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, 1999
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 July 31, 1999 there were 15,594,687 shares of Common Stock, Par Value
$1, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited)
ASSETS ------------- -------------
Current Assets
Cash and cash equivalents $ 34,247,740 $ 35,361,408
Receivables 30,913,805 26,285,798
Inventories 24,937,903 23,411,945
Deferred income tax assets 1,751,000 1,307,151
Other current assets 881,266 2,379,394
------------- -------------
Total current assets $ 92,731,714 $ 88,745,696
------------- -------------
Property, Plant and Equipment $ 45,624,742 $ 45,039,233
------------- -------------
Other Assets $ 9,004,971 $ 9,114,073
------------- -------------
Total assets $ 147,361,427 $ 142,899,002
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 12,072,359 $ 11,187,082
Accrued expenses 7,718,932 6,435,752
------------- -------------
Total current liabilities $ 19,791,291 $ 17,622,834
------------- -------------
Other Long-Term Liabilities $ 6,042,152 $ 6,254,471
------------- -------------
Deferred Income Tax Liabilities $ 1,148,469 $ 1,429,370
------------- -------------
Commitments and Contingencies $ -- -- $ -- --
------------- -------------
Stockholders' Equity
Common stock, par value $1.00 per share;
authorized 30,000,000 shares $ 15,594,687 $ 15,594,982
Additional paid-in capital 1,408,029 1,410,372
Retained earnings 103,619,473 100,829,647
Accumulated other comprehensive income (242,674) (242,674)
------------- -------------
Total stockholders' equity $ 120,379,515 $ 117,592,327
------------- -------------
Total liabilities and
stockholders' equity $ 147,361,427 $ 142,899,002
============= =============
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,
-----------------------------
1999 1998
------------- -------------
Net sales $ 47,050,424 $ 42,142,539
Cost of products sold 38,185,164 34,339,421
------------- -------------
Gross profit $ 8,865,260 $ 7,803,118
------------- -------------
Operating expenses
Selling and warehousing $ 1,582,289 $ 1,496,314
General and administrative 1,698,029 1,672,586
Allowance for doubtful accounts 500,000 -- --
Transaction fees pursuant to tender
offer for common stock of
O'Sullivan Corporation 385,460 -- --
------------- -------------
$ 4,165,778 $ 3,168,900
------------- -------------
Income from operations $ 4,699,482 $ 4,634,218
------------- -------------
Other income
Interest income $ 399,953 $ 528,778
Other, net (2,724) 239,323
------------- -------------
$ 397,229 $ 768,101
------------- -------------
Income from continuing operations
Before income taxes $ 5,096,711 $ 5,402,319
Income taxes 2,383,606 1,949,584
------------- -------------
Income from continuing operations $ 2,713,105 $ 3,452,735
Loss from discontinued operations,
Net of taxes (483,627) -- --
------------- -------------
Net income $ 2,229,478 $ 3,452,735
============= =============
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Continued)
For The Three Months
Ended June 30,
-----------------------------
1999 1998
------------- -------------
Net income (loss) per common share,
Basic and diluted:
Net income per common share from
continuing operations $ .17 $ .22
Net (loss) per common share from
discontinued operations (.03) -- --
------------- -------------
Net income per common share $ .14 $ .22
============= =============
Dividends per common share $ .08 $ .08
============= =============
Average shares outstanding 15,594,759 15,718,170
============= =============
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,
-----------------------------
1999 1998
------------- -------------
Net sales $ 89,939,290 $ 84,088,823
Cost of products sold 73,226,713 69,421,260
------------- -------------
Gross profit $ 16,712,577 $ 14,667,563
------------- -------------
Operating expenses
Selling and warehousing $ 3,200,519 $ 2,923,976
General and administrative 3,409,614 3,205,761
Allowance for doubtful accounts 500,000 -- --
Transaction fees pursuant to tender
offer for common stock of
O'Sullivan Corporation 385,460 -- --
------------- -------------
$ 7,495,593 $ 6,129,737
------------- -------------
Income from operations $ 9,216,984 $ 8,537,826
------------- -------------
Other income
Interest income $ 803,297 $ 1,037,313
Other, net 39,636 518,810
------------- -------------
$ 842,933 $ 1,556,123
------------- -------------
Income from continuing operations
before income taxes $ 10,059,917 $ 10,093,949
Income taxes 4,291,354 3,676,853
------------- -------------
Income from continuing operations $ 5,768,563 $ 6,417,096
Loss from discontinued operations,
Net of taxes (483,627) -- --
------------- -------------
Net income $ 5,284,936 $ 6,417,096
============= =============
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Continued)
For The Six Months
Ended June 30,
-----------------------------
1999 1998
------------- -------------
Net income (loss) per common share,
Basic and diluted:
Net income per common share from
continuing operations $ .37 $ .41
Net (loss) per common share from
discontinued operations (.03) -- --
------------- -------------
Net income per common share $ .34 $ .41
============= =============
Dividends per common share $ .16 $ .16
============= =============
Average shares outstanding 15,594,855 15,730,572
============= =============
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 Six Months
Ended June 30,
---------------------------
1999 1998
------------ ------------
Cash Flows from Operating Activities
Net income $ 5,284,936 $ 6,417,096
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,013,550 3,077,400
Provision for doubtful accounts 500,000 61,250
Deferred income taxes (724,750) (564,359)
(Gain) on disposal of assets (47,407) (114,680)
Unremitted (income) from joint venture -- -- (430,487)
Changes in assets and liabilities:
Receivables (5,128,007) (2,387,932)
Inventories (1,525,958) 24,386
Other current assets 854,087 1,400,617
Accounts payable 885,277 1,527,602
Accrued expenses 1,283,179 136,629
Other operating assets and
Long-term liabilities 16,059 (5,443)
Postemployment benefits and
Deferred compensation (216,376) (254,344)
------------ ------------
Net cash provided by operating activities $ 4,194,590 $ 8,887,735
------------ ------------
Cash Flows from Investing Activities
Purchase of property, plant and equipment $ (3,580,411) $ (5,358,834)
Proceeds from disposal of assets 118,536 725,837
Payments received from non-operating
notes receivable 8,900 250,542
Change in other assets 642,465 (126,371)
------------ ------------
Net cash (used in) investing activities $ (2,810,510) $ (4,508,826)
------------ ------------
Cash Flows from Financing Activities
Purchase of common stock $ (2,638) $ (1,451,312)
Cash dividends paid (2,495,110) (2,518,795)
------------ ------------
Net cash (used in) financing activities $ (2,497,748) $ (3,970,107)
------------ ------------
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
For The Six Months
Ended June 30,
---------------------------
1999 1998
------------ ------------
Increase (decrease) in cash and
Cash equivalents $ (1,113,668) $ 408,802
Cash and cash equivalents at beginning
of period 35,361,408 35,444,138
------------ ------------
Cash and cash equivalents at end
of period $ 34,247,740 $ 35,852,940
============ ============
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 ("O'Sullivan" or "the 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 consolidated financial statements notes and other disclosures
included in the Corporation's 1998 Annual Report to Stockholders and Form 10-K.
In the opinion of management of the Corporation, the unaudited consolidated
financial statements contain all material adjustments (consisting of
normal recurring accruals and adjustments) necessary to fairly present the
Corporation's financial position as of June 30, 1999 and December 31, 1998,
the results of its operations for the three and six months ended June 30,
1999 and 1998 and the results of its cash flows for the six months ended
June 30, 1999 and 1998. The results of operations for the three and six months
ended June 30, 1999 are not necessarily indicative of the operating results
for the full year.
Certain amounts for 1998 have been reclassified to reflect comparability
with account classifications for 1999.
Note B. Changes in Control of O'Sullivan
Pursuant to a tender offer commenced on June 8, 1999, TGC Acquisition
Corporation ("TGC"), a Virginia Corporation and a wholly owned subsidiary of
The Geon Company ("Geon"), a Delaware Corporation, offered to purchase for
cash, at a price of $12.25 per share, all outstanding shares of the common
stock, par value $1.00 per share, of O'Sullivan.
At the close of the tender period on July 7, 1999, TGC was the holder of
record of 13,715,221 shares of O'Sullivan common stock, or 87.9% of the
15,594,687 shares of common stock outstanding at the date of the tender
offer. A Special Meeting of Stockholders is scheduled for August 23, 1999
to vote on the approval of the Merger Agreement. Geon has control of a
sufficient number of the outstanding shares to insure that the agreement
will be approved.
The Merger Agreement contains a provision whereby nine of the eleven
directors of O'Sullivan resigned at the change of control. Those directors who
resigned were: C. Hugh Bloom, Jr., John C. O. Bryant, Robert L. Burrus, Jr.,
Max C. Chapman, Jr., James T. Holland, R. Michael McCullough, Stephen P.
Munn, Timothy J. Sandker and Leighton W. Smith, Jr. Arthur H. Bryant II
and John S. Campbell remained on the Board of Directors and were joined by
William F. Patient, Thomas A. Waltermire, Donald P. Knechtges, V. Lance
Mitchell. Gregory L. Rutman, W. David Wilson and John L. Rastetter. The
seven new members of the Board are currently Directors and/or employees of
Geon.
Note C. Supplementary Balance Sheet Detail
June 30, December 31,
1999 1998
------------ ------------
Receivables
Trade receivables $ 32,148,335 $ 27,008,437
Less allowance for doubtful accounts 1,234,530 722,639
------------ ------------
$ 30,913,805 $ 26,285,798
============ ============
Net receivables from a major automotive customer were $8.0 million at June 30,
1999 and $7.2 million at December 31, 1998.
Inventories
Finished goods $ 5,746,822 $ 4,971,465
Work in process 5,271,281 5,708,598
Raw materials 9,898,124 9,110,258
Supplies 4,021,676 3,621,624
------------ ------------
$ 24,937,903 $ 23,411,945
============ ============
Property, Plant and Equipment
Land $ 1,572,336 $ 1,558,382
Buildings 32,431,041 32,049,426
Machinery and equipment 67,530,928 64,357,301
Transportation equipment 4,070,760 4,070,761
------------ ------------
$105,605,065 $102,035,870
Less accumulated depreciation 59,980,323 56,996,637
------------ ------------
$ 45,624,742 $ 45,039,233
============ ============
Accrued Expenses
Accrued compensation $ 2,784,755 $ 2,590,716
Employee benefits 1,075,550 1,090,660
Dividends payable 1,245,705 1,245,769
Other accrued expenses 2,612,922 1,508,607
------------ ------------
$ 7,718,932 $ 6,435,752
============ ============
Other Long-Term Liabilities
Deferred compensation $ 3,812,313 $ 4,005,363
Employee benefits 1,337,770 1,333,713
Postemployment benefits 892,069 915,395
------------ ------------
$ 6,042,152 $ 6,254,471
============ ============
Note D. Investment in Unconsolidated Joint Venture
Earnings for the three and six months ended June 30, 1998 include $182,965
and $430,487, respectively as the Corporation's share of income from a joint
venture in Kiefel Technologies, Inc. ("Kiefel"). During the six-month
period ended June 30, 1998 the Corporation owned a 49% equity interest in
Kiefel. The investment in Kiefel was sold in its entirety in the fourth
quarter of 1998.
Note E. Earnings Per Share
The following sets forth the computation of basic and diluted earnings per
share:
For the Three Months Ended
June 30, June 30,
1999 1998
---------- ----------
Weighted average number of common shares
used for basic earnings per common share 15,594,759 15,718,170
Effect of dilutive securities:
Stock options 11,687 8,095
---------- ----------
Weighted average number of common shares
used for earnings per common share-
assuming dilution 15,606,446 15,726,265
========== ==========
For the Six Months Ended
June 30, June 30,
1999 1998
---------- ----------
Weighted average number of common shares
used for basic earnings per common share 15,594,855 15,730,572
Effect of dilutive securities:
Stock options 10,035 7,745
---------- ----------
Weighted average number of common shares
used for earnings per common share-
assuming dilution 15,604,890 15,738,317
========== ==========
At June 30, 1999 there were 301,242 stock options exercisable by Directors
and employees. Pursuant to the Merger Agreement between Geon and O'Sullivan,
all options will be canceled and the holders will receive a payment equal
to the excess of the Merger Consideration price of $12.25 per share over the
exercise price of the options. As a result of this provision in the Merger
Agreement, all options exercisable at June 30, 1999 were considered in the
computation of earnings per share-assuming dilution for the three and six
months ended June 30, 1999. Approximately 224,500 shares were not included
in computing earnings per common share-assuming dilution for the three and
six months ended June 30, 1998 because their effects were antidilutive.
Note F. 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 G. Supplemental Cash Flow Information
Supplemental Disclosure of Cash Flow Information
For The Six Months
Ended June 30,
-------------------------
1999 1998
----------- -----------
Cash payments for interest $ -- -- $ -- --
=========== ===========
Cash payments for income taxes $ 3,648,177 $ 3,469,088
=========== ===========
Note H. Commitments and Contingencies
Legal Matters
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.
Environmental Matters
The Corporation has a policy to pro-actively address its environmental
responsibilities. It has made a concerted effort for many years to address
potential environmental issues in its manufacturing operations by changing
processes and utilizing advanced technologies to remediate environmental
matters as they come to management's attention. During the second quarter
management was advised of proposed governmental regulations that likely
will result in remediation costs in order to comply. Based on this new
information management determined that a charge of $850,000 was warranted to
cover the probable future costs of the related remediation. It is possible
that future events may cause the final costs to exceed the amount accrued.
The Corporation may need to revise its estimates as additional information
becomes available or as future governmental regulations become effective.
Note I. Adjustment to Allowance for Doubtful Accounts
O'Sullivan management periodically reviews the financial condition of major
customers to determine their credit-worthiness. Based on recent reviews and
other knowledge gained of the financial condition of certain customers,
management recorded a charge of $500,000 to bad debt expense during the
second quarter of 1999.
Note J. Discontinued Operations
When the Corporation disposed of the former lawn and garden business in 1997,
it kept certain non-trade notes receivable. During the second quarter of
1999, the Corporation determined that the issuer of the notes was not likely
to pay the amounts due and legal action was initiated. The accompanying
financial statements reflect, as a loss from discontinued operations, a
charge of $644,041, net of a tax benefit of ($225,414) for the value of the
notes receivable. The loss also reflects a charge of $100,000, net of a tax
benefit of $35,000) for expenses to withdraw from a former facility occupied
by the lawn and garden business.
Note K. Subsequent Events
The Corporation entered into an agreement during 1998 with Bowles Hollowell
Conner ("BHC"), an investment banking institution, to investigate strategic
alternatives to increase stockholder value. A provision in that agreement
provided that the Corporation would incur an obligation to BHC for a
transaction fee in the event of a sale of the Corporation. A fee of
$1,918,471 became payable to BHC contingent upon Geon obtaining control of
over 70% of the outstanding shares through their tender offer, which did take
place by the end of the tender offer on July 7, 1999. The fee was paid to
BHC on July 9, 1999, net of prior deposits paid to BHC. The Corporation
also agreed to reimburse BHC for out-of-pocket expenses in the amount of
$75,316. These costs are included in the transaction fees incurred during
the three and six months ended June 30, 1999.
At a meeting of the Board of Directors on July 8, 1999, the Board approved a
loan from O'Sullivan to Geon of up to $30 million, to be memorialized in a
credit agreement and promissory note between Geon and O'Sullivan and bearing
interest at a fluctuating annual rate equal to 1.5% below Citibank, N.A.'s
base interest rate. On July 13, 1999 a loan in the amount of $25 million
was made by O'Sullivan to Geon at an interest rate of 5.75%.
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 June 30, 1999, and the related
consolidated condensed statements of income for the three and six month
periods ended June 30, 1999 and 1998 and the related consolidated condensed
statements of cash flows for the six month periods ended June 30, 1999 and
1998. These condensed 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, 1998, and the related statements of income, stockholders'
equity and cash flows for the year then ended (not presented herein); and in
our report dated January 22, 1999, we expressed an unqualified opinion on
those financial statements based on our audit. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998 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 11, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Second Quarter, 1999 Versus Second Quarter, 1998)
Consolidated net sales for the three months ended June 30, 1999 were $47.1
million compared to $42.1 million for the three months ended June 30, 1998,
an increase of 11.6%. The sales increase for the period was due entirely to
improved sales of automotive-related products, which increased by
approximately 30% over the second quarter of 1998. Automotive-related sales
for the second quarter of 1998 were effected by a strike against General
Motors that reduced sales by approximately $800,000. Sales of industrial
products experienced a decline in sales of 7.8% when compared to the second
quarter of 1998.
The gross margin was 18.8% for the three months ended June 30, 1999 and
18.5% for the three months ended June 30, 1998. The gross margin for the
1999 period was reduced by 1.7% due to a charge of $850,000 recorded during
the period for environmental remediation expenses. The primary reason
for the improved margins before environmental remediation costs was the
reduction in effective material costs. Although prices for primary raw
materials began increasing during the quarter, manufacturing efficiency
measures aided in reducing overall material costs. Gross margins in the
second quarter were pressured by marginal increases in labor and employee
benefit costs.
Selling and warehousing and general and administrative expenses were
substantially similar for the second quarters of both 1999 and 1998. During
the second quarter of 1999, the Corporation recorded a charge of $500,000
to the allowance for doubtful accounts based on management's analysis of the
financial condition of certain customers of the industrial products group.
The Corporation also incurred expenses of $385,460 in connection with the
tender offer by Geon for the common stock of O'Sullivan.
The operating margins for the quarter ended June 30, 1999 and 1998 were
10.0% and 11.0%, respectively. Gains from lowered material costs were offset
by the charge for environmental remediation and the charges for bad debts
and tender offer expenses.
Net other income decreased by $371 thousand for the second quarter of 1999
compared to the second quarter of 1998. The decrease is a combination of
reduced interest income and the sale of the joint venture interest in 1998.
The joint venture income for the second quarter of 1998 was $183 thousand.
Income tax expense for continuing operations was $2.4 million for the second
quarter of 1999 and $1.9 million for the second quarter of 1998. The
increase in the income tax expense was a result of higher effective tax rates
for both state and federal and from no longer having substantial equity
investment income (after-tax) from a corporate joint venture.
Results of Operations (Six Months Ended June 30, 1999 versus Six Months
Ended June 30, 1998)
Consolidated net sales were $89.9 million for the six months ended June 30,
1999, an increase of 7.0% from 1998 sales through June 30, 1998 of $84.1
million. The sales increase for the 1999 period is related to the
substantial improvement in demand for automotive-related products. Sales of
automotive-related products increase by approximately 20% over the first six
months of 1998 and, even factoring in the effect of the strike against
General Motors in the second quarter of 1998, there were significant
improvements in sales of these products reflecting new programs coming into
production and continued strong demand for ongoing programs of the major
automotive companies. Sales of industrial products declined by 8.5%
compared to the first six months of 1998. The decline has resulted from
decreased demand from several major customers and the continued pricing
pressures in the markets served.
The gross margin was 18.6% through June 30, 1999 compared to 17.4% for the
six months ended June 30, 1998. Without the effect of the environmental
remediation charge taken in the second quarter of 1999, the rate would
have been 19.5%. The gross margin improvement was achieved by lowering
effective material costs. These reductions were primarily achieved by
improved manufacturing processes and material utilization. Marginally
greater costs for labor and employee benefits negated the gains from improved
material utilization to a limited degree.
Selling and warehousing expenses were 3.6% and 3.5% of sales for the six
months ended June 30, 1999 and 1998, respectively. The increase of $275
thousand was a result of greater compensation and benefit costs. General and
administrative expenses increased by $200 thousand from 1998 to 1999. The
primary increase in this area was also from compensation and benefit costs.
These expenses were 3.8% of sales for the six months ended June 30 of both
1999 and 1998. Reference should be made to the Second Quarter analysis
included earlier for the discussion of the addition to the allowance for
doubtful accounts and the costs incurred for the tender offer for the common
stock of O'Sullivan.
The operating margin was 10.2% for both periods. Gross margin improvements
in the 1999 period from improved material costs were offset by additional
operating charges recorded for bad debts and tender offer fees, along with
the charge for environmental remediation.
Other income through June 30, 1999 decreased by $713 thousand when compared
to the similar period for 1998. The 1998 period included net income from a
joint venture of $431 thousand. Interest income declined due to reduced
levels of invested funds as well as lower rates of return.
The effective tax rate for continuing operations increased from 36.4% for
the six months ended June 30, 1998 to 42.6% for the similar period for 1999.
As described in the Second Quarter analysis, the increase in the income tax
expense can be attributed to higher effective state and federal tax rates
and from no longer having the after-tax equity investment income from a
corporate joint venture. Income tax expense for continuing operations was
$4.3 million and $3.7 million for the six months ended June 30, 1999 and
1998, respectively.
Liquidity and Capital Resources
The Corporation's operating activities provided net cash of $4.2 million for
the first six months of 1999 compared to net cash provided by operating
activities of $8.9 million for the first six months of 1998. Both fiscal
periods experienced comparable levels of net income and depreciation expense.
Working capital requirements for the six months ended June 30, 1999 were
significantly higher to support the sales increases experienced during the
first six months of 1999.
Net cash used in investing activities decreased by $1.7 million for 1999
compared to 1998. Capital outlay decreased by $1.8 million over 1998. The
major capital improvement programs that had been ongoing since the beginning
of 1998 were substantially completed during the first quarter of 1999.
Current capital expenditures are generally being made to provide additional
capacity and modernize equipment to produce products for which orders
currently exist. Total capital outlays for 1999 are expected to be between
$8 and $10 million.
Net cash used in financing activities decreased by $1.5 million due to the
decline in the amount of common stock acquired under the Corporation's
Stock Repurchase Plan.
At June 30, 1999 the Corporation had in place a $50 million line of credit
that was uncommitted. The banking institution providing the line of credit
canceled the credit line on July 8, 1999 upon the change of control.
Management believes that net cash flow from operating activities and available
financing capabilities of The Geon Company will be adequate to meet the
Corporation's normal funding requirements for working capital and capital
expenditures for the remainder of 1999.
Year 2000 Readiness
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
equipment, software and other devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a
temporary inability to manufacture products, acquire or ship inventory, process
transactions, send invoices or engage in other normal business activities.
Due to the significance of computer processing in the conduct of the
Corporation's business activities, failure of these systems could have a
materially adverse effect on the Corporation. In addition, the failure of
vendor computer systems could cause interruption of deliveries of key
supplies or utilities, which might result in similar material adverse
effects. Because of the complexity of the issues and the number of parties
involved, O'Sullivan cannot reasonably predict with certainty the nature or
likelihood of such impacts.
In 1997, the Corporation began an assessment of its potential exposure to
business interruption due to Year 2000 computer hardware and software
failures. The Corporation's MIS department identified areas of concern and
since 1997 has been addressing both the software and hardware issues of
concern in relation to Year 2000 readiness. The department identified, tested
and modified those systems determined to be susceptible to Year 2000
operating failures. At this time virtually all material internal systems
have been modified to be Year 2000 compliant. Management believes that by
September 30, 1999 all final testing and modifications will be materially
completed.
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 operating systems. This plan has caused the systems
to be continually reviewed and modified as business conditions warrant.
Incremental costs incurred to resolve the Year 2000 issues are expected to be
less than $500,000. Any additional costs to be incurred are expected to be
immaterial.
In addition, the Corporation has initiated communications with suppliers and
major customers to determine, to the extent possible, if any problems exist in
connection with electronic interfaces. Since there are no guarantees that
O'Sullivan will be able to rely on others to have their systems converted in a
timely manner, the Corporation has been developing a strategy to continue
business transactions with customers and suppliers in the event of interface
disruptions.
To prepare for the reasonably likely worst-case scenario, O'Sullivan has
developed a contingency plan to mitigate the effects on its operations in case
certain of its systems or suppliers fail to perform as planned. The
contingency plan consists of providing all required resources to repair
internal systems should they fail at critical times, as well as establishing
additional inventories and back-up procedures in the event suppliers are unable
to deliver raw materials and services in a timely manner.
The costs of the project and the date on which the Corporation plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantees that these estimates will be achieved and actual results could
differ from those plans currently anticipated. Specific factors that could
cause such material differences include, but are not limited to, the
availability of personnel trained in Year 2000 issues, the ability of
third-party vendors to correct their hardware and software, the ability of
significant customers to remedy their Year 2000 issues and similar
circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation currently does not have market risk sensitive instruments.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Article 5 of Regulation S-X, Financial Data Schedule for the
Second Quarter, 1999 Form 10-Q.
(b) Reports on Form 8-K
Form 8-K filed on June 2, 1999 announcing a transaction pursuant
to which The Geon Company will acquire O'Sullivan Corporation.
Form 8-K filed on July 20, 1999 reporting a change in control of
O'Sullivan Corporation.
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
Chief Financial Officer, Assistant
Treasurer and Assistant Secretary
August 13, 1999
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