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 September 30, 1998
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 (Zip code)
executive offices)
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 October 31, 1998 there were 15,595,127 shares of Common Stock, Par
Value $1, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
(Unaudited)
ASSETS ------------- -------------
Current Assets
Cash and cash equivalents $ 31,383,665 $ 35,444,138
Receivables 28,599,257 25,658,216
Inventories 22,131,849 20,674,689
Deferred income tax assets 1,077,352 1,041,564
Other current assets 1,563,926 3,234,108
------------- -------------
Total current assets $ 84,756,049 $ 86,052,715
------------- -------------
Property, Plant and Equipment $ 44,411,321 $ 40,316,399
------------- -------------
Other Assets $ 12,281,591 $ 11,662,582
------------- -------------
Total assets $ 141,448,961 $ 138,031,696
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 944,000 $ -- --
Accounts payable 10,077,379 9,988,826
Accrued expenses 6,101,577 5,968,248
------------- -------------
Total current liabilities $ 17,122,956 $ 15,957,074
------------- -------------
Other Long-Term Liabilities $ 7,847,653 $ 8,404,635
------------- -------------
Deferred Income Tax Liabilities $ 265,288 $ 954,921
------------- -------------
Commitments and Contingencies $ -- -- $ -- --
------------- -------------
Stockholders' Equity
Common stock, par value $1.00 per share;
authorized 30,000,000 shares $ 15,595,232 $ 15,743,062
Additional paid-in capital 1,412,358 2,717,863
Retained earnings 99,205,474 94,254,141
------------- -------------
Total stockholders' equity $ 116,213,064 $ 112,715,066
------------- -------------
Total liabilities and
stockholders' equity $ 141,448,961 $ 138,031,696
============= =============
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 September 30,
-----------------------------
1998 1997
------------- -------------
Net sales $ 39,529,682 $ 38,828,516
Cost of products sold 32,770,209 32,893,603
------------- -------------
Gross profit $ 6,759,473 $ 5,934,913
------------- -------------
Operating expenses
Selling and warehousing $ 1,270,655 $ 1,252,614
General and administrative 1,666,882 1,361,458
Allowance for doubtful accounts 680,000 -- --
------------- -------------
$ 3,617,537 $ 2,614,072
------------- -------------
Income from operations $ 3,141,936 $ 3,320,841
------------- -------------
Other income
Interest income $ 526,192 $ 609,204
Other, net (151,291) 371,843
------------- -------------
$ 374,901 $ 981,047
------------- -------------
Income from continuing operations
before income taxes $ 3,516,837 $ 4,301,888
Income taxes 1,216,216 1,430,456
------------- -------------
Income from continuing operations $ 2,300,621 $ 2,871,432
------------- -------------
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Continued)
For The Three Months
Ended September 30,
-----------------------------
1998 1997
------------- -------------
Discontinued operations:
(Loss) from discontinued operations,
net of taxes $ -- -- $ (152,762)
(Loss) on disposal of discontinued
operations, net of taxes -- -- (3,315,000)
------------- -------------
$ -- -- $ (3,467,762)
------------- -------------
Net income (loss) $ 2,300,621 $ (596,330)
============= =============
Net income (loss) per common share,
basic and diluted:
Net income per common share from
continuing operations $ .15 $ .18
Net (loss) per common share from
discontinued operations -- -- (.01)
Net (loss) per common share from
disposal of discontinued operations -- -- (.21)
------------- -------------
Net income (loss) per common share $ .15 $ (.04)
============= =============
Dividends per common share $ .08 $ .08
============= =============
Average shares outstanding 15,595,320 15,743,215
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For The Nine Months
Ended September 30,
-----------------------------
1998 1997
------------- -------------
Net sales $ 123,618,505 $ 123,999,153
Cost of products sold 102,191,469 104,282,651
------------- -------------
Gross profit $ 21,427,036 $ 19,716,502
------------- -------------
Operating expenses
Selling and warehousing $ 4,133,381 $ 3,830,892
General and administrative 4,872,643 4,298,079
Allowance for doubtful accounts 741,250 -- --
------------- -------------
$ 9,747,274 $ 8,128,971
------------- -------------
Income from operations $ 11,679,762 $ 11,587,531
------------- -------------
Other income
Interest income $ 1,563,505 $ 2,014,123
Other, net 367,519 393,337
------------- -------------
$ 1,931,024 $ 2,407,460
------------- -------------
Income from continuing operations
before income taxes $ 13,610,786 $ 13,994,991
Income taxes 4,893,069 5,208,231
------------- -------------
Income from continuing operations $ 8,717,717 $ 8,786,760
------------- -------------
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Continued)
For The Nine Months
Ended September 30,
-----------------------------
1998 1997
------------- -------------
Discontinued operations:
(Loss) from discontinued operations,
net of taxes $ -- -- $ (593,593)
(Loss) on disposal of discontinued
operations, net of taxes -- -- (3,315,000)
------------- -------------
$ -- -- $ (3,908,593)
------------- -------------
Net income $ 8,717,717 $ 4,878,167
============= =============
Net income (loss) per common share,
basic and diluted:
Net income per common share from
continuing operations $ .56 $ .56
Net (loss) per common share from
discontinued operations -- -- (.04)
Net (loss) per common share from
disposal of discontinued operations -- -- (.21)
------------- -------------
Net income per common share $ .56 $ .31
============= =============
Dividends per common share $ .24 $ .24
============= =============
Average shares outstanding 15,685,488 15,763,236
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For The Nine Months
Ended September 30,
---------------------------
1998 1997
------------ ------------
Cash Flows from Operating Activities
Net income from continuing operations $ 8,717,717 $ 8,786,760
Adjustments to reconcile net income
from continuing operations to net
cash provided by operating activities
of continuing operations:
Depreciation 4,635,000 4,070,700
Provision for doubtful accounts 741,250 -- --
Deferred income taxes (725,421) (163,726)
Postemployment benefits and
deferred compensation (560,060) (139,700)
Other operating assets and
Long-term liabilities 3,078 (548,149)
(Gain) loss on disposal of assets (110,589) 345,534
Unremitted (income) from joint venture (294,113) (260,810)
Changes in assets and liabilities:
Receivables (3,682,291) (1,340,988)
Inventories (1,457,160) 4,213,286
Other current assets 1,371,328 2,277,072
Accounts payable 88,553 (458,979)
Accrued expenses 133,330 386,884
------------ ------------
Net cash provided by operating activities $ 8,860,622 $ 17,167,884
------------ ------------
Cash Flows from Investing Activities
Purchase of property, plant and equipment $ (8,768,604) $ (3,826,323)
Proceeds from disposal of assets 721,744 30,037
Proceeds from disposal of subsidiary -- -- 21,958,209
Funds repaid by discontinued operations -- -- 1,088,618
Payments received from non-operating
notes receivable 261,580 160,385
Change in other assets (860,095) (3,444,025)
------------ ------------
Net cash provided by (used in)
investing activities $ (8,645,375) $ 15,966,901
------------ ------------
Cash Flows from Financing Activities
Purchase of common stock $ (1,453,335) $ (994,791)
Cash dividends paid (3,766,385) (3,781,003)
Proceeds from short-term debt 944,000 -- --
------------ ------------
Net cash (used in) financing activities $ (4,275,720) $ (4,775,794)
------------ ------------
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
For The Nine Months
Ended September 30,
---------------------------
1998 1997
------------ ------------
Increase (decrease) in
cash and cash equivalents $ (4,060,473) $ 28,358,991
Cash and cash equivalents at beginning
of period 35,444,138 6,192,431
------------ ------------
Cash and cash equivalents at end
of period $ 31,383,665 $ 34,551,422
============ ============
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
unaudited statements should be read in conjunction with the financial
statement notes and other disclosures thereto included in the Corporation's
1997 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 September 30, 1998 and December 31,
1997, the results of its operations for the three and nine months ended
September 30, 1998 and 1997 and its cash flows for the nine months ended
September 30, 1998 and 1997. The results of operations for the three and
nine months ended September 30, 1998 are not necessarily indicative of the
operating results for the full year.
Certain amounts for 1997 have been reclassified to reflect comparability
with account classifications for 1998.
Note B. Supplementary Balance Sheet Detail
September 30, December 31,
1998 1997
------------ ------------
Receivables
Trade receivables $ 29,165,190 $ 26,228,366
Less allowance for doubtful accounts 565,933 570,150
------------- ------------
$ 28,599,257 $ 25,658,216
============ ============
Net receivables balances for automotive related business were $16,756,692 at
September 30, 1998 and $14,711,831 at December 31, 1997.
Inventories
Finished goods $ 5,460,848 $ 4,505,483
Work in process 4,748,511 3,385,687
Raw materials 8,281,912 9,380,683
Supplies 3,640,578 3,402,836
------------ ------------
$ 22,131,849 $ 20,674,689
============ ============
Property, Plant and Equipment
Land $ 1,548,760 $ 1,414,776
Buildings 28,589,562 27,762,932
Machinery and equipment 66,120,226 58,458,348
Transportation equipment 4,070,761 3,981,665
------------ ------------
$100,329,309 $ 91,617,721
Less accumulated depreciation 55,917,988 51,301,322
------------ ------------
$ 44,411,321 $ 40,316,399
============ ============
Accrued Expenses
Accrued compensation $ 2,564,194 $ 2,540,290
Employee benefits 1,120,557 886,467
Dividends payable 1,242,924 1,257,623
Other accrued expenses 1,173,902 1,283,868
------------ ------------
$ 6,101,577 $ 5,968,248
============ ============
Other Long-Term Liabilities
Deferred compensation $ 3,603,394 $ 3,978,100
Employee benefits 848,544 845,466
Postemployment benefits 895,715 1,081,069
Contingency reserve for discontinued
operations 2,500,000 2,500,000
------------ ------------
$ 7,847,653 $ 8,404,635
============ ============
The contingency reserve for discontinued operations is an allowance for
potential adjustments relating to the sale of the Corporation's former
consumer products subsidiary.
Note C. Investment in Unconsolidated Joint Venture
The Corporation has a 49% equity interest in Kiefel Technologies, Inc.
Kiefel 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 September 30,
---------------------------
1998 1997
------------ ------------
Net sales $ 2,481,490 $ 5,306,656
Gross profit $ 652,006 $ 657,087
Net income (loss) $ (278,314) $ 531,323
Registrant's share of net income (loss) $ (136,374) $ 260,348
For The Nine Months
Ended September 30,
---------------------------
1998 1997
------------ ------------
Net sales $ 10,836,130 $ 8,328,642
Gross profit $ 2,182,209 $ 1,267,821
Net income $ 600,231 $ 532,265
Registrant's share of net income $ 294,113 $ 260,810
Note D. Earnings Per Share
The following sets forth the computation of basic and diluted earnings per
share:
For the Three Months
Ended September 30,
------------------------
1998 1997
---------- ----------
Weighted average number of common shares
used for basic earnings per common share 15,595,320 15,743,215
Effect of dilutive securities:
Stock options 4,765 6,494
---------- ----------
Weighted average number of common shares
used for earnings per common share-
assuming dilution 15,600,085 15,749,709
========== ==========
For the Nine Months
Ended September 30,
-------------------------
1998 1997
---------- ----------
Weighted average number of common shares
used for basic earnings per common share 15,685,488 15,763,236
Effect of dilutive securities:
Stock options 6,750 3,842
---------- ----------
Weighted average number of common shares
used for earnings per common share-
assuming dilution 15,692,238 15,767,078
========== ==========
Options on approximately 203,500 and 248,750 shares were not included in
computing earnings per common share-assuming dilution for the three and nine
months ended September 30, 1998 and 1997, respectively, because their effects
were antidilutive.
Note E. Segment Information
The Corporation operates in one business segment, the manufacture and
distribution of calendered plastics products for the automotive and specialty
plastics manufacturing industries. All operating revenues of the Corporation
are derived from this business activity. Substantially all Corporate assets
are utilized in the manufacturing and distribution activities of the
calendering operations.
Note F. Discontinued Operations
Operating results of the consumer products segment for the one and seven
months ended July 31, 1997 have been segregated in the accompanying income
statements. Income tax benefits for the one and seven months ended July 31,
1997 were $(192,698)and $(429,114), respectively.
The pre-tax loss on the disposal of the business was $5.0 million. The
income tax (benefit) was $(1,685,000). The net (loss) of $(3,315,000)
consisted of the loss from the disposal of substantially all of the
business's assets along with expenses associated with disposal activities.
Reference should be made to the Corporation's 1997 Annual Report to
Stockholders and Form 10-K for additional information concerning the disposal
of Melnor Inc.
Note G. Supplemental Cash Flow Information
Supplemental Disclosure of Cash Flow Information
For The Nine Months
Ended September 30,
-------------------------
1998 1997
----------- -----------
Cash payments for interest $ -- -- $ 8,024
=========== ===========
Cash payments for income taxes $ 4,867,468 $ 3,089,201
=========== ===========
Note H.
Adjustment to Allowance for Doubtful Accounts
The Corporation received formal notification on July 24, 1998 that a customer
had filed for bankruptcy protection under Chapter 11. On the notification
date, the accounts receivable balances for this customer were $670,489. The
accounts receivable balances were $680,022 at June 30, 1998 and $932,355 at
December 31, 1997. During the quarter ended September 30, 1998, the
Corporation recorded a charge of $680,000 to the allowance for doubtful
accounts.
The Corporation is represented on the Creditor's Committee working toward a
resolution of the customer's Chapter 11 filing. Activity concerning the
filing is in its early stages and at this time Management does not believe
that the final outcome can be reasonably determined. The resultant net loss
from the customer's filing is not expected to have a material adverse effect
on the Corporation's financial statements.
Note I.
New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers Disclosures about
Pensions and Other Post Retirement Benefits." This Statement revises
employers' disclosures about pension and other postretirement benefit plans.
It does not change the measurement or recognition of those plans. This
Statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures. Restatement of disclosures for earlier periods is required.
This Statement is effective for the Corporation's financial statements for
the year ended December 31, 1998. This Statement is not expected to have a
material impact on the Corporation's financial statements.
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
O'Sullivan Corporation
Winchester, Virginia
We have reviewed the accompanying consolidated condensed balance sheet of
O'Sullivan Corporation and Subsidiaries as of September 30, 1998, and the
related consolidated condensed statements of income for the three and nine
month periods ended September 30, 1998 and 1997 and the related consolidated
condensed statements of cash flows for the nine month periods ended September
30, 1998 and 1997. These financial statements are the responsibility of the
Corporation's management.
We conducted our review in accordance with standards established 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, 1997, and the related statements of income, retained earnings
and cash flows for the year then ended (not presented herein); and in our
report dated January 26, 1998, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying consolidated condensed balance sheet as of December 31, 1997 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
October 16, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Third Quarter, 1998 versus Third Quarter, 1997)
- ----------------------------------------------------------------------
Continuing Operations (Plastics Products Segment) Operating Results
O'Sullivan Corporation consolidated net sales for the three months ended
September 30, 1998 were $39.5 million, an increase of $701 thousand or 1.8%,
compared to net sales of $38.8 million for the three months ended September
30, 1997. Both components of the segment had an increase of approximately
$350 thousand for the third quarter of 1998 compared to the third quarter of
1997.
The gross margin was 17.1% for the three months ended September 30, 1998 and
15.3% for the three months ended September 30, 1997. The improvement in the
gross margin for the 1998 period was due to stable raw material prices and
continued manufacturing efficiency improvements. The improvement in
manufacturing efficiencies offset higher labor and benefit costs incurred as
a result of product mix changes during the period.
Selling and warehousing expenses, exclusive of an allowance for bad debts,
were $1.3 million or 3.2% of net sales for the third quarter of both 1998 and
1997. An allowance for doubtful accounts of $680 thousand was recorded in
the third quarter of 1998 for losses expected to be experienced in connection
with the bankruptcy filing of a customer. See Note H. of the Notes to
Consolidated Financial Statements for more information regarding this event.
General and administrative expenses increased by $305 thousand for the third
quarter of 1998 compared to 1997. Increased charges for professional fees
was the major change in general and administrative costs for the period, year
to year. These expenses were 4.2% of net sales for the third quarter of 1998
and 3.5% for the third quarter of 1997.
The operating margin for the quarter ended September 30, 1998 was 7.9%
compared to 8.6% for the quarter ended September 30, 1997. Gross margin
improvements for 1998 were offset by the allowance for doubtful accounts
recorded in the third quarter of 1998 along with the increased general and
administrative expenses.
Other income declined by $606 thousand for the quarter ended September 30,
1998 when compared to 1997. Compared to the 1997 period interest income
declined by $83,000, income from a joint venture declined by $397,000 and
gains from the sale of assets declined by $131,000.
Income tax expense was $1.2 million for the third quarter of 1998 and $1.4
million for the third quarter of 1997. The Corporation's effective tax rate
for the third quarter of 1998 was 34.6% compared to 33.3% for the third
quarter of 1997. The increase in the effective rate was primarily due to
the change in earnings recognized for a non-consolidated affiliate.
Results of Operations (Nine Months Ended September 30, 1998 versus
Nine Months Ended September 30, 1997)
- ------------------------------------------------------------------
Continuing Operations (Plastics Products Segment) Operating Results
Consolidated net sales were $123.6 million for the nine months ended
September 30, 1998, a decrease of .3% from 1997 sales of $124.0 million.
The sales decline for the 1998 period was related to lower shipments of
automotive-related products. Sales were lost due to the mid-year strike
experienced by General Motors and to product mix changes in shipments to the
Corporation's various automotive market customers. Sales of industrial
products had a marginal increase over the nine-month period ended September
30, 1997. This increase continued a yearlong trend of sales increases for
this component of the Plastics Products segment.
The gross margin was 17.3% through September 30, 1998 compared to 15.9% for
the nine months ended September 30, 1997. As described in the third quarter
analysis, stable raw material prices and improved manufacturing efficiencies
caused an improvement in the gross margin, offsetting higher labor and
benefit costs during the 1998 period.
Selling and warehousing expenses, exclusive of an allowance for doubtful
accounts, were 3.3% and 3.1% of sales for the nine months ended September 30,
1998 and 1997, respectively. The increase of $302 thousand was a result of
higher marketing-related costs for commissions, advertising and sales
consultants. An allowance for doubtful accounts of $741,250 was recorded for
the nine months ended September 30, 1998. $680,000 of this amount was
recorded in the third quarter in response to a bankruptcy filing by a customer.
General and administrative expenses increased by approximately $575 thousand
from 1997 to 1998. The primary increase was for professional fees. These
expenses were 3.9% and 3.5% of sales for the nine months ended September 30,
1998 and 1997.
The operating margin was 9.4% for the nine months ended September 30, 1998
and 9.3% for the nine months ended September 30, 1997. Substantial
improvements in gross margins for the 1998 period were offset by the expense
recorded for doubtful accounts and by the increases in selling and general
and administrative expenses during the nine months ended September 30, 1998.
Other income through September 30, 1998 decreased by approximately $476
thousand when compared to the similar period for 1997. The primary cause of
the decline was lower amounts of interest income from investment of surplus
funds.
The effective tax rate declined from 37.2% for the nine months ended
September 30, 1997 to 35.9% for the similar period for 1998. The decline
can be attributed to a reduced charge for state income taxes and an
adjustment made to the effective federal income tax rate to more closely
align it to current income levels. Income tax expense was $4.9 million and
$5.2 million for the nine months ended September 30, 1998 and 1997,
respectively.
Liquidity and Capital Resources
The Corporation's operating activities provided net cash of $8.9 million for
the first nine months of 1998 compared to net cash provided by operating
activities of $17.2 million for the first nine months of 1997. Both fiscal
periods experienced comparable levels of net income and depreciation.
Working capital required for the nine months ended September 30, 1998 was
approximately $3.5 million compared to a contribution of approximately $5.1
million for the nine months ended September 30, 1997. The 1997 period reflects
payments of approximately $1.8 million for customer receivables that were
received prior to the end of the accounting period, which normally are
received shortly after the end of the accounting period. The 1997 period
also reflects the results of the Corporation's efforts to materially reduce
inventory levels. Inventory levels at September 30, 1998 and 1997 are
comparable and reflect levels Management believes are required to meet
customer requirements.
Net cash used in investing activities was $8.6 million for 1998 compared to
cash provided by investing activities in 1997 of $16.0 million. Capital
outlay increased by approximately $5.0 million compared to the same period
for 1997. The increase in capital expenditures was primarily due to outlays
related to the additional coating facility and laminating equipment being
installed to accommodate existing and new business. The nine months ended
September 30, 1997 included funds received in connection with the sale of a
subsidiary of approximately $20.5 million, net of an escrow account
established as part of the sale.
The Corporation anticipates that capital expenditures for the remainder of
1998 will be substantially in excess of 1997 levels because of funding
required to complete the coating facility and continue the installation of
additional laminating equipment. Total capital outlay for 1998 is expected to
be between $12 and $14 million.
Net cash used in financing activities decreased by $500 thousand for 1998
compared to the similar period of 1997. Purchases of the Corporation's
common stock under the Corporation's Stock Repurchase Plan increased by $459
thousand for the nine months ended September 30, 1998 compared to the same
period for 1997. This increase was offset by the proceeds from short-term
debt obtained during the nine months ended September 30, 1998.
The Corporation has in place a $50 million line of credit. At September 30,
1998 $944,000 of the line of credit was committed.
Management believes that net cash flow from operating activities, available
financing capabilities and existing cash will be adequate to meet the
Corporation's funding requirements for working capital, capital expenditures
and acquisition activities for the remainder of 1998.
Year 2000
In 1997 the Corporation began an assessment of its potential exposure to
business interruption due to Year 2000 computer software and hardware
failures. The Corporation's MIS department has made substantial progress in
identifying areas of concern. By June 30, 1998, the department had begun
updating and testing identified problem areas. They expect to have all
systems tested and modified well in advance of the end of 1999. Other
personnel of the Corporation have been charged with the responsibility of
reviewing software and hardware utilized in the operation of the
Corporation's manufacturing equipment. Their review of this software and
hardware internally and with representatives of the creators of this
software and hardware have revealed no material deficiencies which could
jeopardize the operation of the Corporation's direct manufacturing equipment.
The Corporation has also initiated communications with suppliers and major
customers to determine if any problems exist in connection with electronic
interfaces. Since there are no guarantees that O'Sullivan Corporation will
be able to rely on others to have their systems converted in a timely manner
for Year 2000 compliance, the Corporation has been developing a strategy to
continue business transactions with customers and suppliers in the event of
interface disruptions.
The Corporation's cost of identifying and modifying programs is expected to
have an immaterial effect on future operating results since for several
years it has had a plan to regularly upgrade the software and hardware for
the Corporation's primary operations systems. This plan has caused the
systems to be continually reviewed and modified as business conditions
warrant.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and its Subsidiaries are involved in legal proceedings
incidental to their normal business activities. While the outcome of these
proceedings cannot be completely predicted, the Corporation does not believe
the ultimate resolution of any existing matters will have a material adverse
effect on its financial position or results of operations.
Item 6. Exhibits and Reports on From 8-K.
(a) Exhibits
27 Article 5 of Regulation S-X, Financial Data Schedule
for the third quarter, 1998 Form 10-Q.
(b) Reports on Form 8-K - No reports on Form 8-K were
filed during the quarter ended September 30, 1998.
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/ John S. Campbell
-------------------------------------
John S. Campbell
President and Chief Executive Officer
/s/ C. Bryant Nickerson
-------------------------------------
C. Bryant Nickerson
Secretary, Treasurer
and Chief Financial Officer
November 12, 1998
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