<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-25848
SLI, INC.
(Exact name of registration specified in charter)
OKLAHOMA 73-1412000
(State of Incorporation) (I.R.S. Employer Identification No.)
500 Chapman Street, Canton, MA 02021
(Address of principal executive offices)
781/828-2948
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the last practicable date.
As of July 4, 1999, 29,710,973 shares of Registrant's Common Stock $.01 par
value, were outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1.- FINANCIAL STATEMENTS
SLI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
July 4, January 3,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,364 $ 27,390
Accounts receivable, net 156,855 160,582
Inventories 172,921 149,453
Prepaid expenses and other 24,090 15,735
--------- ---------
Total current assets 363,230 353,160
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST: 359,913 371,315
Less - Accumulated depreciation 26,726 30,105
--------- ---------
333,187 341,210
--------- ---------
OTHER ASSETS:
Goodwill, net of accumulated amortization 35,677 38,353
Other intangible assets, net of accumulated amortization 29,862 29,091
Other assets 14,672 13,649
--------- ---------
Total other assets 80,211 81,093
--------- ---------
Total assets $ 776,628 $ 775,463
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable $ 35,250 $ 28,086
Current portion of long-term debt 1,239 1,788
Accounts payable 109,808 121,484
Accrued income taxes payable 3,343 3,234
Other accrued expenses 75,406 100,778
--------- ---------
Total current liabilities 225,046 255,370
--------- ---------
LONG-TERM DEBT, LESS CURRENT PORTION 276,223 238,530
--------- ---------
OTHER LIABILITIES:
Deferred income taxes 3,682 10,952
Other long-term liabilities 50,455 52,801
--------- ---------
Total other liabilities 54,137 63,753
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-
Authorized - 100,000,000 shares
Issued - 29,710,973 and 29,346,498
shares at July 4, 1999 and January 3, 1999 respectively 297 293
Common stock to be issued 4,819 8,419
Additional paid-in capital 137,944 131,399
Foreign currency translation adjustment (21,560) 4,080
Retained earnings 99,835 77,703
Treasury stock at cost, 5,000 and 315,900 shares at July 4, 1999
and January 3, 1999, respectively (113) (4,084)
--------- ---------
Total stockholders' equity 221,222 217,810
--------- ---------
Total liabilities and stockholders' equity $ 776,628 $ 775,463
========= =========
</TABLE>
See accompanying notes to the condensed financial statements.
<PAGE> 3
SLI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -------------------------
July 4, July 5, July 4, July 5,
1999 1998 1999 1998
--------- -------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 206,047 $185,669 $ 424,912 $ 378,089
Cost of products sold 144,773 129,097 300,784 262,690
--------- -------- --------- ---------
Gross margin 61,274 56,572 124,128 115,399
Selling, general and administrative expenses 42,509 42,882 86,763 87,330
Restructuring costs 2,300 2,300
--------- -------- --------- ---------
Operating income 16,465 13,690 35,065 28,069
Other (income) expense
Interest, net 4,830 4,072 9,398 7,259
Minority interest (111) 48 (165) 159
Other, net 89 172 (1,030) (143)
--------- -------- --------- ---------
Income before income taxes 11,657 9,398 26,862 20,794
Income taxes 2,297 1,880 4,730 4,159
--------- -------- --------- ---------
Net Income $ 9,360 $ 7,518 $ 22,132 $ 16,635
========= ======== ========= =========
Net income per common share - basic
Net income per share $ 0.32 $ 0.26 $ 0.76 $ 0.58
========= ======== ========= =========
Weighted average shares outstanding 29,320 29,036 29,204 28,894
========= ======== ========= =========
Net income per common share - diluted
Net income per share $ 0.30 $ 0.25 $ 0.72 $ 0.55
========= ======== ========= =========
Weighted average shares outstanding 31,080 30,503 30,911 30,297
========= ======== ========= =========
</TABLE>
See accompanying notes to the condensed financial statements.
<PAGE> 4
SLI, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
----------------------
July 4, July 5,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $(25,555) $ 11,756
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (21,809) (28,930)
Proceeds from disposal of property, plant and equipment 3,885
Proceeds from disposal of other investments 332
Acquisitions, net of cash acquired (5,823) (23,728)
-------- --------
Net cash used in investing activities (27,300) (48,773)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of lines of credit 38,445 1,093
Proceeds from long-term debt 412 14,067
Payments of long-term debt (1,467) (11,851)
Repurchase of shares for treasury (5,681) --
Exercise of stock options 4,946 2,378
-------- --------
Net cash provided by (used in) financing activities 36,655 5,687
Effect of exchange rate changes on cash (1,826) (126)
-------- --------
Net increase (decrease) in cash and cash equivalents (18,026) (31,456)
Cash and cash equivalents, beginning of period 27,390 52,572
-------- --------
Cash and cash equivalents, end of period $ 9,364 $ 21,116
======== ========
</TABLE>
See accompanying notes to the condensed financial statements.
<PAGE> 5
SLI, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
Note 1 General
The interim consolidated financial statements presented have been
prepared by SLI, Inc. ("Company") without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair presentation of (a) the results of operations and cash flows for the three
month and six month periods ended July 4, 1999 and July 5, 1998 and (b) the
financial position at July 4, 1999. Interim results are not necessarily
indicative of results for a full year.
The consolidated balance sheet presented as of January 3, 1999 has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are condensed and do not contain certain information included in the
annual financial statements and notes of the Company. The consolidated financial
statements and notes in the financial statements included herein should be read
in conjunction with the financial statements and notes included in the Company's
Form 10-K filed with the Securities and Exchange Commission and dated March 24,
1999.
Note 2 Inventories
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. Cost is determined by the first-in, first-out
(FIFO) method. Inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
July 5, 1999 January 3, 1999
------------ ---------------
<S> <C> <C>
Raw Materials $42,611 $35,638
Work in process 16,808 17,389
Finished Goods 113,502 96,426
------- ------
$172,921 $149,453
</TABLE>
Note 3 Comprehensive income (loss)
During the three months ended July 4, 1999 and July 5, 1998, total
comprehensive income amounted to $625,000 and $6.6 million,
respectively. During the six months ended July 4, 1999 and July 5, 1998, total
comprehensive income (loss) amounted to ($3.5) million and $11.1 million,
respectively. The components of comprehensive income (loss) are net income and
cumulative foreign currency translation adjustment.
<PAGE> 6
Note 4 Seasonality
It is expected that the Company's operations will experience certain
seasonal patterns. Generally, sales have been highest in the fourth quarter of
each year due to abbreviated daylight hours and increased holiday light usage.
Note 5 Common stock to be issued
In connection with certain 1998 acquisitions, the Company is holding
142,500 shares of common stock to be issued pursuant to the terms of the
purchase agreements.
Note 6 Income taxes
The Company's effective tax rate is lower than the U.S. statutory
effective tax rate due to the impact of income in countries with effective tax
rates lower than those in the U.S. and realization of tax attributes, including
net operating loss carry forwards.
Note 7 Treasury stock
The board of directors has authorized, subject to certain business and
market conditions, the repurchase of shares of the Company's stock. At July 4,
1999, a total of 6,205,950 shares have been repurchased under these plans.
Retirements of treasury stock totaled 6,200,950 shares as of July 4, 1999.
Note 8 Restructuring
Restructuring of acquired operations
In connection with the purchase price accounting for the acquisition of
SLI B.V., effective September 1, 1997, the Company approved a restructuring
plan, which resulted in reorganization accruals of $25.0 million. $8 million of
the amount initially recorded was reversed in fiscal 1998 through an adjustment
to property, plant and equipment. The remaining purchase liabilities recorded
include the following:
(i) Severance costs of $12.9 million include the
termination of 182 employees in Europe, 268 employees in Australia and
28 employees in Asia. Approximately $9.3 million of severance cost was
paid as of July 4, 1999. The remainder will be paid throughout fiscal
1999.
(ii) Costs of $4.1 million are associated with the closure
of leased warehouse and administrative facilities. These costs
represent remaining payments on non-cancelable operating leases (which
expire through 2000), costs to return the facilities to the condition
at the outset of the lease, the write-off of the remaining net book
value of leasehold improvements and the cost to relocate employees.
Accrued lease costs are for costs to be incurred subsequent to the
Company vacating the facilities. The warehouse closures will occur in
France, Belgium and Scandinavia and the administrative office
<PAGE> 7
closures will occur in Switzerland, France, Austria and Benelux. As of
July 4, 1999, $3.3 million of the accrual had been utilized.
Restructuring of existing operations
In the quarter ended July 4, 1999, the Company developed and approved a
restructuring plan for existing operations, which resulted in charges of $2.3
million. The restructuring plan included severance costs of $2.2 million and
$100,000 of other costs. Severance costs relate to the elimination of 26
employees at the Company's France operations. The other costs associated with
the restructuring plan are associated with the closure of sales and
administrative facilities. These costs represent the write-off of the remaining
book value of leasehold improvements, costs to return the facilities to the
condition at the outset of the lease and the cost to relocate employees. As of
July 4, 1999, $414,000 of the accrual had been utilized. The remainder will be
paid throughout the next twelve months into fiscal 2000.
Note 9 Net Income Per Share Data
The numerator in calculating both basic and diluted earnings per share
for each year is reported net income. The denominator is based on the following
weighted-average number of common shares (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 4, 1999 July 5, 1998 July 4, 1999 July 5, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic 29,320 29,036 29,204 28,894
Diluted 31,080 30,503 30,911 30,297
</TABLE>
The difference between basic and diluted weighted-average common shares
results from the assumption that dilutive stock options outstanding were
exercised.
Note 10 Adoption of Accounting Principles
In June 1998, the SFAS No. 133 Accounting for Derivatives Instruments
and Hedging Activities (Statement 133), which is required to be adopted in
fiscal years beginning after June 15, 2000. Statement 133 requires all
derivatives to be recognized in the balance sheet as either assets or
liabilities at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in income. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement 133 will be on
the earnings and financial position of the Company.
Note 11 Subsequent events
Effective July 6, 1999, the Company completed a public offering
pursuant to which the Company issued and sold 6,000,000 shares of its Common
Stock and received net proceeds of approximately $153.5 million. The Company
used the net proceeds from the offering to reduce debt.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations for
the three and six months ended July 4, 1999 should be read in conjunction with
the Company's Condensed Consolidated Financial Statements and accompanying
notes. Except for historical matters contained herein, the matters discussed
herein are forward-looking statements and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect assumptions and involve risks and
uncertainties, which may affect the Company's business and prospects and cause
actual results to differ materially from these forward-looking statements.
GENERAL
The Company is a leading, vertically integrated manufacturer and
supplier of lighting systems, which include lamps, fixtures and ballasts.
Through its 21 acquisitions completed since 1992, the Company has grown from a
specialized manufacturer of neon lamps and miniature lighting products into a
manufacturer, supplier and lighting service provider of a wide variety of
lighting products, including lamps (incandescent, fluorescent, compact
fluorescent, HID, halogen, miniature incandescent, neon, LED's and special
lamps), fixtures, magnetic and electronic ballasts and fiber optic lighting
systems. The Company believes that it is one of the six largest global lighting
companies and one of only three major international producers to offer an
integrated package of lamps, fixtures and ballasts. The Company serves a
diverse, international customer base and at July 4, 1999 had 31 manufacturing
plants in 13 countries. SLI, Inc. acquired 6 companies in 1998 and 2 companies
in 1999, which has an impact on year to year comparisons of revenues and
earnings.
For the six months ended July 4, 1999, 79.0% of the Company's worldwide
net revenue was generated from international operations. International
operations are subject to currency fluctuations and government actions, such as
devaluations. The Company monitors its currency exposure in each country and can
not predict future foreign currency fluctuations, which have and can continue to
affect the Company's balance sheet and results of operations.
Three months ended July 4, 1999 compared to the three months ended July 5, 1998.
Net sales. Net sales increased 11.0% from $185.7 million for the three
months ended July 5, 1998 to $206.0 million for the three months ended July 4,
1999. This increase was primarily due to generic growth generated from the
integration of incremental sales of the 1998 and 1999 acquisitions into ongoing
operations. The generally higher value of the US dollar
<PAGE> 9
compared to other currencies worldwide decreased net sales by approximately 4.7%
for the three months ended July 4, 1999 as compared to the three months ended
July 5, 1998.
Gross Margin. Gross margin increased 8.3% from $56.6 million for the
three months ended July 5, 1998 to $61.3 million for the three months ended July
4, 1999; due primarily to the increase in sales volume. Gross margin, as a
percentage of net sales, decreased from 30.5% for the three months ended July 5,
1998 to 29.7%, for the three months ended July 4, 1999. This decrease is
primarily due to the effects of the changes in product mix as caused by the
addition of the 1998 and 1999 acquisitions. The gross margin of the Company is
expected to improve as further integration of recent acquisitions into the
Company evolves.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased from $42.9 million for the three months ended
July 5, 1998 to $42.5 million for the three months ended July 4, 1999. As a
percentage of net sales, selling, general and administrative expenses decreased
from 23.1% for the three months ended July 5, 1998 to 20.6% for the three months
ended July 4, 1999 as a result of the Company's strategy to decrease selling,
general and administrative expenses at recent acquisitions through
implementation of reorganization plans developed and accrued for at the time of
such acquisitions. Non-recurring charges for the three months ended July 4, 1999
totaled $397,000 and relate to the restructuring activity in France, as compared
to non-recurring charges for the three months ended July 5, 1998 totaling
$525,000 which related to the withdrawal of a public offering in May 1998.
Additionally, the Company seeks to continue to decrease selling, general and
administrative expenses as a percentage of net sales by utilizing the
infrastructure of its recent acquisitions as a base for further sales growth.
Restructuring costs. In the quarter ended July 4, 1999, the Company
developed and approved a restructuring plan for existing operations, which
resulted in charges of $2.3 million. The restructuring plan included severance
costs of $2.2 million and $100,000 of other costs. Severance costs relate to the
elimination of 26 employees at the Company's France operations. The other costs
associated with the restructuring plan are associated with the closure of sales
and administrative facilities. These costs represent the write-off of the
remaining book value of leasehold improvements, costs to return the facilities
to the condition at the outset of the lease and the cost to relocate employees.
The Company expects to realize approximately $1 million in annualized cost
savings over the next year, largely as a result of reduced employee expense.
Interest (income) expense, net. Interest expense, net, increased from
$4.1 million for the three months ended July 5, 1998 to $4.8 million for the
three months ended July 4, 1999, primarily as a result of an increase in
outstanding borrowings of $98.8 million.
Other (income) expense. Other expense decreased from $172,000 for the
three months ended July 5, 1998 to $89,000 for the three months ended July 4,
1999. The other expense for the three months ended July 4, 1999 resulted from a
loss on the sale of an investment totaling $193,000, as offset by recording
other income effects of foreign exchange transactions. Substantially all of the
other expense for the three months ended July 5, 1998 resulted from recording
the effects of foreign exchange transactions.
<PAGE> 10
Income before income taxes. As a result of the above factors, income
before income taxes increased from $9.4 million for the three months ended July
5, 1998 to $11.7 million for the three months ended July 4, 1999. As a
percentage of net sales, income before provision for income taxes increased from
5.1% for the three months ended July 5, 1998 to 5.7% for the three months ended
July 4, 1999.
Income taxes. For the three months ended July 4, 1999, the Company
recorded a tax provision of $2.3 million on pretax income of $11.7 million, for
an effective rate of 19.7%, compared to an effective rate of 20% for the three
months ended July 5, 1998. The lower than U.S. statutory tax rate is due to the
impact of income in countries with effective tax rates lower than those in the
U.S. and realization of tax attributes, including net operating loss carry
forwards. An effective tax rate lower than the U.S. statutory effective tax rate
is expected to continue for several years due to the significant international
operations of the Company.
Six months ended July 4, 1999 compared to the six months ended July 5, 1998.
Net sales. Net sales increased 12.4% from $378.1 million for the six
months ended July 5, 1998 to $424.9 million for the six months ended July 4,
1999. This increase was primarily due to generic growth generated from the
integration of incremental sales of the 1998 and 1999 acquisitions into ongoing
operations. The generally higher value of the US dollar compared to other
currencies worldwide decreased net sales by approximately 2.9% for the six
months ended July 4, 1999 as compared to the six months ended July 5, 1998.
Gross Margin.. Gross margin increased 7.6% from $115.4 million for the
six months ended July 5, 1998 to $124.1 million for the six months ended July 4,
1999; due primarily to the increase in sales volume. Gross margin, as a
percentage of net sales, decreased from 30.5% for the six months ended July 5,
1998 to 29.2%, for the six months ended July 4, 1999. This decrease is primarily
due to the effects of the changes in product mix as caused by the addition of
the 1998 and 1999 acquisitions. The gross margin of the Company is expected to
improve as further integration of recent acquisitions into the Company evolves.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased from $87.3 million for the six months ended
July 5, 1998 to $86.8 million for the six months ended July 4, 1999. As a
percentage of net sales, selling, general and administrative expenses decreased
from 23.1% for the six months ended July 5, 1998 to 20.4% for the six months
ended July 4, 1999 as a result of the Company's strategy to decrease selling,
general and administrative expenses at recent acquisitions through
implementation of reorganization plans developed and accrued for at the time of
such acquisitions. Non-recurring charges for the six months ended July 4, 1999
totaled $397,000 and relate to the restructuring activity in France, as compared
to non-recurring charges for the six months ended July 5, 1998 totaling $525,000
which related to the withdrawal of a public offering in May 1998. Additionally,
the Company seeks to continue to decrease selling, general and administrative
expenses as a percentage of net sales by utilizing the infrastructure of its
recent acquisitions as a base for further sales growth.
<PAGE> 11
Restructuring costs. In the quarter ended July 4, 1999, the Company
developed and approved a restructuring plan for existing operations, which
resulted in charges of $2.3 million. The restructuring plan included severance
costs of $2.2 million and $100,000 of other costs. Severance costs relate to the
elimination of 26 employees at the Company's France operations. The other costs
associated with the restructuring plan are associated with the closure of sales
and administrative facilities. These costs represent the write-off of the
remaining book value of leasehold improvements, costs to return the facilities
to the condition at the outset of the lease and the cost to relocate employees.
The Company expects to realize approximately $1 million in annualized cost
savings over the next year, largely as a result of reduced employee expense.
Interest (income) expense, net. Interest expense, net, increased from
$7.3 million for the six months ended July 5, 1998 to $9.4 million for the six
months ended July 4, 1999, primarily as a result of an increase in outstanding
borrowings of $98.8 million.
Other (income) expense. Other income increased from $143,000 for the
six months ended July 5, 1998 to $1.0 million for the six months ended July 4,
1999. Substantially all of the other income resulted from recording the effects
of foreign exchange transactions. Additionally, for the six months ended July 4,
1999, the Company recognized a loss on the sale of an investment totaling
$193,000.
Income before income taxes. As a result of the above factors, income
before income taxes increased from $20.8 million for the six months ended July
5, 1998 to $26.9 million for the six months ended July 4, 1999. As a percentage
of net sales, income before provision for income taxes increased from 5.5% for
the six months ended July 5, 1998 to 6.3% for the six months ended July 4, 1999.
Income taxes. For the six months ended July 4, 1999, the Company
recorded a tax provision of $4.7 million on pretax income of $26.9 million, for
an effective rate of 17.6%, compared to an effective rate of 20% for the six
months ended July 5, 1998. The lower than U.S. statutory tax rate is due to the
impact of income in countries with effective tax rates lower than those in the
U.S. and realization of tax attributes, including net operating loss carry
forwards. An effective tax rate lower than the U.S. statutory effective tax rate
is expected to continue for several years due to the significant international
operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's major uses of cash have historically been for
acquisitions, working capital to support sales growth and ongoing capital
expenditures. Sources of cash have typically included operating cash flow, bank
borrowings and proceeds from the sale of Common Stock. Effective, July 6, 1999,
the Company completed a public offering pursuant to which the Company issued and
sold 6,000,000 shares of its Common Stock and received net proceeds of
approximately $153.5 million. The Company used the net proceeds from the
offering to reduce debt.
As of July 4, 1999, the Company's cash on hand was $9.4 million. For
the six months ended July 4, 1999, net cash used in operating activities was
$25.6 million and cash used in
<PAGE> 12
investing activities totaled $27.3 million. The investing activities included
(i) capital expenditures, primarily for production equipment, totaling $21.8
million and (ii) acquisitions with which the Company paid an aggregate amount of
approximately $5.8 million, net of cash. Net cash provided by financing
activities for the six months ended July 4, 1999 aggregated $36.7 million, which
included $37.4 in net borrowings under the Company's credit facilities,
repurchases of Common Stock totaling $5.7 million and proceeds from the exercise
of stock options totaling $4.9 million.
Upon completion of the public offering on July 6, 1999, the Company had
available borrowings of approximately $187 million under the Existing Credit
Facility. As of July 4, 1999, the Company had available borrowings of
approximately $33 million under the Existing Credit Facility, and the face
amount of letters of credit issued and outstanding under the Existing Credit
Facility totaled approximately $2.6 million.
The Company conducts business in countries outside of the United
States, which exposes the Company to fluctuations in foreign currency exchange
rates. The Company may enter into short-term forward exchange contracts to hedge
this risk; nevertheless, fluctuations in foreign currency exchange rates could
have an adverse effect on the Company's business. The Company does not hold or
issue financial instruments for trading or speculative purposes. The Company has
significant operations in Europe and, to a lesser extent, in Latin America. The
introduction of a single European currency is expected to reduce the currency
risks associated with inter-European transactions. However, risks will remain
with respect to transactions with customers or suppliers outside of the zone
covered by the single European currency. The Company's operations in Latin
America are carried out primarily in Brazil, Costa Rica and Colombia. Although
currently not classified as a hyper-inflationary country, Brazil has been
classified as such in the past.
The Company believes that cash from operations and borrowings available
under the Company's credit facilities will be sufficient to meet the Company's
working capital and capital expenditures needs for the next twelve months and
the foreseeable future thereafter. Capital expenditures during the next twelve
months are expected to approximate $33 million.
SEASONALITY
It is expected that the Company's operations will experience certain
seasonal patterns. Generally, sales have been highest in the fourth quarter of
each year due to abbreviated daylight hours and increased holiday light usage.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a software system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
<PAGE> 13
In addressing the year 2000 issue, the Company has identified the
following phases. In the awareness phase, the Company defined the year 2000
issue and obtained executive level support and funding. In the Inventory phase,
the Company collected a comprehensive list of items that may be affected by Year
2000 compliance issues. Such items include facilities and related
non-information technology systems (embedded technology) used in production and
manufacturing systems, computer systems, hardware, and services and products
provided by third parties. In the Assessment phase, the Company evaluated the
items and affected systems identified in the Inventory phase to determine which
will need to be remediated and prioritized remediation based on the potential
impact to the Company. Affected systems include automated assembly lines and
related robotic technologies used in various aspects of the manufacturing
process. However, based on a review of its product line, the Company has
determined that most of the products it has sold and will continue to sell do
not require remediation to be year 2000 compliant. Accordingly, the Company does
not believe that the Year 2000 presents a material exposure as it relates to its
products. The remediation phase includes an analysis of the items that are
affected by Year 2000, the identification of problem areas and the repair or
replacement of non-compliant items. In the ordinary course of replacing computer
equipment and software, the Company attempts to obtain replacements that it
believes are Year 2000 compliant and requests representations from
manufacturers. The Testing phase includes testing of all proposed repairs,
including present and forward date testing which simulates dates in the Year
2000. The Implementation phase consists of placing all items that have been
remediated and successfully tested into production.
Utilizing both internal and external resources to reprogram, or
replace, test, and implement the software and operating equipment for year 2000
modifications, the Company currently anticipates that its Year 2000
identification, assessment, remediation and testing efforts will be completed by
December 31, 1999 and that such efforts will be completed prior to any currently
anticipated impact on computer equipment and software. The Company estimates
that as of July 4, 1999, it had completed approximately 70% of the initiatives
that it believes will be necessary to fully address potential Year 2000 issues
relating to computer equipment and software. The total cost of the Year 2000
project is estimated at $9.8 million and is being funded through operating cash
flows. To date the Company has incurred approximately $5.9 million ($5.4 million
capitalized for new systems and equipment and $.5 million expensed), related to
all phases of the Year 2000 project. Of the total remaining project costs,
approximately $3.5 million are attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $.4 million
relates to repair of hardware and software and will be expensed as incurred.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the year 2000 program. In the
event that the Company does not complete any additional phases, the Company
would be unable to take orders, manufacture and ship products, invoice customers
or collect payments. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company. The
Company could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
<PAGE> 14
Although the Company has not developed a comprehensive contingency plan
to address situations that may result if the Company or any of the third parties
upon which the Company is dependent is unable to achieve Year 2000 readiness,
the Company's Year 2000 compliance program is on-going and its ultimate scope,
as well as the consideration of contingency plans, will continue to be evaluated
as new information becomes available. These contingency plans involve, among
other actions, manual workarounds, increasing inventories, and adjusting
staffing strategies.
The foregoing Year 2000 discussion contains "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. There are many uncertainties involved in the Year 2000 issue, including
the extent to which the Company will be able to successfully remediate systems
and adequately provide for contingencies that may arise, as well as the broader
scope of the year 2000 issues as it may affect third parties that are not
controlled by the Company. Accordingly, the costs and results of the Company's
Year 2000 program and the extent of any impact on the Company's operations could
vary materially from those stated herein.
ITEM 7A. MARKET RISK
The tables below summarize information on instruments and transactions
that are sensitive to foreign currency exchange rates, including foreign
currency forward exchange agreements and foreign currency denominated debt
obligations.
Debt Denominated in Foreign Currencies is as follows:
<TABLE>
<CAPTION>
Fair Value
1999 Thereafter Total 7/4/99
------ ----------
(Dollars Equivalents in millions)
<S> <C> <C> <C> <C>
Belgium Francs
Variable Rate 3.0 3.0 3.0
Avg. Interest Rate 4.3%
Avg. Forward Currency
Exchange Rate 0.025
Deutsche Marks
Variable Rate 6.8 6.8 6.8
Avg. Interest Rate 4.3%
Avg. Forward Currency
Exchange Rate 0.524
Japanese Yen
Variable Rate 11.6 11.6 11.6
Avg. Interest Rate 1.6%
Avg. Forward Currency
Exchange Rate 0.008
Swiss Francs
Variable Rate 4.1 4.1 4.1
Avg. Interest Rate 2.5%
Avg. Forward Currency
Exchange Rate 0.637
</TABLE>
<PAGE> 15
Foreign Currency Forward Exchange Contracts are as follows:
<TABLE>
<CAPTION>
Average Fair
Functional Contract Value
Buy Contracts Currency 1999 Thereafter Total Rate 7/4/99
----------------- ---------------------- ---- ----------
(Dollars Equivalents in millions)
<S> <C> <C> <C> <C> <C> <C>
Euro Dollar British Pound Sterling 16.5 -- 16.5 1.439 15.5
United States Dollar British Pound Sterling 3.0 -- 3.0 1.633 3.1
United States Dollar Deutsche Marks 1.0 -- 1.0 0.585 1.2
</TABLE>
A portion of the Company's operations consists of manufacturing and
sales activities in foreign jurisdictions. As a result, the Company's financial
results could be significantly affected by factors such as foreign currency
exchange rates or weak economic conditions in the foreign markets in which the
Company distributes its products. The Company's operating results are exposed to
changes in exchange rates between the U.S. dollar and various other foreign
currencies.
The Company has an existing credit facility with a syndicate of banks
led by BankBoston, N.A., as administrative agent, providing to the Company and
its domestic subsidiaries (the "Borrowers") a $300 million multi-currency
revolving credit facility including a $10.0 million swing-line loan facility and
a $15 million letter of credit facility. Non-U.S.dollar borrowings are capped at
$75.0 million. There are no scheduled amortization payments or repayment
penalties. The facility terminates and is repayable in full on August 30, 2002.
At the Company's option, the interest rates per annum applicable to the
revolving credit facility are either adjusted LIBOR plus a margin ranging from
.75% to 1.75%, or, with respect to U.S.-dollar-denominated loans only, an
adjusted base rate plus a margin ranging from zero to .75%.
The Company's revolving credit facility contains a number of covenants
typical in senior credit facilities that, among other things, restricts the
ability of the Company to dispose of assets (including the stock of
subsidiaries), incur additional indebtedness, create additional liens on assets,
enter into certain leases, investments or acquisitions, engage in mergers or
consolidations, make capital expenditures or engage in certain transactions with
subsidiaries and affiliates, and that otherwise restrict corporate activities.
In addition the Company is also required to comply with certain financial
covenants including maximum leverage, minimum interest coverage and minimum net
worth.
The Company believes that it will continue to use its long-term credit
facility to fund its future acquisitions, capital expenditures, and other
short-term working capital requirements.
The Company expects to generate sufficient cash flows from operations
to pay down remaining debt prior to the expiration of the credit facility
(August 2002). The proceeds from the secondary public offering, completed in
July 1999, were used to pay down a portion of existing debt.
The Company continues to review and analyze financing alternatives
based on capital market conditions.
<PAGE> 16
SLI, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Items 1-5 None
Item 6 Financial Data Schedule (For SEC Use Only)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
SLI, Inc.
By: /s/ Frank M. Ward
-------------------
Frank M. Ward, President and Chief
Executive Officer
Date: August 18, 1999
By: /s/ Richard F. Parenti
-----------------------
Richard F. Parenti,
Chief Financial Officer
Date: August 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> JUL-04-1999
<EXCHANGE-RATE> 1
<CASH> 9,364
<SECURITIES> 0
<RECEIVABLES> 156,855
<ALLOWANCES> 0
<INVENTORY> 172,921
<CURRENT-ASSETS> 363,230
<PP&E> 359,913
<DEPRECIATION> 26,726
<TOTAL-ASSETS> 776,628
<CURRENT-LIABILITIES> 225,046
<BONDS> 276,223
0
0
<COMMON> 297
<OTHER-SE> 220,925
<TOTAL-LIABILITY-AND-EQUITY> 776,628
<SALES> 424,912
<TOTAL-REVENUES> 424,912
<CGS> 300,784
<TOTAL-COSTS> 389,847
<OTHER-EXPENSES> (1,195)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,398
<INCOME-PRETAX> 26,862
<INCOME-TAX> 4,730
<INCOME-CONTINUING> 22,132
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,132
<EPS-BASIC> .76<F1>
<EPS-DILUTED> .72
<FN>
<F1>REFLECTS BASIC EPS
</FN>
</TABLE>
