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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-31282
PROSPECTUS
MAY 31, 2000
O'SULLIVAN INDUSTRIES, INC.
EXCHANGE OFFER FOR $100,000,000 13 3/8% SENIOR SUBORDINATED NOTES DUE 2009
IN EXCHANGE FOR $100,000,000 13 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE
2009,
GUARANTEED FULLY AND UNCONDITIONALLY BY O'SULLIVAN INDUSTRIES - VIRGINIA, INC.
ON A SENIOR SUBORDINATED BASIS.
- THE EXCHANGE OFFER EXPIRES AT 5:00 P.M. NEW YORK CITY TIME ON
JUNE 30, 2000, UNLESS WE EXTEND THIS DATE.
- IF YOU DECIDE TO PARTICIPATE IN THIS EXCHANGE OFFER, YOU WILL RECEIVE
EXCHANGE NOTES THAT WILL BE THE SAME AS OLD NOTES, EXCEPT THE EXCHANGE
NOTES WILL BE REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
AND YOU WILL BE ABLE TO OFFER AND SELL THEM FREELY TO ANY POTENTIAL
BUYER. THIS IS BENEFICIAL TO YOU SINCE YOUR OLD NOTES ARE NOT
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION AND YOU MAY NOT
OFFER OR SELL THE OLD NOTES WITHOUT REGISTRATION OR AN EXEMPTION FROM
REGISTRATION UNDER FEDERAL SECURITIES LAWS.
- THERE IS NO PUBLIC MARKET FOR THE OLD NOTES OR THE EXCHANGE NOTES.
HOWEVER, YOU MAY TRADE THE OLD NOTES AND THE EXCHANGE NOTES IN THE
PORTAL MARKET.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE EXCHANGE NOTES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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Prospectus Summary.......................................... 1
Risk Factors................................................ 7
The Recapitalization Transactions........................... 13
Use of Proceeds............................................. 15
Capitalization.............................................. 16
Selected Consolidated Historical Financial Information...... 17
Unaudited Pro Forma Condensed Consolidated Statements of
Operations................................................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 31
Management.................................................. 43
Security Ownership of Certain Beneficial Owners and
Management................................................ 45
Certain Relationships and Related Transactions.............. 48
Description of Indebtedness................................. 52
Description of Exchange Notes............................... 54
Exchange Offer.............................................. 89
United States Federal Income Tax Considerations............. 96
Plan of Distribution........................................ 97
Legal Matters............................................... 98
Experts..................................................... 98
Available Information....................................... 98
Index to Financial Statements............................... F-1
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REFERENCES TO THE WORDS "WE," "OUR," AND "US" REFER ONLY TO O'SULLIVAN
INDUSTRIES, INC., ITS PREDECESSORS AND ITS SUBSIDIARIES AND NOT TO LEHMAN
BROTHERS. REFERENCES TO "O'SULLIVAN HOLDINGS" REFER ONLY TO O'SULLIVAN
INDUSTRIES HOLDINGS, INC., OUR PARENT HOLDING COMPANY. REFERENCES TO "O'SULLIVAN
INDUSTRIES" REFER ONLY TO O'SULLIVAN INDUSTRIES, INC. THIS PROSPECTUS INCLUDES
SPECIFIC TERMS OF THE EXCHANGE NOTES WE ARE OFFERING AS WELL AS INFORMATION
REGARDING OUR BUSINESS AND DETAILED FINANCIAL DATA. FOR A MORE COMPLETE
UNDERSTANDING OF THIS OFFERING, WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT
AND THE DOCUMENTS WE HAVE REFERRED YOU TO.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS BASIC INFORMATION ABOUT THIS EXCHANGE
OFFER. IT PROBABLY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO
YOU. FOR A MORE COMPLETE UNDERSTANDING OF THIS EXCHANGE OFFER, WE ENCOURAGE YOU
TO READ THIS ENTIRE DOCUMENT AND THE DOCUMENTS WE HAVE REFERRED YOU TO.
IN ADDITION, OUR MANAGEMENT HAS ESTIMATED THE MARKET SHARE PERCENTAGES
PROVIDED IN THIS PROSPECTUS. WE BELIEVE THESE ESTIMATES TO BE RELIABLE, BUT
THESE NUMBERS HAVE NOT BEEN VERIFIED BY AN INDEPENDENT SOURCE.
THE OLD NOTE OFFERING
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Old Notes............................ We sold the old notes in conjunction with the issuance by
our parent corporation, O'Sullivan Industries Holdings,
Inc., of warrants to purchase common and Series B junior
preferred stock of O'Sullivan Industries Holdings, Inc., to
Lehman Brothers, the initial purchaser, on November 30,
1999. The old notes were fully and unconditionally
guaranteed by our subsidiary O'Sullivan Industries -
Virginia, Inc. on a senior subordinated basis. Lehman
Brothers subsequently resold the old notes and warrants to
qualified institutional buyers under Rule 144A of the
Securities Act of 1933. The price to the public of the old
notes and warrants was 98.046% of the principal amount of
the old notes, or $980.46 per unit of note and warrants. Of
this amount, $35.00 was allocated to the warrants, resulting
in a total discount on the old notes of $54.54 from their
face value.
Exchange and Registration Rights
Agreement.......................... We, O'Sullivan Industries - Virginia, Inc. (as guarantor)
and Lehman Brothers entered into a registration rights
agreement on November 30, 1999. The registration rights
agreement granted Lehman Brothers and any subsequent holders
of the old notes exchange and registration rights. We intend
that this exchange offer satisfy those exchange and
registration rights. The exchange and registration rights we
granted will terminate upon the consummation of our exchange
offer.
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THE EXCHANGE OFFER
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Securities Offered................... Up to $100,000,000 of 13 3/8% Series B senior subordinated
notes due 2009. The terms of the exchange notes and old
notes are identical in all material respects, except for
transfer restrictions and registration rights relating to
the old notes.
The Exchange Offer................... We are offering to exchange the old notes for a principal
amount equal to the principal amount of exchange notes. Old
notes may be exchanged only in integral principal multiples
of $1,000.
Expiration Date; Withdrawal of
Tender............................. Our exchange offer will expire at 5:00 p.m. New York City
time, on June 30, 2000, or a later date and time if we
choose to extend this exchange offer. However, we will not
extend this exchange offer beyond July 7, 2000. You may
withdraw your tender of old notes at any time prior to the
expiration date. We will return any old notes not accepted
by us for exchange for any reason at our expense as promptly
as possible after the expiration or termination of our
exchange offer.
Conditions to the Exchange Offer..... Based on an interpretation by the staff of the Securities
and Exchange
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Commission in no-action letters issued to third parties, we
believe that you may offer for resale, resell or otherwise
transfer the exchange notes without complying with the
registration and prospectus delivery provisions of the
Securities Act of 1933, provided that:
- you do not intend to participate and have no arrangement
or understanding with any person to participate in the
distribution of the exchange notes and
- you are not our "affiliate" within the meeting of Rule
405 under the Securities Act of 1933.
Our obligation to accept for exchange, or to issue the
exchange notes in exchange for, any old notes is subject to:
- customary conditions relating to compliance with any
applicable law,
- any applicable interpretation by any staff of the
Securities and Exchange Commission, or
- any order of any governmental agency or court of law.
We currently expect that each of the conditions will be
satisfied and that no waivers will be necessary. See "The
Exchange Offer - Conditions."
Procedures for Tendering Old Notes... Each holder of old notes wishing to accept the exchange
offer must complete, sign and date the Letter of
Transmittal, or a facsimile. The holder must mail or
otherwise deliver the Letter of Transmittal, or facsimile,
together with the old notes and any other required
documentation, to the exchange agent at the address in the
section "The Exchange Offer" under the heading "Procedures
for Tendering Old Notes."
Use of Proceeds...................... We will not receive any proceeds from the exchange of notes.
Exchange Agent....................... Norwest Bank Minnesota, N.A. is serving as the exchange
agent in connection with our exchange offer.
Federal Income Tax Consequences...... O'Sullivan has received an opinion from Kirkland & Ellis
that the exchange of old notes in accordance with the terms
of this exchange offer will not be a taxable event to you
for federal income tax purposes. See "United States Federal
Income Tax Considerations."
Dissenters Rights of Appraisal....... None.
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THE EXCHANGE NOTES
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Issuer............................... O'Sullivan Industries, Inc.
Securities Offered................... $100,000,000 in aggregate principal amount of 13 3/8% Series
B Senior Subordinated Notes due 2009.
Maturity............................. October 15, 2009.
Interest Payments.................... Payment frequency - every six months on April 15 and October
15. First payment October 15, 2000.
Subsidiary Guarantors................ The exchange notes will be guaranteed fully and
unconditionally by each of our current and future domestic
subsidiaries on a senior subordinated basis. At present, the
only guarantor of these exchange notes will be O'Sullivan
Industries - Virginia, Inc. which fully and unconditionally
guarantees these
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exchange notes on a senior subordinated basis. If we cannot
make payments on the exchange notes when they are due, the
guarantor subsidiaries must make them instead.
Optional Redemption.................. On or after October 15, 2004, we may redeem some or all of
the exchange notes at any time at the redemption prices
listed in the section "Description of Notes" under the
heading "Optional Redemption."
Before October 15, 2002, we may redeem up to 25% of the
exchange notes issued under the indenture with the proceeds
of certain offerings of equity at 113.375% of the principal
amount thereof, plus accrued and unpaid interest. See
"Optional Redemption" in the section "Description of Notes."
Before October 15, 2004, we may redeem some or all of the
exchange notes upon the occurrence of a change of control at
the redemption price listed in the section "Description of
Notes" under the heading "Optional Redemption."
Change of Control Offer and Asset
Sale Offer......................... If we experience specific kinds of changes of control, we
must offer to repurchase the exchange notes at the price
listed in the Description of Notes. If we sell certain
assets, under certain circumstances we must offer to
repurchase the exchange notes at the price listed in the
Description of Notes. See "Repurchase at the Option of
Holders - Change of Control" and " - Asset Sales" in the
section "Description of Notes."
Ranking.............................. These exchange notes and the subsidiary guarantees are
senior subordinated debts.
They rank behind all of our and our guarantor subsidiaries'
existing and future senior indebtedness and all other
indebtedness, other than our trade payables and any
indebtedness that expressly provides that it is not senior
to these exchange notes and the subsidiary guarantees. They
rank equally with all of our existing and future senior
subordinated indebtedness, and that of our guarantor
subsidiaries.
Assuming we had completed this offering on March 31, 2000
and applied the proceeds as intended, these exchange notes
and the subsidiary guarantees would have been subordinated
to approximately $145.0 million of senior indebtedness.
Basic Covenants of Indenture......... We will issue the exchange notes under an indenture among
us, the subsidiary guarantors and Norwest Bank Minnesota,
National Association, as trustee. The indenture, among other
things, contains covenants that restrict our ability and the
ability of our restricted subsidiaries to:
- borrow money;
- pay dividends on or purchase our stock or our restricted
subsidiaries' stock;
- make investments;
- create liens;
- sell certain assets or merge with or into other
companies; and
- enter into transactions with affiliates.
These covenants limited our additional borrowing capacity at
March 31, 2000 to $27.2 million under the senior credit
facilities. Some of our future subsidiaries may not be
subject to the covenants in the indenture. For more details,
see the section "Description of Notes - Certain Covenants."
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RISK FACTORS
See "Risk Factors" beginning on page 9 and the other information in this
prospectus prior to deciding to invest in the exchange notes.
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
O'Sullivan Holdings is a holding company which owns all the capital stock
of O'Sullivan Industries. O'Sullivan Holdings has no operations and is dependent
on O'Sullivan Industries to fund the interest cost on $15.0 million of debt and
dividends on mandatorily redeemable preferred stock (liquidation value of
$24.6 million) issued in connection with the merger and recapitalization.
O'Sullivan Holdings also has an intercompany payable to O'Sullivan Industries.
O'SULLIVAN INDUSTRIES, INC.
O'Sullivan Industries designs, manufactures and distributes
ready-to-assemble furniture products. We own manufacturing, warehouse and
distribution facilities located across the United States. Our product offerings
include ready-to-assemble desks, computer workcenters, home entertainment
centers, audio equipment racks, printer and microwave oven carts. We also
manufacture a variety of other ready-to-assemble furniture for home office, home
entertainment and other uses. We design our products to provide the consumer
high quality, value and ease of assembly using straight-forward diagramed
instructions.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 1900 Gulf Street, Lamar,
Missouri 64759. Our telephone number is (417) 682-3322.
THE RECENT MERGER AND RECAPITALIZATION
On May 17, 1999, O'Sullivan Holdings entered into an agreement and plan
of merger with OSI Acquisition, Inc., a company formed by principals of
Bruckmann, Rosser, Sherrill & Co., LLC ("BRS"), a private equity firm. Under the
merger agreement, as amended, OSI was merged with and into O'Sullivan Holdings,
with O'Sullivan Holdings as the surviving corporation. OSI did not survive the
merger. O'Sullivan Holdings is a holding company that owns all the capital stock
of O'Sullivan Industries. O'Sullivan Holdings has no operations and is dependent
on O'Sullivan Industries to fund the interest cost on $15.0 million of debt and
dividends on mandatorily redeemable preferred stock (liquidation value of
$24.6 million) issued in connection with the merger and recapitalization.
O'Sullivan Holdings also has an intercompany payable to O'Sullivan Industries.
Twenty-nine members of our management, four of our directors at the time, and an
affiliate of a director of O'Sullivan Holdings participated with BRS in the
recapitalization and merger of O'Sullivan Holdings. Management now owns a total
of 27.1% of the outstanding common stock of O'Sullivan Holdings. Affiliates of
BRS own the balance.
The total amount of funds necessary to fund the merger and related
transactions was approximately $357.0 million. These funds came primarily from
the following sources:
- an equity investment by an affiliate of BRS of approximately
$45.3 million in cash in the common stock and Series B junior
preferred stock of O'Sullivan Holdings;
- an equity investment in O'Sullivan Holdings by the management
participants in the recapitalization and merger in the amount of
approximately $13.7 million. This investment consisted of the
exchange by the management participants of common stock of O'Sullivan
Holdings with a value of $6.9 million, options to acquire common
stock of O'Sullivan Holdings with an intrinsic value of $6.1 million
and cash of $0.7 million for shares of common stock, shares of
Series B junior preferred stock and options to acquire shares of
Series A junior preferred stock, each of O'Sullivan Holdings;
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- the issuance by O'Sullivan Holdings of senior preferred stock with a
total liquidation value of $24.6 million to the existing stockholders
of O'Sullivan Holdings;
- the issuance by O'Sullivan Holdings of $15.0 million of senior notes
and warrants exercisable in aggregate into 6.0% of O'Sullivan
Holdings' common stock and 6.0% of O'Sullivan Holdings' Series B
junior preferred stock on a fully diluted basis as of the date of the
issuance of the warrants;
- the issuance by O'Sullivan Industries, Inc. of the old notes together
with additional warrants issued by O'Sullivan Holdings exercisable in
aggregate into 6.0% of O'Sullivan Holdings common stock and 6.0% of
O'Sullivan Holdings Series B junior preferred stock on a fully
diluted basis as of the date of issuance of the warrants;
- borrowings by O'Sullivan Industries totaling approximately
$139.0 million under the senior credit facilities; and
- $9.4 million of cash from O'Sullivan Industries.
Also included in the funds used to consummate the merger and
recapitalization were $10.0 million of variable rate industrial revenue bonds
that remain outstanding following the recapitalization transactions. Each of
these transactions is described more fully below.
The merger was approved by the board of directors of O'Sullivan Holdings,
the board of directors of OSI and a majority of the stockholders of O'Sullivan
Holdings. The merger and recapitalization and the transactions described above
are collectively referred to in this prospectus as the "recapitalization
transactions." We expect the merger to qualify for recapitalization accounting.
Under this method, the historical basis of our assets and liabilities will not
be affected.
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Our corporate structure after the recapitalization transactions is as
follows:
[LOGO]
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(1) O'Sullivan Industries International, Ltd. is not a subsidiary guarantor of
the notes.
THE EQUITY SPONSOR
The merger and recapitalization was sponsored by BRS. BRS is a private
equity firm formed in 1995 that specializes in leveraged acquisitions. BRS seeks
to acquire quality businesses with proven operating management. BRS
professionals currently manage two funds, with total committed capital of more
than $1.2 billion. Since BRS' formation, BRS has completed more than 15
acquisitions in the manufacturing and retailing industries. From the mid-1980's
until BRS' formation in 1995, the principals of BRS worked together as senior
officers of Citicorp Venture Capital. While at Citicorp Venture Capital, the
principals of BRS completed 25 acquisitions, including the furniture companies
Chromcraft Revington, Inc. and CORT Business Services Corporation.
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RISK FACTORS
An investment in the exchange notes is subject to a number of risks. You
should carefully consider the following factors, as well as the more detailed
descriptions cross-referenced to the body of this prospectus and the other
matters described in this prospectus.
IF YOU FAIL TO EXCHANGE YOUR OLD NOTES FOR EXCHANGE NOTES YOU WILL NOT BE
ABLE TO TRADE YOUR OLD NOTES FREELY.
Although you may trade your old notes in the Portal market if you do not
exchange your old notes for exchange notes you will not be able to trade your
old notes freely. The exchange notes are being registered with the Securities
and Exchange Commission and may be offered and sold freely to any potential
buyer. The old notes are not registered with the Securities and Exchange
Commission and may not be offered or sold without registration or an exemption
from registration under federal securities laws.
OUR SUBSTANTIAL LEVERAGE COULD MAKE IT MORE DIFFICULT TO PAY OUR DEBTS,
INCLUDING THE EXCHANGE NOTES, DIVERT OUR CASH FLOW FROM OPERATIONS FOR DEBT
PAYMENTS, LIMIT OUR ABILITY TO BORROW FUNDS AND INCREASE OUR VULNERABILITY TO
GENERAL ADVERSE ECONOMIC AND INDUSTRY CONDITIONS.
Any of these consequences of our substantial indebtedness could prevent
us from fulfilling our obligation under the exchange notes because our ability
to make required payments on the exchange notes depends on our ability to
generate sufficient cash flow to make these payments on the exchange notes.
We have a significant amount of indebtedness as shown in the chart below:
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MARCH 31, 2000
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(DOLLARS IN MILLIONS)
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Total indebtedness.......................................... $245.0
Indebtedness senior to the exchange notes................... $145.0
Stockholder's deficit....................................... $ (9.5)
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PRO FORMA
FOR THE NINE MONTHS
ENDED MARCH 31, 2000
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Ratio of earnings to fixed charges.......................... 1.5x
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Our substantial indebtedness could have important consequences to you.
For example, it could:
- make it more difficult for us to satisfy our obligations with respect
to these exchange notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital
expenditures, and other general corporate requirements;
- require a substantial portion of our cash flow from operations for
debt payments;
- limit our flexibility to plan for, or react to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors
that are less leveraged;
- limit our ability to borrow additional funds; and
- expose us to fluctuations in interest rates because some of our new
debt has a variable rate of interest.
See "Description of Notes - Repurchase at Option of Holders - Change of
Control" and "Description of Other Indebtedness - Senior Credit Facilities."
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WE MAY NOT HAVE SUFFICIENT CASH FROM CASH FLOW FROM OPERATIONS, AVAILABLE
CASH AND AVAILABLE BORROWINGS UNDER OUR SENIOR BANK FACILITIES TO SERVICE OUR
INDEBTEDNESS, WHICH WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH.
Our business may not generate sufficient cash flow from operations and we
may not realize operating improvements on schedule. Also, our ability to make
payments on and to refinance our indebtedness, including these exchange notes
will depend on our ability to generate cash in the future. This, to some extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control.
Future borrowings may not be available to us under our senior credit
facilities in an amount sufficient to enable us to service our indebtedness,
including these exchange notes, or to fund our other liquidity needs. We may
need to refinance all or a portion of our indebtedness, including the senior
credit facilities, these exchange notes or O'Sullivan Holdings' senior notes, on
or before maturity. We might not be able to refinance any of our indebtedness on
commercially reasonable terms or at all.
BECAUSE THE EXCHANGE NOTES AND THE SUBSIDIARY GUARANTEES RANK BEHIND OUR SENIOR
DEBT, HOLDERS OF EXCHANGE NOTES MAY RECEIVE PROPORTIONATELY LESS THAN HOLDERS OF
OUR SENIOR DEBT IN A BANKRUPTCY, LIQUIDATION, REORGANIZATION OR SIMILAR
PROCEEDING.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the guarantors, holders of the exchange notes will
participate with all other holders of our and the guarantors' subordinated
indebtedness in the assets remaining after we and our guarantors have paid all
of the senior debt. Because our senior debt must be paid first, you may receive
proportionately less than trade creditors in any proceedings of this nature. In
any of these cases, we and the guarantors may not have sufficient funds to pay
all of our creditors. Therefore, holders of these exchange notes may receive
ratably less than trade creditors.
In addition, all payments on the exchange notes and the guarantees will
be blocked in the event of a payment default on our senior debt and may be
prohibited for up to 179 days each year in the event of some non-payment
defaults on senior debt.
FAILURE TO COMPLY WITH ANY OF THE RESTRICTIONS CONTAINED IN OUR SENIOR CREDIT
FACILITIES OR THE INDENTURE COULD RESULT IN ACCELERATION OF OUR DEBT. WERE THIS
TO OCCUR, WE MIGHT NOT HAVE SUFFICIENT CASH TO PAY OUR ACCELERATED INDEBTEDNESS
OR THESE EXCHANGE NOTES.
We must maintain minimum debt service and maximum leverage ratios under
our senior credit facilities. A failure to comply with the restrictions
contained in our senior credit facilities could lead to an event of default,
which could result in an acceleration of that indebtedness. Were this to occur,
we might not have sufficient cash to pay our accelerated indebtedness or these
exchange notes.
Our senior credit facilities, these exchange notes and O'Sullivan
Holdings' senior notes restrict our ability, among others, to:
- incur additional indebtedness;
- pay dividends and make distributions;
- issue common and preferred stock of subsidiaries;
- make certain investments;
- repurchase stock;
- create liens;
- enter into transactions with affiliates;
- enter into sale and leaseback transactions;
- merge or consolidate; and
- transfer and sell assets other than in the ordinary course of
business.
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An acceleration under our senior credit facilities would also constitute
an event of default under the indenture relating to these exchange notes and the
securities purchase agreement relating to O'Sullivan Holdings' senior notes. See
"Description of Other Indebtedness - Senior Credit Facilities."
DESPITE OUR CURRENT LEVELS OF DEBT, WE MAY STILL INCUR MORE DEBT AND INCREASE
THE RISKS DESCRIBED ABOVE.
We and our subsidiaries may be able to incur significant additional
indebtedness in the future. If we or our subsidiaries add new debt to our
current debt levels, the related risks that we and they now face could intensify
making it less likely that we will be able to fulfill our obligations to holders
of the exchange notes. Neither these exchange notes nor O'Sullivan Holdings'
senior notes completely prohibit us or our subsidiaries from doing so. The
revolving credit facility of the senior credit facilities permit additional
borrowings of up to $27.2 million at March 31, 2000, including $2.2 million for
letters of credit. These additional borrowings would be senior to the exchange
notes and the subsidiary guarantees of the exchange notes. See "Capitalization,"
"Selected Consolidated Historical Financial Information," "Description of
Exchange Notes," and "Description of Other Indebtedness - Senior Credit
Facilities."
OUR PROFITS WOULD BE REDUCED IF THE PRICES OUR SUPPLIERS CHARGE US FOR RAW
MATERIALS INCREASE LEADING TO OUR BEING LESS ABLE TO SERVICE OUR DEBTS,
INCLUDING THE EXCHANGE NOTES.
We are dependent on outside suppliers for all of our raw material needs
and are subject to changes in the prices charged by our suppliers. If these
prices were to increase significantly this could lead to our being unable to
service our debts, including these exchange notes.
In the past, our profits have been reduced by price increases in the
prices of particleboard and fiberboard. The following developments could affect
future results of operations:
- This fiscal year, some of our particleboard suppliers increased their
prices by approximately 6.5%. In fiscal year 1999, we spent
approximately $85 million on these products.
- Certain corrugated carton suppliers are implementing additional price
increases of about 8.5% in our fourth quarter of fiscal 2000. In
fiscal year 1999, we spent approximately $15 million on corrugated
cartons.
BECAUSE WE SELL PRODUCTS TO A SMALL NUMBER OF CUSTOMERS, OUR NET SALES WOULD BE
REDUCED IF ONE OF OUR CUSTOMERS SIGNIFICANTLY REDUCED ITS PURCHASES OF OUR
PRODUCTS OR WERE UNABLE TO FULFILL ITS FINANCIAL OBLIGATIONS TO US. IF THIS WERE
TO HAPPEN OUR ABILITY TO PAY OUR DEBTS, INCLUDING THE EXCHANGE NOTES, MAY BE
SIGNIFICANTLY AFFECTED.
Our sales are concentrated among a relatively small number of customers.
If we were to lose any of our major customers or they were to significantly
reduce the size or number of their orders for any reason at all, including their
bankruptcy or reorganization, this may adversely affect our cash flows and our
ability to pay our debts, including the exchange notes. During fiscal year 1999,
our two largest customers accounted for approximately 34.0% of our sales:
OfficeMax accounted for 20.9% and Office Depot accounted for 13.1%. For fiscal
year 1999, our largest five customer accounts receivable balances comprised
approximately 62% of our trade receivables balance. We do not have long term
contracts with any of our customers and our sales depend on our continuing
ability to deliver attractive products at reasonable prices.
OUR PAYMENTS TO TANDY MAY BE SIGNIFICANTLY HIGHER THAN WE CURRENTLY ANTICIPATE
IF TANDY'S INTERPRETATION OF THE TAX SHARING AND TAX BENEFIT REIMBURSEMENT
AGREEMENT WITH TANDY IS ACCEPTED OVER OUR INTERPRETATION OF THE AGREEMENT AND
CONSEQUENTLY OUR ABILITY TO PAY OUR DEBTS, INCLUDING THE EXCHANGE NOTES, MAY BE
ADVERSELY AFFECTED.
If Tandy is successful, our payments to Tandy may be significantly higher
than currently anticipated, which would adversely affect our ability to pay our
debts, including these exchange notes.
On June 29, 1999, Tandy filed suit in a Texas court against us. The suit
relates to a potential reduction in our tax benefit payments to Tandy resulting
from our increased interest expense following completion of the merger. Tandy
claims that this reduction would violate the tax sharing and tax benefit
reimbursement agreement entered into at the time of our initial public offering.
If Tandy were to prevail, our increased interest expense
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following the merger and certain expenses incurred to consummate the merger
would not be taken into account in determining our annual payments to Tandy. For
example, based on current estimates, our payments to Tandy would be
approximately $5.5 million greater than we currently anticipate for fiscal years
2000 and 2001 combined. However, if our earnings are significantly less than
current estimates, then the difference between the amount we believe we would
owe to Tandy and the amount Tandy believes we would owe under the tax sharing
agreement would be significantly greater. If necessary, we would fund these
increased payment obligations from cash flow from operations, borrowing under
the revolving credit agreement, or other sources of capital, if available. See
"Business - Litigation."
REDUCTIONS IN RETAIL SALES COULD REDUCE OUR SALES, ESPECIALLY IF THE REDUCTIONS
OCCUR IN THE INDUSTRIES THAT WE BELIEVE ARE CONTRIBUTING TO THE GROWTH OF THE
READY-TO-ASSEMBLE FURNITURE INDUSTRY AND COULD REDUCE OUR ABILITY TO PAY OUR
DEBTS, INCLUDING THE EXCHANGE NOTES.
Most of our sales are to major retail chains. If there is a reduction in
the overall level of retail sales, our sales could also decline and our ability
to pay our debts, including the exchange notes, could be reduced. We believe
that sales of ready-to-assemble furniture increased over the last several years
in part because of an increase in sales of personal computers and home
entertainment electronic equipment. As this market, and our market generally,
has now matured it is possible that our growth may be adversely affected by a
recession more than in previous periods. If the level of sales of these types of
electronic equipment decreases, our sales could also decrease.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET WHICH MAY FORCE US TO REDUCE MARGINS,
REDUCING OUR CASH FLOWS AND OUR ABILITY TO PAY OUR DEBTS, INCLUDING THE EXCHANGE
NOTES.
The industry in which we operate is highly competitive. Some of our
competitors are significantly larger and have greater financial, marketing and
other resources than we do. The competitive nature of our industry could lead to
smaller profit margins due to competitive pricing policies or excess capacity.
If this were to occur our cash flows and our ability to pay our debts including
the exchange notes may be reduced.
ORIGINAL ISSUE DISCOUNT WILL BE INCLUDABLE IN INCOME FOR U.S. FEDERAL INCOME TAX
PURPOSES BEFORE IT IS PAID.
The old notes were issued at a discount from their stated principal
amount at maturity. Exchange notes received by a holder in the exchange offer
are regarded as a continuation of the old notes for U.S. federal income tax
purposes. See "United States Federal Income Tax Considerations." Consequently,
original issue discount ("OID") will be includable in the gross income of a
holder of the exchange notes over the life of the exchange notes, before the
amount of the OID is actually paid to the holder on the maturity or other
repayment of the exchange notes. OID will accrue daily on a constant yield basis
based on compounding of interest.
IF WE BECOME BANKRUPT YOUR CLAIM AGAINST US MAY BE LESS THAN THE FACE VALUE OF
THE EXCHANGE NOTES DUE TO ORIGINAL ISSUE DISCOUNT.
The exchange notes will bear a discount from their stated principal
amount at maturity. If a bankruptcy case is commenced by or against O'Sullivan
Industries under the U.S. Bankruptcy Code after the issuance of the exchange
notes, the claim of a holder of exchange notes with respect to the principal
amount thereof would likely be limited to an amount equal to the sum of (1) the
initial offering price and (2) the portion of the OID that is not deemed to
constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code. Any
OID that was not accrued as of the bankruptcy filing would constitute "unmatured
interest."
WE ARE AT RISK THAT USERS OF OUR PRODUCTS WILL SUE US FOR PRODUCT LIABILITY. IF
WE WERE UNABLE TO DEFEND OURSELVES AGAINST SOME PRODUCT LIABILITY LAWSUITS, OUR
SUCCESS AND OUR ABILITY TO PAY OUR DEBTS, INCLUDING THE EXCHANGE NOTES, MAY BE
ADVERSELY AFFECTED.
All of our products are designed for use by consumers. Like other
manufacturers of similar products, we are subject to product liability claims
and could be subject to class action litigation with respect to our products. If
we were unable to defend ourselves against certain product liability lawsuits,
our success and ability to pay our debts, including these exchange notes, may be
adversely affected. We are party to various pending product liability legal
actions arising in the ordinary operation of our business. Our liability
insurance may not be
10
<PAGE>
adequate for our needs, and we may not be fully insured against any particular
lawsuit which may adversely affect us.
WE MAY BE LIABLE FOR PENALTIES UNDER ENVIRONMENTAL LAWS, RULES AND REGULATIONS.
THIS COULD NEGATIVELY AFFECT OUR SUCCESS AND OUR ABILITY TO PAY OUR DEBTS,
INCLUDING THE EXCHANGE NOTES.
Our operations are subject to many federal, state and local environmental
laws, regulations and ordinances. Some of our operations require permits, that
are subject to revocation, modification and renewal by governmental authorities.
Governmental authorities have the power to enforce compliance with their
regulations, and violators may be subject to fines, injunction or both. Our
business involves operations which are subject to these rules and regulations.
Compliance with them may require substantial capital expenditures or increase
our operating expense. These costs and expenses may adversely affect our success
and ability to pay our debts, including these exchange notes.
THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS MAY BE IN CONFLICT WITH YOUR
INTERESTS AS A HOLDER OF EXCHANGE NOTES. THIS CONFLICT COULD RESULT IN CORPORATE
DECISION MAKING THAT INVOLVES DISPROPORTIONATE RISKS TO THE HOLDERS OF THE
EXCHANGE NOTES, INCLUDING OUR ABILITY TO SERVICE OUR DEBTS OR PAY THE PRINCIPAL
AMOUNT OF INDEBTEDNESS WHEN DUE.
Following the recapitalization and merger, affiliates of BRS own
securities representing approximately 72.9% of the voting power of the
outstanding common stock of O'Sullivan Holdings. By reason of their ownership,
they control our affairs and policies. There may be circumstances where the
interests of BRS and its affiliates could be in conflict with the interests of
the holders of the securities. For example, BRS and its affiliates may have an
interest in pursuing transactions that, in their judgment, could enhance their
equity investment, even though these transactions might involve risks to the
holders of the exchange notes. See "Management," "Security Ownership of Certain
Beneficial Owners and Management" and "Certain Relationships and Related
Transactions."
IF OUR KEY PERSONNEL WERE TO LEAVE OUR SUCCESS COULD BE NEGATIVELY AFFECTED AND
OUR ABILITY TO SERVICE OUR DEBTS, INCLUDING THE EXCHANGE NOTES, COULD BE
ADVERSELY AFFECTED.
Our continued success is dependent, to a certain extent, upon our ability
to attract and retain qualified personnel in all areas of our business,
including management positions and key sales positions, especially those
positions servicing our major customers. If any of our key personnel were to
leave it may adversely affect our ability to service our debt, including the
exchange notes. Members of the O'Sullivan family in particular have been
instrumental in the development of our business and the implementation of our
corporate strategy. We do not have employment agreements with any of our
officers or key personnel located in the United States and we do not carry key
person life insurance on any of our employees. We may not be able to keep
existing personnel, including O'Sullivan family members, or be able to attract
qualified new personnel. Our inability to do so could have a negative effect on
us as we may be unable to efficiently and effectively run our business without
these key personnel.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES, SUBORDINATE CLAIMS IN RESPECT OF THE EXCHANGE NOTES AND REQUIRE
EXCHANGE NOTE HOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
Under federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, courts may void guarantees or claims related to these
exchange notes, or subordinate any guarantees to all of our other debts or all
other debts of our guarantor if, among other things, at the time our guarantor
incurred the indebtedness connected with its guarantee, we or the guarantor:
- received less than reasonably equivalent value or fair consideration
for the issuance of the guarantee; and
- we were or the guarantor was insolvent or rendered insolvent by the
incurrence; or
- we were or the guarantor was engaged in a business or transaction for
which our or the guarantor's remaining assets constituted
unreasonably small capital; or
11
<PAGE>
- we or the guarantor intended to incur or believed that we or it would
incur debts beyond our or its ability to pay these debts as they
mature.
In addition, a court could void any payment by us or the guarantor
related to its guarantee and require that payment to be returned to us or the
guarantor, or to a fund for the benefit of our creditors or the creditors of the
guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied. Generally, a guarantor would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets; or
- the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they became
absolute and mature; or
- it could not pay its debts as they became due.
If a court were to disagree with our conclusions as to the legality of
any subsidiary guarantees it could adversely affect the rights of holders of the
exchange notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE A CHANGE OF
CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon certain change of control events, we will be required to offer to
repurchase all outstanding exchange notes. If we do not have sufficient funds at
the time of a change of control we will not be able to make the required
repurchase of exchange notes. This could be because of cash flow difficulties or
because of restrictions in our senior credit facilities and any future credit
agreements that will not allow these repurchases. In addition, some kinds of
corporate events, such as a leveraged recapitalization, would increase the level
of our indebtedness but would not necessarily constitute a "Change of Control"
under the indenture and would therefore not require us to repurchase the
exchange notes. See "Description of Exchange Notes - Repurchase at the Option of
Holders."
AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR THESE EXCHANGE NOTES, WHICH COULD
LIMIT THE LIQUIDITY OF YOUR EXCHANGE NOTES.
If an active trading market for these exchange notes does not develop you
may not be able to sell them at any time in the future. Lehman Brothers, the
initial purchaser of the old notes, has informed us that it intends to make a
market in the exchange notes after this offering is completed. However, Lehman
Brothers may cease its market-making at any time. We do not intend to list the
exchange notes or to take any action, other than making our financial statements
available, to facilitate trading in the exchange notes. In addition, the
liquidity of the trading market in these exchange notes, and the market price
quoted for these exchange notes, may be adversely affected by changes in the
overall market for high yield securities and by changes in our financial
performance or prospects or in the prospects for companies in our industry
generally.
OUR ACTUAL OPERATING RESULTS MAY DIFFER FROM THE RESULTS DESCRIBED IN THIS
EXCHANGE OFFER WHICH MAY AFFECT OUR ABILITY TO PAY OUR DEBTS, INCLUDING THE
EXCHANGE NOTES.
This prospectus includes "forward-looking statements" including, in
particular, the statements about our plans, strategies and prospects under the
headings "Exchange Offer Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," and in the
Unaudited Pro Forma Financial Information and the related notes. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make in this prospectus, adversely affecting our
ability to pay our debts including the exchange notes. These factors are set
forth in this prospectus, including under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." All forward-looking statements made by us or anyone
acting for us must only be considered in light of all of the relevant
statements, information and risk factors set out in this prospectus relating to
the forward looking statements.
12
<PAGE>
THE RECAPITALIZATION TRANSACTIONS
THE RECAPITALIZATION AND MERGER
On May 17, 1999, O'Sullivan Holdings entered into an agreement and plan
of merger with OSI, a company formed by principals of BRS. Under the merger
agreement, as amended, OSI was merged with and into O'Sullivan Holdings and
O'Sullivan Holdings is the surviving corporation. OSI did not survive the
merger. O'Sullivan Holdings is a holding company and does not have any
operations or assets other than its ownership of all of the capital stock and an
intercompany receivable of O'Sullivan Industries. Twenty-nine members of our
management, four of our then directors and an affiliate of a director of
O'Sullivan Holdings participated with BRS in the recapitalization and merger of
O'Sullivan Holdings. Management participants now own a total of 27.1% of the
outstanding common stock of O'Sullivan Holdings. Affiliates of BRS own the
balance. O'Sullivan Industries and O'Sullivan Holdings have incurred gross debt
of $249.0 million and $15.0 million, respectively, and net debt of
$243.5 million and $11.5 million, respectively, net of original issue discount
and the value attributed to the warrants. All of this debt was used to finance
the recapitalization and merger. The total amount of funds necessary to fund the
merger and related transactions was approximately $357.0 million. These funds
came from the following sources:
- an equity investment by an affiliate of BRS of approximately
$45.3 million in cash in the common stock and Series B junior
preferred stock of O'Sullivan Holdings;
- an equity investment in O'Sullivan Holdings by the management
participants of approximately $13.7 million. This investment
consisted of the exchange by the management participants of common
stock of O'Sullivan Holdings with a value of $6.9 million, options to
acquire common stock of O'Sullivan Holdings with an intrinsic value
of $6.1 million and cash of $0.7 million for shares of common stock,
shares of Series B junior preferred stock and options to acquire
shares of Series A junior preferred stock, each of O'Sullivan
Holdings;
- the issuance by O'Sullivan Holdings of senior preferred stock with a
total liquidation value of about $24.6 million to its existing
stockholders;
- the issuance by O'Sullivan Holdings of $15.0 million of senior notes
and warrants exercisable in aggregate into 6.0% of O'Sullivan
Holdings' common stock and 6.0% of O'Sullivan Holdings' Series B
junior preferred stock on a fully diluted basis as of the date of the
issuance of the warrants;
- the issuance by O'Sullivan Industries of the old notes together with
additional warrants issued by O'Sullivan Holdings exercisable into an
aggregate of 6.0% of O'Sullivan Holdings common stock and 6.0% of
O'Sullivan Holdings Series B junior preferred stock on a fully
diluted basis as of the date of issuance of the warrants;
- borrowings by O'Sullivan Industries totaling $139.0 million under the
senior credit facilities; and
- $9.4 million in cash from O'Sullivan Industries.
Also included in the funds used to consummate the merger and
recapitalization were $10.0 million of variable rate industrial revenue bonds
which remain outstanding following the recapitalization transactions. Each of
these transactions is described more fully below.
The merger was approved by the board of directors of O'Sullivan Holdings,
the board of directors of OSI and a majority of the stockholders of O'Sullivan
Holdings. We expect the merger to qualify for recapitalization accounting. Under
this method, the historical basis of our assets and liabilities will not be
affected.
The merger agreement contained various other provisions customary for
transactions of this size and type, including representations and warranties
with respect to the condition and operations of the business,
13
<PAGE>
covenants with respect to the conduct of the business prior to the closing of
the merger and various closing conditions, including:
- holders of no more than five percent of the outstanding shares of
common stock of O'Sullivan Holdings demanding appraisal rights;
- approval of the merger by our stockholders;
- obtaining financing; and
- no material adverse change in our financial condition, operations or
ability to consummate the merger.
SENIOR CREDIT FACILITIES
As part of the recapitalization transactions, we entered into a credit
agreement, referred to throughout this document as the "senior credit
facilities," with a syndicate of financial institutions for which an affiliate
of Lehman Brothers served as arranger, lender and agent. The senior credit
facilities consist of:
- a term loan facility of $135.0 million, consisting of a
$35.0 million six-year tranche A term loan facility and a
$100.0 million seven-and-one-half-year tranche B term loan facility,
a portion of which has been used to provide some of the funds
necessary to finance the merger; and
- a six-year revolving credit facility of up to $40.0 million,
including a swing line sub-facility of $5.0 million and a letter of
credit sub-facility of $15.0 million. Upon the completion of the
recapitalization and merger, letters of credit of approximately
$12.8 million were issued and approximately $4.0 million of
borrowings were drawn on the revolving credit facility.
O'Sullivan Industries distributed a portion of its borrowings under the
term loan facility to O'Sullivan Holdings, which used the borrowings to pay a
portion of the cash consideration to O'Sullivan Holdings' existing stockholders
in exchange for their shares of common stock in the merger. The revolving credit
facility will provide financing for future working capital, capital
expenditures, acquisitions and other general corporate purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Description of Other
Indebtedness - Senior Credit Facilities."
OFFERING OF O'SULLIVAN INDUSTRIES NOTES
As part of the recapitalization transaction, O'Sullivan Industries issued
$100.0 million of the old notes. O'Sullivan Industries distributed the cash
proceeds from the sale of these notes to O'Sullivan Holdings, which used the
proceeds to pay a portion of the cash consideration to its existing stockholders
in exchange for their shares of common stock in the merger. The old notes were
issued together with the additional warrants issued by O'Sullivan Holdings to
purchase an aggregate of 93,273 shares of O'Sullivan Holdings common stock and
39,273 shares of O'Sullivan Holdings Series B junior preferred stock.
O'SULLIVAN HOLDINGS NOTES AND WARRANTS
As part of the recapitalization transactions, O'Sullivan Holdings issued
$15.0 million of senior notes due 2009 and issued warrants to purchase an
aggregate of 93,273 shares of its common stock and warrants to purchase an
aggregate of 39,273 shares of its Series B junior preferred stock. O'Sullivan
Holdings used the proceeds from the issuance of the senior notes and warrants to
pay a portion of the cash consideration to its existing stockholders in exchange
for their shares of capital stock in the merger.
EQUITY FINANCING
ISSUANCE OF SENIOR PREFERRED STOCK. O'Sullivan Holdings issued shares of
senior preferred stock with a total liquidation value of about $24.6 million.
These shares of senior preferred stock were issued to the current
14
<PAGE>
stockholders of O'Sullivan Holdings as part of the consideration for the
exchange of their shares of common stock in the merger. The senior preferred
stock has a liquidation preference of $1.50 per share. Dividends accrue on the
senior preferred stock at a rate of 12.0% per annum. The senior preferred stock
may be redeemed by O'Sullivan Holdings at any time and must be redeemed on the
12th anniversary of the date of issuance or in the event that some types of
changes in the control of O'Sullivan Holdings occur.
ROLLOVER EQUITY. The management participants made an investment in the
amount of approximately $13.7 million in the equity of O'Sullivan Holdings and
OSI. These managers, directors and an affiliate of a director exchanged shares
of common stock of O'Sullivan Holdings with a value of $6.9 million and options
to acquire shares of common stock of O'Sullivan Holdings with an intrinsic value
of $6.1 million for common stock, Series B junior preferred stock, and options
to acquire shares of Series A junior preferred stock, each of O'Sullivan
Holdings. The management participants also made a cash investment of
$0.7 million in the common stock of OSI. These shares of OSI common stock were
converted into shares of common stock of O'Sullivan Holdings in the merger.
O'Sullivan Holdings used the proceeds of this cash equity investment to pay a
portion of the cash consideration to its current stockholders in exchange for
their shares of common stock. In the merger, O'Sullivan Holdings issued options
to purchase its Series A junior preferred stock in exchange for certain options
held by management participants in the buyout. The agreements for the options
provide for a special accrual at the rate of 14% per annum on the difference
between the liquidation value of the stock ($150.00 per share) and the exercise
price of the option ($50.00 per share). The special accrual accrues at the same
time and in the same manner as the 14% dividend on the Series A preferred stock
would if the Series B preferred stock were issued and outstanding. The special
acrrual is not payable until the exercise of the option. Payment is further
subject to the terms of any debt agreement of O'Sullivan Holdings and
O'Sullivan. When made, payment of the special accrual may be made in cash or by
a reduction in the exercise price of the option, at O'Sullivan Holdings'
discretion. The special accruals are reflected as compensation expense in the
accompanying unaudited consolidated statement of operations.
BRS EQUITY INVESTMENT. An affiliate of BRS made an investment of
approximately $45.3 million in the common stock and junior preferred stock of
OSI. These securities were converted into shares of common stock and Series B
junior preferred stock of O'Sullivan Holdings in the merger. O'Sullivan Holdings
used the cash proceeds from BRS' equity investment to pay a portion of the cash
consideration to its current stockholders in exchange for their shares of common
stock.
USE OF PROCEEDS
O'Sullivan Industries, Inc. will not receive any proceeds from this
exchange offer.
15
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 2000 our historical
capitalization. This table should be read in conjunction with the "Summary
Consolidated Historical Financial Information," the "Selected Consolidated
Historical Financial Information," the "Unaudited Pro Forma Condensed
Consolidated Financial Statements" and the historical financial statements and
the related notes included elsewhere in this prospectus. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Cash and cash equivalents................................... $ 14.8
======
TOTAL DEBT:
Senior credit facilities (A).............................. 135.0
Senior subordinated Series B notes offered hereby (B)..... 94.6
8.01% senior notes........................................ --
Industrial revenue bonds (C).............................. 10.0
------
Total debt............................................ 239.6
------
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock.............................................. --
Additional paid-in capital................................ --
Accumulated other comprehensive income.................... (0.1)
Retained earnings (deficit)............................... (9.5)
------
Total stockholder's equity (deficit).................. (9.5)
------
Total capitalization.................................. $230.0
======
</TABLE>
------------------------
(a) Letters of credit of approximately $12.8 million were issued and no
borrowings were drawn under the revolving credit facility. See "Description
of Other Indebtedness - Senior Credit Facilities."
(b) The Series B notes are recorded at a discount of approximately $5.5 million
to the face amount to reflect the original issue discount on the notes of
approximately $2.0 million and the value attributable to the warrants issued
with the previously offered old senior subordinated notes of approximately
$3.5 million which has been recorded as an increase to stockholder's equity.
(c) Obligations of O'Sullivan Industries - Virginia, Inc., a wholly owned
subsidiary of O'Sullivan Industries.
16
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
The following table sets forth our selected consolidated historical
financial data as of the dates and for the periods indicated. The selected
statement of operations and balance sheet data for the years ended and at
June 30, 1995 through 1999 were derived from our audited consolidated financial
statements. The selected statement of operations and balance sheet data for the
nine months ended and at March 31, 1999 and 2000 were derived from, and should
be read in conjunction with, our unaudited consolidated financial statements.
You should read the data presented below together with, and qualified by
reference to, our consolidated financial statements and related notes for the
three years ended June 30, 1999 and our unaudited consolidated financial
statements for the nine months ended March 31, 1999 and March 31, 2000 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," each of which is included herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $269,306 $291,766 $321,490 $339,407 $379,632 $293,988 $329,701
Costs and expenses:
Cost of sales..................... 208,176 229,262 230,578 244,086 267,630 208,187 232,180
Selling, marketing and
administrative.................. 45,489 52,691 62,137 69,212 74,962 58,240 64,443
Compensation expense associated
with stock options.............. -- -- -- -- -- -- 10,627
Loss on settlement of interest
rate swap....................... -- -- -- -- -- -- 408
Restructuring charge (A).......... -- 5,212 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses.............. 253,665 287,165 292,715 313,298 342,592 266,427 307,658
Operating income...................... 15,641 4,601 28,775 26,109 37,040 27,561 22,043
Interest expense, net................. 2,382 3,831 2,327 2,468 2,844 2,284 10,287
-------- -------- -------- -------- -------- -------- --------
Income before income tax provision and
extraordinary item.................. 13,259 770 26,448 23,641 34,196 25,277 11,756
Income tax provision.................. 5,038 433 10,050 8,742 12,311 9,098 4,232
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item...... 8,221 337 16,398 14,899 21,885 16,179 7,524
Extraordinary loss from early
extinguishment of debt................ -- -- -- -- -- -- (305)
-------- -------- -------- -------- -------- -------- --------
Net income.............................. $ 8,221 $ 337 $ 16,398 $ 14,899 $ 21,885 $ 16,179 $ 7,219
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges
(B)................................. 6.2x 1.2x 11.1x 9.2x 11.2x 11.6x 2.1x
Cash flow provided (used) by:
Operating activities.............. $ 13,188 $ 25,345 $ 23,512 $ 27,164 $ 25,297 $ 14,604 $ 33,501
Investing activities.............. (30,355) (4,403) (15,825) (28,359) (15,779) (13,294) (7,719)
Financing activities.............. 17,334 (21,000) (1,218) (3,970) (7,588) (1,251) (14,766)
BALANCE SHEET DATA (AT PERIOD END):
Working capital....................... $ 86,058 $ 71,136 $ 82,045 $ 72,893 $ 85,262 $ 85,005 $ 96,652
Total assets.......................... 228,477 212,317 232,607 250,314 266,967 272,023 299,406
Long-term debt........................ 51,000 30,000 30,000 30,000 22,000 29,000 236,638
Stockholder's equity.................. 103,627 103,982 120,375 135,225 157,103 173,251 (9,534)
</TABLE>
17
<PAGE>
(a) In March 1996, we adopted a business restructuring plan to cut costs and
better utilize working capital. The plan included the discontinuance of
certain product lines which had received marginal acceptance in the
marketplace ($4.2 million), costs associated with the initial training of
terminated employees at our Utah facility ($0.4 million), write-off of
certain machinery that was used to manufacture the discontinued product
lines ($0.2 million) and the modification of the business structure of an
international division ($0.4 million). The above restructuring plan resulted
in a pre-tax charge of $5.2 million, which was recognized in the third
quarter of fiscal 1996. Proceeds from the disposal of discontinued products
approximated $1.5 million and were received in fiscal 1997.
(b) Earnings used in computing the ratio of earnings to fixed charges consist of
pre-tax earnings and fixed charges. Fixed charges are defined as interest
expense related to debt, amortization expense related to deferred financing
costs and a portion of rental charges.
18
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
O'SULLIVAN INDUSTRIES, INC.
The following tables show selected consolidated financial data reflecting
the merger that we refer to as "pro forma" information. They are based on
adjustments to the historical consolidated financial statements to give effect
to the merger using recapitalization accounting and to the financing of the
merger including the old note offering and the application of the net proceeds
therefrom. The pro forma information, while helpful in illustrating the
financial characteristics of O'Sullivan Industries after the merger under one
set of assumptions, does not attempt to predict or suggest future results. The
pro forma information also does not attempt to show how we would actually have
performed had the merger been effective throughout these periods.
The pro forma statement of operations data for the fiscal year ended on
June 30, 1999 and the nine months ended March 31, 2000 give effect to the merger
as if it was completed on the first day of the respective period. This data
should be read in conjunction with our consolidated financial statements and
related notes, the interim consolidated financial data and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The pro forma financial
information is based on assumptions which we believe are reasonable.
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $379,632 $ -- $379,632
Costs and expenses:
Cost of sales............................................. 267,630 -- 267,630
Selling, marketing and administrative..................... 74,962 510 (A)
874 (B) 74,723
-------- -------- --------
Total costs and expenses.................................... 342,592 1,384 343,976
-------- -------- --------
Operating income............................................ 37,040 (1,384) 35,656
Interest expense, net....................................... 2,844 26,443 (E) 29,287
-------- -------- --------
Income before income tax provision.......................... 34,196 (27,827) 6,369
Income tax provision........................................ 12,311 (10,018)(F) 2,293
-------- -------- --------
Net income.................................................. $ 21,885 $(17,809)(G) $ 4,076
======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges (H)...................... 11.2x -- 1.2x
</TABLE>
See notes to the unaudited pro forma condensed consolidated statements of
operations.
19
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES O'SULLIVAN HOLDINGS, INC.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $329,701 $ -- $329,701
Costs and expenses:
Cost of sales............................................. 232,180 -- 232,180
Selling, marketing and administrative..................... 64,443 223 (A)
372 (B) 65,038
Compensation expense associated with stock options.......... 10,627 (10,627)(C) --
Loss on settlement of interest rate swap.................... 408 (408)(D) --
-------- ----------- --------
Total costs and expenses.................................... 307,658 (10,440) 297,218
-------- ----------- --------
Operating income............................................ 22,043 10,440 32,483
Interest expense, net....................................... 10,287 11,680(E) 21,967
-------- ----------- --------
Income before income tax provision and extraordinary item... 11,756 (1,240) 10,516
Income tax provision........................................ 4,232 (446)(F) 3,786
-------- ----------- --------
Income before extraordinary item............................ $ 7,524 $ (794)(G) $ 6,730
======== =========== ========
OTHER DATA:
Ratio of earnings to fixed charges (H)...................... 2.1x -- 1.5x
</TABLE>
See notes to the unaudited pro forma condensed consolidated statements of
operations
20
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(a) After completion of the merger, O'Sullivan Industries entered into a
management services agreement with BRS. In exchange for specified services,
BRS will receive an annual fee equal to the greater of (1) 1.0% of
O'Sullivan Industries' annual consolidated earnings before interest, taxes,
depreciation and amortization, or (2) $300,000. For the nine months ended
March 31, 2000, the adjustment represents an additional fee of $223,000,
which reflects the accrual covering the period from July 1, 1999 to
November 30, 1999. The historical statements reflect a charge of $220,000
representing the accrual for the period from December 1, 1999 to March 31,
1999. See "Certain Relationships and Related Transactions - Management
Services Agreement."
(b) For the year ended June 30, 1999, the adjustment reflects the compensation
expense recognized in connection with the special accrual on the options to
purchase Series A junior preferred stock of O'Sullivan Holdings. For the
nine months ended March 31, 2000, the adjustment represents an additional
special accrual amount of $372,000, which represents the accrual covering
the period from July 1, 1999 to November 30, 1999. The historical statements
reflect a charge of $284,000 representing the accrual for the period from
December 1, 1999 to March 31, 2000.
(c) Reflects the reversal of non-recurring compensation expense charge of
$10.6 million which was directly associated with the merger.
(d) Reflects the reversal of the loss on the settlement of interest rate swap
which was directly related to the merger.
(e) Reflects the interest expense related to the existing variable rate
industrial revenue bonds, the new senior credit facilities and the old
senior subordinated notes after taking into account repayment of
O'Sullivan's existing long-term debt, as follows:
<TABLE>
<CAPTION>
PRINCIPAL ASSUMED YEAR ENDED NINE MONTHS ENDED
AMOUNT INTEREST RATE JUNE 30, 1999 MARCH 31, 2000
--------- ------------- ------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Existing variable rate industrial revenue bonds... $ 10,000 8.50% $ 850 $ 638
Senior credit facilities:
Revolving line of credit........................ 4,000 9.25% 370 278
Term loan A..................................... 35,000 9.25% 3,238 2,428
Term loan B..................................... 100,000 9.75% 9,750 7,313
Commitment and letter of credit fees............ 200 150
Old senior subordinated notes..................... 100,000 13.38% 13,375 10,031
Discount amortization............................. 278 209
Amortization of debt issue costs.................. -- 1,226 920
-------- ------- --------
Total............................................. $249,000 29,287 21,967
========
Historical interest expense....................... (2,844) (10,287)
------- --------
Pro forma adjustment.......................... $26,443 $ 11,680
======= ========
</TABLE>
(f) Reflects the statutory tax rate applied to notes (a) through (e) above for
all periods presented.
We believe that our interest expense associated with merger-related debt, and
certain other expenses incurred to consummate the merger, are deductible for
federal and state income tax purposes. We also believe that these expenses
are deductible in determining the benefit payment payable to Tandy under the
tax sharing and tax benefit reimbursement agreement. Whether these expenses
are or are not deductible in determining the benefit payment to Tandy has no
impact on our tax provision; it merely impacts the timing
21
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
of when payments will be made to Tandy under the tax sharing agreement.
O'Sullivan Industries' cash flow after completion of the merger will be
unfavorably impacted if Tandy prevails in its position that these expenses
are not deductible in determining the amount payable to Tandy under the tax
sharing agreement. See "Risk Factors - Tandy Tax Sharing and Tax Benefit
Reimbursement Agreement" and "Business - Litigation."
(g) Excluded from "net income (loss)" are one-time, non-recurring charges that
do not affect future results of operations. The charges reflect the
prepayment penalty associated with the old New York Life debt, the
termination of the interest rate swap with NationsBank, compensation charges
associated with the exercise of stock options and fees which do not affect
future periods. The amounts below represent the actual charge recorded for
the nine months ended March 31, 2000:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Prepayment penalty.......................................... $ 476
Interest rate swap.......................................... 408
Compensation expense for stock options...................... 10,627
-------
Total................................................... $11,511
=======
</TABLE>
(f) Earnings used in computing the ratio of earnings to fixed charges consist of
pre-tax earnings and fixed charges. Fixed charges are defined as interest
expense related to debt, amortization expense related to deferred financing
costs and a portion of rental charges.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "RISK
FACTORS," AS WELL AS THE MORE DETAILED INFORMATION IN THE HISTORICAL FINANCIAL
STATEMENTS AND UNAUDITED PRO FORMA FINANCIAL INFORMATION, INCLUDING THE RELATED
NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
On March 24, 1999, O'Sullivan Holdings announced that members of its
senior management team, in conjunction with a financial buyer, had made a
proposal to O'Sullivan Holdings' Board of Directors to acquire O'Sullivan
Holdings, subject to requisite financing. On May 18, 1999, O'Sullivan Holdings
announced that it had entered into a definitive merger agreement with OSI
Acquisition, Inc. Investors in OSI Acquisition, Inc. included members of
O'Sullivan's senior management and Bruckmann, Rosser, Sherrill Co., II, L.P. The
merger agreement was amended and restated on October 18, 1999.
On November 30, 1999, OSI Acquisition, Inc. was merged into O'Sullivan
Holdings in a recapitalization transaction approved by O'Sullivan Holdings' on
November 22, 1999. As a result of the merger, all of O'Sullivan Holdings'
outstanding common stock is held by members of O'Sullivan's senior management
and BRS and its affiliates. The management participants in the buyout own a
total of 27.1% of the outstanding common stock of O'Sullivan Holdings. BRS and
its affiliates own the balance.
Each share of O'Sullivan Holdings' outstanding common stock was exchanged
for $16.75 in cash and one share of O'Sullivan Holdings' senior preferred stock
with a liquidation value of $1.50 per share. Unpaid dividends accrue at the rate
of 12.0% per annum and if not paid, will be accumulated and compounded at the
same rate during the period that the senior preferred stock is outstanding. Some
of the shares of O'Sullivan Holdings' common stock and options held by the
management participants in the buyout were exchanged for common stock, junior
preferred stock and options to acquire junior preferred stock of O'Sullivan
Holdings.
O'Sullivan Holdings' required approximately $357.0 million to complete
the merger and pay related fees and expenses of which approximately
$264.0 million was funded via debt proceeds. We borrowed $239 million of this
amount. We paid a dividend of approximately $186.8 million to O'Sullivan
Holdings and repaid an intercompany balance of about $28.5 million to finance
the repurchase of stock. The remainder of the borrowings was used to refinance
our existing debt and for debt issuance costs.
RESULTS OF OPERATIONS
The following table sets forth the approximate percentage of items
included in the Consolidated Statement of Operations and EBITDA relative to net
sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------ -------------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Cost of sales................................. 71.7% 71.9% 70.5% 70.8% 70.4%
Gross margin.................................. 28.3% 28.1% 29.5% 29.2% 29.6%
Selling, marketing and administrative
expenses.................................... 19.3% 20.4% 19.7% 19.8% 19.5%
Compensation expense associated with stock
options..................................... 0.0% 0.0% 0.0% 0.0% 3.2%
Loss on settlement of interest rate swap...... 0.0% 0.0% 0.0% 0.0% 0.1%
Operating income.............................. 9.0% 7.7% 9.8% 9.4% 6.7%
Interest expense, net......................... 0.7% 0.7% 0.7% 0.8% 3.1%
Income tax expense............................ 3.1% 2.6% 3.2% 3.1% 1.3%
Net income before extraordinary item.......... 5.1% 4.4% 5.8% 5.5% 2.3%
Extraordinary item............................ 0.0% 0.0% 0.0% 0.0% 0.1%
Net income.................................... 5.1% 4.4% 5.8% 5.5% 2.2%
Depreciation and amortization................. 3.1% 3.4% 3.7% 3.5% 3.6%
</TABLE>
23
<PAGE>
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
1999
RESULTS OF OPERATIONS
NET SALES. For the nine-month period ended March 31, 2000, net sales
increased $35.7 million, or 12.1%, to $329.7 million from $294.0 million. Sales
increases in the office superstore, home-improvement and specialty retailer
channels more than offset sales decreases in the catalog showroom channel. Sales
increased principally due to higher unit volume and slightly higher average
sales prices.
In March 1999, Service Merchandise Co., one of our largest customers,
filed for bankruptcy protection under Channel 11. We are currently shipping to
Service Merchandise while it operates under Chapter 11 bankruptcy protection,
which gives certain priority claims to vendors in the event of liquidation. On
February 22, 2000, Service Merchandise announced that as a part of its
bankruptcy reorganization plan, it would no longer sell a number of product
lines, including indoor furniture. Service Merchandise, however, has informed us
that it plans to continue to sell kitchen furniture. We expect this decision
will substantially reduce or eliminate our sales to Service Merchandise in
fiscal 2001 and thereafter. In fiscal year 1999, our sales to Service
Merchandise were about 7% of our gross annual sales. For the first three
quarters of fiscal 2000, sales to Service Merchandise were about 5% of our gross
sales.
GROSS PROFIT. Gross profit increased to $97.5 million, or 29.6% of
sales, for the nine months ended March 31, 2000, up from $85.8 million, or 29.2%
of sales, for the same period in fiscal 1999. The increase in gross profit
dollars was primarily from higher sales volume, greater overhead absorption and
increased productivity offset by increased material costs, primarily for
particleboard. During the prior year, we incurred higher labor and overhead
costs associated with the implementation of new manufacturing equipment and
related adaption of manufacturing processes.
In the fourth quarter of fiscal 1999, certain key commodity suppliers
announced price increases. We were able to minimize the effect of initial
increases during the first quarter of fiscal 2000 through our value analysis
program and productivity gains in manufacturing. Additional price increases
became effective during the second quarter and third quarter of fiscal 2000 and
others will become effective during the fourth quarter. We were able to
partially offset the effect of these price increases through the programs
mentioned above combined with increased operating leverage from higher sales
levels. We currently estimate these increases will reduce our budgeted gross
margin by approximately $1.0 million during the last three months of fiscal
2000. We believe that we can continue to partially offset the effect of these
increases through the programs mentioned above and through the eventual
inclusion of the higher costs in the selling price of our products. However,
there can be no assurance that we will be successful in offsetting these or
future potential price increases.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Selling, marketing and
administrative expenses increased $6.2 million, to $64.4 million, for the nine
months ended March 31, 2000, up from $58.2 million in the same period of fiscal
1999. The majority of the dollar increase in selling, marketing and
administrative expenses for the nine-month period was due to higher promotional
costs and increased sales levels.
MERGER RELATED AND OTHER SPECIAL CHARGES. For the nine months ended
March 31, 2000, O'Sullivan incurred compensation expense in connection with
stock options related to the merger of $10.6 million. Additionally, for the nine
month period, we incurred a charge of $408,000 for the settlement of an interest
rate swap agreement entered into in fiscal 1997. Both the compensation expense
from stock options and the loss on the settlement of the interest rate swap have
been included as separate line items in the accompanying consolidated statement
of operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $1.6 million or 15.4% to $12.0 million for the nine months ended
March 31, 2000, from $10.4 million for the same period in fiscal 1999. The
increase in depreciation and amortization expense was due primarily to
amortization of prepaid loan fees associated with the financing of the merger
and capital expenditures of approximately $10.2 million during
24
<PAGE>
the past 12 months. The expenditures were made to replace and upgrade existing
equipment and to increase manufacturing capacity, primarily at the Cedar City
and Lamar locations.
OPERATING INCOME. Operating income decreased $5.5 million from
$27.6 million in the first nine months of fiscal 1999 to $22.0 million during
the nine-month period ended March 31, 2000. The decrease was due to the merger
related and other special charges, totaling $11.0 million, incurred during the
period. Excluding merger related and other one-time charges, operating income
increased $5.5 million or 19.9% to $33.1 million from $27.6 million in the
comparable prior nine month period.
NET INTEREST EXPENSE. Net interest expense increased significantly for
nine months ended March 31, 2000 when compared to the same period in the prior
fiscal year. Net interest expense increased from $2.3 million to $10.3 million
during the nine-month period. The interest expense increased due to the higher
level of borrowings associated with the financing of the merger. The merger
closed on November 30, 1999, so only four months of increased expense is
reflected in the year to date results.
EXTRAORDINARY ITEM. O'Sullivan repaid private placement notes held with
a principal amount of $16.0 million for $16.5 million on November 30, 1999. The
$476,000 prepayment fee has been recognized an extraordinary loss of $305,000,
net of the related tax benefit.
YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998
NET SALES. Net sales increased by $40.2 million, or 11.9%, to
$379.6 million in fiscal 1999, up from $339.4 million in fiscal 1998. The
increase in net sales was primarily driven by a 10.9% increase in the number of
units sold and, to a lesser extent, a 1.0% increase in the average selling
price. Strong increases in net sales to the national discount mass merchant,
electronic specialty retailer and office superstore channels accounted for
approximately $44.3 million of the sales increase, offset by a $4.1 million
decline in sales to the regional mass merchant, department store/catalog
showroom, home improvement, original equipment manufacturer and export channels.
Consumer demand for our products was driven by market growth fueled by the
robust growth of the sub-$1,000 computer market, sales efforts targeted toward
specific rapidly growing customers, the success of new product introductions,
additional floor space and resources provided by retailers for ready-to-assemble
furniture and new store openings by certain retailers.
In March 1999, Service Merchandise Co., one of our largest customers,
filed for bankruptcy protection under Chapter 11. In addition, Montgomery
Ward & Co. recently exited Chapter 11 on August 2, 1999. If Service Merchandise,
Montgomery Ward or another major customer liquidates or ceases or substantially
reduces its purchases of products from us, we cannot assure you that we will be
able to replace these sales.
GROSS PROFIT. Our gross profit for fiscal year 1999 was $112.0 million,
an increase of $16.7 million, or 17.5%, from $95.3 million in fiscal 1998. This
increase was attributable to higher net sales and an improvement in the gross
profit margin, which increased by 140 basis points to 29.5% in fiscal 1999 from
28.1% in fiscal 1998. The increase in gross margin was primarily attributable to
increased unit sales and, to some extent, lower material costs due to our
on-going value-engineering program and improved manufacturing productivity.
These increases were somewhat offset by the increase in net sales to discount
mass merchants which normally have lower gross profit margins.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Selling, marketing and
administrative expenses increased by $5.8 million, or 8.3%, to $75.0 million in
fiscal 1999, from $69.2 million in fiscal 1998. The increase in selling,
marketing and administrative expenses was due primarily to $3.2 million of
higher advertising and out-bound freight expense directly associated with higher
net sales levels and customer mix and $2.3 million in higher profit sharing and
incentive compensation costs resulting from our improved financial results.
These increases were partially offset by lower commission expense resulting from
management's emphasis on reducing costs, and to some extent lower bad debt
expense related to the purchase and initiation of credit insurance during fiscal
1999. As a percentage of sales, selling, marketing and administrative expenses
decreased by 70 basis points to 19.7% of sales in fiscal 1999 from 20.4% of
sales in fiscal 1998 primarily from improved economies of scale.
25
<PAGE>
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization
expenses increased $2.4 million, or 20.7%, to $14.0 million in fiscal 1999 from
$11.6 million in fiscal 1998. The increase in depreciation and amortization
expense was due to capital additions of $15.8 million in fiscal 1999 and
$28.4 million in fiscal 1998. The expenditures were primarily for capacity
expansion in our Virginia plant and upgrading manufacturing equipment in our
Missouri plant.
OPERATING INCOME. Operating income increased by $10.9 million, or 41.9%,
to $37.0 million in fiscal 1999 from $26.1 million in fiscal 1998.
NET INTEREST EXPENSE. Net interest expense increased by $0.4 million to
$2.8 million in fiscal 1999. The increase was due largely to the refinancing of
our $10.0 million of industrial revenue bonds in the second quarter of this
fiscal year, which triggered a one-time charge of $0.3 million to pay the call
premium.
INCOME TAX EXPENSE. Income tax expense increased by $3.6 million, or
41.4%, to $12.3 million in fiscal 1999 from $8.7 million in fiscal 1998. Our
effective tax rate for fiscal 1999 was 36.0%, down slightly from 37.0% in fiscal
1998.
NET INCOME. As a result of the above factors, net income increased by
$7.0 million to $21.9 million for fiscal 1999 up from $14.9 million in fiscal
1998.
YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997
NET SALES. Net sales increased $17.9 million, or 5.6%, to
$339.4 million in fiscal year 1998, up from $321.5 million in fiscal 1997. The
average selling price per unit increased 13.1% in fiscal 1998, while the number
of units sold decreased by 5.9%, reflecting the growth in the office superstore
channel, which sells products with higher average price points. Sales decreases
in the national discount mass merchant, department store/catalog showroom, home
improvement, and original equipment manufacturer channels were more than offset
by increased sales through the office superstore, regional mass merchant,
electronic specialty retailer and export channels. These sales increases were
the result of targeted sales efforts toward the regional retail chains, the
addition of new customers in the electronics channel, and the continued success
of products in the office superstore channels.
The decrease in the national discount mass merchant channel was due to
the volatile order pattern of one major mass merchant in the fourth quarter of
fiscal 1997 and the first half of fiscal 1998. The decrease in the department
store/catalog showroom channel reflected the bankruptcy and subsequent
liquidation of Best Products Co., Inc. in September 1996. Lower sales through
the home improvement channel were a result of the largest home improvement
company's discontinuance of ready-to-assemble furniture products other than
storage products for the home. Original equipment manufacturer sales continued a
decline that began in fiscal 1995 because of a decreased emphasis on this lower
margin business.
In September 1996, one of our then-largest customers, Best Products
Co., Inc., filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. Best Products Co., Inc. subsequently liquidated its assets and
ceased doing business. Sales to Best Products were zero in fiscal 1998 and
$6.0 million in fiscal 1997.
In July 1997, another of our large customers, Montgomery Ward & Co.,
filed for bankruptcy protection under Chapter 11. Sales to Montgomery Ward were
down slightly overall in fiscal 1998 compared to fiscal 1997. Montgomery Ward
exited bankruptcy protection on August 2, 1999.
GROSS PROFIT. Our gross profit increased to $95.3 million in fiscal 1998
from $90.9 million in fiscal 1997 but decreased slightly as a percentage of
sales, to 28.1% from 28.3%. A change in customer mix favoring the office
superstore market over the national discount mass merchant channel provided
higher margins, which were offset by lost efficiencies from the installation of
new manufacturing software systems and the installation of new equipment,
including the related training of employees and adaptation of manufacturing
processes.
26
<PAGE>
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Selling, marketing and
administrative expenses were $69.2 million, or 20.4% of sales, in fiscal 1998,
compared with $62.1 million, or 19.3% of sales, in fiscal 1997. The increase was
due primarily to the higher advertising costs associated with our promotional
efforts with certain customers and higher outbound freight costs resulting from
a change in the freight program of a large customer. Fiscal 1997 expenses also
included bad debt expenses for the bankruptcies of Montgomery Ward & Co. and
Best Products Co., Inc.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization
expenses increased to $11.6 million in fiscal 1998 from $10.0 million in fiscal
1997. The increased expense resulted from capital additions of $28.4 million in
fiscal 1998 and $11.2 million during the second half of fiscal 1997. The
expenditures were primarily for manufacturing capacity expansion and increased
capabilities, as well as a major software system implementation.
OPERATING INCOME. Operating income decreased by $2.7 million to
$26.1 million in fiscal 1998. The decrease was due primarily to manufacturing
inefficiencies associated with the installation of new manufacturing equipment,
training of employees on the new equipment, software systems installation, and
the related adaptation of manufacturing processes. Additionally, operating
income was reduced by higher advertising costs from promotional efforts with
certain customers and higher outbound freight costs due to a change in the
freight program of a large customer.
NET INTEREST EXPENSE. Net interest expense increased by $0.2 million to
$2.5 million in fiscal 1998. The increase was due primarily to lower cash
balances from increased capital expenditures and our stock repurchase program.
INCOME TAX EXPENSE. Our effective tax rate for fiscal 1998 was 37.0%,
down slightly from 38.0% in fiscal 1997.
NET INCOME. Net income decreased by $1.5 million to $14.9 million in
fiscal 1998. The decrease was due primarily to lost manufacturing efficiencies
discussed above with respect to cost of sales and gross margin, as well as
higher promotional costs and increased outbound freight costs.
BACKLOG
Our business is characterized by short-term order and shipment schedules
of generally less than two weeks. Accordingly, we do not consider backlog at any
given date to be indicative of future sales.
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 Tandy and to
provide for working capital and capital expenditures.
WORKING CAPITAL. As of March 31, 2000, we had cash and cash equivalents
of $14.8 million. Net working capital was $96.5 million at March 31, 2000
compared to $85.0 million at March 31, 1999. Working capital increased from last
year primarily because of the increased cash balances and higher inventory
levels decreased by lower trade receivables due to changes in payment terms with
certain customers.
OPERATING ACTIVITIES. Net cash provided by operating activities for the
nine months ended March 31, 2000, was $33.5 million compared to $14.6 million
for the nine months ended March 31, 1999. The increase of $18.9 million in cash
flows from operations was due to less cash needed to finance receivables and
inventories plus more cash generated by increases in accounts payable, accrued
liabilities and income taxes payable, when compared to the prior nine month
period. Partially offsetting these items was less cash generated by net income
because of merger-related expenses and the transactions fee to a related party.
27
<PAGE>
INVESTING ACTIVITIES. We invested $7.7 million for capital expenditures
for the nine months ended March 31, 2000 compared to $13.3 million for the prior
year nine-month period. We currently estimate that the total capital expenditure
requirements for the remainder of the fiscal year will be approximately
$8.0 million, which we expect to fund from cash flow from operations or cash on
hand. Our ability to make future capital expenditures is subject to certain
restrictions under our senior credit facilities.
FINANCING ACTIVITIES. On November 30, 1999 we completed our merger and
recapitalization. Our consolidated indebtedness at March 31, 2000 was
$245.0 million, consisting of:
- $100.0 million in 13 3/8% senior subordinated notes due 2009 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. These notes were issued at a price
of 98.046% providing $98.1 million in cash proceeds before expenses
related to the issuance.
- $135.0 million in senior secured credit facilities consisting of a
six year $35.0 million term loan, a seven and one-half year
$100.0 million term loan and a $40.0 million revolving line of
credit, currently with no borrowings. The revolving line of credit
has a $15.0 million sub-limit for letters of credit, of which we are
currently utilizing approximately $12.8 million.
- $10.0 million in variable rate industrial revenue bonds.
Expenses related to the issuance of debt financing were approximately
$12.6 million. 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.
From time to time we may use derivative financial instruments to reduce
interest rate risks. We do not hold or issue derivative financial instruments
for trading purposes. During fiscal 1997, we entered into a forward starting
interest rate swap agreement with a notional principal amount of $10.0 million.
The effective date of the agreement was October 1, 1998, and the termination
date was October 1, 2008. We contracted to pay a fixed rate of 7.13% and receive
a floating interest rate during the duration of the swap agreement. On
November 30, 1999, we terminated this swap, incurring a loss of $408,000, as
part of the merger and recapitalization.
As required under the new senior credit facilities, we hedged one-half of
our term loans with an initial notational amount of $67.5 million with a
costless interest rate collar. The collar, effective February 28, 2000, is based
on 3 month LIBOR with a floor of 6.43% and a ceiling of 8.75%.
We repaid our private placement notes with a principal amount of
$16.0 million for $16.5 million on November 30, 1999. The $476,000 prepayment
fee is recorded as a $305,000 extraordinary item, net of taxes.
TAX SHARING AGREEMENT. For the nine months ended March 31, 2000,
O'Sullivan paid Tandy Corporation $2.5 million pursuant to the Tax Sharing and
Tax Reimbursement Agreement between us. The effect of the merger upon our
payments to Tandy under this agreement is the subject of an arbitration
proceeding. See Note 12 to the audited financial statements and Note 10 to the
unaudited financial statements included in this prospectus. If the arbitrators
decide in Tandy's favor, our payments under the tax sharing agreement would be
substantially higher; the amount would depend on our taxable income. Based on
current estimates, our payments to Tandy would be approximately $5.5 million
greater than we currently anticipate for fiscal years 2000 and 2001 combined.
RETIREMENT CHARGE
In October 1998, Mr. Daniel F. O'Sullivan, Chairman of the Board of
Directors and former Chief Executive Officer of O'Sullivan Holdings, completed
negotiations of a retirement and consulting agreement with O'Sullivan Holdings
contingent upon our hiring his successor. In May 1999, the original retirement
agreement was amended, removing a contingency relating to the hiring of his
successor. The retirement agreement contains standard noncompetition provisions.
The present value of all future payments under this agreement of
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approximately $1.9 million has been capitalized and recorded as an intangible
asset. The asset recorded to reflect the noncompete covenant will be recognized
on a straight line basis over the term of the agreement with Mr. O'Sullivan
commencing with his retirement on March 31, 2000. The amortization period will
be approximately 6.3 years. Payments under this agreement will total
approximately $2.2 million over the contract period.
YEAR 2000 COMPLIANCE
O'Sullivan computers and computerized equipment experienced only two
minor problems at the start of calendar 2000. We discovered the problems testing
our systems on January 1, 2000. Both problems were fixed in less than one day
and caused no interruption of production, sales or shipments. Further, we know
of no supplier or customer whose ability to sell us raw materials or to purchase
finished goods has been materially affected by Year 2000 compliance problems.
We spent approximately $110,000 in connection with our Year 2000 program.
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 instruments to
reduce the impact of adverse changes in market prices. We do not hold or issue
derivative instruments for trading purposes, and we have no material sensitivity
to changes in market rates and prices on our derivative financial instruments
positions.
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 or collars 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 commodities such as particleboard, fiberboard, corrugated
cardboard, glass 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 the after-tax earnings of O'Sullivan by approximately
$700,000 annually.
As noted above, in fiscal 2000 we have encountered price increases in
certain commodities, which increases are expected to reduce our budgeted gross
margin by about $1.0 million during the last three months of fiscal 2000. We
cannot guarantee that there will not be further price increases in these or
other commodities.
SEASONALITY
Historically, we have generally experienced a somewhat higher level of
sales in the second and third quarters of our fiscal year in anticipation of and
following the holiday selling season.
INCOME TAXES
Prior to O'Sullivan Holdings' initial public offering in 1994, we were
owned by Tandy Corporation. As part of the initial public offering, O'Sullivan
Holdings entered into a tax sharing and tax benefit reimbursement agreement with
Tandy. The structure of the public offering increased our basis in our assets
for tax purposes. This basis increase raises our tax deductions for depreciation
and amortization each year. This reduces the amount of income taxes we pay to
the IRS. Under the tax agreement, O'Sullivan Holdings agreed to pay Tandy nearly
all of any benefit we receive from the increased depreciation and amortization
that reduces our taxable income, as determined after taking into account all of
our other deductible expenses. This agreement remains in effect after the
merger.
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Since the initial public offering, in determining the benefit payment to
Tandy under the tax agreement, we have deducted our interest expense. We will
incur a significant increase in interest expense associated with our higher debt
levels in connection with the financing of the merger. We believe that our
increased interest expense, and certain expenses incurred to consummate the
merger, should be taken into account in determining the payments that we are
required to make to Tandy.
Tandy has filed suit in a Texas state court against O'Sullivan Holdings
claiming that any reduction in our tax benefit payments resulting from these
expenses in connection with the merger would violate the tax agreement. The
court has ordered the dispute to be submitted to arbitration pursuant to the tax
sharing agreement. Arbitrators have been appointed and each party has submitted
its initial position statement. Discovery is now commencing. O'Sullivan Holdings
is and expects to continue to be in full compliance with the tax agreement.
O'Sullivan Holdings believes Tandy's lawsuit is without merit and intend to
defend itself vigorously. Although we believe O'Sullivan Holdings'
interpretation of the tax agreement will ultimately prevail over Tandy's
interpretation, we cannot assure you of this. If Tandy's interpretation prevails
over O'Sullivan Holdings' and these expenses are not allowable in determining
our payment to Tandy, payments to Tandy are estimated to be $5.5 million greater
than we currently anticipate for fiscal years 2000 and 2001 combined. See "Risk
Factors - Tandy Tax Sharing and Tax Benefit Reimbursement Agreement" and
"Business - Litigation."
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BUSINESS
Our business was founded in 1954 by Thomas M. O'Sullivan, Sr. and was
incorporated as a Delaware corporation in 1969. Our subsidiary, O'Sullivan
Industries - Virginia, Inc. is a Virginia corporation which was organized in
1988.
We are a leading designer, manufacturer and distributor of
ready-to-assemble furniture products, with over 45 years of experience. We sell
primarily to the rapidly growing home office and home entertainment markets. We
manufacture approximately 450 stock keeping units of ready-to-assemble furniture
at retail price points from $20 to $999. Our product offerings include
ready-to-assemble desks, computer workcenters, home entertainment centers, audio
equipment racks, pantries and microwave oven carts. We also manufacture a
variety of other ready-to-assemble furniture for home office, home entertainment
and other uses. We design our products to provide the consumer high quality,
value and ease of assembly using straight-forward diagramed instructions.
We distribute our products primarily through office superstores,
including OfficeMax, Office Depot and Staples, discount mass merchants including
Wal-Mart, Target and Kmart, as well as through other retail channels. We own
three modern manufacturing facilities totaling over 2.1 million square feet that
are strategically located across the United States. This network of
manufacturing facilities positions us closer to our customers and reduces
freight costs, which represent a significant portion of total product cost.
The Company estimates, based on data from FURNITURE TODAY and HFD, that
the $3.3 billion ready-to-assemble segment of the North American furniture
market grew at a compound annual growth rate of 11.6% from 1990 through 1998.
This was significantly faster than the 5.1% compound annual growth rate of the
total $57.9 billion domestic residential furniture market from 1990 to 1998 as
provided by the Bureau of Economic Analysis. The market for residential
furniture, which includes upholstered furniture and wood furniture shipped fully
assembled by the manufacturer, is influenced by a variety of factors, including
home sales, housing starts and general economic conditions. We believe the
faster growth of ready-to-assemble furniture products is the result of changes
in the needs of consumers, expansion of certain retail distribution channels and
improvements in product quality.
- CHANGES IN THE NEEDS OF CONSUMERS. Consumer demand for personal
computers, which has been strong due in part to the rapid growth of
the Internet, and for larger screen televisions and related
equipment, has driven the demand for more sophisticated
ready-to-assemble home office and home entertainment furniture. We
expect these trends to continue as the number of households owning
personal computers, home theaters and other audio and video equipment
expands;
- EXPANSION OF CERTAIN RETAIL DISTRIBUTION CHANNELS. Office superstores
and discount mass merchants have altered the way many products are
sold in the United States. The ready-to-assemble furniture segment
has been positively impacted by the rapid growth and increased market
share of these retailers. These distribution channels accounted for
over 50% of the domestic sales of ready-to-assemble furniture in
1997; and
- IMPROVEMENTS IN PRODUCT QUALITY. Improvements in equipment, software
and manufacturing processes have enabled the ready-to-assemble
furniture industry to produce higher quality, more durable products.
As a result of these improvements, ready-to-assemble furniture has
become more comparable in quality and durability to wood furniture
shipped assembled by the manufacturer but remains relatively less
expensive.
We believe that these trends will continue to drive the growth of the
ready-to-assemble segment of the retail furniture market.
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COMPETITIVE STRENGTHS
We believe that we are able to compete effectively due to the following
strengths:
LEADING MARKET SHARE POSITION. We believe that we are the second largest
North American ready-to-assemble furniture manufacturer in terms of domestic
sales. We estimate that our share of the ready-to-assemble furniture market in
calendar year 1998 was approximately 16%. Many of our largest customers,
including office superstores and discount mass merchants, have substantial
purchasing requirements across the country. We are able to satisfy these
requirements because of our large manufacturing capacity and our innovative,
high quality products.
LEADER IN PRODUCT QUALITY, INNOVATION AND DESIGN. We believe that we are
recognized as a leader in product quality, innovation and design in the
ready-to-assemble furniture industry. Our computer-aided design software and our
modern manufacturing processes enable us to develop more than 150 new products
per year. Consequently, about one-third of our products are new each year. Our
ability to innovate allows us to keep pace with changes in retailer and consumer
tastes and demands.
WELL-ESTABLISHED CUSTOMER RELATIONSHIPS. We have well-established
relationships with many of the largest retailers of ready-to-assemble furniture
in the United States. These include office superstores like OfficeMax, Office
Depot and Staples and national discount mass merchants, like Wal-Mart, Target
and Kmart. Over the past two years, we have also established relationships with
leading electronic superstores like Best Buy and Circuit City. We believe we
have a long history as a trusted vendor and have earned a reputation for product
quality and innovation, customer responsiveness and manufacturing flexibility.
RECENT CAPACITY EXPANSION AND SYSTEM UPGRADES POSITION US FOR GROWTH. We
recently completed a $20 million capacity expansion program in our Virginia
plant. This expansion increased our total manufacturing capacity by
approximately 15%. We also recently completed a $13 million manufacturing
equipment upgrade in our Missouri plant. In addition, we have finished an
upgrade of our management information systems, that included a corporate-wide
conversion to JD Edwards software. We also installed new point-of-sale
analytical software that allows our sales force to better analyze sales trends
and consumer preferences. In addition, we installed Pro-engineering, a
computer-aided design software package. This software enhances our product
design capabilities and reduces the time before newly conceived products reach
the market.
LOW-COST, GEOGRAPHICALLY DIVERSIFIED MANUFACTURING OPERATIONS. We
believe that we are a low-cost ready-to-assemble furniture producer due to our
large scale, modern facilities and efficient manufacturing processes. We are the
only major ready-to-assemble furniture manufacturer with a plant in each of the
eastern, central and western regions of the United States. This allows our
plants to receive particleboard and fiberboard from the manufacturers located
nearest to them. Our network of manufacturing facilities positions us closer to
our customers and reduces shipping costs, which represent a significant
proportion of product cost. We are the only major ready-to-assemble furniture
manufacturer with a manufacturing facility in the western United States, the
fastest growing region of the nation for ready-to-assemble furniture sales.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY OWNERSHIP. Our
senior management team has extensive experience in the ready-to-assemble
furniture industry. Our top twelve executives have been with us for an average
of over 17 years. In addition, we have broadened our management's expertise by
hiring executives from other manufacturers. In connection with our
recapitalization and merger, members of our senior management retained equity in
O'Sullivan Holdings valued at a total of $13.7 million. This retained equity
includes an interest in O'Sullivan Holdings' common stock of about 27.1%. As a
result of its substantial equity interest, we believe our senior management will
have significant incentive to continue to increase our sales and profitability.
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GROWTH STRATEGY
Sales of ready-to-assemble furniture, although expanding more rapidly
than sales of traditional casegood furniture, still represented only about 5.7%
of the overall domestic residential furniture market in 1998. As the quality of
ready-to-assemble furniture continues to improve, and office superstores and
discount mass merchants continue to expand, we expect ready-to-assemble
furniture to gain additional market share. The key elements of our growth
strategy are as follows:
CONTINUE TO DEVELOP A BROAD RANGE OF INNOVATIVE, HIGH QUALITY
PRODUCTS. We are dedicated to offering a broad range of high quality products
over a wide range of retail price points. We believe that by maintaining a broad
product line, we can appeal to a greater number of consumers and penetrate a
larger number of distribution channels. We seek to drive demand for our products
and maintain profitability in an otherwise price-rigid environment by providing
a steady supply of high quality product introductions. In fiscal year 1999, we
introduced approximately 150 new products.
FURTHER PENETRATE EXISTING AND NEW, GROWING DISTRIBUTION CHANNELS. Sales
to office superstores and discount mass merchants, our core distribution
channels, have grown at a compound annual growth rate of 14.6% since fiscal year
1995 to over $250.0 million in fiscal year 1999. To increase sales to our
existing customer base, we have developed several initiatives, including
dedicated product lines, enhanced customer service and tailored marketing
programs. We have also focused on increasing sales to other growing distribution
channels, such as electronic specialty retailers and home improvement centers.
Many of these retailers are increasing the ready-to-assemble furniture component
of their product mix.
LOWER PRODUCTION COSTS. Producing ready-to-assemble furniture cost
effectively is vital to our competitive position. This belief was the premise
for our recently completed capital expansion and management information systems
upgrade. Our capital investments have increased our total manufacturing capacity
and we are currently standardizing selected manufacturing processes to further
reduce set-up downtime. New equipment and employee training have also improved
our inventory management, order fulfillment rates and production efficiency. In
addition, our JD Edwards and Pro-engineering software have improved our customer
responsiveness and product design capability. We believe that we have not yet
fully realized the benefits of our capital expansion and management information
systems upgrade.
REMAIN COMMITTED TO CUSTOMER SERVICE. We are committed to providing
superior customer service to maintain strong relationships with our customers.
We strive to develop marketing strategies that are consistent with our
customers' needs and their position in the marketplace. The recent investments
we have made to improve our management information systems and increase our
manufacturing capacity should enable us to provide a higher level of customer
responsiveness, improve the look and quality of our products and enhance our
ability to forecast orders.
INDUSTRY OVERVIEW
GENERAL. The $3.3 billion ready-to-assemble segment of the North
American furniture market is comprised of all sales of prefinished, or
unfinished, non-upholstered furniture purchased in component form and then
assembled by the consumer. Domestic ready-to-assemble furniture is generally
made from particleboard or fiberboard laminated to replicate the appearance of
different types of wood or other surfaces. Through improvements in product
quality, innovation and assembly, ready-to-assemble furniture manufacturers
today can offer a broad array of products ranging from $20 television and video
cassette recorder stands to $999 computer workcenters. Although technological
advances allow ready-to-assemble furniture manufacturers to imitate the look and
durability of casegood furniture, ready-to-assemble furniture manufacturers are
generally able to sell at lower prices due to lower raw material, manufacturing
and transportation costs.
The Company estimates, based on data from FURNITURE TODAY and HFD that
the ready-to-assemble segment of the North American furniture market grew at an
11.6% compound annual growth rate from 1990 to 1998. This growth rate compares
favorably with the compound annual growth rate of the United States gross
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domestic product of 5.0% published by the Bureau of Economic Analysis over the
same period before adjusting for inflation. We believe the growing popularity of
ready-to-assemble furniture products is the result of improvements in product
quality, basic structural changes in retail distribution channels and increased
demand created by changes in the needs of consumers.
IMPROVEMENTS IN PRODUCT QUALITY. During the past ten years,
ready-to-assemble furniture has evolved and improved dramatically. Industry
studies and publications indicate that consumers' attitudes regarding
ready-to-assemble furniture have followed suit to a large extent. Due to
improvements in the ready-to-assemble furniture manufacturing process, the
quality of ready-to-assemble furniture is now more comparable to that of wood
furniture shipped assembled by the manufacturer although it remains lower in
cost. Ready-to-assemble furniture manufacturers are able to provide additional
competitive advantages relative to assembled wood furniture. These advantages
include a broader range of surfaces and colors, enhanced design to support the
most recent home office/entertainment equipment and immediate product
availability.
EXPANSION OF KEY CUSTOMERS. The growth in the office superstore and mass
merchant retail channels has fueled the growth of ready-to-assemble furniture in
the United States. These channels accounted for over 50% of all
ready-to-assemble furniture sales in 1998 according to FURNITURE TODAY. Some
mass merchants and office superstores have announced that they will open new
North American stores in 2000. These include about 50 to 75 stores for
OfficeMax, 100 stores for Office Depot, 125 stores for Wal-Mart, 80 stores for
Target and 150 stores for Staples. We anticipate having our products included in
the majority of these new stores.
GROWTH IN HOME OFFICE FURNITURE. As the number of home office households
and households owning one or more personal computers continues to increase, we
expect the demand for home office furniture to increase as well. Home office
households are projected by International Data Corporation to grow at a compound
annual growth rate of 7.4% from 1997 to 2002. Home office households with
personal computers are projected to grow at a compound annual growth rate of
11.0%, reaching 37.8 million by 2002. Additionally, as the price of lower-end
personal computers has steadily declined below $1,000 in the past three years,
we believe that computer ownership in median and lower income households has
increased. According to the Consumer Electronics Manufacturers Association,
personal computer shipments through consumer channels in 1998 increased to an
estimated 12.8 million units, up 16.4% from 11.0 million units in 1997. The
penetration rate of personal computers in U.S. households due to declining
prices and increased use of the Internet is estimated by ING Baring Furman Selz
LLC to increase from 43% in 1997 to 51% in 2001.
CONTINUING GROWTH AND INNOVATION IN THE HOME ENTERTAINMENT MARKET. The
demand for larger television sets and related audio and video equipment has
increased demand for ready-to-assemble furniture. In 1998, an estimated
22.2 million televisions were sold in the United States. In 1998, the Consumer
Electronics Manufacturers Association's published materials indicated that
television sales increased 1.6%, to $6.1 billion from $6.0 billion in 1997. HFN
stated that during this period the market for large screen televisions, defined
as 32 inches or larger, increased 57% from $2.1 billion in 1997 to $3.3 billion
in 1998. The surge in sales of large screen televisions has occurred in part due
to a general price decline. Many entertainment centers sold over the past decade
accommodate televisions with a maximum screen size of 27 inches. These
entertainment centers need to be replaced by new furniture products to
accommodate larger screen televisions.
PRODUCT OVERVIEW
We group our product offerings into three distinct categories:
- furniture for the home office, including desks, computer work
centers, bookcases, filing cabinets and computer storage racks;
- electronics display furniture, including home entertainment centers,
home theater systems, television and stereo tables and cabinets, and
audio and video storage racks; and
- home decor furniture, including microwave oven carts, pantries,
living room and recreation room furniture and bedroom pieces,
including dressers, night stands and wardrobes.
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The following is a description of some of our products:
<TABLE>
<CAPTION>
PRODUCT LINE DESCRIPTION KEY CUSTOMERS
------------------------ ------------------------------------------------ --------------------------------------
<S> <C> <C>
Living Dimensions Contemporary small office/home office and OfficeMax, Office Depot, Best Buy,
entertainment furniture. Upscale features Office World, Circuit City, Service
include Armortop-Registered Trademark- laminates Merchandise
and Quikfit-TM- fastener system.
Ovations Transition style entertainment furniture Best Buy, Circuit City, Montgomery
collection in medium Mystique Maple and light Ward
Snow Maple finish.
Scandinavian Contemporary small office/home office and Office Depot, OfficeMax, Ames, Target,
entertainment furniture collection in medium Best Buy
Alder finish.
Xpressions-TM- Generation X targeted home office and Wal-Mart, Circuit City, Meijer, Ames,
entertainment furniture collection. Features Staples, Montgomery Ward
include mini-stereo system compatibility, lavish
media storage and youthful high contrast,
two-tone finish.
French Gardens Country French style collection with antique OfficeMax, Shopko, Montgomery Ward
Odessa Pine finish. Both home office and
entertainment products.
Carmel Transition style home office and entertainment Ames, Montgomery Ward, Service
Valley-Registered Trademark- furniture collection in medium oak finish. Merchandise, Best Buy
</TABLE>
PRODUCT DESIGN AND DEVELOPMENT
We believe we are an industry leader in product quality and innovation.
We are committed to the continuing development of unique furniture that meets
consumer needs. With over 50% of our sales to the home office market, we believe
we are recognized as one of the industry's premier producers of contemporary
home office ready-to-assemble furniture. As evidence of our commitment to
quality and innovation, in the past three years we have introduced an average of
over 150 new products per year. In the ready-to-assemble furniture industry, a
new product can be a variation in color or styling of an existing product. By
providing a continuous supply of new product introductions, we are able to drive
demand for our products. We believe this will allow us to maintain our profit
margins in an otherwise price-rigid environment.
We maintain an in-house product design staff that collaborates with our
marketing personnel and customers to develop new products based on demographic
and consumer information. The product design professionals then work with our
engineering division to produce full-scale prototypes. The engineering staff
uses computer-aided design Pro-engineering software, providing the latest
three-dimensional graphics capabilities. Pro-engineering software allows a
design engineer to accelerate the time-to-completion for a new product design.
This allows us to reduce the time before newly conceived products reach the
market. We then show our prototypes to our customers to gauge interest. If
initial indications of product appeal are favorable, we usually can commence
production within 12 weeks. We spent approximately $800,000, $900,000 and
$700,000 on product design and development in fiscal 1999, 1998 and 1997,
respectively.
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CUSTOMERS
Ready-to-assemble furniture is sold through a broad array of distribution
channels, as shown in the chart set forth below. While the ready-to-assemble
furniture segment historically has been dominated by discount mass merchants
like Wal-Mart, Target and Kmart, office superstores have quickly become the
second largest distribution channel. The office superstores are the fastest
growing channel.
We have a large market share position in both of the two major
distribution channels and longstanding relationships with key customers. In
fiscal 1999, over 60% of our sales were made through the office superstore and
discount mass merchant channels. In that same period, sales to OfficeMax
accounted for 20.9% of our total sales and Office Depot accounted for 13.1% of
our total sales. Our top five customers accounted for approximately 60% of our
sales in fiscal 1999. The loss of, or significant reductions in orders from, any
of these five customers could have a material adverse effect on O'Sullivan.
Similar to other large ready-to-assemble furniture manufacturers, our sales are
fairly concentrated. See "Risk Factors."
INDUSTRY WIDE SALES BY DISTRIBUTION CHANNEL
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MASS MERCHANTS/DISCOUNTERS 33%
<S> <C>
Other 10%
Department Stores 12%
Furniture Stores 7%
Electronic Superstores 7%
Home Centers 7%
Office Superstores/Dealers 25%
</TABLE>
SALES AND MARKETING
We manage our customer relationships both through our in-house sales
force and a network of independent sales representatives. Key accounts like
OfficeMax and Office Depot are called on jointly by our sales force and
independent sales representatives. Smaller customers are serviced mainly by
independent sales representatives, whose activities are reviewed by our in-house
sales force. As of May 15, 2000, we employed 20 people in our sales department
and 18 people in our marketing department.
We work extensively with our customers to meet their specific
merchandising needs. Through customer presentations and other direct feedback
from the customer and consumers, we identify the consumer tastes and profiles of
a particular retailer. With this information, we make product recommendations to
our customers. We maintain a close dialogue with customers to ensure that the
design and functional requirements of our products are fulfilled.
Our products are promoted by our customers to the public under
cooperative and other advertising agreements. Under these agreements, our
products are advertised in newspaper inserts and catalogs, among other
publications. We generally cover a portion of the customer's advertising
expenses if the customer places approved advertisements mentioning us and our
products by name. We may also provide support to some advertising programs. We
generally do not advertise directly to consumers. We do, however, advertise in
trade publications to promote us as a producer of high quality ready-to-assemble
furniture.
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We provide extensive service support to our customers. This support
includes designing and installing in-store product displays, educating
retailers' sales forces and maintaining floor displays. We have been recognized
for our commitment to our retail partners and have earned several awards in
recent years. These awards include the 1998 Vendor of the Year award in the
ready-to-assemble furniture category from both Kmart and Shopko.
We participate in the eight-day furniture markets held in High Point,
North Carolina in April and October of each year. High Point is the principal
international market in the furniture industry. It attracts buyers from the
United States and abroad. We maintain over 16,000 square feet of leased showroom
space at High Point. We also maintain two other showrooms to market our product
lines. In addition, we participate in other trade shows, including the
international furniture show in Cologne, Germany.
We sell our products throughout the United States and in Canada, Mexico,
the United Kingdom and other countries. Export sales were $23.5 million, $27.9
million and $22.5 million in fiscal 1999, 1998 and 1997, respectively. In fiscal
1999, international sales declined largely due to the strength of the dollar
against the pound. In fiscal 1998 and 1997, international sales increased
because of increased sales in the United Kingdom and the growth of international
office superstores. Fiscal 1998 sales to the Middle East also increased, and
sales to Mexico began to recover.
MANUFACTURING
We operate three modern manufacturing facilities, as described more fully
below. They are located in Lamar, Missouri, South Boston, Virginia and Cedar
City, Utah. In total, our facilities have over 2.1 million square feet.
- LAMAR, MISSOURI: Opened in 1965, this facility has about 1.1 million
square feet. It is the largest of our three facilities and has the
capability to produce our entire product offering. This facility also
serves as our corporate headquarters.
- SOUTH BOSTON, VIRGINIA: Opened in 1989, our South Boston facility has
been expanded to approximately 480,000 square feet. This includes a
100,000 square foot expansion in 1993 and an additional 30,000 square
foot expansion in 1998. The South Boston facility has the capability
to manufacture substantially all of our products. As a part of our
expansion in 1998, we added a strip line, a laminator, a combi-former
machine and a new wrap line to the facility.
- CEDAR CITY, UTAH: This facility was opened in the spring of 1995. Our
newest plant encompasses about 530,000 square feet. It has about 25%
of the production capacity of our Lamar facility. We opened this
facility in Utah to be closer to western customers and particleboard
suppliers in order to reduce transportation costs. The building in
Cedar City is now utilizing approximately 50% of its available
manufacturing space. Consequently, it could accommodate substantial
capacity expansion.
We have invested over $60.1 million in capital improvements to expand
production capacity, increase manufacturing efficiency and install a new
corporate-wide JD Edwards management information system since the beginning of
fiscal year 1997. These efforts have provided significant production
improvements, including:
- IMPROVED PRODUCT STYLING AND EFFICIENCY: We were one of the first
ready-to-assemble furniture manufacturers to utilize combi-former
machines. This fall, we expect to install our fourth combi-former
machine. These machines provide a significant advantage in product
styling by creating rounded and other curved edges on furniture
parts.
- IMPROVED MANUFACTURING EFFICIENCY: Our new equipment is highly
automated and efficient. However, it is also complex and requires
extensive training. As our employees have become more familiar with
the new equipment, their productivity has improved. We expect these
improvements to continue.
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- INCREASED MANUFACTURING FLEXIBILITY: The new equipment installed at
our South Boston, Virginia plant has provided expanded capacity and
manufacturing flexibility. As a result, the South Boston facility is
now capable of manufacturing a broader spectrum of parts. Some of
these parts were formerly manufactured only in our Lamar plant. We
believe that our expanded manufacturing capacity will increase
manufacturing flexibility, reduce freight costs and allow us to
better serve East Coast markets.
RAW MATERIALS
The materials used in our manufacturing operations include particleboard,
fiberboard, coated paper laminates, glass, furniture hardware and packaging
materials. Our largest raw material cost is particleboard. We purchase all of
our raw material needs from outside suppliers. We buy our particleboard and
fiberboard at market-based prices from several independent wood product
suppliers. We purchase other raw materials from a limited number of vendors.
These raw materials are generally available from other suppliers, although the
cost from alternate suppliers might be higher.
As is customary in the ready-to-assemble furniture industry, we do not
maintain long-term supply contracts with our suppliers. We do, however, have
long standing relationships with all of our key suppliers and encourage supplier
partnerships. Our supplier base is sufficiently diversified so that the loss of
any one supplier in any given commodity should not have a material adverse
effect on our operations. We have never been unable to secure needed raw
materials. However, there could be adverse effects on our operations and
financial condition if we are unable to secure necessary raw materials like
particleboard and fiberboard.
Because we purchase all of our raw materials from outside suppliers, we
are subject to fluctuations in prices of raw materials. For example, our results
of operations were significantly affected in fiscal year 1995 by higher
particleboard and fiberboard prices. Future increases in the price of raw
materials could again affect our results of operations. See "Risk Factors."
COMPETITION
The residential furniture market is very competitive and includes a large
number of both domestic and foreign manufacturers. Our competitors include
manufacturers of both ready-to-assemble furniture and assembled furniture.
Although a large number of companies manufacture ready-to-assemble furniture,
the top five ready-to-assemble furniture manufacturers including O'Sullivan,
accounted for an estimated 76% of the domestic ready-to-assemble furniture
market in 1998. In calendar 1999, our estimated share of the domestic
ready-to-assemble furniture market was approximately 16%. Our top five
competitors in terms of market share of the ready-to-assemble furniture segment
are Sauder Woodworking, Inc., Bush Industries, Inc., Dorel Industries, Inc.,
Mill's Pride, and Creative Interiors. Some of our competitors have greater sales
volume and financial resources than us.
We, along with some of our competitors, have continued to increase
production capacity significantly as the market for ready-to-assemble furniture
has grown. In fiscal year 1996, these increases in capacity created some surplus
in production capacity in the ready-to-assemble furniture industry. The current
increases in production capacity could again cause excess capacity and increased
competition if anticipated sales increases do not materialize. This could
adversely affect our margins and results of operations. See "Risk Factors."
PATENTS AND TRADEMARKS
We have a United States trademark registration and international
trademark registrations or applications for the use of the
O'Sullivan-Registered Trademark- name on furniture. We believe that the
O'Sullivan name and trademark are well-recognized and associated with high
quality by both our customers and consumers and are important to the success of
our business. Our products are sold under a variety of trademarks in addition to
O'Sullivan. Some of these names are registered trademarks. We do not believe
that the other trademarks we own enjoy the same level of recognition as the
O'Sullivan trademark. United States, and generally foreign, trademarks can be
38
<PAGE>
renewed indefinitely. O'Sullivan expects to renew any trademarks that it
believes are material to its business. We also do not believe that the loss of
the right to use any one of these other trademarks would be material to our
business. We hold a number of patents and licenses. None of these patents and
licenses are individually considered by us to be material to our business.
SHIPPING
We offer customers the choice of paying their own freight costs or having
us absorb freight costs. If we absorb the freight costs, our product prices are
adjusted accordingly. When we pay freight costs, we use independent trucking
companies with whom we have negotiated competitive transportation rates.
BACKLOG
Our business is characterized by short-term order and shipment schedules
of generally less than two weeks. Accordingly, we do not consider backlog at any
given date to be indicative of future sales.
SEASONALITY
We generally experience a somewhat higher level of sales in the second
and third quarters of our fiscal year in anticipation of and following the
holiday selling seasons.
PROPERTIES
We own our three manufacturing facilities. We also lease distribution
warehouses in Lamar, Missouri and South Boston, Virginia. We utilize space in
bonded warehouses in Markham, Ontario for our Canadian operations and in
Oxfordshire, United Kingdom to serve our European customers. We do not consider
our leased space to be material to our operations.
INSURANCE
We maintain liability insurance at levels that we believe are adequate
for our needs. We believe these levels are comparable to the level of insurance
maintained by other companies in the furniture manufacturing business.
EMPLOYEES
As of April 30, 2000, we had approximately 2,600 employees. Sixty-four
percent of these employees are located in Lamar. None of our employees are
represented by a labor union. We believe that we have good relations with our
employees.
LITIGATION
Prior to O'Sullivan Holdings' initial public offering in 1994, we were
owned by Tandy Corporation. As part of the initial public offering, O'Sullivan
Holdings entered into a tax sharing and tax benefit reimbursement agreement with
Tandy. The structure of the public offering increased the basis in our assets
for tax purposes. This basis increase reduces the amount of gain we recognize
upon sales of our assets and increases our annual tax deductions for
depreciation and amortization. This increase in deductions reduces the amount of
income taxes that we pay. Under the tax sharing agreement, O'Sullivan Holdings
agreed to pay Tandy nearly all of any benefit we receive from this reduction in
our taxable income. Our taxable income is determined after taking into account
all of our other deductible expenses. The annual payment to Tandy under the tax
sharing agreement was $9.7 million for fiscal 1999, $11.7 million for fiscal
1998 and $6.0 million for fiscal 1997. This agreement will remain in effect
until 2033. However, under the terms of the tax sharing agreement, O'Sullivan
Holdings and Tandy are expected to negotiate a final payment and termination
date of the agreement in 2009.
39
<PAGE>
Since the initial public offering, in determining the benefit payment to
Tandy under the tax sharing agreement, we have deducted our interest expense. We
will incur a significant increase in interest expense associated with our higher
debt levels in connection with the financing of the merger. We believe that this
increased interest expense, and certain expenses incurred to consummate the
merger, should be taken into account in determining the payments O'Sullivan
Holdings is required to make to Tandy under the tax sharing agreement, and Tandy
does not. Under the tax sharing agreement, disputes between the parties must be
referred to the chief executive officers. If they are unable to resolve the
dispute, it is to be resolved by a public accounting firm or a law firm
reasonably satisfactory to Tandy and us.
On June 29, 1999, Tandy filed a complaint against us in the District
Court of Texas in Tarrant County. Tandy's complaint sought a court order
compelling us to submit to a dispute resolution process. Alternatively, the
complaint sought a declaratory judgment that after the merger we must continue
to make tax-sharing payments to Tandy as if the merger had not occurred.
On September 9, 1999, Tandy filed a motion for summary judgment in its
lawsuit against us. On October 8, 1999, Tandy's motion was denied, as was all
other relief sought by Tandy, except that O'Sullivan Holdings was directed to
commence dispute resolution procedures before an arbitrator, according to the
terms of the tax sharing agreement. Arbitrators have been selected to hear the
dispute. Each party has submitted its initial position statement, and discovery
commencing.
To support its motion for summary judgment, Tandy referred to a letter it
received from its independent outside auditors, PricewaterhouseCoopers LLP.
PricewaterhouseCoopers audits both Tandy's financial statements and our
financial statements. The PricewaterhouseCoopers letter advised Tandy on how
PricewaterhouseCoopers expected the tax sharing agreement would operate, if
certain assumptions were valid. On its face, the letter made clear that it was
not expressing an "opinion" on how the actual dispute between Tandy and
O'Sullivan Holdings would in fact be resolved, and the letter addressed
assumptions that PricewaterhouseCoopers had been given by Tandy.
O'Sullivan Holdings' annual report to stockholders on SEC Form 10-K
disclosed these facts, and expressed management's view, based on an opinion of
our outside counsel, Blackwell Sanders Peper Martin LLP, that Tandy's position
in its suit was without merit. Because PricewaterhouseCoopers both wrote its
letter to Tandy but did not object to the inclusion of our management's view in
the Form 10-K on the merits of Tandy's lawsuit, the SEC Staff has asked
O'Sullivan Holdings to clarify "whether PricewaterhouseCoopers has a reasonable
basis to doubt management's view that Tandy's lawsuit has no merit." In our
view, PricewaterhouseCoopers had a perfectly reasonable basis for its
acquiescence in the footnote disclosure in the Form 10-K that Tandy's position
was without merit. First, O'Sullivan Holdings received an opinion from Blackwell
Sanders Peper Martin LLP that supports our view that Tandy's position in the
litigation was without merit. That opinion was made available to
PricewaterhouseCoopers in connection with its annual audit, and clearly supports
the decision not to object to the inclusion of that footnote in O'Sullivan
Holdings' financial statements. Second, PricewaterhouseCoopers also has advised
O'Sullivan Holdings that its letter was predicated on assumptions it now
understands are not relevant to the merger as presently structured, and
therefore, PricewaterhouseCoopers has reaffirmed that its original letter did
not attempt to offer an expert opinion to Tandy on the merger or predict the
actual outcome of the litigation between Tandy and us. Neither
PricewaterhouseCoopers nor we believe there is any inconsistency between
PricewaterhouseCoopers' original letter and its non-objection to the inclusion
of that footnote disclosure in the Form 10-K. In light of
PricewaterhouseCoopers' response, the PricewaterhouseCoopers letter had no
relevance to the merger. However, we have included this discussion of the
PricewaterhouseCoopers letter because the SEC requested that it be included in
the proxy statement relating to the merger.
Finally, the Staff suggests that its concerns about this situation could
be eliminated if PricewaterhouseCoopers were to withdraw the letter to Tandy.
But, since the letter is not an expert opinion on any pending matter, a position
PricewaterhouseCoopers has since reaffirmed to us, we do not believe there is
any reason for PricewaterhouseCoopers formally to withdraw its letter.
40
<PAGE>
O'Sullivan Holdings is now, and expects to continue to be, in full
compliance with the tax sharing agreement. O'Sullivan Holdings believes that
Tandy's position is without merit and intends to defend ourselves vigorously.
However, if Tandy's interpretation prevails over O'Sullivan Holdings' and our
increased interest and other merger-related expenses are not allowable in
determining our payment to Tandy, payments to Tandy are estimated to be $5.5
million higher than we currently anticipate for fiscal years 2000 and 2001
combined. See "Risk Factors - Tax Sharing and Tax Benefit Reimbursement
Agreement."
On May 18, 1999, five lawsuits were filed as class actions by
stockholders in the Delaware Court of Chancery seeking to enjoin the merger or,
in the alternative, to rescind the merger and recover monetary damages. The
complaints name as defendants O'Sullivan Holdings, all of its directors and, in
some cases, BRS. The complaints allege that O'Sullivan Holdings' directors
breached their fiduciary duties by approving the merger. The complaints also
allege that the price terms of the merger are inadequate and unfair to
O'Sullivan Holdings' stockholders. In addition, the complaints allege that the
management participants in the buyout have conflicts of interest that have
prevented them from acting in the best interests of O'Sullivan Holdings'
stockholders and that make it inherently unfair for BRS and the management
participants in the buyout to acquire 100% of O'Sullivan Holdings' stock. In the
cases naming BRS as a defendant, BRS is alleged to have aided and abetted the
alleged breaches of fiduciary duties. The defendants do not have to respond to
the lawsuits until after the plaintiffs have combined their complaints into one
complaint. The court issued an order on July 22, 1999 requiring the plaintiffs
to consolidate their complaints into one complaint. However, no date has been
set by which the defendants must move or answer in response to the consolidated
complaint. We believe that the claims are without merit and intend to defend the
lawsuits vigorously.
In addition, we are a party to various pending legal actions arising in
the ordinary operation of our business. These include product liability claims,
employment disputes and general business disputes. We believe that these actions
will not have a significant negative effect on our operating results and
financial condition.
ENVIRONMENTAL AND SAFETY REGULATIONS
Our operations are subject to extensive federal, state and local
environmental laws, regulations and ordinances. Some of our operations require
permits. These permits are subject to revocation, modification and renewal by
governmental authorities.
Governmental authorities have the power to enforce compliance with their
regulations. Violators may be subject to fines, injunction or both. Compliance
with these regulations has not in the past had a significant effect on our
earnings, capital expenditures or competitive position. We anticipate increased
federal and state environmental regulations affecting us as a manufacturer,
particularly regarding emissions and the use of various materials in our
production process. In particular, regulations to be issued under the Clean Air
Act Amendments of 1990 could subject us to new standards regulating emissions of
some air pollutants from our wood furniture manufacturing operations. We cannot
at this time estimate the impact of these new standards on our operations,
future capital expenditure requirements or the cost of compliance. We have
applied for air emission permits under Title V of the Clean Air Act Amendments
of 1990.
Our manufacturing process creates by-products, including sawdust and
particleboard flats. At the South Boston facility, this material is given to a
recycler or disposed of in landfills. At the Lamar facility, the material has
been sent to a recycler and off-site disposal sites. Wood by-products generated
at the Cedar City facility are shipped to a local landfill. Our by-product
disposal costs were $1.8 million for fiscal 1999, $1.2 million for fiscal 1998
and $1.0 million for fiscal 1997.
Our manufacturing facilities ship waste products to various disposal
sites. If our waste products include hazardous substances and are discharged
into the environment, we are potentially liable under various laws. These laws
may impose liability for releases of hazardous substances into the environment.
These laws may also provide for liability for damage to natural resources. One
example of these laws is the federal Comprehensive Environmental Response,
Compensation and Liability Act. Generally, liability under this act is joint and
several and is determined without regard to fault. In addition to the
Comprehensive Environmental Response,
41
<PAGE>
Compensation and Liability Act, similar state or other laws and regulations may
impose the same or even broader liability for releases of hazardous substances.
We have been designated as a potentially responsible party under the
Arkansas Remedial Action Trust Fund Act for the cost of cleaning up a disposal
site in Diaz, Arkansas. We entered into a DE MINIMIS buyout agreement with some
of the other potentially responsible parties and have contributed $2,000 to date
toward cleanup costs under this agreement. The agreement subjects potentially
responsible parties to an equitable share of any additional contributions if
cleanup costs exceed $9 million. In this event, we would be liable for our share
of the excess. Cleanup expenses have approached $9 million. The state has
approved a plan providing that groundwater at the site be monitored. No further
remediation activity is necessary unless further problems are discovered. The
monitoring activities should not require the potentially responsible parties to
make additional payments. We believe that the amounts we may be required to pay
in the future, if any, relating to this site will be immaterial.
Our operations also are governed by laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Act and related regulations. Additionally, some of our products must
comply with the requirements and standards of the United States Consumer
Products Safety Commission. We believe that we are in substantial compliance
with all of these laws and regulations.
42
<PAGE>
MANAGEMENT
Set forth below are the names, ages and brief accounts of the business
experience of each person that is a director or executive officer of O'Sullivan
Industries, Inc., O'Sullivan Industries O'Sullivan Holdings, Inc. and O'Sullivan
Industries - Virginia, Inc. Officers are appointed by the Board of Directors in
November of each year. Directors serve for three year terms. Mr. Davidson's term
expires in November 2000. Mr. Edwards' term expires in November 2001. The
current terms of Messrs. O'Sullivan and Rosser expire in November 2002.
<TABLE>
<CAPTION>
OFFICER OR
NAME AGE DIRECTOR SINCE POSITION
------------------------------------------ -------- -------------- ------------------------------------------
<S> <C> <C> <C>
Daniel F. O'Sullivan...................... 58 1969 Chairman of the Board
Richard D. Davidson....................... 52 1996 President, Chief Executive Officer and
Director
Tyrone E. Riegel.......................... 57 1969 Executive Vice President
Phillip J. Pacey.......................... 35 1999 Senior Vice President and Chief Financial
Officer
Thomas M. O'Sullivan, Jr. ................ 45 1993 Senior Vice President-Sales
Michael P. O'Sullivan..................... 40 1995 Senior Vice President-Marketing
Rowland H. Geddie, III.................... 46 1993 Vice President, General Counsel and
Secretary
E. Thomas Riegel.......................... 56 1993 Vice President-Strategic Operations
James C. Hillman.......................... 55 1973 Vice President-Human Resources
Tommy W. Thieman.......................... 48 1999 Vice President-Manufacturing-Lamar
Stuart D. Schotte......................... 38 1999 Vice President-Supply Chain Management
Stephen F. Edwards........................ 37 1999 Director of O'Sullivan Holdings
Harold O. Rosser.......................... 51 1999 Director of O'Sullivan Holdings
</TABLE>
DANIEL F. O'SULLIVAN was named President, Chief Executive Officer and a
director of O'Sullivan Holdings in November 1993 and became Chairman of the
Board in December 1993. He relinquished the position of President of O'Sullivan
Holdings in July 1996, and resigned as Chief Executive Officer in October 1998.
He served as President of O'Sullivan Industries from 1986 until July 1996, and
was appointed Chairman of the Board and Chief Executive Officer in 1994. He also
serves as Chairman of the Board and Chief Executive Officer of O'Sullivan
Industries - Virginia. Mr. O'Sullivan has been employed by O'Sullivan Industries
since September 1962. Under the terms of his retirement and consulting agreement
with O'Sullivan Holdings, Mr. O'Sullivan retired as an executive of O'Sullivan
Industries, O'Sullivan Holdings and O'Sullivan Industries - Virginia effective
March 31, 2000. He remains as non-executive Chairman of the Board for each
company.
RICHARD D. DAVIDSON was promoted to President and Chief Executive Officer
of O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan Industries -
Virginia in January 2000. He was named President and Chief Operating Officer of
O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan Industries - Virginia
in July 1996. He was named a Director of O'Sullivan Industries and O'Sullivan
Industries - Virginia in July 1996 and of O'Sullivan Holdings in August 1996.
From October 1995 to July 1996 he was a private investor. For more than five
years prior to October 1995, he served as a Senior Vice President of Sunbeam
Corporation and as President of Sunbeam's Outdoor Products Division.
TYRONE E. RIEGEL has been Executive Vice President of O'Sullivan
Industries since July 1986 and served as a Director from 1994 through November
1999. He was appointed as Executive Vice President and a Director of O'Sullivan
Holdings in November 1993. His service as a director of O'Sullivan Holdings
ended in November 1999. Mr. Riegel also serves as Executive Vice President of
O'Sullivan Industries - Virginia. Mr. Riegel has been employed by O'Sullivan
Industries since January 1964.
PHILLIP J. PACEY was appointed Senior Vice President and Chief Financial
Officer of O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan Industries
-Virginia in January 2000. From July 1999 to January 2000, he was Vice
President-Finance and Treasurer for these companies. From November 1995 until
July 1999, he served as Treasurer of O'Sullivan Holdings, O'Sullivan Industries
and O'Sullivan Industries - Virginia. From 1994 until November 1995, Mr. Pacey
served as Corporate Tax Manager of Savannah Foods & Industries, Inc., a sugar
refiner and marketer.
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<PAGE>
THOMAS M. O'SULLIVAN, JR. was promoted to Senior Vice President-Sales of
O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan Industries - Virginia
in January 2000. From 1993 to January 2000, he was Vice President-Sales of these
companies. Prior to his appointment as Vice President-Sales, Mr. O'Sullivan was
the National Sales Manager for O'Sullivan Industries and O'Sullivan Industries -
Virginia. Mr. O'Sullivan has been employed by O'Sullivan Industries since
June 1979.
MICHAEL P. O'SULLIVAN was named Senior Vice President-Marketing of
O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan Industries - Virginia
in January 2000. From November 1995 to January, 2000 he served as Vice
President-Marketing of these companies. Mr. O'Sullivan was National Sales
Manager of O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan Industries
-Virginia from July 1993 until November 1995. Mr. O'Sullivan has been employed
by O'Sullivan Industries since 1984.
ROWLAND H. GEDDIE, III has been Vice President, General Counsel and
Secretary of O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan
Industries - Virginia since December 1993. He served as a Director of O'Sullivan
Industries and O'Sullivan Industries - Virginia from March 1994 through November
1999.
E. THOMAS RIEGEL has been Vice President-Strategic Operations of
O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan Industries - Virginia
since November 1995. From June 1993 until November 1995, he was Vice
President-Marketing of O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan
Industries - Virginia. Mr. Riegel has been employed by O'Sullivan Industries
since May 1971.
JAMES C. HILLMAN has been Vice President-Human Resources of O'Sullivan
Holdings since November 1993 and of O'Sullivan Industries since 1980. He also
serves as Vice President-Human Resources of O'Sullivan Industries - Virginia.
Mr. Hillman has been employed by O'Sullivan Industries since 1971.
TOMMY W. THIEMAN was appointed Vice President-Manufacturing-Lamar in
July 1999 for O'Sullivan Holdings and O'Sullivan Industries. Since 1987, he has
served as the Plant Manager in Lamar. Mr. Thieman has been employed by
O'Sullivan Industries since 1972.
STUART D. SCHOTTE was appointed Vice President-Supply Chain Management in
July 1999 for O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan
Industries - Virginia. From February 1998 until July 1999, he served as
Controller of O'Sullivan Holdings, O'Sullivan Industries and O'Sullivan
Industries - Virginia. From July 1996 until February 1998, Mr. Schotte served as
Director of Financial Analysis and Planning for Fast Food Merchandisers, Inc.
From October 1994 to July 1996, he was a certified public accountant.
STEPHEN F. EDWARDS was appointed a director of O'Sullivan Holdings in
connection with the merger. Mr. Edwards has been a principal of BRS since
August , 1995. Mr. Edwards was an officer of Citicorp Venture Capital from 1993
through July 1995. From 1988 through 1991, he was an associate at Citicorp
Venture Capital. Prior to joining Citicorp Venture Capital, Mr. Edwards worked
with Citicorp/Citibank in various corporate finance positions. Mr. Edwards is a
director of Town Sports International, Inc., Anvil Knitwear, Inc., and American
Paper Group, Inc.
HAROLD O. ROSSER was appointed a director of O'Sullivan Holdings in
connection with the merger. Mr. Rosser has been a principal of BRS since
August , 1995. Mr. Rosser was an officer of Citicorp Venture Capital from 1987
through July 1995. Previously, he spent 12 years with Citicorp/Citibank in
various management and corporate finance positions. He is a director of B&G
Foods, Inc., California Pizza Kitchen, Inc., American Paper Group, Inc.,
Jitney-Jungle Stores of America, Inc., Acapulco Restaurants, Inc. and Penhall
International, Inc. Mr. Rosser is also Chairman of the Board of Trustees of Hope
Church in Wilton, Connecticut.
FAMILY RELATIONSHIPS
Daniel F. O'Sullivan, Thomas M. O'Sullivan, Jr. and Michael P. O'Sullivan
are brothers. Tommy W. Thieman is a brother-in-law of Daniel F. O'Sullivan,
Thomas M. O'Sullivan, Jr. and Michael P. O'Sullivan. Tyrone E. Riegel and James
C. Hillman were, prior to the deaths of their respective spouses,
brothers-in-law of Daniel F. O'Sullivan, Thomas M. O'Sullivan, Jr. and Michael
P. O'Sullivan. Tyrone E. Riegel and E. Thomas Riegel are brothers.
44
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the securities
of O'Sullivan Holdings. These amounts do not include the options to acquire
common stock which may be granted to our employees or the warrants to purchase
an aggregate of 93,273 shares of common stock and 39,273 shares of Series B
junior preferred stock of O'Sullivan Holdings issued pursuant to the offering of
old senior subordinated notes. The investment of BRS includes shares held by
employees and affiliates of BRS.
<TABLE>
<CAPTION>
OPTIONS TO
PURCHASE
PERCENTAGE SHARES
SHARES OF OF OF SERIES A SHARES OF SERIES
COMMON COMMON SHARES OF SENIOR JUNIOR PREFERRED B JUNIOR
NAME OF BENEFICIAL OWNER STOCK STOCK PREFERRED STOCK STOCK PREFERRED STOCK
------------------------ --------- ---------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
BRS(1)..................................... 996,600 72.85% -- -- 442,933
Richard D. Davidson........................ 81,549 5.96% 14,819 10,929 20,839
Daniel F. O'Sullivan....................... 9,972 0.73% 197,681 4,432 --
Tyrone E. Riegel........................... 21,265 1.55% 101,939 3,378 3,644
O'Sullivan Properties, Inc. (affiliate of
Thomas M. O'Sullivan, Sr.)............... 21,735 1.59% 112,958 -- 9,660
Michael P. O'Sullivan...................... 31,305 2.29% 5,080 6,176 5,117
Thomas M. O'Sullivan, Jr................... 34,151 2.50% 6,664 5,996 6,561
James C. Hillman........................... 27,251 1.99% 8,067 5,995 4,124
Rowland H. Geddie, III..................... 24,759 1.81% 5,420 6,375 2,636
E. Thomas Riegel........................... 19,816 1.45% 20,711 4,390 2,425
Tommy W. Thieman........................... 17,635 1.29% 7,858 2,563 3,282
Phillip J. Pacey........................... 11,749 0.86% 10,677 1,411 1,722
Stuart D. Schotte.......................... 11,209 0.82% 216 493 2,496
Management participants in the buyout as a
group (37 persons)....................... 371,400 27.15% 668,596 60,319 72,748
BancBoston Investments, Inc................ 93,273 (2) 6.38% -- -- 39,273 (2)
</TABLE>
--------------------------
(1) The principals of BRS's parent are Bruce C. Bruckmann, Harold O. Rosser,
Stephen C. Sherrill, Stephen F. Edwards and Paul D. Kaminsky, each of whom
could be deemed to own the shares of O'Sullivan Holdings held by BRS.
(2) BancBoston Investments, Inc. holds warrants to purchase these shares.
Each management participant has a business address at 1900 Gulf Street,
Lamar, Missouri 64759-1899. O'Sullivan Properties, Inc. has a business address
at 1101 Gulf Street, Lamar, Missouri 64759. While Mr. Thomas M. O'Sullivan, Sr.
participated in the recapitalization and merger through O'Sullivan Properties,
we are treating him as if he had been a management participant in the
recapitalization and merger for purposes of this document. BRS' address is 126
East 56th Street, 29th Floor, New York, New York 10022. BancBoston Investments,
Inc.'s address is 175 Federal Street, 10(th) Floor, Boston, Massachusetts 02110.
BancBoston Investments, Inc. is a subsidiary of Fleet Boston Financial
Corporation, a publicly held corporation.
45
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table reflects the cash and non-cash compensation for the
chief executive officer of O'Sullivan and the four next most highly compensated
executive officers at June 30, 1999.
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION (1) COMPENSATION
------------------- ----------------
SECURITIES ALL OTHER
FISCAL SALARY BONUS UNDERLYING STOCK COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS(#)(2) ($)(3)
--------------------------- -------- -------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Daniel F. O'Sullivan............................. 1999 275,000 229,279 -- 44,107
Chairman of the Board 1998 273,269 74,856 80,000 35,939
1997 229,807 210,849 136,000 21,096
Richard D. Davidson.............................. 1999 225,000 174,263 -- 37,104
President and Chief Executive Officer 1998 224,423 56,942 65,000 31,760
1997 205,961 178,809 100,000 18,119
Tyrone E. Riegel................................. 1999 195,000 116,276 -- 35,009
Executive Vice President 1998 194,615 38,062 28,000 35,441
1997 184,856 121,268 84,500 26,503
Terry L. Crump (4)............................... 1999 160,000 95,460 -- 28,576
Executive Vice President and Chief Financial 1998 159,423 31,284 28,000 27,366
Officer 1997 144,904 85,531 61,750 20,710
Thomas M. O'Sullivan, Jr......................... 1999 130,000 54,422 -- 24,222
Senior Vice President-Sales 1998 129,615 17,922 12,000 23,660
1997 119,904 55,226 41,000 20,915
</TABLE>
------------------------
(1) For the years shown, the named officers did not receive any annual
compensation not properly categorized as salary or bonus, except for certain
perquisites and other personal benefits. The amounts for perquisites and
other personal benefits for the named officers are not shown because the
aggregate amount of the compensation, if any, for each of the Named Officers
during the fiscal year shown does not exceed the lesser of $50,000 or 10% of
total salary and bonus reported for the officer.
(2) Includes all options granted during fiscal years shown the O'Sullivan
Industries Holdings, Inc. Amended and Restated 1994 Incentive Stock Plan. No
stock appreciation rights were granted with any options.
(3) In fiscal 1999, other compensation for the named officers consisted of the
following:
<TABLE>
<CAPTION>
STOCK DEFERRED
SPSP PURCHASE COMPENSATION
GROUP MATCHING PROGRAM PLAN
LIFE AND PROFIT ("SPP") MATCHING AND
INSURANCE AUTO SHARING MATCHING PROFIT SHARING
NAME PREMIUMS ALLOWANCE CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS
---- --------- --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Daniel F. O'Sullivan................. $3,150 $ --* $11,474 $8,747 $20,737
Richard D. Davidson.................. $2,016 $8,500 $11,474 $5,639 $ 9,495
Tyrone E. Riegel..................... $3,150 $8,154 $11,474 $5,827 $ 6,405
Terry L. Crump....................... $1,218 $8,154 $11,474 $3,826 $ 3,904
Thomas M. O'Sullivan, Jr............. $ 490 $7,827 $10,909 $3,698 $ 1,656
</TABLE>
------------------------
* Mr. Daniel F. O'Sullivan had the use of a company-owned automobile as a
perquisite.
The table does not include amounts payable in the event of a Change in
Control. See "Change in Control Protections".
(4) Mr. Crump resigned as an officer of O'Sullivan on August 31, 1999.
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OPTION GRANTS IN THE LAST YEAR
During the fiscal year ended June 30, 1999, no options were granted to
the named officers.
OPTION EXERCISES IN THE LAST YEAR
AND YEAR-END OPTION VALUES
The following table summarizes information on outstanding options to
purchase O'Sullivan Holdings common stock held by the named officers as of
June 30, 1999. No options were exercised by officers or directors during the
fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
VALUE OF VALUE OF
SHARES SHARES EXERCISABLE UNEXERCISABLE
EXERCISABLE UNEXERCISABLE OPTIONS OPTIONS
NAME @ 6/30/99 @ 6/30/99 @ 6/30/99 @ 6/30/99
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Daniel F. O'Sullivan................................ 139,248 124,052 $1,100,853 $601,479
Richard D. Davidson................................. 78,657 86,343 644,122 398,882
Tyrone E. Riegel.................................... 94,030 54,470 784,092 341,565
Terry L. Crump...................................... 64,215 42,455 549,398 264,846
Thomas M. O'Sullivan, Jr............................ 48,563 22,437 351,016 142,046
</TABLE>
In connection with the merger and recapitalization, on November 30, 1999,
all outstanding options issued by O'Sullivan Holdings were either
- converted into options to purchase shares of O'Sullivan Holdings
Series A junior preferred stock; or
- converted into the right to receive shares of O'Sullivan Holdings
senior preferred stock and cash, with each option share becoming
entitled to receive one share of senior preferred stock and an amount
equal to the difference between the exercise price of the option
share and $16.75.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The members of the O'Sullivan Holdings Compensation Committee during
fiscal 1999 were William C. Bousquette, Stewart M. Kasen and Ronald G. Stegall.
No member of the Compensation Committee was an officer or employee of O'Sullivan
Holdings or its subsidiaries during the fiscal year ended June 30, 1999. None
was formerly an officer of O'Sullivan or any of its subsidiaries, except that
Mr. Bousquette was a Vice President of O'Sullivan Industries from July 12, 1991
until February 7, 1994. In addition, no executive officer of O'Sullivan serves
on the board of directors or the compensation committee of another entity where
a committee member is employed. The service of Messrs. Bousquette, Kasen and
Stegall as Directors and as members of the Compensation Committee ended upon the
effectiveness of the merger.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS RELATING TO THE EQUITY OF O'SULLIVAN HOLDINGS
BRS, its affiliates and the management participants in the
recapitalization and merger entered into agreements relating to their investment
in the surviving corporation. These agreements do not impose any restrictions on
the voting rights of the management participants in the recapitalization and
merger other than voting for the election of directors of the surviving
corporation. These agreements provide for:
- restrictions on transfer;
- the right of BRS to require the management participants to sell their
interests in O'Sullivan Holdings if BRS decides to sell its interest
in O'Sullivan Holdings;
- the right of management participants to sell their interests in
O'Sullivan Holdings on the same terms as BRS or any of its affiliates
if BRS or any of its affiliates sells its interests in O'Sullivan
Holdings;
- the right to register securities of O'Sullivan Holdings under the
Securities Act;
- the right of management participants to purchase additional shares to
retain their percentage interest in O'Sullivan Holdings if O'Sullivan
Holdings issues additional securities to BRS or any of its
affiliates; and
- the right of O'Sullivan Holdings or BRS to repurchase the common
stock interest of a management participant if that person is no
longer employed by O'Sullivan Holdings.
CHANGE IN CONTROL PROTECTIONS
O'Sullivan Holdings has termination agreements with its executive
officers and certain members of management of O'Sullivan Industries. If the
employment of a protected employee is terminated by us within a period of up to
24 months after a change in control of O'Sullivan Holdings, the employee will be
entitled to receive various benefits. The completion of the merger is a change
of control for purposes of these agreements. These benefits include:
1. a cash payment equal to the current base salary and highest bonus
received in the previous years;
2. a cash payment equal to the bonus earned by the employee in the year
of termination, calculated on a pro rated basis on the date of
termination;
3. a cash payment equal to accrued and unpaid vacation pay;
4. a cash payment for an automobile allowance of 12 months;
5. continued life and health insurance coverage for up to 12 months;
6. a lump sum payment, adjusted for taxes, to the employee in an amount
equal to the protected employee's unvested profit sharing account in
the Savings and Profit Sharing Plan;
7. a cash payment based on the amount that the protected employee would
have received under our Deferred Compensation Plan had he continued to
work for O'Sullivan until he attained the age of 65;
8. all outstanding stock options vest and become immediately exercisable;
9. O'Sullivan will be required to purchase for cash any shares of
unrestricted common stock and options for shares at the fair market
value;
10. one year of outplacement services;
11. for certain executive officers, if the protected employee moves more
than 20 miles from his primary residence in order to accept permanent
employment within 36 months after leaving O'Sullivan, we will
repurchase employee's primary residence; and
12. if the executive officer is required to pay an excise tax under
Section 4999 of the Internal Revenue code of 1986, we will pay the
employee an additional amount to offset the effect of the tax.
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<PAGE>
The agreements for certain executive officers also provide for cash
payments in lieu of matching payments under the Stock Purchase Program and the
Savings and Profit Sharing Plan. The agreements for certain executive officers
also provide that, in some circumstances, they may voluntarily leave the
employment of O'Sullivan after a change in control and receive the benefits
under the protection agreements. These circumstances include:
- an adverse change in the executive's status, title or duties;
- a reduction in the executive's salary or bonus;
- relocation of the executive's office to a site more than 20 miles
from its present location;
- a reduction in the executive's benefit levels;
- the insolvency or bankruptcy of O'Sullivan; or
- the executive leaves the employment of O'Sullivan for any reason
during the 60-day period beginning on the first anniversary of the
change in control.
However, for purposes of the merger, each of the executive officers who
is a management participant in the buyout has waived his right to receive
benefits under the protection agreements in these circumstances, other than a
reduction in his salary or bonus.
TERMINATION PROTECTION AGREEMENTS
The table below sets forth the total payments that may be received by
each of the executive officers and all persons having protection agreements as a
group if these persons are terminated following a change of control of
O'Sullivan Holdings. The values of non-cash benefits have been included on the
basis of their estimated fair value. These amounts do not include any payments
for shares of O'Sullivan Holdings common stock, preferred stock or options to
acquire O'Sullivan Holdings Series A junior preferred stock. These amounts also
do not include payments which we would be required to make to offset the effect
of excise taxes or to purchase any executive officer's home. For the purposes of
this table we have assumed that the officers' employment was terminated on
January 31, 2000.
<TABLE>
<CAPTION>
OFFICER AMOUNT
------- ----------
<S> <C>
Richard D. Davidson......................................... $ 683,000
President and Chief Executive Officer
Tyrone E. Riegel............................................ $ 494,000
Executive Vice President
Phillip J. Pacey............................................ $ 217,000
Senior Vice President and Chief Financial Officer
Thomas M. O'Sullivan, Jr.................................... $ 292,000
Senior Vice President-Sales
Michael P. O'Sullivan....................................... $ 273,000
Senior Vice President-Marketing
Rowland H. Geddie, III...................................... $ 282,000
General Counsel, Vice President and Secretary
E. Thomas Riegel............................................ $ 282,000
Vice President-Strategic Operations
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OFFICER AMOUNT
------- ----------
<S> <C>
James C. Hillman............................................ $ 248,000
Vice President-Human Resources
Tommy W. Thieman............................................ $ 202,000
Vice President-Manufacturing-Lamar
Stuart D. Schotte........................................... $ 202,000
Vice President-Supply Chain Management
All persons having a protection agreement (32 persons)...... $4,838,000
</TABLE>
BRS TRANSACTION FEES
BRS provided various advisory services to us related to the merger. These
services included arranging and negotiating the financing of the merger,
arranging and structuring the transaction, including forming OSI, planning its
capital structure, planning our capital structure and the capital structure of
O'Sullivan Holdings and related services. For these services, BRS received a
transaction fee of $4.0 million plus $62,000 in expenses upon completion of the
merger.
BRS also provided $15.0 million of financing pursuant to a securites
purchase agreement with O'Sullivan Holdings. BRS received a transaction fee of
$300,000 in connection with its provision of this financing. BRS subsequently
sold this note to BancBoston Investments, Inc.
MANAGEMENT SERVICES AGREEMENT
In connection with the merger, O'Sullivan Industries entered into a
management services agreement with BRS. Under the terms of this agreement, BRS
provides:
- general management services;
- assistance with the negotiation and analysis of financial
alternatives; and
- other services agreed upon by BRS.
In exchange for these services, BRS will earn an annual fee equal to the
greater of:
- 1.0% of O'Sullivan Industries' annual consolidated earnings before
interest, taxes, depreciation and amortization; or
- $300,000.
In addition to certain restrictions on the payment of the management fee
contained in the senior credit facilities, the management services agreement
contains certain restrictions on the payment of that fee. The management
services agreement, among other things, provides that no cash payment of the
management fee will be made unless the Fixed Charge Coverage Ratio for our most
recently ended four full fiscal quarters for which internal financial statements
are available to management immediately preceding the date when the management
fee is to be paid is at least 2.0 to 1. The management services agreement also
provides that the payment of all fees and other obligations under the management
services agreement will be subordinated to the prior payment in full in cash of
all interest, principal and other obligations on the exchange notes in the event
of a bankruptcy, liquidation or winding-up of O'Sullivan Industries.
SEVERANCE AGREEMENTS
In October 1998, O'Sullivan Holdings entered into a Retirement and
Consulting Agreement, Release and Waiver of Claims with Daniel F. O'Sullivan.
Under the retirement agreement, as amended in May 1999, Mr. O'Sullivan resigned
as Chief Executive Officer in October 1998 and retired as an executive on
March 31, 2000. O'Sullivan Holdings agreed to pay Mr. O'Sullivan $42,160 per
month for 36 months after his retirement and then to pay him $11,458 per month
until he reaches age 65. Payments under Mr. O'Sullivan's retirement and
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<PAGE>
consulting agreement amount to an aggregate of $2.2 million and a present value
of approximately $1.9 million. During this period, Mr. O'Sullivan will provide
consulting, marketing and promotional services with respect to our manufacturing
activities and relations with major customers as requested by us from time to
time. Mr. O'Sullivan has agreed not to compete with us during the period he is a
consultant. O'Sullivan Holdings will also provide Mr. O'Sullivan with health
insurance during the term of the agreement and thereafter until he becomes
eligible for Medicare and life insurance during the term of the agreement.
In August 1999, O'Sullivan Holdings entered into a severance agreement
with Terry Crump, our Executive Vice President and Chief Financial Officer at
the time. Pursuant to the agreement, Mr. Crump resigned as an officer of
O'Sullivan Holdings and O'Sullivan Industries effective August 31, 1999,
although he remained an employee until January 2000. Under Mr. Crump's severance
agreement, O'Sullivan Holdings paid Mr. Crump approximately $325,000 in January
2000. This amount has been recorded as a non-current asset and is being
amortized over the life of the non-compete agreement. The $325,000 payment did
not include payment for shares of O'Sullivan Holdings' common stock or stock
options held by Mr. Crump.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During fiscal 1999, Casey O'Sullivan, a son of Daniel F. O'Sullivan,
worked as a salesman successively for companies that provide O'Sullivan
Industries corrugated boxes for its products. Sun Container provided O'Sullivan
Industries with corrugated boxes with a sales price aggregating $401,000 during
fiscal 1999, of which $55,000 was supplied during the time Casey O'Sullivan was
employed by Sun. Bennett Packaging has long been one of O'Sullivan Industries'
suppliers; O'Sullivan Industries paid Bennett $5,790,000 during fiscal 1999, of
which $2,936,000 was paid during the six months Casey O'Sullivan was an employee
of Bennett. O'Sullivan Industries has followed the practice of awarding purchase
orders for cartons for a model to the lowest bidder for the carton.
O'Sullivan Industries has in the past rented storage and office space
from O'Sullivan Properties, Inc. O'Sullivan Properties is controlled by Thomas
M. O'Sullivan, Sr. During fiscal 1999, O'Sullivan Industries did not rent any
space from O'Sullivan Properties, but it paid O'Sullivan Properties $12,000
during fiscal 1999 in connection with the termination of a lease.
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<PAGE>
DESCRIPTION OF INDEBTEDNESS
SENIOR CREDIT FACILITIES
Under an agreement entered into on November 30, 1999, Lehman Commercial
Paper Inc. and Lehman Brothers agreed to provide O'Sullivan Industries with
senior credit facilities in an aggregate amount of $175.0 million. The senior
credit facilities are comprised of the following:
- a $35.0 million tranche A term loan facility repayable in 24
consecutive quarterly installments;
- a $100.0 million tranche B term loan facility repayable in 26
consecutive quarterly installments, beginning 15 months after the
completion of the recapitalization transactions; and
- a $40.0 million revolving credit facility maturing six years after
the closing of the recapitalization transactions with a
$15.0 million letter of credit sub-facility. Upon completion of the
recapitalization and merger, letters of credit of approximately
$12.8 million were issued and borrowings of approximately
$4.0 million had been drawn under the revolving credit facility.
O'Sullivan Industries is the borrower under the senior credit facilities.
All present and future domestic subsidiaries of O'Sullivan Industries are
guarantors of the senior credit facilities. In addition, the senior credit
facilities are secured by the following:
- substantially all of the assets of O'Sullivan Industries and its
domestic subsidiaries; and
- a pledge of all of the capital stock of O'Sullivan Industries and its
present and future domestic subsidiaries and two-thirds of the
capital stock of O'Sullivan Industries' present and future foreign
subsidiaries.
Loans under the senior credit facilities bear interest, at O'Sullivan
Industries' option, at either:
- the base rate plus an applicable margin; or
- the eurodollar rate plus an applicable margin.
The base rate is defined as the highest of the following:
- the rate of interest publicly announced by Deutsche Bank as its prime
rate in effect at its principal office in New York City;
- the secondary market rate for three-month certificates of deposit, as
adjusted for statutory reserve requirements, plus 1%; or
- the federal funds effective rate from time to time plus 0.5%.
The eurodollar rate is defined as the rate, as adjusted for statutory
reserve requirements for eurocurrency liabilities, at which eurodollar deposits
for one, two, three or six months, as selected by O'Sullivan Industries, are
offered in the interbank eurodollar market. The initial applicable margins for
the tranche A term loans and the loans under the revolving credit facility for
the first two quarters are fixed. After the first two quarters, the applicable
margin for the tranche A term loans and the revolving credit loans will vary
within three levels, from 1.50% to 3.25%, based upon the leverage ratio of
O'Sullivan Industries. The applicable margin for the tranche B loan will be
fixed at 2.75% or 3.75% (depending upon whether it is base rate or eurodollar)
for the life of the loan.
The documents for the senior credit facilities contain affirmative,
negative and financial covenants and events of default customary for credit
facilities of a size and type similar to the senior credit facilities.
INDUSTRIAL REVENUE BONDS
Following the recapitalization transactions, approximately $10.0 million
of previous indebtedness remains outstanding. This indebtedness consists of
variable rate industrial revenue bonds maturing in 2008 payable by
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<PAGE>
O'Sullivan Industries - Virginia. As of March 31, 2000, the interest cost on the
variable rate industrial revenue bonds was approximately 8.5%.
O'SULLIVAN HOLDINGS' SENIOR NOTES AND WARRANTS
In connection with the recapitalization transactions, O'Sullivan Holdings
issued $15.0 million of senior notes due 2009 to BRS pursuant to a securities
purchase agreement. Pursuant to the securities purchase agreement, BRS received
senior notes due 2009 in the principal amount of $15.0 million and warrants to
receive 93,273 shares of common stock and 39,273 shares of Series B junior
preferred stock of O'Sullivan Holdings. The O'Sullivan Holdings' senior notes
bear interest at a rate of 12.0% per annum and may be paid in cash or additional
notes at the option of O'Sullivan Holdings.
As of January 31, 2000, BRS sold these senior notes and warrants to
BancBoston Investments, Inc.
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<PAGE>
DESCRIPTION OF EXCHANGE NOTES
You can find the definitions of some of the terms used in this
description under the subheading "Certain Definitions" beginning on page 76. In
this description, the word "O'Sullivan" refers only to O'Sullivan
Industries, Inc. and not to any of its subsidiaries.
We will issue the exchange notes under the terms of the indenture dated
as of November 30, 1999 between O'Sullivan Industries, Inc., as the issuer, the
Guarantors' and Norwest Bank Minnesota, National Association, as trustee. The
terms of the exchange notes include those stated in the indenture and those made
part of the indenture by reference to the Trust Indenture Act of 1939.
The form and terms of the Series B senior subordinated notes due 2009 are
the same as the form and terms of the old notes except that
(1) the exchange notes will have been registered under the Securities Act of
1933 and thus will not bear restrictive legends restricting their transfer
under the Securities Act of 1933 and
(2) holders of exchange notes will not be entitled to rights of holders of the
old notes under the registration rights agreement that terminate upon the
consummation of the exchange offer.
The following description is a summary of the significant provisions of
the indenture and the Registration Rights Agreement. It does not restate those
agreements in their entirety and sections of this description which correspond
to similar sections of the indenture have been redrafted for clarity in this
description in terms substantively the same as those of the Indenture and Reg
Rights Agreement. We urge you to read the indenture and the Registration Rights
Agreement because they, and not this description, define your rights as Holders
of these exchange notes. Copies of the proposed form of indenture and
Registration Rights Agreement are available as set forth below under the
subheading "Additional Information."
BRIEF DESCRIPTION OF THE EXCHANGE NOTES AND THE SUBSIDIARY GUARANTEES
THE NOTES
These exchange notes:
- are general unsecured obligations of O'Sullivan;
- are subordinated in right of payment to payment in full in cash of
all Senior Debt of O'Sullivan;
- are senior or PARI PASSU in right of payment to all existing and
future subordinated Indebtedness of O'Sullivan; and
- are unconditionally guaranteed by the Guarantors.
THE SUBSIDIARY GUARANTEES
These exchange notes are guaranteed by each Domestic Restricted
Subsidiary of O'Sullivan.
The Subsidiary Guarantees of these exchange notes:
- are general unsecured obligations of each Guarantor;
- are subordinated in right of payment to all Senior Debt of each
Guarantor; and
- are senior or PARI PASSU in right of payment to all existing and
future subordinated Indebtedness of each Guarantor.
O'Sullivan and the Guarantors had total Senior Debt of approximately
$144.5 million as of March 31, 2000. At present our subsidiary, O'Sullivan
Industries - Virginia, Inc. is the only Guarantor of the notes. Under the
indenture, we are allowed to incur additional borrowings as long as our fixed
charge coverage ratio is at least 2.0 to 1.0 until November 30, 2001 and at
least 2.25 to 1.0 after November 30, 2001. However, if our fixed
54
<PAGE>
charge coverage is less than 2.0 to 1.0, we are able to incur additional
borrowings up to the level of the current credit facilities, or approximately
$27.2 million at March 31, 2000. As indicated above and as discussed in detail
below under the subheading "Subordination," payments on the exchange notes and
under the Subsidiary Guarantees will be subordinated to the payment of Senior
Debt. The indenture will permit us and the Guarantors to incur additional Senior
Debt.
As of the date of the indenture, all of our subsidiaries were "Restricted
Subsidiaries." However, under the circumstances described below under the
subheading "Certain Covenants - Designation of Restricted and Unrestricted
Subsidiaries," we will be permitted to designate certain of our subsidiaries as
"Unrestricted Subsidiaries." Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants in the indenture. Unrestricted Subsidiaries
will not guarantee the exchange notes.
PRINCIPAL, MATURITY AND INTEREST
O'Sullivan will issue notes with a maximum aggregate principal amount of
$200.0 million, of which $100.0 million will be issued in this offering.
O'Sullivan will issue notes in denominations of $1,000 and integral multiples of
$1,000. The exchange notes will mature on October 15, 2009.
Interest on the exchange notes will be payable semi-annually at the rate
of 13.375% per annum in cash in arrears on April 15 and October 15, commencing
on October 15, 2000. O'Sullivan will make each interest payment to the Holders
of record of these exchange notes on the immediately preceding April 1 and
October 1.
Interest on the exchange notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it was most
recently paid. Additional notes may be issued from time to time after this
Offering, subject to the provisions of the indenture described below under the
caption " - Certain Covenants - Incurrence of Indebtedness and Issuance of
Preferred Stock." The exchange notes offered by delivery of this prospectus and
any additional notes subsequently issued under the indenture would be treated as
a single class for all purposes under the indenture, including without
limitation, waivers, amendments, redemptions and offers to purchase. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
METHODS OF RECEIVING PAYMENTS ON THE EXCHANGE NOTES
If a Holder has given wire transfer instructions to O'Sullivan,
O'Sullivan will make all principal, premium and interest payments including
Liquidated Damages, if any, on those exchange notes in accordance with those
instructions. All other payments on these exchange notes will be made at the
office or agency of the paying agent and registrar within the City and State of
New York unless O'Sullivan elects to make interest payments by check mailed to
the Holders at their address set forth in the register of Holders.
PAYING AGENTS AND REGISTRAR FOR THE EXCHANGE NOTES
The trustee will initially act as paying agent and registrar. O'Sullivan
may change the paying agent or registrar without prior notice to the Holders of
the notes, and O'Sullivan or any of its Subsidiaries may act as paying agent or
registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents. O'Sullivan may also
require a Holder to pay any taxes and fees required by law or permitted by the
indenture. O'Sullivan is not required to transfer or exchange any note selected
for redemption. Also, O'Sullivan is not required to transfer or exchange any
note for a period of 15 days before a selection of notes to be redeemed.
The registered Holder of a note will be treated as the owner of it for
all purposes.
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<PAGE>
SUBSIDIARY GUARANTEES
The Guarantors will jointly and severally guarantee, on a senior
subordinated basis, O'Sullivan's obligations under these exchange notes. Each
Subsidiary Guarantee will be subordinated to the prior payment in full of all
Senior Debt of that Guarantor. We have not included separate financial
statements concerning each separate subsidiary because we do not believe that
this information is material to our investors. The obligations of each Guarantor
under its Subsidiary Guarantee will be limited as necessary to prevent that
Subsidiary Guarantee from constituting a fraudulent conveyance under applicable
law. See "Risk Factors - Fraudulent Conveyance Matters."
Unless the other Person is O'Sullivan or another Guarantor, a Guarantor
may not sell or otherwise dispose of all or substantially all of its assets,
consolidate with, or merge with or into another Person, whether or not the
Guarantor is the surviving Person, unless:
(1) immediately after giving effect to that transaction, no Default or Event of
Default exists; and
(2) either:
(a) the Person acquiring the property in the sale or disposition or the
Person formed by or surviving the consolidation or merger assumes all
the obligations of that Guarantor pursuant to a supplemental indenture
satisfactory to the trustee; or
(b) the Net Proceeds of the sale or other disposition are applied under
the applicable provisions of the indenture.
The Subsidiary Guarantee of a Guarantor will be released:
(1) if the Guarantor applies the Net Proceeds of the sale or other disposition
in accordance with the provisions of the indenture when any sale or other
disposition of all or substantially all of the assets of that Guarantor
takes place, including by merger or consolidation, to a Person that is not,
either before or after giving effect to the transaction, a subsidiary of
O'Sullivan; or
(2) in connection with the sale of all of the capital stock of a Guarantor, to a
person that is not, either before or after giving effect to the transaction,
a subsidiary of O'Sullivan if the Guarantor applies the Net Proceeds of that
sale, under the applicable provisions of the indenture; or
(3) if O'Sullivan properly designates any Restricted Subsidiary that is a
Guarantor as an Unrestricted Subsidiary.
See "Repurchase at Option of Holders - Asset Sales."
SUBORDINATION
The payment of all Obligations in respect of the exchange notes will be
subordinated to the prior payment in full in cash of all Senior Debt of
O'Sullivan.
The holders of Senior Debt will be entitled to receive payment in full in
cash of all amounts due in respect of Senior Debt. This payment shall include
all interest after the commencement of any bankruptcy proceeding at the rate
specified in the applicable Senior Debt. Also, all outstanding letters of credit
under Credit Facilities shall either have been terminated or cash collateralized
in accordance with the terms of the Credit Facilities before the Holders of
exchange notes will be entitled to receive any payment or distribution with
respect to the exchange notes. However, Holders of exchange notes may receive
and retain Permitted Junior Securities and payments made from the trust
described under " - Legal Defeasance and Covenant Defeasance". In the event of
any distribution to creditors of O'Sullivan:
(1) in a liquidation or dissolution of O'Sullivan;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to O'Sullivan or its property;
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<PAGE>
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of O'Sullivan's assets and liabilities.
O'Sullivan also may not make any payment on, or distribution with respect
to the exchange notes, except in Permitted Junior Securities or from the trust
described under " - Legal Defeasance and Covenant Defeasance", if:
(1) a payment default on Designated Senior Debt occurs and is continuing beyond
any applicable grace period; or
(2) any other default occurs and is continuing on any series of Designated
Senior Debt that permits holders of that series of Designated Senior Debt to
accelerate its maturity and the trustee receives a notice of the default (a
"Payment Blockage Notice") from the Credit Agent or any holder of any
Designated Senior Debt.
Payments on the exchange notes may and shall be resumed:
(1) in the case of a payment default, upon the date when the default is cured or
waived; and
(2) in case of a nonpayment default, the earlier of:
(A) the date the nonpayment default is issued or waived;
(B) 179 days after the date when the applicable Payment Blockage Notice is
received.
No new Payment Blockage Notice may be delivered unless and until
360 days have elapsed since the delivery of the immediately prior Payment
Blockage Notice.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless the default shall have
been cured or waived for a period of not less than 90 days.
If the trustee or any Holder of the exchange notes receives a payment in
respect of the exchange notes, except in Permitted Junior Securities or from the
trust described under " - Legal Defeasance and Covenant Defeasance", when the
payment is prohibited by these subordination provisions, the trustee or the
Holder shall hold the payment in trust for the benefit of the holders of Senior
Debt. The trustee or Holder shall also immediately deliver the amounts in trust
to the holders of Senior Debt or their proper representative in the form
received with any necessary or requested endorsement.
O'Sullivan must promptly notify holders of Senior Debt if payment of the
exchange notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of O'Sullivan, Holders of
exchange notes may recover less ratably than creditors of O'Sullivan who are
holders of Senior Debt. See "Risk Factors - Subordination."
OPTIONAL REDEMPTION
At any time prior to October 15, 2002, O'Sullivan may on any one or more
occasions redeem up to 25% of the aggregate principal amount of exchange notes
issued under the indenture. If this were to occur, it would be at a redemption
price of 113.375% of the principal amount of the exchange notes, plus any
accrued and unpaid interest and Liquidated Damages, to the redemption date. The
redemption will be made with the net cash proceeds of one or more Equity
Offerings by O'Sullivan or a contribution to the common equity capital of
O'Sullivan made with the net cash proceeds of a concurrent Equity Offering by
O'Sullivan's direct parent; provided that:
(1) at least $75.0 million in aggregate principal amount of exchange notes
issued under the indenture remains outstanding immediately after the
occurrence of the redemption, excluding notes held by O'Sullivan and its
Subsidiaries; and
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(2) the redemption must occur within 90 days of the date of the closing of the
Equity Offering.
At any time prior to October 15, 2004, O'Sullivan may also redeem all or
a part of the exchange notes upon the occurrence of a Change of Control. If this
were to occur, the redemption must be upon not less than 30 nor more than
60 days' prior notice, but in no event may the redemption occur more than
90 days after the occurrence of the Change of Control in question. The notice
shall be mailed by first-class mail to each Holder's registered address. The
redemption shall be at a redemption price equal to 100% of the principal amount
of the exchange notes redeemed plus the Applicable Premium as of the date of
redemption (the "Redemption Date"), together with any accrued and unpaid
interest and Liquidated Damages at the Redemption Date.
Except pursuant to the preceding two paragraphs, the exchange notes will
not be redeemable at O'Sullivan's option prior to October 15, 2004.
On and after October 15, 2004, O'Sullivan may also redeem all or a part
of these exchange notes. If this were to occur, the redemption must be upon not
less than 30 nor more than 60 days' notice. The redemption shall be at the
redemption prices set forth below, plus accrued and unpaid interest on the
exchange notes and Liquidated Damages, to the applicable redemption date. The
redemption prices shown below are expressed in percentages of principal amount.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2004........................................................ 106.6875%
2005........................................................ 105.0156%
2006........................................................ 103.3438%
2007........................................................ 101.6719%
--------
2008 and thereafter......................................... 100.0000%
========
</TABLE>
SELECTION AND NOTICE
If less than all of the exchange notes are to be redeemed at any time,
the trustee will select exchange notes for redemption in compliance with the
requirements of the principal national securities exchange where the exchange
notes are listed.
No exchange notes of $1,000 or less will be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of exchange notes to be
redeemed at its registered address. Notices of redemption may not be
conditional.
If any exchange note is to be redeemed in part only, the notice of
redemption that relates to that exchange note will state the portion of the
principal amount of the exchange note to be redeemed. A new exchange note in
principal amount equal to the unredeemed portion of the original exchange note
will be issued in the name of the Holder of the exchange note upon cancellation
of the original exchange note. Exchange notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on exchange notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under " - Repurchase at the Option of Holders,"
O'Sullivan is not required to make mandatory redemption or sinking fund payments
with respect to the exchange notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of exchange notes will have
the right to require O'Sullivan to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of that Holder's exchange notes
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pursuant to the Change of Control Offer. In the Change of Control Offer,
O'Sullivan will offer a change of control payment in cash equal to 101% of the
aggregate principal amount of exchange notes repurchased plus any accrued and
unpaid interest and Liquidated Damages on the exchange notes to the date of
purchase. Within 60 days following any Change of Control, O'Sullivan will mail a
notice to each Holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase exchange notes on the change of
control payment date specified in the notice. This date shall be no earlier than
30 days and no later than 60 days from the date when the notice is mailed,
pursuant to the procedures required by the indenture and described in the
notice. O'Sullivan will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations under the Securities
Exchange Act of 1934 to the extent those laws and regulations are applicable to
the repurchase of the exchange notes as a result of a Change of Control. To the
extent that any securities law or regulation conflicts with the provisions of
the indenture relating to the Change of Control Offer, O'Sullivan will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations described in the indenture by virtue of
O'Sullivans' compliance with these laws and regulations.
On the change of control payment date, O'Sullivan will, to the extent
lawful:
(1) accept for payment all exchange notes or portions of exchange notes properly
tendered under the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the change of control
payment in respect of all exchange notes or portions of exchange notes so
tendered; and
(3) deliver or cause to be delivered to the trustee the exchange notes to be
accepted together with an Officers' Certificate stating the aggregate
principal amount of exchange notes or portions of exchange notes being
purchased by O'Sullivan.
The paying agent will promptly mail to each Holder of exchange notes
properly tendered the change of control payment for those exchange notes. The
trustee will promptly authenticate and mail, or cause to be transfered by book
entry, to each Holder a new note equal in principal amount to any unpurchased
portion of the exchange notes surrendered, if any. Each new note issued may only
be in a principal amount of $1,000 or an integral multiple thereof.
Before complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days after a Change of Control, O'Sullivan
will either repay all outstanding Senior Debt in cash or obtain any requisite
consents under all agreements governing outstanding Senior Debt to permit the
repurchase of exchange notes required by this covenant.
O'Sullivan will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the change of control payment date.
The provisions described above that require O'Sullivan to make a Change
of Control Offer following a Change of Control will be applicable regardless of
whether or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the Holders of the exchange notes to require that
O'Sullivan repurchase or redeem the exchange notes in the event of a takeover,
recapitalization or similar transaction.
O'Sullivan's outstanding Senior Debt currently prohibits O'Sullivan from
purchasing any exchange notes, and also provides that certain change of control
events with respect to O'Sullivan would constitute a default under the
agreements governing the Senior Debt. Any future credit agreements or other
agreements relating to Senior Debt to which O'Sullivan becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when O'Sullivan is prohibited from purchasing exchange notes,
O'Sullivan could seek the consent of its senior lenders to the purchase of
exchange notes or could attempt to refinance the borrowings that contain the
prohibition. If O'Sullivan does not obtain consent or repay the borrowings,
O'Sullivan will remain prohibited from purchasing exchange notes. If that
happened, O'Sullivan's failure to
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<PAGE>
purchase tendered exchange notes would constitute an Event of Default under the
indenture which would, in turn, constitute a default under O'Sullivan's Senior
Debt agreements. Were this to occur, the subordination provisions in the
indenture would probably restrict payments to the Holders of exchange notes.
O'Sullivan will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times, and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by
O'Sullivan and purchases all exchange notes validly tendered and not withdrawn
under the Change of Control Offer.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of O'Sullivan and its Subsidiaries taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially all,"
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of exchange notes to require O'Sullivan to
repurchase its exchange notes as a result of a sale, lease, transfer, conveyance
or other disposition of less than all of the assets of O'Sullivan and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
ASSET SALES
O'Sullivan will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) O'Sullivan, or the Restricted Subsidiary, as the case may be, receives
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of;
(2) the fair market value is determined by O'Sullivan's Board of Directors and
evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the trustee; and
(3) at least 75% of the consideration therefor received by O'Sullivan or the
Restricted Subsidiary is in the form of cash or Cash Equivalents. For these
purposes, each of the following will be deemed to be cash:
(a) any liabilities, as shown on O'Sullivan's or the Restricted
Subsidiary's most recent balance sheet, of O'Sullivan or any Restricted
Subsidiary that are assumed by the transferee of any assets under a
customary novation agreement that releases O'Sullivan or the Restricted
Subsidiary from further liability, except liabilities that are by their
terms subordinated to the notes;
(b) any securities, notes or other obligations received by O'Sullivan or
any Restricted Subsidiary from a transferee that are converted by
O'Sullivan or the Restricted Subsidiary into cash or Cash Equivalents
within 90 days after the closing of the Asset Sale, to the extent of
the cash or Cash Equivalents received in that conversion; and
(c) any long-term assets that are to be used in a Permitted Business.
The 75% limitation referred to in clause (3) above will not apply to any
Asset Sale where the cash or Cash Equivalents portion of the consideration
received, determined in accordance with the preceding proviso, is equal to or
greater than what the after-tax proceeds would have been had the Asset Sale
complied with the 75% limitation.
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Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
O'Sullivan or any Restricted Subsidiary may apply the Net Proceeds, at its
option:
(1) to repay or repurchase Senior Debt of O'Sullivan or any Restricted
Subsidiary and to correspondingly permanently reduce the commitments with
respect thereto;
(2) to acquire a controlling interest in another Permitted Business;
(3) to make capital expenditures in a Permitted Business; or
(4) to acquire other long-term assets that are to be used in a Permitted
Business.
Pending the final application of any of the Net Proceeds, O'Sullivan may
temporarily reduce revolving Indebtedness under Credit Facilities or otherwise
invest the Net Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $10.0 million, O'Sullivan will be
required to make an offer to all Holders of exchange notes and to all holders of
other Indebtedness that ranks equally with the exchange notes containing
provisions similar to those set forth in the indenture with respect to offers to
purchase or redeem with the proceeds from sales of assets (an "Asset Sale
Offer") to purchase the maximum principal amount of exchange notes and any other
PARI PASSU Indebtedness that may be purchased out of the Excess Proceeds. The
offer price in any Asset Sale Offer will be equal to 100% of principal amount
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, O'Sullivan may use these Excess Proceeds
for general corporate purposes or any other purpose not prohibited by the
indenture. If the aggregate principal amount of exchange notes and any other
PARI PASSU Indebtedness tendered in the Asset Sale Offer exceeds the amount of
Excess Proceeds, the trustee shall select the exchange notes and other PARI
PASSU Indebtedness to be purchased on a pro rata basis based on the principal
amount of exchange notes and any other PARI PASSU indebtedness tendered. Upon
completion of each Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
O'Sullivan will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on
account of O'Sullivan's or any of its Restricted Subsidiaries' Equity
Interests, including, without limitation, any payment on Equity Interests in
connection with any merger or consolidation involving O'Sullivan, or to the
direct or indirect Holders of O'Sullivan's or any of its Restricted
Subsidiaries' Equity Interests. The restriction in this clause (1) does not
apply to dividends or distributions payable in Equity Interests except for
Disqualified Stock;
(2) purchase, redeem or otherwise acquire or retire for value, including without
limitation, in connection with any merger or consolidation involving
O'Sullivan, any Equity Interests of O'Sullivan or any direct or indirect
parent of O'Sullivan. The restriction in this clause (2) does not apply to
Equity Interests owned by O'Sullivan or any of its Restricted Subsidiaries;
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated
to the exchange notes or the Subsidiary Guarantees, except for scheduled
payments of interest or principal at Stated Maturity on the indebtedness or,
in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date
of purchase, redemption, acquisition or retirement; or
(4) make any Restricted Investment, all payments and other actions set forth in
clauses (1) through (4) above being collectively referred to as "Restricted
Payments",
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<PAGE>
unless, at the time of and after giving effect to the Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
(2) O'Sullivan would, after giving pro forma effect to the Restricted Payment as
if it had been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set out in the first
paragraph of the covenant described below under the caption " - Incurrence
of Indebtedness and Issuance of Preferred Stock;" and
(3) the Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by O'Sullivan and its Restricted Subsidiaries after
the date of the indenture (excluding Restricted Payments permitted by
clauses (2), (3), (6), (8), (10) and (11) of the next succeeding paragraph
and without duplication), is less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of O'Sullivan for the period (taken
as one accounting period) from the beginning of the first full fiscal
quarter commencing after the date of the indenture to the end of
O'Sullivan's most recently ended fiscal quarter for which internal
financial statements are available to management at the time of the
Restricted Payment or, if the Consolidated Net Income for the period is
a deficit, less 100% of the deficit; plus
(b) The fair market value of any Permitted Business contributed to the
common or preferred equity capital of O'Sullivan (other than
Disqualified Stock) with the fair market value determined as set out
below, plus 100% of the aggregate net cash proceeds received by
O'Sullivan:
(1) as a contribution to O'Sullivan's Capital; or
(2) from the issue or sale since the date of the indenture of Equity
Interests of O'Sullivan (other than Disqualified Stock); or
(3) from the issue or sale since the date of the indenture of
Disqualified Stock or debt securities of O'Sullivan that have been
converted into Equity Interests (other than Equity interests or
Disqualified Stock or debt securities sold to a Restricted
Subsidiary of O'Sullivan and other than Disqualified Stock or
Convertible Debt securities that have been converted into
Disqualified Stock);
provided that O'Sullivan shall only be entitled to use up to one-third
of the net cash proceeds from any Equity Offering in any twelve-month
period to make Restricted Payments; plus
(c) to the extent that any Restricted Investment that was made after the
date of the indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of:
(1) the cash return of capital with respect to the Restricted
Investment, less the cost of disposition, if any; and
(2) the initial amount of the Restricted Investment; plus
(d) if any Unrestricted Subsidiary;
(1) is properly redesignated as a Restricted Subsidiary, the fair
market value of the redesignated Subsidiary, as determined in good
faith by the Board of Directors, as of the date of its
redesignation; or
(2) pays any cash dividends or cash distributions to O'Sullivan or any
of its Restricted Subsidiaries, 100% of any cash dividends or cash
distributions made after the date of the indenture; minus
(e) 100% of any Excess Tandy Payments.
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<PAGE>
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration the payment would have complied with
the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other acquisition of
any subordinated Indebtedness or Equity Interests of O'Sullivan or any
Restricted Subsidiary in exchange for, or out of the net cash proceeds of
the substantially concurrent sale or issuance of other Equity Interests of
O'Sullivan, other than to a Restricted Subsidiary of O'Sullivan or of
Disqualified Stock. However, the amount of any of the net cash proceeds that
are utilized for the redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness of O'Sullivan or any Restricted Subsidiary with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of O'Sullivan to the
holders of its Equity Interests on a pro rata basis;
(5) the payment of dividends by O'Sullivan to O'Sullivan Holdings for the
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of O'Sullivan Holdings held by any member or former member
of O'Sullivan's or any of its Restricted Subsidiaries' management under any
management equity subscription agreement, stockholders agreement, stock
option agreement or other similar agreements. However, in this case the
aggregate price shall not exceed:
(a) $2.5 million in any calendar year, with unused amounts in any calendar
year being carried over to succeeding calendar years subject to a
maximum, without giving effect to the clause (b), of $5 million in any
calendar year; plus
(b) the aggregate cash proceeds received by O'Sullivan from any issuance
or reissuance of Equity Interests to members of O'Sullivan's and its
Restricted Subsidiaries' management and the proceeds to O'Sullivan of
any "key man" life insurance policies. However, the cancellation of
Indebtedness owing to O'Sullivan from members of its or its Restricted
Subsidiaries' management in connection with the repurchase of Equity
Interests will not be deemed to be a Restricted Payment;
(6) the payment by O'Sullivan of dividends to O'Sullivan Holdings for the
purpose of:
(a) permitting O'Sullivan Holdings to satisfy tax obligations that are
actually due and owing, in accordance with the Tax Sharing Agreement as
in effect on the date of the indenture. However, these amounts shall
not exceed the amounts that would otherwise be due and owing if
O'Sullivan and its Restricted Subsidiaries were an independent,
individual, taxpayer, without recognizing any tax loss carryforwards or
carrybacks or other tax attributes; and
(b) permitting O'Sullivan Holdings to pay the necessary fees and expenses
to maintain its corporate existence and good standing and other general
and administrative expenses, which amount shall not exceed $500,000 per
annum;
(7) so long as no Default or Event of Default has occurred and is continuing,
the declaration and payment of dividends on Disqualified Stock, the
incurrence of which satisfied the covenant set forth in " - Incurrence of
Indebtedness and Issuance of Preferred Stock" below;
(8) repurchases of Equity Interests deemed to occur upon the exercise of stock
options if the Equity Interests represent a portion of the exercise price
thereof;
(9) cash payments to O'Sullivan Holdings from and after the fifth anniversary of
the date of the indenture to enable O'Sullivan Holdings to make interest
payments on the senior notes of O'Sullivan Holdings in amounts not to exceed
12% per annum on the senior notes of O'Sullivan Holdings issued on the date
of the indenture plus interest at the same rate on senior notes issued to
pay interest on them; provided that, in each case
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(a) any cash payments are used within 30 days of the payment to make
interest payments on the senior notes;
(b) no Default or Event of Default shall have occurred and be continuing;
and
(c) O'Sullivan would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth
in the first paragraph of the covenant described above under the
caption " - Incurrence of Indebtedness and Issuance of Preferred
Stock;"
(10) other Restricted Payments in an aggregate amount not to exceed
$2.5 million; and
(11) distributions to fund the Recapitalization.
The amount of all Restricted Payments, other than cash, shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by O'Sullivan or the Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined in good faith by the Board of
Directors whose resolution with respect thereto shall be delivered to the
trustee. The Board of Directors' determination must be based upon an opinion or
appraisal issued by an accounting, appraisal, or investment banking firm of
national standing if the fair market value exceeds $15.0 million. The fair
market value of any Permitted Business contributed to the common or preferred
equity capital of O'Sullivan (other than Disqualified Stock) shall be determined
in good faith by the Board of Directors. In relation to the fair market value
determination the Board of Directors shall deliver a resolution of the board
with its determination to the trustee if the fair market value is in excess of
$2.0 million. If the fair market value determination exceeds $10.0 million, the
board's resolution must be based upon an opinion or appraisal issued by an
accounting, appraisal, or investment banking firm of national standing.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
O'Sullivan and its Restricted Subsidiaries will not:
(1) directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly, indirectly, contingently or otherwise liable (collectively,
"incur"), with respect to any Indebtedness including Acquired Debt;
(2) issue any Disqualified Stock or permit any of the Restricted Subsidiaries to
issue any shares of preferred stock;
unless the Fixed Charge Coverage Ratio for O'Sullivan's most recently ended
four full fiscal quarters for which internal financial statements are
available to management immediately preceding the date when such additional
Indebtedness is incurred or the Disqualified Stock or preferred stock is
issued would have been:
(1) at least 2.0 to 1 if the incurrence or issuance occurs on or before the
second anniversary of the date of the indenture; and
(2) at least 2.25 to 1 if the incurrence or issuance occurs at any time
thereafter;
in each case determined on a pro forma basis, including a pro forma
application of the net proceeds therefrom, as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case
may be, at the beginning of the four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by O'Sullivan of Indebtedness and letters of credit pursuant
to Credit Facilities. However, the aggregate amount of all Indebtedness then
classified as having been incurred in reliance upon this clause (1) that
remains outstanding under Credit Facilities after giving effect to the
incurrence must not exceed an amount equal to $175.0 million less the
aggregate amount of all Net Proceeds of Asset Sales that have been applied
by O'Sullivan or any of its Restricted Subsidiaries since the date of the
indenture to repay any Indebtedness under a Credit Facility, and to reduce
commitments with respect thereto in the case of any
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Indebtedness that is revolving credit Indebtedness, pursuant to the covenant
described above under the caption " - Repurchase at Option of Holders -
Asset Sales;"
(2) the incurrence by O'Sullivan and its Restricted Subsidiaries of Existing
Indebtedness;
(3) the incurrence by O'Sullivan and the Guarantors of Indebtedness represented
by the notes and the Subsidiary Guarantees to be issued on the date of the
indenture and the New Notes on the related Subsidiary Guarantees to be
issued pursuant to the Registration Rights Agreement;
(4) the incurrence by O'Sullivan or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of
O'Sullivan or the Restricted Subsidiary, whether through the direct purchase
of assets or the Capital Stock of any Person owning the Assets, in an
aggregate principal amount or accreted value, as applicable, including all
Permitted Refinancing Indebtedness issued to refund, replace or refinance
any Indebtedness incurred pursuant to this clause (4), not to exceed 5.0% of
O'Sullivan's Total Assets;
(5) the incurrence by O'Sullivan or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness that was
permitted by the indenture to be incurred under the first paragraph of this
covenant or clauses (2), (3), (4) and (12) of this paragraph;
(6) the incurrence by O'Sullivan or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among O'Sullivan and any of its
Restricted Subsidiaries; provided, however, that:
(a) if O'Sullivan or any Guarantor is the obligor on the Indebtedness, the
Indebtedness must be expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the exchange notes, in
the case of O'Sullivan, or the Subsidiary Guarantee of the Guarantor,
in the case of a Guarantor; and
(b) any subsequent issuance or transfer of Equity Interests that results
in any intercompany Indebtedness being held by a Person other than
O'Sullivan or a Restricted Subsidiary; and any sale or other transfer
of any intercompany Indebtedness to a Person that is not either
O'Sullivan or a Restricted Subsidiary will be deemed, in each case, to
constitute an incurrence of intercompany Indebtedness by O'Sullivan or
its Restricted Subsidiary, as the case may be;
(7) the incurrence by O'Sullivan or its Restricted Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging:
(a) interest rate risk with respect to any floating rate Indebtedness that
is permitted by the terms of this indenture to be outstanding;
(b) commodities risk relating to commodities agreements, entered into in
the ordinary course of business, for the purchase of raw material used
by O'Sullivan and its Restricted Subsidiaries; or
(c) exchange rate risk with respect to any agreement or Indebtedness of
O'Sullivan or its Restricted Subsidiaries payable in a currency other
than U.S. dollars; or
(8) the Guarantee by O'Sullivan or any of its Restricted Subsidiaries of
Indebtedness of O'Sullivan or a Restricted Subsidiary of O'Sullivan that was
permitted to be incurred by another provision of this covenant;
(9) the incurrence by O'Sullivan's Unrestricted Subsidiaries of Non-Recourse
Debt; provided, however, that if it ceases to be Non-Recourse Debt of an
Unrestricted Subsidiary, then it shall be deemed to constitute an incurrence
of Indebtedness by a Restricted Subsidiary of O'Sullivan;
(10) Indebtedness incurred by O'Sullivan or any of its Restricted Subsidiaries
constituting reimbursement obligations with respect to letters of credit
issued in the ordinary course of business. This shall include without
limitation, letters of credit in respect to workers' compensation claims or
self-insurance, or other
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Indebtedness with respect to reimbursement type obligations regarding
workers' compensation claims. However, upon the drawing of the letters of
credit or the incurrence of the Indebtedness, the obligations must be
reimbursed within 30 days following the drawing or incurrence;
(11) obligations in respect of performance and surety bonds and completion
guarantees provided by O'Sullivan or any Restricted Subsidiary in the
ordinary course of business; and
(12) the incurrence by O'Sullivan or any of its Restricted Subsidiaries of
additional Indebtedness, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any other Indebtedness incurred
pursuant to this clause (12), not to exceed $25.0 million.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (12) above or is
entitled to be incurred pursuant to the first paragraph of this covenant,
O'Sullivan will be permitted to classify each item of Indebtedness on the date
of its incurrence in any manner that complies with this covenant. In addition,
O'Sullivan may, at any time, change the classification of an item of
Indebtedness, or any portion of the Indebtedness, to any other clause or to the
first paragraph of this covenant provided that O'Sullivan would be permitted to
incur the item of Indebtedness, or portion of the Indebtedness, pursuant to
another clause or the first paragraph of this covenant, as the case may be, at
the time of reclassification. Accrual of interest, accretion or amortization of
original issue discount and the accretion of accreted value will not be deemed
to be an incurrence of Indebtedness for purposes of this covenant.
LIENS
O'Sullivan will not, and will not permit any of its Restricted
Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or
become effective any Lien of any kind securing trade payables or Indebtedness
that does not constitute Senior Debt, other than Permitted Liens, upon any of
their property or assets, now owned or hereafter acquired unless:
(1) in the case of Liens securing Indebtedness that is expressly subordinated or
junior in right of payment to the exchange notes, the notes are secured on a
senior basis to the obligations so secured until the time when the
obligations are no longer secured by a Lien; and
(2) in all other cases, the exchange notes are secured on an equal and ratable
basis with the obligations so secured until the time when the obligations
are no longer secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
O'Sullivan will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) (a) pay dividends or make any other distributions to O'Sullivan or any of
its Restricted Subsidiaries
(i) on its Capital Stock; or
(ii) with respect to any other interest or participation in, or measured
by, its profits; or
(b) pay any Indebtedness owed to O'Sullivan or any of its Restricted
Subsidiaries;
(2) make loans or advances to O'Sullivan or any of its Restricted Subsidiaries;
or
(3) transfer any of its properties or assets to O'Sullivan or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, restructurings, replacements or refinancings of
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that Existing Indebtedness. However, this shall only apply so long as the
amendments, modifications, restatements, renewals, increases, supplements,
refundings, restructurings, replacements or refinancings are no more
restrictive, taken as a whole, than those contained in the Existing
Indebtedness as in effect on the date of the indenture. The determination as
to whether they are no more restrictive taken as a whole shall be made by
O'Sullivan's Board of Directors using its good faith judgment with respect
to the dividend and other payment restrictions.
(2) the Credit Facilities as in effect as of the date of the indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, restructurings, replacements or refinancings of the Credit
Facilities. However, this shall only apply so long as the amendments,
modifications, restatements, renewals, increases, supplements, refundings,
restructurings, replacements or refinancings are no more restrictive, taken
as a whole than those contained in the Credit Facilities as in effect on the
date of the indenture. The determination as to whether they are no more
restrictive taken as a whole shall be made by O'Sullivan's Board of
Directors using their good faith judgment with respect to the dividend and
other payment restrictions.
(3) the indenture, the exchange notes and the Subsidiary Guarantees;
(4) any applicable law, rule, regulation or order;
(5) any instrument of a Person acquired by O'Sullivan or any of its Restricted
Subsidiaries as in effect at the time of the acquisition where the
encumbrance or restriction is only applicable to the Person acquired or the
property or assets acquired from the Person, unless the encumbrance or
restriction was incurred in connection with or in contemplation of the
acquisition. However, this clause (5) shall only apply to Indebtedness when
it was permissible to incur the Indebtedness under the terms of the
indenture.
(6) customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices;
(7) purchase money obligations for property acquired in the ordinary course of
business that impose restrictions on the property so acquired of the nature
described in clause (3) of the preceding paragraph;
(8) Permitted Refinancing Indebtedness, provided that the material restrictions
contained in the agreements governing the Permitted Refinancing Indebtedness
are no more restrictive when taken as a whole to the Holders of notes, than
those contained in the agreements governing the Indebtedness being
refinanced as determined by the Board of Directors of O'Sullivan in it's
good faith judgment.
(9) contracts for the sale of assets, including without limitation customary
restrictions with respect to a Subsidiary pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of
the Capital Stock or assets of the Subsidiary; and
(10) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
O'Sullivan may not:
(A) consolidate or merge with or into another Person, whether or not O'Sullivan
is the surviving corporation; or
(B) sell, assign, transfer, convey or otherwise dispose of all or substantially
all of its properties or assets, in one or more related transactions, to
another Person unless:
(1) either:
(a) O'Sullivan is the surviving corporation; or
(b) the Person formed by or surviving any consolidation or merger (if
other than O'Sullivan) or to which the sale, assignment, transfer,
conveyance or other disposition shall have been made is a
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corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia;
(2) the entity or Person formed by or surviving any consolidation or merger (if
other than O'Sullivan) or the entity or Person to which the sale,
assignment, transfer, conveyance or other disposition shall have been made
assumes all the obligations of O'Sullivan under the exchange notes and the
indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the trustee;
(3) immediately after the transaction no Default or Event of Default exists; and
(4) except in the case of a merger entered into solely for the purpose of
reincorporating O'Sullivan in another jurisdiction, O'Sullivan or the entity
or Person formed by or surviving any consolidation or merger, if other than
O'Sullivan, or to which the sale, assignment, transfer, conveyance or other
disposition will have been made:
(a) will be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption " -
Incurrence of Indebtedness and Issuance of Preferred Stock," after
giving pro forma effect to the transaction as if it had occurred at the
beginning of the applicable four-quarter period; or
(b) would, together with its Restricted Subsidiaries, have a higher Fixed
Charge Coverage Ratio immediately after the transaction than the Fixed
Charge Coverage Ratio of O'Sullivan and its subsidiaries immediately
prior to the transaction, after giving pro forma effect to the
transaction as if it had occurred at the beginning of the applicable
four-quarter period.
The preceding clause (4) will not prohibit a merger between O'Sullivan
and a Wholly Owned Subsidiary so long as the amount of Indebtedness of
O'Sullivan and its Restricted Subsidiaries is not increased thereby.
In addition, O'Sullivan may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation, or Sale of
Assets" covenant will not be applicable to a sale, assignment, transfer,
conveyance or other disposition of assets between or among O'Sullivan and any of
its Wholly Owned Restricted Subsidiaries.
TRANSACTIONS WITH AFFILIATES
O'Sullivan will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable to
O'Sullivan or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by O'Sullivan or the Restricted
Subsidiary with an unrelated Person; and
(2) O'Sullivan delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$2.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that the Affiliate Transaction
complies with clause (1) above and that the Affiliate Transaction has
been approved by a majority of the disinterested members of the Board
of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the Holders of the
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
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The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) customary directors' fees, indemnification or similar arrangements or any
employment agreement or other compensation plan or arrangement entered into
by O'Sullivan or any of its Restricted Subsidiaries in the ordinary course
of business and consistent with the past practice of O'Sullivan or its
Restricted Subsidiary;
(2) transactions between or among O'Sullivan and/or its Restricted Subsidiaries;
(3) Restricted Payments that are permitted by the provisions of the indenture
described above under the caption " - Restricted Payments;"
(4) customary loans, advances, fees and compensation paid to, and indemnity
provided on behalf of, officers, directors, employees or consultants of
O'Sullivan or any of its Restricted Subsidiaries;
(5) transactions pursuant to any contract or agreement in effect on the date of
the indenture as the same may be amended, modified or replaced from time to
time so long as any amendment, modification or replacement is no less
favorable to O'Sullivan and its Restricted Subsidiaries than the contract or
agreement as in effect on the date of the indenture;
(6) management or similar fees payable to BRS or an Affiliate thereof pursuant
to the Management Services Agreement as in effect on the date of the
indenture, all as described above in the section of this prospectus entitled
"Certain Relationships and Related Transactions;" and
(7) payments in connection with the Recapitalization including the payment of
fees and expenses with respect to the Recapitalization.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary that is
not a Significant Subsidiary to be an Unrestricted Subsidiary if that
designation would not cause a Default. If a Restricted Subsidiary is designated
as an Unrestricted Subsidiary, all outstanding Investments owned by O'Sullivan
and its Restricted Subsidiaries, except to the extent repaid in cash, in the
Subsidiary so designated will be deemed to be Restricted Payments at the time of
the designation, to the extent not designated a Permitted Investment, and will
reduce the amount available for Restricted Payments under the first paragraph of
the covenant described above under the caption " - Restricted Payments." All of
these outstanding Investments will be valued at their fair market value at the
time of any designation, as determined in good faith by the Board of Directors.
That designation will only be permitted if the Restricted Payment would be
permitted at that time and if the Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
ANTI-LAYERING
O'Sullivan will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is both:
(1) subordinate or junior in right of payment to any Senior Debt; and
(2) senior in any respect in right of payment to the exchange notes.
No Guarantor will incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is both:
(1) subordinate or junior in right of payment to any Senior Debt of the
Guarantor; and
(2) senior in any respect in right of payment to the Subsidiary Guarantees.
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SALE AND LEASEBACK TRANSACTIONS
O'Sullivan will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
O'Sullivan or any Restricted Subsidiary may enter into a sale and leaseback
transaction if:
(1) O'Sullivan or its Restricted Subsidiary could have:
(a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to the sale and leaseback transaction pursuant to the covenant
described above under the caption " - Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(b) incurred a Lien to secure the Indebtedness pursuant to the covenant
described above under the caption " - Liens;"
(2) the gross cash proceeds of that sale and leaseback transaction are at least
equal to the fair market value, as determined in good faith by the Board of
Directors and set forth in an Officers' Certificate delivered to the
trustee, of the property that is the subject of the sale and leaseback
transaction; and
(3) the transfer of assets in the sale and leaseback transaction is permitted
by, and O'Sullivan or its Restricted Subsidiary applies the proceeds of the
transaction in compliance with, the covenant described above under the
caption " - Asset Sales."
ADDITIONAL GUARANTEES
If O'Sullivan acquires or creates a Domestic Restricted Subsidiary after
the date of the indenture, or if any Subsidiary of O'Sullivan becomes a Domestic
Restricted Subsidiary of O'Sullivan after the date of the indenture, then the
newly acquired or created Domestic Restricted Subsidiary will become a Guarantor
and execute a supplemental indenture and deliver an opinion of counsel, in
accordance with the terms of the indenture.
BUSINESS ACTIVITIES
O'Sullivan will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Permitted Business, except to an extent that
would not be material to O'Sullivan and its Restricted Subsidiaries taken as a
whole.
REPORTS
Whether or not required by the Commission, so long as any exchange notes
are outstanding, O'Sullivan will furnish to the Holders of exchange notes,
within the time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if
O'Sullivan were required to file the Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report on the annual
financial statements by O'Sullivan's certified independent accountants; and
(2) all current reports that would be required to be filed with the Commission
on Form 8-K if O'Sullivan were required to file the reports.
In addition, following the consummation of this exchange offer, whether
or not required by the Commission, O'Sullivan will file a copy of all the
information and reports referred to in clauses (1) and (2) above with the
Commission for public availability within the time periods specified in the
Commission's rules and regulations, unless the Commission will not accept the
filing, and make this information available to securities analysts and
prospective investors upon request. In addition, O'Sullivan has agreed that, for
so long as any exchange notes remain outstanding, it will furnish to the Holders
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144(d)(4) under the
Securities Act.
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EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or Liquidated
Damages with respect to, the exchange notes whether or not prohibited by the
subordination provisions of the indenture;
(2) default in the payment when due of the principal of or premium, if any, on
the exchange notes, whether or not prohibited by the subordination
provisions of the indenture;
(3) failure by O'Sullivan to comply with the provisions described under the
caption "- Repurchase at Option of Holders - Change of Control" or
"- Merger, Consolidation, or Sale of Assets;"
(4) failure by O'Sullivan for 60 days after notice from the trustee or Holders
of at least 25% in principal amount of the exchange notes then outstanding
to comply with the provisions described under the captions "- Asset Sales,"
"- Restricted Payments" or "- Incurrence of Indebtedness and Issuance of
Preferred Stock" or with any of its other agreements in the indenture or the
exchange notes;
(5) default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by O'Sullivan or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by O'Sullivan or any of its Restricted
Subsidiaries) whether the Indebtedness or Guarantee now exists, or is
created after the date of the indenture, if that default:
(a) is caused by a failure to pay principal on the Indebtedness at final
maturity (a "Payment Default"); or
(b) results in the acceleration of the Indebtedness prior to its express
maturity,
and, in each case, the principal amount of any of the Indebtedness, together
with the principal amount of any other of the Indebtedness under which there
has been a Payment Default or the maturity of which has been so accelerated,
aggregates $7.5 million or more;
(6) failure by O'Sullivan or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $7.5 million, which judgments are not
paid, discharged or stayed for a period of 60 days;
(7) except as permitted by the indenture, any Subsidiary Guarantee shall be held
in any judicial proceeding to be unenforceable or invalid or shall cease for
any reason to be in full force and effect or any Guarantor shall deny or
disaffirm its obligations under its Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency with respect to O'Sullivan or any
of its Restricted Subsidiaries that are Significant Subsidiaries.
In the event of a declaration of acceleration of the exchange notes
because an Event of Default has occurred and is continuing as a result of the
acceleration of any Indebtedness described in clause (5) of the preceding
paragraph, the declaration of acceleration of the exchange notes shall be
automatically annulled if the holders of any Indebtedness described in
clause (5) of the preceding paragraph have rescinded the declaration of
acceleration in respect of the Indebtedness within 30 days of the date of the
declaration and if:
(1) the annulment of the acceleration of exchange notes would not conflict with
any judgment or decree of a court of competent jurisdiction; and
(2) all existing Events of Default, except nonpayment of principal or interest
or other amounts on the exchange notes that became due solely because of the
acceleration of the exchange notes, have been cured or waived.
If any Event of Default occurs and is continuing, the trustee or the
Holders of at least 25% in principal amount of the then outstanding exchange
notes may declare all the exchange notes to be due and payable immediately;
provided, that so long as any Obligations pursuant to the Senior Credit
Facilities shall be
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outstanding or the commitments thereunder shall not have expired or been
terminated, the acceleration will not be effective until the earlier of:
(1) an acceleration of any of the Indebtedness under the Senior Credit
Facilities, or
(2) five business days after receipt by O'Sullivan and the Credit Agent of
written notice of the acceleration.
Notwithstanding the preceding paragraph, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency, with respect to
O'Sullivan or any of its Restricted Subsidiaries that are Significant
Subsidiaries, all outstanding exchange notes will become due and payable without
further action or notice.
Holders of the exchange notes may not enforce the indenture or the
exchange notes except as provided in the indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
exchange notes may direct the trustee in its exercise of any trust or power. The
trustee may withhold from Holders of the exchange notes notice of any continuing
Default or Event of Default, except a Default or Event of Default relating to
the payment of principal or interest or Liquidated Damages, if it determines
that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of O'Sullivan with the
intention of avoiding payment of the premium that O'Sullivan would have had to
pay if O'Sullivan then had elected to redeem the exchange notes pursuant to the
optional redemption provisions of the indenture, an equivalent premium will also
become and be immediately due and payable to the extent permitted by law upon
the acceleration of the exchange notes. If an Event of Default occurs prior to
October 15, 2004 by reason of any willful action, or inaction, taken or not
taken by or on behalf of O'Sullivan with the intention of avoiding the
prohibition on redemption of the exchange notes prior to October 15, 2004, then
the Applicable Premium will also become immediately due and payable to the
extent permitted by law upon the acceleration of the exchange notes.
The Holders of a majority in aggregate principal amount of the exchange
notes then outstanding by notice to the trustee may on behalf of the Holders of
all of the exchange notes waive any existing Default or Event of Default and its
consequences under the indenture except a continuing Default or Event of Default
in the payment of interest or Liquidated Damages on, or the principal of, the
exchange notes.
O'Sullivan is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, O'Sullivan is required to deliver to the trustee a statement
specifying the Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of
O'Sullivan, or any Guarantor, shall have any liability for any obligations of
O'Sullivan or the Guarantors under the exchange notes, the indenture, the
Subsidiary Guarantees or for any claim based on, in respect of, or by reason of,
these obligations or their creation. Each Holder of exchange notes by accepting
an exchange note waives and releases all of this liability. The waiver and
release are part of the consideration for issuance of the exchange notes. The
waiver may not be effective to waive liabilities under the federal securities
laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
O'Sullivan may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding exchange notes and all
obligations of the Guarantors discharged with respect to their Subsidiary
Guarantees ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding exchange notes to receive payments in
respect of the principal of, or interest or premium and Liquidated Damages,
if any, on the exchange notes when payments are due from the trust referred
to below;
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(2) O'Sullivan's obligations with respect to the exchange notes concerning
issuing temporary exchange notes, registration of exchange notes, mutilated,
destroyed, lost or stolen exchange notes and the maintenance of an office or
agency for payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
O'Sullivan's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, at its option and at any time O'Sullivan may elect to have
the obligations of O'Sullivan and the Guarantors released with respect to
certain covenants that are described in the indenture ("Covenant Defeasance").
After an election of this nature, any omission to comply with those covenants
will not constitute a Default or Event of Default with respect to the exchange
notes. In the event Covenant Defeasance occurs, certain events, not including
non-payment, bankruptcy, receivership, rehabilitation and insolvency events,
described under "Events of Default" will no longer constitute an Event of
Default with respect to the exchange notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) O'Sullivan must irrevocably deposit in trust for the benefit of the Holders
of the exchange notes with the trustee, cash in U.S. dollars, non-callable
Government Securities, or a combination of the two, in a sufficient amount
to pay the principal of, or any interest and premium and Liquidated Damages
on the outstanding exchange notes on the stated maturity or on the
applicable redemption date, as the case may be. The payment shall be of an
amount which will be sufficient to make the necessary payments in the
opinion of a nationally recognized firm of independent accountants.
O'Sullivan must specify whether the exchange notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, O'Sullivan must have delivered to the
trustee an opinion of counsel in the United States reasonably acceptable to
the trustee, based upon, and confirming that:
(a) O'Sullivan has received from, or there has been published by, the
Internal Revenue Service a ruling; or
(b) since the date of the indenture there has been a change in the
applicable federal income tax law;
in either case to the effect that subject to customary assumptions and
exclusions, the Holders of the outstanding exchange notes will not recognize
income, gain or loss for federal income tax purposes as a result of the
Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner, and at the same times as would have been the
case if the Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, O'Sullivan must have delivered to the
trustee an opinion of counsel in the United States reasonably acceptable to
the trustee confirming that, subject to customary assumptions and
exclusions, the Holders of the outstanding exchange notes will not recognize
income, gain or loss for federal income tax purposes as a result of the
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner, and at the same times as would have been the
case if the Covenant Defeasance had not occurred;
(4) no Default or Event of Default will have occurred and be continuing on the
date of the deposit, other than a Default or Event of Default resulting from
the borrowing of funds to be applied to the deposit;
(5) the Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or
instrument, other than the indenture, to which O'Sullivan or any of its
Subsidiaries is a party or by which O'Sullivan or any of its Subsidiaries is
bound;
(6) O'Sullivan must deliver to the trustee an Officers' Certificate stating that
the deposit was not made by O'Sullivan with the intent of preferring the
Holders of exchange notes over the other creditors of O'Sullivan with the
intent of defeating, hindering, delaying or defrauding creditors of
O'Sullivan or others; and
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(7) O'Sullivan must deliver to the trustee an Officers' Certificate and an
opinion of counsel, which opinion may be subject to customary assumptions
and exclusions, each stating that all conditions precedent relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
With the consent of the Holders of not less than a majority in principal
amount of the exchange notes at the time outstanding, O'Sullivan and the trustee
are permitted to amend or supplement the indenture or any supplemental indenture
or modify the rights of the Holders; provided that without the consent of each
Holder affected, no amendment, supplement, modification or waiver may, with
respect to any exchange notes held by a non-consenting Holder,:
(1) reduce the principal amount of exchange notes whose Holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any exchange note or
alter the provisions with respect to the redemption of the exchange notes,
other than provisions relating to the covenants described above under the
caption "- Repurchase at the Option of Holders";
(3) reduce the rate of or change the time for payment of interest on any
exchange note;
(4) waive a Default or Event of Default in the payment of principal of, or
interest or premium, or Liquidated Damages, if any, on the exchange notes,
except a rescission of acceleration of the exchange notes by the Holders of
at least a majority in aggregate principal amount of the exchange notes and
a waiver of the payment default that resulted from the acceleration;
(5) make any exchange note payable in money other than that stated in the
exchange notes;
(6) make any change in the provisions of the indenture relating to waivers of
past Defaults or the rights of Holders of exchange notes to receive payments
of principal of, or interest or premium, or Liquidated Damages, if any, on
the exchange notes;
(7) waive a redemption payment with respect to any exchange note, other than a
payment required by one of the covenants described above under the caption
"- Repurchase at the Option of Holders";
(8) make any change in the preceding amendment and waiver provisions; or
(9) release any guarantor from any of its obligations under its guarantee of the
exchange notes or the indenture, except in accordance with the terms of the
indenture.
In addition, any amendment to, or waiver of the provisions of Article 10
of the indenture relating to subordination that adversely affects the rights of
the Holders of the exchange notes will require the consent of the Holders of at
least 75% in aggregate principal amount of the exchange notes then outstanding.
Notwithstanding the preceding, without the consent of any Holder of
exchange notes, O'Sullivan and the trustee may amend or supplement the indenture
or the exchange notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated exchange notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of O'Sullivan's obligations to Holders of
exchange notes in the case of a merger or consolidation or the sale of all
or substantially all of O'Sullivan's assets;
(4) to make any change that would provide any additional rights or benefits to
the Holders of exchange notes or that does not adversely affect the legal
rights under the indenture of any Holder; or
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(5) to comply with requirements of the Commission in order to effect or maintain
the qualification of the indenture under the Trust Indenture Act, to provide
for the issuance of Additional Notes in accordance with the limitations set
forth in the indenture or to allow any Subsidiary to guarantee the exchange
notes.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect
as to all exchange notes issued thereunder, when:
(1) either:
(a) all exchange notes that have been authenticated have been delivered to
the trustee for cancellation, except lost, stolen or destroyed exchange
notes that have been replaced or paid and exchange notes for whose
payment money has theretofore been deposited in trust and thereafter
repaid to O'Sullivan; or
(b) all exchange notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the making of a
notice of redemption or otherwise or will become due and payable within
one year and O'Sullivan or any Guarantor has irrevocably deposited or
caused to be deposited with the trustee as trust funds in trust solely
for the benefit of the Holders, cash in U.S. dollars, non-callable
Government Securities, or a combination of the two, in sufficient
amount without consideration of any reinvestment of interest, to pay
and discharge the entire indebtedness on the exchange notes not
delivered to the trustee for cancellation for principal, premium and
Liquidated Damages, if any, and accrued interest to the date of
maturity or redemption;
(2) no Default or Event of Default can have occurred and be continuing on the
date of the deposit or will occur as a result of the deposit and the deposit
will not result in a breach or violation of, or constitute a default under,
any other instrument to which O'Sullivan or any Guarantor is a party or by
which O'Sullivan or any Guarantor is bound;
(3) O'Sullivan or any Guarantor has paid or caused to be paid all sums payable
by it under the indenture; and
(4) O'Sullivan has delivered irrevocable instructions to the trustee under the
indenture to apply the deposited money toward the payment of the exchange
notes at maturity or the redemption date, as the case may be.
In addition, O'Sullivan must deliver an Officers' Certificate and an
opinion of counsel to the trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of O'Sullivan or any Guarantor, the
indenture limits the trustee's right to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any of these
claims as security or otherwise. The trustee will be permitted to engage in
other transactions. However, if the trustee acquires any conflicting interest it
must eliminate the conflict within 90 days, apply to the Commission for
permission to continue, or resign.
The Holders of a majority in principal amount of the then outstanding
exchange notes will have the right to direct the time, method, and place of
conducting any proceeding for exercising any remedy available to the trustee,
subject to certain exceptions. The indenture provides that in case an Event of
Default shall occur and be continuing, the trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to these provisions, the trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any Holder of exchange notes, unless the Holder has offered to the
trustee security and an indemnity satisfactory to it against any loss, liability
or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture
and Registration Rights Agreement without charge by writing to O'Sullivan
Industries, Inc., 1900 Gulf Street, Lamar, Missouri 64759; Attention: Vice
President, General Counsel and Secretary.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture.
Reference is made to the indenture for a full disclosure of all of these terms,
as well as any other capitalized terms used in this prospectus for which no
definition is provided.
"144A GLOBAL NOTE" means a permanent global note that is deposited with
and registered in the name of the Depositary or its nominee, representing a
series of notes sold in reliance on Rule 144A.
"ACQUIRED DEBT" means, with respect to any specified first Person:
(1) Indebtedness of any second Person existing at the time the second Person is
merged with or into or became a Subsidiary of the specified first Person,
whether or not the Indebtedness is incurred in connection with, or in
contemplation of, the second Person merging with or into, or becoming a
Subsidiary of the specified first Person, and
(2) Indebtedness secured by a Lien encumbering any asset acquired by the
specified first Person.
"AFFILIATE" of any specified first Person means any second Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the specified first Person. For purposes of this definition,
"CONTROL," as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of the Person, whether through the ownership of voting securities, by
agreement or otherwise. For purposes of this definition, the terms
"controlling," "controlled by" and "under common control with" have correlative
meanings.
"APPLICABLE PREMIUM" means, with respect to any note on any date (the
"calculation date"), the greater of:
(1) 1.0% of the principal amount of the note; or
(2) the excess of:
(A) the present value at the calculation date of:
(1) the redemption price of the note at October 15, 2004 (the redemption
price being set forth in the table above under the caption "Optional
Redemption") plus
(2) all required interest payments due on the note through October 15,
2004 (excluding accrued but unpaid interest),
computed using a discount rate equal to the Treasury Rate plus 50 basis
points over
(B) the principal amount of the note, if greater.
"ASSET SALE" means:
(1) the sale, lease, conveyance or other disposition (a "Disposition") of any
assets or rights, including, without limitation, by way of a sale and
leaseback, provided that the sale, lease, conveyance or other disposition of
all or substantially all of the assets of O'Sullivan and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
indenture described above under the caption "- Change of Control" and/or the
provisions described above under the caption "- Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sale covenant; and
(2) the issue or sale by O'Sullivan or any of its Restricted Subsidiaries of
Equity Interests of any of O'Sullivan's Restricted Subsidiaries, in the case
of either clause (1) or (2), whether in a single transaction or a series of
related transactions:
(a) that have a fair market value in excess of $5.0 million, or
(b) for net proceeds in excess of $5.0 million.
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Notwithstanding the preceding, the following items will not be deemed to
be Asset Sales:
(1) a disposition of assets by O'Sullivan to a Restricted Subsidiary or by a
Restricted Subsidiary to O'Sullivan or to another Restricted Subsidiary;
(2) an issuance of Equity Interests by a Restricted Subsidiary to O'Sullivan or
to another Restricted Subsidiary;
(3) a Restricted Payment that is permitted by the covenant described above under
the caption "- Restricted Payments;"
(4) a disposition in the ordinary course of business;
(5) the sale and leaseback of any assets within 90 days of the acquisition
thereof;
(6) foreclosures on assets; and
(7) the licensing of intellectual property.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in the
sale and leaseback transaction including any period for which the lease has been
extended or may, at the option of the lessor, be extended. The present value
will be calculated using a discount rate equal to the rate of interest implicit
in the transaction, determined in accordance with GAAP.
"BENEFICIAL OWNER" has the meaning assigned to the term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person", as that term is used in Section 13(d)(3)
of the Exchange Act, each "person" will be deemed to have beneficial ownership
of all securities that that "person" has the right to acquire by conversion or
exercise of other securities, whether the right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"BRS" means Bruckmann, Rosser, Sherrill & Co., L.L.C., a Delaware limited
liability company.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at the time be required to be capitalized on a balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock;
(3) in the case of a partnership or limited liability company, partnership or
membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"CASH EQUIVALENTS" means:
(1) United States dollars;
(2) Government Securities having maturities of not more than six months from the
date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each
case with any lender party to the Senior Credit Facilities or with any
domestic commercial bank having capital and surplus in excess of
$500 million and a Thompson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
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(5) commercial paper having the rating of "P-2" or higher from Moody's Investors
Service, Inc. or "A-3" or higher from Standard & Poor's Corporation and in
each case maturing within six months after the date of acquisition; and
(6) any fund investing exclusively in investments of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition other than by way
of merger or consolidation, in one or a series of related transactions, of
all or substantially all of the assets of O'Sullivan and its Subsidiaries
taken as a whole to any "person", as the term is used in Section 13(d)(3) of
the Exchange Act, other than a Principal or a Related Party of a Principal;
(2) the adoption of a plan relating to the liquidation or dissolution of
O'Sullivan;
(3) the consummation of any transaction the result of which is that any
"person", as defined in Sections 13(d) and 14(d) of the Exchange Act, other
than one or more Principals or their Related Parties or a Permitted Group
becomes the Beneficial Owner, directly or indirectly, of more than 50% of
the Voting Stock of O'Sullivan Holdings, provided, that the Principals and
Related Parties Beneficially Own, directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock of
O'Sullivan Holdings than the other person and do not have the right or
ability by voting power, contract or otherwise, to elect or designate for
election a majority of the Board of Directors of O'Sullivan Holdings;
(4) the first day on which a majority of the members of the Board of Directors
of O'Sullivan Holdings are not Continuing Directors; or
(5) the first day on which O'Sullivan ceases to be a Wholly Owned Restricted
Subsidiary of O'Sullivan Holdings.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any
period, the Consolidated Net Income of that Person for the period, plus:
(1) an amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale, to the extent the losses were deducted in
computing the Consolidated Net Income; plus
(2) provision for taxes based on income or profits of the Person and its
Subsidiaries for the period, to the extent that the provision for taxes was
deducted in computing the Consolidated Net Income; plus
(3) consolidated interest expense of the Person and its Subsidiaries for the
period, whether paid or accrued and whether or not capitalized, including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net payments, if any, pursuant to Hedging Obligations, to the extent
that any expense was deducted in computing the Consolidated Net Income; plus
(4) depreciation, amortization, including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period, and other non-cash charges, excluding any non-cash
charge to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period, of that Person and its Subsidiaries for the
period to the extent that any depreciation, amortization and other non-cash
expenses were deducted in computing the Consolidated Net Income; plus
(5) expenses and charges of O'Sullivan related to the Recapitalization which are
incurred within 90 days of the consummation of the Recapitalization, plus
(6) any extraordinary charges, as defined by GAAP, for the period to the extent
that any charges were deducted in computing the Consolidated Net Income,
plus
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(7) amounts accrued pursuant to the Management Services Agreement to the extent
any amounts were deducted in computing Consolidated Net Income but were not
paid in cash; minus
(8) the amount of any cash payments made pursuant to the Management Services
Agreement whether or not the amount was deducted in computing Consolidated
Net Income; minus
(9) any tax payments to Tandy or any of its Affiliates in respect of the period
to the extent payments exceed the provision for taxes for the period.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the interest expense of that Person and its Restricted Subsidiaries for the
period, on a consolidated basis, determined in accordance with GAAP
(including amortization of original issue discount, non-cash interest
payments, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments, if
any, pursuant to Hedging Obligations; provided that in no event shall any
amortization of deferred financing costs be included in Consolidated
Interest Expense); plus
(2) the consolidated capitalized interest of the Person and its Restricted
Subsidiaries for the period, whether paid or accrued.
Notwithstanding the preceding, the Consolidated Interest Expense with respect to
any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary will
be included only to the extent, and in the same proportion, that the net income
of the Restricted Subsidiary was included in calculating Consolidated Net
Income.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any
period, the aggregate of the Net Income of that Person and its Restricted
Subsidiaries for the period, on a consolidated basis, determined in accordance
with GAAP; provided that
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by
that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval that has not
yet been obtained, or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary or its
stockholders;
(3) the Net Income of any Person acquired in a pooling of interests transaction
for any period prior to the date of the acquisition shall be excluded;
(4) the cumulative effect of a change in accounting principles will be excluded;
and
(5) the Net Income of any Unrestricted Subsidiary will be excluded, whether or
not distributed to O'Sullivan or one of its Restricted Subsidiaries, for
purposes of the covenant described under the caption "Incurrence of
Indebtedness and Issuance of Preferred Stock" and will be included for
purposes of the covenant described under the caption "Restricted Payments"
only to the extent of the amount of dividends or distributions paid in cash
to O'Sullivan or one of its Restricted Subsidiaries.
"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the Board of Directors of O'Sullivan who:
(1) was a member of the Board of Directors on the date of the indenture;
(2) was nominated for election or elected to the Board of Directors with the
approval of a majority of the Continuing Directors who were members of the
Board at the time of the nomination or election; or
(3) was nominated by the Principals pursuant to the Stockholders Agreement.
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"CREDIT AGENT" means Lehman Commercial Paper Inc., in its capacity as
Administrative Agent for the lenders party to the Senior Credit Facilities, or
any successor thereto or any person otherwise appointed.
"CREDIT FACILITIES" means, the Senior Credit Facilities and/or one or
more debt facilities or commercial paper facilities, in each case with banks or
other institutional lenders providing for revolving credit loans, term loans,
receivables financing, including through the sale of receivables to the lenders
or to special purpose entities formed to borrow from the lenders against the
receivables or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced, restructured or refinanced in whole or in part from
time to time.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DESIGNATED SENIOR DEBT" means:
(1) any Indebtedness outstanding under the Senior Credit Facilities; and
(2) after payment in full of all Obligations under the Senior Credit Facilities,
any other Senior Debt permitted under the indenture the principal amount of
which is $25.0 million or more and that has been designated by O'Sullivan as
"Designated Senior Debt."
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms, or by
the terms of any security into which it is convertible or for which it is
exchangeable, or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would not qualify as Disqualified
Stock but for change of control or asset sale provisions shall not constitute
Disqualified Stock if the provisions are not more favorable to the Holders of
the Capital Stock than the provisions described under "- Change of Control" and
"- Asset Sales."
"DOMESTIC RESTRICTED SUBSIDIARY" means, with respect to O'Sullivan, any
Wholly Owned Subsidiary of O'Sullivan that was formed under the laws of the
United States of America.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"EQUITY OFFERING" means an offering of the Equity Interests, other than
Disqualified Stock, of O'Sullivan or O'Sullivan Holdings that results in net
proceeds to O'Sullivan, or a contribution to the common equity capital of
O'Sullivan, of at least $25,000,000.
"EXCESS TANDY PAYMENTS" means the aggregate amount of all payments made
to Tandy after the date of the indenture in excess of the amount that would have
been payable to Tandy had the increase in interest expense resulting from the
recapitalization and merger been taken into account in determining our annual
payments to Tandy.
"EXISTING INDEBTEDNESS" means Indebtedness of O'Sullivan and its
Subsidiaries, other than Indebtedness under the Senior Credit Facilities, in
existence on the date of the indenture, until the Indebtedness is repaid.
"FIXED CHARGES" means, with respect to any Person for any period, the
sum, without duplication, of:
(1) the Consolidated Interest Expense of that Person for the period;
(2) any interest expense on Indebtedness of another Person that is Guaranteed by
that Person or one of its Restricted Subsidiaries or secured by a Lien on
assets of that Person or one of its Restricted Subsidiaries, whether or not
the Guarantee or Lien is called upon;
(3) the product of (a) all dividend payments, whether or not in cash, on any
series of preferred stock of that Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable
solely in Equity Interests of O'Sullivan, other than Disqualified Stock, and
other than accruals of dividends on Equity Interests that are not
Disqualified Stock that are added to the liquidation preference of the
Equity
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Interests and are not required to be paid in cash, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of that Person,
expressed as a decimal, in each case, on a consolidated basis and in
accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of that Person for the period to
the Fixed Charges of that Person for the period. In the event that O'Sullivan or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness, other than revolving credit borrowings, or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect
to this incurrence, assumption, Guarantee or redemption of Indebtedness, or any
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by O'Sullivan or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to this reference period and on or prior to the Calculation Date
will be calculated to include the Consolidated Cash Flow of the acquired
entities on a pro forma basis, to be calculated in accordance with
Article 11-02 of Regulation S-X, as in effect on the date of the indenture,
after giving effect to cost savings resulting from employee terminations,
facilities consolidations and closings, standardization of employee benefits
and compensation policies, consolidation of property, casualty and other
insurance coverage and policies, standardization of sales and distribution
methods, reductions in taxes other than income taxes and other cost savings
reasonably expected to be realized from the acquisition, will be deemed to
have occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for the reference period will be calculated without
giving effect to clause (3) of the proviso set forth in the definition of
Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, will be excluded, but only to the extent that the
obligations giving rise to these Fixed Charges will not be obligations of
the specified Person or any of its Restricted Subsidiaries following the
Calculation Date.
"FOREIGN SUBSIDIARY" means any Subsidiary of O'Sullivan that is not
organized under the laws of a state or territory of the United States or the
District of Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in any other statements by any other
entity that has been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture, except that
calculations made for purposes of determining compliance with the terms of the
covenants and with other provisions of the indenture will be made without giving
effect to depreciation, amortization or other expenses recorded as a result of
the application of purchase accounting in accordance with Accounting Principles
Board Opinion Nos. 16 and 17.
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"GLOBAL NOTES" means, individually and collectively, each of the
Restricted Global Notes and the Unrestricted Global Notes, issued in accordance
with certain sections of the indenture.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, letters of credit and
reimbursement agreements in respect thereof, of all or any part of any
Indebtedness.
"GUARANTORS" means each of:
(1) O'Sullivan Industries - Virginia, Inc.; and
(2) any other Subsidiary of O'Sullivan that executes a Subsidiary Guarantee in
accordance with the provisions of the indenture, and their respective
successors and assigns.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations
of that Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
(2) other agreements or arrangements designed to protect the Person against
fluctuations in interest rates or currency exchange rates or commodity
prices.
"INDEBTEDNESS" means, with respect to any specified Person, any
indebtedness of the Person, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters of
credit, or reimbursement agreements in respect thereof;
(3) bankers' acceptances;
(4) representing Capital Lease Obligations; or
(5) the balance deferred and unpaid of the purchase price of any property or
representing any Hedging Obligations, except any the balance that
constitutes an accrued expense or trade payable,
if and to the extent any of the preceding items, other than letters of credit
and Hedging Obligations would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person, whether or not the Indebtedness is assumed by the
specified Person and, to the extent not otherwise included, the Guarantee by the
Person of any indebtedness of any other Person; provided that Indebtedness will
not include the pledge by O'Sullivan of the Capital Stock of an Unrestricted
Subsidiary of O'Sullivan to secure Non-Recourse Debt of that Unrestricted
Subsdiary.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any Indebtedness that
does not require current payments of interest; and
(2) the principal amount of the Indebtedness, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
"INVESTMENTS" means, with respect to any Person, all investments by that
Person in other Persons, including Affiliates, in the forms of direct or
indirect loans, including guarantees of Indebtedness or other obligations,
advances or capital contributions, excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business,
purchases or other acquisitions for consideration of
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Indebtedness, Equity Interests or other securities, together with all items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If O'Sullivan or any Restricted Subsidiary of O'Sullivan
sells or otherwise disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of O'Sullivan so that, after giving effect to any sale or
disposition, the Person is no longer a Restricted Subsidiary of O'Sullivan,
O'Sullivan will be deemed to have made an Investment on the date of this sale or
disposition equal to the fair market value of the Equity Interests of the
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "- Restricted Payments."
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of the asset,
whether or not filed, recorded or otherwise perfected under applicable law
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"MANAGEMENT SERVICES AGREEMENT" means the Management Services Agreement,
dated as of the date of the indenture, between O'Sullivan and BRS as in effect
on the date of the indenture.
"NET INCOME" means, with respect to any Person, the net income or loss of
that Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain, but not loss, together with any related provision for taxes on
such gain, but not loss, realized in connection with:
(a) any Asset Sale; or
(b) the disposition of any securities by the Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of
the Person or any of its Restricted Subsidiaries; and
(2) any extraordinary or nonrecurring gain, but not loss, together with any
related provision for taxes on the extraordinary or nonrecurring gain, but
not loss.
"NET PROCEEDS" means the aggregate cash proceeds received by O'Sullivan
or any of its Restricted Subsidiaries in respect of any Asset Sale, including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale, net of the direct costs
relating to the Asset Sale, including, without limitation, legal, accounting and
investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, after
taking into account any available tax credits or deductions and any tax sharing
arrangements, the amounts required to be applied to the payment of Indebtedness,
other than Indebtedness incurred pursuant to the Senior Credit Facilities,
secured by a Lien on the asset or assets that were the subject of the Asset
Sale, and any reserve for adjustment in respect of the sale price of the asset
or assets established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither O'Sullivan nor any of its Restricted Subsidiaries:
(a) provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness;
(b) is directly or indirectly liable as a guarantor or otherwise; or
(c) constitutes the lender;
(2) no default with respect to which, including any rights that the Holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit upon notice, lapse of time or both any Holder of
any other Indebtedness, other than the notes, of O'Sullivan or any of its
Restricted Subsidiaries to declare a default on this other Indebtedness or
cause the payment of this other Indebtedness to be accelerated or payable
prior to its stated maturity; and
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(3) as to which the lenders have been notified in writing that they will not
have any recourse to the stock, other than stock of an Unrestricted
Subsidiary pledged by O'Sullivan to secure debt of the Unrestricted
Subsidiary, or assets of O'Sullivan or any of its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities and obligations
payable under the documentation governing any Indebtedness, including, without
limitation, interest after the commencement of any bankruptcy proceeding at the
rate specified in the applicable instrument governing or evidencing Senior Debt.
"PERMITTED BUSINESS" means any business in which O'Sullivan and its
Restricted Subsidiaries are engaged on the date of the indenture or any business
reasonably related, incidental or ancillary thereto.
"PERMITTED GROUP" means any group of investors that is deemed to be a
"person", as that term is used in Section 13(d)(3) of the Exchange Act, at any
time prior to O'Sullivan's initial public offering of common stock, by virtue of
the Stockholders Agreement, as the same may be amended, modified or supplemented
from time to time, provided that no single Person, other than the Principals and
their Related Parties, Beneficially Owns, together with its Affiliates, more of
the Voting Stock of O'Sullivan that is Beneficially Owned by this group of
investors than is then collectively Beneficially Owned by the Principals and
their Related Parties in the aggregate.
"PERMITTED INVESTMENTS" means:
(1) any Investment in O'Sullivan or in a Restricted Subsidiary of O'Sullivan;
(2) any Investment in Cash Equivalents;
(3) any Investment by O'Sullivan or any Restricted Subsidiary of O'Sullivan in a
Person, if as a result of this Investment:
(a) the Person becomes a Restricted Subsidiary of O'Sullivan; or
(b) the Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, O'Sullivan or a Restricted Subsidiary of O'Sullivan;
(4) Hedging Obligations;
(5) any Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "- Repurchase at the
Option of Holders - Asset Sales;"
(6) any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of O'Sullivan; and
(7) other Investments made after the date of the indenture in any Person engaged
in a Permitted Business having an aggregate fair market value, measured on
the date each Investment was made and without giving effect to subsequent
changes in value, when taken together with all other Investments made
pursuant to this clause (7) since the date of the indenture, not to exceed
$7.5 million.
"PERMITTED JUNIOR SECURITIES" means:
(1) common Equity Interests in O'Sullivan or any Guarantor; or
(2) debt or preferred equity securities of O'Sullivan or any Guarantor issued
pursuant to a plan of reorganization consented to by each class of Senior
Debt; provided that these debt securities are subordinated to all Senior
Debt and any debt securities issued in exchange for Senior Debt to
substantially the same extent as, or to a greater extent than, the notes and
the Subsidiary Guarantees are subordinated to Senior Debt under the
indenture.
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"PERMITTED LIENS" means:
(1) Liens securing Senior Debt, including, without limitation, Indebtedness
under the Senior Credit Facilities, permitted by the terms of the indenture
to be incurred or other Indebtedness allowed to be incurred under
clause (1) of the second paragraph of the covenant described above under the
caption "- Incurrence of Indebtedness and Issuance of Preferred Stock;"
(2) Liens in favor of O'Sullivan or any Restricted Subsidiary;
(3) Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in
the ordinary course of business;
(4) Liens existing on the date of the indenture;
(5) Liens to secure Indebtedness, including Capital Lease Obligations, permitted
by clause (4) of the second paragraph of the covenant entitled "Incurrence
of Indebtedness and Issuance of Preferred Stock;"
(6) Liens securing Permitted Refinancing Indebtedness where the Liens securing
the Indebtedness being refinanced were permitted under the indenture;
(7) Liens incurred in the ordinary course of business of O'Sullivan or any
Restricted Subsidiary of O'Sullivan with respect to obligations that do not
exceed $7.5 million at any one time outstanding and that:
(a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the
ordinary course of business); and
(b) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of
business by O'Sullivan or the Restricted Subsidiary; and
(8) Liens securing reimbursement obligations with respect to commercial letters
of credit which encumber documents and other property relating to these
letters of credit and products and proceeds thereof;
(9) Liens on property of a Person existing at the time the Person is merged into
or consolidated with O'Sullivan or any Restricted Subsidiary of O'Sullivan,
provided that the Liens were not incurred in contemplation of the merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with O'Sullivan or any Restricted Subsidiary;
(10) Liens on property existing at the time of acquisition thereof by O'Sullivan
or any Restricted Subsidiary of O'Sullivan, provided the Liens were not
incurred in contemplation of the acquisition; and
(11) Liens secured Hedging Obligations which Hedging Obligations relate to
Indebtedness that is otherwise permitted under the indenture;
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of O'Sullivan
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of O'Sullivan or any of its Restricted Subsidiaries;
provided that:
(1) the principal amount, or accreted value, if applicable, of the Permitted
Refinancing Indebtedness does not exceed the principal amount of or accreted
value, if applicable, plus accrued interest on, the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded, plus the
amount of reasonable expenses incurred in connection therewith except, in
the case of the Senior Credit Facilities, the principal amount of the
Permitted Refinancing Indebtedness does not exceed the greater of:
(i) the principal amount of Indebtedness permitted (whether or not
borrowed) under clause (1) of the covenant described above under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock";
or
(ii) the amount actually borrowed under the Senior Credit Facilities;
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(2) any Permitted Refinancing Indebtedness has a final maturity date no earlier
than the final maturity date of, and has a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and
(3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded is subordinated in right of payment to the notes, any Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the notes on
terms at least as favorable to the Holders of notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"PRINCIPALS" means BRS and its affiliates.
"RECAPITALIZATION" means the transactions described under the caption
"The Recapitalization Transactions" or related thereto.
"RELATED PARTY" with respect to any Principal means:
(1) any controlling stockholder or partner, 80%, or more, owned Subsidiary, or
spouse or immediate family member, in the case of an individual, of the
Principal; or
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a 51% or more
controlling interest of which consist of the Principal and/or other Persons
referred to in the immediately preceding clause (1).
"REPRESENTATIVE" means the trustee, agent or representative for any
Senior Debt.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"RULE 144A" means Rule 144A promulgated under the Securities Act.
"SENIOR CREDIT FACILITIES" means the Credit Agreement dated as of or
around the date of the indenture among O'Sullivan, O'Sullivan Holdings, Lehman
Commercial Paper Inc., as Arranger, syndication agent and administrative agent,
and the other entities from time to time parties thereto providing for revolving
credit borrowings and term loans, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended, modified, renewed, refunded,
restructured, replaced or refinanced from time to time including increases in
principal amount, whether the same are provided by the original Credit Agent and
lenders under the Senior Credit Facilities or a successor agent or other
lenders.
"SENIOR DEBT" means:
(1) all Indebtedness of O'Sullivan, O'Sullivan Holdings or any Guarantor
outstanding under Credit Facilities and all Hedging Obligations with respect
thereto;
(2) any other Indebtedness of O'Sullivan or any Guarantor permitted to be
incurred under the terms of the indenture, unless the instrument under which
the Indebtedness is incurred expressly provides that it is on a parity with
or subordinated in right of payment to the notes or any Subsidiary
Guarantee; and
(3) all Obligations with respect to the items listed in the preceding clauses
(1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt
will not include:
(1) any liability for federal, state, local or other taxes owed or owing by
O'Sullivan;
(2) any Indebtedness of O'Sullivan to any of its Subsidiaries or other
Affiliates;
(3) any trade payables; or
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(4) the portion of any Indebtedness that is incurred in violation of the
indenture; provided that Indebtedness under a Credit Facility will not cease
to be Senior Debt under this clause (4) if the lenders obtained a
certificate from an executive officer of O'Sullivan as of the date of the
incurrence of the Indebtedness to the effect that the Indebtedness was
permitted to be incurred by the indenture.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as the Regulation is in effect on the date
hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing the Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any interest or principal prior to the date
originally scheduled for the payment thereof.
"STOCKHOLDERS AGREEMENT" means that certain Stockholders Agreement, dated
as of November 30, 1999, by and among O'Sullivan Holdings, BRS and the other
signatories party thereto, as in effect on the date of the indenture.
"SUBSIDIARY" means, with respect to any Person:
(1) any corporation, association or other business entity of which more than 50%
of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person (or a combination thereof); and
(2) any partnership or limited liability company:
(a) the sole general partner or the managing general partner or managing
member of which is that Person or a Subsidiary of that Person; or
(b) the only general partners of which are that Person or one or more
Subsidiaries of that Person, or any combination thereof.
"TAX SHARING AGREEMENT" means that certain Tax Sharing Agreement, dated
as of November 30, 1999, by and between O'Sullivan and O'Sullivan Holdings.
"TOTAL ASSETS" means the total consolidated assets of O'Sullivan and its
Restricted Subsidiaries, as set forth on O'Sullivan's most recent consolidated
balance sheet.
"TREASURY RATE" means, as of any calculation date, the yield to maturity
as of the calculation date of United States Treasury securities with a constant
maturity, as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to the calculation date, or, if the Statistical Release is
no longer published, any publicly available source of similar market data, most
nearly equal to the period from the calculation date to October 15, 2004;
provided, however, that if the period from the calculation date to October 15,
2004 is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year will be
used.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution,
but only to the extent that the Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding with
O'Sullivan or any Restricted Subsidiary of O'Sullivan unless the terms of
any of these agreements, contracts, arrangements or understandings are no
less favorable to O'Sullivan or the Restricted Subsidiary than those that
might be obtained at the time from Persons who are not Affiliates of
O'Sullivan;
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(3) is a Person with respect to which neither O'Sullivan nor any of its
Restricted Subsidiaries has any direct or indirect obligation:
(a) to subscribe for additional Equity Interests; or
(b) to maintain or preserve the Person's financial condition or to cause
the Person to achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of O'Sullivan or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of O'Sullivan as an Unrestricted
Subsidiary will be evidenced to the trustee by filing with the trustee a
certified copy of the Board Resolution giving effect to the designation and an
Officers' Certificate certifying that the designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "Certain Covenants - Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of the Subsidiary
will be deemed to be incurred by a Restricted Subsidiary of O'Sullivan as of
that date and, if the Indebtedness is not permitted to be incurred as of that
date under the covenant described under the caption "Incurrence of Indebtedness
and Issuance of Preferred Stock," O'Sullivan will be in default of the covenant.
The Board of Directors of O'Sullivan may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that this designation will be
deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of
O'Sullivan of any outstanding Indebtedness of the Unrestricted Subsidiary and
this designation will be permitted only if:
(1) the Indebtedness is permitted under the covenant described under the
caption "Certain Covenants - Incurrence of Indebtedness and Issuance of
Preferred Stock,"; and
(2) no Default or Event of Default would be in existence following the
designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of
that Person that is at the time entitled to vote in the election of the Board of
Directors of the Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying: (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will elapse between that date and the making of the payment, by
(2) the then outstanding principal amount of the Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any specified Person means any
Wholly Owned Subsidiary of the Person that at the time of determination is a
Restricted Subsidiary.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of that Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) will at the time be owned by that
Person and/or by one or more Wholly Owned Subsidiaries of that Person.
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EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions in this prospectus and in
the letter of transmittal, we will accept any and all notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on the expiration date. We
will issue $1,000 principal amount of exchange notes in exchange for each $1,000
principal amount of outstanding notes accepted in the exchange offer. Holders
may tender some or all of their notes pursuant to the exchange offer. However,
notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and
terms of the notes except that:
(1) the exchange notes have been registered under the Securities Act of 1933 and
will not bear legends restricting their transfer thereof; and
(2) the holders of the exchange notes will not be entitled to rights under the
registration rights agreement. These rights include the provisions for an
increase in the interest rate on the notes in some circumstances relating to
the timing of the exchange offer. All of these rights will terminate when
the exchange offer is terminated. The exchange notes will evidence the same
debt as the notes. Holders of exchange notes will be entitled to the
benefits of the indenture.
As of the date of this prospectus, $100.0 million aggregate principal
amount of notes was outstanding. We have fixed the close of business on June 2,
2000 as the record date for the exchange offer for purposes of determining the
persons to whom this prospectus and the letter of transmittal will be mailed
initially.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
We shall be deemed to have accepted validly tendered notes when, as and
if we have given oral or written notice to the exchange agent. The exchange
agent will act as agent for the tendering holders for the purpose of receiving
the exchange notes from the issuers.
If any tendered notes are not accepted for exchange because of an invalid
tender, the occurrence of other events in this prospectus or otherwise, we will
return the certificates for any unaccepted notes, at our expense, to the
tendering holder as promptly as practicable after the expiration date.
Holders who tender notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of notes. We will
pay all charges and expenses, other than transfer taxes in some circumstances,
in connection with the exchange offer as described under the subheading "- Fees
and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" shall mean 5:00 p.m., New York City time, on
June 30, 2000, unless we extend the exchange offer. In that case, the term
"expiration date" shall mean the latest date and time to which the exchange
offer is extended. Notwithstanding the foregoing, we will not extend the
expiration date beyond July 7, 2000.
In order to extend the exchange offer, prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date,
we will:
(1) notify the exchange agent of any extension by oral or written notice and
(2) mail to the registered holders an announcement of any extension.
We reserve the right, in our sole discretion,
(1) if any of the conditions below under the heading "Conditions" shall not have
been satisfied,
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(A) to delay accepting any notes,
(B) to extend the exchange offer or
(C) to terminate the exchange offer, or
(2) to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice of delay to the registered
holders. We will give oral or written notice of any delay, extension or
termination to the exchange agent.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest from their date of issuance.
Holders of notes that are accepted for exchange will receive, in cash, accrued
interest on the exchange notes to, but not including, the date of issuance of
the exchange notes. We will make the first interest payment on the exchange
notes on October 15, 2000. Interest on the notes accepted for exchange will
cease to accrue upon issuance of the exchange notes.
Interest on the exchange notes is payable semi-annually on each April 15
and October 15, commencing on October 15, 2000.
PROCEDURES FOR TENDERING OLD NOTES
Only a holder of notes may tender notes in the exchange offer. To tender
in the exchange offer, a holder must
- complete, sign and date the letter of transmittal, or a facsimile of
the letter of transmittal,
- have the signatures guaranteed if required by the letter of
transmittal, and
- mail or otherwise deliver the letter of transmittal or facsimile,
together with the notes and any other required documents, to the
exchange agent prior to 5:00 p.m., New York City time, on the
expiration date.
To tender notes effectively, the holder must complete the letter of transmittal
and other required documents and the exchange agent must receive all the
documents prior to 5:00 p.m., New York City time, on the expiration date.
Delivery of the notes may be made by book-entry transfer in accordance with the
procedures described below. The exchange agent must receive confirmation of
book-entry transfer prior to the expiration date.
The tender by a holder and the acceptance of the tender by us will
constitute agreement between the holder and us under the terms and subject to
the conditions in this prospectus and in the letter of transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO US. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR THEM.
Any beneficial owner whose notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should promptly instruct the registered holder to tender on the beneficial
owner's behalf. See "Instruction to Registered Holder and/or Book-Entry Transfer
Facility Participant from Owner" included with the letter of transmittal.
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An institution that is a member firm of the Medallion system must
guarantee signatures on a letter of transmittal or a notice of withdrawal unless
the notes are tendered:
(1) by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or
(2) for the account of member firm of the Medallion system.
If the letter of transmittal is signed by a person other than the
registered holder of any notes listed in that letter of transmittal, the notes
must be endorsed or accompanied by a properly completed bond power, signed by
the registered holder as the registered holder's name appears on the notes. An
institution that is a member firm of the Medallion System must guarantee the
signature.
Trustees, executors, administrators, guardians, attorneys-in-fact,
offices of corporations or others acting in a fiduciary or representative
capacity should indicate their capacities when signing the letter of transmittal
or any notes or bond powers. Evidence satisfactory to us of their authority to
so act must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the notes at
the book-entry transfer facility, The Depository Trust Company, for the purpose
of facilitating the exchange offer. Subject to the establishment of the
accounts, any financial institution that is a participant in The Depository
Trust Company's system may make book-entry delivery of notes. To do so, the
financial institution should cause the book-entry transfer facility to transfer
the notes into the exchange agent's account with respect to the notes following
the book-entry transfer facility's procedures for transfer. Delivery of the
notes may be effected through book-entry transfer into the exchange agent's
account at the book-entry transfer facility. However, the holder must transmit
and the exchange agent must receive or confirm an appropriate letter of
transmittal properly completed and duly executed with any required signature
guarantee and all other required documents on or prior to the expiration date,
or, if the guaranteed delivery procedures described below are complied with,
within the time period provided under the procedures. Delivery of documents to
the book-entry transfer facility does not constitute delivery to the exchange
agent.
The Depositary and The Depository Trust Company have confirmed that the
exchange offer is eligible for The Depository Trust Company Automated Tender
Offer Program. Accordingly, The Depository Trust Company participants may
electronically transmit their acceptance of the exchange offer by causing The
Depository Trust Company to transfer notes to the depositary in accordance with
The Depository Trust Company's Automated Tender Offer Program procedures for
transfer. The Depository Trust Company will then send an "agent's message" to
the Depositary.
The term "agent's message" means a message transmitted by The Depository
Trust Company, received by the Depositary and forming part of the confirmation
of a book-entry transfer, which states that
(1) The Depository Trust Company has received an express acknowledgment from the
participant in The Depository Trust Company tendering notes subject of the
book-entry confirmation,
(2) the participant has received and agrees to be bound by the terms of the
letter of transmittal and
(3) we may enforce the agreement against the participant.
In the case of an agent's message relating to guaranteed delivery, the term
means a message transmitted by The Depository Trust Company and received by the
Depositary, which states that The Depository Trust Company has received an
express acknowledgment from the participant in The Depository Trust Company
tendering notes that the participant has received and agrees to be bound by the
notice of guaranteed delivery.
Notwithstanding the foregoing, in order to validly tender in the exchange
offer with respect to securities transferred through the Automated Tender Offer
Program, a The Depository Trust Company participant using Automated Tender Offer
Program must also properly complete and duly execute the applicable letter of
transmittal and deliver it to the Depositary.
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By the authority granted by The Depository Trust Company, any Depository
Trust Company participant that has notes credited to The Depository Trust
Company account at any time (and held of record by The Depository Trust
Company's nominee) may directly provide a tender as though it were the
registered holder by completing, executing and delivering the applicable letter
of transmittal to the Depositary. DELIVERY OF DOCUMENTS TO THE DEPOSITORY TRUST
COMPANY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
All questions as to the
- validity,
- form,
- eligibility (including time of receipt),
- acceptance of tendered notes and
- withdrawal of tendered notes
will be determined by us in our sole discretion. Our determination will be final
and binding. We reserve the absolute right to reject any and all notes not
properly tendered. We reserve the absolute right to reject any notes that would
be unlawful if accepted, in the opinion of our counsel. We also reserve the
right in our sole discretion to waive any defects, irregularities or conditions
of tender as to particular notes. Our interpretation of the terms and conditions
of the exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of notes must be cured within a time
to be determined by us. We intend to notify holders of defects or irregularities
with respect to tenders of notes. However, neither we, the exchange agent nor
any other person shall incur any liability for failure to give this
notification. Tenders of notes will not be deemed to have been made until any
defects or irregularities have been cured or waived. Any notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their notes and:
(1) whose notes are not immediately available;
(2) who cannot deliver their notes, the letter of transmittal or any other
required documents to the exchange agent; or
(3) who cannot complete the procedures for book-entry transfer, prior to the
expiration date may effect a tender if:
(1) they tender through an institution that is a member firm of the Medallion
system;
(2) prior to the expiration date, the exchange agent receives from an
institution that is a member firm of the Medallion system a properly
completed and duly executed notice of guaranteed delivery, by facsimile
transmission, mail or hand delivery, setting forth the name and address of
the holder, the certificate number(s) of the notes and the principal amount
of notes tendered, stating that the tender is being made and guaranteeing
that, within five New York Stock Exchange trading days after the expiration
date, the letter of transmittal, or facsimile thereof, together with the
certificate(s) representing the notes, or a confirmation of book-entry
transfer of the notes into the exchange agent's account at the book-entry
transfer facility, and any other documents required by the letter of
transmittal will be deposited by the firm with the exchange agent; and
(3) the exchange agent receives
92
<PAGE>
(A) the properly completed and executed letter of transmittal, of
facsimile thereof,
(B) the certificate(s) representing all tendered notes in proper form for
transfer, or a confirmation of book-entry transfer of the notes into
the exchange agent's account at the book-entry transfer facility, and
(C) all other documents required by the letter of transmittal
upon five New York Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, we will send a notice of guaranteed
delivery to holders who wish to tender their notes according to the guaranteed
delivery procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders may withdraw
tenders of notes at any time prior to 5:00 p.m., New York City time, on the
expiration date. To withdraw a tender of notes in the exchange offer, the
exchange agent must receive a telegram, telex, letter or facsimile transmission
notice of withdrawal at its address in this prospectus prior to 5:00 p.m., New
York City time, on the expiration date. Any notice of withdrawal must:
(1) specify the name of the person having deposited the notes to be withdrawn;
(2) identify the notes to be withdrawn (including the certificate number(s) and
principal amount of these notes, or, in the case of notes transferred by
book-entry transfer, the name and number of the account at the book-entry
transfer facility to be credited);
(3) be signed by the holder in the same manner as the original signature on the
letter of transmittal by which the notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the trustee with respect to the notes register the
transfer of notes into the name of the person withdrawing the tender; and
(4) specify the name in which any notes are to be registered, if different from
that of the person who deposited the notes.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of these notices. Our determination shall be final
and binding on all parties. We will not deem notes so withdrawn to have been
validly tendered for purposes of the exchange offer. We will not issue exchange
notes for withdrawn notes unless you validly retender the withdrawn notes. We
will return any notes that have been tendered but that are not accepted for
exchange to the holder of the notes at our cost as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. You may
retender properly withdrawn notes by following one of the procedures described
above under the heading "Procedures for Tendering Old Notes" at any time prior
to the expiration date.
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<PAGE>
CONDITIONS
Notwithstanding any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange notes for, any notes, and may
terminate or amend the exchange offer as provided in this prospectus before the
acceptance of the notes, if:
(1) any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the exchange offer that, in
our sole judgment, might materially impair our ability to proceed with the
exchange offer or any development has occurred in any existing action or
proceeding that may be harmful to us or any of our subsidiaries; or
(2) any law, statute, rule, regulation or interpretation by the staff of the
Securities and Exchange Commission is proposed, adopted or enacted, that, in
our sole judgment, might impair our ability to proceed with the exchange
offer or impair the contemplated benefits of the exchange offer to us; or
(3) any governmental approval has not been obtained, that we believe, in our
sole discretion, is necessary for the consummation of the exchange offer as
outlined in this prospectus.
If we determine in our sole discretion that any of the conditions are not
satisfied, we may:
(1) refuse to accept any notes and return all tendered notes to the tendering
holders;
(2) extend the exchange offer and retain all notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of holders
to withdraw their notes; or
(3) waive the unsatisfied conditions of the exchange offer and accept all
properly tendered notes that have not been withdrawn.
EXCHANGE AGENT
Norwest Bank of Minnesota, National Association has been appointed as the
exchange agent for the exchange offer. You should direct all
- executed letters of transmittal,
- questions,
- requests for assistance,
- requests for additional copies of this prospectus or of the letter of
transmittal and
- requests for Notices of Guaranteed Delivery
to the exchange agent addressed as follows:
<TABLE>
<S> <C> <C>
BY REGULAR MAIL OR BY HAND: BY REGISTERED OR
OVERNIGHT COURIER: CERTIFIED MAIL:
Norwest Bank Minnesota, NA Norwest Bank Minnesota, NA Norwest Bank Minnesota, NA
Corporate Trust Operation 12th Floor - NorthStar East Corporate Trust Operations
MAC N9303-121 Building MAC N9303-111
Sixth & Marquette Avenue Corporate Trust Services P.O. Box 1517
Minneapolis, Minnesota 55479 608 Second Avenue South Minneapolis, Minnesota 55480
Minneapolis, Minnesota
BY FACSIMILE
(FOR ELIGIBLE INSTITUTIONS
ONLY):
(612) 667-4927
CONFIRM BY PHONE:
(612) 667-9764
</TABLE>
DELIVERY OTHER THAN THOSE ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
94
<PAGE>
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. We are mailing the
principal solicitation. However, our officers and regular employees and those of
our affiliates may make additional solicitation by telegraph, telecopy,
telephone or in person.
We have not retained any dealer-manager in connection with the exchange
offer. We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services. We will reimburse the exchange
agent for its reasonable out-of-pocket expenses.
We will pay the cash expenses incurred in connection with the exchange
offer. These expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the old
notes on the date of exchange. The carrying value is 94.638% of face value at
March 31, 2000. Accordingly, we will recognize no gain or loss for accounting
purposes. The expenses of the exchange offer will be expensed.
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection with the exchange. However, holders who
instruct us to register exchange notes in the name of, or request that old notes
not tendered or not accepted in the exchange offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax on that transfer.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF EXCHANGE NOTES
The notes that are not exchanged for exchange notes under the exchange
offer will remain restricted securities. Accordingly, those notes may be resold
only:
(1) to us, upon redemption of the notes or otherwise;
(2) so long as the notes are eligible for resale pursuant to Rule 144A, to a
person inside the United States who is a qualified institutional buyer
according to Rule 144A under the Securities Act of 1933 or pursuant to
another exemption from the registration requirements of the Securities Act
of 1933, based upon an opinion of counsel reasonably acceptable to us;
(3) outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act of 1933; or
(4) under an effective registration statement under the Securities Act of 1933
in each case in accordance with any applicable securities laws of any state of
the United States.
RESALES OF THE EXCHANGE NOTES
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes will be allowed to resell the
exchange notes to the public without further registration under the Securities
Act of 1933 and without delivering a prospectus that satisfies the requirements
of Section 10 of the Securities Act of 1933. The holder, other than a person
that is our "affiliate" within the meaning of Rule 405 under the Securities Act
of 1933, who receives exchange notes in exchange for notes in the ordinary
course of business and who is not participating, need not intend to participate
or have an arrangement or understanding with any person to participate in the
distribution of the exchange notes. However, if any holder acquires exchange
notes in the exchange offer for the
95
<PAGE>
purpose of distributing or participating in a distribution of the exchange
notes, the holder cannot rely on the position of the staff of the Securities and
Exchange Commission enunciated in the no-action letters or any similar
interpretive letters. A holder who acquires exchange notes in order to
distribute them must comply with the registration and prospectus delivery
requirements of the Securities Act of 1933 in connection with any resale
transaction, unless an exemption from registration is otherwise available.
Further, each broker-dealer that receives exchange notes for its own account in
exchange for notes as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection with
any resale of the exchange notes.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, including the opinion of counsel described
below, is based upon current provisions of the Internal Revenue Code of 1986, as
amended, applicable Treasury regulations, judicial authority and administrative
rulings and practice. The Internal Revenue Service may take a contrary view, and
no ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the following statements and conditions. Any changes or interpretations
may or may not be retroactive and could affect the tax consequences to holders.
Some holders, including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States, may be subject to special rules not
discussed below. We recommend that each holder consult the holder's own tax
advisor as to the particular tax consequences of exchanging that holder's old
notes for exchange notes, including the applicability and effect of any state,
local or foreign tax laws.
Kirkland & Ellis has advised us that in its opinion, the exchange of the
old notes for exchange notes pursuant to the exchange offer will not be treated
as an "exchange" for federal income tax purposes because the exchange notes will
not be considered to differ materially in kind or extent from the old notes.
Rather, the exchange notes received by a holder will be treated as a
continuation of the old notes in the hands of the holder. As a result, there
will be no federal income tax consequences to holders solely as a result of the
exchange of the old notes for exchange notes pursuant to the exchange offer.
96
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account under
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of exchange notes.
This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of exchange notes
received in exchange for old notes if the old senior subordinated notes were
acquired as a result of market-making activities or other trading activities.
We and our guarantor subsidiaries have agreed to make this prospectus, as
amended or supplemented, available to any broker-dealer to use in connection
with any resale for a period of at least 90 days after the expiration date. In
addition, until September 7, 2000, all dealers effecting transactions in the
exchange notes may be required to deliver a prospectus.
Neither we nor our guarantor subsidiaries will receive any proceeds from
any sale of exchange notes by broker-dealers. Exchange notes received by
broker-dealers for their own accounts under the exchange offer may be sold from
time to time in one or more transactions
- in the over-the-counter market,
- in negotiated transactions,
- through the writing of options on the exchange notes or a combination
of methods of resale,
- at market prices prevailing at the time of resale,
- at prices related to prevailing market prices or
- at negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers. Brokers or dealers may receive compensation in the form of commissions
or concessions from any broker-dealer or the purchasers of any exchange notes.
An "underwriter" within the meaning of the Securities Act of 1933 includes
(1) any broker-dealer that resells exchange notes that were received by it for
its own account pursuant to the exchange offer or
(2) any broker or dealer that participates in a distribution of the exchange
notes.
Any profit on any resale of exchange notes and any commissions or concessions
received by any persons may be deemed to be underwriting compensation under the
Securities Act of 1933. The letter of transmittal states that, by acknowledging
that it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act of 1933.
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes will be allowed to resell the
exchange notes to the public without further registration under the Securities
Act of 1933 and without delivering to the purchasers of the exchange notes a
prospectus that satisfies the requirements of Section 10 of the Securities Act
of 1933. The holder (other than a person that is an "affiliate" of O'Sullivan
Industries, Inc. within the meaning of Rule 405 under the Securities Act of
1933) who receives exchange notes in exchange for old notes in the ordinary
course of business and who is not participating, need not intend to participate
or have an arrangement or understanding with person to participate in the
distribution of the exchange notes.
However, if any holder acquires exchange notes in the exchange offer for
the purpose of distributing or participating in a distribution of the exchange
notes, the holder cannot rely on the position of the staff of the Securities and
Exchange Commission enunciated in no-action letters or any similar interpretive
letters. The holder must comply with the registration and prospectus delivery
requirements of the Securities Act of 1933 in connection with any resale
transaction. A secondary resale transaction should be covered by an effective
registration statement containing the selling security holder information
required by Item 507 or 508, as
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<PAGE>
applicable, of Regulation S-K under the Securities Act of 1933, unless an
exemption from registration is otherwise available.
Further, each broker-dealer that receives exchange notes for its own
account in exchange for old notes, where the old notes were acquired by the
participating broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of any exchange notes. We and each of our guarantor
subsidiaries have agreed, for a period of not less than 90 days from the
consummation of the exchange offer, to make this prospectus available to any
broker-dealer for use in connection with any resale.
For a period of not less than 90 days after the expiration date we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests those documents
in the letter of transmittal. We and each of our guarantor subsidiaries have
jointly and severally agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the old notes, other
than commissions or concessions of any brokers or dealers. We will indemnify the
holders of the old notes against liabilities under the Securities Act of 1933,
including any broker-dealers.
LEGAL MATTERS
Certain legal matters with respect to the validity of the notes offered
hereby will be passed upon for O'Sullivan Industries, Inc. by Kirkland & Ellis,
New York, New York.
EXPERTS
The consolidated financial statements as of June 30, 1999 and 1998 and
for each of the three years in the period ended June 30, 1999 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We and our guarantor subsidiaries have filed with the Securities and
Exchange Commission a Registration Statement on Form S-4, the "Exchange Offer
Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules to the Registration Statement on Form S-4, pursuant to the
Securities Act of 1933, and the rules and regulations promulgated by that act,
covering the exchange notes being offered. This prospectus does not contain all
the information in the exchange offer registration statement. For further
information with respect to O'Sullivan Industries, Inc. and O'Sullivan
Industries - Virginia, Inc., and the exchange offer, reference is made to the
exchange offer registration statement. Statements made in this prospectus as to
the contents of any contract, agreement or other document referred to may
constitute only a summary of the material provisions. For a fuller understanding
and description of each contract, agreement or other document filed as an
exhibit to the exchange offer registration statement, we encourage you to read
the documents contained in the exhibits.
The exchange offer registration statement, including the exhibits to it,
can be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Securities and
Exchange Commission at Seven World Trade Center, Suite 1300, New York, New York
10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of these materials can be obtained from the Public Reference Section of
the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the Securities and Exchange Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of this Web site is: http://www.sec.gov.
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<PAGE>
Our parent corporation, O'Sullivan Holdings, is currently and following
completion of this exchange offer we will also be subject to the informational
requirements of the Securities Exchange Act of 1934, and in accordance with
these requirements will be required to file periodic reports and other
information with the Securities and Exchange Commission. Our obligation to file
periodic reports and other information with the Securities and Exchange
Commission will be suspended if the exchange notes are held of record by fewer
than 300 holders as of the beginning of our fiscal year other than the fiscal
year in which the exchange offer registration statement is declared effective.
We will nevertheless be required to continue to file reports with the
Securities and Exchange Commission if the exchange notes are listed on a
national securities exchange. In the event we cease to be subject to the
informational requirements of the Securities Exchange Act of 1934, we will be
required under the indenture to continue to file with the Securities and
Exchange Commission the annual and quarterly reports, information, documents or
other reports, including reports on Forms 10-K, 10-Q and 8-K, that would be
required pursuant to the informational requirements of the Securities Exchange
Act of 1934.
Under the indenture, we shall file with the trustee annual, quarterly and
other reports after it files reports with the Securities and Exchange
Commission. Annual reports delivered to the trustee and the holders of exchange
notes will contain financial information that has been examined and reported
upon, with an opinion expressed by an independent public accountant. We will
also furnish any other reports as may be required by law.
Information contained in this prospectus contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," or "anticipates" or the
negative thereof or other similar terminology, or by discussions of strategy.
Our actual results could differ materially from those anticipated by any of
these forward-looking statements as a result of factors described in the "Risk
Factors" beginning on page 7 and elsewhere in this prospectus.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Cash Flows..................... F-5
Consolidated Statement of Changes in Stockholder's
Equity.................................................. F-6
Notes to Consolidated Financial Statements................ F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets..................... F-22
Unaudited Consolidated Statements of Operations........... F-23
Unaudited Consolidated Statements of Cash Flows........... F-24
Unaudited Consolidated Statement of Changes in
Stockholder's Equity.................................... F-25
Notes to Unaudited Consolidated Financial Statements...... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
O'Sullivan Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholder's equity present fairly, in all material respects, the financial
position of O'Sullivan Industries, Inc. (a wholly-owned subsidiary of O'Sullivan
Industries Holdings, Inc.) and its subsidiaries (the "Company") at June 30, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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 amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Fort Worth, Texas
August 4, 1999, except as
to Note 3 and paragraphs
one through five of Note 12
which are as of October 28, 1999
F-2
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS,
EXCEPT FOR SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,740 $ 1,810
Trade receivables, net of allowance for doubtful
accounts of $2,416 and $2,289, respectively............. 63,268 61,548
Inventories, net.......................................... 56,134 46,727
Prepaid expenses and other current assets................. 3,810 3,762
-------- --------
TOTAL CURRENT ASSETS.................................. 126,952 113,847
Property, plant and equipment, net.......................... 96,684 93,378
Other assets................................................ 1,909 --
Goodwill, net of accumulated amortization................... 41,422 43,089
-------- --------
TOTAL ASSETS.......................................... $266,967 $250,314
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,416 $ 14,031
Current portion of long-term debt......................... 4,000 4,000
Accrued liabilities....................................... 24,695 22,613
Income taxes payable...................................... 1,579 310
-------- --------
TOTAL CURRENT LIABILITIES............................. 41,690 40,954
Long-term debt, less current portion........................ 22,000 30,000
Other non-current liabilities............................... 1,909 --
Deferred income taxes....................................... 16,232 15,690
Intercompany payable........................................ 28,033 28,445
-------- --------
TOTAL LIABILITIES..................................... 109,864 115,089
Commitments and contingent liabilities (Note 12)
Stockholder's equity:
Common stock; $1.00 par value, 100 shares authorized,
issued and outstanding.................................. -- --
Additional paid-in capital................................ 66,944 66,944
Retained earnings......................................... 90,202 68,317
Accumulated other comprehensive loss...................... (43) (36)
-------- --------
TOTAL STOCKHOLDER'S EQUITY............................ 157,103 135,225
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $266,967 $250,314
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $379,632 $339,407 $321,490
Costs and expenses:
Cost of sales............................................. 267,630 244,086 230,578
Selling, marketing and administrative..................... 74,962 69,212 62,137
-------- -------- --------
Total costs and expenses.................................... 342,592 313,298 292,715
-------- -------- --------
Operating income.......................................... 37,040 26,109 28,775
Other income (expense):
Interest expense.......................................... (3,110) (2,847) (2,642)
Interest income........................................... 266 379 315
-------- -------- --------
Income before income tax provision.......................... 34,196 23,641 26,448
Income tax provision........................................ 12,311 8,742 10,050
-------- -------- --------
Net income.................................................. 21,885 14,899 16,398
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $21,885 $14,899 $16,398
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 13,962 11,560 9,960
Bad debt expense........................................ 524 1,581 3,178
Loss on disposal of assets.............................. 223 11 599
Deferred income taxes................................... 481 414 1,000
Employee option amortization............................ 749 749 749
Retirement charge....................................... 160 -- --
Changes in current assets and liabilities:
Trade receivables....................................... (2,244) (4,468) (8,269)
Inventories............................................. (9,407) (2,569) (2,677)
Other assets............................................ 13 (335) (792)
Accounts payable, income taxes payable and other
liabilities........................................... (1,049) 5,322 3,366
------- ------- -------
Net cash flows provided by operating activities....... 25,297 27,164 23,512
------- ------- -------
Cash flows used for investing activities:
Capital expenditures.................................... (15,779) (28,359) (15,825)
------- ------- -------
Cash flows used for financing activities:
Repayment of long-term debt............................. (14,000) -- --
Borrowings on long-term debt............................ 10,000 -- --
Net addition to (repayment of) revolver................. (4,000) 4,000 --
Advances (repayment) on intercompany debt............... 412 (7,970) (1,218)
------- ------- -------
Net cash flows used for financing activities.......... (7,588) (3,970) (1,218)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 1,930 (5,165) 6,469
Cash and cash equivalents, beginning of year................ 1,810 6,975 506
------- ------- -------
Cash and cash equivalents, end of year...................... $ 3,740 $ 1,810 $ 6,975
======= ======= =======
Supplemental cash flow information:
Interest paid........................................... $ 3,110 $ 2,847 $ 2,631
Income taxes paid....................................... 10,150 11,650 5,983
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN RETAINED COMPREHENSIVE STOCKHOLDER'S COMPREHENSIVE
CAPITAL EARNINGS INCOME (LOSS) EQUITY INCOME
---------- --------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996......................... $66,944 $ 37,020 $ 18 $103,982
Net income................................... 16,398 16,398 $16,398
Other comprehensive income................... (5) (5) (5)
------- --------- -------- -------- -------
Balance, June 30, 1997......................... 66,944 53,418 13 120,375 $16,393
=======
Net income................................... 14,899 14,899 $14,899
Other comprehensive income................... (49) (49) (49)
------- --------- -------- -------- -------
Balance, June 30, 1998......................... 66,944 68,317 (36) 135,225 $14,850
=======
Net income................................... 21,885 21,885 $21,885
Other comprehensive income................... (7) (7) (7)
------- --------- -------- -------- -------
Balance, June 30, 1999......................... $66,944 $ 90,202 $ (43) $157,103 $21,878
======= ========= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION.
O'Sullivan Industries, Inc. ("O'Sullivan"), a wholly-owned subsidiary of
O'Sullivan Industries Holdings, Inc. ("O'Sullivan Holdings") is a Delaware
corporation, and a domestic producer of ready-to-assemble ("RTA") furniture.
O'Sullivan's RTA furniture includes desks, computer tables, cabinets, home
entertainment centers, audio equipment racks, microwave oven carts and a wide
variety of other RTA furniture for use in the home, office and home office. The
products are distributed primarily through office superstores, discount mass
merchants, mass merchants (department stores and catalog showrooms), home
centers, electronics retailers, furniture stores, OEM and internationally.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
BASIS OF PRESENTATION: The accompanying consolidated financial
statements include the accounts of O'Sullivan and its wholly owned subsidiaries.
They are presented as if the Company had existed as a corporation separate from
O' Sullivan Holdings during the periods presented and include the historical
assets, liabilities, revenues and expenses that are directly related to the
Company's operations. All material intercompany transactions have been
eliminated. O'Sullivan Holdings has no assets other than the stock of O'Sullivan
and an intercompany receivable from O'Sullivan. Expenses incurred by O'Sulivan
Holdings for the benefit of O'Sullivan are paid by O'Sullivan.
The financial information included in the financial statements may not
necessarily reflect what the financial position, results of operations or cash
flows would have been if the Company had been a separate, stand-alone company
during the periods presented.
PERVASIVENESS OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and related revenues and expenses, and disclosure of gain and loss
contingencies at the date of the financial statements. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on
hand and all highly liquid investments with original maturities of three months
or less.
BUSINESS AND CREDIT RISK CONCENTRATIONS: The largest five customer
accounts receivable balances accounted for approximately 62% and 56% of the
trade receivable balance at June 30, 1999 and 1998, respectively. Credit is
extended to customers based on evaluation of the customer's financial condition,
generally without requiring collateral. Exposure to losses on receivables is
dependent on each customer's financial condition. Therefore, O'Sullivan would be
exposed to a large loss if one of its major customers were not able to fulfill
its financial obligations. O'Sullivan maintains certain limited credit insurance
which helps reduce, but not eliminate, exposure to potential credit losses. In
addition, O'Sullivan monitors its exposure for credit losses and maintains
allowances for anticipated losses.
REVENUES: Revenue is recognized at the date product is shipped to
customers.
INVENTORIES: Inventories are stated at the lower of cost, determined on
a first-in, first-out (FIFO) basis, or market.
PROPERTY, PLANT AND EQUIPMENT: Depreciation and amortization of
property, plant and equipment is calculated using the straight-line method,
which amortizes the cost of the assets over their estimated useful lives. The
ranges of estimated useful lives are: buildings - 30 to 40 years; machinery and
equipment - 3 to 10 years; leasehold improvements - the lesser of the life of
the lease or asset. Maintenance and repairs are charged to expense as incurred.
Renewals and betterments which materially prolong the useful lives of the assets
are
F-7
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED)
capitalized. The cost and related accumulated depreciation of property retired
or sold are removed from the accounts, and gains or losses on disposal are
recognized in the statement of operations.
AMORTIZATION OF EXCESS PURCHASE PRICE OVER NET TANGIBLE ASSETS OF
BUSINESSES ACQUIRED: Cost in excess of net assets acquired is amortized over a
40-year period using the straight-line method. Accumulated amortization at
June 30, 1999 and 1998 approximated $26,419,000 and $24,752,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets (I.E., property,
plant and equipment and goodwill) held and used are reviewed for possible
impairment whenever events or changes in circumstances indicate that the net
book value of the asset may not be recoverable. O'Sullivan recognizes an
impairment loss if the sum of the expected future cash flows (undiscounted and
before interest) from the use of the asset is less than the net book value of
the asset. The amount of the impairment loss is measured as the difference
between the net book value of the assets and the estimated fair value of the
related assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques, as appropriate. Unless otherwise disclosed, the fair value
of financial instruments approximates their recorded values due primarily to the
short-term nature of their maturities.
DERIVATIVES: O'Sullivan utilizes derivative financial instruments to
reduce interest rate risks. O'Sullivan does not hold or issue derivative
financial instruments for trading purposes. Amounts to be paid or received under
the agreement are accrued as interest rates change and are recognized over the
life of the agreement as adjustments to interest expense.
ADVERTISING COSTS: Advertising costs are expensed the first time the
advertising takes place. Cooperative advertising costs are accrued and expensed
when the related revenues are recognized. Advertising expense for fiscal 1999,
1998 and 1997 was $21,147,000, $19,625,000 and $15,248,000, respectively.
INCOME TAXES: Deferred taxes are provided on the liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss carryforwards and deferred tax liabilities 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 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.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE: Environmental remediation and
compliance expenditures that relate to current operations are expensed or
capitalized, as appropriate. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenue generation are expensed. Liabilities are recognized when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated. Generally, the timing of these accruals coincides with completion of
a feasibility study or O'Sullivan's commitment to a formal plan of action. To
date, environmental expenditures have not been material, and management is not
aware of any material environmental related contingencies.
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS: During the fourth quarter of
fiscal 1997, bad debt charges approximating $700,000, net of tax, were recorded
due to the bankruptcy filing of a major customer.
ACCOUNTING FOR STOCK-BASED COMPENSATION: O'Sullivan accounts for stock
based compensation pursuant to the intrinsic value based method of accounting as
prescribed by Accounting Principles Board Opinion No. 25,
F-8
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED)
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Employees of O'Sullivan have been
granted stock options to purchase O'Sullivan Holdings common stock. O'Sullivan
has made pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting defined in Statement of Financial
Accounting Standards ("SFAS") No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION:
("SFAS 123") had been applied. See Note 9.
COMPREHENSIVE INCOME: Effective July 1, 1998, O'Sullivan adopted SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. O'Sullivan has reported the components
of comprehensive income in the accompanying consolidated statement of changes in
stockholder's equity. Comprehensive income is defined as the change in equity
(net assets) of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. For O'Sullivan, other comprehensive income consists of
foreign currency translation adjustments. The tax benefit related to other
comprehensive loss approximated $4,000, $31,000 and $3,000 for the years ended
June 30, 1999, 1998 and 1997, respectively.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS: In June 1999, the FASB issued
SFAS No. 138, which delayed the effective date of SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Accordingly, O'Sullivan will
adopt SFAS No. 133 effective July 1, 2000. This new accounting standard will
require that derivative instruments be measured at fair value and recognized in
the balance sheet as either assets or liabilities, as the case may be. The
treatment of changes in the fair value of a derivative (I.E., gains and losses)
will depend on its use and designation. O'Sullivan will initially report gains
and losses on derivatives designated as hedges against the cash flow effect of a
forecasted transaction as a component of other comprehensive income and,
subsequently, reclassify the gains and losses into earnings when the forecasted
transaction affects earnings. If SFAS 133 had been adopted on July 1, 1998, the
net change in the interest swap would reduce other accumulated comprehensive
income at June 30, 1999 by $336,000 (a current period increase to comprehensive
income of $267,000 offset by an accumulated loss at June 30, 1998 of $603,000).
Management has no intention of retiring the swap prior to the retirement of the
variable rate industrial revenue bonds.
RECLASSIFICATIONS: Certain items on the prior years financial statements
have been reclassified to conform with the current years presentation.
NOTE 3 - PENDING MERGER.
On March 24, 1999, O'Sullivan Holdings announced that members of its
senior management team, in conjunction with a financial buyer, had made a
proposal to O'Sullivan Holdings' Board of Directors to acquire O'Sullivan
Holdings, subject to requisite financing. On May 18, 1999, O'Sullivan Holdings
announced that it had entered into a definitive merger agreement with an
investment group that includes members of O'Sullivan's senior management and
Bruckmann, Rosser, Sherrill & Co., LLC ("BRS"). The merger agreement was
subsequently amended on October 18, 1999.
Under the amended merger agreement, O'Sullivan Holdings will be the
surviving entity after the merger. Certain directors and members of senior
management are participating with BRS in the buyout of existing O'Sullivan
Holdings stockholders. After the completion of the merger, the management
participants in the buyout will own a total of approximately 27.1% of the common
stock of the surviving corporation. BRS and its affiliates will own the balance.
The amended merger agreement stipulates that each share of outstanding
common stock of O'Sullivan Holdings will be exchanged for $16.75 in cash and one
share of O'Sullivan Holdings' senior preferred stock with a liquidation value of
$1.50 per share. Unpaid dividends, accruing at the stated rate of 12.0% per
annum, will be
F-9
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - PENDING MERGER. (CONTINUED)
accumulated and compounded at the same rate during the period that the
O'Sullivan Holdings' senior preferred stock is outstanding. Some of the shares
of O'Sullivan Holdings common stock and options held by the management
participants in the buyout will be exchanged for O'Sullivan Holdings' common
stock, O'Sullivan Holdings' junior preferred stock and options to acquire junior
preferred stock of O'Sullivan Holdings.
O'Sullivan Holdings will require approximately $357.0 million to complete
the merger and pay related fees and expenses, of which approximately $270.0
million will be funded via debt proceeds from borrowings of both O'Sullivan
Holdings and O'Sullivan. The completion of the merger is subject to stockholder
approval, obtaining suitable financing and the absence of material adverse
changes in O'Sullivan Holdings and O'Sullivan's business.
NOTE 4 - INVENTORY.
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $39,623 $26,892
Work in process............................................. 6,263 6,835
Raw materials............................................... 10,248 13,000
------- -------
$56,134 $46,727
======= =======
</TABLE>
NOTE 5 - PROPERTY, PLANT & EQUIPMENT.
Property, plant, and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,034 $ 1,034
Buildings and improvements.................................. 42,289 41,216
Machinery and equipment..................................... 111,505 92,950
Construction in progress.................................... 3,068 10,466
------- -------
157,896 145,666
Less: Accumulated depreciation.............................. (61,212) (52,288)
------- -------
$96,684 $93,378
======= =======
</TABLE>
Depreciation and amortization expense was $12,295,000, $9,893,000 and
$8,293,000 for fiscal 1999, 1998, and 1997, respectively, of which $9,912,000,
$8,200,000, and $7,309,000 respectively, was included in cost of sales.
In fiscal 1999, equipment with a net book value of $273,000 was disposed
of for $50,000. In fiscal 1997, machinery and tooling with a net book value of
$743,000 was disposed of for $46,000 and a note receivable of $98,000. The
losses are classified as costs of sales in the accompanying consolidated
statement of operations.
F-10
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - ACCRUED LIABILITIES.
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accrued employee compensation............................... $14,591 $11,467
Accrued advertising......................................... 9,055 9,402
Other current liabilities................................... 1,049 1,744
------- -------
$24,695 $22,613
======= =======
</TABLE>
NOTE 7 - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS.
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revolving credit agreement.................................. $ -- $ 4,000
Senior notes................................................ 16,000 20,000
Industrial revenue bonds.................................... 10,000 10,000
------- -------
Total debt.................................................. 26,000 34,000
Less current portion of senior notes........................ (4,000) (4,000)
------- -------
Total long-term debt........................................ $22,000 $30,000
======= =======
</TABLE>
Aggregate annual principal payments subsequent to June 30, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
2000........................... $ 4,000
2001........................... 4,000
2002........................... 4,000
2003........................... 4,000
2004........................... --
Thereafter..................... 10,000
-------
$26,000
=======
</TABLE>
REVOLVING CREDIT AGREEMENT - O'Sullivan has a variable-rate, unsecured
$25.0 million revolving credit facility with a bank that expires on
February 28, 2001. As of June 30, 1999 there were no borrowings outstanding
under this facility.
SENIOR NOTES - O'Sullivan issued $20.0 million of 8.01% notes in a 1995
private placement to certain insurance companies. These notes are payable in
annual $4.0 million increments from fiscal 1999 to fiscal 2003. The first
$4.0 million payment on the notes was made in May 1999. Of the $16.0 million
remaining on these notes, $12.0 million is classified as long-term and
$4.0 million is classified as the current portion of long-term debt.
Under the terms of the Note Purchase Agreements, O'Sullivan is required
to meet certain financial ratios, including a funded debt-to-earnings ratio
requirement, a minimum net worth requirement and an earnings to fixed charges
ratio requirement. The agreements also contain a prepayment penalty.
INDUSTRIAL REVENUE BONDS - A subsidiary of O'Sullivan was the obligor on
$10.0 million of 8.25% industrial revenue bonds ("IRB's") that were to mature on
October 1, 2008. On October 1, 1998, O'Sullivan Industries - Virginia, Inc.
refinanced these bonds with new, ten year variable interest rate IRB's. The
$300,000 premium on the early retirement of the bonds was recognized as a loss
in the second quarter of fiscal 1999 and
F-11
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS. (CONTINUED)
is included in interest expense in the accompanying consolidated statement of
operations. Interest on the IRB's is paid quarterly. The loan is secured by a
$10.3 million standby letter of credit under the revolving credit facility.
Effective October 1, 1998, O'Sullivan entered into a forward starting
interest rate swap agreement with a notional principal amount of $10.0 million
which terminates October 1, 2008. Pursuant to the agreement, O'Sullivan pays a
fixed rate of 7.13% and receives a floating interest rate for the duration of
the swap agreement (5.0% at June 30, 1999). The swap has the effect of hedging
O'Sullivan's exposure to an increase in interest rates under the refinanced
IRB's discussed above. O'Sullivan has designated the swap as a hedge against
future cash flow exposure. The fair value of this interest rate swap at
June 30, 1999 was approximately $525,000. This amount represents the amount
O'Sullivan would have to pay to terminate the swap. This amount has not been
recognized in the accompanying consolidated financial statements since it is
accounted for as a hedge.
NOTE 8 - INCOME TAXES.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................. $11,282 $7,886 $ 9,955
State................................................... 548 442 473
------- ------ -------
11,830 8,328 10,428
Deferred.................................................... 481 414 (378)
------- ------ -------
$12,311 $8,742 $10,050
======= ====== =======
</TABLE>
The following table reconciles O'Sullivan's federal corporate statutory
rate and its effective income tax rate:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory rate.............................................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................. 1.6 1.7 1.7
Goodwill amortization....................................... 1.1 1.3 1.2
Other, net.................................................. (1.7) (1.0) 0.1
---- ---- ----
Effective tax rate.......................................... 36.0% 37.0% 38.0%
==== ==== ====
</TABLE>
F-12
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - INCOME TAXES. (CONTINUED)
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Bad debt reserve.......................................... $ 895 $ 847
Insurance reserves........................................ 592 755
Accrued compensation...................................... 1,184 898
Other..................................................... 154 93
-------- --------
Total deferred tax assets............................... 2,825 2,593
-------- --------
Deferred tax liabilities:
Depreciation and amortization............................. (16,318) (15,690)
Inventories............................................... (98) (39)
Other..................................................... (372) (346)
-------- --------
Total deferred tax liabilities.......................... (16,788) (16,075)
-------- --------
Net deferred tax liability.............................. $(13,963) $(13,482)
======== ========
Reported as:
Current assets (included in prepaid expenses and other
current assets)........................................... $ 2,269 $ 2,208
Noncurrent liabilities-deferred income taxes................ (16,232) (15,690)
-------- --------
Net deferred tax liability.............................. $(13,963) $(13,482)
======== ========
</TABLE>
FAS 109 provides that the allocation of current and deferred tax expense
to each member of a consolidated group should be made on a systematic, rational
method. The tax provision and the deferred tax assets/liabilities presented in
the accompanying consolidated financial statements have been determined on a
stand-alone basis as allowed pursuant to FAS 109. O'Sullivan does not file a
consolidated tax return with O'Sullivan Holdings.
In connection with the 1994 initial public offerings of O'Sullivan
Holdings' common stock, Tandy, TE Electronics Inc. and O'Sullivan Holdings
entered into a Tax Sharing and Tax Benefit Reimbursement Agreement. Pursuant to
the tax agreement, Tandy is primarily responsible for all U.S. federal income
taxes, state income taxes and foreign income taxes with respect to O'Sullivan
Holdings for all periods ending on or prior to the date of consummation of the
Offerings and for audit adjustments to such federal income and foreign income
taxes. O'Sullivan Holdings is responsible for all other taxes owing with respect
to O'Sullivan Holdings, including audit adjustments to state and local income
and for franchise taxes.
O'Sullivan Holdings and Tandy made an election under Sections 338(g) and
338(h)(10) of the Internal Revenue Code with the effect that the tax basis of
O'Sullivan Holdings' and O'Sullivans' assets was increased to the deemed
purchase price of the assets. This additional tax basis results in increased
income tax deductions and, accordingly, reduced income taxes payable by
O'Sullivan Holdings. Pursuant to the tax agreement, O'Sullivan Holdings pays
Tandy nearly all of the federal tax benefit expected to be realized with respect
to such additional basis. Amounts payable to Tandy pursuant to the tax agreement
are recorded as current federal income tax expense in the accompanying
consolidated statements of operations. Income tax expense thus approximates the
amount which would be recognized by O'Sullivan Holdings in the absence of the
tax agreement. Although the
F-13
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - INCOME TAXES. (CONTINUED)
amount of the payment required to be made in a particular year under the tax
agreement may differ somewhat from the difference in that tax year between
O'Sullivan Holdings' actual taxes and the taxes that O'Sullivan Holdings would
have owed had the increase in basis not occurred, the aggregate amount of
payments required to be made by O'Sullivan Holdings to Tandy over the life of
the tax agreement will not differ materially from the difference over the life
of the tax agreement between O'Sullivan Holdings' actual taxes and the amount of
taxes that O'Sullivan Holdings would have owed had the increase in basis not
occurred. Consequently, such payments should have no effect on O'Sullivan
Holdings' earnings and should not have a material effect on its cash flow. The
tax agreement provides for adjustments to the amount of tax benefit payable in
the event of certain material transactions, such as a business combination or
significant disposition of assets. During fiscal 1999, 1998 and 1997,
$9.7 million, $11.7 million and $6.0 million, respectively, were paid to
O'Sullivan Holdings and ultimately, Tandy pursuant to this agreement. O'Sullivan
is responsible for, and must pay O'Sullivan Holdings for, any taxes due with
respect to Tandy Corporation ("Tandy") pursuant to a tax sharing agreement
between Tandy and O'Sullivan Holdings. See Note 12.
NOTE 9 - STOCK OPTIONS.
Under O'Sullivan Holdings' Amended and Restated 1994 Incentive Stock
Plan, designated officers, employees, employee directors and consultants of
O'Sullivan Holdings and its subsidiaries are eligible to receive awards in the
form of incentive stock options, nonqualified stock options, stock appreciation
rights, restricted stock grants or performance awards. The purchase price of
common stock subject to an option shall not be less than the market value of the
stock on the date of the grant and for a term not to exceed ten years. An
aggregate of 2,000,000 shares of common stock have been reserved for issuance
under the Plan, no more than 300,000 of which may be awarded as restricted stock
or performance awards. In fiscal 1994, O'Sullivan Holdings awarded restricted
shares of common stock totaling 19,950 shares. The restrictions on these shares
lapsed in fiscal 1999.
In July 1996, the compensation committee granted, subject to stockholder
approval, options to purchase 625,250 shares of O'Sullivan Holdings common stock
to O'Sullivan's officers and other key employees. Depending on whether certain
performance objectives were met, the options would become exercisable in
one-third increments on each of the first three anniversaries of the date of the
grant and would expire ten years after the date of the grant. To the extent
performance objectives were not met, the options would become exercisable on
August 10, 2003 and would expire September 10, 2003. As a result of O'Sullivan's
performance in fiscal 1997, the options became exercisable over three years
through fiscal 1999 and will expire in July 2006. The stockholders approved the
grants in November 1996; accordingly, O'Sullivan recognized compensation expense
of approximately $2.2 million over the three year vesting period, which amount
was based on the difference between the exercise price and the fair market value
of common stock on the date of stockholder approval. O'Sullivan recognized
compensation expense of $749,000 in each of fiscal 1999, fiscal 1998 and fiscal
1997 related to the granting of these options.
Additionally, during fiscal 1997, the Board of Directors granted options
to purchase 284,150 shares of O'Sullivan Holdings common stock that were not
based on performance objectives. Full vesting terms ranged from three to five
years with the options expiring ten years from the date of the grant. The
exercise prices for these options were equal to the fair market value on the
respective dates of grant; therefore, no compensation expense was recognized.
F-14
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - STOCK OPTIONS. (CONTINUED)
SUMMARY OF STOCK OPTION TRANSACTIONS
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
(SHARE AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.......................... 1,529 $ 9.77 1,210 $ 7.61 324 $ 9.14
Grants.................................................... 81 $10.60 368 $ 15.9 904 $ 7.31
Exercised................................................. (14) $ 7.23 (38) $ 7.13 (1) $ 7.5
Canceled.................................................. (28) $10.00 (11) $ 9.32 (17) $ 8.02
----- ----- -----
Outstanding at end of year................................ 1,568 $ 9.84 1,529 $ 9.77 1,210 $ 7.61
===== ===== =====
Exercisable at end of year................................ 928 $ 8.82 500 $ 8.45 145 $10.04
===== ===== =====
Weighted average fair value of options granted during the
year.................................................... $5.38 $7.95 $6.53
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED
SHARES AVERAGE WEIGHTED SHARES WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE JUNE 30, 1999 CONTRACTUAL EXERCISE JUNE 30, 1999 EXERCISE
PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
--------------------------------------------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$6.18 - $7.59..................................... 1,001 6.9 years $ 7.21 704 $ 7.24
$7.60 - $9.49..................................... 4 6.7 years $ 8.65 4 $ 8.49
$9.50 - $11.39..................................... 79 9.4 years $ 10.6 -- --
$11.40 - $13.29.................................... 138 5.9 years $12.52 123 $12.54
$15.20 - $16.10.................................... 346 8.0 years $16.09 91 $16.09
----- ---
$6.18 - $16.10..................................... 1,568 7.2 years $ 9.84 922 $ 8.82
===== ===
</TABLE>
O'Sullivan has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for options granted except
as mentioned above. Had compensation cost for stock option plans been determined
based on the fair value at the grant date for awards in fiscal 1999, 1998 and
fiscal 1997 in accordance with the provisions of SFAS 123, O'Sullivan's net
income and net income per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income.................................................. As reported $21,885 $14,899 $16,398
Pro forma 19,825 13,789 15,581
</TABLE>
F-15
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - STOCK OPTIONS. (CONTINUED)
We estimate the fair value of each option grant on the date of grant
using the Black-Scholes option-pricing model based upon the following weighted
average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate............................... 5.10% 6.24% 6.70%
Dividend yield........................................ None None None
Volatility factor..................................... 42.57% 37.56% 47.84%
Weighted average expected life (years)................ 6.0 6.6 6.8
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period. The effects of applying
SFAS 123 in this pro forma disclosure are not indicative of the impact on future
years as the pro forma amounts above do not include the impact of stock option
awards granted prior to fiscal 1996.
NOTE 10 - EMPLOYEE BENEFIT PLANS.
O'Sullivan Holdings maintains a stock purchase program that is available
to most employees of O'Sullivan. The stock purchase program (the "SPP"), as
amended, allows a maximum employee contribution of 5%, while O'Sullivan's
matching contribution is 25%, 40% or 50% of the employee's contribution,
depending on the length of the employee's participation in the program. The
matching contributions to the stock purchase program were $700,000, $700,000 and
$600,000 in fiscal years 1999, 1998 and 1997, respectively.
O'Sullivan Holdings also has a Savings and Profit Sharing Plan in which
most O'Sullivan employees are eligible to participate. Under the savings or
Section 401(k) portion of the plan, employees may contribute from 1% to 15% of
their compensation (subject to certain limitations imposed by the Internal
Revenue Code), and O'Sullivan makes matching contributions equal to 50% of the
first 5% of eligible employee contributions. Under the profit sharing portion of
the plan, O'Sullivan Holdings may contribute annually an amount up to 7.5% of
O'Sullivan Holdings' pre-tax earnings, subject to Board approval. Employer
matching contributions are invested in O'Sullivan Holdings common stock.
Employer matching contributions vest immediately, while profit sharing
contributions vest 100% when the employee has five years of service with
O'Sullivan. For fiscal 1999, 1998 and 1997, O'Sullivan accrued approximately
$2.5 million, $1.7 million and $2.0 million, respectively, for the profit
sharing portion of the plan. The matching contributions to the savings portion
of the plan were $800,000, $700,000 and $600,000 in fiscal year 1999, 1998 and
1997 respectively.
Employees can direct the voting of O'Sullivan Holdings common stock
attributable to their Stock Purchase Program and Savings and Profit Sharing Plan
accounts.
Effective July 1, 1997, O'Sullivan implemented its Deferred Compensation
Plan. This plan is available to employees of O'Sullivan deemed to be "highly
compensated employees" pursuant to the Internal Revenue Code. O'Sullivan will
make certain matching and profit sharing accruals to the accounts of
participants. All amounts deferred or accrued under the terms of the plan
represent unsecured obligations of O'Sullivan to the participants. Matching and
profit sharing accruals under the this plan were not material in fiscal 1999 or
fiscal 1998.
NOTE 11 - TERMINATION PROTECTION AGREEMENTS.
O'Sullivan Holdings has entered into Termination Protection Agreements
with most of O'Sullivan's officers. These Termination Protection Agreements, all
of which are substantially similar, have initial terms of two years which
automatically extend to successive one-year periods unless terminated by either
party. If the
F-16
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - TERMINATION PROTECTION AGREEMENTS. (CONTINUED)
employment of any of these officers is terminated, with certain exceptions,
within 24 months following a change in control, the officers are entitled to
receive certain cash payments, as well as the continuation of fringe benefits
for a period of up to twelve months. Additionally, all benefits under the
Savings and Profit Sharing Plan and the Deferred Compensation Plan vest, all
restrictions on any outstanding incentive awards or shares of restricted common
stock will lapse and such awards or shares will become fully vested, all
outstanding stock options will become fully vested and immediately exercisable,
and O'Sullivan Holdings will be required to purchase for cash, on demand made
within 60 days following a change in control, any shares of unrestricted common
stock and options for shares at the then current per-share fair market value.
The agreements as amended in February 1996 also provide one year of outplacement
services for the officer and that, if the officer moves more than 20 miles from
his primary residence in order to accept permanent employment within 36 months
after leaving O'Sullivan Holdings, O'Sullivan Holdings will, upon request,
repurchase the officer's primary residence at a price determined in accordance
with the agreement.
In March 1999, O'Sullivan Holdings entered into 24 Termination Protection
Agreements with O'Sullivan's director-level managers, three of whom were
promoted to officers in July 1999. The Termination Protection Agreements (all of
which are substantially similar) have initial terms of two years which
automatically extend for successive one-year periods unless terminated by either
party. If the employment of any of these employees is terminated (with certain
exceptions) within twelve months following a "Change in Control," or in certain
other instances in connection with a Change in Control, the employees are
entitled to receive a cash payment equal to the total of six months salary and
one-half of their respective annual bonus (twelve months salary and an annual
bonus amount in certain instances). The employees would also be entitled to the
continuation of certain insurance benefits (life insurance, disability, medical,
dental and hospitalization benefits) for a period of up to six (or twelve)
months. The agreements also provide for outplacement services for the employee.
Under the Termination Protection Agreements, a "Change in Control" will
be deemed to have occurred if either (i) any person or group acquires beneficial
ownership of 15% of the voting securities of O'Sullivan Holdings, (ii) there is
a change in the composition of a majority of the Board of Directors within any
two-year period which is not approved by certain of the directors who were
directors at the beginning of the two-year period; (iii) the stockholders of
O'Sullivan Holdings approve a merger, consolidation or reorganization involving
O'Sullivan Holdings; (iv) there is a complete liquidation or reorganization
involving O'Sullivan Holdings; or (v) O'Sullivan Holdings enters into an
agreement for the sale or other disposition of all or substantially all of the
consolidated assets of O'Sullivan Holdings.
However, for purposes of the merger discussed in Note 3 above, each of
the executive officers who is a management participant in the recapitalization
and merger has waived his right to receive benefits under the protection
agreements under any circumstances except for a reduction in his salary or
bonus.
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
TANDY LITIGATION On June 29, 1999, Tandy Corporation filed a complaint
against O'Sullivan Holdings in the District Court of Texas in Tarrant County.
The complaint relates to a potential reduction in O'Sullivan Holdings' tax
benefit payments to Tandy that would result from increased interest expense
after the completion of the merger. Tandy claims that this reduction would
violate the tax sharing and tax reimbursement agreement. The complaint sought a
court order compelling O'Sullivan Holdings to submit to a dispute resolution
process. Alternatively, the complaint sought a declaratory judgment that after
the merger O'Sullivan Holdings must continue to make tax-sharing payments to
Tandy as if the merger had not occurred.
F-17
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - COMMITMENTS AND CONTINGENCIES. (CONTINUED)
On September 9, 1999, Tandy filed a motion for summary judgment in its
lawsuit against O'Sullivan Holdings. On October 8, 1999, Tandy's motion was
denied, as was all other relief sought by Tandy, except that O'Sullivan Holdings
was directed to commence dispute resolution procedures before an arbitrator,
according to the terms of the tax sharing agreement. To support its motion for
summary judgment, Tandy referred to a letter it received from its independent
outside auditors, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers").
PricewaterhouseCoopers audits both Tandy's financial statements and O'Sullivan's
financial statements. The PricewaterhouseCoopers letter advised Tandy on how
PricewaterhouseCoopers expected the tax sharing agreement would operate, if
certain assumptions were valid. On its face, the letter made clear that it was
not expressing an "opinion" on how the actual dispute between Tandy and
O'Sullivan Holdings would in fact be resolved, and the letter addressed
assumptions that PricewaterhouseCoopers had been given by Tandy.
O'Sullivan Holdings' annual report to stockholders on SEC Form 10-K
disclosed these facts, and expressed management's view, BASED ON AN OPINION OF
OUR OUTSIDE COUNSEL, Blackwell Sanders Peper Martin LLP, that Tandy's position
in its suit was without merit. Because PricewaterhouseCoopers both wrote its
letter to Tandy but did not object to the inclusion of management's view in the
Form 10-K on the merits of Tandy's lawsuit, the SEC Staff has asked O'Sullivan
Holdings to clarify "whether PricewaterhouseCoopers has a reasonable basis to
doubt management's view that Tandy's lawsuit has no merit." In management's
view, PricewaterhouseCoopers had a perfectly reasonable basis for its
acquiescence in the footnote disclosure in the Form 10-K that Tandy's position
was without merit. First, O'Sullivan Holdings received an opinion from Blackwell
Sanders Peper Martin LLP that supports management's view that Tandy's position
in the litigation was without merit. That opinion was made available to
PricewaterhouseCoopers in connection with its annual audit, and clearly supports
the decision not to object to the inclusion of that footnote in O'Sullivan's
financial statements. Second, PricewaterhouseCoopers also has advised O'Sullivan
that its letter was predicated on assumptions it now understands are not
relevant to the merger as presently structured, and therefore,
PricewaterhouseCoopers has reaffirmed that its original letter did not attempt
to offer an expert opinion to Tandy on the merger or predict the actual outcome
of the litigation between Tandy and O'Sullivan. Neither PricewaterhouseCoopers
nor O'Sullivan believe there is any inconsistency between
PricewaterhouseCoopers' original letter, and its non-objection to the inclusion
of that footnote disclosure in the Form 10-K. In light of
PricewaterhouseCoopers' response, the PricewaterhouseCoopers letter has no
relevance to the merger. At the SEC Staff's request, however, we have included
this discussion of PricewaterhouseCoopers' letter.
Finally, the Staff suggests that its concerns about this situation could
be eliminated if PricewaterhouseCoopers were to withdraw the letter to Tandy.
But, since the letter is not an expert opinion on any pending matter, a position
PricewaterhouseCoopers has since reaffirmed to us, management does not believe
there is any reason for PricewaterhouseCoopers formally to withdraw its letter.
We are now and, after completion of the merger, expect to continue to be
in full compliance with the tax sharing agreement. O'Sullivan believes that
Tandy's position is without merit and intends to defend itself vigorously.
OTHER LITIGATION In addition, O'Sullivan is a party to various legal
actions arising in the ordinary course of its business. O'Sullivan does not
believe that any such pending actions will have a material adverse effect on its
results of operations or financial position. O'Sullivan maintains liability
insurance at levels which it believes are adequate for its needs.
O'Sullivan's operations are subject to extensive federal, state and local
laws, regulations and ordinances relating to the generation, storage, handling,
emission, transportation and discharge of certain materials,
F-18
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - COMMITMENTS AND CONTINGENCIES. (CONTINUED)
substances and waste into the environment. Permits are required for certain of
O'Sullivan's operations and are subject to revocation, modification and renewal
by governmental authorities. In general, compliance with air emission
regulations is not expected to have a material adverse effect on O'Sullivan's
business, results of operations or financial condition.
O'Sullivan's manufacturing facilities ship waste product to various
disposal sites. O'Sullivan has been designated as a potentially responsible
party under the Arkansas Remedial Action Trust Fund Act in connection with the
cost of cleaning up one site in Diaz, Arkansas and has entered into a DE MINIMIS
buyout agreement with certain other potentially responsible parties, pursuant to
which it has contributed $2,000 to date toward cleanup costs. O'Sullivan
believes that amounts it may be required to pay in the future, if any, will be
immaterial.
RETIREMENT BENEFITS In October 1998, Mr. Daniel F. O'Sullivan, Chairman
of the Board of Directors and Chief Executive Officer, completed negotiations of
a retirement and consulting agreement with O'Sullivan Holdings contingent upon
the hiring of his successor. In May 1999, the original retirement agreement was
amended, removing a contingency relating to the hiring of his successor. The
retirement agreement contains standard noncompetition provisions. The present
value of all future payments to Mr. O'Sullivan under this agreement have been
capitalized and recorded as an intangible asset. The noncompetition asset will
be amortized on a straight line basis over the term of the agreement with
Mr. O'Sullivan commencing on the earlier of his retirement or March 31, 2000.
Based on a retirement date of March 31, 2000, the amortization period would be
approximately 6.3 years. The noncompetition asset of $1.9 million, which
represents the present value of the future payments to be paid pursuant to the
agreement, and the corresponding liability of $1.9 million, are included in the
accompanying consolidated balance sheet.
During fiscal 1999, O'Sullivan also recorded compensation expense equal
to the intrinsic value of Mr. O'Sullivan's outstanding options in conjunction
with the acceleration of the vesting of Mr. O'Sullivan's unvested options and
the extension of the exercise period for all of Mr. O'Sullivan's options. The
compensatory charge related to the options, combined with the associated legal
and other costs, approximated $235,000.
OPERATING LEASES O'Sullivan leases warehouse space, computers and
certain other equipment under operating leases. As of June 30, 1999, minimum
future lease payments for all noncancellable lease agreements were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
2000....................................... $1,611
2001....................................... 1,102
2002....................................... 753
2003....................................... 515
2004....................................... 338
Thereafter................................. 66
------
Total...................................... $4,385
======
</TABLE>
Amounts incurred by O'Sullivan under operating leases (including
renewable monthly leases) were $1,679,000, $1,367,000 and $936,000 in 1999, 1998
and 1997, respectively.
F-19
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - MAJOR CUSTOMERS AND INTERNATIONAL OPERATIONS.
Sales to three customers exceeded 10% of net sales in at least one of the
prior three fiscal years. Sales to such customers as a percentage of net sales
were:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Customer A......................................... 20.9% 20.1% 17.1%
Customer B......................................... 13.1% 11.6% 12.3%
Customer C......................................... 7.6% 9.7% 12.0%
</TABLE>
There are no material foreign operations or export sales.
NOTE 14 - QUARTERLY OPERATING RESULTS - UNAUDITED
<TABLE>
<CAPTION>
FISCAL 1999 (BY QUARTER)
---------------------------------------------
1 2 3 4
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales...................................... $87,673 $97,786 $108,529 $85,644
Gross profit................................... 24,893 28,099 32,809 26,201
Net income..................................... 3,715 4,733 7,732 5,705
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998 (BY QUARTER)
---------------------------------------------
1 2 3 4
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales...................................... $77,141 $85,524 $ 92,325 $84,417
Gross profit................................... 22,738 23,386 24,653 24,544
Net income..................................... 3,603 3,424 3,814 4,058
</TABLE>
NOTE 15 - SUBSIDIARY FINANCIAL INFORMATION
The following summarized financial information for O'Sullivan Industries
-Virginia, Inc. ("Virginia"), a wholly-owned subsidiary of O'Sullivan, is
presented as if Virginia had existed as a corporation separate from O'Sullivan
during the periods presented and include the historical assets, liabilities,
revenues and expenses that are directly related to Virginia's operations. All
material intercompany transactions have been eliminated. For the periods
presented, certain expenses reflected in the combined financial statements
included allocations of corporate expenses from O'Sullivan to Virginia. These
allocations include expenses for general management, management information
systems, treasury, legal, benefits administration, insurance, tax compliance and
other miscellaneous services. The allocation of expenses was generally based on
actual costs incurred, and such costs were apportioned to Virginia using varying
methods including volume of sales and number of employees. In addition, Virginia
sells all customer trade receivables to O'Sullivan immediately after
consummation of the sale.
Management believes that the foregoing allocations were made on a
reasonable basis; however, the allocations of costs and expenses do not
necessarily indicate the costs that would have been incurred by Virginia on a
stand-alone basis. Also, the financial information included in accompanying
consolidated financial statements may not necessarily reflect what the financial
position, results of operations and cash flows of the consolidated entity would
have been had O'Sullivan and Virginia been separate, stand-alone companies
during the periods presented. Virginia will guarantee the debt of O'Sullivan
Industries, Inc., incurred to consummate the
F-20
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - SUBSIDIARY FINANCIAL INFORMATION (CONTINUED)
transaction described in Note 3, on a full and unconditional basis. O'Sullivan's
only other subsidiary, O'Sullivan Industries International, Ltd. has no
operations, no assets and no revenues.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales............................................. $71,282 $63,138 $55,722
Gross profit.......................................... 14,112 15,460 13,234
Operating income...................................... 5,161 6,680 5,882
Net income............................................ 2,682 3,705 3,173
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C> <C>
Current assets........................................ $12,061 $ 8,632
Noncurrent assets..................................... 26,658 21,046
Current liabilities................................... 2,831 2,736
Noncurrent liabilities................................ 10,403 5,646
</TABLE>
F-21
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
UNAUDITED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
2000
------------
(DOLLARS IN
THOUSANDS,
EXCEPT FOR
SHARE DATA)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,756
Trade receivables, net of allowance for doubtful
accounts of $2,969...................................... 73,824
Inventories, net.......................................... 55,530
Prepaid expenses and other current assets................. 5,678
--------
TOTAL CURRENT ASSETS.................................. 149,788
Property, plant and equipment, net.......................... 94,242
Other assets................................................ 14,433
Receivable from parent...................................... 771
Goodwill, net of accumulated amortization................... 40,172
--------
TOTAL ASSETS.......................................... $299,406
========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 20,210
Current portion of long-term debt......................... 3,000
Accrued liabilities....................................... 27,715
Income taxes payable...................................... 2,211
--------
TOTAL CURRENT LIABILITIES............................. 53,136
Long-term debt, less current portion........................ 236,638
Other non-current liabilities............................... 1,909
Deferred income taxes....................................... 17,257
--------
TOTAL LIABILITIES..................................... 308,940
Commitments and contingent liabilities (Note 10)
Stockholder's equity:
Common stock; $1.00 par value, 100 shares authorized,
issued and outstanding.................................. --
Additional paid-in capital................................ --
Retained deficit.......................................... (9,480)
Accumulated other comprehensive loss...................... (54)
--------
TOTAL STOCKHOLDER'S DEFICIT........................... (9,534)
--------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT........... $299,406
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED
MARCH 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $329,701 $293,988
Costs and expenses:
Cost of sales............................................. 232,180 208,187
Selling, marketing and administrative..................... 64,443 58,240
Compensation expense associated with stock options........ 10,627 --
Loss on settlement of interest rate swap.................. 408 --
-------- --------
Total costs and expenses.................................... 307,658 266,427
-------- --------
Operating income.......................................... 22,043 27,561
Other income (expense):
Interest expense.......................................... (10,605) (2,485)
Interest income........................................... 318 201
-------- --------
Income before income tax provision and extraordinary item... 11,756 25,277
Income tax provision........................................ 4,232 9,098
-------- --------
Income before extraordinary item............................ 7,524 16,179
Extraordinary loss from early extinguishment of debt, net of
income tax benefit of $171................................ (305) --
-------- --------
Net income.................................................. $ 7,219 $ 16,179
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED MARCH 31,
----------------------
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 7,219 16,179
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 11,340 10,367
Amortization of debt issuance costs..................... 655 --
Bad debt expense........................................ 856 737
Loss on disposal of assets.............................. 125 142
Deferred income taxes................................... 1,025 --
Employee option amortization............................ -- 561
Compensation expense associated with stock options...... 10,627 --
Changes in current assets and liabilities:
Trade receivables....................................... (11,412) (17,909)
Inventories............................................. 604 (2,153)
Other assets............................................ (2,339) 429
Accounts payable, income taxes payable and other
liabilities............................................ 14,801 6,251
--------- --------
Net cash flows provided by operating activities....... 33,501 14,604
--------- --------
Cash flows used for investing activities:
Capital expenditures.................................... (7,719) (13,294)
--------- --------
Cash flows used for financing activities:
Repayment of long-term debt............................. (20,000) --
Proceeds from borrowings................................ 233,533 --
Dividend to parent...................................... (186,827) --
Debt issuance costs..................................... (12,668) --
Net addition to (repayment of) revolver................. -- (1,000)
Advances (repayment) on intercompany debt............... (28,804) (251)
--------- --------
Net cash flows used by financing activities........... (14,766) (1,251)
--------- --------
Net increase in cash and cash equivalents................... 11,016 59
Cash and cash equivalents, beginning of period.............. 3,740 1,810
--------- --------
Cash and cash equivalents, end of period.................... $ 14,756 $ 1,869
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES O'SULLIVAN HOLDINGS, INC.)
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN RETAINED COMPREHENSIVE STOCKHOLDER'S COMPREHENSIVE
CAPITAL EARNINGS (DEFICIT) INCOME (LOSS) EQUITY (DEFICIT) INCOME (LOSS)
---------- ------------------ ------------- ---------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1999................. $66,944 $ 90,202 $ (43) $157,103
Net income........................... 7,219 7,219 $ 7,219
Other comprehensive loss............. (11) (11) (11)
Compensation expense associated with
stock options...................... 12,982 12,982
Dividend to parent................... (79,926) (106,901) (186,827)
------- --------- -------- -------- -------
Balance, March 31, 2000................ $ -- $ (9,480) $ (54) $ (9,534) $ 7,208
======= ========= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by O'Sullivan Industries, Inc. and subsidiaries ("O'Sullivan"), which
is a wholly-owned subsidiary of O'Sullivan Industries Holdings, Inc.
("O'Sullivan Holdings"), 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 this prospectus. The
interim results are not necessarily indicative of the results that may be
expected for a full year.
NOTE 2 - MERGER
On March 24, 1999, O'Sullivan Holdings announced that members of its
senior management team, in conjunction with a financial buyer, had made a
proposal to Holding's Board of Directors to acquire O'Sullivan Holdings, subject
to requisite financing. On May 18, 1999, O'Sullivan Holdings announced that it
had entered into a definitive merger agreement with OSI Acquisition, Inc.
Investors in OSI Acquisition, Inc. included members of O'Sullivan's senior
management and Bruckmann, Rosser, Sherill & Co., II, L.P. ("BRS"). The merger
agreement was amended and restated on October 18, 1999.
On November 30, 1999, OSI Acquisition, Inc. was merged into O'Sullivan
Holdings in a recapitalization transaction approved by O'Sullivan Holdings'
stockholders on November 22, 1999. As a result of the merger, all of O'Sullivan
Holdings' outstanding common stock is held by members of O'Sullivan's senior
management and BRS and its affiliates. The management participants in the buyout
own a total of 27.1% of the outstanding common stock of O'Sullivan Holdings. BRS
and its affiliates own the balance.
Each share of common stock of O'Sullivan Holdings outstanding before the
merger was exchanged for $16.75 in cash and one share of senior preferred stock
with a liquidation value of $1.50 per share. Unpaid dividends accrue at the rate
of 12.0% per annum and, if not paid, will be accumulated and compounded at the
same rate during the period that the senior preferred stock is outstanding. The
senior preferred stock was recorded at fair value of $0.70 per share and is
being accreted to its full liquidation value. The senior preferred stock is
mandatorily redeemable on November 30, 2011, or, if sooner, upon a change of
control of O'Sullivan Holdings. Some of the shares of O'Sullivan Holdings common
stock and options held by the management participants in the buyout were
exchanged for common stock, junior preferred stock and options to acquire junior
preferred stock of O'Sullivan Holdings.
O'Sullivan Holdings' Series B junior preferred stock was issued to BRS,
its affiliates and the management participants in the buyout in exchange for
cash or shares of O'Sullivan Holdings common stock. The liquidation value of the
Series B junior preferred stock is $100.00 per share. Dividends accrue at the
rate of 14.0% annum and, if not paid, will be accumulated and compounded at the
same rate during the period the Series B junior preferred stock is outstanding.
In the merger, O'Sullivan Holdings issued options to purchase its Series
A preferred stock in exchange for certain options held by management
participants in the buyout. The agreements for the options to purchase
O'Sullivan Holdings' Series A junior preferred stock provide for a special
accrual at the rate of 14% per annum on the difference between the liquidation
value of the stock ($150.00 per share) and the exercise price of the option
($50.00 per share). The special accrual accrues at the same time and in the same
manner as would issued
F-26
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - MERGER (CONTINUED)
and outstanding Series A junior preferred stock. No amount is payable until the
exercise of the option, and payment is further subject to the terms of any debt
agreement of O'Sullivan Holdings. When made, payment of the special accrual may
be made in cash or by a reduction in the option price for the option. The
special accruals are included in compensation expense.
O'Sullivan Holdings required approximately $357.0 million to complete the
merger and pay related fees and expenses of which approximately $264.0 million
was funded via debt proceeds. O'Sullivan borrowed $239 million of this amount.
O'Sullivan paid a dividend of approximately $186.8 million to O'Sullivan
Holdings and repaid an intercompany balance of about $28.5 million to finance
the repurchase of stock. The remainder of the borrowings was used to refinance
existing debt and for debt issuance costs.
NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS
Effective October 1, 1998, O'Sullivan had a forward starting interest
rate swap agreement with a notional principal amount of $10.0 million, which was
to terminate on October 1, 2008. Pursuant to the agreement, O'Sullivan paid a
fixed rate of 7.13% and received a floating interest rate during the duration of
the swap agreement. On November 30, 1999, O'Sullivan terminated the swap as
required by the counter-party due to the merger and recapitalization, incurring
a loss of $408,000.
O'Sullivan called its existing $10.0 million of 8.25% industrial
development revenue bonds on October 1, 1998 at a redemption price of 103%. The
$300,000 premium on the early retirement of the bonds was recognized as a loss
in O'Sullivan's second quarter of fiscal 1999 and was included in interest
expense. O'Sullivan refinanced these bonds with new, ten-year industrial revenue
bonds with a tax-exempt variable interest rate, which is reset weekly. Interest
on the bonds is paid monthly. The bonds mature on October 1, 2008.
As required under the new senior credit facilities, O'Sullivan hedged
one-half of its term loans with an initial notional amount of $67.5 million with
an interest rate collar. The collar, effective February 28, 2000, is based on
three month LIBOR and has a floor of 6.43% and a ceiling of 8.75%.
NOTE 4 - NEW ACCOUNTING STANDARDS
In June 1999, the FASB issued SFAS No. 138, which delayed the effective
date of SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. Accordingly, O'Sullivan will adopt SFAS No. 133 effective July 1,
2000. This new accounting standard will require that derivative instruments be
measured at fair value and recognized in the balance sheet as either assets or
liabilities, as the case may be. The treatment of changes in the fair value of a
derivative (I.E., gains and losses) will depend on its use and designation.
O'Sullivan will initially report gains and losses on derivatives designated as
hedges against the cash flow effect of a forecasted transaction as a component
of other comprehensive income and, subsequently, reclassify the gains and losses
into earnings when the forecasted transaction affects earnings.
NOTE 5 - COMPENSATION EXPENSE ASSOCIATED WITH OPTIONS
O'Sullivan incurred approximately $10.6 million in compensation expense
associated with stock options as part of the merger. Of this amount,
$6.0 million was exchanged for options to purchase 60,319 shares of O'Sullivan
Holdings Series A junior preferred stock, $5.9 million in cash was paid and
$1.1 million in liquidation value of senior preferred stock was distributed to
the option holders. The compensation expense on the options has been included as
a separate line item in the accompanying consolidated statement of operations.
F-27
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - COMPENSATION EXPENSE ASSOCIATED WITH OPTIONS (CONTINUED)
During the nine months ended March 31, 2000, O'Sullivan incurred
compensation expense of approximately $220,000 related to the special accruals
on the options to purchase O'Sullivan Holdings Series A junior preferred stock.
This expense has been included in selling, marketing and administrative expenses
in the accompanying consolidated statement of operations.
NOTE 6 - EXTRAORDINARY ITEM
O'Sullivan repaid private placement notes held with a principal amount of
$16.0 million for $16.5 million on November 30, 1999. The $476,000 prepayment
fee has been recognized as a $305,000 extraordinary loss, net of related tax
benefit.
NOTE 7 - INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------
(IN THOUSANDS)
<S> <C>
Finished goods.............................................. $35,283
Work in process............................................. 6,220
Raw materials............................................... 14,027
-------
$55,530
=======
</TABLE>
NOTE 8 - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term debt consists of the following at March 31, 2000:
<TABLE>
<CAPTION>
MARCH 31,
2000
--------------
(IN THOUSANDS)
<S> <C>
Senior term notes, tranche A................................ $ 35,000
Senior term notes, tranche B................................ 100,000
Revolving credit agreement.................................. --
Senior notes................................................ --
Industrial revenue bonds.................................... 10,000
Senior subordinated notes - face value of $100.0 million
discounted at 98.046% and net of $3.5 million original
issue discount arising from issuance by O'Sullivan
Holdings of warrants to buy common and Series B junior
preferred stock........................................... 94,638
--------
Total debt.................................................. 239,638
Less current maturities..................................... (3,000)
--------
$236,638
========
</TABLE>
F-28
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS (CONTINUED)
SENIOR SECURED CREDIT FACILITY. O'Sullivan is the obligor under a senior
secured credit facility totaling $175.0 million and $100.0 million of senior
subordinated notes. O'Sullivan Industries - Virginia, Inc., a subsidiary of
O'Sullivan, is the obligor for $10.0 million of variable rate industrial revenue
bonds.
The senior secured credit facility is comprised of the of the following:
- a $35.0 million term loan facility payable in 23 quarterly
installments beginning March 31, 2000. The first four installments of
this loan facility will total $500,000 per quarter followed by eight
quarterly installments of $750,000. The final eleven payments will
range from $1,250,000 to $4,000,000.
- a $100.0 million term loan facility repayable in 26 quarterly
installments beginning March 31, 2001. The first 20 installment
payments of this loan facility will total $250,000 per quarter
followed by four quarterly payments of $8.75 million and two final
payments of $30.0 million per quarter; and
- a $40.0 million revolving credit facility due November 30, 2005,
which includes a $15.0 million letter of credit subfacility and a
$5.0 million swing line subfacility. At March 31, 2000 the Company
had no borrowings outstanding on the credit facility and
approximately $12.8 million of letters of credit outstanding.
O'Sullivan's obligations under the senior secured facility are secured by
first priority liens and security interests in the stock of O'Sullivan and
O'Sullivan Industries - Virginia, Inc. and substantially all of the assets of
O'Sullivan and O'Sullivan Industries - Virginia, Inc.
At O'Sullivan's option, borrowings under the senior secured credit
facility accrue interest at varying rates based on (a) a Eurodollar rate plus an
applicable margin or (b) an applicable margin plus the highest of a bank's prime
rate, the federal funds effective rate plus 0.5% or three-month certificates of
deposit secondary market rates as adjusted for statutory reserves plus 1.0%.
Until June 30, 2000, the applicable margins for the $35.0 million term loan and
the revolving credit facility are fixed at 3.25% for Eurodollar loans and 2.25%
for base rate loans. After June 30, 2000, the applicable margins vary based upon
O'Sullivan's leverage ratio. The applicable margins for the $100.0 million term
loan are 3.75% for Eurodollar loans and 2.75% for base rate loans for the life
of the loan. O'Sullivan also pays a quarterly fee equal to 0.5% per annum of the
unused commitment under the senior secured credit facility. The weighted
averaged interest rate at March 31, 2000 was approximately 11.8%.
O'Sullivan is subject to various covenants associated with the
$175.0 million senior secured credit facility such as leverage and coverage
ratios and other customary covenants. These covenants limited the Company's
additional borrowing capacity at March 31, 2000 to $27.2 million under the
senior credit facilities. In addition, O'Sullivan has certain restrictions on
its ability to incur additional debt, make capital expenditures, pay dividends,
sell its assets, issue securities, engage in acquisitions, and other
restrictions. At March 31, 2000, O'Sullivan was in compliance with all debt
covenants.
SENIOR SUBORDINATED NOTES. The senior subordinated notes totaling $100.0
million bear interest at the rate of 13.375% per annum and are due in 2009.
Interest is payable semiannually on April 15 and October 15. The senior
subordinated notes contain various covenants including restrictions on
additional indebtedness based upon EBITDA coverage. In connection with these
notes, O'Sullivan Holdings issued warrants to purchase 93,273 shares of
O'Sullivan Holdings common stock at an exercise price of $0.01 per shares and
39,273 shares of
F-29
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS (CONTINUED)
O'Sullivan Holdings Series B junior preferred stock at an exercise price of
$0.01 per share. The warrants were recorded at their fair value of
$3.5 million.
The original issue discount and the warrants are amortized over the life
of the notes using the effective interest rate method. Expenses related to the
issuance of the debt financing were approximately $12.6 million and have been
capitalized as other assets. Of this amount, $1.0 million was paid to BRS.
NOTE 9 - RELATED PARTY TRANSACTIONS
BRS provided various advisory services to O'Sullivan Holdings related to
the merger. These services included arranging and negotiating the financing of
the merger, arranging and structuring the transaction, planning O'Sullivan
Holdings' capital structure and related services. BRS received a transaction fee
of $4.0 million from O'Sullivan Holdings and expenses of $62,000 for these
services. Of the $4.0 million transaction fee, $3.0 million was recognized as a
merger related expense by O'Sullivan Holdings and $1.0 million was capitalized
into loan fees at O'Sullivan.
BRS also provided $15.0 million in financing pursuant to a securities
purchase agreement with O'Sullivan Holdings. BRS received a transaction fee of
$300,000 in connection with this financing. BRS later sold this note and the
related warrants to an unrelated third party.
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 accrued management fee for the period ended March 31, 2000 was
$220,000 and is included in accounts payable in the accompanying consolidated
balance sheet with the expense being included in selling, marketing and
administrative expense in the accompanying statements of operations.
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 O'Sullivan's 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.
At March 31, 2000, O'Sullivan Holdings held a note receivable with a
balance of approximately $285,000 from employees of O'Sullivan. O'Sullivan
Holdings loaned the employees money to purchase common stock and Series B junior
preferred stock options of O'Sullivan Holdings in the 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 and are with full recourse to the employee. The
receivable is recorded on the O'Sullivan Holdings balance sheet as a reduction
in stockholder's deficit.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
TANDY LITIGATION
On June 29, 1999, Tandy Corporation filed a complaint against O'Sullivan
Holdings in a District Court of Texas in Tarrant County. The complaint relates
to a potential reduction in O'Sullivan Holdings' tax benefit
F-30
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
payments to Tandy that would result from increased interest expense after the
completion of the merger, and certain expenses incurred to consummate the
merger. Tandy claims that this reduction would violate the tax sharing and tax
reimbursement agreement. The complaint sought a court order compelling
O'Sullivan Holdings to submit to a dispute resolution process. Alternatively,
the complaint sought a declaratory judgment that after the merger O'Sullivan
Holdings must continue to make tax-sharing payments to Tandy as if the merger
had not occurred.
On September 9, 1999, Tandy filed a motion for summary judgment in its
lawsuit against O'Sullivan Holdings. The motion argued that Tandy was entitled
to a court order requiring O'Sullivan Holdings to commence dispute resolution
procedures under the tax sharing agreement. Because O'Sullivan Holdings has made
all payments required under the tax sharing agreement and because no merger had
occurred, O'Sullivan Holdings believed that Tandy'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, Tandy argued that it was entitled to a court order preventing
O'Sullivan Holdings from deducting the interest expense related to the merger
from O'Sullivan Holdings' tax-sharing payments to Tandy.
On October 8, 1999, the District Court ruled on Tandy's motion for
summary judgment. It found that the dispute resolution provision of the tax
sharing agreement was triggered, and ordered that O'Sullivan Holdings begin the
dispute resolution process according to the terms of the tax sharing agreement.
The District Court denied all other relief sought by Tandy. Pursuant to the
dispute resolution provisions, Tandy and O'Sullivan Holdings representatives
have discussed the issues in the dispute but did not reach a resolution.
Arbitrators have been selected to resolve the disputes and the parties have
submitted initial position statements to the arbitrators. Discovery is
commencing.
For the nine months ended March 31, 2000, O'Sullivan Holdings paid Tandy
$2.5 million under the agreement. If the arbitration ruling is in Tandy's favor,
O'Sullivan Holdings' current payable would be substantially higher. The amount
of the increased current payable would depend on O'Sullivan's income. Based on
current estimates, O'Sullivan's payment to Tandy would be approximately $5.5
million greater than it currently anticipates for fiscal year 2000 and 2001
combined if the arbitration ruling were in Tandy's favor. O'Sullivan Holdings
believes that Tandy's position is without merit and intends to defend itself
vigorously.
NOTE 11 - SUBSIDIARY FINANCIAL INFORMATION
The following summarized financial information for O'Sullivan
Industries - Virginia, Inc. ("Virginia"), a wholly owned subsidiary of
O'Sullivan Industries, Inc., is presented as if Virginia had existed as a
corporation separate from O'Sullivan during the periods presented and include
the historical assets, liabilities, revenues and expenses that are directly
related to Virginia's operations. All material intercompany transactions have
been eliminated. For the periods presented, certain expenses reflected in the
combined financial statements included allocations of corporate expenses from
O'Sullivan to Virginia. These allocations include expenses for general
management, management information systems, treasury, legal, benefits
administration, insurance, tax compliance and other miscellaneous services. The
allocation of expenses was generally based on actual costs incurred, and such
costs were apportioned to Virginia using varying methods including volume of
sales and number of employees. In addition, Virginia sells all customer trade
receivables to O'Sullivan immediately after consummation of the sale.
F-31
<PAGE>
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - SUBSIDIARY FINANCIAL INFORMATION (CONTINUED)
Management believes that the foregoing allocations were made on a
reasonable basis; however, the allocations of costs and expenses do not
necessarily indicate the costs that would have been incurred by Virginia on a
stand-alone basis. Also, the financial information included in accompanying
consolidated financial statements may not necessarily reflect what the financial
position, results of operations and cash flows of the consolidated entity would
have been had O'Sullivan and Virginia been separate, stand-alone companies
during the periods presented. Virginia is the sole guarantor of the senior
subordinated notes on a full and unconditional basis. O'Sullivan's only other
subsidiary, O'Sullivan Industries International, Ltd. has no operations, no
assets and no revenues.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $69,376 $51,163
Gross profit................................................ 14,789 9,512
Operating income............................................ 5,142 3,153
Net income.................................................. 2,708 1,501
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Current assets.............................................. $14,097
Noncurrent assets........................................... 25,335
Current liabilities......................................... 5,200
Noncurrent liabilities...................................... 6,036
</TABLE>
NOTE 12 - COMPREHENSIVE INCOME
Comprehensive income for the nine months ended March 31, 1999 was $16.1
million.
F-32
<PAGE>
$100,000,000
[LOGO]
100,000 UNITS CONSISTING OF
13 3/8% SERIES B SENIOR SUBORDINATED NOTES
DUE 2009 OF O'SULLIVAN INDUSTRIES, INC.
-------------------------------
PROSPECTUS
May 31, 2000
---------------------------
