Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _________________
Commission file number: 1-12754
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
(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 10, 1997, 16,500,405 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>
PART I
------
Item 1. Financial Statements
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except for share data)
<TABLE>
<CAPTION>
Assets: September 30, June 30,
1997 1997
------ ------------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,077 $ 6,975
Trade receivables, net of allowance
for doubtful accounts of
$3,535 and $3,158, respectively 62,525 58,661
Inventories:
Finished merchandise 29,015 29,840
Work in process 6,874 4,224
Raw materials 9,850 10,094
------- -------
45,739 44,158
Prepaid expenses and other current assets 2,884 3,134
------- -------
Total current assets 113,225 112,928
------- -------
Property, plant and equipment, at cost 128,852 119,566
Less accumulated depreciation
and amortization (46,224) (44,643)
------- -------
82,628 74,923
Goodwill, net of accumulated amortization 44,339 44,756
------- -------
$240,192 $232,607
======== ========
Liabilities and Stockholders' Equity:
------------------------------------
Current liabilities:
Accounts payable $ 11,969 $ 7,234
Accrued liabilities 20,162 19,481
Income taxes payable 2,783 4,168
------- -------
Total current liabilities 34,914 30,883
------- -------
Long-term debt, less current maturities 32,500 30,000
Deferred income taxes 14,934 14,934
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 87,803 87,968
Retained earnings 57,021 53,418
------- -------
161,644 158,206
Less common stock in treasury at cost,
296,430 and 94,000 shares, respectively 3,800 1,416
------- -------
Total stockholders' equity 157,844 156,790
------- -------
Commitments and Contingencies ------- -------
$240,192 $232,607
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1997 1996
------- --------
<S> <C> <C>
Net sales $77,141 $83,126
------ ------
Costs and expenses:
Cost of sales 54,403 60,574
Selling, marketing and administrative 16,541 16,200
Interest, net 473 718
------ ------
71,417 77,492
------ ------
Income before income tax provision 5,724 5,634
Income tax provision 2,121 2,158
------ ------
Net income $ 3,603 $ 3,476
====== ======
Earnings per common share:
Primary $ 0.21 $ 0.21
Fully Diluted $ 0.21 $ 0.21
Weighted average common shares outstanding:
Primary 17,061 16,806
Fully Diluted 17,067 16,982
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1997 1996
------ --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,603 $ 3,476
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,525 2,437
Employee option amortization 187 -
Changes in current assets and liabilities:
Trade receivables (3,864) (8,918)
Inventories (1,581) 3,479
Other assets 202 77
Accounts payable, accrued liabilities
and income taxes payable 3,844 3,686
------ ------
Net cash provided by
operating activities 4,916 4,237
------ ------
Cash flows used for investing activities:
Capital expenditures (9,770) (2,471)
------ ------
Cash flows used for financing activities:
Additions to long-term debt 2,500 -
Purchase of common stock for treasury (3,703) (730)
Exercise of stock options 96 -
Sale of common stock to employee benefit plans 1,063 424
------ ------
Net cash flows used for
financing activities (44) (306)
------ ------
Net increase (decrease) in cash and cash equivalents (4,898) 1,460
Cash and cash equivalents, beginning of period 6,975 506
------ ------
Cash and cash equivalents, end of period $ 2,077 $ 1,966
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Preferred stock Common stock
------------------- -------------------
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 - $ - 16,820 $16,820
Net income
Translation adjustment
Purchase of common stock
Exercise of stock options
Sale of common stock
------ ------- ------ -------
Balance, September 30, 1997 - $ - 16,820 $16,820
====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Additional Treasury stock Total
paid-in Retained -------------- stockholders'
capital earnings Shares Dollars equity
---------- -------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $87,968 $53,418 (94) $(1,416) $156,790
Net income - 3,603 3,603
Translation adjustment (5) (5)
Purchase of common stock (295) (3,703) (3,703)
Exercise of stock options (125) 15 221 96
Sale of common stock (35) 78 1,098 1,063
-------- ------- ----- ------- --------
Balance, September 30, 1997 $87,803 $57,021 (296) $(3,800) $157,844
======== ======= ===== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1997
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 in 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, 1997. 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
Earnings per Share: In February 1997, the FASB issued FAS
No. 128, Earnings per Share ("FAS 128"), which is effective for
financial statements issued for periods ending after December 15,
1997, including interim periods. Effective December 15, 1997,
the Company will adopt FAS 128, which establishes standards for
computing and presenting earnings per share ("EPS") and will
retroactively restate EPS for the first quarter of fiscal 1998 at
that time. The statement requires dual presentation of basic and
diluted EPS on the face of the income statement for entities with
complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. Basic
EPS excludes the effect of potentially dilutive securities, while
diluted EPS reflects the potential dilution that would have
occurred if securities or other contracts to issue common stock
had been exercised, converted into or resulted in the issuance of
common stock that had then shared in the earnings of the entity.
The pro forma EPS amounts shown below have been calculated
assuming the Company had already adopted the provisions of this
statement:
<TABLE>
<CAPTION>
3 months ended September 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Basic EPS $ 0.22 $ 0.21
Diluted EPS $ 0.21 $ 0.21
</TABLE>
Note 3 - Derivative Financial Instruments
Derivative financial instruments are utilized by the Company
to reduce interest rate risk. The Company does not hold or issue
derivative financial instruments for trading purposes. During
fiscal 1997, the Company entered into a forward starting interest
rate swap agreement with a notional principal amount of
$10 million. The effective date of the agreement is October 1,
1998 and the termination date is October 1, 2008. The Company
has contracted to pay a fixed rate of 7.13% and receive a
floating interest rate during the duration of the swap agreement.
The Company has the ability and intent to call its existing
$10.0 million of 8.25% industrial development revenue bonds
commencing October 1, 1998 at a redemption premium of 103%. The
bonds would be refinanced at the then existing interest rate.
Accordingly, the swap will have the effect of hedging the Company
against an increase in interest rates prior to the first
opportunity to refinance these bonds. Management has designated
this swap as a hedge of the future interest rate exposure of
refinancing these bonds.
Amounts to be paid or received under the swap agreement will
be accrued as interest rates change and will be recognized over
the life of the swap agreement as adjustments to interest
expense. Gains or losses on terminated swaps will be recognized
over the remaining life of the underlying obligation as an
adjustment to interest expense. The fair value of the forward
starting swap agreement approximated $433,000 at September 30,
1997 (representing the amount the Company would have to pay to
terminate the swap) and has not been recognized in the
Consolidated Financial Statements, since it is accounted for as a
hedge.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Net sales for the quarter ended September 30, 1997 decreased
7.2% to $77.1 million from $83.1 million for the quarter ended
September 30, 1996. Sales decreased in the mass merchant
distribution channel due to the bankruptcy of a major customer,
Best Products Co., Inc., in September 1996. Sales to Best
Products approximated $6 million in the three months ending
September 30, 1996. Sales also decreased in the discount mass
merchant channel as a major discount retailer placed unusually
large orders for shipment during the previous quarter and reduced
purchases during the first quarter of this year. The Company
anticipates this customer will return to a more normal purchasing
pattern in the future.
In July 1997, a large customer of the Company, Montgomery
Ward & Co., filed for bankruptcy protection under Chapter 11.
Montgomery Ward subsequently announced that it intends to close
33 Lechmere stores, 11 Electric Avenue outlets and 48 Montgomery
Ward stores, which sell ready-to-assemble furniture. The Company
recorded fiscal 1997 sales to Lechmere approximating $1.7 million
but had no direct sales to Electric Avenue. The Company expects
that Montgomery Ward will be able to reorganize its operation
under Chapter 11 protection and will continue to purchase
products from the Company; however, the level of purchases could
decline as a result of any such reorganization or otherwise.
In the event that Montgomery Ward or another major customer
ceases or substantially reduces its purchases of products from
the Company, there can be no certainty that the Company will be
able to replace these sales.
Gross profit increased slightly to $22.7 million, or 29.5%
of sales, for the three month period ended September 30, 1997,
from $22.6 million, or 27.1% of sales, for the three months ended
September 30, 1996. The higher gross margins were due primarily
to lower material costs and improved production efficiencies.
The Company also benefited from increased margins on new products
in conjunction with changes in product mix. These benefits were
offset to some degree by manufacturing inefficiencies associated
with the installation of new equipment and training costs associated
with the implementation of new software.
During the remainder of the fiscal year, the Company plans to install
new manufacturing software and systems at each of its three production
facilities, and production equipment at its Missouri and Virginia facilities.
The Company believes that these additions and improvements should enhance
efficiency and support long-term growth of the Company. Costs associated
with the implementation of the software, the installation of new equipment
and the related adaptation of manufacturing processes may affect sales and
gross profits during the remainder of the fiscal year. The Company is taking
steps to minimize the impact of these changes, but cannot quantify the costs
at this time.
Selling, marketing and administrative expenses increased to
$16.5 million, or 21.4% of sales, for the three months ended
September 30, 1997, from $16.2 million, or 19.5% of sales, for
the three months ended September 30, 1996. The increase in
selling, marketing and administrative expenses for the quarter
was due to increased salaries and wages due to additional
management, marketing and MIS staff. The increase in expenses as
a percentage of sales was caused by the lower sales level this
year compared to last year.
Net interest expense decreased 34.1% from $0.7 million in
the first quarter of fiscal 1997 to $0.5 million during the first
quarter of fiscal 1998. The decrease was due to a higher average
cash balance and greater interest income in the three months
ended September 30, 1997.
Liquidity and Capital Resources
Cash provided by operating activities during the three month
period ended September 30, 1997, amounted to $4.9 million
compared to $4.2 million in the comparable prior year period.
The increase in cash flows resulted from a smaller increase in
receivables during the quarter primarily related to lower sales
levels partially offset by an increased investment in
inventories. Cash used in investing activities for this quarter
included approximately $10.0 million for capital expenditures
compared to $2.5 million for the prior year quarter.
Approximately $8.5 million of the current year additions was for
equipment to add production capabilities as well as to improve
efficiencies. Software implementation costs accounted for the
remainder.
The Company has an unsecured $25.0 million revolving credit
facility with a bank that expires on February 28, 2000. The
Credit Facility 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 $10.0 million of industrial revenue bonds for which
a subsidiary of the Company is the obligor. Tandy Corporation
can draw against the standby letter of credit only in the event
that it must pay any amounts with respect to the bonds.
The Credit Agreement has several financial ratio covenants
including the maintenance of a minimum working capital ratio and
a minimum net worth. In addition, the Credit Agreement has
provisions specifying certain limitations on dividends,
investments and future indebtedness. The Company is currently in
compliance with all of its debt agreements.
At September 30, 1997, the Company had long-term debt
outstanding of $32.5 million; $10.0 million of industrial revenue
bonds that bear interest at 8.25% and mature on October 1, 2008;
$20.0 million in private placement debt with certain insurance
companies at 8.01% due fiscal 2003; and $2.5 million under the
Company's revolving credit facility.
On May 6, 1997, the Company announced that its Board of
Directors had authorized the purchase of up to five percent of
the outstanding shares of its common stock during the next 24
months. The actual number of shares purchased, the timing of the
purchases and the prices paid for the shares will be dependent
upon future market conditions. Funding for the purchases is
expected to come from available working capital and existing
borrowing facilities. The program includes no specific pricing
nor timing targets and may be suspended at any time or terminated
prior to completion. For the three months ended September 30,
1997, the Company purchased 207,000 shares of its stock for
approximately $2.6 million.
The Company also purchases Company common stock to fund its
employee benefit programs. During the three months ended
September 30, 1997, the Company purchased 88,000 shares of the
Company's common stock at a cost of approximately $1.1 million;
shares with a cost of approximately $1.1 million were transferred
to the Company's employee benefit plans.
Derivative financial instruments are utilized by the Company
to reduce interest rate risk. The Company does not hold or issue
derivative financial instruments for trading purposes. During
fiscal 1997, the Company entered into a forward starting interest
rate swap agreement with a notional principal amount of
$10 million. The effective date of the agreement is October 1,
1998 and the termination date is October 1, 2008. The Company
has contracted to pay a fixed rate of 7.13% and receive a
floating interest rate during the duration of the swap agreement.
The Company has the ability and intent to call its existing
$10.0 million of 8.25% industrial development revenue bonds
commencing October 1, 1998 at a redemption premium of 103%. The
bonds would be refinanced at the then existing interest rate.
Accordingly, the swap will have the effect of hedging the Company
against an increase in interest rates prior to the first
opportunity to refinance these bonds. Management has designated
this swap as a hedge of the future interest rate exposure of
refinancing these bonds.
Amounts to be paid or received under the swap agreement will
be accrued as interest rates change and will be recognized over
the life of the swap agreement as adjustments to interest
expense. Gains or losses on terminated swaps will be recognized
over the remaining life of the underlying obligation as an
adjustment to interest expense. The fair value of the forward
starting swap agreement approximated $433,000 at September 30,
1997 (representing the amount the Company would have to pay to
terminate the swap) and has not been recognized in the
Consolidated Financial Statements, since it is accounted for as a
hedge.
The Company believes that cash flow from operations,
existing cash and current unused balances under existing credit
agreements, will be sufficient to fund the Company's operations
in fiscal 1998, including capital expenditures, which are
currently estimated in the range of $30.0 to $35.0 million for
increased production capacity, improved productivity, enhanced
new product development and replacement equipment.
Seasonality
The Company generally experiences higher sales levels 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.
Forward Looking Statements
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. These statements can be identified by the use of
future tense or dates or terms such as "believe," "expect,"
"anticipate" or "plan." Important factors could cause results to
differ materially from those anticipated by some of the
statements made in this report. Some of the factors include,
among other things:
* changes from anticipated levels of sales of the
Company's products, whether due to future national or
regional economic and competitive conditions, customer
acceptance of existing and new products, or otherwise;
* pricing pressures due to excess capacity in the
ready-to-assemble furniture industry, as occurred in 1995;
* raw material cost increases, particularly in particle
board and fiberboard, such as the increases that reduced
the Company's earnings in fiscal 1994 and 1995;
* transportation cost increases due to a shortage of
supply of trucks or railcars;
* the bankruptcy of a major customer, such as Best
Products Co., Inc. in 1996 and Montgomery Ward & Co. in 1997;
* loss of significant customers in connection with a merger or
acquisition or bankruptcy;
* actions of current or new competitors, such as reduction
of prices on competitive products or introduction of new
products competitive with the Company's products;
* increased advertising costs associated with promotional efforts;
* pending or new litigation;
and other uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------
<S> <C>
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
<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.
Date: November 14, 1997 By: Daniel F. O'Sullivan
Chairman and
Chief Executive Officer
Date: November 14, 1997 By: Terry L. Crump
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
<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, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,077
<SECURITIES> 0
<RECEIVABLES> 66,060
<ALLOWANCES> 3,535
<INVENTORY> 45,739
<CURRENT-ASSETS> 113,225
<PP&E> 128,852
<DEPRECIATION> 46,224
<TOTAL-ASSETS> 240,192
<CURRENT-LIABILITIES> 34,914
<BONDS> 32,500
0
0
<COMMON> 16,820
<OTHER-SE> 141,024
<TOTAL-LIABILITY-AND-EQUITY> 240,192
<SALES> 77,141
<TOTAL-REVENUES> 77,141
<CGS> 54,403
<TOTAL-COSTS> 54,403
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 473
<INCOME-PRETAX> 5,724
<INCOME-TAX> 2,121
<INCOME-CONTINUING> 3,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,603
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
