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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
____________________________
COMMISSION FILE NUMBER 0-8675
OIL-DRI CORPORATION OF AMERICA
DELAWARE 36-2048898
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
410 NORTH MICHIGAN AVENUE, SUITE 400, CHICAGO, ILLINOIS 60611-4213
(312) 321-1515
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether Oil-Dri (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 Oil-Dri 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 pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Oil-Dri's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether Oil-Dri is an accelerated filer:
Yes [ ] No [X]
1
The aggregate market value of Oil-Dri's Common Stock owned by non-affiliates as
of January 31, 2004 for accelerated filer purposes was $66,598,000.
The aggregate market value of Oil-Dri's Common Stock owned by non-affiliates as
of September 30, 2004 was $60,577,000.
Number of shares of each class of Oil-Dri's capital stock outstanding as of
September 30, 2004:
Common Stock - 5,598,460 shares (including 1,538,571 treasury shares)
Class B Stock - 1,792,583 shares (including 342,241 treasury shares)
Class A Common Stock - 0 shares
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
1. Oil-Dri's Proxy Statement for its 2004 Annual Meeting of Stockholders
("Proxy Statement"), which will be filed with the Securities and Exchange
Commission not later than November 29, 2004 (120 days after the end of Oil-Dri's
fiscal year ended July 31, 2004), is incorporated into Part III of this Annual
Report on Form 10-K, as indicated herein.
2
CONTENTS
PAGE
----
PART I
ITEM 1: Business................................................................... 4 - 8
ITEM 2: Properties................................................................. 9 - 10
ITEM 3: Legal Proceedings.......................................................... 10
ITEM 4: Submission of Matters to a Vote of Security Holders........................ 10
EXECUTIVE OFFICERS OF OIL-DRI............................................................ 11
PART II
ITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters...... 12
ITEM 6: Selected Financial Data.................................................... 14 - 15
ITEM 7: Management Discussion and Analysis of Financial
Condition and the Results of Operations.................................... 16 - 23
ITEM 7a: Quantitative and Qualitative Disclosures About Market Risk................. 24
ITEM 8: Financial Statements and Supplementary Data................................ 26 - 55
ITEM 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................................... 56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................................. 56
PART III
ITEM 10: Directors and Executive Officers of Oil-Dri................................ 57
ITEM 11: Executive Compensation..................................................... 57
ITEM 12: Security Ownership of Certain Beneficial Owners and Management............. 57
ITEM 13: Certain Relationships and Related Transactions............................. 58
ITEM 14: Controls and Procedures.................................................... 58
PART IV
ITEM 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 59 - 62
SIGNATURES ........................................................................... 63 - 64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE.. 65
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS......................................... 66
EXHIBIT INDEX ........................................................................... 67
ATTACHED EXHIBITS........................................................................ 68 - 76
3
PART I
ITEM 1. BUSINESS
Oil-Dri is a leader in developing, manufacturing and marketing sorbent
products and related services for the consumer, specialty, crop production and
horticultural and industrial and automotive markets. Oil-Dri's sorbent products
are principally produced from clay minerals and, to a lesser extent, other
sorbent materials. Oil-Dri's sorbent technologies include absorbent and
adsorbent products. Absorbents, like sponges, draw liquids up into their many
pores. Examples of Oil-Dri's absorbent clay products are Cat's Pride(R) and
Jonny Cat(R) premium cat litter and other cat litters, Oil-Dri All Purpose(R)
floor absorbent and other floor absorbents and Agsorb(R) granular agricultural
chemical carriers. Adsorbent products attract liquids, impurities, metals and
surfactants to themselves and form low-level chemical bonds. Oil-Dri's
adsorbents are used for cleanup and filtration mediums. Oil-Dri's adsorbent
products include Oil-Dri Lites(TM) sorbents for industrial cleanup, Pure-Flo(R),
Pure-Flo(R) Supreme, Perform(TM) and Select(TM) bleaching clays for edible oils,
fats and tallows, and Ultra-Clear(R) clarification aids for petroleum-based oils
and by-products.
Consumer products, consisting primarily of cat litter, are sold through
the grocery products industry, mass merchandisers, warehouse clubs, and pet
retail outlets. Specialty products, consisting of both bleaching, filtration and
clarification clays, are sold to processors and refiners of edible and
petroleum-based oils and animal health products sold to feed manufacturers and
poultry producer. Crop production and horticultural products, which include
carriers for crop protection chemicals and fertilizers, drying agents, soil
conditioners, sports field products, and flowability aids, are sold to
manufacturers of agricultural chemicals and distributors of other agricultural
and sports turf products. Industrial and automotive products, consisting
primarily of oil, grease and water sorbents (both clay and non-clay), are sold
to distributors of industrial cleanup and automotive products, environmental
service companies and retail outlets.
Oil-Dri has pursued a strategy of developing products for consumer,
specialty, crop production, horticultural, and industrial and automotive uses,
where Oil-Dri's marketing, manufacturing and research and development
capabilities can play important roles. Oil-Dri's products are sold through its
specialized divisional sales staffs supported by technical service
representatives and a network of industrial distributors and food brokers.
Oil-Dri maintains its own research and development facility and staff.
Oil-Dri Corporation of America was incorporated in 1969 in Delaware as the
successor to an Illinois corporation incorporated in 1946; the Illinois
corporation was the successor to a partnership that commenced business in 1941.
Except as otherwise indicated herein or as the context otherwise requires,
references herein to "Oil-Dri" or to the "Company" are to Oil-Dri Corporation of
America and its subsidiaries. Certain financial information on segments is
contained in Note 3 of the Notes to the Consolidated Financial Statements,
incorporated herein by reference. Information concerning total revenue of
classes of similar products accounting for more than 10% of consolidated
revenues in any of the last three fiscal years is not separately provided
because it is the same as the information on net sales of segments furnished in
Note 3 of the Notes to the Consolidated Financial Statements. Certain financial
information about Oil-Dri's foreign and domestic operations is also contained in
Note 3 of the Notes to the Consolidated Financial Statements, and is
incorporated herein by reference.
Consumer Products Group
Oil-Dri's cat litter products, in both coarse granular and fine granular
clumping (scoopable) forms, are sold under Oil-Dri's Cat's Pride(R), Jonny
Cat(R) and Lasting Pride(R) brand names, the Fresh Step(R) brand manufactured
for The Clorox Company ("Clorox"), and private label cat litters manufactured
for mass merchandisers, wholesale clubs, drugstore chains, pet superstores and
retail grocery stores. Oil-Dri also packages and markets Cat's Pride(R) Kat
Kit(R) and Jonny Cat(R) cat litter in a disposable tray. These products are sold
through independent food brokers and Oil-Dri's sales force to major outlets such
as Wal-Mart, Publix, Kroger, Stop and Shop and others.
The cat litter market consists of two segments of product, coarse
(traditional) and scoopable. Coarse litters are products that have absorbent and
odor controlling characteristics. Scoopable litters, in addition to having
absorbent and odor controlling characteristics, also have the characteristic of
clumping when exposed to moisture, allowing the consumer to dispose of the used
portion of the litter selectively. The cat litter market has expanded at a
moderate pace in recent years, with the larger portion of the growth coming in
the scoopable segment. Introduced in the early 1990s, the scoopable litters have
captured the majority of the market measured in retail dollars.
4
The overwhelming majority of all cat litter is mineral based; however,
over the years various alternative litters have been introduced based on
alternative strata such as paper, various agricultural waste products and most
recently, silica gels. To date, these products have assumed only niche positions
within the category.
Oil-Dri has two long-term supply agreements (only one of which is
material) under which it manufactures branded traditional litters for other
marketers. Under these co-manufacturing relationships, the marketer controls all
aspects of sales, marketing, distribution and the odor control formula; the
Company is responsible for manufacturing. Oil-Dri and Clorox have such an
agreement under which they developed Fresh Step(R) premium-priced cat litter
products and under which Oil-Dri has an exclusive right to supply Clorox's
requirements for Fresh Step(R) coarse cat litter up to certain levels.
Oil-Dri had manufactured and sold dog treats as part of its Consumer
Products Group. In February 2004, however, Oil-Dri sold this business. The sale
had no material impact on Oil-Dri's revenue or results of operations.
Specialty Products Group
Specialty products include Pure-Flo(R) and Pure-Flo(R) Supreme bleaching
clays and Ultra-Clear(R) clarification aids. These products are supported by a
team of technical sales and support representatives employed by the Company as
well as agent representatives and the services of Oil-Dri's research and
development group. The products are marketed in the United States and
international markets.
Pure-Flo(R) bleaching clays, used in the bleaching of edible oils, remove
impurities and color bodies from these oils. The primary customers for these
products are refiners of food oils. Ultra-Clear(R) clarification aids are used
as filtration and purification mediums for jet fuel and other petroleum-based
products. These products adsorb unwanted moisture and other impurities, and are
primarily sold to petroleum refiners.
Oil-Dri also produces Perform(TM) and Select(TM) bleaching clays, which
offer performance advantages to refiners. The Perform(TM) products provide
increased activity for hard-to-bleach oils. The Select(TM) line of products is
used earlier in the process stream to remove a variety of impurities from edible
oils. Select(TM) bleaching clays can also be used to significantly improve the
refining process of edible oils. Other products include Pel-Unite Plus(TM) and
ConditionAde(R) binders used in the manufacturing of animal feeds and Poultry
Guard(R) litter amendments used in controlling ammonia levels in commercial
poultry houses.
Crop Production and Horticultural Products Group
Oil-Dri produces and markets a wide range of granular and powdered mineral
absorbent products that are used with crop protection chemicals, agricultural
drying agents, bulk processing aids, growing media, turf fertilizers and sports
field products. Brands include Agsorb(R) agricultural chemical carriers and
drying agents; Flo-Fre(R), a highly absorbent microgranule flowability aid;
Terra-Green(R) growing media supplement; and Pro's Choice(R) sports field
conditioners.
Agsorb(R) carriers are used as a delivery system for crop protection
chemicals, including herbicides, fungicides, insecticides, and fertilizers.
Agsorb(R) customized carriers are designed to reduce dust and to facilitate
accuracy of application. Oil-Dri's Agsorb(R) drying agent is used to make blends
of fertilizers and pesticides more robust, allowing farmers to apply these
blends to their fields in one application. Oil-Dri has also developed the
Agsorb(R) product as a blending agent for fertilizers and chemicals used in the
lawn and garden market.
Agricultural products are marketed in the United States by technical
salesmen employed by the Company who sell to crop protection chemical
manufacturers, feed producers and lawn and garden manufacturers. Oil-Dri's
principal customers for these products include DowElanco, Syngenta, ASDG and
Bayer.
Pro's Choice sports field products are used on baseball, football and
soccer fields to prevent rain outs, break up field compaction and improve field
resiliency. They are used at all levels of play, including professional,
college, high school and on municipal fields. These products are sold through a
network of distributors specializing in sports turf products use by
groundskeepers and athletic directors.
5
Industrial and Automotive Products Group
Products for industrial applications include Oil-Dri's oil, grease and
water sorbents, which are cost effective floor maintenance products that provide
a non-slip and nonflammable surface for workers. These products are sold through
a wide range of distribution channels and have achieved a high level of brand
name recognition. Oil-Dri distributes clay-based sorbents sold in granular form
and in other configurations such as "socks." Oil-Dri also distributes
polypropylene sorbents in various forms such as pads and rolls. Oil-Dri sells
its industrial products through a distributor network that includes industrial,
auto parts, safety, sanitary supply, chemical and paper distributors and
environmental service companies. Oil-Dri supports the efforts of the industrial
distributors with specialized divisional sales personnel.
Oil-Dri also produces a floor absorbent for home and garage use. This
product is sold through automobile parts distributors and mass merchandisers.
Patents
Oil-Dri has obtained or applied for patents for certain of its processes
and products. These patents expire at various times, beginning in 2005. Patented
processes and products are not material to Oil-Dri's overall business.
Foreign
Favorite Products Company, Ltd. (d.b.a. Oil-Dri Canada) is a manufacturer
and marketer of branded and private label cat litter in the Canadian market
place. Among its branded products are Saular(R), a leading cat litter brand in
Canada; and Saular(R)Kat-Kit(TM), a disposable cat litter tray and litter
combination. Certain of the products sold in Canada are blends of clay and
synthetic sorbent materials. Oil-Dri's wholly-owned subsidiary in England,
Oil-Dri (U.K.), Ltd., packages clay granules produced by Oil-Dri's domestic
manufacturing facilities and, for certain applications, blends a synthetic
sorbent material which it manufactures locally. Oil-Dri (U.K.), Ltd. markets
these products, primarily in the United Kingdom, as an oil and grease absorbent
and as a cat litter. Oil-Dri's wholly owned subsidiary in Switzerland, Oil-Dri
S.A., performs various management, customer service and administrative functions
for Oil-Dri and its foreign subsidiaries.
The Company's foreign operations are subject to the normal risks of doing
business overseas, such as currency devaluations and fluctuations, restrictions
on the transfer of funds and import/export duties. Oil-Dri was not materially
impacted by these foreign currency fluctuations in any of its last three fiscal
years.
Backlog; Seasonality
At July 31, 2004, 2003 and 2002, Oil-Dri's backlog of orders was
approximately $3,421,000, $4,277,000 and $2,448,000 respectively. Oil-Dri
considers its clay sorbent business, taken as a whole, to be only moderately
seasonal. However, business activities of certain customers (such as
agricultural) are subject to such factors as crop acreage planted and product
formulation cycles.
Customers
Sales to Wal-Mart Stores, Inc. accounted for approximately 18%, 19% and
22% of Oil-Dri's net sales for the fiscal year ended July 31, 2004, 2003 and
2002 respectively. Sales to The Clorox Company accounted for approximately 9%,
9% and 10% of Oil-Dri's net sales for the fiscal year ended July 31, 2004, 2003
and 2002 respectively. The loss of any other of Oil-Dri's customers would not
have a materially adverse effect on Oil-Dri.
Competition
Oil-Dri has approximately seven principal competitors in the United
States, some of which have substantially greater financial resources than the
Company, which compete with Oil-Dri in certain markets and with respect to
certain products. Price, service and technical support, product quality and
delivery are the principal methods of competition in Oil-Dri's markets and
competition has historically been very vigorous.
6
Reserves
Oil-Dri mines sorbent materials, consisting of either montmorillonite,
attapulgite or diatomaceous earth on leased or owned land near its manufacturing
facilities in Mississippi, Georgia, Illinois and California; it also has
reserves in Nevada, Oregon and Tennessee (see "Item 2. Properties" below).
Oil-Dri estimates that its proven recoverable reserves of these sorbent
materials aggregate approximately 462,467,000 tons. Based on its rate of
consumption during the 2004 fiscal year, without regard to any of its reserves
in Nevada, Oregon and Tennessee, Oil-Dri considers its proven recoverable
reserves adequate to supply Oil-Dri's needs for over 40 years. Although Oil-Dri
considers these reserves to be both marketable and extremely valuable to the
business, only a small portion of the reserves, those which were acquired in
acquisitions, are reflected at cost on the balance sheet.
It is Oil-Dri's policy to attempt to add to reserves in most years, but
not necessarily in every year, an amount at least equal to the amount of
reserves consumed in that year. Oil-Dri has a program of exploration for
additional reserves and, although reserves have been acquired, Oil-Dri cannot
assure that additional reserves will continue to become available. Oil-Dri's use
of these reserves will be subject to compliance with existing and future federal
and state statutes and regulations regarding mining and environmental
compliance. Also, requirements for environmental compliance may restrict
exploration or use of lands that might otherwise be utilized as a source of
reserves. During the fiscal year ended July 31, 2004, Oil-Dri utilized these
reserves to produce substantially all of the sorbent minerals that it sold.
Proven reserves are those reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or
quality are computed from results of detailed sampling, and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well established. Probable reserves are computed from information
similar to that used for proven reserves, but the sites for inspection,
sampling, and measurement are farther apart or are otherwise less adequately
spaced. The degree of assurance, although lower than that for proven reserves,
is high enough to assume continuity between points of observation. Oil-Dri
employs a staff of geologists and mineral specialists who estimate and evaluate
existing and potential reserves in terms of quality, quantity and availability.
Mining Operations
Oil-Dri has conducted mining operations in Ripley, Mississippi since 1963;
in Ochlocknee, Georgia since 1971; in Blue Mountain, Mississippi since 1989; in
Mounds, Illinois since 1998 and in Taft, California since 2002. Oil-Dri's raw
materials are surface mined on a year-round basis, generally using large earth
moving scrapers, bulldozers, excavators or off-road tucks to remove overburden,
and then loaded into dump trucks with backhoe or front end loader for movement
to the processing facilities. The mining and hauling of Oil-Dri's clay is
performed by Oil-Dri and by independent contractors. Oil-Dri's current operating
mines range in distance from immediately adjacent to approximately 13 miles from
the related processing plants. Access to processing facilities from the mining
areas is generally by private road, and in some instances public highways are
utilized. Each of Oil-Dri's processing facilities maintains inventories of
unprocessed clay of approximately one week of production requirements. The
following schedule summarizes, for each of Oil-Dri's manufacturing facilities,
the net book value of land and other plant and equipment:
PLANT AND
LAND EQUIPMENT
---- ---------
(IN THOUSANDS)
Ochlocknee, Georgia....................................................... $ 2,433 $ 9,911
Ripley, Mississippi....................................................... $ 1,535 $ 7,140
Mounds, Illinois.......................................................... $ 1,544 $ 6,541
Blue Mountain, Mississippi................................................ $ 955 $ 5,089
Taft, California.......................................................... $ 1,283 $ 3,289
7
Employees
As of July 31, 2004, Oil-Dri employed 781 persons, 72 of who were employed
by Oil-Dri's foreign subsidiaries. Oil-Dri's corporate offices, research and
development center and manufacturing facilities are adequately staffed and no
material labor shortages are anticipated. Approximately 44 of Oil-Dri's
employees in the U.S. and approximately 28 of Oil-Dri's employees in Canada are
represented by labor unions, which have entered into separate collective
bargaining agreements with the Company. Employee relations are considered
satisfactory.
Environmental Compliance
Oil-Dri's mining and manufacturing operations and facilities in Georgia,
Mississippi, California and Illinois are required to comply with state surface
mining statutes and various federal, state and local statutes, regulations and
ordinances which govern the discharge of materials, water and waste into the
environment and restrict mining on wetlands or otherwise regulate Oil-Dri's
operations. In recent years, environmental regulation has grown increasingly
stringent, a trend that Oil-Dri expects will continue. Oil-Dri endeavors to be
in substantial compliance at all times with all applicable environmental
controls and regulations. As a result, expenditures relating to environmental
compliance have increased over the years; however, these expenditures have not
been material. Oil-Dri continues, and will continue, to incur costs in
connection with reclaiming exhausted mining sites. The costs of reclamation have
not had a material effect on its mining costs. These costs are treated as part
of Oil-Dri's mining expense.
In addition to the environmental requirements relating to mining and
manufacturing operations and facilities, there is increasing federal and state
legislation and regulation with respect to the labeling, use, and disposal after
use, of various Oil-Dri products. Oil-Dri endeavors to be in substantial
compliance at all times with that legislation and regulation and to assist its
customers in that compliance.
Oil-Dri cannot assure that, despite all commercially reasonable efforts,
it will always be in compliance with environmental legislation and regulations
or with requirements regarding the labeling, use, and disposal after use, of its
products; nor can it assure that from time to time enforcement of such
requirements will not have an adverse impact on its business.
Energy
Oil-Dri uses coal, natural gas and recycled fuel oil as permitted for
energy sources in the processing of its clay products. Consistent with prior
years, Oil-Dri has switched from natural gas to other energy sources during
certain months due to seasonal unavailability and the higher cost of natural gas
relative to other fuels. See Item 7a. "Quantitative and Qualitative Disclosures
About Market Risk" with respect to the use of forward contracts.
Research and Development
At Oil-Dri's research and development facility, the staff develops new
products and applications and improves existing products. The staff and various
consultants consist of geologists, mineralogists and chemists. In the past
several years, Oil-Dri's research efforts have resulted in a number of new
sorbent products and processes. The facility produces prototype samples and
tests new products for customer trial and evaluation.
Oil-Dri spent approximately $2,453,000, $1,923,000 and $1,955,000 during
its fiscal years ended July 31, 2004, 2003 and 2002, respectively, for research
and development. None of such research and development was customer sponsored,
and all research and development costs are expensed in the year in which
incurred. See Note 1 of the Notes to the Consolidated Financial Statements.
8
ITEM 2. PROPERTIES
Oil-Dri's properties are generally described below:
LAND HOLDINGS & MINERAL RESERVES
ESTIMATED ESTIMATED
LAND LAND LAND PROVEN PROBABLE
OWNED LEASED UNPATENTED CLAIMS TOTAL RESERVES RESERVES TOTAL
----- ------ ----------------- ----- -------- -------- -----
(ACRES) (ACRES) (ACRES) (ACRES) (000S OF TONS) (000S OF TONS) (000S OF TONS)
California ... 795 -- 1,030 1,825 5,997 11,226 17,223
Georgia ...... 1,884 1,639 -- 3,523 26,455 11,854 38,309
Illinois ..... 82 598 -- 680 8,163 5,132 13,295
Mississippi .. 2,182 978 -- 3,160 112,012 114,923 226,935
Nevada ....... 535 -- 5,827 6,362 306,830 248,874 555,704
Oregon ....... 360 -- -- 360 10 35 45
Tennessee .... 178 -- -- 178 3,000 3,000 6,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
6,016 3,215 6,857 16,088 462,467 395,044 857,511
========== ========== ========== ========== ========== ========== ==========
See also "Item 1. Business--Reserves"
There are no mortgages on the real property owned by Oil-Dri. The
Mississippi, Georgia, Tennessee, Nevada, California and Illinois properties are
primarily mineral in nature. Parcels of such land are also sites of
manufacturing facilities operated by Oil-Dri. The Illinois land also includes
the site of Oil-Dri's research and development facility. Oil-Dri owns
approximately one acre of land in Laval, Quebec, Canada, which is the site of
the processing and packaging facility for Oil-Dri's Canadian subsidiary.
Oil-Dri's mining operations are conducted on leased or owned land. The
Georgia, Illinois, and Mississippi mining leases generally require that Oil-Dri
pay a minimum monthly rental to continue the lease term. The rental payments are
generally applied against a stated royalty related to the number of unprocessed,
or in some cases processed, tons of mineral extracted from the leased property.
Most of the mining leases generally have no stated expiration dates. Some of the
Georgia leases have expiration dates ranging from 2005 to 2053. The expiration
of any of these leases would not have a material adverse effect on Oil-Dri.
Manufacturing at facilities that are not contiguous with the related mines,
Oil-Dri has a variety of access arrangements, some of which are styled as
leases. The expiration or termination of any of these arrangements would not
have a material adverse effect on the Company.
Of Oil-Dri's total reserves and land around the plants, certain placer
claims and mill sites in California and Nevada are claims leased by Oil-Dri, on
which Oil-Dri has the right to conduct mining or processing activities. The
validity of title to unpatented claims is dependent upon numerous factual
matters. Oil-Dri believes the unpatented claims it leases are in compliance with
all applicable federal, state and local mining laws, rules and regulations.
Future amendments to existing federal mining laws, however, could have a
prospective effect on mining operations on federal lands and include, among
other changes, the imposition of royalty fees on the mining of unpatented
claims, the elimination or restructuring of the patent system and an increase in
fees for the maintenance of unpatented claims. To the extent that future
proposals may result in the imposition of royalty fees on unpatented lands, the
mining of Oil-Dri's unpatented claims may become uneconomic. Oil-Dri cannot
predict the form that any such amendments might take or whether or when such
amendments might be adopted. In addition, the construction and operation of
processing facilities on these sites would require the approval of federal,
state and local regulatory authorities.
9
Oil-Dri operates facilities in the following locations:
LOCATION OWNED/LEASED SIZE (SQ. FT.) FUNCTION
- --------------------------------------------------------------------------------------------------
Alpharetta, Georgia Leased 26,000 Non-clay processing and warehousing
- --------------------------------------------------------------------------------------------------
Blue Mountain, Both 146,000 Clay mining, manufacturing and
Mississippi packaging
- --------------------------------------------------------------------------------------------------
Chicago, Illinois Leased 20,000 Principal executive office
- --------------------------------------------------------------------------------------------------
Mounds, Illinois Owned 129,000 Clay mining, manufacturing and
packaging
- --------------------------------------------------------------------------------------------------
Coppet, Switzerland Leased 1,000 Customer service office
- --------------------------------------------------------------------------------------------------
Laval, Quebec, Canada Owned 22,500 Non-clay production and packaging
- --------------------------------------------------------------------------------------------------
Ochlocknee, Georgia Owned 398,000 Clay mining, manufacturing and
packaging
- --------------------------------------------------------------------------------------------------
Ripley, Mississippi Owned 208,000 Clay mining, manufacturing and
packaging
- --------------------------------------------------------------------------------------------------
Taft, California Owned 135,000 Clay mining, manufacturing and
packaging
- --------------------------------------------------------------------------------------------------
Vernon Hills, Illinois Owned 19,100 Research and development
- --------------------------------------------------------------------------------------------------
Wisbech, United Kingdom Leased 66,850 Non-clay production and packaging
- --------------------------------------------------------------------------------------------------
The lease for the Alpharetta, Georgia facility expires in 2008. A portion of the
Blue Mountain, Mississippi facility is leased by Oil-Dri from the Town of Blue
Mountain in connection with industrial revenue bond financing obtained by
Oil-Dri in 1988. See Note 4 of Notes to Consolidated Financial Statements. Upon
expiration of the relevant leases in 2008 and full payment of the bonds, Oil-Dri
has the right to purchase the leased property for $100. The lease for the
Chicago, Illinois facility expires in 2018. The lease for the Wisbech, United
Kingdom facility expires in 2031. The lease for the Coppet, Switzerland office
is on a year-to-year basis.
ITEM 3. LEGAL PROCEEDINGS
The Company was named as a defendant in an action captioned PSN Illinois
LLC v. Oil-Dri Corporation of America filed February 5, 2004 in the United
States District Court for the Northern District of Illinois. The lawsuit alleged
that most of the Company's scoopable cat litter products infringed two patents
owned by the plaintiff. The plaintiff was seeking monetary damages in an
unspecified amount, treble damages if the alleged infringement is found to be
willful, as well as injunctive relief. On August 12, 2004, the Company announced
a settlement and dismissal of the plaintiff's claims. Under terms of the
settlement, the Company paid the plaintiff $1,250,000 and the plaintiff granted
the Company paid-up licenses of the two patents involved in the litigation as
well as a third patent owned by the plaintiff.
In April 2002, the Company filed parallel actions in state and federal
courts in Nevada against Washoe County, Nevada, alleging that the County's
denial of a special use permit (sought by the Company in connection with its
plan to build a manufacturing facility outside of Reno, Nevada) violated both
federal and state law. The lawsuits seek damages resulting from the County's
improper denial of the special use permit, which caused the Company to abandon
its plan to build the Reno facility. The federal court action has been dismissed
on jurisdictional grounds, and the state court action is now proceeding. A
hearing on the liability issues in the state court action took place in January
2004; however, no ruling has yet been issued. An adverse decision in the matter
would not have a material adverse effect on the Company.
The Company is involved in other ordinary routine litigation, none of
which is material individually or in aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
ITEM 401(b) OF REGULATION S-K. EXECUTIVE OFFICERS OF OIL-DRI
The following table gives certain information with respect to the
executive officers of Oil-Dri.
PRINCIPAL OCCUPATION
NAME(1) FOR LAST FIVE YEARS AGE
------- ------------------- ---
Daniel S. Jaffee(1)......... President and Chief Executive Officer of Oil-Dri 40
since August 1997.
Andrew N. Peterson(2)....... Vice President and Chief Financial Officer of Oil-Dri 52
since October 2004; Vice President and Chief
Financial Officer of Barjan Products, LLC, February
2003 to March 2004; Chief Financial Officer and Chief
Operating Officer of Cognitive Concepts, Inc., March
2000 to March 2002; Chief Financial Officer of
PCQuote.com, Inc., April 1999 to March 2000.
Eugene W. Kiesel(3)......... Vice President of Specialty Products Group of Oil-Dri 47
since January 2001; Vice President & General Manager
of Global Fluids Purification Division from October,
1997 to January 2001.
Wade R. Bradley............. Vice President of Consumer Products Group of Oil-Dri 44
since June 2000; Vice President, Industrial & Automotive
Products Group from December 1998 to June 2000.
Thomas F. Cofsky(4)......... Vice President of Manufacturing and Logistics of 43
Oil-Dri since June 1999.
Charles P. Brissman......... Vice President, General Counsel and Secretary 44
of Oil-Dri since October 2002; Chief Counsel, Corporate
Development and Asset Distribution, and Chief Litigation
Counsel, Heller Financial, Inc. April 1998 to October 2002.
Steven M. Azzarello......... Vice President of New Product Development of Oil-Dri 45
since May 2002; Vice President of Sales and Marketing for
the Americas from September 2000 to May 2002; General
Sales Manager for the Americas from January 2000
to September 2000: Commercial Director, Latin America
from September 1999 to January 2000.
The term of each executive officer expires at the 2004 annual meeting of
stockholders and when his successor is elected and qualified.
- ----------
(1) Of the persons in this table, only Daniel S. Jaffee is a director.
(2) Andrew N. Peterson joined the Company on October 8, 2004.
(3) Eugene W. Kiesel has notified the Company of his resignation, effective
October 31, 2004.
(4) Thomas F. Cofsky is Daniel S. Jaffee's brother-in-law.
11
PART II
ITEM 5. MARKET FOR OIL-DRI'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
(a). Information with respect to holders of Common Stock and Class B Stock
is contained in Note 7 of the Notes to the Consolidated Financial Statements
incorporated herein by reference.
Information concerning stock prices and dividends with regard to the
Common Stock of Oil-Dri, which is traded on the New York Stock Exchange, and
information concerning dividends with regard to the Class B Stock of Oil-Dri,
for which there is no established public trading market, is contained in Note 16
of the Notes to the Consolidated Financial Statements, incorporated herein by
reference. No shares of Class A Common Stock are outstanding. Oil-Dri's 1998
Note Agreement with Teachers Insurance and Annuity Association and Prudential
Financial (which acquired the retirement services business of Cigna Corporation
in April 2004) and Oil-Dri's Credit Agreement with Harris Trust and Savings Bank
dated January 29, 1999 as amended, require that certain minimum net worth and
tangible net worth levels are to be maintained. To the extent that these
balances are not attained, Oil-Dri's ability to pay dividends may be impaired.
See Note 4 of the Notes to the Consolidated Financial Statements.
(c). The following chart summarizes Common Stock repurchases for the three
months ended July 31, 2004.
ISSUER PURCHASES OF EQUITY SECURITIES
TOTAL NUMBER OF
SHARES PURCHASED (d) MAXIMUM
(a) TOTAL (b) AS PART OF NUMBER OF SHARES
FOR THE THREE NUMBER OF AVERAGE PUBLICLY THAT MAY YET BE
MONTHS ENDED SHARES PRICE PAID ANNOUNCED PLANS PURCHASED UNDER
JULY 31, 2004 PURCHASED PER SHARE OR PROGRAMS PLANS OR PROGRAMS
- ------------------------------------------------------------------------------------
May 1, 2004 to
May 31, 2004 1,700 $16.67 1,700 210,504
- ------------------------------------------------------------------------------------
June 1, 2004 to
June 30, 2004 24,300 $16.07 24,300 186,204
- ------------------------------------------------------------------------------------
July 1, 2004 to
July 31, 2004 3,700 $16.72 3,700 182,504
- ------------------------------------------------------------------------------------
12
(This page intentionally left blank.)
13
ITEM 6. SELECTED FINANCIAL DATA
TEN YEAR SUMMARY OF FINANCIAL DATA
2004 2003 2002 2001
---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Summary of Operations ...........................
Net Sales ....................................... $ 185,511 $ 173,041 $ 162,345 $ 160,669
Cost of Sales ................................... 142,263 137,413 131,265 131,804
---------- ---------- ---------- ----------
Gross Profit .................................... 43,248 35,628 31,080 28,865
Other Contractual Income & Charges .............. (1,250) 675 -- 4,278
Loss on Impaired Long-Lived Assets .............. (464) -- (3,213) --
Selling, General and Administrative Expenses .... (32,975) (29,686) (27,878) (28,977)
Restructuring and Special Charges ............... -- -- -- --
---------- ---------- ---------- ----------
Income (Loss) from Operations ................... 8,559 6,617 (11) 4,166
---------- ---------- ---------- ----------
Other Income (Expense)
Interest Income ............................... 222 216 295 235
Interest Expense .............................. (2,079) (2,361) (2,575) (2,916)
Foreign Exchange Gains (Losses) ............... (26) 22 (133) (228)
Gain on the Sale of Mineral Rights ............ -- 139 769 --
Other, Net .................................... 255 (291) 96 212
---------- ---------- ---------- ----------
Total Other Expense, Net .................... (1,628) (2,275) (1,548) (2,697)
---------- ---------- ---------- ----------
Income (Loss) before Income Taxes ............... 6,931 4,342 (1,559) 1,469
Income Taxes (Benefit) .......................... 1,898 1,259 (465) 556
---------- ---------- ---------- ----------
Net Income (Loss) ............................... $ 5,033 $ 3,083 $ (1,094) $ 913
========== ========== ========== ==========
AVERAGE SHARES OUTSTANDING
Diluted ....................................... 5,962 5,708 5,614 5,613
NET INCOME (LOSS) PER SHARE
Diluted ....................................... $ 0.84 $ 0.54 $ (0.19) $ 0.16
IMPORTANT HIGHLIGHTS
Total Assets .................................. $ 128,875 $ 126,823 $ 125,035 $ 130,524
Long-Term Debt ................................ $ 23,320 $ 27,400 $ 31,400 $ 34,256
Working Capital ............................... $ 40,945 $ 35,396 $ 37,652 $ 36,100
Working Capital Ratio ......................... 2.5 2.4 2.9 2.8
Book Value per Share .......................... $ 13.19 $ 12.38 $ 12.30 $ 12.80
Dividends Declared ............................ $ 2,050 $ 1,883 $ 1,894 $ 1,892
Capital Expenditures .......................... $ 6,067 $ 4,882 $ 4,096 $ 5,609
Depreciation and Amortization ................. $ 8,057 $ 8,534 $ 8,785 $ 9,089
Net Income (Loss) as a Percent of Sales ....... 2.7% 1.8% (0.7%) 0.6%
Return on Average Stockholders' Equity ........ 7.1% 4.5% (1.6%) 1.3%
Gross Profit as a Percent of Net Sales ........ 23.3% 20.6% 19.1% 18.0%
Operating Expenses as a Percent of Net Sales .. 18.7% 16.8% 19.2% 15.4%
14
YEAR ENDED JULY 31
------------------
2000 1999 1998 1997 1996 1995
- ---------- ---------- ---------- ---------- ---------- ----------
$ 164,044 $ 163,888 $ 152,194 $ 148,895 $ 144,210 $ 148,861
127,434 121,230 111,990 109,906 108,997 109,288
- ---------- ---------- ---------- ---------- ---------- ----------
36,610 42,658 40,204 38,989 35,213 39,573
-- -- -- -- -- --
-- -- -- -- -- --
(29,617) (30,907) (28,646) (28,320) (28,309) (26,863)
(1,239) -- (3,129) -- (921) --
- ---------- ---------- ---------- ---------- ---------- ----------
5,754 11,751 8,429 10,669 5,983 12,710
- ---------- ---------- ---------- ---------- ---------- ----------
206 480 491 637 587 448
(3,185) (3,185) (2,049) (1,775) (1,917) (1,921)
(173) (124) (146) -- (7) (5)
-- -- -- -- -- --
446 1,114 (119) (17) 137 (84)
- ---------- ---------- ---------- ---------- ---------- ----------
(2,706) (1,715) (1,823) (1,155) (1,200) (1,562)
- ---------- ---------- ---------- ---------- ---------- ----------
3,048 10,036 6,606 9,514 4,783 11,148
821 2,860 1,883 2,721 1,409 3,145
- ---------- ---------- ---------- ---------- ---------- ----------
$ 2,227 $ 7,176 $ 4,723 $ 6,793 $ 3,374 $ 8,003
========== ========== ========== ========== ========== ==========
5,677 5,996 6,165 6,599 6,807 6,936
$ 0.39 $ 1.20 $ 0.77 $ 1.03 $ 0.50 $ 1.15
$ 132,844 $ 133,750 $ 134,215 $ 114,558 $ 117,693 $ 116,988
$ 39,434 $ 38,150 $ 39,976 $ 17,052 $ 18,978 $ 20,422
$ 38,875 $ 37,141 $ 36,283 $ 31,165 $ 30,399 $ 33,074
3.6 3.3 3.1 3.0 2.7 3.1
$ 13.01 $ 13.00 $ 12.15 $ 12.03 $ 11.46 $ 11.35
$ 1,900 $ 1,904 $ 1,808 $ 1,936 $ 2,022 $ 2,047
$ 6,001 $ 8,495 $ 6,496 $ 5,395 $ 7,184 $ 7,032
$ 9,099 $ 8,497 $ 7,832 $ 7,587 $ 7,926 $ 7,808
1.4% 4.4% 3.1% 4.6% 2.3% 5.4%
3.0% 9.8% 6.3% 8.8% 4.3% 10.6%
22.3% 26.0% 26.4% 26.2% 24.4% 26.6%
18.8% 18.9% 20.9% 19.0% 20.3% 18.0%
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Fiscal 2004 Compared to Fiscal 2003
Consolidated net sales for the year ended July 31, 2004 were $185,511,000,
an increase of 7.2% from net sales of $173,041,000 in fiscal 2003. Net income
for the year was $5,033,000, an increase of 63.3% compared to the profit
reported in fiscal 2003 of $3,083,000. Diluted income per share was $0.84 in
fiscal 2004, versus a diluted income per share of $0.54 in fiscal 2003. Fiscal
2004 net income was positively impacted by the additional gross profit
associated with the 7.2% sales increase, foreign and domestic price increases
and generally improved manufacturing performance. Fiscal 2004 income was
negatively impacted by a $464,000 pre-tax loss on impaired assets, a $1,250,000
pre-tax charge to settle a patent infringement lawsuit and $700,000 of pre-tax
defense costs associated with the Company's settlement of the patent
infringement litigation.
Fiscal 2003 net income was positively impacted by a pre-tax gain of
$139,000 on the sale of mineral rights, a pre-tax contractual payment of
$675,000 from a customer that failed to meet minimum purchase requirements under
a supply agreement with the Company, a pre-tax gain on real estate sales of
$310,000, improved sales and reduced distribution costs. The increase in net
income was partially offset by a pre-tax write-off associated with the closure
of the Christmas Valley, Oregon production facility in the fourth quarter of
$573,000, a pre-tax asset write-off of $385,000 and a pre-tax goodwill write-off
of $350,000 related to an equity investment. See Note 2 of the Notes to the
Consolidated Financial Statements for a discussion of the loss on impaired
long-lived assets; the settlement of the patent infringement lawsuit; the gains
on the sale of land and mineral rights, the other contractual income and the
2003 closure and write-off of the Christmas Valley production plant.
Net sales of the Consumer Products Group for fiscal 2004 were
$114,027,000, an increase of 8.5% from net sales of $105,108,000 in fiscal 2003.
This segment's operating income increased 31.4% from $13,343,000 in fiscal 2003
to $17,532,000 in fiscal 2004. The net sales increase was driven by a full
year's sales of the Jonny Cat(R) product line in fiscal 2004 (versus seven
months in fiscal 2003), which also positively contributed to the segment's
increased gross profit. Also contributing to the sales and profit increases were
sales increases in the Cat's Pride scooping litters and private label litter for
Wal-Mart. The improved performance was facilitated by price increases and lower
purchasing costs on selected materials. Offsetting part of the gross profit
increase associated with the increased sales were increases in commissions and
advertising and trade spending expenses. The expense increases were incurred in
an effort to stabilize the market share of the Jonny Cat product line and to
continue to grow other product lines in this group. The Company's sale of its
dog treats business in the third quarter of fiscal 2004 did not have a material
impact on this group's sales or profitability.
Net sales of the Specialty Products Group for fiscal 2004 were
$27,759,000, an increase of 11.1% from net sales of $24,990,000 in fiscal 2003.
This segment's operating income increased 23.0% from $4,927,000 in fiscal 2003
to $6,058,000 in fiscal 2004. The profit increase was driven by improved sales
in the animal health and nutrition market, led by Poultry Guard(R) litter
amendments and ConditionAde(R) binding agents, and by price increases in animal
health and nutrition and bleaching earth. The growth was attributable to new
customers in Asia and Latin America as a result of an increased sales focus and
enhanced training of distributors. Sales growth was also seen in the bleaching
earth business in North America. Offsetting part of the gross profit increase
were expense increases in outside services, travel and commissions to support
the market expansion and increased technical services costs.
Net sales of the Crop Production and Horticultural Products Group for
fiscal 2004 were $21,006,000, a decrease of 3.7% from net sales of $21,820,000
in fiscal 2003. The net sales decrease resulted primarily from decreased sales
of Agsorb(R) drying agents and agricultural carriers, and decreased sales of
Pro's Choice(R) sports field products. The agricultural carriers business
softened in the second half of fiscal 2004 due to general concerns related to
the future direction of genetically modified seeds. The sports field products
sales have declined due to slower golf course construction sales. This segment's
operating income increased by 18.3% from $2,614,000 in fiscal 2003 to $3,092,000
in fiscal 2004. The increase in operating income was driven by price increases
and by a reduction of freight costs due to a better geographical mix of
customers close to the Company's facilities.
16
Net sales of the Industrial and Automotive Products Group for fiscal 2004
were $22,719,000, an increase of 7.6% from net sales of $21,123,000 in fiscal
2003. An increase in sales of industrial absorbents was due to additional volume
generated by a full year of production from the acquired production facility in
Taft, California versus seven months in fiscal 2003. Also price increases in
both clay and synthetic products and sales efforts focused on key growth
accounts contributed to the increased net sales. This segment's operating income
improved from a loss of $826,000 in fiscal 2003 to a loss of $452,000 in fiscal
2004. The improvement was driven by increased volumes and prices.
Consolidated gross profit as a percentage of net sales for fiscal 2004
increased to 23.3% from 20.6% in fiscal 2003 primarily as a result of a full
year's sales of the Jonny Cat product line in fiscal 2004 (versus seven months
in fiscal 2003), lower purchasing costs on selected materials in the Consumer
Products Group, increased sales of animal health and nutrition products in the
Specialty Products Group, and price increases in all groups. Also contributing
to the increased gross profit was a 2.6% reduction in non-fuel manufacturing
costs. Gross profit was negatively impact by a 14% increase in fuel costs as
compared to fiscal 2003.
The Christmas Valley closure negatively impacted the overall gross profit
in fiscal 2003. Approximately $484,000 of the $573,000 write-off was reflected
in cost of goods sold. This adjustment reduced the gross profit percentage from
20.9% for the year, down to the final reported level of 20.6%.
Operating expenses as a percentage of net sales for fiscal 2004 increased
to 18.7% from the 16.8% reported in fiscal 2003. Excluding the other contractual
income and charges in both fiscal 2004 and fiscal 2003 and the loss on impaired
assets in fiscal 2004, operating expenses increased from 17.2% in fiscal 2003 to
17.8% in fiscal 2004. Most of this increase was due to expense increases
discussed above in the Consumer Products and Specialty Products segments and the
defense costs associated with the patent infringement litigation.
Interest expense for fiscal 2004 decreased 11.9% from fiscal 2003 due to
the reduction in outstanding debt of $4,000,000.
The Company's effective tax rate was 27.4% of pre-tax income in fiscal
2004 versus 29.0% in fiscal 2003. Contributing to the decrease in the effective
tax rate for fiscal 2004 was a change in estimate in calculating the Company's
depletion deduction and the Company's decision to change from a separate company
federal tax filing to a consolidated company federal tax filing, which has
allowed the Company to better utilize its various tax attributes. Negatively
impacting the tax rate in fiscal 2004 was a $210,000 tax expense recorded on
certain unremitted earnings of the Company's Switzerland subsidiary. This charge
was taken to reflect the estimated potential impact of repatriating certain cash
balances held by that subsidiary.
Total assets of the Company increased $2,052,000 or 1.6% during fiscal
2004. Current assets increased $7,351,000 or 12.1% from the fiscal 2003 year-end
balances, primarily due to increases in cash and cash equivalents, investments
in securities, accounts receivable, prepaid expenses. The increase in cash and
investments was due the improved financial performance of the Company. Also, in
fiscal 2003 the Company's cash position was reduced by over $6,000,000 spent to
consummate the purchase of the Jonny Cat brand from Clorox. See Note 5 of the
Notes to the Consolidated Financial Statements.
The increase in prepaid expenses was due to a reclassification of the
deferred tax assets from long-term to current based on an analysis of the
composition of the deferred tax assets. Offsetting some of the increase were
decreases in inventories and prepaid overburden expense.
Property, plant and equipment, net of accumulated depreciation decreased
$1,224,000, or 2.5%, from the year-end balance in fiscal 2003. The decrease in
property, plant and equipment was due to normal depreciation expense exceeding
capital investments. Offsetting part of this decrease was the adoption of EITF
04-02 "Whether Mineral Rights are Tangible or Intangible Assets," which required
the Company to reclassify $1,205,000 from intangible assets to property, plant
and equipment.
Total liabilities decreased $1,192,000, or 2.1%, during fiscal 2004.
Current liabilities increased $1,802,000 or 7.1% during fiscal 2004, primarily
due to increased salaries, wages and commissions payable, accrued trade
promotions, and other accrued expenses. The settlement of patent infringement
litigation, described in Note 2 of the Notes of the Consolidated Financial
Statements, drove the increase in other accrued expenses. Offsetting some of the
17
increase was a decrease in accounts payable. Long-term debt decreased
approximately $4,000,000 due to principal payments.
Expectations
The Company believes that sales for fiscal 2005 should show a one to three
percent increase over those reported in fiscal 2004. The Company continues to
focus on replacing low margin business with higher margin business, while also
focusing on new product development. The Company anticipates continuing the
progress made in lowering non-fuel manufacturing costs and improving branded
product mix in fiscal 2005. Also, the Company does not expect any significant
non-recurring charges in the upcoming fiscal year. Therefore, the Company
estimates earnings per diluted share for fiscal 2005 to be in the range of $1.20
to $1.30.
Liquidity and Capital Resources
Working capital increased $5,549,000 during fiscal 2004 to $40,945,000,
primarily due to increased cash and cash equivalents, investments in Treasury
and debt securities, and prepaid expenses and other and decreased accounts
payable. The increase in cash and investments was due to the improved financial
performance of the Company and the fact that capital expenditures continued to
be less than depreciation and amortization. In addition, the Company received
$2,241,000 associated with the termination of two split-dollar life insurance
plans and the $325,000 for the sale of its dog treats business. In fiscal 2003
the Company's cash position was reduced by over $6,000,000 spent to consummate
the purchase of the Jonny Cat brand from Clorox. Partially offsetting some of
the increase in working capital were increases in other accrued expenses. These
increases were driven in large part by increased legal expenses and settlement
costs associated with the PSN lawsuit.
Cash provided by operating activities was used to fund capital
expenditures of $6,067,000, payments on long-term debt of $4,000,000,
repurchases of treasury stock of $1,824,000 and dividend payments of $1,998,000.
Total cash and investment balances held by the Company's foreign subsidiaries at
July 31, 2004 and July 31, 2003 were $3,633,000 and $2,557,000, respectively.
The increase in foreign cash and investments was driven by the improved
operating performance in the Company's Canadian subsidiary.
Accounts receivable, less allowance for doubtful accounts, increased by
1.7%, or $401,000 for fiscal 2004. During fiscal 2004 the Company experienced a
decrease in bad debts expense, from the $387,000 in fiscal 2003 to $201,000 in
fiscal 2004. The Company maintains policies and practices to monitor the
creditworthiness of its customers. These policies include maintaining and
monitoring a list of customers whose creditworthiness has diminished. The total
balance of accounts receivable for accounts on that list represents
approximately 1.8% and 1.4% of the Company's outstanding receivables at July 31,
2004 and 2003 respectively.
The table listed on the following page summarizes the Company's
contractual obligations and commercial commitments at July 31, 2004 for the
timeframes listed:
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------
CONTRACTUAL LESS THAN 1 1 - 3 4 - 5 AFTER 5
OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
- --------------------- ------------ -------------- ----------- ------------ -------------
Long-Term Debt $ 27,400,000 $ 4,080,000 $ 7,160,000 $ 8,160,000 $ 8,000,000
Operating Leases 12,900,000 1,656,000 2,651,000 2,170,000 6,423,000
Capital Leases 123,000 31,000 67,000 25,000
Unconditional
Purchase Obligations 2,932,000 2,932,000 -- -- --
------------ -------------- ----------- ------------ -------------
Total Contractual
Cash Obligations $ 43,355,000 $ 8,699,000 $ 9,878,000 $ 10,355,000 $ 14,423,000
============ ============== =========== ============ =============
18
OTHER COMMERCIAL COMMITMENTS
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------------------------
TOTAL
OTHER COMMERCIAL AMOUNTS LESS THAN 1 1 - 3 4 - 5 AFTER 5
COMMITMENTS COMMITTED YEAR YEARS YEARS YEARS
- --------------------- ----------- ----------- ----------- ----------- -------------
Standby Letters of
Credit $ 3,073,000 $ 3,073,000 $ -- $ -- $ --
Other Commercial
Commitments 3,671,000 3,671,000 -- -- --
----------- ----------- ----------- ----------- -------------
Guarantees 3,000,000 500,000 -- 2,500,000 --
----------- ----------- ----------- ----------- -------------
Total Commercial
Commitments $ 9,744,000 $ 7,244,000 $ -- $ 2,500,000 $ --
=========== =========== =========== =========== =============
The Company's liquidity needs have been, and are expected to be, met
through internally generated funds and, to the extent needed, borrowings under
the Company's revolving credit facility with Harris Trust and Savings. During
the second quarter of fiscal 2004 the Company extended the Harris Trust and
Savings agreement to January 2005. As of July 31, 2004, the Company had
$7,500,000 available under the credit facility. The Credit Agreement, as
amended, contains restrictive covenants that, among other things and under
various conditions (including a limitation on capital expenditures), limit the
Company's ability to incur additional indebtedness or to acquire or dispose of
assets and to pay dividends.
The Company believes that cash flow from operations, availability under
its revolving credit facility and current cash and investment balances will
provide adequate cash funds for foreseeable working capital needs, capital
expenditures at existing facilities and debt service obligations. The Company's
ability to fund operations, to make planned capital expenditures, to make
scheduled debt payments and to remain in compliance with all of the financial
covenants under debt agreements, including, but not limited to, the Credit
Agreement, depends on its future operating performance, which, in turn, is
subject to prevailing economic conditions and to financial, business and other
factors.
The Company as part of its normal course of business guarantees certain debts
and trade payables of its wholly owned subsidiaries. These arrangements are made
at the request of the subsidiaries creditors, as separate financial statements
are not distributed for the wholly owned subsidiaries. As of July 31, 2004, the
value of these guarantees was $500,000 of short-term liabilities and $2,500,000
of long-term debt.
Results of Operations
Fiscal 2003 Compared to Fiscal 2002
Consolidated net sales for the year ended July 31, 2003 were $173,041,000,
an increase of 6.6% from net sales of $162,345,000 in fiscal 2002. Net income
for the year was $3,083,000, an increase of $4,177,000 compared to the loss
reported in fiscal 2002 of $1,094,000. Diluted income per share was $0.54 in
fiscal 2003, versus a diluted loss per share of $0.19 in fiscal 2002. The fiscal
2003 net income was positively impacted by a pre-tax gain of $139,000 on the
sale of mineral rights, a pre-tax contractual payment of $675,000 from a
customer that failed to meet minimum purchase requirements under a supply
agreement with the Company, a pre-tax gain on real estate sales of $310,000,
improved sales and reduced distribution costs. The increase in net income was
partially offset by a pre-tax write-off associated with the closure of the
Christmas Valley, Oregon production facility in the fourth quarter of $573,000,
a pre-tax asset write-off of $385,000 and a pre-tax goodwill write-off of
$350,000 related to the Company's equity investment in Kamterter. The fiscal
2002 loss was driven by a $3,213,000 pre-tax write-off associated with a loss on
impaired long-lived assets. Partially offsetting this loss was a $937,000
pre-tax gain on the sales of land and mineral rights. See Note 2 in the Notes to
the Consolidated Financial Statements for a discussion of the loss on impaired
long-lived assets; the gains on the sale of land and mineral rights, the other
contractual income and the 2003 closure and write-off of the Christmas Valley
production plant.
Net sales of the Consumer Products Group for fiscal 2003 were
$105,108,000, an increase of 4.0% from net sales of $101,042,000 in fiscal 2002.
This segment's operating income increased 31.1% from $10,175,000 in fiscal 2002
to $13,343,000 in fiscal 2003. The net sales increase was driven by the addition
of the Jonny Cat(R) product line, which also positively contributed to the
segment's profit through increased gross profit dollars. The sales increase was
partially offset by the elimination of unprofitable business with Wal-Mart,
which was implemented in the fourth quarter of fiscal 2002. In that quarter,
Wal-Mart and Oil-Dri agreed on new terms pursuant to which Oil-Dri stopped
shipping
19
private label cat litter to Wal-Mart distribution centers where the freight cost
(a cost borne by Oil-Dri) was prohibitive. This change caused sales to be
reduced but profits to be increased in terms of both gross profit margin and
absolute dollars. The expenses related to the addition of the Jonny Cat product
line and subsequent marketing investments caused the segment's operating
expenses to increase, but that increase was more than offset by the gross profit
increase. The marketing investments associated with the line are intended to
stabilize the base Jonny Cat business and provide a platform for future growth.
Net sales of the Specialty Products Group for fiscal 2003 were
$24,990,000, an increase of 2.0% from net sales of $24,499,000 in fiscal 2002.
This segment's operating income increased 15.1% from $4,280,000 in fiscal 2002
to $4,927,000 in fiscal 2003. The profit increase was driven by improved sales
of PelUnite(R) and PelUnite PlusTM animal feed binding agents and by improved
pricing from the bleaching earth products due to changes in the geographical
sales mix.
Net sales of the Crop Production and Horticultural Products Group for
fiscal 2003 were $21,820,000, an increase of 27.2% from net sales of $17,154,000
in fiscal 2002. The net sales increase resulted primarily from increased sales
of Agsorb(R) drying agents and agricultural carriers, and increased sales of
Pro's Choice(R) sports field products. The agricultural carriers business has
seen increased sales due to the spread of rotation resistant corn rootworm
beetles. The sports field products have seen strong growth in the golf course
market place. This segment's operating income increased by 11.2% from $2,350,000
in fiscal 2002 to $2,614,000 in fiscal 2003. The increase in operating income
was driven by the gross profit change from increased sales.
Net sales of the Industrial and Automotive Products Group for fiscal 2003
were $21,123,000, an increase of 7.5% from net sales of $19,650,000 in fiscal
2002. This segment's operating income decreased from a profit of $18,000 in
fiscal 2002 to a loss of $826,000 in fiscal 2003. The loss was driven by higher
manufacturing processing labor and expenses. Also, the fuel price increase seen
in the second half of fiscal 2003 negatively impacted the income of this
segment.
Consolidated gross profit as a percentage of net sales for fiscal 2003
increased to 20.6% from 19.1% in fiscal 2002. A favorable sales mix led by the
acquired Jonny Cat product line in the Consumer Products Group, improved sales
of PelUnite Plus and price increases in the Specialty Product Group, increased
sales of Agsorb and sports field products in Crop Production and Horticultural
Products Group and the elimination of sales to unprofitable geographic areas all
contributed to this increase. The Company's year-to-date fuel costs are down
approximately 4% as compared to fiscal 2002. While fuel was down for the year,
rate increases in the second half of the year drove the overall expenses to be
down only 4% compared to fiscal 2002.
The Christmas Valley closure negatively impacted the overall gross profit.
Approximately $484,000 of the $573,000 write-off was reflected in cost of goods
sold. This adjustment reduced the gross profit percentage from 20.9% for the
year, down to the final reported level of 20.6%. The remaining $89,000 of the
write-off was reported as part of other income and expense.
Operating expenses as a percentage of net sales for fiscal 2003 decreased
to 16.8% from the 19.2% reported in fiscal 2002. Excluding the other contractual
income in 2003 and the loss on impaired assets in 2002, operating expenses for
2003 would have remained flat at 17.2% for both years. A good portion of the
absolute dollar value increase in operating expenses in 2003 was experienced in
an effort to support the new Jonny Cat product line. The increased sales from
this line offset the dollar value increase in expense and therefore led to the
consistent expense ratio between the two years, after the contractual income and
loss on impaired asset are excluded.
Interest expense and interest income for fiscal 2003 decreased 5.9% from
fiscal 2002 due to the reduction in debt.
The Company's effective tax rate was 29.0% of pre-tax income in fiscal
2003 versus 29.8% in fiscal 2002. The effective tax rate was consistent between
the years.
Total assets of the Company increased $1,788,000 or 1.4% during fiscal
2003. Current assets increased $3,086,000 or 5.4% from the fiscal 2002 year-end
balances, primarily due to increases in accounts receivable, current deferred
income taxes and inventory. The accounts receivable increase was related to the
improved sales in the fourth quarter. Quarterly sales were up $5,449,000 or
13.9% from the fourth quarter of fiscal 2002. Offsetting some of the
20
increase were decreases in other receivables and prepaid overburden expense.
Other receivables decreased due to a change from taxes receivable to taxes
payable driven by the profitability of the Company. The prepaid overburden
account was reduced by the extra overburden amortization that was incurred in
fiscal 2003. See Note 2 in the Notes to the Consolidated Financial Statements
for a discussion of this issue.
Cash, cash equivalents and investments increased 2.7%, or $434,000, from
fiscal 2002 despite the fact that the Company spent over $6,000,000 in cash to
consummate the Purchase from a wholly owned subsidiary of Clorox. Positive
operating cash flows drove the combined cash and investments in treasury
securities balances to a higher level than reported for fiscal 2002.
Property, plant and equipment, net of accumulated depreciation increased
$404,000, or 0.8%, from the year-end balance in fiscal 2002. The increase in
property, plant and equipment associated with the Purchase and other normal
capital investments were substantially offset by normal depreciation expense on
the Company's pre-existing fixed asset base and the Christmas Valley, Oregon
write-off. See Note 2 in the Notes to the Consolidated Financial Statements.
Total liabilities increased $1,845,000, or 3.3%, during fiscal 2003.
Current liabilities increased $5,342,000 or 26.9% during fiscal 2003, as a
result of increases in current maturities of notes payable, accounts payable,
freight payables, accrued trade promotions, and salaries, wages and commissions
payable. The increased business activity in the fourth quarter helped drive
increases in several of the payable balances. Long-term debt decreases
$2,850,000 due to principal payments.
Significant Accounting Policies
Management's discussion and analysis of the financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with the generally accepted
accounting principles of the United States. The Company annually reviews its
financial reporting and disclosure practices and accounting policies to ensure
that its financial reporting and disclosures provides accurate and transparent
information relative to the current economic and business environment. The
Company believes that of its significant accounting policies stated in Note 1 of
the Notes to the Consolidated Financial Statements, the policies listed below
involve a higher degree of judgment and/or complexity. The preparation of the
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, as well as the reported amounts of revenues
and expenses during the reporting period. Significant estimates included
inventory reserves, allowance for doubtful accounts and the amount of prepaid
overburden. Actual results could differ from these estimates.
Revenue Recognition. Under the terms of its sales agreements with
customers, the Company recognizes revenue when title is transferred. Upon
shipment an invoice is generated that sets the fixed and determinable price.
Sales returns and allowances, which have historically not been material, are
reviewed to determine if any additional reserve is necessary. Sales returns and
allowances are not material due to the nature of the Company's business.
Allowance for doubtful accounts are evaluated by the Company utilizing a
combination of a historical percentage of sales by division and specific
customer account analysis. The Company maintains and monitors a list of
customers whose creditworthiness has diminished. This list is used as part of
the specific customer account analysis.
Inventories. Inventories are valued at the lower of cost (first-in,
first-out) or market. Inventory costs include the cost of raw materials,
packaging supplies, labor and other overhead costs. The Company performs a
detailed review of its inventory items to determine if an obsolescence reserve
adjustment is necessary. The review surveys all of the Company's operating
facilities and sales divisions to ensure that both historical issues and new
market trends are considered. The allowance not only considers specific items,
but also takes into consideration the overall value of the inventory as of the
balance sheet date. The inventory obsolescence reserve values at July 31, 2004,
2003 and 2002 were $641,000, $568,000 and $341,000 respectively.
Prepaid Overburden Removal and Mining Costs. As part of its overall
operations, the Company mines sorbent materials on property that it either owns
or leases. A significant part of the Company's overall mining cost is incurred
during the process of removing the overburden (non-usable material) from the
mine site, thus exposing the sorbent material that is then used in a majority of
the Company's production processes. The cost of the overburden removal is
recorded in a prepaid expense account and, as the usable sorbent material is
mined, the
21
prepaid overburden removal expense is amortized over the estimated available
material. The Company had $2,407,000 and $2,492,000 of prepaid expense recorded
on its consolidated balance sheet, as of July 31, 2004 and July 31, 2003,
respectively. The Company amortized to current expense approximately $2,895,000
of previously recorded prepaid expense in fiscal 2004, $3,552,000 in fiscal 2003
and $3,918,000 in fiscal 2002.
To determine the value of prepaid overburden, the Company's mining
personnel survey the individual mining areas. The estimation work is conducted
utilizing a combination of manual and computerized survey tools. Once the survey
data is recorded it is charted on numerous topographical maps of the mining
areas. Finally based on the survey data, maps and professional judgment of the
mining engineers' estimates are developed.
During the normal course of the Company's overburden removal activities
the Company performs on-going reclamation activities. As overburden is removed
from a pit, it is hauled to a previously mined pit and used to refill the older
site. This process allows the Company to continuously reclaim older pits and
dispose of overburden simultaneously, therefore minimizing the liability for the
reclamation function.
Additionally, it is Oil-Dri's policy to capitalize the purchase cost of
land and mineral rights, including associated legal fees, survey fees and real
estate fees. The costs of obtaining mineral patents, including legal fees and
drilling expenses, are also capitalized. Development costs of determining the
nature and amount of mineral reserves and any prepaid royalties that are
offsetable against future royalties due upon extraction of the mineral are also
capitalized. All exploration related costs are expensed as incurred.
Stock Based Compensations. The Company applies the intrinsic value method
under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees", and related other interpretations to account for its stock
option plans. All the outstanding options issued under the plans have had
exercise prices equal to the market value on the day of issue. Accordingly, the
Company has not recorded any compensation expense associated with its issuance
of stock options. The Company has recorded as expense the fair market value on
the date of issue of any restricted stock awards granted. The fair value of the
issued stock options is estimated on the grant date using the Black-Scholes
Option Pricing Method. Had the Company accounted for stock-based compensation in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company would have reported in 2004, 2003 and 2002 additional employee
compensation expense (net of related tax effect) of approximately $301,000,
$686,000 and $769,000 respectively.
Recently Issued Accounting Standards
In December 2003, the FASB issued a revision to Statement of Financial
Accounting Standards ("SFAS") No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits," effective for fiscal periods
beginning after December 15, 2003. This revised statement requires additional
annual disclosures regarding types of plan assets, investment strategy, future
plan contributions, expected benefit payments and other items. The statement
also requires quarterly disclosure of the components of net periodic benefit
cost and plan contributions. The Company has adopted SFAS No. 132 (revised 2003)
in fiscal 2004.
In March of 2004, The Emerging Issues Task Force (EITF) issued EITF 04-02,
"Whether Mineral Rights are Tangible or Intangible Assets and Related Issues."
Under the provisions of EITF 04-02, mineral rights, as defined in the Issue, are
tangible assets. The guidance in this EITF became effective for the first
reporting period beginning after April 29, 2004. This guidance caused the
Company to reclassify certain assets from intangible to tangible assets in the
Consolidated Balance Sheet dated July 31, 2004 and prior years. The adoption of
EITF 04-02 required the Company to reclassify $1,205,000 from intangible assets
to property, plant and equipment.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 03-06, "Participating Securities and the Two-Class Method under SFAS
128 on EPS" ("EITF 03-06"). EITF 03-06 provided guidance in determining when the
"Two-Class" method, as defined in SFAS No. 128 "Earnings per Share" is to be
utilized in calculating earnings per share. The Company was required to adopt
EITF 03-06 for the quarter and year ended July 31, 2004. The Common Stock of the
Company has a 33.3% dividend preference to the Class B Common Stock. The Class B
Common Stock, which has ten votes per share as opposed to one vote per share for
the Common Stock, may be converted at any time on a one for one basis for the
Common Stock at the option of the holder of the Class B Common Stock. EITF 03-06
requires the income per share for each class of common stock to be calculated
assuming 100% of the Company's earnings are distributed as dividends to each
class of common stock.
22
The effective result of EITF 03-06 has been that the basic earnings per share
for the Common Stock will be approximately 33% greater than the basic earnings
per share of the Class B Common Stock.
Foreign Operations
Net sales by the Company's foreign subsidiaries during fiscal 2004 were
$13,397,000 or 7.2% of total Company sales. This represents an increase of 17.5%
from fiscal 2003, in which foreign subsidiary sales were $11,400,000 or 6.6% of
total Company sales. This increase in sales was seen largely in the Company's
Canadian operation where the addition of the Jonny Cat product line, positive
currency movement of the Canadian dollar and price increases positively impact
its results. For fiscal 2004, the foreign subsidiaries reported a gain of
$615,000, an improvement of $334,000 from the $281,000 gain reported in fiscal
2003. The improvement for the year was due to improved sales and lower
distribution costs at the Company's Canadian operation. Identifiable assets of
the Company's foreign subsidiaries as of July 31, 2004 were $11,271,000 compared
to $9,737,000 as of July 31, 2003. Most of the increase in identifiable assets
was in cash and investments at the Company's Canadian operation.
Net sales by the Company's foreign subsidiaries during fiscal 2003 were
$11,400,000 or 6.6% of total Company sales. This represents an increase of 6.0%
from fiscal 2002, in which foreign subsidiary sales were $10,754,000 or 6.6% of
total Company sales. This increase in sales was seen largely in the Company's
Canadian operation where the addition of the Jonny Cat product line and price
increases positively impacted its results. For fiscal 2003, the foreign
subsidiaries reported a gain of $281,000, an improvement of $188,000 from the
$93,000 gain reported in fiscal 2002. The improvement for the year was due to
improved sales and lower material costs at the Company's Canadian operation.
Identifiable assets of the Company's foreign subsidiaries as of July 31, 2003
were $9,737,000 compared to $9,542,000 as of July 31, 2002.
Forward-Looking Statements
Certain statements in this report, including, but not limited to, those
under the heading "Expectations" and those statements elsewhere in this report
that use forward-looking terminology such as "expect," "would," "could,"
"should," "estimates," "anticipates" and "believes" are "forward-looking
statements" within the meaning of that term in the Securities Exchange Act of
1934, as amended. Actual results may differ materially from those reflected in
these forward-looking statements, due to uncertainties such as continued
vigorous competition in the grocery, mass merchandiser and club markets and
specialty product markets, the level of success of new products, and the cost of
product introductions and promotions in the consumer market. Forward-looking
statements are also subject to the risk of changes in market conditions in the
overall economy, energy prices, the risk of war or international instability
and, for the fluids purification and agricultural markets, changes in planting
activity, crop quality and overall agricultural demand, including export demand,
increasing regulation of the food chain and foreign exchange rate fluctuations.
Other factors affecting these forward-looking statements may be detailed from
time to time in other reports filed by the Company with the Securities and
Exchange Commission.
23
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk and employs policies and
procedures to manage its exposure to changes in the market risk of its cash
equivalents and short-term investments. The Company had two interest rate swap
agreements as of July 31, 2004. The Company believes that the market risk
arising from holdings of its financial instruments is not material.
The Company is exposed to currency risk as it relates to certain accounts
receivables and the Company's foreign operations. The Company has always
determined that the currency risk is immaterial to the overall presentation of
the financial statements. However, the Company began a program in fiscal 2004 of
hedging certain receivable balances in a further attempt to minimize the risk.
The Company is exposed to regulatory risk in the fluid purification and
agricultural markets, principally as a result of the risk of increasing
regulation of the food chain in the United States and Europe. The Company
actively monitors developments in this area, both directly and through trade
organizations of which it is a member.
The Company is exposed to commodity price risk with respect to natural
gas. The Company has contracted for a portion of its fuel needs for fiscal 2005
using forward purchase contracts to manage the volatility related to this
exposure. These contracts will reduce the volatility in fuel prices, and the
weighted average cost of these contracts has been estimated to be approximately
11.5% higher than the contracts for fiscal 2004. These contracts were entered
into during the normal course of business and no contracts were entered into for
speculative purposes.
The table below provides information about the Company's natural gas
future contracts, which are sensitive to changes in commodity prices,
specifically natural gas prices. For the future contracts the table presents the
notional amounts in MMBtu's, the weighted average contract prices, and the total
dollar contract amount, which will mature by July 31, 2005. The Fair Value was
determined using the "Most Recent Settle" price for the "Henry Hub Natural Gas"
option contract prices as listed by the New York Mercantile Exchange on
September 28, 2004.
COMMODITY PRICE SENSITIVITY
NATURAL GAS FUTURE CONTRACTS
FOR THE YEAR ENDING JULY 31, 2005
Expected 2005 Maturity Fair Value
---------------------- ----------
Natural Gas Future Volumes (MMBtu) 464,400
Weighted Average Price (Per MMBtu) $ 6.31
Contract Amount ($ U.S., in thousands) $ 2,932.5 $ 3,021.7
========== ==========
Factors that could influence the fair value of the natural gas contracts,
include, but are not limited to, the creditworthiness of the Company's natural
gas suppliers, the overall general economy, developments in world events, and
the general demand for natural gas by the manufacturing sector, seasonality and
the weather patterns throughout the United States and the world. Some of these
same events have allowed the Company to mitigate the impact of the natural gas
contracts by the continued and in some cases expanded use of recycled oil in our
manufacturing processes. Accurate estimates of the impact that these contracts
may have on the Company's fiscal 2004 financial results are difficult to make
due to the inherent uncertainty of future fluctuations in option contract prices
in the natural gas options market.
24
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25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
JULY 31,
-----------------------------------
2004 2003
------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 6,348 $ 4,753
Investment in treasury securities.................................. 13,942 11,917
Investment in debt securities...................................... 2,779 --
Accounts receivable, less allowance of $608 in 2004 and
$441 in 2003...................................................... 24,169 23,768
Inventories........................................................ 12,399 12,819
Prepaid overburden removal expense................................. 2,407 2,492
Deferred income taxes.............................................. 2,330 1,473
Prepaid expenses and other assets.................................. 3,607 3,408
------------ ------------
Total Current Assets....................................... 67,981 60,630
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Buildings and leasehold improvements............................... 22,319 21,928
Machinery and equipment............................................ 94,215 93,078
Office furniture and equipment..................................... 10,722 10,137
Vehicles........................................................... 4,368 4,739
------------ ------------
131,624 129,882
Less accumulated depreciation and amortization..................... (97,696) (92,250)
------------ ------------
33,928 37,632
Construction in progress........................................... 3,619 2,563
Land............................................................... 10,255 8,831
------------ ------------
Total Property, Plant and Equipment, Net................... 47,802 49,026
------------ ------------
OTHER ASSETS
Goodwill............................................................. 5,162 5,115
Intangibles (Net of accumulated amortization
of $2,611 in 2004 and $2,474 in 2003)............................. 2,389 3,869
Deferred income taxes................................................ 1,556 2,617
Other................................................................ 3,985 5,566
------------ ------------
Total Other Assets......................................... 13,092 17,167
------------ ------------
Total Assets......................................................... $ 128,875 $ 126,823
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
26
JULY 31,
------------------------------------
2004 2003
----------- -----------
(IN THOUSANDS OF DOLLARS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable................................ $ 4,080 $ 4,000
Accounts payable................................................... 5,701 6,856
Dividends payable.................................................. 513 461
Accrued expenses
Salaries, wages and commissions................................... 4,747 4,250
Trade promotions and advertising.................................. 4,715 4,160
Freight........................................................... 1,088 1,089
Other............................................................. 6,192 4,418
----------- -----------
Total Current Liabilities.................................. 27,036 25,234
----------- -----------
NONCURRENT LIABILITIES
Notes payable...................................................... 23,320 27,400
Deferred compensation.............................................. 3,455 3,212
Other.............................................................. 2,806 1,963
----------- -----------
Total Noncurrent Liabilities............................... 29,581 32,575
----------- -----------
Total Liabilities.......................................... 56,617 57,809
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, par value $.10 per share, issued 5,583,960
shares in 2004 and 5,472,935 in 2003.............................. 559 547
Class B Stock, par value $.10 per share, issued 1,792,583
shares in 2004 and 1,765,083 in 2003.............................. 179 177
Additional paid-in capital......................................... 9,301 7,646
Retained earnings.................................................. 90,985 88,002
Restricted unearned stock compensation............................. (9) (37)
Cumulative translation adjustment.................................. (694) (1,082)
----------- -----------
100,321 95,253
Less treasury stock, at cost (1,538,571 common and
342,241 Class B shares at July 31, 2004 and 1,419,065
Common and 342,241 Class B shares at July 31, 2003)............... (28,063) (26,239)
----------- -----------
Total Stockholders' Equity................................. 72,258 69,014
----------- -----------
Total Liabilities and Stockholders' Equity........................... $ 128,875 $ 126,823
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
27
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31,
-----------------------------------------------------
2004 2003 2002
----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NET SALES............................................ $ 185,511 $ 173,041 $ 162,345
COST OF SALES........................................ 142,263 137,413 131,265
----------- ----------- -----------
GROSS PROFIT......................................... 43,248 35,628 31,080
OTHER CONTRACTUAL INCOME & CHARGES (1,250) 675 --
LOSS ON IMPAIRED LONG-LIVED ASSETS................... (464) -- (3,213)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... (32,975) (29,686) (27,878)
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS........................ 8,559 6,617 (11)
----------- ----------- -----------
OTHER INCOME (EXPENSE)...............................
Interest income.................................... 222 216 295
Interest expense................................... (2,079) (2,361) (2,575)
Foreign exchange gain (losses)..................... (26) 22 (133)
Other investment (loss)............................ -- (40) (187)
Gain on the sale of mineral rights................. -- 139 769
Other, net......................................... 255 (251) 283
----------- ----------- -----------
Total Other Expense, Net................... (1,628) (2,275) (1,548)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.................... 6,931 4,342 (1,559)
INCOME TAXES (BENEFIT)............................... 1,898 1,259 (465)
----------- ----------- -----------
NET INCOME (LOSS).................................... $ 5,033 $ 3,083 $ (1,094)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE..........................
Basic Common....................................... $ 0.98 $ 0.59 $ (0.19)
=========== =========== ===========
Basic Class B Common............................... $ 0.74 $ 0.44 $ (0.19)
=========== =========== ===========
Diluted............................................ $ 0.84 $ 0.54 $ (0.19)
=========== =========== ===========
AVERAGE SHARES OUTSTANDING...........................
Basic Common....................................... 4,040 4,151 4,191
=========== =========== ===========
Basic Class B Common............................... 1,437 1,423 1,423
=========== =========== ===========
Diluted............................................ 5,962 5,708 5,614
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
RESTRICTED ACCUMULATED
COMMON ADDITIONAL UNEARNED OTHER TOTAL
& CLASS PAID-IN RETAINED STOCK TREASURY COMPREHENSIVE STOCKHOLDERS'
B STOCK CAPITAL EARNINGS COMPENSATION STOCK INCOME EQUITY
----------- ----------- ---------- ------------ ----------- ------------- -------------
(in thousands)
BALANCE, JULY 31, 2001 $ 724 $ 7,667 $ 89,778 $ (25) $ (24,824) $ (1,474) $ 71,846
Net (Loss) -- -- (1,094) -- -- -- (1,094)
Cumulative Translation
Adjustments -- -- -- -- -- 186 186
----------
Total Comprehensive
(Loss) (908)
----------
Dividends Declared -- -- (1,894) -- -- -- (1,894)
Purchases of Treasury Stock -- -- -- -- (4) -- (4)
Issuance of Stock Under 1995
Long-Term Incentive Plan -- 10 -- -- -- -- 10
Amortization of Restricted
Common Stock Compensation -- -- -- 21 -- -- 21
----------- ----------- ---------- ----------- ----------- ----------- ----------
BALANCE, JULY 31, 2002 724 7,677 86,790 (4) (24,828) (1,288) 69,071
Net Income -- -- 3,083 -- -- 3,083
Cumulative Translation
Adjustments -- -- -- -- -- 206 206
----------
Total Comprehensive
Income 3,289
----------
Dividends Declared -- -- (1,871) -- -- -- (1,871)
Purchases of Treasury Stock -- -- -- (1,508) -- (1,508)
Issuance of Stock Under 1995
Long-Term Incentive Plan -- (31) -- (56) 97 -- 10
Amortization of Restricted
Common Stock Compensation -- -- -- 23 -- -- 23
----------- ----------- ---------- ----------- ----------- ----------- ----------
BALANCE, JULY 31, 2003 724 7,646 88,002 (37) (26,239) (1,082) 69,014
Net Income -- -- 5,033 -- -- -- 5,033
Cumulative Translation
Adjustments -- -- -- -- -- 388 388
----------
Total Comprehensive
Income 5,421
----------
Dividends Declared -- -- (2,050) -- -- -- (2,050)
Purchases of Treasury Stock -- -- -- -- (1,824) -- (1,824)
Issuance of Stock Under 1995
Long-Term Incentive Plan 14 1,655 -- -- -- -- 1,669
Amortization of Restricted
Common Stock Compensation -- -- -- 28 -- -- 28
----------- ----------- ---------- ----------- ----------- ----------- ----------
BALANCE, JULY 31, 2004 $ 738 $ 9,301 $ 90,985 $ (9) $ (28,063) $ (694) $ 72,258
=========== =========== ========== =========== =========== =========== ==========
The accompanying statements are an integral part of the consolidated financial
statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31,
--------------------------------------------------
2004 2003 2002
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES (IN THOUSANDS OF DOLLARS)
Net Income (Loss) $ 5,033 $ 3,083 $ (1,094)
---------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,057 8,534 8,785
Amortization of investment discounts (51) (113) (7)
Deferred income taxes 204 (118) (817)
Provision for bad debts 201 387 409
Loss on impaired assets 464 -- 3,213
Loss (gain) on the sale of fixed assets 398 549 (78)
(Increase) decrease in:
Accounts receivable (615) (2,737) 2,443
Other receivables -- 1,022 1,472
Inventories 108 486 3,647
Prepaid overburden removal expense 85 1,186 119
Prepaid expenses (199) 159 643
Other assets 1,775 229 (8)
Increase (decrease) in:
Accounts payable (823) 1,736 (671)
Accrued expenses 2,825 2,470 220
Deferred compensation 243 258 185
Other liabilities 580 245 (292)
---------- ---------- ----------
Total Adjustments 13,252 14,293 19,263
---------- ---------- ----------
Net Cash Provided by Operating Activities 18,285 17,376 18,169
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (6,067) (4,882) (4,096)
Proceeds from the sale of Phoebe Products Co. 325 -- --
Proceeds from sale of property, plant and equipment 311 679 319
Purchases of net assets -- (6,652)
Purchases of investments in debt securities (5,217) -- --
Maturities of investments in debt securities 2,156 -- --
Purchases of investment securities (43,608) (39,197) (9,632)
Dispositions of investment securities 41,672 36,475 1,814
---------- ---------- ----------
Net Cash Used in Investing Activities (10,428) (13,577) (11,595)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (4,000) (2,850) (2,156)
Dividends paid (1,998) (1,883) (1,894)
Purchase of treasury stock (1,824) (1,518) (14)
Proceeds from issuance of common stock 1,337 10 10
Other, net 223 41 190
---------- ---------- ----------
Net Cash Used in Financing Activities (6,262) (6,200) (3,864)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,595 (2,401) 2,710
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,753 7,154 4,444
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,348 $ 4,753 $ 7,154
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
30
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Oil-Dri
Corporation of America and its subsidiaries, all of which are wholly owned. All
significant intercompany balances and transactions have been eliminated from the
consolidated financial statements.
Management Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Under the terms of its sales agreements with customers, the Company
recognizes revenue when title is transferred. At the time of shipment an invoice
is generated which sets the fixed and determinable price. Sales returns and
allowances are not material due to the nature of the Company's business.
Trade Receivables
Trade receivables are recognized when the risk of loss and title pass to
the customer consistent with the Revenue Recognition policy. The company
provides for an allowance for doubtful accounts based on its historical
experience and a periodic review of its accounts receivable including a review
of the overall aging of accounts and analysis of specific accounts. A customer
is determined to be uncollectible when the Company has completed its internal
collection procedures including termination of shipments, direct customer
contact and formal demand of payment. Outside collection agencies are retained
by the Company in its collection efforts. Past due status is determined based on
contractual terms and customer payment history.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between
the assets and liabilities recognized for financial reporting purposes and
amounts recognized for tax purposes.
Historically no provision had been made for possible income taxes which
may be paid on the distribution of approximately $22,608,000, $19,533,000 and
$18,391,000 as of July 31, 2004, 2003 and 2002, respectively, of retained
earnings of foreign subsidiaries, as substantially all such amounts were
intended to be indefinitely invested in these subsidiaries or to be handled in
such a way that no additional income taxes would be incurred when such earnings
are distributed. It is generally not practicable to determine the amount of
income taxes or withholding taxes that would be payable upon the remittance of
assets that represent those earnings. However in 2004, a $210,000 tax expense
was recorded on certain unremitted earnings of the foreign subsidiary in
Switzerland. This charge was taken to reflect the estimated potential impact of
repatriating certain cash balances held by that subsidiary.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries, where the local currency
is the functional currency, are translated at the exchange rates in effect at
period end. Income statement items are translated at the average exchange rate
on a monthly basis. Resulting translation adjustments are recorded as a separate
component of stockholders' equity.
Cash Equivalents and Investments in Treasury Securities
Cash equivalents are highly liquid investments with maturities of three
months or less when purchased. Investments in treasury securities are carried at
cost, plus accrued interest, which approximates market.
31
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. The Company recorded additional inventory obsolescence reserves of
approximately $504,000, $441,000 and $275,000 for the years of 2004, 2003 and
2002 respectively. The composition of inventories as of July 31, 2004 is as
follows:
2004 2003
----------- -----------
(IN THOUSANDS)
Finished goods............................................................. $ 7,529 $ 7,821
Packaging.................................................................. 3,130 3,718
Other...................................................................... 1,740 1,280
----------- -----------
$ 12,399 $ 12,819
=========== ===========
Prepaid Overburden Removal and Mining Costs
As part of its overall operations, the Company mines sorbent materials on
property that it either owns or leases. A significant part of the Company's
overall mining cost is incurred during the process of removing the overburden
(non-usable material) from the mine site, thus exposing the sorbent material
that is then used in a majority of the Company's production processes. The cost
of the overburden removal is recorded in a prepaid expense account and, as the
usable sorbent material is mined, the prepaid overburden removal expense is
amortized over the estimated available material. The Company had $2,407,000 and
$2,492,000 of prepaid expense recorded on its consolidated balance sheet, as of
July 31, 2004 and July 31, 2003, respectively. The Company amortized to current
expense approximately $2,895,000 of previously recorded prepaid expense in
fiscal 2004, $3,552,000 in fiscal 2003 and $3,918,000 in fiscal 2002.
During the normal course of the Company's overburden removal activities
the Company performs on-going reclamation activities. As overburden is removed
from a pit, it is hauled to a previously mined pit and used to refill the older
site. This process allows the Company to continuously reclaim older pits and
dispose of overburden simultaneously, therefore minimizing the liability for the
reclamation function.
Additionally, it is Oil-Dri's policy to capitalize the purchase cost of
land and mineral rights, including associated legal fees, survey fees and real
estate fees. The costs of obtaining mineral patents, including legal fees and
drilling expenses, are also capitalized. Development costs of determining the
nature and amount of mineral reserves and any prepaid royalties that are
offsetable against future royalties due upon extraction of the mineral are also
capitalized. All exploration related costs are expensed as incurred.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash investments and
accounts receivable. The Company places its cash investments in
government-backed instruments, both foreign and domestic, and with other quality
institutions. Concentrations of credit risk with respect to accounts receivable
are subject to the financial condition of certain major customers, principally
the customer referred to in Note 3 of the Notes to the Consolidated Financial
Statements. The Company generally does not require collateral to secure customer
receivables.
32
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment expenditures are generally depreciated using
the straight-line method over their estimated useful lives which are listed
below. Major improvements and betterments are capitalized while maintenance and
repairs that do not extend the useful life of the applicable assets are expensed
as incurred.
YEARS
-----
Buildings and leasehold improvements....................................... 5-30
Machinery and equipment.................................................... 2-20
Office furniture and equipment............................................. 2-10
Vehicles................................................................... 2-8
Shipping and Handling Costs
Shipping and handling costs are included in the cost of goods sold and
were $28,732,000, $27,568,000 and $28,717,000 for the years ended July 31, 2004,
2003 and 2002, respectively.
Research and Development
Research and development costs of $2,453,000, $1,923,000 and $1,955,000
were charged to expense as incurred for the years ended July 31, 2004, 2003 and
2002, respectively.
Intangibles and Goodwill
Intangibles are amortized on a straight-line basis over periods ranging
from 7 to 35 years. The Company periodically reviews intangibles to assess
recoverability from projected undiscounted cash flows of the related operating
entities.
33
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Beginning in fiscal 2003, goodwill is no longer being amortized; instead
it is tested annually for impairment. The Company tests the fair value of
goodwill using methods such as discounted cash flow, stock market value and
outside appraiser's evaluations. No impairment adjustment was required during
fiscal year 2004. Had SFAS No. 142 been in effect for fiscal 2002 net income and
earnings per share, net of tax, would have been as follows:
YEAR ENDED JULY 31,
---------------------------------------
2004 2003 2002
------------ ------------ ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Net Income (Loss)
Net as reported $ 5,033 $ 3,083 $ (1,094)
Add back: Goodwill amortization --- --- 122
------------ ------------ ----------
Adjusted Net Income (Loss) $ 5,033 $ 3,083 $ (972)
============ ============ ==========
Basic Earnings (Loss) per share Common
Net as reported $ 0.98 $ 0.59 $ (0.19)
Add back: Goodwill amortization --- --- 0.02
------------ ------------ ----------
Adjusted Net Income (Loss) $ 0.98 $ 0.59 $ (0.17)
============ ============ ==========
Basic Earnings (Loss) per share Class B
Net as reported $ 0.74 $ 0.44 $ (0.19)
Add back: Goodwill amortization --- --- 0.02
------------ ------------ ----------
Adjusted Net Income (Loss) $ 0.74 $ 0.44 $ (0.17)
============ ============ ==========
Diluted Earnings (Loss) per share
Net as reported $ 0.84 $ 0.54 $ (0.19)
Add back: Goodwill amortization --- --- 0.02
------------ ------------ ----------
Adjusted Net Income (Loss) $ 0.84 $ 0.54 $ (0.17)
============ ============ ==========
Weighted Average shares outstanding
Basic Common 4,040 4,151 4,191
============ ============ ==========
Basic Class B Common 1,437 1,423 1,423
============ ============ ==========
Diluted 5,962 5,708 5,614
============ ============ ==========
Advertising Costs
The Company defers recognition of advertising production costs until the
first time the advertising takes place; other advertising costs are expensed as
incurred. Advertising expenses were $2,852,000, $1,907,000 and $1,227,000 for
the years ended July 31, 2004, 2003 and 2002, respectively.
34
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclamation Obligations
The Company evaluated its potential reclamation liability at the end of
fiscal 2004 in accordance with SFAS No. 143, "Accounting for Asset Retirement
Obligations." Based on that evaluation, the Company recorded estimated
reclamation assets of approximately $263,000 and corresponding reclamation
liabilities in the same amount. The value represents the discounted present
value of the estimated future mining reclamation costs at the production plants.
The assets will be depreciated over the estimated useful lives of the various
mines. The liabilities will be increased based on a yearly accretion charge,
once again over the estimated useful lives of the mines.
Fair Value of Financial Instruments
Non-derivative financial instruments included in the consolidated balance
sheets are cash and cash equivalents, investment securities and notes payable.
These instruments, except for notes payable, were carried at amounts
approximating fair value as of July 31, 2004 and 2003. The fair value of notes
payable was estimated based on future cash flows discounted at current interest
rates available to the Company for debt with similar maturities and
characteristics. The fair value of notes payable as of July 31, 2004 was greater
than its carrying value by approximately $641,000 and greater than its carrying
value by approximately $818,000 as of July 31, 2003.
Stock Based Compensation
The Company applies the intrinsic value method under Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and
related other interpretations to account for its stock option plans. All the
outstanding options issued under the plans have had exercise prices equal to the
market value on the day of issue. Accordingly, the Company has not recorded any
compensation expense associated with its issuance of stock options. The Company
has recorded as expense the fair market value on the date of issue of any
restricted stock awards granted.
The following table details the effect on net income and earnings per
share if compensation expense for the stock plans had been recorded based on the
fair value method under SFAS 123, "Accounting for Stock Based Compensation."
YEAR ENDED
(IN THOUSANDS, ---------------------------------------------------
EXCEPT PER SHARE DATA) 2004 2003 2002
- --------------------- --------- --------- -------------
Reported net income $ 5,033 $ 3,083 $ (1,094)
Add: Total stock-based 20 13 14
employee compensation expense
included in reported net income,
net of related tax effects
Deduct: Total stock-based (321) (699) (783)
employee compensation expense
determined under fair value
method for all awards
net of related tax effects
--------- --------- -------------
Pro forma net income $ 4,732 $ 2,397 $ (1,863)
--------- --------- -------------
Earnings per share:
Basic Common - as reported $ 0.98 $ 0.59 $ (0.19)
Basic Common - pro forma $ 0.92 $ 0.46 $ (0.33)
--------- --------- -------------
Basic Class B Common - as reported $ 0.74 $ 0.44 $ (0.19)
Basic Class B Common - pro forma $ 0.69 $ 0.35 $ (0.33)
--------- --------- -------------
Diluted - as reported $ 0.84 $ 0.54 $ (0.19)
Diluted - pro forma $ 0.79 $ 0.42 $ (0.33)
--------- --------- -------------
35
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards
In December 2003, the FASB issued a revision to Statement of Financial
Accounting Standards ("SFAS") No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits," effective for fiscal periods
beginning after December 15, 2003. This revised statement requires additional
annual disclosures regarding types of plan assets, investment strategy, future
plan contributions, expected benefit payments and other items. The statement
also requires quarterly disclosure of the components of net periodic benefit
cost and plan contributions. The Company has adopted SFAS No. 132 (revised 2003)
in fiscal 2004 and is contained in Note 9 of the Notes of the Consolidated
Financial Statements.
In March of 2004, The Emerging Issues Task Force (EITF) issued EITF 04-02,
"Whether Mineral Rights are Tangible or Intangible Assets and Related Issues."
Under the provisions of EITF 04-02, mineral rights, as defined in the Issue, are
tangible assets. The guidance in this EITF became effective for the first
reporting period beginning after April 29, 2004. This guidance caused the
Company to reclassify certain assets from intangible to tangible assets in the
Consolidated Balance Sheet dated July 31, 2004 and prior years. The adoption of
EITF 04-02 required the Company to reclassify $1,205,000 from intangible assets
to property, plant and equipment.
36
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 03-06, "Participating Securities and the Two-Class Method under SFAS
128 on EPS" ("EITF 03-06"). EITF 03-06 provided guidance in determining when the
"Two-Class" method, as defined in SFAS No. 128 "Earnings per Share" is to be
utilized in calculating earnings per share. The Company was required to adopt
EITF 03-06 for the quarter and year ended July 31, 2004. The Common Stock of the
Company has a 33.3% dividend preference to the Class B Common Stock. The Class B
Common Stock, which has ten votes per share as opposed to one vote per share for
the Common Stock, may be converted at any time on a one for one basis for the
Common Stock at the option of the holder of the Class B Common Stock. EITF 03-06
requires the income per share for each class of common stock to be calculated
assuming 100% of the Company's earnings are distributed as dividends to each
class of common stock. The effective result of EITF 03-06 has been that the
basic earnings per share for the Common Stock will be approximately 33% greater
than the basic earnings per share of the Class B Common Stock. The following
table summarizes the earnings per share presentation under EITF 03-06:
FOR THE YEARS ENDED JULY 31,
----------------------------
EARNINGS PER SHARE: 2004 2003 2002
- ----------------------------- ------ ----- -------
AS REQUIRED UTILIZING THE TWO
CLASS METHOD OF EITF 03-06
Basic Common $0.98 $0.59 $(0.19)
Basic Class B Common $0.74 $0.44 $(0.19)
Diluted $0.84 $0.54 $(0.19)
AS PREVIOUSLY REPORTED
UTILIZING THE IF CONVERTED
METHOD
Basic -- $0.55 $(0.19)
Diluted -- $0.54 $(0.19)
FOR THE YEARS ENDED JULY 31,
-----------------------------------------
EARNINGS PER SHARE
RECONCILIATION: 2004 2003 2002
- -------------------------- ---------- ---------- -----------
BASIC
COMMON
Dividends paid $1,617,000 $1,487,000 --
Undistributed Income $2,355,000 $ 964,000 --
Allocated Earnings $3,972,000 $2,451,000 $ (817,000)
Weighted Ave. shares 4,040,000 4,151,000 4,191,000
Earnings per share $ 0.98 $ 0.59 $ (0.19)
CLASS B COMMON
Dividends paid $ 433,000 $ 384,000 --
Undistributed Income $ 628,000 $ 248,000 --
Allocated Earnings $1,061,000 $ 632,000 $ (277,000)
Weighted Ave. shares 1,437,000 1,423,000 1,423,000
Earnings per share $ 0.74 $ 0.44 $ (0.19)
DILUTED
Net Income $5,033,000 $3,083,000 $(1,094,000)
Basic Ave. shares 5,477,000 5,574,000 5,614,000
Diluted Ave. shares 484,000 134,000 --
Earnings per share $ 0.84 $ 0.54 $ (0.19)
37
NOTE 2 - SPECIAL CHARGES, FEES AND CHANGES IN ACCOUNTING ESTIMATES
Other Charge - Patent Infringement Lawsuit
The Company was named as a defendant in an action captioned PSN Illinois
LLC v. Oil-Dri Corporation of America filed February 5, 2004 in the United
States District Court for the Northern District of Illinois. The lawsuit alleged
that most of the Company's scoopable cat litter products infringed two patents
owned by the plaintiff. The plaintiff was seeking monetary damages in an
unspecified amount, treble damages if the alleged infringement is found to be
willful, as well as injunctive relief. On August 12, 2004, the Company announced
a settlement and dismissal of the plaintiff's claims. Under terms of the
settlement, the Company paid the plaintiff $1,250,000 and the plaintiff granted
the Company paid-up licenses of the two patents involved in the litigation as
well as a third patent owned by the plaintiff. The $1,250,000 pre-tax charge has
been reflected as Other Contractual Income & Charges on the Consolidated
Statement of Operations.
Loss on Impaired Long-Lived Assets
During the second quarter of fiscal 2004, the Company recorded a loss on
impaired assets of $464,000. This loss, related to the write-off of a scoopable
"box" product line located at the Company's Georgia facility and the write-off
of the remaining estimated held-for-sale value of a similar box line at one of
the Company's Mississippi facilities, resulted from the shift from boxed
products to jug products and the long term direction of the Company. Both lines
were previously used exclusively by the Consumer Product Group.
Special Charges - Christmas Valley, Oregon Plant Closure
On July 17, 2003 the Company announced a reorganization of service for its
customers in the Pacific Northwest. On July 31, 2003 the Company closed its
Christmas Valley, Oregon facility and transferred its existing customer base to
the newly acquired plant in Taft, California and other Oil-Dri production
facilities. The Company recorded a fourth quarter charge of $573,000, which is
detailed below:
2003
--------------
(IN THOUSANDS)
Severance Costs $106
Write-off of Obsolete Inventory 198
Write-off of Fixed Assets 89
Reclamation Expense 180
----
Total $573
====
Of the $573,000, $484,000 was recorded as part of cost of goods sold for
the fourth quarter 2003. The balance of the adjustment was recorded in other
income and expense. During fiscal 2004 the Company recognized as operating
expense (consistent with SFAS 146) the remaining costs associated with the final
shutdown of the facility. These costs were immaterially different from the
estimates reported in fiscal 2003.
38
NOTE 2 - SPECIAL CHARGES, FEES AND CHANGES IN ACCOUNTING ESTIMATES (CONTINUED)
Change in Accounting Estimate for Prepaid Overburden Removal Expense
During the second quarter of fiscal 2002, an internal review of the
estimated amount of uncovered mineable clay took place at the Company's Georgia
production complex. The quantity of uncovered clay is one of the key elements in
the amortization of the prepaid overburden removal account balance. The review
led to a change in the estimated amount of uncovered clay. This estimate change
then caused a change in the amortization of the prepaid overburden removal
account. The impact of this estimate revision for fiscal 2003 and 2002 was an
additional pre-tax charge to cost of goods sold of approximately $630,000 and
$1,092,000 respectively, versus the previous estimate. The estimate change also
increased the amortization rate approximately $1.31 per ton of uncovered
mineable clay. The Company returned to using lower rates, more consistent with
its historic experience at the Georgia complex, to amortize the overburden
account at the end of the second quarter of fiscal 2003.
Sale of Mineral Rights
During the first quarter of fiscal 2003, the Company recorded a $139,000
pre-tax gain from the sale of certain mineral leases on land in Tennessee. The
land was geographically located in an area that the Company was not actively
planning to develop. The mineral rights, had they been pursued, could have been
associated with any or all of the operating segments.
During the third quarter of fiscal 2002, the Company reported a $769,000
pre-tax gain when it elected to sell certain mineral leases on land in northern
Florida. The land contained minerals for a market that the Company was not
actively planning to pursue. The mineral rights, had they been pursued, would
have been associated with the Company's Specialty Products Group.
Other Contractual Income
During the second quarter of fiscal 2003, the Company recorded $675,000 of
other contractual pre-tax income as a result of a one-time payment from a
customer who failed to meet minimum purchase requirements under a supply
agreement with the Company.
Reno Processing Plant
During the latter part of the fourth quarter of fiscal 2002, the Company
reviewed both properties in Washoe County, Nevada for possible long-term asset
impairment. The decision to review the properties was driven by a combination of
the February 26, 2002, County Commission decision and the successful completion
in June of 2002 of a significant geographic distribution change with Wal-Mart.
The accumulated cost of the Reno project that was reviewed for impairment
was approximately $3,734,000. This value included the cost of purchased land,
water and mineral rights, legal fees associated with the land and water rights
purchases, consulting fees for the design of the proposed facility, fees
associated with an environment impact study, various mining exploration costs,
Company overhead costs for the project, machinery costs and finally various
legal and consulting fees associated with the preparation and presentation of
the special use permit.
The accumulated cost of the other Washoe County property was approximately
$1,114,000. This value included the purchase price of the land and associated
costs and mineral exploration costs.
Based on the February 26, 2002 determination of the County Commission and
the geographic distribution change with Wal-Mart, the Company determined that a
significant portion of the costs of both properties was impaired. Therefore, a
pre-tax loss on impaired long-lived assets of $3,213,000 was recognized in the
fourth quarter of fiscal 2002 to write down the accumulated costs associated
with these projects and the reduction in the value of assets remaining to the
current fair market value. The main business segment impacted by this impairment
was the Company's Consumer Products group.
39
NOTE 2 - SPECIAL CHARGES, FEES AND CHANGES IN ACCOUNTING ESTIMATES (CONTINUED)
In April 2002, the Company filed parallel actions in state and federal
courts in Nevada against Washoe County, Nevada, alleging that the County's
denial of a special use permit (sought by the Company in connection with its
plan to build a manufacturing facility outside of Reno, Nevada) violated both
federal and state law. The lawsuits seek damages resulting from the County's
improper denial of the special use permit, which caused the Company to abandon
its plan to build the Reno facility. The federal court action has been dismissed
on jurisdictional grounds, and the state court action is now proceeding. A
hearing on the liability issues in the state court action took place in January
2004; however, no ruling has yet been issued. An adverse decision in the matter
would not have a material adverse effect on the Company.
40
NOTE 3 - OPERATING SEGMENTS
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments. Under this standard, the Company has four reportable operating
segments: Consumer Products Group, Specialty Products Group, Crop Production and
Horticultural Products Group, and Industrial and Automotive Products Group.
These segments are managed separately because each business has different
economic characteristics.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
Management does not rely on any segment asset allocations and does not
consider them meaningful because of the shared nature of the Company's
production facilities. However the Company has estimated the segment asset
allocations as follows:
JULY 31,
-----------------------------------------
ASSETS
-----------------------------------------
2004 2003 2002
--------- --------- ---------
(IN THOUSANDS)
Consumer Products Group $ 55,240 $ 54,307 $ 51,600
Specialty Products Group 14,594 17,251 15,813
Crop Production and Horticulture Group 11,452 12,383 11,043
Industrial and Automotive Products Group 8,646 8,539 8,417
Unallocated Assets 38,943 34,343 38,162
--------- --------- ---------
TOTAL ASSETS $ 128,875 $ 126,823 $ 125,035
========= ========= =========
YEAR ENDED JULY 31
------------------------------------------------------------------------------
NET SALES INCOME
------------------------------------- -----------------------------------
2004 2003 2002 2004 2003 2002
--------- -------- --------- -------- -------- -------
(IN THOUSANDS)
Consumer Products Group $ 114,027 $105,108 $ 101,042 $ 17,532 $ 13,343 $10,175
Specialty Products Group 27,759 24,990 24,499 6,058 4,927 4,280
Crop Production and Horticulture Group 21,006 21,820 17,154 3,092 2,614 2,350
Industrial and Automotive Products Group 22,719 21,123 19,650 (452) (826) 18
--------- -------- --------- -------- -------- -------
TOTAL SALES/OPERATING INCOME $ 185,511 $173,041 $ 162,345 26,230 20,058 16,823
--------- -------- ---------
Other Contractual Income and
Charges(2) (1,250) 675 --
Gain on the Sale of Mineral
Rights(1) -- 139 769
Less:
Loss on Impaired Assets(3) 464 -- 3,213
Corporate Expenses 15,727 14,385 13,658
Interest Expense, net of interest
Income 1,858 2,145 2,280
-------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES 6,931 4,342 (1,559)
INCOME TAXES (BENEFIT) PROVISION 1,898 1,259 (465)
-------- -------- -------
NET INCOME (LOSS) $ 5,033 $ 3,083 $(1,094)
======== ======== ========
(1) See Note 2 for a discussion of the gain on the sale of mineral rights.
(2) See Note 2 for a discussion of other contractual income and charges.
(3) See Note 2 for a discussion of the loss on impaired assets.
41
NOTE 3 - OPERATING SEGMENTS (CONTINUED)
The following is a summary of financial information by geographic region
for the years ended July 31:
2004 2003 2002
-------- -------- ---------
(IN THOUSANDS)
Sales to unaffiliated customers:
Domestic .......................... $172,114 $161,641 $ 151,591
Foreign subsidiaries .............. $ 13,397 $ 11,400 $ 10,754
Sales or transfers between geographic areas:
Domestic .......................... $ 6,035 $ 5,346 $ 5,000
Income (Loss) before income taxes:
Domestic .......................... $ 5,968 $ 3,906 $ (1,614)
Foreign subsidiaries .............. $ 963 $ 436 $ 55
Net Income (Loss):
Domestic .......................... $ 4,418 $ 2,802 $ (1,187)
Foreign subsidiaries .............. $ 615 $ 281 $ 93
Identifiable assets:
Domestic .......................... $117,604 $117,086 $ 115,493
Foreign subsidiaries .............. $ 11,271 $ 9,737 $ 9,542
The Company's largest customer accounted for the following percentage of
consolidated net sales and net accounts receivable under the Consumer Products
segment:
2004 2003 2002
---- ---- ----
Sales for the years ended July 31........... 18% 19% 22%
Accounts receivable as of July 31........... 27% 26% 26%
42
NOTE 4 - NOTES PAYABLE
The composition of notes payable at July 31 is as follows:
2004 2003
-------- --------
(IN THOUSANDS)
Town of Blue Mountain, Mississippi
Principal payable on October 1, 2008. Interest payable monthly at a
variable interest rate reset weekly based on market conditions for similar
instruments. The average annual rate was 1.23% and 1.52% in fiscal 2004 and
2003, respectively. Payment of these bonds by the Company is guaranteed by
a letter of credit issued by Harris Trust and Savings Bank ................ $ 2,500 $ 2,500
Teachers Insurance and Annuity Association of America
Payable in annual principal installments on August 15:
$2,500,000 in fiscal 2005. Interest is payable semiannually at an
annual rate of 7.17% ...................................................... 2,500 5,000
Teachers Insurance and Annuity Association of America and
Prudential Financial
Payable in annual principal installments on April 15: $1,500,000 in
fiscal 2005; $3,000,000 in fiscal 2006; $4,000,000 in fiscal 2007 and
2008; $1,500,000 in fiscal 2009; $3,000,000 in fiscal 2010; $2,000,000
in fiscal 2011; and $1,500,000 in fiscal 2012 and 2013. Interest is
payable semiannually at an annual rate of 6.55% ........................ 22,000 23,500
Other .......................................................................... 400 400
-------- --------
$ 27,400 $ 31,400
Less current maturities of notes payable .................................. (4,080) (4,000)
-------- --------
$ 23,320 $ 27,400
======== ========
On January 29, 1999, the Company entered into a Credit Agreement with
Harris Trust and Savings Bank, which provides for up to $15,000,000 in committed
unsecured revolving credit loans and/or letters of credit (not to exceed
$5,000,000). In May 2002, the Company reduced this facility to $7,500,000 and
amended the definition of Consolidated EBITDA used for covenant compliance
purposes to exclude non-cash charges, up to $3,600,000 relating to the write-off
of its equity investment in the Washoe County, Nevada, project and/or certain
other costs associated with the write-off of the Company's Christmas Valley,
Oregon production facility. See Note 2 of the Notes to the Consolidated
Financial Statements for the description of write-downs totaling $573,000 in
fiscal 2003 and $3,213,000 in fiscal 2002. On November 22, 2002, the Company and
Harris Trust and Savings Bank entered into a second amendment whereby for the
purposes of the fixed charge coverage ratio, as defined, up to $6,000,000 of
capital expenditures incurred by the Company related to its acquisition of the
Taft, California facility and the Jonny Cat brand are excluded from the
computation. During the second quarter of fiscal 2004 the Company extended the
Harris Trust and Savings agreement to January 2005. There were not any
outstanding borrowings against this facility at July 31, 2004 and 2003.
43
NOTE 4 - NOTES PAYABLE (CONTINUED)
In January 2001, the note agreement for the $25,000,000 private debt
placement was amended to modify the fixed charges ratio covenant contained
therein from the original ratio of 1.5 to 1.0 to new ratios as follows: (i) for
the period ending November 1, 2000 through April 30, 2001 to 1.00 to 1.00; (ii)
for the period ending May 1, 2001 through October 31, 2001 to 1.15 to 1.00;
(iii) for the period ending November 1, 2001 through July 31, 2002 to 1.25 to
1.00; (iv) and for the period ending August 1, 2002 and thereafter to 1.50 to
1.00. Additionally, prior note agreements dated as of April 15, 1993 and April
15, 1991 with Teachers Insurance and Annuity Association have also been amended
to add a fixed charges coverage ratio covenant at substantially the same terms
as those in the note agreement dated as of April 15, 1998 as amended.
In July 2002, the 1993 and 1998 note agreements were further amended to
modify the fixed charge covenant ratio for periods beginning May 1, 2002, as
follows: (i) for the period May 1, 2002 through July 31, 2002 the ratio test was
waived by the noteholders; (ii) for the periods ending August 1, 2002 through
January 31, 2002 to 1.00 to 1.00; (iii) for the periods ending February 1, 2003
through October 31, 2003 to 1.25 to 1.00; (iv) and for the periods ending
November 1, 2003 and thereafter to 1.50 to 1.00. Also, for any fiscal quarter
ending on or after July 31, 2002 an additional interest charge of 0.25% is
imposed if the fixed charge coverage ratio is less than 1.25 to 1.00 for the
quarter ended July 31, 2002 and 1.50 to 1.00 for periods thereafter. Finally,
the definition of Consolidated Net Income for covenant compliance purposes also
has been amended to exclude non-cash charges incurred by the Company on or
before July 31, 2003, relating to the write-off of the Company's equity
investments in the Washoe County, Nevada projects and other costs associated
with the write-off of the Company's Christmas Valley, Oregon production
facility. See Note 2 of the Notes to the Consolidated Financial Statements for a
description of a write-down totaling $573,000 in fiscal 2003 and $3,213,000 in
fiscal 2002. The aggregate amount of these write-offs cannot be in excess of
$4,700,000.
The agreements with the Town of Blue Mountain, Mississippi, Teachers
Insurance and Annuity Association of America and Harris Trust and Savings Bank
impose working capital requirements, dividend and financing limitations, minimum
tangible net worth requirements and other restrictions. The Company's Credit
Agreement with Harris Trust and Savings Bank indirectly restricts dividends by
requiring the Company to maintain tangible net worth, as defined, in the amount
of $50,000,000 plus 40% of cumulative annual earnings from July 31, 1998.
In prior years, the Town of Blue Mountain, Mississippi issued long-term
bonds to finance the purchase of substantially all of the assets of certain
plant expansion projects, and leased the projects to the Company and various of
its subsidiaries (with the Company and various of its wholly owned subsidiaries
as guarantors) at rentals sufficient to pay the debt service on the bonds.
The following is a schedule by year of future maturities of notes payable
as of July 31, 2004:
(IN THOUSANDS)
2006.................................... $3,080
2007 ................................... 4,080
2008.................................... 4,080
2009.................................... 4,080
Later years............................. 8,000
-------
$23,320
=======
44
NOTE 5 - PURCHASE OF ASSETS RELATED TO THE JONNY CAT(R) BRAND OF CAT LITTER
On December 13, 2002, the Company completed the purchase, for $6,000,000
in cash, of assets related to the Jonny Cat(R) brand of cat litter (the
"Purchase") from a wholly owned subsidiary of Clorox (NYSE: CLX). The Company
has also spent approximately $652,000 on various post-closing costs related to
the Purchase. Included in the Purchase were inventories, trademarks, a
manufacturing plant in Taft, California, and mineral reserves.
The aggregate purchase price has been allocated as follows:
Inventory $1,507,000
Prepaid Expenses 175,000
Property, Plant & Equipment 4,594,000
Trademarks & Trade Name 376,000
----------
Purchase total $6,652,000
==========
The Company has assessed the pro forma disclosure criteria of SFAS No. 141
and has determined that the Purchase is not material under the asset, investment
and income tests of the pronouncement. Based on that assessment, the Company has
concluded that the pro forma results are not materially different from the
results reported in the current filing.
NOTE 6 - INCOME TAXES
The provision for income tax expense consists of the following:
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Current
Federal ................................................................... $ 1,220 $ 1,061 $ 425
Foreign ................................................................... 297 45 (14)
State ..................................................................... 177 271 (59)
-------- ------- -------
1,694 1,377 352
-------- ------- -------
Deferred
Federal ................................................................... 57 (256) 629
Tax effect of operating loss carryforward, net ............................ -- -- (1,629)
Foreign ................................................................... 51 110 --
State ..................................................................... 96 28 183
-------- ------- -------
204 (118) (817)
-------- ------- -------
Total Income Tax Provision (Benefit) ........................................... $ 1,898 $ 1,259 $ (465)
======== ======= =======
Principal reasons for variations between the statutory federal rate and
the effective rates for the years ended July 31 were as follows:
2004 2003 2002
------ ----- -------
U.S. federal income tax rate .................................................. 34.0% 34.0% (34.0)%
Depletion deductions allowed for mining ....................................... (16.2) (7.4) (11.4)
State income tax expense (benefit), net of
federal tax (benefit)/expense ............................................ 2.6 4.3 (5.3)
AMT ........................................................................... 4.0 -- 22.9
Difference in effective tax rate of foreign subsidiaries ...................... 0.3 -- (2.1)
Empowerment Zone Credits ...................................................... (1.1) (2.8) --
Unremitted foreign earnings ................................................... 3.0
Other ......................................................................... 0.8 0.9 0.1
---- ---- -----
27.4% 29.0% (29.8)%
==== ==== =====
45
NOTE 6 - INCOME TAXES (CONTINUED)
The consolidated balance sheets as of July 31 included the following tax
effects of cumulative temporary differences:
2004 2003
---------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN THOUSANDS)
Depreciation .............................. $ -- $1,071 $ -- $451
Deferred compensation ..................... 1,533 -- 1,327 --
Postretirement benefits ................... 199 -- 175 --
Allowance for doubtful accounts ........... 353 -- 265 --
Other assets .............................. 437 -- 372 --
Accrued expenses .......................... 1,734 -- 991 --
Tax credits ............................... 2,066 -- 580 --
Amortization .............................. 224 -- 221 --
Inventory ................................. 243 -- 217 --
Depletion ................................. -- 240 -- 53
Unremitted earnings of foreign
subsidiaries............................... -- 210 -- --
Other assets - Foreign .................... -- 109 -- 58
Operating loss carryforward ............... -- -- 861 --
------- ------ ------- ----
6,789 1,630 5,009 562
Valuation allowance ....................... (1,273) -- (357) --
------- ------ ------- ----
Total deferred taxes ...................... $ 5,516 $1,630 $ 4,652 $562
======= ====== ======= ====
As of July 31, 2004, for federal income tax purposes there were
alternative minimum tax credit carryforwards of approximately $1,798,000. A
valuation allowance has been established for $1,273,000 of the deferred tax
benefit related to the AMT tax credits since it is more likely than not that the
benefit will not be realized.
The Company's effective tax rate was 27.4% of pre-tax income in fiscal
2004 versus 29.0% in fiscal 2003. Contributing to the decrease in the effective
tax rate for fiscal 2004 was a change in estimate in calculating the Company's
depletion deduction.
NOTE 7 - STOCKHOLDERS' EQUITY
The authorized capital stock of the Company at July 31, 2004 and 2003
consisted of 15,000,000 shares of Common Stock, 7,000,000 shares of Class B
Stock and 30,000,000 shares of Class A Common Stock, each with a par value of
$.10 per share. There are no Class A shares currently outstanding.
The Common Stock and Class B Stock are equal, on a per share basis, in all
respects except as to voting rights, conversion rights, cash dividends and stock
splits or stock dividends. The Class A Common Stock is equal, on a per share
basis, in all respects, to the Common Stock except as to voting rights and stock
splits or stock dividends. In the case of voting rights, Common Stock is
entitled to one vote per share and Class B Stock is entitled to ten votes per
share, while Class A Common Stock generally has no voting rights. Common Stock
and Class A Common Stock have no conversion rights. Class B Stock is convertible
on a share-for-share basis into Common Stock at any time and is subject to
mandatory conversion under certain circumstances.
Common Stock is entitled to cash dividends, as and when declared or paid,
must be equal to at least 133 1/3% on a per share basis of the cash dividend
paid on Class B Stock. Class A Common Stock is entitled to cash dividends on a
per share basis equal to the cash dividend on Common Stock. Additionally, while
shares of Common Stock, Class A Common Stock and Class B Stock are outstanding,
the sum of the per share cash dividend paid on shares of Common Stock and Class
A Common Stock, must be equal to at least 133 1/3% of the sum of the per share
cash dividend paid on Class B Stock and Class A Common Stock. See Note 4 of the
Notes to the Consolidated Financial Statements regarding dividend restrictions.
46
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
Shares of Common Stock, Class A Common Stock and Class B Stock are equal
in respect of all rights to dividends (other than cash) and distributions in the
form of stock or other property (including stock dividends and split-ups) in
each case in the same ratio except in the case of a Special Stock Dividend. The
Special Stock Dividend, which can be issued only once, is either a dividend of
one share of Class A Common Stock for each share of Common Stock and Class B
Stock outstanding or a recapitalization, in which half of each outstanding share
of Common Stock and Class B Stock would be converted into a half share of Class
A Common Stock.
The Board of Directors of the Company has authorized the repurchase of
1,916,771 shares of the Company stock. As of July 31, 2004, 1,392,026 shares of
Common Stock and 342,241 shares of Class B stock have been repurchased under the
Board approved repurchase authorizations and 146,545 shares of Common Stock by
other transactions authorized by management prior to the adoption of this plan.
The number of holders of record of Common Stock and Class B stock on July
31, 2004 were 792 and 33, respectively, as reported by the Company's transfer
agent. The Company's Common Stock is traded on the New York Stock Exchange.
There is no established trading market for the Class B Stock.
NOTE 8 - STOCK OPTION PLANS
The Company instituted the Oil-Dri Corporation of America 1995 Long Term
Incentive Plan during the fiscal year ended July 31, 1996. Generally, other than
grants to Richard M. Jaffee family members, shares of stock awarded under the
1995 Plan will be Class A Common Stock, except that, if there is no Class A
Common Stock issued and publicly traded on a securities exchange when such
awards are exercised, the shares awarded would be Common Stock. Grants to the
Richard M. Jaffee family members are Class B shares. The Plan provides for
various other types of awards. No restricted stock awards were made during the
fiscal years ended July 31, 2002 and July 31, 2004. Awards of restricted stock
in the amount of 7,000 shares were made during the fiscal year ended July 31,
2003. All stock option grants awarded to date under this plan have a term of ten
years. Grants vest and become exercisable gradually between two and seven years.
The Oil-Dri Corporation of America 1988 Stock Option Plan terminated on
December 12, 1995, for purposes of future grants. The outstanding options under
this plan will remain outstanding and exercisable in accordance with their
respective terms. As of July 31, 2004, all options outstanding are vested and
exercisable. All options exercisable as of July 31, 2004 under this plan expired
in August, 2004.
The Company instituted the Oil-Dri Corporation of America Outside
Director's Stock Plan on June 9, 1998. The Plan is administered by the
Compensation Committee of the Company's Board of Directors. All shares of stock
issued under this plan will be shares of Common Stock issued from Treasury
Stock. The Plan provides for stock option grants, restricted stock, stock awards
and stock units. All awards to date under this plan are stock options that have
a term of ten years and a vesting period of one year.
47
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
EQUITY COMPENSATION PLAN INFORMATION AS OF JULY 31, 2004
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES
REMAINING
AVAILABLE FOR
NUMBER OF FURTHER ISSUANCE
SECURITIES TO BE UNDER EQUITY
ISSUED UPON COMPENSATION
EXERCISE OF WEIGHTED-AVERAGE PLANS (EXCLUDING
OUTSTANDING EXERCISE PRICE OF SECURITIES
OPTIONS, WARRANTS OUTSTANDING REFLECTED IN
AND RIGHTS OPTIONS, WARRANTS COLUMN (A))
(IN THOUSANDS) AND RIGHTS (IN THOUSANDS)
PLAN CATEGORY (A) (B) (C)
- ---------------------------------------------------------- ----------------- ----------------- ----------------
Equity compensation plans approved by security holders 1,300 $10.73 103
Equity compensation plans not approved by security holders 175 $ 9.91 25
----- ------ ---
A summary of option transactions under the plans follows:
NUMBER OF WEIGHTED
SHARES AVERAGE
(IN THOUSANDS) EXERCISE PRICE
-------------- --------------
Options outstanding at August 1, 2001 1,137 $ 11.74
Granted 310 $ 6.18
Exercised 1 $ 8.19
Canceled 45 $ 12.65
----- ---------
Options outstanding at August 1, 2002 1,401 $ 10.49
Granted 165 $ 10.01
Exercised 1 $ 8.19
Canceled 92 $ 10.92
----- ---------
Options outstanding at August 1, 2003 1,473 $ 10.41
Granted 196 $ 12.16
Exercised 139 $ 9.65
Canceled 55 $ 12.62
----- ---------
OPTIONS OUTSTANDING AT AUGUST 1, 2004 1,475 $ 10.63
Options exercisable were 927,504, 760,512 and 576,151 as of July 31, 2004,
2003 and 2002, respectively. The weighted average exercise price of the options
exercisable as of July 31, 2004, 2003 and 2002 was $11.13, $11.74 and $12.43
respectively.
The Company had reserved 102,875, 255,750 and 350,626 shares,
respectively, as of July 31, 2004, 2003 and 2002 under the Oil-Dri Corporation
of America 1995 Long Term Incentive Plan.
The Company had reserved 25,000, 15,000 and 5,000 shares of Common Stock,
respectively, as of July 31, 2004, 2003 and 2002, under the Oil-Dri Corporation
of America Outside Director's Stock Plan.
48
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
OPTIONS OUTSTANDING AND EXERCISABLE
BY PRICE RANGE AS OF 7/31/2004
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- --------------------------------
Weighted
Outstanding as Average Weighted Weighted
Range of of 7/31/2004 Remaining Average Shares Average
Exercise Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price
- --------------- -------------- ---------------- -------------- -------------- --------------
$6.01 - $8.00 392 7.16 $ 6.81 202 $ 6.93
$8.01 - $10.00 155 5.98 $ 9.25 81 $ 9.11
$10.01 - $12.00 719 5.98 $ 11.40 459 $ 11.25
$14.01 - $16.00 138 4.53 $ 14.64 120 $ 14.65
$16.01 - $18.00 5 9.67 $ 17.12 -- $ --
$18.01 - $20.00 66 0.07 $ 19.29 66 $ 19.29
- --------------- ----- ---- --------- --- ---------
$6.01 - $20.00 1,475 5.91 $ 10.63 928 $ 11.13
=============== ===== ==== ========= === =========
The weighted average fair value of the options granted was $3.30, $2.59
and $1.40 for the fiscal years ended July 31, 2004, 2003 and 2002, respectively.
See Note 1 in the Notes to the Consolidated Financial Statements regarding Stock
Based Compensation.
The fair value of issued stock options is estimated on the grant date
using the Black-Scholes Option Pricing Method with the following assumptions:
2004 2003 2002
---- ---- ----
Dividend Yields....................... 3.0% 3.7% 5.8%
Volatility............................ 36.0% 36.2% 38.1%
Risk-free Interest Rate............... 3.1% 3.5% 4.7%
Expected Life (Years)................. 5.4 5.4 4.6
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have a defined benefit pension plan for
eligible salaried and hourly employees. Benefits are based on a formula of years
of credited service and levels of compensation or stated amounts for each year
of credited service. Effective August 1, 2002, the defined benefit pension plans
for salaried and hourly employees and the assets of those plans were merged into
one plan and trust. This merger did not change the benefit formulas or
eligibility requirements for either of the two groups of employees.
Pension benefit obligations and the related effects on operations are
calculated using actuarial models. Two critical assumptions, discount rate and
expected return on assets, are important elements of plan expense and
asset/liability measurement. We evaluate these critical assumptions at least
annually. Other assumptions involving demographic factors such as retirement
age, mortality and turnover are evaluated periodically and are updated to
reflect our experience. Actual results in any given year will often differ from
actuarial assumptions because of economic and other factors.
The discount rate utilized for determining future pension obligations of
the U.S. qualified plans is based on the Moody's AA corporate rate on July 31.
The resulting discount rate decreased from 6.5% at July 31, 2003 to 6.25% at
July 31, 2004.
Our expected rate of return on plan assets is determined by our asset
allocation, our historical long-term investment performance, our estimate of
future long-term returns by asset class (using input from our actuaries,
investment services and investment managers), and long-term inflation
assumptions. The long-term rate of return assumption used for determining net
periodic pension expense for the fiscal year ended July 31, 2004 was 8%. This
assumption is maintained at 8% for determining fiscal 2005 net periodic pension
expense. The Company's historical
49
NOTE 9 - EMPLOYEE BENEFIT PLANS (CONTINUED)
actual return averaged 10.5% for the ten-year period ending July 31, 2004. The
actual rate of return in fiscal 2004 was 14.2%. Future actual pension expense
will depend on future investment performance, changes in future discount rates
and various other factors related to the population of participants in the
Company's pension plans. The investment objective for the pension plan is to
secure the benefit obligations to participants at a reasonable cost to the
Company. The goal is to optimize the long-term return on plan assets at a
moderate level of risk.
The allocation of plan assets is reviewed quarterly by the Company. The
allocation of plan assets at July 31, 2004 was 53% fixed income, 45% equity and
2% cash and accrued income. The allocation of plan assets at July 31, 2003 was
60% fixed income, 34% equity and 6% cash and accrued income. The company is
currently targeting a 50% fixed income and 50% equity funds allocation for
fiscal 2005. There is no Oil-Dri common stock in the pension trust fund.
The net periodic pension cost for the years ended July 31 consists of the
following:
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Service cost ................................. $ 775 $600 $534
Interest cost on projected benefit
obligations................................... 906 823 763
Expected return on plan assets ............... (814) (740) (912)
Amortization of:
Net transition asset .................. (27) (27) (27)
Prior service costs ................... 50 50 50
Other actuarial loss .................. 60 -- 20
----- ---- ----
Net pension cost ............................. $ 950 $706 $388
===== ==== ====
The measurement dates used to calculate the net periodic pension cost were
August 1, 2003, 2002 and 2001 respectively.
The funded status of the plans at July 31 is as follows:
2004 2003
------- -------
(IN THOUSANDS)
Fair Value of Plan Assets Less Than Projected Benefit
Obligations...................................................... $(3,705) $(3,907)
Unrecognized Net Loss ........................................... 1,916 2,389
Unrecognized Prior Service Cost ................................. 381 431
Unrecognized Net Asset at Transition ............................ (105) (132)
------- -------
Accrued Pension Included in Noncurrent Liabilities--Other ....... $(1,513) $(1,219)
======= =======
50
NOTE 9 - EMPLOYEE BENEFIT PLANS (CONTINUED)
Reconciliation of the assets and liabilities of the plans at July 31 is as
follows:
2004 2003
------------ -----------
(IN THOUSANDS)
Change in Plan Assets:
Plan assets at fair value, beginning of year................................... $ 10,224 $ 9,465
Actual return on plan assets................................................... 1,447 740
Contributions.................................................................. 655 484
Benefits paid.................................................................. (483) (465)
------------ -----------
Plan assets at fair value, end of year......................................... $ 11,843 $ 10,224
============ ===========
Change in Projected Benefit Obligation:
Projected benefit obligation, beginning of year................................ $ 14,131 $ 11,624
Service cost................................................................... 775 600
Interest cost.................................................................. 906 823
Plan amendments................................................................ -- --
Actuarial loss................................................................. 219 1,549
Benefits paid.................................................................. (483) (465)
------------ -----------
Projected benefit obligation, end of year...................................... $ 15,548 $ 14,131
============ ===========
Assumptions used in the previous calculations are as follows:
2004 2003
---- ----
Discount rate...................................................................... 6.25% 6.50%
Rate of increase in compensation levels............................................ 4.00% 4.50%
Long-term expected rate of return on assets........................................ 8.00% 8.00%
The Company has funded the plans based upon actuarially determined
contributions that take into account the amount deductible for income tax
purposes and the minimum contribution required under the Employee Retirement
Income Security Act of 1974 (ERISA), as amended.
The Company contributed $655,000 and $484,000 to the pension during the
fiscal years ended July 31, 2004 and July 31, 2003, respectively. The Company is
not required to make a contribution to the plan in fiscal 2005. However, the
Company expects to make a contribution to the plan sufficient to fund the annual
cost. An estimate of that contribution is $500,000.
The accumulated benefit obligation for the pension plan was $12,739,000 as
of July 31, 2004 and $11,269,000 as of July 31, 2003. The measurement dates for
determining the accumulated benefit obligation at July 31 are July 31, 2004 and
2003, respectively. The measurement dates for determining the net periodic
pension cost for fiscal years ended July 31, 2004 and 2003 are August 1, 2003
and 2002, respectively.
Our estimated future benefit payments are as follows:
Year ended July 31, 2005 2006 2007 2008 2009 2010-13
---- ---- ---- ---- ---- -------
(IN THOUSANDS)
Estimated benefit payments $515 $517 $598 $643 $661 $4,215
==== ==== ==== ==== ==== ======
For the years ended July 31, 2004, 2003 and 2002, the Company maintained a
401(k) savings plan under which the Company matches a portion of employee
contributions. The plan is available to essentially all domestic employees
following thirty or sixty days of employment. The Company's contributions to
this plan, and to similar plans maintained by the Company's foreign
subsidiaries, were $533,000, $509,000 and $435,000 for fiscal years 2004, 2003
and 2002, respectively.
51
NOTE 10 - DEFERRED COMPENSATION
Effective April 1, 2003, the Company adopted the Oil-Dri Corporation of
America Supplemental Executive Retirement Plan ("SERP"). The purpose of the Plan
is to provide certain retired participants in the Oil-Dri Corporation of America
Pension Plan ("Retirement Plan") with the amount of benefits that would have
been provided under the Retirement Plan but for: (1) the limitations on benefits
imposed by Section 415 of the Internal Revenue Code ("Code"), and/or (2) the
limitation on compensation for purposes of calculating benefits under the
Retirement Plan imposed by Section 401(a)(17) of the Code. The Company recorded
$23,500 in expense associated with this plan in the fiscal year ended July 31,
2004. The plan is unfunded and the Company will fund benefits when payments are
made. The total liability recorded for SERP is $45,000.
In December 1995, the Company adopted the Oil-Dri Corporation of America
Deferred Compensation Plan. This plan has permitted Directors and certain
management employees to defer portions of their compensation and earn interest
on the deferred amounts. During the period January 1, 1999 through September 30,
2000, participants' returns were tied to the performance of various investment
elections. After September 30, 2000 the participants' returns have been set at
the Company's long-term cost of borrowing plus 1%. Compensation deferred since
the inception of the plan has been accrued as well as earnings thereon.
Participants have deferred $360,000, $205,000 and $86,000 in fiscal years 2004,
2003 and 2002 respectively. Payments to participants were $46,000.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation of a nature that is normal
to its business. While it is impossible at this time to determine with certainty
the ultimate outcome of these or other lawsuits, each lawsuit is either covered
by insurance or adequate provisions have been made for probable losses with
respect thereto as can best be determined at this time. Management therefore
believes that none of the pending litigation will have a material adverse effect
on the financial condition of the Company or on results of operations.
NOTE 12 - LEASES
The Company's mining operations are conducted on leased or owned property.
These leases generally provide the Company with the right to mine as long as the
Company continues to pay a minimum monthly rental, which is applied against the
per ton royalty when the property is mined.
The Company leases its corporate offices in Chicago, Illinois (20,000
square feet), office, production and warehouse space in Alpharetta, Georgia
(26,000 square feet), production and office facilities in Europe. The office
space in Chicago is subject to a lease expiring in fiscal 2018. The Alpharetta,
Georgia lease expires in fiscal 2008. The facilities in Switzerland are leased
on a year-to-year basis.
In addition, the Company leases vehicles, railcars, mining property and
equipment, warehouse space, data processing equipment, and office equipment. In
most cases, the Company expects that, in the normal course of business, leases
will be renewed or replaced by other leases.
The following is a schedule by year of future minimum rental requirements
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of July 31, 2004:
(IN THOUSANDS)
------------
2005................................................................ $ 1,656
2006................................................................ 1,394
2007................................................................ 1,257
2008................................................................ 1,183
2009................................................................ 987
Later years......................................................... 6,423
-----------
$ 12,900
===========
52
NOTE 12 - LEASES (CONTINUED)
The following schedule shows the composition of total rental expense for
all operating leases, including those with terms of one month or less which were
not renewed, as of the years ended July 31:
2004 2003 2002
-------- ------- ---------
(IN THOUSANDS)
Vehicles and Railcars............... $ 878 $ 884 $ 880
Office facilities................... 516 499 496
Warehouse facilities................ 253 231 379
Mining properties...................
Minimum........................ 91 91 181
Contingent..................... 678 556 516
Other............................... 902 883 859
-------- ------- ---------
$ 3,318 $ 3,144 $ 3,311
======== ======= =========
Contingent mining royalty payments are determined based on the tons of raw
clay mined.
NOTE 13 - OTHER CASH FLOW INFORMATION
Cash payments for interest and income taxes were as follows:
2004 2003 2002
-------- ------- ---------
(IN THOUSANDS)
Interest............................ $ 1,859 $ 2,147 $ 2,283
Income taxes........................ $ 1,034 $ 672 $ 1,057
======== ======= =========
NOTE 14 - POST RETIREMENT HEALTH BENEFITS
Domestic salaried employees who retire prior to reaching age 65 and have
at least 17 years of continuous service and whose age is at least 55 and whose
age plus years of service equals at least 80 may elect to continue their health
care coverage under the Oil-Dri Corporation of America Employee Benefits Plan
until they reach the age of 65. The Company accrues the costs of such benefits
during the employees' active years of service.
Net periodic postretirement cost for the years ended July 31, was as follows:
2004 2003 2002
-------- --------- -----------
(IN THOUSANDS)
Components of net periodic postretirement
cost
Service Cost $ 56 $ 40 $ 23
Interest Cost 45 43 37
Amortization of Net transition obligation 16 16 16
Amortization of Losses 5 -- --
-------- --------- -----------
Net periodic postretirement benefit cost $ 122 $ 99 $ 76
======== ========= ===========
The accumulated postretirement benefit obligation assumptions were as follows:
2004 2003
---- ----
Discount rate 6.25% 5.75%
Medical trend 6% 7%
The medical trend rate going forward has been assumed constant at 6%.
53
NOTE 14 - POST RETIREMENT HEALTH BENEFITS (CONTINUED)
A one-percentage point change in assumed health care cost trend would have had
the following effects in the fiscal year ended July 31, 2004:
(IN THOUSANDS)
One-Percentage Point Increase One-Percentage Point Decrease
Effect on total service and
interest costs for fiscal year
ended July 31, 2004 $ 18 ($15)
Effect on accumulated
postretirement benefit obligation
as of July 31, 2004 $103 ($87)
Our estimated future benefit payments are as follows:
Year ended July 31, 2005 2006 2007 2008 2009 2010-13
---- ---- ---- ---- ---- -------
(IN THOUSANDS)
Estimated benefit payments $ 40 $ 24 $ 21 $ 27 $ 41 $551
==== ==== ==== ==== ==== ====
The Company's policy is to pay insurance premiums and claims under the
above-mentioned plan from Company assets.
The accrued postretirement benefit liability and the change in benefit
obligation as of July 31, 2004, and July 31, 2003, were as follows:
JULY 31,
------------------------------------
2004 2003
------------ ------------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year $ 798 $ 626
Service cost 56 40
Interest cost 45 43
Participant contributions -- --
Actuarial (gain) loss (68) 141
Benefits paid (54) (52)
------------ ------------
Benefit obligation at end of year $ 777 $ 798
============ ============
Change in plan assets:
Employer contribution $ 54 $ 52
Benefits paid (54) (52)
------------ ------------
Fair value of plan assets at end of year $ -- $ --
============ ============
Reconciliation of funded status:
Funded status $ (777) $ (798)
Unrecognized net transition obligation 158 173
Unrecognized actuarial loss 93 166
------------ ------------
Net amount recognized at end of year $ (526) $ (459)
============ ============
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 will
have minimal effect on the accumulated post retirement benefit liability or on
the periodical post retirement benefit cost.
54
NOTE 15 - DERIVATIVE INSTRUMENTS
In 1998, the Company entered into two interest rate swap agreements. The
notional amount of these agreements is $22,000,000 at July 31, 2004 and
$23,500,000 at July 31, 2003, respectively. The swap agreements terminate on May
1, 2013. Changes in the fair value of the derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. These derivatives do not qualify for hedge accounting and
accordingly, the Company has recorded these derivative instruments and the
associated assets or liabilities at their fair values with the related gains or
losses recorded as other income or expense in the consolidated statements of
operations. The Company recognized additional interest expense of $14,000,
$15,000 and $15,000 in fiscal years 2004, 2003 and 2002 respectively, as a
result of these contracts.
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected information for 2004 and 2003 is as follows:
FISCAL 2004 QUARTER ENDED
-------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 TOTAL
------------ ----------- ------------ ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net Sales.............................. $ 46,292 $ 47,800 $ 46,616 $ 44,803 $ 185,511
Gross Profit........................... $ 10,878 $ 11,293 $ 11,068 $ 10,009 $ 43,248
Net Income (Loss)...................... $ 1,718 $ 1,728 $ 1,824 $ (237) $ 5,033
Net Income (Loss) Per Share
Basic Common...................... $ 0.34 $ 0.34 $ 0.36 $ (0.04) $ 0.98
Basic Class B Common.............. $ 0.25 $ 0.26 $ 0.27 $ (0.04) $ 0.74
Diluted........................... $ 0.30 $ 0.29 $ 0.30 $ (0.04) $ 0.84
Dividends Per Share
Common............................ $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.40
Class B........................... $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.30
Company Common Stock Price Range:
High.............................. $ 14.94 $ 17.40 $ 17.30 $ 17.00
Low............................... $ 11.35 $ 14.26 $ 16.15 $ 15.20
FISCAL 2003 QUARTER ENDED
-------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 TOTAL
------------ ----------- --------- ----------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net Sales.............................. $ 37,730 $ 44,456 $ 46,125 $ 44,730 $ 173,041
Gross Profit........................... $ 7,753 $ 9,623 $ 9,915 $ 8,337 $ 35,628
Net Income (Loss)...................... $ 411 $ 1,219 $ 977 $ 476 $ 3,083
Net Income (Loss) Per Share
Basic Common...................... $ 0.08 $ 0.23 $ 0.19 $ 0.09 $ 0.59
Basic Class B Common.............. $ 0.06 $ 0.17 $ 0.14 $ 0.07 $ 0.44
Diluted........................... $ 0.07 $ 0.21 $ 0.17 $ 0.08 $ 0.54
Dividends Per Share
Common............................ $ 0.09 $ 0.09 $ 0.09 $ 0.09 $ 0.36
Class B........................... $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.27
Company Common Stock Price Range:
High.............................. $ 8.39 $ 9.65 $ 11.22 $ 12.35
Low............................... $ 7.10 $ 7.00 $ 8.40 $ 10.10
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Oil-Dri Corporation of America:
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, stockholders' equity, and cash
flows present fairly, in all material respects, the financial position of
Oil-Dri Corporation of America at July 31, 2004 and 2003 and the results of
their operations and their cash flows for each of the two years in the period
ended July 31, 2004 in conformity with accounting principles generally accepted
in the United States of America. 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 of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. The financial statements of the Company for the year ended July
31, 2002 were audited by other auditors whose report dated September 10, 2002
expressed an unqualified opinion on those statements.
As disclosed in Note 1 in the financial statements, the Company changed the
manner in which it accounts for goodwill and other intangible assets upon
adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets" on October 1, 2002.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
September 15, 2004
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OIL-DRI
The information required by this Item is (except for information set forth
below concerning the Board of Directors and information in Part I hereof,
concerning executive officers) contained in Oil-Dri's Proxy Statement for its
2004 annual meeting of stockholders ("Proxy Statement") under the caption "1.
Election of Directors" and is incorporated herein by this reference.
BOARD OF DIRECTORS
Richard M. Jaffee Thomas D. Kuczmarski
Chairman of the Board of Directors Senior Partner and President,
Kuczmarski & Associates, Inc.
Daniel S. Jaffee
President and Chief Executive Officer Joseph C. Miller
Vice Chairman of the Board of Directors
J. Steven Cole(1)
President, Cole & Associates Paul J. Miller
Partner, Sonnenschein Nath & Rosenthal, LLP
Arnold W. Donald
Chairman, Merisant Company Allan H. Selig(2)
President and Chairman, Selig Lease
Ronald B. Gordon Company
President and Chief Operating Officer Commissioner of Major League Baseball
Nice-Pak Products, Inc.
(1) Audit Committee Chair
(2) Compensation Committee Chair
The Company has adopted a Code of Ethics and Business Conduct (the "Code")
which applies to all of its directors, officers (including the Company's Chief
Executive Officer and senior financial officers) and employees. The Code imposes
special responsibilities on the Chief Executive Officer and the senior financial
officers of the Company. The Code, the Company's Corporate Governance Guidelines
and the charter of its Audit Committee may be viewed on the Company's website,
www.oildri.com and are available in print to any person upon request to Investor
Relations, Oil-Dri Corporation of America, 410 North Michigan Avenue, Suite 400,
Chicago, Illinois 60611-4213, telephone (312) 706-3232. Any amendment to, or
waiver of, a provision of the Code which applies to the Company's Chief
Executive Officer or senior financial officers and relates to the elements of a
"code of ethics" as defined by the Securities and Exchange Commission will also
be posted on the Company's website. As allowed by the controlled company
exemption to certain New York Stock Exchange rules, the Company does not have a
nominating/corporate governance committee and its compensation committee does
not have a charter.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in Oil-Dri's Proxy
Statement under the captions "Executive Compensation," "Report of the
Compensation and the Stock Option Committees of Oil-Dri Corporation of America
on Executive Compensation," "Compensation Committee Interlocks and Insider
Participation" and "Performance Graph" and is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in Oil-Dri's Proxy
Statement under the captions "General--Principal Stockholders" and "Security
Ownership of Management" and is incorporated herein by this reference.
57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in Oil-Dri's Proxy
Statement under the caption "Compensation Committee Interlocks and Insider
Participation" and is incorporated herein by this reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Based on their evaluation within 90 days prior to the filing date of
this Annual Report on Form 10-K, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934, as amended, are
effective for gathering, analyzing, and disclosing the information
the Company is required to disclose in reports filed under the Act.
(b) There were no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls
since the date of last evaluation of those internal controls.
58
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are contained
herein.
Consolidated Balance Sheets as of July 31, 2004 and July 31,
2003.
Consolidated Statements of Operations for the fiscal years ended
July 31, 2004, July 31, 2003 and July 31, 2002.
Consolidated Statements of Stockholders' Equity for the fiscal
years ended July 31, 2004, July 31, 2003 and July 31, 2002.
Consolidated Statements of Cash Flows for the fiscal years ended
July 31, 2004, July 31, 2003 and July 31, 2002.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm.
(a)(2) The following financial statement schedules are contained herein:
Schedule to Financial Statements, as follows:
Schedule II--Valuation and Qualifying Accounts, years ended
July 31, 2004, July 31, 2003 and July 31, 2002.
(a)(3) The following documents are exhibits to this Report:
(3)(a)(1) Articles of Incorporation of Oil-Dri, as amended.
(3)(b)(2) Bylaws of Oil-Dri, as amended June 16, 1995.
(10)(c)(4)(6) Memorandum of Agreement #1450 "Fresh Step"(TM), dated as of March 12, 2001 between A&M Products
Manufacturing Company and Registrant. (Confidential treatment of certain portions of this Exhibit has been
granted.)
(10)(d)(8) Description of 1987 Executive Deferred Compensation Program.*
(10)(e)(1)(9) Salary Continuation Agreement dated August 1, l989 between Richard M. Jaffee and Oil-Dri ("1989
Agreement").*
(10)(e)(2)(10) Extension and Amendment, dated October 9, 1998, to the 1989 Agreement.*
(10)(e)(3)(11) Second Amendment, Effective October 31, 2000, to the 1989 Agreement.*
(10)(f)(12) 1988 Stock Option Plan.*
(10)(h)(14) Note Agreement, dated as of April 15, 1993, between Oil-Dri and Teacher's Insurance and Annuity Association
of America regarding $6,500,000 7.17% Senior Notes due August 15, 2004.
(10)(h)(1)(13) First Amendment, dated as of January 15, 2001, to the Note Agreement dated as of April 15, 1993.
59
(10)(h)(2)(25) Second Amendment dated July 15, 2002 to Note Agreement dated as of April 15, 1993.
(10)(j)(22) The Oil-Dri Corporation of America Deferred Compensation Plan adopted November 15, 1995, as amended and
restated effective October 1, 2000.*
(10)(j)(1)(29) Restatement dated April 1, 2003 of the Oil-Dri Corporation of America November 15, 1995 Deferred
Compensation Plan.*
(10)(k)(23) The Oil-Dri Corporation of America 1995 Long Term Incentive Plan as amended and restated effective June
9, 2000.*
(10)(l)(30) Supplemental Executive Retirement Plan dated April 1, 2003.
(10)(m)(17) $25,000,000 Note Purchase Agreement dated as of April 15, 1998 between Oil-Dri and Teachers Insurance and
Annuity Association of America and Cigna Investments, Inc.
(10)(m)(5)(16) First Amendment, dated as of January 15, 2001 to the Note Agreement dated as of April 15, 1998.
(10)(m)(6)(26) Second Amendment dated as of July 15, 2002 to Note Agreement dated as of April 15, 1998.
(10)(n)(24) The Oil-Dri Corporation of America Outside Director Stock Plan as amended and restated effective October 16,
1999.*
(10)(o)(18) $15,000,000 unsecured, committed line of credit agreement dated January 29, 1999 between the Company and
Harris Trust and Savings Bank.
(10)(o)(1)(27) First Amendment, dated May 30, 2002 to Credit Agreement dated as of January 29, 1999.
(10)(o)(2)(28) Second Amendment, dated November 22, 2002, to Credit Agreement dated as of January 29, 1999.
(10)(o)(3) Third Amendment, dated November 24, 2003, to Credit Amendment dated as of January 29, 1999.
(10)(r)(21) Agreement ("Church & Dwight Agreement") dated May 19, 1999 between Church & Dwight Co., Inc. and
Oil-Dri. (Confidential treatment of certain portions of this Exhibit has been granted.)
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated May 27, 2004,
reporting that it had issued a press release announcing its
third quarter and nine month earnings.
The Company filed a Current Report on Form 8-K dated August 13,
2004, reporting that it had issued a press release announcing
a patent licensing agreement for scoopable cat litter in
settlement of patent infringement litigation.
(11) Statement re: Computation of Income per Share.
(21) Subsidiaries of Oil-Dri.
(23) Consents of PricewaterhouseCoopers LLP and Blackman Kallick Bartelstein,
LLP.
(31) Certifications pursuant to Rule 13a - 14(a).
60
(99) Certifications pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002.
- ----------
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to Exhibit (4.1) to Oil-Dri's Registration
Statement on Form S-8 (Registration No. 333-57625), made effective on June
24, 1998.
(2) Incorporated by reference to Exhibit (3)(b) to Oil-Dri's Annual Report on
Form 10-K for the fiscal year ended July 31, 1995.
(6) Incorporated by reference to Exhibit 10(s) to Registrant's Current Report
on Form 8-K dated May 1, 2001.
(8) Incorporated by reference to Exhibit (10)(f) to Oil-Dri's Annual Report on
Form 10-K for the fiscal year ended July 31, 1988.
(9) Incorporated by reference to Exhibit (10)(g) to Oil-Dri's Annual Report on
Form 10-K for the fiscal year ended July 31, 1989.
(10) Incorporated by reference to Exhibit (10)(n) to Oil-Dri's Annual Report on
Form 10-K for the fiscal year ended July 31, 1998.
(11) Incorporated by reference to Exhibit 99.1 to Registrant's Current Report
on Form 8-K dated November 13, 2000.
(12) Incorporated by reference to Exhibit (4)(a) to Oil-Dri's Registration
Statement on Form S-8 (Registration No. 33-29650), made effective on June
30, 1989.
(13) Incorporated by reference to Exhibit (10)(m)(4) to Oil-Dri's Quarterly
Report on Form 10-Q for the quarter ended January 31, 2001.
(14) Incorporated by reference to Exhibit (10)(i) to Oil-Dri's Annual Report on
Form 10-K for the fiscal year ended July 31, 1993.
(16) Incorporated by reference to Exhibit (10)(m)(5) to Oil-Dri's Quarterly
Report on Form 10-Q for the quarter ended January 31, 2001.
(17) Incorporated by reference to Exhibit (10)(m) to Oil-Dri's Quarterly Report
on Form 10-Q for the quarter ended April 30, 1998.
(18) Incorporated by reference to Exhibit (10)(o) to Oil-Dri's Quarterly Report
on Form 10-Q for the quarter ended January 31, 1999.
(21) Incorporated by reference to Exhibit (10)(r) to Oil-Dri's Annual Report on
Form 10-K for the fiscal year ended July 31, 1999.
(22) Incorporated by reference to Exhibit (10)(j) to Oil-Dri's Annual Report on
Form 10-K for the fiscal year ended July 31, 2001.
(23) Incorporated by reference to Exhibit (10)(k) to Oil-Dri's Annual Report on
Form 10-K for the fiscal year ended July 31, 2001.
(24) Incorporated by reference to Exhibit (10)(n) to Oil-Dri's Annual Report on
Form 10-K for the fiscal year ended July 31, 2001.
(25) Incorporated by reference to Exhibit (10)(h)(2) to Oil-Dri's Annual Report
on Form 10-K for the fiscal year ended July 31, 2002.
61
(26) Incorporated by reference to Exhibit (10)(m)(6) to Oil-Dri's Annual Report
on Form 10-K for the fiscal year ended July 31, 2002.
(27) Incorporated by reference to Exhibit (10)(o)(1) to Oil-Dri's Annual Report
on Form 10-K for the fiscal year ended July 31, 2002.
(28) Incorporated by reference to Exhibit (10)(o)(2) to Oil-Dri's Quarterly
Report on Form 10-Q for the quarter ended January 31, 2003.
(29) Incorporated by reference to Exhibit (10)(j)(1) to Oil-Dri's Quarterly
Report on Form 10-Q for the quarter ended April 30, 2003.
(30) Incorporated by reference to Exhibit (10)(1) to Oil-Dri's Quarterly Report
on Form 10-Q for the quarter ended April 30, 2003.
Oil-Dri agrees to furnish the following agreements upon the request of the
Commission:
Exhibit (4)(b) Letter of Credit Agreement, dated as of October 1, 1988
between Harris Trust and Savings Bank and Blue Mountain
Production Company in the amount of $2,634,590 in connection
with the issuance by Town of Blue Mountain, Mississippi of
Variable/Fixed Rate Industrial Development Revenue Bonds,
Series 1988 B (Blue Mountain Production Company Project) in
the aggregate principal amount of $2,500,000 and related
Indenture of Trust, Lease Agreement, Remarketing Agreement and
Guaranties.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Oil-Dri has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OIL-DRI CORPORATION OF AMERICA
(Registrant)
By /s/ Daniel S. Jaffee
----------------------------------------
Daniel S. Jaffee
President and Chief Executive Officer,
Director
Dated: October 28, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Oil-Dri
and in the capacities and on the dates indicated:
/s/ Richard M. Jaffee October 28, 2004
- ------------------------------------------------------
Richard M. Jaffee
Chairman of the Board of Directors
/s/ Andrew N. Peterson October 28, 2004
- ------------------------------------------------------
Andrew N. Peterson
Vice President and Chief Financial Officer
Principal Financial Officer
/s/ Daniel T. Smith October 28, 2004
- ------------------------------------------------------
Daniel T. Smith
Vice President and Controller
Principal Accounting Officer
/s/ J. Steven Cole October 28, 2004
- ------------------------------------------------------
J. Steven Cole
Director
/s/ Arnold W. Donald October 28, 2004
- ------------------------------------------------------
Arnold W. Donald
Director
/s/ Ronald B. Gordon October 28, 2004
- ------------------------------------------------------
Ronald B. Gordon
Director
/s/ Thomas D. Kuczmarski October 28, 2004
- ------------------------------------------------------
Thomas D. Kuczmarski
Director
63
/s/ Joseph C. Miller October 28, 2004
- --------------------------------------------------------
Joseph C. Miller
Vice Chairman of the Board of Directors
/s/ Paul J. Miller October 28, 2004
- --------------------------------------------------------
Paul J. Miller
Director
/s/ Allan H. Selig October 28, 2004
- --------------------------------------------------------
Allan H. Selig
Director
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders
of Oil-Dri Corporation of America:
Our audits of the consolidated financial statements referred to in our
report, dated September 15, 2004, appearing in the 2004 Annual Report on Form
10-K of Oil-Dri Corporation of America (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules
for the year ended July 31, 2004 and 2003, presents fairly, in all material
respects, the information set forth herein when read in conjunction with the
related consolidated financial statements. The financial statements schedules of
the Company for the year ended July 31, 2002 were audited by other auditors
whose report dated September 10, 2002 expressed an unqualified opinion on those
statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
September 15, 2004
65
SCHEDULE II
OIL-DRI CORPORATION OF AMERICA AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JULY 31
-----------------------------------------
2004 2003 2002
--------- --------- ---------
(IN THOUSANDS)
Allowance for doubtful accounts:
Beginning balance................................. $ 441 $ 392 $ 455
Additions charged to expense...................... 201 387 409
Deductions*....................................... 34 338 472
--------- --------- ---------
Balance at end of year............................ $ 608 $ 441 $ 392
========= ========= =========
* Net of recoveries.
Valuation reserve for income taxes:
Beginning balance................................. $ 357 $ 357 $ --
Additions charged to expense...................... 916 -- 357
Deductions........................................ -- -- --
-------- --------- ---------
Balance at end of year............................ $ 1,273 $ 357 $ 357
======== ========= =========
66
EXHIBITS
EXHIBIT
NUMBER
- -----------------
Exhibit 10(o)(3): Third Amendment, dated November 24, 2003, to Credit
Amendment dated as of January 29, 1999
Exhibit 11: Statement Re: Computation of per share earnings
Exhibit 21: Subsidiaries of Oil-Dri
Exhibit 23: Consents of PricewaterhouseCoopers LLP and Blackman Kallick
Bartelstein, LLP
Exhibit 31: Certifications by Daniel S. Jaffee, President and Chief
Executive Officer and Andrew N. Peterson, Chief Financial
Officer, required by Rule 13a-14(a)
Exhibit 99: Certifications pursuant to Section 1350 of the
Sarbanes-Oxley Act of 2002
Note: Stockholders may receive copies of the above listed exhibits, without fee,
by written request to Investor Relations, Oil-Dri Corporation of America,
410 North Michigan Avenue, Suite 400, Chicago, Illinois 60611-4213.
67