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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 September 30, 2000
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 333-31282
O'SULLIVAN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 43-0923022
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1900 Gulf Street, Lamar, Missouri 64759-1899
(Address of principal executive offices) (ZIP Code)
(417) 682-3322
(Registrant's telephone number, including area code)
</TABLE>
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
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As of September 15, 2000, 100 shares of Common Stock of O'Sullivan
Industries, Inc., par value $1.00 per share, were outstanding.
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The Index to Exhibits begins on page 15.
Page 1 of 17
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PART I
ITEM 1. FINANCIAL STATEMENTS.
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A wholly owned subsidiary of O'Sullivan Industries Holdings, Inc.)
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
September 30, June 30,
Assets: 2000 2000
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,648 $ 11,867
Trade receivables, net of allowance for doubtful accounts
of $3,268 and $3,095, respectively 65,884 58,975
Inventories, net 66,238 65,256
Prepaid expenses and other current assets 6,746 6,432
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Total current assets 144,516 142,530
Property, plant and equipment, net 100,428 99,548
Other assets 13,429 13,935
Goodwill, net of accumulated amortization 39,338 39,755
Receivable from parent 321 521
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Total assets $ 298,032 $ 296,289
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Liabilities and Stockholder's Deficit:
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Current liabilities:
Accounts payable $ 15,621 $ 15,399
Current portion of long-term debt 6,500 3,000
Accrued liabilities 31,596 30,597
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Total current liabilities 53,717 48,996
Long-term debt, less current portion 234,819 235,708
Other liabilities 2,075 1,816
Deferred income taxes 17,626 17,626
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Total liabilities 308,237 304,146
Commitments and contingencies (Note 5)
Stockholder's deficit:
Common stock; $1.00 par value, 100 shares authorized, issued and outstanding - -
Retained deficit (9,897) (7,843)
Accumulated other comprehensive loss (308) (14)
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Total stockholder's deficit (10,205) (7,857)
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Total liabilities and stockholder's deficit $ 298,032 $ 296,289
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The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A wholly owned subsidiary of O'Sullivan Industries Holdings, Inc.)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
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2000 1999
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<S> <C> <C>
Net sales $ 90,519 $ 101,992
Costs and expenses:
Cost of sales 66,175 72,231
Selling, marketing and administrative 19,727 20,546
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Total costs and expenses 85,902 92,777
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Operating income 4,617 9,215
Other income (expense)
Interest expense (7,815) (494)
Interest income 137 72
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Income (loss) before income tax provision and cumulative effect of accounting change (3,061) 8,793
Income tax provision (benefit) (1,102) 3,165
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Income (loss) before cumulative effect of accounting change (1,959) 5,628
Cumulative effect of accounting change, net of income tax benefit of $53 (95) -
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Net income (loss) $ (2,054) $ 5,628
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The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A wholly owned subsidiary of O'Sullivan Industries Holdings, Inc.)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
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2000 1999
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<S> <C> <C>
Cash flows provided (used) by operating activities:
Net income (loss) $ (2,054) $ 5,628
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 3,919 3,654
Amortization of debt issuance cost 460 -
Bad debt expense 150 309
Loss on disposal of assets 71 3
Changes in assets and liabilities:
Trade receivables (7,059) (8,677)
Inventories (982) 432
Other assets (609) (318)
Accounts payable, accrued liabilities and other liabilities 1,480 9,882
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Net cash provided (used) by operating activities (4,624) 10,913
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Cash flows used for investing activities:
Capital expenditures (4,337) (3,300)
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Cash flows provided (used) by financing activities:
Proceeds from borrowings 3,042 -
Repayment of borrowings (500) -
Advances on intercompany debt 200 20
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Net cash flows provided by financing activities 2,742 20
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Net increase (decrease) in cash and cash equivalents (6,219) 7,633
Cash and cash equivalents, beginning of period 11,867 3,740
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Cash and cash equivalents, end of period $ 5,648 $ 11,373
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The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A wholly owned subsidiary of O'Sullivan Industries Holdings, Inc.)
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDER'S DEFICIT
For the three months ended September 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Accumulated
other Total
Retained comprehensive stockholder's Comprehensive
deficit loss deficit loss
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, June 30, 2000 $ (7,843) $ (14) $ (7,857)
Net loss (2,054) (2,054) $ (2,054)
Other comprehensive loss - (294) (294) (294)
------------ ---------- ----------- -------------
Balance, September 30, 2000 $ (9,897) $ (308) $ (10,205) $ (2,348)
============ ========== =========== =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1--BASIS OF PRESENTATION
The unaudited consolidated financial statements of O'Sullivan
Industries, Inc. ("O'Sullivan"), a wholly owned subsidiary of O'Sullivan
Industries Holdings, Inc., included herein have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-Q and Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in O'Sullivan's Annual Report on Form 10-K for the fiscal year
ended June 30, 2000. The interim results are not necessarily indicative of the
results that may be expected for a full year.
NOTE 2--ADOPTION OF SFAS 133
O'Sullivan adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"), on July 1, 2000. As required by the
transition provisions of FAS 133, O'Sullivan recorded a net-of-tax
cumulative-effect type adjustment of $95,000 in current earnings to recognize
the fair value of its derivatives designated as cash-flow hedging instruments.
O'Sullivan's derivatives instruments are recognized on the balance
sheet at their fair value. O'Sullivan currently has a costless interest rate
collar hedging one-half the value of its senior credit facilities. On the date
the derivative contract is entered into, O'Sullivan designates its derivative
as either a hedge of the fair value of a recognized asset or liability ("fair
value" hedge), as a hedge of the variability of cash flows to be received
("cash flow" hedge), or as a foreign-currency cash flow hedge ("foreign
currency" hedge). Changes in the fair value of a derivative that is highly
effective as - and that is designated and qualifies as - a fair-value hedge,
along with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk (including losses or gains on firm
commitments), are recorded in current-period earnings. Changes in the fair
value of a derivative that is highly effective as - and that is designated and
qualifies as - a cash-flow hedge are recorded in other comprehensive income,
until earnings are affected by the variability of cash flows. Changes in the
fair value of derivatives that are highly effective as - and that are
designated and qualify as - foreign-currency hedges are recorded in either
current-period earnings or other comprehensive income, depending on whether the
hedge transaction is a fair-value hedge (e.g., a hedge of a firm commitment
that is to be settled in a foreign currency) or a cash-flow hedge (e.g., a
foreign-currency-denominated forecasted transaction).
O'Sullivan formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value, cash-flow or
foreign-currency hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. O'Sullivan also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge or
that it has ceased to be a highly effective hedge, O'Sullivan discontinues
hedge accounting prospectively, as discussed below.
O'Sullivan discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated or
exercised; (3) the derivative is de-designated as a hedge instrument, because
it is unlikely that a forecasted transaction will occur; (4) because a hedged
firm commitment no longer meets the definition of a firm commitment; or (5)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
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When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the derivative will continue to be carried
on the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from
the balance sheet and recognized as a gain or loss in current-period earnings.
When hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings. In all
other situations in which hedge accounting is discontinued, the derivative will
be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current-period earnings.
NOTE 3--INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
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(in thousands)
<S> <C> <C>
Finished goods $48,263 $47,350
Work in process 6,702 6,258
Raw materials 11,273 11,648
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$66,238 $65,256
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</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
O'Sullivan entered into a management services agreement with BRS for
strategic and financial advisory services on November 30, 1999. The annual fee
for these services is the greater of (a) 1% of O'Sullivan's consolidated
earnings before interest, taxes, depreciation and amortization or (b) $300,000.
Under the management services agreement, BRS can also receive reimbursement for
expenses which are limited to $50,000 a year under the senior credit facility
agreement.
The senior credit facilities and the management services agreement both
contain certain restrictions on the payment of the management fee. The
management services agreement provides that no cash payment for the management
fee can be made unless the fixed charge coverage ratio for the most recently
ended four full fiscal quarters would have been at least 2.0 to 1.0. All fees
and expenses under the management services agreement are subordinated to the
senior subordinated notes.
O'Sullivan has prepaid a portion of the fiscal 2001 management fees.
The prepaid balance of $233,000 is included in prepaid expenses and other
current assets in the accompanying consolidated balance sheet. The management
fee expense of $85,000 recognized during the quarter ended September 30, 2000,
is included in selling, marketing and administrative expense in the accompanying
consolidated statement of operations.
NOTE 5--COMMITMENTS AND CONTINGENCIES
RADIOSHACK LITIGATION
On June 29, 1999, RadioShack Corporation (formerly Tandy Corporation)
filed a complaint against O'Sullivan Industries Holdings, Inc. ("Holdings") in
the District Court of Texas in Tarrant County. The complaint relates to a
potential reduction in Holdings' tax benefit payments to RadioShack that
would result from increased interest expense after the completion of the
merger. RadioShack claims that this reduction would violate the tax sharing and
tax reimbursement agreement. The complaint sought a court order compelling
Holdings to submit to a dispute resolution process. Alternatively, the
complaint sought a declaratory judgment that after the merger Holdings must
continue to make tax-sharing payments to RadioShack as if the merger had not
occurred.
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On September 9, 1999, RadioShack filed a motion for summary judgment in
its lawsuit against Holdings. The motion argued that RadioShack was entitled
to a court order requiring Holdings to commence dispute resolution procedures
under the tax sharing agreement. Because Holdings had made all payments
required under the tax sharing agreement and because no merger had occurred,
Holdings believed that RadioShack's lawsuit was premature since there could
not be a dispute under the tax sharing agreement with respect to the increased
interest resulting from the merger before the merger was completed.
Alternatively, RadioShack argued that it was entitled to a court order
preventing Holdings from deducting the interest expense related to the merger
from Holdings' tax-sharing payments to RadioShack.
On October 8, 1999, the District Court ruled on RadioShack's motion for
summary judgment. It found that the dispute resolution provision of the tax
sharing agreement was triggered, and ordered that Holdings begin the dispute
resolution process according to the terms of the tax sharing agreement. The
District Court denied all other relief sought by RadioShack. Pursuant to the
dispute resolution provisions, RadioShack and Holdings representatives have
discussed the issues in the dispute but did not reach a resolution. Arbitrators
have been selected to resolve the dispute, and discovery is progressing.
During the quarter ended September 30, 2000, Holdings made no payment
to RadioShack pursuant to the tax sharing agreement. If the ruling in the
arbitration proceeding is in RadioShack's favor, Holdings' payments under the
tax sharing agreement would be substantially higher; the amount would depend on
Holdings' taxable income.
NOTE 6--SUBSIDIARY FINANCIAL INFORMATION
The following summarized financial information for O'Sullivan
Industries - Virginia, Inc. is presented as if O'Sullivan Industries - Virginia
had existed as a corporation separate from O'Sullivan during the periods
presented and include the historical assets, liabilities, revenues and expenses
that are directly related to O'Sullivan Industries - Virginia's operations. All
material intercompany transactions have been eliminated. For the periods
presented, certain expenses reflected in the combined financial statements
included allocations of corporate expenses from O'Sullivan to O'Sullivan
Industries - Virginia. These allocations include expenses for general
management, management information systems, treasury, legal, benefits
administration, insurance, tax compliance and other miscellaneous services. The
allocation of expenses was generally based on actual costs incurred, and such
costs were apportioned to O'Sullivan Industries - Virginia using varying
methods including volume of sales and number of employees. In addition,
O'Sullivan Industries - Virginia sells all customer trade receivables to
O'Sullivan immediately after consummation of the sale.
Management believes that the foregoing allocations were made on a
reasonable basis; however, the allocations of costs and expenses do not
necessarily indicate the costs that would have been incurred by O'Sullivan
Industries - Virginia on a stand-alone basis. Also, the financial information
included in accompanying consolidated statements may not necessarily reflect
what the financial position, results of operations and cash flows of the
consolidated entity would have been had O'Sullivan and O'Sullivan Industries -
Virginia been separate, stand-alone companies during the periods presented.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
--------------------------
2000 1999
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<S> <C> <C>
Net sales $ 24,481 $ 21,478
Gross profit 4,464 4,951
Operating income 726 2,118
Net income 329 1,257
</TABLE>
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<TABLE>
<CAPTION>
BALANCE SHEET DATA
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SEPTEMBER 30, JUNE 30,
2000 2000
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<S> <C> <C>
Current assets $ 15,141 $ 16,403
Noncurrent assets 28,509 27,405
Current liabilities 5,490 4,923
Noncurrent liabilities 8,696 9,750
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The domestic ready-to-assemble furniture market has experienced
significant growth over the past several years and has emerged as a key
component of the overall U.S. home and office furnishings industry. We are a
leading ready-to-assemble furniture manufacturer in the United States with over
45 years of experience. We design, manufacture and distribute a broad range of
RTA furniture products--bookcases, cabinets, computer workcenters, desks,
entertainment centers and stereo racks--with retail prices ranging from $20 to
$999. In recent years, we have committed substantial resources to the
development and implementation of a diversified sales, marketing and product
strategy in order to capitalize on growth opportunities presented by emerging
retail channels of distribution and changes in consumer demographics and
preferences. We have structured our business to offer a wide variety of RTA
furniture products through increasingly popular retail distribution channels,
including office superstores, discount mass merchants, electronic superstores,
department stores, home improvement centers and home furnishings retailers. We
continue to strive toward building long-term relationships with quality
retailers in existing and emerging high growth distribution channels to develop
and sustain our future growth.
In fiscal 1999 and 2000, our net sales increased in excess of 10% per
year, reflecting the strong growth for the RTA furniture market and the strong
U.S. economy generally. In the first quarter of fiscal 2001, however, this
growth stalled, reflecting an industry slowdown and caution about the U.S.
economy generally. We currently expect that our sales for the remainder of the
fiscal year will be flat to down slightly from the prior year. However, our
sales could continue to suffer if the weak retail environment does not improve.
We will be taking steps to rationalize our operations with our revised sales
expectations.
While we have confidence in the long term future of the RTA furniture
industry, we cannot yet predict when our sales will return to their historical
growth rates.
We purchase large quantities of raw materials including particleboard
and fiberboard. We are dependent on our outside suppliers for all these raw
materials. Therefore, we are subject to changes in the prices charged by our
suppliers. In fiscal 2000, our profits were reduced by price increases of these
commodities. While we have recently seen some price declines that will reduce
our costs in the second quarter of fiscal 2001, we cannot assure you that raw
material prices will not increase in the future.
RESULTS OF OPERATIONS
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Net Sales. Net sales for the quarter ended September 30, 2000 decreased
by $11.5 million, or 11.2%, to $90.5 million, down from $102.0 million for the
quarter ended September 30, 1999. O'Sullivan's sales were hurt by the
following:
- a general weakening in retail sales, especially in the
discount mass merchant channel, which may be due to rising
interest rates, higher oil prices and waning consumer
confidence;
- the decision by Service Merchandise, subsequent to its
bankruptcy filing in March 1999, to stop selling home office
and home entertainment furniture. Sales to Service Merchandise
declined from 9% of our gross sales in the first quarter of
fiscal 2000 to 1% in the first quarter of fiscal 2001;
- inventory reductions by some of our large customers.
The sales decreases were offset somewhat by sales increases in the export, home
center and consumer electronics channels. For the quarter, lower unit volume
accounted for virtually all of the sales decrease although the average sales
price was also negligibly lower.
Gross Profit. Gross profit decreased to $24.3 million or 26.9% of sales
for the three month period ended September 30, 2000, from $29.8 million or 29.2%
of sales, for the comparable prior year quarter. The decrease in gross profit
was primarily caused by decreased sales volume. Additionally, commodity prices
of particleboard and fiberboard, major components of our products, were
generally higher during the first quarter of fiscal 2001 compared to the first
quarter of fiscal 2000. We anticipate lower particleboard prices during the rest
of this fiscal year because of generally weaker economic conditions. Finally,
production volumes decreased in conjunction with lower sales, resulting in less
overhead absorption and lower production efficiencies.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses decreased to $19.7 million or 21.8% of sales for the
three month period ended September 30, 2000, from $20.5 million or 20.1% of
sales for the quarter ended September 30, 1999. Decreases in volume related
expenses, freight and commissions, more than offset higher promotional costs.
Profit sharing and incentive compensation expenses declined in fiscal 2001
compared to the first quarter of fiscal 2000 because of lower sales and profit
levels.
Depreciation and Amortization. Depreciation and amortization expenses
increased slightly to $3.9 million for the first quarter of fiscal 2001 compared
to $3.7 million for the first quarter of fiscal 2000. The increase was due to
capital additions for capacity expansion and manufacturing equipment upgrades as
well as amortization of certain non-compete agreements with former employees.
Operating Income. Operating income decreased $4.6 million to $4.6
million for the quarter ended September 30, 2000, from $9.2 million in the three
months ended September 30, 1999. The lower sales volume, overhead absorption at
lower production levels and higher material prices contributed to the decrease
in operating income. We continue to look for ways to improve operating results.
Net Interest Expense. Net interest expense increased significantly from
$400,000 in the first quarter of fiscal 2000 to $7.7 million in the first
quarter of fiscal 2001. Interest expense increased due to the higher level of
borrowings associated with the financing of the recapitalization and merger
which was completed on November 30, 1999. As a result of the adoption of FAS
133, interest expense included $238,000 related to the change in value of the
interest rate collar entered into on February 28, 2000.
Income Tax Expense. Income tax expense decreased from $3.2 million in
the three months ended September 30, 1999 to a tax benefit of $1.1 million in
the three months ended September 30, 2000. The effective tax rate remained
constant at 36%.
Cumulative Effect Of Accounting Change. Upon adoption of FAS 133,
O'Sullivan recognized a liability of $386,000 based upon the fair value of a
costless interest rate collar initiated on February 28, 2000. That
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portion of the liability incurred prior to the current quarter, $148,000, is
included, net of income tax benefit of $53,000, as cumulative effect of
accounting change on the accompanying consolidated statement of operations.
Net Income. Net income decreased by $7.7 million from $5.6 million in
the first quarter of fiscal 2000 to a loss of $2.1 million in the first quarter
of fiscal 2001. Lower operating income and higher net interest expense combined
to produce a loss that was reduced somewhat by the income tax benefit.
EBITDA. EBITDA, which we define as earnings before interest income and
interest expense, income taxes, depreciation and amortization, decreased by $4.3
million to $8.5 million for the quarter ended September 30, 2000 from $12.9
million for the prior year quarter. EBITDA decreased primarily due to decreased
sales in the quarter, lower overhead absorption associated with decreased
production levels and higher material costs.
EBITDA is presented to provide additional information about our
operations. This item should be considered in addition to, but not as a
substitute for or superior to, operating income, net income, operating cash flow
and other measures of financial performance prepared in accordance with
generally accepted accounting principles. EBITDA may differ in the method of
calculation from similarly titled measures used by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows from operations and
borrowings under our senior secured credit facility, which is discussed below.
Our liquidity requirements will be to pay our debt, including interest expense
under the senior credit facilities and the notes, payments to RadioShack and to
provide for working capital and capital expenditures.
Working Capital. As of September 30, 2000 cash and cash equivalents
totaled $5.6 million. Net working capital was $90.9 million at September 30,
2000 compared to $93.5 million at June 30, 2000. This decrease was mainly due to
an increase in short term financing as we borrowed $3.0 million against our
revolving line of credit.
Operating Activities. Net cash used by operating activities for the
three months ended September 30, 2000 was $4.6 million compared to net cash
provided of $10.9 million for the three months ended September 30, 1999. The
decrease of $15.5 million was due to a decrease in net income of $7.7 million
and an increased investment in inventories of $1.4 million offset by an increase
in receivables that was $1.6 million less in fiscal 2001 compared to fiscal
2000. Additionally, reduced production and profit levels resulted in increases
in accounts payable, accrued liabilities and accrued income taxes of $1.5
million in fiscal 2001 compared to increases of $9.9 million in fiscal 2000.
Investing Activities. We invested $4.3 million for capital expenditures
in the three months ended September 30, 2000 compared to $3.3 million for the
prior year three-month period. We currently estimate that the total capital
expenditure requirements for the remainder of the fiscal year will be
approximately $13.0 million, which we expect to fund from cash flow from
operations, cash on hand or borrowing under our revolver. Our ability to make
future capital expenditures is subject to certain restrictions under our senior
credit facilities.
Financing Activities. As of September 30, 2000, we had total debt of
$246.5 million consisting of the following:
- $100.0 million in 13-3/8% senior subordinated notes due 2009
issued with warrants to purchase 6.0% of common and Series B
junior preferred stock on a fully diluted basis. These
warrants were assigned a value of $3.5 million. These notes
were issued at a price of 98.46% providing $98.0 million in
cash proceeds before expenses related to the issuance.
- $136.5 million in senior secured credit facilities consisting
of a five year $33.5 million term loan, a seven and one-half
year $100.0 million term loan and a $40.0 million revolving
line of
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credit, with a current balance of $3.0 million. The revolving
line of credit has a $15.0 million sub-limit for letters of
credit, of which we are currently utilizing approximately
$14.4 million.
- $10.0 million in variable rate industrial revenue bonds.
During the quarter we made a regularly scheduled principal payment of
$500,000 against a term loan which is included in our senior secured credit
facility. We also borrowed $3.0 million against our revolving line of credit. We
expect to fund principal and interest payments on our debt from cash flow from
operations, cash on hand or borrowings under our revolver. Our borrowing
availability under our revolver was approximately $22.0 million at September 30,
2000.
The credit facilities and notes are subject to certain financial and
operational covenants and other restrictions, including among others, a
requirement to maintain certain financial ratios and restrictions on our ability
to incur additional indebtedness. In addition, the agreements effectively
prohibit the payment of dividends on our stock. We are currently in compliance
with these covenants.
As required under the new senior credit facilities, we hedged one-half
of our term loans with an initial notional amount of $67.5 million with a
costless interest rate collar. The collar is based on three-month LIBOR with a
floor of 6.43% and a ceiling of 8.75%. To terminate this contract at September
30, 2000, we would have been required to pay the counter-party approximately
$386,000.
Tax Sharing Agreement. During the quarter ended September 30, 2000,
O'Sullivan made no payment to RadioShack pursuant to the Tax Sharing and Tax
Reimbursement Agreement between us. The effect of the merger upon our payments
to RadioShack under this agreement is the subject of an arbitration proceeding.
If the ruling in the arbitration proceeding is in RadioShack's favor, our
payments under the tax sharing agreement would be substantially higher; the
amount would depend on our taxable income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk is impacted by changes in interest rates, foreign
currency exchange rates and certain commodity prices. Pursuant to our policies,
we may use natural hedging techniques and derivative financial instruments to
reduce the impact of adverse changes in market prices. We do not hold or issue
derivative instruments for trading purposes. A one percent change in interest
rates would effect our interest expense by about $1.5 million.
We have market risk in interest rate exposure, primarily in the United
States. We manage interest rate exposure through our mix of fixed and floating
rate debt. Interest rate swaps or collars may be used to adjust interest rate
exposures when appropriate based on market conditions. For qualifying hedges,
the interest differential of swaps is included in interest expense. We believe
that our foreign exchange risk is not material.
Due to the nature of our product lines, O'Sullivan has material
sensitivity to some commodities, including particleboard, fiberboard, corrugated
cardboard and hardware. We manage commodity price exposures primarily through
the duration and terms of our vendor contracts. A one percent change in these
commodity prices, assuming none of the increase could be passed on to customers,
would affect our cost of sales by approximately $1.4 million annually.
As noted above, in fiscal 2000 we encountered price increases in
certain commodities, which reduced our gross margin in the first quarter of
fiscal 2001. During the first quarter of fiscal 2001, prices for these products
declined somewhat, which should help gross margins in the second quarter of
fiscal 2001. We cannot guarantee that there will not be further price increases
or decreases in these or other commodities.
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
FORWARD LOOKING STATEMENTS.
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Cautionary Statement Regarding Forward Looking Information.
Certain portions of this Report, and particularly the Notes to the
Consolidated Financial Statements and the Management's Discussion and Analysis
of Financial Condition and Results of Operations, contain forward-looking
statements. These statements can be identified by the use of future tense or
dates or terms such as "believe," "would," "expect," "anticipate" or "plan."
These forward-looking statements involve risks and uncertainties. Actual results
may differ materially from those predicted by the forward-looking statements.
Factors and possible events which could cause results to differ include:
- significant indebtedness that may limit our financial and
operational flexibility;
- changes from anticipated levels of sales, whether due to future
national or regional economic and competitive conditions, including
new domestic or foreign entrants into the industry, customer
acceptance of existing and new products, or otherwise, as we
experienced in the first quarter of fiscal 2001;
- pricing pressures due to excess capacity in the ready-to-assemble
furniture industry, as occurred in 1995, or customer demand in
excess of our ability to supply product;
- raw material cost increases, particularly in particleboard and
fiberboard, as occurred in 1994 and 1995 and to a lesser extent in
fiscal year 2000;
- transportation cost increases, due to higher fuel costs or
otherwise;
- loss of or reduced sales to significant customers as a result of a
merger, acquisition, bankruptcy, liquidation or any other reason, as
occurred with the liquidation of Best Products in 1996 and with the
reorganization of Service Merchandise Co., Inc. in 2000;
- actions of current or new competitors that increase competition
with our products or prices;
- the consolidation of manufacturers in the ready-to-assemble
furniture industry;
- increased advertising costs associated with promotional efforts;
- increased interest rates;
- pending or new litigation or governmental regulations such as the
pending arbitration involving RadioShack;
- other uncertainties which are difficult to predict or beyond our
control; and
- the risk that we incorrectly analyze these risks and forces, or
that the strategies we develop to address them could be
unsuccessful.
See also the Risk Factors section in our annual report on Form 10-K for the year
ended June 30, 2000.
Because these forward-looking statements involve risks and
uncertainties, actual results may differ significantly from those predicted in
these forward-looking statements. You should not place a lot of weight on these
statements. These statements speak only as of the date of this document or, in
the case of any document incorporated by reference, the date of that document.
All subsequent written and oral forward-looking statements attributable
to O'Sullivan or any person acting on our behalf are qualified by the cautionary
statements in this section. We will have no obligation to revise these
forward-looking statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
A list of exhibits required to be filed as part of this Report is set
forth in the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K:
None
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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, thereunto duly authorized.
O'SULLIVAN INDUSTRIES, INC.
Date: November 14, 2000 By: /s/ Richard D. Davidson
-------------------------------------------
Richard D. Davidson
President and
Chief Executive Officer
Date: November 14, 2000 By: /s/ Phillip J. Pacey
-------------------------------------------
Phillip J. Pacey
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit No. Description Page
2.1 Amended and Restated Agreement and Plan of Merger, dated
as of October 18, 1999, between O'Sullivan Industries
Holdings, Inc. and OSI Acquisition, Inc. (incorporated by
reference from Appendix A to Proxy Statement/Prospectus
included in Amendment No. 5 to Registration Statement on
Form S-4 (File No. 333-81631))
3.1 & 4.1 Certificate of Incorporation of O'Sullivan (incorporated
by reference from Exhibit 3.1(a) to Registration
Statement on Form S-1 (File No. 333-31282))
3.2 & 4.2 Bylaws of O'Sullivan (incorporated by reference from
Exhibit 3.2 to Registration Statement on Form S-1 (File
No. 333-31282))
4.3 Specimen Senior Preferred Stock Certificate of O'Sullivan
(incorporated by reference from Exhibit 3 to Registration
Statement on Form 8-A (File No. 0-28493))
4.4 Indenture dated as of November 30, 1999, by O'Sullivan
Industries, Inc., as Issuer, O'Sullivan Industries -
Virginia, Inc., as Guarantor, and Norwest Bank Minnesota,
National Association, as Trustee, relating to O'Sullivan
Industries, Inc.'s $100,000,000 principal amount of
13.375% senior subordinated notes (incorporated by
reference to Exhibit 4.4 to Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999 (File No.
0-28493))
4.5 Warrant Agreement dated as of November 30, 1999 between
O'Sullivan Industries Holdings, Inc. and Norwest Bank
Minnesota, National Association, as Warrant Agent,
relating to warrants to purchase 39,273 shares of
O'Sullivan Industries Holdings, Inc. series B junior
preferred stock, including form of warrant certificate
(incorporated by reference to Exhibit 4.5 to Quarterly
Report on Form 10-Q for the quarter ended December 31,
1999 (File No. 0-28493))
4.6 Warrant Agreement dated as of November 30, 1999 between
O'Sullivan Industries Holdings, Inc. and Norwest Bank
Minnesota, National Association, as Warrant Agent,
relating to warrants to purchase 93,273 shares of
O'Sullivan Industries Holdings, Inc. common stock,
including form of warrant certificate (incorporated by
reference to Exhibit 4.4 to Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999 (File No.
0-28493))
4.7 Amended and Restated Warrant Agreement dated as of
January 31, 2000 between O'Sullivan Industries Holdings,
Inc. and the holder thereof relating to warrants to
purchase 39,273 shares of O'Sullivan Industries Holdings,
Inc. series B junior preferred stock, including form of
warrant certificate (incorporated by reference to Exhibit
4.7 to Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999 (File No. 0-28493))
4.8 Amended and Restated Warrant Agreement dated as of
January 31, 2000 between O'Sullivan Industries Holdings,
Inc. and the holder thereof relating to warrants to
purchase 93,273 shares of O'Sullivan Industries Holdings,
Inc. common stock, including form of warrant certificate
(incorporated by reference to Exhibit 4.8 to Quarterly
Report on Form 10-Q for the quarter ended December 31,
1999 (File No. 0-28493))
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9 Stockholders Agreement dated November 30, 1999 by and
among O'Sullivan Holdings, Bruckmann, Rosser, Sherrill &
Co., II L.P., each of the persons executing and investor
or executive signature page thereto and each of the
warrant holders executing a warrant holder signature page
attached thereto and such other persons acquiring a
warrant after the date thereof (incorporated by reference
to Exhibit 10.5 to Quarterly Report Form 10-Q of
O'Sullivan Holdings for the quarter ended December 31,
1999 (File No. 0-028493))
10.1 Debt Registration Rights Agreement dated as of November
30, 1999 by and among O'Sullivan Industries, Lehman
Brothers and O'Sullivan Industries - Virginia as
guarantor (incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-4 (File No. 333-31282))
10.2 Stock Purchase Agreement dated as of November 30, 1999 by
and among O'Sullivan Industries, Lehman Brothers and
O'Sullivan Industries - Virginia as guarantor
(incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-4 (File No. 333-31282))
27 Financial Data Schedule.................................. 17
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