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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 December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number: 1-12754
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 43-1659062
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1900 Gulf Street, Lamar, Missouri 64759-1899
(Address of principal executive offices) (ZIP Code)
</TABLE>
(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 February 5, 1999, 15,971,078 shares of Common Stock of O'Sullivan
Industries Holdings, Inc., par value $1.00 per share, and associated preferred
stock purchase rights were outstanding.
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Page 1 of 16
The Index to Exhibits is on Page 15
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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>
December 31, June 30,
Assets: 1998 1998
----------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,139 $ 1,810
Trade receivables, net of allowance for doubtful accounts
of $2,507 and $2,289, respectively 67,625 61,548
Inventories:
Finished merchandise 27,807 26,892
Work in process 7,121 6,835
Raw materials 12,350 13,000
------------ ------------
47,278 46,727
Prepaid expenses and other current assets 3,702 3,762
------------ ------------
Total current assets 122,744 113,847
Property, plant and equipment, at cost 156,539 145,666
Less accumulated depreciation and amortization (57,786) (52,288)
------------ ------------
98,753 93,378
------------ ------------
Goodwill, net of accumulated amortization 42,255 43,089
------------ ------------
$ 263,752 $ 250,314
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 16,513 $ 14,031
Current portion long-term debt 4,000 4,000
Accrued liabilities 23,584 22,613
Income taxes payable 848 310
------------ ------------
Total current liabilities 44,945 40,954
------------ ------------
Long-term debt, less current maturities 32,000 30,000
Deferred income taxes 15,690 15,690
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 87,421 87,809
Foreign currency translation (68) (36)
Retained earnings 76,764 68,317
------------ ------------
180,937 172,910
Less common stock in treasury at cost, 873,889 and
798,231 shares, respectively 9,820 9,240
------------ ------------
Total stockholders' equity 171,117 163,670
Commitments and contingencies
------------ ------------
$ 263,752 $ 250,314
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 3
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
----------------------- ------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 97,786 $ 85,524 $ 185,459 $ 162,665
Costs and expenses:
Cost of sales 69,687 62,138 132,467 116,541
Selling, marketing and administrative 19,708 17,321 38,081 33,862
Interest, net 996 639 1,711 1,112
---------- ----------- ----------- -----------
90,391 80,098 172,259 151,515
---------- ----------- ----------- -----------
Income before income tax provision 7,395 5,426 13,200 11,150
Income tax provision 2,662 2,002 4,753 4,123
---------- ----------- ----------- -----------
Net Income $ 4,733 $ 3,424 $ 8,447 $ 7,027
========== =========== =========== ===========
Earnings per common share
Basic $ 0.30 $ 0.21 $ 0.53 $ 0.42
Diluted $ 0.29 $ 0.20 $ 0.52 $ 0.41
Weighted average common shares outstanding
Basic 15,904 16,496 15,935 16,575
Diluted 16,137 16,849 16,206 16,955
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
December 31,
----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from (used by) operating activities:
Net income $ 8,447 $ 7,027
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,720 5,065
Bad debt expense 193 807
Loss on disposal of assets 35 -
Employee option amortization 374 374
Changes in current assets and liabilities:
Trade receivables (6,270) (13,355)
Inventories (551) 1,875
Other assets 28 (825)
Accounts payable, accrued liabilities and
income taxes payable 3,617 7,440
------------ ------------
Net cash provided by operating activities 12,593 8,408
------------ ------------
Cash flows used for investing activities:
Capital expenditures (11,296) (16,429)
Cash flows from (used by) financing activities:
Addition to long-term debt 2,000 8,000
Purchase of common stock (2,811) (7,298)
Exercise of stock options 52 101
Sale of common stock to employee benefit plans 1,791 1,800
------------ ------------
Net cash flows provided by financing activities 1,032 2,603
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,329 (5,418)
Cash and cash equivalents, beginning of period 1,810 6,975
------------ ------------
Cash and cash equivalents, end of period $ 4,139 $ 1,557
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
For the six months ended December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Additional Foreign
paid-in currency Retained
Preferred stock Common stock capital translation earnings
--------------- ------------ ------- ----------- --------
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 - $ - 16,820 $ 16,820 $ 87,809 $ (36) $ 68,317
Net income 8,447
Foreign currency translation (32)
Purchase of common stock
Exercise of stock options,
net of tax benefit 52
Sale of common stock (440)
----------- ----------- ---------- ---------- ----------- ----------- ----------
Balance, December 31, 1998 - $ - 16,820 $ 16,820 $ 87,421 $ (68) $ 76,764
=========== =========== ========== ========== =========== =========== ==========
<CAPTION>
Total
stockholders'
Treasury stock equity
-------------- ------
Shares Dollars
------ -------
<S> <C> <C> <C>
Balance, June 30, 1998 (798) $ (9,240) $ 163,670
Net income 8,447
Foreign currency translation (32)
Purchase of common stock (257) (2,811) (2,811)
Exercise of stock options,
net of tax benefit 52
Sale of common stock 181 2,231 1,791
--------- ---------- ----------
Balance, December 31, 1998 (874) $ (9,820) $ 171,117
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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O'SULLIVAN INDUSTRIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1998
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 fiscal year ended June 30, 1998. The interim results
are not necessarily indicative of the results which may be expected for a full
year.
NOTE 2 - EARNINGS PER SHARE
Effective for the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, Earnings per Share ("FAS
128"). FAS 128 replaces prior earnings per share ("EPS") reporting requirements
and requires the dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted average number
of shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. The dilutive effect of
outstanding options issued by the Company are reflected in diluted EPS using the
treasury stock method. Under the treasury stock method, options will only have a
dilutive effect when the average market price for common stock during the period
exceeds the exercise price of the options. In accordance with FAS 128, the basic
and diluted average weighted shares outstanding have been restated for all
periods presented.
The following is a reconciliation of the numerator and denominator used
in the basic and diluted EPS calculation:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ---------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Income available to common stockholders (numerator) $ 4,733 $ 3,424 $ 8,477 $ 7,027
========== ========== ========== ==========
Weighted average shares outstanding
(basic EPS denominator) 15,904 16,496 15,935 16,575
Effect of dilutive securities--options 233 353 271 380
---------- ---------- ---------- ----------
Weighted average shares, plus assumed conversions
(diluted EPS denominator) 16,137 16,849 16,206 16,955
========== ========== ========== ==========
</TABLE>
Options to purchase 577,784 additional shares of common stock at prices ranging
from $10.72 to $16.09 per share were outstanding but were not included in the
computation of diluted EPS for the three months ended December 31, 1998, because
the options' exercise prices were greater than the average market price of the
common shares, and thus the effect would have been antidilutive.
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NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments 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 $10.0
million. The effective date of the swap 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 called its existing $10.0 million of 8.25% industrial development
revenue bonds on October 1, 1998 at a redemption price of 103%. The $0.3 million
premium on the early retirement of the bonds was recognized as a loss in the
Company's second quarter of fiscal 1999. The Company refinanced these bonds with
new, ten-year industrial revenue bonds with a tax-exempt variable interest rate
which is reset weekly. Interest on the bonds is paid monthly. The bonds mature
on October 1, 2008. Accordingly, the swap will have the effect of hedging the
Company against an increase in interest rates. Management has also designated
this swap as a hedge against future interest rate exposure.
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. Due to the decrease in interest rates since
the swap was consummated, the fair value of the forward starting swap agreement
approximated $1,425,000 at December 31, 1998. This amount represents the amount
the Company would have to pay to terminate the swap and approximates the present
value of the reduced variable rate interest the Company expects to pay over the
life of the bonds. This amount has not been recognized in the Consolidated
Financial Statements, since it is accounted for as a hedge and the Company has
no present intention of terminating the swap prior to the maturity date of the
bonds.
NOTE 4 - NEW ACCOUNTING STANDARDS
Comprehensive Income. Effective July 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("FAS 130"). Comprehensive income is defined as the change in equity (net
assets) of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Comprehensive income for the three months ended
December 31, 1998 and 1997 were $4,729,000 and $3,387,000, respectively.
Accounting for Derivative Instruments. Effective July 1, 1999, the
Company will adopt Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). This
new accounting standard will require that derivative instruments be measured at
fair value and recognized in the balance sheet as either assets or liabilities,
as the case may be. The treatment of changes in the fair value of a derivative
(i.e., gains and losses) will depend on its use and designation. Gains and
losses on derivatives designated as hedges against the cash flow effect of a
forecasted transaction will initially be reported as a component of
comprehensive income and, subsequently, reclassified into earnings when the
forecasted transaction affects earnings. Gains and losses on all other forms of
derivatives will be recognized in the period of change. If FAS 133 had been
adopted on July 1, 1998, the net change in the interest rate swap for the three
months ended December 31, 1998, would have been an increase in comprehensive
income of $93,000. For the six months ended December 31, 1998, the net change in
the interest rate swap would have been a reduction in comprehensive income of
$910,000 (a six month period reduction of $307,000 and a cumulative effect type
of adjustment of $603,000). The Company has no present intention of terminating
the swap prior to the maturity date of the bonds.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In August 1998, the Company announced that Daniel F. O'Sullivan,
Chairman and Chief Executive Officer, had decided to retire effective upon the
completion of the Board's search for a replacement. In October 1998, Mr.
O'Sullivan and the Board of Directors completed negotiations on Mr. O'Sullivan's
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<PAGE> 8
retirement package. The retirement agreement reached with Mr. O'Sullivan
provides for certain benefits to be paid over a period of time.
Under terms of Mr. O'Sullivan's retirement agreement, the aggregate
amount of his ultimate retirement benefits is dependent upon the date his
successor is employed and therefore is not yet determinable. Accordingly, the
one-time charge has not yet been recognized by the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales for the quarter ended December 31, 1998 increased 14.3% to
$97.8 million from $85.5 million for the quarter ended December 31, 1997. Sales
for the six month period ended December 31, 1998 increased 14.0% to $185.5
million from $162.7 million for the six months ended December 31, 1997. During
the quarter and the six month period, sales increased in the discount mass
merchant, specialty retailer and office superstore channels. Sales increased
principally due to higher unit volume with no material increase in the average
unit selling price. Sales increases continue to be driven primarily by strong
market growth, fueled in part by the sub-$1,000 computer market and the
expansion of our market share in the consumer electronics channel.
In July 1997, a large customer of the Company, Montgomery Ward & Co.,
filed for bankruptcy protection under Chapter 11. Montgomery Ward expects that
it will be able to reorganize its operations under Chapter 11 protection and has
continued to purchase products from the Company; however, the level of purchases
declined in fiscal 1998 and in the first and second quarters of fiscal 1999 and
could decline further as a result of the reorganization or otherwise.
A significant customer of the Company has announced that it will
suspend payment of its obligations for approximately 120 days as it evaluates
and determines a strategic plan for the future. The Company has credit insurance
coverage for specified amounts; however, some of the insurance coverage expired
on January 31, 1999. The customer has received an additional $750 million in
financing, but it is uncertain whether this is sufficient to meet its
obligations to creditors, including the Company.
If 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 to $28.1 million, or 28.7% of sales, for the
three month period ended December 31, 1998, from $23.4 million, or 27.3% of
sales, for the comparable prior year quarter. Gross profit increased to $53.0
million, or 28.6% of sales for the six month period ended December 31, 1998,
compared to $46.1 million, or 28.4% of sales for the comparable prior year
period. The Company's higher gross margin during the quarter was due, in part,
to a continued emphasis on value engineering--taking costs out of products
through improving processes and reducing material costs without sacrificing
quality--and in part due to increased production and efficiencies in production
during the quarter. A shift in product mix to the discount mass merchant channel
partially offset margin gains. For the six months ended December 31, 1998, gross
profit increased due to value engineering, production efficiency increases and
higher production, offset in part by the shift to the discount mass merchants
and higher labor and overhead costs in the first quarter associated with the
implementation of new manufacturing equipment and the related adaptation of
manufacturing processes. The equipment installation is complete; we anticipate
continued increased production from the new equipment as our employees become
more proficient operators.
Selling, marketing and administrative expenses increased to $19.7
million, or 20.2% of sales, for the three months ended December 31, 1998, from
$17.3 million, or 20.3% of sales, for the three months ended December 31, 1997.
Selling, marketing and administrative expenses for the six month period ended
December 31, 1998, increased to $38.1 million, or 20.5% of sales, from $33.9
million, or 20.8% of sales, for
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the comparable prior year period. For the quarter ended December 31, 1998, the
dollar increase in selling, marketing and administrative expenses for the
quarter was due primarily to increased out-bound freight reflecting higher sales
levels and increased costs of shipping smaller quantities per pallet. For the
six months ended December 31, 1998, advertising and freight were higher due to
increased advertising programs and higher sales volume, offset slightly by a
decrease in commissions paid.
Interest expense of $1.0 million for the quarter ended December 31,
1998, increased 55.9% compared to the $0.6 million during the quarter ended
December 31, 1997. Interest expense increased primarily because of a one-time
charge of $300,000 for recording the call premium on the Virginia Industrial
Revenue Bonds ("IRB's") described more fully in the Liquidity and Capital
Resources section. Interest expense of $1.7 million for the six months ended
December 31, 1998 is 53.9% higher than the related prior year quarter of $1.1
million, reflecting the call premium on the IRB's and increased borrowings in
the first quarter. Borrowings at December 31, 1998 were down when compared to
the prior year. Reduced net working capital needs in the third and fourth
quarters should result in lower borrowings and interest expense in the last half
of the fiscal year as compared to the first half of the fiscal year.
In August 1998, the Company announced that Daniel F. O'Sullivan,
Chairman and Chief Executive Officer, had decided to retire effective upon the
completion of the Board's search for a replacement. In October 1998, Mr.
O'Sullivan and the Board of Directors completed negotiations on Mr. O'Sullivan's
retirement package. The retirement agreement reached with Mr. O'Sullivan
provides for certain benefits to be paid over a period of time.
Under terms of Mr. O'Sullivan's retirement agreement, the aggregate
amount of his ultimate retirement benefits is dependent upon the date his
successor is employed and therefore is not yet determinable. Accordingly, the
one-time charge has not yet been recognized by the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and cash equivalents of
$4.1 million and net working capital of $77.8 million compared to cash and cash
equivalents of $1.6 million and net working capital of $72.9 million at June 30,
1998.
Cash provided by operating activities during the quarter ended December
31, 1998 amounted to $12.6 million compared to $8.4 million in the comparable
prior year period. The increase in cash flows resulted from higher income and a
smaller increase in receivables for this year's six months compared to the prior
year period. Cash used in financing activities for this year to date included
approximately $11.3 million for capital expenditures, primarily for equipment in
our Virginia facility, compared to $16.4 million for the prior year period. Cash
provided by financing activities for the quarter was $1.0 million compared to
$2.6 million in the prior year quarter. The $1.0 million for this year's quarter
was primarily due to the purchase of treasury stock (net of contributions to
employee benefit plans) offset by additions to long-term debt.
At December 31, 1998, the Company had long-term debt outstanding of
$32.0 million. In 1995, the Company issued $20.0 million in private placement
notes to certain insurance companies. The notes are payable in $4.0 million
increments from fiscal 1999 to fiscal 2003; accordingly, $16.0 million of debt
is classified as long term and $4.0 million is classified as current portion of
long-term debt. A subsidiary of the Company was the obligor on $10.0 million of
8.25% IRB's that would have matured on October 1, 2008. On October 1, 1998, the
Company refinanced these bonds with new, ten-year IRB's with the interest having
a variable rate. The $0.3 million premium on the early retirement of the bonds
was recognized as a loss in the Company's second quarter of fiscal 1999. The
remainder of the Company's long-term debt is $6.0 million borrowed under the
Company's revolving Credit Agreement.
The Company has an unsecured $25.0 million revolving Credit Agreement
with a bank that expires on February 28, 2000. With the refinancing of the
IRB's, the $10.8 million standby letter of credit established in favor of Tandy
Corporation expired on October 1, 1998. The Credit Agreement has several
financial ratio covenants including the maintenance of a minimum working capital
ratio and a minimum net worth. In
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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.
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. In October 1998, the Company purchased 13,000 shares of its stock
for approximately $0.1 million, completing purchases under the program. Funding
for the purchases came from available working capital and existing borrowing
facilities.
The Company also purchases Company common stock to fund its employee
benefit programs. For the quarter, the Company purchased approximately $1.1
million in stock and transferred $1.0 million, at cost, to its employee benefit
plans.
The Company uses derivative financial instruments 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 $10.0
million. The effective date of the swap 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 swap will have the effect of hedging the Company's exposure to an increase
in interest rates under its refinanced IRB's discussed above. Management has
also designated this swap as a hedge against future interest rate exposure.
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. Due to the decrease in interest rates since
the swap was consummated, the fair value of the forward starting swap agreement
approximated $1,425,000 at December 31, 1998. This amount represents the amount
the Company would have to pay to terminate the swap and approximates the present
value of the reduced variable rate interest the Company expects to pay over the
life of the bonds. This amount has not been recognized in the Consolidated
Financial Statements, since it is accounted for as a hedge and the Company has
no present intention of terminating the swap prior to the maturity date of the
bonds.
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 1999, including capital expenditures, which are
currently estimated in the range of $16.0 million for increased production
capacity, improved productivity, enhanced new product development and for
replacement equipment.
YEAR 2000 COMPLIANCE
Almost all companies must address whether their computer systems and
applications will recognize and process dates after December 31, 1999. In prior
years, many computer programs were written using two digits rather than four to
define the applicable year. These programs were written without considering the
impact of the upcoming change of the century and may experience problems
handling dates beyond the year 1999. This could cause computer applications to
fail or to create erroneous results unless corrective measures are taken.
In fiscal 1998, the Company completed final rollout of an enterprise
software package to support the Company's expanded sales and multiple plant and
warehouse locations. With the exception of two ancillary modules, the vendor of
the software package states the package is year 2000 compliant. We expect to
install and test upgrades to the two non-compliant modules by May 31, 1999. The
Company has identified one other software program that is not year 2000
compliant and has installed and is testing an upgrade to the program.
The Company is in the process of testing its computer systems to verify
that software and hardware can process dates after December 31, 1999. This
testing will continue. The Company has begun testing
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its electronic communications with certain of its customers to ensure that
order, shipping and invoicing data for dates after December 31, 1999 can be
processed. This testing and verification is expected to continue through March
31, 1999.
The Company's ability to produce its products is dependent upon timely
receipt of raw materials. Accordingly, the Company has requested its suppliers
to provide information regarding their efforts to address year 2000 compliance
issues. Every major supplier responded that it has evaluated and addressed its
year 2000 compliance issues or is in the process of doing so. If a major
supplier does not resolve its year 2000 compliance issues and is unable to
provide the Company with timely deliveries of quality materials after December
31, 1999, the Company expects to locate and use alternative suppliers, although
it is possible that it may be unable to do so, or may be able to do so only at
increased expense.
In addition, the Company has reviewed remaining critical business
systems and is in the process of reviewing its computerized machinery and
equipment for year 2000 compliance issues. As deficiencies are discovered, a
plan to remedy the deficiency is crafted and implemented. The review of
machinery and equipment is expected to be complete by March 31, 1999. Based upon
current information, the Company estimates that aggregate amounts expended to
resolve year 2000 issues should not exceed $500,000.
The Company expects to complete implementation of computer systems that
are year 2000 compliant in fiscal 1999. However, this expectation is subject to
uncertainties. For example, if the Company does not identify and fix all year
2000 problems in critical operations, the Company's results of operations or
financial condition could be materially impacted. The Company's results could
also be hurt if a major supplier or customer is unable to supply raw materials
or receive the Company's product.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is impacted by changes in interest rates,
foreign currency exchange rates and certain commodity prices. Pursuant to the
Company's policies, natural hedging techniques and derivative financial
instruments may be utilized to reduce the impact of adverse changes in market
prices. The Company does not hold or issue derivative instruments for trading
purposes, and has no material sensitivity to changes in market rates and prices
on its derivative financial instrument positions.
The Company has market risk in interest rate exposure, primarily in the
United States. The Company manages interest rate exposure through its
conservative debt ratio target and its mix of fixed and floating rate debt.
Interest rate swaps may be used to adjust interest rate exposures when
appropriate based on market conditions, and, for qualifying hedges, the interest
differential of swaps is included in interest expense. The Company believes that
its foreign exchange risk is not material.
Due to the nature of its product lines, the Company has material
sensitivity to certain commodities. The Company manages commodity price
exposures primarily through the duration and terms of its vendor contracts. A
one percent change in these commodity prices, assuming none of the increase
could be passed on to customers, would affect the after-tax earnings of the
Company by approximately $600,000 annually.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In July 1998, the Company received a notice from the federal
Environmental Protection Agency ("EPA") alleging that certain reports had not
been filed with federal, state and local authorities under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA")
and the Emergency Planning and Community Right to Know Act of 1986 ("EPCRA")
regarding emissions of formaldehyde from the Company's Lamar, Missouri plant.
The Company has permits for all such emissions. The Company accordingly believed
that the Company was not subject to the specified reporting requirements of
CERCLA and EPCRA. In the second quarter of fiscal 1999, the EPA withdrew its
allegations against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders of the Company was held on November
12, 1998 to elect three Class II directors. The nominees for Class II directors
and the votes for, and withheld with respect to, each nominee are as follows:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHELD
<S> <C> <C>
Charles G. Hanson 13,344,800 580,736
Thomas M. O'Sullivan, Sr. 13,380,115 545,421
Tyrone E. Riegel 13,383,298 542,238
</TABLE>
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:
- 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, or customer demand in
excess of the Company's ability to supply product;
- 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;
- failure by the Company or a major supplier or vendor to identify
and remedy all critical year 2000 compliance issues or the
discovery of additional year 2000 compliance issues requiring
significant expenditures to remedy;
- new litigation or governmental regulations; and
- other uncertainties,
all of which are difficult to predict and many of which are beyond the control
of the Company.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
A list of exhibits required to be filed as part of this Report is set
forth in the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K:
None
13
<PAGE> 14
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: February 8, 1999 By: /s/ Richard D. Davidson
----------------------------------------------
Richard D. Davidson
President and
Chief Operating Officer
Date: February 8, 1999 By: /s/ Terry L. Crump
----------------------------------------------
Terry L. Crump
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page
<S> <C> <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))
10 Retirement and Consulting Agreement, Release and Waiver of Claims
between the Company and Daniel F. O'Sullivan dated October 16,
1998 (incorporated by reference from Exhibit 10 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
(File No. 1-12754))
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company has not
filed agreements relating to certain long-term debt of the Company aggregating
$10 million. The Company agrees to furnish the Securities and Exchange
Commission a copy of such agreements upon request.
15
<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 DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4139
<SECURITIES> 0
<RECEIVABLES> 70132
<ALLOWANCES> 2507
<INVENTORY> 47278
<CURRENT-ASSETS> 122744
<PP&E> 156539
<DEPRECIATION> 57786
<TOTAL-ASSETS> 263752
<CURRENT-LIABILITIES> 44945
<BONDS> 32000
0
0
<COMMON> 16820
<OTHER-SE> 154297
<TOTAL-LIABILITY-AND-EQUITY> 263752
<SALES> 185459
<TOTAL-REVENUES> 185459
<CGS> 132467
<TOTAL-COSTS> 132467
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1711
<INCOME-PRETAX> 13200
<INCOME-TAX> 4753
<INCOME-CONTINUING> 8447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8447
<EPS-PRIMARY> .53
<EPS-DILUTED> .52
</TABLE>
