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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 September 30, 2000
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: 0-28493
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<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
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As of November 10, 2000, 1,368,000 shares of Common Stock of O'Sullivan
Industries Holdings, Inc., par value $0.01 per share, were outstanding.
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The Index to Exhibits begins on page 15.
Page 1 of 16
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PART I
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ITEM 1. FINANCIAL STATEMENTS.
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
September 30, June 30,
Assets: 2000 2000
------ ------------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,648 $ 11,867
Trade receivables, net of allowance for doubtful accounts
of $3,268 and $3,095, respectively 65,884 58,975
Inventories, net 66,238 65,256
Prepaid expenses and other current assets 6,746 6,432
------------- ----------
Total current assets 144,516 142,530
Property, plant and equipment, net 100,428 99,548
Other assets 13,777 14,295
Goodwill, net of accumulated amortization 39,338 39,755
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Total assets $ 298,059 $ 296,128
============= ==========
Liabilities and Stockholders' Deficit:
-------------------------------------
Current liabilities:
Accounts payable $ 15,621 $ 15,399
Current portion of long-term debt 6,500 3,000
Accrued liabilities 31,358 30,547
-------------- ----------
Total current liabilities 53,479 48,946
Long-term debt, less current portion 246,449 247,299
Other liabilities 4,301 3,364
Deferred income taxes 17,626 17,626
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Total liabilities 321,855 317,235
Commitments and contingencies (Note 6)
Mandatorily redeemable senior preferred stock; $0.01 par value, $27,178
liquidation value including accumulated dividends, 17,000,000 shares
authorized, 16,431,050 issued 13,383 12,781
Stockholders' deficit:
Junior preferred stock, Series A; $0.01 par value,
100,000 shares authorized, none issued - -
Junior preferred stock, Series B; $0.01 par value, at liquidation value including
accumulated dividends; 1,000,000 shares authorized, 523,051.33 and
515,681.33 issued at September 30, 2000 and June 30, 2000 respectively 58,515 55,822
Common stock; $0.01 par value, 2,000,000 shares authorized, 1,368,000 issued 14 14
Additional paid-in capital 13,648 14,385
Retained deficit (108,746) (103,799)
Notes receivable from employees (302) (296)
Accumulated other comprehensive loss (308) (14)
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Total stockholders' deficit (37,179) (33,888)
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Total liabilities and stockholders' deficit $ 298,059 $ 296,128
============= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net sales $ 90,519 $ 101,992
Costs and expenses:
Cost of sales 66,175 72,231
Selling, marketing and administrative 19,756 20,546
Merger related expenses - 630
---------- ----------
Total costs and expenses 85,931 93,407
---------- ----------
Operating income 4,588 8,585
Other income (expense)
Interest expense (8,314) (494)
Interest income 143 72
---------- ----------
Income (loss) before income tax provision and cumulative effect of accounting change (3,583) 8,163
Income tax provision (benefit) (1,290) 2,935
---------- ----------
Income (loss) before cumulative effect of accounting change (2,293) 5,228
Cumulative effect of accounting change, net of income tax benefit of $53 (95) -
---------- ----------
Net income (loss) (2,388) 5,228
Dividends and accretion on preferred stock (2,559) -
---------- ----------
Net income (loss) attributable to common stockholders $ (4,947) $ 5,228
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net income (loss) $ (2,388) $ 5,228
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 3,919 3,654
Amortization of debt issuance cost 511 -
Bad debt expense 150 309
Loss on disposal of assets 71 3
Payment accrued on options to purchase Series A junior preferred stock 229 -
Changes in assets and liabilities:
Trade receivables (7,059) (8,677)
Inventories (982) 432
Other assets (609) (318)
Accounts payable, accrued liabilities and other liabilities 1,734 9,922
----------- -----------
Net cash provided (used) by operating activities (4,424) 10,553
----------- -----------
Cash flows used for investing activities:
Capital expenditures (4,337) (3,300)
----------- -----------
Cash flows provided (used) by financing activities:
Proceeds from borrowings 3,042 -
Repayment of borrowings (500) -
Exercise of stock options - 366
Sale of common stock to employee benefit plans - 14
----------- -----------
Net cash flows provided by financing activities 2,542 380
----------- -----------
Net increase (decrease) in cash and cash equivalents (6,219) 7,633
Cash and cash equivalents, beginning of period 11,867 3,740
----------- -----------
Cash and cash equivalents, end of period $ 5,648 $ 11,373
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the three months ended September 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Series B junior
preferred
stock Common Stock Additional
----------------- ----------------- paid-in
Shares Dollars Shares Dollars capital
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 2000 516 $55,822 1,368 $ 14 $14,385
Net loss
Other comprehensive loss
Loans to employees-interest income
Issuance of preferred stock upon
exercise of warrants 7 737 (737)
Accrual of dividends and accretion on
senior preferred stock
Accrual of dividends and accretion on
junior preferred stock 1,956
------- ------- ------- ------- -------
Balance, September 30, 2000 523 $58,515 1,368 $ 14 $13,648
======= ======= ======= ======= =======
<CAPTION>
Notes Accumulated
receivable other Total
Retained from comprehensive stockholders' Comprehensive
deficit employees loss deficit loss
-------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 2000 $(103,799) $ (296) $ (14) $ (33,888)
Net loss (2,388) (2,388) $ (2,388)
Other comprehensive loss -- (294) (294) (294)
Loans to employees-interest income (6) (6)
Issuance of preferred stock upon
exercise of warrants
Accrual of dividends and accretion on
senior preferred stock (603) (603)
Accrual of dividends and accretion on
junior preferred stock (1,956)
-------- -------- -------- -------- --------
Balance, September 30, 2000 $(108,746) $ (302) $ (308) $ (37,179) $ (2,682)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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O'SULLIVAN INDUSTRIES HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1--BASIS OF PRESENTATION
The unaudited consolidated financial statements of O'Sullivan
Industries Holdings, Inc. and subsidiaries ("O'Sullivan") included herein have
been prepared 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. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The financial statements should be read in conjunction with the
audited financial statements and notes thereto included in O'Sullivan's Annual
Report on Form 10-K for the fiscal year ended June 30, 2000. The interim results
are not necessarily indicative of the results that may be expected for a full
year.
NOTE 2--MERGER RELATED EXPENSES
On November 30, 1999, O'Sullivan completed a recapitalization and
merger through which the outstanding stock of O'Sullivan was purchased by an
investment firm, Bruckmann, Rosser, Sherrill & Co., LLC (BRS), certain directors
and members of O'Sullivan's senior management. The leveraged recapitalization
required approximately $357 million to complete the merger and pay related fees
and expenses. Approximately $264 million was funded via debt proceeds.
For the three months ended September 30, 1999, O'Sullivan recognized
certain merger related expenses of $630,000 incurred for legal, accounting and
printing services. The merger related expenses were included as a separate line
item in the accompanying consolidated statement of operations.
NOTE 3--ADOPTION OF SFAS 133
O'Sullivan adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"), on July 1, 2000. As required by the
transition provisions of FAS 133, O'Sullivan recorded a net-of-tax
cumulative-effect type adjustment of $95,000 in current earnings to recognize
the fair value of its derivatives designated as cash-flow hedging instruments.
O'Sullivan's derivatives instruments are recognized on the balance
sheet at their fair value. O'Sullivan currently has a costless interest rate
collar hedging one-half the value of its senior credit facilities. On the date
the derivative contract is entered into, O'Sullivan designates its derivative
as either a hedge of the fair value of a recognized asset or liability ("fair
value" hedge), as a hedge of the variability of cash flows to be received
("cash flow" hedge), or as a foreign-currency cash flow hedge ("foreign
currency" hedge). Changes in the fair value of a derivative that is highly
effective as - and that is designated and qualifies as - a fair-value hedge,
along with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk (including losses or gains on firm
commitments), are recorded in current-period earnings. Changes in the fair
value of a derivative that is highly effective as - and that is designated and
qualifies as - a cash-flow hedge are recorded in other comprehensive income,
until earnings are affected by the variability of cash flows. Changes in the
fair value of derivatives that are highly effective as - and that are
designated and qualify as - foreign-currency hedges are recorded in either
current-period earnings or other comprehensive income, depending on whether the
hedge transaction is a fair-value hedge (e.g., a hedge of a firm commitment
that is to be settled in a foreign currency) or a cash-flow hedge (e.g., a
foreign-currency-denominated forecasted transaction).
O'Sullivan formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value, cash-flow, or
foreign-currency hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. O'Sullivan also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives
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that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be a
highly effective hedge, O'Sullivan discontinues hedge accounting prospectively,
as discussed below.
O'Sullivan discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated or
exercised; (3) the derivative is de-designated as a hedge instrument, because
it is unlikely that a forecasted transaction will occur; (4) because a hedged
firm commitment no longer meets the definition of a firm commitment; or (5)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the derivative will continue to be carried
on the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from
the balance sheet and recognized as a gain or loss in current-period earnings.
When hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings. In all
other situations in which hedge accounting is discontinued, the derivative will
be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current-period earnings.
NOTE 4--INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
-------- -------
(in thousands)
<S> <C> <C>
Finished goods $48,263 $47,350
Work in process 6,702 6,258
Raw materials 11,273 11,648
------ ------
$66,238 $65,256
====== ======
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
O'Sullivan entered into a management services agreement with BRS for
strategic and financial advisory services on November 30, 1999. The annual fee
for these services is the greater of (a) 1% of O'Sullivan's consolidated
earnings before interest, taxes, depreciation and amortization or (b) $300,000.
Under the management services agreement, BRS can also receive reimbursement for
expenses which are limited to $50,000 a year under the senior credit facility
agreement.
The senior credit facilities and the management services agreement both
contain certain restrictions on the payment of the management fee. The
management services agreement provides that no cash payment for the management
fee can be made unless the fixed charge coverage ratio for the most recently
ended four full fiscal quarters would have been at least 2.0 to 1.0. All fees
and expenses under the management services agreement are subordinated to the
senior subordinated notes.
O'Sullivan has prepaid a portion of the fiscal 2001 management fees.
The prepaid balance of $233,000 is included in prepaid expenses and other
current assets in the accompanying consolidated balance sheet. The management
fee expense of $85,000 recognized during the quarter ended September 30, 2000,
is included in selling, marketing and administrative expense in the accompanying
consolidated statement of operations.
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At September 30, 2000, O'Sullivan held two notes receivable with a
balance of approximately $302,000 from two employees of O'Sullivan. O'Sullivan
loaned the employees money to purchase common stock and Series B junior
preferred stock of O'Sullivan in the recapitalization and merger. The notes bear
interest at the rate of 9% per annum and mature on November 30, 2009, or earlier
if there is a change of control. The notes are with full recourse to the
employees. The receivables are recorded on the balance sheet as a reduction in
stockholders' equity.
NOTE 6--COMMITMENTS AND CONTINGENCIES
RADIOSHACK LITIGATION
On June 29, 1999, RadioShack Corporation (formerly Tandy Corporation)
filed a complaint against O'Sullivan in the District Court of Texas in Tarrant
County. The complaint relates to a potential reduction in O'Sullivan's tax
benefit payments to RadioShack that would result from increased interest expense
after the completion of the merger. RadioShack claims that this reduction would
violate the tax sharing and tax reimbursement agreement. The complaint sought a
court order compelling O'Sullivan to submit to a dispute resolution process.
Alternatively, the complaint sought a declaratory judgment that after the merger
O'Sullivan must continue to make tax-sharing payments to RadioShack as if the
merger had not occurred.
On September 9, 1999, RadioShack filed a motion for summary judgment in
its lawsuit against O'Sullivan. The motion argued that RadioShack was entitled
to a court order requiring O'Sullivan to commence dispute resolution procedures
under the tax sharing agreement. Because O'Sullivan had made all payments
required under the tax sharing agreement and because no merger had occurred,
O'Sullivan believed that RadioShack's lawsuit was premature since there could
not be a dispute under the tax sharing agreement with respect to the increased
interest resulting from the merger before the merger was completed.
Alternatively, RadioShack argued that it was entitled to a court order
preventing O'Sullivan from deducting the interest expense related to the merger
from the Company's tax-sharing payments to RadioShack.
On October 8, 1999, the District Court ruled on RadioShack's motion for
summary judgment. It found that the dispute resolution provision of the tax
sharing agreement was triggered, and ordered that O'Sullivan begin the dispute
resolution process according to the terms of the tax sharing agreement. The
District Court denied all other relief sought by RadioShack. Pursuant to the
dispute resolution provisions, RadioShack and O'Sullivan representatives have
discussed the issues in the dispute but did not reach a resolution. Arbitrators
have been selected to resolve the dispute, and discovery is progressing.
During the quarter ended September 30, 2000, O'Sullivan made no payment
to RadioShack pursuant to the tax sharing agreement. If the ruling in the
arbitration proceding is in RadioShack's favor, O'Sullivan's payments under the
tax sharing agreement would be substantially higher; the amount would depend on
O'Sullivan's taxable income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The domestic ready-to-assemble furniture market has experienced
significant growth over the past several years and has emerged as a key
component of the overall U.S. home and office furnishings industry. We are a
leading ready-to-assemble furniture manufacturer in the United States with over
45 years of experience. We design, manufacture and distribute a broad range of
RTA furniture products--bookcases, cabinets, computer workcenters, desks,
entertainment centers and stereo racks--with retail prices ranging from $20 to
$999. In recent years, we have committed substantial resources to the
development and implementation of a diversified sales, marketing and product
strategy in order to capitalize on growth opportunities presented by emerging
retail channels of distribution and changes in consumer demographics and
preferences. We have structured our business to offer a wide variety of RTA
furniture products through increasingly popular retail distribution channels,
including office superstores, discount mass merchants, electronic superstores,
department stores, home improvement centers and home furnishings retailers. We
continue to strive toward building long-term relationships with quality
retailers in existing and emerging high growth distribution channels to develop
and sustain our future growth.
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In fiscal 1999 and 2000, our net sales increased in excess of 10% per
year, reflecting the strong growth for the RTA furniture market and the strong
U.S. economy generally. In the first quarter of fiscal 2001, however, this
growth stalled, reflecting an industry slowdown and caution about the U.S.
economy generally. We currently expect that our sales for the remainder of the
fiscal year will be flat to down slightly from the prior year. However, our
sales could continue to suffer if the weak retail environment does not improve.
We will be taking steps to rationalize our operations with our revised
sales expectations.
While we have confidence in the long term future of the RTA furniture
industry, we cannot yet predict when our sales will return to their historical
growth rates.
We purchase large quantities of raw materials including particleboard
and fiberboard. We are dependent on our outside suppliers for all these raw
materials. Therefore, we are subject to changes in the prices charged by our
suppliers. In fiscal 2000, our profits were reduced by price increases of these
commodities. While we have recently seen some price declines that will reduce
our costs in the second quarter of fiscal 2001, we cannot assure you that raw
material prices will not increase in the future.
RESULTS OF OPERATIONS
Net Sales. Net sales for the quarter ended September 30, 2000 decreased
by $11.5 million, or 11.2%, to $90.5 million, down from $102.0 million for the
quarter ended September 30, 1999. Our sales were hurt by the following:
- a general weakening in retail sales, especially in the
discount mass merchant channel, which may be due to rising
interest rates, higher oil prices and waning consumer
confidence;
- the decision by Service Merchandise, subsequent to its
bankruptcy filing in March 1999, to stop selling home office
and home entertainment furniture. Sales to Service Merchandise
declined from 9% of our gross sales in the first quarter of
fiscal 2000 to 1% in the first quarter of fiscal 2001;
- inventory reductions by some of our large customers.
The sales decreases were offset somewhat by sales increases in the export, home
center and consumer electronics channels. For the quarter, lower unit volume
accounted for virtually all of the sales decrease although the average sales
price was also negligibly lower.
Gross Profit. Gross profit decreased to $24.3 million or 26.9% of sales
for the three month period ended September 30, 2000, from $29.8 million or
29.2% of sales, for the comparable prior year quarter. The decrease in gross
profit was primarily caused by decreased sales volume. Additionally, commodity
prices of particleboard and fiberboard, major components of our products, were
generally higher during the first quarter of fiscal 2001 compared to the first
quarter of fiscal 2000. We anticipate lower particleboard prices during the
rest of this fiscal year because of generally weaker economic conditions.
Finally, production volumes decreased in conjunction with lower sales,
resulting in less overhead absorption and lower production efficiencies.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses decreased to $19.8 million or 21.8% of sales for the
three month period ended September 30, 2000, from $20.5 million or 20.1% of
sales for the quarter ended September 30, 1999. Decreases in volume related
expenses, freight and commissions, more than offset higher promotional costs.
Profit sharing and incentive compensation expenses declined in fiscal 2001
compared to the first quarter of fiscal 2000 because of lower sales and profit
levels.
Merger Related and Other Special Charges. There were no merger related
expenses for the quarter ended September 30, 2000 compared to $630,000 in the
first quarter of fiscal 2000.
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Depreciation and Amortization. Depreciation and amortization expenses
increased slightly to $3.9 million for the first quarter of fiscal 2001 compared
to $3.7 million for the first quarter of fiscal 2000. The increase was due to
capital additions for capacity expansion and manufacturing equipment upgrades as
well as amortization of certain non-compete agreements with former employees.
Operating Income. Operating income, including merger related and other
one-time charges, decreased $4.0 million to $4.6 million for the quarter ended
September 30, 2000, from $8.6 million in the three months ended September 30,
1999. The lower sales volume, overhead absorption at lower production levels
and higher material prices contributed to the decrease in operating income. We
continue to look for ways to improve operating results.
Net Interest Expense. Net interest expense increased significantly from
$400,000 in the first quarter of fiscal 2000 to $8.2 million in the first
quarter of fiscal 2001. Interest expense increased due to the higher level of
borrowings associated with the financing of the recapitalization and merger
which was completed on November 30, 1999. As a result of the adoption of FAS
133, interest expense included $238,000 related to the change in value of the
interest rate collar entered into on February 28, 2000.
Income Tax Expense. Income tax expense decreased from $2.0 million in
the three months ended September 30, 1999 to a tax benefit of $1.3 million in
the three months ended September 30, 2000. The effective tax rate remained
constant at 36%.
Cumulative Effect Of Accounting Change. Upon the July 1, 2000 adoption
of FAS 133, O'Sullivan recognized a liability of $386,000 based upon the fair
value of a costless interest rate collar initiated on February 28, 2000. That
portion of the liability incurred prior to the current quarter, $148,000, is
included, net of income tax benefit of $53,000, as cumulative effect of
accounting change on the accompanying consolidated statement of operations.
Net Income. Net income decreased by $7.6 million from $5.2 million in
the first quarter of fiscal 2000 to a loss of $2.4 million in the first quarter
of fiscal 2001. Lower operating income and higher net interest expense combined
to produce a loss that was reduced somewhat by the income tax benefit.
EBITDA. EBITDA, which we define as earnings before interest income and
interest expense, income taxes, depreciation and amortization, decreased by $3.7
million to $8.5 million for the quarter ended September 30, 2000 from $12.2
million for the prior year quarter. EBITDA decreased primarily due to decreased
sales in the quarter, lower overhead absorption associated with decreased
production levels and higher material costs.
EBITDA is presented to provide additional information about our
operations. This item should be considered in addition to, but not as a
substitute for or superior to, operating income, net income, operating cash flow
and other measures of financial performance prepared in accordance with
generally accepted accounting principles. EBITDA may differ in the method of
calculation from similarly titled measures used by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows from operations and
borrowings under our senior secured credit facility, which is discussed below.
Our liquidity requirements will be to pay our debt, including interest expense
under the senior credit facilities and the notes, payments to RadioShack and to
provide for working capital and capital expenditures.
Working Capital. As of September 30, 2000 cash and cash equivalents
totaled $5.6 million. Net working capital was 91.0 million at September 30, 2000
compared to $93.6 million at June 30, 2000. This decrease was mainly due to an
increase in short term financing as we borrowed $3.0 million against our
revolving line of credit.
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Operating Activities. Net cash used by operating activities for the
three months ended September 30, 2000 was $4.4 million compared to net cash
provided of $10.6 million for the three months ended September 30, 1999. The
decrease of $15.0 million was due to a decrease in net income of $7.6 million
and an increased investment in inventories of $1.4 million offset by an increase
in receivables that was $1.6 million less in fiscal 2001 compared to fiscal
2000. Additionally, reduced production and profit levels resulted in increases
in accounts payable, accrued liabilities and accrued income taxes of $1.7
million in fiscal 2001 compared to increases of $9.9 million in fiscal 2000.
Investing Activities. We invested $4.3 million for capital expenditures
in the three months ended September 30, 2000 compared to $3.3 million for the
prior year three-month period. We currently estimate that the total capital
expenditure requirements for the remainder of the fiscal year will be
approximately $13.0 million, which we expect to fund from cash flow from
operations, cash on hand or borrowing under our revolver. Our ability to make
future capital expenditures is subject to certain restrictions under our senior
credit facilities.
Financing Activities. As of September 30, 2000, we had total debt of
$261.5 million consisting of the following:
- $100.0 million in 13-3/8% senior subordinated notes due 2009
issued with warrants to purchase 6.0% of common and Series B
junior preferred stock on a fully diluted basis. These
warrants were assigned a value of $3.5 million. These notes
were issued at a price of 98.46% providing $98.0 million in
cash proceeds before expenses related to the issuance.
- $136.5 million in senior secured credit facilities consisting
of a five year $33.5 million term loan, a seven and one-half
year $100.0 million term loan and a $40.0 million revolving
line of credit, with a current balance of $3.0 million. The
revolving line of credit has a $15.0 million sub-limit for
letters of credit, of which we are currently utilizing
approximately $14.4 million.
- $10.0 million in variable rate industrial revenue bonds.
- $15.0 million in a senior note issued with warrants to
purchase 6.0% of our common and Series B junior preferred
stock on a fully diluted basis. These warrants were assigned a
value of $3.5 million.
- Other loans totaling $43,500.
During the quarter we made a regularly scheduled principal payment of
$500,000 against a term loan which is included in our senior secured credit
facility. We also borrowed $3.0 million against our revolving line of credit.
We expect to fund principal and interest payments on our debt from cash flow
from operations, cash on hand or borrowings under our revolver. Our borrowing
availablilty under our revolver was approximately $22.0 million at September
30, 2000.
The credit facilities and notes are subject to certain financial and
operational covenants and other restrictions, including among others, a
requirement to maintain certain financial ratios and restrictions on our ability
to incur additional indebtedness. In addition, the agreements effectively
prohibit the payment of dividends on our stock. We are currently in compliance
with these covenants.
As required under the new senior credit facilities, we hedged one-half
of our term loans with an initial notional amount of $67.5 million with a
costless interest rate collar. The collar is based on three-month LIBOR with a
floor of 6.43% and a ceiling of 8.75%. To terminate this contract at September
30, 2000, we would have been required to pay the counter-party approximately
$386,000.
Tax Sharing Agreement. During the quarter ended September 30, 2000,
O'Sullivan made no payment to RadioShack pursuant to the Tax Sharing and Tax
Reimbursement Agreement between us. The effect of the merger upon our payments
to RadioShack under this agreement is the subject of an arbitration proceeding.
If the ruling in the arbitration proceeding is in RadioShack's favor, our
payments under the tax sharing agreement would be substantially higher; the
amount would depend on our taxable income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk is impacted by changes in interest rates, foreign
currency exchange rates and certain commodity prices. Pursuant to our policies,
we may use natural hedging techniques and derivative financial
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instruments to reduce the impact of adverse changes in market prices. We do not
hold or issue derivative instruments for trading purposes. A one percent change
in interest rates would effect our interest expense by about $1.5 million.
We have market risk in interest rate exposure, primarily in the United
States. We manage interest rate exposure through our mix of fixed and floating
rate debt. Interest rate swaps or collars may be used to adjust interest rate
exposures when appropriate based on market conditions. For qualifying hedges,
the interest differential of swaps is included in interest expense. We believe
that our foreign exchange risk is not material.
Due to the nature of our product lines, O'Sullivan has material
sensitivity to some commodities, including particleboard, fiberboard, corrugated
cardboard and hardware. We manage commodity price exposures primarily through
the duration and terms of our vendor contracts. A one percent change in these
commodity prices, assuming none of the increase could be passed on to customers,
would affect our cost of sales by approximately $1.4 million annually.
As noted above, in fiscal 2000 we encountered price increases in
certain commodities, which reduced our gross margin in the first quarter of
fiscal 2001. During the first quarter of fiscal 2001, prices for these products
declined somewhat, which should help gross margins in the second quarter of
fiscal 2001. We cannot guarantee that there will not be further price increases
or decreases in these or other commodities.
PART II -- OTHER INFORMATION
----------------------------
ITEM 5. OTHER INFORMATION.
FORWARD LOOKING STATEMENTS.
Cautionary Statement Regarding Forward Looking 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 Operations, contain forward-looking
statements. These statements can be identified by the use of future tense or
dates or terms such as "believe," "would," "expect," "anticipate" or "plan."
These forward-looking statements involve risks and uncertainties. Actual results
may differ materially from those predicted by the forward-looking statements.
Factors and possible events which could cause results to differ include:
- significant indebtedness that may limit our financial and operational
flexibility;
- changes from anticipated levels of sales, whether due to future
national or regional economic and competitive conditions, including
new domestic or foreign entrants into the industry, customer
acceptance of existing and new products, or otherwise, as we
experienced in the first quarter of fiscal 2001;
- pricing pressures due to excess capacity in the ready-to-assemble
furniture industry, as occurred in 1995, or customer demand in excess
of our ability to supply product;
- raw material cost increases, particularly in particleboard and
fiberboard, as occurred in 1994 and 1995 and to a lesser extent in
fiscal year 2000;
- transportation cost increases, due to higher fuel costs or otherwise;
- loss of or reduced sales to significant customers as a result of a
merger, acquisition, bankruptcy, liquidation or any other reason, as
occurred with the liquidation of Best Products in 1996 and with the
reorganization of Service Merchandise Co., Inc. in 2000;
- actions of current or new competitors that increase competition with
our products or prices;
- the consolidation of manufacturers in the ready-to-assemble furniture
industry;
- increased advertising costs associated with promotional efforts;
- increased interest rates;
- pending or new litigation or governmental regulations such as the
pending arbitration involving RadioShack;
- other uncertainties which are difficult to predict or beyond our
control; and
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<PAGE> 13
- the risk that we incorrectly analyze these risks and forces, or that
the strategies we develop to address them could be unsuccessful.
See also the Risk Factors section in our annual report on Form 10-K for the year
ended June 30, 2000.
Because these forward-looking statements involve risks and
uncertainties, actual results may differ significantly from those predicted in
these forward-looking statements. You should not place a lot of weight on these
statements. These statements speak only as of the date of this document or, in
the case of any document incorporated by reference, the date of that document.
All subsequent written and oral forward-looking statements attributable
to O'Sullivan or any person acting on our behalf are qualified by the cautionary
statements in this section. We will have no obligation to revise these
forward-looking statements.
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
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<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: November 14, 2000 By: /s/ Richard D. Davidson
---------------------------------------------
Richard D. Davidson
President and
Chief Executive Officer
Date: November 14, 2000 By: /s/ Phillip J. Pacey
---------------------------------------------
Phillip J. Pacey
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as
of October 18, 1999, between O'Sullivan Industries Holdings,
Inc. and OSI Acquisition, Inc. (incorporated by reference
from Appendix A to Proxy Statement/Prospectus included in
Amendment No. 5 to Registration Statement on Form S-4 (File
No. 333-81631))
3.1 & 4.1 Amended and Restated Certificate of Incorporation of
O'Sullivan (incorporated by reference from Exhibit 2.4(a) to
Registration Statement on Form S-4 (File No. 333-81631))
3.2 & 4.2 Bylaws of O'Sullivan (incorporated by reference from Exhibit
3.2 to Registration Statement on Form S-1 (File No.
33-72120))
4.3 Specimen Senior Preferred Stock Certificate of O'Sullivan
(incorporated by reference from Exhibit 3 to Registration
Statement on Form 8-A (File No. 0-28493))
4.4 Indenture dated as of November 30, 1999, by O'Sullivan
Industries, Inc., as Issuer, O'Sullivan Industries -
Virginia, Inc., as Guarantor, and Norwest Bank Minnesota,
National Association, as Trustee, relating to O'Sullivan
Industries, Inc.'s $100,000,000 principal amount of 13.375%
senior subordinated notes (incorporated by reference to
Exhibit 4.4 to Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999 (File No. 0-28493))
4.5 Warrant Agreement dated as of November 30, 1999 between
O'Sullivan Industries Holdings, Inc. and Norwest Bank
Minnesota, National Association, as Warrant Agent, relating
to warrants to purchase 39,273 shares of O'Sullivan
Industries Holdings, Inc. Series B junior preferred stock,
including form of warrant certificate (incorporated by
reference to Exhibit 4.5 to Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999 (File No. 0-28493))
4.6 Warrant Agreement dated as of November 30, 1999 between
O'Sullivan Industries Holdings, Inc. and Norwest Bank
Minnesota, National Association, as Warrant Agent, relating
to warrants to purchase 93,273 shares of O'Sullivan
Industries Holdings, Inc. common stock, including form of
warrant certificate (incorporated by reference to Exhibit
4.6 to Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999 (File No. 0-28493))
4.7 Amended and Restated Warrant Agreement dated as of January
31, 2000 between O'Sullivan Industries Holdings, Inc. and
the holder thereof relating to warrants to purchase 39,273
shares of O'Sullivan Industries Holdings, Inc. Series B
junior preferred stock, including form of warrant
certificate (incorporated by reference to Exhibit 4.7 to
Quarterly Report on Form 10-Q for the quarter ended December
31, 1999 (File No. 0-28493))
4.8 Amended and Restated Warrant Agreement dated as of January
31, 2000 between O'Sullivan Industries Holdings, Inc. and
the holder thereof relating to warrants to purchase 93,273
shares of O'Sullivan Industries Holdings, Inc. common stock,
including form of warrant certificate (incorporated by
reference to Exhibit 4.8 to Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999 (File No. 0-28493))
27 Financial Data Schedule..................................... 16
</TABLE>
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