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 March 31, 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 (IRS 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 April 30, 1999 there were 15,594,813 shares of Common Stock, Par
Value $1, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Unaudited) (Audited)
ASSETS ------------- -------------
Current Assets
Cash and cash equivalents $ 33,308,221 $ 35,361,408
Receivables 31,701,716 26,285,798
Inventories 24,188,923 23,411,945
Deferred income tax assets 1,385,149 1,307,151
Other current assets 1,392,679 2,379,394
------------- -------------
Total current assets $ 91,976,688 $ 88,745,696
------------- -------------
Property, Plant and Equipment $ 44,919,141 $ 45,039,233
------------- -------------
Other Assets $ 9,024,653 $ 9,114,073
------------- -------------
Total assets $ 145,920,482 $ 142,899,002
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 12,693,916 $ 11,187,082
Accrued expenses 6,472,901 6,435,752
------------- -------------
Total current liabilities $ 19,166,817 $ 17,622,834
------------- -------------
Other Long-Term Liabilities $ 6,181,694 $ 6,254,471
------------- -------------
Deferred Income Tax Liabilities $ 1,172,767 $ 1,429,370
------------- -------------
Commitments and Contingencies $ -- -- $ -- --
------------- -------------
Stockholders' Equity
Common stock, par value $1.00 per share;
authorized 30,000,000 shares $ 15,594,867 $ 15,594,982
Additional paid-in capital 1,409,472 1,410,372
Retained earnings 102,637,539 100,829,647
Accumulated other comprehensive income (242,674) (242,674)
------------- -------------
Total stockholders' equity $ 119,399,204 $ 117,592,327
------------- -------------
Total liabilities and
stockholders' equity $ 145,920,482 $ 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 March 31,
-----------------------------
1999 1998
------------- -------------
Net sales $ 42,888,866 $ 41,946,284
Cost of products sold 35,041,549 35,081,839
------------- -------------
Gross profit $ 7,847,317 $ 6,864,445
------------- -------------
Operating expenses
Selling and warehousing $ 1,618,230 $ 1,427,662
General and administrative 1,711,585 1,533,175
------------- -------------
$ 3,329,815 $ 2,960,837
------------- -------------
Income from operations $ 4,517,502 $ 3,903,608
------------- -------------
Other income
Interest income $ 403,344 $ 508,535
Other, net 42,360 279,487
------------- -------------
$ 445,704 $ 788,022
------------- -------------
Income before income taxes $ 4,963,206 $ 4,691,630
Income taxes 1,907,748 1,727,269
------------- -------------
Net income $ 3,055,458 $ 2,964,361
============= =============
Net income per common share,
basic and diluted $ .20 $ .19
============= =============
Dividends per common share $ .08 $ .08
============= =============
Average shares outstanding 15,594,951 15,742,975
============= =============
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 Three Months
Ended March 31,
---------------------------
1999 1998
------------ ------------
Cash Flows from Operating Activities
Net income $ 3,055,458 $ 2,964,361
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,753,575 1,538,700
Provision for doubtful accounts -- -- 20,000
Deferred income taxes (334,601) (377,141)
(Gain) on disposal of assets (48,122) (45,298)
Unremitted (income) from joint venture -- -- (247,522)
Changes in assets and liabilities:
Receivables (5,415,918) (3,363,542)
Inventories (776,978) (539,089)
Other current assets 986,715 1,487,506
Accounts payable 1,506,834 439,035
Accrued expenses 37,149 957,014
Other operating assets and
long-term liabilities 69,836 35,426
Postemployment benefits and
deferred compensation (142,613) (141,365)
------------ ------------
Net cash provided by operating activities $ 691,335 $ 2,728,085
------------ ------------
Cash Flows from Investing Activities
Purchase of property, plant and equipment $ (1,617,658) $ (1,987,736)
Proceeds from disposal of assets 118,536 553,168
Payments received from non-operating
notes receivable 3,750 52,924
Change in other assets (569) 60,340
------------ ------------
Net cash (used in) investing activities $ (1,495,941) $ (1,321,304)
------------ ------------
Cash Flows from Financing Activities
Purchase of common stock $ (1,015) $ (1,873)
Cash dividends paid (1,247,566) (1,259,408)
------------ ------------
Net cash (used in) financing activities $ (1,248,581) $ (1,261,281)
------------ ------------
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
For The Three Months
Ended March 31,
---------------------------
1999 1998
------------ ------------
Increase (decrease) in cash and
cash equivalents $ (2,053,187) $ 145,500
Cash and cash equivalents at beginning
of period 35,361,408 35,444,138
------------ ------------
Cash and cash equivalents at end
of period $ 33,308,221 $ 35,589,638
============ ============
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 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 only of
normal recurring accruals and adjustments) necessary to fairly present the
Corporation's financial position as of March 31, 1999 and December 31, 1998
and the results of its operations and cash flows for the three months ended
March 31, 1999 and 1998. The results of operations for the three months
ended March 31, 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. Supplementary Balance Sheet Detail
March 31, December 31,
1999 1998
------------ ------------
Receivables
Trade receivables $ 32,451,293 $ 27,008,437
Less allowance for doubtful accounts 749,577 722,639
------------- ------------
$ 31,701,716 $ 26,285,798
============ ============
Net receivables from a major automotive customer were $8.4 million at March
31, 1999 and $7.2 million at December 31, 1998.
Inventories
Finished goods $ 5,629,054 $ 4,971,465
Work in process 5,192,001 5,708,598
Raw materials 9,232,287 9,110,258
Supplies 4,135,581 3,621,624
------------ ------------
$ 24,188,923 $ 23,411,945
============ ============
Property, Plant and Equipment
Land $ 1,564,741 $ 1,558,382
Buildings 32,234,450 32,049,426
Machinery and equipment 65,797,461 64,357,301
Transportation equipment 4,070,761 4,070,761
------------ ------------
$103,667,413 $102,035,870
Less accumulated depreciation 58,748,272 56,996,637
------------ ------------
$ 44,919,141 $ 45,039,233
============ ============
Accrued Expenses
Accrued compensation $ 2,573,536 $ 2,590,716
Employee benefits 783,399 1,090,660
Dividends payable 1,245,723 1,245,769
Income taxes payable 961,440 -- --
Other accrued expenses 908,803 1,508,607
------------ ------------
$ 6,472,901 $ 6,435,752
============ ============
Other Long-Term Liabilities
Deferred compensation $ 3,874,338 $ 4,005,363
Employee benefits 1,403,549 1,333,713
Postemployment benefits 903,807 915,395
------------ ------------
$ 6,181,694 $ 6,254,471
============ ============
Note C. Investment in Unconsolidated Joint Venture
Earnings for the three months ended March 31, 1998 include $247,522 as the
Corporation's share of income for the first three months of 1998 for Kiefel
Technologies, Inc., in which O'Sullivan Corporation at that time owned a 49%
interest. The investment in Kiefel Technologies was sold in the fourth
quarter of 1998.
Note D. Earnings Per Share
The following shows the weighted average number of shares used in computing
earnings per share and the effect on weighted average number of shares of
diluted potential common stock.
March 31, March 31,
1999 1998
---------- ----------
Weighted average number of common shares
used in earnings per common share 15,594,951 15,742,975
Effect of dilutive securities:
Stock options 8,382 7,393
---------- ----------
Weighted average number of common shares
used in earnings per common share-
assuming dilution 15,603,333 15,750,368
========== ==========
Options on approximately 190,500 and 222,750 shares were not included in
computing earnings per common share-assuming dilution for the three months
ended March 31, 1999 and 1998, 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. Supplemental Cash Flow Information
Supplemental Disclosure of Cash Flow Information
For The Three Months
Ended March 31,
----------------------
1999 1998
---------- ----------
Cash payments for interest $ -- -- $ -- --
========== ==========
Cash payments for income taxes $ 322,202 $ 194,645
========== ==========
Note G. 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. The Corporation has recorded
liabilities for all material remediation costs that are probable in the
estimation of management and can be reasonably estimated. Management is not
aware of any environmental costs that would be expected to have a material
adverse effect on the Corporation's financial condition or results of
operations. However, it is possible that future events and circumstances
could cause the recorded estimates for environmental costs to be exceeded by
the final outcome of future events.
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 March 31, 1999, and the related
consolidated condensed statements of income and cash flows for the three-
month periods ended March 31, 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 consolidated 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
May 11, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (First Quarter, 1999 versus First Quarter, 1998)
O'Sullivan Corporation's consolidated net sales were $42.9 million for the
first quarter of 1999 and $41.9 million for the first quarter of 1998. The
sales increase over the first quarter of 1998 was $1.0 million or 2.2%.
Sales of automotive-related products improved considerably for the first
quarter of 1999 when compared to 1998's first quarter, increasing by
approximately 10%. The increase reflects a combination of improvements in
sales in the automotive industry and new business programs procured by the
Corporation. Sales of industrial products continue to decline due primarily
to the intense pricing competition in the markets served, but also due to
reduced production demands during this quarter from major customers in the
industrial products area.
The gross margin was 18.3% for the first quarter of 1999 and 16.4% for the
first quarter of 1998. The improvement in the gross margin was due to
manufacturing efficiency improvements and lower raw material costs.
Selling and warehousing expenses were 3.8% of net sales for the first
quarter of 1999 and 3.4% for the first quarter of 1998. The increased costs
for 1999 resulted from increased selling-related compensation costs. General
and administrative expenses were 4.0% of net sales for the first quarter of
1999 and 3.7% for the first quarter of 1998. The increased costs for 1999
were mainly a result of increased administrative compensation costs and
outside professional fees.
Income tax expense was $1.9 million for the first quarter of 1999 and $1.7
million for the first quarter of 1998. The increase in the provision for
income taxes resulted from the higher level of pre-tax income for the first
quarter of 1999. The Corporation's effective tax rate for the first quarter
of 1999 was 38.4% compared to 36.8% for the first quarter of 1998. The
increase in the effective rate for the 1999 period is primarily a result of
a decrease in recognized income from the joint venture investment, which is
recorded net of tax, compared to the first quarter of 1998.
Net other income decreased by approximately $340 thousand compared to the
first quarter of 1998. The net decrease resulted from less interest income,
due to lower earnings rates on invested funds, and the absence of joint
venture earnings in 1999. These earnings were $248 thousand for the first
quarter of 1998.
Liquidity and Capital Resources
Operating activities provided net cash of $691 thousand for the first
quarter of 1999 compared to net cash provided by operating activities of
$2.7 million for the first quarter of 1998. The decline in cash provided by
operating activities for the two periods resulted from the greater increase
in receivables from December 31, 1998 to March 31, 1999 when compared to the
same period for 1998. The increase reflects the increase in sales for the
first quarter of 1999 over 1998 and changes in payment terms primarily due to
competitive market conditions.
Capital outlay was $1.6 million for the first quarter of 1999 and $2.0 million
for the first quarter of 1998. 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 1999 is expected
to be between $8 and $10 million.
The Corporation has in place a $50 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 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 adressing 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.
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 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of O'Sullivan Corporation was held on
April 28, 1999, for the purpose of electing a board of directors and
approving the appointment of independent auditors. Proxies for the meeting
were solicited pursuant to Section 14(a) of the Securities Exchange Act of
1934 and there was no solicitation in opposition to management's
solicitation. All of management's nominees for directors as listed in the
proxy statement were elected.
Proxy Vote Proxy Vote Proxy Vote
Name of Director For Against Abstain
- ----------------- ---------- ------- -------
C. Hugh Bloom, Jr. 12,736,379 1,300 36,430
Arthur H. Bryant, II 12,717,893 19,786 36,430
John C. O. Bryant 12,734,842 1,000 38,267
Robert L. Burrus, Jr. 12,733,911 3,768 36,430
John S. Campbell 12,737,459 220 36,430
Max C. Chapman, Jr. 12,737,479 200 36,430
James T. Holland 12,732,930 2,912 38,267
R. Michael McCullough 12,735,515 327 38,267
Stephen P. Munn 12,737,352 327 36,430
Timothy J. Sandker 12,736,252 1,427 36,430
Leighton W. Smith, Jr. 12,734,415 1,427 38,267
The proposal for approving Yount, Hyde and Barbour, P.C. as independent
auditors for 1999 was approved by the following proxy vote:
For 12,737,218
Against 18,061
Abstain 18,830
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Article 5 of Regulation S-X, Financial Data
Schedule for the first quarter, 1999 Form 10-Q.
(b) Reports on Form 8-K - No reports on Form 8-K were filed
during the quarter ended March 31, 1999.
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
May 12, 1999
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