Item 1. BUSINESS
O'Sullivan Corporation (O'Sullivan or the Corporation) is a Virginia corporation originally organized in 1896 as O'Sullivan Rubber Company. In 1932 the Corporation was moved to Winchester, Virginia. In 1970 the corporate name was changed from O'Sullivan Rubber Corporation to O'Sullivan Corporation to acknowledge the increasing importance of plastics manufacturing to the Corporation's operations.
Subsequent to the Corporation's name change and through the early 1990's, the Corporation concentrated on expansion of its plastics manufacturing operations, both calendering and injection-molding. The expansion was accomplished by adding additional capacity within the Corporation and the acquisition or creation of several subsidiaries to gain facilities in other regions of the United States. In 1986, the Corporation divested itself of its rubber operations.
In 1994, the Corporation sold the injection-molding operations portion of its plastics products segment. The sale involved primarily the inventories and fixed assets of the Corporation associated with injection-molding operations and the stock of a subsidiary corporation also involved in injection-molding operations. The sale was for approximately $50 million net of certain liabilities assumed by the purchaser. The disposal of this portion of the Corporation's operations has been treated as a discontinued operation in the accompanying financial statements.
In 1992, the Corporation created a subsidiary, Melnor Inc. (Melnor), to acquire substantially all the assets of a corporation engaged in the water sprinkler and lawn and garden business.
The Corporation's activities are now conducted in two business segments: (i) calendered plastics products which manufactures calendered plastics products for the automotive and specialty plastics manufacturing industries and (ii) lawn and garden consumer products which is involved with the manufacture and distribution of a wide range of lawn and garden products.
For financial information with respect to industry segments, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 10 of Notes to Financial Statements included elsewhere in this Form 10-K.
PLASTICS PRODUCTS BUSINESS
The Corporation's Plastics Products segment manufactures calendered plastics products for the automotive and specialty plastics manufacturing industries. Calendered plastics products manufactured include vinyl sheeting for vehicular dashboard pads, swimming pool liners and covers, notebook binders, luggage, upholstered furniture, golf bags, floor tile, pond liners, protective clothing, mine curtains, boat and automobile windows and medical grade materials. The Plastics Products segment products are sold in markets in which there is competition from many plastic manufacturers, both domestic and foreign. While no single competitor offers all of the products produced by this segment, there are many competitors for any single product. Major competitors include; Borden, Inc., Canadian General Tower, Ellay, Gencorp Inc., Haartz, Nanya Plastics Corporation and Uniroyal Technology Corpor- ation. Distribution of the segment's products is by direct sales to other manufacturers.
The normal production backlog of the Plastic Products segment is approximately thirty to forty-five days. The Corporation has various long-term contracts totaling several million dollars applicable to this segment, but such contracts are not considered as firm orders until production releases are received from customers. The business of the segment is not seasonal.
All essential raw materials are readily available to the Plastics Products segment. For critical raw materials, secondary sources of supply are available if required. Major suppliers of raw materials to this segment include the following companies; The Geon Company, General Electric Specialty Chemicals, Occidental Chemical, Aristech Chemicals, Witco Corporation, Penn Colors and Toray.
This segment of the Corporation possesses significant technology in the compounding, formulation and manufacture of its products.
A significant customer of the Plastics Products segment accounting for ten percent or more of the segment's 1996 sales was Ford Motor Company.
CONSUMER PRODUCTS BUSINESS
The Corporation's Consumer Products segment has as a primary activity the manufacture, assembly, sale and distribution of lawn and garden products. The products produced and sold by this segment include; oscillating, rotary and traveling sprinklers, hose storage units, watering timers, aqua guns, air spray tanks and snow shovels. A secondary product line representing less than ten percent of sales volumes is the buy-sell distribution of ceiling fans and thermostats. The products of its segment are sold in markets in which there is intense competition from many lawn and garden products suppliers. While it is believed that no one competitor offers the array of products offered by the segment, there are numerous competitors for specific products. Major competitors include; Rain Bird Corporation, Suncast Company, Gilmour Corporation and Nelson Company.
All essential raw materials utilized by this segment are readily available. Some raw materials are obtained from foreign sources, but they are not of significant volume and can be obtained from secondary sources, if necessary. Purchased components are generally designs that are readily available from several suppliers. Major suppliers to this segment include; Computime, Ltd., Stax Ltd., Landen Enterprises, Jamison Plastic Corp. and CPC of Vermont.
The business in which this segment is involved is highly seasonal in nature. Lawn and garden products are traditionally shipped to distribution and retail outlets beginning in late-December or early-January and continuing through the following May.
This segment holds many patents and trademarks for products produced and sold. However, due to the rapidly changing nature of the segment's business activity, the Corporation does not believe that the patents and trademarks have any significant long-term value or provide any material benefit to the long-term success of the segment's business operations.
Home Depot, Inc. was the only customer of the Consumer Products segment accounting for ten percent or more of the segment's sales for 1996.
GENERAL
The Corporation anticipates no material effects on the capital expenditures, earnings or competitive position of the Corporation's businesses from the enactment or adoption of federal, state or local environmental regulations. The Corporation has several ongoing environmental programs, including recycling, waste reduction and environmental audits. The Corporation also has proactive dialogues with federal and state environmental agencies to insure continuing compliance with environmental regulations.
The Corporation and its Subsidiaries currently have approximately 1,100 employees.
The Corporation and its Subsidiaries are not engaged in any material transactions with customers or suppliers located outside North America.
Item 2.
Item 2. PROPERTIES
The Corporation owns approximately 623,000 square feet of manufacturing, warehouse and office space on approximately 113 acres in Winchester, Virginia; 76,000 square feet of manufacturing, warehouse and office space on approximately six acres in Lebanon, Pennsylvania; 110,000 square feet of manufacturing and warehouse space on approximately five acres in Newton Upper Falls, Massachusetts; 85,000 square feet of manufacturing and warehouse space on approximately thirteen acres in Yerington, Nevada; 82,000 square feet of manufacturing, warehouse and office space in Brantford, Ontario, Canada.
The Corporation leases 40,000 square feet of warehouse space in Winchester, Virginia, 29,250 square feet of warehouse space in St. Louis, Missouri; 10,000 square feet of warehouse space in Yerington, Nevada and 347,000 square feet of manufacturing, warehouse and office space in Moonachie, New Jersey. The lease for the property leased in Moonachie, New Jersey expires June 30, 1997 and will not be renewed. Operations formerly housed in the New Jersey location were substantially relocated to Winchester, Virginia during 1995. A subsidiary of the Corporation is a party to an agreement to utilize additional warehouse space in Winchester, Virginia for the storage and handling of various inventories. The agreement expires August 31, 1997. The Corporation also has sales offices located in Chicago, Illinois and Bloomfield Hills, Michigan.
Management of the Corporation believes that unused capacity existed in both segments of the Corporation's operations during 1996. Percentage utilization of the Corporation's facilities is difficult to accurately measure due to the Corporation's policy of adding facilities as required by business conditions.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Corporation and its Subsidiaries are involved in legal proceedings incidental to their normal business activities. While the outcome of these proceedings cannot be completely predicted, the Corporation does not believe the ultimate resolution of any existing matters will have a material adverse effect on its financial position or results of operations.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were voted upon during the fourth quarter of 1996.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The principal market in which the Corporation's common stock is traded is the American Stock Exchange. The stock is traded under the symbol OSL.
The quarterly price range of common stock and the quarterly dividends per share for 1996 and 1995 are included as part of Note 14 of Notes to Consol- idated Financial Statements included elsewhere in this Form 10-K.
At December 31, 1996 the number of owners of the Corporation's common stock was 3,000.
The Corporation has paid quarterly dividends since 1958. There are no restrictions on the payment of dividends at the current time. The payment and amount of future dividends will depend on the existing conditions, including such factors as the Corporation's earnings, financial condition and working capital requirements.
Item 6.
Item 6. SELECTED FINANCIAL DATA (FROM CONTINUING OPERATIONS)
1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ Net sales $211,363,709 $209,723,562 $194,974,264 $173,345,501 $125,776,914
Net income 10,729,493 14,032,063 10,974,970 10,382,400 8,407,638
Net income per common share .66 .85 .67 .63 .51
Total assets 140,822,440 149,996,525 144,528,888 144,365,419 121,996,656
Long-term debt 15,790 51,745 1,652,996 1,501,834 4,871,664
Total debt 85,884 1,717,193 1,705,069 13,518,543 12,132,365
Cash dividends per common share .32 .31 .28 .28 .28
Return on equity 9.3% 13.2% 10.1% 10.0% 8.6%
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS 1996 VERSUS 1995
Consolidated net sales from continuing operations for 1996 were $211.4 million compared to $209.7 million for 1995. Consolidated net income from continuing operations for 1996 was $10.7 million, $ .66 per share, compared to $14.0 million, $ .85 per share, for 1995.
Income tax expense for continuing operations was $6.9 million for 1996 compared to $9.6 million for 1995. The decrease was due to a lower pre-tax income for 1996 and a decrease in the Corporation's effective tax rate from 40.7% for 1995 to 39.1% for 1996. The decrease in the effective tax rate was primarily due to lower charges for state income taxes.
Plastics Products Segment
Net sales for the Plastics Products segment were $171.2 million for 1996 as compared to $169.5 million for 1995. The 1996 net sales represent an increase of $1.8 million or 1.0%. The increase was entirely from sales of automotive-related products. Through the end of the third quarter of 1996, sales for the segment had increased approximately $6.4 million over 1995. However, substantial reductions in requirements by major automotive customers in the fourth quarter reduced the overall 1996 sales increase to the net $1.8 million increase. 1996 sales of industrial products were virtually the same as 1995. The sales performance of this group has been negatively affected by extremely competitive pricing pressures in markets serviced by the industrial products group. This pressure will continue in 1997. Nevertheless, sales of the Plastics Product segment are expected to remain strong in 1997. The Corporation does have negotiated agreements with several major customers allowing for the pass-through of raw material price increases to enhance unit sales prices. However, the approved increases frequently lag several months behind increased costs incurred by the Corporation.
The gross margin for this segment declined from 20.3% in 1995 to 18.1% in 1996. While the segment continues to succeed in obtaining numerous productivity improvements through the efforts of its employees and suppliers, the efforts for 1996 were mitigated due to problems incurred with the raw material component of the segment's products. Raw materials are a very substantial part of the unit cost for the segment's products and during the third quarter of 1996 the contamination of a key raw material resulted in raw material component costs far in excess of normal. Along with the increased raw material costs, other manufacturing costs increased as a result of inefficient production runs, scrapping of defective product and increased control and review activities to insure product quality. Along with the raw material contamination problem the Corporation continued to experience pressures from suppliers to accept raw material price increases. The Corporation resists the increases whenever possible and continually searches for alternative materials and suppliers. However, in many instances alternatives are not available because of customer specifications. In those cases the Corporation endeavors to pass on increases where agreements and market conditions permit.
Operating profit for the segment decreased by $3.4 million for the year from $29.4 million for 1995 to $26.0 million for 1996. The decrease primarily resulted from the operational problem created by the previously discussed raw material contamination as well as the customer resistance encountered in attempting to recover higher material and operational costs through product price increases.
Selling expenses for this segment were $5.0 million for 1996 and $4.9 million for 1995, 2.9% percent of net sales for both 1996 and 1995. Slight increases in compensation and benefit costs in this area were offset by a reduction in the charge for doubtful accounts for 1996. General and administrative expenses were $6.1 million or 3.6% of net sales for 1996, compared to $5.7 million or 3.4% of net sales for 1995. Increases in benefit costs were the main reason for increased costs in this area in 1996.
Other income of the Plastics Products segment increased by approximately $600 thousand for 1996. The increase was primarily a result of the gain from the sales of various assets during 1996.
Management believes its program for the Plastics Products segment could result in increased market share and entry into additional niches of markets in 1997. Incremental price increases are unlikely due to the competitive pressures currently existing in markets being served.
Consumer Products Segment
Net sales for the Consumer Products segment were $40.2 million for both 1996 and 1995. The segment's sales for 1996 were depressed by unfavorable weather conditions in the U.S. for much of its selling season, plus sales lost due to insufficient inventories of requested products and a further reduction due to excessive amounts of sales allowances and returns for defective materials.
This segment experienced a further decline in its gross margin for 1996 as compared to 1995. The gross margin declined from 17.9% to 11.9%. The decline resulted from material management inefficiencies that created increased raw material and component costs, increased freight costs incurred to expedite shipments of components from overseas suppliers, excessive product rework costs and freight costs incurred in consolidating inventories.
Selling and warehousing expenses were $5.7 million for 1996 and $5.3 million for 1995. These amounts represent 14.2% and 13.0% of sales for 1996 and 1995, respectively. The dollar increase in this category resulted from increased levels of sales commissions, rebates and advertising costs incurred in an effort to stimulate sales throughout the year. General and administrative expenses for this segment were $2.0 million for 1996 and $2.4 million for 1995.
Interest expense for this segment was $105 thousand for 1996 compared to $55 thousand for 1995.
Management has instituted a significant cost containment program and productivity improvements for this segment and plans to introduce several new products in 1997.
RESULTS OF OPERATIONS 1995 VERSUS 1994
Consolidated net sales from continuing operations for 1995 were $209.7 million compared to $195.0 million for 1994. Consolidated net income from continuing operations for 1995 was $14.0 million, $ .85 per share, compared to $11.0 million, $ .67 per share, for 1994.
Income tax expense for continuing operations was $9.6 million for 1995 compared to $7.1 million for 1994. The increase is due to higher pre-tax income and an increase in the Corporation's effective tax rate from 39.4% for 1994 to 40.7% for 1995. The increase in the effective tax rate was primarily due to charges for state income taxes.
Plastics Products Segment
Net sales for the Plastics Products segment were $169.5 million for 1995 as compared to $149.4 million for 1994. The 1995 net sales represent an increase of $20.1 million or 13.4%. Approximately 70% of the sales increase was from automotive-related products. The sales increase in the automotive-related component of this segment was substantially a result of product mix changes to shipments of products with greater incremental prices. Competitive pressures in both automotive and industrial sales components of this segment continued to preclude unit price increases except for negotiated pass-throughs of raw material price increases. Approved increases frequently lag several months behind increased costs incurred by the Corporation.
The gross margin for this segment improved to 20.3% in 1995 from 18.7% in 1994. The margin improvement was a result of higher sales volumes and reductions in variable manufacturing expenses.
Operating profit for the segment increased by $7.8 million for the year from $21.6 million for 1994 to $29.4 million for 1995. The increase was primarily a result of the volume sales increases experienced in 1995 aided by the improvements in gross margin and the significant reduction in selling expenses.
Selling expenses for this segment were $4.9 million or 2.9% as a percent of net sales for 1995, compared to $6.2 million or 4.2% as a percent of net sales for 1994. The reduction in selling expenses was a result of consolidations made within the selling area following the disposal of the Corporation's Gulfstream Division in December of 1994 along with a significant reduction in charges for doubtful accounts. General and administrative expenses were $5.7 million or 3.4% of net sales for 1995, compared to $5.2 million or 3.5% of net sales for 1994.
Other income of the Plastic Products segment increased marginally over 1994. Interest income increased by approximately $700 thousand over 1994, but was offset by reduced income in other non-operating areas including the loss experienced on a joint venture started in 1995.
Consumer Products Segment
Net sales for the Consumer Products segment were $40.2 million for 1995 compared to $45.5 million for 1994. The 1995 sales represent a decrease of $5.3 million. Changes in customer purchasing patterns and dramatically unfavorable weather conditions during 1995 caused sales to fall considerably below sales levels expected by management. This segment experienced a significant decline in its gross margin for 1995 as compared to 1994. The gross margin declined from 22.3% to 17.9%. The decline was due to excess rework costs for purchased components, increases in raw material prices over those anticipated and excess freight costs for product deliveries from off-shore sources. Operating profit for this segment decreased by $3.1 million for 1995. The decrease can be directly attributed to the substantial sales volume reductions experienced by this segment during 1995.
Selling and warehousing expenses were $5.3 million for 1995 and $5.9 million for 1994. These amounts represent 13.0% and 12.9% of sales for 1995 and 1994, respectively. The dollar decrease in these costs was a result of lower sales commission and advertising costs that are directly related to sales volumes. General and administrative expenses for this segment were $2.4 million for 1995 and $2.1 million for 1994. During 1995 this segment incurred charges of $756 thousand in connection with the relocation of US operations.
Interest expense for this segment dropped from $808 thousand for 1994 to $55 thousand for 1995. The reduction in interest expense of the segment was primarily related to the utilization of funds received by the Corporation to pay back funds borrowed under various credit arrangements previously utilized by the consumer products segment.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $14.1 million for 1996. Cash and cash equivalents declined by $3.9 million during 1996. The reduction was primarily due to the Corporation's purchase of approximately 660 thousand shares of its common stock and the payoff of $1.6 million of debt.
Capital expenditures for property, plant and equipment for 1996 were $6.8 million compared to $10.2 million for 1995. 1997 capital expenditures are projected to be comparable to 1996. At December 31, 1996, the majority of the projected outlay was uncommitted. The Corporation presently has unused capacity in both business operating segments. Future capital expenditures by the Corporation would be to provide additional capacity or modernize equipment to meet customer demands for new or improved products or production processes.
Total corporate debt was $86 thousand at December 31, 1996 and $1.7 million at December 31, 1995. The Corporation has in place a $35 million line of credit which expires in June, 1998. At December 31, 1996 the line of credit was unused except for a $850 thousand stand-by letter of credit commitment.
In 1996, the Corporation's Board of Directors authorized the repurchase of up to 800 thousand shares of the Corporation's common stock as market conditions permit. At December 31, 1996 approximately 660 thousand shares had been repurchased.
Management of the Corporation believes that net cash flow from operating activities, along with available financing capabilities will be adequate to meet the Corporation's funding requirements for 1997.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This page left blank intentionally. See following pages for financial statements.
O'SULLIVAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
1996 1995 ------------- ------------- ASSETS Current Assets Cash and cash equivalents $ 6,494,657 $ 10,400,583 Receivables 30,809,386 30,458,872 Inventories 41,787,941 42,196,303 Deferred income tax assets 1,381,957 2,262,636 Other current assets 4,045,365 3,562,325 ------------- ------------- Total current assets $ 84,519,306 $ 88,880,719 ------------- ------------- Property, Plant and Equipment $ 47,127,292 $ 48,027,329 ------------- ------------- Other Assets $ 9,175,842 $ 13,088,477 ------------- ------------- Total assets $ 140,822,440 $ 149,996,525 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 70,094 $ 1,665,448 Accounts payable 13,204,916 15,714,112 Accrued expenses 6,994,547 10,180,317 ------------- ------------- Total current liabilities $ 20,269,557 $27,559,877 ------------- ------------- Long-Term Debt $ 15,790 $ 51,745 ------------- ------------- Long-Term Liabilities Deferred compensation $ 1,685,792 $ 1,384,619 Employee benefits 1,410,848 1,718,180 ------------- ------------- $ 3,096,640 $ 3,102,799 ------------- ------------- Deferred Income Tax Liabilities $ 3,442,131 $ 3,519,139 ------------- ------------- Commitments and Contingencies $ -- -- $ -- -- ------------- ------------- Stockholders' Equity Common stock, par value $1.00 per share; authorized 30,000,000 shares $ 15,850,562 $ 16,510,402 Additional paid-in capital 3,606,399 10,182,295 Retained earnings 95,022,594 89,453,514 Cumulative translation adjustments (243,791) (220,566) Unrecognized pension costs, net of deferred tax effect (237,442) (162,680) ------------- ------------- Total stockholders' equity $ 113,998,322 $ 115,762,965 ------------- ------------- 	 Total liabilities and stockholders' equity $ 140,822,440 $ 149,996,525 ============= ============= The accompanying notes are an integral part of the consolidated financial statements. O'SULLIVAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ------------ Net sales $211,363,709 $209,723,562 $194,974,264 Cost of products sold 175,559,141 168,142,885 156,984,225 ------------ ------------ ------------ Gross profit $ 35,804,568 $ 41,580,677 $ 37,990,039 ------------ ------------ ------------ Operating expenses Selling and warehousing $ 10,717,579 $ 10,161,297 $ 12,077,019 General and administrative 8,157,101 8,170,944 7,289,802 Relocation charge -- -- 755,930 -- -- ------------ ------------ ------------ $ 18,874,680 $ 19,088,171 $ 19,366,821 ------------ ------------ ------------ Income from operations $ 16,929,888 $ 22,492,506 $ 18,623,218 ------------ ------------ ------------ Other income (expense) Interest income $ 686,021 $ 863,530 $ 180,217 Interest expense (108,249) (59,753) (811,676) Other, net 107,486 364,320 118,720 ------------ ------------ ------------ $ 685,258 $ 1,168,097 $ (512,739) ------------ ------------ ------------ Income from continuing opera- tions before income taxes $ 17,615,146 $ 23,660,603 $ 18,110,479
Income taxes 6,885,653 9,628,540 7,135,509 ------------ ------------ ------------ Income from continuing operations $ 10,729,493 $ 14,032,063 $ 10,974,970 ------------ ------------ ------------ Discontinued operations: Loss from discontinued operations, net of taxes $ $ $ (125,126) Loss on disposal of discontinued operations, net of taxes (8,220,000) ------------ ------------ ------------ $ -- -- $ -- -- $ (8,345,126) ------------ ------------ ------------
Net income $ 10,729,493 $ 14,032,063 $ 2,629,844 ============ ============ ============ Net income (loss) per common share: Income from continuing operations $ .66 $ .85 $ .67 Loss from discontinued operations -- -- -- -- (.01) Loss on disposal of discontinued operations -- -- -- -- (.50) ------------ ------------ ------------ Net income per common share $ .66 $ .85 $ .16 ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements. O'SULLIVAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ------------ Cash Flows from Operating Activities Net income $ 10,729,493 $ 14,032,063 $ 2,629,844 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,256,543 6,820,128 10,867,275 Provision for doubtful accounts 74,872 439,480 1,138,617 Deferred income taxes 844,660 486,782 (6,064,033) (Gain)loss on disposal of assets (644,099) (38,090) 10,964,763 Interest accrual on zero coupon notes payable 139,111 163,246 138,864 Interest accrual on zero coupon notes receivable (15,590) (196,025) 25,191 Foreign currency exchange rate (gains) losses (101,347) (237,018) 37,336 Unremitted (income) loss from joint venture (19,071) 209,825 -- -- Changes in operating assets and liabilities: Receivables (425,386) 9,469,616 8,340,071 Inventories 408,362 (9,721,098) (2,702,071) Other current assets (483,040) (77,033) (1,169,491) Accounts payable (2,509,196) (1,015,779) (4,791,149) Accrued expenses (1,140,971) (3,447,609) 4,099,149 ------------ ------------ ------------ Net cash provided by operating activities $ 14,114,341 $ 16,888,488 $ 23,514,366 ------------ ------------ ------------ Cash Flows from Investing Activities Purchase of property, plant and equipment $ (6,804,030) $(10,172,585) $ (8,751,196) Proceeds from disposal of assets 1,306,488 138,127 46,655,229 Investment in and loan to joint venture (441,000) (1,128,362) -- -- Decrease in deposits -- -- 463,328 -- -- Purchase of intangible assets -- -- -- -- (211,275) Disbursements on non-operating notes receivable -- -- -- -- (150,000) Payments received from non- operating notes receivable 2,417,883 -- -- 250,894 Other, net (523,698) (570,635) 286,882 ------------ ------------ ------------ Net cash provided by (used in) investing activities $ (4,044,357) $(11,270,127) $ 38,080,534 ------------ ------------ ------------
O'SULLIVAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1995 and 1994 (Continued)
1996 1995 1994 ------------ ------------ ------------ Cash Flows from Financing Activities Changes in short-term debt $ -- -- $ -- -- $ (8,483,977) Net change in line of credit borrowings -- -- -- -- (13,000,000) Repayment of long-term debt (1,579,761) (46,322) (28,622,307) Cash dividends paid (5,160,413) (5,117,607) (4,615,655) Purchase of common stock (7,235,736) (2,635) (1,175) Issuance of common stock -- -- 246,985 -- -- ------------ ------------ ------------ Net cash (used in) financing activities $(13,975,910) $ (4,919,579) $(54,723,114) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents $ (3,905,926) $ 698,782 $ 6,871,786
Cash and cash equivalents at beginning of period 10,400,583 9,701,801 2,830,015 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 6,494,657 $ 10,400,583 $ 9,701,801 ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
O'SULLIVAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1996, 1995 and 1994
Additional Common Paid-in Retained Stock Capital Earnings ------------ ------------ ------------ Balance at January 1, 1994 $ 16,484,948 $ 9,964,574 $ 82,524,869 Net income -- -- -- -- 2,629,844 Purchase of common stock (117) (1,058) -- -- Dividends declared, $.28 per share -- -- -- -- (4,615,655) Translation adjustments -- -- -- -- -- -- Unrecognized pension costs -- -- -- -- -- -- ------------ ------------ ------------ Balance at December 31, 1994 $ 16,484,831 $ 9,963,516 $ 80,539,058 Net income -- -- -- -- 14,032,063 Issuance of common stock 25,811 221,724 -- -- Purchase of common stock (240) (2,395) -- -- Dividends declared, $.31 per share -- -- -- -- (5,117,607) Translation adjustments -- -- -- -- -- -- Unrecognized pension costs -- -- -- -- -- -- ------------ ------------ ------------ Balance at December 31, 1995 $ 16,510,402 $ 10,182,295 $ 89,453,514 Net income -- -- -- -- 10,729,493 Purchase of common stock (659,840) (6,575,896) -- -- Dividends declared, $.32 per share -- -- -- -- (5,160,413) Translation adjustments -- -- -- -- -- -- Unrecognized pension costs -- -- -- -- -- -- ------------ ------------ ------------ Balance at December 31, 1996 $ 15,850,562 $ 3,606,399 $ 95,022,594 ============ ============ ============
O'SULLIVAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1996, 1995 and 1994 (Continued)
Cumulative Unrecognized Translation Pension Stockholders' Adjustments Costs Equity ------------ ------------ ------------ Balance at January 1, 1994 $ (101,732) $ (119,296) $108,753,363 Net income -- -- -- -- 2,629,844 Purchase of common stock -- -- -- -- (1,175) Dividends declared, $.28 per share -- -- -- -- (4,615,655) Translation adjustments (243,370) -- -- (243,370) Unrecognized pension costs -- -- 119,296 119,296 ------------ ------------ ------------ Balance at December 31, 1994 $ (345,102) $ -- -- $106,642,303 Net income -- -- -- -- 14,032,063 Issuance of common stock -- -- -- -- 246,985 Purchase of common stock -- -- -- -- (2,635) Dividends declared, $.31 per share -- -- -- -- (5,117,607) Translation adjustments 124,536 -- -- 124,536 Unrecognized pension costs -- -- (162,680) (162,680) ------------ ------------ ------------ Balance at December 31, 1995 $ (220,566) $ (162,680) $115,762,965 Net income -- -- -- -- 10,729,493 Purchase of common stock -- -- -- -- (7,235,736) Dividends declared, $.32 per share -- -- -- -- (5,160,413) Translation adjustments (23,225) -- -- (23,225) Unrecognized pension costs -- -- (74,762) (74,762) ------------ ------------ ------------ Balance at December 31, 1996 $ (243,791) $ (237,442) $113,998,322 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
O'Sullivan Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
Nature of Operations-O'Sullivan Corporation is engaged in two business segments. The Plastics Products segment manufactures calendered plastics products for the automotive and specialty manufacturing industries. The Consumer Products segment manufactures and distributes lawn and garden products. A significant amount of the Corporation's businesses are conducted in North America. Reference should be made to Note 10 which provides further information as to the Corporation's operations.
Principles of Consolidation-The consolidated financial statements include the accounts of all subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments in affiliates in which the Corporation has a 20% to 50% interest are carried at cost, adjusted for the Corporation's proportionate share of the affiliate's undistributed earnings or losses.
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which require the Corporation to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents-The Corporation considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
Receivables and Concentration of Credit Risk-Receivables from trade customers are generally due within thirty to sixty days. The Corporation conducts periodic reviews of its major customers' financial condition and grants trade credit based upon evaluations of the credit worthiness of each customer. Management performs regular assessments of receivables and makes estimates as to the adequacy of the allowance for doubtful accounts based on historical data and knowledge of customers' financial condition. Credit losses have been within the expectations of management.
Inventories-Inventories are valued at the lower of cost or market, with cost being determined substantially by the first-in, first-out or average cost method.
Property, Plant and Equipment and Depreciation-Property, plant and equipment are stated at historical cost, adjusted to current exchange rates where applicable. Depreciation is computed primarily by the straight-line method over the estimated useful lives of assets. The estimated useful lives are twenty to forty years for buildings and three to fourteen years for machinery and other equipment. Accelerated methods of depreciation are utilized for tax purposes. Expenditures for repairs and maintenance are charged to operations as incurred. Betterments and improvements that extend the useful life of an asset are capitalized. Upon sale and other dispositions of assets, the cost and related accumulated depreciation is removed from the accounts and the resulting gain or loss is reflected in operations.
Intangibles-Intangible assets are stated at historical cost less accumulated amortization. Amortization is determined on a straight-line basis over the estimated useful lives of the assets that have been determined to range from two to seven years. Amortization expense for 1996, 1995 and 1994 was $134,828, $266,718 and $447,770, respectively.
Income Taxes-Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Advertising Costs-Costs incurred for producing and communicating advertising are expensed when incurred, including costs incurred in connection with cooperative advertising programs with distributors and other customers. Advertising costs were $1,685,862 for 1996, $1,203,141 for 1995 and $1,649,788 for 1994.
Research and Development-Product and process research and development are charged to expense as incurred.
Per Share Information-Net income and dividends per share were calculated on the weighted average common shares outstanding for 1996, 1995 and 1994 which were 16,169,162, 16,503,877 and 16,484,879, respectively. Stock options were not dilutive for 1996, 1995 or 1994.
Foreign Currency Translation-Financial statements for the Corporation's foreign subsidiary are translated into US dollars at year-end exchange rates as to assets and liabilities and weighted average exchange rates as to revenues and expenses. The resulting translation adjustments are recorded in stockholders' equity. Transaction gains and losses are reflected in net income.
Pension Plans-The Corporation and its subsidiaries have retirement plans that cover substantially all employees who meet certain eligibility requirements. Employees not covered under a retirement plan maintained by the Corporation and its subsidiaries are generally participants in multiemployer plans sponsored by other entities. The plans include non-contributory defined benefit plans providing benefits to certain salaried employees based on years of service and final years' average earnings and to certain hourly employees based on a dollar unit multiplied by years of eligible service. The Corporation's policy is to fund at least the minimum amounts required by the applicable governing bodies.
The Corporation also maintains a Retirement Savings Plan (Plan) to provide retirement benefits to employees not covered by a defined benefit plan. The Plan provides that the Corporation will make a basic contribution of three percent of eligible compensation for participants. The Plan also provides that the Corporation will make an additional contribution of up to two percent of eligible compensation if the participant is making voluntary contributions to the Plan. Participants may generally contribute up to five percent of their eligible compensation. The Corporation is not required to make any contributions during a plan year if it elects to not do so.
Postretirement Benefits-The Corporation provided health care benefits to certain of its retired employees under a plan which was terminated January 1, 1993. Upon termination of the plan this group of retired employees was allowed to continue to be covered by the Corporation's group insurance plan. Effective January 1, 1993 the Corporation adopted Financial Accounting Standards Board Statement No. 106 to account for its share of the costs of benefits provided to this group. To effect adoption of Statement No. 106, the Corporation accrued as of January 1, 1993 its share of the estimated costs to insure this group of retirees. Prior to January 1, 1993, the Corporation expensed its share of these expenses as they were incurred.
Reclassification of Amounts-Certain amounts for 1995 and 1994 have been reclassified to reflect comparability with account classifications for 1996.
2. Supplementary Balance Sheet Detail
Balances at December 31, 1996 1995 ------------ ------------
Receivables Accounts receivable $ 31,612,778 $ 31,357,520 Less allowance for doubtful accounts 803,392 898,648 ------------ ------------ $ 30,809,386 $ 30,458,872 ============ ============ Receivable balances for automotive related business were $12,736,630 at December 31,1996 and $13,825,514 at December 31, 1995.
Inventories Finished goods $ 14,780,621 $ 11,801,242 Work in process 9,000,680 10,754,865 Raw materials 14,794,005 16,373,017 Supplies 3,212,635 3,267,179 ------------ ------------ $ 41,787,941 $ 42,196,303 ============ ============ Slow moving inventories were $695,265 at December 31, 1996 and $1,169,628 at December 31, 1995. Slow moving inventories is an estimate of inventory held in excess of one year's requirements, based on historical sales volumes.
Property, Plant and Equipment Land $ 1,214,544 $ 1,262,754 Buildings 27,701,240 26,898,482 Machinery and equipment 71,370,912 67,730,663 Transportation equipment 3,838,249 3,626,921 ------------ ------------ $104,124,945 $ 99,518,820 Less accumulated depreciation 56,997,653 51,491,491 ------------ ------------ $ 47,127,292 $ 48,027,329 ============ ============ Depreciation expense totaled $7,121,715, $6,553,410 and $10,419,505 in 1996, 1995 and 1994, respectively.
Accrued Expenses Accrued compensation $ 2,680,035 $ 2,633,871 Employee benefits 945,277 1,053,905 Dividends payable 1,274,621 1,319,419 Contingency reserve for discontinued operations 70,598 2,417,252 Other accrued expenses 2,024,016 2,755,870 ------------ ------------ $ 6,994,547 $ 10,180,317 ============ ============ The contingency reserve for discontinued operations is an allowance for potential adjustments relating to the sale of the Corporation's former Gulfstream Division.
3. Debt December 31, ------------ 1996 1995 Long-Term Debt ------------ ------------
Non-interest bearing obligation to Melnor Industries, Inc. $ 34,138 $ 276,331
Unsecured non-interest bearing promissory note to Melnor Industries, Inc. -- -- 1,340,738
Capital lease obligations and other debt 51,746 100,124 ------------ ------------ $ 85,884 $ 1,717,193 Less current maturities 70,094 1,665,448 ------------ ------------ $ 15,790 $ 51,745 ============ ============ The non-interest bearing obligation payable to Melnor Industries, Inc. is discounted at 9.0%. The final payment of the obligation is contingent on Melnor Industries, Inc. satisfying its obligation under the New Jersey Environmental Cleanup Act.
The unsecured non-interest bearing promissory note to Melnor Industries, Inc. was discounted at 9.0%. The note was paid in full in November of 1996.
The debt remaining at December 31, 1996 matures as follows; $70,094 in 1997 and $15,790 in 1998.
Interest incurred and capitalized are as follows:
1996 1995 1994 --------- --------- --------- Interest incurred $ 147,708 $ 143,825 $ 914,211 Less interest capitalized 39,459 84,072 102,535 --------- --------- --------- $ 108,249 $ 59,753 $ 811,676 ========= ========= =========
The Corporation has a $35,000,000 unsecured line of credit through First Union National Bank of Virginia to support general corporate activities. Interest rates for the line of credit vary based on the Corporation's choice of rate options provided by the lender. All available rates are at or below prevailing prime interest rates. The line of credit matures June 30, 1998. At December 31, 1996 the Corporation has utilized $850,000 of the line of credit to provide a standby letter of credit in that amount for a subsidiary corporation.
4. Investment in Unconsolidated Joint Venture
The Corporation acquired a 49% equity interest in Keifel Technologies, Inc. (Keifel) during 1995. Keifel designs, manufactures and distributes thermoforming and radio frequency welding machines and related machinery and tools. Financial information for Keifel is as follows:
Income Statement Data For The Year Ended December 31, 1996 And For The Period August 9, 1995 Through December 31, 1995
Period Ended December 31, 1996 1995 ------------ ------------
Net sales $ 5,986,996 $ 213,312 Gross profit (loss) $ 1,174,687 $ (27,439) Net income (loss) $ 38,920 $ (428,214)
Corporation's share of net income (loss) $ 19,071 $ (209,825)
Balance Sheet Data at December 31, 1996 1995 - ---------------------------------- ------------ ------------
Assets Current assets $ 3,134,561 $ 736,317 Property, plant and equipment, net 1,950,801 1,525,028 Other assets 9,500 9,500 ------------ ------------- Total assets $ 5,094,862 $ 2,270,845 ============ =============
Liabilities and Equity Current liabilities $ 2,384,526 $ 399,059 Notes payable 2,496,000 1,800,000 Other long-term liabilities 103,623 -- -- Stockholders' equity 110,713 71,786 ------------ ------------- Total liabilities and equity $ 5,094,862 $ 2,270,845 ============ =============
Corporation's share of equity $ 54,249 $ 35,175 ============ =============
5. Income Tax Matters
Pretax income for the years ended December 31, 1996, 1995 and 1994 was taxed by the following jurisdictions:
1996 1995 1994 ------------ ------------ ------------ Domestic $ 17,581,047 $ 22,800,687 $ 16,934,578 Foreign 34,099 859,916 1,175,901 ------------ ------------ ------------ $ 17,615,146 $ 23,660,603 $ 18,110,479 ============ ============ ============
Net deferred tax liabilities at December 31, 1996 and 1995 consisted of the following components
1996 1995 ------------ ------------ Deferred tax assets Provision for doubtful accounts $ 288,861 $ 279,344 Employee benefits 1,707,436 1,580,115 Inventory basis differences 167,400 191,775 Contingency reserve for discontinued operations 28,239 966,901 Marketing expenses 168,711 153,419 Other 169,416 175,377 ------------ ------------ $ 2,530,063 $ 3,346,931 ------------ ------------ Deferred tax liabilities Property, plant and equipment $ 4,133,758 $ 4,181,375 Like-kind exchange 254,856 254,856 Employee benefits 201,623 167,203 ------------ ------------ $ 4,590,237 $ 4,603,434 ------------ ------------
Net deferred tax liabilities $ (2,060,174) $ (1,256,503) ============ ============
The deferred tax amounts included above have been classified on the balance sheets for December 31, 1996 and 1995 as follows 1996 1995 ------------ ------------
Noncurrent liabilities $ (3,442,131) $ (3,519,139) Current assets 1,381,957 2,262,636 ------------ ------------ Net deferred tax liabilities $ (2,060,174) $ (1,256,503) ============ ============
The provision for income taxes charged to operations for the years ended December 31, 1996, 1995 and 1994 includes the following
1996 1995 1994 ------------ ------------ ------------ Current Federal $ 5,050,010 $ 6,728,076 $ 5,478,787 Foreign (21,617) 301,072 472,492 State 1,012,600 2,112,610 960,462 ------------ ------------ ------------ $ 6,040,993 $ 9,141,758 $ 6,911,741 ------------ ------------ ------------ Deferred Federal $ 706,102 $ 403,589 $ 190,369 Foreign -- -- 28,853 21,387 State 138,558 54,340 12,012 ------------ ------------ ------------ $ 844,660 $ 486,782 $ 223,768 ------------ ------------ ------------ $ 6,885,653 $ 9,628,540 $ 7,135,509 ============ ============ ============
The income tax provision differs from the amount of income tax determined by applying the US federal income tax rate to pretax income for the years ended December 31, 1996, 1995 and 1994 due to the following
1996 1995 1994 -------- -------- -------- Statutory federal tax rate 35.0% 35.0% 35.0% Income taxed at lower federal tax rate (.6%) -- -- (.6%) State taxes, net of federal benefit 4.3% 6.0% 3.5% Rate differential on foreign income (.1%) .1% .5% Business credits -- -- -- -- (.4%) Other .5% (.4%) 1.4% -------- -------- -------- 39.1% 40.7% 39.4% ======== ======== ========
6. Benefit Plans
Defined Benefit Plans
The net pension cost for defined benefit plans included the following components 1996 1995 1994 ----------- ----------- ----------- Benefits earned during the year $ 117,775 $ 100,835 $ 228,417 Interest cost on projected benefit obligations 634,168 607,454 678,236 Actual (return) on assets (585,470) (1,082,007) (222,158) Net amortization and deferral (28,149) 549,493 (312,142) Settlement (gain) -- -- (81,954) (92,961) ----------- ----------- ----------- Net pension cost $ 138,324 $ 93,821 $ 279,392 =========== =========== ===========
The funded status of the defined benefit pension plans as of December 31, 1996 was as follows Overfunded Underfunded ------------ ------------ Actuarial present value: Vested benefit obligation $ 3,020,775 $ 5,940,487 Nonvested benefit obligation 2,699 101,829 ------------ ------------ Accumulated benefit obligation $ 3,023,474 $ 6,042,316 Effect of projected compensation increases 300,710 -- -- ------------ ------------ Projected benefit obligation $ 3,324,184 $ 6,042,316 Fair value of plan assets 4,020,901 4,961,943 ------------ ------------ Plan assets in excess of (less than) projected benefit obligation $ 696,717 $ (1,080,373) Unrecognized net loss 67,841 158,338 Unrecognized prior service costs -- -- 525,489 Unrecognized net (asset) liability at initial adoption of FAS 87 (258,896) 20,191 Adjustment required to recognize minimum liability -- -- (704,018) ------------ ------------ Prepaid (accrued) pension cost $ 505,662 $ (1,080,373) ============ ============
The funded status of the defined benefit pension plans as of December 31, 1995 was as follows Overfunded Underfunded ------------ ------------ Actuarial present value: Vested benefit obligation $ 2,334,090 $ 6,193,084 Nonvested benefit obligation -- -- 101,795 ------------ ------------ Accumulated benefit obligation $ 2,334,090 $ 6,294,879 Effect of projected compensation increases -- -- 269,707 ------------ ------------ Projected benefit obligation $ 2,334,090 $ 6,564,586 Fair value of plan assets 2,860,196 5,288,778 ------------ ------------ Plan assets in excess of (less than) projected benefit obligation $ 526,106 $ (1,275,808) Unrecognized net loss 144,980 80,676 Unrecognized prior service costs -- -- 594,823 Unrecognized net (asset) liability at initial adoption of FAS 87 (253,080) (3,268) Adjustment required to recognize minimum liability -- -- (691,139) ------------ ------------ Prepaid (accrued) pension cost $ 418,006 $ (1,294,716) ============ ============
Discount rates for the plans ranged from 7% to 8%. The assumed long-term rates of return on plan assets were 8%. The assumed rate of increase in future compensation levels was 7%. The unrecognized asset (liability) at the initial adoption of FAS 87 is being amortized on a straight-line basis over the average remaining service period of plan participants. Plan assets consist of listed common stocks, corporate and government bonds and short-term investments.
Retirement Savings Plan
The expense associated with the Retirement Savings Plan was $1,434,095 for 1996, $1,312,222 for 1995 and $1,268,087 for 1994.
Deferred Compensation Plan
The Corporation has a deferred compensation program for key employees of the Corporation. Under this program, the Corporation has agreed to pay each covered employee a certain sum annually for fifteen years upon their retirement or, in the event of their death, to their designated beneficiary. A benefit is also paid if the employee terminates employment other than by his voluntary action or discharge for cause before they attain age 65. In that event, the amount of the benefit depends on the employee's years of service with the Corporation with full benefit paid only if the employee has completed 25 years of service. The Corporation has purchased individual life insurance contracts with respect to each employee covered by this program. The Corporation is the owner and beneficiary of the insurance contracts. The employees are general creditors of the Corporation with respect to these benefits. The expense associated with the Deferred Compensation plan was $493,773 for 1996, $397,798 for 1995 and $295,299 for 1994.
Postretirement Benefit Plan
At January 1, 1993 the Corporation adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This statement requires the Corporation to recognize the estimated costs of providing certain postretirement benefits to former employees of the Corporation. The Corporation elected to recognize the transition obligation immediately as the effect of an accounting change.
Annual net postretirement benefit costs are determined on an actuarial basis. Net periodic postretirement benefit cost included the following components for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---------- ---------- ---------- Interest expense on accumulated postretirement benefit obligation $ 28,000 $ 27,000 $ 29,000 Other amortization and deferrals 2,000 (16,000) (12,000) ---------- ---------- ---------- $ 30,000 $ 11,000 $ 17,000 ========== ========== ==========
Postretirement benefit obligations at December 31, 1996 and 1995, none of which are funded, are as follows 1996 1995 ------------ ------------ Accumulated postretirement benefit obligation, retirees $ 332,000 $ 394,000 Plan assets -- -- -- -- ------------ ------------ Accumulated postretirement benefit obligation in excess of plan assets $ 332,000 $ 394,000 Unrecognized transition obligation -- -- -- -- Unrecognized net experience losses (gains) -- -- -- -- ------------ ------------ Accrued postretirement benefit obligation $ 332,000 $ 394,000 ============ ============
For measurement purposes, a 13% annual rate of increase in per capita health care costs of covered benefits was assumed for 1996, with such annual rate of increase gradually declining to 6% in 2003.
7. Leases
The Corporation and its subsidiaries lease various plant and warehouse facilities along with various equipment. Leases for the plant and warehouse facilities and capitalized leases for machinery and equipment generally require the payment of appropriate taxes, insurance and maintenance costs. Most noncapitalized leases, except for the lease of facilities in New Jersey by a subsidiary, are cancelable within a limited period of time. The facility in New Jersey is leased under a noncancelable agreement that expires June 30, 1997. The net minimum rental commitment for the New Jersey facility through June 30, 1997 is $48,226.
Net rental expense for all noncapitalized leases for the years ended 1996, 1995, and 1994 was $768,680, $738,588 and $858,213, respectively.
8. Research and Development
Research and development costs charges to expense were $3,105,546 in 1996, $3,545,330 in 1995 and $3,423,175 in 1994.
9. Commitments and Contingencies
Environmental Matters
The Corporation continues to modify, on an ongoing, regular basis, certain of its processes which may have an environmental impact. The Corporation's efforts in this regard include the removal of many of its underground storage tanks and the reduction or elimination of certain chemicals and wastes in its operations. Although it is very difficult to quantify the potential impact of compliance with environmental protection laws, the Corporation's financial statements reflect the cost of these ongoing modifications. Management believes that the continuing costs to the Corporation of environmental compliance will not result in a material adverse effect on its future financial condition or results of operations.
10. Business Segment Information
The Corporation's operations are classified principally into two business segments; Calendered Plastics Products (Plastics Products) and Lawn and Garden Consumer Products (Consumer Products). The Plastics Products segment primarily involves the manufacture of calendered plastics products for the automotive and specialty plastics manufacturing industries. The Consumer Products segment primarily involves the manufacture and distribution of a wide range of lawn and garden products. Operating profit represents net sales less operating expenses for each segment and excludes general corporate expenses and non-operating revenues and expenses. Identifiable assets for each segment represent those assets used in the Corporation's operations and exclude general corporate assets. General corporate assets include cash, investments and other non-operating assets.
Net sales for the Plastics Products segment to the divisions and subsidiaries of Ford Motor Company amounted to $44,186,054 (20.9% of net sales) in 1996, $40,622,615 (19.4% of net sales) in 1995 and $24,385,299 (12.5% of net sales) in 1994.
Receivables at December 31, 1996, 1995 and 1994 from Ford Motor Company were $5,006,569, $6,275,579 and $3,396,054, respectively.
Business Segment Information 1996 1995 1994 Net sales by classes of similar ------------ ------------ ------------ products Plastics products $171,218,487 $169,455,886 $149,438,108 Consumer products 40,145,222 40,267,676 45,536,156 ------------ ------------ ------------ $211,363,709 $209,723,562 $194,974,264 ============ ============ ============ Operating profit (loss) Plastics products $ 26,038,371 $ 29,443,430 $ 21,630,468 Consumer products (951,382) 1,220,020 4,282,552 ------------ ------------ ------------ Total operating profit $ 25,086,989 $ 30,663,450 $ 25,913,020 General corporate expenses 8,157,101 8,170,944 7,289,802 Nonoperating revenue (expense) 685,258 1,168,097 (512,739) ------------ ------------ ------------ Income from continuing operations before income taxes $ 17,615,146 $ 23,660,603 $ 18,110,479 ============ ============ ============ Identifiable assets Plastics products $ 92,003,894 $ 91,139,594 $ 92,203,867 Consumer products 29,825,140 30,056,412 27,318,222 ------------ ------------ ------------ Total identifiable assets $121,829,034 $121,196,006 $119,522,089 General corporate assets 18,993,406 28,800,519 25,006,799 ------------ ------------ ------------
$140,822,440 $149,996,525 $144,528,888 ============ ============ ============
Capital expenditures Plastics products $ 5,779,111 $ 7,617,926 $ 7,477,833 Consumer products 915,792 2,382,011 1,205,377 General corporate 109,127 172,648 67,986 ------------ ------------ ------------ $ 6,804,030 $ 10,172,585 $ 8,751,196 ============ ============ ============
Depreciation and amortization Plastics products $ 4,915,452 $ 4,391,048 $ 8,644,205 Consumer products 2,078,816 1,958,777 1,719,307 General corporate 262,275 470,303 503,763 ------------ ------------ ------------ $ 7,256,543 $ 6,820,128 $ 10,867,275 ============ ============ ============
11. Incentive Stock Option Plan
1985 Incentive Stock Option Plan
The 1985 option plan expired on January 28, 1995. Options previously granted may be exercised by the participants until the options expire, which is ten years after the date of the original option grant. The option price of grants under this plan could not be less than the fair market value of the common stock on the date of grant.
1995 Stock Option Plan
In 1995 the Corporation adopted a new incentive stock option plan under which options may be granted to certain key employees for the purchase of the Corporation's common stock. The effective date of the Plan was February 7, 1995 with an expiration date of February 6, 2005. The Plan reserves for issuance an aggregate of 200,000 shares of the Corporation's common stock. The option price for options granted cannot be less than 100% of fair market value of the common stock on the date of the grant. The Plan contains an antidilutive provision providing for adjustments to the options previously granted in the event of changes in the Corporation's capital structure.
1995 Outside Directors Stock Option Plan
In 1995 the Corporation adopted an incentive stock plan under which options may be granted to members of the Corporation's Board of Directors for the purchase of the Corporation's common stock. The effective date of the Plan was April 25, 1995 with an expiration date of April 24, 2005. The Plan reserves for issuance an aggregate of 200,000 share of the Corporation's common stock. Each eligible director received an option for 10,000 shares common stock on the effective date of the Plan. On each April 25 thereafter each eligible director will receive an option for 1,000 shares of common stock. Directors who become eligible after April 25, 1995 will receive an option for 10,000 shares as of the date they become eligible for the Plan and will receive an option for 1,000 shares on each April 25 thereafter. The option price for options granted cannot be less than 100% of fair market value of the common stock on the date of the grant. The plan contains an antidilutive provision providing for adjustments to the options previously granted in the event of changes in the Corporation's capital structure.
The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1996 and 1995. Dividend rate of 2.9% for both years, price volatility of 25% for 1996 and 26% for 1995, risk-free interest rate of 5.31% for 1996 and 6.50% for 1995 and expected lives of 7.75 years for both years.
The Corporation applies APB Opinion 25 in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for 1996 and 1995. Had compensation cost been determined on the basis of fair value pursuant to FASB Statement No. 123, net income and earnings per share would have been as follows
1996 1995 ------------ ------------
Net income As reported $ 10,729,493 $ 14,032,063 ============ ============ Proforma $ 16,688,056 $ 13,847,180 ============ ============
Earnings per share As reported $ .66 $ .85 ============ ============ Proforma $ .66 $ .84 ============ ============
The status of the stock option plans during 1996 and 1995 is as follows
1995 Directors 1985 Option Plan 1995 Option Plan Option Plan ---------------- ---------------- -------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Outstanding at January 1, 1996 96,965 $ 10.99 102,000 $ 10.31 80,000 $ 10.31 Granted during 1996 -- -- -- -- 24,000 11.19 8.000 11.13 Exercised during 1996 -- -- -- -- -- -- -- -- -- -- -- -- Forfeited during 1996 (2,000) 10.10 (1,000) 10.31 -- -- -- -- --------- ---------- --------- Outstanding at December 31, 1996 94,965 11.01 125,000 10.48 88,000 10.39 ========= ========== =========
All outstanding options were exercisable at December 31, 1996
Weighted average fair value of options granted during 1996 N/A $ 11.19 $ 11.13 ======== ======== ========
1995 Directors 1985 Option Plan 1995 Option Plan Option Plan ---------------- ---------------- -------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Outstanding at January 1, 1995 153,062 $ 10.59 -- -- $ -- -- -- -- $ -- -- Granted during 1995 -- -- -- -- 102,000 10.31 80,000 10.31 Exercised during 1995 (25,811) 9.57 -- -- -- -- -- -- -- -- Forfeited during 1995 (30,286) 10.21 -- -- -- -- -- -- -- -- --------- ---------- --------- Outstanding at December 31, 1995 96,965 10.99 102,000 10.31 80,000 10.31 ========= ========== =========
All outstanding options were exercisable at December 31, 1995
Weighted average fair value of options granted during 1995 N/A $ 10.31 $ 10.31 ======== ======== ========
The status of the options outstanding at December 31, 1996 is as follows
Remaining Exercise Contractual Price Number Life -------- -------- ----------- $ 11.47 21,595 .3 Years 15.90 18,750 2.1 Years 10.88 17,000 3.1 Years 8.32 36,620 5.8 Years 9.69 1,000 6.3 Years 10.31 181,000 8.3 Years 11.18 32,000 9.3 Years
12. Fair Value of Financial Instruments
The Corporation estimates that each category of financial instruments; including cash, trade receivables and payables, investments and debt instruments, approximate current value at December 31, 1996 and 1995.
13. Supplemental Cash Flow Information
Supplemental Disclosure of Cash Flow Information
1996 1995 1994 ------------ ------------ ------------ Cash payments for interest, net of interest capitalized $ 2,976 $ 59,753 $ 3,199,018 ============ ============ ============
Cash payments for income taxes $ 5,689,279 $ 8,375,829 $ 8,797,775 ============ ============ ============
Supplemental Schedule of Noncash Investment Activities
In 1996 notes receivable of $654,794 were received as part of the proceeds from the sale of property and equipment.
14. Supplemental Financial Data (Unaudited)
Quarter Ended ------------------------------------------------------ 1996 March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ Net sales $ 56,156,946 $ 63,409,554 $ 47,552,955 $ 44,244,254 Gross profit $ 12,249,561 $ 11,848,688 $ 6,780,648 $ 4,925,671 Net income $ 4,234,201 $ 4,230,605 $ 1,546,699 $ 717,988 Earnings per share $ .26 $ .26 $ .10 $ .04 Dividends declared $ .08 $ .08 $ .08 $ .08 Market price per share High 11 1/4 12 3/4 12 1/8 11 3/4 Low 9 3/4 10 5/8 10 5/8 10
Total ------------ Net sales $211,363,709 Gross profit $ 35,804,568 Net income $ 10,729,493 Earnings per share $ .66 Dividends declared $ .32 Market price per share High 12 3/4 Low 9 3/4
Quarter Ended ------------------------------------------------------ 1995 March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ Net sales $ 55,052,191 $ 57,070,658 $ 48,551,668 $ 49,049,045 Gross profit $ 12,191,603 $ 11,280,312 $ 8,736,647 $ 9,372,115 Net income $ 4,083,884 $ 3,963,481 $ 2,784,742 $ 3,199,956 Earnings per share $ .25 $ .24 $ .17 $ .19 Dividends declared $ .07 $ .08 $ .08 $ .08 Market price per share High 10 5/8 12 3/8 12 11 7/8 Low 9 1/4 9 7/8 10 3/8 9 7/8
Total ------------ Net sales $209,723,562 Gross profit $ 41,580,677 Net income $ 14,032,063 Earnings per share $ .85 Dividends declared $ .31 Market price per share High 12 3/8 Low 9 1/4
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of O'Sullivan Corporation
We have audited the accompanying consolidated balance sheets of O'Sullivan Corporation and Subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of O'Sullivan Corporation and Subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for the years ended December 31, 1996, 1995 and 1994 in conformity with generally accepted accounting principles.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia January 24, 1997
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the Corporation's Directors and Director nominees, see pages 3 through 5 of the Corporation's definitive Proxy Statement dated March 28, 1997 which pages are incorporated herein by reference. For information concerning the compliance by directors, officers and beneficial owners of more than 10% of the Corporation's stock with the requirement of Section 16(a) of the Securities Exchange Act of 1934, see page 6 of the Corporation's Definitive Proxy Statement dated March 28, 1997, which page is incorporated herein by reference.
Executive Officers of the Registrant
The names, ages and positions of the executive officers of O'Sullivan Corporation at December 31, 1996 are listed below. All officers are elected by the Board of Directors for a one year term. There are no family relationships among officers or any other arrangement or understanding between any officer and any other person pursuant to which the officer was elected.
Served As Name Age Office Officer Since - --------------------- ---- --------------------- ------------- James T. Holland 56 President 1976 C. Bryant Nickerson 50 Secretary & Treasurer 1986 Phillip S. Griffin 58 Vice President 1975 John S. Campbell 46 Vice President 1986
Mr. Holland has served in the following capacities for the Corporation; Treasurer, 1976-1979, Vice President and Treasurer, 1979-1984, Executive Vice President and Chief Operating Officer, 1984-1986, President and Chief Operating Officer, 1986-1995, President and Chief Executive Officer, 1995 to the Present.
Mr. Nickerson has been employed by the Corporation since 1973 serving in various capacities within the corporate financial area. He has served as Controller and Treasurer and Chief Accounting Officer before being elected as Secretary, Treasurer and Chief Financial Officer in 1995.
Mr. Griffin has served the Corporation in various capacities in sales, manufacturing and corporate management since 1968. He has served as a Vice President since 1975 and also served as the President of Melnor Inc., a subsidiary of the Corporation. Mr. Griffin retired from the Corporation effective January 31, 1997.
Mr. John S. Campbell has served as a Vice President since 1986. He has been employed by the Corporation since 1973 and has been involved in both the sales and manufacturing operations of the calendered plastics products business of the Corporation.
Other Officers of the Registrant Served As Name Age Office Officer Since - --------------------- ---- --------------------- ------------- William O. Bauserman 53 Vice President 1987 Ewen A. Campbell 49 Vice President 1993 Dee S. Johnston 60 Vice President 1992 Michael J. Meissner 57 Vice President 1995 James L. Tremoulis 43 Vice President 1986 Robert C. Westfall 54 Vice President 1979
Mr. Bauserman has been employed by the Corporation since 1968 and has served as a Vice President since 1987. Mr. Bauserman has been employed in various capacities within the data processing and management information services areas during his tenure with the Corporation.
Mr. Ewen A. Campbell has an extensive background in chemistry and plastics compounding. He has been employed by the Corporation since 1991 in the areas of compounding and research and development activities. He has served as a Vice President since 1993. Mr. Ewen Campbell and Mr. John Campbell are not related.
Mrs. Johnston has been employed by the Corporation since 1976 and has served as a Vice President since 1992. Mrs. Johnston has been involved in all phases of the Corporation's purchasing function during her employment.
Mr. Meissner has been employed by the Corporation since 1995. Prior to that time he was employed by and was a principal with a business that served as a manufacturers' representative to the automotive industry for the Corporation.
Mr. Tremoulis has served in various capacities in the sales area for calendered plastics products since his employment by the Corporation in 1980. He was elected as a Vice President in 1986.
Mr. Westfall has been employed by the Corporation since 1965. He was a chemist, the Quality Control Director and a Plant Manager for the Corporation prior to being elected as a Vice President of Research and Development in 1979.
Item 11.
Item 11. EXECUTIVE COMPENSATION
See Pages 7 through 12 of the Corporation's Proxy Statement dated March 28, 1997, which pages are incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Pages 3 through 6 of the Corporation's Proxy Statement dated March 28, 1997, which pages are incorporated herein by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions during 1996 that would be applicable for disclosure under this item.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a). (1) Financial Statements Page
Included in Part II, Item 8, of this report:
Report of Independent Auditors 34
Consolidated Balance Sheets at December 31, 1996 and 1995 12
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 13
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 14-15
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 16-17
Consolidated Notes to Financial Statements 18-33
(a). (2) Financial Statement Schedules
Included in part IV of this report:
Report of Independent Auditors on Financial Statement Schedule 40
Schedule II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1996, 1995 and 1994 41
(a). (3) Exhibits
3.1 O'Sullivan Corporation Amended and Restated Articles of Incorporation, including the Articles of Amendment, dated April 30, 1985, filed with the State Corporation Commission of Virginia on May 6, 1985, adopted by stockholders of O'Sullivan Corporation at the annual meeting held April 30, 1985. (Incorporated by reference to the March 31, 1985, Quarterly Report on Form 10-Q of the Corporation.)
3.2 O'Sullivan Corporation Bylaws as amended to January 29, 1985. (Incorporated by reference to the March 31, 1985, Quarterly Report on Form 10-Q of the Corporation.)
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued)
Page 3.3 O'Sullivan Corporation Amended and Restated Articles of Incorporation dated April 29, 1989, filed with the State Corporation Commission dated April 29, 1989, adopted by stockholders of O'Sullivan Corporation at the annual meeting held April 25, 1989. (Incorporated by reference to the March 31, 1989 Quarterly Report on Form 10-Q of the Corporation.)
10.1 Compensatory arrangement with executive officers of the registrant. See Pages 7 through 12 of the Corporation's Proxy Statement dated March 28, 1997 which pages are incorporated herein by reference.
10.2 Form of Employment Continuity Agreement between the Registrant and James T. Holland, John S. Campbell, C. Bryant Nickerson, William O. Bauserman, Ewen A. Campbell, Dee S. Johnston, Michael M. Meissner, James L. Tremoulis and Robert C. Westfall.
10.3 The O'Sullivan Corporation 1995 Stock Option Plan filed as exhibit 99.1 to the Corporation's Form S-8 registration statement (Registration Number 033-58895) filed with the Commission on April 28, 1995 and incorporated herein by reference.
10.4 The O'Sullivan Corporation 1995 Outside Directors Stock Option Plan filed as exhibit 99.2 to the Corporation's Form S-8 registration statement (Registration Number 033-58895) filed with the Commission on April 28, 1995 and incorporated herein by reference.
10.5 1985 Incentive Stock option Plan. Amended and Restated as of July 27, 1993. (Incorporated by reference to the Annual report on form 10-K for the Year Ended December 31, 1994.)
21. Subsidiaries of the Registrant - filed herewith
23. Consent of Independent Auditors - filed herewith
24. Powers of Attorney - filed herewith
27. Financial Data Schedule - filed herewith
(b). Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended December 31, 1996.
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of the O'Sullivan Corporation
The examination referred to in our opinion dated January 24, 1997 of the consolidated financial statements as of December 31, 1996 and 1995 and for the three years ended December 31 ,1996, 1995 and 1994 included the related supplemental financial schedule as listed in Item 14(a) 2, which, when considered in relation to the basis financial statements, present fairly in all material respects the information shown therein.
/s/ YOUNT, HYDE & BARBOUR, P.C.
O'SULLIVAN CORPORATION AND SUBSIDIARIES Schedule II VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1996, 1995 and 1994
Column A Column B Column C Column D Column E - ---------- ---------- ------------------------ ----------- ----------- Additions ------------------------ (1) (2) Balance Charged Charged Balance at to costs to at Beginning and Other End Description of Year Expense Accounts Deductions of Year - ---------- ---------- ---------- ------------ ----------- ----------- 1996: Allowance for Doubtful Accounts $ 898,648 $ 74,872 $ -- -- $ 170,128(A)$ 803,392 ========== ========== =========== =========== =========== 1995: Allowance for Doubtful Accounts $ 884,467 $ 439,480 $ -- -- $ 425,299(A)$ 898,648 ========== ========== =========== =========== =========== 1994: Allowance for Doubtful Accounts $1,133,793 $1,138,617 $ -- -- $ 1,387,943(A)$ 884,467 ========== ========== =========== =========== ===========
Note (A) - Write-offs of uncollectible accounts, net of recoveries. Column D for 1994 also includes a reduction of $27,013 for a bad debt allowance pertaining to a subsidiary disposed of during 1994.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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.
March 27, 1997 O'SULLIVAN CORPORATION - -------------- By: /s/ C. Bryant Nickerson Date -------------------------- C. Bryant Nickerson Secretary, Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on the dates given.
Arthur H. Bryant, II * March 27, 1997 - ------------------------ -------------- Arthur H. Bryant, II Chairman and Director Date
/s/ James T. Holland March 27, 1997 - ------------------------ -------------- James T. Holland President, Chief Executive Date Officer and Director
/s/ C. Bryant Nickerson March 27, 1997 - ----------------------- -------------- C. Bryant Nickerson Secretary, Treasurer and Date Chief Financial Officer
John J. Armstrong * March 27, 1997 - ------------------------ -------------- John J. Armstrong Director Date
C. Hugh Bloom * March 27, 1997 - ------------------------ -------------- C. Hugh Bloom Director Date
Magalen O. Bryant * March 27, 1997 - ------------------------ -------------- Magalen O. Bryant Director Date
Robert L. Burrus, Jr. * March 27, 1997 - ------------------------ -------------- Robert L. Burrus, Jr. Director Date
Max C. Chapman, Jr. * March 27, 1997 - ------------------------ -------------- Max C. Chapman, Jr. Director Date
R. Michael McCullough * March 27, 1997 - ------------------------ -------------- R. Michael McCullough Director Date
Stephen P. Munn * March 27, 1997 - ------------------------ -------------- Stephen P. Munn Director Date
* By: /s/ James T. Holland --------------------- James T. Holland Attorney-In-Fact
EXHIBIT INDEX
Page 10.2 Employment Continuity Agreement 45-56
21. Subsidiaries of the Registrant 57
23. Consent of Experts 58
24. Powers of Attorney 59-66
27. Financial Data Schedule 67