity improvements throughout the organization.
I wish I could say that our stock price reflected these successes. The
positive spin on our stock price is that, at September 30, 1998, it's trading
near book value and selling at only 11.3 times operating income per share.
Beginning in the new fiscal year, we are implementing a management tool we
call "NOVA," an acronym for Net Oil-Dri Value Added. Here is how it works. Every
investment decision, whether it be in fixed assets or working capital, carries
with it a cost of capital. We were able to borrow $25 million this past year at
an excellent fixed rate of 6.55% over the 15-year term of the debt. With our mix
of debt and equity, along with the higher cost associated with equity, our
weighted average cost of capital is 10%. This
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TO OUR SHAREHOLDERS
means that for a project to add value to the company, it must yield a positive
return after being charged approximately 10% for the cost of all capital
necessary to realize the opportunity.
As an example, let's look at two very different projects. The first (Project
A) involves building a plant while the second (Project B) is a marketing
opportunity whereby the manufacturing will be done by a third party. For
simplicity's sake, let's assume that all other variables are the same (i.e.,
inventory levels, payment terms, etc.). The only difference in the cost is the
fixed investment in the first opportunity. Here's what the two projects look
like:
PROJECT A PROJECT B
Annual Sales $ 15.0 million $ 15.0 million
Pre-Tax Earnings $ 2.0 million $ 1.5 million
Fixed Investment $ 10.0 million $ 0.0
In which one do you invest? In the past, we might have bet on Project A
because the depreciation on the fixed assets is in the pre-tax number and it
still yields a better return. However, starting August 1, 1998, the individual
business units at Oil-Dri will be charged for the cost of the capital employed
related to each specific business unit. This requires our business managers to
go to the "bank" and borrow at a rate of 10% for all the capital required to run
their businesses. Once you charge Project A 10% of the $10 million fixed
investment, the NOVA (Net Oil-Dri Value Added) drops to $1.0 million, while the
NOVA for Project B remains $1.5 million and becomes the project of choice.
In the past, the business units were given a free pass for the capital used
in their respective areas. They were charged for depreciation, but not for the
carrying cost of the inventory, outstanding accounts receivable, or the funds
necessary to finance a growth initiative. That has all changed. NOVA will put
the responsibility for making informed investment decisions where it needs to
be, in the hands of our general managers. Once we've had a year to work with it,
a significant piece of annual incentive bonuses will be tied to NOVA growth.
This leads to our growth opportunities. In fiscal 1999, we will be launching
two new cat litters made from recycled paper. A third-party supplier will
provide the raw material and we will add the technical know-how to make the
materials perform like cat litter. The traditional cat litter, DustStopperTM,
performs like the best cat litters except for one notable omission - it's
virtually dust-free.
The new scoopable litter is equally exciting. Demographics of cat owners show
that a large percentage of them live in high rises and keep their cat box in a
bathroom. Consumer research indicates they would prefer to flush the used litter
rather than dispose of it in a waste can. Our new product, Scoop'N FlushTM, acts
just like the leading scoopable litters, but unlike the other litters, has been
certified safe-to-flush through residential plumbing systems. The initial
reaction from the trade has been very favorable.
My time is up. The remainder of this annual report provides additional detail
on the positive events of the year and opportunities for the future. The Oil-Dri
team is extremely bullish about our prospects. I hope at the end of your
analysis, you will decide that Oil-Dri is a company worthy of your investment
and whose stock you can be proud to own.
/s/ Daniel S. Jaffee
DANIEL S. JAFFEE
President and CEO
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[DIAGRAM]
FOCUSING ON CORE STRENGTHS
CUSTOMER BASE
MANUFACTURING EXPERTISE
MINERAL RESERVES
RESEARCH AND DEVELOPMENT CAPABILITIES
INNOVATIVE PRODUCTS
CREATIVE MARKETING
9
Seeing the Forest for the Trees
During Oil-Dri's strategic planning process, each business unit was examined and
the company's strengths and weaknesses were defined. The strengths far
outnumbered the weaknesses, but during this introspection, it became clear that
Oil-Dri Transportation Company was no longer an integral part of Oil-Dri's
strategy. The reasons behind entering the transportation business (direct store
door deliveries for major customers, over-the-road shipments to the West Coast,
heavy competition for drivers and equipment) were no longer issues. Shipping to
distribution centers is more common, rail shipments to the West Coast have
become more economical, and drivers and equipment are more readily available.
Oil-Dri Transportation Company was no longer providing a strategic, competitive
advantage, and, while it generated sales of almost $8,000,000 in fiscal 1997, it
has historically not contributed to profitability.
The question was then, "How to serve our customers with convenient,
cost-effective transportation options while focusing energies and resources on
Oil-Dri's core strengths, delivering innovative solutions that help our
customers make the world cleaner, safer and healthier?"
The answer was to exit the trucking business and form a strategic alliance
with a firm that could handle Oil-Dri's over-the-road shipping needs. CRST was
just the kind of partner Oil-Dri was looking for. In this new relationship, CRST
has assumed all equipment leases and set up logistics centers at our facilities
to handle over-the-road shipments for our customers.
A special charge of $0.36 per share was taken in fiscal 1998 to cover the
cost of exiting the transportation business as well as writing down certain
nonperforming assets. Going forward, trucking rates are expected to be more
competitive through CRST, and because we no longer need to support Oil-Dri's
backhaul business, many of our traditional over-the-road shipping lanes are
being replaced with less expensive rail shipping. We anticipate related savings
will be approximately $1,000,000 annually.
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[ILLUSTRATION]
11
Spreading Our Roots
Oil-Dri has significant roots in the sorbent mineral business. The acquisition
of American Colloid's Fuller's Earth business has helped spread these roots even
further. The purchase will contribute approximately $15,000,000 in revenues next
year, including coarse private label cat litter, oil and grease absorbents, and
agricultural carriers.
With this acquisition, Oil-Dri has become the largest manufacturer of cat
litters in North America and a consolidated source for private label and branded
cat litter products. The acquisition also increased manufacturing capacity for
clay sorbents to over 1,000,000 finished tons, provided a Midwestern
distribution point, and expanded Oil-Dri's mineral reserve base in the western
United States.
Strategically, the acquisition will allow Oil-Dri to more effectively partner
with retailers. As the only manufacturer dedicated to providing private label
and branded cat litter products in coarse and scoopable varieties, Oil-Dri can
offer retailers a consolidated source for all their cat litter needs. The
breadth of our product offerings is important to retailers who want to reduce
the number of vendors providing products. It also allows them to enjoy the
logistic synergies of receiving truckload orders with a variety of branded,
private label, scoopable and traditional cat litters. Combining these orders
will help reduce inventories, purchase orders and logistical difficulties.
At the same time, in accounts where Oil-Dri provides private label products,
its branded products are represented, on average, three times more often,
increasing the profitability and value for Oil-Dri from these partnerships.
The acquisition is also benefiting our agricultural, industrial and
automotive product groups. The new Mounds, Illinois plant is Oil-Dri's
northernmost facility for these products. It has added capacity and provided
more flexibility in both manufacturing and shipping options for our customers.
The cost of the acquisition was less than a dollar for a dollar of sales.
Financing was done with a long-term, fixed-rate private debt placement at 6.55%
over a fifteen-year life.
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[ILLUSTRATION]
13
Branching Out
Diversification and continued innovation in our pet product line was marked this
year by two exciting developments. First, Oil-Dri's research and development
team, in conjunction with a major paper manufacturer, created two new cat
litters made from recycled paper. DustStopperTM and Scoop'N FlushTM cat litters
perform as well as, or better than, clay cat litters while offering consumer
benefits clay products can't. They're like "toilet paper for your cat."
Consumers demand absorbency and odor control from their cat litters.
DustStopper granular cat litter performs these mandatory tasks, and because it
is made from recycled paper, it has none of the nuisance dust that consumers
associate with clay cat litters.
Scoop'N Flush scoopable litter offers the same odor control and absorptivity,
and it is completely safe to flush. This is particularly important because most
consumers keep their litter boxes in the bathroom and would prefer to flush the
litter. It's the more convenient scoopable cat litter.
In addition to product performance, consumers can feel good about the fact
that DustStopper and Scoop'N Flush are environmentally responsible and carry the
recommendation of the American Humane Association.
The second event related to branching out in the pet aisle was the
acquisition of a dog biscuit manufacturer. Phoebe Products Company, named,
appropriately enough, after a labrador retriever, will produce a line of
high-quality dog biscuits that address specific pet issues. Special, 100%
American-made rawhides and healthy jerky treats, which will be outsourced, will
round out the dog treat line.
During the past year, consumer research and product testing were completed.
The dog treats will be launched into test markets around mid-year of fiscal
1999.
Oil-Dri continues to deliver innovation to the pet aisle and expand its
product offerings for retailers and consumers. In a time of vendor
rationalization, Oil-Dri is establishing itself, not just as a leading
manufacturer of cat litters, but as a leading supplier of pet products -
delivering clay cat litters, new paper cat litters, and soon, a full line of dog
treats.
[PHOTO OF PET PRODUCTS]
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TEN YEAR SUMMARY OF FINANCIAL DATA
GROSS PROFIT CAPITAL EXPENDITURES
millions of dollars millions of dollars
1989 25.0 million 1989 9.0 million
1990 30.0 million 1990 7.0 million
1991 31.0 million 1991 10.5 million
1992 40.0 million 1992 8.5 million
1993 45.0 million 1993 9.0 million
1994 47.5 million 1994 13.5 million
1995 47.5 million 1995 10.5 million
1996 47.5 million 1996 10.5 million
1997 48.0 million 1997 5.0 million
1998 50.0 million 1998 7.0 million
(in thousands except for per share amounts)
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1998 1997 1996 1995
--------------------------------------------
SUMMARY OF OPERATIONS
NET SALES ........................................ $160,252 $156,616 $153,787 $152,899
COST OF SALES .................................... 110,096 108,687 107,730 108,268
GROSS PROFIT ..................................... 50,156 47,929 46,057 44,631
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ..... 38,598 37,260 39,153 31,921
SPECIAL CHARGES .................................. 3,129 -- 921 --
--------------------------------------------
INCOME FROM OPERATIONS ........................... 8,429 10,669 5,983 12,710
--------------------------------------------
OTHER INCOME (EXPENSE)
Interest Income ............................... 491 637 587 448
Interest Expense .............................. (2,049) (1,775) (1,917) (1,921)
Foreign Exchange (Losses) Gains ............... (146) -- (7) (5)
Other, Net .................................... (119) (17) 137 (84)
Total Other Expense, Net ................... (1,823) (1,155) (1,200) (1,562)
--------------------------------------------
INCOME BEFORE INCOME TAXES ....................... 6,606 9,514 4,783 11,148
INCOME TAXES ..................................... 1,883 2,721 1,409 3,145
--------------------------------------------
NET INCOME ....................................... $ 4,723 $ 6,793 $ 3,374 $ 8,003
======== ======== ======== ========
AVERAGE SHARES OUTSTANDING ....................... 6,165 6,599 6,807 6,936
NET INCOME PER SHARE ............................. $ 0.77 $ 1.03 $ 0.50 $ 1.15
IMPORTANT HIGHLIGHTS
Total Assets .................................. $134,215 $114,558 $117,693 $116,988
Long-Term Debt ................................ $ 39,976 $ 17,052 $ 18,978 $ 20,422
Working Capital ............................... $ 36,283 $ 31,165 $ 30,399 $ 33,074
Working Capital Ratio ........................ 3.1 3.0 2.7 3.1
Dividends Declared ............................ $ 1,808 $ 1,936 $ 2,022 $ 2,047
Capital Expenditures .......................... $ 6,496 $ 5,395 $ 7,184 $ 7,032
Depreciation and Amortization ................. $ 7,832 $ 7,587 $ 7,926 $ 7,808
Operating Cash Flows, less Capital Expenditures $ 2,331 $ 8,349 $ 6,869 $ 5,285
Long-Term Debt to Total Capital ............... 35.8% 18.1% 19.7% 20.7%
Net Income as a Percent of Net Sales .......... 3.0% 4.3% 2.2% 5.2%
Return on Average Stockholder's Equity ........ 6.3% 8.8% 4.3% 10.6%
Gross Profit as a Percent of Net Sales ........ 31.3% 30.6% 29.9% 29.2%
Operating Expenses as a Percent of Net Sales .. 26.0% 23.8% 26.1% 20.9%
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ASSETS SHAREHOLDERS' EQUITY
millions of dollars millions of dollars
1989 70 million 1989 44 million
1990 78 million 1990 50 million
1991 90 million 1991 55 million
1992 92 million 1992 60 million
1993 103 million 1993 65 million
1994 112 million 1994 72 million
1995 120 million 1995 78 million
1996 122 million 1996 76 million
1997 112 million 1997 76 million
1998 140 million 1998 70 million
YEAR ENDED JULY 31
- --------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
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$ 147,147 $ 140,866 $ 124,585 $ 106,054 $ 97,677 $ 85,652
102,457 97,396 85,116 74,370 68,110 61,508
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44,690 43,470 39,469 31,684 29,567 24,144
30,394 29,553 28,967 21,778 20,016 16,252
-- -- -- -- -- --
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14,296 13,917 10,502 9,906 9,551 7,892
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441 452 515 602 633 567
(1,752) (1,729) (1,884) (1,363) (1,156) (979)
3 (88) 63 (23) 37 11
171 (298) 15 50 73 (9)
- --------------------------------------------------------------------------------
(1,137) (1,663) (1,291) (734) (413) (410)
- --------------------------------------------------------------------------------
13,159 12,254 9,211 9,172 9,138 7,482
3,307 2,834 2,110 2,092 2,351 1,935
- --------------------------------------------------------------------------------
$ 9,852 $ 9,420 $ 7,101 $ 7,080 $ 6,787 $ 5,547
========= ========= ========= ========= ========= =========
7,011 7,031 7,026 7,055 7,042 7,003
$ 1.41 $ 1.34 $ 1.01 $ 1.00 $ 0.96 $ 0.79
$ 112,267 $ 102,117 $ 95,018 $ 89,394 $ 76,779 $ 67,193
$ 21,521 $ 17,766 $ 18,831 $ 20,176 $ 11,893 $ 11,820
$ 29,337 $ 26,043 $ 24,359 $ 24,763 $ 16,149 $ 15,170
3.0 2.7 2.8 3.4 2.3 2.7
$ 1,807 $ 1,679 $ 1,548 $ 1,422 $ 1,149 $ 959
$ 13,559 $ 9,158 $ 8,040 $ 10,416 $ 6,403 $ 8,936
$ 6,798 $ 5,835 $ 5,407 $ 4,831 $ 4,466 $ 3,990
$ (3,734) $ 5,080 $ 645 $ (1,310) $ 4,410 $ (1,976)
22.8% 21.1% 24.0% 26.6% 19.2% 21.4%
6.7% 6.7% 5.7% 6.7% 6.9% 6.5%
14.1% 14.9% 12.3% 13.4% 14.5% 13.5%
30.4% 30.9% 31.7% 29.9% 30.3% 28.2%
20.7% 21.0% 23.3% 20.5% 20.5% 19.0%
13
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated net sales for the year ended July 31, 1998, were $160,252,000, an
increase of 2.3% over net sales of $156,616,000 in fiscal 1997. Excluding
transportation sales, which were $2,372,000 in fiscal 1998 and $7,705,000 in
fiscal 1997, sales increased 6.0% over 1997. Net income for fiscal 1998 was
$4,723,000 or $0.77 per share, a decrease of 30.5% from $6,793,000 or $1.03 per
share earned in fiscal 1997. This decrease was primarily due to a special
charge recorded in the second quarter of fiscal 1998. The special charge, which
primarily covered the costs of exiting the transportation business as well as
writing off certain non-performing assets, reduced pre-tax income by
$3,129,000, net income by $2,237,000 and earnings per share by $0.36 for the
year ended July 31, 1998. Excluding the special charge, earnings per share were
$1.13, an increase of 9.7% over the prior year.
Net sales of pet products increased $4,851,000 or 5.1% over prior year amounts,
even though such sales to Sam's Club, which decided to discontinue carrying the
Company's cat litter product, were down approximately $2,300,000 from the prior
year. The growth resulted primarily from increased sales of branded and private
label products in both the grocery and mass merchandiser markets. Additionally,
sales of private label products increased as a result of the April 20, 1998
acquisition of Oil-Dri, Mounds Production Company. Net sales of fluids
purification products increased $2,016,000 or 12.9% from fiscal 1997, due to
increased demand for these products in the United Kingdom. Agricultural product
sales increased $1,113,000 or 6.0% compared to fiscal 1997, due to increased
demand in the industry for agricultural carriers. Net sales of industrial and
environmental sorbents increased $1,027,000 or 5.3% from prior year levels.
Consolidated gross profit as a percentage of net sales for fiscal 1998
increased to 31.3% from 30.6% in fiscal 1997. Changes in sales mix, a
companywide effort to reduce costs and exiting the transportation business
contributed to this increase.
Operating expenses as a percentage of net sales increased to 26.0% for fiscal
1998 from 23.8% in fiscal 1997. This increase is primarily due to a pre-tax
special charge of $3,129,000 recorded in the second quarter of fiscal 1998.
Interest expense increased $274,000 while interest income decreased $146,000.
The higher interest expense is primarily due to the fixed-rate financing
secured during the third quarter which was used to fund the purchase of
Oil-Dri, Mounds Production Company.
The Company's effective tax rate decreased to 28.5% of pre-tax income in fiscal
1998 from 28.6% in fiscal 1997.
Total assets of the Company increased $19,657,000 or 17.2% during the year
ended July 31, 1998. Current assets increased $6,699,000 or 14.3% from fiscal
1997 year-end balances primarily due to higher inventory and accounts
receivable levels. Property, plant and equipment, net of accumulated
depreciation, increased $7,004,000 or 12.5% during the year, primarily due to
the acquisition of Oil-Dri, Mounds Production Company, partially offset by
depreciation
14
17
expense exceeding capital expenditures. Investments in property, plant and
equipment included expenditures for increased productivity. Other assets
increased $5,954,000 due to intangibles resulting from the acquisition.
Total liabilities increased $25,179,000 or 67.6% during the year due primarily
to an increase in long-term debt partially used to acquire Oil-Dri, Mounds
Production Company. Current liabilities increased $1,581,000 or 10.0% from July
31, 1997 balances, due to an increase in freight payable related to exiting the
transportation business, partially offset by a decrease in accrued trade
promotions and advertising.
EXPECTATIONS
The Company anticipates net sales for fiscal 1999 will be higher than the net
sales in fiscal 1998. Sales of branded cat box absorbents are expected to
increase moderately as existing products and new product introductions gain
incremental distribution. Sales of private label cat box absorbents,
agricultural carriers, and industrial sorbents in fiscal 1999 will be at higher
levels than 1998 due to incremental sales resulting from the April 20, 1998
acquisition of Oil-Dri, Mounds Production Company. However, sales growth of cat
box absorbents is subject to continuing competition for shelf space in the
grocery, mass merchandiser and club markets. Sales of the Company's fluids
purification products are also expected to increase moderately in fiscal 1999.
The foregoing statements under this heading are "forward-looking statements"
within the meaning of that term in the Securities Exchange Act of 1934, as
amended. Actual results may be lower than those reflected in these
forward-looking statements, due primarily to continued vigorous competition in
the grocery, mass merchandiser and club markets, the level of success of new
products, integration of recent acquisitions, and the cost of product
introductions and promotions in the consumer market. These forward-looking
statements also involve the risk of changes in market conditions in the overall
economy and, for the agricultural and fluids purification markets, in planting
activity, crop quality, and overall agricultural demand, including export
demand and foreign exchange rate fluctuations. Other factors affecting these
forward-looking statements may be detailed from time to time in reports filed
with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
The current ratio increased to 3.1 at July 31, 1998 from 3.0 at July 31, 1997.
Working capital increased $5,118,000 during fiscal 1998 to $36,283,000. Cash
provided by operations continues to be the Company's primary source of funds to
finance ordinary investing and financing activities. During the year, the
balances of cash, cash equivalents and investment securities decreased
$958,000. Cash on hand at the beginning of the year of $9,997,000, cash
provided by operating activities of $6,511,000 and $25,000,000 of fixed-rate
financing secured during the third quarter was used for the purchase of
Oil-Dri, Mounds Production Company ($14,657,000), the purchase of the Company's
15
18
Common Stock ($8,238,000), capital expenditures ($6,496,000), principal
payments on long-term debt ($1,937,000) and dividend payments ($1,839,000).
Total cash and investment balances held by the Company's foreign subsidiaries
at July 31, 1998 and July 31, 1997 were $3,350,000 and $2,803,000,
respectively.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Consolidated net sales for the year ended July 31, 1997, were $156,616,000, an
increase of 1.8% over net sales of $153,787,000 in fiscal 1996. Net income for
fiscal 1997 was $6,793,000 or $1.03 per share, an increase of 101.3% from
$3,374,000 or $0.50 per share earned in fiscal 1996.
Net sales of pet products increased $4,384,000 or 4.8% over prior year amounts,
even though such sales to Sam's Club were down approximately $4,100,000 from
the prior year. The growth resulted from increased sales of branded and private
label products in both the grocery and mass merchandiser markets. Net sales of
fluids purification products increased $2,115,000 or 15.6% from fiscal 1996,
due to increased demand for Pure-Flo(R) Supreme products. Agricultural product
sales decreased $1,270,000 or 6.4% compared to fiscal 1996, primarily due to
reduced demand in the industry for agricultural carriers. Net sales of
industrial and environmental sorbents decreased $665,000 or 3.3% from prior
year levels. The decrease was due to an internal focus on profitability versus
sales growth as well as open positions in the sales force responsible for these
products during the first quarter. Net sales of transportation services
decreased $1,976,000 or 20.4% from fiscal 1996 due to lower backhaul revenue
resulting from a reduction in the Company's fleet.
Consolidated gross profit as a percentage of net sales for fiscal 1997
increased to 30.6% from 29.9% in fiscal 1996. Changes in sales mix and a
companywide effort to reduce costs contributed to this increase.
Operating expenses as a percentage of net sales decreased to 23.8% for fiscal
1997 from 26.1% in fiscal 1996. This decrease is primarily attributable to
lower advertising and promotion costs for the consumer products introduced last
year and a pre-tax special charge in the second quarter of fiscal 1996 of
$921,000, reflecting settlement costs and legal fees related to patent
litigation.
Interest expense decreased $142,000 while interest income increased $50,000.
The lower interest expense is primarily due to reduced notes payable balances.
The Company's effective tax rate decreased to 28.6% of pre-tax income in fiscal
1997 from 29.5% in fiscal 1996 due to higher domestic income subject to
depletion allowances.
Total assets of the Company decreased $3,135,000 or 2.7% during the year ended
July 31, 1997. Current assets decreased $1,300,000 or 2.7% from fiscal 1996
year-end balances primarily due to lower inventory levels. Property, plant and
equipment, net of accumulated depreciation, decreased
16
19
$2,331,000 during the year due to depreciation expense exceeding capital
expenditures. Investments in property, plant and equipment included
expenditures for increased productivity and pollution control equipment.
Additionally, the Company leased substantial acreage in Nevada containing a
mineral reserve for potential development in the future.
Total liabilities decreased $3,235,000 or 8.0% during the year due primarily to
the repayment of long-term debt and a reduction in accounts payable. Current
liabilities decreased $2,067,000 or 11.6% from July 31, 1996 balances, due to a
reduction in accounts payable, income taxes payable, and accrued trade
promotions and advertising, partially offset by an increase in accrued
salaries, wages, and commissions.
FOREIGN OPERATIONS
Net sales by the Company's foreign subsidiaries during fiscal 1998 were
$13,987,000 or 8.7% of total Company sales. This represents an increase of
$1,987,000 from fiscal 1997, in which foreign subsidiary sales were $12,000,000
or 7.7% of total Company sales. The increase is due to higher demand for fluids
purification products in the United Kingdom, partially offset by substantially
lower demand for fluids purification products in Malaysia. Net income of the
foreign subsidiaries for fiscal 1998 was $650,000 compared with $570,000 in
fiscal 1997. Identifiable assets of the Company's foreign subsidiaries as of
July 31, 1998 were $11,760,000, an increase of $1,894,000 from $9,866,000 as of
July 31, 1997. The increase is primarily due to higher inventories and cash and
cash equivalents.
Net sales by the Company's foreign subsidiaries during fiscal 1997 were
$12,000,000 or 7.7% of total Company sales. This represents an increase of
$113,000 from fiscal 1996, in which foreign subsidiary sales were $11,887,000
or 7.7% of total Company sales. Net income of the foreign subsidiaries for
fiscal 1997 was $570,000 compared with $554,000 in fiscal 1996. Identifiable
assets of the Company's foreign subsidiaries as of July 31, 1997 were
$9,866,000, an increase of $830,000 from $9,036,000 as of July 31, 1996. The
increase is primarily due to higher current assets.
YEAR 2000
The Year 2000 (Y2K) issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond 1999, which could cause a system
failure or application errors, leading to disruptions in operations. The
Company has completed an internal review of all systems to determine major
areas of exposure to Y2K issues, and most of these issues have been resolved.
In addition, third parties with whom there are systems interaction are being
surveyed to assess Y2K compliance, or if contingency plans will become
necessary. The cost of Y2K issue resolution will not have a material adverse
impact on the Company's financial statements, and it is anticipated that the
Company's computer systems will be Y2K-compliant by July 31, 1999.
17
20
Consolidated Balance Sheets
JULY 31
-----------------------
1998 1997
-----------------------
ASSETS (in thousands)
CURRENT ASSETS
Cash and cash equivalents.................................................................. $ 9,410 $ 9,997
Investment securities...................................................................... 1,173 1,544
Accounts receivable, less allowance of $351 in 1998 and $261 in 1997....................... 24,210 20,080
Inventories............................................................................... 13,258 10,604
Prepaid expenses........................................................................... 5,558 4,685
-----------------------
Total Current Assets................................................................... 53,609 46,910
-----------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Buildings and leasehold improvements....................................................... 20,132 16,963
Machinery and equipment.................................................................... 87,070 81,666
Office furniture and equipment............................................................. 8,999 8,742
Vehicles................................................................................... 90 95
-----------------------
............................................................................................ 116,291 107,466
Less accumulated depreciation and amortization............................................. (63,493) (58,737)
-----------------------
............................................................................................ 52,798 48,729
Construction in progress.................................................................... 3,390 840
Land....................................................................................... 6,697 6,312
-----------------------
Total Property, Plant and Equipment, Net............................................... 62,885 55,881
-----------------------
OTHER ASSETS
Goodwill and intangibles, net of accumulated amortization of $1,469 in 1998
and $1,337 in 1997......................................................................... 8,963 4,041
Deferred income taxes...................................................................... 3,697 2,446
Other...................................................................................... 5,061 5,280
-----------------------
Total Other Assets..................................................................... 17,721 11,767
-----------------------
Total Assets............................................................................... $134,215 $114,558
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
18
21
JULY 31
-------------------
1998 1997
-------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands)
CURRENT LIABILITIES
Current maturities of notes payable................ $ 2,084 $ 1,946
Accounts payable................................... 4,416 4,050
Dividends payable.................................. 444 475
Accrued expenses
Salaries, wages and commissions................... 3,120 3,177
Trade promotions and advertising.................. 1,900 2,902
Freight........................................... 1,747 554
Other............................................. 3,615 2,641
-------------------
Total Current Liabilities...................... 17,326 15,745
-------------------
NONCURRENT LIABILITIES
Notes payable...................................... 39,976 17,052
Deferred compensation.............................. 3,174 2,750
Other.............................................. 1,931 1,681
-------------------
Total Noncurrent Liabilities................... 45,081 21,483
-------------------
Total Liabilities.............................. 62,407 37,228
-------------------
STOCKHOLDERS' EQUITY
Common and Class B Stock........................... 724 724
Paid-in capital in excess of par value............. 7,702 7,686
Restricted unearned stock compensation............. (51) (18)
Retained earnings.................................. 85,158 82,243
Cumulative translation adjustments................. (1,151) (907)
-------------------
92,382 89,728
Less treasury stock, at cost....................... (20,574) (12,398)
-------------------
Total Stockholders' Equity..................... 71,808 77,330
-------------------
Total Liabilities and Stockholders' Equity......... $134,215 $114,558
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
19
22
Consolidated Statements of Income
YEAR ENDED JULY 31
----------------------------
(in thousands except for per share amounts) 1998 1997 1996
----------------------------
Net Sales..................................... $160,252 $156,616 $153,787
Cost of Sales................................. 110,096 108,687 107,730
----------------------------
Gross Profit.................................. 50,156 47,929 46,057
Selling, General and Administrative Expenses.. 38,598 37,260 39,153
Special Charges............................... 3,129 -- 921
----------------------------
Income from Operations........................ 8,429 10,669 5,983
----------------------------
Other Income (Expense)
Interest income.............................. 491 637 587
Interest expense............................. (2,049) (1,775) (1,917)
Foreign exchange losses...................... (146) -- (7)
Other, net................................... (119) (17) 137
----------------------------
Total Other Expense, Net................... (1,823) (1,155) (1,200)
----------------------------
Income before Income Taxes.................... 6,606 9,514 4,783
Income Taxes.................................. 1,883 2,721 1,409
----------------------------
Net Income.................................... $4,723 $6,793 $3,374
======== ====== ======
Average Shares Outstanding.................... 6,165 6,599 6,807
======== ====== ======
Net Income Per Share.......................... $ 0.77 $ 1.03 $ 0.50
======== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
20
23
Consolidated Statements of Stockholders' Equity
Stock
-------------------------- Paid-In Restricted
Shares Capital In Unearned
----------------- Excess of Stock Retained
(in thousands) Common Class B Amount Par Value Compensation Earnings
- -----------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1995.................. 5,119 2,114 $724 $7,657 $ -- $ 76,034
Net income............................. -- -- -- -- -- 3,374
Dividends declared..................... -- -- -- -- -- (2,022)
Conversion of Class B Stock to
Common Stock......................... 72 (72) -- -- -- --
Issuance of stock under 1995
Long Term Incentive Plan............. 2 -- -- 27 (27) --
Amortization of Restricted unearned
common stock compensation............ -- -- -- -- 3 --
-----------------------------------------------------------------
BALANCE, JULY 31, 1996.................. 5,193 2,042 724 7,684 (24) 77,386
Net income............................. -- -- -- -- -- 6,793
Dividends declared..................... -- -- -- -- -- ( 1,936)
Conversion of Class B Stock to
Common Stock......................... 74 (74) -- -- -- --
Issuance of stock under 1995
Long Term Incentive Plan............. -- -- -- 2 (18) --
Amortization of Restricted unearned
common stock compensation............ -- -- -- -- 14 --
-----------------------------------------------------------------
BALANCE, JULY 31, 1997.................. 5,267 1,968 724 7,686 (18) 82,243
Net income............................. -- -- -- -- -- 4,723
Dividends declared..................... -- -- -- -- -- ( 1,808)
Conversion of Class B Stock to
Common Stock......................... 189 ( 189) -- -- -- --
Issuance of stock under 1995
Long Term Incentive Plan............. -- -- -- 16 (77) --
Amortization of Restricted unearned
common stock compensation............ -- -- -- -- 44 --
-----------------------------------------------------------------
BALANCE, JULY 31, 1998.................. 5,456 1,779 $724 $7,702 $ (51) $ 85,158
The accompanying notes are an integral part of the consolidated financial
statements.
21
24
Consolidated Statements of Cash Flows
YEAR ENDED JULY 31
--------------------------
(in thousands) 1998 1997 1996
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................. $4,723 $6,793 $3,374
--------------------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 7,832 7,587 7,926
Non-cash special charge............................................................... 1,689 -- --
Deferred income taxes................................................................. (1,251) (181) (1,791)
Provision for bad debts............................................................... 2 125 202
(Increase) decrease in
Accounts receivable................................................................. (4,282) 235 692
Inventories......................................................................... (2,381) 1,133 (838)
Prepaid expenses and taxes.......................................................... (873) (383) 1,191
Other assets........................................................................ (637) (537) (830)
Increase (decrease) in
Accounts payable.................................................................... 366 (1,289) 636
Income taxes payable................................................................ -- (691) 457
Accrued expenses.................................................................... 649 (361) 333
Deferred compensation............................................................... 424 497 475
Other............................................................................... 250 261 642
--------------------------
Total Adjustments.................................................................. 1,788 6,396 9,095
--------------------------
Net Cash Provided by Operating Activities.......................................... 6,511 13,189 12,469
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................................. (6,496) (5,395) (7,184)
Proceeds from sale of property, plant and equipment................................... 78 555 923
Purchases of investment securities.................................................... (1,173) (350) (167)
Dispositions of investment securities................................................. 1,544 400 906
Proceeds from sale of investments..................................................... 709 -- --
Purchase of Oil-Dri, Mounds Production Company assets................................. (14,657) -- --
Other................................................................................. 32 (141) (267)
--------------------------
Net Cash Used in Investing Activities.............................................. (19,963) (4,931) (5,789)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt.................................................. (1,937) (1,628) (1,145)
Proceeds from issuance of long-term debt.............................................. 25,000 21 230
Dividends paid........................................................................ (1,839) (1,961) (2,015)
Purchase of treasury stock............................................................ (8,238) (4,883) (2,434)
Other................................................................................. (121) 76 (32)
--------------------------
Net Cash Provided by (Used in) Financing Activities................................ 12,865 (8,375) (5,396)
--------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................... (587) (117) 1,284
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........................................... 9,997 10,114 8,830
--------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR................................................. $9,410 $9,997 $10,114
====== ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
22
25
Notes to Consolidated Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Oil-Dri
Corporation of America and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated from the
consolidated financial statements.
No provision has been made for possible income taxes which may be paid on the
distribution of approximately $10,251,000 and $9,870,000 as of July 31, 1998
and 1997, respectively, of retained earnings of foreign subsidiaries, as
substantially all such amounts are intended to be indefinitely invested in
these subsidiaries or no additional income taxes would be incurred when such
earnings are distributed. It is not practicable to determine the amount of
income taxes or withholding taxes that would be payable upon the remittance of
assets that represent those earnings.
MANAGEMENT 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 as of 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.
REVENUE RECOGNITION
Revenues from sales of products are recognized upon shipment.
INCOME TAXES
Deferred income taxes reflect the impact of temporary differences between the
assets and liabilities recognized for financial reporting purposes and amounts
recognized for tax purposes.
INTEREST RATE DERIVATIVE INSTRUMENTS
An interest rate swap agreement is utilized in the management of interest rate
exposure. Interest differentials on the swap contract (Note 5) are recorded as
interest expense in the contract period incurred. The Company recognized
additional interest expense of $57,000, $60,100 and $58,100 in fiscal years
1998, 1997 and 1996, respectively, as a result of this contract.
RECLASSIFICATION
Certain items in prior year financial statements have been reclassified to
conform to the presentation used in fiscal 1998.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries, where the local currency is the
functional currency, are translated at the exchange rates in effect at period
end. Income statement items are translated at the average exchange rate on a
monthly basis. Resulting translation adjustments are recorded as a separate
component of stockholders' equity.
Changes in the cumulative translation adjustments account for the years ended
July 31 are as follows: (in thousands)
- ------------------------------------------------------------------------------
---------------------------
1998 1997 1996
---------------------------
Balance, at beginning of year.............................. $ (907) $(1,018) $ (988)
---------------------------
Translation adjustments resulting from exchange
rate changes and intercompany transactions................ (244) 111 (30)
---------------------------
Balance, at end of year.................................... $(1,151) $ (907) $(1,018)
======= ======= =======
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with maturities of three months
or less when purchased.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
The composition of inventories as of July 31 is as follows: (in thousands)
- -------------------------------------------------------------------------------------------
------------------
1998 1997
------------------
Finished goods........................................................ $ 7,935 $ 6,684
Packaging............................................................. 4,220 3,168
Other................................................................. 1,103 752
----------------
$13,258 $10,604
======= =======
- --------------------------------------------------------------------------------
23
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash investments and accounts receivable.
The Company places its cash investments in government backed instruments, both
foreign and domestic, and with other quality institutions. Concentrations of
credit risk with respect to accounts receivable are subject to the financial
condition of certain major customers, principally the customer referred to in
Note 4. The Company generally does not require collateral to secure customer
receivables.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment expenditures are primarily depreciated using the
straight-line method over their estimated useful lives as follows:
Years
-----
Buildings and leasehold improvements.............................. 5-30
Machinery and equipment........................................... 3-15
Office furniture and equipment.................................... 2-10
Vehicles.......................................................... 2- 8
RESEARCH AND DEVELOPMENT
Research and development COSTS OF $2,376,000 IN 1998, $2,049,000 IN 1997 AND
$2,026,000 IN 1996 WERE CHARGED TO EXPENSE AS INCURRED.
INTANGIBLES AND GOODWILL
Intangibles and goodwill are amortized on a straight-line basis over periods
ranging from 15 to 40 years. The Company periodically reviews goodwill and
other intangibles to assess recoverability from projected undiscounted cash
flows of the related operating entities.
ADVERTISING COSTS
The Company defers recognition of advertising production costs until the first
time the advertising takes place; other advertising costs are expensed as
incurred. Advertising expenses were $4,352,000, $3,650,000 and $6,295,000 for
the years ended July 31, 1998, 1997 and 1996, respectively. Prepaid advertising
production costs at July 31, 1998, 1997 and 1996 were not material.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Non-derivative financial instruments included in the consolidated balance
sheets are cash and cash equivalents, investment securities and notes payable.
These instruments, except for notes payable, were carried at amounts
approximating fair value as of July 31, 1998. The fair value of notes payable
was estimated based on future cash flows discounted at current interest rates
available to the Company for debt with similar maturities and characteristics.
The fair value of notes payable as of July 31, 1998 and 1997 was less than its
carrying value by approximately $125,000 and $720,000, respectively.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" during the second quarter of 1998. This standard
prescribes the methods of calculating basic and diluted earnings per share and
requires dual presentation of these amounts on the face of the income
statement. As the calculation of basic and diluted earnings per share resulted
in the same amount, only one earnings per share amount has been reported for
all years presented.
NEW ACCOUNTING STANDARDS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" were
issued. SFAS No. 130 establishes standards for the reporting of comprehensive
income and its components in a financial statement presentation. SFAS No. 130
separates comprehensive income into net income and other comprehensive income,
but does not change the measurement and presentation of net income. Other
comprehensive income includes certain changes in the equity of the Company
which are currently recognized and presented separately in the Consolidated
Statements of Stockholders' Equity, such as the change in the Cumulative
Translation Adjustment account. SFAS No. 130 is effective for the Company
beginning in fiscal 1999.
SFAS No. 131 establishes new standards for the way companies report information
about operating segments and requires that those enterprises report selected
information about operating segments in the financial reports issued to
shareholders. SFAS No. 131 is effective for the Company beginning in fiscal
1999.
- ------------------------------------------------------------------------------
24
27
NOTE 2 -- SPECIAL CHARGE
The Company recorded a pre-tax special charge of $3,129,000 during the second
quarter. At July 31, 1998, $358,000 of the charge remained in current
liabilities. A summary of the special charge and other expense is presented
below: (in thousands)
Transportation business exit costs................................ $1,508
Writeoff of other nonperforming assets............................ 932
Other exit costs.................................................. 689
------
$3,129
======
The transportation business exit costs consisted primarily of trailer
rehabilitation, employee severance, and professional fees. None of these items
were individually significant.
The Company recorded a pre-tax special charge of $921,000 during the second
quarter of fiscal 1996, reflecting settlement costs and legal fees related to
patent litigation.
- ------------------------------------------------------------------------------
NOTE 3 -- ACQUISITION
On April 20, 1998, the Company completed the purchase of the Fuller's Earth
absorbent business of American Colloid Co., a wholly owned subsidiary of Amcol
International, for $14,657,000 including transaction expenses. The purchase
includes a production plant and mineral reserves in Mounds, Illinois (Oil-Dri,
Mounds Production Company), and mineral reserves located in Paris, Tennessee,
and Silver Springs, Nevada. The business has annual sales approximating
$15,000,000. The Company financed the acquisition through a fixed-rate private
debt placement. The acquisition was accounted for as a purchase, with the
excess purchase price over fair market value of the underlying assets allocated
to intangibles, including supply contracts and non-compete covenants. These
intangibles are being amortized over 15 years.
- ------------------------------------------------------------------------------
NOTE 4 -- BUSINESS AND GEOGRAPHIC REGION
INFORMATION
Nature of Business
The Company is a leader in developing, manufacturing and marketing sorbent
products for consumer, industrial, environmental, agricultural and fluids
purification markets, and operates within a single segment. The Company has
operations in the United States, Canada and the United Kingdom and exports
goods worldwide.
The Company had net sales in excess of 10% of total net sales to one
unaffiliated customer in 1998, 1997 and 1996. Accounts receivable related to
this major customer amounted to $6,220,000, $4,736,000 and $4,905,000 as of
July 31, 1998, 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
25
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 -- BUSINESS AND GEOGRAPHIC REGION INFORMATION (Continued)
The sales to this customer for the years ended July 31 were as follows: (in
thousands)
- ------------------------------------------------------------------------------
-------------------------
1998 1997 1996
-------------------------
Amount......................................... $36,125 $37,219 $39,916
Percent of net sales........................... 23% 24% 26%
The following is a summary of financial information by geographic region for
the years ended July 31 : (in thousands)
- ------------------------------------------------------------------------------
------------------------------
1998 1997 1996
------------------------------
Sales to unaffiliated customers:
Domestic...................................... $146,265 $144,616 $141,900
Foreign....................................... $ 13,987 $ 12,000 $ 11,887
Sales or transfers between geographic areas:
Domestic...................................... $ 9,200 $ 5,611 $ 5,039
Income before income taxes:
Domestic...................................... $ 5,750 $ 8,637 $ 3,920
Foreign....................................... $ 856 $ 877 $ 863
Net Income:
Domestic...................................... $ 4,073 $ 6,223 $ 2,820
Foreign....................................... $ 650 $ 570 $ 554
Identifiable assets:
Domestic...................................... $122,455 $104,692 $108,657
Foreign....................................... $ 11,760 $ 9,866 $ 9,036
- ------------------------------------------------------------------------------
26
29
NOTE 5 -- NOTES PAYABLE
The composition of notes payable at July 31 is as follows: (in thousands)
- -----------------------------------------------------------------------------------------------------------
--------------------
1998 1997
--------------------
Town of Blue Mountain, Mississippi
Principal payable on October 1, 2008. Interest payable monthly at a variable
interest rate set weekly based on market conditions for similar instruments.
The average rate was 3.91% in fiscal 1998 and fiscal 1997. Payment of these
bonds by the Company is guaranteed by a letter of credit issued by Harris
Trust and Savings Bank. In May 1991, the Company entered into a seven-year
interest rate swap contract. Under this agreement, which expired on August 1,
1998, the Company receives a floating interest rate based on LIBOR and pays
interest at a fixed rate of 6.53%......................................... $ 2,500 $ 2,500
Teachers Insurance and Annuity Association of America
Payable in annual principal installments on November 15; $1,200,000 in fiscal
2000; $1,100,000 in fiscal 2001; and $1,000,000 in fiscal 2002. Interest is
payable semiannually at an annual rate of 9.38%........................... 3,300 5,100
Teachers Insurance and Annuity Association of America
Payable in annual principal installments on August 15; $500,000 in fiscal
2002; $1,000,000 in fiscal 2003; $2,500,000 in fiscal 2004; and $2,500,000 in
fiscal 2005. Interest is payable semiannually at an annual
rate of 7.17%............................................................. 6,500 6,500
Harris Trust and Savings Bank
Payable in annual principal installments on June 20; $1,950,000 in fiscal
1999; $900,000 in fiscal 2000; $650,000 in fiscal 2001 and 2002; and $350,000
in fiscal 2003. Interest is payable quarterly at an annual
rate of 7.78%............................................................. 4,500 4,500
Teachers Insurance and Annuity Association of America and Connecticut General
Life Insurance Company
Payable in annual principal installments on April 15; $1,500,000 in fiscal
2003, 2004 and 2005; $3,000,000 in fiscal 2006; $4,000,000 in fiscal 2007 and
2008; $1,500,000 in fiscal 2009; $3,000,000 in fiscal 2010; $2,000,000 in
fiscal 2011 and $1,500,000 in fiscal 2012 and 2013. Interest is payable
semiannually at an annual rate of 6.55%................................... 25,000 --
Other........................................................................ 260 398
-----------------
42,060 18,998
Less current maturities of notes payable (2,084) (1,946)
-----------------
$39,976 $17,052
======= =======
- --------------------------------------------------------------------------------
27
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -- NOTES PAYABLE (Continued)
The Company has a Credit Agreement with Harris Trust and Savings Bank which
provides for a $5,000,000 committed unsecured revolving line of credit which
expires on August 1, 1999, at certain short-term rates. Additionally, in April
1998, the Company increased its uncommitted unsecured line of credit agreement
with Harris Trust and Savings Bank to $20,000,000. There were no outstanding
borrowings against these lines at July 31, 1998 and 1997.
In April 1998, the Company completed a private debt placement
of $25,000,000 at 6.55% with Teachers Insurance and Annuity Association of
America ($14,000,000) and Connecticut General Life Insurance Company
($11,000,000). The proceeds of this fixed-rate note were used to fund the
purchase of the Company's production facility in Mounds, Illinois, to repay
draws against the Company's line of credit and for general working capital
purposes.
The agreements with the Town of Blue Mountain, Mississippi, Teachers Insurance
and Annuity Association of America, Harris Trust and Savings Bank and
Connecticut General Life Insurance Company impose working capital requirements,
dividend and financing limitations, minimum tangible net worth requirements and
other restrictions. The Company's credit agreement with Harris Trust and Savings
Bank indirectly restricts dividends by requiring the Company to maintain
tangible net worth, as defined, in the amount of $50,000,000 plus 25% of
cumulative annual earnings from July 31, 1994.
In prior years, The Town of Blue Mountain, Mississippi issued long-term bonds to
finance the purchase of substantially all of the assets of certain plant
expansion projects, and leased the projects to the Company and various of its
subsidiaries (with the Company and various of its wholly owned subsidiaries as
guarantors) at rentals sufficient to pay the debt service on the bonds.
The following is a schedule by year of future maturities of notes payable at
July 31, 1998: (in thousands)
- --------------------------------------------------------------------------------
2000 ............................................................... $ 2,226
2001 ............................................................... 1,750
2002 ............................................................... 2,150
2003 ............................................................... 2,850
Later years ........................................................ 31,000
-------
$39,976
NOTE 6 -- INCOME TAXES
The provision for income tax expense for the years ended July 31 consists of the
following: (in thousands)
- --------------------------------------------------------------------------------
--------------------------------------
1998 1997 1996
--------------------------------------
Current
Federal ............................ $ 2,159 $ 1,988 $ 2,020
Foreign ............................ 194 308 332
State .............................. 781 606 848
--------------------------------------
3,134 2,902 3,200
--------------------------------------
Deferred
Federal ............................ (436) 35 (799)
Operating loss carryforward ........ (611) (154) (644)
Foreign ............................ 25 12 (23)
State .............................. (229) (74) (325)
--------------------------------------
(1,251) (181) (1,791)
--------------------------------------
Total Income Tax Provision ............ $ 1,883 $ 2,721 $ 1,409
======= ======= =======
- --------------------------------------------------------------------------------
28
31
NOTE 6 -- INCOME TAXES (Continued)
Principal reasons for variations between the statutory federal rate and the
effective rates for the years ended July 31 were as follows:
- --------------------------------------------------------------------------------
-----------------------------------
1998 1997 1996
-----------------------------------
U.S. federal statutory income tax rate ....................... 34.0% 34.0% 34.0%
Depletion deductions allowed for mining ...................... (15.1) (10.8) (23.4)
State income taxes, net of federal tax benefit ............... 2.2 4.1 7.4
Valuation allowance without income tax benefit ............... 10.4 1.6 12.0
Difference in effective tax rate of foreign subsidiaries ..... (1.1) (0.1) (0.1)
Other ........................................................ (1.9) (0.2) (0.4)
-----------------------------------
28.5% 28.6% 29.5%
========= ====== ========
- --------------------------------------------------------------------------------
The consolidated balance sheets as of July 31 included the following tax
effects of cumulative temporary differences: (in thousands)
1998 1997
-------------------------------------------------------------------
Assets Liabilities Assets Liabilities
-------------------------------------------------------------------
Depreciation ................................... $ -- $ 1,455 $ -- $ 1,667
Deferred Compensation .......................... 1,232 -- 1,031 --
Postretirement Benefits ........................ 614 -- 474 --
Trade Promotions and Advertising ............... 39 -- 117 --
Other Assets ................................... 583 -- -- --
Accrued Expenses ............................... 523 -- 464 --
Tax Credits .................................... 936 -- 922 --
Operating Loss Carryforward .................... 2,133 -- 1,528 --
Other .......................................... -- 260 307 --
-------------------------------------------------------------------
6,060 1,715 4,843 1,667
Valuation Allowance ............................ (648) -- (730) --
-------------------------------------------------------------------
Total Deferred Taxes ........................... $ 5,412 $ 1,715 $ 4,113 $ 1,667
======= ======= ======= =======
The valuation allowance represents operating loss carryforwards not anticipated
to be utilized. As of July 31, 1998, for federal income tax purposes there were
regular tax operating loss carryforwards of approximately $5,494,000, which
begin to expire in the year 2011. A valuation allowance has been established for
$648,000 of the deferred tax benefit related to those loss carryforwards for
which it is considered more likely than not the benefit will not be realized.
Tax credits of approximately $936,000 primarily consisting of foreign tax
credits expiring in 2001 and later are also being carried forward.
- --------------------------------------------------------------------------------
29
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- DEFERRED COMPENSATION
In December 1995, the Company adopted the Oil-Dri Corporation of America
Deferred Compensation Plan. Deferrals are no longer being made under the
original plan, The Oil-Dri Corporation of America Key Employee and Directors
Deferred Compensation Plan. The new plan permits Directors and certain
management employees to defer portions of their compensation and earn interest
on the deferred amounts. The compensation, which has been deferred since the
inception of the original plan, has been accrued as well as interest thereon.
The Company has purchased life insurance contracts on some participants to
partially fund the original plan. The new plan is unfunded.
NOTE 8 -- STOCKHOLDERS' EQUITY
The authorized capital stock of the Company at July 31, 1998 and 1997 consisted
of 15,000,000 shares of Common Stock, 7,000,000 shares of Class B Stock and
30,000,000 shares of Class A Common Stock, each with a par value of $.10 per
share. There are no Class A shares currently outstanding.
The Common Stock and Class B Stock are equal, on a per share basis, in all
respects except as to voting rights, conversion rights, cash dividends and stock
splits or stock dividends. The Class A Common Stock is equal, on a per share
basis, in all respects, to the Common Stock except as to voting rights and stock
splits or stock dividends. In the case of voting rights, Common Stock is
entitled to one vote per share and Class B Stock is entitled to ten votes per
share, while Class A Common Stock generally has no voting rights. Common Stock
and Class A Common Stock have no conversion rights. Class B Stock is convertible
on a share-for-share basis into Common Stock at any time and is subject to
mandatory conversion under certain circumstances.
Common Stock is entitled to cash dividends, as and when declared or paid, equal
to 133 1/3% on a per share basis of the cash dividend paid on Class B Stock.
Class A Common Stock is entitled to cash dividends on a per share basis equal to
the cash dividend on Common Stock. Additionally, while shares of Common Stock,
Class A Common Stock and Class B Stock are outstanding, the sum of the per share
cash dividend paid on shares of Common Stock and Class A Common Stock, must be
equal to at least 133 1/3% of the sum of the per share cash dividend paid on
Class B Stock and Class A Common Stock. See Note 5 regarding dividend
restrictions.
Shares of Common Stock, Class A Common Stock and Class B Stock are equal in
respect of all rights to dividends (other than cash) and distributions in the
form of stock or other property (including stock dividends and split-ups) in
each case in the same ratio except in the case of a Special Stock Dividend. The
Special Stock Dividend, which can be issued only once, is either a dividend of
one share of Class A Common Stock for each share of Common Stock and Class B
Stock outstanding or a recapitalization, in which half of each outstanding share
of Common Stock and Class B Stock would be converted into a half share of Class
A Common Stock.
All per share amounts included in the financial statements and notes reflect
adoption of SFAS No. 128. See Note 9 for information regarding common share
equivalents.
In July 1998, the Board of Directors of the Company authorized the repurchase,
from time to time, of up to 200,000 shares of the Company's stock. This
authorization, in addition to previous authorizations, totals 1,366,771 shares.
As of July 31, 1998, 1,166,771 shares have been repurchased under these
authorizations.
The number of holders of record of Common Stock and Class B stock on July 31,
1998 was 1,196 and 28, respectively. The Company's Common Stock is traded on the
New York Stock Exchange. There is no established trading market for the Class B
Stock.
- --------------------------------------------------------------------------------
30
33
NOTE 8 -- STOCKHOLDERS' EQUITY (Continued)
The following reflects the changes in treasury stock over the last three years:
(in thousands)
- --------------------------------------------------------------------------------
Common Stock Class B Stock Total
---------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------
Balance July 31, 1995. .................... 332 $ 5,088 -- $ -- 332 $ 5,088
Purchased during Fiscal 1996 ........... 167 2,434 -- -- 167 2,434
---------------------------------------------------------------------------------
Balance July 31, 1996 ..................... 499 7,522 -- -- 499 7,522
Reissued during Fiscal 1997 ............ ( 1) ( 7) -- -- ( 1) ( 7)
Purchased during Fiscal 1997 ........... 307 4,883 -- -- 307 4,883
---------------------------------------------------------------------------------
Balance July 31, 1997 ..................... 805 12,398 -- -- 805 12,398
REISSUED DURING FISCAL 1998 ............ ( 4) ( 62) -- -- ( 4) ( 62)
PURCHASED DURING FISCAL 1998 ........... 180 3,104 342 5,134 522 8,238
---------------------------------------------------------------------------------
BALANCE JULY 31, 1998 ..................... 981 $ 15,440 342 $5,134 1,323 $ 20,574
=== ======== === ====== ===== =========
- --------------------------------------------------------------------------------
NOTE 9 -- STOCK OPTION PLANS
The Company instituted the Oil-Dri Corporation of America 1995 Long Term
Incentive Plan during the fiscal year ended July 31, 1996. On December 9, 1997,
the stockholders voted to increase the number of shares available for grant
under the 1995 Plan from 500,000 to 1,000,000 and further authorized the grant
of Class B Shares under the Plan to certain members of the Richard Jaffee
family. Generally, other than grants to Richard Jaffee family members, shares of
stock awarded under the 1995 Plan will be Class A Common Stock, except that, if
there is no Class A Common Stock issued and publicly traded on a securities
exchange when such awards are exercised, the shares awarded would be Common
Stock. The Plan provides for various other types of awards. Awards of restricted
stock in the amount of 4,500, 500 and 2,000 shares were made during the fiscal
years ended July 31, 1998, 1997 and 1996 respectively. On June 24, 1998, 442,500
options originally issued on various days during April 1998 at an average
exercise price of $15.94 were cancelled and reissued at an exercise price of
$14.06. The terms of the reissued options are identical to the original options,
except that the period required before vesting of the option was lengthened.
The Oil-Dri Corporation of America 1988 Stock Option Plan terminated on December
12, 1995, for purposes of future grants. The outstanding options under this plan
will remain outstanding and exercisable in accordance with their respective
terms.
The Company instituted the Oil-Dri Corporation of America Outside Director's
Stock Plan on June 9, 1998. All shares of stock issued under this plan will be
shares of Common Stock issued from Treasury Stock. The Plan provides for stock
options grants and various other types of awards.
- --------------------------------------------------------------------------------
31
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- STOCK OPTION PLANS (Continued)
A summary of option transactions under the plans is as follows: (in thousands except for per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
1988 OPTION PLAN 1995 OPTION PLAN
----------------------------------------------------------------------------------
NUMBER OF SHARES NUMBER OF SHARES
(WEIGHTED AVERAGE OPTION PRICE) (WEIGHTED AVERAGE OPTION PRICE)
----------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------------------------------------------------------
Outstanding, Beginning of Year................. 199 251 267 324 195 --
$(18.49) $(18.63) $(18.66) $(14.88) $(14.92) --
Granted........................................ -- -- -- 1,036 145 199
-- -- -- $(15.33) $(14.82) $(14.93)
Exercised -- -- -- -- -- --
-- -- -- -- -- --
Canceled/Terminated............................ 13 52 16 37 16 4
$(18.59) $(19.14) $(19.13) $(15.62) $(14.96) $(15.13)
Canceled/Reissued.............................. -- -- -- 442 -- --
-- -- -- $(15.94) -- --
Outstanding, End of Year....................... 186 199 251 881 324 195
$(18.49) $(18.49) $(18.63) $(14.84) $(14.88) $(14.92)
OUTSIDE DIRECTOR'S PLAN COMBINED PLANS
---------------------------------------------------------------------------------
NUMBER OF SHARES NUMBER OF SHARES
(WEIGHTED AVERAGE OPTION PRICE) (WEIGHTED AVERAGE OPTION PRICE)
---------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
---------------------------------------------------------------------------------
Outstanding, Beginning of Year................. -- -- -- 523 446 267
-- -- -- $(16.25) $(17.00) $(18.66)
Granted........................................ 70 -- -- 1,106 145 199
$(14.63) -- -- $(15.28) $(14.82) $(14.93)
Exercised -- -- -- -- -- --
-- -- -- -- -- --
Canceled/Terminated............................ -- -- -- 50 68 20
-- -- -- $(16.36) $(18.16) $(18.34)
Canceled/Reissued.............................. -- -- -- 442 -- --
-- -- -- $(15.94) -- --
Outstanding, End of Year....................... 70 -- -- 1,137 523 446
$(14.63) -- -- $(15.42) $(16.25) $(17.00)
- --------------------------------------------------------------------------------
32
35
NOTE 9 -- STOCK OPTION PLANS (Continued)
The Company has reserved 112,375 and 130,000 shares of Common Stock for future
grants and issuances under the Oil-Dri Corporation of America 1995 Long Term
Incentive Plan and the Oil-Dri Corporation of America Outside Director's Stock
Plan, respectively.
Exercise prices of the options outstanding under the 1988 Option Plan range
between $15.60 and $20.00 per share with a weighted average price of $18.49 per
share and a weighted remaining average contractual life at July 31, 1998 of 4.19
years. As of July 31, 1998, 149,066 options were exercisable.
The exercise price of options outstanding under the Outside Director's Stock
Plan is $14.63 with a contractual life of 9.9 years. None of these options are
exercisable at July 31, 1998.
Exercise prices of the options outstanding under the 1995 Long Term Incentive
Plan range between $13.63 and $17.63 per share with a weighted average exercise
price of $14.84 per share and a weighted remaining average contractual life of
9.03 years at July 31, 1998. 43,750 of these options are exercisable as of July
31, 1998. See Note 15 regarding the cancellation and reissuance of these
options.
The Company has elected to continue to account for stock-based compensation
using the intrinsic value method under APB Opinion No. 25. Consequently, no
compensation expense has been recognized for stock options. If compensation
expense for the Company's stock options issued in the fiscal years ended July
31, 1998 and 1997 had been determined based on the fair value method of
accounting, as defined in SFAS No. 123, the Company's net income and net income
per share would have been reduced to the pro forma amounts indicated below:
(in thousands except for per share amounts)
- -----------------------------------------------------------------------------
---------------------------------
1998 1997 1996
---------------------------------
Net income as reported .................... $4,723 $6,793 $3,374
pro forma .............................. $4,430 $6,651 $3,311
Net income per share as reported .......... $ .77 $ 1.03 $ .50
pro forma .............................. $ .72 $ 1.01 $ .49
The fair value of issued stock options is estimated on the grant date using the
Black-Scholes Option Pricing Method with the following assumptions for the
fiscal years ended July 31, 1998, 1997 and 1996, respectively: Dividend yields
of 2.1%, 2.1% and 2.2%; volatility of 25.6%, 25.7% and 26.0%; risk-free interest
rates of 5.7%, 6.0% and 6.2%; and an expected life of 5 years for all three
years. The weighted average fair value of the options granted was $4.55, $4.22
and $4.28 for the fiscal years ended July 31, 1998, 1997 and 1996, respectively.
The fair value method of accounting has not been applied for options granted
prior to August 1, 1995.
- --------------------------------------------------------------------------------
33
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 -- EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have defined benefit pension plans for eligible
salaried and hourly employees. Benefits are based on a formula of years of
credited service and levels of compensation or stated amounts for each year of
credited service. The assets of these plans are invested in various high-quality
marketable securities.
The net periodic pension cost for the years ended July 31 consists of the
following: (in thousands)
- --------------------------------------------------------------------------------
---------------------------------------
1998 1997 1996
---------------------------------------
Service cost....................................... $ 438 $ 348 $ 349
Interest cost on projected benefit obligations..... 538 441 427
Earnings on plan assets............................ (1,060) (1,892) (561)
Net amortization and deferral...................... 422 1,427 154
---------------------------------------
Net pension cost................................... $ 338 $ 324 $ 369
======= ======= =========
- --------------------------------------------------------------------------------
The funded status of the plans at July 31 is as follows: (in thousands)
- --------------------------------------------------------------------------------
--------------------------
1998 1997
--------------------------
Actuarial Present Value of Benefit Obligations
Accumulated Benefit Obligations
Vested................................................................................. $ 6,320 $ 4,711
Nonvested.............................................................................. 374 446
-----------------------
Total Accumulated Benefit Obligations................................................ $ 6,694 $ 5,157
======== =========
Projected Benefit Obligations.......................................................... $ 8,943 $ 6,565
Plan Assets at Fair Value................................................................. 8,524 7,546
-----------------------
(Deficiency) Excess of Plan Assets (Under) Over Projected Benefit Obligations.......... ( 419) 981
Unrecognized Net Gain..................................................................... (1,267) ( 2,361)
Unrecognized Prior Service Cost........................................................... 626 535
Unrecognized Net Excess Plan Assets as of August 1, 1987 Being
Recognized Principally Over 21 Years................................................... ( 264) ( 291)
Adjustment Required to Recognize Minimum Liability........................................ ( 247) --
-----------------------
Accrued Pension Included in Noncurrent Liabilities - Other................................ $ (1,571) $(1,136)
======== =======
- --------------------------------------------------------------------------------
34
37
NOTE 10 -- EMPLOYEE BENEFIT PLANS (Continued)
Assumptions used in the previous calculations are as follows:
------------------
1998 1997
------------------
Discount rate .................................. 7.0% 7.5%
Rate of increase in compensation levels ........ 5.0% 5.0%
Long-term expected rate of return
on assets ...................................... 8.0% 8.0%
The Company has funded the plans based upon actuarially determined contributions
that take into account the amount deductible for income tax purposes and the
minimum contribution required under the Employee Retirement Income Security Act
of 1974 (ERISA), as amended.
For the years ended July 31, 1998, 1997 and 1996, the Company maintained a
profit sharing/401(k) savings plan under which the Company matches a portion of
employee contributions. The plan is available to essentially all domestic
employees. The Company's contributions to this plan, and to similar plans
maintained by the Company's foreign subsidiaries, were approximately $226,000,
$175,000 and $141,000 for fiscal years 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
NOTE 11 -- CONTINGENT LIABILITIES
The Company is involved in various litigation of a nature that is normal to its
business. While it is impossible at this time to determine with certainty the
ultimate outcome of these or other lawsuits, each lawsuit is either covered by
insurance or adequate provisions have been made for probable losses with respect
thereto as best can be determined at this time. Management therefore believes
that none of the pending litigation will have a material adverse effect on the
financial condition of the Company or on results of operations.
- --------------------------------------------------------------------------------
NOTE 12 -- LEASES
The Company's mining operations are conducted on leased or owned property. These
leases generally provide the Company with the right to mine as long as the
Company continues to pay a minimum monthly rental, which is applied against the
per ton royalty when the property is mined. During fiscal 1998, the Company
leased 5,907 acres in Nevada for potential future development of a mineral
reserve base.
The Company leases its corporate offices in Chicago, Illinois (20,000 square
feet), office and warehouse space in Alpharetta, Georgia (26,000 square feet),
office and production facilities in Kiel, Wisconsin (16,000 square feet) and
office facilities in Europe. The office space in Chicago is subject to a lease
expiring in 2008. The Alpharetta, Georgia lease expires in 2000, and the Kiel,
Wisconsin lease expires in 2003. The facilities in Europe are leased on a
year-to-year basis.
In addition, the Company leases railcars, data processing equipment, and office
equipment. In most cases, the Company expects that, in the normal course of
business, leases will be renewed or replaced by other leases. Prior to exiting
the transportation business, the Company leased tractors and trailers.
The following is a schedule by year of future minimum rental requirements under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year as of July 31, 1998:
(in thousands)
1999 ........................................................... $ 2,826
2000 ........................................................... 2,148
2001 ........................................................... 1,718
2002 ........................................................... 1,170
2003 ........................................................... 1,067
Later years 4,952
-------
$13,881
=======
The following schedule shows the composition of total rental expense for all
operating leases, including those with terms of one month or less which were not
renewed as of the years ended July 31: (in thousands)
------------------------------
1998 1997 1996
------------------------------
Transportation equipment................... $2,347 $2,734 $3,770
Office facilities.......................... 441 382 377
Mining properties
Minimum................................. 202 177 168
Contingent.............................. 403 361 239
Other...................................... 488 654 688
------------------------------
$3,881 $4,308 $5,242
====== ====== =======
- --------------------------------------------------------------------------------
35
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 -- OTHER CASH FLOW INFORMATION
Cash payments for interest and income taxes for the years ended July 31 were as follows: (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------
1998 1997 1996
----------------------------------------------
Interest................................................................ $1,398 $1,557 $1,706
======== ======== ========
Income Taxes............................................................ $2,624 $3,997 $1,353
======== ======== ========
NOTE 14 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected information for 1998 and 1997 is as follows: (in thousands except per share amounts)
- ------------------------------------------------------------------------------------------------------------------
FISCAL 1998 QUARTER ENDED
---------------------------------------------------------------
OCT. 31 Jan. 31 April 30 July 31 Total
---------------------------------------------------------------
Net Sales.................................................. $ 39,749 $40,912 $ 38,334 $41,257 $160,252
Gross Profit............................................... $ 11,898 $13,296 $ 12,186 $12,776 $ 50,156
Net Income (Loss).......................................... $ 1,872 $ ( 97) $ 1,389 $ 1,559 $ 4,723
Net Income (Loss) Per Share................................ $ 0.30 $ (0.02) $ 0.23 $ 0.26 $ 0.77
Dividends Paid Per Common Share............................ $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.32
Dividends Paid Per Class B Share........................... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
Company Common Stock Price Range:
High.................................................... $ 18 1/8 $17 7/8 $ 17 $16
Low..................................................... $ 16 3/8 $14 1/8 $ 14 5/8 $13 5/8
FISCAL 1997 QUARTER ENDED
----------------------------------------------------------------
Oct. 31 Jan. 31 April 30 July 31 Total
----------------------------------------------------------------
Net Sales.................................................. $ 40,525 $42,792 $ 36,002 $37,297 $156,616
Gross Profit............................................... $ 12,292 $13,635 $ 10,064 $11,938 $ 47,929
Net Income................................................. $ 1,930 $ 2,264 $ 1,164 $ 1,435 $ 6,793
Net Income Per Share....................................... $ 0.29 $ 0.34 $ 0.18 $ 0.22 $ 1.03
Dividends Paid Per Common Share............................ $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.32
Dividends Paid Per Class B Share........................... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
Company Common Stock Price Range:
High.................................................... $ 15 1/4 $17 1/8 $ 17 3/4 $17 5/8
Low..................................................... $ 13 1/4 $12 3/4 $ 15 1/2 $15 3/8
NOTE 15 -- SUBSEQUENT EVENT
On September 18, 1998, the Company approved the cancellation and reissuance of
all the outstanding options granted under the Oil-Dri Corporation of America
1995 Long Term Incentive Plan. A total of 880,625 outstanding options under the
plan were repriced at the closing market price of $11.25 per share on September
18, 1998.
As discussed in Note 9, the Company has elected to continue to account for stock
based compensation under the intrinsic value method under APB Opinion No. 25 and
adopted the disclosure-only provisions of SFAS No. 123. Consequently, no
compensation expense will be recognized for stock options, since they were
granted at the market price. Under the Black-Scholes Option Pricing Method the
maximum additional fair value attached to the options due to the repricing is
approximately $702,000, net of tax benefit, and would be recognized over the new
five-year vesting period. The assumptions used in this valuation were similar to
the assumptions used in determining the fair value disclosures for the fiscal
year ended July 31, 1998. In addition, it was assumed that all participants
would elect to reprice their individual options outstanding.
- --------------------------------------------------------------------------------
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INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
Oil-Dri Corporation of America
We have audited the consolidated balance sheets of OIL-DRI CORPORATION OF
AMERICA AND SUBSIDIARIES as of July31, 1998 and 1997, and the related
consolidated statements of income, stockholders' 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OIL-DRI CORPORATION
OF AMERICA AND SUBSIDIARIES as of July 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended July 31, 1998 in conformity with generally accepted accounting principles.
BLACKMAN KALLICK BARTELSTEIN, LLP
Chicago, Illinois
September 18, 1998
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BOARD OF DIRECTORS o OFFICERS o SENIOR MANAGEMENT
BOARD OF DIRECTORS
Richard M. Jaffee, Chairman
Daniel S. Jaffee, President and Chief Executive Officer
Robert D. Jaffee, Retired Chairman of the Board, Amco Corporation
J. Steven Cole(1), President, Cole & Associates, Chairman, Sav-A-Life Systems,
Inc.
Arnold W. Donald, Senior Vice-President, Monsanto Company
Ronald B. Gordon, Chief Executive Officer, Beiersdorf North America, Inc.
Edgar D. Jannotta, Senior Director, William Blair & Company, LLC
Joseph C. Miller, Vice-Chairman
Paul J. Miller, Partner, Sonnenschein Nath & Rosenthal
Haydn H. Murray, Professor Emeritus of Geology, Indiana University, President,
H.H.Murray & Associates
Allan H. Selig(2), President and Chairman, Selig Executive Leasing, Inc.,
Commissioner of Baseball
OFFICERS
Richard M. Jaffee, Chairman
Daniel S. Jaffee, President and Chief Executive Officer
Joseph C. Miller, Vice-Chairman
Michael L. Goldberg, Executive Vice-President and Chief Financial Officer
Thomas F. Cofsky, Vice-President, Logistics, Quality & Service
Brian P. Curtis, General Counsel and Secretary
Norman B. Gershon, Vice-President, International Operations, Managing Director,
Oil-Dri S.A.
Richard V. Hardin, Group Vice-President, Technology
Daniel J. Jones, Vice-President, Oil-Dri, Canada
Steven M. Levy, Vice-President and General Manager, Consumer Products Group
Richard L. Pietrowski, Treasurer
William O. Thompson, Vice-President, Manufacturing
SENIOR MANAGEMENT
Wade R. Bradley, General Manager, Industrial & Environmental Products Group
Karen Jaffee Cofsky, Director, Human Resources
Sam J. Colello, Director, Information Systems
Fred G. Heivilin, Vice-President, Raw Materials Development
James F. Japczyk, Corporate Controller
Richard D. Johnsonbaugh, Eastern Regional Manager, Manufacturing
Eugene W. Kiesel, Vice-President and General Manager, Global Fluids
Purification Products Group
Michael A. Komenda, Vice-President, Human Resources
Jeffrey M. Libert, Vice-President, Corporate Development & Planning
Kelly A. McGrail, Director, Investor Relations & Corporate Communications
John D. McMaster, Western Regional Manager, Manufacturing
E. Thomas Rutherford, General Manager, Agricultural Products Group
(1) Audit Committee Chair, (2) Compensation Committee Chair
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INVESTOR INFORMATION
INVESTOR INQUIRIES
Securities analysts, portfolio managers and representatives of financial
institutions seeking information about the corporation should contact Kelly
McGrail, Director of Investor Relations, at Oil-Dri's corporate headquarters.
Stockholders with inquiries related to stockholder records, stock transfers,
change of ownership, change of address, or dividend payments should contact the
company's registrar and transfer agent:
Harris Trust and Savings Bank
Shareholder Services Department
311 W. Monroe, 11th Floor
Chicago, Illinois 60690-9502
(312) 461-3309
STOCK LISTING
Oil-Dri Corporation of America's Common Stock is listed under the ticker symbol
ODC on the New York Stock Exchange. The corporation's daily trading activity,
stock price and dividend information are in the financial sections of most major
newspapers. Stock prices are also available on the company's web site at
WWW.OILDRI.COM.
ANNUAL MEETING
Oil-Dri Corporation of America will hold its 1998 annual meeting of stockholders
on Tuesday, December 8, 1998 at 10:30 a.m. (Central Time) at the Standard Club,
320 South Plymouth Court, Chicago, Illinois.
INDEPENDENT PUBLIC ACCOUNTANTS
Blackman Kallick Bartelstein, LLP
LEGAL COUNSEL
Sonnenschein Nath & Rosenthal
Forward-Looking Statements: When used in this report, the words "expect",
"believe", "should", "would" and similar expressions which are not historical
are intended to identify forward-looking. These forward-looking statements are
subject to uncertainties, which include, without limitation, the integration of
acquisitions, the realization of cost savings, the degree of success of new
products, changes in market conditions and the overall economy, and other
factors detailed from time to time in the company's annual report and reports
filed with the Securities and Exchange Commission.
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Investor Information
CORPORATE HEADQUARTERS
Oil-Dri Corporation of America
410 North Michigan Avenue, Suite 400
Chicago, Illinois 60611-4211
(312) 321-1515
OIL-DRI SUBSIDIARIES
Oil-Dri Corporation of Georgia
Georgia, U.S.A.
Oil-Dri, Mounds Production Company, LLC
Illinois, U.S.A.
Oil-Dri Production Company
Mississippi and Oregon, U.S.A.
Oil-Dri S.A.
Coppet, Switzerland
Oil-Dri U.K. Limited
Wisbech, United Kingdom
Blue Mountain Production Company
Mississippi, U.S.A.
Oil-Dri, Canada
Quebec, Canada
Phoebe Products Company
Wisconsin, U.S.A.
CREDITS
ILLUSTRATIONS: Scott Roberts
PRODUCED BY: Kelly McGrail, Director, Investor Relations and Corporate
Communications
DESIGN: Lee Ann Jaffee Design Associates, Inc.
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