FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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: 1-12754
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1659062
- ------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Gulf Street, Lamar, Missouri 64759-1899
- ---------------------------------------- ---------------
(Address of principal executive offices) (ZIP Code)
(417) 682-3322
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(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.
Yes X No
------ ------
As of November 1, 1996, 16,801,633 shares of Common Stock of
O'Sullivan Industries Holdings, Inc., par value $1.00 per share,
and associated preferred stock purchase rights were outstanding.
PAGE
<PAGE>
PART I
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ITEM 1. FINANCIAL STATEMENTS
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Sept. 30, June 30,
Assets: 1996 1996
------ --------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,966 $ 506
Trade receivables, net of allowance
for doubtful accounts of $2,162
and $1,225, respectively 62,488 53,570
Inventories:
Finished merchandise 22,864 26,031
Work in process 5,609 5,116
Raw materials 9,529 10,334
-------- --------
38,002 41,481
Prepaid expenses and other
current assets 2,260 2,347
-------- --------
Total current assets 104,716 97,904
-------- --------
Property, plant and equipment,
at cost 114,603 112,828
Less accumulated depreciation
and amortization (46,162) (44,838)
-------- --------
68,441 67,990
Goodwill, net of accumulated
amortization 46,006 46,423
-------- --------
$219,163 $212,317
======== ========
Liabilities and Stockholders' Equity:
- ------------------------------------
Current liabilities:
Accounts payable $ 9,584 $ 11,046
Accrued liabilities 17,945 14,955
Income taxes payable 2,925 767
-------- --------
Total current liabilities 30,454 26,768
-------- --------
Long-term debt 30,000 30,000
Deferred income taxes 13,934 13,934
Stockholders' equity:
Preferred stock; $1.00 par value,
20,000,000 shares authorized,
none issued - -
Common stock; $1.00 par value,
100,000,000 shares authorized,
16,819,950 issued 16,820 16,820
Additional paid-in capital 87,807 87,775
Retained earnings 40,496 37,020
-------- --------
145,123 141,615
Less common stock in treasury
at cost, 40,317 shares in 1997;
none in 1996 348 -
-------- --------
Total stockholders' equity 144,775 141,615
-------- --------
Commitments and contingencies
(see Note 4) -------- --------
$219,163 $212,317
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Quarter ended
September 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
Net sales $83,126 $74,774
Costs and expenses:
Cost of sales 60,574 59,890
Selling, marketing and administrative 16,200 11,655
Interest, net 718 1,057
------- -------
77,492 72,602
------- -------
Income before income tax provision 5,634 2,172
Income tax provision 2,158 824
------- -------
Net Income $ 3,476 $ 1,348
======= =======
Earnings per common share $0.21 $0.08
======= =======
Weighted average common shares outstanding 16,806 16,820
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
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<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Quarter ended
September 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,476 $ 1,348
Adjustments to reconcile net income to
net cash provided (used)
by operating activities:
Depreciation and amortization 2,437 2,343
Changes in current assets and
liabilities:
Trade receivables (8,918) (7,062)
Inventories 3,479 (1,761)
Other assets 77 475
Accounts payable, accrued
liabilities and
income taxes payable 3,686 4,128
------- -------
Net cash provided (used) by
operating activities 4,237 (529)
------- -------
Cash flows from investing activities:
Capital expenditures (2,471) (831)
------- -------
Cash flows from financing activities:
Additions to long-term debt - 1,000
Purchase of treasury stock (730) -
Sale of common stock to employee
benefit plans 424 -
------- -------
Net cash flows provided (used)
for financing activities (306) 1,000
------- -------
Net increase (decrease) in cash and
cash equivalents 1,460 (360)
Cash and cash equivalents, beginning
of period 506 564
------- -------
Cash and cash equivalents, end of period $ 1,966 $ 204
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Preferred Common
stock stock
------------------ ----------------
Shares Dollars Shares Dollars
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, June 30, 1996 - $ - 16,820 $16,820
Net income - - - -
Translation adjustment - - - -
Purchase of common stock - - - -
Sale of common stock - - - -
-------- -------- ------- -------
Balance, September 30, 1996 - $ - 16,820 $16,820
======== ======== ======== ========
<CAPTION>
Additional Treasury Total
paid-in Retained stock stockholders'
capital earnings Shares Dollars equity
-------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $87,775 $37,020 - $ - $141,615
Net income - 3,476 - - 3,476
Translation adjustment (10) - - - (10)
Purchase of common stock - - (90) (730) (730)
Sale of common stock 42 - 50 382 424
------- ------- -------- --------- ---------
Balance, September 30, 1996
$87,807 $40,496 (40) $ (348) $144,775
======= ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1996
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included
herein have been prepared by O'Sullivan Industries Holdings, Inc.
and subsidiaries (the "Company") in accordance with generally
accepted accounting principles for interim financial information
and with instructions to Form 10-Q and Article 10 of Regulation
S-X. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended June 30, 1996. The
interim results are not necessarily indicative of the results
which may be expected for a full year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting for Stock-Based Compensation: In October 1995,
the FASB issued FAS No. 123, Accounting for Stock-Based
Compensation ("FAS 123"), which is effective for fiscal years
beginning after December 15, 1995. Effective July 1, 1996, the
Company adopted FAS 123 establishing financial accounting and
reporting standards for stock-based employee compensation plans.
The pronouncement defines a fair value based method of accounting
for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for
all of their employee stock option compensation plans. However,
it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of
accounting as prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25").
Entities electing to remain with the intrinsic method of
accounting pursuant to APB 25 must make pro forma disclosures of
net income and earnings per share as if the fair value based
method of accounting defined in FAS 123 had been applied. The
Company will account for stock-based employee compensation plans
under the intrinsic method pursuant to APB 25 and will make the
disclosures in its footnotes as required by FAS 123.
6
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<PAGE>
Impairment of Long-Lived Assets: In March 1995, the FASB
issued FAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121"),
which is effective for fiscal years beginning after December 15,
1995. Effective July 1, 1996, the Company adopted FAS 121, which
requires that long-lived assets (i.e., property, plant and
equipment and goodwill) held and used by an entity be reviewed
for impairment whenever events or changes in circumstances
indicate that the net book value of the asset may not be
recoverable. An impairment loss will be recognized if the sum of
the expected future cash flows (undiscounted and before interest)
from the use of the asset is less than the net book value of the
asset. Generally, the amount of the impairment loss is measured
as the difference between the net book value of the assets and
the estimated fair value of the related assets. The adoption of
this statement had no impact on the Company's results of
operations nor its financial position.
NOTE 3 - INCENTIVE STOCK PLAN
On July 1, 1996, the Board of Directors granted, subject to
stockholder approval, options to purchase 625,250 shares of
common stock to the Company's officers and other key employees.
To the extent certain performance objectives regarding (a)
Company quarterly earnings measured against Company goals and (b)
quarterly percentage sales increases measured against a
competitor are met, the options become exercisable in up to one-
third increments on each of the first three anniversaries of the
date of the grant and expire ten years after the date of the
grant. To the extent the performance objectives are not met, the
options become exercisable on August 10, 2003 and expire
September 10, 2003. If approved, the Company will recognize
compensation expense equal to the difference between the exercise
price of $7.1875 and the fair market value of the Company's
common stock on November 14, 1996, the date of stockholder
approval, over the appropriate vesting period.
Additionally, the Board of Directors granted 260,200 options
that were not based on attaining performance objectives. Full
vesting terms ranged from three to five years with the options
expiring ten years from the date of the grant. The exercise
price for these options is equal to the fair market value on the
date of the grant, July 1, 1996; therefore, no compensation
expense was recognized.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
On July 30, 1996, Fisher-Price, Inc. filed suit against
O'Sullivan Industries, Inc. in the Supreme Court of New York,
Erie County, alleging breach of a License Agreement between
O'Sullivan Industries, Inc. and Fisher-Price. Pursuant to the
License Agreement, the Company was to have manufactured a line of
furniture under the Fisher-Price name. The suit alleges a failure
to pay minimum royalties under the License Agreement of
$1,400,000. The Company believes that the License Agreement was
terminated in September 1995 and that it has meritorious defenses
against the suit and will defend itself vigorously. The ultimate
outcome of this matter cannot be predicted at this time.
7
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the quarter ended September 30, 1996,
increased 11.2% to $83.1 million from $74.8 million for the prior
year quarter. The increase in sales was due to an increase in
the average selling price per unit and an increase in the number
of units sold. The Company had strong sales increases in both
the office products and mass merchant distribution channels.
Recently introduced products, such as the Cockpit [TM],
have contributed to increased customer demand for higher-priced,
ergonomically designed office products. The increases in the
channels mentioned above were partially offset by lower sales
through the furniture/specialty channel as compared with the
first quarter of fiscal 1996.
On September 4, 1996, two of the Company's office superstore
customers, Office Depot, Inc. and Staples, Inc., announced a
definitive agreement to merge into a single company. O'Sullivan
sells its products to both Office Depot and Staples. Management
does not currently anticipate this merger to materially impact
sales to these customers; however, there can be no assurance that
future purchases will not be materially changed.
On September 24, 1996, one of the Company's largest
customers, Best Products Co., Inc., filed for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code.
Best Products subsequently announced that it has signed an
agreement to sell substantially all retail store-related assets
to two investment groups. Further announcements stated that the
investment groups planned to liquidate the assets of the
retailer, essentially terminating the existence of Best Products
as a retailer and leaving the corporate shell with approximately
$535 million in bankruptcy-related liabilities offset by
estimated cash of $410 million from the sale of the assets. All
of the above dealings are subject to approval by the United
States Bankruptcy Court. There can be no certainty that the
Company will be able to replace these sales. Sales to Best
Products approximated $5 million in the first quarter of fiscal
1997 and $20 million in the fiscal year ended June 30, 1996.
The Company expects to receive orders from two major home
improvement retailers which should partially offset lost sales to
Best Products.
8
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<PAGE>
The Company's gross margin increased to $22.6 million, or
27.1% of sales, for the quarter ended September 30, 1996, from
$14.9 million, or 19.9% of sales, in the prior year quarter. The
Company's higher gross margin was due to several factors
including: (i) lower material costs, particularly packaging
materials, particle board and fiberboard; (ii) decreased overhead
on a per unit basis due to increased volume and capacity
utilization rates; (iii) changes in product mix resulting in the
production and sale of more expensive, higher margin products;
and (iv) a change in the freight program of a large customer
which increased sales and selling expenses on a dollar for dollar
basis, effectively increasing gross margin.
Selling, marketing and administrative expenses increased to
$16.2 million or 19.5% of sales, from $11.7 million or 15.6% of
sales, for the comparable prior year period. The increase in
selling, marketing and administrative expenses is due primarily
to higher advertising costs associated with promotional efforts
with certain customers and higher outbound freight costs
associated with the change in the freight program of a large
customer. Additionally, a bad debt reserve of $0.8 million ($0.5
million after-tax) was established relating to the bankruptcy
filing of Best Products, which is disclosed above. The Company's
gross trade receivables from Best Products approximated $1.7
million on September 30, 1996. The Company believes that it has
adequately reserved its receivable from Best Products.
Interest expense decreased by $0.3 million to $0.7 million
for the first quarter of fiscal 1997. The decrease was due to
reduced borrowings caused by lower working capital requirements.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash
equivalents amounting to $2.0 million and net working capital of
$74.3 million.
Cash provided by operating activities during the three month
period ended September 30, 1996, amounted to $4.2 million
compared to cash used by operating activities of $0.5 million in
the comparable prior year period. The increase in cash flows from
operations resulted primarily from increased net income and the
reduction in inventories which was partially offset by an
increase in receivables. Of the $4.2 million in cash flow
provided by operating activities, approximately $2.5 million was
used for capital expenditures.
9
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<PAGE>
At September 30, 1996, the Company had long-term debt
outstanding of $30.0 million; $10.0 million industrial revenue
bonds that bear interest at 8.25% and mature on October 31, 2008
and $20.0 million in private placement debt with certain
insurance companies at 8.01% due fiscal 2003. The Company also
has a $30 million Revolving Credit Agreement with two banks. At
September 30, 1996 there were no borrowings under the revolving
line of credit. The Credit Agreement also includes a $10.8
million standby letter of credit established in favor of Tandy
Corporation. The letter of credit indemnifies Tandy Corporation
from its obligations as guarantor of the $10 million industrial
revenue bonds for which a subsidiary of the Company is the
obligor. Tandy can draw against the standby letter of credit
only in the event that it must pay any amount with respect to the
bonds. Debt as a percentage of total capitalization was 17.1%
and 26.7% at September 30, 1996 and September 30, 1995,
respectively.
The Company believes that cash flow from operations, along
with current unused balances under existing credit agreements,
will be sufficient to fund the Company's operations in fiscal
1997, including capital expenditures, which are currently
estimated at approximately $12.0 to $15.0 million.
The Company currently is in compliance with all relevant
covenants of its debt agreements.
SEASONALITY
The Company generally experiences increased sales in the
first and second quarters of the fiscal year in anticipation of
the holiday selling season.
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
Certain portions of this Report, and particularly the Notes
to the Consolidated Financial Statements and the Management's
Discussion and Analysis of Financial Condition and Results of
Operation in Part I of this report contain forward-looking
statements. There are certain important factors which could
cause results to differ materially from those anticipated by some
of the statements made in this report. Some of the important
factors which could cause actual results to differ materially
10
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from those in the forward-looking statements include, among other
things, changes from anticipated levels of sales, whether due to
future national or regional economic and competitive conditions,
customer acceptance of existing and new products, or otherwise,
pending litigation described above, pricing pressures due to
excess capacity, raw material cost increases, transportation cost
increases, the inability of a major customer to meet its
obligations, loss of significant customers in connection with a
merger or acquisition or otherwise, increased advertising costs
associated with promotional efforts, change of tax rates, change
of interest rates, future business decisions and other
uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company.
11
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
<S> <C>
Exhibit No. Description
- ----------- ------------------------------------------------------------
2 Amended and Restated Stock Exchange Agreement dated as of
February 1, 1994 between O'Sullivan Industries Holdings, Inc.
(the "Company") and TE Electronics Inc. ("TE") (incorporated by
reference from Exhibit 2 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 (File No. 1-12754))
3.1 & 4.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 to Registration Statement on
Form S-1 (File No. 33-72120))
3.2 & 4.2 Bylaws of the Company (incorporated by reference from
Exhibit 3.2 to Registration Statement on Form S-1 (File
No. 33-72120))
4.3 Specimen Stock Certificate of the Company (incorporated by
reference from Exhibit 4.1 to Amendment No. 3 to Registration
Statement on Form S-1 (File No. 33-72120))
4.4 Rights Agreement dated as of February 1, 1994 between the
Company and the First National Bank of Boston, as Rights Agent
(incorporated by reference from Exhibit 4.4 to Quarterly Report
on Form 10-Q for the quarter ended March 31, 1994
(File No. 1-12754))
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K:
None
12
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<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
(Registrant)
Date: November 8, 1996 By: /s/ Daniel F. O'Sullivan
Daniel F. O'Sullivan
Chairman of the Board
and Chief Executive Officer
Date: November 8, 1996 /s/ Terry L. Crump
Terry L. Crump
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF O'SULLIVAN INDUSTRIES HOLDINGS, INC. FOR THE
PERIOD ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,966
<SECURITIES> 0
<RECEIVABLES> 64,650
<ALLOWANCES> 2,162
<INVENTORY> 38,002
<CURRENT-ASSETS> 104,716
<PP&E> 114,603
<DEPRECIATION> 46,162
<TOTAL-ASSETS> 219,163
<CURRENT-LIABILITIES> 30,454
<BONDS> 30,000
0
0
<COMMON> 16,820
<OTHER-SE> 127,955
<TOTAL-LIABILITY-AND-EQUITY> 219,163
<SALES> 83,126
<TOTAL-REVENUES> 83,126
<CGS> 60,574
<TOTAL-COSTS> 60,574
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 718
<INCOME-PRETAX> 5,634
<INCOME-TAX> 2,158
<INCOME-CONTINUING> 3,476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,476
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0
</TABLE>
