-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EtZy4sZDxJ71WvJiB5b+s51S/f8rWo2qo+zdAZrT8iKPgZPQ3zvIV3bHoyop7ItV CoI+TikeukNOp64omFRroQ== 0000893220-97-001735.txt : 19971030 0000893220-97-001735.hdr.sgml : 19971030 ACCESSION NUMBER: 0000893220-97-001735 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971029 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SL INDUSTRIES INC CENTRAL INDEX KEY: 0000089270 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 210682685 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04987 FILM NUMBER: 97702555 BUSINESS ADDRESS: STREET 1: 520 FELLOWSHIP ROAD STREET 2: STE 306C CITY: MT LAUREL STATE: NJ ZIP: 08054 BUSINESS PHONE: 6097271500 MAIL ADDRESS: STREET 1: 520 FELLOWSHIP ROAD STREET 2: STE 306C CITY: MT LAUREL STATE: NJ ZIP: 08054 FORMER COMPANY: FORMER CONFORMED NAME: SGL INDUSTRIES INC DATE OF NAME CHANGE: 19841008 FORMER COMPANY: FORMER CONFORMED NAME: GL INDUSTRIES INC DATE OF NAME CHANGE: 19710111 FORMER COMPANY: FORMER CONFORMED NAME: GL ELECTRONICS CO INC DATE OF NAME CHANGE: 19670928 10-K405 1 SL INDUSTRIES, INC. FORM 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period ______ to ______ Commission file number 1-4987 SL INDUSTRIES, INC. (Exact name of registrant as specified in its charter)
NEW JERSEY 21-0682685 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
520 FELLOWSHIP ROAD, SUITE A114, MT. LAUREL, NJ 08054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 609-727-1500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common stock, $.20 par value New York Stock Exchange Philadelphia Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.[X] On October 17, 1997, the aggregate market value of SL common stock was approximately $77,187,000. The number of shares of common stock outstanding as of October 17, 1997, was 5,513,333. DOCUMENTS INCORPORATED BY REFERENCE: Part I, II, IV - Annual Report to Shareholders for the fiscal year ended July 31, 1997 Part III - Proxy Statement dated October 10, 1997 2 PART I ITEM 1. DESCRIPTION OF BUSINESS (a) General Development of Business On March 29, 1956, the Registrant was incorporated as G-L Electronics Company in the state of New Jersey. Its name was changed to G-L Industries, Inc., in November 1963, SGL Industries, Inc., in November 1970 and then to the present name of SL Industries, Inc., in September 1984. The Registrant and its subsidiaries design and produce propriety advanced systems and equipment for the high-growth Power and Data Quality ("PDQ") industry. The products of the Registrant and its subsidiaries either become components of other industrial or consumer products or are sold through distribution for general retail or commercial use. For the most part, the Registrant and its subsidiaries concentrate on specialty markets believed to offer higher profit margins and greater potential for growth than industrial commodities. Sales between segments are not material. No single customer accounts for more than 10% of consolidated net sales nor are export sales material thereto. On May 1, 1997, the Registrant sold substantially all the assets, excluding real property, of its wholly-owned subsidiary, SL Auburn, Inc., for $12,216,000. For financial reporting purposes, the sale resulted in a pre-tax gain, net of severance, facility closing, legal and other costs of $5,888,000, increasing net income by $3,556,000, or $.59 per common share. (b) Financial Segment Information Financial information about the Registrant's business segments is incorporated herein by reference to Note 13 in the Annual Report to Shareholders for the fiscal year ended July 31, 1997. (c) Narrative Description of Business Power and Data Quality Segment: Products Power Supplies - The Registrant produces a wide range of standard and custom power supply products which convert AC or DC power to direct electrical current to be used in customers' products. Condor D.C. Power Supplies, Inc. ("Condor"), designs, manufactures and markets standard and custom AC-DC and DC-DC power supplies in both linear and switching configurations. These products range in power from 5 to 700 watts and are manufactured in either commercial or medical configurations. Condor's power supplies closely regulate and monitor power outputs, using patented filter and other technologies, resulting in little or no electrical interference. Condor's power supplies service the medical, industrial, telecommunications and instrumentation markets. SL Montevideo Technology, Inc. ("MTI") also incorporates power supplies into its drive systems for electric vehicles and other motion control systems. For the years ended July 31, 1997, 1996 and 1995, Condor's net sales, as a percentage of consolidated net sales, were 26%, 23% and 23%. 3 Power Distribution and Power Conditioning Units - The Registrant is the leader in the design and manufacture of customized power distribution and power conditioning units. Teal Electronics Corporation ("Teal") acquired in May 1995, develops and manufactures custom electrical subsystems for OEM's of semiconductor, medical imaging, graphics and telecommunication systems. Outsourcing the AC power system to Teal helps its customers reduce cost and time to market, while increasing system performance and customer satisfaction. Custom products are often called "Power Conditioning and Distribution Units," which provide voltage conversion and stabilization, system control, power distribution, and agency approvals for systems such as CT and MRI scanners, chip testers and cellular radio systems. Most of Teal's products are sold direct to its OEM customers who include them with their systems, which are sold to the end user. SL Waber, Inc. ("Waber") also designs and manufacturers Power Distribution Units that safely convert a high power input into user specified output ranges. For the years ended July 31, 1997 and 1996, Teal's net sales, as a percentage of consolidated net sales, were 13% and 12%. Uninterruptible Power Supplies and Battery Charging - Waber designs and manufactures uninterruptible power supplies that provide back-up power in the event of a power failure. These products are also used to recharge batteries and, in some applications, provide a direct power supply to connected equipment. Two of the products sold are "POWERHOUSE(R)" and "UPSTART(R)", which were introduced in 1996 as an under the monitor product that included software used to save and restore data, as well as typical UPS back up capability and surge protection. This concept was extended to network equipment in 1997 in the form of the "UPSTART Network(TM)" 350 and 550 products. Condor also designs and manufactures custom back-up power supplies for medical equipment and other critical industrial applications. MTI has introduced and developed battery chargers as part of its motion control systems for electric vehicle applications and is advancing its flywheel energy storage systems that provide uninterruptible power by storing electricity as kinetic energy which does not require batteries. Motion Control Systems - MTI is continuing its recent growth as a technological leader in the design and manufacture of intelligent, high power density, precision motors. MTI has been capitalizing on its new motor and (patented and patent pending) motor control technologies to win important programs in both traditional and new market areas. MTI's new motor and motion controls are used in numerous applications, including aerospace, medical and industrial products. Negotiations are continuing with customers on advanced designs for numerous programs including flywheel energy storage systems, high performance missile guidance motors, and medical/surgical drills and saws. For the years ended July 31, 1997, 1996 and 1995, MTI's net sales, as a percentage of consolidated net sales, were 10%, 8% and 9%. Surge Suppressors and Other - Surge suppressors are sold to protect computers, audiovisual and other electronic equipment from sudden surges in power. Waber is a leader in the design and manufacture of surge suppressors for the custom, OEM and retail marketplaces. These products include those sold under the trademarks of "POWERMASTER(R)" and "DATAGARD(R)". Waber also manufactures a multi-directional antenna designed for AM/FM radio and television. For the years ended July 31, 1997, 1996 and 1995, Waber's net sales, as a percentage of consolidated net sales, were 41%, 42% and 46%. 4 Raw Materials Raw materials are supplied by various domestic and international vendors and availability for materials is not foreseen to be a problem. Some raw materials are purchased direct whenever possible to avoid distributor mark-ups. Average lead times run from immediate availability to eight weeks. Seasonality Generally, seasonality is not a factor in this segment. Significant Customers No business has a customer which accounts for 10% or more of consolidated net sales. The loss of any one major customer should not have an adverse effect on the segment. Backlog Backlog at September 7, 1997, and September 8, 1996, was $30,713,000 and $22,709,000, respectively. The increase is primarily related to MTI entering the commercial product market and extended business with its existing customers, along with Waber increasing its marketing of custom products. Competitive Conditions The businesses in this segment are in active competition with domestic companies, some with national name recognition, offering similar products or services and with companies producing alternative products appropriate for the same uses. In addition, Waber and Condor have experienced significant off-shore competition, for certain products in certain markets. Currently, the businesses are sourcing many components and products outside of the United States. The decreasing military market has also created more competitive conditions in both the military and commercial markets. The businesses in this segment differentiate themselves from their competitor by concentrating on customized products based on customer needs. Methods of competition are primarily quality, service, innovation, delivery and price. Specialty Products Segment: Products Spark Plugs and Igniters - Prior to its disposition, on May 1, 1997, SL Auburn, Inc. ("Auburn"), produced aviation spark plugs and igniters, under "Spitfire(TM)" and "auburn(TM)" trademarks; and custom engineered industrial spark ignition plugs, under the "Auburn(TM)" and "Durafire(TM)" trademarks. These products convert or transfer electrical power in devices that include aircraft engines (turbine and piston), furnaces and ovens for industrial processes, motors and transformers for air conditioning, and liquid level sensors for boilers and chemical processing. Auburn's products also included several higher-temperature igniters for turbine engines and improved technology and certified leak-proof feed throughs which meet more stringent requirements for extreme temperatures, pressures and environmental mandates in air-conditioning markets. Auburn's customers were categorized as OEM, distributors, government and end users. Auburn's products were sold by company sales representatives, warehouse distributors and independent sales representatives throughout the world. For the years ended July 31, 1997, 1996 and 1995, net sales for Auburn, as a percentage of consolidated net sales, were 7%, 9% and 10%, respectively. 5 Industrial surface finishing - SL Surface Technologies, Inc. ("STI"), provides chromium electroplated, specialty engineered surfaces to the paper, plastics, steel, nuclear and construction industries. Examples include its specifically designed, wear resistant, NUchrome(TM) (introduced in FY 1995) coating for rolls used in the manufacture of corrugated paper board, controlled gloss surfaces for plastic laminate press plates and containment resistant barrier surfaces for vinyl flooring stencils. The company is a major supplier of these services in the Greater Philadelphia region, and has developed a presence in Western Europe. Sales are made by appropriate company technical personnel. Raw Materials Raw materials are supplied by various domestic vendors and availability is not foreseen to be a problem. In most cases, viable multiple sources are maintained for flexibility and competitive leverage. Seasonality Seasonality is not a factor in this segment. Significant Customers No business has a customer which accounts for 10% or more of consolidated net sales. STI has four customers which make up approximately seventy-five percent of its sales. Backlog Backlog at September 7, 1997, and September 8, 1996, was $122,000 and $3,927,000, respectively. The decrease is related to the disposition of Auburn. Competitive Conditions The businesses in this segment compete primarily with companies offering similar services or products. STI competes on technology, as well as service. Environmental The Registrant (together with the industries in which it operates or has operated) is subject to United States and Mexican environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, and the generation, handling, storage, transportation, treatment and disposal of waste materials. The Registrant and the industries are also subject to other federal, state and local environmental laws and regulations, including those that require the Registrant to remediate or mitigate the effects of the disposal or release of certain chemical substances at various sites, including some where it has ceased operations. It is impossible to predict precisely what effect these laws and regulations will have on the Registrant in the future. However, it is not expected that the Registrant will be affected differently from others in its industries. It is the Registrant's policy to comply with all environmental, health and safety regulations, as well as industry standards for maintenance. The Registrant's domestic competitors are subject to the same environmental, health and safety laws and regulations, and the Registrant believes that the compliance issues and potential expenditures of its operating subsidiaries are comparable to those 6 faced by their major domestic competitors. Environmental liabilities and related costs are believed to have been adequately provided for in the consolidated financial statements. Capital expenditures for these purposes for fiscal year 1997 were immaterial and are estimated to be immaterial for fiscal 1998. For additional information related to environmental issues, see Note 10 to the consolidated financial statements and "Management Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report to Shareholders for the fiscal year ended July 31, 1997, and is incorporated herein by reference. Employees As of September 7, 1997, the Registrant had approximately 1,700 employees. Of these employees, approximately 150 are subject to collective bargaining agreements. Additional Information For the purposes of providing additional information regarding the development of the Registrant's businesses in fiscal 1997, the "Power and Data Quality Operations" and "Management Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report to Shareholders for the fiscal year ended July 31, 1997, are incorporated by reference. 7 ITEM 2. PROPERTIES
Approx. Owned or Square Leased And Location General Character Footage Expiration Date -------- ----------------- ------- --------------- Montevideo, MN Manufacture of 26,200 Owned precision motors and 7,040 Leased motion control systems 12/31/98 Matamoros, Mexico Manufacture of 8,600 Leased precision motors 11/05/99 Nogales, Mexico Manufacture of power 65,000 Leased protection products 12/31/02 Nogales, AZ Distribution of power Leased protection products 43,500 10/31/00 11,700 N/A Mt. Laurel, NJ Corporate Office - 15,900 Leased power protection 11/30/99 products Oxnard, CA Manufacture and 36,000 Leased distribution of power 02/28/03 supply products Mexicali, Mexico Manufacture and Leased distribution of power 40,000 6/01/98 supply products 21,150 08/31/00 San Diego, CA Manufacture of AC 31,200 Leased power subsystems 03/22/00 Camden, NJ Industrial surface 15,800 Owned finishing Pennsauken, NJ Industrial surface 6,000 Owned finishing warehouse Mt. Laurel, NJ Corporate Office 4,200 Leased 11/30/99
All manufacturing facilities are adequate for current production requirements. The Registrant believes that its facilities are sufficient for future operations, maintained in good operating condition and adequately insured. Of the owned properties, none are subject to a major encumbrance material to the operations of the Registrant. 8 ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Registrant is subject to loss contingencies pursuant to federal, state and local governmental laws and regulations and is also party to certain legal actions, most frequently complaints by terminated employees. It is management's opinion that the impact of these legal actions will not have a material effect on the financial position or results of operations of the Registrant. There are no legal proceedings to which any Director or Officer of the Registrant, or any associate of any Director or Officer, is a party or has a material interest adverse to the Registrant's interest. There are no material proceedings with environmental issues, which involve penalties or sanctions. Additional information pertaining to legal proceedings is found in Note 10 to the consolidated financial statements, and in "Management Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report to Shareholders for the fiscal year ended July 31, 1997, and is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter ended July 31, 1997, there were no matters submitted to a vote of security holders, through a solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------ FISCAL 1997 FISCAL 1996 ------------------------------------------------ HIGH LOW HIGH LOW ------------------------------------------------ Stock Prices 1st Quarter................ 10 1/4 8 1/8 8 3/8 5 5/8 2nd Quarter................ 8 5/8 6 7/8 9 3/8 6 5/8 3rd Quarter................ 7 7/8 6 3/8 8 1/2 6 5/8 4th Quarter................ 11 7 3/8 11 3/8 7 7/8 Dividends Cash - November............ $.03 $.03 Cash - June................ $.04 $.03 ------------------------------------------------
As of September 12, 1997, there were approximately 1,700 registered shareholders. A semi-annual cash dividend of $.04 per share was declared on September 25, 1997, which is payable on November 25, 1997, to shareholders of record on November 3, 1997. 9 ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to the material captioned "Selected Financial Data" in the Annual Report to Shareholders for the fiscal year ended July 31, 1997. ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to the material captioned "Management Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report to Shareholders for the fiscal year ended July 31, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference to the consolidated financial statements and the notes thereto and the material captioned "Report of Independent Public Accountants" and "Selected Quarterly Financial Data(Unaudited)" in the Annual Report to Shareholders for the fiscal year ended July 31, 1997. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This item is not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item, except for the ages and positions held with the Registrant of the executive officers, is incorporated herein by reference to the material captioned "Election of Directors" on pages 4 through 5 of the proxy statement dated October 10, 1997. The ages of the executive officers are as follows: Owen Farren, age 46, James D. Klemashevich, age 41, and James E. Morris, age 60. The capacities in which each served are as follows: O. Farren, President and Chief Executive Officer since April 1991 and prior thereto Executive Vice President since 1990; J.D. Klemashevich, Vice President of Operational Development since April 1997, and J.E. Morris, Vice President and Corporate Controller since September 1991, Secretary and Treasurer since November 1995 and a financial executive since 1978. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the material captioned "The Board Of Directors" and "Executive Officer Compensation" on pages 6 through 10 of the proxy statement dated October 10, 1997. 10 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the material captioned "Security Ownership of Principal Shareholders and Management" on page 3 of the proxy statement dated October 10, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item, except for related transactions, is incorporated herein by reference to the material captioned "Executive Officer Compensation" on pages 7 through 8 of the proxy statement dated October 10, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following consolidated financial statements, related notes to consolidated financial statements and the report of independent public accountants appearing in the portions of the Registrant's Annual Report to Shareholders, filed as Exhibit 13, for the fiscal year ended July 31, 1997, are incorporated herein by reference: Consolidated Statements of Earnings - Years ended July 31, 1997, 1996 and 1995 Consolidated Balance Sheets - July 31, 1997 and 1996 Consolidated Statements of Shareholders' Equity - Years ended July 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended July 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Public Accountants (a) (2) Financial Statement Schedules The following financial statement schedules for the years 1997, 1996 and 1995 are submitted herewith: Report of Independent Public Accountants - Arthur Andersen LLP Schedule II - Valuation and Qualifying Accounts 11 All other schedules are omitted because (a) the required information is shown elsewhere in the Annual Report, or (b) they are inapplicable, or (c) they are not required. (a) (3) Exhibits The information called for by this section is listed in the Exhibit Index of this report. (b) Reports on Form 8-K On May 16, 1997, the Registrant filed a report dated May 1, 1997, on Form 8-K covering the sale of SL Auburn, Inc. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SL INDUSTRIES, INC. ----------------------- (Registrant) /s/ Owen Farren ----------------------- Owen Farren, President October 27, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. /s/ Owen Farren /s/ Edward A. Gaugler - ------------------------ ----------------------------------- Owen Farren Edward A. Gaugler President and Chief Director Executive Officer October 26, 1997 October 27, 1997 /s/ James E. Morris /s/ George R. Hornig - ------------------------ ----------------------------------- James E. Morris George R. Hornig Vice President, Director Corporate Controller, October 24, 1997 Treasurer and Secretary October 27, 1997 /s/ Salvatore J. Nuzzo /s/ Walter I. Rickard - ------------------------ ----------------------------------- Salvatore J. Nuzzo Walter I. Rickard Chairman of the Board Director October 25, 1997 October 27, 1997 /s/ Robert J. Sanator ----------------------------------- Robert J. Sanator Director October 25, 1997 13 [ARTHUR ANDERSEN LLP Letterhead] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To SL Industries, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in SL Industries, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated September 5, 1997. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index at Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Philadelphia,PA September 5, 1997 14 COMMISSION FILE NO. 1-4987 - -------------------------------------------------------------------------------- SL INDUSTRIES, INC. AND SUBSIDIARIES SUPPORTING SCHEDULES FOR ANNUAL REPORT (Form 10-K) TO SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 15 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995 (In Thousands)
- -------------------------------------------------------------------------------------------------------------------------- Additions ------------------------------------- Balance at Charged to Charged to Beginning of Costs and Other Balance at Description Period Expenses Accounts Deductions End of Period - -------------------------------------------------------------------------------------------------------------------------- YEAR 1997 Allowance for: doubtful accounts $428 $62 $35 $29 $496 ---- --- --- --- ---- customer credits $1,212 $2,157 $-- $2,075(b) $1,294 ------ ------ --- ------ ------ YEAR 1996 Allowance for: doubtful accounts $453 $151 $41 $217(a) $428 ---- ---- --- ---- ---- customer credits $1,367 $1,888 $-- $2,043(b) $1,212 ------ ------ --- ------ ------ YEAR 1995 Allowance for: doubtful accounts $256 $175 $63 $41(a) $453 ---- ---- --- --- ---- customer credits $528 $2,701 $-- $1,862(b) $1,367 ---- ------ --- ------ ------
- ---------------------- (a) Accounts receivable written off, net of recoveries. (b) Primarily for customer advertising programs. 16 INDEX TO EXHIBITS The exhibit number, description and sequential page number in the original copy of this document where exhibits can be found follows:
Exhibit # Description - --------- ----------- 3.1 Articles of Incorporation. Incorporated by reference to Exhibit 3-A to the Registrant's report on Form 10-K for the fiscal years ended July 31, 1985, July 31, 1986, July 31, 1987, and July 31, 1988. 3.2 By-Laws. Incorporated by reference to Exhibit 3 to the Registrant's report on Form 10-Q for the quarters ended October 31, 1994 and October 31, 1996. 10.1 Supplemental Compensation Agreement for the Benefit of Byrne Litschgi. Incorporated by reference to Exhibit 10.1 to the Registrants report on Form 8 dated November 9, 1990. 10.2 Chairman's Executive Severance Agreement. Incorporated by reference to Exhibit 10.2 to the Registrant's report on Form 8 dated November 9, 1990. 10.3 First Amendment to Chairman's Executive Severance Agreement and to Supplemental Compensation Agreement. Incorporated by reference to Exhibit 10.3.1 to the Registrant's report on Form 8 dated November 9, 1990. 10.4 Second Amendment to Chairman's Executive Severance Agreement and to Supplemental Compensation Agreement. Incorporated by reference to Exhibit 10.3.2 to the Registrant's report on Form 8 dated November 9, 1990. 10.5 Third Amendment to Chairman's Executive Severance Agreement and to Supplemental Compensation Agreement. Incorporated by reference to Exhibit 10.3.3 to the Registrant's report on Form 8 dated November 9, 1990. 10.6 Fourth Amendment to Chairman's Executive Severance Agreement and to Supplemental Compensation Agreement. Incorporated by reference to Exhibit 10.3.2 to the Registrant's report on Form 8 dated November 9, 1990. 10.7 Deferred Supplemental Compensation Agreement with Grant Heilman. Incorporated by reference to Exhibit 10.4.5 to the Registrant's report on Form 8 dated November 9, 1990. 10.8 Deferred Supplemental Compensation Agreement with William Hess. Incorporated by reference to Exhibit 10.4.6 to the Registrant's report on Form 8 dated November 9, 1990. 10.9 Supplemental Compensation Agreement for the Benefit of Donald J. Lloyd-Jones. Incorporated by reference to Exhibit 10.5.1 to the Registrant's report on Form 8 dated November 9, 1990. 10.10 Supplemental Compensation Agreement for the Benefit of Salvatore J. Nuzzo. Incorporated by reference to Exhibit 10.5.3 to the Registrant's report on Form 8 dated November 9, 1990. 10.11 Supplemental Compensation Agreement for the Benefit of Marlin Miller, Jr. Incorporated by reference to Exhibit 10.5.4 to the Registrant's report on Form 8 dated November 9, 1990.
17 10.12 Supplemental Compensation Agreement for the Benefit of Grant Heilman. Incorporated by reference to Exhibit 10.5.5 to the Registrant's report on Form 8 dated November 9, 1990. 10.13 Supplemental Compensation Agreement for the Benefit of William M. Hess. Incorporated by reference to Exhibit 10.5.6 to the Registrant's report on Form 8 dated November 9, 1990. 10.14 1988 Deferred Compensation Agreement with a Certain Officer. Incorporated by reference to Exhibit 10.6 to the Registrant's report on Form 8 dated November 9, 1990. 10.15 Death Benefit Arrangement with Certain Officers adopted by Board Resolution dated September 18, 1975. Incorporated by reference to Exhibit 10.7 to the Registrant's report on Form 8 dated November 9, 1990. 10.16 Non-Qualified Stock Option Agreement dated June 19, 1991. Incorporated by reference to Exhibit 10-A to the Registrant's report on Form 10-K for the fiscal year ended July 31, 1991. 10.17 Non-Qualified Stock Option Agreement dated September 25, 1991. Incorporated by reference to Exhibit 10-B to the Registrant's report on Form 10-K for the fiscal year ended July 31, 1991. 10.18 Severance Pay Agreement with Owen Farren. Incorporated by reference to Exhibit 10-C to the Registrant's report on Form 10-K for the fiscal year ended July 31, 1991. 10.19 Severance Pay Agreement with Ted D. Taubeneck. Incorporated by reference to Exhibit 10-D to the Registrant's report on Form 10-K for the fiscal year ended July 31, 1991. 10.20 Deferred Compensation Agreement with James E. Morris. Incorporated by reference to Exhibit 10-E to the Registrant's report on Form 10-K for the fiscal year ended July 31, 1991. 10.21 1991 Long Term Incentive Plan of SL Industries, Inc., as amended, is incorporated by reference to Appendix to the Registrant's Proxy Statement for its 1995 Annual Meeting held November 17, 1995, previously filed with the Securities and Exchange Commission. 10.22 SL Industries, Inc. Non-Employee Director Non-Qualified Stock Option Plan. Incorporated by reference to Exhibit 4.3 to Registration Statement No. 33-63681, filed October 25, 1995. 10.23 Capital Accumulation Plan. Incorporated by reference to the Registrant's report on Form 10K/A for the fiscal period ended July 31, 1994. 10.24 Amendment No. 1 to Non-Qualified Stock Option Agreement dated September 25, 1991, is incorporated herein by reference to Exhibit 4.5 to Registration Statement on Form S-8/A (No. 33-53274) filed with the Securities and Exchange Commission on June 18, 1996. 10.25 Non-Qualified Stock Option Agreement Incorporated by reference to Exhibit 4.3 to Registration Statement No. 33-65445, filed December 28, 1995. 10.26 Severance Pay Agreement with James D. Klemashevich (transmitted herewith). 11 Statement Re Computation of Per Share Earnings (transmitted herewith). 13 Portions of Annual Report to Shareholders for the fiscal year ended July
18 31, 1997 (transmitted herewith). 17 Letter Re Director Resignation. Incorporated by reference to the Registrant's report on Form 8-K filed on October 20, 1992. 22 Subsidiaries of the Registrant (transmitted herewith). 24 Consent of Independent Public Accountants - Arthur Andersen LLP (transmitted herewith). 27 Financial Data Schedule (Schedule is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of Form 10-K, or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934). 28 Annual Report on Form 11-K (to be filed by amendment).
EX-10.26 2 SEVERANCE PAY AGREEMENT WITH J. D. KLEMASHEVICH 1 EXHIBIT 10.26 AGREEMENT REGARDING SEVERANCE BENEFIT This AGREEMENT REGARDING SEVERANCE BENEFIT ("Agreement") is made as of the 28th day of April, 1997 by and between SL INDUSTRIES, INC., a New Jersey corporation, and JAMES D. KLEMASHEVICH ("Employee"). Background A. Employee has this date commenced employment with the Company as its Vice President - Operational Development. B. In connection with his employment with the Company, Employee, because of the at-will nature of his employment, has requested and the Company has agreed to provide the following severance benefit in the event of a termination by the Company without cause. NOW THEREFORE, for good and valuable consideration and intending to be legally bound hereby, the undersigned agree as follows: 1. The Company may terminate Employee's employment with the Company, without payment of severance benefits, upon the occurrence of any of the following: a. Any breach of any of the terms of this Agreement, if such breach has not been corrected within twenty (20) days following written notice from the Company; b. The repeated failure or neglect by Employee to perform his assigned duties and responsibilities; c. The commission by Employee of any act that tends to bring Employee, the Company or any of its affiliates into disrepute, or that results in or reasonably may result in any material harm to the business of the Company or any of its affiliates; d. The conviction of Employee of a felony; or e. Employee's death or disability. For purposes of this Agreement, the term "disability" shall mean the inability of Employee, due to a physical or mental condition, to perform the essential functions of his job with reasonable accommodation that does not impose an undue hardship on the Company. 2. The Company may also terminate Employee's employment with the Company for any other or no reason, in its sole discretion, upon written notice. 2 3. Upon any termination under paragraph 2, above, and subject to the terms and conditions of paragraph 4, below, the Company shall pay to Employee an amount equal to twelve (12) months' salary at the Employee's annual base salary in effect on the date of termination (the "Severance Benefit"). The Severance Benefit shall be paid to Employee at the same time and in the same manner as Employee's base salary was paid to Employee, immediately prior to termination, and shall be subject to deduction for any amounts that are required to be withheld or deducted according to applicable law. The Severance Benefit shall be the Company's sole obligation to Employee in the event of such a termination. 4. As consideration for the payment of the Severance Benefit, Employee shall provide to the Company a general release from all liability, in form and substance satisfactory to the Company in its reasonable discretion. 5. This Agreement: may not be modified or amended except by writing signed by both parties; shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns; sets forth the entire agreement and understanding of the parties hereto with respect to the specific subject matter hereof and supersedes any and all prior discussions, agreements or understandings, whether oral or written; may be executed in counterparts and delivered by facsimile transmission or comparable means; and shall be governed by and construed in accordance with the laws of the State of New Jersey without reference to any principles of conflicts of law. This Agreement is hereby executed and delivered by the undersigned as of the date and year first above written. SL INDUSTRIES, INC. By: /s/ Owen Farren /s/ James D. Klemashevich ----------------------------- ---------------------------------- Owen Farren, President and JAMES D. KLEMASHEVICH Chief Executive Officer 2 EX-11 3 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (In Thousands, Except Per Share Data)
Years Ended July 31, ---------------------------------- 1997 1996 1995 ---- ---- ---- NET INCOME PER COMMON SHARE - ---------------------------------------------------------------------- Net income............................................................ $7,815 $3,498 $3,677 ------ ------ ------ Weighted average number of common shares outstanding during the year........................................... 5,776 5,701 5,940 ----- ----- ----- Net income per common share........................................... $1.35 $.61 $.62 ----- ---- ---- PRIMARY - ---------------------------------------------------------------------- Net income............................................................ $7,815 $3,498 $3,677 ------ ------ ------ Weighted average number of common shares outstanding during the year........................................... 5,776 5,701 5,940 Add: shares of common stock equivalents............................... 231 249 102 ----- ----- ----- Weighted average number of shares used in calculation of primary net income per share........................... 6,007 5,950 6,042 ----- ----- ----- Primary net income per common share................................... $1.30 $.59 $.61 ----- ---- ---- FULLY DILUTED - ---------------------------------------------------------------------- Net income............................................................ $7,815 $3,498 $3,677 ------ ------ ------ Weighted average number of common shares outstanding as adjusted above......................................... 6,007 5,950 6,042 Add: incremental shares of common stock equivalents........................................................... 14 18 20 ----- ----- ----- Weighted average number of shares used in calculation of fully diluted net income per share.......................................... 6,021 5,968 6,062 ----- ----- ----- Fully diluted net income per common share............................. $1.30 $.59 $.61 ----- ---- ----
EX-13 4 PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 [SL INDUSTRIES LOGO] POWER & DATA QUALITY OPERATIONS [PHOTO] Today, SL Industries' energy and resources are dedicated to its mission of becoming a world-class producer of power and data quality supplies and products. In recognition of the Company's accomplishments, in November 1996, SL Industries was named Electronics Company of the Year by the New Jersey Technology Council. The technology developed by SL Industries spans a number of PDQ applications with excellent growth potential. In general, the Company's products have been developed to meet specific customer needs. However, by partnering with its customers, the Company is increasingly able to anticipate industry developments and challenges. SL Industries is now positioning its operations to leverage its well-established reputation for quality and innovation, in order to penetrate new markets in the PDQ industry. During the past year SL Industries has continued to develop its PDQ technology through its mass customization strategy of employing market-driven engineering teams as close to each customer as practicable. Some of the customers who rely on SL Industries to develop and build their PDQ products and solutions are listed on page 6. In fiscal 1997 SL Industries realized a number of important product developments. The following is a highlight of some of the Company's recent developments and achievements: POWER SUPPLIES SL Industries produces a wide range of standard and custom power supply products which convert AC or DC power to direct electrical current for use in our customers' products. CONDOR designs and manufactures linear and switching AC power supplies, primarily in the seven to 700 watt power range, for applications in medical, telecommunications and industrial products. Over the last year CONDOR significantly expanded its product capabilities and power ranges and also introduced several new power supplies that we believe are the highest power density units available in their class. In 1998 CONDOR will introduce its new Gold Series products for medical equipment as part of the Company's plans to further penetrate this market. In addition, SL-MONTEVIDEO TECHNOLOGY (SL-MTI) has applied this same technology to incorporate power supplies into its drive systems for electric vehicles and other motion control systems. SL Industries is exploring other industrial markets where its power supply technology can be applied to create value-added products. [PHOTO] Condor's power supply is being used in a portable patient monitoring unit. The power supply is used to drive all the electronics which monitor a patient's vital signs. This includes heart rate and blood pressure. The instrument can be used in any location and environment. 4 2 [SL INDUSTRIES LOGO] [PHOTO] POWER DISTRIBUTION AND POWER CONDITIONING UNITS SL Industries is a leader in the design and manufacture of customized power distribution and power conditioning units. These units can be used to filter out noise from power lines, as well as for voltage conversion and stabilization, system control and distribution of power. Power conditioning and distribution units (PCDUs) enhance the quality and reliability of equipment and systems by providing the power and distribution features required for dependable operation. For instance, TEAL'S PCDUs condition and stabilize power to allow original equipment manufacturers (OEMs) to market and sell products in compliance with applicable domestic and international agency standards. SL WABER designs and manufactures Power Distribution Units (PDUs) that safely convert a high power input into user specified output ranges. These PDUs distribute power evenly and conveniently throughout the customer's system. For electronic enclosure installations, the PDUs are designed with application specific mounting means to provide a reliable and cost effective power solution. [PHOTO] Through solid modeling and the creation of virtual prototypes, Teal's PCDU equipment is designed to improve reliability, throughput and accuracy of semiconductor test (ATE) equipment. UNINTERRUPTIBLE POWER SUPPLIES AND BATTERY CHARGING Uninterruptible power supply (UPS) products provide back-up power in the event of a power failure. UPS products also recharge batteries and, in some applications, provide a direct power supply to connected equipment. This year SL WABER expanded its offering to include back-up power supplies (Upstart Network) for computers operating in a network environment. These units incorporate sophisticated software for managing, saving and restoring files. CONDOR has also expanded into custom back-up power supplies that target medical equipment and other critical industrial applications. This is an area of rapid growth for our CONDOR subsidiary. SL-MTI has introduced and developed battery chargers as part of its motion control systems for electric vehicle applications and is advancing its flywheel energy storage systems. Flywheel energy storage systems provide uninterruptible power by storing electricity as kinetic energy which does not require batteries. The Company anticipates that these systems, which combine traditional power supply technology and motion control technology, will be the power systems of the future. [PHOTO] UPSTART NETWORK battery back-up includes exclusive Save-and-Restore Software (SRS(TM)) which automatically activates during a power outage, saving all files and safely shutting down the computer system, then rebooting the system and restoring the data as it originally appeared--even when the computer is unattended. 5 3 [SL INDUSTRIES LOGO] [PHOTO] This picture illustrates the traction drive electric motor, smart battery charger, and power electronics for the Sparrow vehicle. The Sparrow vehicle is a "Personal Transit Module" manufactured by Corbin industries in California. MOTION CONTROL SYSTEMS SL Industries' competitive advantages in motion control systems lies in its cutting-edge designs. SL-MTI's new motor and motion controls are used in numerous applications, including aerospace, medical and industrial products, which demand extremely high reliability and operating characteristics. SL-MTI developed proprietary motor/generator technology employed in our advanced flywheel systems for the telecommunications and utility markets, as well as the electric motor systems shown in the Sparrow and Rhino-cart illustrations. This exciting new technology will expand SL Industries' position as a leader in two high growth segments of the motion control and power supply market. SURGE SUPPRESSORS AND OTHER SL Industries has a well established reputation in the design and manufacture of surge suppressors and surge suppression technologies. These devices are sold to protect computers, audiovisual and other electronic equipment from sudden surges in power. SL WABER is a leader in the design and manufacture of these products for custom, OEM and retail marketplaces. Additionally, SL Industries' other operating subsidiaries generally incorporate surge suppression and other types of noise filtration technology into many of our more advanced products. SL Industries provides power and data quality solutions for a wide range of customers in several industries. The following list represents some of the leading corporations that purchase the Company's PDQ products: AKSYS Future Electronics Office Depot Allied Signal GEC Marconi Phillips Avnet/Allied Electronics General Electric Raytheon Bell/Milgray Electronics Healthdyne Schlumberger B.F. Goodrich/Aerospace Hewlett Packard Siemens Digi-Key Home Depot Teradyne Digital Equipment Motorola Textron Ericsson Nellcor/Purital Bennett 3M Corporation Federal Express Newark Electronics Toshiba
[PHOTO] MTI supplies traction drive electric motors, power electronics, and battery chargers for utility vehicles. These products range in scope from shopping cart retrieval systems to aircraft tugs and other push and pull applications. The Rhino Cart system is manufactured in Minnesota by Rhino Craft, Inc. 6 4 SL INDUSTRIES, INC. SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------- Years ended July 31, 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) SUMMARY OF OPERATIONS Net sales...................................................... $115,687 $117,313 $91,125 $76,593 $58,529 Income before extraordinary item and cumulative effect of changes in accounting principles (1) .............. $ 7,815 $ 3,498 $ 3,677 $ 1,951 $ 954 Extraordinary item - utilization of the federal tax benefit of a net operating loss carryforward......................... -- -- -- -- 500 Cumulative effect of change in accounting for income taxes..... -- -- -- 603 -- ---------------------------------------------------------------- Net income..................................................... $ 7,815 $ 3,498 $ 3,677 $ 2,554 $ 1,454 ================================================================ Net income per common share: Income before extraordinary item and cumulative effect of changes in accounting principles (1) .............. $ 1.30 $ 0.59 $ 0.62 $ 0.32 $ 0.15 Extraordinary item - utilization of the federal tax benefit of a net operating loss carryforward ........................ -- -- -- -- 0.07 Cumulative effect of change in accounting for income taxes..... -- -- -- 0.10 -- ---------------------------------------------------------------- Net income..................................................... $ 1.30 $ 0.59 $ 0.62 $ 0.42 $ 0.22 ================================================================ Shares used in computing net income per common share (2) ...... 6,021 5,950 5,940 6,152 6,500 Cash dividend per common share................................. $ 0.07 $ 0.06 $ 0.06 $ 0.06 $ 0.09 YEAR-END FINANCIAL POSITION Working capital................................................ $ 17,399 $ 20,765 $21,929 $21,125 $18,995 Current ratio.................................................. 1.8 2.3 2.5 2.9 2.8 Total assets................................................... $ 66,804 $ 64,175 $62,156 $52,397 $49,831 Long-term debt................................................. $ 700 $ 13,186 $17,373 $11,918 $ 9,218 Shareholders' equity........................................... $ 36,492 $ 28,680 $24,930 $23,577 $23,431 Book value per share........................................... $ 6.27 $ 4.98 $ 4.43 $ 3.93 $ 3.60 OTHER Capital expenditures (3) ...................................... $ 2,097 $ 2,219 $ 1,736 $ 1,446 $ 1,191 Depreciation and amortization.................................. $ 2,700 $ 2,584 $ 2,108 $ 1,868 $ 1,674 ================================================================
(1) Fiscal 1997 includes pre-tax gain, net of severance, facility closing, legal and other costs, on disposition of subsidiary of $5,888,000, increasing net income by $3,556,000, or $.59 per common share. Fiscal 1995 includes pre-tax gain, net of severance, legal and other costs, on disposition of subsidiary of $818,000, increasing net income by $1,100,000, or $.19 per common share. (2) Fiscal 1997 and 1996 includes the effect of outstanding dilutive stock options. (3) Excludes assets acquired in business combinations. 7 5 SL INDUSTRIES, INC. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES During fiscal 1997, the net cash provided by operating activities was $3,266,000, as compared to $4,687,000 and $3,307,000 provided in fiscal 1996 and 1995, respectively. The fiscal 1997 decrease, as compared to fiscal 1996, resulted primarily from increased inventories at current operations, offset, in part, by increased accounts payable. The fiscal 1996 increase, as compared to fiscal 1995, resulted primarily from increased net income from operations and decreased inventories, offset, in part, by increased receivables. During fiscal 1997, the net cash provided by investing activities was principally related to the disposition of substantially all of the assets of SL Auburn, Inc. ("Auburn"), offset, in part, by capital expenditures. During fiscal 1996 and 1995, the net cash used in investing activities of $1,240,000, and $8,126,000, respectively, was primarily related to capital expenditures for both years, the acquisition of substantially all of the net assets of Teal Electronics Corporation ("Teal") in May 1995, offset, in part, by the fiscal 1996 disposition of substantially all of the assets of SL Piping Systems, Inc. ("Piping"), net of certain liabilities. During fiscal 1997 and 1996, the net cash used in financing activities of $12,665,000 and $4,024,000 was primarily related to payments made to reduce the Company's long-term debt obligation. During fiscal 1995, the net cash provided by financing activities of $5,199,000 was primarily related to the use of the Company's revolving line of credit for the fiscal 1995 Teal acquisition. The Company's current ratio was 1.8 to 1 at July 31, 1997, 2.3 to 1 at July 31, 1996, and 2.5 to 1 at July 31, 1995. The fiscal 1997 decrease, as compared to fiscal 1996, resulted from a 28% increase in current liabilities, as compared to a 3% increase in current assets. The increase in current liabilities resulted primarily from increased accounts payable. The fiscal 1996 decrease, as compared to fiscal 1995, resulted from a 10% increase in current liabilities, as compared to a 1% increase in current assets. As a percentage of total capitalization, consisting of long-term debt and shareholders' equity, total borrowings by the Company were 2% at July 31, 1997, 32% at July 31, 1996, and 41% at July 31, 1995. The fiscal 1997 and 1996 decreases in total borrowings, as compared to fiscal 1996 and 1995, were primarily a result of payments made to reduce the outstanding balance of the Company's revolving line of credit. On October 31, 1996, the Company entered into a new revolving credit agreement in the amount of $25,000,000 with three participating banks. The agreement's maturity date is October 31, 1999. At July 31, 1997, the Company had $23,320,000, net of outstanding trade letters of credit of $980,000, of its revolving line of credit available for use. On September 12, 1997, the Company utilized $4,130,000 of its revolving line of credit to purchase 375,500 shares of its common stock. See Note 8 to the consolidated financial statements for additional information about the credit agreement. The Company's borrowing capacity at July 31, 1997, remained considerably above its use of outside financing. Capital expenditures were $2,097,000 in 1997, as compared to $2,219,000 in 1996, and $1,736,000 in 1995. Expenditures during the three-year period have primarily included investments in new process technology and increased production capacity. Fiscal 1998 capital expenditures are planned to be approximately $2,582,000, and the Company expects to fund the expenditures with cash provided by operations. The Company is not aware of any demands, commitments, trends or uncertainties, which are reasonably likely, in the normal course, to impair its ability to generate or obtain adequate amounts of cash to meet its future needs. RESULTS OF OPERATIONS FISCAL 1997 COMPARED TO FISCAL 1996 Fiscal 1997 consolidated net sales of $115,687,000 decreased approximately 1% ($1,626,000), as compared to fiscal 1996 consolidated net sales. Fiscal 1997's consolidated net sales included nine months of Auburn's net sales of $8,489,000 and fiscal 1996 consolidated net sales included twelve months of Auburn's net sales of $10,766,000 and $2,964,000 of Piping's net sales. Fiscal 1997 net income was $7,815,000, or $1.30 per share, as compared to fiscal 1996 net income of $3,498,000, or $.59 per share. Fiscal 1997 net income included a $3,556,000, or $.59 per share, gain, net of severance, facility closing, legal and other costs, from the disposition of substantially all of the assets of Auburn. If the gain is excluded from fiscal 1997 net income, net income increased approximately 22% ($761,000). The power and data quality segment's fiscal 1997 net sales and operating income increased approximately 4% ($3,533,000) and 6% ($511,000), respectively, as compared to fiscal 1996 net sales and operating income. Contributing to these increases were increased net sales of linear and switching power supplies, custom electrical subsystems and precision motor products which resulted from increased market share, offset by decreased sales of surge protection and uninterruptible power supplies because of a flat retail market. The increase in fiscal 1997 operating income resulted from the increased net sales realized by the businesses within this segment. The specialty products segment's fiscal 1997 net sales and operating income decreased approximately 30% ($5,159,000), and increased approximately 34% ($224,000), respectively, as compared to fiscal 1996 net sales and operating income. Fiscal 1997 and 1996's net sales and operating income included the results of Auburn and, in fiscal 1996, also included the results of Piping. During fiscal 1997, net sales of surface finishing services increased slightly because of increased demand. COST OF SALES As a percentage of net sales, fiscal 1997 cost of products sold was approximately 64%, as compared to approximately 65% in fiscal 1996. The percentage decrease was a direct result of improved operational efficiencies contributed by the power and data quality segment's product lines. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES Fiscal 1997 engineering and product development expenses of $5,283,000 increased approximately 12% ($570,000), as compared to fiscal 1996. As a percentage of net sales, fiscal 1997 engineering and product development expenses were 5%, as compared to 4% in fiscal 1996. The fiscal 1997 increases were primarily related to additional investments made by the businesses within the power and data quality segment. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Fiscal 1997 selling, general and administrative expenses of $26,364,000 decreased approximately 2% ($520,000), as compared to fiscal 1996. As a percentage of net sales, fiscal 1997 and 1996 selling, general and administrative expenses were approximately 23% for both years. DEPRECIATION AND AMORTIZATION EXPENSE Fiscal 1997 depreciation and amortization expense of $2,700,000 increased approximately 4% ($116,000), as compared to fiscal 1996. The slight fiscal 1997 increase was primarily related to the depreciation of equipment within the power and data quality segment. 8 6 OTHER INCOME (EXPENSE) Fiscal 1997 other income (expense) included the gain on the disposition of Auburn, as well as interest income and expense, as compared to fiscal 1996 other income (expense), which consisted entirely of interest income and expense. Fiscal 1997 interest income increased, as compared to fiscal 1996, because of additional cash available for investment. Fiscal 1997 interest expense decreased, as compared to fiscal 1996, primarily because of a reduction in the Company's long-term debt obligation. TAXES The fiscal 1997 effective tax rate on pre-tax income was 39%, as compared to 35% in fiscal 1996. This increase was primarily related to taxes associated with the Company's Mexican operations, the gain realized from the disposition of Auburn and state income tax refunds included in fiscal 1996. FISCAL 1996 COMPARED TO FISCAL 1995 Fiscal 1996 consolidated net sales of $117,313,000 increased approximately 29% ($26,188,000), as compared to fiscal 1995 consolidated net sales. Fiscal 1996 net income was $3,498,000, or $.59 per share, as compared to fiscal 1995 net income of $3,677,000, or $.62 per share. Fiscal 1995 net income included a gain, net of severance, legal and other costs from the disposition of SL LUBE/systems, Inc., ("LUBE") of $1,100,000 or $.19 per share. If the gain is excluded from fiscal 1995 net income, fiscal 1996 net income increased approximately 36% ($921,000). The power and data quality segment's fiscal 1996 net sales increased approximately 37% ($27,136,000), as compared to fiscal 1995 net sales. The segment's fiscal 1996 net sales included a full year of Teal's net sales, as compared to a partial year in fiscal 1995. If the net sales of Teal are excluded from both fiscal 1996 and 1995, the segment's net sales increased approximately 23% ($15,946,000), as compared to fiscal 1995. Contributing to this increase were increased net sales of surge protectors and uninterruptible power supplies, which primarily resulted from increased market share and the sale of new products, increased net sales of linear and switching power supplies, which resulted from new customer programs and increased demand and increased net sales of precision motor products, which resulted from increased volume, offset, in part, by reduced defense spending. The power and data quality segment's fiscal 1996 operating income increased approximately 54% ($3,095,000), as compared to fiscal 1995. If the operating income of Teal is excluded from both fiscal 1996 and 1995, the segment's operating income increased approximately 25% ($1,408,000), as compared to fiscal 1995. The increase in fiscal 1996 operating income resulted from the increased net sales realized by the businesses within this segment. The specialty products segment's fiscal 1996 net sales decreased approximately 5% ($948,000), as compared to fiscal 1995 net sales. The net sales decrease was related to the divestiture of Piping and LUBE in February 1996 and May 1995, respectively. If the net sales of Piping are excluded from both fiscal 1996 and 1995 and the net sales of LUBE are excluded from fiscal 1995, the segment's net sales increased approximately 16% ($1,968,000), as compared to fiscal 1995. Contributing to this increase were increased sales of aviation and industrial igniters, and surface finishing services, offset, in part, by decreased sales of aviation spark plugs. The increases in sales of aviation and industrial igniters, and surface finishing services were primarily a result of increased demand. The decrease in sales of aviation spark plugs was primarily a result of decreased demand because of softness in the general aviation market. The specialty products segment's fiscal 1996 operating income decreased approximately 63% ($1,100,000), as compared to fiscal 1995. If the operating losses of Piping are excluded from both fiscal 1996 and 1995 and the operating income of LUBE is excluded from fiscal 1995, the segment's operating income decreased approximately 27% ($387,000), as compared to 1995. This decrease resulted primarily from decreased gross margins realized by the businesses within this segment. COST OF SALES As a percentage of net sales, fiscal 1996 and 1995 costs of products sold were approximately 65%. Investments are being made to improve operational efficiencies that should reduce cost of products sold as a percentage of net sales. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES Fiscal 1996 engineering and product development expenses of $4,713,000 increased approximately 39% ($1,319,000), as compared to fiscal 1995. If the expenses of Teal are excluded from both fiscal 1996 and 1995, engineering and product development expenses increased approximately 21% ($678,000), as compared to 1995. The fiscal 1996 increase was primarily related to investments made by the businesses within the power and data quality segment. As a percentage of net sales, fiscal 1996 and 1995 engineering and product development expenses were approximately 4%. If the expenses and net sales of Teal are excluded from both fiscal 1996 and 1995, the expenses, as a percentage of net sales, remain the same. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Fiscal 1996 selling, general and administrative expenses of $26,884,000 increased approximately 25% ($5,442,000), as compared to fiscal 1995. If the expenses of Teal are excluded from both fiscal 1996 and 1995, selling, general and administrative expenses increased approximately 16% ($3,351,000), as compared to 1995. The fiscal 1996 increase was primarily related to increased marketing expenses. As a percentage of net sales, fiscal 1996 selling, general and administrative expenses were approximately 23%, as compared to 24% in fiscal 1995. If the expenses and net sales of Teal are excluded from both fiscal 1996 and 1995, the expenses, as a percent of net sales, remain the same. DEPRECIATION AND AMORTIZATION EXPENSE Fiscal 1996 depreciation and amortization expense of $2,584,000 increased approximately 23% ($476,000), as compared to fiscal 1995. If the expenses of Teal are excluded from both fiscal 1996 and 1995, depreciation and amortization expense increased approximately 2% ($37,000). OTHER INCOME (EXPENSE) Fiscal 1996 other income (expense) consisted entirely of interest income and expense. Fiscal 1995 other income (expense) included the gain on the disposition of LUBE, as well as interest income and expense. Fiscal 1996 interest income increased, as compared to fiscal 1995, because of higher interest rates and additional cash available for investment. Fiscal 1996 interest expense increased, as compared to fiscal 1995, primarily because of higher interest rates and the use of the Company's revolving line of credit for the May 1995 Teal acquisition. TAXES The fiscal 1996 effective tax rate on pre-tax income was 35%, as compared to 26% in fiscal 1995. The fiscal 1996 effective tax rate included the effect of prior year state income tax refunds. The fiscal 1995 effective tax rate included the effect of the May 1995 tax free disposition of LUBE. ENVIRONMENTAL During fiscal 1997, 1996 and 1995, investigation or remediation activities, or both, were undertaken at 18 sites owned, leased or previously utilized by the Company. During the latter part of fiscal 1995, the New Jersey Department of Environmental 9 7 SL INDUSTRIES, INC. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Protection ("NJDEP") required the Company to begin additional investigation of the extent of off-site contamination at its former facility in Wayne, New Jersey, where remediation has been underway for several years, and based on the results of that investigation, which were received in fiscal 1996, the Company determined that additional remediation costs of approximately $1,000,000 are probable; therefore, in fiscal 1996, the Company made an additional provision of $900,000. In a November 1991, Administrative Directive, NJDEP alleged that SL Surface Technologies, Inc. ("STI"), formerly SL Modern Hard Chrome, Inc., and 20 other respondents are responsible for a contaminant plume which has affected the Puchack Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey), and are, therefore, jointly and severally obligated to pay for the construction and operation of a potable water treatment system there. Three other actions have been initiated from the underlying directive. The first is Supplemental Directive No. 1 issued by NJDEP to the same parties in May 1992, which seeks a cost reimbursement of $8,655,000 for the construction of a treatment system at the Puchack site and an annual payment of $611,000 for ongoing operation and maintenance of the treatment system. The second matter is a lawsuit initiated by one of the parties named in the original directive seeking to have the remainder of those parties and more than 600 others pay some or all of that party's cost of compliance with the directive and any other costs associated with its site. The third matter is a Spill Act Directive by NJDEP to STI alone, regarding similar matters at its site. The state has not initiated enforcement action regarding any of its three Directives. There also exists an outstanding enforcement issue regarding the Company's compliance with ECRA at the same site. With regard to the $8,655,000 amount, in the Company's view it is not appropriate to consider that amount as "potential cost reimbursements". The STI site, which is the subject of these actions, has undergone remedial activities under NJDEP's supervision since 1983. The Company believes that it has a significant defense against all or any part of the $8,655,000 claim since technical data generated as part of previous remedial activities indicate that there is no offsite migration of contaminants at the Company's STI site. Based on this and other technical factors, the Company has been advised by its outside technical consultant, with the concurrence of its outside counsel, that it has a significant defense to the Cost Reimbursement Directive and any material exposure is remote. Although these contingencies could result in additional expenses or judgments, or offsets, thereto, at present such expenses or judgments are not expected to have a material affect on the Company's consolidated financial position or results of earnings. The Company filed claims with its insurers seeking reimbursement for past and future environmental costs and received $900,000 from one insurer during fiscal 1996 and a commitment to pay 15% of the environmental costs associated with the STI site up to an aggregate of $300,000. During fiscal 1997, the Company received $1,500,000 from three additional insurers and from two of those insurers, commitments to pay 15% and 20% of the environmental costs associated with the same location up to an aggregate of $150,000 and $400,000, respectively. In addition, the Company will receive $100,000 during the fiscal years 1998, 1999, 2000 and 2001, as stipulated in the settlement agreement negotiated with one of the three insurers. See Note 10 to the consolidated financial statements for additional information. TRENDS AND PROSPECTS At the present time, all of the Company's businesses are profitable and are expected to remain so, and it is anticipated that the Company's fiscal year 1998 consolidated financial results will continue to show improvements. 10 8 SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF EARNINGS
- ---------------------------------------------------------------------------------------------------------------------------- Years ended July 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Net sales................................................. $115,687,000 $117,313,000 $91,125,000 Cost and expenses: Cost of products sold................................... 74,085,000 76,773,000 59,249,000 Engineering and product development..................... 5,283,000 4,713,000 3,394,000 Selling, general and administrative expenses............ 26,364,000 26,884,000 21,442,000 Depreciation and amortization........................... 2,700,000 2,584,000 2,108,000 ------------------------------------------------------------ Total cost and expenses................................... 108,432,000 110,954,000 86,193,000 ------------------------------------------------------------ Income from operations.................................... 7,255,000 6,359,000 4,932,000 Other income (expense): Gain on disposition of subsidiaries..................... 5,888,000 -- 818,000 Interest income......................................... 301,000 159,000 54,000 Interest expense........................................ (680,000) (1,123,000) (859,000) ------------------------------------------------------------ Income before income taxes................................ 12,764,000 5,395,000 4,945,000 Provision for federal and state income taxes.............. 4,949,000 1,897,000 1,268,000 ------------------------------------------------------------ Net income................................................ $ 7,815,000 $ 3,498,000 $ 3,677,000 ============================================================ Net income per common share............................... $ 1.30 $ 0.59 $ 0.62 ============================================================ Shares used in computing net income per common share...... 6,021,000 5,950,000 5,940,000 ============================================================
See accompanying notes to consolidated financial statements. 11 9 SL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------- July 31, 1997 1996 - -------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents.................................................... $ -- $ -- Receivables, less allowances of $1,790,000 and $1,639,000, respectively................................. 18,141,000 16,428,000 Inventories.................................................................. 16,505,000 17,339,000 Prepaid expenses............................................................. 712,000 868,000 Deferred income taxes........................................................ 3,168,000 2,668,000 ----------------------------- Total current assets................................................... 38,526,000 37,303,000 ----------------------------- Property, plant and equipment, net............................................. 6,296,000 7,119,000 Assets held for future sale.................................................... 958,000 985,000 Long-term note receivable...................................................... 2,234,000 2,264,000 Deferred income taxes.......................................................... 2,442,000 1,488,000 Cash surrender value of life insurance policies................................ 7,627,000 7,095,000 Intangible assets, net......................................................... 7,594,000 7,401,000 Other assets................................................................... 1,127,000 520,000 ----------------------------- Total assets........................................................... $66,804,000 $64,175,000 ============================= LIABILITIES Current liabilities: Long-term debt due within one year........................................... $ 133,000 $ 187,000 Accounts payable............................................................. 8,839,000 5,770,000 Accrued income taxes......................................................... 770,000 786,000 Accrued liabilities: Payroll and related costs.................................................. 5,331,000 4,614,000 Other...................................................................... 6,054,000 5,181,000 ----------------------------- Total current liabilities.............................................. 21,127,000 16,538,000 ----------------------------- Long-term debt less portion due within one year................................ 700,000 13,186,000 Deferred compensation and supplemental retirement benefits..................... 4,133,000 3,723,000 Other liabilities.............................................................. 4,352,000 2,048,000 ----------------------------- Total liabilities...................................................... $30,312,000 $35,495,000 ----------------------------- Commitments and contingencies (Note 10) SHAREHOLDERS' EQUITY Preferred stock, no par value; authorized, 6,000,000 shares; none issued....... $ -- $ -- Common stock, $.20 par value; authorized, 25,000,000 shares; issued, 1997 - 7,958,000 shares, 1996 - 7,899,000 shares..................... 1,592,000 1,580,000 Capital in excess of par value................................................. 34,695,000 34,306,000 Retained earnings.............................................................. 9,607,000 2,196,000 Treasury stock at cost, 2,141,000 shares....................................... (9,402,000) (9,402,000) ----------------------------- Total shareholders' equity............................................. $36,492,000 $28,680,000 ----------------------------- Total liabilities and shareholders' equity............................. $66,804,000 $64,175,000 =============================
See accompanying notes to consolidated financial statements. 12 10 SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock --------------------------------------------------------- Retained Issued Held In Treasury Capital in Earnings --------------------------------------------------------- Excess of (Accumulated Shares Amount Shares Amount Par Value Deficit) ------------------------------------------------------------------------------------------ Balance August 1, 1994.............. 7,739,000 $1,548,000 (1,741,000) $(7,352,000) $33,620,000 $(4,239,000) Net income ......................... 3,677,000 Cash dividends, $.06 per share...... (349,000) Rights redemption, $.0079 per share. (48,000) Other, including exercise of employee stock options............ 34,000 7,000 115,000 1,000 Treasury stock received from tax free distribution................. (400,000) (2,050,000) ------------------------------------------------------------------------------------------ Balance July 31, 1995............... 7,773,000 1,555,000 (2,141,000) (9,402,000) 33,735,000 (958,000) Net income.......................... 3,498,000 Cash dividends, $.06 per share...... (343,000) Other, including exercise of employee stock options and related income tax benefits............... 126,000 25,000 571,000 (1,000) ------------------------------------------------------------------------------------------ Balance July 31, 1996............... 7,899,000 1,580,000 (2,141,000) (9,402,000) 34,306,000 2,196,000 Net income.......................... 7,815,000 Cash dividends, $.07 per share...... (405,000) Other, including exercise of employee stock options and related income tax benefits....... 59,000 12,000 389,000 1,000 ------------------------------------------------------------------------------------------ BALANCE JULY 31, 1997............... 7,958,000 $1,592,000 (2,141,000) $(9,402,000) $34,695,000 $ 9,607,000 ==========================================================================================
See accompanying notes to consolidated financial statements. 13 11 SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------- Years ended July 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income.............................................................. $ 7,815,000 $ 3,498,000 $ 3,677,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................................ 1,889,000 1,869,000 1,687,000 Amortization........................................................ 811,000 715,000 421,000 Provisions for losses on accounts receivable........................ 63,000 151,000 175,000 Additions to other assets........................................... (820,000) (259,000) (95,000) Cash surrender value of life insurance premiums..................... (534,000) (499,000) (661,000) Deferred compensation and supplemental retirement benefits.......... 942,000 863,000 521,000 Deferred compensation and supplemental retirement benefit payments.. (499,000) (449,000) (691,000) Increase in deferred income taxes................................... (1,454,000) (1,148,000) (724,000) (Gain) loss on the sale of equipment................................ (23,000) (5,000) 13,000 Discontinued product line expenses.................................. (143,000) (246,000) (172,000) Gain on disposition of subsidiaries................................. (5,888,000) -- (818,000) Changes in operating assets and liabilities, net of the effect of acquisition and dispositions: Receivables....................................................... (3,073,000) (5,000,000) (356,000) Inventories....................................................... (1,718,000) 2,682,000 (3,318,000) Prepaid expenses.................................................. 135,000 11,000 (57,000) Accounts payable.................................................. 3,633,000 444,000 872,000 Accrued liabilities............................................... 2,025,000 2,325,000 2,526,000 Accrued income taxes.............................................. 105,000 (265,000) 307,000 -------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................... $ 3,266,000 $ 4,687,000 $ 3,307,000 -------------------------------------------------- INVESTING ACTIVITIES: Proceeds from sales of property, plant and equipment.................... 29,000 151,000 14,000 Purchases of property, plant and equipment.............................. (2,097,000) (2,219,000) (1,736,000) Proceeds from notes receivable.......................................... 74,000 7,000 -- Payments for acquisition, net of cash acquired.......................... (823,000) (533,000) (6,404,000) Proceeds from disposition of subsidiaries............................... 12,216,000 1,354,000 -- -------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............... $ 9,399,000 $(1,240,000) $(8,126,000) -------------------------------------------------- FINANCING ACTIVITIES: Cash dividends paid..................................................... (405,000) (343,000) (349,000) Rights redemption....................................................... -- -- (48,000) Proceeds from long-term debt............................................ 2,200,000 600,000 9,000,000 Payments on long-term debt.............................................. (14,740,000) (4,786,000) (3,526,000) Proceeds from stock options exercised................................... 280,000 505,000 122,000 -------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............... $(12,665,000) $(4,024,000) $ 5,199,000 -------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. -- (577,000) 380,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ -- 577,000 197,000 -------------------------------------------------- CASH AND CASH EQUIVALENTS AT YEAR END..................................... $ -- $ -- $ 577,000 ==================================================
See accompanying notes to consolidated financial statements. 14 12 SL INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation: The consolidated financial statements include the accounts of SL Industries, Inc. and its wholly-owned subsidiaries ("the Company"). All intercompany accounts and transactions have been eliminated in consolidation. Revenue recognition: Sales are recognized upon shipment of products. Inventories: Inventories are valued at the lower of cost or market. Cost is primarily determined using the first-in, first-out ("FIFO") method. Cost for certain inventories is determined using the last-in, first-out ("LIFO") method. Property, plant and equipment: Property, plant and equipment are carried at cost and include expenditures for new facilities and major renewals and betterments. Maintenance, repairs and minor renewals are charged to expense as incurred. When assets are sold or otherwise disposed of, any gain or loss is recognized currently. Depreciation is provided primarily using the straight-line method over the estimated useful lives of the assets, which range from 25 to 40 years for buildings, 3 to 10 years for equipment and other property and the lease term for leasehold improvements. Intangible assets: Intangible assets consist primarily of goodwill, trademarks, covenants not to compete and patents. The goodwill and trademarks resulting from the May 1995 acquisition are being amortized over 25 years or less. Goodwill resulting from acquisitions made prior to November 1, 1970, of $955,000, is considered to have continuing value over an indefinite period, and is not being amortized. Covenants are amortized over their stated terms and patents are amortized over their remaining lives. Subsequent to its acquisitions, the Company continually evaluates whether later events or circumstances have occurred that would indicate that the remaining estimated useful life of an intangible asset may warrant revision or that the remaining balance may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows over the remaining life of the intangible asset to measure recoverability. Environmental expenditures: Expenditures that relate to current operations are charged to expense or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations, which do not contribute to future revenues, are charged to expense. Liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated. The liability for remediation expenditures includes, as appropriate, elements of costs such as site investigations, consultants' fees, feasibility studies, outside contractor expenses and monitoring expenses. Estimates are not discounted, nor are they reduced by potential claims for recovery from the Company's insurance carriers. The liability is periodically reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity and other relevant factors including changes in technology or regulations. Product warranty costs: The Company offers various warranties on its products. The Company provides for its estimated future warranty obligations in the period in which the related sales are recognized. Advertising costs: Advertising costs are expensed as incurred. For the fiscal years ended July 31, 1997, 1996 and 1995, these costs were $2,287,000, $2,322,000 and $2,085,000, respectively. Research and development costs: Research and development costs are expensed as incurred. For the fiscal years ended July 31, 1997, 1996 and 1995, these costs were $1,405,000, $1,245,000 and $985,000, respectively. Income taxes: Deferred income taxes are provided to reflect the tax effect of temporary differences in reporting income and deductions for tax and financial statement purposes. Foreign currency conversion: The balance sheets and statements of earnings of the Company's foreign subsidiaries are converted at the year-end rate of exchange and the monthly weighted average rate of exchange, respectively, except for those items requiring conversion at historical rates of exchange, as the foreign subsidiaries' functional currency is U.S. dollars. Gains or losses resulting from foreign currency conversions are included in the accompanying consolidated statements of earnings. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant areas which require the use of management estimates relate to product warranty costs, allowance for doubtful accounts, allowance for inventory obsolescence and environmental costs. Net income per common share: Net income per common share for fiscal 1997 and 1996 is calculated using weighted average shares outstanding plus the effect of outstanding dilutive stock options, using the treasury stock method. Fully diluted net income per common share is not materially different than the net income per common share presented. The effect of outstanding dilutive stock options is not material for fiscal 1995 and is not included in the calculations for this year. New accounting pronouncements: In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS No. 121")." SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill. The Company adopted SFAS No. 121, effective August 1, 1996. The adoption had no effect on the Company's financial condition or results of operations during fiscal 1997. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS No. 123")." SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. This statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. The Company adopted SFAS No. 123, effective August 1, 1996. The Company has elected to adopt the disclosure requirement of this Statement with respect to its valuation of stock options. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings per Share ("SFAS No. 128")", which the Company is required to adopt for both interim and annual periods ending after December 15, 1997. SFAS No. 128 simplifies the Earnings per Share ("EPS") calculation by replacing primary EPS with basic EPS. Basic EPS is computed by dividing reported earnings available to common shareholders by weighted average shares outstanding. Fully diluted EPS, now called diluted EPS, is still required. Early application is prohibited, although footnote disclosure of pro forma EPS amounts are required. For the periods ended July 31, 1997, 1996 and 1995, the pro forma basic EPS would have been $1.35, $.61 and $.62, respectively. The diluted EPS for the periods presented would have remained the same as presented. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income ("SFAS No. 130")", which the Company is required to adopt for the interim and annual periods ending after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in interim and annual financial statements. 15 13 SL INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131")", which the Company is required to adopt for the interim and annual periods ending after December 15, 1997. SFAS No. 131 establishes standards for the reporting of information about operating segments in interim and annual financial statements. Management is in the process of analyzing the impact of the adoption of SFAS No. 131. Reclassifications: Reclassifications, when applicable, are made to the prior year consolidated financial statements to conform with current year presentation. 2. ACQUISITIONS AND DISPOSITIONS On May 1, 1995, the Company acquired substantially all of the assets and liabilities of Teal Electronics Corporation ("Teal"), for $6,404,000, net of cash acquired. In addition, the asset purchase agreement includes a provision to pay additional purchase price equal to 50% of the annual net profits of the acquired business in excess of $1,100,000 for each of the five twelve-month periods beginning May 1, 1995. For the twelve month periods ended April 30, 1996 and 1997, additional purchase price of $423,000 and $669,000, respectively, was paid and during fiscal 1997, an additional $271,000 was accrued. The acquisition has been accounted for using the purchase method of accounting. Therefore, the aggregate purchase price has been allocated to the assets and liabilities acquired based on their respective fair values at date of acquisition. A total of $4,412,000 of the aggregate purchase price has been allocated to goodwill and trademarks. Additional purchase price will be allocated to goodwill as amounts become determinable. The results of operations of Teal, since the acquisition date, are included in the accompanying consolidated statements of earnings. Unaudited pro forma consolidated results of operations, as though the Company acquired Teal on August 1, 1993, are as follows:
---------------------- 1995 ---------------------- (In thousands, except per share data) Net sales. . . . . . . . . . . . . . $ 98,307 Net income . . . . . . . . . . . . . $ 3,992 Net income per common share. . . . . $ .67
The unaudited pro forma consolidated results of operations include the amortization of goodwill, covenant not to compete and other intangible assets, and additional interest and depreciation expense as if these acquisition related expenses had been incurred since the August 1st date. The unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the purchase actually been made at the August 1st date, or of results which may occur in the future. On May 24, 1995, the Company distributed all of the shares of its wholly-owned subsidiary, SL LUBE/systems, Inc., in a tax free distribution, in exchange for 400,000 shares of its common stock owned by Vesper Corporation. For financial reporting purposes, the distribution resulted in a pre-tax gain, net of severance, legal and other costs, of $818,000, increasing net income by $1,100,000, or $.19 per common share. On February 20, 1996, the Company sold substantially all the assets of its wholly-owned subsidiary, SL Piping Systems, Inc., for $1,354,000 and the assumption of certain liabilities. The sale had no material impact on the Company's consolidated financial position or income from operations. On May 1, 1997, the Company sold substantially all the assets, excluding real property, of its wholly-owned subsidiary, SL Auburn, Inc., for $12,216,000. For financial reporting purposes, the sale resulted in a pre-tax gain, net of severance, facility closing, legal and other costs of $5,888,000, increasing net income by $3,556,000, or $.59 per common share. 3. INCOME TAXES The provision for federal and state income taxes consists of the following:
--------------------------------- 1997 1996 1995 --------------------------------- (In thousands) Current: Federal . . . . . . . . . . . . . $ 5,288 $ 2,584 $ 1,607 State . . . . . . . . . . . . . . 1,115 461 361 Deferred: Federal . . . . . . . . . . . . . (1,182) (1,038) (587) State . . . . . . . . . . . . . . (272) (110) (113) --------------------------------- $ 4,949 $ 1,897 $ 1,268 =================================
Significant components of the Company's deferred tax assets and liabilities at July 31, 1997 and 1996, are as follows:
-------------------- 1997 1996 -------------------- (In thousands) Deferred tax assets: Deferred compensation. . . . . . . $ 1,681 $ 1,516 Liabilities related to discontinued product line. . . . . 366 422 Liabilities related to environmental matters. . . . . . . 304 453 Inventory valuation. . . . . . . . 514 692 Prepaid and accrued expenses . . . 3,484 1,830 Other. . . . . . . . . . . . . . . 17 2 -------------------- 6,366 4,915 Deferred tax liabilities: Accelerated depreciation and amortization . . . . . . . . . . 756 759 -------------------- $ 5,610 $ 4,156 ====================
Following is a reconciliation between the amount of income tax expense at the applicable federal statutory rate and the effective rates:
------------------------------- 1997 1996 1995 ------------------------------- Federal statutory rate. . . . . . . . 34% 34% 34% Adjustment related to disposal of subsidiary. . . . . . . - - (12) Tax rate differential on Foreign Sales Corporation earnings. . . . . - (1) (1) State income taxes, net of federal income tax benefit . . . . . . . . . 4 4 5 Other. . . . . . . . . . . . . . . . . 1 (2) - ------------------------------- 39% 35% 26% ===============================
16 14 4. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many industries and geographic regions. 5. INVENTORIES Inventories consist of the following:
--------------------------------- 1997 1996 --------------------------------- (In thousands) Raw materials. . . . . . . . . . $ 7,691 $ 8,139 Work in process. . . . . . . . . 2,283 2,601 Finished goods . . . . . . . . . 6,531 6,599 --------------------------------- $ 16,505 $ 17,339 =================================
The above includes certain inventories, which are valued using the LIFO method, which aggregated $2,254,000 and $1,019,000 at July 31, 1997 and 1996, respectively. The excess of FIFO cost over LIFO cost at July 31, 1997 and 1996, was approximately $446,000 and $608,000, respectively. 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
---------------------- 1997 1996 ---------------------- (In thousands) Land . . . . . . . . . . . . . . . $ 58 $ 79 Buildings and leasehold improvements . . . . . . . . . . . 2,873 3,688 Equipment and other property . . . 15,240 14,743 ---------------------- 18,171 18,510 Less accumulated depreciation. . . 11,875 11,391 ---------------------- $ 6,296 $ 7,119 ======================
"Assets held for future sale" at July 31, 1997 and 1996, are not included above and relate to assets remaining after the 1989 relocation of a power and data quality operation. The assets remaining consist primarily of land, building and building improvements which are being leased to a third party. The building and building improvements are being depreciated and accounted for as an operating lease. Aggregate accumulated depreciation for the building and building improvements at July 31, 1997 and 1996, was $483,000 and $434,000, respectively. Aggregate minimum rental income for fiscal 1997 and 1996 was $123,000 and $205,000, respectively, which for fiscal 1996, included $88,000 from the assets sold that year. Aggregate minimum rental income for the remaining lease period will be $131,000, $138,000 and $81,000 in 1998, 1999 and 2000, respectively. The net book values of these assets are less than the estimated net realizable value based on a market survey received from an independent third party. 7. INTANGIBLE ASSETS Intangible assets consist of the following:
--------------------------------- 1997 1996 --------------------------------- (In thousands) Patents . . . . . . . . . . . . . . $ 873 $ 873 Covenants not to compete. . . . . . 2,980 2,980 Goodwill . . . . . . . . . . . . . 4,447 3,624 Trademarks . . . . . . . . . . . . 920 920 Other . . . . . . . . . . . . . . . 386 386 --------------------------------- 9,606 8,783 Less accumulated amortization . . . 2,012 1,382 --------------------------------- $ 7,594 $ 7,401 =================================
8. DEBT Long-term debt consists of the following:
--------------------------- 1997 1996 --------------------------- (In thousands) Revolving line of credit.............. $ 700 $ 13,000 Industrial revenue bonds payable in various principal amounts through 1998.......................... 133 373 --------------------------- 833 13,373 Less portion due within one year...... 133 187 --------------------------- $ 700 $ 13,186 ===========================
On October 31, 1996, the Company entered into a new revolving credit agreement in the amount of $25,000,000 with three participating banks. The agreement's maturity date is October 31, 1999. Under the terms of this agreement, the Company can borrow for acquisitions, working capital and, for other purposes, at either a "CD or LIBOR rate," as defined, or prime interest rate. The agreement contains limitations on borrowings and requires maintenance of specified ratios, the most restrictive of which is the ratio of total funded debt plus standby letters of credit to earnings before interest, taxes, depreciation and amortization. At July 31, 1997, the Company is in compliance with the above covenants. In lieu of compensating balances, the Company pays commitment fees as defined under the agreement. Under the terms of the industrial revenue bond installment loan agreements, interest is payable quarterly on the outstanding principal at 65% of the prevailing prime rate, adjusted monthly. Generally the banks have the right and option to call each loan, at specified dates, if certain levels of shareholders' equity, as defined, are not maintained. Principal maturities of long-term debt in the next two years are $133,000 in 1998, and $700,000 in 2000. 9. RETIREMENT PLANS AND DEFERRED COMPENSATION The Company maintains two noncontributory defined contribution pension plans covering substantially all employees. The Company's aviation igniter subsidiary also had a noncontributory defined contribution plan covering all its employees. The Company's contribution to its plans is based on a percentage of employee elective contributions and, in one plan, calendar year gross wages, as defined. The power conditioner subsidiary's contribution to its plan is based on a percentage of employee elective contributions. The aviation igniter subsidiary's contribution to its plan was based on a percentage of salary, as defined in the plan. Costs accrued under the plans for fiscal 1997, 1996 and 1995 amounted to approximately 17 15 SL INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $531,000, $508,000 and $416,000, respectively. It is the Company's policy to fund its accrued retirement income costs. In addition, the Company makes contributions, based on rates per hour, as specified in two union agreements, to two union administered defined benefit multi-employer pension plans. Contributions to these plans amounted to $55,000, $52,000 and $50,000 in 1997, 1996 and 1995, respectively. Under the Multi-employer Pension Plan Amendments Act of 1980, an employer is liable upon withdrawal from or termination of a multi-employer plan for its proportionate share of the plan's unfunded vested benefits liability. The Company's share of the unfunded vested benefits liabilities of the union plans to which it contributes is not material. The Company has agreements with certain active and retired directors, officers and key employees providing for supplemental retirement benefits. The liability for supplemental retirement benefits is based on the most recent mortality tables available and discount rates of 8%, 10% and 12%. The amount charged to income in connection with these agreements amounted to $491,000, $398,000 and $373,000 in 1997, 1996 and 1995, respectively. In addition, the Company has agreements with certain active officers and key employees providing for deferred compensation benefits. Benefits to be provided to each participant are stated in separate elective salary deferral agreements. The amount charged to income in connection with these agreements amounted to $451,000, $465,000 and $148,000 in 1997, 1996 and 1995, respectively. The Company is the owner and beneficiary of insurance policies on the lives of a majority of the participants having a deferred compensation or supplemental retirement agreement. At July 31, 1997, the aggregate death benefit totaled $13,416,000 with the corresponding cash surrender value totaling $7,627,000. At July 31, 1997, certain agreements may restrict the Company from utilizing cash surrender value totaling $1,845,000 for purposes other than satisfaction of the specific underlying deferred compensation agreements, if benefits are not paid by the Company. The Company nets the dividends realized from the insurance policies with premium expense. Net amounts included in income in connection with the policies amounted to $257,000, $337,000 and $217,000 in 1997, 1996 and 1995, respectively. 10. COMMITMENTS AND CONTINGENCIES For the fiscal years ended July 31, 1997, 1996 and 1995, rental expense applicable to continuing operations aggregated $1,602,000, $2,000,000 and $1,743,000, respectively. These expenses are primarily for facilities and vehicles. The minimum rental commitments as of July 31, 1997, are as follows:
(In thousands) 1998 . . . . . . . $1,419 2001 . . . . . . . 476 1999 . . . . . . . 1,015 2002 . . . . . . . 472 2000 . . . . . . . 755 Thereafter . . . . 199 ------ $4,336 ======
At July 31, 1997, the Company was contingently liable for $1,216,000, under outstanding letters of credit issued primarily for inventory purchases from foreign suppliers and settlement of a civil lawsuit. In the ordinary course of its business, the Company is subject to loss contingencies pursuant to federal, state and local governmental laws and regulations and is also party to certain legal actions, most frequently complaints by terminated employees. It is management's opinion that the impact of these legal actions will not have a material effect on the consolidated financial position or results of operations of the Company. Loss contingencies include potential obligations to investigate and eliminate or mitigate the affects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other facilities, whether or not they are currently in operation. The Company is currently participating in environmental assessments and cleanups at a number of sites under these laws and may in the future be involved in additional environmental assessments and cleanups. Based upon investigations completed by the Company and its independent engineering consulting firm to date, management has provided an estimated accrual for all known costs believed to be probable. However, it is in the nature of environmental contingencies that other circumstances might arise, the costs of which are indeterminable at this time due to such factors as changing government regulations and tougher standards, the unknown magnitude of defense and cleanup costs, the unknown timing and extent of the remedial actions that may be required, the determination of the Company's liability in proportion to other responsible parties, and the extent, if any, to which such costs are recoverable from other parties or from insurance. Although these contingencies could result in additional expenses or judgments, or off-sets thereto, at present such expenses or judgments are not expected to have a material effect on the Company's consolidated financial position or results of operations. In the fourth quarter of fiscal year 1990, the Company made a provision of $3,500,000 to cover various such environmental costs for six locations, based upon estimates prepared at that time by the independent engineering consulting firm. In fiscal 1991 and 1996, the Company made additional provisions of $480,000 and $900,000, respectively, based upon new estimates. The fiscal 1996 provision was necessary since, during the latter part of fiscal 1995, the New Jersey Department of Environmental Protection required the Company to begin additional investigation of the extent of off-site contamination at its former facility in Wayne, New Jersey, where remediation has been underway for years, and based on the results of that investigation, which were received in fiscal 1996, the Company determined that additional remediation costs of approximately $1,000,000 were probable. During fiscal years 1993, 1994, 1995, 1996 and 1997, the Company incurred environmental related capital expenditures of approximately $416,000. The Company filed claims with its insurers seeking reimbursement for many of these costs, and received $900,000 from one insurer during fiscal year 1996 and a commitment to pay 15% of the environmental costs associated with one location up to an aggregate of $300,000. During fiscal 1997, the Company received $1,500,000 from three additional insurers and from two of those insurers, commitments to pay 15% and 20% of the environmental costs associated with the same location up to an aggregate of $150,000 and $400,000, respectively. In addition, the Company will receive $100,000 during fiscal years 1998, 1999, 2000 and 2001, as stipulated in the settlement agreement negotiated with one of the three insurers. At July 31, 1997 and 1996, the remaining environmental accrual was $1,075,000 and $1,438,000, respectively, of which $400,000 and $400,000, respectively, have been included in "Accrued Liabilities" and $675,000 and $1,038,000, respectively, in "Other Liabilities" in the accompanying consolidated balance sheets. 11. STOCK OPTIONS AND CAPITAL STOCK At the Company's 1993 Annual Meeting, the shareholders approved a Nonemployee Director Nonqualified Stock Option Plan (the "Director Plan"), which was effective June 1, 1993. The Director Plan provides for the granting of nonqualified options to purchase up to 250,000 shares of the Company's Common Stock to nonemployee directors of the Company in lieu of paying quarterly retainer fees and regular quarterly meeting attendance fees, when elected. The Director Plan enables the Company to grant options, with an exercise price per share not less than fair market value of the Company's Common Stock on the date of grant, which are 18 16 exercisable at any time. Each option granted under the Director Plan expires no later than ten years from date of grant and no options can be granted under the Director Plan after its May 31, 2003, expiration date. Information for the years 1995, 1996 and 1997 with respect to the Director Plan is as follows:
--------------------------------------- Shares Option Price --------------------------------------- (In thousands, except for option price) Outstanding and exercisable at August 1, 1994 . . . . . . . . . . 17 $3.5625 to $4.25 Granted . . . . . . . . . . . . . . . 34 $4.1875 to $5.125 Outstanding and exercisable at July 31, 1995. . . . . . . . . . . 51 $3.5625 to $5.125 Granted . . . . . . . . . . . . . . . 39 $5.6875 to $10.50 Exercised . . . . . . . . . . . . . . (14) $3.5625 to $5.125 Outstanding and exercisable at July 31, 1996. . . . . . . . . . . 76 $3.5625 to $10.50 Granted . . . . . . . . . . . . . . . 27 $7.1875 to $9.6875 Outstanding and exercisable at July 31, 1997. . . . . . . . . . . 103 $3.5625 to $10.50
As of July 31, 1997, 1996 and 1995, the number of shares available for grant were 133,000, 160,000 and 199,000, respectively. At the Company's 1991 Annual Meeting, the shareholders approved the adoption of a Long Term Incentive Plan (the "1991 Plan") which provides for the granting of options to officers and key employees of the Company to purchase up to 500,000 shares of the Company's Common Stock. At the 1995 Annual Meeting, the shareholders approved an amendment to increase the number of shares subject to options under the 1991 Plan from 500,000 to 922,650. The 1991 Plan enables the Company to grant either nonqualified options, with an exercise price per share established by the Board's Compensation Committee, or incentive stock options, with an exercise price per share not less than the fair market value of the Company's Common Stock on the date of grant. Options granted before August 1, 1996, are exercisable at any time. Options granted after August 1, 1996, are exercisable in equal installments, with 25% exercisable on the grant date and the balance exercisable on each one, two and three year anniversary date thereafter. Each option granted under the 1991 Plan expires no later than ten years from date of grant and no options can be granted under the 1991 Plan after its September 25, 2001, expiration date. Information for the years 1995, 1996 and 1997 with respect to the 1991 Plan is as follows:
--------------------------------------- Shares Option Price --------------------------------------- (In thousands, except for option price) Outstanding and exercisable at August 1, 1994 . . . . . . . . . . 266 $3.25 to $3.75 Granted . . . . . . . . . . . . . . . 70 $4.25 to $4.50 Exercised . . . . . . . . . . . . . . (34) $3.25 to $3.75 Cancelled . . . . . . . . . . . . . . (1) $3.25 to $3.50 Outstanding and exercisable at July 31, 1995. . . . . . . . . . . 301 $3.25 to $4.50 Granted . . . . . . . . . . . . . . . 83 $6.875 Exercised . . . . . . . . . . . . . . (95) $3.25 to $6.875 Cancelled . . . . . . . . . . . . . . (2) $3.25 to $6.875 Outstanding and exercisable at July 31, 1996. . . . . . . . . . . 287 $3.25 to $6.875 Granted . . . . . . . . . . . . . . . 133 $7.25 to $9.375 Exercised . . . . . . . . . . . . . . (59) $3.25 to $9.375 Cancelled . . . . . . . . . . . . . . (13) $3.25 to $9.375 Outstanding at July 31, 1997. . . . . 348 $3.25 to $9.375
The number of shares exercisable at July 31, 1997, were 259,000. As of July 31, 1997, 1996, and 1995, the number of shares available for grant were 381,000, 501,000, and 159,000, respectively. The Company's 1981 Incentive Stock Option Plan for officers and employees expired on July 31, 1991. The Plan provided that option prices were equivalent to 100% of market value at date of grant. All options granted under the Plan were exercisable three years from date of grant and expired five years after date of grant. Information for the years 1995 and 1996 with respect to the Plan is as follows:
--------------------------------------- Shares Option Price --------------------------------------- (In thousands, except for option price) Outstanding at August 1, 1994 . . . . 35 $5.90 to $7.90 Expired . . . . . . . . . . . . . . . (16) $7.90 Cancelled . . . . . . . . . . . . . . (2) $5.90 to $7.90 Outstanding and exercisable at July 31, 1995. . . . . . . . . . . 17 $5.90 Exercised . . . . . . . . . . . . . . (1) $5.90 Expired . . . . . . . . . . . . . . . (16) $5.90 Outstanding at July 31, 1996. . . . . 0
During fiscal 1991, the Board of Directors approved the granting of nonqualified stock options to purchase 110,000 shares at an option price of $4.13, and 15,000 shares at an option price of $ 5.25 to the Chief Executive Officer of the Company and a subsidiary president, respectively. The option for 15,000 shares was exercised during fiscal 1996. In fiscal 1992, an option to purchase 50,000 shares was granted to another officer of the Company at an option price of $3.25 and is exercisable at July 31, 1997, with an expiration date of November 30, 1998. In fiscal 1996, an option to purchase 50,000 shares was granted to a subsidiary officer at an option price of $8.375 and is exercisable 20% at July 31, 1997, and 50%, 20% and 10% on or after October 13, 1997, April 13, 1998, and April 13, 1999, respectively, with no expiration date, except in the event of termination, disability or death provided that the subsidiary officer has been employed through such date. The remaining options are exercisable at any time after the date of grant with no expiration date, except in the event of termination, disability or death. All of the option prices are equivalent to 100% of market value at date of grant. The above data have been adjusted to reflect subsequent stock dividends. The Company applies Accounting Principles Board opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and net income per common share would have been reduced in 1997 and 1996 as follows: 19 17 SL INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------- 1997 1996 ----------------------- Net income - as reported . . . . . . . . . . . . $7,815,000 $3,498,000 Net income - pro forma . . . . . . . . . . . . . $7,617,000 $3,202,000 Net income per common share - as reported . . . $1.30 $.59 Net income per common share - pro forma . . . . $1.27 $.55
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
----------------------- 1997 1996 ----------------------- Expected dividend yield. . . . . . . . . . . . . .98% 1.61% Expected stock price volatility. . . . . . . . . 31.0% 27.2% Risk-free interest rate. . . . . . . . . . . . . 6.7% 6.0% Expected life of option. . . . . . . . . . . . . 7 YEARS 7 years
Transactions from August 1, 1994 through July 31, 1997, under the above plans were as follows:
----------------------------------------------------------------- Number of Option Price Weighted Weighted Average Shares per Share Average Price Life Remaining ----------------------------------------------------------------- Options at August 1, 1994 . . . . 494 $3.25 to $7.90 $3.60 8.11 years Granted . . . . . . . . 104 $3.5625 to $5.125 $4.37 Exercised . . . . . . . (34) $3.25 to $3.75 $3.58 Expired . . . . . . . . (16) $7.90 $7.90 Cancelled . . . . . . . (3) $3.25 to $7.90 $6.35 Outstanding at July 31, 1995 . . . . . 545 $3.25 to $5.90 $3.76 7.53 years Granted . . . . . . . . 172 $5.6875 to $10.50 $7.48 Exercised . . . . . . . (126) $3.25 to $5.90 $3.87 Expired . . . . . . . . (16) $5.90 $5.90 Cancelled . . . . . . . (2) $3.25 to $6.875 $5.27 Outstanding at July 31, 1996 . . . . . 573 $3.25 to $10.50 $4.87 7.18 years Granted . . . . . . . . 160 $7.1875 to $9.6875 $8.84 Exercised . . . . . . . (59) $3.25 to $9.375 $4.69 Cancelled . . . . . . . (13) $3.25 to $9.375 $7.26 Outstanding at July 31, 1997 . . . . . 661 $3.25 to $10.50 $5.78 6.83 years Exercisable at July 31, 1997 . . . . . 532 $3.25 to $10.50 $5.05 6.83 years
12. CASH FLOW INFORMATION For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments, purchased with an original maturity of three months or less, to be cash equivalents. Supplemental disclosures of cash flow information:
--------------------------- 1997 1996 1995 --------------------------- (In thousands) Interest paid . . . . . . . . . $ 735 $ 1,158 $ 790 Income taxes paid . . . . . . . $ 6,431 $ 3,312 $ 1,667
Non-cash investing and financing activities: During fiscal 1996, the Company received a $2,300,000 note as part of the consideration for a sale of property, plant and equipment. Excluded from the consolidated statements of cash flows for fiscal 1995 are certain noncash investing and financing activities relating to acquisitions which result in the item reflected under investing activities "Payments for acquisitions, net of cash acquired $6,404,000":
-------------- 1995 -------------- (In thousands) Fair value of assets acquired, net of cash . . . . . . . . . . $6,969 Liabilities assumed . . . . . . $ 565
13. INDUSTRY SEGMENTS The Company's operations are conducted through domestic subsidiaries within two major industry segments. Sales between segments are not material. No single customer accounts for more than 10% of consolidated sales nor are export sales material thereto.
------------------------------------------- 1997 1996 1995 ------------------------------------------- (In thousands) NET SALES Power and data quality . . . . $103,852 $100,319 $ 73,183 Specialty products . . . . . . 11,835 16,994 17,942 ------------------------------------------- Consolidated . . . . . . . . $115,687 $117,313 $ 91,125 =========================================== OPERATING INCOME Power and data quality . . . . $ 9,364 $ 8,853 $ 5,758 Specialty products . . . . . . 884 660 1,760 Corporate. . . . . . . . . . . (2,993) (3,154) (2,586) ------------------------------------------- Total. . . . . . . . . . . . 7,255 6,359 4,932 Gain on disposition. . . . . . 5,888 - 818 Interest income. . . . . . . . 301 159 54 Interest expense . . . . . . . (680) (1,123) (859) ------------------------------------------- Consolidated income before income taxes. . . . . $ 12,764 $ 5,395 $ 4,945 =========================================== IDENTIFIABLE ASSETS Power and data quality . . . . $ 46,735 $ 39,984 $ 38,653 Specialty products . . . . . . 4,265 7,590 9,582 ------------------------------------------- Consolidated segment totals. 51,000 47,574 48,235 Corporate. . . . . . . . . . . 15,804 16,601 13,921 ------------------------------------------- Consolidated assets. . . . . $ 66,804 $ 64,175 $ 62,156 =========================================== CAPITAL EXPENDITURES (1) Power and data quality . . . . $ 1,691 $ 1,761 $ 1,113 Specialty products . . . . . . 361 324 614 Corporate. . . . . . . . . . . 45 134 9 ------------------------------------------- Total. . . . . . . . . . . . $ 2,097 $ 2,219 $ 1,736 =========================================== DEPRECIATION AND AMORTIZATION Power and data quality . . . . $ 2,116 $ 1,830 $ 1,255 Specialty products . . . . . . 459 580 627 Corporate. . . . . . . . . . . 125 174 226 ------------------------------------------- Total. . . . . . . . . . . . $ 2,700 $ 2,584 $ 2,108 ===========================================
(1) Excludes assets acquired in business combinations. 20 18 SL INDUSTRIES, INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of SL Industries, Inc.: We have audited the accompanying consolidated balance sheets of SL Industries, Inc. and subsidiaries as of July 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended July 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SL Industries, Inc. and subsidiaries as of July 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP /s/ ARTHUR ANDERSEN LLP Philadelphia, PA September 5, 1997 21 19 SL INDUSTRIES, INC. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
----------------------------------------------------------------------------------------------- Quarter Ended ----------------------------------------------------------------------------------------------- October 31, January 31, April 30, July 31, ----------------------------------------------------------------------------------------------- 1996 1995 1997 1996 1997(2) 1996 1997 1996 ----------------------------------------------------------------------------------------------- (In thousands, except per share data) Net sales ..................... $27,844 $28,939 $29,253 $29,635 $29,773 $28,302 $28,817 $30,437 Gross margin .................. $ 9,665 $ 9,632 $10,069 $ 9,820 $10,085 $ 9,733 $10,517 $10,092 Income before income taxes .... $ 1,416 $ 1,160 $ 1,619 $ 1,222 $ 7,526 $ 1,453 $ 2,203 $ 1,560 Net income .................... $ 880 $ 757 $ 964 $ 817 $ 4,572 $ 900 $ 1,399 $ 1,024 Net income per common share (1) $ 0.15 $ 0.13 $ 0.16 $ 0.14 $ 0.76 $ 0.15 $ 0.23 $ 0.17 -----------------------------------------------------------------------------------------------
(1) Fiscal 1997 and 1996 include the effect of outstanding dilutive stock options. See Note 1 to consolidated financial statements. (2) Includes pre-tax gain, net of severance, facility closing, legal and other costs, on disposition of subsidiary of $5,888,000, increasing net income by $3,556,000, or $.59 per common share. See Note 2 to consolidated financial statements. 22 EX-22 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT
State or other Jurisdiction of Subsidiaries Incorporation - ------------ ------------- Cedar Corporation Nevada Cedro de Mexico, S.A. De C.V. Mexico Condor D.C. Power Supplies, Inc. California Industrias SL, S.A. de C.V Mexico PDQ Corporation New Jersey SL Ameritech Plastics, Inc. New York SL Auburn, Inc.(a) New York SL Delaware, Inc. Delaware SL International (FSC), Inc. U.S. Virgin Islands SL Surface Technologies, Inc.(b) New Jersey SL Montevideo Technology, Inc. Minnesota SL Piping Systems, Inc.(c) Delaware SL Waber, Inc. New Jersey Teal Electronics Corporation California Waber de Mexico, S.A. De C.V. Mexico Waber Power, LTD(d) Connecticut
All of the registrant's subsidiaries are included in the consolidated financial statements for the year ended July 31, 1997 - ---------------------- (a) Disposed on May 1, 1997. (b) Formerly SL Modern Hard Chrome, Inc. (c) Disposed on February 20, 1996. (d) Formerly SL Electrostatic Technology, Inc. EX-24 6 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 24 [ARTHUR ANDERSEN LLP LETTERHEAD] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports incorporated by reference or included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-53274, 33-63681, 33-65445 and 33-00269. /s/ Arthur Andersen LLP ------------------- Philadelphia, PA October 29, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Statement of Earnings, Consolidated Balance Sheet and Consolidated Statements of Cash Flow and is qualified in its entirety by reference to such 10-K -- Year Ended July 31, 1997. 1,000 YEAR JUL-31-1997 AUG-01-1996 JUL-31-1997 0 0 19,931 1,790 16,505 38,526 18,171 11,875 66,804 21,127 0 0 0 1,592 36,492 66,804 115,687 115,687 74,085 108,432 680 63 0 12,764 4,949 0 0 0 0 7,815 1.30 1.30
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