SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Or
[ ] 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 1-4438
O'SULLIVAN CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-0463029
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1944 Valley Avenue, PO Box 3510, Winchester, Virginia, 22601
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
540-667-6666
--------------------------------------------------
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. [X] Yes [ ] No
As of July 31, 1997 there were 15,743,222 shares of Common Stock, Par
Value $1, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1997 1996
Current Assets ------------- -------------
Cash and cash equivalents $ 8,668,758 $ 6,192,431
Receivables 28,457,240 23,788,028
Inventories 22,856,829 26,407,284
Deferred income tax assets 989,201 1,085,021
Other current assets 1,510,338 3,483,706
Assets of discontinued operations 27,752,107 29,693,643
------------- -------------
Total current assets $ 90,234,473 $ 90,650,113
------------- -------------
Property, Plant and Equipment $ 40,773,690 $ 41,426,522
------------- -------------
Other Assets $ 8,801,080 $ 8,745,805
------------- -------------
Total assets $ 139,809,243 $ 140,822,440
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 9,993,642 $ 10,269,685
Accrued expenses 5,428,565 5,553,811
Liabilities of discontinued operations 2,089,506 4,524,140
------------- -------------
Total current liabilities $ 17,511,713 $ 20,347,636
------------- -------------
Other Long-Term Liabilities
Deferred compensation $ 1,591,492 $ 1,685,792
Employee benefits 1,354,322 1,412,373
------------- -------------
$ 2,945,814 $ 3,098,165
------------- -------------
Deferred Income Tax Liabilities $ 3,151,048 $ 3,134,526
------------- -------------
Commitments and Contingencies $ -- -- $ -- --
------------- -------------
Stockholders' Equity
Common stock, par value $1 per share;
authorized 30,000,000 shares $ 15,743,222 $ 15,850,562
Additional paid-in capital 2,719,373 3,606,399
Retained earnings 97,975,515 95,022,594
Unrecognized pension costs, net of
deferred tax effect (237,442) (237,442)
------------- -------------
Total stockholders' equity $ 116,200,668 $ 114,242,113
------------- -------------
Total liabilities and stockholders' equity $ 139,809,243 $ 140,822,440
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For The Three Months Ended June 30,
----------------------------------
1997 1996
------------ ------------
Net sales $ 44,706,832 $ 47,846,657
Cost of products sold 37,017,828 39,459,288
------------ ------------
Gross profit $ 7,689,004 $ 8,387,369
------------ ------------
Operating expenses
Selling and warehousing $ 1,327,032 $ 1,277,348
General and administrative 1,406,197 1,395,009
------------ ------------
$ 2,733,229 $ 2,672,357
------------ ------------
Income from operations $ 4,955,775 $ 5,715,012
------------ ------------
Other income (expense)
Interest income $ 738,624 $ 639,599
Other, net (57,624) 474,250
------------ ------------
$ 681,000 $ 1,113,849
------------ ------------
Income from continuing operations
before income taxes $ 5,636,775 $ 6,828,861
Income taxes 2,219,454 2,724,999
------------ ------------
Income from continuing operations $ 3,417,321 $ 4,103,862
Discontinued operations:
Income(loss) from discontinued
operations, net of taxes (166,801) 126,743
------------ ------------
Net income $ 3,250,520 $ 4,230,605
============ ============
Net income (loss) per common share:
Net income per common share from
continuing operations $ .22 $ .25
Net income (loss) per common share
from discontinued operations (.01) .01
------------ ------------
Net income per common share $ .21 $ .26
============ ============
Dividends per common share $ .08 $ .08
============ ============
Average share outstanding 15,743,272 16,252,022
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For The Six Months Ended June 30,
--------------------------------
1997 1996
------------ ------------
Net sales $ 85,170,637 $ 90,680,504
Cost of products sold 71,389,048 72,933,457
------------ ------------
Gross profit $ 13,781,589 $ 17,747,047
------------ ------------
Operating expenses
Selling and warehousing $ 2,578,278 $ 2,609,314
General and administrative 2,936,621 3,073,805
------------ ------------
$ 5,514,899 $ 5,683,119
------------ ------------
Income from operations $ 8,266,690 $ 12,063,928
------------ ------------
Other income
Interest income $ 1,404,919 $ 1,239,887
Other, net 21,494 325,456
------------ ------------
$ 1,426,413 $ 1,565,343
------------ ------------
Income from continuing operations
before income taxes $ 9,693,103 $ 13,629,271
Income taxes 3,777,775 5,453,772
------------ ------------
Income from continuing operations $ 5,915,328 $ 8,175,499
Discontinued operations:
Income (loss) from discontinued
operations, net of taxes (440,831) 289,307
------------ ------------
Net income $ 5,474,497 $ 8,464,806
============ ============
Net income (loss) per common share:
Net income per common share from
continuing operations $ .38 $ .50
Net income (loss) per common share
from discontinued operations (.03) .02
------------ ------------
Net income per common share $ .35 $ .52
============ ============
Dividends per common share $ .16 $ .16
============ ============
Average shares outstanding 15,743,247 16,354,637
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For The Six Months Ended June 30,
--------------------------------
1997 1996
------------ ------------
Cash Flows from Operating Activities
Net income from continuing operations $ 5,915,328 $ 8,175,499
Adjustments to reconcile net income
from continuing operations to net
cash provided by operating activities
of continuing operations:
Depreciation 2,713,800 2,643,570
Provision for doubtful accounts -- -- 47,000
Deferred income taxes 9,902 (155,915)
(Gain) on disposal of assets (9,906) (598,801)
Unremitted (income) loss from joint
venture (462) 173,481
Changes in operating assets and
liabilities:
Receivables (4,669,212) (4,676,794)
Inventories 3,550,455 2,005,428
Other current assets 1,973,368 1,050,619
Accounts payable (276,043) 2,338,398
Accrued expenses 125,246 (2,404,444)
------------ ------------
Net cash provided by operating activities $ 9,332,476 $ 8,598,041
------------ ------------
Cash Flows from Investing Activities
Purchase of property, plant and equipment $ (2,611,539) $ (2,866,632)
Proceeds from disposal of assets 14,287 1,110,788
Loan to joint venture -- -- (245,000)
Funds advanced to discontinued operations (1,244,197) (4,807,323)
Other, net 501,242 347,339
------------ ------------
Net cash (used in) investing activities $ (3,340,207) $ (6,460,828)
------------ ------------
Cash Flows from Financing Activities
Purchase of common stock $ (994,366) $ (3,898,764)
Cash dividends paid (2,521,576) (2,606,763)
------------ ------------
Net cash (used in) financing activities $ (3,515,942) $ (6,505,527)
------------ ------------
Increase (decrease) in cash and cash
equivalents $ 2,476,327 $ (4,368,314)
Cash and cash equivalents at beginning
of period 6,192,431 10,456,131
------------ ------------
Cash and cash equivalents at end
of period $ 8,668,758 $ 6,087,817
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
O'SULLIVAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements include the
accounts of O'Sullivan Corporation and its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation. Certain information and footnote disclosure normally included
in financial statements prepared in accordance with generally accepted
accounting principles have not been included in these statements. These
statements should be read in conjunction with the financial statements notes
and other disclosures thereto included in the Corporation's 1996 Annual Report
to Stockholders and Form 10-K.
Investments in affiliates in which the Corporation has a 20% to 50% interest
are carried at cost adjusted for the Corporation's proportionate share of
the affiliate's undistributed earnings or loss.
In the opinion of management of the Corporation, the unaudited consolidated
financial statements contain all material adjustments, consisting only of
normal recurring accruals and adjustments, necessary to fairly present the
Corporation's financial position as of June 30, 1997 and December 31, 1996
and the results of its operations and cash flows for the three and six
months ended June 30, 1997 and 1996. The results of operations for the
three and six months ended June 30, 1997 are not necessarily indicative of
the operating results for the full year.
Per share information was calculated on the weighted average common shares
outstanding at June 30, 1997 and 1996 that were 15,773,247 and 16,354,637,
respectively.
Certain amounts for 1996 have been reclassified to reflect comparability
with account classifications for 1997.
Note B. Discontinued Operations
On July 16, 1997 the Corporation agreed to sell to GH Acquisition Corp.
substantially all of Registrant's consumer products business , identified
as Melnor Inc., including the stock of Melnor's wholly-owned subsidiary,
Melnor Canada, Ltd. The sales became effective July 31, 1997 after the receipt
of various governmental approvals.
The final net purchase price is estimated to be approximately $21 million.
The price is subject to adjustments made at the completion of a Closing
Balance Sheet as of July 31, 1997 agreed to by the Registrant and GH
Acquisition Corp.
The estimated loss on the disposal of the business is $5.0 million (net of
income tax benefit of $1.685 million). The loss includes the estimated loss
from the disposal of substantially all of the business's assets along with
expenses associated with disposal activities, including severance costs,
professional fees and potential variances in projected operations of the
business during the fiscal year subsequent to the transaction.
Operating results of the consumer products segment for the three and six
months ended June 30, 1997 and 1996 have been segregated in the accompanying
income statements. Income tax (benefits) for the three and six months ended
June 30, 1997 were $(84,881) and $(236,416), respectively. Income tax
expense for the three and six months ended June 30, 1996 were $52,502 and
$164,088, respectively.
Net sales of the Consumer Products segment were $9,443,444 and $19,794,284
for the three and six months ended June 30, 1997, respectively. Net sales
were $15,562,897 and $28,885,996 for the three and six months ended June 30,
1996, respectively. These amounts are not included in net sales reported in
the accompanying income statements.
The net assets, liabilities and stockholders' equity adjustments of Melnor
Inc. included in the accompanying consolidated balance sheet as of June 30,
1997 and December 31, 1996 are as follows:
June 30, December 31,
1997 1996
------------ ------------
Assets
Cash and cash equivalents $ 170,761 $ 302,226
Receivables 7,862,886 7,021,358
Inventories 13,661,559 15,380,657
Deferred income tax assets 306,437 296,936
Other current assets 144,349 561,659
Property, plant and equipment 5,193,695 5,700,770
Other assets 412,420 430,037
------------ ------------
$ 27,752,107 $ 29,693,643
============ ============
Liabilities and Stockholders' Equity Adjustments
Current maturities of
long-term debt $ 62,296 $ 70,094
Accounts payable 801,506 2,935,231
Accrued expenses 1,347,561 1,440,736
Long-term debt -- -- 15,790
Long-term liabilities (1,086) (1,525)
Deferred income tax liabilities 162,673 307,605
Cumulative translation adjustments (283,444) (243,791)
------------ ------------
$ 2,089,506 $ 4,524,140
============ ============
The foregoing amounts have been classified as current at June 30, 1997
and December 31, 1996 since the sale of the discontinued operations is
expected to be completed during August, 1997.
Note C. Supplementary Balance Sheet Detail
June 30, December 31,
1997 1996
------------ ------------
Receivables
Accounts receivable $ 29,039,572 $ 24,361,797
Less allowance for doubtful
accounts 582,332 573,769
------------ ------------
$ 28,457,240 $ 23,788,028
============ ============
Receivable balances for automotive related business were $15,507,599 at
June 30, 1997 and $12,736,630 at December 31, 1996.
Inventories
Finished goods $ 4,431,830 $ 5,563,314
Work in process 5,067,589 7,080,058
Raw materials 9,970,794 10,551,277
Supplies 3,386,616 3,212,635
------------ ------------
$ 22,856,829 $ 26,407,284
============ ============
Property, Plant and Equipment
Land $ 1,289,695 $ 1,160,065
Buildings 27,057,901 25,959,282
Machinery and equipment 57,143,688 60,004,921
Transportation equipment 3,875,321 3,838,249
------------ ------------
$ 89,366,605 $ 90,962,517
Less accumulated depreciation 48,592,915 49,535,995
------------ ------------
$ 40,773,690 $ 41,426,522
============ ============
Accrued Expenses
Accrued compensation $ 2,133,189 $ 2,596,388
Employee benefits 1,092,836 967,427
Dividends payable 1,257,547 1,274,621
Other accrued expenses 944,993 715,375
------------ ------------
$ 5,428,565 $ 5,553,811
============ ============
Note D. Investment in Unconsolidated Joint Venture
The Corporation has a 49% equity interest in Keifel Technologies, Inc.
Keifel designs, manufactures and distributes thermoforming and radio
frequency welding machines and related machinery and tools. Summary income
statement information for Kiefel is as follows:
For The Three Months Ended June 30,
-----------------------------------
1997 1996
------------ ------------
Net sales $ 1,268,603 $ 881,120
Gross profit $ 287,770 $ 165,448
Net (loss) $ (111,104) $ (138,909)
Registrant's share of net (loss) $ (54,441) $ (68,066)
For The Six Months Ended June 30,
-----------------------------------
1997 1996
------------ ------------
Net sales $ 3,021,986 $ 936,688
Gross profit $ 610,734 $ 134,485
Net income (loss) $ 942 $ (354,042)
Registrant's share of net income (loss) $ 462 $ (173,481)
Note E. Supplemental Cash Flow Information
Supplemental Disclosure of Cash Flow Information for
Continuing Operations
For The Six Months Ended June 30,
--------------------------------
1997 1996
------------ ------------
Cash payments for interest $ 7,108 $ 1,282
============ ============
Cash payments for income taxes $ 2,670,407 $ 4,319,714
============ ============
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
O'Sullivan Corporation
Winchester, Virginia
We have reviewed the accompanying condensed consolidated balance sheet of
O'Sullivan Corporation and Subsidiaries as of June 30, 1997, and the
related condensed consolidated statements of income and cash flows for the
three and six month periods ended June 30, 1997 and 1996. These financial
statements are the responsibility of the Corporation's management.
We conducted our review in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of O'Sullivan Corporation and Subsidiaries as
of December 31, 1996, and the related statements of income and cash flows for
the year then ended (not presented herein); and in our report dated January
24, 1997, we expressed an unqualified opinion on those financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1996 is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
August 7, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Second Quarter, 1997 versus Second Quarter, 1996)
- ------------------------------------------------------------------------
Continuing Operations (Plastics Products Segment) Operating Results
Net sales for the Plastics Products segment were $44.7 million for the second
quarter of 1997 and $47.8 million for the second quarter of 1996. The 1997
sales represent a decrease of $3.1 million or 6.6%. The sales decrease
recorded during the second quarter was primarily a result of sales volume
decreases in those products produced for the non-automotive businesses.
Automotive product sales were flat compared to the same period last year.
However, consumer demand and automotive product sales increased compared to the
first quarter of 1997. Non-automotive products declined during the quarter
when compared to the second quarter of 1996 due to a general weakness in
demand and increased competitive pricing pressures.
The gross margin for this segment was 17.2% for the first quarter of 1997 and
17.5% for the second quarter of 1996. The decline was substantially a result
of the decline in net sales of the segment that caused higher unit costs for
fixed charges and certain indirect labor and benefit costs. Competitive
pressures in the markets served by the Plastics Products segment have generally
prevented passing through any raw material price increases.
Selling expenses were 3.0% of net sales for the second quarter of 1997 and 2.7%
for the second quarter of 1996. The monetary increase in selling expenses was
a result of minor increases in compensation costs associated with this area.
General and administrative expenses as a percentage of sales were 3.1% for
the second quarter of 1997 compared to 2.9% for the second quarter of 1996.
Total monetary costs for general and administrative costs were virtually the
same for the second quarter of both 1997 and 1996. Increases in compensation
and benefits for employees associated with this area were offset by
reductions in professional fees for the second quarter of 1997 when compared
to 1996.
Other income for the segment declined for the second quarter of 1997 from 1996
by approximately $433 thousand. Other income for the second quarter of 1996
included a pre-tax gain of $599 thousand from the sale of assets.
Income tax expense for continuing operations was $2.2 million for the second
quarter of 1997 (an effective rate of 39.4%) and $2.7 million for the second
quarter of 1996 (an effective rate of 39.9%). The reduction in income tax
expense resulted from the reduced level of income along with a reduction in the
charge for state income taxes.
Results of Operations (Six Months Ended June 30, 1997 versus Six Months
Ended June 30, 1996)
- -----------------------------------------------------------------------
Continuing Operations (Plastics Product Segment) Operating Results
Net sales for the Plastics Products segment were $85.2 million for the six
months ended June 30, 1997 compared to $90.7 million for the first six months
of 1996. The 1997 sales represent a decrease of $5.5 million or 6.1%. The
sales decrease recorded for the six months ended June 30, 1997 was the result
of decreased sales for the automotive products produced by this segment and a
decline in non-automotive products produced by the segment. Sales of
automotive products were influenced by lower consumer demand for those
products, primarily during the first quarter of 1997. Sales of non-automotive
products produced by the segment declined during the six months ended June 30,
1997 due to a general weakness in demand and increased competitive pricing
pressures.
The gross margin for this segment was 16.2% for the six months ended June 30,
1997 and 19.6% for the six months ended June 30, 1996. The decline was
substantially a result of price increases absorbed by the segment for key raw
materials. Competitive pressures in the markets served by the Plastics
Products segment have generally prevented passing through any raw material
price increases for an extended period of time.
Selling expenses year to date through both June 30, 1997 and 1996 were $2.6
million representing 3.0% of net sales for 1997 and 2.9% of net sales for 1996.
Minor increases in compensation costs were offset by a similar reduction in
bad debt expense through June 30. General and administrative expenses as a
percentage of sales were 3.4% through June 30 for both 1997 and 1996.
Professional fees declined by approximately $120 thousand through the first
six months of 1997 when compared to the first six months of 1996. This
reduction was offset by increases in compensation and insurance costs.
Other income for the segment declined by approximately $140 thousand for the
six months ended June 30, 1997 compared to the similar period for 1996. The
1996 period included the gain from the sale of assets of $599 thousand
(pre-tax) mentioned in the second quarter analysis.
Income tax expense for continuing operations was $3.8 million for the six
months ended June 30, 1997 (an effective rate of 39.0%) and $5.5 million for
the first six months of 1996. (an effective rate of 40.0%). As described in
the second quarter analysis, the reduction in income tax expense resulted from
the reduced level of income along with a reduction in the charge for state
income taxes.
Liquidity and Capital Resources
Operating activities of continuing operations provided net cash of $9.3
million for the first six months of 1997 and $8.6 million for the first six
months of 1996. Total cash and cash equivalents of continuing operations
increased $2.5 million for the first six months of 1997 compared to a decrease
of $4.4 million for the first six months of 1996. The major factors for the
improvement were the reduction in funds committed to purchases of the
Corporation's common stock and a reduction in the level of funds advanced to
discontinued operations.
Capital outlay for continuing operations was $2.6 million for the first six
months of 1997. Current capital expenditures are primarily to provide
additional capacity and modernize present equipment to produce products for
which orders currently exist. Total capital outlay for 1997 is expected to
be between $5 and $7 million.
The Corporation has in place a $35 million line of credit to provide capital
to finance capital outlay and/or acquisitions.
Management believes that net cash flow from operating activities, along with
available financing capabilities will be adequate to meet the Corporation's
funding requirements for 1997.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.3 The O'Sullivan Corporation 1995 Stock Option Plan filed
as exhibit 99.1 to the Corporation's Form S-8 registration
statement (Registration Number 033-58895) filed with the
Commission on April 28, 1995 and incorporated herein by
reference.
10.4 The O'Sullivan Corporation 1995 Outside Directors Stock
Option Plan filed as exhibit 99.2 to the Corporation's
Form S-8 registration statement (Registration Number
033-58895) filed with the Commission on April 28, 1995
and incorporated herein by reference.
10.5 1985 Incentive Stock Option Plan, Amended and Restated
as of July 27, 1993. (Incorporated by reference to the
Annual Report on Form 10-K for the Year Ended
December 31, 1993.)
27 Article 5 of Regulation S-X, Financial Data Schedule
for the second quarter, 1997 Form 10-Q.
(b) Reports on Form 8-K - report dated July 16, 1997, disclosing
the Asset Purchase Agreement and the Agreement Concerning the
Canadian Collective Bargaining Ageement in regard to the
proposed sale of substantially all of the assets of the
Melnor Inc. subsidiary of Registrant.
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 CORPORATION
/s/ James T. Holland
-------------------------------------
James T. Holland
President and Chief Executive Officer
/s/ C. Bryant Nickerson
-------------------------------------
C. Bryant Nickerson
Secretary, Treasurer
and Chief Financial Officer
August 8, 1997
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